ALBANY INTERNATIONAL CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended March 31, 2023 2022 Net sales $ 269,096 $ 244,169 Cost of goods sold 169,778 152,565 Gross profit 99,318 91,604 Selling, general, and administrative expenses 48,479 42,707 Technical and research expenses 10,277 9,889 Restructuring expenses, net 20 254 Operating income 40,542 38,754 Interest expense, net 3,290 3,609 Other (income)/expense, net ( 455 ) ( 3,928 ) Income before income taxes 37,707 39,073 Income tax expense 10,621 10,998 Net income 27,086 28,075 Net income attributable to the noncontrolling interest 197 338 Net income attributable to the Company $ 26,889 $ 27,737 Earnings per share attributable to Company shareholders - Basic $ 0.86 $ 0.87 Earnings per share attributable to Company shareholders - Diluted $ 0.86 $ 0.87 Shares of the Company used in computing earnings per share: Basic 31,131 31,877 Diluted 31,217 31,961 Dividends declared per share, Class A and Class B $ 0.25 $ 0.21 The accompanying notes are an integral part of the consolidated financial statements 1 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (in thousands) (unaudited) Three Months Ended March 31, 2023 2022 Net income $ 27,086 $ 28,075 Other comprehensive income/(loss), before tax: Foreign currency translation and other adjustments 13,440 ( 1,551 ) Amortization of pension liability adjustments: Prior service credit ( 1,031 ) ( 1,123 ) Net actuarial loss 346 971 Payments and amortization related to interest rate swaps included in earnings ( 3,223 ) 1,696 Derivative valuation adjustment ( 662 ) 11,721 Income taxes related to items of other comprehensive income/(loss): Amortization of prior service credit 315 344 Amortization of net actuarial loss ( 105 ) ( 297 ) Payments and amortization related to interest rate swaps included in earnings 815 ( 430 ) Derivative valuation adjustment 168 ( 2,969 ) Comprehensive income 37,149 36,437 Comprehensive income attributable to the noncontrolling interest 435 394 Comprehensive income attributable to the Company $ 36,714 $ 36,043 The accompanying notes are an integral part of the consolidated financial statements 2 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) March 31, 2023 December 31, 2022 ASSETS Cash and cash equivalents $ 304,258 $ 291,776 Accounts receivable, net 216,035 200,018 Contract assets, net 153,817 148,695 Inventories 153,777 139,050 Income taxes prepaid and receivable 8,711 7,938 Prepaid expenses and other current assets 52,857 50,962 Total current assets $ 889,455 $ 838,439 Property, plant and equipment, net 450,254 445,658 Intangibles, net 32,874 33,811 Goodwill 179,255 178,217 Deferred income taxes 15,843 15,196 Noncurrent receivables, net 27,322 27,913 Other assets 100,755 103,021 Total assets $ 1,695,758 $ 1,642,255 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 76,241 $ 69,707 Accrued liabilities 103,986 126,385 Current maturities of long-term debt — — Income taxes payable 4,464 15,224 Total current liabilities 184,691 211,316 Long-term debt 491,000 439,000 Other noncurrent liabilities 108,371 108,758 Deferred taxes and other liabilities 14,181 15,638 Total liabilities 798,243 774,712 SHAREHOLDERS' EQUITY Preferred stock, par value $ 5.00 per share; authorized 2,000,000 shares; none issued — — Class A Common Stock, par value $ .001 per share; authorized 100,000,000 shares; 40,842,023 issued in 2023 and 40,785,434 in 2022 41 41 Class B Common Stock, par value $ .001 per share; authorized 25,000,000 shares; none issued and outstanding in 2023 and 2022 — — Additional paid in capital 441,917 441,540 Retained earnings 950,415 931,318 Accumulated items of other comprehensive income: Translation adjustments ( 132,970 ) ( 146,851 ) Pension and postretirement liability adjustments ( 16,699 ) ( 15,783 ) Derivative valuation adjustment 14,805 17,707 Treasury stock (Class A), at cost; 9,674,542 shares in 2023 and 9,674,542 in 2022 ( 364,923 ) ( 364,923 ) Total Company shareholders' equity 892,586 863,049 Noncontrolling interest 4,929 4,494 Total equity 897,515 867,543 Total liabilities and shareholders' equity $ 1,695,758 $ 1,642,255 The accompanying notes are an integral part of the consolidated financial statements 3 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, 2023 2022 OPERATING ACTIVITIES Net income $ 27,086 $ 28,075 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 15,864 15,597 Amortization 1,503 2,165 Change in deferred taxes and other liabilities ( 887 ) 1,792 Impairment of property, plant, equipment, and inventory 100 2,868 Non-cash interest expense 280 282 Compensation and benefits paid or payable in Class A Common Stock 378 745 Provision/(recovery) for credit losses from uncollected receivables and contract assets 309 1,858 Foreign currency remeasurement (gain)/loss on intercompany loans ( 1,732 ) ( 2,385 ) Fair value adjustment on foreign currency options 58 ( 977 ) Changes in operating assets and liabilities that provided/(used) cash: Accounts receivable ( 13,702 ) ( 15,674 ) Contract assets ( 4,403 ) 272 Inventories ( 12,360 ) ( 7,549 ) Prepaid expenses and other current assets ( 2,191 ) ( 1,976 ) Income taxes prepaid and receivable ( 693 ) 1,829 Accounts payable 5,214 ( 375 ) Accrued liabilities ( 23,137 ) ( 19,350 ) Income taxes payable ( 10,996 ) ( 10,890 ) Noncurrent receivables 867 614 Other noncurrent liabilities 7 ( 1,914 ) Other, net 2,042 ( 398 ) Net cash used in operating activities ( 16,393 ) ( 5,391 ) INVESTING ACTIVITIES Purchases of property, plant and equipment ( 16,275 ) ( 15,719 ) Purchased software — ( 35 ) Net cash used in investing activities ( 16,275 ) ( 15,754 ) FINANCING ACTIVITIES Proceeds from borrowings 58,000 77,000 Principal payments on debt ( 6,000 ) — Principal payments on finance lease liabilities — ( 390 ) Purchase of Treasury shares — ( 42,230 ) Taxes paid in lieu of share issuance ( 3,136 ) ( 770 ) Proceeds from options exercised — 7 Dividends paid ( 7,778 ) ( 6,742 ) Net cash provided by financing activities 41,086 26,875 Effect of exchange rate changes on cash and cash equivalents 4,064 ( 351 ) Increase in cash and cash equivalents 12,482 5,379 Cash and cash equivalents at beginning of period 291,776 302,036 Cash and cash equivalents at end of period $ 304,258 $ 307,415 The accompanying notes are an integral part of the consolidated financial statements 4 Index ALBANY INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Significant Accounting Policies Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for such periods. Albany International Corp. ("Albany", the "Registrant", the "Company", "we", "us", or "our") consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Company's Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Albany International Corp.’s Annual Report on Form 10-K for the year ended December 31, 2022. 2. Reportable Segments and Revenue Recognition In accordance with applicable disclosure guidance for enterprise segments and related information, the internal organization that is used by management for making operating decisions and assessing performance is used as the basis for our reportable segments. Machine Clothing: The Machine Clothing (“MC”) segment supplies permeable and impermeable belts used in the manufacture of paper, paperboard, tissue and towel, nonwovens, fiber cement and several other industrial applications. We sell our MC products directly to customer end-users in countries across the globe. Our products, manufacturing processes, and distribution channels for MC are substantially the same in each region of the world in which we operate. We design, manufacture, and market paper machine clothing (used in the manufacturing of paper, paperboard, tissue and towel) for each section of the paper machine and for every grade of paper. Paper machine clothing products are customized, consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. Albany Engineered Composites: 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, the SAFRAN Group (“SAFRAN”) owns a 10 percent noncontrolling interest. AEC, through ASC, is the exclusive supplier of the LEAP program of advanced composite fan blades and fan cases under a long-term supply contract, where revenue is determined by a cost-plus-fee agreement. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft . AEC's largest aerospace customer is the SAFRAN Group 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. AEC net sales to SAFRAN were $ 45.3 million and $ 40.4 million in the first three months of 2023 and 2022, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from SAFRAN amounted to $ 80.2 million and $ 80.8 million as of March 31, 2023 and December 31, 2022, respectively. 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. 5 Index The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements: Three months ended March 31, (in thousands) 2023 2022 Net sales Machine Clothing $ 153,222 $ 154,062 Albany Engineered Composites 115,874 90,107 Consolidated total $ 269,096 $ 244,169 Operating income/(loss) Machine Clothing $ 48,964 $ 49,644 Albany Engineered Composites 9,418 1,195 Corporate expenses ( 17,840 ) ( 12,085 ) Operating income $ 40,542 $ 38,754 Reconciling items: Interest income ( 1,102 ) ( 652 ) Interest expense 4,392 4,261 Other (income)/expense, net ( 455 ) ( 3,928 ) Income before income taxes $ 37,707 $ 39,073 Revenue Recognition: Products and services provided under long-term contracts represent a significant portion of sales in the Albany Engineered Composites segment and we account for these contracts over time, primarily using the percentage of completion (actual cost to 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. Changes in the estimated profitability of long-term contracts could be caused by increases or decreases in the contract value, revisions to customer delivery requirements, updated labor or overhead rates, factors affecting the supply chain, changes in the evaluation of contract risks and opportunities, or other factors . Changes in the estimated profitability of long-term contracts decreased operating income by $ 0.7 million during the first three months of 2023, compared to a decrease of $ 0.7 million in the same period last year. 6 Index We disaggregate revenue earned from contracts with customers for each of our business segments and product groups based on the timing of revenue recognition, and groupings used for internal review purposes. The following table disaggregates revenue for each product group by timing of revenue recognition: Three months ended March 31, 2023 (in thousands) Point in Time Revenue Recognition Over Time Revenue Recognition Total Machine Clothing $ 152,278 $ 944 $ 153,222 Albany Engineered Composites ASC — 44,532 44,532 Other AEC 5,793 65,549 71,342 Total Albany Engineered Composites 5,793 110,081 115,874 Total revenue $ 158,071 $ 111,025 $ 269,096 Three months ended March 31, 2022 (in thousands) Point in Time Revenue Recognition Over Time Revenue Recognition Total Machine Clothing $ 153,163 $ 899 $ 154,062 Albany Engineered Composites ASC — 39,712 39,712 Other AEC 3,913 46,482 50,395 Total Albany Engineered Composites 3,913 86,194 90,107 Total revenue $ 157,076 $ 87,093 $ 244,169 The following table disaggregates MC segment revenue by significant product groupings (paper machine clothing ("PMC") and engineered fabrics), and, for PMC, the geographical region to which the paper machine clothing was sold: Three months ended March 31, (in thousands) 2023 2022 Americas PMC $ 83,378 $ 76,616 Eurasia PMC 51,737 55,486 Engineered Fabrics 18,107 21,960 Total Machine Clothing Net sales $ 153,222 $ 154,062 We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contracts in the MC segment are generally for periods of less than a year. Most contracts in the AEC segment are relatively short duration firm-fixed-price orders. Remaining performance obligations on contracts that had an original duration of greater than one year totaled $ 821 million and $ 263 million as of March 31, 2023 and 2022, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of March 31, 2023, we expect to recognize as revenue approximately $ 126 million during 2023, $ 135 million during 2024, $ 129 million during 2025, and the remainder thereafter. 7 Index 3. Pensions and Other Postretirement Benefit Plans The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing these benefits during the active service period of the employees. The composition of the net periodic benefit cost for the three months ended March 31, 2023 and 2022, was as follows: Pension plans Other postretirement benefits (in thousands) 2023 2022 2023 2022 Components of net periodic benefit cost: Service cost $ 281 $ 355 $ 15 $ 29 Interest cost 1,063 1,417 468 305 Expected return on assets ( 971 ) ( 1,706 ) — — Amortization of prior service cost/(credit) ( 8 ) ( 1 ) ( 1,023 ) ( 1,122 ) Amortization of net actuarial loss 139 500 207 471 Net periodic benefit cost/(credit) $ 504 $ 565 $ ( 333 ) $ ( 317 ) The amount of net benefit cost/(credit) is determined at the beginning of each year and generally only varies from quarter to quarter when a significant event occurs, such as a curtailment or a settlement. There were no such events in the first three months of 2023 or 2022. Service cost for defined benefit pension and postretirement plans are reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are included in the line item Other (income)/expense, net in the Consolidated Statements of Income. 4. Other (Income)/Expense, net The components of Other (Income)/Expense, net are: Three months ended March 31, (in thousands) 2023 2022 Currency transaction (gains)/losses $ 60 $ ( 3,741 ) Bank fees and amortization of debt issuance costs 59 96 Components of net periodic pension and postretirement cost other than service cost ( 125 ) ( 136 ) Other ( 449 ) ( 147 ) Total $ ( 455 ) $ ( 3,928 ) Other (income)/expense, net, included foreign currency losses of $ 0.1 million in the first three months of 2023, as compared to gains of $ 3.7 million in the same period last year. The weaker Euro and Renminbi during the three month period ended March 31, 2023 led to a net loss on foreign currency related transactions, compared to a stronger Euro and Renminbi in the same period last year. 8 Index 5. Income Taxes The following table presents components of income tax expense for the three months ended March 31, 2023 and 2022: Three months ended March 31, (in thousands, except percentages) 2023 2022 Income tax based on income from continuing operations (1) $ 11,058 $ 10,942 Provision for change in estimated tax rate — — Income tax before discrete items 11,058 10,942 Discrete tax expense: Exercise of U.S. stock options — ( 9 ) Impact of amended tax returns — ( 81 ) True-up of prior year estimated taxes ( 545 ) 104 Enacted tax legislation and rate change 313 — Provision for/resolution of tax audits and contingencies, net 28 6 Impact of long range tax planning ( 443 ) — Other 210 36 Total income tax expense/(benefit) $ 10,621 $ 10,998 (1) Calculated at estimated annual tax rates of 29.3 % and 28.0 %, respectively. Income tax expense for the quarter was computed in accordance with ASC 740-270, Income Taxes – Interim Reporting. Under this method, loss jurisdictions, which cannot recognize a tax benefit with regard to their generated losses, are excluded from the annual effective tax rate calculation and their taxes will be recorded discretely in each quarter. 6. Earnings Per Share The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows: Three months ended March 31, (in thousands, except market price and earnings per share) 2023 2022 Net income attributable to the Company $ 26,889 $ 27,737 Weighted average number of shares: Weighted average number of shares used in calculating basic net income per share 31,131 31,877 Effect of dilutive stock-based compensation plans: Stock options — — RSU and MPP shares 86 84 Weighted average number of shares used in calculating diluted net income per share 31,217 31,961 Net income attributable to the Company per share: Basic $ 0.86 $ 0.87 Diluted $ 0.86 $ 0.87 9 Index 7. Accumulated Other Comprehensive Income ("AOCI") The table below presents changes in the components of AOCI for the period December 31, 2022 to March 31, 2023: (in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income December 31, 2022 $ ( 146,851 ) $ ( 15,783 ) $ 17,707 $ ( 144,927 ) Other comprehensive income/(loss) before reclassifications, net of tax 13,881 ( 441 ) ( 494 ) 12,946 Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax — — ( 2,408 ) ( 2,408 ) Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax — ( 475 ) — ( 475 ) Net current period other comprehensive income 13,881 ( 916 ) ( 2,902 ) 10,063 March 31, 2023 $ ( 132,970 ) $ ( 16,699 ) $ 14,805 $ ( 134,864 ) The table below presents changes in the components of AOCI for the period December 31, 2021 to March 31, 2022: (in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income December 31, 2021 $ ( 105,880 ) $ ( 38,490 ) $ ( 1,614 ) $ ( 145,984 ) Other comprehensive income/(loss) before reclassifications, net of tax ( 1,730 ) 179 8,752 7,201 Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax — — 1,266 1,266 Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax — ( 105 ) — ( 105 ) Net current period other comprehensive income ( 1,730 ) 74 10,018 8,362 March 31, 2022 $ ( 107,610 ) $ ( 38,416 ) $ 8,404 $ ( 137,622 ) The components of AOCI that are reclassified to the Consolidated Statements of Income relate to our pension and postretirement plans and interest rate swaps. 10 Index The table below presents the expense/(income) amounts reclassified from AOCI, and the line items of the Consolidated Statements of Income that were affected for the three months ended March 31, 2023 and 2022: Three months ended March 31, (in thousands) 2023 2022 Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: Expense/(income) related to interest rate swaps included in Income before taxes $ ( 3,223 ) $ 1,696 Income tax effect 815 ( 430 ) Effect on net income due to items reclassified from Accumulated Other Comprehensive Income $ ( 2,408 ) $ 1,266 Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: Amortization of prior service credit ( 1,031 ) ( 1,123 ) Amortization of net actuarial loss 346 971 Total pretax amount reclassified (a) ( 685 ) ( 152 ) Income tax effect 210 47 Effect on net income due to items reclassified from Accumulated Other Comprehensive Income $ ( 475 ) $ ( 105 ) (a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3). 8. Noncontrolling Interest Effective October 31, 2013, Safran S.A. (Safran) acquired a 10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC ("ASC"). The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity in the Company’s subsidiary, Albany Safran Composites, LLC: Three months ended March 31, (in thousands, except percentages) 2023 2022 Net income of Albany Safran Composites (ASC) $ 2,282 $ 3,702 Less: Return attributable to the Company's preferred holding 308 319 Net income of ASC available for common ownership $ 1,974 $ 3,383 Ownership percentage of noncontrolling shareholder 10 % 10 % Net income attributable to the noncontrolling interest $ 197 $ 338 Noncontrolling interest, beginning of year $ 4,494 $ 3,638 Net income attributable to noncontrolling interest 197 338 Changes in other comprehensive income attributable to the noncontrolling interest 238 56 Noncontrolling interest, end of interim period $ 4,929 $ 4,032 11 Index 9. Accounts Receivable Accounts receivable includes trade receivables. In connection with certain sales in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year. As of March 31, 2023 and December 31, 2022, Accounts receivable consisted of the following: (in thousands) March 31, 2023 December 31, 2022 Trade and other accounts receivable $ 199,290 $ 179,676 Bank promissory notes 20,196 23,439 Allowance for expected credit losses ( 3,451 ) ( 3,097 ) Accounts receivable, net $ 216,035 $ 200,018 The Company has Noncurrent receivables in the AEC segment that represent revenue earned, which has extended payment terms. The Noncurrent receivables will be invoiced to the customer over a 10-year period, which began in 2020. As of March 31, 2023 and December 31, 2022, Noncurrent receivables consisted of the following: (in thousands) March 31, 2023 December 31, 2022 Noncurrent receivables $ 27,459 $ 28,053 Allowance for expected credit losses ( 137 ) ( 140 ) Noncurrent receivables, net $ 27,322 $ 27,913 10. Contract Assets and Liabilities Contract assets includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance Sheets. Contract assets and Contract liabilities are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting period. As of March 31, 2023 and December 31, 2022, Contract assets and Contract liabilities consisted of the following: (in thousands) March 31, 2023 December 31, 2022 Contract assets $ 154,589 $ 149,443 Allowance for expected credit losses ( 772 ) ( 748 ) Contract assets, net $ 153,817 $ 148,695 Contract liabilities $ 12,310 $ 15,176 Contract assets increased $ 5.1 million during the three-month period ended March 31, 2023. The increase was primarily due to an increase in unbilled revenue related to the satisfaction of performance obligations, in excess of the amounts billed to customers for contracts that were in a contract asset position. There were no impairment losses related to our Contract assets during the three month periods ended March 31, 2023 and March 31, 2022. Contract liabilities decreased $ 2.9 million during the three-month period ended March 31, 2023, primarily due to revenue recognized from satisfied performance obligations exceeding amounts invoiced to customers that were in a contract liability position. Revenue recognized for the three-month periods ended March 31, 2023 and 2022 that was included in the Contract liability balance at the beginning of the year was $ 6.7 million and $ 4.8 million, respectively. 12 Index 11. Inventories Costs included in inventories are raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new cost basis of such inventories. As of March 31, 2023 and December 31, 2022, Inventories consisted of the following: (in thousands) March 31, 2023 December 31, 2022 Raw materials $ 81,611 $ 74,631 Work in process 56,537 50,516 Finished goods 15,629 13,903 Total inventories $ 153,777 $ 139,050 12. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Our reportable segments are consistent with our operating segments. In the second quarter of 2022, management applied the qualitative assessment approach in performing its annual evaluation of goodwill for the Company's Machine Clothing reporting unit and two AEC reporting units and concluded that each reporting unit’s fair value continued to exceed its carrying value. In addition, there were no amounts at risk due to the estimated excess between the fair and carrying values. Accordingly, no impairment charges were recorded. When a quantitative assessment is performed, determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable. To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company, as well as publicly available industry information, to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. 13. Financial Instruments Long-term debt, principally to banks and noteholders, consists of: (in thousands, except interest rates) March 31, 2023 December 31, 2022 Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.58 % in 2023 and 3.16 % in 2022 (including the effect of interest rate hedging transactions, as described below), due in 2024 $ 491,000 $ 439,000 We had no current maturities of Long-term debt as of March 31, 2023 or December 31, 2022. 13 Index 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, entered into on November 7, 2017 (the “Prior Agreement”). Under the Credit Agreement, $ 491 million of borrowings were outstanding as of March 31, 2023. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio (as defined in the Credit Agreement) at the time of borrowing. At the time of the last borrowing on March 30, 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 EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of March 31, 2023, we would have been able to borrow an additional $ 209 million under the Agreement. The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default that are comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company’s subsidiaries. Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change (as defined in the Credit Agreement). On June 14, 2021, we entered into interest rate swap agreements for the period October 17, 2022 through October 27, 2024. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $ 350 million of indebtedness, drawn under the Credit Agreement at the rate of 0.838 % during the period. Under the terms of these transactions, we pay the fixed rate of 0.838 % and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date. The monthly calculation date is the 16th of each month, and on March 16, 2023, one-month LIBOR was 4.73 %. On March 16, 2023, the all-in-rate on the $ 350 million of debt was 2.463 %. On October 17, 2022, our interest rate swap agreements that were in effect from December 18, 2017 terminated. These transactions had the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $ 350 million of indebtedness drawn under the Credit Agreement at the rate of 2.11 % during the period. Under the terms of those transactions, we paid the fixed rate of 2.11 % and the counterparties paid a floating rate based on the one-month LIBOR rate at each monthly calculation date. The all-in-rate on the $ 350 million of debt was 3.735 %. These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 14. No cash collateral was received or pledged in relation to the swap agreements. Under the Credit Agreement, we are required to maintain leverage and minimum interest coverage ratios (as defined in the Credit Agreement) of not greater than 3.50 to 1.00 and greater than 3.00 to 1.00, respectively. As of March 31, 2023, our leverage ratio was 1.47 to 1.00 and our interest coverage ratio was 14.76 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash, provided our leverage ratio does not exceed the limits noted above. Indebtedness under the Credit Agreement is ranked equally in right of payment to all unsecured senior debt. We were in compliance with all debt covenants as of March 31, 2023. Currently, our Credit Agreement and certain of our derivative instruments reference one-month USD LIBOR-based rates, which are set to discontinue after June 30, 2023. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate ("SOFR"). Our Credit Agreement contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark and we have adhered to the ISDA IBOR Fallbacks Protocol, which will govern our derivatives upon the final cessation of USD LIBOR. Amendments to the Reference Rate Reform standard have helped limit the accounting impact from contract modifications, including hedging relationships, due to the transition from LIBOR to alternative reference rates that are completed by December 31, 2024. We adopted certain provisions of this standard during 2021. While we currently do not expect a significant impact to our operating results, financial position or cash flows from the transition from LIBOR to alternative reference interest rates, we will continue to monitor the impact of this transition until it is completed. 14 Index 14. Fair-Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had no Level 3 financial assets or liabilities at March 31, 2023, or at December 31, 2022. The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair value on a recurring basis: March 31, 2023 December 31, 2022 Quoted prices in active markets Significant other observable inputs Quoted prices in active markets Significant other observable inputs (in thousands) (Level 1) (Level 2) (Level 1) (Level 2) Fair Value Assets: Cash equivalents $ 4,317 $ — $ 6,533 $ — Other Assets: Common stock of unaffiliated foreign public company (a) 601 — 602 — Interest rate swaps 19,784 — 23,605 (a) Original cost basis $ 0.5 million. Cash equivalents include short-term securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities. The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities in the Consolidated Balance Sheets. Amounts determined to be due within one year are reclassified to Other current assets and/or Accrued liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the interest rate swaps flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets. As of March 31, 2023, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions), affect earnings. Interest (income)/expense related to payments under the active swap agreements totaled $( 3.2 ) million for the three month period ended March 31, 2023, and $ 1.7 million for the three month period ended March 31, 2022. We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes in fair value of these instruments are recorded as gains or losses within Other (income)/expense, net. When exercised, the foreign currency instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and the risk of unfavorable changes in interest and currency rates, which may reduce the value of the instruments. We seek to mitigate risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies. 15 Index (Gains)/losses related to changes in fair value of derivative instruments that were recognized in Other (income)/expense, net in the Consolidated Statements of Income were as follows: Three months ended March 31, (in thousands) 2023 2022 Derivatives not designated as hedging instruments Foreign currency options (gains)/losses $ 16 $ ( 977 ) 15. Contingencies Asbestos Litigation Albany International Corp. is a defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills. We were defending 3,597 claims as of March 31, 2023. The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented: Year ended December 31, Opening Number of Claims Claims Dismissed, Settled, or Resolved New Claims Closing Number of Claims Amounts Paid (thousands) to Settle or Resolve 2022 3,609 43 32 3,598 125 2023 (As of March 31) 3,598 4 3 3,597 $ — We anticipate that additional claims will be filed against the Company and related companies in the future but are unable to predict the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims and therefore are unable to estimate a range of reasonably possible loss in excess of amounts already accrued for pending or future claims. While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of March 31, 2023, we had resolved, by means of settlement or dismissal, 38,028 claims. The total cost of resolving all claims was $ 10.6 million. Of this amount, almost 100 % was paid by our insurance carrier, who has confirmed that we have approximately $ 140 million of remaining coverage under primary and excess policies that should be available with respect to current and future asbestos claims. The Company’s subsidiary, Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against 7,709 claims as of March 31, 2023, only twelve claims have been filed against Brandon since January 1, 2012, and only $ 15,000 in settlement costs have been incurred since 2001. Brandon was acquired by the Company in 1999 and has its own insurance policies covering periods prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100 % of indemnification and defense costs, subject to policy limits and a standard reservation of rights. In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability 16 arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions. We currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results of operations, or cash flows. 16. Changes in Shareholders’ Equity The following table summarizes changes in Shareholders’ Equity for the period December 31, 2022 to March 31, 2023: Class A Common Stock Class B Common Stock Additional paid-in capital Retained earnings Accumulated items of other comprehensive income Class A Treasury Stock Noncontrolling Interest Total Equity (in thousands) Shares Amount Shares Amount Shares Amount December 31, 2022 40,785 $ 41 — $ — $ 441,540 $ 931,318 $ ( 144,927 ) 9,675 $ ( 364,923 ) $ 4,494 $ 867,543 Net income — — — — — 26,889 — — — 197 27,086 Compensation and benefits paid or payable in shares 58 — — — 378 — — — — — 378 Dividends declared Class A Common Stock, $ 0.25 per share — — — — — ( 7,792 ) — — — — ( 7,792 ) Class B Common Stock, $ 0.25 per share — — — — — — — — — — — Cumulative translation adjustments — — — — — — 13,881 — — 238 14,119 Pension and postretirement liability adjustments — — — — — — ( 916 ) — — — ( 916 ) Derivative valuation adjustment — — — — — — ( 2,902 ) — — — ( 2,902 ) March 31, 2023 40,842 $ 41 — $ — $ 441,917 $ 950,415 $ ( 134,864 ) 9,675 $ ( 364,923 ) $ 4,929 $ 897,515 The following table summarizes changes in Shareholders’ Equity for the period December 31, 2021 to March 31, 2022: Class A Common Stock Class B Common Stock Additional paid-in capital Retained earnings Accumulated items of other comprehensive income Class A Treasury Stock Noncontrolling Interest Total Equity (in thousands) Shares Amount Shares Amount Shares Amount December 31, 2021 40,760 $ 41 — $ — $ 436,996 $ 863,057 $ ( 145,984 ) 8,665 $ ( 280,143 ) $ 3,638 $ 877,605 Net income — — — — — 27,737 — — — 338 28,075 Compensation and benefits paid or payable in shares 21 — — — 745 — — — — — 745 Options exercised — — — — 7 — — — — — 7 Purchase of Treasury shares (a) — — — — — — — 515 ( 43,937 ) — ( 43,937 ) Dividends declared Class A Common Stock, $ 0.21 per share — — — — — ( 6,661 ) — — — — ( 6,661 ) Class B Common Stock, $ 0.21 per share — — — — — — — — — — — Cumulative translation adjustments — — — — — — ( 1,730 ) — — 56 ( 1,674 ) Pension and postretirement liability adjustments — — — — — — 74 — — — 74 Derivative valuation adjustment — — — — — — 10,018 — — — 10,018 March 31, 2022 40,781 41 — — 437,748 884,133 ( 137,622 ) 9,180 ( 324,080 ) 4,032 864,252 (a) In October 2021, the Company's Board of Directors authorized the Company to repurchase shares of up to $ 200 million through open market purchases, privately negotiated transactions or otherwise, and to determine the prices, times and amounts. During the three months ended March 31, 2022, the Company repurchased 514,686 shares totaling $ 43.9 million. The Company did not repurchase shares during the three months ended March 31, 2023. 17