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, 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;
• 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;
• 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;
• Expectations regarding our ability to attract, motivate, and retain the workforce necessary to execute our business strategy and other goals;
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• 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, 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;
• 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 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; 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 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. 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
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. Mr. 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. Mr. 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. Mr. 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
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million. 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.
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 and in our Forms 10-Q previously filed with the SEC in 2024. 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 September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 % Change 2024 2023 % Change
Machine Clothing $ 183,033 $ 166,588 9.9 % $ 561,828 $ 479,027 17.3 %
Albany Engineered Composites
115,353 114,518 0.7 % 381,882 345,298 10.6 %
Total $ 298,386 $ 281,106 6.1 % $ 943,710 $ 824,325 14.5 %
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, Q3 2024 (Decrease)/ increase due to changes in currency translation rates Q3 2024 revenues on same basis as Q3 2023 currency translation rates Net revenues as reported, Q3 2023 % Change compared to Q3 2023, excluding currency rate effects
Machine Clothing $ 183,033 $ 727 $ 182,306 $ 166,588 9.4 %
Albany Engineered Composites
115,353 159 115,194 114,518 0.6 %
Total $ 298,386 $ 886 $ 297,500 $ 281,106 5.8 %
(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 $ 561,828 $ (999) $ 562,827 $ 479,027 17.5 %
Albany Engineered Composites
381,882 161 381,721 345,298 10.5 %
Total $ 943,710 $ (838) $ 944,548 $ 824,325 14.6 %
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Three month comparison
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 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.
Gross Profit
The following table summarizes Gross profit by business segment:
Three months ended September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 88,921 $ 79,257 $ 262,449 $ 238,031
Albany Engineered Composites
1,463 22,578 49,004 65,826
Total $ 90,384 $ 101,835 $ 311,453 $ 303,857
% of Net revenues 30.3 % 36.2 % 33.0 % 36.9 %
Three month comparison
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 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:
• MC's gross profit margin decreased from 49.7% in 2023 to 46.7% in 2024. This margin decrease was primarily attributable to lower gross margin at Heimbach.
• 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
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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 September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 28,191 $ 22,442 $ 83,813 $ 66,197
Albany Engineered Composites
7,920 9,519 24,228 26,270
Corporate expenses 15,986 20,014 54,406 54,747
Total
$ 52,097 $ 51,975 $ 162,447 $ 147,214
% of Net revenues 17.5 % 18.5 % 17.2 % 17.9 %
Three month comparison
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 $5.7 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 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 September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 2024 2023
Machine Clothing $ 7,042 $ 6,023 $ 22,066 $ 18,207
Albany Engineered Composites
3,802 3,685 13,303 12,096
Total
$ 10,844 $ 9,708 $ 35,369 $ 30,303
% of Net revenues 3.6 % 3.5 % 3.7 % 3.7 %
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Three month comparison
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.
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 $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 $2.3 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 September 30, Nine months ended September 30,
(in thousands, except percentages) 2024 2023 2024 2023
Machine Clothing $ 2,207 $ 82 $ 3,294 $ 227
Albany Engineered Composites 34 — 3,144 —
Corporate expenses 31 — 146 —
Consolidated total $ 2,272 $ 82 $ 6,584 $ 227
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.
Operating Income
The following table summarizes operating income/(loss) by business segment:
Three months ended September 30, Nine months ended September 30,
(in thousands, except percentages) 2024 2023 2024 2023
Machine Clothing $ 51,481 $ 50,710 $ 153,276 $ 153,400
Albany Engineered Composites (10,293) 9,374 8,329 27,460
Corporate expenses (16,017) (20,014) (54,552) (54,747)
Total $ 25,171 $ 40,070 $ 107,053 $ 126,113
% of Net revenues 8.4 % 14.3 % 11.3 % 15.3 %
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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,
(in thousands) 2024 2023 2024 2023
Interest expense, net $ 2,411 $ 3,653 $ 8,680 $ 10,049
Other (income)/expense, net 3,257 56 5,932 (4,910)
Income tax expense 1,282 9,207 22,131 39,908
Net income attributable to the noncontrolling interest 192 45 366 396
Interest Expense/(Income), net
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. 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 $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 September 30, Nine months ended September 30,
2024 2023 2024 2023
Effective income tax rate 6.6 % 25.3 % 23.9 % 33.0 %
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 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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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 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 September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 2024 2023
Net revenues $ 183,033 $ 166,588 $ 561,828 $ 479,027
Gross profit
88,921 79,257 262,449 238,031
% of Net revenues 48.6 % 47.6 % 46.7 % 49.7 %
SG&A expenses
28,191 22,442 83,813 66,197
Technical and research expenses
7,042 6,023 22,066 18,207
Operating income 51,481 50,710 153,276 153,400
Net Revenues
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.
Gross Profit
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.
Operating Income
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.
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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 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 September 30, Nine months ended September 30,
(in thousands, except percentages)
2024 2023 2024 2023
Net revenues $ 115,353 $ 114,518 $ 381,882 $ 345,298
Gross profit
1,463 22,578 49,004 65,826
% of Net revenues 1.3 % 19.7 % 12.8 % 19.1 %
SG&A expenses
7,920 9,519 24,228 26,270
Technical and research expenses
3,802 3,685 13,303 12,096
Operating income (10,293) 9,374 8,329 27,460
Net Revenues
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 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 nine months of 2024 and 2023.
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 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.
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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 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
Nine months ended September 30,
(in thousands)
2024 2023
Net income $ 70,310 $ 81,066
Depreciation and amortization 67,003 54,778
Changes in working capital (a) 7,700 (58,130)
Changes in other noncurrent liabilities and deferred taxes (7,569) (4,866)
Other operating items 2,541 964
Net cash provided by operating activities 139,985 73,812
Net cash used in investing activities (61,053) (182,596)
Net cash used in financing activities
(121,773) (10,839)
Effect of exchange rate changes on cash and cash equivalents (3,357) (647)
Decrease in cash and cash equivalents
(46,198) (120,270)
Cash and cash equivalents at beginning of year 173,420 291,776
Cash and cash equivalents at end of period
$ 127,222 $ 171,506
(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.
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.
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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, $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. For more information on credit agreements, see Note 14. Financial Instruments in the Notes to Consolidated Financial Statements.
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 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. 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 2024, we paid $24.4 million in dividends and had no share repurchases.
Off-Balance Sheet Arrangements
The Company is party to certain off-balance sheet arrangements, including certain guarantees. The Company provides financial assurance, such as payment guarantee and letters of credit and surety bonds, primarily to support workers’ compensation programs and customs clearance, of less than $12 million. There were no material changes in the Company’s off-balance sheet arrangements during 2024.
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