Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8 of this Form 10-K.
The MD&A generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, incorporated herein by reference.
Business Environment Overview and Trends
Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”) draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities.
The MC segment is the Company’s long-established core business and primary generator of cash. While it has been negatively impacted by well-documented declines in publication grades in the Company’s traditional markets, there has been some offsetting effect due to growth in demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets. Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future. MC has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.
The AEC segment provides significant longer term growth potential for the Company. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group ("SAFRAN") and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net sales in 2022. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787, and vacuum waste tanks for Boeing 7-Series aircraft. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2022, approximately 46 percent of AEC sales were related to U.S. government contracts or programs.
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Consolidated Results of Operations
Net sales
The following table summarizes our Net sales by business segment:
(in thousands, except percentages)
Years ended December 31, 2022 2021 2020
Machine Clothing
$ 609,461 $ 619,015 $ 572,955
Albany Engineered Composites
425,426 310,225 327,655
Total
$ 1,034,887 $ 929,240 $ 900,610
% change
11.4 % 3.2 % -14.6 %
Changes in currency translation rates had the effect of decreasing 2022 Net sales by $28.5 million (3% of Net sales) driven by the weaker Euro, as compared to 2021.
Excluding the effect of changes in currency translation rates: consolidated Net sales increased 14.4%, Net sales in MC increased 1.8% compared to 2021, driven by increased sales of packaging, pulp and tissue grades, and AEC experienced significant growth during 2022, with Net sales increasing 39.6%, primarily driven by CH-53K and LEAP programs.
Backlog
Backlog in the MC segment was $172 million at December 31, 2022 and $190 million December, 31 2021. Backlog in the AEC segment increased to $414 million at December 31, 2022, compared to $347 million at December 31, 2021. The increase in AEC’s backlog was primarily due to increased demand on the CH-53K program. All of the backlog in MC and approximately 65% of the AEC backlog is expected to be invoiced during the next 12 months.
Gross Profit
The following table summarizes Gross profit by business segment:
(in thousands, except percentages)
Years ended December 31, 2022 2021 2020
Machine Clothing
$ 312,285 $ 322,457 $ 301,144
Albany Engineered Composites
77,497 55,934 69,928
Total
$ 389,782 $ 378,391 $ 371,072
% of Net Sales
37.7 % 40.7 % 41.2 %
The increase in 2022 Gross profit, as compared to 2021, was principally due to increased Net sales at AEC. Gross profit as a percentage of sales:
• At MC, decreased from 52.1% in 2021 to 51.2% in 2022 in MC, due to an increase in input costs
• At AEC, was largely in line with the prior year, increasing from 18.0% in 2021 to 18.2% in 2022
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Selling, Technical, General, and Research (STG&R)
Selling, technical, general and research (STG&R) expenses include selling, general, administrative, technical, product engineering and research expenses.
The following table summarizes STG&R by business segment:
(in thousands, except percentages)
Years ended December 31, 2022 2021 2020
Machine Clothing
$ 105,979 $ 105,602 $ 107,594
Albany Engineered Composites
45,918 39,742 35,571
Corporate expenses
56,757 53,705 56,091
Total
$ 208,654 $ 199,049 $ 199,256
% of Net Sales
20.2 % 21.4 % 22.1 %
Consolidated STG&R expenses increased 5% as compared to 2021, but represented a smaller percentage of Net Sales.
• At MC, STG&R remained largely in line with the prior year.
• At AEC, Selling and general expenses increased $3.7 million related to investments in business development activities, and Research expense increased $2.5 million related to investments in new technologies and enhanced capabilities.
Research and Development
The following table is a subset of the STG&R table above and summarizes expenses associated with internally funded research and development by business segment:
(in thousands)
Years ended December 31, 2022 2021 2020
Machine Clothing
$ 16,060 $ 16,710 $ 15,922
Albany Engineered Composites
15,353 12,891 9,828
Total
$ 31,413 $ 29,601 $ 25,750
Restructuring
In addition to the items discussed above affecting Gross profit and STG&R expenses, operating income was affected by restructuring expense, net, which was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods. For more information on our restructuring charges, see Note 5 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.
Operating Income
The following table summarizes operating income/(loss) by business segment:
(in thousands)
Years ended December 31, 2022 2021 2020
Machine Clothing
$ 206,214 $ 215,654 $ 190,805
Albany Engineered Composites
31,579 16,160 31,536
Corporate expenses
(56,771) (53,803) (56,261)
Total
$ 181,022 $ 178,011 $ 166,080
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Other Earnings Items
(in thousands)
Years ended December 31, 2022 2021 2020
Interest expense, net
$ 14,000 $ 14,891 $ 13,584
Pension settlement expense 49,128 — —
AMJP grant — (5,832) —
Other (income)/expense, net
(14,086) 3,021 13,422
Income tax expense
35,472 47,163 41,831
Net income/(loss) attributable to the noncontrolling interest
746 290 (1,346)
Interest Expense
Interest expense, net, decreased over the prior year as a result of higher interest earned on Cash and cash equivalents, in addition to decreased interest expense on Finance leases during the fourth quarter. See the Working Capital, Liquidity and Capital Structure section for further discussion of borrowings and interest rates.
Pension settlement expense
In the third quarter of 2022, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred in the prior year. See Note 4 to the Consolidated Financial Statements for additional information.
AMJP grant
During the third quarter of 2021, the Company was awarded an Aviation Manufacturing Jobs Protection Program ("AMJP") grant of $5.8 million, under the American Rescue Plan of the U.S. Department of Transportation. No such award was granted during 2022. See Note 1 to the Consolidated Financial Statements for additional information.
Other (income)/expense, net
In 2022, Other (income)/expense, net included gains related to the revaluation of nonfunctional-currency balances of $10.0 million, as compared to a gain of $1.2 million during 2021, principally resulting from a weaker Euro throughout the course of 2022. Also in 2022, the Company recorded a gain of $3.4 million on the sale of IP addresses that the Company had no future critical need to retain. There were no similar gains of this nature in the previous two years.
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Income Taxes
Significant items that impacted the effective tax rate in the years 2022, 2021 and 2020, included the following (percentages reflect the effect of each item as a percentage of income before income taxes):
Year Ended December 31,
2022 2021 2020
(in thousands, except percentages) Tax Amount % Tax Amount % Tax Amount %
Continuing Operations (Excluding Discrete Items) $ 40,497 30.7% $ 50,045 30.2% $ 39,544 28.4%
Changes in uncertain tax positions (780) (0.6) 232 0.1 252 0.2
Impact of amended tax returns (98) (0.1) (2,098) (1.2) 500 0.3
Tax effect of non-deductible foreign exchange loss on intercompany loan — — — — 3,801 2.7
Changes in opening valuation allowance — — — — — —
Provision for/adjustment to beginning of year valuation allowances (802) (0.6) 957 0.6 168 0.1
True-up of prior year estimated taxes (1,436) (1.1) (1,584) (1.0) (2,420) (1.8)
Enacted tax legislation and rate change (587) (0.4) 352 0.2 — —
US Pension Plan and interest rate swap settlements - Release of Residual Tax Effect (4,926) (3.8) — — — —
Foreign withholding on incremental earnings repatriation 1,518 1.2 — — — —
Impact of non-election of high tax exclusion under GILTI * 1,723 1.3 — — — —
Other tax adjustments 363 0.3 (741) (0.5) (14) 0.2
Effective Tax Rate $ 35,472 26.9% $ 47,163 28.4% $ 41,831 30.1%
* Global Intangible Low-Taxed Income
Our tax planning initiatives included repatriating additional earnings to the U.S. and managing overall cash taxes in the short term. Such initiatives resulted in discrete adjustments that increased our 2022 effective tax rate, partially offset by true ups of prior year estimated taxes and the release of residual tax effects due to termination of our U.S. Pension Plan and settlements of interest rate swaps.
For more information on income tax, see Note 7 to the Consolidated Statements in item 8.
Segment Results of Operations
Machine Clothing Segment
Machine Clothing is our primary business segment and accounted for 59 percent of our consolidated revenues during 2022. MC products are purchased primarily by manufacturers of paper and paperboard. We believe we are well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand. Additionally, we face pricing pressures in all of our markets.
The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in
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all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
Review of Operations
(in thousands, except percentages)
Years ended December 31, 2022 2021 2020
Net sales
$ 609,461 $ 619,015 $ 572,955
% change from prior year
-1.5 % 8.0 % -4.7 %
Gross profit
312,285 322,457 301,144
% of net sales
51.2 % 52.1 % 52.6 %
STG&R expenses
105,979 105,602 107,594
Operating income
206,214 215,654 190,805
Net Sales
Net sales decreased 1.5%. Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $20.8 million compared to 2021. Excluding the effect of changes in currency translation rates, Net sales in MC increased 1.8% compared to 2021, driven by growth in sales of packaging, pulp and tissue grades.
Gross Profit
The decrease in MC Gross profit was primarily driven by changes in currency translation rates, principally the weaker Euro, as well as increases in input costs, causing a decrease in Gross margin from 52.1% in 2021 to 51.2% in 2022.
Operating Income
The decrease in Operating income was principally due to the decrease in Gross profit. STG&R expenses remained largely in line with the prior year.
Albany Engineered Composites Segment
The Albany Engineered Composites (“AEC”) segment, provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. The segment includes Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group, owns a 10 percent noncontrolling interest, AEC, through ASC, is the exclusive supplier to the LEAP program of advanced composite fan blades and fan cases under a long-term supply contract. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft. AEC’s largest aerospace customer is SAFRAN and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net sales in 2022. Other significant programs by AEC include the Sikorsky CH-53K, F-35, JASSM, and Boeing 787 programs. AEC also supplies vacuum waste tanks for the Boeing 7-Series programs, and specialty components for the Rolls Royce lift fan on the F-35, as well as the fan case for the GE9X engine. In 2022, approximately 46 percent of AEC sales were related to U.S. government contracts or programs.
Review of Operations
(in thousands, except percentages)
Years ended December 31, 2022 2021 2020
Net sales
$ 425,426 $ 310,225 $ 327,655
% change from prior year
37.1 % -5.3 % -27.7 %
Gross profit
77,497 55,934 69,928
% of net sales
18.2 % 18.0 % 21.3 %
STG&R expenses
45,918 39,742 35,571
Operating income/(loss)
31,579 16,160 31,536
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Net Sales
AEC experienced significant growth during 2022, with Net sales increasing approximately $115 million, primarily due to CH-53K and LEAP programs. Excluding the effect of changes in currency translation rates, the increase in Net sales was 39.6%.
AEC has contracts with certain customers, including its contract for the LEAP program, where revenue is determined by a cost-plus-fee agreement. Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for 2022 and 2021. LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.
In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses. Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.
Gross Profit
The increase in Gross profit was primarily due to increased Net Sales due to growth on CH-53K and LEAP programs. Gross margin remained largely in line with the prior year.
Operating Income/(Loss)
Operating income nearly doubled year over year, increasing $15.4 million in 2022, principally due to an increase in Gross profit, as described above, partially offset by an increase in Selling and general expenses of $3.7 million related to investments in business development activities, and an increase in Research expense of $2.5 million related to investments in new technologies and enhanced capabilities.
Working Capital, Liquidity and Capital Structure
Working Capital
Payment terms granted to paper industry and other machine clothing customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation. In some markets, customer agreements require us to maintain significant amounts of finished goods inventory to assure continuous availability of our products.
In addition to supplying paper, paperboard, and tissue companies, the MC segment is a leading supplier to the nonwovens (which includes the manufacture of products such as diapers, personal care, and household wipes), building products, and tannery and textile industries. These non-paper industries have a wide range of customers, with markets that vary from industrial applications to consumer use products. The AEC segment primarily serves customers in the commercial and defense aerospace market through both engine and airframe applications. AEC's working capital levels rose sharply in the last few years in line with the segment's growth.
In the MC segment, the Chinese New Year, summer months, and the end of the year are often periods of lower production for some of our customers, which, in the past contributed to seasonal variation in sales and orders. In recent years, shorter order cycles and lower inventory levels throughout the supply chain have become a more significant factor in quarterly sales. The impact of these combined factors on any quarter can be difficult to predict, and can make quarterly comparisons less meaningful than annual comparisons. While seasonality is generally not a significant factor in the Albany Engineered Composites segment, the commercial terms of the supply agreement governing the LEAP program resulted in fourth quarter sales volatility in recent years.
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Cash Flow Summary
(in thousands)
For the years ended December 31,
2022 2021 2020
Net income
$ 96,508 $ 118,768 $ 97,243
Depreciation and amortization
69,049 74,255 72,705
Changes in working capital (a)
(63,478) 16,488 (60,727)
Changes in long-term liabilities, deferred taxes and other credits
(18,629) (1,532) 8,664
Non-cash portion of pension settlement expense 42,657 — 411
Other operating items
2,107 9,496 21,957
Net cash provided by operating activities
128,214 217,475 140,253
Net cash used in investing activities
(96,348) (53,699) (42,390)
Net cash used in financing activities (23,652) (99,635) (60,669)
Effect of exchange rate changes on cash flows
(18,474) (3,421) 8,582
Increase/(decrease) in cash and cash equivalents
(10,260) 60,720 45,776
Cash and cash equivalents at beginning of year
302,036 241,316 195,540
Cash and cash equivalents at end of year
$ 291,776 $ 302,036 $ 241,316
_________________________
(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable and Accrued liabilities.
Net cash provided by operating activities was $128.2 million in 2022, compared to $217.5 million in the same period last year. The decrease in net cash provided by operating activities was driven primarily by the following. AEC generated working capital cash inflows in Accounts receivable and Contract assets during 2021 (due to significant deliveries of LEAP components throughout the year), while during 2022, AEC invested in working capital as it prepared to execute on its expanded CH-53K scope of work. The Company made contributions of approximately $12.6 million to the U.S. pension plan during 2022, in connection with the termination of such plan (see discussion in Note 4 to the Consolidated Financial Statements) . In addition, the timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during 2022 compared to the same period in 2021, contributed to reduced net cash provided by operating activities.
We strategically deploy our cash with a focus on investing in our business and new technologies to provide our customers with enhanced capabilities, increase shareholder value, and position ourselves to take advantage of new business opportunities as they arise. Based on such strategy, we have continued to invest in our business and technologies through capital expenditures, research and development, and when appropriate, selective business acquisitions. Our capital expenditures totaled $96.3 million and $53.7 million for 2022 and 2021, respectively, comprised of both sustaining and return seeking projects. In the recent past, a portion of our capital expenditures consisted of investments to improve operational productivity, in addition to producing a meaningful impact on energy and resource efficiency.
Net cash used in financing activities during 2022 was $23.7 million compared to $99.6 million in 2021, driven by increased borrowings during the current year that were partially used to fund repurchases of shares.
Liquidity and Capital Structure
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend to be insignificant.
Under our $700 million unsecured credit agreement, $439 million of borrowings were outstanding as of December 31, 2022. We believe cash flows from operations and availability under our Credit Agreement will be adequate to cover our operations and business needs over the next twelve months. As of December 31, 2022, we had cash and cash equivalents of $292 million and availability under our Credit Agreement of $261 million, for a total liquidity of approximately $553 million. For more information on the revolving credit agreement, see Note 13 to the Consolidated Financial Statements.
As of December 31, 2022, $273.2 million of our total cash and cash equivalents was held by non-U.S. subsidiaries. The accumulated undistributed earnings of the Company’s foreign operations not targeted for
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repatriation to the U.S. were in excess of $201 m illion at December 31, 2022, and are intended to remain indefinitely invested in foreign operations. Our cash planning strategy includes repatriating current earnings in excess of working capital requirements from certain countries in which our subsidiaries operate. While we have been successful in such endeavor to date, there can be no assurance that we will be able to cost effectively repatriate funds in the future. Repatriating such cash from certain jurisdictions may also result in additional withholding taxes.
We have also returned cash to shareholders through dividends and share repurchases. During 2022, we paid $26.5 million in dividends and repurchased 1 million shares of our Class A Common shares at a cost of $85 million under the $200 million share repurchase program that our Board approved in October 2021.
At December 31, 2022, we had no off-balance sheet arrangements. We have contractual commitments to repay debt, make payments under leases, contribute to our pension and postretirement plans, and settle obligations related to agreements to purchase goods and services, income taxes, compensation plans, and as applicable, interest rate swaps. We estimate these contractual commitments amount to approximately $588 million as of December 31, 2022, of which we expect to pay $44 million within the next year. Such commitments are not representative of all our future cash requirements, which will vary based on future needs.
Critical Accounting Policies and Estimates
For the discussion of our accounting policies, see Note 1 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments which can affect our results of operations. In addition to the accounting policies stated in Item 8, financial statement amounts and disclosures are significantly influenced by market factors, judgments and estimates as described below.
Revenue Recognition
Contracts with customers in the Machine Clothing segment have various terms that can affect the point in time when revenue is recognized. The contractual terms are closely monitored in order to ensure revenue is recognized in the proper period.
Products and services provided under long-term contracts represent a significant portion of sales in the Albany Engineered Composites segment. AEC’s largest source of revenue is derived from the LEAP contract under a cost-plus-fee agreement. The fee is variable based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is significant judgment involved in determining applicable contract costs and the amount of revenue to be recognized.
We also have fixed price long-term contracts, for which we use the percentage of completion (incurred cost to total estimated cost) method. That method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are included in earnings in the period the change occurs.
AEC has long-term aerospace contracts under which there are two phases: a phase during which the production part is designed and tested, and a phase of supplying production parts. During the design and testing phases, we perform pre-production or nonrecurring engineering services, which are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized in Other assets. The capitalized costs are amortized into Cost of goods sold over the period which the asset is expected to contribute to future cash flows, including anticipated renewal periods. Accumulated capitalized costs are written-off when those costs are determined to be unrecoverable.
For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract loss provisions include contract options that are probable of exercise, excluding any profitable options that might be expected to follow. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative costs, which are treated as period expenses. We are required to limit our estimate of contract values to the period of the legally enforceable contract. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, the contract period may result in a loss contract provision at the inception of the contract.
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Pension and Postretirement Liabilities
We sponsor several pension and postretirement benefit plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate.
Discount Rate Selection
We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero coupon bonds. We use the RATE: Link 60-90 model (the "RATE Link"). We believe the projected cash flows used to determine RATE Link provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustments to RATE Link has been made.
Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments. The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefit obligation. Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligation.
Long-term Rate of Return on Plan Assets Assumption
Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes. Our analysis gives consideration to recent plan performance and historical returns; however, the assumptions are primarily based on long-term, prospective rates of return. The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 3.2% for 2022.
Based on information provided by actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and postretirement benefits are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
Income Taxes
We regularly assess the likelihood that deferred tax assets are expected to be realized through the reversal of existing temporary differences and/or future taxable income. To the extent we believe that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. The amount of a valuation allowance is based upon our best estimate of our ability to realize the deferred tax assets.
Goodwill and Intangible assets
Goodwill is not amortized, but is tested for impairment at least annually. Estimating the fair value of reporting units requires the use of estimates and significant judgments, including but not limited to revenue growth rates, operating margins, discount rates, and future market conditions. It is possible that these judgments and estimates could change in future periods.
The determination of the fair value of intangible assets acquired in a business acquisition is subject to many estimates and assumptions. Among such estimates and assumptions are royalties, discount rate and useful life. We review amortizable intangible asset groups for impairment whenever events and changes in circumstances indicate that the related carrying amounts may not be recoverable.
Recent Pronouncements
In March 2022, the SEC issued a proposed rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. The proposed rules are intended to provide more consistent, comparable and decision-useful information so that investors can better evaluate the Company’s exposure to cybersecurity risks, incidents, and strategies to mitigate risks and incidents. We will continue to monitor developments around this proposed rule.
Also in March 2022, the SEC issued a proposed rule that would enhance and standardize the climate-related disclosures provided by public companies. Under the proposed rule, we would be required to provide quantitative and qualitative disclosures in registration statements and annual reports that include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of
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which would be presented in a footnote to the financial statements. Such disclosures would also be subject to management's internal control over financial reporting ("ICFR") and external audit. As a Company, we have long been committed to sustainable practices and corporate social responsibility and have more recently taken steps to articulate our values and goals, some of which are summarized in our published sustainability report that is included at our website www.albint.com. In 2020, we began establishing more formalized and scalable approaches to our sustainability practices, reporting and systems, in order to ensure we prioritize efforts that are impactful to our business and stakeholders. We have begun to incorporate certain climate-related disclosures and risk factors in our existing disclosures to this point. We will continue to monitor developments around this proposed rule, which once finalized, is expected to allow for a multi-year phased transition to achieving compliance.
In October 2022, the SEC adopted final rules regarding the recovery of erroneously awarded incentive-based
executive compensation. The rules direct US securities exchanges to establish standards to require listed
issuers to develop and implement a written policy providing for the recovery of incentive-based compensation
received by current and former executive officers in the event of a required accounting restatement when that
compensation was based on an erroneously reported financial reporting measure. The new rule and related amendments include a number of new disclosure requirements, including requiring issuers to file their recovery policy as an exhibit to their annual reports and establishing new cover page disclosures on Forms 10-K indicating whether the financial statements included in the filing reflect the correction of an error and whether the error correction required an incentive-based compensation recovery analysis. The exchanges must file proposed listing standards to implement the SEC’s directive no later than February 26, 2023 (which is 90 days after the final rules were published in the Federal Register), and those listing standards must be effective no later than November 28, 2023. We will be required to adopt a recovery policy no later than 60 days after the listing standards become effective.
In November 2022, the Federal Acquisition Regulatory Council proposed new rules that would require many federal contractors to provide certain climate-related disclosures. The proposed rule has a stated intent of prompting
suppliers to take action on measuring and managing greenhouse gas (GHG) emissions reductions via public
transparency. The proposal would require “major” federal contractors, as defined, to provide public disclosure of:
• scope 1, scope 2, and relevant scope 3 GHG emissions;
• climate-related financial risk factors based on the Task Force on Climate-Related Financial Disclosures (TCFD)
framework; and
• GHG reduction targets established in line with the Science Based Targets initiative (SBTi). Major contractors
without existing targets would be required to establish them.
Smaller contractors, defined as “significant,” would be required to provide disclosure of scope 1 and scope 2
GHG emissions. “Major” contractors are those receiving more than $50 million in federal contracts, while
“significant” contractors are those receiving from $7.5 to $50 million in federal contracts. These thresholds are
based on the size of contracts awarded and not on related revenue in any given year. There are also limited
exceptions. Based on our business with the federal government, we are highly likely to be considered a "significant" or "major" federal contractor in a given year and would be subject to the requirements in this proposal, if passed. We will continue to monitor developments around this proposed rule, which if finalized, is expected to allow for a multi-year phased transition to achieving compliance .
Non-GAAP Measures
This Form 10-K contains certain non-GAAP measures that should not be considered in isolation or as a substitute for the related GAAP measures. Such non-GAAP measures include net sales and percent change in net sales, excluding the impact of currency translation effects; EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin; Net debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). Management believes that these non-GAAP measures provide additional useful information to investors regarding the Company’s operational performance.
Presenting Net sales and change in Net sales, after currency effects are excluded, provides management and investors insight into underlying sales trends. Net sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period.
EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations. The Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance. Such excluded costs or benefits do not consist of normal,
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recurring cash items necessary to generate revenues or operate our business. Adjusted EBITDA margin represents Adjusted EBITDA expressed as a percentage of net sales.
The Company defines Adjusted EPS as basic earnings per share (GAAP), adjusted by the after tax per share amount of costs or benefits not reflective of the Company’s ongoing or expected future operational performance. The income tax effects are calculated using the applicable statutory income tax rate of the jurisdictions where such costs or benefits were incurred or the effective tax rate applicable to total company results.
The Company’s Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted EPS may not be comparable to similarly titled measures of other companies.
Net debt aids investors in understanding the Company’s debt position if all available cash were applied to pay down indebtedness.
Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt.
We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following tables show the calculation of EBITDA and Adjusted EBITDA:
Consolidated results
(in thousands)
Years ended December 31,
2022 2021 2020
Net income (GAAP)
$ 96,508 $ 118,768 $ 97,243
Interest expense, net
14,000 14,891 13,584
Income tax expense
35,472 47,163 41,831
Depreciation and amortization expense
69,049 74,255 72,705
EBITDA (non-GAAP)
215,029 255,077 225,363
Restructuring expenses, net 106 1,331 5,736
Foreign currency revaluation (gains)/losses
(9,829) (1,442) 15,444
Dissolution of business relationships in Russia 2,275 — —
Pension settlement expense 49,128 — —
IP address sales (3,420) — —
Aviation Manufacturing Jobs Protection (AMJP) grant — (4,731) —
Former CEO termination costs — — 2,742
Acquisition/integration costs 1,057 1,166 1,272
Pre-tax (income)/loss attributable to noncontrolling interest (817) (510) 1,348
Adjusted EBITDA (non-GAAP)
$ 253,529 $ 250,891 $ 251,905
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(in thousands)
Year ended December 31, 2022
Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Net income/(loss) (GAAP) 206,214 31,579 (141,285) 96,508
Interest expense, net — — 14,000 14,000
Income tax expense — — 35,472 35,472
Depreciation and amortization expense 19,483 46,202 3,364 69,049
EBITDA (non-GAAP) 225,697 77,781 (88,449) 215,029
Restructuring expenses, net 92 — 14 106
Foreign currency revaluation (gains)/losses (a) (520) 672 (9,981) (9,829)
Dissolution of business relationships in Russia 1,494 — 781 2,275
Pension settlement expense — — 49,128 49,128
IP address sales — — (3,420) (3,420)
Acquisition/integration costs — 1,057 — 1,057
Pre-tax (income) attributable to noncontrolling interest — (817) — (817)
Adjusted EBITDA (non-GAAP) $ 226,763 $ 78,693 $ (51,927) $ 253,529
(in thousands)
Year ended December 31, 2021
Machine Clothing
Albany Engineered Composites
Corporate expenses and other
Total Company
Net income/(loss) (GAAP) $ 215,654 $ 16,160 $ (113,046) $ 118,768
Interest expense, net — — 14,891 14,891
Income tax expense — — 47,163 47,163
Depreciation and amortization expense 20,191 50,402 3,662 74,255
EBITDA (non-GAAP) 235,845 66,562 (47,330) 255,077
Restructuring expenses, net 1,202 32 97 1,331
Foreign currency revaluation (gains)/losses (a) (307) 50 (1,185) (1,442)
AMJP grant — 1,101 (5,832) (4,731)
Acquisition/integration costs — 1,166 — 1,166
Pre-tax (income) attributable to noncontrolling interest — (510) — (510)
Adjusted EBITDA (non-GAAP) $ 236,740 $ 68,401 $ (54,250) $ 250,891
(in thousands)
Year ended December 31, 2020
Machine Clothing
Albany Engineered Composites
Corporate expenses and other
Total Company
Net income/(loss) (GAAP)
$ 190,805 $ 31,536 $ (125,098) $ 97,243
Interest expense, net
— — 13,584 13,584
Income tax expense
— — 41,831 41,831
Depreciation and amortization expense
20,304 48,496 3,905 72,705
EBITDA (non-GAAP)
211,109 80,032 (65,778) 225,363
Restructuring expenses, net
2,746 2,821 169 5,736
Foreign currency revaluation (gains)/losses (a) 1,743 130 13,571 15,444
Former CEO termination costs — — 2,742 2,742
Acquisition/integration costs — 1,272 — 1,272
Pre-tax loss attributable to noncontrolling interest — 1,348 — 1,348
Adjusted EBITDA (non-GAAP)
$ 215,598 $ 85,603 $ (49,296) $ 251,905
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The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying earnings and are financial performance metrics commonly used by investors. The Company calculates the per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the earnings per share effect of certain income and expense items:
(in thousands, except per share amounts)
Year ended December 31, 2022
Pre tax
Amounts
Tax
Effect
After tax
Effect
Per Share
Effect
Restructuring expenses, net $ 106 $ 34 $ 72 $ 0.01
Foreign currency revaluation (gains)/losses (a) (9,829) (2,582) (7,247) (0.23)
Dissolution of business relationships in Russia 2,275 305 1,970 0.06
Pension settlement expense 49,128 11,947 37,181 1.20
Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability — 5,217 (5,217) (0.17)
IP address sales (3,420) (872) (2,548) (0.08)
Acquisition/integration costs 1,057 316 741 0.04
(in thousands, except per share amounts)
Year ended December 31, 2021
Pre tax
Amounts
Tax
Effect
After tax
Effect
Per Share
Effect
Restructuring expenses, net $ 1,331 $ 399 $ 932 $ 0.02
Foreign currency revaluation (gains)/losses (a) (1,442) (323) (1,119) (0.04)
AMJP grant (4,731) (1,404) (3,327) (0.11)
Acquisition/integration costs 1,166 349 817 0.04
(in thousands, except per share amounts)
Year ended December 31, 2020
Pre tax
Amounts
Tax
Effect
After tax
Effect
Per Share
Effect
Restructuring expenses, net $ 5,736 $ 1,862 $ 3,874 $ 0.11
Foreign currency revaluation (gains)/losses (a) (c) 15,444 896 14,548 0.46
Former CEO termination costs 2,742 713 2,029 0.06
Acquisition/integration costs 1,272 380 892 0.04
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The following table contains the calculation of full-year Adjusted EPS, excluding adjustments:
Per share amounts (Basic)
Years ended December 31,
2022 2021 2020
Earnings per share (GAAP)
$ 3.06 $ 3.66 $ 3.05
Adjustments, after tax (c):
Restructuring expenses, net 0.01 0.02 0.11
Foreign currency revaluation (gains)/losses (a) (0.23) (0.04) 0.46
Dissolution of business relationships in Russia 0.06 — —
Pension settlement expense 1.20 — —
IP address sales (0.08) — —
Tax impact of stranded OCI benefit from TCJA for pension liability (b) (0.17) — —
AMJP grant — (0.11) —
Former CEO termination costs — — 0.06
Acquisition/integration costs 0.04 0.04 0.04
Adjusted earnings per share (non-GAAP)
$ 3.89 $ 3.57 $ 3.72
(a) Foreign currency revaluation (gains)/losses represent unrealized gains and losses arising from the remeasurement of monetary assets and liabilities denominated in non-functional currencies on the balance sheet date.
(b) Our Adjusted EPS excluded the benefit from the reclassification of stranded income tax effects caused by the TCJA associated with the US pension plan liability that was eliminated in September 2022, a one-time event that would not recur in the future. Such stranded income tax effect represented a one-time benefit that distorted the effective tax rate for the quarter and year-to-date ended September 30, 2022 , and would not be indicative of ongoing or expected future income tax rate at the Company. Management believes excluding pension settlement expense and its income tax impact, including the stranded income tax effects, from its Adjusted EBITDA and Adjusted EPS for the quarter and year-to-date ended September 30, 2022 would provide investors a transparent view and enhanced ability to better assess the Company’s ongoing operational and financial performance.
(c) In 2020, the company recorded losses of approximately $14 million in jurisdictions where it cannot record a tax benefit from the losses, which results in an unusual relationship between the pre-tax and after-tax amounts.
Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. The Company calculates Net debt by subtracting Cash and cash equivalents from Total debt. Total debt is calculated by adding Long-term debt, Current maturities of long-term debt, and Notes and loans payable, if any.
The following table contains the calculation of net debt:
(in thousands)
As of December 31,
2022 2021 2020
Current maturities of long-term debt
$ — $ — $ 9
Long-term debt
439,000 350,000 398,000
Total debt
439,000 350,000 398,009
Cash and cash equivalents
291,776 302,036 241,316
Net debt
$ 147,224 $ 47,964 $ 156,693
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Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt. The Company calculates net leverage ratio by subtracting cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA.
The calculation of net leverage ratio is as follows:
Total Company
Year ended
(in thousands) December 31, 2022
Net income/(loss) (GAAP) 96,508
Interest expense, net 14,000
Income tax expense 35,472
Depreciation and amortization expense 69,049
EBITDA (non-GAAP) 215,029
Restructuring expenses, net 106
Foreign currency revaluation (gains)/losses (a) (9,829)
Dissolution of business relationships in Russia 2,275
Pension settlement expense 49,128
IP address sales (3,420)
Acquisition/integration costs 1,057
Pre-tax (income) attributable to noncontrolling interest (817)
Adjusted EBITDA (non-GAAP) $ 253,529
(in thousands, except for net leverage ratio) December 31, 2022
Net debt (non-GAAP) $ 147,224
Adjusted EBITDA (non-GAAP) 253,529
Net leverage ratio (non-GAAP) 0.58
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