Albany International Corp 10-Q for FY2022 Q3
Albany International Corp (AIN)
10-Q
2022-10-25
For: 2022-09-30
View Original
Added on
April 11, 2026
About this 10-Q
Albany International Corp filed this 10-Q on October 25, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $260.56M
- up 12.1% from $232.44M a year earlier
- Net income
- $10.69M
- down 65.3% from net income of $30.86M a year earlier
- Diluted EPS
- $0.34
- down 64.2% from $0.95 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the quarterly period ended: | ||||||||
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from __________ to __________ | |||||
Commission file number: 1-10026
| (Exact name of registrant as specified in its charter) | ||
(State or other jurisdiction of incorporation or organization) | ||
(Address of principal executive offices) | ||
(IRS Employer Identification No.) | ||
(Zip Code) | ||
| (Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
The New York Stock Exchange ( | ||||||||
The New York Stock Exchange ( | ||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 31.1 million shares of Class A Common Stock and no shares of Class B Common Stock outstanding as of October 15, 2022.
ALBANY INTERNATIONAL CORP.
TABLE OF CONTENTS
| Page No. | ||||||||
Consolidated statements of comprehensive income/(loss) – three and nine months ended September 30, 2022 and 2021 | ||||||||
ITEM 1. FINANCIAL STATEMENTS
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general, and administrative expenses | |||||||||||||||||||||||
| Technical and research expenses | |||||||||||||||||||||||
| Restructuring expenses, net | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Pension settlement expense | |||||||||||||||||||||||
| Aviation Manufacturing Jobs Protection (AMJP) grant | ( | ( | |||||||||||||||||||||
| Other (income)/expense, net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense/(benefit) | ( | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to the noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to the Company | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share attributable to Company shareholders - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share attributable to Company shareholders - Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Shares of the Company used in computing earnings per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Dividends declared per share, Class A and Class B | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
1
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income/(loss), before tax: | |||||||||||||||||||||||
| Foreign currency translation and other adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Reclassification of loss on pension settlement | |||||||||||||||||||||||
| Amortization of pension liability adjustments: | |||||||||||||||||||||||
| Prior service credit | ( | ( | ( | ( | |||||||||||||||||||
| Net actuarial loss | |||||||||||||||||||||||
| Payments and amortization related to interest rate swaps included in earnings | ( | ||||||||||||||||||||||
| Derivative valuation adjustment | |||||||||||||||||||||||
| Income taxes related to items of other comprehensive income/(loss): | |||||||||||||||||||||||
| Reclassification of loss on pension settlement | ( | ( | |||||||||||||||||||||
| Amortization of prior service credit | |||||||||||||||||||||||
| Amortization of net actuarial loss | ( | ( | ( | ( | |||||||||||||||||||
| Payments and amortization related to interest rate swaps included in earnings | ( | ( | ( | ( | |||||||||||||||||||
| Derivative valuation adjustment | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Comprehensive income attributable to the noncontrolling interest | ( | ( | |||||||||||||||||||||
| Comprehensive income attributable to the Company | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements
2
ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Contract assets, net | |||||||||||
| Inventories | |||||||||||
| Income taxes prepaid and receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | $ | $ | |||||||||
| Property, plant and equipment, net | |||||||||||
| Intangibles, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Noncurrent receivables, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Deferred taxes and other liabilities | |||||||||||
| Total liabilities | |||||||||||
| SHAREHOLDERS' EQUITY | |||||||||||
Preferred stock, par value $ | |||||||||||
Class A Common Stock, par value $ | |||||||||||
Class B Common Stock, par value $ | |||||||||||
| Additional paid in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated items of other comprehensive income: | |||||||||||
| Translation adjustments | ( | ( | |||||||||
| Pension and postretirement liability adjustments | ( | ( | |||||||||
| Derivative valuation adjustment | ( | ||||||||||
Treasury stock (Class A), at cost; | ( | ( | |||||||||
| Total Company shareholders' equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of the consolidated financial statements
3
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Change in deferred taxes and other liabilities | ( | ( | |||||||||||||||||||||
| Impairment of property, plant, equipment, and inventory | ( | ||||||||||||||||||||||
| Non-cash interest expense | |||||||||||||||||||||||
| Non-cash portion of pension settlement expense | |||||||||||||||||||||||
| Compensation and benefits paid or payable in Class A Common Stock | |||||||||||||||||||||||
| Provision/(recovery) for credit losses from uncollected receivables and contract assets | ( | ( | ( | ||||||||||||||||||||
| Foreign currency remeasurement (gain)/loss on intercompany loans | ( | ( | ( | ||||||||||||||||||||
| Fair value adjustment on foreign currency options | ( | ( | |||||||||||||||||||||
| Changes in operating assets and liabilities that provided/(used) cash: | |||||||||||||||||||||||
| Accounts receivable | ( | ( | ( | ( | |||||||||||||||||||
| Contract assets | ( | ( | ( | ||||||||||||||||||||
| Inventories | ( | ( | ( | ||||||||||||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||||||||||||||
| Income taxes prepaid and receivable | ( | ( | |||||||||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||||||||
| Accrued liabilities | ( | ( | ( | ||||||||||||||||||||
| Income taxes payable | ( | ||||||||||||||||||||||
| Noncurrent receivables | |||||||||||||||||||||||
| Other noncurrent liabilities | ( | ( | ( | ( | |||||||||||||||||||
| Other, net | ( | ||||||||||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | ( | ( | |||||||||||||||||||
| Purchased software | ( | ( | ( | ( | |||||||||||||||||||
| Net cash used in investing activities | ( | ( | ( | ( | |||||||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||||||||
| Proceeds from borrowings | |||||||||||||||||||||||
| Principal payments on debt | ( | ( | ( | ||||||||||||||||||||
| Principal payments on finance lease liabilities | ( | ( | ( | ||||||||||||||||||||
| Purchase of Treasury shares | ( | ||||||||||||||||||||||
| Taxes paid in lieu of share issuance | ( | ( | |||||||||||||||||||||
| Proceeds from options exercised | |||||||||||||||||||||||
| Dividends paid | ( | ( | ( | ( | |||||||||||||||||||
| Net cash used in financing activities | ( | ( | ( | ( | |||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ( | ( | |||||||||||||||||||
| (Decrease)/increase in cash and cash equivalents | ( | ( | |||||||||||||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | $ | $ | |||||||||||||||||||
4
The accompanying notes are an integral part of the consolidated financial statements
5
ALBANY INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for such periods. Albany International Corp. (Albany, the Registrant, the Company, we, us, or our) consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Albany International Corp.’s Annual Report on Form 10-K for the year ended December 31, 2021.
2. Reportable Segments and Revenue Recognition
In accordance with applicable disclosure guidance for enterprise segments and related information, the internal organization that is used by management for making operating decisions and assessing performance is used as the basis for our reportable segments.
Machine Clothing:
The Machine Clothing (“MC”) segment supplies permeable and impermeable belts used in the manufacture of paper, paperboard, tissue and towel, nonwovens, fiber cement and several other industrial applications. We sell our MC products directly to customer end-users in countries across the globe. Our products, manufacturing processes, and distribution channels for MC are substantially the same in each region of the world in which we operate.
We design, manufacture, and market paper machine clothing (used in the manufacturing of paper, paperboard, tissue and towel) for each section of the paper machine and for every grade of paper. Paper machine clothing products are customized, consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure.
Albany Engineered Composites:
The Albany Engineered Composites (“AEC”) segment provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. The segment includes Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group (“Safran”) owns a 10 percent noncontrolling interest. AEC, through ASC, is the exclusive supplier of the LEAP program of advanced composite fan blades and fan cases under a long-term supply contract. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft . AEC's largest aerospace customer is the SAFRAN Group and sales to SAFRAN (consisting primarily of fan blades and cases for CFM's LEAP engine) accounted for approximately 12 percent of the Company's consolidated Net sales in 2021. AEC net sales to Safran were $125.4 million and $81.6 million in the first nine months of 2022 and 2021, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $76.4 million and $79.6 million as of September 30, 2022 and December 31, 2021, respectively.
Other significant programs by AEC include the Sikorsky CH-53K, F-35, JASSM, and Boeing 787 programs. AEC also supplies vacuum waste tanks for the Boeing 7-Series programs, and specialty components for the Rolls Royce lift fan on the F-35, as well as the fan case for the GE9X engine. In 2021, approximately 47 percent of AEC sales were related to U.S. government contracts or programs.
6
The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | ||||||||||||||
Machine Clothing | $ | $ | $ | $ | ||||||||||
| Albany Engineered Composites | ||||||||||||||
Consolidated total | $ | $ | $ | $ | ||||||||||
| Operating income/(loss) | ||||||||||||||
Machine Clothing | $ | $ | $ | $ | ||||||||||
| Albany Engineered Composites | ||||||||||||||
Corporate expenses | ( | ( | ( | ( | ||||||||||
| Operating income | $ | $ | $ | $ | ||||||||||
Reconciling items: | ||||||||||||||
| Interest income | ( | ( | ( | ( | ||||||||||
Interest expense | ||||||||||||||
| Pension settlement expense | ||||||||||||||
| AMJP grant | ( | ( | ||||||||||||
| Other (income)/expense, net | ( | ( | ||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||
A subsidiary within our Machine Clothing segment has been a partner in a joint venture (“JV”) that supplies paper machine clothing products to local papermakers in Russia. In March 2022, we made the decision to cease doing business in Russia, including giving notice to our JV partner of our intent to exit the venture. As a result, we recognized $1.6 million expense in the consolidated statement of operations, representing reserves against the risk of uncollectible customer receivables and obsolescence of certain inventory destined for Russian customers. We also wrote down the net book value of our investment in the aforementioned JV to reflect our intent to exit such venture, resulting in $0.8 million impairment loss during the first quarter of 2022.
In the third quarter, we took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million, which were included as Corporate expenses and other. This led to a reduction of unfunded pension liabilities of $6.2 million.
Revenue Recognition:
Products and services provided under long-term contracts represent a significant portion of sales in the Albany Engineered Composites segment and we account for these contracts using the percentage of completion (actual cost to estimated cost) method. That method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are included in earnings in the period the change occurs. Changes in the estimated profitability of long-term contracts could be caused by increases or decreases in the contract value, revisions to customer delivery requirements, updated labor or overhead rates, factors affecting the supply chain, changes in the evaluation of contract risks and opportunities, or other factors. Changes in the estimated profitability of long-term contracts increased operating income by $2.6 million for the third quarter of 2022 and $2.0 million for the first nine months of 2022. Adjustments in the estimated profitability of long-term contracts increased operating income by $2.1 million and $2.4 million for the three and nine month periods ended September 30, 2021, respectively.
7
We disaggregate revenue earned from contracts with customers for each of our business segments and product groups based on the timing of revenue recognition, and groupings used for internal review purposes.
The following table disaggregates revenue for each product group by timing of revenue recognition:
| Three months ended September 30, 2022 | |||||||||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | ||||||||
| Machine Clothing | $ | $ | $ | ||||||||
| Albany Engineered Composites | |||||||||||
ASC | |||||||||||
| Other AEC | |||||||||||
Total Albany Engineered Composites | |||||||||||
| Total revenue | $ | $ | $ | ||||||||
| Three months ended September 30, 2021 | |||||||||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | ||||||||
| Machine Clothing | $ | $ | $ | ||||||||
| Albany Engineered Composites | |||||||||||
ASC | |||||||||||
| Other AEC | |||||||||||
Total Albany Engineered Composites | |||||||||||
Total revenue | $ | $ | $ | ||||||||
| Nine months ended September 30, 2022 | |||||||||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | ||||||||
| Machine Clothing | $ | $ | $ | ||||||||
| Albany Engineered Composites | |||||||||||
| ASC | |||||||||||
| Other AEC | |||||||||||
| Total Albany Engineered Composites | |||||||||||
| Total revenue | $ | $ | $ | ||||||||
8
| Nine months ended September 30, 2021 | |||||||||||
| (in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | ||||||||
| Machine Clothing | $ | $ | $ | ||||||||
| Albany Engineered Composites | |||||||||||
| ASC | |||||||||||
| Other AEC | |||||||||||
| Total Albany Engineered Composites | |||||||||||
| Total revenue | $ | $ | $ | ||||||||
The following table disaggregates MC segment revenue by significant product groupings (paper machine clothing (PMC) and engineered fabrics), and, for PMC, the geographical region to which the paper machine clothing was sold:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Americas PMC | $ | $ | $ | $ | ||||||||||
Eurasia PMC | ||||||||||||||
| Engineered Fabrics | ||||||||||||||
Total Machine Clothing Net sales | $ | $ | $ | $ | ||||||||||
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contracts in the MC segment are generally for periods of less than a year. Most contracts in the AEC segment are relatively short duration firm-fixed-price orders. Remaining performance obligations on contracts that had an original duration of greater than one year totaled $600 million and $155 million as of September 30, 2022 and 2021, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of September 30, 2022, we expect to recognize as revenue approximately $46 million during 2022, $124 million during 2023, $107 million during 2024, and the remainder thereafter.
9
3. Pensions and Other Postretirement Benefit Plans
The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing these benefits during the active service period of the employees.
The composition of the net periodic benefit cost for the nine months ended September 30, 2022 and 2021, was as follows:
Pension plans | Other postretirement benefits | |||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Components of net periodic benefit cost: | ||||||||||||||
Service cost | $ | $ | $ | $ | ||||||||||
| Interest cost | ||||||||||||||
Expected return on assets | ( | ( | ||||||||||||
| Amortization of prior service cost/(credit) | ( | ( | ( | |||||||||||
Amortization of net actuarial loss | ||||||||||||||
| Net periodic benefit cost/(credit) | $ | $ | $ | ( | $ | ( | ||||||||
| Settlement charge | ||||||||||||||
| Net benefit cost/(credit) | $ | $ | $ | ( | $ | ( | ||||||||
The amount of net benefit cost/(credit) is determined at the beginning of each year and generally only varies from quarter to quarter when a significant event occurs, such as a curtailment or a settlement. In the third quarter, we took actions to settle certain pension plan liabilities for a plan in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred in the prior year.
Service cost for defined benefit pension and postretirement plans are reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are included in the line item Other (income)/expense, net in the Consolidated Statements of Income.
4. Other (Income)/Expense, net
The components of Other (Income)/Expense, net are:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Currency transaction (gains)/losses | $ | ( | $ | $ | ( | $ | ||||||||
Bank fees and amortization of debt issuance costs | ||||||||||||||
| Components of net periodic pension and postretirement cost other than service cost | ( | ( | ( | ( | ||||||||||
Other | ( | ( | ||||||||||||
| Total | $ | ( | $ | $ | ( | $ | ||||||||
Other (income)/expense, net, included foreign currency gains of $6.6 million and $17.7 million in the three and nine month periods ended September 30, 2022, respectively, as compared to losses of $0.5 million and $0.8 million in the three and nine month periods ended September 30, 2021, respectively. The weaker Euro during the three and nine month periods ended September 30, 2022 led to the gains on foreign currency related transactions during such periods.
10
5. Income Taxes
The following table presents components of income tax expense for the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Income tax based on income from continuing operations (1) | $ | $ | $ | $ | ||||||||||
| Provision for change in estimated tax rate | ||||||||||||||
| Income tax before discrete items | ||||||||||||||
| Discrete tax expense: | ||||||||||||||
| Exercise of U.S. stock options | ( | ( | ( | ( | ||||||||||
| Impact of amended tax returns | ( | |||||||||||||
| True-up of prior year estimated taxes | ( | ( | ( | ( | ||||||||||
| Enacted tax legislation and rate change | ||||||||||||||
| Provision for/resolution of tax audits and contingencies, net | ( | |||||||||||||
| US Pension Settlement - Release of Residual Tax Effect | ( | ( | ||||||||||||
| Other | ||||||||||||||
| Total income tax expense/(benefit) | $ | ( | $ | $ | $ | |||||||||
(1) Calculated at estimated annual tax rates of | ||||||||||||||
Income tax expense for the quarter was computed in accordance with ASC 740-270, Income Taxes – Interim Reporting. Under this method, loss jurisdictions, which cannot recognize a tax benefit with regard to their generated losses, are excluded from the annual effective tax rate (AETR) calculation and their taxes will be recorded discretely in each quarter.
The Company's policy for releasing income tax effects from accumulated other comprehensive income is the specific identification approach, whereas these items are released to income tax expense when the individual items are disposed of, terminated or extinguished.
11
6. Earnings Per Share
The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands, except market price and earnings per share) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net income attributable to the Company | $ | $ | $ | $ | ||||||||||
| Weighted average number of shares: | ||||||||||||||
Weighted average number of shares used in calculating basic net income per share | ||||||||||||||
| Effect of dilutive stock-based compensation plans: | ||||||||||||||
| Stock options | ||||||||||||||
| RSU and MPP shares | ||||||||||||||
| Weighted average number of shares used in calculating diluted net income per share | ||||||||||||||
| Average market price of common stock used for calculation of dilutive shares | $ | $ | $ | $ | ||||||||||
| Net income attributable to the Company per share: | ||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||
7. Accumulated Other Comprehensive Income (AOCI)
The table below presents changes in the components of AOCI for the period December 31, 2021 to September 30, 2022:
(in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income | ||||||||||
| December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
Other comprehensive income/(loss) before reclassifications, net of tax | ( | ( | ||||||||||||
| Pension settlement expense, net of tax | ||||||||||||||
| Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | ||||||||||||||
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | ( | ( | ||||||||||||
| Net current period other comprehensive income | ( | ( | ||||||||||||
| September 30, 2022 | $ | ( | $ | ( | $ | $ | ( | |||||||
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The table below presents changes in the components of AOCI for the period December 31, 2020 to September 30, 2021:
| (in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income | ||||||||||
| December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
| Other comprehensive income/(loss) before reclassifications, net of tax | ( | ( | ||||||||||||
| Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | ||||||||||||||
| Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | ( | ( | ||||||||||||
| Net current period other comprehensive income | ( | ( | ||||||||||||
| September 30, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
The components of our Accumulated Other Comprehensive Income that are reclassified to the Statement of Income relate to our pension and postretirement plans and interest rate swaps.
The table below presents the expense/(income) amounts reclassified from AOCI, and the line items of the Statement of Income that were affected for the three and nine months ended September 30, 2022 and 2021:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: | ||||||||||||||
Expense/(income) related to interest rate swaps included in Income before taxes (a) | $ | ( | $ | $ | $ | |||||||||
| Income tax effect | ( | ( | ( | ( | ||||||||||
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $ | ( | $ | $ | $ | |||||||||
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: | ||||||||||||||
| Pension settlement expense | ||||||||||||||
| Amortization of prior service credit | ( | ( | ( | ( | ||||||||||
Amortization of net actuarial loss | ||||||||||||||
| Total pretax amount reclassified (b) | ( | ( | ||||||||||||
Income tax effect | ( | ( | ||||||||||||
| Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $ | $ | ( | $ | $ | ( | ||||||||
(a)Included in Interest expense, net are payments related to the interest rate swap agreements and amortization of swap buyouts (see Notes 13 and 14).
(b)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3).
8. Noncontrolling Interest
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| Nine months ended September 30, | ||||||||
| (in thousands, except percentages) | 2022 | 2021 | ||||||
| Net income of Albany Safran Composites (ASC) | $ | $ | ||||||
| Less: Return attributable to the Company's preferred holding | ||||||||
| Net income of ASC available for common ownership | $ | $ | ||||||
| Ownership percentage of noncontrolling shareholder | % | % | ||||||
| Net income attributable to the noncontrolling interest | $ | $ | ||||||
| Noncontrolling interest, beginning of year | $ | $ | ||||||
| Net income attributable to noncontrolling interest | ||||||||
| Changes in other comprehensive income attributable to the noncontrolling interest | ( | ( | ||||||
| Noncontrolling interest, end of interim period | $ | $ | ||||||
9. Accounts Receivable
Accounts receivable includes trade receivables. In connection with certain sales in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year. As of September 30, 2022 and December 31, 2021, Accounts receivable consisted of the following:
(in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Trade and other accounts receivable | $ | $ | ||||||
Bank promissory notes | ||||||||
| Allowance for expected credit losses | ( | ( | ||||||
Accounts receivable, net | $ | $ | ||||||
The Company has Noncurrent receivables in the AEC segment that represent revenue earned, which has extended payment terms. The Noncurrent receivables will be invoiced to the customer over a 10-year period, which began in 2020. As of September 30, 2022 and December 31, 2021, Noncurrent receivables consisted of the following:
(in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Noncurrent receivables | $ | $ | ||||||
Allowance for expected credit losses | ( | ( | ||||||
| Noncurrent receivables, net | $ | $ | ||||||
10. Contract Assets and Liabilities
Contract assets includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance Sheets.
Contract assets and Contract liabilities are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting period.
14
(in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Contract assets | $ | $ | ||||||
Allowance for expected credit losses | ( | ( | ||||||
| Contract assets, net | $ | $ | ||||||
| Contract liabilities | $ | $ | ||||||
Contract assets increased $36.2 million during the nine-month period ended September 30, 2022. The increase was primarily due to an increase in unbilled revenue related to the satisfaction of performance obligations, in excess of the amounts billed to customers for contracts that were in a contract asset position. There were no
Contract liabilities decreased $1.3 million during the nine-month period ended September 30, 2022, primarily due to revenue recognized from satisfied performance obligations exceeding amounts invoiced to customers that were in a contract liability position. Revenue recognized for the nine-month periods ended September 30, 2022 and 2021 that was included in the Contract liability balance at the beginning of the year was $5.0 million and $5.3 million, respectively.
11. Inventories
Costs included in inventories are raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new cost basis of such inventories.
As of September 30, 2022 and December 31, 2021, Inventories consisted of the following:
(in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Raw materials | $ | $ | ||||||
Work in process | ||||||||
| Finished goods | ||||||||
Total inventories | $ | $ | ||||||
12. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Our reportable segments are consistent with our operating segments.
In the second quarter of 2022, management applied the qualitative assessment approach in performing its annual evaluation of goodwill for the Company's Machine Clothing reporting unit and two AEC reporting units and concluded that each reporting unit’s fair value continued to exceed its carrying value. In addition, there were no amounts at risk due to the estimated excess between the fair and carrying values. Accordingly, no impairment charges were recorded.
When a quantitative assessment is performed, determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable.
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13. Financial Instruments
Long-term debt, principally to banks and noteholders, consists of:
(in thousands, except interest rates) | September 30, 2022 | December 31, 2021 | ||||||
Revolving credit agreement with borrowings outstanding at an end of period interest rate of | $ | $ | ||||||
We had no
On October 27, 2020, we entered into a $700 million unsecured Four-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior amended and restated $685 million Five-Year Revolving Credit Facility Agreement, which we had entered into on November 7, 2017 (the “Prior Agreement”). Under the Credit Agreement, $447 million of borrowings were outstanding as of September 30, 2022. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 26, 2022, the spread was 1.625 %. The spread was based on a pricing grid, which ranged from 1.500 % to 2.000 %, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of September 30, 2022, we would have been able to borrow an additional $253 million under the Agreement.
The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default that are comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company’s subsidiaries.
Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change (as defined in the Credit Agreement).
On June 14, 2021, we entered into interest rate swap agreements for the period October 17, 2022 through October 27, 2024. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn under the Credit Agreement at the rate of 0.838 % during the period. Under the terms of these transactions, we pay the fixed rate of 0.838 % and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date. The monthly calculation date is the 16th day of each month, and on September 16, 2022, one-month LIBOR was 2.94 %.
On November 28, 2017, we entered into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn under the Credit Agreement at the rate of 2.11 % during the period. Under the terms of these transactions, we pay the fixed rate of 2.11 % and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date. The monthly calculation date is the 16th day of each month, and on September 16, 2022, one-month LIBOR was 2.94 %. On September 16, 2022, the all-in-rate on the $350 million of debt was 3.735 %.
These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 14. No cash collateral was received or pledged in relation to the swap agreements.
Under the Credit Agreement, we are currently required to maintain a leverage ratio (as defined in the agreement) of not greater than 3.50 to 1.00 and minimum interest coverage (as defined) of 3.00 to 1.00.
As of September 30, 2022, our leverage ratio was 1.22 to 1.00 and our interest coverage ratio was 15.79 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash, provided our leverage ratio does not exceed the limits noted above.
16
Indebtedness under the Credit Agreement is ranked equally in right of payment to all unsecured senior debt. We were in compliance with all debt covenants as of September 30, 2022.
Currently, our Credit Agreement and certain of our derivative instruments reference one-month USD LIBOR-based rates, which are set to discontinue after June 30, 2023. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR) for USD LIBOR. Our Credit Agreement contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark and we have adhered to the ISDA IBOR Fallbacks Protocol, which will govern our derivatives upon the final cessation of USD LIBOR. ASU 2020-04, Reference Rate Reform, helps limit the accounting impact from contract modifications, including hedging relationships, due to the transition from LIBOR to alternative reference rates that are completed by December 31, 2022. We adopted certain provisions of ASU 2020-04 during 2021. While we currently do not expect a significant impact to our operating results, financial position or cash flows from the transition from LIBOR to alternative reference interest rates, we will continue to monitor the impact of this transition until it is completed.
14. Fair-Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had no Level 3 financial assets or liabilities at September 30, 2022, or at December 31, 2021.
The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair value on a recurring basis:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
Quoted prices in active markets | Significant other observable inputs | Quoted prices in active markets | Significant other observable inputs | ||||||||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 1) | (Level 2) | |||||||||||||||||||
| Fair Value | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
Other Assets: | |||||||||||||||||||||||
| Common stock of unaffiliated foreign public company (a) | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | ( | ||||||||||||||||||||||
(a)Original cost basis $0.5
Cash equivalents include short-term securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities.
The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities in the Consolidated Balance Sheets. Amounts determined to be due within one year are reclassified to Other current assets and/or Accrued liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets. As of September 30, 2022, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest (income)/expense related to payments under the active swap agreements totaled $2.8 million for the nine month period ended
17
September 30, 2022, and $5.3 million for the nine month period ended September 30, 2021. Additionally, non-cash interest income related to the amortization of swap buyouts totaled $0.0 million for the nine month period ended September 30, 2022 and $0.3 million for the nine month period ended September 30, 2021.
We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes in fair value of these instruments are recorded as gains or losses within Other (income)/expense, net.
When exercised, the foreign currency instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and the risk of unfavorable changes in interest and currency rates, which may reduce the value of the instruments. We seek to mitigate risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies.
(Gains)/losses related to changes in fair value of derivative instruments that were recognized in Other (income)/expense, net in the Consolidated Statements of Income were as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||
| Foreign currency options (gains)/losses | $ | ( | $ | $ | ( | $ | ||||||||
15. Contingencies
Asbestos Litigation
Albany International Corp. is a defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills.
We were defending 3,603 claims as of September 30, 2022.
The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented:
| Year ended December 31, | Opening Number of Claims | Claims Dismissed, Settled, or Resolved | New Claims | Closing Number of Claims | Amounts Paid (thousands) to Settle or Resolve | ||||||||||||
| 2021 | |||||||||||||||||
| 2022 (As of September 30) | $ | ||||||||||||||||
We anticipate that additional claims will be filed against the Company and related companies in the future but are unable to predict the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims and therefore are unable to estimate a range of reasonably possible loss in excess of amounts already accrued for pending or future claims.
While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of September 30, 2022, we had resolved, by means of settlement or dismissal, 38,007 claims. The total cost of resolving all claims was $10.5 million. Of this amount,
18
almost 100 % was paid by our insurance carrier, who has confirmed that we have approximately $140 million of remaining coverage under primary and excess policies that should be available with respect to current and future asbestos claims.
The Company’s subsidiary, Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against 7,709 claims as of September 30, 2022, only twelve claims have been filed against Brandon since January 1, 2012, and only $15,000 in settlement costs have been incurred since 2001. Brandon was acquired by the Company in 1999 and has its own insurance policies covering periods prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100 % of indemnification and defense costs, subject to policy limits and a standard reservation of rights.
In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.
We currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results of operations, or cash flows.
16. Changes in Shareholders’ Equity
19
Class A Common Stock | Class B Common Stock | Additional paid-in capital | Retained earnings | Accumulated items of other comprehensive income | Class A Treasury Stock | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares issued to Directors' | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Purchase of Treasury shares (a) | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Shares issued to Directors' | — | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||
| Purchase of Treasury shares (a) | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| June 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares issued to Directors' | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Purchase of Treasury shares (a) | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||
| Settlement of certain pension liabilities | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
20
The following table summarizes changes in Shareholders’ Equity for the period December 31, 2020 to September 30, 2021:
Class A Common Stock | Class B Common Stock | Additional paid-in capital | Retained earnings | Accumulated items of other comprehensive income | Class A Treasury Stock | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||
(in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | ( | — | — | — | — | — | ( | |||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| March 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Shares issued to Directors' | — | — | — | — | — | — | ( | — | |||||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Compensation and benefits paid or payable in shares | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Shares issued to Directors' | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Dividends declared | |||||||||||||||||||||||||||||||||||
Class A Common Stock, $ | — | — | — | — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||
Class B Common Stock, $ | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Conversion of Class B shares to Class A shares (b) | ( | ( | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | — | — | ( | — | — | ( | ( | ||||||||||||||||||||||||
| Pension and postretirement liability adjustments | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Derivative valuation adjustment | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||
(a)In October 2021, the Company's Board of Directors authorized the Company to repurchase shares of up to $200 million through open market purchases, privately negotiated transactions or otherwise, and to determine the prices, times and amounts. In 2021, the Company repurchased 285,286 shares totaling $24.4 million. During the nine month period ending September 30, 2022, the Company repurchased 1,022,717 shares totaling $85.1 million.
(b)In the third quarter of 2021, Standish Family Holdings, LLC and J.S. Standish Company (the "Selling Stockholders") agreed to sell to J.P. Morgan Securities LLC 1,566,644 shares of the Company’s Class A Common Stock, par value $0.001 per share, to be issued upon conversion of an equal number of shares of the Company’s Class B common stock, par value $0.001 per share, at a price per share of $75.9656 (the "Transaction"). Immediately following the Transaction, the Selling Stockholders and related persons (including Christine L. Standish and John C. Standish) hold in the aggregate shares of the Company’s common stock
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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,” ”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 continuation of COVID-19 pandemic effects for an extended period of time;
•Across the entire Company, increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures
•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, and unanticipated reductions in demand, delays, technical difficulties, or cancellations in aerospace programs that are expected to generate revenue and drive long-term growth;
•Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; and
•Other risks and uncertainties detailed in this report.
General risks associated with macroeconomic conditions, as noted above, have changed during the first nine months of 2022. The Russia-Ukraine war has had and may continue to have profound effects on macroeconomic business conditions around the world, including in our Machine Clothing and Albany Engineered Composites segments. Certain COVID-19 related disruptions and risks have persisted during the current year, causing inflationary pressure connected to global supply chain bottlenecks and elevated energy price pressures. These challenges have only increased as a result of the Russia-Ukraine war, which also has quickly prompted a global imposition of stringent sanctions that have resulted in a sharp decline in trade with Russia. Correspondingly, and in union with the global community, we voluntarily decided to dissolve business relationships in Russia during the first quarter of 2022, despite the associated cost to our investment and the loss of future revenue in the region. While our Albany Engineered Composites segment does not have significant direct exposure in this region of the world, and our Machine Clothing segment has now significantly reduced its exposure, the broader economic ramifications of this war will indirectly affect all sectors of the economy. This conflict, including imposed sanctions, has amplified inflationary pressures, driving higher prices for global oil, natural gas, agricultural and metal prices, as well as causing additional supply-chain disruptions.
Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K. Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and
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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
Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”), draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities.
The MC segment is the Company’s long-established core business and primary generator of cash. While it has been negatively impacted by well-documented declines in publication grades in the Company’s traditional markets, there has been some offsetting effect due to growth in demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets. Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future. MC has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.
The AEC segment provides significant longer term growth potential for our Company. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group, owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 12 percent of the Company’s consolidated Net sales in 2021. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787, and vacuum waste tanks for Boeing 7-Series aircraft. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2021, approximately 47 percent of AEC sales were related to U.S. government contracts or programs.
Effect of Russia-Military Conflict
The war between Russia and Ukraine is affecting the economic and global financial markets and exacerbating ongoing economic challenges caused by impacts of the ongoing COVID-19 pandemic, including rising inflation and global supply chain disruptions.
Our MC segment generates approximately 2% of its annual net sales from customers in Russia and Ukraine. In addition, a subsidiary within our Machine Clothing segment has been a partner in a joint venture (“JV”) that supplies paper machine clothing products to local papermakers in Russia. In March 2022, we made the decision to cease doing business in Russia, including giving notice to our JV partner of our intent to exit the venture. As a result, we recognized $1.6 million expense in cost of goods sold and in Selling, Administrative, and General expense, representing reserves against the risk of obsolescence of certain inventory destined for Russian customers and uncollectible receivables from Russian customers, respectively. We also wrote down the net book value of our investment in the aforementioned JV to reflect our intent to exit such venture, resulting in $0.8 million impairment loss included in Other (income)/expense, net during the first quarter of 2022.
We anticipate approximately $10.0 million reduction in future annual net sales in the MC segment, due to our cessation of doing business in Russia.
For the year-to-date ended September 30, 2022, our segments saw higher input costs due to increased energy costs, tight supply market, and global logistics challenges.
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During the quarter ended September 30, 2022, our MC segment experienced higher energy prices, driven by energy surcharges supporting increased raw material prices. Such was due to capacity constraints, due to limited opportunity to move supply globally from Europe. We continued to identify alternatives to secure materials in the face of intense supply constraints. Logistics costs have begun to stabilize compared to the same period last year, though they remained higher than those pre-pandemic.
We anticipate inflationary pressure to remain for the balance of this fiscal year and energy cost escalation to be a primary input cost pressure in the near term.
The ultimate financial impact due to the war between Russia and Ukraine, the ongoing COVID-19 pandemic, and inflationary environment is difficult to predict. After consideration of possible offsets through corresponding price increases to our customers and productivity improvements, we estimate a net increase to the MC segment input costs of between $8.0 million and $10.0 million for the year ending December 31, 2022, or an unfavorable impact to the segment gross margin of up to 140 basis points for the year ending December 31, 2022.
Our Albany Engineered Composites segment does not have significant direct exposure in Russia. However, it has not been immune from supply chain disruptions. Increasing fuel prices coupled with higher demand has resulted in increased freight costs during the quarter, along with ongoing logistic constraints. Due to the nature of AEC’s contracts with its customers, we currently anticipate passing through a majority of such cost increases to the customers.
Until the effects of the war between Russia and Ukraine, as well as the COVID-19 pandemic, on the economic and global financial markets subside, there can be no assurance that our input costs will not continue to rise beyond our current estimate, thus unfavorably impacting our future results of operations, financial position and liquidity.
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Consolidated Results of Operations
Net sales
The following table summarizes our Net sales by business segment:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
(in thousands, except percentages) | 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||
| Machine Clothing | $153,389 | $154,171 | -0.5 | % | $459,121 | $462,298 | -0.7 | % | ||||||||||||
Albany Engineered Composites | 107,174 | 78,271 | 36.9 | % | 306,980 | 227,024 | 35.2 | % | ||||||||||||
| Total | $260,563 | $232,442 | 12.1 | % | $766,101 | $689,322 | 11.1 | % | ||||||||||||
The following tables provide a comparison of 2022 Net sales, excluding the impact of currency translation effects, to 2021 Net sales:
(in thousands, except percentages) | Net sales as reported, Q3 2022 | Decrease due to changes in currency translation rates | Q3 2022 sales on same basis as Q3 2021 currency translation rates | Net sales as reported, Q3 2021 | % Change compared to Q3 2021, excluding currency rate effects | ||||||||||||
| Machine Clothing | $ | 153,389 | $ | (6,570) | $ | 159,959 | $ | 154,171 | 3.8 | % | |||||||
Albany Engineered Composites | 107,174 | (3,637) | 110,811 | 78,271 | 41.6 | % | |||||||||||
| Total | $ | 260,563 | $ | (10,207) | $ | 270,770 | $ | 232,442 | 16.5 | % | |||||||
(in thousands, except percentages) | Net sales as reported, YTD 2022 | Decrease due to changes in currency translation rates | YTD 2022 sales on same basis as 2021 currency translation rates | Net sales as reported, YTD 2021 | % Change compared to 2021, excluding currency rate effects | ||||||||||||
| Machine Clothing | $ | 459,121 | $ | (14,545) | $ | 473,666 | $ | 462,298 | 2.5 | % | |||||||
Albany Engineered Composites | 306,980 | (5,631) | 312,611 | 227,024 | 37.7 | % | |||||||||||
| Total | $ | 766,101 | $ | (20,176) | $ | 786,277 | $ | 689,322 | 14.1 | % | |||||||
Three month comparison
•Changes in currency translation rates had the effect of decreasing Net sales by $10.2 million during the third quarter of 2022, as compared to 2021, principally due to a weaker Euro in 2022.
•Excluding the effect of changes in currency translation rates:
•Net sales increased 16.5% compared to the same period in 2021.
•Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.
•Net sales in AEC increased 41.6%, mainly due to growth on CH-53K and LEAP programs.
Nine month comparison
•Changes in currency translation rates had the effect of decreasing Net sales by $20.2 million during the first nine months of 2022, as compared to 2021, principally due to a weaker Euro in 2022.
•Excluding the effect of changes in currency translation rates:
•Net sales increased 14.1% compared to the same period in 2021.
•Net sales in MC increased 2.5% compared to the first nine months of 2021, driven by increased sales of packaging, pulp and engineered fabrics.
•Net sales in AEC increased 37.7%, primarily due to growth on CH-53K and LEAP programs.
Gross Profit
The following table summarizes Gross profit by business segment:
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| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Machine Clothing | $ | 79,232 | $ | 79,437 | $ | 237,434 | $ | 240,427 | ||||||
Albany Engineered Composites | 21,261 | 12,605 | 55,256 | 41,889 | ||||||||||
| Total | $ | 100,493 | $ | 92,042 | $ | 292,690 | $ | 282,316 | ||||||
% of Net sales | 38.6 | % | 39.6 | % | 38.2 | % | 41.0 | % | ||||||
Three month comparison
The increase in third quarter 2022 Gross profit, as compared to the same period in 2021, was due to increased Net sales at AEC. Gross profit as a percentage of sales:
•Remained consistent year over year in MC, increasing from 51.5% in 2021 to 51.7% in 2022.
•Increased from 16.1% in 2021 to 19.8% in 2022 in AEC, principally due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs. Changes in the estimated profitability of long-term contracts increased Gross profit by $2.6 million for the third quarter of 2022, compared to an increase of $2.1 million for the third quarter of 2021.
Nine month comparison
The increase in Gross profit during the first nine months of 2022, as compared to the same period in 2021, was due to increased Net sales at AEC. Gross profit as a percentage of sales:
•Remained consistent year over year in MC, decreasing from 52.0% in 2021 to 51.7% in 2022 in MC, due to an increase in input costs.
•Decreased from 18.5% in 2021 to 18.0% in 2022 in AEC, primarily driven by reserves recorded on inventory that was damaged at an off-site storage facility in the first quarter, reducing gross profit as a percent of sales. Changes in the estimated profitability of long-term contracts were also less favorable, increasing Gross profit by $2.0 million in the first nine months of 2022, as compared to an increase of $2.4 million for the same period last year.
Selling, Technical, General, and Research ("STG&R")
The following table summarizes STG&R expenses by business segment:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Machine Clothing | $ | 21,941 | $ | 23,717 | $ | 75,427 | $ | 78,501 | ||||||
Albany Engineered Composites | 11,302 | 9,769 | 34,568 | 28,909 | ||||||||||
| Corporate expenses | 13,564 | 13,883 | 39,314 | 38,405 | ||||||||||
Total | $ | 46,807 | $ | 47,369 | $ | 149,309 | $ | 145,815 | ||||||
| % of Net sales | 18.0 | % | 20.4 | % | 19.5 | % | 21.2 | % | ||||||
Three month comparison
The overall decrease in STG&R expenses in the third quarter of 2022, compared to the same period in 2021, was due to the net effect of the following:
•In MC, changes in currency translation rates had the effect of decreasing STG&R by $1.5 million during 2022, driven by the weaker Euro.
•In AEC, selling and general expenses increased $0.7 million due to investment in business development activities, and research expense increased $0.8 million over the prior year.
Nine month comparison
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The overall increase in STG&R expenses in the first nine months of 2022, compared to the same period in 2021, was due to the net effect of the following:
•In MC, changes in currency translation rates had the effect of decreasing STG&R by $3.1 million during 2022, driven by the weaker Euro. This favorability was partially offset by customer credit loss reserve increases related to our dissolution of business relationships in Russia.
•In AEC, selling and general expenses increased $3.0 million, and research expense increased $2.7 million over the prior year.
Restructuring Expense, net
In addition to the items discussed above affecting Gross profit and STG&R expenses, operating income was affected by restructuring expenses, as summarized in the following table:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Machine Clothing | $ | 42 | $ | 251 | $ | 255 | $ | 193 | ||||||
| Albany Engineered Composites | — | (81) | — | (40) | ||||||||||
| Corporate expenses | — | 17 | 13 | 77 | ||||||||||
| Total | $ | 42 | $ | 187 | $ | 268 | $ | 230 | ||||||
Restructuring expense, net was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods.
Operating Income
The following table summarizes operating income/(loss) by business segment:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Machine Clothing | $ | 57,247 | $ | 55,467 | $ | 161,752 | $ | 161,731 | ||||||
| Albany Engineered Composites | 9,958 | 2,917 | 20,688 | 13,019 | ||||||||||
| Corporate expenses | (13,561) | (13,898) | (39,327) | (38,479) | ||||||||||
| Total | $ | 53,644 | $ | 44,486 | $ | 143,113 | $ | 136,271 | ||||||
Other Earnings Items
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Interest expense, net | $ | 3,794 | $ | 3,734 | $ | 11,336 | $ | 11,521 | ||||||
| Pension settlement expense | 49,128 | — | 49,128 | — | ||||||||||
| AMJP grant | — | (5,832) | — | (5,832) | ||||||||||
| Other (income)/expense, net | (6,918) | 2,753 | (17,891) | 4,215 | ||||||||||
| Income tax expense/(benefit) | (3,183) | 12,889 | 22,273 | 36,375 | ||||||||||
| Net income/(loss) attributable to the noncontrolling interest | 129 | 80 | 635 | 150 | ||||||||||
Interest Expense, net
Interest expense, net, was largely in line with the prior year. See the Working Capital, Liquidity and Capital Structure section for further discussion of borrowings and interest rates.
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Pension settlement expense
In the third quarter, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred in the prior year.
AMJP grant
During the third quarter of 2021, the Company was awarded an Aviation Manufacturing Jobs Protection Program ("AMJP") grant of $5.8 million, under the American Rescue Plan of the U.S. Department of Transportation. No such award was granted during 2022.
Other (income)/expense, net
Other (income)/expense, net, was primarily driven by foreign currency gains of $6.6 million and $17.7 million in the three and nine month periods ended September 30, 2022, respectively, as compared to losses of $0.5 million and $0.8 million in the three and nine month periods ended September 30, 2021, respectively. The weaker Euro during the three and nine month periods ended September 30, 2022 led to the gains on foreign currency during such periods.
Income Tax expense/(benefit)
The Company has operations which constitute a taxable presence in 18 countries outside of the United States. The majority of these countries had income tax rates that are 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 income earned in those jurisdictions. The tax rate is also affected by U.S. tax costs on foreign earnings, and by discrete items that may occur in any given year but are not consistent from year to year. The Company’s effective tax rates for the third quarter of 2022 was (41.6%), lower compared to 29.4% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current period. For the first nine months of 2022, the Company’s effective tax rate was 22.2%, lower compared to 28.8% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current year.
For more information on income tax, see Note 5 to the Consolidated Financial Statements.
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Segment Results of Operations
Machine Clothing Segment
Machine Clothing is our primary business segment and accounted for 60% of our consolidated revenues during the first nine months of 2022. MC products are purchased primarily by manufacturers of paper and paperboard. We feel we are well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand. Additionally, we face pricing pressures in all of our markets.
The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
Review of Operations
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | $ | 153,389 | $ | 154,171 | $ | 459,121 | $ | 462,298 | ||||||
Gross profit | 79,232 | 79,437 | 237,434 | 240,427 | ||||||||||
| % of Net sales | 51.7 | % | 51.5 | % | 51.7 | % | 52.0 | % | ||||||
STG&R expenses | 21,941 | 23,717 | 75,427 | 78,501 | ||||||||||
| Operating income | 57,247 | 55,467 | 161,752 | 161,731 | ||||||||||
Net Sales
Three month comparison
•Net sales decreased by 0.5%.
•Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing third-quarter 2022 sales by $6.6 million.
•Excluding the effect of changes in currency translation rates, Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.
Nine month comparison
•Net sales decreased by 0.7%.
•Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $14.5 million compared to the same period in 2021.
•Excluding the effect of changes in currency translation rates, Net sales in MC increased 2.5% compared to 2021, driven by growth in sales of packaging, pulp and engineered fabrics.
Gross Profit
For the three and nine month periods ended September 30, 2022, the decrease in MC Gross profit was primarily driven by changes in currency translation rates, principally the weaker Euro, as well as increases in input costs.
Operating Income
The increase in Operating income was driven by lower STG&R expenses over the prior year.
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Albany Engineered Composites Segment
The Albany Engineered Composites segment, including Albany Safran Composites, LLC, in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace (both commercial and defense) industry. AEC’s largest program relates to CFM International’s LEAP engine. AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft. Other significant AEC programs include CH-53K, F-35, JASSM, and Boeing 787 programs.
Review of Operations
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net sales | $ | 107,174 | $ | 78,271 | $ | 306,980 | $ | 227,024 | ||||||
Gross profit | 21,261 | 12,605 | 55,256 | 41,889 | ||||||||||
| % of Net sales | 19.8 | % | 16.1 | % | 18.0 | % | 18.5 | % | ||||||
STG&R expenses | 11,302 | 9,769 | 34,568 | 28,909 | ||||||||||
| Operating income | 9,958 | 2,917 | 20,688 | 13,019 | ||||||||||
Net Sales
For the three and nine month periods ended September 30, 2022, the increase in Net sales was mainly due to growth on CH-53K and LEAP programs.
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 each of the first nine months of 2022 and 2021. LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.
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 and nine month periods ended September 30, 2022, the increase in Gross profit was primarily due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs. Gross profit during the nine month period ended September 30, 2022, was reduced by a $2 million reserve recorded on inventory that was damaged at an off-site storage facility. Changes in the estimated profitability of long-term contract had an insignificant effect on Gross profit year over year.
Operating Income
The increase in Operating income was driven by higher gross profit, partially offset by higher research and selling expense.
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Working Capital, Liquidity and Capital Structure
Cash Flow Summary
| Nine months ended September 30, | ||||||||
(in thousands) | 2022 | 2021 | ||||||
| Net income | $ | 78,267 | $ | 89,992 | ||||
| Depreciation and amortization | 51,908 | 55,347 | ||||||
| Changes in working capital (a) | (89,899) | (9,959) | ||||||
| Changes in other noncurrent liabilities and deferred taxes | (21,542) | 1,440 | ||||||
| Other operating items | 48,573 | 11,679 | ||||||
| Net cash provided by operating activities | 67,307 | 148,499 | ||||||
| Net cash used in investing activities | (52,832) | (32,148) | ||||||
| Net cash used in financing activities | (9,119) | (69,339) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (30,910) | (2,111) | ||||||
| (Decrease)/increase in cash and cash equivalents | (25,554) | 44,901 | ||||||
| Cash and cash equivalents at beginning of year | 302,036 | 241,316 | ||||||
Cash and cash equivalents at end of period | $ | 276,482 | $ | 286,217 | ||||
(a)Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.
Cash provided in operating activities was $67.3 million in the first nine months of 2022, compared to $148.5 million in the same period last year. AEC experienced particularly strong working capital cash flows in Accounts receivable and Contract assets during 2021, driven by significant deliveries of LEAP components throughout the year. In addition, during 2022, the Company made necessary investments in working capital as it prepared to execute on its recently expanded CH-53K scope of work. Customer payment is expected to be collected in a later period. In the third quarter of 2022, we made contributions of approximately $12.6 million to the U.S. pension plan, in line with the Company's plan to reduce pension obligations over time. In addition, the timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during the first nine months in 2022 compared to the same period in 2021, contributed to reduced net cash provided by operating activities.
We strategically deploy our cash with a focus on investing in our business and new technologies to provide our customers with enhanced capabilities, to increase shareholder value, and to position ourselves to take advantage of new business opportunities as they arise. Based on such strategy, we have continued to invest in our business and technologies through capital expenditures, research and development, and when appropriate, selective business acquisitions. Our capital expenditures totaled $52.8 million and $32.1 million for the first nine months ended September 30, 2022 and 2021, respectively, comprised of both sustaining and return seeking projects. In the recent past, a portion of our capital expenditures consist of investments which improve operational productivity, in addition to producing a meaningful impact on energy and resource efficiency.
Net cash used in financing activities during 2022 was $9.1 million compared to net cash used in financing activities of $69.3 million in 2021, driven by increased borrowings during the current year that were partially used to fund repurchases of shares.
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, but borrowings under such local facilities tend not to be significant.
On October 27, 2020, we entered into a $700 million unsecured Four-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior amended and restated $685 million Five-Year Revolving Credit Facility Agreement, which we had entered into on November 7, 2017 (the “Prior Agreement”). Under the Credit Agreement, $447 million of borrowings were outstanding as of September 30, 2022. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 26, 2022, the spread was 1.625%. The spread was based on a pricing grid, which ranged from 1.500% to 2.000%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated Adjusted EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of September 30, 2022, we would have been able to borrow an additional $253 million under the Agreement. We were in compliance with all debt covenants as of September 30, 2022.
For more information, see Note 13 to the Consolidated Financial Statements.
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We believe cash flows from operations and availability under our Credit Agreement will be adequate to cover our operations and business needs over the next twelve months. As of September 30, 2022, we had cash and cash equivalents of approximately $276 million and availability under our Credit Agreement of $253 million, for a total liquidity of approximately $529 million.
As of September 30, 2022, $245.6 million of our total cash and cash equivalents was 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 approximately $190.2 million at September 30, 2022, 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 may also result in additional withholding taxes.
We have also returned cash to shareholders through dividends and share repurchases. During the first nine months of 2022, we paid $20 million in dividends and repurchased 1 million shares of our Class A Common shares at a cost of $85 million under the $200 million share repurchase program that our Board approved in October 2021.
Off-Balance Sheet Arrangements
As of September 30, 2022, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Recent Pronouncements
On March 9, 2022, the SEC issued a proposed rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. The proposed rules are intended to provide more consistent, comparable and decision-useful information so that investors can better evaluate the Company’s exposure to cybersecurity risks, incidents, and strategies to mitigate risks and incidents. We will continue to monitor developments around this proposed rule.
On March 21, 2022, the SEC issued a proposed rule that would enhance and standardize the climate-related disclosures provided by public companies. Under the proposed rule, we would be required to provide quantitative and qualitative disclosures in registration statements and annual reports that include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of which would be presented in a footnote to the financial statements. Such disclosures would also be subject to management's internal control over financial reporting ("ICFR") and external audit.
As a Company, we have long been committed to sustainable practices and corporate social responsibility and have more recently taken steps to articulate our values and goals, some of which are summarized in our published sustainability report that is included at our website www.albint.com. In 2020, we began establishing more formalized and scalable approaches to our sustainability practices, reporting and systems, in order to ensure we prioritize efforts that are impactful to our business and stakeholders. We have begun to incorporate certain climate-related disclosures and risk factors in our existing disclosures to this point. We will continue to monitor developments around this proposed rule, which once finalized, is expected to allow for a multi-year phased transition to achieving compliance.
Non-GAAP Measures
This Form 10-Q contains certain non-GAAP measures, that should not be considered in isolation or as a substitute for the related GAAP measures. Such non-GAAP measures include net sales and percent change in net sales, excluding the impact of currency translation effects ; EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin; Net debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). Management believes that these non-GAAP measures provide additional useful information to investors regarding the Company’s operational performance.
Presenting Net sales and change in Net sales, after currency effects are excluded, provides management and investors insight into underlying sales trends. Net sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period.
EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations. The
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Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance. Such excluded costs or benefits do not consist of normal, recurring cash items necessary to generate revenues or operate our business. Adjusted EBITDA margin represents Adjusted EBITDA expressed as a percentage of net sales.
The Company defines Adjusted EPS as basic earnings per share (GAAP), adjusted by the after tax per share amount of costs or benefits not reflective of the Company’s ongoing or expected future operational performance. The income tax effects are calculated using the applicable statutory income tax rate of the jurisdictions where such costs or benefits were incurred or the effective tax rate applicable to total company results.
The Company’s Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted EPS may not be comparable to similarly titled measures of other companies.
Net debt aids investors in understanding the Company’s debt position if all available cash were applied to pay down indebtedness.
Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt.
We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following tables show the calculation of EBITDA and Adjusted EBITDA:
| Three months ended September 30, 2022 | ||||||||||||||
| (in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||
| Net income/(loss) (GAAP) | $ | 57,247 | $ | 9,958 | $ | (56,382) | $ | 10,823 | ||||||
| Interest expense, net | — | — | 3,794 | 3,794 | ||||||||||
| Income tax expense/(benefit) | — | — | (3,183) | (3,183) | ||||||||||
| Depreciation and amortization expense | 4,913 | 11,303 | 818 | 17,034 | ||||||||||
| EBITDA (non-GAAP) | 62,160 | 21,261 | (54,953) | 28,468 | ||||||||||
| Restructuring expenses, net | 42 | — | — | 42 | ||||||||||
| Foreign currency revaluation (gains)/losses (a) | (2,931) | 122 | (6,633) | (9,442) | ||||||||||
| Dissolution of business relationships in Russia | (214) | — | — | (214) | ||||||||||
| Pension settlement expense | — | — | 49,128 | 49,128 | ||||||||||
| Acquisition/integration costs | — | 255 | — | 255 | ||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (176) | — | (176) | ||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 59,057 | $ | 21,462 | $ | (12,458) | $ | 68,061 | ||||||
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| Three months ended September 30, 2021 | ||||||||||||||
| (in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||
| Net income/(loss) (GAAP) | $ | 55,467 | $ | 2,917 | $ | (27,442) | $ | 30,942 | ||||||
| Interest expense, net | — | — | 3,734 | 3,734 | ||||||||||
| Income tax expense | — | — | 12,889 | 12,889 | ||||||||||
| Depreciation and amortization expense | 5,014 | 12,265 | 935 | 18,214 | ||||||||||
| EBITDA (non-GAAP) | 60,481 | 15,182 | (9,884) | 65,779 | ||||||||||
| Restructuring expenses, net | 251 | (81) | 17 | 187 | ||||||||||
| Foreign currency revaluation (gains)/losses (a) | (1,571) | 31 | 472 | (1,068) | ||||||||||
| AMJP grant | — | 963 | (5,832) | (4,869) | ||||||||||
| Acquisition/integration costs | — | 297 | — | 297 | ||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (95) | — | (95) | ||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 59,161 | $ | 16,297 | $ | (15,227) | $ | 60,231 | ||||||
| Nine months ended September 30, 2022 | |||||||||||||||||
| (in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | |||||||||||||
| Net income/(loss) (GAAP) | $ | 161,752 | $ | 20,688 | $ | (104,173) | $ | 78,267 | |||||||||
| Interest expense, net | — | — | 11,336 | 11,336 | |||||||||||||
| Income tax expense | — | — | 22,273 | 22,273 | |||||||||||||
| Depreciation and amortization expense | 14,716 | 34,792 | 2,400 | 51,908 | |||||||||||||
| EBITDA (non-GAAP) | 176,468 | 55,480 | (68,164) | 163,784 | |||||||||||||
| Restructuring expenses, net | 255 | — | 13 | 268 | |||||||||||||
| Foreign currency revaluation (gains)/losses (a) | (3,690) | 755 | (17,644) | (20,579) | |||||||||||||
| Dissolution of business relationships in Russia | 1,573 | — | 781 | 2,354 | |||||||||||||
| Pension settlement expense | — | — | 49,128 | 49,128 | |||||||||||||
| Acquisition/integration costs | — | 806 | — | 806 | |||||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (633) | — | (633) | |||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 174,606 | $ | 56,408 | $ | (35,886) | $ | 195,128 | |||||||||
| Nine months ended September 30, 2021 | ||||||||||||||
| (in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||
| Net income/(loss) (GAAP) | $ | 161,731 | $ | 13,019 | $ | (84,758) | $ | 89,992 | ||||||
| Interest expense, net | — | — | 11,521 | 11,521 | ||||||||||
| Income tax expense | — | — | 36,375 | 36,375 | ||||||||||
| Depreciation and amortization expense | 15,272 | 37,326 | 2,749 | 55,347 | ||||||||||
| EBITDA (non-GAAP) | 177,003 | 50,345 | (34,113) | 193,235 | ||||||||||
| Restructuring expenses, net | 193 | (40) | 77 | 230 | ||||||||||
| Foreign currency revaluation (gains)/losses (a) | (156) | 363 | 813 | 1,020 | ||||||||||
| AMJP grant | — | 963 | (5,832) | (4,869) | ||||||||||
| Acquisition/integration costs | — | 911 | — | 911 | ||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (206) | — | (206) | ||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 177,040 | $ | 52,336 | $ | (39,055) | $ | 190,321 | ||||||
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The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the earnings per share effect of certain income and expense items:
| Three months ended September 30, 2022 (in thousands, except per share amounts) | Pre tax Amounts | Tax Effect | After tax Effect | Per share Effect | ||||||||||
| Restructuring expenses, net | $ | 42 | $ | 6 | $ | 36 | $ | 0.00 | ||||||
| Foreign currency revaluation (gains)/losses (a) | (9,442) | (2,694) | (6,748) | (0.22) | ||||||||||
| Dissolution of business relationships in Russia | (214) | (18) | (196) | (0.01) | ||||||||||
| Pension settlement expense | 49,128 | 11,947 | 37,181 | 1.20 | ||||||||||
| Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) | — | 5,217 | (5,217) | (0.17) | ||||||||||
| Acquisition/integration costs | 255 | 77 | 178 | 0.01 | ||||||||||
| Three months ended September 30, 2021 (in thousands, except per share amounts) | Pre tax Amounts | Tax Effect | After tax Effect | Per share Effect | ||||||||||
| Restructuring expenses, net | $ | 187 | $ | 55 | $ | 132 | $ | 0.00 | ||||||
| Foreign currency revaluation (gains)/losses (a) | (1,068) | (314) | (754) | (0.02) | ||||||||||
| AMJP grant | (4,869) | (1,446) | (3,423) | (0.11) | ||||||||||
| Acquisition/integration costs | 297 | 89 | 208 | 0.01 | ||||||||||
| Nine months ended September 30, 2022 (in thousands, except per share amounts) | Pre tax Amounts | Tax Effect | After tax Effect | Per share Effect | ||||||||||
| Restructuring expenses, net | $ | 268 | $ | 75 | $ | 193 | $ | 0.01 | ||||||
| Foreign currency revaluation (gains)/losses (a) | (20,579) | (5,829) | (14,750) | (0.47) | ||||||||||
| Dissolution of business relationships in Russia | 2,354 | 314 | 2,040 | 0.06 | ||||||||||
| Pension settlement expense | 49,128 | 11,947 | 37,181 | 1.20 | ||||||||||
| Tax impact of stranded OCI benefit from TCJA for pension liability (b) | — | 5,217 | (5,217) | (0.17) | ||||||||||
| Acquisition/integration costs | 806 | 241 | 565 | 0.03 | ||||||||||
| Nine months ended September 30, 2021 (in thousands, except per share amounts) | Pre tax Amounts | Tax Effect | After tax Effect | Per share Effect | ||||||||||
| Restructuring expenses, net | $ | 230 | $ | 67 | $ | 163 | $ | 0.00 | ||||||
| Foreign currency revaluation (gains)/losses (a) | 1,020 | 332 | 688 | 0.02 | ||||||||||
| AMJP grant | (4,869) | (1,446) | (3,423) | (0.11) | ||||||||||
| Acquisition/integration costs | 911 | 273 | 638 | 0.03 | ||||||||||
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The following table contains the calculation of Adjusted EPS:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||
Per share amounts (Basic) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Earnings per share (GAAP) | $ | 0.34 | $ | 0.95 | $ | 2.47 | $ | 2.78 | ||||||
| Adjustments, after tax: | ||||||||||||||
| Restructuring expenses, net | — | — | 0.01 | — | ||||||||||
| Foreign currency revaluation (gains)/losses (a) | (0.22) | (0.02) | (0.47) | 0.02 | ||||||||||
| Dissolution of business relationships in Russia | (0.01) | — | 0.06 | — | ||||||||||
| Pension settlement charge | 1.20 | — | 1.20 | — | ||||||||||
| Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) | (0.17) | — | (0.17) | — | ||||||||||
| AMJP grant | — | (0.11) | — | (0.11) | ||||||||||
| Acquisition/ integration costs | 0.01 | 0.01 | 0.03 | 0.03 | ||||||||||
| Adjusted Earnings per share (non-GAAP) | $ | 1.15 | $ | 0.83 | $ | 3.13 | $ | 2.72 | ||||||
(a) Foreign currency revaluation (gains)/losses represent unrealized gains and losses arising from the remeasurement of monetary assets and liabilities denominated in non-functional currencies on the balance sheet date.
(b) Our Adjusted EPS excluded the benefit from the reclassification of stranded income tax effects caused by the TCJA associated with the US pension plan liability that was eliminated in September 2022, a one-time event that would not recur in the future. Such stranded income tax effect represented a one-time benefit that distorted the effective tax rate for the quarter and year-to-date ended September 30, 2022 , and would not be indicative of ongoing or expected future income tax rate at the Company. Management believes excluding pension settlement expense and its income tax impact, including the stranded income tax effects, from its Adjusted EBITDA and Adjusted EPS for the quarter and year-to-date ended September 30, 2022 would provide investors a transparent view and enhanced ability to better assess the Company’s ongoing operational and financial performance.
Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. The Company calculates Net debt by subtracting Cash and cash equivalents from Total debt. Total debt is calculated by adding Long-term debt, Current maturities of long-term debt, and Notes and loans payable, if any.
The following table contains the calculation of net debt:
(in thousands) | September 30, 2022 | June 30, 2022 | March 31, 2022 | December 31, 2021 | ||||||||||
| Current maturities of long-term debt | $ | — | $ | — | $ | — | $ | — | ||||||
Long-term debt | 447,000 | 485,000 | 427,000 | 350,000 | ||||||||||
| Total debt | 447,000 | 485,000 | 427,000 | 350,000 | ||||||||||
Cash and cash equivalents | 276,482 | 320,870 | 307,415 | 302,036 | ||||||||||
| Net debt (non GAAP) | $ | 170,518 | $ | 164,130 | $ | 119,585 | $ | 47,964 | ||||||
Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt. The Company calculates net leverage ratio by subtracting cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA.
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The calculation of net leverage ratio as of September 30, 2022 is as follows:
| Total Company | ||||||||||||||
| Twelve months ended | Nine months ended | Trailing twelve months ended | ||||||||||||
| (in thousands) | December 31, 2021 | September 30, 2021 | September 30, 2022 | September 30, 2022 (non-GAAP) (c) | ||||||||||
| Net income/(loss) (GAAP) | $ | 118,768 | $ | 89,992 | $ | 78,267 | $ | 107,043 | ||||||
| Interest expense, net | 14,891 | 11,521 | 11,336 | 14,706 | ||||||||||
| Income tax expense | 47,163 | 36,375 | 22,273 | 33,061 | ||||||||||
| Depreciation and amortization expense | 74,255 | 55,347 | 51,908 | 70,816 | ||||||||||
| EBITDA (non-GAAP) | 255,077 | 193,235 | 163,784 | 225,626 | ||||||||||
| Restructuring expenses, net | 1,331 | 230 | 268 | 1,369 | ||||||||||
| Foreign currency revaluation (gains)/losses (a) | (1,442) | 1,020 | (20,579) | (23,041) | ||||||||||
| Aviation Manufacturing Job Protection (AMJP) grant | (4,731) | (4,869) | — | 138 | ||||||||||
| Dissolution of business relationships in Russia | — | — | 2,354 | 2,354 | ||||||||||
| Pension settlement expense | — | — | 49,128 | 49,128 | ||||||||||
| Acquisition/integration costs | 1,166 | 911 | 806 | 1,061 | ||||||||||
| Pre-tax (income) attributable to noncontrolling interest | (510) | (206) | (633) | (937) | ||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 250,891 | $ | 190,321 | $ | 195,128 | $ | 255,698 | ||||||
| (in thousands, except for net leverage ratio) | September 30, 2022 | ||||
| Net debt (non-GAAP) | 170,518 | ||||
| Trailing twelve months Adjusted EBITDA (non-GAAP) | 255,698 | ||||
| Net leverage ratio (non-GAAP) | 0.67 | ||||
| (c) Calculated as amounts incurred during the twelve months ended December 31, 2021, less those incurred during the nine months ended September 30, 2021, plus those incurred during the nine months ended September 30, 2022. | ||||||||||||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures about Market Risk”, which is included as an exhibit to this Form 10-Q.
Item 4. Controls and Procedures
a) Disclosure controls and procedures.
The principal executive officer and principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted reports is accumulated
38
and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The information set forth above under Note 15 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.
Item 1A. Risk Factors
There have been no material changes in risks since December 31, 2021, except as discussed below.
The military invasion of Ukraine by Russia, and the ensuing sanctions are likely to continue to have an impact on our business. We have already stopped shipping our products to Russia and are in the process of winding down a small joint venture in that country which supplied dryer fabrics to local papermakers, resulting in lost sales and possible future write-offs. However, we also expect that there could be further indirect impacts. For instance, the conflict has already caused disruption in the availability of shipping options between Asia and Europe. Supply chain disruptions could make it more difficult to find favorable pricing and reliable sources for the raw materials we need, putting upward pressure on our costs and increasing the risk that we may be unable to acquire the materials or services we need to continue to make and deliver certain products. Moreover, these same pressures could hinder our customers’ ability to source materials needed for their own manufacturing efforts, thereby reducing or slowing their demand for our products. There can be no assurance that we will be able to pass through these cost increases to our customers or to fully offset them via operational efficiencies. If we are unsuccessful in managing such cost increases, they could have a material adverse effect on our business, financial position, results of operations, and liquidity.
For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities during the nine months ended September 30, 2022
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Approx. dollar value of shares that may yet be purchased under the program (thousands) | ||||||||||
| January 1 to January 31, 2022 | 140,879 | $ | 85.24 | 140,879 | $ | 163,722 | ||||||||
| February 1 to February 28, 2022 | 145,164 | 86.29 | 145,164 | 151,244 | ||||||||||
| March 1 to March 31, 2022 | 228,643 | 85.51 | 228,643 | 131,688 | ||||||||||
| April 1 to April 30, 2022 | 236,091 | 82.21 | 236,091 | 112,418 | ||||||||||
| May 1 to May 31, 2022 | 271,940 | 80.98 | 271,940 | 90,561 | ||||||||||
| June 1 to September 30, 2022 | — | — | — | — | ||||||||||
| Total | 1,022,717 | 1,022,717 | $ | 90,587 | ||||||||||
On October 25, 2021, the Company's Board of Directors authorized the Company to repurchase shares of up to $200 million through open market purchases, privately negotiated transactions or otherwise, and to determine the prices, times and amounts. The program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company's discretion. The share repurchase program does not have an expiration date. The timing and amount of any share repurchases will be based on the Company’s liquidity, general business and market conditions, debt covenant restrictions and other factors, including alternative investment opportunities and capital structure. We purchased 1,308,003 shares of our Class A Common Stock since the Board repurchase authorization in 2021, 1,022,717 of which were purchased during the first nine months of 2022.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 99.1 | |||||
| 101.INS | XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 | ||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALBANY INTERNATIONAL CORP. | ||||||||
| (Registrant) | ||||||||
| Date: October 25, 2022 | By | /s/ Stephen M. Nolan | ||||||
| Stephen M. Nolan Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
EXHIBIT (31.1)
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, A. William Higgins, certify that:
1.I have reviewed this report on Form 10-Q of Albany International Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: October 25, 2022 | By | /s/ A. William Higgins | ||||||
A. William Higgins President and Chief Executive Officer (Principal Executive Officer) | ||||||||
EXHIBIT (31.2)
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Nolan, certify that:
1.I have reviewed this report on Form 10-Q of Albany International Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: October 25, 2022 | By | /s/ Stephen M. Nolan | ||||||
Stephen M. Nolan Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
EXHIBIT (32.1)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Albany International Corp. (the Company) on Form 10-Q for the period ending September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the Report), A. William Higgins, President and Chief Executive Officer, and Stephen M. Nolan, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: October 25, 2022 | /s/ A. William Higgins | |||||||
| A. William Higgins President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| /s/ Stephen M. Nolan | ||||||||
| Stephen M. Nolan Chief Financial Officer and Treasurer (Principal Financial Officer) | ||||||||
EXHIBIT (99.1)
MARKET RISK SENSITIVITY – As of September 30, 2022
We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.
Foreign Currency Exchange Rate Risk
We have manufacturing plants and sales transactions worldwide and therefore are subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. To manage this risk, we periodically enter into forward exchange contracts either to hedge the net assets of a foreign investment or to provide an economic hedge against future cash flows. The total net assets of non-U.S. operations and long-term intercompany loans denominated in nonfunctional currencies subject to potential loss amount to approximately $653.1 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to $65.3 million. Furthermore, related to foreign currency transactions, we have exposure to various nonfunctional currency balances totaling $133.5 million. This amount includes, on an absolute basis, exposures to assets and liabilities held in currencies other than our local entity’s functional currency. On a net basis, we had $111.7 million of foreign currency assets as of September 30, 2022. As currency rates change, these nonfunctional currency balances are revalued, and the corresponding adjustment is recorded in the income statement. A hypothetical change of 10% in currency rates could result in an adjustment to the income statement of approximately $11.2 million. Actual results may differ.
Interest Rate Risk
We are exposed to interest rate fluctuations with respect to our variable rate debt, depending on general economic conditions.
On September 30, 2022, we had the following variable rate debt:
| (in thousands, except interest rates) | |||||
| Long-term debt | |||||
| Credit agreement with borrowings outstanding, net of fixed rate portion, at an end of period interest rate of 4.38% in 2022, due in 2024 | $97,000 | ||||
| Total | $97,000 | ||||
Assuming borrowings were outstanding for an entire year, an increase of one percentage point in weighted average interest rates would increase interest expense by $1.0 million. To manage interest rate risk, we may periodically enter into interest rate swap agreements to effectively fix the interest rates on variable debt to a specific rate for a period of time. (See Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference).