Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes.
Forward-looking Statements
This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” "forecast," ”look for,” “will,” “should,” “guidance,” “guide” and similar expressions identify forward-looking statements, which generally are not historical in nature. Because forward-looking statements are subject to certain risks and uncertainties, (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by such forward-looking statements.
There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:
• Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including higher interest rates, inflationary pressures, 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, 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;
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• 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;
• 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; and
• Other risks and uncertainties detailed in this report and other periodic reports.
Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K. Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.
Business Environment Overview and Trends
During the second quarter of 2024, the MC segment continued to see challenges in Europe, and, to a lesser degree, softness in North America and China. However, our global backlog remains stable. The integration of Heimbach continues to be on track with our internal plans. We transitioned Heimbach’s PMC businesses onto our SAP platform in July, an integral step to integrate Heimbach into the MC business.
The AEC segment continues to increase production levels on commercial, defense, and space programs. For the first half of 2024, the AEC segment has been awarded over $900 million in awards mostly on defense programs, and modest awards on commercial and space programs. While both major large aircraft manufacturers, Boeing and Airbus SE, had earlier announced increases in build rates in 2024 compared to 2023, due to continued quality issues at Boeing, Boeing has slowed their production rate on 737 MAX. Additionally, Airbus SE has given indications that their expected ramp on the A320 will be pushed out beyond previous expectations. We have decreased our LEAP production forecast for the remainder of 2024 and we are working with our customer, Safran, to determine the appropriate production volumes for our LEAP production into 2025.
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Also, 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
Net revenues
The following table summarizes our Net revenues by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 % Change 2024 2023 % Change
Machine Clothing $ 193,578 $ 159,217 21.6 % $ 378,795 $ 312,439 21.2 %
Albany Engineered Composites
138,416 114,906 20.5 % 266,529 230,780 15.5 %
Total $ 331,994 $ 274,123 21.1 % $ 645,324 $ 543,219 18.8 %
The following tables provide a comparison of 2024 Net revenues, excluding currency translation effects, to 2023 Net revenues:
(in thousands, except percentages)
Net revenues as reported, Q2 2024 (Decrease)/ increase due to changes in currency translation rates Q2 2024 revenues on same basis as Q2 2023 currency translation rates Net revenues as reported, Q2 2023 % Change compared to Q2 2023, excluding currency rate effects
Machine Clothing $ 193,578 $ (1,128) $ 194,706 $ 159,217 22.3 %
Albany Engineered Composites
138,416 (219) 138,635 114,906 20.7 %
Total $ 331,994 $ (1,347) $ 333,341 $ 274,123 21.6 %
(in thousands, except percentages)
Net revenues as reported, YTD 2024 (Decrease)/ increase due to changes in currency translation rates YTD 2024 revenues on same basis as 2023 currency translation rates Net revenues as reported, YTD 2023 % Change compared to 2023, excluding currency rate effects
Machine Clothing $ 378,795 $ (1,726) $ 380,521 $ 312,439 21.8 %
Albany Engineered Composites
266,529 2 266,527 230,780 15.5 %
Total $ 645,324 $ (1,724) $ 647,048 $ 543,219 19.1 %
Three month comparison
Net revenues increased 21.1% compared to the same period in 2023, driven by $39.8 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 21.6% compared to the second quarter of 2023, driven by Heimbach Net revenues of $39.8 million. This was partially offset by $4.3 million of lower Net revenues in the rest of the segment, due to decreased sales in pulp, packaging and publication grades, net of increased sales in tissue grades and engineered fabrics. Changes in currency translation rates had the effect of decreasing Net revenues $1.1 million.
AEC's Net revenues increased 20.5%, primarily driven by growth on CH-53K, Boeing 787 Frames, and other commercial and space programs. Changes in currency translation rates had had an insignificant effect on Net revenues.
Six month comparison
Net revenues increased 18.8% compared to the same period in 2023, driven by $77.7 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 21.2% compared to the same period in 2023, driven by Heimbach Net revenues of $77.7 million. This was partially offset by $9.6 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication globally, and in most grades in Europe, as well as decreased sales in packaging grades. Changes in currency translation rates had the effect of decreasing Net revenues $1.7 million.
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AEC's Net revenues increased 15.5%, primarily driven by growth on commercial and space programs, including Boeing 787 Frames, as well as growth on certain defense programs, including CH-53K. Changes in currency translation rates had an insignificant effect on Net revenues.
Gross Profit
The following table summarizes Gross profit by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 88,873 $ 80,919 $ 173,528 $ 158,774
Albany Engineered Composites
23,510 21,785 47,541 43,248
Total $ 112,383 $ 102,704 $ 221,069 $ 202,022
% of Net revenues 33.9 % 37.5 % 34.3 % 37.2 %
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 was as follows:
• MC's gross profit margin decreased from 50.8% in 2023 to 45.9% in 2024. This margin decrease was primarily attributable to lower gross margin at Heimbach. Excluding Heimbach, MC's gross profit margin increased to 51.7% in 2024.
• AEC's gross profit margin decreased from 19.0% in 2023 to 17.0% in 2024, driven primarily by changes in the estimated profitability of long-term contracts, which decreased gross profit by $5.0 million in 2024, as compared to a decrease of $1.9 million during the same period last year.
Six month comparison
The increase in Gross profit during the first half of 2024, as compared to the same period in 2023, was driven by higher sales in both segments. Gross profit as a percentage of revenues was as follows:
• MC's gross profit margin decreased from 50.8% in 2023 to 45.8% in 2024. This margin decrease was primarily attributable to lower gross margin at Heimbach. Excluding Heimbach, MC's gross profit margin increased to 51.9% in 2024.
• AEC's gross profit margin decreased from 18.7% in 2023 to 17.8% in 2024, driven primarily by changes in the estimated profitability of long-term contracts, which decreased gross profit by $7.6 million in 2024, as compared to a decrease of $4.0 million during the same period last year, partially offset by a favorable shift in revenue mix.
Selling, General, and Administrative ("SG&A")
The following table summarizes SG&A expenses by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 26,618 $ 20,682 $ 55,622 $ 43,755
Albany Engineered Composites
8,798 9,185 16,308 16,751
Corporate expenses 20,099 16,893 38,420 34,733
Total
$ 55,515 $ 46,760 $ 110,350 $ 95,239
% of Net revenues 16.7 % 17.0 % 17.1 % 17.5 %
Three month comparison
Consolidated SG&A expenses increased 18.7% as compared to 2023, however, as a percentage of Net revenues, SG&A expenses decreased from 17.0% in 2023 to 16.7% in 2024.
• MC SG&A expenses increased $5.9 million as compared to 2023, with a $7.4 million increase related to Heimbach, offset by a $1.5 million decrease due to changes in currency translation rates.
• In AEC, SG&A expenses remained largely in line with the prior year, decreasing $0.4 million.
• Corporate SG&A expenses increased $3.2 million, principally due to Heimbach IT-related costs and acquisition and integration related expenses.
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Six month comparison
Consolidated SG&A expenses increased 15.9% as compared to 2023, however, as a percentage of Net revenues, SG&A expenses decreased from 17.5% in 2023 to 17.1% in 2024.
The overall increase in SG&A expenses in the first six months of 2024, compared to the same period in 2023, was due to the net effect of the following:
• MC SG&A expenses increased $11.9 million as compared to 2023, of which $16.5 million of the increase related to Heimbach. Excluding Heimbach, MC's SG&A decreased $4.6 million, driven primarily by changes in currency translation rates, which reduced expense by $4.9 million, partially offset by higher employee-related compensation.
• In AEC, SG&A expenses remained largely in line with the prior year, decreasing $0.4 million.
• Corporate SG&A expenses increased $3.7 million, principally due to Heimbach IT-related costs and acquisition and integration related expenses.
Technical and Research
The following table summarizes technical and research expenses by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 7,504 $ 6,386 $ 15,024 $ 12,184
Albany Engineered Composites
4,356 3,932 9,501 8,411
Total
$ 11,860 $ 10,318 $ 24,525 $ 20,595
% of Net revenues 3.6 % 3.8 % 3.8 % 3.8 %
Three month comparison
Consolidated Technical and research expenses increased 14.9% as compared to 2023, and as a percentage of Net revenues decreased from 3.8% in 2023 to 3.6% in 2024.
• MC Technical and research expenses increased $1.1 million as compared to 2023, of which $1.6 million was due to the addition of Heimbach. Excluding Heimbach, material and labor costs were lower as compared to the prior year, driving the decrease in expenses.
• AEC Technical and research expenses increased $0.4 million as compared to 2023, due to increases in research material and labor costs.
Six month comparison
Consolidated Technical and research expenses increased 19.1% as compared to 2023, but as a percentage of Net revenues remained unchanged at 3.8% in both 2023 and 2024.
• MC Technical and research expenses increased $2.8 million as compared to 2023, of which $3.1 million was due to the addition of Heimbach. Excluding Heimbach, labor costs were lower as compared to the prior year, driving decreases in expenses.
• AEC Technical and research expenses increased $1.1 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, SG&A and Technical and research expenses, Operating income was affected by restructuring expense, net, of $2.1 million in the three months ended June 30, 2024, compared to $0.1 million in in the same period of 2023; and $4.3 million in the six months ended June 30, 2024, compared to $0.1 million in the same period in 2024.
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The following table summarizes Restructuring expenses, net by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages) 2024 2023 2024 2023
Machine Clothing $ 1,066 $ 125 $ 1,087 $ 145
Albany Engineered Composites 922 — 3,110 —
Corporate expenses 115 — 115 —
Consolidated total $ 2,103 $ 125 $ 4,312 $ 145
Restructuring expenses, net in the second quarter of 2024 at MC were primarily related to actions taken to cease operations at the Company's MC forming fabric manufacturing facility in Chungju, South Korea. This led to a $1.0 million charge to Restructuring expenses, net related to workforce reductions, as well as a $0.5 million charge to Cost of goods sold for the write-off of inventory. We expect to incur additional restructuring expenses related to this action throughout the remainder of the year.
At AEC, restructuring activities were related to reductions in the workforce at various AEC locations, which resulted in restructuring expenses of $0.9 million during the second quarter and $3.1 million during the first half of 2024.
Restructuring expenses incurred at MC and AEC during 2023 were not significant.
Operating Income
The following table summarizes operating income/(loss) by business segment:
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages) 2024 2023 2024 2023
Machine Clothing $ 53,685 $ 53,726 $ 101,795 $ 102,690
Albany Engineered Composites 9,434 8,668 18,622 18,086
Corporate expenses (20,214) (16,893) (38,535) (34,733)
Total $ 42,905 $ 45,501 $ 81,882 $ 86,043
% of Net revenues 12.9 % 16.6 % 12.7 % 15.8 %
Changes in operating income were primarily attributable to the drivers noted above.
Other Earnings Items
Three months ended June 30, Six months ended June 30,
(in thousands) 2024 2023 2024 2023
Interest expense, net $ 2,950 $ 3,106 $ 6,269 $ 6,396
Other (income)/expense, net 5,657 (4,511) 2,675 (4,966)
Income tax expense 9,578 20,080 20,849 30,701
Net income attributable to the noncontrolling interest 96 154 174 351
Interest Expense/(Income), net
Interest expense/(income), net, was largely in line with the prior year. See Note 14. Financial Instruments in the Notes to Consolidated Financial Statements for further discussion of borrowings and interest rates.
Other (Income)/Expense, net
Other (income)/expense, net, included foreign currency related transactions which resulted in losses of $0.2 million and gains of $1.1 million in the three and six months ended June 30, 2024, respectively, as compared to gains of $4.2 million and $4.1 million in the same period last year. In addition, changes in the fair value of derivative instruments included losses of $4.4 million and $4.3 million in the three and six months ended June 30, 2024, as compared to gains of $0.1 million and $0.1 million in the same period last year, driven by currency rate movements, most notably the Brazilian Real and Mexican Peso. Net periodic pension and postretirement costs, other than service costs, were $0.7 million and $1.3 million in the three and six months ended June 30, 2024, respectively, as compared to benefits of $0.1 million and $0.2 million in the same period last year. Other (income)/expense, net, also included net
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proceeds of $0.5 million from the divestiture of assets related to Heimbach during the three and six months ended June 30, 2024, as well as bank fees, amortization of debt issuance costs, and rental income.
Effective Income Tax Rate
Three months ended June 30, Six months ended June 30,
2024 2023 2024 2023
Effective income tax rate 27.9 % 42.8 % 28.6 % 36.3 %
The Company has operations that constitute a taxable presence in 22 countries outside of the United States. The majority of these countries had income tax rates that were above the United States federal tax rate of 21 percent during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges.
The tax rate is affected by recurring items, such as the income tax rate in the U.S. and non-U.S. jurisdictions and the mix of pre-tax income earned in those jurisdictions. The tax rate is also affected by U.S. 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 second quarter of 2024 was 27.9%, lower compared to 42.8% for the same period in 2023, mainly due to favorable discrete tax adjustments in the current period compared to unfavorable discrete tax adjustments in the prior period. For the first half of 2024, the Company's effective tax rate was 28.6%, lower compared to 36.3% for the same period in 2023, mainly due to favorable discrete tax adjustments in the current period compared to unfavorable discrete tax adjustments in the prior period. 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.
Segment Results of Operations
Machine Clothing Segment
The MC segment accounted for 58% and 59% of our consolidated revenues during the three and six months ended June 30, 2024, respectively. A summary of selected financial results for MC is as follows:
Review of Operations
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 2024 2023
Net revenues $ 193,578 $ 159,217 $ 378,795 $ 312,439
Gross profit
88,873 80,919 173,528 158,774
% of Net revenues 45.9 % 50.8 % 45.8 % 50.8 %
SG&A expenses
26,618 20,682 55,622 43,755
Technical and research expenses
7,504 6,386 15,024 12,184
Operating income 53,685 53,726 101,795 102,690
Net Revenues
For the three months ended June 30, 2024, Net revenues increased by 21.6% as compared to the prior year, driven by Heimbach Net revenues of $39.8 million. This was partially offset by $4.3 million of lower Net revenues in the rest of the segment, driven primarily by decreased sales in pulp, packaging and publication grades, net of increased sales in tissue grades and engineered fabrics. Changes in currency translation rates had the effect of decreasing Net revenues $1.1 million.
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For the six months ended June 30, 2024, Net revenues increased by 21.2% as compared to the prior year, driven by Heimbach Net revenues of $77.7 million. This was partially offset by $9.6 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication globally, and in most grades in Europe, as well as decreased sales in packaging grades. Changes in currency translation rates had the effect of decreasing Net revenues $1.7 million.
Gross Profit
For the three months ended June 30, 2024, Gross profit increased by $8.0 million as compared to the same period in the prior year, driven by the higher sales noted above; however, gross profit margin decreased from 50.8% in 2023 to 45.9% in 2024. This margin decrease was primarily driven by lower gross margins at Heimbach. Excluding Heimbach, MC's gross profit margins increased to 51.7% in 2024.
For the six months ended June 30, 2024, Gross profit increased by $14.8 million as compared to the same period in the prior year, driven by the higher sales noted above; however, gross profit margin decreased from 50.8% in 2023 to 45.8% in 2024. This margin decrease was primarily driven by lower gross margins at Heimbach. Excluding Heimbach, MC's gross profit margins increased to 51.9% in 2024.
Operating Income
For the three months ended June 30, 2024, Operating income was largely in line with the prior year. The addition of Heimbach increased SG&A expenses by $7.4 million and increased Technical and research expenses by $1.6 million. Excluding Heimbach, SG&A decreased $1.5 million and Technical and research expenses decreased $0.5 million, driven primarily by changes in currency translation rates and reduced material and labor costs.
For the six months ended June 30, 2024, Operating income decreased $0.9 million, principally due to lower gross profit margins and higher SG&A and Technical and research expenses from the Heimbach acquisition. The addition of Heimbach increased SG&A expenses by $16.3 million and increased Technical and research expenses by $3.1 million. Excluding Heimbach, SG&A decreased $4.9 million due to changes in currency translation rates, partially offset by higher employee-related compensation, and Technical and research expenses decreased $0.3 million, driven by reduced labor costs.
Albany Engineered Composites ("AEC") Segment
The AEC segment accounted for 42% and 41% of our consolidated revenues during the three and six months ended June 30, 2024, respectively. A summary of selected financial results for AEC is as follows:
Review of Operations
Three months ended June 30, Six months ended June 30,
(in thousands, except percentages)
2024 2023 2024 2023
Net revenues $ 138,416 $ 114,906 $ 266,529 $ 230,780
Gross profit
23,510 21,785 47,541 43,248
% of Net revenues 17.0 % 19.0 % 17.8 % 18.7 %
SG&A expenses
8,798 9,185 16,308 16,751
Technical and research expenses
4,356 3,932 9,501 8,411
Operating income 9,434 8,668 18,622 18,086
Net Revenues
For the three months ended June 30, 2024, Net revenues increased 20.5% as compared to the prior year, driven by growth on CH-53K, Boeing 787 Frames, and other commercial and space programs. Changes in currency translation rates had an insignificant effect on Net revenues.
For the six months ended June 30, 2024, Net revenues increased 15.5%, primarily driven by growth on commercial and space programs, including Boeing 787 Frames, as well as growth on certain defense programs, including CH-53K. Changes in currency translation rates had an insignificant effect on Net revenues.
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 six months of 2024 and 2023.
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In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses. Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.
Gross Profit
For the three months ended June 30, 2024, Gross profit increased $1.7 million as compared to the same period last year, and as a percentage of revenues decreased from 19.0% in 2023 to 17.0% in 2024. The decrease in profit margin was driven primarily by unfavorable changes in the estimated profitability of long-term contracts as noted below.
For the six months ended June 30, 2024, Gross profit increased $4.3 million as compared to the same period last year, and gross profit margin decreased from 18.7% in 2023 to 17.8% in 2024. The decrease in profit margin was driven primarily by unfavorable changes in the estimated profitability of long-term contracts as noted below, partially offset by a favorable shift in revenue mix.
Operating Income
For the three months ended June 30, 2024, Operating income increased $0.8 million, principally due to an increase of $23.5 million in Net revenues and an increase of $1.7 million in Gross profit, offset by restructuring expenses of $0.9 million, as described above.
For the six months ended June 30, 2024, Operating income increased $0.5 million, principally due to an increase of $35.7 million in Net revenues, an increase of $4.3 million in Gross profit, and a reduction of $0.4 million in SG&A, offset by an increase of $1.1 million in Technical and research expenses and restructuring expenses of $3.1 million, as described above.
Changes in the estimated profitability of long-term contracts decreased operating income by $5.0 million for the second quarter of 2024 and decreased operating income $7.6 million for the first half of 2024. For the 2023 year, adjustments in the estimated profitability of long-term contracts decreased operating income by $1.9 million in the second quarter and decreased operating income by $4.0 million for the first half of the year.
Working Capital, Liquidity and Capital Structure
Cash Flow Summary
Six months ended June 30,
(in thousands)
2024 2023
Net income $ 52,089 $ 53,912
Depreciation and amortization 44,693 35,317
Changes in working capital (a) 1,868 (71,524)
Changes in other noncurrent liabilities and deferred taxes (3,315) (135)
Other operating items (2,346) (2,895)
Net cash provided by operating activities 92,989 14,675
Net cash used in investing activities (45,627) (34,971)
Net cash used in financing activities
(98,225) 29,294
Effect of exchange rate changes on cash and cash equivalents (6,118) 142
Decrease in cash and cash equivalents
(56,981) 9,140
Cash and cash equivalents at beginning of year 173,420 291,776
Cash and cash equivalents at end of period
$ 116,439 $ 300,916
(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.
Net cash provided by operating activities during the first six months of 2024 was $93.0 million, compared to $14.7 million in the same period last year. The increase was primarily driven by improved levels of working capital at both
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segments, but was most pronounced at AEC, which invested a much more significant amount in working capital during 2023 related to the expanded CH-53K scope of work and the build-up of inventory in the LEAP program as compared to 2024.
Net cash used in investing activities primarily included capital expenditures totaling $45.6 million and $35.0 million for the first six 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 $98.2 million as compared to net cash provided by financing activities of $29.3 million in 2023. The change was primarily due to lower borrowings and a significant increase in principal payments on debt during 2024.
Liquidity and Capital Structure
We finance our business activities principally with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks.
Under our $800 million unsecured committed Amended Credit Agreement, $370.0 million of borrowings were outstanding as of June 30, 2024. In addition, we have borrowings outstanding at our newly acquired Heimbach subsidiary of $7.1 million, of which $2.7 million was considered current.
As of June 30, 2024, we had cash and cash equivalents of $116.4 million and available borrowings under our Amended Credit Agreement of $430.0 million, for a total liquidity of approximately $546.4 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. For more information on credit agreements, see Note 14. Financial Instruments in the Notes to Consolidated Financial Statements.
As of June 30, 2024, $100.2 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 $120.0 million, as of June 30, 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 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 six months of 2024, we paid $16.2 million in dividends and had no share repurchases.
Off-Balance Sheet Arrangements
The Company is party to certain off-balance sheet arrangements, including certain guarantees. The Company provides financial assurance, such as payment guarantee and letters of credit and surety bonds, primarily to support workers’ compensation programs and customs clearance, of less than $12 million. There were no material changes in the Company’s off-balance sheet arrangements during 2024.
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