What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-30 compared with 2024-08-06 · 131 added, 117 removed, 221 unchanged (53% of the section changed)

8 unchanged sentences

• 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.

• Across the entire Company, increasing labor, raw material, energy, or 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;

• Across both segments, potential ports strikes could cause additional disruptions to our supply chain;

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

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• 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;

• In the Albany Engineered Composites segment, risks associated with changes in estimates and assumptions that could result in a decline in program gross margins or turn a profitable program into a loss program;

• 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;

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

• 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;

• In the Albany Engineered Composites segment, future funding and compliance risks associated with our contracts with government entities, OEM customers or prime contractors on contracts with government entities;

• Costly and disruptive legal disputes and settlements;

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• 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;

• Failure to adequately integrate the Heimbach Group companies 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;

• 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.

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 the “Business Environment Overview and Trends” sections of this quarterly report, as well as in the 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.

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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.

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.

Machine Clothing Segment

During the third quarter of 2024, the Company announced that Merle Stein was appointed President of the Machine Clothing (“MC”) segment, after serving as the Segment’s Chief Operating Officer.

Stein has considerable experience in the paper and pulp industries, significant knowledge of the MC business, and a strategic understanding of the markets it serves.

Stein joined the Company in 2011.

The MC segment global backlog is stable and profitability continues to improve despite challenges in Europe, and, to a lesser degree, softness in China.

North America is stable.

The integration of Heimbach is on track with our internal plans.

We transitioned Heimbach’s Paper Machine Clothing (“PMC”) businesses onto our SAP platform in July, an integral step to integrate Heimbach into the MC business.

Albany Engineered Composites Segment

In the third quarter, the Company announced the appointment of Christopher Stone as President of the Albany Engineered Composites segment.

Stone brings a deep knowledge of the Aerospace and Defense industry, and considerable operational experiences to his new role.

He has held a wide range of leadership positions at public companies, with a focus in manufacturing and supply chain management, business operations, production control, logistics and organizational transformation.

The AEC segment continues to ramp-up production levels on commercial, defense, and space programs.

In the third quarter of 2024, the Company updated its labor, material input and scrap assumptions and estimates of certain long-term programs that resulted in a negative cumulative change in estimated profitability in the amount of $22.4

The negative cumulative change in profitability was primarily driven by a few large complex programs, including $13.3 million for various CH-53K programs, $6.5 million on our Gulfstream program, $2.2 million on our F-35 program, and $0.4 million, net on all other programs.

Boeing and Airbus SE had earlier announced increases in build rates in 2024 compared to 2023.

During the year, both OEMs announced slower production rates than initially projected.

We are seeing lower production rates on our Boeing 787 program causing AEC to slow its production on its content for this program for the remainder of 2024.

Furthermore, although we have not yet experienced an adverse impact as a result of the Boeing Machinist strike, we are monitoring the strike and its potential impact on our future production rates.

Airbus SE has indicated 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.

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:

2 unchanged sentences

The following table summarizes our Net revenues by business segment:

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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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.

Net revenues increased 6.1% compared to the same period in 2023, driven by an increase in Net revenues from the Heimbach acquisition and stable Net revenues in AEC in line with the prior year, partially offset by lower organic Net revenues at MC.

MC's Net revenues increased 9.9% compared to the third quarter of 2023 driven by an increase in Heimbach Net revenues of $17.4 million.

This was partially offset by $1.7 million of lower Net Revenues in the rest of the segment, due to lower revenues in packaging and publication grades.

In addition, changes in currency translation rates had the effect of increasing Net revenues $0.7 million.

AEC's Net revenues were largely in line with the prior year, increasing $0.8 million or 0.7%, primarily driven by growth on certain commercial and space programs, which was partially offset by lower revenues on CH-53K and other defense programs.

Changes in currency translation rates had an insignificant effect on Net revenues.

Nine month comparison

Net revenues increased 14.5% compared to the same period in 2023, driven by an increase 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 17.3% compared to the same period in 2023 driven by an increase in Heimbach Net revenues of $95.0 million.

This was partially offset by $11.2 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 $1.0 million.

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.

AEC's Net revenues increased 10.6%, primarily driven by growth on certain commercial and space programs, which was partially offset by lower revenues on the F-35 program.

Changes in currency translation rates had an insignificant effect on Net revenues.

The following table summarizes Gross profit by business segment:

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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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.

The decrease in 2024 Gross profit, as compared to the same period last year, was driven by increased cost assumptions that adjusted the expected profitability of certain long-term contracts in the AEC segment.

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.

• MC's gross profit margin increased from 47.6% in 2023 to 48.6% in 2024, primarily attributable to reduced input costs.

• AEC's gross profit margin decreased from 19.7% in 2023 to 1.3% in 2024, driven primarily by cumulative changes in the estimated profitability of long-term contracts, which decreased gross profit by $22.4 million in 2024, as compared to a increase of $0.9 million during the same period last year.

Nine month comparison

The decrease in Gross profit during the first nine months of 2024, as compared to the same period in 2023, was driven by increased cost assumptions that adjusted the expected profitability of certain long-term contracts in the AEC segment.

Gross profit as a percentage of revenues was as follows:

1 unchanged sentence

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.

• AEC's gross profit margin decreased from 19.1% in 2023 to 12.8% in 2024, driven primarily by cumulative changes in the estimated profitability of long-term contracts, which decreased gross profit by $28.3 million in

2024, as compared to a decrease of $4.1 million during the same period last year, partially offset by a favorable shift in revenue mix to commercial and space programs.

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,

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

(in thousands, except percentages)

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Consolidated SG&A expenses increased 0.2% as compared to 2023, however, as a percentage of Net revenues, SG&A expenses decreased from 18.5% in 2023 to 17.5% 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.

Six month comparison

• MC SG&A expenses increased $5.7 million as compared to 2023, with a $3.9 million increase related to Heimbach, a $1.2 million increase due to changes in currency translation rates, and a $0.6 million increase in professional, consulting, and personnel-related costs.

• In AEC, SG&A expenses decreased $1.6 million, primarily driven by lower incentive compensation and personnel-related costs.

• Corporate SG&A expenses decreased $4.0 million, principally due to lower incentive compensation and personnel-related costs.

Nine month comparison

Consolidated SG&A expenses increased 10.3% as compared to 2023, however, as a percentage of Net revenues, SG&A expenses decreased from 17.9% in 2023 to 17.2% 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.

The overall increase in SG&A expenses in the first nine months of 2024, compared to the same period in 2023, was due to the net effect of the following:

• MC SG&A expenses increased $17.6 million as compared to 2023, with a $20.4 million increase related to Heimbach and a $0.9 million increase related to personnel-related and travel costs, partially offset by a $3.7 million decrease due to changes in currency translation rates.

• In AEC, SG&A expenses decreased $2.0 million, driven by a $0.8 million decrease in personnel-related costs, a $0.8 million decrease in marketing costs, and a $0.4 million decrease in professional and consulting fees.

• Corporate SG&A expenses remained largely in line with the prior year, decreasing $0.3 million.

Technical and Research

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

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

6 unchanged sentences

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.

Consolidated Technical and research expenses increased 11.7% as compared to 2023 and as a percentage of Net revenues increased from 3.5% in 2023 to 3.6% in 2024.

• MC Technical and research expenses increased $1.0 million as compared to 2023 due to the addition of Heimbach.

• AEC Technical and research expenses increased $0.1 million as compared to 2023, due to increases in research material and labor costs.

Six month comparison

Nine month comparison

Consolidated Technical and research expenses increased 16.7% as compared to 2023, but as a percentage of Net revenues remained unchanged at 3.7% 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.

• MC Technical and research expenses increased $3.9 million as compared to 2023, with a $4.3 million increase related to Heimbach, which was partially offset by a $0.4 million decrease in personnel-related costs.

• AEC Technical and research expenses increased $1.2 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.

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 $2.3 million in the three months ended September 30, 2024, compared to $0.1 million in in the same period of 2023;

and $6.6 million in the nine months ended September 30, 2024, compared to $0.2 million in the same period in 2023.

The following table summarizes Restructuring expenses, net by business segment:

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages) 2024 2023 2024 2023

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Consolidated total $ 2,272 $ 82 $ 6,584 $ 227

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.

At MC, restructuring actions were taken in the second and third quarters of 2024 to cease operations at the Company's MC forming fabric manufacturing facility in Chungju, South Korea, and at the Company's Heimbach engineered fabric manufacturing facility in Rochdale, UK.

This was the principal driver of $3.3 million in Restructuring expenses, net for the first nine months of 2024 related to workforce reductions, fixed asset impairments and related costs, as well as charges of $1.3 million in Costs of goods sold for the write-off of inventory.

We expect to incur additional restructuring expenses related to these actions 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 $3.1 million for the first nine months of 2024.

Restructuring expenses incurred at MC and AEC during 2023 were not significant.

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

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages) 2024 2023 2024 2023

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Other Earnings Items

Three months ended June 30, Six months ended June 30,

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

(in thousands) 2024 2023 2024 2023

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Interest Expense/(Income), net

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

Interest expense/(income), net, decreased over the prior year primarily due to lower average debt balances, in part offset by less interest income earned on cash equivalents during the current year.

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

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.

Other (income)/expense, net, included foreign currency related transactions, which resulted in losses of $1.8 million and $0.7 million in the three and nine months ended September 30, 2024, respectively, as compared to losses of $0.5 million and gains of $3.6 million in the same periods last year.

In addition, changes in the fair value of derivative instruments included gains of $0.5 million and losses of $3.8 million in the three and nine months ended September 30, 2024, as compared to losses of $0.7 million and $0.6 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 $2.0 million in the three and nine months ended September 30, 2024, respectively, as compared to benefits of $0.1 million and $0.3 million in the same period last year.

Other (income)/expense, net, also included net losses of $0.7 million from the divestiture of assets related to Heimbach during the nine months ended September 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,

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

2024 2023 2024 2023

10 unchanged sentences

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.

The Company’s effective tax rate for the third quarter of 2024 was 6.6%, lower compared to 25.3% for the same period in 2023, mainly due to favorable discrete tax adjustments in the current period exceeding favorable discrete tax adjustments in the prior period.

The favorable discrete benefits in the third quarter of 2024 were partially offset by an unfavorable change in the jurisdictional mix of earnings compared to the prior period.

For the nine months ended September 30, 2024, the Company's effective tax rate was 23.9%, lower compared to 33.0% 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, partially offset by an unfavorable change in the jurisdictional mix of earnings compared to the prior period.

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

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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.

The MC segment accounted for 61% and 60% of our consolidated revenues during the three and nine months ended September 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,

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

(in thousands, except percentages)

8 unchanged sentences

Operating income 51,481 50,710 153,276 153,400

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.

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.

For the three months ended September 30, 2024, Net revenues increased by 9.9% as compared to the prior year, driven by an increase in Heimbach Net revenues of $17.4 million.

This was partially offset by $1.7 million of lower organic Net Revenues in the rest of the segment, due to decreased sales in packaging and publication grades.

In addition, changes in currency translation rates had the effect of increasing Net revenues $0.7 million.

For the nine months ended September 30, 2024, Net revenues increased by 17.3% as compared to the prior year, driven by an increase in Heimbach Net revenues of $95.0 million.

This was partially offset by $11.2 million of lower organic 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 $1.0 million.

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;

For the three months ended September 30, 2024, Gross profit increased by $9.7 million and the gross profit margin increased from 47.6% in 2023 to 48.6% in 2024.

This margin increase was primarily attributable to reduced input costs.

For the nine months ended September 30, 2024, Gross profit increased by $24.4 million as compared to the same period in the prior year, driven by the higher sales noted above;

however, gross profit margin decreased from 49.7% in 2023 to 46.7% 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.

For the three months ended September 30, 2024, Operating income was largely in line with the prior year, increasing $0.8 million or 1.5%.

The strong Gross profit performance was largely offset by increased SG&A and Technical and Research expenses, primarily at Heimbach locations.

SG&A expenses increased $5.7 million as compared to 2023, with a $3.9 million increase related to Heimbach, a $1.2 million increase due to changes in currency translation rates, and a $0.6 million increase in professional, consulting, and personnel-related costs.

Technical and research expenses increased $1.0 million as compared to 2023 due to the addition of Heimbach.

In addition, Restructuring expenses increased $2.2 million related to recent announcements to cease operations at multiple manufacturing facilities, further reducing Operating income.

For the nine months ended September 30, 2024, Operating income was also largely in line with the prior year, decreasing $0.1 million or 0.1%.The strong Gross profit performance was largely offset by increased SG&A and Technical and Research expenses, primarily at Heimbach locations.

SG&A expenses increased $17.6 million as compared to 2023, with a $20.4 million increase related to Heimbach and a $0.9 million increase related to personnel-related and travel costs, partially offset by a $3.7 million decrease due to changes in currency translation rates.

Technical and research expenses increased $3.9 million as compared to 2023, with a $4.3 million increase related to Heimbach, which was offset by a $0.4 million decrease in personnel-related costs.

In addition, Restructuring expenses increased $3.3 million related to recent announcements to cease operations at multiple manufacturing facilities, further reducing Operating income.

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.

The AEC segment accounted for 39% and 40% of our consolidated revenues during the three and nine months ended September 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,

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

(in thousands, except percentages)

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Operating income (10,293) 9,374 8,329 27,460

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.

For the three months ended September 30, 2024, Net revenues increased 0.7% as compared to the prior year, primarily driven by growth on certain commercial and space programs, which was partially offset by lower revenues on CH-53K and other defense 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.

For the nine months ended September 30, 2024, Net revenues increased 10.6%, primarily driven by growth on certain commercial and space programs, which was partially offset by lower revenues on the F-35 program.

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.

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

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

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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 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.

For the three months ended September 30, 2024, Gross profit decreased $21.1 million as compared to the same period last year, and as a percentage of revenues decreased from 19.7% in 2023 to 1.3% in 2024.

This decrease in Gross profit was driven primarily by changes in the estimated profitability of long-term contracts, which decreased gross profit by $22.4 million in 2024 due to increased cost assumptions as well as the impact of suspended production at a key customer.

For the 2023 year, adjustments in the estimated profitability of long-term contracts increased Gross profit $0.9 million.

For the nine months ended September 30, 2024, Gross profit decreased $16.8 million as compared to the same period last year, and gross profit margin decreased from 19.1% in 2023 to 12.8% in 2024.

This decrease in Gross profit was driven primarily by changes in the estimated profitability of long-term contracts, which decreased gross profit by $28.3 million in 2024 due to increased cost assumptions as well as the impact of suspended production at a key customer, partially offset by a favorable shift in revenue mix to commercial and space programs.

For the 2023 year, adjustments in the estimated profitability of long-term contracts decreased Gross profit $4.1 million.

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.

For the three months ended September 30, 2024, Operating income decreased $19.7 million, principally due to reduced Gross profit as noted above.

This was partially offset by a decrease in SG&A expenses of $1.6 million, primarily driven by decreased incentive compensation and personnel-related costs.

Technical and research expenses and Restructuring expenses remained largely in line with the prior year.

For the nine months ended September 30, 2024, Operating income decreased $19.1 million, principally due to reduced Gross profit as noted above.

This was partially offset by a decrease in SG&A expenses of $2.0 million, driven by a $0.8 million decrease in personnel-related costs, a $0.8 million decrease in marketing costs, and a $0.4 million decrease in professional and consulting fees.

Technical and research expenses increased $1.2 million as compared to 2023 due to increases in research material and labor costs.

Restructuring activities related to reductions in the workforce at various AEC locations resulted in restructuring expenses of $3.1 million, further reducing Operating income.

Working Capital, Liquidity and Capital Structure

Cash Flow Summary

Six months ended June 30,

Nine months ended September 30,

(in thousands)

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(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

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.

Net cash provided by operating activities during the first nine months of 2024 was $140.0 million, compared to $73.8 million in the same period last year.

The increase was primarily driven by improved levels of working capital at both 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 included capital expenditures totaling $62.1 million and $49.1 million for the first nine months of 2024 and 2023, respectively, including investments in new aerospace programs and to improve productivity in our MC segment.

In addition, investing activities during the prior year included the acquisition of Heimbach, headquartered in Düren, Germany, for net cash of $133.5 million, funded using cash on hand.

Net cash used in financing activities was $121.8 million for the first nine months of 2024 as compared to $10.8 million for the first nine months of 2023.

The significant increase in net cash used during 2024 was due to increased principal payments on debt and increased dividends paid to shareholders.

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, $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.

Under our $800 million unsecured committed Amended Credit Agreement, $360.0 million of borrowings were outstanding as of September 30, 2024.

In addition, we have borrowings outstanding at our Heimbach subsidiary of $2.2 million, of which $0.6 million was considered current.

As of September 30, 2024, we had cash and cash equivalents of $127.2 million and available borrowings under our Amended Credit Agreement of $440.0 million, for a total liquidity of approximately $567.2 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.

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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.

As of September 30, 2024, $106.5 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.

were in excess of $120.0 million, as of September 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.

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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.

During the first nine months of 2024, we paid $24.4 million in dividends and had no share repurchases.

Off-Balance Sheet Arrangements

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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