Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
The MD&A generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 26, 2024, incorporated herein by reference.
Business Environment Overview and Trends
We conduct our business under two reportable segments: Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”) each rooted in similar materials sciences know-how that forms a common approach to customer
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value proposition in design and manufacturability. MC competes on the basis of its deep industry knowledge, customer reputation and customer service and global advanced textile manufacturing capabilities, which has enabled it to develop a robust and market leading product offering that can be tailored to customer specific requirements. AEC competes on the basis of its innovative technology solutions, extensive composite manufacturing capabilities and capacity that enable it to offer high quality specific part and assembly solutions that achieve its customers’ application performance requirements.
General
Global, economic, and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, potential changes in U.S. government policy positions, including changes in Department of Defense policies or priorities, geopolitical conflicts and strained intercountry relations, U.S. and non-U.S. tax law changes, foreign currency exchange rates, sanctions, tariffs, energy costs and supply, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses.
Machine Clothing
Prior to the acquisition of Heimbach, the MC segment experienced declining revenues due to changing global market consumption of publication grade paper. The MC segment expects revenues to continue to decline for publication grade paper into 2025 and beyond, however, we see an offsetting effect due to growth in demand for packaging, and to a lesser degree, tissue grade products. During 2024, the MC segment saw stronger revenue in tissue, pulp, and engineered fabrics, and weaker revenue in packaging and publication grades, with softness in Asia, particularly China, and Europe. Going into 2025, the MC segment expects a modest recovery in Europe beginning in late 2025; however, China's recovery remains unclear. The MC segment's backlog continues to be stable going into 2025.
MC believes it is well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Some of the markets in which MC's products are sold are expected to have volume trends that are in line with global GDP. MC continues to face pricing pressures in all markets. Despite these market pressures on revenue growth, the MC segment is expected to improve earnings in the future through cost controls and manufacturing productivity efficiencies.
The MC segment has been a significant generator of cash for the Company. The Company seeks to maintain the cash-generating potential of this business by maintaining lower costs through a continued focus on cost-reduction initiatives and strategic investment, and by vigorously using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.
In August, 2023, the Company acquired Heimbach, a privately-held manufacturer of paper machine clothing headquartered in Düren, Germany, which provides the MC segment with an increase in scale and complementary technology that further drives MC's differentiated manufacturing sales and service network. Unlocking the full benefits and value of Heimbach is a complex integration process that is well underway and tracking to expectations. It is a multi-year program that started with harmonizing Heimbach operations with our legacy MRP systems and establishing a new global customer and operations organization. There is a disciplined focus to realize not only the combined benefits from procurement and overhead, but also to leverage best practices in manufacturing and a deep realignment of our operational footprint. During 2024, the Company announced several initiatives to further rationalize MC's operating footprint, including the closure of the South Korea facility, the consolidation of activities and facilities across the United Kingdom and the closure of Heimbach's Switzerland facility.
Albany Engineered Composites
The AEC segment's strategy is to continue to build on its global brand by leveraging its industry leading performance to drive future growth through technology differentiation. This includes continued investment in AEC's proprietary 3D-woven technology to accelerate solutions that can be offered across a set of broader applications; and by leveraging the AEC's non-3D technology capabilities and capacity, on high-value aerospace (both commercial and defense) applications, and other emerging markets such as space and advance air mobility ("AAM"). The AEC segment provides longer-term growth potential for the Company and the AEC segment continues to penetrate new programs and applications, as well as ramping up production on certain long-term programs, such as the CH-53K and other commercial aircraft programs that have not yet returned to pre-COVID production rates.
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The AEC segment (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10% noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group ("SAFRAN") and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM International’s LEAP engine) accounted for approximately 14% of the Company’s consolidated Net revenues in 2024. The AEC segment, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. Outside of ASC, the AEC segment also supplies 3D-woven composite vanes for the F-35 liftfan.
The AEC segment's current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787 aircraft, vacuum waste tanks for Boeing commercial aircraft and components and structures for other commercial, business jet, defense, and space and AAM programs. In 2024, approximately 36% of AEC net revenues were related to U.S. government contracts or programs.
The AEC segment is dependent on global supply chains and has experienced disruptions in recent years. In addition, higher inflation levels increased material costs, higher labor rates and other supplier costs that have impacted the AEC segment’s results of operations. The AEC segment attempts to mitigate raw material and supplier costs by entering into long-term supply agreements. However, in some cases, higher raw material and supplier costs adversely impacted certain firm-fixed price programs resulting in lower program gross margins. In addition, as the AEC segment ramps-up larger complex programs, such as CH-53K and Gulfstream, it continues to face challenges in staffing and training its workforce to support production rates, which has impacted operational productivity, particularly at its Salt Lake City facility, and contributed to increased labor and scrap costs.
As a result of the higher costs and operational challenges, the AEC segment updated labor, material input and scrap assumptions and estimates for certain long-term programs that resulted in negative cumulative changes in estimated profitability in the amount of $43.2 million in 2024, primarily related to the CH-53K, Gulfstream, F-35 and GE Platforms programs. Although the AEC segment believes it has action plans to mitigate these cost increases, the AEC segment may continue to experience similar issues into 2025 as it ramps up production levels on key programs.
Consolidated Results of Operations
Net Revenues
The following table summarizes our Net revenues by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 749,907 $ 670,768 $ 609,461
Albany Engineered Composites
480,708 477,141 425,426
Total net revenues
$ 1,230,615 $ 1,147,909 $ 1,034,887
% change
7.2 % 10.9 % 11.4 %
Net revenues increased 7.2% compared to 2023, driven by an increase of Net revenues from the Heimbach acquisition in 2023 and marginally higher Net revenues in AEC, partially offset by lower organic Net revenues at MC.
MC's Net revenues increased 11.8% compared to 2023 driven by an increase in Heimbach Net revenues of $95.0 million as well as better performance in tissue, pulp, and engineered fabrics. This was partially offset by $14.0 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication and packaging globally. Changes in currency translation rates had the effect of decreasing Net revenues $1.9 million.
AEC's Net revenues increased 0.7%, primarily driven by growth on certain commercial and space programs, which were partially offset by lower revenues on the LEAP, F-35 and CH-53K programs. Changes in currency translation rates had an insignificant effect on Net revenues.
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Gross Profit
The following table summarizes Gross profit by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 346,044 $ 331,558 $ 312,285
Albany Engineered Composites
55,732 92,160 77,497
Total
$ 401,776 $ 423,718 $ 389,782
% of net revenues
32.6 % 36.9 % 37.7 %
The decrease in Gross profit during 2024, as compared to 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 49.4% in 2023 to 46.1% in 2024. This margin decrease was primarily attributable to lower gross margin at Heimbach.
• AEC's gross profit margin decreased from 19.3% in 2023 to 11.6% in 2024, driven primarily by changes in the estimated profitability of long-term contracts, which decreased gross profit by $43.2 million in 2024, as compared to a decrease of $4.1 million during 2023, partially offset by a favorable shift in program revenue mix.
Selling, General, and Administrative ("SG&A")
Selling, general and administrative ("SG&A") expenses include segment selling, general and administrative expenses and corporate expenses. The following table summarizes SG&A by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 123,120 $ 118,196 $ 91,393
Albany Engineered Composites
47,421 48,833 42,339
Corporate
40,341 47,886 34,981
Total
$ 210,882 $ 214,915 $ 168,713
% of net revenues
17.1 % 18.7 % 16.3 %
Certain prior year amounts have been reclassified in order to conform to current year presentation. Global information system costs previously included in Corporate expenses are allocated to the segments in the above presentation. Management believes this presentation better reflects the performance of the segments and is how management will review segment performance on a going forward basis. Global information system costs were $31.9 million in 2024, $27.3 million in 2023, and $22.7 million in 2022. Corporate expenses include global information system costs of $1.0 million in 2024, $2.1 million in 2023 and $1.0 million in 2022. For more information on our segments, see Note 3, Reportable Segments and Geographic Data, of the Notes to the Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Consolidated SG&A expenses decreased 1.9% as compared to 2023 and as a percentage of Net revenues, SG&A expenses decreased from 18.7% in 2023 to 17.1% in 2024.
The overall decrease in SG&A expenses was due to the net effect of the following:
• MC SG&A expenses increased $4.9 million as compared to 2023, with a $13.5 million increase related to Heimbach, partially offset by a $8.2 million decrease due to changes in currency translation rates and a $0.5 million decrease due to personnel-related costs.
• In AEC, SG&A expenses decreased $1.4 million, driven by a $0.8 million decrease in marketing costs and a $0.6 million decrease in personnel-related costs, partially offset by an increase in global information systems costs.
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• Corporate SG&A expenses decreased $7.5 million, driven by a $4.4 million decrease in personnel-related costs, a decrease of $1.9 million in professional fees, and a decrease of $1.1 million in global information system costs.
Technical and Research
Technical and research expenses include technical, product engineering, internally funded research and development expenses.
The following table summarizes technical and research expenses by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 29,832 $ 24,651 $ 24,588
Albany Engineered Composites
16,265 15,976 15,353
Total technical and research expenses
$ 46,097 $ 40,627 $ 39,941
% of net revenues
3.7 % 3.5 % 3.9 %
Consolidated Technical and research expenses increased 13.5% as compared to 2023 and as a percentage of Net revenues increased from 3.5% in 2023 to 3.7% in 2024.
• MC Technical and research expenses increased $5.2 million as compared to 2023, driven primarily by a $5.1 million increase related to Heimbach.
• AEC Technical and research expenses increased $0.3 million as compared to 2023, driven by increased research material and labor costs.
Restructuring
In addition to the items discussed above affecting Gross profit, SG&A and Technical and research expenses, Operating income was affected by Restructuring expense, net, of $13.4 million in 2024, as compared to $0.3 million in 2023.
The following table summarizes Restructuring expenses, net, by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 9,460 $ 282 $ 92
Albany Engineered Composites
3,649 — —
Corporate
329 — 14
Total restructuring expenses
$ 13,438 $ 282 $ 106
At MC, restructuring actions were taken throughout 2024 in order to cease operations at several facilities, including at the Company's MC forming fabric manufacturing facility in Chungju, South Korea, at the Company's Heimbach engineered fabric manufacturing facility in Rochdale, UK, and at the Company's Heimbach paper machine clothing facility in Olten, Switzerland. These actions drove $11.2 million of restructuring charges during 2024, of which $9.5 million in Restructuring expenses, net was due to workforce reductions, fixed asset impairments, and related costs and $1.7 million in Costs of goods sold was due to the write-off of inventory. We expect to incur additional restructuring expenses related to these actions into 2025.
At AEC, restructuring activities were related to reductions in the workforce at various AEC locations, which resulted in restructuring expenses of $3.6 million for the year ended 2024.
Restructuring expenses incurred at MC and AEC during 2023 were not significant.
During the first quarter of 2025, the Company decided to consolidate headquarters in Portsmouth, NH. This change impacts approximately 100 employees, will take place over the next year and a half, and will cost an estimated $7 million over that period related to retention, relocation, severance, and professional costs.
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Operating Income
The following table summarizes operating income/(loss) by business segment:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Machine Clothing
$ 183,632 $ 188,429 $ 196,212
Albany Engineered Composites
(11,603) 27,351 19,805
Corporate
(40,670) (47,886) (34,995)
Total operating income
$ 131,359 $ 167,894 $ 181,022
% of net revenues
10.7 % 14.6 % 17.5 %
See the Segment Results of Operations section of this Management Discussion and Analysis of Financial Condition and Results of Operations for significant drivers of Operating income/(loss) for each business segment.
Other Earnings Items
The following table summarizes other earnings items that are presented below Operating income:
(in thousands)
Years ended December 31, 2024 2023 2022
Interest expense, net
$ 12,549 $ 13,601 $ 14,000
Pension settlement expense — — 49,128
Other (income)/expense, net
1,721 (6,163) (14,086)
Income tax expense
29,034 48,846 35,472
Net income/(loss) attributable to the noncontrolling interest
432 490 746
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. In addition, our 2021 interest rate swap contracts expired in the fourth quarter of 2024. Although we entered into new interest rate swap contracts in the fourth quarter, our interest cost will increase significantly in 2025 and beyond. For more information, see Note 17, Financial Instruments, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Pension settlement expense
During 2022, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred during 2024 or 2023. See Note 4, Pension, Postretirement, and Other Benefit Plans, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
Other (income)/expense, net
Other (income)/expense, net included foreign currency related transactions that resulted in gains of $3.9 million in 2024 and $2.9 million in 2023. In addition, changes in the fair value of derivative instruments included losses of $3.5 million in 2024 and gains of $0.4 million in 2023, driven by currency rate movements, most notably the Brazilian Real and Mexican Peso. Other (income)/expense also included bank fees, amortization of debt issuance costs, and rental income. See Note 6, Other (Income)/Expense, net , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.
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Income Taxes
Years ended December 31,
2024 2023 2022
Effective tax rate
24.8% 30.4% 26.9%
The effective tax rate represents the combined federal, state and foreign tax effects attributable to pretax earnings. For more information on income tax, see Note 7, Income Taxes, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
The Company has continuously monitored its ability to realize deferred tax assets as it pertains to Heimbach GmbH due to their existing net operating loss carryovers. After reviewing the positive and negative evidence available as of December 31, 2024, we continue to assert that we will more likely than not be able to utilize the net deferred tax assets. Net operating losses, which make up the majority of the deferred tax assets, have an unlimited carryforward period in Germany and we expect continued improvements in the business post-acquisition due to synergies and efficiencies that will be realized in the near future. The current net deferred tax asset position at Heimbach GmbH as of December 31, 2024 is $8.4 million. If it was determined that a valuation allowance was required, a deferred tax expense of $8.4 million as of December 31, 2024 would be required to create a reserve against those net deferred tax assets. The assessment of the need for a valuation allowance could change in future periods if additional negative evidence is observed. The amount of the tax expense needed to book the valuation allowance could also change depending on additional activities.
The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15% effective on January 1, 2024. While the U.S. has indicated that it will not adopt 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. We have evaluated the impact of these rules and have determined that it did not materially increase our global tax costs in 2024. We will continue to monitor U.S. and global legislative action related to Pillar Two for potential impacts.
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Segment Results of Operations
Machine Clothing Segment
The MC segment accounted for 61% of our consolidated revenues during 2024. A summary of MC's selected financial results is as follows:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Net revenues
$ 749,907 $ 670,768 $ 609,461
% change
11.8 % 10.1 % -1.5 %
Gross profit
346,044 331,558 312,285
% of net revenues
46.1 % 49.4 % 51.2 %
SG&A expenses
123,120 118,196 91,393
Technical and research expenses
29,832 24,651 24,588
Restructuring expenses, net
9,460 282 92
Operating income
$ 183,632 $ 188,429 $ 196,212
% of net revenues
24.5 % 28.1 % 32.2 %
Net revenues
Net revenues increased 11.8% as compared to 2023, driven by the addition of Heimbach Net revenues of $95.0 million as well as better performance in tissue, pulp, and engineered fabrics. This was partially offset by $14.0 million of lower Net revenues in the rest of the segment, driven primarily by weakness in publication and packaging globally. Changes in currency translation rates had the effect of decreasing Net revenues $1.9 million.
Heimbach contributed total Net revenues of $141.6 million and $51.2 million in 2024 and 2023, respectively. Heimbach reduced MC's Operating income by $20.0 million and $6.3 million in 2024 and 2023, respectively. Included in Heimbach's 2024 operating loss is $8.8 million of non-recurring restructuring and acquisition-related costs.
Gross Profit
Gross profit increased by $14.5 million as compared to 2023, driven by the higher sales noted above; however, gross profit margin decreased from 49.4% in 2023 to 46.1% in 2024. This margin decrease was primarily driven by lower gross margins at Heimbach.
Operating Income
Operating income decreased $4.8 million or 2.5% as compared to 2023. The strong Gross profit performance noted above was more than offset by increased SG&A, Technical and Research, and Restructuring expenses. SG&A expenses increased $4.9 million as compared to 2023, with a $13.5 million increase related to Heimbach, partially offset by a $8.2 million decrease due to changes in currency translation rates and a $0.5 million decrease due to personnel-related costs. Technical and research expenses increased $5.2 million as compared to 2023, driven primarily by a $5.1 million increase related to Heimbach. In addition, Restructuring expenses increased $9.2 million related to announcements during the year to cease operations at multiple manufacturing facilities, further reducing Operating income.
Backlog
Backlog at MC represents the summation of the value of all firm, open orders from customers. Backlog in the MC segment was $236 million at December 31, 2024. All of the backlog in MC as of December 31, 2024 is expected to be recognized as revenues during the next 12 months.
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Albany Engineered Composites Segment
The AEC segment accounted for 39% of our consolidated net revenues during 2024. A summary of AEC's selected financial results is as follows:
(in thousands, except percentages)
Years ended December 31, 2024 2023 2022
Net revenues
$ 480,708 $ 477,141 $ 425,426
% change
0.7 % 12.2 % 37.1 %
Gross profit
55,732 92,160 77,497
% of net revenues
11.6 % 19.3 % 18.2 %
SG&A expenses
47,421 48,833 42,339
Technical and research expenses
16,265 15,976 15,353
Restructuring expenses, net
3,649 — —
Operating income
$ (11,603) $ 27,351 $ 19,805
% of net revenues
-2.4 % 5.7 % 4.7 %
Net revenues
Net revenues increased 0.7%, primarily driven by growth on certain commercial and space programs, which were partially offset by lower revenues on the LEAP, F-35 and CH-53K programs. 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 37% of segment revenue for 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
Gross profit decreased $36.4 million as compared to last year and Gross profit margin decreased from 19.3% in 2023 to 11.6% in 2024. The reduction was driven primarily by cumulative changes in the estimated profitability of long-term contracts, which decreased gross profit by $43.2 million in 2024, as compared to a decrease of $4.1 million during 2023. The unfavorable effects in 2024 related to higher labor, material and scrap costs. The negative change in estimated profitability in 2024 was primarily driven by a few large complex programs, including approximately $25.5 million for the various CH-53K programs, $11.4 million on our Gulfstream program, $3.9 million on our F-35 program, and $2.2 million on our GE Platforms program. The unfavorable effects in 2023 related to additional reserves taken on certain contracts and inflationary factors decreasing anticipated margins.
Operating Income/(Loss)
Operating income decreased $39.0 million, principally due to reduced Gross profit as noted above. This was partially offset by a decrease in SG&A expenses of $1.4 million, driven by a $0.8 million decrease in marketing costs and a $0.6 million decrease in personnel-related costs. Technical and research expenses increased $0.3 million as compared to 2023, driven by increased research material and labor costs. Restructuring activities were related to reductions in the workforce at various AEC locations and resulted in restructuring expenses of $3.6 million, further reducing Operating income.
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Backlog
Backlog at AEC represents the aggregate dollar value of products and services for the given term of our contracts with customers where we have enforceable rights, including both funded and unfunded contract scope, for which products have not been provided or services have not been performed, but excluding unexercised contract options and potential orders under ordering-type contracts. For new contract awards, the initial backlog recorded may only reflect a portion of the total value of the contract award, particularly for ordering-type contracts. Backlog may increase over time as the orders placed against a contract include enforceable rights. For our ASC LEAP contract with our partner Safran, our backlog reflects the agreed business plan values with Safran for the subsequent full twelve-month calendar year.
Orders included in our backlog may be modified, canceled, or rescheduled by our customers, although customers may incur cancellation penalties as defined in the terms of such customer contracts; and which such terms may vary from contract to contract. If any of our enforceable contracts were to be terminated, our backlog would be reduced by the expected value of the unfilled orders of such contracts.
Backlog differs from unsatisfied performance obligations for contracts disclosed in Note 2, Revenue Recognition, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K, which excludes unsatisfied performance obligations with an original expected duration of one year or less.
Backlog at AEC was $1.4 billion as of December 31, 2024.
Working Capital, Liquidity and Capital Structure
Working Capital
Payment terms granted to paper industry and other machine clothing customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation. In some markets, customer agreements require us to maintain significant amounts of finished goods inventory to assure continuous availability of our products.
In addition to supplying paper, paperboard, and tissue companies, the MC segment is a leading supplier to the nonwovens (which includes the manufacture of products such as diapers, personal care, and household wipes), building products, and tannery and textile industries. These non-paper industries have a wide range of customers, with markets that vary from industrial applications to consumer use products. The AEC segment primarily serves customers in the commercial and defense aerospace market through both engine and airframe applications. AEC's working capital levels rose sharply in the last several years in line with the segment's growth.
In the MC segment, the Chinese New Year, summer months, and the end of the year are often periods of lower production for some of our customers, which, in the past contributed to seasonal variation in sales and orders. In recent years, shorter order cycles and lower inventory levels throughout the supply chain have become a more significant factor in quarterly sales. The impact of these combined factors on any quarter can be difficult to predict, and can make quarterly comparisons less meaningful than annual comparisons. While seasonality is generally not a significant factor in the Albany Engineered Composites segment, the commercial terms of the supply agreement governing the LEAP program resulted in fourth quarter sales volatility in recent years.
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Cash Flow Summary
(in thousands)
For the years ended December 31, 2024 2023 2022
Net income
$ 88,055 $ 111,610 $ 96,508
Depreciation and amortization
89,294 76,733 69,049
Changes in working capital (a)
54,321 (44,214) (63,478)
Changes in long-term liabilities, deferred taxes and other credits
(23,033) (11,829) (18,629)
Non-cash portion of pension settlement expense — — 42,657
Other operating items
9,804 15,756 2,107
Net cash provided by operating activities
218,441 148,056 128,214
Net cash used in investing activities
(80,180) (217,899) (96,348)
Net cash used in financing activities (183,832) (52,641) (23,652)
Effect of exchange rate changes on cash flows
(12,566) 4,128 (18,474)
Increase/(decrease) in cash and cash equivalents
(58,137) (118,356) (10,260)
Cash and cash equivalents at beginning of year
173,420 291,776 302,036
Cash and cash equivalents at end of year
$ 115,283 $ 173,420 $ 291,776
_________________________
(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable and Accrued liabilities.
Net cash provided by operating activities during 2024 was $218.4 million, compared to $148.1 million in the 2023. 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 $80.2 million and $84.4 million during 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 $183.8 million during 2024 as compared to $52.6 million during 2023. The significant increase in net cash used during 2024 was due to increased principal payments on debt, increased share repurchases, and increased dividends paid to shareholders.
Liquidity and Capital Structure
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks.
Under our $800 million unsecured credit agreement, $318.5 million of borrowings were outstanding as of December 31, 2024. We believe cash flows from operations and the availability of funds under our Amended Credit Agreement will be adequate to fund our operations and business needs over the next twelve months.
As of December 31, 2024, we had cash and cash equivalents of $115.3 million and availability under our Credit Agreement of $481.5 million, for a total liquidity of approximately $596.8 million. Bank debt at the Company's Heimbach subsidiary was paid down to less than $0.1 million as of December 31, 2024. For more information on the revolving credit agreement, see Note 17, Financial Instruments, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
As of December 31, 2024, $97.6 million of our total cash and cash equivalents was held by non-U.S. subsidiaries. The Company has targeted for repatriation $163.0 million of current year and prior year earnings of the Company’s foreign operations. The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S. were approximately $132.9 million, and are intended to remain indefinitely invested in foreign operations. Our cash planning strategy includes repatriating current earnings in excess of working capital requirements from certain countries in which our subsidiaries operate. While we have been successful in such endeavor to date, there
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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. We paid dividends of $32.5 million and $31.2 million during 2024 and 2023, respectively. The Company repurchased 182,901 shares during 2024 for $14.2 million. In total, the Company repurchased 1,490,904 shares for a total cost of $124.0 million since 2021. On February 21, 2025, the Company's Board of Directors authorized the Company to repurchase shares up to $250 million, which replaces the 2021 authorization.
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.
During the first quarter of 2025, the Company decided to consolidate headquarters in Portsmouth, NH. This change impacts approximately 100 employees, will take place over the next year and a half, and will cost an estimated $7 million over that period related to retention, relocation, severance, and professional costs.
Other Sources/Uses of Capital
We have contractual commitments to repay debt, make payments under leases, contribute to our pension and postretirement plans, and settle obligations related to agreements to purchase goods and services, income taxes, compensation plans, and as applicable, interest rate swaps. We estimate these contractual commitments amount to approximately $538 million as of December 31, 2024, of which we expect to pay $62 million within the next year. Interest payments on debt are expected to be approximately $18 million in 2025, $18 million in 2026, $19 million in 2027, and $12 million in 2028, and principal payments on debt of $318 million are not due until 2028. For more information on the revolving credit agreement, see Note 17, Financial Instruments , for payments related to leases see Note 20, Leases , and for payments related to pension and postretirement plans see Note 4, Pension, Postretirement, and Other Benefit Plans , as included in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Payments for these commitments are not representative of all our future cash requirements, which will vary based on future needs.
Critical Accounting Estimates
For the discussion of our accounting policies, see Note 1, Accounting Policies , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments which can affect our results of operations. In addition to the accounting policies stated in Note 1, Accounting Policies, of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, the financial statement amounts and disclosures are significantly influenced by market factors, judgments and estimates as described below.
Revenue Recognition
Contracts with customers in the MC segment have various terms that can affect the point in time when revenue is recognized. The contractual terms are closely monitored in order to ensure revenue is recognized in the proper period.
Products and services provided under long-term contracts represent a significant portion of net revenues in the AEC segment. AEC’s largest source of revenue is derived from the LEAP contract under a cost-plus-fee agreement. The fee may vary within a narrow range based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is judgment involved in determining applicable contract costs and the amount of revenue to be recognized.
We also have fixed price long-term contracts, for which revenue is generally recognized over time using an input method as the measure of progress. This method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract
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revenues or costs are required, any changes from prior estimates are included in earnings in the period the change occurs.
AEC has long-term aerospace contracts under which there are two phases: a phase during which the production part is designed and tested, and a phase of supplying production parts. During the design and testing phases, we perform pre-production or nonrecurring engineering services, which are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized in Other assets. The capitalized costs are amortized into cost of goods sold over the period which the asset is expected to contribute to future cash flows, including anticipated renewal periods. Accumulated capitalized costs are written-off when those costs are determined to be unrecoverable.
For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract loss provisions include contract options that are probable of exercise, excluding any profitable options that might be expected to follow. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative costs, which are treated as period expenses. We are required to limit our estimate of contract values to the period of the legally enforceable contract. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, the contract period may result in a loss contract provision at the inception of the contract.
Pension and Postretirement Liabilities
We sponsor several pension and postretirement benefit plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate.
Discount Rate Selection
We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero-coupon bonds. We use the RATE: Link 60-90 model (the "RATE Link"). We believe the projected cash flows used to determine RATE Link provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustments to RATE Link has been made.
Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments. The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefit obligation. Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligation.
Long-term Rate of Return on Plan Assets Assumption
Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes. Our analysis gives consideration to recent plan performance and historical returns; however, the assumptions are primarily based on long-term, prospective rates of return. The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 4.98% for 2024.
Based on information provided by actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and postretirement benefits are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
Income Taxes
We regularly assess the likelihood that deferred tax assets will be realized through the reversal of existing temporary differences and/or future taxable income. To the extent we believe that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. The amount of a valuation allowance is based upon our best estimate of our ability to realize the deferred tax assets.
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Tax positions taken or expected to be taken in a tax return are recognized when it is more-likely-than-not, based on technical merits, to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement, including resolution of related appeals and/or litigation process, if any.
Business Combinations
As we enter into business combinations, we perform acquisition accounting requirements including the following:
• Identifying the acquirer,
• Determining the acquisition date,
• Recognizing and measuring the identifiable assets acquired and the liabilities assumed, and
• Recognizing and measuring goodwill, as applicable.
We complete valuation procedures and record the resulting fair value of the acquired assets and assumed liabilities in accordance with the acquisition method under ASC 805, Business Combinations. The acquisition methodology requires management to make assumptions and apply judgment to determine the fair value of assets acquired and liabilities assumed. If estimates or assumptions used to complete the enterprise valuation and estimates of the fair value of the acquired assets and assumed liabilities significantly differ from assumptions made, the resulting difference could materially affect the fair value of net assets.
In determining the fair value of the tangible assets, including property, plant and equipment, we consider the cost-approach and the market approach, which estimates the cost to replace the asset, less accrued depreciation resulting from physical deterioration, functional obsolescence and external obsolescence. In the determination of the fair value of the identified intangible assets, we use cash flow models following the income approach, specifically, a relief from royalty method methodology. Inputs include estimated revenue growth rates, gross margins, operating expenses, and estimated attrition, royalty and discount rates. Goodwill is recorded as the difference in the fair value of the acquired assets and assumed liabilities and the purchase price, as applicable.
Goodwill and Intangible assets
Goodwill is not amortized, but is tested for impairment at least annually. Estimating the fair value of reporting units requires the use of estimates and significant judgments, including but not limited to revenue growth rates, operating margins, discount rates, and future market conditions. It is possible that these judgments and estimates could change in future periods.
The determination of the fair value of intangible assets acquired in a business acquisition is subject to many estimates and assumptions. Among such estimates and assumptions are royalties, discount rate and useful life. We review amortizable intangible asset groups for impairment whenever events and changes in circumstances indicate that the related carrying amounts may not be recoverable.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 1, Accounting Policies , of the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.