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ALBANY INTERNATIONAL CORP /DE/

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 June 30, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission File No. 1-10026

ALBANY INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

Delaware	14-0462060
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
216 Airport Drive, Rochester, New Hampshire	03867
(Address of Principal Executive Offices)	(Zip Code)

603-330-5850

(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
Class A Common Stock	AIN	The New York Stock Exchange (NYSE)
Class B Common Stock	AIN	The New York Stock Exchange (NYSE)

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.

Large accelerated filer ☒	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 30.7 million shares of Class A Common Stock and 1.6 million shares of Class B Common Stock outstanding as of July 21, 2019.

Index

ALBANY INTERNATIONAL CORP.

TABLE OF CONTENTS

	Page Number
Part I Financial information
Item 1.Financial Statements	3
Consolidated statements of income – three and six months ended June 30, 2019 and 2018	3
Consolidated statements of comprehensive income/(loss) – three and six months ended June 30, 2019 and 2018	4
Consolidated balance sheets as of June 30, 2019 and December 31, 2018	5
Consolidated statements of cash flows – three and six months ended June 30, 2019 and 2018	6
Notes to consolidated financial statements	7
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Forward-looking statements	31
Item 3.Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.Controls and Procedures	46
Part II Other Information
Item 1.Legal Proceedings	48
Item 1A.Risk Factors	48
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.Defaults upon Senior Securities	49
Item 4.Mine Safety Disclosures	49
Item 5.Other Information	49
Item 6.Exhibits	50
SIGNATURES	51

Index

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

Three Months Ended June 30,			Six Months Ended June 30,
2019	2018		2019	2018
$273,949	$255,374	Net sales	$525,321	$478,977
168,767	163,731	Cost of goods sold	328,368	309,552

105,182	91,643	Gross profit	196,953	169,425
40,816	36,700	Selling, general, and administrative expenses	81,761	78,588
9,242	10,198	Technical and research expenses	19,491	20,515
899	2,589	Restructuring expenses, net	1,383	11,162

54,225	42,156	Operating income	94,318	59,160
4,631	4,621	Interest expense, net	9,048	8,909
930	726	Other (income)/expense, net	(278)	2,178

48,664	36,809	Income before income taxes	85,548	48,073
14,405	6,966	Income tax expense	21,881	10,331
34,259	29,843	Net income	63,667	37,742
205	(59)	Net income/(loss) attributable to the noncontrolling interest	423	178
$34,054	$29,902	Net income attributable to the Company	$63,244	$37,564
$1.05	$0.93	Earnings per share attributable to Company shareholders — Basic	$1.96	$1.17
$1.05	$0.93	Earnings per share attributable to Company shareholders — Diluted	$1.96	$1.16
		Shares of the Company used in computing earnings per share:
32,299	32,257	Basic	32,286	32,239
32,311	32,273	Diluted	32,298	32,255
$0.18	$0.17	Dividends declared per share, Class A and Class B	$0.36	$0.34

The accompanying notes are an integral part of the consolidated financial statements

Index

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in thousands)

(unaudited)

Three Months Ended June 30,			Six Months Ended June 30,
2019	2018		2019	2018

$34,259	$29,843	Net income	$63,667	$37,742

		Other comprehensive income/(loss), before tax:
(50)	(30,851)	Foreign currency translation and other adjustments	(2,202)	(13,346)
—	(518)	Pension/postretirement curtailment	—	(518)
		Amortization of pension liability adjustments:
(1,105)	(1,113)	Prior service credit	(2,210)	(2,227)
1,118	1,291	Net actuarial loss	2,239	2,588
(420)	54	Payments and amortization related to interest rate swaps included in earnings	(872)	234
(5,887)	2,211	Derivative valuation adjustment	(9,264)	7,926

		Income taxes related to items of other comprehensive income/(loss):
—	155	Pension/postretirement curtailment	—	155
(4)	(53)	Amortization of pension liability adjustment	(9)	(108)
108	(13)	Payments related to interest rate swaps included in earnings	223	(56)
1,504	(530)	Derivative valuation adjustment	2,367	(1,902)
29,523	476	Comprehensive income	53,939	30,488
207	(48)	Comprehensive income/(loss) attributable to the noncontrolling interest	417	182
$29,316	$524	Comprehensive income attributable to the Company	$53,522	$30,306

The accompanying notes are an integral part of the consolidated financial statements

Index

ALBANY INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	June 30, 2019	December 31, 2018
ASSETS
Cash and cash equivalents	$215,233	$197,755
Accounts receivable, net	220,584	223,176
Contract assets	54,431	57,447
Inventories	104,254	85,904
Income taxes prepaid and receivable	7,165	7,473
Prepaid expenses and other current assets	25,108	21,294
Total current assets	$626,775	$593,049

Property, plant and equipment, net	458,038	462,055
Intangibles, net	46,089	49,206
Goodwill	164,083	164,382
Deferred income taxes	66,082	62,622
Noncurrent receivables	45,651	45,061
Other assets	51,381	41,617
Total assets	$1,458,099	$1,417,992

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$61,899	$52,246
Accrued liabilities	120,693	129,030
Current maturities of long-term debt	19	1,224
Income taxes payable	14,078	6,806
Total current liabilities	196,689	189,306

Long-term debt	482,019	523,707
Other noncurrent liabilities	119,642	88,277
Deferred taxes and other liabilities	8,433	8,422
Total liabilities	806,783	809,712

SHAREHOLDERS' EQUITY
Preferred stock, par value $5.00 per share; authorized 2,000,000 shares; none issued	—	—
Class A Common Stock, par value $.001 per share; authorized 100,000,000 shares; issued 39,095,992 in 2019 and 37,450,329 in 2018	39	37
Class B Common Stock, par value $.001 per share; authorized 25,000,000 shares; issued and outstanding 1,617,998 in 2019 and 3,233,998 in 2018	2	3
Additional paid in capital	431,037	430,555
Retained earnings	641,297	589,645
Accumulated items of other comprehensive income:
Translation adjustments	(116,631)	(115,976)
Pension and postretirement liability adjustments	(48,636)	(47,109)
Derivative valuation adjustment	(2,849)	4,697
Treasury stock (Class A), at cost 8,408,770 shares in 2019 and 8,418,620 shares in 2018	(256,391)	(256,603)
Total Company shareholders' equity	647,868	605,249
Noncontrolling interest	3,448	3,031
Total equity	651,316	608,280
Total liabilities and shareholders' equity	$1,458,099	$1,417,992

The accompanying notes are an integral part of the consolidated financial statements

Index

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW

(in thousands)

(unaudited)

Three Months Ended June 30,			Six Months Ended June 30,
2019	2018		2019	2018
		OPERATING ACTIVITIES
$34,259	$29,843	Net income	$63,667	$37,742
		Adjustments to reconcile net income to net cash provided by operating activities:
15,345	17,114	Depreciation	30,987	35,416
2,409	2,559	Amortization	4,723	5,205
319	(6,183)	Change in deferred taxes and other liabilities	(746)	(8,211)
720	853	Provision for write-off of property, plant and equipment	1,106	1,124
152	154	Non-cash interest expense	303	154
1,170	1,047	Compensation and benefits paid or payable in Class A Common Stock	623	1,336
—	34	Fair value adjustment on foreign currency option	—	71

		Changes in operating assets and liabilities that provided cash:
14,434	(12,052)	Accounts receivable	2,810	(37,141)
3,528	(13,877)	Contract assets	3,047	(11,761)
(1,505)	(1,687)	Inventories	(18,167)	(13,440)
(1,384)	(1,157)	Prepaid expenses and other current assets	(4,188)	(5,220)
(316)	(5)	Income taxes prepaid and receivable	358	97
(14,276)	11,420	Accounts payable	7,474	8,882
(1,074)	5,846	Accrued liabilities	(12,169)	4,619
5,724	10,020	Income taxes payable	7,230	6,589
(46)	(1,643)	Noncurrent receivables	(340)	(4,170)
(481)	(854)	Other noncurrent liabilities	(2,160)	(1,231)
(448)	(5,745)	Other, net	(1,462)	(3,321)
58,530	35,687	Net cash provided by operating activities	83,096	16,740

		INVESTING ACTIVITIES
(14,606)	(23,352)	Purchases of property, plant and equipment	(35,404)	(39,123)
(27)	(23)	Purchased software	(49)	(52)
(14,633)	(23,375)	Net cash used in investing activities	(35,453)	(39,175)

		FINANCING ACTIVITIES
—	10,020	Proceeds from borrowings	20,000	23,031
(9,004)	(5,653)	Principal payments on debt	(37,008)	(14,143)
(178)	—	Principal payments on finance lease liabilities	(578)	—
—	—	Taxes paid in lieu of share issuance	(971)	(1,652)
28	3	Proceeds from options exercised	72	150
(5,813)	(5,482)	Dividends paid	(11,621)	(10,956)
(14,967)	(1,112)	Net cash used in financing activities	(30,106)	(3,570)

(1,082)	(7,882)	Effect of exchange rate changes on cash and cash equivalents	(59)	(2,978)

27,848	3,318	Increase/(decrease) in cash and cash equivalents	17,478	(28,983)
187,385	151,426	Cash and cash equivalents at beginning of period	197,755	183,727
$215,233	$154,744	Cash and cash equivalents at end of period	$215,233	$154,744

The accompanying notes are an integral part of the consolidated financial statements

Index

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 “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Albany International Corp. Annual Report on Form 10-K for the year ended December 31, 2018. Certain quarterly results for 2018 contained within this report have been revised to correct immaterial errors, as described in Note 24 of Item 8 in that same Annual Report on Form 10-K.

Effective January 1, 2019, we adopted the provisions of ASC 842, Leases, using the effective date approach for transition as discussed in Note 3, Leases. Accounting policies have been applied consistently to periods presented, except for the application of ASC 842, as further described in Note 3.

2. Reportable Segments

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.

The Machine Clothing (MC) segment designs and manufactures fabrics and process felts used in the manufacture of all grades of paper products and other industrial products. 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.

The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group (Safran) owns a 10 percent noncontrolling interest, is a designer and manufacturer of advanced materials-based engineered components for jet engine and airframe applications, supporting both commercial and military platforms provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. AEC’s largest program relates to CFM International’s LEAP engine. Under this program, AEC through ASC, is the exclusive supplier of advanced composite fan blades and cases under a long-term supply contract. The manufacturing spaces used for the production of parts under the long-term supply agreement are owned by Safran, and leased to the Company at either a market rent or a minimal cost. All lease expense is reimbursable by Safran to the Company due to the cost-plus nature of the supply agreement. AEC net sales to Safran were $116.3 million and $88.4 million in the first six months of 2019 and 2018, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $91.1 million and $96.8 million as of June 30, 2019 and December 31, 2018, respectively.

Index

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)	2019	2018	2019	2018
Net sales
Machine Clothing	$155,016	$161,784	$299,349	$303,557
Albany Engineered Composites	118,933	93,590	225,972	175,420
Consolidated total	$273,949	$255,374	$525,321	$478,977
Operating income/(loss)
Machine Clothing	$49,538	$50,315	$93,781	$77,258
Albany Engineered Composites	17,732	4,092	27,254	6,366
Corporate expenses	(13,045)	(12,251)	(26,717)	(24,464)
Operating income	$54,225	$42,156	$94,318	$59,160
Reconciling items:
Interest income	(587)	(438)	(1,186)	(820)
Interest expense	5,218	5,059	10,234	9,729
Other (income)/expense, net	930	726	(278)	2,178
Income before income taxes	$48,664	$36,809	$85,548	$48,073

The table below presents restructuring costs by reportable segment (also see Note 5):

	Three months ended June 30,		Six months ended June 30,
(in thousands)	2019	2018	2019	2018
Machine Clothing	$935	$1,800	$1,336	$10,152
Albany Engineered Composites	(32)	558	51	779
Corporate expenses	(4)	231	(4)	231
Total	$899	$2,589	$1,383	$11,162

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. In 2019, net adjustments to the estimated profitability of long-term contracts increased AEC operating income by $0.6 million in the first quarter, and $5.0 million in the second quarter. The amount recorded in the second quarter includes an immaterial out-of-period favorable adjustment of $1.8 million that the Company should have recorded in the first quarter of 2019. In 2018, net adjustments to the estimated profitability of long-term contracts had a negligible effect on AEC operating income in the first quarter, and reduced operating income by $1.6 million in the second quarter.

We disaggregate revenue earned from contracts with customers for each of our business segments and reporting units based on the timing of revenue recognition, and groupings used for internal review purposes.

Index

The following table disaggregates revenue for each reporting unit by timing of revenue recognition:

	For the three months ended June 30, 2019
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$154,216	$800	$155,016

Albany Engineered Composites
ASC	—	58,694	58,694
Other AEC	9,897	50,342	60,239
Total Albany Engineered Composites	9,897	109,036	118,933

Total revenue	$164,113	$109,836	$273,949

	For the six months ended June 30, 2019
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$297,749	$1,600	$299,349

Albany Engineered Composites
ASC	—	114,137	114,137
Other AEC	16,142	95,693	111,835
Total Albany Engineered Composites	16,142	209,830	225,972

Total revenue	$313,891	$211,430	$525,321

	For the three months ended June 30, 2018
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$160,984	$800	$161,784

Albany Engineered Composites
ASC	—	47,025	47,025
Other AEC	5,704	40,861	46,565
Total Albany Engineered Composites	5,704	87,886	93,590

Total revenue	$166,688	$88,686	$255,374

	For the six months ended June 30, 2018
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$301,957	$1,600	$303,557

Albany Engineered Composites
ASC	—	87,806	87,806
Other AEC	11,744	75,870	87,614
Total Albany Engineered Composites	11,744	163,676	175,420

Total revenue	$313,701	$165,276	$478,977

Index

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:

	For the three months ended June 30,		For the six months ended June 30,
(in thousands)	2019	2018	2019	2018
Americas PMC	$81,583	$82,197	$156,923	$149,826
Eurasia PMC	54,081	59,543	105,519	113,354
Engineered Fabrics	19,352	20,044	36,907	40,377
Total Machine Clothing Net sales	$155,016	$161,784	$299,349	$303,557

In accordance with ASC 606, 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 short duration firm-fixed-price orders representing performance obligations with an original maturity of less than one year. Remaining performance obligations on contracts that had an original duration of greater than one year totaled $112 million and $105 million as of June 30, 2019 and 2018, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of June 30, 2019 we expect to recognize as revenue approximately $64 million during 2019, with the remainder to be recognized in between 2020 and 2021.

At the January 1, 2019 date of adoption of ASC 842, Leases, MC assets increased by $5.6 million, AEC assets increased by $0.5 million, and Corporate assets increased by $1.0 million.

3. Leases

Effective January 1, 2019, we adopted the provisions of ASC 842, Leases, using the effective date (or modified retrospective) approach for transition. Under this transition method, periods prior to 2019 have not been restated and the cumulative effect of initially applying the new standard was recorded as an adjustment to Retained earnings at January 1, 2019.

The new standard is intended to increase transparency and comparability among organizations by requiring the recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We applied the new accounting standard to leases existing at the date of initial application on January 1, 2019.

We elected the available package of practical expedients, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We implemented processes and internal controls to enable the preparation of financial information on adoption.

The most significant impact resulting from the adoption of the new standard was the recognition of ROU assets and lease liabilities for operating leases on our balance sheet for our real estate and automobile operating leases, in addition to the derecognition and reassessment of assets and liabilities related to our primary manufacturing facility in Salt Lake City, Utah (SLC lease), which had been accounted for as a build-to-suit lease with a failed sale leaseback. For that lease, transitional guidance required the derecognition of existing assets and liabilities and a reassessment of lease classification. We determined that the lease met the criteria for recording as a finance lease and we determined the January 1, 2019 values of the ROU asset and lease liability on the basis of that reassessment. The change in the SLC lease-related assets and liabilities resulted in a $0.3 million pre-tax reduction to retained earnings at the date of adoption.

Index

The table below presents the cumulative effect of changes made to our December 31, 2018 Balance Sheet as a result of the adoption of ASC 842, Leases:

ALBANY INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEET

(in thousands, except share data)

(unaudited)

	As previously reported at December 31, 2018	Adjustments Increase/ (decrease)	Opening balance, as adjusted, January 1, 2019
ASSETS
Cash and cash equivalents	$197,755	$—	$197,755
Accounts receivable, net	223,176	—	223,176
Contract assets	57,447	—	57,447
Inventories	85,904	—	85,904
Income taxes prepaid and receivable	7,473	—	7,473
Prepaid expenses and other current assets	21,294	(370)	20,924
Total current assets	593,049	(370)	592,679

Property, plant and equipment, net	462,055	(6,144)	455,911
Intangibles, net	49,206	—	49,206
Goodwill	164,382	—	164,382
Deferred income taxes	62,622	(20)	62,602
Noncurrent receivables	45,061	—	45,061
Other assets	41,617	13,615	55,232
Total assets	$1,417,992	$7,081	$1,425,073

LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and loans payable	$—	$—	$—
Accounts payable	52,246	—	52,246
Accrued liabilities	129,030	4,964	133,994
Current maturities of long-term debt	1,224	(1,206)	18
Income taxes payable	6,806	—	6,806
Total current liabilities	189,306	3,758	193,064

Long-term debt	523,707	(24,680)	499,027
Other noncurrent liabilities	88,277	27,968	116,245
Deferred taxes and other liabilities	8,422	—	8,422
Total liabilities	809,712	7,046	816,758

SHAREHOLDERS' EQUITY
Preferred stock, par value $5.00 per share; authorized 2,000,000 shares; none issued	—	—	—
Class A Common Stock, par value $.001 per share; authorized 100,000,000 shares; issued 37,450,329 in 2018 and 37,395,753 in 2017	37	—	37
Class B Common Stock, par value $.001 per share; authorized 25,000,000 shares; issued and outstanding 3,233,998 in 2018 and 2017	3	—	3
Additional paid in capital	430,555	—	430,555
Retained earnings	589,645	35	589,680
Accumulated items of other comprehensive income:
Translation adjustments	(115,976)	—	(115,976)
Pension and postretirement liability adjustments	(47,109)	—	(47,109)
Derivative valuation adjustment	4,697	—	4,697
Treasury stock (Class A), at cost 8,418,620 shares in 2018 and 8,431,335 shares in 2017	(256,603)	—	(256,603)
Total Company shareholders' equity	605,249	35	605,284
Noncontrolling interest	3,031	—	3,031
Total equity	608,280	35	608,315
Total liabilities and shareholders' equity	$1,417,992	$7,081	$1,425,073

Index

Adoption of the standard had no impact to cash from or used in operating, investing, or financing activities in our Consolidated Statements of Cash Flows.

Significant changes to our accounting policies as a result of adopting the new standard are discussed below.

We determine if an arrangement is a lease at inception. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, we assess whether:

•

The contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset,

•

The lessee has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use, and

•

The lessee has the right to direct the use of the asset, which is demonstrated when the lessee has decision-making rights that are most relevant to changing how and for what purpose the asset is used.

Judgement is required in the application of ASC 842, including the determination of whether a contract contains a lease, the appropriate classification, allocation of consideration, and the determination of the discount rate for the lease. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.

We are generally the lessee in our lease transactions. For periods ending after December 31, 2018, lessees are required to recognize a lease liability and an ROU asset for leases with terms greater than 12 months, in accordance with the practical expedient that is available for ongoing accounting.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term, using the rate implicit in the lease. If that rate is not readily determinable, the rate is based on the Company’s incremental borrowing rate. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease. Our ROU assets include the values associated with the additional periods when it is reasonably certain that we will exercise the option. We review the carrying value of ROU assets for impairment whenever events and circumstances indicate that the carrying value of an asset group may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.

We have lease agreements with lease and non-lease components. For most leases, we account for the lease and non-lease components as a single lease component, in accordance with the practical expedient that is available for ongoing accounting. Additionally, for certain leases, such as for vehicles, we apply a portfolio approach. New leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Expenses related to operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile, in which interest and amortization are presented separately in the income statement.

Operating lease ROU assets are included in Other assets in the Consolidated Balance Sheets and Operating lease liabilities are included in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. Finance lease ROU assets are included in Property, plant, and equipment, net in the Consolidated Balance Sheets and Finance lease liabilities are included in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets.

We have operating and finance leases for offices, manufacturing facilities, warehouses, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 11 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.

Index

The components of lease expense were as follows:

(in thousands)	For the three months ended June 30, 2019	For the six months ended June 30, 2019
Finance lease
Amortization of right-of-use asset	$246	$499
Interest on lease liabilities	394	793
Operating lease
Fixed lease cost	1,208	2,425
Variable lease cost	147	204
Short-term lease cost	340	672
Total lease expense	$2,335	$4,593

Lease expense for the three and six month periods ended June 30, 2018 was $1.9 million and $4.0 million, respectively.

Supplemental cash flow information related to leases was as follows:

(in thousands)	For the three months ended June 30, 2019	For the six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$1,182	$2,373
Operating cash flows from finance leases	394	793
Financing cash flows from finance leases	178	578

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$2,590	$3,002
Finance leases	—	—

The initial recognition of each ROU asset and lease liability at lease commencement is a noncash transaction that is excluded from amounts reported in the Consolidated Statements of Cash Flows.

Supplemental balance sheet information related to leases was as follows:

(in thousands)	June 30, 2019
Operating leases

Right of use assets included in Other assets	$14,443
Lease liabilities included in
Accrued liabilities	$3,854
Other noncurrent liabilities	10,637
Total operating lease liabilities	$14,491
Finance leases

Right of use assets included in Property, plant and equipment, net	$10,472
Lease liabilities included in
Accrued liabilities	$1,252
Other noncurrent liabilities	18,235
Total finance lease liabilities	$19,487

Index

Additional information for leases existing at June 30, 2019 was as follows:

Weighted average remaining lease term
Operating leases	5 years
Finance leases	11 years
Weighted average discount rate
Operating leases	5.6%
Finance leases	8.0%

Maturities of lease liabilities as of June 30, 2019 were as follows:

(in thousands)	Operating leases	Finance lease
Year ending December 31,
2019	$2,317	$1,371
2020	4,496	2,790
2021	3,304	2,790
2022	2,271	2,838
2023	1,495	3,004
Thereafter	3,054	15,512
Total lease payments	16,937	28,305

Less imputed interest	(2,446)	(8,818)
Total	$ 14,491	$ 19,487

The finance lease liability includes the SLC lease described above, but excludes additional manufacturing space that was included in the September 2018 modification of that lease. We expect to take control of the additional space during the fourth quarter of 2019, which would be the commencement of this lease component, at which time the lease liability and ROU asset will be recorded. We will have control of the additional space through 2029 and the additional space will increase gross cash outflows during that period by $6.1 million.

As of December 31, 2018, future rental payments required under operating leases with initial or remaining non-cancelable lease terms in excess of one year, were: 2019, $4.6 million; 2020, $3.2 million; 2021, $2.1 million; 2022, $1.5 million; and 2023 and thereafter, $6.5 million.

As of December 31, 2018, the following schedule presents future minimum annual payments under the SLC lease finance obligation, and the present value of the minimum payments:

	(in thousands)
Year ending December 31,
2019	$2,451
2020	2,974
2021	2,990
2022	3,054
2023	3,277
Thereafter	18,930
Total minimum payments	33,676

Less imputed interest	(7,790)
Total	$ 25,886

As of December 31, 2018, the capitalized value associated with the SLC lease was included in Property, plant, and equipment, net at a value of $17.3 million, which included a gross cost of $20.8 million, and Accumulated depreciation of $3.5 million.

Index

4. Pensions and Other Postretirement Benefit Plans

Pension Plans

The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The U.S. qualified defined benefit pension plan has been closed to new participants since October 1998, and benefits accrued under this plan have been frozen since February 2009. As a result of the freeze, employees covered by the pension plan will receive, at retirement, benefits already accrued through February 2009 but no new benefits accrue after that date. Benefit accruals under the U.S. Supplemental Executive Retirement Plan ("SERP") were similarly frozen. The eligibility, benefit formulas, and contribution requirements for plans outside of the U.S. vary by location.

Other Postretirement Benefits

The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing postretirement benefits during the active service period of the employees. The Company currently funds the plans as claims are paid.

The composition of the net periodic benefit cost for the six months ended June 30, 2019 and 2018, was as follows:

	Pension plans		Other postretirement benefits
(in thousands)	2019	2018	2019	2018
Components of net periodic benefit cost:
Service cost	$1,261	$1,391	$95	$116
Interest cost	3,578	3,621	1,057	1,013
Expected return on assets	(4,102)	(4,470)	—	—
Curtailment gain	—	(518)	—	—
Amortization of prior service cost/(credit)	34	17	(2,244)	(2,244)
Amortization of net actuarial loss	1,125	1,110	1,114	1,478
Net periodic benefit cost	$1,896	$1,151	$22	$363

The amount of net periodic pension 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 occurs. There were no such events in the first six months of 2019 or 2018.

Service cost for defined benefit pension and postretirement plans are reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are presented in the income statement separately from the service cost component and outside a subtotal of income from operations, in the line item Other (income)/expense, net in the Consolidated Statements of Income.

5. Restructuring

MC restructuring charges include expenses for the first six months of 2019 and 2018 principally related to discontinued operations at its MC production facility in Sélestat, France. In 2018, the plan was approved by the French Labor Ministry which led to restructuring expense of $8.6 million in the first six months of 2018 for severance and outplacement costs for the approximately 50 positions that were terminated under this plan. In the first six months of 2019, restructuring charges were $0.8 million. Since 2017, we have recorded $12.5 million of restructuring charges related to this action.

AEC restructuring charges include expenses for the first six months of 2019 and 2018 related to work force reductions in AEC locations in Salt Lake City, Utah and Rochester, New Hampshire.

Index

The following table summarizes charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:

	Three months ended June 30,		Six months ended June 30,
(in thousands)	2019	2018	2019	2018
Machine Clothing	$935	$1,800	$1,336	$10,152
Albany Engineered Composites	(32)	558	51	779
Corporate expenses	(4)	231	(4)	231
Total	$899	$2,589	$1,383	$11,162

Six months ended June 30, 2019 (in thousands)	Total restructuring costs incurred	Termination and other costs	Impairment of assets
Machine Clothing	$1,336	$1,309	$27
Albany Engineered Composites	51	51	—
Corporate expenses	(4)	(4)	—
Total	$1,383	$1,356	$27

Six months ended June 30, 2018 (in thousands)	Total restructuring costs incurred	Termination and other costs
Machine Clothing	$10,152	$10,152
Albany Engineered Composites	779	779
Corporate expenses	231	231
Total	$11,162	$11,162

We expect that approximately $2.3 million of Accrued liabilities for restructuring at June 30, 2019 will be paid within one year and approximately $1.2 million will be paid the following year. The table below presents the year-to-date changes in restructuring liabilities for 2019 and 2018, all of which related to termination costs:

(in thousands)	December 31, 2018	Restructuring charges accrued	Payments	Currency translation /other	June 30, 2019
Total termination and other costs	$5,570	$1,356	$(3,129)	$(290)	$3,507

(in thousands)	December 31, 2017	Restructuring charges accrued	Payments	Currency translation/ other	June 30, 2018
Total termination and other costs	$3,326	$11,162	$(5,323)	$(378)	$8,787

6. Other (Income)/Expense, net

The components of Other (Income)/Expense, net are:

	Three months ended June 30,		Six months ended June 30,
(in thousands)	2019	2018	2019	2018
Currency transaction (gains)/losses	$342	$(9)	$(1,696)	$681
Bank fees and amortization of debt issuance costs	72	96	181	204
Components of net periodic pension and postretirement cost other than service	281	259	562	525
Other	235	380	675	768
Total	$930	$726	$(278)	$2,178

Index

7. Income Taxes

The following table presents components of income tax expense for the three and six months ended June 30, 2019 and 2018:

	Three months ended June 30,		Six months ended June 30,
(in thousands, except percentages)	2019	2018	2019	2018
Income tax based on income from continuing operations, at estimated tax rates of 28.4% and 30.1%, respectively	$13,821	$11,080	$24,668	$14,736
provision for change in estimated tax rate	(382)	(266)	(382)	(266)
Income tax before discrete items	13,439	10,814	24,286	14,470

Discrete tax expense:

Exercise of U.S. Stock Options	(6)	(3)	(56)	(126)
Impact of Mandatory Repatriation	—	(1,099)	—	(1,099)
Adjustments to prior period tax liabilities	153	(206)	347	(252)
Provision for/resolution of tax audits and contingencies, net	5	2,443	(2,227)	2,448
Adjustment related to prior period change in opening valuation allowance	—	—	(1,346)	—
Other changes in valuation allowances	841	(4,986)	841	(4,986)
Other	(27)	3	36	(124)
Total income tax expense	$14,405	$6,966	$21,881	$10,331

The second-quarter estimated annual effective tax rate on continuing operations was 28.4 percent in 2019, compared to 30.1 percent for the same period in 2018.

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 tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter.

The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. The Company has targeted for repatriation $153.2 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were distributed, the Company would be subject to foreign withholding taxes of $3.9 million and state income taxes of $3.2 million which have already been recorded.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2007 to 2019. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Italy and Canada.

In the first quarter of 2019, the Company recorded a net benefit of $2.2 million for tax audit settlements with Canada. The Canadian Revenue Agency agreed to accept the Company’s appeal of all protested issues. The Company has begun to receive refunds from the Canadian Revenue Agency and Ontario for taxes that were pre-paid at the time of protests. As such, during the first quarter, the Company had determined that it was more likely than not that the liability for unrecognized tax benefits of $2.2 million that was recorded as of December 31, 2018 was no longer warranted and thus it was reduced in the first quarter of 2019, resulting in a $2.2 million discrete tax benefit.

Index

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In the second quarter of 2019, the Company recorded a valuation allowance of $0.8 million related to a non-U.S. subsidiary. In the first quarter of 2019, the Company recorded a $1.3 million out-of-period immaterial adjustment related to a German tax valuation allowance. In the second quarter of 2018, income tax expense was reduced $5.0 million as the Company reversed a previously-established valuation allowance for its subsidiary in Germany.

8. 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 June 30,		Six months ended June 30,
(in thousands, except market price and earnings per share)	2019	2018	2019	2018
Net income attributable to the Company	$34,054	$29,902	$63,244	$37,564
Weighted average number of shares:
Weighted average number of shares used in calculating basic net income per share	32,299	32,257	32,286	32,239
Effect of dilutive stock-based compensation plans:
Stock options	12	16	12	16
Weighted average number of shares used in calculating diluted net income per share	32,311	32,273	32,298	32,255
Average market price of common stock used for calculation of dilutive shares	$74.86	$61.86	$73.08	$62.83

Net income attributable to the Company per share:
Basic	$1.05	$0.93	$1.96	$1.17
Diluted	$1.05	$0.93	$1.96	$1.16

9. Accumulated Other Comprehensive Income (AOCI)

The table below presents changes in the components of AOCI for the period December 31, 2018 to June 30, 2019:

(in thousands)	Translation adjustments	Pension and post retirement liability adjustments	Derivative valuation adjustment	Total Other Comprehensive Income
December 31, 2018	$(115,976)	$(47,109)	$4,697	$(158,388)
Other comprehensive income/(loss) before reclassifications	(655)	(201)	(6,897)	(7,753)
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax	—	—	(649)	(649)
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax	—	20	—	20
Adjustment related to prior period change in opening valuation allowance	—	(1,346)	—	(1,346)
Net current period other comprehensive income	(655)	(1,527)	(7,546)	(9,728)
June 30, 2019	$(116,631)	$(48,636)	$(2,849)	$(168,116)

Index

The table below presents changes in the components of AOCI for the period December 31, 2017 to June 30, 2018:

(in thousands)	Translation adjustments	Pension and post retirement liability adjustments	Derivative valuation adjustment	Total Other Comprehensive Income
December 31, 2017	$(87,318)	$(50,536)	$1,953	$(135,901)
Other comprehensive income/(loss) before reclassifications	(15,570)	2,224	6,024	(7,322)
Pension/post retirement curtailment gain, net of tax	—	(363)	—	(363)
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax	—	—	178	178
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax	—	253	—	253
Net current period other comprehensive income	(15,570)	2,114	6,202	(7,254)
June 30, 2018	$(102,888)	$(48,422)	$8,155	$(143,155)

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, and the line items of the Consolidated Statements of Income that were affected for the three and six months ended June 30, 2019 and 2018:

	Three months ended June 30,		Six months ended June 30,
(in thousands)	2019	2018	2019	2018
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:
Expense related to interest rate swaps included in Income before taxes(a)	$(420)	$54	$(872)	$234
Income tax effect	107	(13)	223	(56)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income	$(313)	$41	$(649)	$178
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:
Pension/postretirement curtailment	—	(518)	—	(518)
Amortization of prior service credit	(1,105)	(1,113)	(2,210)	(2,227)
Amortization of net actuarial loss	1,118	1,291	2,239	2,588
Total pretax amount reclassified(b)	13	(340)	29	(157)
Income tax effect	(4)	102	(9)	47
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income	$9	$(238)	$20	$(110)

(a)	Included in Interest expense, net, are payments related to the interest rate swap agreements and amortization of swap buyouts (see Notes 15 and 16).
(b)	These accumulated other comprehensive income components are included in the computation of net periodic cost (see Note 4).

10. Noncontrolling Interest

Effective October 31, 2013, Safran S.A. (Safran) acquired a 10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC (ASC). Under the terms of the transaction agreements, ASC is the exclusive supplier to Safran of advanced 3D-woven composite parts for use in aircraft and rocket engines, thrust reversers and nacelles, and aircraft landing and braking systems (the “Safran Applications”).

Index

AEC may develop and supply parts other than advanced 3D-woven composite parts for all aerospace applications, as well as advanced 3D-woven composite parts for any aerospace applications that are not Safran Applications (such as airframe applications) and any non-aerospace applications.

The agreement provides Safran an option to purchase Albany’s remaining 90 percent interest upon the occurrence of certain bankruptcy or performance default events, or if Albany’s Engineered Composites business is sold to a direct competitor of Safran. The purchase price is based initially on the same valuation of ASC used to determine Safran’s 10 percent equity interest, and increases over time as LEAP production increases.

In accordance with the operating agreement, Albany received a $28 million preferred holding in ASC, which includes a preferred return based on the Company’s revolving credit agreement. The common shares of ASC are owned 90 percent by Albany and 10 percent by Safran.

The 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)	2019	2018
Net income of Albany Safran Composites (ASC)	$4,884	$2,419
Less: Return attributable to the Company's preferred holding	652	635
Net income of ASC available for common ownership	$4,232	$1,784
Ownership percentage of noncontrolling shareholder	10%	10%
Net income attributable to noncontrolling interest	$423	$178

Noncontrolling interest, beginning of year	$3,031	$3,247
Decrease attributable to 2018 adoption of ASC 606	—	(327)
Net income attributable to noncontrolling interest	423	178
Changes in other comprehensive income attributable to noncontrolling interest	(6)	4
Noncontrolling interest	$3,448	$3,102

11. 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.

The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the allowance based on historical write-off experience, customer-specific facts and economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

As of June 30, 2019 and December 31, 2018, Accounts receivable consisted of the following:

(in thousands)	June 30, 2019	December 31, 2018
Trade and other accounts receivable	$214,045	$211,244
Bank promissory notes	14,680	19,269
Allowance for doubtful accounts	(8,141)	(7,337)
Accounts receivable, net	$220,584	$223,176

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, with 2% interest, over a 10-year period starting in 2020.

As of June 30, 2019 and December 31, 2018, Noncurrent receivables consisted of the following:

Index

(in thousands)	June 30, 2019	December 31, 2018
Noncurrent receivables	$45,651	$45,061

Index

12. 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 receivab