What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-25 · 88 added, 249 removed, 252 unchanged (57% of the section changed)

9 unchanged sentences

• Across the entire Company, increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures;

challenges that have only increased as a result of the ongoing Russia-Ukraine war;

• In the Machine Clothing segment, greater than anticipated declines in the demand for publication grades of paper, or lower than anticipated growth in other paper grades;

1 unchanged sentence

• Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment;

• Other risks and uncertainties detailed in this report.

General risks associated with macroeconomic conditions, as noted above, have changed during the first nine months of 2022.

The Russia-Ukraine war has had and may continue to have profound effects on macroeconomic business conditions around the world, including in our Machine Clothing and Albany Engineered Composites segments.

Certain COVID-19 related disruptions and risks have persisted during the current year, causing inflationary pressure connected to global supply chain bottlenecks and elevated energy price pressures.

These challenges have only increased as a result of the Russia-Ukraine war, which also has quickly prompted a global imposition of stringent sanctions that have resulted in a sharp decline in trade with Russia.

Correspondingly, and in union with the global community, we voluntarily decided to dissolve business relationships in Russia during the first quarter of 2022, despite the associated cost to our investment and the loss of future revenue in the region.

While our Albany Engineered Composites segment does not have significant direct exposure in this region of the world, and our Machine Clothing segment has now significantly reduced its exposure, the broader economic ramifications of this war will indirectly affect all sectors of the economy.

This conflict, including imposed sanctions, has amplified inflationary pressures, driving higher prices for global oil, natural gas, agricultural and metal prices, as well as causing additional supply-chain disruptions.

• Other risks and uncertainties detailed in this report and other periodic reports.

Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K.

Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance.

perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.

The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

7 unchanged sentences

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 our Company.

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 and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 12 percent of the Company’s consolidated Net sales in 2021.

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.

3 unchanged sentences

government contracts or programs.

Effect of Russia-Military Conflict

The war between Russia and Ukraine is affecting the economic and global financial markets and exacerbating ongoing economic challenges caused by impacts of the ongoing COVID-19 pandemic, including rising inflation and global supply chain disruptions.

Our MC segment generates approximately 2% of its annual net sales from customers in Russia and Ukraine.

In addition, a subsidiary within our Machine Clothing segment has been a partner in a joint venture (“JV”) that supplies paper machine clothing products to local papermakers in Russia.

In March 2022, we made the decision to cease doing business in Russia, including giving notice to our JV partner of our intent to exit the venture.

As a result, we recognized $1.6 million expense in cost of goods sold and in Selling, Administrative, and General expense, representing reserves against the risk of obsolescence of certain inventory destined for Russian customers and uncollectible receivables from Russian customers, respectively.

We also wrote down the net book value of our investment in the aforementioned JV to reflect our intent to exit such venture, resulting in $0.8 million impairment loss included in Other (income)/expense, net during the first quarter of 2022.

We anticipate approximately $10.0 million reduction in future annual net sales in the MC segment, due to our cessation of doing business in Russia.

For the year-to-date ended September 30, 2022, our segments saw higher input costs due to increased energy costs, tight supply market, and global logistics challenges.

During the quarter ended September 30, 2022, our MC segment experienced higher energy prices, driven by energy surcharges supporting increased raw material prices.

Such was due to capacity constraints, due to limited opportunity to move supply globally from Europe.

We continued to identify alternatives to secure materials in the face of intense supply constraints.

Logistics costs have begun to stabilize compared to the same period last year, though they remained higher than those pre-pandemic.

We anticipate inflationary pressure to remain for the balance of this fiscal year and energy cost escalation to be a primary input cost pressure in the near term.

The ultimate financial impact due to the war between Russia and Ukraine, the ongoing COVID-19 pandemic, and inflationary environment is difficult to predict.

After consideration of possible offsets through corresponding price increases to our customers and productivity improvements, we estimate a net increase to the MC segment input costs of between $8.0 million and $10.0 million for the year ending December 31, 2022, or an unfavorable impact to the segment gross margin of up to 140 basis points for the year ending December 31, 2022.

Our Albany Engineered Composites segment does not have significant direct exposure in Russia.

However, it has not been immune from supply chain disruptions.

Increasing fuel prices coupled with higher demand has resulted in increased freight costs during the quarter, along with ongoing logistic constraints.

Due to the nature of AEC’s contracts with its customers, we currently anticipate passing through a majority of such cost increases to the customers.

Until the effects of the war between Russia and Ukraine, as well as the COVID-19 pandemic, on the economic and global financial markets subside, there can be no assurance that our input costs will not continue to rise beyond our current estimate, thus unfavorably impacting our future results of operations, financial position and liquidity.

Consolidated Results of Operations

The following table summarizes our Net sales by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands, except percentages)

2022 2021 % Change 2022 2021 % Change

2023 2022 % Change

Machine Clothing $153,222 $154,062 -0.5 %

2 unchanged sentences

Total $269,096 $244,169 10.2 %

The following tables provide a comparison of 2022 Net sales, excluding the impact of currency translation effects, to 2021 Net sales:

The following tables provide a comparison of 2023 Net sales, excluding currency translation effects, to 2022 Net sales:

(in thousands, except percentages)

4 unchanged sentences

Total $ 269,096 $ (4,964) $ 274,060 $ 244,169 12.2 %

(in thousands, except percentages)

Net sales as reported, YTD 2022 Decrease due to changes in currency translation rates YTD 2022 sales on same basis as 2021 currency translation rates Net sales as reported, YTD 2021 % Change compared to 2021, excluding currency rate effects

Machine Clothing $ 459,121 $ (14,545) $ 473,666 $ 462,298 2.5 %

Albany Engineered Composites

306,980 (5,631) 312,611 227,024 37.7 %

Total $ 766,101 $ (20,176) $ 786,277 $ 689,322 14.1 %

Three month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $10.2 million during the third quarter of 2022, as compared to 2021, principally due to a weaker Euro in 2022.

• Excluding the effect of changes in currency translation rates:

• Net sales increased 16.5% compared to the same period in 2021.

• Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

• Net sales in AEC increased 41.6%, mainly due to growth on CH-53K and LEAP programs.

Nine month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $20.2 million during the first nine months of 2022, as compared to 2021, principally due to a weaker Euro in 2022.

• Excluding the effect of changes in currency translation rates:

• Net sales increased 14.1% compared to the same period in 2021.

• Net sales in MC increased 2.5% compared to the first nine months of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

• Net sales in AEC increased 37.7%, primarily due to growth on CH-53K and LEAP programs.

Changes in currency translation rates had the effect of decreasing Net sales by $5.0 million, driven by the weaker Euro and Renminbi, as compared to 2022.

Excluding the effect of changes in currency translation rates, consolidated Net sales increased 12.2%.

Net sales at MC increased 1.7%, driven by higher net sales in packaging and publication grades, and AEC Net sales increased 30.3%, primarily driven by growth in CH-53K and LEAP programs.

The following table summarizes Gross profit by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands, except percentages)

2022 2021 2022 2021

Machine Clothing $ 77,855 $ 79,345

4 unchanged sentences

36.9 % 37.5 %

Three month comparison

The increase in third quarter 2022 Gross profit, as compared to the same period in 2021, was due to increased Net sales at AEC.

Gross profit as a percentage of sales:

• Remained consistent year over year in MC, increasing from 51.5% in 2021 to 51.7% in 2022.

• Increased from 16.1% in 2021 to 19.8% in 2022 in AEC, principally due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs.

Changes in the estimated profitability of long-term contracts increased Gross profit by $2.6 million for the third quarter of 2022, compared to an increase of $2.1 million for the third quarter of 2021.

Nine month comparison

The increase in Gross profit during the first nine months of 2022, as compared to the same period in 2021, was due to increased Net sales at AEC.

The increase in 2023 Gross profit, as compared to the same period last year, was due to increased Net sales at AEC.

Gross profit as a percentage of sales:

• Remained consistent year over year in MC, decreasing from 52.0% in 2021 to 51.7% in 2022 in MC, due to an increase in input costs.

• Decreased from 18.5% in 2021 to 18.0% in 2022 in AEC, primarily driven by reserves recorded on inventory that was damaged at an off-site storage facility in the first quarter, reducing gross profit as a percent of sales.

Changes in the estimated profitability of long-term contracts were also less favorable, increasing Gross profit by $2.0 million in the first nine months of 2022, as compared to an increase of $2.4 million for the same period last year.

• At MC, decreased from 51.5% in 2022 to 50.8% in 2023, due to an increase in input costs, mainly due to the inflationary environment.

• At AEC, increased from 13.6% in 2022 to 18.5% in 2023, driven by improved absorption and the absence of a raw material reserve recorded in the prior year, offset by losses on a new program.

Selling, Technical, General, and Research ("STG&R")

The following table summarizes STG&R expenses by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands, except percentages)

2022 2021 2022 2021

Machine Clothing $ 28,871 $ 29,477

4 unchanged sentences

% of Net sales 21.8 % 21.5 %

Three month comparison

The overall decrease in STG&R expenses in the third quarter of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $1.5 million during 2022, driven by the weaker Euro.

• In AEC, selling and general expenses increased $0.7 million due to investment in business development activities, and research expense increased $0.8 million over the prior year.

Nine month comparison

The overall increase in STG&R expenses in the first nine months of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $3.1 million during 2022, driven by the weaker Euro.

This favorability was partially offset by customer credit loss reserve increases related to our dissolution of business relationships in Russia.

• In AEC, selling and general expenses increased $3.0 million, and research expense increased $2.7 million over the prior year.

Consolidated STG&R expenses increased 11.7% as compared to 2022, but represented a fairly consistent percentage of Net Sales.

• MC STG&R expenses remained largely in line with the prior year and improved $0.7 million as a result of changes in currency translation rates, notably the weaker Euro and Renminbi

• AEC Research expense increased related to investments in new technologies and enhanced capabilities, driving higher STG&R as compared to the prior year

• Corporate STG&R expenses increased principally due to higher personnel-related costs and professional fees

Restructuring Expense, net

In addition to the items discussed above affecting Gross profit and STG&R expenses, operating income was affected by restructuring expenses, as summarized in the following table:

Three months ended September 30, Nine months ended September 30,

(in thousands) 2022 2021 2022 2021

Machine Clothing $ 42 $ 251 $ 255 $ 193

Albany Engineered Composites — (81) — (40)

Corporate expenses — 17 13 77

Total $ 42 $ 187 $ 268 $ 230

Restructuring expense, net was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods.

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.

Operating Income

The following table summarizes operating income/(loss) by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands) 2023 2022

4 unchanged sentences

Other Earnings Items

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands) 2023 2022

Interest expense, net $ 3,290 $ 3,609

Pension settlement expense 49,128 — 49,128 —

AMJP grant — (5,832) — (5,832)

Other (income)/expense, net (455) (3,928)

Income tax expense/(benefit) (3,183) 12,889 22,273 36,375

Net income/(loss) attributable to the noncontrolling interest 129 80 635 150

Income tax expense 10,621 10,998

Net income attributable to the noncontrolling interest 197 338

Interest Expense, net

Interest expense, net, was largely in line with the prior year.

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.

See the Working Capital, Liquidity and Capital Structure section for further discussion of borrowings and interest rates.

Pension settlement expense

In the third quarter, 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.

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.

Other (income)/expense, net

Other (income)/expense, net, was primarily driven by foreign currency gains of $6.6 million and $17.7 million in the three and nine month periods ended September 30, 2022, respectively, as compared to losses of $0.5 million and $0.8 million in the three and nine month periods ended September 30, 2021, respectively.

The weaker Euro during the three and nine month periods ended September 30, 2022 led to the gains on foreign currency during such periods.

Other (income)/expense, net includes losses related to the revaluation of nonfunctional-currency balances of $0.1 million, as compared to gains of $3.7 million during 2022, driven by changes in exchange rates.

Income Tax expense/(benefit)

9 unchanged sentences

tax costs on foreign earnings, and by discrete items that may occur in any given year but are not consistent from year to year.

The Company’s effective tax rates for the third quarter of 2022 was (41.6%), lower compared to 29.4% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current period.

For the first nine months of 2022, the Company’s effective tax rate was 22.2%, lower compared to 28.8% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current year.

The Company’s effective tax rate for the first quarter of 2023 was 28.2%, compared to 28.1% for the same period in 2022.

The effective tax rate for the first quarter of 2023 includes the impact of certain tax planning initiatives related to future repatriation of additional earnings to the U.S.

and managing overall cash tax exposure.

For more information on income tax, see Note 5 to the Consolidated Financial Statements.

1 unchanged sentence

Machine Clothing Segment

Machine Clothing is our primary business segment and accounted for 60% of our consolidated revenues during the first nine months of 2022.

Machine Clothing is our primary business segment and accounted for 57% of our consolidated revenues during the first three months of 2023.

MC products are purchased primarily by manufacturers of paper and paperboard.

We feel 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.

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.

2 unchanged sentences

Review of Operations

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands, except percentages)

2022 2021 2022 2021

Net sales $ 153,222 $ 154,062

4 unchanged sentences

Operating income 48,964 49,644

Three month comparison

• Net sales decreased by 0.5%.

• Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing third-quarter 2022 sales by $6.6 million.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

Nine month comparison

• Net sales decreased by 0.7%.

• Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $14.5 million compared to the same period in 2021.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 2.5% compared to 2021, driven by growth in sales of packaging, pulp and engineered fabrics.

For the three and nine month periods ended September 30, 2022, 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.

Changes in currency translation rates, driven by a weaker Euro and Renminbi, decreased 2023 net sales by $3.5 million compared to 2022.

Excluding the effect of changes in currency translation rates, Net sales in MC increased 1.7% compared to 2022, driven by higher net sales in packaging and publication grades.

The decrease in MC Gross profit was driven by higher input costs.

This had the effect of decreasing Gross margin from 51.5% in 2022 to 50.8% in 2023.

Operating Income

The increase in Operating income was driven by lower STG&R expenses over the prior year.

Albany Engineered Composites Segment

The Albany Engineered Composites segment, including Albany Safran Composites, LLC, in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace (both commercial and defense) industry.

AEC’s largest program relates to CFM International’s LEAP engine.

AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract.

The decrease in Operating income was principally due to the decrease in Gross profit noted above, offset partially by lower STG&R expenses, reflecting the benefit from changes in currency translation rates.

Albany Engineered Composites ("AEC") Segment

The 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.

Other significant AEC programs include CH-53K, F-35, JASSM, and Boeing 787 programs.

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.

Review of Operations

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(in thousands, except percentages)

2022 2021 2022 2021

Net sales $ 115,874 $ 90,107

4 unchanged sentences

Operating income 9,418 1,195

For the three and nine month periods ended September 30, 2022, the increase in Net sales was mainly due to growth on CH-53K and LEAP programs.

Net sales increased 28.6% compared to prior year, driven by growth in CH-53K and LEAP programs.

Excluding the effect of changes in currency translation rates, the increase in Net sales was 30.3%.

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 each of the first nine months of 2022 and 2021.

LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.

Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for the first three months of 2023 and 2022.

In addition, AEC has long-term contracts in which the selling price is fixed.

4 unchanged sentences

Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.

For the three and nine month periods ended September 30, 2022, the increase in Gross profit was primarily due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs.

Gross profit during the nine month period ended September 30, 2022, was reduced by a $2 million reserve recorded on inventory that was damaged at an off-site storage facility.

Changes in the estimated profitability of long-term contract had an insignificant effect on Gross profit year over year.

The increase in Gross profit was primarily due to increased Net Sales, driven by growth on CH-53K and LEAP programs.

Gross profit as a percentage of sales increased from 13.6% in 2022 to 18.5% in 2023, driven by improved absorption and the absence of a raw material reserve recorded in the prior year, offset by losses on a new program.

Operating Income

The increase in Operating income was driven by higher gross profit, partially offset by higher research and selling expense.

Operating income increased year over year, principally due to higher Net sales and Gross profit, as described above, partially offset by an increase in Research expenses related to investments in new technologies and enhanced capabilities.

Working Capital, Liquidity and Capital Structure

Cash Flow Summary

Nine months ended September 30,

Three months ended March 31,

(in thousands)

4 unchanged sentences

Other operating items (11,578) (8,430)

Net cash provided by operating activities 67,307 148,499

Net cash used in operating activities (16,393) (5,391)

Net cash used in investing activities (16,275) (15,754)

Net cash used in financing activities (9,119) (69,339)

Net cash provided by financing activities 41,086 26,875

Effect of exchange rate changes on cash and cash equivalents 4,064 (351)

(Decrease)/increase in cash and cash equivalents (25,554) 44,901

Increase in cash and cash equivalents 12,482 5,379

Cash and cash equivalents at beginning of year 291,776 302,036

2 unchanged sentences

(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.

Cash provided in operating activities was $67.3 million in the first nine months of 2022, compared to $148.5 million in the same period last year.

AEC experienced particularly strong working capital cash flows in Accounts receivable and Contract assets during 2021, driven by significant deliveries of LEAP components throughout the year.

In addition, during 2022, the Company made necessary investments in working capital as it prepared to execute on its recently expanded CH-53K scope of work.

Customer payment is expected to be collected in a later period.

In the third quarter of 2022, we made contributions of approximately $12.6 million to the U.S.

pension plan, in line with the Company's plan to reduce pension obligations over time.

In addition, the timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during the first nine months in 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, to increase shareholder value, and to position ourselves to take advantage of new business opportunities as they arise.

Net cash used in operating activities was $16.4 million in 2023, compared to $5.4 million in the same period last year.

Such increase was primarily due to AEC's investment in working capital, as we continue to execute on the expanded CH-53K scope of work and build-up inventory to position ourselves for ongoing demand on the LEAP program.

We 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 $52.8 million and $32.1 million for the first nine months ended September 30, 2022 and 2021, respectively, comprised of both sustaining and return seeking projects.

In the recent past, a portion of our capital expenditures consist of investments which improve operational productivity, in addition to producing a meaningful impact on energy and resource efficiency.

Net cash used in financing activities during 2022 was $9.1 million compared to net cash used in financing activities of $69.3 million in 2021, driven by increased borrowings during the current year that were partially used to fund repurchases of shares.

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 not to be significant.

On October 27, 2020, we entered into a $700 million unsecured Four-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior amended and restated $685 million Five-Year Revolving Credit Facility Agreement, which we had entered into on November 7, 2017 (the “Prior Agreement”).

Under the Credit Agreement, $447 million of borrowings were outstanding as of September 30, 2022.

The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing.

At the time of the last borrowing on September 26, 2022, the spread was 1.625%.

The spread was based on a pricing grid, which ranged from 1.500% to 2.000%, based on our leverage ratio.

Based on our maximum leverage ratio and our Consolidated Adjusted EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of September 30, 2022, we would have been able to borrow an additional $253 million under the Agreement.

We were in compliance with all debt covenants as of September 30, 2022.

For more information, see Note 13 to the Consolidated Financial Statements.

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 September 30, 2022, we had cash and cash equivalents of approximately $276 million and availability under our Credit Agreement of $253 million, for a total liquidity of approximately $529 million.

As of September 30, 2022, $245.6 million of our total cash and cash equivalents was held by non-U.S.

Our capital expenditures totaled $16.3 million and $15.8 million for the first three months of 2023 and 2022, 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 provided by financing activities during 2023 was $41.1 million compared to $26.9 million in 2022, driven by the absence of Treasury share purchases in the current year, which resulted in lower borrowings from the revolving credit facility, as compared to the prior year.

Liquidity and Capital Structure

We finance our business activities principally 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, $491.0 million of borrowings were outstanding as of March 31, 2023.

As of March 31, 2023, we had cash and cash equivalents of $304 million and availability under our Credit Agreement of $209 million, for a total liquidity of approximately $513 million.

We believe cash flows from operations and the availability of funds under our Credit Agreement will be adequate to cover our operations and business needs over the next twelve months.

For more information on the revolving credit agreement, see Note 13 to the Consolidated Financial Statements.

As of March 31, 2023, $273 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 repatriation to the U.S.

were approximately $190.2 m illion at September 30, 2022, and are intended to remain indefinitely invested in foreign operations.

were in excess of $201 m illion at March 31, 2023, 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.

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 the first nine months of 2022, we paid $20 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.

During the first three months of 2023, we paid $7.8 million in dividends.

Off-Balance Sheet Arrangements

As of September 30, 2022, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Recent Pronouncements

On March 9, 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.

On March 21, 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 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.

As of March 31, 2023, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Non-GAAP Measures

11 unchanged sentences

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.

Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance.

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, recurring cash items necessary to generate revenues or operate our business.

7 unchanged sentences

The following tables show the calculation of EBITDA and Adjusted EBITDA:

Three months ended September 30, 2022

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Net income/(loss) (GAAP) $ 57,247 $ 9,958 $ (56,382) $ 10,823

Interest expense, net — — 3,794 3,794

Income tax expense/(benefit) — — (3,183) (3,183)

Depreciation and amortization expense 4,913 11,303 818 17,034

EBITDA (non-GAAP) 62,160 21,261 (54,953) 28,468

Restructuring expenses, net 42 — — 42

Foreign currency revaluation (gains)/losses (a) (2,931) 122 (6,633) (9,442)

Dissolution of business relationships in Russia (214) — — (214)

Pension settlement expense — — 49,128 49,128

Acquisition/integration costs — 255 — 255

Pre-tax (income) attributable to noncontrolling interest — (176) — (176)

Adjusted EBITDA (non-GAAP) $ 59,057 $ 21,462 $ (12,458) $ 68,061

Three months ended September 30, 2021

Three months ended March 31, 2023

(in thousands) Machine Clothing Albany Engineered

8 unchanged sentences

Foreign currency revaluation (gains)/losses (a) 1,960 (133) 60 1,887

AMJP grant — 963 (5,832) (4,869)

Acquisition/integration costs — 269 — 269

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 55,719 $ 21,029 $ (16,397) $ 60,351

Nine months ended September 30, 2022

Three months ended March 31, 2022

(in thousands) Machine Clothing Albany Engineered

9 unchanged sentences

Dissolution of business relationships in Russia 1,787 — 781 2,568

Pension settlement expense — — 49,128 49,128

Acquisition/integration costs — 282 — 282

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 57,654 $ 13,687 $ (10,305) $ 61,036

Nine months ended September 30, 2021

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Net income/(loss) (GAAP) $ 161,731 $ 13,019 $ (84,758) $ 89,992

Interest expense, net — — 11,521 11,521

Income tax expense — — 36,375 36,375

Depreciation and amortization expense 15,272 37,326 2,749 55,347

EBITDA (non-GAAP) 177,003 50,345 (34,113) 193,235

Restructuring expenses, net 193 (40) 77 230

Foreign currency revaluation (gains)/losses (a) (156) 363 813 1,020

AMJP grant — 963 (5,832) (4,869)

Acquisition/integration costs — 911 — 911

Pre-tax (income) attributable to noncontrolling interest — (206) — (206)

Adjusted EBITDA (non-GAAP) $ 177,040 $ 52,336 $ (39,055) $ 190,321

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 quarterly earnings and are financial performance metrics commonly used by investors.

The Company believes that such disclosures provide important insights into the underlying quarterly earnings and are financial performance metrics commonly used by investors.

The Company calculates the quarterly 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.

2 unchanged sentences

The following tables show the earnings per share effect of certain income and expense items:

Three months ended September 30, 2022

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

Restructuring expenses, net $ 42 $ 6 $ 36 $ 0.00

Foreign currency revaluation (gains)/losses (a) (9,442) (2,694) (6,748) (0.22)

Dissolution of business relationships in Russia (214) (18) (196) (0.01)

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 (b) — 5,217 (5,217) (0.17)

Acquisition/integration costs 255 77 178 0.01

Three months ended September 30, 2021

Three months ended March 31, 2023

(in thousands, except per share amounts) Pre tax

3 unchanged sentences

Foreign currency revaluation (gains)/losses (a) 1,887 553 1,334 0.04

AMJP grant (4,869) (1,446) (3,423) (0.11)

Acquisition/integration costs 269 77 192 0.01

Nine months ended September 30, 2022

Three months ended March 31, 2022

(in thousands, except per share amounts) Pre tax

4 unchanged sentences

Dissolution of business relationships in Russia 2,568 332 2,236 0.07

Pension settlement expense 49,128 11,947 37,181 1.20

Tax impact of stranded OCI benefit from TCJA for pension liability (b) — 5,217 (5,217) (0.17)

Acquisition/integration costs 282 84 198 0.01

Nine months ended September 30, 2021

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

Restructuring expenses, net $ 230 $ 67 $ 163 $ 0.00

Foreign currency revaluation (gains)/losses (a) 1,020 332 688 0.02

AMJP grant (4,869) (1,446) (3,423) (0.11)

Acquisition/integration costs 911 273 638 0.03

The following table contains the calculation of Adjusted EPS:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

Per share amounts (Basic)

2022 2021 2022 2021

Earnings per share (GAAP) $ 0.86 $ 0.87

3 unchanged sentences

Dissolution of business relationships in Russia — 0.07

Pension settlement charge 1.20 — 1.20 —

Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) (0.17) — (0.17) —

AMJP grant — (0.11) — (0.11)

Acquisition/ integration costs 0.01 0.01

1 unchanged sentence

(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.

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.

3 unchanged sentences

(in thousands)

September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021

March 31, 2023 December 31, 2022 March 31, 2022

Current maturities of long-term debt $ — $ — $ —

7 unchanged sentences

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 as of September 30, 2022 is as follows:

The calculation of net leverage ratio as of March 31, 2023 is as follows:

Total Company

Twelve months ended Nine months ended Trailing twelve months ended

(in thousands) December 31, 2021 September 30, 2021 September 30, 2022 September 30, 2022 (non-GAAP) (c)

Twelve months ended Three months ended Trailing twelve months ended

(in thousands) December 31, 2022 March 31, 2022 March 31, 2023 March 31, 2023 (non-GAAP) (b)

Net income/(loss) (GAAP) $ 96,508 $ 28,075 $ 27,086 $ 95,519

5 unchanged sentences

Foreign currency revaluation (gains)/losses (a) (9,829) (2,260) 1,887 (5,682)

Aviation Manufacturing Job Protection (AMJP) grant (4,731) (4,869) — 138

Dissolution of business relationships in Russia 2,275 2,568 — (293)

Pension settlement expense 49,128 — — 49,128

IP address sales (3,420) — — (3,420)

Acquisition/integration costs 1,057 282 269 1,044

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 253,529 $ 61,036 $ 60,351 $ 252,844

(in thousands, except for net leverage ratio) September 30, 2022

(in thousands, except for net leverage ratio) March 31, 2023

Net debt (non-GAAP) 186,742

1 unchanged sentence

Net leverage ratio (non-GAAP) 0.74

(c) Calculated as amounts incurred during the twelve months ended December 31, 2021, less those incurred during the nine months ended September 30, 2021, plus those incurred during the nine months ended September 30, 2022.

(b) Calculated as amounts incurred during the twelve months ended December 31, 2022, less those incurred during the three months ended March 31, 2022, plus those incurred during the three months ended March 31, 2023.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis