What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-29 compared with 2023-11-06 · 139 added, 357 removed, 126 unchanged (80% of the section changed)

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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;

• 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, or the effects of another pandemic, 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.

These challenges have only increased as a result of the ongoing Russia-Ukraine war and the conflict in the Middle East;

• Harm caused by changes in our relationships or contracts with suppliers and customers;

• 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 ;

• In the Albany Engineered Composites segment, longer-than-expected timeframe for the aerospace industry to utilize existing inventories, unanticipated reductions in demand, delays, technical difficulties, and cancellations in aerospace programs that are expected to generate revenue and drive long-term growth;

• Inability of our Machine Clothing or Albany Engineered Composite segments to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of geopolitical crises, natural disaster, public health crises and epidemics/pandemics, regulatory or otherwise);

• Changes in geopolitical conditions impacting countries where the Company does or intends to do business;

• Failure to achieve or maintain anticipated profitable growth;

• Failure to achieve our strategic initiatives and other goals, including, but not limited to, our sustainability goals;

• In the Albany Engineered Composites segment, the estimates and expectations based on aircraft production rates provided by Airbus, Boeing and others;

• In the Albany Engineered Composites segment, risks and uncertainties associated with the successful implementation and ramp up of significant new programs, including the ability to manufacture the products to the detailed specifications required and recover start-up costs and other investments in the programs;

• Adverse impacts from inflation, an economic slowdown or recession and by disruption in capital and credit markets that might impede our access to credit, increase our borrowing costs and impair the financial soundness of our customers and suppliers;

• Risks and uncertainties associated with the successful integration of our Heimbach Group acquisition;

• Expectations regarding our ability to attract, motivate, and retain the workforce necessary to execute our business strategy;

• Adverse impacts from fluctuations in foreign currency exchange rates;

• Harm caused by large customer purchase reductions, payment defaults or contract non-renewal;

• In the Albany Engineered Composites segment, our contracts with government entities involve future funding and compliance risks;

• Costly and disruptive legal disputes and settlements;

• Future levels of indebtedness and capital expenditures;

• Adverse impacts from changes in tax legislation or challenges to our tax positions;

• Cybersecurity incidents or significant computer system compromises or data breaches;

• Significant problems with information systems or networks;

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

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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.

Please refer to the Business Environment Overview and Trends in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.

The Annual Report on Form 10-K, along with the Company's other filings, can be found on the Securities and Exchange Commission's website, www.sec.gov, as well as on the Company's website:

www.albint.com.

Consolidated Results of Operations

The following table summarizes our Net revenues by business segment:

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

Three months ended March 31,

(in thousands, except percentages)

2023 2022 % Change 2023 2022 % Change

2024 2023 % Change

Machine Clothing $ 185,217 $ 153,222 20.9 %

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(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

Net revenues as reported, Q1 2024 (Decrease)/ increase due to changes in currency translation rates Q1 2024 revenues on same basis as Q1 2023 currency translation rates Net revenues as reported, Q1 2023 % Change compared to Q1 2023, excluding currency rate effects

Machine Clothing $ 185,217 $ (598) $ 185,815 $ 153,222 21.3 %

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Total $ 313,330 $ (377) $ 313,707 $ 269,096 16.6 %

Three month comparison

Net revenues increased 7.9% compared to the same period in 2022.

Net revenues increased 16.4% compared to the same period in 2023, driven by $37.9 million of Net revenues from the Heimbach acquisition and higher Net revenues in AEC, partially offset by lower organic Net revenues at MC.

MC's Net revenues increased 20.9% compared to the first quarter of 2023, driven by Heimbach Net revenues of $37.9 million.

This was partially offset by $5.3 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication globally, and in all grades in Europe.

This decrease was partially offset with increases in revenues in North America.

Changes in currency translation rates had the effect of decreasing Net revenues $0.6 million.

AEC's Net revenues increased 10.6%, primarily driven by growth on commercial and space programs, partially offset by lower revenues on defense programs.

Changes in currency translation rates had the effect of increasing Net revenues $0.2 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.

The following table summarizes Gross profit by business segment:

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

Three months ended March 31,

(in thousands, except percentages)

2023 2022 2023 2022

Machine Clothing $ 84,655 $ 77,855

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% of Net revenues 34.7 % 36.9 %

Three month comparison

The increase in 2024 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.

• 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,

Gross profit as a percentage of revenues was as follows:

• MC's gross profit margin decreased from 50.8% in 2023 to 45.7% in 2024.

This margin decrease was primarily attributable to lower gross margin at Heimbach.

Excluding Heimbach, MC's gross profit margin increased to 52.1% in 2024.

• AEC's gross profit margin remained largely in line with the prior year, increasing from 18.5% in 2023 to 18.8% in 2024, driven by a favorable shift in program revenue mix.

Changes in the estimated profitability of long-term contracts decreased operating income by $0.9 million in 2024, as compared to a decrease of $0.7 million during the same period last year.

Selling, General, and Administrative ("SG&A")

The following table summarizes SG&A expenses by business segment:

Three months ended March 31,

(in thousands, except percentages)

2023 2022 2023 2022

Machine Clothing $ 29,004 $ 23,073

Albany Engineered Composites

13,204 11,302 38,366 34,568

Corporate expenses 18,321 17,840

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% of Net revenues 17.5 % 18.0 %

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.

Consolidated SG&A expenses increased 13.1% as compared to 2023, however, as a percentage of Net revenues it decreased from 18.0% in 2023 to 17.5% in 2024.

• MC SG&A expenses increased $5.9 million as compared to 2023, of which $9.2 million of the increase related to Heimbach.

Excluding Heimbach, MC's SG&A decreased $3.3 million, driven primarily by changes in currency translation rates, which reduced expenses by $2.8 million, as well as lower consulting fees and incentive compensation costs.

• In AEC, SG&A expenses remained largely in line with the prior year.

• Corporate SG&A expenses increased $0.5 million, principally due to acquisition and integration related expenses.

Technical and Research

The following table summarizes technical and research expenses by business segment:

Three months ended March 31,

(in thousands, except percentages)

Machine Clothing $ 7,520 $ 5,798

Albany Engineered Composites

$ 12,665 $ 10,277

% of Net revenues 4.0 % 3.8 %

Consolidated Technical and research expenses increased 23.2% as compared to 2023, and as a percentage of Net revenues increased from 3.8% in 2023 to 4.0% in 2024.

• MC Technical and research expenses increased $1.7 million as compared to 2023, of which $1.6 million was due to the addition of Heimbach.

• AEC Technical and research expenses increased $0.7 million as compared to 2023, due to increases in research material and labor costs.

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.

In addition to the items discussed above affecting Gross profit, SG&A and Technical and research expenses, Operating income was affected by restructuring expense, net, of $2.2 million in the three months ended March 31, 2024, compared to an insignificant amount in in the same period of 2023.

The following table summarizes restructuring expenses by business segment:

Three months ended March 31,

(in thousands) 2024 2023

Machine Clothing $ 21 $ 20

Albany Engineered Composites 2,188 —

Consolidated total $ 2,209 $ 20

% of Net revenues 0.7 % 0.0 %

Restructuring costs in the first quarter of 2024 were primarily related to reductions in workforce at various AEC locations, while restructuring charges for the first quarter of 2023 were not significant.

There were no charges related to the impairment of assets for the periods presented.

Operating Income

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

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

Three months ended March 31,

(in thousands) 2024 2023

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Total $ 38,977 $ 40,542

% of Net revenues 12.4 % 15.1 %

Changes in operating income were primarily attributable to the drivers noted above.

Other Earnings Items

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

Three months ended March 31,

(in thousands) 2024 2023

Interest expense, net $ 3,319 $ 3,290

Pension settlement expense — 49,128 — 49,128

Other (income)/expense, net (2,982) (455)

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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.

Interest expense/(income), net, was largely in line with the prior year.

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)

Other (income)/expense, net, included foreign currency related transactions which resulted in income of $1.3 million in the three months ended March 31, 2024, as compared to losses of $0.1 million in the same period last year.

Other (income)/expense, net, also included gains on changes in fair value of derivative instruments, gains on sales of fixed assets, and rental income.

Effective Income Tax Rate

Three months ended March 31,

Effective income tax rate 29.2 % 28.2 %

The Company has operations that constitute a taxable presence in 22 countries outside of the United States.

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The tax rate is affected by recurring items, such as the income tax rate in the U.S.

jurisdictions and the mix of income earned in those jurisdictions.

jurisdictions and the mix of pre-tax 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

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.

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

The Company’s effective tax rate for the first quarter of 2024 was 29.2%, higher compared to 28.2% for the same period in 2023, mainly due to an unfavorable change in the jurisdictional mix of earnings forecasted for 2024.

For more information, see Note 6 , Income Taxes, in the Notes to the Consolidated Financial Statements.

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 is now with the United States Senate.

We will continue to monitor the status of this legislation and assess the potential impact, if passed.

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.

The MC segment accounted for 59% of our consolidated revenues during the first three months of 2024.

A summary of selected financial results for MC is as follows:

Review of Operations

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

Three months ended March 31,

(in thousands, except percentages)

2023 2022 2023 2022

Net revenues $ 185,217 $ 153,222

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% of Net revenues 45.7 % 50.8 %

STG&R expenses

SG&A expenses

29,004 23,073

Technical and research expenses

Operating income 48,110 48,964

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.

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.

Net revenues increased by 20.9%, driven by Heimbach Net revenues of $37.9 million.

This was partially offset by $5.3 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication globally, and in all grades in Europe.

This decrease was partially offset with increases in North America.

Changes in currency translation rates had the effect of decreasing Net revenues $0.6 million.

Gross profit increased by $6.8 million as compared to the prior year, driven by the higher sales noted above;

however, gross profit margin decreased from 50.8% in 2023 to 45.7% in 2024.

This margin decrease was primarily driven by lower gross margins at Heimbach.

Excluding Heimbach, MC's gross profit margins increased to 52.1% in 2024 as a result of higher revenues in North America.

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.

Operating income decreased year-over-year, due to higher SG&A and Technical and research expenses from the Heimbach acquisition in addition to Heimbach's lower gross profit margins.

The addition of Heimbach increased SG&A expenses by $9.2 million and increased Technical and research expenses by $1.6 million.

Excluding Heimbach, SG&A decreased $3.3 million, driven primarily by changes in currency translation rates, which reduced expenses $2.8 million, as well as lower consulting fees and incentive compensation costs.

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.

The AEC segment accounted for 41% of our consolidated revenues during the first three months of 2024.

A summary of selected financial results for AEC is as follows:

Review of Operations

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

Three months ended March 31,

(in thousands, except percentages)

2023 2022 2023 2022

Net revenues $ 128,113 $ 115,874

1 unchanged sentence

% of Net revenues 18.8 % 18.5 %

STG&R expenses

13,204 11,302 38,366 34,568

SG&A expenses

Technical and research expenses

Operating income 9,188 9,418

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%.

For the three months ended March 31, 2024, Net revenues increased 10.6% as compared to the prior year, driven by growth on commercial and space programs of approximately $17.0 million, partially offset by lower revenues on defense programs.

Changes in currency translation rates had the effect of increasing Net revenues $0.2 million.

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.

Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for the first three months of 2024 and 2023.

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

4 unchanged sentences

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

For the three 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.

For the three months ended March 31, 2024, Gross profit increased $2.6 million as compared to the same period last year, and gross profit margin remained largely in line with the prior year, increasing from 18.5% in 2023 to 18.8% in 2024.

The increase in profit margin was driven primarily by a favorable shift in program revenue mix to commercial programs.

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.

For the three months ended March 31, 2024, Operating income decreased $0.2 million, principally due to a $0.7 million increase in Technical and research expenses, as well as restructuring expenses of $2.2 million, as described above.

Changes in the estimated profitability of long-term contracts decreased operating income by $0.9 million in 2024, as compared to a decrease of $0.7 million during the same period last year.

Working Capital, Liquidity and Capital Structure

Cash Flow Summary

Nine months ended September 30,

Three months ended March 31,

(in thousands)

15 unchanged sentences

(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

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.

Net cash provided by operating activities was $9.6 million in 2024, compared to net cash used in activities of $16.4 million in the same period last year.

The increase was driven by improved levels of working capital at both segments and lower tax payments during the current period.

Net cash used in investing activities primarily include capital expenditures totaling $26.9 million and $16.3 million for the first three months of 2024 and 2023, respectively, including investments in new aerospace programs and to improve productivity in our MC segment.

Net cash used in financing activities during 2024 was $28.1 million as compared to net cash provided by financing activities of $41.1 million in 2023.

The change was primarily due to lower borrowings that were more than offset by a significant increase in principal payments on debt during the current period.

Liquidity and Capital Structure

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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.

Under our $800 million unsecured committed Amended Credit Agreement, $429.0 million of borrowings were outstanding as of March 31, 2024.

In addition, we have borrowings outstanding at our newly acquired Heimbach subsidiary of $10.1 million, of which $4.4 million was considered current.

As of March 31, 2024, we had cash and cash equivalents of $125.4 million and available borrowings under our Amended Credit Agreement of $371.0 million, for a total liquidity of approximately $496.4 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.

1 unchanged sentence

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.

As of March 31, 2024, $109.0 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.

were in excess of $155.0 million, as of March 31, 2024 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.

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, which is currently considered to be indefinitely reinvested in foreign operations, may also result in additional taxes.

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.

During the first three months of 2024, we paid $8.1 million in dividends and had no share repurchases.

Off-Balance Sheet Arrangements

2 unchanged sentences

There were no material changes in the Company’s off-balance sheet arrangements during 2024.

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 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

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

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

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

Effect After tax

Effect Per share

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

Effect After tax

Effect Per share

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

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

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

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

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

Acquisition/integration costs 255 77 178 0.01

Nine months ended September 30, 2023

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

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

Effect After tax

Effect Per share

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

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis