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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 September 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)	(IRS 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, $0.001 par value per share	AIN	The New York Stock Exchange (NYSE)
Class B Common Stock, $0.001 par value per share	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 October 20, 2019.

ALBANY INTERNATIONAL CORP.

TABLE OF CONTENTS

	Page Number
Part I Financial information
Item 1.Financial Statements	3
Consolidated statements of income – three and nine months ended September 30, 2019 and 2018	3
Consolidated statements of comprehensive income/(loss) – three and nine months ended September 30, 2019 and 2018	4
Consolidated balance sheets as of September 30, 2019 and December 31, 2018	5
Consolidated statements of cash flows – three and nine months ended September 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	30
Forward-looking statements	30
Item 3.Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.Controls and Procedures	45
Part II Other Information
Item 1.Legal Proceedings	47
Item 1A.Risk Factors	47
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.Defaults upon Senior Securities	48
Item 4.Mine Safety Disclosures	48
Item 5.Other Information	48
Item 6.Exhibits	49

Index

ITEM 1. FINANCIAL STATEMENTS

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

Three Months Ended September 30,			Nine Months Ended September 30,
2019	2018		2019	2018
$271,133	$251,889	Net sales	$796,454	$730,866
167,026	159,487	Cost of goods sold	495,394	469,039

104,107	92,402	Gross profit	301,060	261,827
39,841	39,058	Selling, general, and administrative expenses	121,602	117,646
8,832	9,958	Technical and research expenses	28,323	30,473
(244)	2,552	Restructuring expenses, net	1,139	13,714

55,678	40,834	Operating income	149,996	99,994
3,987	4,621	Interest expense, net	13,035	13,530
(1,628)	(3,151)	Other income, net	(1,906)	(973)

53,319	39,364	Income before income taxes	138,867	87,437
13,194	11,359	Income tax expense	35,075	21,690
40,125	28,005	Net income	103,792	65,747
116	269	Net income attributable to the noncontrolling interest	539	447
$40,009	$27,736	Net income attributable to the Company	$103,253	$65,300
$1.24	$0.86	Earnings per share attributable to Company shareholders — Basic	$3.20	$2.02
$1.24	$0.86	Earnings per share attributable to Company shareholders — Diluted	$3.20	$2.02
		Shares of the Company used in computing earnings per share:
32,306	32,264	Basic	32,293	32,247
32,317	32,280	Diluted	32,305	32,263
$0.18	$0.17	Dividends declared per share, Class A and Class B	$0.54	$0.51

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 September 30,			Nine Months Ended September 30,
2019	2018		2019	2018

$40,125	$28,005	Net income	$103,792	$65,747

		Other comprehensive income/(loss), before tax:
(22,041)	(7,847)	Foreign currency translation and other adjustments	(24,243)	(21,193)
—	(232)	Pension/postretirement curtailment gain	—	(750)
		Amortization of pension liability adjustments:
(1,105)	(1,114)	Prior service credit	(3,315)	(3,341)
1,118	1,294	Net actuarial loss	3,357	3,882
(245)	(96)	Payments and amortization related to interest rate swaps included in earnings	(1,117)	138
(1,532)	1,777	Derivative valuation adjustment	(10,796)	9,703

		Income taxes related to items of other comprehensive income/(loss):
—	70	Pension/postretirement curtailment gain	—	225
(4)	(54)	Amortization of pension liability adjustment	(13)	(162)
62	23	Payments and amortization related to interest rate swaps included in earnings	285	(33)
392	(427)	Derivative valuation adjustment	2,759	(2,329)
16,770	21,399	Comprehensive income	70,709	51,887
103	264	Comprehensive income/(loss) attributable to the noncontrolling interest	520	446
$16,667	$21,135	Comprehensive income attributable to the Company	$70,189	$51,441

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)

	September 30, 2019	December 31, 2018
ASSETS
Cash and cash equivalents	$173,739	$197,755
Accounts receivable, net	224,232	223,176
Contract assets	64,571	57,447
Inventories	105,705	85,904
Income taxes prepaid and receivable	6,774	7,473
Prepaid expenses and other current assets	24,849	21,294
Total current assets	$599,870	$593,049

Property, plant and equipment, net	449,299	462,055
Intangibles, net	44,530	49,206
Goodwill	162,075	164,382
Deferred income taxes	51,761	62,622
Noncurrent receivables	45,699	45,061
Other assets	51,488	41,617
Total assets	$1,404,722	$1,417,992

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$60,994	$52,246
Accrued liabilities	122,741	129,030
Current maturities of long-term debt	20	1,224
Income taxes payable	7,787	6,806
Total current liabilities	191,542	189,306

Long-term debt	424,012	523,707
Other noncurrent liabilities	118,153	88,277
Deferred taxes and other liabilities	7,934	8,422
Total liabilities	741,641	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 39,098,292 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	431,860	430,555
Retained earnings	675,491	589,645
Accumulated items of other comprehensive income:
Translation adjustments	(139,153)	(115,976)
Pension and postretirement liability adjustments	(48,146)	(47,109)
Derivative valuation adjustment	(4,172)	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	659,530	605,249
Noncontrolling interest	3,551	3,031
Total equity	663,081	608,280
Total liabilities and shareholders' equity	$1,404,722	$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 September 30,			Nine Months Ended September 30,
2019	2018		2019	2018
		OPERATING ACTIVITIES
$40,125	$28,005	Net income	$103,792	$65,747
		Adjustments to reconcile net income to net cash provided by operating activities:
15,672	17,436	Depreciation	46,659	52,852
1,582	2,366	Amortization	6,305	7,571
13,548	1,199	Change in deferred taxes and other liabilities	12,802	(7,012)
(5)	2,131	Provision for write-off of property, plant and equipment	1,101	3,255
151	150	Non-cash interest expense	454	304
790	543	Compensation and benefits paid or payable in Class A Common Stock	1,413	1,879
—	(10)	Fair value adjustment on foreign currency option	—	61
		Changes in operating assets and liabilities that provided cash:
(9,950)	(2,813)	Accounts receivable	7,140	(39,954)
(9,605)	3,040	Contract assets	(6,558)	(8,721)
(3,760)	(2,968)	Inventories	(21,927)	(16,408)
131	103	Prepaid expenses and other current assets	(4,057)	(5,117)
304	(551)	Income taxes prepaid and receivable	662	(454)
363	(2,728)	Accounts payable	7,837	6,154
3,407	7,552	Accrued liabilities	(8,762)	12,171
(5,611)	6,766	Income taxes payable	1,619	13,355
(339)	(4,676)	Noncurrent receivables	(679)	(8,846)
(2,251)	(5,102)	Other noncurrent liabilities	(4,411)	(6,333)
(1,055)	(5,728)	Other, net	(2,517)	(9,049)
43,497	44,715	Net cash provided by operating activities	126,593	61,455

		INVESTING ACTIVITIES
(13,442)	(21,441)	Purchases of property, plant and equipment	(48,846)	(60,564)
(257)	(78)	Purchased software	(306)	(130)
(13,699)	(21,519)	Net cash used in investing activities	(49,152)	(60,694)

		FINANCING ACTIVITIES
—	3,000	Proceeds from borrowings	20,000	26,031
(58,006)	(10,471)	Principal payments on debt	(95,014)	(24,614)
(298)	—	Principal payments on finance lease liabilities	(876)	—
—	—	Taxes paid in lieu of share issuance	(971)	(1,652)
33	52	Proceeds from options exercised	105	202
(5,814)	(5,485)	Dividends paid	(17,435)	(16,441)
(64,085)	(12,904)	Net cash used in financing activities	(94,191)	(16,474)

(7,207)	(4,443)	Effect of exchange rate changes on cash and cash equivalents	(7,266)	(7,421)

41,494	5,849	Increase/decrease in cash and cash equivalents	(24,016)	(23,134)
215,233	154,744	Cash and cash equivalents at beginning of period	197,755	183,727
$173,739	$160,593	Cash and cash equivalents at end of period	$173,739	$160,593

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, and 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 $175.2 million and $136.9 million in the first nine months of 2019 and 2018, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $107.5 million and $96.2 million as of September 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 September 30,		Nine months ended September 30,
(in thousands)	2019	2018	2019	2018
Net sales
Machine Clothing	$151,324	$157,608	$450,673	$461,165
Albany Engineered Composites	119,809	94,281	345,781	269,701
Consolidated total	$271,133	$251,889	$796,454	$730,866
Operating income/(loss)
Machine Clothing	$51,906	$49,695	$145,688	$126,952
Albany Engineered Composites	17,345	3,613	44,598	9,980
Corporate expenses	(13,573)	(12,474)	(40,290)	(36,938)
Operating income	$55,678	$40,834	$149,996	$99,994
Reconciling items:
Interest income	(851)	(579)	(2,037)	(1,399)
Interest expense	4,838	5,200	15,072	14,929
Other income, net	(1,628)	(3,151)	(1,906)	(973)
Income before income taxes	$53,319	$39,364	$138,867	$87,437

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

	Three months ended September 30,		Nine months ended September 30,
(in thousands)	2019	2018	2019	2018
Machine Clothing	$(211)	$370	$1,125	$10,522
Albany Engineered Composites	(33)	2,189	18	2,968
Corporate expenses	—	(7)	(4)	224
Total	$(244)	$2,552	$1,139	$13,714

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. The sum of net adjustments to the estimated profitability of long-term contracts during the first three quarters increased AEC operating income by $8.8 million and $0.5 million in 2019 and 2018, respectively.

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 September 30, 2019
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$150,524	$800	$151,324

Albany Engineered Composites
ASC	—	56,414	56,414
Other AEC	6,708	56,687	63,395
Total Albany Engineered Composites	6,708	113,101	119,809

Total revenue	$157,232	$113,901	$271,133

	For the nine months ended September 30, 2019
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$448,273	$2,400	$450,673

Albany Engineered Composites
ASC	—	170,551	170,551
Other AEC	22,850	152,380	175,230
Total Albany Engineered Composites	22,850	322,931	345,781

Total revenue	$471,123	$325,331	$796,454

	For the three months ended September 30, 2018
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$156,808	$800	$157,608

Albany Engineered Composites
ASC	—	47,166	47,166
Other AEC	4,165	42,950	47,115
Total Albany Engineered Composites	4,165	90,116	94,281

Total revenue	$160,973	$90,916	$251,889

	For the nine months ended September 30, 2018
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$458,765	$2,400	$461,165

Albany Engineered Composites
ASC	—	134,972	134,972
Other AEC	15,909	118,820	134,729
Total Albany Engineered Composites	15,909	253,792	269,701

Total revenue	$474,674	$256,192	$730,866

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 September 30,		For the nine months ended September 30,
(in thousands)	2019	2018	2019	2018
Americas PMC	$82,763	$79,246	$239,686	$229,072
Eurasia PMC	50,330	59,321	155,849	172,675
Engineered Fabrics	18,231	19,041	55,138	59,418
Total Machine Clothing Net sales	$151,324	$157,608	$450,673	$461,165

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 $81 million and $95 million as of September 30, 2019 and 2018, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of September 30, 2019 we expect to recognize as revenue approximately $25 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. Other than the impact from adoption, noted above, there were no other material changes in the total assets of the reportable segments in the first nine months of 2019.

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 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 10 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 September 30, 2019	For the nine months ended September 30, 2019
Finance lease
Amortization of right-of-use asset	$249	$748
Interest on lease liabilities	388	1,181
Operating lease
Fixed lease cost	991	3,416
Variable lease cost	59	263
Short-term lease cost	350	1,022
Total lease expense	$2,037	$6,630

Lease expense for the three and nine month periods ended September 30, 2018 was $2.1 million and $6.1 million, respectively.

Supplemental cash flow information related to leases was as follows:

(in thousands)	For the three months ended September 30, 2019	For the nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$974	$3,350
Operating cash flows from finance leases	388	1,181
Financing cash flows from finance leases	298	876

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$988	$3,990
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)	September 30, 2019
Operating leases
Right of use assets included in Other assets	$13,838
Lease liabilities included in
Accrued liabilities	$3,780
Other noncurrent liabilities	10,131
Total operating lease liabilities	$13,911
Finance leases
Right of use assets included in Property, plant and equipment, net	$10,223
Lease liabilities included in
Accrued liabilities	$1,290
Other noncurrent liabilities	17,900
Total finance lease liabilities	$19,190

Index

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

Weighted average remaining lease term
Operating leases	4 years
Finance leases	10 years
Weighted average discount rate
Operating leases	5.7%
Finance leases	8.0%

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

(in thousands)	Operating leases	Finance lease
Year ending December 31,
2019	$1,316	$686
2020	4,603	2,790
2021	3,497	2,790
2022	2,471	2,838
2023	1,495	3,004
Thereafter	3,054	15,512
Total lease payments	16,436	27,620
Less imputed interest	(2,525)	(8,430)
Total	$13,911	$ 19,190

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 expect to have control of the additional space through 2029 and the additional space is expected to 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 nine months ended September 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	$1,892	$2,085	$142	$174
Interest cost	5,368	5,430	1,585	1,520
Expected return on assets	(6,155)	(6,702)	—	—
Curtailment gain	—	(750)	—	—
Amortization of prior service cost/(credit)	51	25	(3,366)	(3,366)
Amortization of net actuarial loss	1,687	1,665	1,670	2,217
Net periodic benefit cost	$2,843	$1,753	$31	$545

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. There were no such events in the first nine months of 2019. In 2018, we recorded curtailment gains of $0.5 million in the second quarter and $0.2 million in the third quarter related to restructuring in France.

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 nine 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 $9.0 million in the first nine months of 2018 for severance and outplacement costs for the approximately 50 positions that were terminated under this plan. In the first nine months of 2019, restructuring charges were $0.3 million. Since 2017, we have recorded $12.0 million of restructuring charges related to this action. As a result of this action, the Company recorded a pension plan curtailment gain of $0.7 million in 2018 which is recorded in Other (income)/expense.

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

AEC restructuring charges in the third quarter of 2018 were principally related to the discontinuation of certain manufacturing processes in Salt Lake City, resulting in a non-cash restructuring charge of $1.7 million, and an additional $0.2 million for severance.

Index

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

	Three months ended September 30,		Nine months ended September 30,
(in thousands)	2019	2018	2019	2018
Machine Clothing	$(211)	$370	$1,125	$10,522
Albany Engineered Composites	(33)	2,189	18	2,968
Corporate expenses	—	(7)	(4)	224
Total	$(244)	$2,552	$1,139	$13,714

Nine months ended September 30, 2019 (in thousands)	Total restructuring costs incurred	Termination and other costs	Impairment of assets	Impairment of intangible assets
Machine Clothing	$1,125	$1,081	$44	$—
Albany Engineered Composites	18	18	—	—
Corporate expenses	(4)	(4)	—	—
Total	$1,139	$1,095	$44	$—

Nine months ended September 30, 2018 (in thousands)	Total restructuring costs incurred	Termination and other costs	Impairment of assets	Impairment of intangible assets
Machine Clothing	$10,522	$11,128	$144	$(750)
Albany Engineered Composites	2,968	1,206	1,762	—
Corporate expenses	224	224	—	—
Total	$13,714	$12,558	$1,906	$(750)

We expect that approximately $0.4 million of Accrued liabilities for restructuring at September 30, 2019 will be paid within one year and approximately $1.7 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	September 30, 2019
Total termination and other costs	$5,570	$1,095	$(4,195)	$(360)	$2,110

(in thousands)	December 31, 2017	Restructuring charges accrued	Payments	Currency translation/ other	September 30, 2018
Total termination and other costs	$3,326	$12,558	$(9,153)	$(379)	$6,352

Index

6. Other (Income)/Expense, net

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

	Three months ended September 30,		Nine months ended September 30,
(in thousands)	2019	2018	2019	2018
Currency transaction (gains)/losses	$(2,028)	$(3,611)	$(3,724)	$(2,930)
Bank fees and amortization of debt issuance costs	81	100	262	303
Pension curtailment gain	—	(232)	—	(750)
Components of net periodic pension and postretirement cost other than service	278	264	840	789
Other	41	328	716	1,615
Total	$(1,628)	$(3,151)	$(1,906)	$973

7. Income Taxes

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

	Three months ended September 30,		Nine months ended September 30,
(in thousands, except percentages)	2019	2018	2019	2018
Income tax based on income from continuing operations, at estimated tax rates of 27.5% and 29.7%, respectively	$14,662	$11,691	$38,256	$25,970
Effect of change in estimated tax rate	(692)	(191)	—	—
Income tax before discrete items	13,970	11,500	38,256	25,970

Discrete tax expense:

Exercise of U.S. stock options	(55)	(29)	(111)	(155)
Impact of mandatory repatriation	—	—	—	(1,099)
Adjustments to prior period tax liabilities	(160)	(7)	187	(259)
Provision for/resolution of tax audits and contingencies, net	(558)	(168)	(2,785)	2,280
Adjustment related to prior period change in opening valuation allowance	—	63	(1,366)	(4,923)
Change in valuation allowances	(11)	—	830	—
Other	8	—	64	(124)
Total income tax expense	$13,194	$11,359	$35,075	$21,690

The third-quarter estimated annual effective tax rate on continuing operations was 27.5 percent in 2019, compared to 29.7 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 $170.4 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 $4.0 million and state income taxes of $3.8 million which have already been recorded.

Index

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 Canada and Italy.

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.

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. As of June 30, 2019, the Company determined that a valuation allowance of $0.8 million was necessary for one of its Mexico entities. Therefore, the Company booked an expense of $0.8 million in the second quarter of 2019.

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.

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 September 30,		Nine months ended September 30,
(in thousands, except market price and earnings per share)	2019	2018	2019	2018
Net income attributable to the Company	$40,009	$27,736	$103,253	$65,300
Weighted average number of shares:
Weighted average number of shares used in calculating basic net income per share	32,306	32,264	32,293	32,247
Effect of dilutive stock-based compensation plans:
Stock options	11	16	12	16
Weighted average number of shares used in calculating diluted net income per share	32,317	32,280	32,305	32,263
Average market price of common stock used for calculation of dilutive shares	$82.99	$72.30	$76.45	$66.01

Net income attributable to the Company per share:
Basic	$1.24	$0.86	$3.20	$2.02
Diluted	$1.24	$0.86	$3.20	$2.02

9. Accumulated Other Comprehensive Income (AOCI)

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

(in thousands)	Translation adjustments	Pension and postretirement 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	(23,177)	280	(8,037)	(30,934)
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax	—	—	(832)	(832)
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax	—	29	—	29