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5: EX-99.1 Miscellaneous Exhibit HTML 25K
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3: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 24K
11: R1 Cover page HTML 80K
12: R2 Consolidated Statements of Income HTML 111K
13: R3 Consolidated Statements of Comprehensive HTML 77K
Income/(Loss)
14: R4 Consolidated Balance Sheets HTML 156K
15: R5 Consolidated Balance Sheets (Parenthetical) HTML 42K
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17: R7 Significant Accounting Policies HTML 25K
18: R8 Reportable Segments and Revenue Recognition HTML 119K
19: R9 Pensions and Other Postretirement Benefit Plans HTML 43K
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49: R39 Reportable Segments and Revenue Recognition HTML 58K
(Schedule of Financial Data by Reporting Segment)
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50: R40 Reportable Segments and Revenue Recognition HTML 52K
(Schedule of Disaggregate Revenue for Each
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51: R41 Reportable Segments and Revenue Recognition HTML 37K
(Schedule of Disaggregate MC Segment Revenue by
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(Exact name of registrant as specified in its charter)
iDelaware
(State or other jurisdiction of incorporation or organization)
i216
Airport Drive, iRochester, iNew Hampshire
(Address of principal executive offices)
i14-0462060
(IRS Employer Identification No.)
i03867
(Zip Code)
i603-i330-5850
(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
iClass
A Common Stock, $0.001 par value per share
iAIN
The New York Stock Exchange (iNYSE)
iClass
B Common Stock, $0.001 par value per share
iAIN
The New York Stock Exchange (iNYSE)
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. iYes☒ 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). iYes☒ 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.
iLarge accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☒
The registrant had i31.1
million shares of Class A Common Stock and ino shares of Class B Common Stock outstanding as of July 15, 2022.
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.
iReportable 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 i10 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 i12 percent of the Company's consolidated Net sales in 2021. AEC net sales to Safran were $i83.1
million and $i54.0 million in the first six months of 2022 and 2021, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $i77.7
million and $i79.6 million as of June 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 i47
percent of AEC sales were related to U.S. government contracts or programs.
The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements:
Three
months ended June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Net sales
Machine Clothing
$
i151,670
$
i159,921
$
i305,732
$
i308,127
Albany
Engineered Composites
i109,699
i74,598
i199,806
i148,753
Consolidated
total
$
i261,369
$
i234,519
$
i505,538
$
i456,880
Operating
income/(loss)
Machine Clothing
$
i54,861
$
i55,902
$
i104,505
$
i106,264
Albany
Engineered Composites
i9,535
i7,164
i10,730
i10,102
Corporate
expenses
(i13,681)
(i13,100)
(i25,766)
(i24,581)
Operating
income
$
i50,715
$
i49,966
$
i89,469
$
i91,785
Reconciling
items:
Interest income
(i846)
(i401)
(i1,498)
(i930)
Interest
expense
i4,779
i4,619
i9,040
i8,717
Other
(income)/expense, net
(i7,045)
i862
(i10,973)
i1,462
Income
before income taxes
$
i53,827
$
i44,886
$
i92,900
$
i82,536
/
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 $i1.8 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 $i0.8 million impairment loss during the first quarter of 2022.
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 $i1.2 million for the second quarter of 2022
and decreased operating income $i0.6 million for the first half of 2022. Adjustments in the estimated profitability of long-term contracts increased operating income by $i4.3 million
and $i3.7 million for the second quarter and first half of 2021, respectively.
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.
i
The following table disaggregates revenue for each product group by timing of revenue recognition:
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 June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Americas
PMC
$
i79,062
$
i82,343
$
i155,678
$
i155,645
Eurasia
PMC
i52,368
i55,900
i107,854
i111,043
Engineered
Fabrics
i20,240
i21,678
i42,200
i41,439
Total
Machine Clothing Net sales
$
i151,670
$
i159,921
$
i305,732
$
i308,127
/
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 $i579
million and $i149 million as of June 30, 2022 and 2021, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of June 30, 2022, we expect to recognize as revenue approximately $i77
million during 2022, $i96 million during 2023, $i71 million during 2024, and the remainder thereafter.
3.
iPensions 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.
i
The composition of the net periodic benefit cost for the six months ended June 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
$
i708
$
i1,090
$
i57
$
i66
Interest
cost
i2,828
i2,674
i611
i551
Expected
return on assets
(i3,405)
(i3,211)
i—
i—
Amortization
of prior service cost/(credit)
(i1)
i7
(i2,244)
(i2,244)
Amortization
of net actuarial loss
i997
i1,087
i941
i1,130
Net
periodic benefit cost
$
i1,127
$
i1,647
$
(i635)
$
(i497)
/
The
amount of net periodic benefit cost 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. There were no such events in the first six months of 2022 or 2021.
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. iOther
(Income)/Expense, net
i
The components of Other (Income)/Expense, net are:
Three months ended June 30,
Six
months ended June 30,
(in thousands)
2022
2021
2022
2021
Currency transaction (gains)/losses
$
(i7,284)
$
i175
$
(i11,024)
$
i341
Bank
fees and amortization of debt issuance costs
i80
i104
i176
i210
Components
of net periodic pension and postretirement cost other than service cost
(i137)
(i4)
(i273)
(i6)
Other
i296
i587
i148
i917
Total
$
(i7,045)
$
i862
$
(i10,973)
$
i1,462
/
Other
(income)/expense, net, included foreign currency related transactions which resulted in gains of $i7.3 million and $i11.0 million
in the three and six month periods ended June 30, 2022, respectively, as compared to losses of $i0.2 million and $i0.3 million
in the three and six month periods ended June 30, 2021, respectively. The weaker Euro during the three and six month periods ended June 30, 2022 led to the gains on foreign currency related transactions during such periods.
The following table presents components of income tax expense for the three and six months ended June 30, 2022 and 2021:
Three
months ended June 30,
Six months ended June 30,
(in thousands, except percentages)
2022
2021
2022
2021
Income tax based on income from continuing operations (1)
$
i15,165
$
i13,251
$
i26,107
$
i24,583
Provision
for change in estimated tax rate
i66
(i218)
i66
(i218)
Income
tax before discrete items
i15,231
i13,033
i26,173
i24,365
Discrete
tax expense:
Exercise of U.S. stock options
i—
(i14)
(i9)
(i156)
Impact
of amended tax returns
(i17)
i—
(i98)
i—
True-up
of prior year estimated taxes
(i612)
i22
(i508)
(i1,421)
Enacted
tax legislation and rate change
i—
i352
i—
i352
Provision
for/resolution of tax audits and contingencies, net
(i146)
i—
(i140)
i278
Other
i2
i53
i38
i68
Total
income tax expense
$
i14,458
$
i13,446
$
i25,456
$
i23,486
(1)
Calculated at estimated annual tax rates of ii28.2/%
and ii29.5/% for
the three and six months ended June 30, 2022 and 2021.
/
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.
6.
iEarnings Per Share
i
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 June 30,
Six months ended June 30,
(in thousands, except market price and earnings per share)
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.
iThe 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 six months ended June 30, 2022 and 2021:
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:
Expense/(income) related to interest rate swaps included in Income before taxes (a)
$
i1,168
$
i1,770
$
i2,864
$
i3,246
Income
tax effect
(i295)
(i457)
(i725)
(i838)
Effect
on net income due to items reclassified from Accumulated Other Comprehensive Income
$
i873
$
i1,313
$
i2,139
$
i2,408
Pretax
pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:
Amortization of prior service credit
(i1,122)
(i1,118)
(i2,245)
(i2,237)
Amortization
of net actuarial loss
i967
i1,108
i1,938
i2,217
Total
pretax amount reclassified (b)
(i155)
(i10)
(i307)
(i20)
Income
tax effect
i47
i3
i94
i6
Effect
on net income due to items reclassified from Accumulated Other Comprehensive Income
$
(i108)
$
(i7)
$
(i213)
$
(i14)
(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. iNoncontrolling
Interest
Effective October 31, 2013, Safran S.A. (Safran) acquired a i10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC (ASC). iThe
table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity in the Company’s subsidiary Albany Safran Composites, LLC:
Six months ended June 30,
(in thousands, except percentages)
2022
2021
Net income of Albany Safran Composites (ASC)
$
i5,690
$
i1,343
Less:
Return attributable to the Company's preferred holding
i632
i647
Net
income of ASC available for common ownership
$
i5,058
$
i696
Ownership
percentage of noncontrolling shareholder
i10
%
i10
%
Net
income attributable to the noncontrolling interest
$
i506
$
i70
Noncontrolling
interest, beginning of year
$
i3,638
$
i3,799
Net
income attributable to noncontrolling interest
i506
i70
Changes
in other comprehensive income attributable to the noncontrolling interest
(i35)
(i27)
Noncontrolling
interest, end of interim period
$
i4,109
$
i3,842
9.
iAccounts 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. iAs
of June 30, 2022 and December 31, 2021, Accounts receivable consisted of the following:
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 i10-year period, which began in 2020. iAs
of June 30, 2022 and December 31, 2021, Noncurrent receivables consisted of the following:
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.
Contract
assets increased $i23.4 million during the six-month period ended June 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 iino/
impairment losses related to our Contract assets during the six month periods ended June 30, 2022 and June 30, 2021.
Contract liabilities decreased $i2.0 million during the six-month
period ended June 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 six-month periods ended June 30, 2022 and 2021 that was included in the Contract liability balance at the beginning of the year was $i5.5
million and $i4.7 million, respectively.
11. iInventories
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.
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 itwo 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, ino
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.
To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company, as well as publicly available industry information, to determine earnings multiples
and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
13. iFinancial Instruments
i
Long-term
debt, principally to banks and noteholders, consists of:
Revolving credit agreement with borrowings outstanding at an end of period interest rate of i3.52%
in 2022 and i3.74% in 2021 (including the effect of interest rate hedging transactions, as described below), due in 2024
On October 27, 2020, we entered into a $i700 million unsecured iFour-Year
Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior amended and restated $i685 million iFive-Year Revolving Credit Facility Agreement, which we had entered into on
November 7, 2017 (the “Prior Agreement”). Under the Credit Agreement, $i485 million of borrowings were outstanding as of June 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 June 27, 2022, the spread was i1.625%.
The spread was based on a pricing grid, which ranged from i1.500% to i2.000%, 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 June 30, 2022, we would have been able to borrow an additional $i215 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 $i350 million of indebtedness drawn under the Credit Agreement at the rate of i0.838%
during the period. Under the terms of these transactions, we pay the fixed rate of i0.838% 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 June 16, 2022, one-month LIBOR was i1.51%.
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 $i350 million of indebtedness drawn under the Credit Agreement at the rate of i2.11%
during the period. Under the terms of these transactions, we pay the fixed rate of i2.11% 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 June 16, 2022, one-month LIBOR was i1.51%.
On June 16, 2022, the all-in-rate on the $i350 million of debt was i3.735%.
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 i3.50 to 1.00 and minimum interest coverage (as defined) of i3.00 to
1.00.
As of June 30, 2022, our leverage ratio was i1.43 to 1.00 and our interest coverage ratio was i15.19 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below
i3.50 to 1.00, and may make acquisitions with cash, provided our leverage ratio does not exceed the limits noted above.
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 June 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. iFair-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 June 30, 2022, or at December 31, 2021.
iThe
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:
Common stock of unaffiliated foreign public company (a)
i616
i—
i702
i—
Interest
rate swaps
i
i16,063
i—
i3,328
Liabilities:
Interest
rate swaps
i—
i—
i—
(i5,176)
(a)Original
cost basis $ii0.5/ million.
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 June 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 $i2.9 million for the six month
period ended June 30, 2022, and $i3.5 million for the six month period ended June 30, 2021. Additionally, non-cash interest income related to the amortization of swap buyouts totaled $i0.0 million
for the six month period ended June 30, 2022 and $i0.3 million for the six month period ended June 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.
i
(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:
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 i3,614
claims as of June 30, 2022.
i
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
i3,615
i32
i26
i3,609
i93
2022
(As of June 30)
i3,609
i8
i13
i3,614
$
i—
/
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 June 30, 2022, we had resolved, by means of settlement or dismissal, i37,988 claims. The total cost of resolving all claims was $i10.5
million. Of this amount, almost i100% was paid by our insurance carrier, who has confirmed that we have approximately $i140 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 i7,709 claims as of June 30, 2022, only
itwelve claims have been filed against Brandon since January 1, 2012, and only $i15,000
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 i100% 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.
(a)In
October 2021, the Company's Board of Directors authorized the Company to repurchase shares of up to $i200 million through open market purchases, privately negotiated transactions or otherwise, and to determine the prices, times and amounts. In 2021, the Company repurchased i285,286
shares totaling $i24.4 million. During the six months period ending June 30, 2022, the Company repurchased i1,022,717
shares totaling $i85.1 million.
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 six 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
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 $1.8 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.
During the first six months of 2022, energy costs soared, the supply market continued to tighten against strong demands and global logistics challenges persisted.
Our
MC segment has continued experiencing input cost pressures. Raw material costs increased due to higher crude oil and natural gas prices, coupled by non-contractual vendor surcharges to sustain price pressure and maintain their operations. Supply limitation and high energy costs continue to put upward pressure on indirect supply costs. Lastly, logistics costs remained elevated, due to higher fuel prices and limited availability.
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 due to raw material shortages, abnormally high commodity prices, labor shortages, and 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.
The following table summarizes our Net sales by business segment:
Three
months ended June 30,
Six months ended June 30,
(in thousands, except percentages)
2022
2021
% Change
2022
2021
% Change
Machine Clothing
$151,670
$159,921
-5.2
%
$305,732
$308,127
-0.8
%
Albany
Engineered Composites
109,699
74,598
47.1
%
199,806
148,753
34.3
%
Total
$261,369
$234,519
11.4
%
$505,538
$456,880
10.7
%
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, Q2 2022
Decrease due to changes in currency translation rates
Q2 2022 sales on same basis as Q2 2021 currency translation rates
Net
sales as reported, Q2 2021
% Change compared to Q2 2021, excluding currency rate effects
Machine Clothing
$
151,670
$
(5,447)
$
157,117
$
159,921
-1.8
%
Albany Engineered Composites
109,699
(1,994)
111,693
74,598
49.7
%
Total
$
261,369
$
(7,441)
$
268,810
$
234,519
14.6
%
(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
$
305,732
$
(7,975)
$
313,707
$
308,127
1.8
%
Albany
Engineered Composites
199,806
(3,152)
202,958
148,753
36.4
%
Total
$
505,538
$
(11,127)
$
516,665
$
456,880
13.1
%
Three
month comparison
•Changes in currency translation rates had the effect of decreasing Net sales by $7.4 million during the second 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 14.6% compared to the same period in 2021.
•Net sales in MC decreased 1.8% compared to the second quarter of 2021, driven by declines in sales for engineered fabrics and tissue grades, partially due to our previously announced cessation of doing business in Russia.
•Net sales in AEC increased 49.7%, mainly due to growth on CH-53K and LEAP programs.
Six
month comparison
•Changes in currency translation rates had the effect of decreasing Net sales by $11.1 million during the first six 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 13.1% compared to the same period in 2021.
•Net sales in MC increased 1.8% compared to the first six months of 2021, primarily due to growth in sales for pulp and publication grades.
•Net sales in AEC increased 36.4%, primarily due to growth on CH-53K and LEAP programs.
Gross Profit
The
following table summarizes Gross profit by business segment:
The decrease in second quarter 2022 Gross profit, as compared to the same period in 2021, was due to a decline in MC Gross profit, partially offset by an increase at AEC. Gross profit as a percentage of sales:
•Decreased from 52.9% in 2021 to 52.0% in 2022 in MC, due to an increase
in input costs.
•Decreased from 23.0% in 2021 to 19.8% in 2022 in AEC, principally due to a smaller impact from changes in the estimated profitability of long-term contracts, which increased Gross profit by $1.2 million for the second quarter of 2022, compared to an increase of $4.3 million for the second quarter of 2021.
Six month comparison
The increase in Gross profit during the first half of 2022, as compared to the same period in 2021, was due to an increase in AEC Gross profit, partially offset by a decline in Gross profit in MC. Gross profit as a percentage of sales:
•Decreased from 52.2% in 2021 to 51.7% in 2022
in MC, due to an increase in input costs.
•Decreased from 19.7% in 2021 to 17.0% in 2022 in AEC, driven by changes in the estimated profitability of long-term contracts, which decreased Gross profit by $0.6 million in the first half of 2022, as compared to an increase in Gross profit of $3.7 million in the first half of 2021. In addition, during the first quarter, reserves were recorded on inventory that was damaged at an off-site storage facility, further reducing gross profit as a percent of sales.
Selling, Technical, General, and Research ("STG&R")
The following table summarizes STG&R expenses by business segment:
Three
months ended June 30,
Six months ended June 30,
(in thousands, except percentages)
2022
2021
2022
2021
Machine Clothing
$
24,009
$
28,685
$
53,486
$
54,784
Albany
Engineered Composites
12,202
10,014
23,266
19,140
Corporate expenses
13,695
13,071
25,750
24,522
Total
$
49,906
$
51,770
$
102,502
$
98,446
%
of Net sales
19.1
%
22.1
%
20.3
%
21.5
%
Three month comparison
The overall decrease in STG&R expenses in the second 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 $1.8 million during 2022, driven by the weaker Euro, as compared
to an increase to expense by $1.9 million during 2021.
•In AEC, selling and general expenses increased $1.4 million due to investment in business development activities, and research expense increased $0.8 million over the prior year.
Six month comparison
The overall increase in STG&R expenses in the first six 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 $0.8 million during 2022, driven by the weaker Euro, as compared to an increase to expense by $1.4 million during 2021. 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 $2.3 million, and research expense increased $1.8 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 June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Machine Clothing
$
(30)
$
10
$
213
$
(58)
Albany
Engineered Composites
—
(48)
—
41
Corporate expenses
2
29
13
60
Total
$
(28)
$
(9)
$
226
$
43
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 June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Machine
Clothing
$
54,861
$
55,902
$
104,505
$
106,264
Albany Engineered Composites
9,535
7,164
10,730
10,102
Corporate
expenses
(13,681)
(13,100)
(25,766)
(24,581)
Total
$
50,715
$
49,966
$
89,469
$
91,785
Other
Earnings Items
Three months ended June 30,
Six months ended June 30,
(in thousands)
2022
2021
2022
2021
Interest expense, net
$
3,933
$
4,218
$
7,542
$
7,787
Other
(income)/expense, net
(7,045)
862
(10,973)
1,462
Income tax expense
14,458
13,446
25,456
23,486
Net income/(loss) attributable to the noncontrolling interest
168
43
506
70
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.
Other (income)/expense, net
Other (income)/expense, net, included foreign currency related transactions which resulted in gains of $7.3 million and $11.0 million in the three and six month periods ended June 30, 2022, respectively, as compared to losses of $0.2 million
and
$0.3 million in the three and six month periods ended June 30, 2021, respectively. The weaker Euro during the three and six month periods ended June 30, 2022 led to the gains on foreign currency related transactions during such periods.
Income Tax
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 second quarter of 2022 was 26.9%, lower compared to 30.0% for the same period in 2021, mainly due to favorable
discrete tax adjustments in the current period. For the first half of 2022, the Company’s effective tax rate was 27.4%, lower compared to 28.5% for the same period in 2021, mainly due to a lower forecasted annual effective tax run rate. The decrease in the forecasted annual effective tax run rate is mainly attributable to a change in forecasted earnings mix and the foreign exchange loss on previously taxed income targeted for future repatriation.
For more information on income tax, see Note 5 to the Consolidated Financial Statements.
Machine Clothing is our primary business segment and accounted for 60% of our consolidated revenues during the six 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.
We have incurred significant restructuring charges in recent years as we reduced MC manufacturing capacity and administrative positions in various countries.
Review of Operations
Three
months ended June 30,
Six months ended June 30,
(in thousands, except percentages)
2022
2021
2022
2021
Net sales
$
151,670
$
159,921
$
305,732
$
308,127
Gross
profit
78,857
84,597
158,202
160,990
% of Net sales
52.0
%
52.9
%
51.7
%
52.2
%
STG&R
expenses
24,009
28,685
53,486
54,784
Operating income
54,861
55,902
104,505
106,264
Net Sales
Three month comparison
•Net
sales decreased by 5.2%.
•Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing second-quarter 2022 sales by $5.4 million.
•Excluding the effect of changes in currency translation rates, Net sales in MC decreased 1.8% compared to the second quarter of 2021, driven by declines in sales for engineered fabrics and tissue grades, partially due to our decision to cease doing business in Russia.
Six month comparison
•Net sales decreased by 0.8%.
•Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $8.0 million compared to the same
period in 2021.
•Excluding the effect of changes in currency translation rates, Net sales in MC increased 1.8% compared to 2021, driven by growth in sales for pulp and publication grades.
Gross Profit
For the three and six month periods ended June 30, 2022, the decrease in MC Gross profit was primarily due to lower sales as noted above, as well as increases in input costs.
The reduction in Operating income was driven by lower gross profit, partially offset by the effect of currency translation rates, most notably the weaker Euro, reducing STG&R expenses.
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 June 30,
Six months ended June 30,
(in thousands, except percentages)
2022
2021
2022
2021
Net
sales
$
109,699
$
74,598
$
199,806
$
148,753
Gross profit
21,736
17,131
33,995
29,284
%
of Net sales
19.8
%
23.0
%
17.0
%
19.7
%
STG&R expenses
12,202
10,014
23,266
19,140
Operating
income
9,535
7,164
10,730
10,102
Net Sales
For the three and six month periods ended June 30, 2022, the increase in Net sales was mainly due to growth on CH-53K and LEAP programs.
Gross Profit
For the three and six month periods ended June 30, 2022, the decrease
in Gross profit was primarily driven by changes in the estimated profitability of long-term contracts, which were more muted during 2022, as compared to larger favorable changes in the prior year. We recognized $0.6 million net unfavorable change in the estimated profitability of long-term contracts during the first six months of 2022, as compared to a favorable change of $3.7 million in the first six months of 2021. In addition, incremental reserves in excess of $2 million were recorded on inventory that was damaged at an off-site storage facility, decreasing Gross profit during 2022.
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 six 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.
Operating Income
The increase in Operating income was driven by higher gross profit, partially offset by higher research and selling expense.
Working
Capital, Liquidity and Capital Structure
Cash Flow Summary
Six months ended June 30,
(in thousands)
2022
2021
Net income
$
67,444
$
59,050
Depreciation
and amortization
34,874
37,133
Changes in working capital (a)
(63,679)
(921)
Changes in other noncurrent liabilities and deferred taxes
(656)
1,153
Other operating items
(270)
(775)
Net
cash provided by operating activities
37,713
95,640
Net cash used in investing activities
(36,025)
(23,124)
Net cash provided by/(used in) financing activities
35,404
(62,504)
Effect of exchange rate changes on cash and cash equivalents
Cash provided in operating activities was $37.7 million in the first six months of 2022, compared to $95.6 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 second quarter of 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
addition, the timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during the first six 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 $36.0 million and $23.1 million for the first six months ended June 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 provided by financing activities during 2022 was $35.4 million compared to net cash used in financing activities of $62.5 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, $485 million of borrowings were outstanding as of June 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 June 27, 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 June 30, 2022, we would have been able to borrow an additional $215 million under the Agreement. We were in compliance with all debt covenants as of June 30, 2022.
For more information, see Note 13 to the Consolidated Financial Statements.
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 June 30, 2022, we had cash and cash equivalents of approximately $321 million and availability under our Credit Agreement of $215 million, for a total liquidity of approximately $536 million.
As of June 30, 2022, $288.5 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 June 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 six months of 2022, we paid $13 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 June 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 financials 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 websitewww.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, including: Net sales, and percent change in Net sales, excluding the impact of currency translation effects (for each segment and on a consolidated basis); EBITDA and Adjusted EBITDA (for each segment and on a consolidated basis, represented in dollars or as a percentage of net sales); Net debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). Such items are provided
because management believes that they provide additional useful information to investors regarding the
Company’s operational performance.
Presenting Net sales and increases or decreases in Net sales, after currency effects are excluded, can give management and investors insight into underlying sales trends. EBITDA, Adjusted EBITDA and Adjusted EPS are performance measures that relate to the Company’s continuing operations. EBITDA, or net income with interest, taxes, depreciation, and amortization added back, is a common indicator of financial performance used, among other things, to analyze and compare core profitability between companies and industries because it eliminates effects due to differences in financing, asset bases and taxes. An understanding of the impact in a particular quarter of specific restructuring costs, former CEO termination costs, acquisition/integrations costs, currency revaluation, pension settlement/curtailment
charges, inventory write-offs associated with discontinued businesses, or other gains and losses, on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect. Restructuring expenses, while frequent in recent years, are reflective of significant reductions in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business going forward as restructured.
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. The
Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax expense, and Depreciation and amortization expense. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring, former CEO termination costs, and inventory write-offs associated with discontinued businesses; adding charges and credits related to pension plan settlements and curtailments; adding (or subtracting) revaluation losses (or gains); subtracting (or adding) gains (or losses) from the sale of buildings or investments; adding acquisition/integration costs and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC). Adjusted earnings per share (Adjusted EPS) is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis: restructuring
charges; former CEO severance costs; inventory write-offs associated with discontinued businesses; charges and credits related to pension settlements and curtailments; foreign currency revaluation losses (or gains); and acquisition-related expenses.
EBITDA, Adjusted EBITDA, and Adjusted earnings per share as defined by the Company may not be similar to similarly named measures of other companies. Such measures are not considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s statements of income.
The following tables show the calculation of EBITDA and Adjusted EBITDA:
Pre-tax
(income) attributable to noncontrolling interest
—
(111)
—
(111)
Adjusted EBITDA (non-GAAP)
$
117,879
$
36,039
$
(23,828)
$
130,090
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 June 30, 2022 (in thousands, except per share amounts
Pre tax Amounts
Tax Effect
After tax Effect
Per share Effect
Restructuring expenses, net
$
(28)
$
(4)
$
(24)
$
0.00
Foreign
currency revaluation (gains)/losses
(8,877)
(2,492)
(6,385)
(0.20)
Acquisition/integration costs
269
80
189
0.01
Three
months ended June 30, 2021 (in thousands, except per share amounts)
Pre tax Amounts
Tax Effect
After tax Effect
Per share Effect
Restructuring expenses, net
$
(9)
$
(3)
$
(6)
$
0.00
Foreign
currency revaluation (gains)/losses
1,838
781
1,057
0.03
Acquisition/integration costs
300
90
210
0.01
Six
months ended June 30, 2022 (in thousands, except per share amounts)
Pre tax Amounts
Tax Effect
After tax Effect
Per share Effect
Restructuring expenses, net
$
226
$
69
$
157
$
0.01
Foreign
currency revaluation (gains)/losses
(11,137)
(3,135)
(8,002)
(0.25)
Dissolution of business relationships in Russia
2,568
332
2,236
0.07
Acquisition/integration costs
551
164
387
0.02
Six
months ended June 30, 2021 (in thousands, except per share amounts)
The
following table contains the calculation of Adjusted EPS:
Three months ended June 30,
Six months ended June 30,
Per share amounts (Basic)
2022
2021
2022
2021
Earnings per share (GAAP)
$
1.25
$
0.97
$
2.12
$
1.82
Adjustments,
after tax:
Restructuring expenses, net
—
—
0.01
—
Foreign currency revaluation (gains)/losses
(0.20)
0.03
(0.25)
0.04
Dissolution
of business relationships in Russia
—
—
0.07
—
Acquisition/integration costs
0.01
0.01
0.02
0.02
Adjusted Earnings per share (non-GAAP)
$
1.06
$
1.01
$
1.97
$
1.88
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:
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.
(a)
Calculated as amounts incurred during the twelve months ended December 31, 2021, less those incurred during the six months ended June 30, 2021, plus those incurred during the six months ended June 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
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities during the six months ended June 30, 2022
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 six months of 2022.
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.
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.
