ALBANY INTERNATIONAL CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes. Forward-looking statements This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” "forecast," ”look for,” “will,” “should,” “guidance,” “guide” and similar expressions identify forward-looking statements, which generally are not historical in nature. Because forward-looking statements are subject to certain risks and uncertainties, (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by such forward-looking statements. There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to: • Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including higher interest rates, inflationary pressures, the effects of another COVID-19 outbreak, or other similar outbreaks, for an extended period of time; • Across the entire Company, increasing labor, raw material, energy, and logistics costs due to supply chain constraints and inflationary pressures commodities have adversely impacted profit margins. These challenges have only increased as a result of the ongoing Russia-Ukraine war and the escalating conflicts in regions of the Middle East; • 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; • In the Albany Engineered Composites segment, longer-than-expected timeframe for the aerospace industry to utilize existing inventories, unanticipated reductions in demand, including reductions driven by supply chain shortages on other aircraft components, delays, technical difficulties, and cancellations in aerospace programs that are expected to generate revenue and drive long-term growth; • Slower to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; • Failure to adequately integrate Heimbach into our business systems and processes within the expected timeframe or, failure to or delayed realization of anticipated benefits of the acquisition could adversely impact the Company’s business, financial condition and results of operations, as further described in Item 1A. Risk Factors ; and • 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. 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. 24 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. Business Environment Overview and Trends Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”), draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities. The MC segment is the Company’s long-established core business and primary generator of cash. While it has been negatively impacted by declines in publication grades in the Company’s traditional markets, there has been some offsetting effect due to growth in demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets. Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future. MC has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality. On August 31, 2023, the Company acquired Heimbach, a privately-held manufacturer of paper machine clothing with headquarters in Düren, Germany. See Note 17, Business Combination for additional information. The AEC segment provides significant longer term growth potential for the Company. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group ("SAFRAN") and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net revenues in 2022. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35 joint strike fighter, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787, and vacuum waste tanks for Boeing 7-Series aircraft. AEC is actively engaged in research to develop new applications in both commercial, space, and defense aircraft engine and airframe markets. For the year ended December 31, 2022, approximately 46 percent of AEC revenues were related to U.S. government contracts or programs. Consolidated Results of Operations Net revenues The following table summarizes our Net revenues by business segment: Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2023 2022 % Change 2023 2022 % Change Machine Clothing $ 166,588 $ 153,389 8.6 % $ 479,027 $ 459,121 4.3 % Albany Engineered Composites 114,518 107,174 6.9 % 345,298 306,980 12.5 % Total $ 281,106 $ 260,563 7.9 % $ 824,325 $ 766,101 7.6 % 25 The following tables provide a comparison of 2023 Net revenues, excluding currency translation effects, to 2022 Net revenues: (in thousands, except percentages) Net revenues as reported, Q3 2023 Increase due to changes in currency translation rates Q3 2023 revenues on same basis as Q3 2022 currency translation rates Net revenues as reported, Q3 2022 % Change compared to Q3 2022, excluding currency rate effects Machine Clothing $ 166,588 $ 662 $ 165,926 $ 153,389 8.2 % Albany Engineered Composites 114,518 1,275 113,243 107,174 5.7 % Total $ 281,106 $ 1,937 $ 279,169 $ 260,563 7.1 % (in thousands, except percentages) Net revenues as reported, YTD 2023 (Decrease)/ increase due to changes in currency translation rates YTD 2023 revenues on same basis as 2022 currency translation rates Net revenues as reported, YTD 2022 % Change compared to 2022, excluding currency rate effects Machine Clothing $ 479,027 $ (3,684) $ 482,711 $ 459,121 5.1 % Albany Engineered Composites 345,298 851 344,447 306,980 12.2 % Total $ 824,325 $ (2,833) $ 827,158 $ 766,101 8.0 % Three month comparison Net revenues increased 7.9% compared to the same period in 2022. Changes in currency translation rates had the effect of increasing Net revenues $1.9 million. MC's Net revenues increased 8.6% compared to the third quarter of 2022, driven by Heimbach Net revenues of $15.6 million and, to a lesser extent, higher Net revenues in tissue and packaging grades, more than offset by lower Net revenues in pulp and engineered fabrics. AEC's Net revenues increased 6.9%, primarily driven by growth on LEAP programs, the Boeing Frames program and other commercial programs, offset by lower CH-53K sales. Nine month comparison Changes in currency translation rates had the effect of decreasing Net revenues by $2.8 million, driven by a weaker Renminbi as compared to 2022. Excluding the effect of changes in currency translation rates: • Net revenues increased 8.0% compared to the same period in 2022. • Net revenues in MC increased 5.1% compared to the first nine months of 2022, primarily due to the contribution of Heimbach Net revenues of $15.6 million and growth in revenues for packaging and tissue grades, partially offset by decreases in Engineered Fabrics. • Net revenues in AEC increased 12.2%, primarily due to growth on LEAP programs. Gross Profit The following table summarizes Gross profit by business segment: Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2023 2022 2023 2022 Machine Clothing $ 79,257 $ 79,232 $ 238,031 $ 237,434 Albany Engineered Composites 22,578 21,261 65,826 55,256 Total $ 101,835 $ 100,493 $ 303,857 $ 292,690 % of Net revenues 36.2 % 38.6 % 36.9 % 38.2 % Three month comparison The increase in 2023 Gross profit, as compared to the same period last year, was driven by higher sales in both segments. Gross profit as a percentage of revenues: • MC's gross profit margin decreased from 51.7% in 2022 to 47.6% in 2023, driven by lower margins at Heimbach, in addition to higher input costs due to the inflationary environment and lower overhead absorption. 26 • AEC's gross profit margin remained largely in line with the prior year, decreasing slightly from 19.8% in 2022 to 19.7% in 2023, driven by an unfavorable shift in program revenue mix. Favorable changes in the estimated profitability of long-term contracts increased operating income by $0.9 million in 2023; however, in 2022, favorable changes were more significant, increasing operating income by $2.6 million. Nine month comparison The increase in Gross profit during the first nine months of 2023, as compared to the same period in 2022, was driven by the following: • MC's gross profit margin decreased from 51.7% in 2022 to 49.7% in 2023, driven by lower margins at Heimbach, in addition to increased input costs, mainly due to the inflationary environment, and lower overhead absorption. • AEC's Gross profit increased $10.6 million and, as a percentage of revenues, increased from 18.0% in the prior year to 19.1% in 2023. The increase in gross profit was driven by growth in revenues during 2023, primarily on LEAP programs and other commercial programs, with improved overhead absorption and reductions in raw material reserves as compared to 2022. In addition, gross profit margin increased as a result of improved overhead absorption and the absence of a $2 million raw material reserve on damaged inventory, as compared to prior year. 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, (in thousands, except percentages) 2023 2022 2023 2022 Machine Clothing $ 28,465 $ 21,941 $ 84,404 $ 75,427 Albany Engineered Composites 13,204 11,302 38,366 34,568 Corporate expenses 20,014 13,564 54,747 39,314 Total $ 61,683 $ 46,807 $ 177,517 $ 149,309 % of Net revenues 21.9 % 18.0 % 21.5 % 19.5 % Three month comparison Consolidated STG&R expenses increased 31.8% as compared to 2022, and as a percentage of revenues increased from 18.0% in 2022 to 21.9% in 2023. • In MC, changes in currency translation rates had the effect of increasing STG&R by $2.3 million over the prior year. The addition of Heimbach, combined with increases in customer credit loss reserves, contributed to higher STG&R expenses as compared to 2022. • In AEC, Selling and general expenses increased $1.9 million, primarily driven by increased incentive compensation and personnel-related costs. • Corporate STG&R expenses increased $6.4 million, principally due to acquisition-related expenses, the vesting of retirement compensation costs for the former CEO, and higher personnel-related costs. Nine month comparison The overall increase in STG&R expenses in the first nine months of 2023, compared to the same period in 2022, was due to the net effect of the following: • In MC, changes in currency translation rates had the effect of increasing STG&R by $5.6 million over the prior year. The addition of Heimbach, combined with increases in travel and related expenses, contributed to higher STG&R expenses as compared to 2022. • In AEC, Selling and general expenses increased $2.2 million due to higher incentive compensation and personnel-related costs, and $0.5 million related to investments in business development, including increases in marketing and trade show activities. • Corporate STG&R expenses increased $15.4 million principally due to higher professional fees, acquisition-related expenses, vesting of retirement compensation costs for the former CEO, and higher personnel-related costs. 27 Restructuring Expense, net In addition to the items discussed above affecting Gross profit and STG&R expenses, Operating income was affected by restructuring expense, net, of $0.1 million in the third quarter, and $0.2 million in the nine months ended September 30, 2023, 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, (in thousands) 2023 2022 2023 2022 Machine Clothing $ 50,710 $ 57,247 $ 153,400 $ 161,752 Albany Engineered Composites 9,374 9,958 27,460 20,688 Corporate expenses (20,014) (13,561) (54,747) (39,327) Total $ 40,070 $ 53,644 $ 126,113 $ 143,113 Other Earnings Items Three months ended September 30, Nine months ended September 30, (in thousands) 2023 2022 2023 2022 Interest expense, net $ 3,653 $ 3,794 $ 10,049 $ 11,336 Pension settlement expense — 49,128 — 49,128 Other (income)/expense, net 56 (6,918) (4,910) (17,891) Income tax expense 9,207 (3,183) 39,908 22,273 Net income attributable to the noncontrolling interest 45 129 396 635 Interest expense/(income), net Interest expense/(income), 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 of 2022, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred in the current year. Other (income)/expense, net Other (income)/expense, net, included foreign currency related transactions which resulted in expense of $0.5 million in the three months ended September 30, 2023, as compared to gains of $6.6 million in the same period last year, and resulted in gains of $3.6 million in the nine months ended September 30, 2023, as compared to gains of $17.7 million in the same period last year. During 2023, the Mexican Peso weakened during the third quarter, but was overall stronger during the nine months ended September 30, 2023, driving the foreign currency gain in the period. During 2022, the Euro remained weaker for the three and nine months ended September 30, 2022, resulting in a more significant foreign currency gain during those periods. Income Tax expense/(benefit) The Company has operations that constitute a taxable presence in 22 countries outside of the United States. The majority of these countries had income tax rates that were above the United States federal tax rate of 21 percent during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges. The tax rate is affected by recurring items, such as the income tax rate in the U.S. and non-U.S. jurisdictions and the mix of income earned in those jurisdictions. The tax rate is also affected by U.S. 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 28 tax rate for the third quarter of 2023 was 25.3%, higher compared to (41.6%) for the same period in 2022, mainly due to favorable discrete tax adjustments in the prior period. For the first nine months of 2023, the Company's effective tax rate was 33.0%, higher compared to 22.2% for the same period in 2022, mainly due to favorable discrete tax adjustments in the prior year. For more information, see Note 5. Income Taxes in the Notes to the Consolidated Financial Statements. Segment Results of Operations Machine Clothing Segment Machine Clothing is our largest business segment and accounted for 58% of our consolidated revenues during the first nine months of 2023. MC products are purchased primarily by manufacturers of paper and paperboard. We believe we are well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. 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. The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology and selective business acquisitions, and to maintain and grow our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement. On August 31, 2023, the Company acquired Heimbach, a privately-held manufacturer of paper machine clothing with headquarters in Düren, Germany, which is expected to enhance the Company's scale and geographic footprint, provide complementary technology, and create a differentiated manufacturing, sales and service network. Review of Operations Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2023 2022 2023 2022 Net revenues $ 166,588 $ 153,389 $ 479,027 $ 459,121 Gross profit 79,257 79,232 238,031 237,434 % of Net revenues 47.6 % 51.7 % 49.7 % 51.7 % STG&R expenses 28,465 21,941 84,404 75,427 Operating income 50,710 57,247 153,400 161,752 Net Revenues Three month comparison Net revenues increased by 8.6%. Changes in currency translation rates, driven by a stronger Euro, offset in part by a weaker Renminbi, had the effect of increasing third quarter 2023 revenues by $0.7 million. Excluding the effect of changes in translation rates, Net revenues in MC increased 8.2% compared to the third quarter of 2022, driven by higher Net revenues in tissue and packaging grades and the contribution of $15.6 million of revenues from the Heimbach acquisition. Nine month comparison Net revenues increased by 4.3%. Changes in currency translation rates, driven by a weaker Renminbi, had the effect of decreasing 2023 revenues by $3.7 million compared to the same period in 2022. Excluding the effect of changes in currency translation rates, Net revenues in MC increased 5.1% compared to 2022, primarily due to growth in revenues for tissue and packaging grades and the contribution of $15.6 million of revenues from the Heimbach acquisition. Gross Profit MC delivered steady Gross profit in the three and nine months ended September 30, 2023, in line with prior year performance, though it experienced some reduction in gross margin on account of higher input costs and lower overhead absorption. 29 Operating Income Operating income decreased year-over-year, due to higher STG&R expenses. Changes in currency translation rates had the effect of increasing STG&R by $2.3 million and $5.6 million for the three and nine months ended September 30, 2023, as compared to the prior year. The addition of Heimbach, combined with increases in customer credit loss reserves, contributed to higher STG&R expenses as compared to 2022. The acquisition of Heimbach impacted MC's third quarter results by reducing Operating income $0.5 million, which included an incremental Cost of goods sold charge related to the acquisition step-up of inventory balances, and also included Depreciation expense on Property, plant, and equipment, net of $1.1 million, and amortization expense on Intangibles, net of $0.1 million. 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 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, (in thousands, except percentages) 2023 2022 2023 2022 Net revenues $ 114,518 $ 107,174 $ 345,298 $ 306,980 Gross profit 22,578 21,261 65,826 55,256 % of Net revenues 19.7 % 19.8 % 19.1 % 18.0 % STG&R expenses 13,204 11,302 38,366 34,568 Operating income 9,374 9,958 27,460 20,688 Net Revenues For the three months ended September 30, 2023, Net revenues increased 6.9% compared to the prior year, driven by growth on LEAP programs and other commercial programs. Excluding the effect of changes in currency translation rates, the increase in Net revenues was 5.7%. For the nine months ended September 30, 2023, Net revenues in AEC increased 12.5%, primarily due to growth on LEAP programs. Excluding the effect of changes in currency translation rates, the increase in Net revenues was 12.2%. 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 the first nine months of 2023 and 2022. In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses. Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow. 30 Gross Profit For the three months ended September 30, 2023, Gross profit increased $1.3 million as compared to the same period last year, and as a percentage of revenues decreased from 19.8% in 2022 to 19.7% in 2023, driven by an unfavorable shift in program revenue mix, coupled with $1.7 million of less favorable changes in the estimated profitability of long-term contracts as compared to the same period last year. For the nine months ended September 30, 2023, Gross profit increased $10.6 million and as a percentage of revenues increased from 18.0% in the prior year to 19.1% in 2023. The increase was driven by growth in revenues during 2023, primarily on LEAP programs and other commercial programs, with improved overhead absorption and reductions in raw material reserves as compared to 2022. Operating Income For the three months ended September 30, 2023, Operating income decreased $0.6 million, principally due to an increase in Selling, general, and research expenses, as described above. For the nine months ended September 30, 2023, Operating income increased $6.8 million, principally due to higher Net revenues and Gross profit, as described above, partially offset by higher STG&R expenses. Changes in the estimated profitability of long-term contracts increased operating income by $0.9 million for the third quarter of 2023 and decreased operating income $4.1 million for the nine months ended September 30, 2023. Adjustments in the estimated profitability of long-term contracts increased operating income by $2.6 million and $2.0 million in the three and nine months ended September 30, 2022, respectively. Working Capital, Liquidity and Capital Structure Cash Flow Summary Nine months ended September 30, (in thousands) 2023 2022 Net income $ 81,066 $ 78,267 Depreciation and amortization 54,778 51,908 Changes in working capital (a) (58,130) (89,899) Changes in other noncurrent liabilities and deferred taxes (4,866) (21,542) Other operating items 964 48,573 Net cash provided by operating activities 73,812 67,307 Net cash used in investing activities (182,596) (52,832) Net cash used in financing activities (10,839) (9,119) Effect of exchange rate changes on cash and cash equivalents (647) (30,910) Decrease in cash and cash equivalents (120,270) (25,554) Cash and cash equivalents at beginning of year 291,776 302,036 Cash and cash equivalents at end of period $ 171,506 $ 276,482 (a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities. Net cash provided by operating activities was $73.8 million in 2023, compared to $67.3 million in the same period last year. The increase was driven by improved levels of working capital at MC and lower cash outflows related to other liabilities. In the previous year, the Company 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. No similar payment was made during the current year. 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. On August 31, 2023, the Company acquired Heimbach, a privately-held manufacturer of paper machine clothing with headquarters in Düren, Germany, for net cash of $133.5 million, funded using cash on hand. Net cash used in investing activities also included capital expenditures totaling $49.1 million and $52.8 million for the first nine months 31 of 2023 and 2022, respectively, including investments to improve productivity and produce a meaningful impact on energy and resource efficiency. Net cash used in financing activities during 2023 was $10.8 million as compared to $9.1 million in 2022. The increase was, in part, due to the absence of share repurchases in the current year, which resulted in lower borrowings from the revolving credit facility. 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. Under our $800 million unsecured committed Amended Credit Agreement, $461.0 million of borrowings were outstanding as of September 30, 2023, in addition we have borrowings outstanding at the newly acquired Heimbach subsidiary of $29.6 million, of which $27.2 million was considered current. As of September 30, 2023, we had cash and cash equivalents of $171.5 million and available borrowings under our Amended Credit Agreement of $339.0 million, for a total liquidity of approximately $510.5 million. We believe cash flows from operations and the availability of funds under our Amended Credit Agreement will be adequate to fund our operations and business needs over the next twelve months. For more information on credit agreements, see Note 13. Financial Instruments in the Notes to Consolidated Financial Statements. As of September 30, 2023, $150.9 million of our total cash and cash equivalents were 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 in excess of $42 m illion as of September 30, 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 endeavors 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. Bank debt at the Company's Heimbach subsidiary, assumed in the acquisition, is held by several European financial institutions. Certain bank agreements allow for the repayment of the debt upon demand by any of the financial institutions in the event of a change in control. Some or all of the assumed bank debt could become due upon notification by any of the financial institutions before the maturity date of the bank agreements. As a result, of the $29.6 million borrowings outstanding as of September 30, 2023, we have classified $27.2 million as current maturity (see Note 17, Business Combination and Note 13, Financial Instruments , for additional information). In the event this debt becomes callable, we have sufficient liquidity to settle this debt. We have also returned cash to shareholders through dividends and share repurchases. During the first nine months of 2023, we paid $23.4 million in dividends and had no share repurchases. Off-Balance Sheet Arrangements The Company is party to certain off-balance sheet arrangements, including certain guarantees. The Company provides financial assurance, such as payment guarantee and letters of credit and surety bonds, primarily to support workers’ compensation programs and customs clearance, of less than $7 million. There were no material changes in the Company’s off-balance sheet arrangements during 2023. Non-GAAP Measures This Form 10-Q contains certain non-GAAP measures that should not be considered in isolation or as a substitute for the related GAAP measures. Such non-GAAP measures include Net revenues and percent change in Net revenues, excluding the impact of currency translation effects; EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin; Net debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). Management believes that these non-GAAP measures provide additional useful information to investors regarding the Company’s operational performance. Presenting Net revenues and change in Net revenues, after currency effects are excluded, provides management and investors insight into underlying revenues trends. Net revenues, or percent changes in Net revenues, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the 32 exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period. EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations. The Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance. Such excluded costs or benefits do not consist of normal, recurring cash items necessary to generate revenues or operate our business. Adjusted EBITDA margin represents Adjusted EBITDA expressed as a percentage of Net revenues. The Company defines Adjusted EPS as basic earnings per share (GAAP), adjusted by the after tax per share amount of costs or benefits not reflective of the Company’s ongoing or expected future operational performance. The income tax effects are calculated using the applicable statutory income tax rate of the jurisdictions where such costs or benefits were incurred or the effective tax rate applicable to total company results. The Company’s Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted EPS may not be comparable to similarly titled measures of other companies. Net debt aids investors in understanding the Company’s debt position if all available cash were applied to pay down indebtedness. Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt. We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. The following tables show the calculation of EBITDA and Adjusted EBITDA: Three months ended September 30, 2023 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 50,710 $ 9,374 $ (32,930) $ 27,154 Interest expense/(income), net — — 3,653 3,653 Income tax expense — — 9,207 9,207 Depreciation and amortization expense 5,976 12,510 975 19,461 EBITDA (non-GAAP) 56,686 21,884 (19,095) 59,475 Restructuring expenses, net 82 — — 82 Foreign currency revaluation (gains)/losses (a) (656) 19 516 (121) CEO transition expenses — — 2,052 2,052 Inventory step-up impacting Cost of goods sold 1,370 — — 1,370 Acquisition/integration costs — 273 1,642 1,915 Pre-tax (income) attributable to noncontrolling interest — (73) — (73) Adjusted EBITDA (non-GAAP) $ 57,482 $ 22,103 $ (14,885) $ 64,700 33 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/(income), net — — 3,794 3,794 Income tax 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 — 0 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 Nine months ended September 30, 2023 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 153,400 $ 27,460 $ (99,794) $ 81,066 Interest expense/(income), net — — 10,049 10,049 Income tax expense — — 39,908 39,908 Depreciation and amortization expense 15,682 36,246 2,850 54,778 EBITDA (non-GAAP) 169,082 63,706 (46,987) 185,801 Restructuring expenses, net 227 0 0 227 Foreign currency revaluation (gains)/losses (a) 1,870 19 (3,609) (1,720) CEO transition expenses — — 2,052 2,052 Inventory step-up impacting Cost of goods sold 1,370 — — 1,370 Acquisition/integration costs — 813 2,005 2,818 Pre-tax (income) attributable to noncontrolling interest — (474) — (474) Adjusted EBITDA (non-GAAP) $ 172,549 $ 64,064 $ (46,539) $ 190,074 34 Nine months ended September 30, 2022 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 161,752 $ 20,688 $ (104,173) $ 78,267 Interest expense/(income), net — — 11,336 11,336 Income tax expense — — 22,273 22,273 Depreciation and amortization expense 14,716 34,792 2,400 51,908 EBITDA (non-GAAP) 176,468 55,480 (68,164) 163,784 Restructuring expenses, net 255 — 13 268 Foreign currency revaluation (gains)/losses (a) (3,690) 755 (17,644) (20,579) Dissolution of business relationships in Russia 1,573 — 781 2,354 Pension settlement expense — — 49,128 49,128 Acquisition/integration costs — 806 — 806 Pre-tax (income) attributable to noncontrolling interest — (633) — (633) Adjusted EBITDA (non-GAAP) $ 174,606 $ 56,408 $ (35,886) $ 195,128 The Company discloses certain income and expense items on a per-share basis. 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. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period. The following tables show the earnings per share effect of certain income and expense items: Three months ended September 30, 2023 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 82 $ 21 $ 61 $ 0.00 Foreign currency revaluation (gains)/losses (a) (121) (35) (86) 0.00 CEO transition expenses 2,052 — 2,052 0.07 Inventory step-up impacting Cost of goods sold 1,370 411 959 0.03 Acquisition/integration costs 1,915 476 1,439 0.05 Three months ended September 30, 2022 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect 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 35 Nine months ended September 30, 2023 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 227 $ 68 $ 159 $ 0.01 Foreign currency revaluation (gains)/losses (a) (1,720) (504) (1,216) (0.04) CEO transition expenses 2,052 — 2,052 0.07 Withholding tax related to internal restructuring — (3,026) 3,026 0.10 Inventory step-up impacting Cost of goods sold 1,370 411 959 0.03 Acquisition/integration costs 2,818 725 2,093 0.07 Nine months ended September 30, 2022 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 268 $ 75 $ 193 $ 0.01 Foreign currency revaluation (gains)/losses (a) (20,579) (5,829) (14,750) (0.47) Dissolution of business relationships in Russia 2,354 314 2,040 0.06 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 806 241 565 0.03 The following table contains the calculation of Adjusted EPS: Three months ended September 30, Nine months ended September 30, Per share amounts (Basic) 2023 2022 2023 2022 Earnings per share (GAAP) $ 0.87 $ 0.34 $ 2.59 $ 2.47 Adjustments, after tax: Restructuring expenses, net — — 0.01 0.01 Foreign currency revaluation (gains)/losses (a) — (0.22) (0.04) (0.47) CEO transition expenses 0.07 — 0.07 — Inventory step-up impacting Cost of goods sold 0.03 — 0.03 — Acquisition/integration costs 0.05 0.01 0.07 0.03 Dissolution of business relationships in Russia — (0.01) — 0.06 Pension settlement expense — 1.20 — 1.20 Withholding tax related to internal restructuring — — 0.10 — Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) — (0.17) — (0.17) Adjusted Earnings per share (non-GAAP) $ 1.02 $ 1.15 $ 2.83 $ 3.13 Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. The Company calculates Net debt by subtracting Cash and cash equivalents from Total debt. Total debt is calculated by adding Long-term debt, Current maturities of long-term debt, and Notes and loans payable, if any. The following table contains the calculation of net debt: (in thousands) September 30, 2023 December 31, 2022 September 30, 2022 Current maturities of long-term debt $ 27,246 $ — $ — Long-term debt 463,339 439,000 447,000 Total debt 490,585 439,000 447,000 Cash and cash equivalents 171,506 291,776 276,482 Net debt (non GAAP) $ 319,079 $ 147,224 $ 170,518 36 Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt. The Company calculates net leverage ratio by subtracting cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA. The calculation of net leverage ratio as of September 30, 2023 is as follows: Total Company Twelve months ended Nine months ended Trailing twelve months ended (in thousands) December 31, 2022 September 30, 2022 September 30, 2023 September 30, 2023 (non-GAAP) (c) Net income/(loss) (GAAP) $ 96,508 $ 78,267 $ 81,066 $ 99,307 Interest expense/(income), net 14,000 11,336 10,049 12,713 Income tax expense 35,472 22,273 39,908 53,107 Depreciation and amortization expense 69,049 51,908 54,778 71,919 EBITDA (non-GAAP) 215,029 163,784 185,801 237,046 Restructuring expenses, net 106 268 227 65 Foreign currency revaluation (gains)/losses (a) (9,829) (20,579) (1,720) 9,030 Dissolution of business relationships in Russia 2,275 2,354 — (79) CEO transition expenses — — 2,052 2,052 Pension settlement expense 49,128 49,128 — — Inventory step-up impacting Cost of goods sold — — 1,370 1,370 IP address sales (3,420) — — (3,420) Acquisition/integration costs 1,057 806 2,818 3,069 Pre-tax (income) attributable to noncontrolling interest (817) (633) (474) (658) Adjusted EBITDA (non-GAAP) $ 253,529 $ 195,128 $ 190,074 $ 248,475 (in thousands, except for net leverage ratio) September 30, 2023 Net debt (non-GAAP) 319,079 Trailing twelve months Adjusted EBITDA (non-GAAP) 248,475 Net leverage ratio (non-GAAP) 1.28 (a) Foreign currency revaluation (gains)/losses represent unrealized gains and losses arising from the remeasurement of monetary assets and liabilities denominated in non-functional currencies on the balance sheet date. (b) Our Adjusted EPS excluded the benefit from the reclassification of stranded income tax effects caused by the TCJA associated with the US pension plan liability that was eliminated in September 2022, a one-time event that would not recur in the future. Such stranded income tax effect represented a one-time benefit that distorted the effective tax rate for the quarter and year-to-date ended September 30, 2022 , and would not be indicative of ongoing or expected future income tax rate at the Company. Management believes excluding pension settlement expense and its income tax impact, including the stranded income tax effects, from its Adjusted EBITDA and Adjusted EPS for the quarter and year-to-date ended September 30, 2022 would provide investors a transparent view and enhanced ability to better assess the Company’s ongoing operational and financial performance. (c) Calculated as amounts incurred during the twelve months ended December 31, 2022, less those incurred during the nine months ended September 30, 2022, plus those incurred during the nine months ended September 30, 2023. 37