Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
The MD&A generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 24, 2023, incorporated herein by reference.
Business Environment Overview and Trends
Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”) draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities.
The MC segment is the Company’s long-established core business and primary generator of cash. While it has been negatively impacted by 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 believe 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
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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, we acquired Heimbach, a privately-held manufacturer of paper machine clothing headquartered in Düren, Germany, which provides MC with an increase in scale and complementary technology that further drives MC's differentiated manufacturing sales and service network. See Note 24, Business Combination, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K 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 International’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net revenues in 2023. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787 aircraft, and vacuum waste tanks for Boeing commercial aircraft. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2023, approximately 39 percent of AEC net 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:
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Machine Clothing
$ 670,768 $ 609,461 $ 619,015
Albany Engineered Composites
477,141 425,426 310,225
Total net revenues
$ 1,147,909 $ 1,034,887 $ 929,240
% change
10.9 % 11.4 % 3.2 %
Changes in currency translation rates had the effect of decreasing 2023 Net revenues by $0.8 million, driven by the weaker Renminbi, which was partially offset by the stronger Euro, as compared to 2022. Excluding the effect of changes in currency translation rates, consolidated Net revenues increased 11 percent.
Net revenues in MC increased 10.5 percent, excluding the effect of changes in currency translation rates, compared to 2022, driven by the acquisition of the Heimbach business in August 2023, which contributed Net revenues of $51.2 million. MC net revenues also improved due to better performance in tissue and packaging grades, which was partially offset by lower revenues from engineered fabrics.
AEC's Net revenues increased 11.7 percent, excluding the effect of changes in currency translation rates, primarily due to revenue growth across AEC's portfolio of commercial programs including LEAP, Boeing 787 Frames, GE9X and other commercial programs. Recurring production revenues for defense programs grew year-over-year, however, the defense growth was more than offset by lower non-recurring revenues associated with the start-up of the CH-53K aft transition program.
Backlog
Backlog represents the summation of the value of all firm, open orders from customers at both segments. Backlog in the MC segment was $256 million at December 31, 2023, which included $72 million related to Heimbach, and $172 million at December, 31 2022. Backlog in the AEC segment increased to $494 million at December 31,
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2023, compared to $414 million at December 31, 2022. The increase in AEC’s backlog was primarily due to growth on the LEAP and CH-53K programs. All of the backlog in MC and approximately 75 percent of the AEC backlog is expected to be invoiced during the next 12 months.
Gross Profit
The following table summarizes Gross profit by business segment:
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Machine Clothing
$ 331,558 $ 312,285 $ 322,457
Albany Engineered Composites
92,160 77,497 55,934
Total
$ 423,718 $ 389,782 $ 378,391
% of net revenues
36.9 % 37.7 % 40.7 %
The increase in 2023 Gross profit, as compared to 2022, was principally due to increased Net revenues in both segments and the acquisition of Heimbach. The change in gross profit as a percentage of revenues for each segment is as follows:
• MC gross profit margin decreased from 51.2 percent in 2022 to 49.4 percent in 2023 in MC. This margin decrease was partially driven by increased cost of goods sold at Heimbach, which included the non-recurring amortization of the fair value step-up of acquired inventory of $5.5 million. In addition, gross profit margin decreased as a result of increased input costs, mainly due to the inflationary environment, and lower overhead absorption.
• AEC gross profit margin increased from 18.2 percent in 2022 to 19.3 percent in 2023. Growth in LEAP and other commercial programs contributed to improved overhead absorption, which improved gross profit margins.
Selling, General, and Administrative ("SG&A")
Selling, general and administrative ("SG&A") expenses include segment selling, general and administrative expenses and corporate expenses. The following table summarizes SG&A by business segment:
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Machine Clothing
$ 107,246 $ 81,391 $ 79,570
Albany Engineered Composites
34,597 30,565 26,852
Corporate
73,072 56,757 53,705
Total
$ 214,915 $ 168,713 $ 160,127
% of net revenues
18.7 % 16.3 % 17.2 %
Consolidated SG&A expenses increased 27.4 percent as compared to 2022. SG&A expenses also increased as a percentage of Net Revenues from 16.3 percent in 2022 to 18.7 percent in 2023. The change in SG&A by segment is driven by the following:
• MC SG&A expenses increased $25.9 million as compared to 2022, of which $20.5 million of the increase relates to the acquisition of Heimbach and $4.6 million was due to changes in currency translation rates. Excluding Heimbach and changes in currency translation rates, MC's SG&A increase was modest at $0.8 million driven primarily by higher wages.
• AEC SG&A expenses increased $4.0 million as compared to 2022, of which $1.7 million was due to increased incentive compensation and personnel-related costs and $0.9 was related to investments in business development, including increases in marketing and trade show activities.
• Corporate SG&A expenses increased $16.3 million principally due to non-recurring acquisition-related costs and other non-recurring strategic costs of $4.6 million, $2.7 million of vesting of retirement compensation
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costs for the former CEO, $4.3 million in higher employee-related compensation and $3.1 million of IT-related costs.
Technical and Research
Technical and research expenses include technical, product engineering, internally funded research and development expenses.
The following table summarizes technical and research expenses by business segment:
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Machine Clothing
$ 24,651 $ 24,588 $ 26,032
Albany Engineered Composites
15,976 15,353 12,890
Total technical and research expenses
$ 40,627 $ 39,941 $ 38,922
% of net revenues
3.5 % 3.9 % 4.2 %
Consolidated Technical and research expenses increased 1.7 percent as compared to 2022, however, as a percentage of Net revenues, it decreased from 3.9 percent in 2022 to 3.5 percent in 2023. The change in Technical and research expenses by segment is driven by the following:
• MC Technical and research expenses remained largely consistent with the prior year, increasing only marginally.
• AEC Technical and research expenses increased $0.6 million as compared to 2022, due to increases in research material and labor costs.
Restructuring
In addition to the items discussed above affecting Gross profit, SG&A and Technical and research expenses, operating income was affected by Restructuring expenses, net, which was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods. For more information on our restructuring charges, see Note 5, Restructuring, of the Notes to the Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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Operating Income
The following table summarizes operating income/(loss) by business segment:
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Machine Clothing
$ 199,378 $ 206,214 $ 215,654
Albany Engineered Composites
41,587 31,579 16,160
Corporate
(73,071) (56,771) (53,803)
Total operating income
$ 167,894 $ 181,022 $ 178,011
% of net revenues
14.6 % 17.5 % 19.2 %
See the Segment Results of Operations section of this Management Discussion and Analysis of Financial Condition and Results of Operations for significant drivers of Operating income/(loss) for each business segment.
Other Earnings Items
The following table summarizes other earnings items that are presented below Operating income:
(in thousands)
Years ended December 31, 2023 2022 2021
Interest expense, net
$ 13,601 $ 14,000 $ 14,891
Pension settlement expense — 49,128 —
AMJP grant — — (5,832)
Other (income)/expense, net
(6,163) (14,086) 3,021
Income tax expense
48,846 35,472 47,163
Net income/(loss) attributable to the noncontrolling interest
490 746 290
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 lower 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
During 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 during 2023. See Note 4, Pension, Postretirement, and Other Benefit Plans, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
AMJP grant
During 2021, the Company was awarded an Aviation Manufacturing Jobs Protection Program ("AMJP") grant of $5.8 million, under the American Rescue Plan of the U.S. Department of Transportation. No such award was granted during 2022 or 2023. See Government Grants under Note 1, Accounting Policies, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
Other (income)/expense, net
Other (income)/expense, net included foreign currency related transactions that resulted in gains of $2.9 million during 2023 and gains of $10.0 million during 2022. During 2023, the stronger Mexican Peso primarily drove transaction gains on nonfunctional currency monetary liabilities, while during 2022, the weaker Euro primarily drove transaction gains related to nonfunctional currency monetary assets.
During 2022, the Company recorded a gain of $3.4 million on the sale of IP addresses that the Company had no future critical need to retain. There were no similar gains of this nature during 2023.
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Income Taxes
Years ended December 31,
2023 2022 2021
Effective tax rate
30.4% 26.9% 28.4%
The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings.
The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15 percent intended to be effective on January 1, 2024. While the U.S. has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation. As currently designed, Pillar Two will ultimately apply to our worldwide operations. Although we do not expect these rules to materially increase our global tax costs in 2024, there remains uncertainty as to the final Pillar Two model rules. We will continue to monitor U.S. and global legislative action related to Pillar Two for potential impacts.
On January 17, 2024, the House Ways and Means Committee announced a draft legislation called "The Tax Relief for American Families and Workers Act of 2024". This act would restore 100% bonus depreciation for property placed in service after December 31, 2022 and before January 1, 2026; and retroactively restore the ability to deduct domestic research and experimentation costs that were required to be capitalized beginning in 2022 under Section 174. On January 31, 2024, the United States House of Representatives voted to approve this bill, which will now go to the United States Senate. We will continue to monitor the status of this legislation and assess the potential impact, if passed.
For more information on income tax, see Note 7, Income Taxes, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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Segment Results of Operations
Machine Clothing Segment
The MC segment accounted for 58 percent of our consolidated revenues during 2023. A summary of MC's selected financial results is as follows:
Review of Operations
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Net revenues
$ 670,768 $ 609,461 $ 619,015
% change
10.1 % -1.5 % 8.0 %
Gross profit
331,558 312,285 322,457
% of net revenues
49.4 % 51.2 % 52.1 %
SG&A expenses
107,246 81,391 79,570
Technical and research expenses
24,651 24,588 26,032
Operating income
199,378 206,214 215,654
Net revenues
MC's Net revenues increased 10.1 percent in 2023, driven by the acquisition of the Heimbach business in August, which contributed Net revenues of $51.2 million. Net revenues also increased due to better performance in tissue and packaging grades, which was partially offset by lower revenues in engineered fabrics. Changes in currency translation rates had the effect of decreasing 2023 Net revenues by $2.6 million, driven by the weaker Renminbi, which was partially offset by the stronger Euro, as compared to 2022.
Gross Profit
MC gross profit increased $19.3 million, driven by the additional gross profit from Heimbach's revenues and organic revenue growth. Gross profit margin decreased from 51.2 percent in 2022 to 49.4 percent in 2023. This margin decrease was partially driven by increased cost of goods sold at Heimbach, which included the non-recurring amortization of the fair value step-up of acquired inventory of $5.5 million. In addition, gross profit margin decreased as a result of increased input costs, mainly due to the inflationary environment, and lower overhead absorption.
Operating Income
The decrease in Operating income as compared to 2022 was principally due to Heimbach's operating loss of $6.3 million and increases in SG&A expenses as discussed above.
Albany Engineered Composites Segment
The AEC segment accounted for 42 percent of our consolidated net revenues during 2023. A summary of AEC's selected financial results is as follows:
Review of Operations
(in thousands, except percentages)
Years ended December 31, 2023 2022 2021
Net revenues
$ 477,141 $ 425,426 $ 310,225
% change
12.2 % 37.1 % -5.3 %
Gross profit
92,160 77,497 55,934
% of net revenues
19.3 % 18.2 % 18.0 %
SG&A expenses
34,597 30,565 26,852
Technical and research expenses
15,976 15,353 12,890
Operating income/(loss)
41,587 31,579 16,160
Net revenues
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AEC's Net revenues increased 12.2 percent primarily due to revenue growth across AEC's portfolio of commercial programs including LEAP, Boeing 787 Frames, GE9x and other commercial programs. These increases amounted to approximately $63.0 million. Recurring production revenues for defense programs grew year-over-year, however, the growth was more than offset by lower non-recurring revenues associated with the start-up of the CH-53K aft transition program. These net decreases amounted to approximately $11.0 million. Excluding the effect of changes in currency translation rates, the increase in Net revenues was 11.7 percent.
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 2023 and 2022. LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.
In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for these contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses. Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.
Gross Profit
Net revenues growth on key programs, as noted above, contributed to improved overhead absorption, driving a Gross profit increase of $14.7 million as compared to 2022. Gross profit margin increased from 18.2 percent in 2022 to 19.3 percent in 2023.
Operating Income/(Loss)
Operating income increased $10.0 million in 2023, principally due to an increase in Gross profit, as described above, partially offset by a $4.0 million increase in SG&A expenses related to incentive compensation, personnel-related costs, and investments in business development activities. The sum of net adjustments to the estimated profitability of long-term contracts decreased AEC operating income by $4.1 million in 2023, compared to an increase in AEC operating income of $0.5 million in 2022.
Working Capital, Liquidity and Capital Structure
Working Capital
Payment terms granted to paper industry and other machine clothing customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation. In some markets, customer agreements require us to maintain significant amounts of finished goods inventory to assure continuous availability of our products.
In addition to supplying paper, paperboard, and tissue companies, the MC segment is a leading supplier to the nonwovens (which includes the manufacture of products such as diapers, personal care, and household wipes), building products, and tannery and textile industries. These non-paper industries have a wide range of customers, with markets that vary from industrial applications to consumer use products. The AEC segment primarily serves customers in the commercial and defense aerospace market through both engine and airframe applications. AEC's working capital levels rose sharply in the last few years in line with the segment's growth.
In the MC segment, the Chinese New Year, summer months, and the end of the year are often periods of lower production for some of our customers, which, in the past contributed to seasonal variation in sales and orders. In recent years, shorter order cycles and lower inventory levels throughout the supply chain have become a more significant factor in quarterly sales. The impact of these combined factors on any quarter can be difficult to predict, and can make quarterly comparisons less meaningful than annual comparisons. While seasonality is generally not a significant factor in the Albany Engineered Composites segment, the commercial terms of the supply agreement governing the LEAP program resulted in fourth quarter sales volatility in recent years.
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Cash Flow Summary
(in thousands)
For the years ended December 31, 2023 2022 2021
Net income
$ 111,610 $ 96,508 $ 118,768
Depreciation and amortization
76,733 69,049 74,255
Changes in working capital (a)
(44,214) (63,478) 16,488
Changes in long-term liabilities, deferred taxes and other credits
(11,829) (18,629) (1,532)
Non-cash portion of pension settlement expense — 42,657 —
Other operating items
15,756 2,107 9,496
Net cash provided by operating activities
148,056 128,214 217,475
Net cash used in investing activities
(217,899) (96,348) (53,699)
Net cash used in financing activities (52,641) (23,652) (99,635)
Effect of exchange rate changes on cash flows
4,128 (18,474) (3,421)
Increase/(decrease) in cash and cash equivalents
(118,356) (10,260) 60,720
Cash and cash equivalents at beginning of year
291,776 302,036 241,316
Cash and cash equivalents at end of year
$ 173,420 $ 291,776 $ 302,036
_________________________
(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable and Accrued liabilities.
Net cash provided by operating activities was $148.1 million in 2023, compared to $128.2 million in the same period last year. The increase was driven by higher Net income, 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 (see discussion in Note 4, Pension, Postretirement, and Other Benefit Plans , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K ) .
We strategically deploy our cash with a focus on investing in our business and new technologies to provide our customers with enhanced capabilities, increase shareholder value, and position ourselves to take advantage of new business opportunities as they arise. Based on such strategy, we have continued to invest in our business and technologies through capital expenditures, research and development, and when appropriate, selective business acquisitions. In the third quarter of 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 $84.4 million in 2023, compared to $96.3 million in the same period last year, including investments to improve productivity and produce a meaningful impact on energy and resource efficiency.
Net cash used in financing activities during 2023 was $52.6 million compared to $23.7 million in 2022, driven by increased principal payments on debt and increased dividends paid to shareholders during 2023.
Liquidity and Capital Structure
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks.
Under our $800 million unsecured credit agreement, $446 million of borrowings were outstanding as of December 31, 2023. 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.
As of December 31, 2023, we had cash and cash equivalents of $173.4 million and availability under our Credit Agreement of $354 million, for a total liquidity of approximately $527 million. For more information on the revolving credit agreement, see Note 17, Financial Instruments, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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As of December 31, 2023, $133 million of our total cash and cash equivalents was held by non-U.S. subsidiaries. The Company has targeted for repatriation $160.8 million of current year and prior year earnings of the Company’s foreign operations. The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S. were approximately $154.8 million, and are intended to remain indefinitely invested in foreign operations. Our cash planning strategy includes repatriating current earnings in excess of working capital requirements from certain countries in which our subsidiaries operate. While we have been successful in such endeavor to date, there can be no assurance that we will be able to cost effectively repatriate funds in the future. Repatriating such cash from certain jurisdictions, that is currently considered to be indefinitely reinvested in foreign operations, may also result in additional taxes.
Bank debt at the Company's Heimbach subsidiary, of which $32.7 million was assumed in the acquisition, is held by several European financial institutions. Since August 31, 2023 the Company paid down approximately $22 million of this debt ($18.6 million during the fourth quarter of 2023), reducing outstanding debt borrowings at the Company's Heimbach subsidiary to approximately $11 million as of December 31, 2023, of which $4.2 million is classified as Current maturity on long-term debt (see Note 24 , Business Combination and Note 17, Financial Instruments , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information).
We have also returned cash to shareholders through dividends and share repurchases. We paid dividends of $31 million and $26 million during 2023 and 2022, respectively. There were no share repurchases in 2023.
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.
Other Sources/Uses of Capital
We have contractual commitments to repay debt, make payments under leases, contribute to our pension and postretirement plans, and settle obligations related to agreements to purchase goods and services, income taxes, compensation plans, and as applicable, interest rate swaps. We estimate these contractual commitments amount to approximately $716 million as of December 31, 2023, of which we expect to pay $58 million within the next year. Such commitments are not representative of all our future cash requirements, which will vary based on future needs.
Critical Accounting Policies and Estimates
For the discussion of our accounting policies, see Note 1, Accounting Policies , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments which can affect our results of operations. In addition to the accounting policies stated in Note 1, Accounting Policies, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, the financial statement amounts and disclosures are significantly influenced by market factors, judgments and estimates as described below.
Revenue Recognition
Contracts with customers in the MC segment have various terms that can affect the point in time when revenue is recognized. The contractual terms are closely monitored in order to ensure revenue is recognized in the proper period.
Products and services provided under long-term contracts represent a significant portion of net revenues in the AEC segment. AEC’s largest source of revenue is derived from the LEAP contract under a cost-plus-fee agreement. The fee may vary within a narrow range based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is judgment involved in determining applicable contract costs and the amount of revenue to be recognized.
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We also have fixed price long-term contracts, for which revenue is generally recognized over time using an input method as the measure of progress. This method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are included in earnings in the period the change occurs.
AEC has long-term aerospace contracts under which there are two phases: a phase during which the production part is designed and tested, and a phase of supplying production parts. During the design and testing phases, we perform pre-production or nonrecurring engineering services, which are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized in Other assets. The capitalized costs are amortized into cost of goods sold over the period which the asset is expected to contribute to future cash flows, including anticipated renewal periods. Accumulated capitalized costs are written-off when those costs are determined to be unrecoverable.
For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract loss provisions include contract options that are probable of exercise, excluding any profitable options that might be expected to follow. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative costs, which are treated as period expenses. We are required to limit our estimate of contract values to the period of the legally enforceable contract. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, the contract period may result in a loss contract provision at the inception of the contract.
Pension and Postretirement Liabilities
We sponsor several pension and postretirement benefit plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate.
Discount Rate Selection
We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero coupon bonds. We use the RATE: Link 60-90 model (the "RATE Link"). We believe the projected cash flows used to determine RATE Link provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustments to RATE Link has been made.
Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments. The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefit obligation. Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligation.
Long-term Rate of Return on Plan Assets Assumption
Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes. Our analysis gives consideration to recent plan performance and historical returns; however, the assumptions are primarily based on long-term, prospective rates of return. The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 5.2 percent for 2023.
Based on information provided by actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and postretirement benefits are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
Income Taxes
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We regularly assess the likelihood that deferred tax assets will be realized through the reversal of existing temporary differences and/or future taxable income. To the extent we believe that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. The amount of a valuation allowance is based upon our best estimate of our ability to realize the deferred tax assets.
Business Combinations
As we enter into business combinations, we perform acquisition accounting requirements including the following:
• Identifying the acquirer,
• Determining the acquisition date,
• Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and
• Recognizing and measuring goodwill, as applicable
We complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities in accordance with the acquisition method under ASC 805, Business Combinations. The acquisition methodology requires management to make assumptions and apply judgment to determine the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differed from assumptions made, the resulting difference could materially affect the fair value of net assets.
In determining the fair value of the tangible assets, including property, plant and equipment, we consider the cost-approach and the market-approach, which estimates the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. In the determination of the fair value of the identified intangible assets, we use cash flow models following the income approach, specifically, a relief from royalty method methodology. Inputs include estimated revenue growth rates, gross margins, operating expenses, and estimated attrition, royalty and discount rates. Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price, as applicable. The Heimbach acquisition did not result in any goodwill.
Goodwill and Intangible assets
Goodwill is not amortized, but is tested for impairment at least annually. Estimating the fair value of reporting units requires the use of estimates and significant judgments, including but not limited to revenue growth rates, operating margins, discount rates, and future market conditions. It is possible that these judgments and estimates could change in future periods.
The determination of the fair value of intangible assets acquired in a business acquisition is subject to many estimates and assumptions. Among such estimates and assumptions are royalties, discount rate and useful life. We review amortizable intangible asset groups for impairment whenever events and changes in circumstances indicate that the related carrying amounts may not be recoverable.
Recent Accounting Pronouncements
See Note 1, Accounting Policies , of the Notes to the Consolidated Financial Statements for Recent Accounting Pronouncements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Non-GAAP Measures
This Form 10-K contains certain non-GAAP measures that should not be considered in isolation or as a substitute for the related GAAP measures. Such non-GAAP measures include net 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 Diluted 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 sales trends. Net revenues, or percent changes in net revenues,
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excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period.
EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations. The Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance. Such excluded costs or benefits do not consist of normal, 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 diluted 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 consolidated EBITDA and consolidated Adjusted EBITDA:
(in thousands)
Years ended December 31, 2023 2022 2021
Net income (GAAP)
$ 111,610 $ 96,508 $ 118,768
Interest expense, net
13,601 14,000 14,891
Income tax expense
48,846 35,472 47,163
Depreciation and amortization expense
76,733 69,049 74,255
EBITDA (non-GAAP)
250,790 215,029 255,077
Restructuring expenses, net 282 106 1,331
Foreign currency revaluation (gains)/losses
1,296 (9,829) (1,442)
CEO transition expenses 2,719 — —
Inventory step-up impacting Cost of goods sold 5,480 — —
Dissolution of business relationships in Russia — 2,275 —
Pension settlement expense — 49,128 —
IP address sales — (3,420) —
Aviation Manufacturing Jobs Protection (AMJP) grant — — (4,731)
Acquisition/integration costs 5,194 1,057 1,166
Pre-tax (income)/loss attributable to noncontrolling interest (665) (817) (510)
Adjusted EBITDA (non-GAAP)
$ 265,096 $ 253,529 $ 250,891
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(in thousands)
Year ended December 31, 2023
Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Net income/(loss) (GAAP) $ 199,378 $ 41,587 $ (129,355) $ 111,610
Interest expense, net — — 13,601 13,601
Income tax expense — — 48,846 48,846
Depreciation and amortization expense 23,891 49,030 3,812 76,733
EBITDA (non-GAAP) 223,269 90,617 (63,096) 250,790
Restructuring expenses, net 282 — — 282
Foreign currency revaluation (gains)/losses (a) 4,117 63 (2,884) 1,296
CEO transition expenses — — 2,719 2,719
Inventory step-up impacting Cost of goods sold 5,480 — — 5,480
Acquisition/integration costs 984 1,081 3,129 5,194
Pre-tax (income) attributable to noncontrolling interest (24) (641) — (665)
Adjusted EBITDA (non-GAAP) $ 234,108 $ 91,120 $ (60,132) $ 265,096
(in thousands)
Year ended December 31, 2022
Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Net income/(loss) (GAAP) $ 206,214 $ 31,579 $ (141,285) $ 96,508
Interest expense, net — — 14,000 14,000
Income tax expense — — 35,472 35,472
Depreciation and amortization expense 19,483 46,202 3,364 69,049
EBITDA (non-GAAP) 225,697 77,781 (88,449) 215,029
Restructuring expenses, net 92 — 14 106
Foreign currency revaluation (gains)/losses (a) (520) 672 (9,981) (9,829)
Dissolution of business relationships in Russia 1,494 — 781 2,275
Pension settlement expense — — 49,128 49,128
IP address sales — — (3,420) (3,420)
Acquisition/integration costs — 1,057 — 1,057
Pre-tax (income) attributable to noncontrolling interest — (817) — (817)
Adjusted EBITDA (non-GAAP) $ 226,763 $ 78,693 $ (51,927) $ 253,529
(in thousands)
Year ended December 31, 2021
Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Net income/(loss) (GAAP)
$ 215,654 $ 16,160 $ (113,046) $ 118,768
Interest expense, net
— — 14,891 14,891
Income tax expense
— — 47,163 47,163
Depreciation and amortization expense
20,191 50,402 3,662 74,255
EBITDA (non-GAAP)
235,845 66,562 (47,330) 255,077
Restructuring expenses, net
1,202 32 97 1,331
Foreign currency revaluation (gains)/losses (a) (307) 50 (1,185) (1,442)
Former CEO termination costs — 1,101 (5,832) (4,731)
Acquisition/integration costs — 1,166 — 1,166
Pre-tax loss attributable to noncontrolling interest — (510) — (510)
Adjusted EBITDA (non-GAAP)
$ 236,740 $ 68,401 $ (54,250) $ 250,891
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The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying earnings and are financial performance metrics commonly used by investors. The Company calculates the per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total Company results. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the diluted earnings per share effect of certain income and expense items:
(in thousands, except per share amounts)
Year ended December 31, 2023
Pre tax
Amounts Tax
Effect After tax
Effect Per Share
Effect
Restructuring expenses, net $ 282 $ 70 $ 212 $ 0.01
Foreign currency revaluation (gains)/losses (a) 1,296 416 880 0.03
CEO transition expenses 2,719 — 2,719 0.09
Inventory step-up impacting Cost of goods sold 5,480 1,211 4,269 0.14
Withholding tax related to internal restructuring — (3,026) 3,026 0.10
Acquisition/integration costs 5,194 951 4,243 0.14
(in thousands, except per share amounts)
Year ended December 31, 2022
Pre tax
Amounts Tax
Effect After tax
Effect Per Share
Effect
Restructuring expenses, net $ 106 $ 34 $ 72 $ 0.01
Foreign currency revaluation (gains)/losses (a) (9,829) (2,582) (7,247) (0.23)
Dissolution of business relationships in Russia 2,275 305 1,970 0.06
Pension settlement expense 49,128 11,947 37,181 1.20
Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability — 5,217 (5,217) (0.17)
IP address sales (3,420) (872) (2,548) (0.08)
Acquisition/integration costs 1,057 316 741 0.04
(in thousands, except per share amounts)
Year ended December 31, 2021
Pre tax
Amounts Tax
Effect After tax
Effect Per Share
Effect
Restructuring expenses, net $ 1,331 $ 399 $ 932 $ 0.02
Foreign currency revaluation (gains)/losses (a) (1,442) (323) (1,119) (0.04)
AMJP grant (4,731) (1,404) (3,327) (0.11)
Acquisition/integration costs 1,166 349 817 0.04
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The following table contains the calculation of full-year consolidated Adjusted EPS, excluding adjustments:
Per share amounts
Years ended December 31, 2023 2022 2021
Earnings per share attributable to Company shareholders - Basic (GAAP) $ 3.56 $ 3.06 $ 3.66
Effect of dilutive stock-based compensation plans (0.01) (0.02) (0.01)
Earnings per share attributable to Company shareholders - Diluted (GAAP) $ 3.55 $ 3.04 $ 3.65
Adjustments, after tax:
Restructuring expenses, net 0.01 0.01 0.02
Foreign currency revaluation (gains)/losses (a) 0.03 (0.23) (0.04)
CEO transition expenses 0.09 — —
Inventory step-up impacting Cost of goods sold 0.14 — —
Dissolution of business relationships in Russia — 0.06 —
Pension settlement expense — 1.20 —
IP address sales — (0.08) —
Tax impact of stranded OCI benefit from TCJA for pension liability (b) — (0.17) —
AMJP grant — — (0.11)
Withholding tax related to internal restructuring 0.10 —
Acquisition/integration costs 0.14 0.04 0.04
Adjusted Diluted earnings per share (non-GAAP)
$ 4.06 $ 3.87 $ 3.56
(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 U.S. pension plan liability that was eliminated in September 2022, a one-time event that would not recur in the future. Such stranded income tax effect represented a one-time benefit that distorted the effective tax rate for the quarter and year-to-date ended September 30, 2022, and would not be indicative of ongoing or expected future income tax rate at the Company. Management believes excluding pension settlement expense and its income tax impact, including the stranded income tax effects, from its Adjusted EBITDA and Adjusted EPS for the quarter and year-to-date ended September 30, 2022 would provide investors a transparent view and enhanced ability to better assess the Company’s ongoing operational and financial performance.
Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. 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 consolidated net debt:
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(in thousands)
As of December 31, 2023 2022 2021
Current maturities of long-term debt
$ 4,218 $ — $ —
Long-term debt
452,667 439,000 350,000
Total debt
456,885 439,000 350,000
Cash and cash equivalents
173,420 291,776 302,036
Net debt
$ 283,465 $ 147,224 $ 47,964
Consolidated 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 consolidated net leverage ratio by subtracting Cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA.
The calculation of the consolidated net leverage ratio is as follows:
Year ended
(in thousands) December 31, 2023
Net income/(loss) (GAAP) $ 111,610
Interest expense, net 13,601
Income tax expense 48,846
Depreciation and amortization expense 76,733
EBITDA (non-GAAP) 250,790
Restructuring expenses, net 282
Foreign currency revaluation (gains)/losses (a) 1,296
CEO transition expenses 2,719
Inventory step-up impacting Cost of goods sold 5,480
Acquisition/integration costs 5,194
Pre-tax (income) attributable to noncontrolling interest (665)
Adjusted EBITDA (non-GAAP) $ 265,096
(in thousands, except for net leverage ratio) December 31, 2023
Net debt (non-GAAP) $ 283,465
Adjusted EBITDA (non-GAAP) 265,096
Net leverage ratio (non-GAAP) 1.07