UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended: December 31 , 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from __________ to __________.
Commission file number: 1-10026
______________________________________________________________
____________________________________________________________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices)
(IRS Employer
Identification No.)
(Zip Code)
Registrant’s telephone number, including area code 603 -330-5850
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
The New York Stock Exchange ( | ||||||||
The New York Stock Exchange ( | ||||||||
| Securities registered pursuant to Section 12(g) of the Act: | None | |||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2022, the last business day of the registrant’s most recently completed second quarter, computed by reference to the price at which Common Stock was last sold on such a date, was $2.4 billion.
The registrant had 31.1 million shares of Class A Common Stock and no shares of Class B Common Stock outstanding as of February 17, 2023.
| DOCUMENTS INCORPORATED BY REFERENCE | PART | ||||
| III | |||||
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TABLE OF CONTENTS
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Forward-Looking Statements
This annual report and the documents incorporated or deemed to be incorporated by reference in this annual report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “may,” “will,” “should,” and variations of such words or similar expressions are intended, but are not the exclusive means, to identify forward-looking statements. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.
There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:
•Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including continuation of COVID-19 pandemic effects for an extended period of time;
•Across the entire Company, increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures; these challenges have only increased as a result of the ongoing Russia-Ukraine war
•In the Machine Clothing segment, greater than anticipated declines in the demand for publication grades of paper, or lower than anticipated growth in other paper grades;
•In the Albany Engineered Composites segment, longer-than-expected timeframe for the aerospace industry to utilize existing inventories, and unanticipated reductions in demand, delays, technical difficulties or cancellations in aerospace programs that are expected to generate revenue and drive long-term growth;
•Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; and
•Other risks and uncertainties detailed in this report and other periodic reports.
Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” as well as in Item 1A - “Risk Factors.” Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this annual report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this annual report to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.
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PART I
Item 1. Business
Albany International Corp. (the Registrant, the Company, we, us, or our) and its subsidiaries are engaged in two business segments.
The Machine Clothing (“MC”) segment supplies consumable permeable and impermeable belts used in the manufacture of paper, paperboard, tissue and towel, pulp, nonwovens, fiber cement and several other industrial applications. Within the pulp and paper industry these belts are referred to as “machine clothing” or “paper machine clothing.” In other industries we serve the products we produce are generally referred to as “processing belts.”
We design, manufacture, and market paper machine clothing for each section of the paper machine and for every grade of paper. We manufacture and sell approximately twice as much paper machine clothing worldwide than any other company. Paper machine clothing products are customized, consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. The design and material composition of paper machine clothing can have a considerable effect on the quality of paper products produced and a meaningful effect on the energy and resource efficiency of the paper machines on which it is used. Principal paper machine clothing products include forming, pressing, and drying fabrics, and process belts. A forming fabric assists in paper sheet formation and conveys the very wet sheet through the forming section. Pressing fabrics are designed to carry the sheet through the press section, where water is pressed from the sheet as it passes through the press nip. In the drying section, drying fabrics manage air movement and hold the sheet against heated cylinders to enhance drying to a final moisture content between 4% to 9%, depending on the grade.
Process belts are used in the press section to increase dryness and enhance sheet properties, as well as in other sections of the machine to improve runnability and enhance sheet qualities.
The MC segment also supplies engineered processing belts used in the manufacturing process in the pulp, corrugator, nonwovens, fiber cement, building products, and textile industries.
The MC segment sells its products directly to customer end-users in countries across the globe. MC products, manufacturing processes, and distribution channels are substantially the same in each region of the world in which we operate. The sales of paper machine clothing forming, pressing, and drying fabrics, individually and in the aggregate, accounted for more than 10 percent of our consolidated Net sales during one or more of the last three years. No individual customer accounted for as much as 10 percent of MC segment Net sales in any of the periods presented. A majority of MC segment Net sales in the year ended December 31, 2022 were for use in the production of the growing grades of tissue, containerboard, other paper categories, and other engineered fabrics, while less than 20% of MC segment Net sales were for the production of the declining newsprint and printing and writing papers categories.
The Albany Engineered Composites (“AEC”) segment, provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. The segment includes Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group ("SAFRAN"), owns a 10 percent noncontrolling interest. AEC, through ASC, is the exclusive supplier to the LEAP program of advanced composite fan blades and fan cases under a long-term supply contract. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircrafts. AEC’s largest aerospace customer is SAFRAN and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net sales in 2022. Other significant AEC programs include the production of structures and parts for the Sikorsky CH-53K helicopter, F-35 fighter jet, Joint Air-to-Surface Standoff Missile ("JASSM"), and Boeing 787 platforms. AEC also supplies vacuum waste tanks for most of the Boeing 7X7 aircraft, as well as the fan case for the GE9X engine. In 2022, approximately 46% of the AEC segment’s sales were related to U.S. government contracts or programs.
See “Business Environment Overview and Trends” under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of general segment developments in recent years.
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Following is a table of Net sales by segment for 2022, 2021, and 2020.
(in thousands) | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 609,461 | $ | 619,015 | $ | 572,955 | ||||||||||||||
Albany Engineered Composites | 425,426 | 310,225 | 327,655 | |||||||||||||||||
Consolidated total | $ | 1,034,887 | $ | 929,240 | $ | 900,610 | ||||||||||||||
The table setting forth certain sales, operating income, and balance sheet data that appears in Note 3, is included in “Reportable Segments and Geographic Data,” of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.
International Operations
Our Machine Clothing business segment maintains manufacturing facilities in Brazil, Canada, China, France, Italy, Mexico, South Korea, Sweden, the United Kingdom, and the United States. MC's global manufacturing footprint is designed to most efficiently meet regional customer requirements. Our AEC business segment maintains manufacturing facilities in the United States, France, Mexico, and Germany to meet customer demand in those regions.
Our global presence subjects us to certain risks, including tariffs and other restrictions on trade, and controls on foreign exchange and the repatriation of funds. While the direct impact of recent developments in global trade and tariff policy has not been significant, there is risk that the impact of such developments on companies in our supply chain will be reflected in higher costs from affected suppliers. We have a cash repatriation strategy that targets a certain amount of foreign current year earnings that are not indefinitely reinvested. Changes in the trade or regulatory compliance in any country that we have significant cash balances could make it difficult to repatriate foreign earnings cost-effectively in the future.
Effect of Global Macroeconomic and Political Climate
The war between Russia and Ukraine is affecting the economic and global financial markets and exacerbating ongoing economic challenges caused by impacts of the ongoing COVID-19 pandemic, including rising inflation and global supply chain disruptions.
Our MC segment has historically generated approximately 2% of its annual net sales from customers in Russia and Ukraine. In addition, a subsidiary within our Machine Clothing segment has been a partner in a joint venture (“JV”) that supplies paper machine clothing products to local papermakers in Russia. In March 2022, we made the decision to cease doing business in Russia, including giving notice to our JV partner of our intent to exit the venture. As a result, we recognized $1.5 million expense in cost of goods sold and in Selling, General, and Administrative expense, representing reserves against the risk of obsolescence of certain inventory destined for Russian customers and uncollectible receivables from Russian customers, respectively. In the first quarter of 2022, we also wrote down the net book value of our investment in the aforementioned JV to reflect our intent to exit such venture, resulting in $0.8 million impairment loss included in Other (income)/expense, net.
Our cessation of doing business in Russia resulted in a reduction of approximately $10 million in annual net sales in the MC segment during 2022.
During 2022, our segments saw higher input costs due to increased energy costs, tight supply market, and global logistics challenges. Our MC segment experienced higher energy prices, higher labor costs, and increased raw material prices. We continued to identify alternatives to secure materials in the face of intense supply constraints. Logistics costs have begun to stabilize compared to the same period last year, though they remained higher than pre-pandemic levels.
We anticipate inflationary pressure and energy cost escalation to be a primary input cost pressure in the near term.
The ultimate financial impact due to the aforementioned global macroeconomic conditions and political climate is difficult to predict. During 2022, MC segment input costs increased approximately $10 million as a result of these factors, or an unfavorable impact to the segment gross margin of approximately 140 basis points for the year.
Our Albany Engineered Composites segment does not have significant direct exposure in Russia. However, it has not been immune from supply chain disruptions. Increasing fuel prices coupled with higher demand has resulted in increased freight costs during the quarter, along with ongoing logistic constraints, higher labor costs, and increases in raw material prices. Due to the nature of AEC’s contracts with its customers, we currently anticipate passing through a portion of such cost increases to the customers.
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Until the effects of the macroeconomic conditions and political climate on global markets subside, there can be no assurance that our input costs will not continue to rise beyond our current estimate, thus unfavorably impacting our future results of operations, financial position and liquidity.
Research and Development and Technology
We invest in research, new product development, and technical analysis with the objective of maintaining our technological leadership in each business segment. While much of our research activity supports existing products, we also engage in significant research and development activities for new technology platforms, products and product enhancements.
MC segment products are custom-designed for each user, depending on the type, size, and speed of the machine, and the products being produced. Product design is also a function of the machine section, the grade of product being produced, and the quality of the stock used. Technical expertise, judgment, and experience are critical in designing the appropriate clothing for each machine, position, and application. As a result, many employees in sales and technical functions have engineering degrees, paper mill experience, or other manufacturing experience in the markets in which they operate. Our market leadership position reflects our commitment to technological innovation. This innovation has resulted in new MC products and/or enhancements across all of our product lines.
Albany Engineered Composites designs, develops and manufactures advanced composite parts for complex aerospace applications, using a range of core technologies, including its proprietary 3D-woven reinforced composites technology, traditional 2D laminated composite structures, automated material placement, filament winding, through-thickness reinforcement, braiding, and thermoplastic pultrusion.
In addition to continuous significant investment in core research and development activities in pursuit of new proprietary products and manufacturing processes, experienced research and development employees in each business segment also work collaboratively with customers, OEMs and suppliers on targeted development efforts to introduce new products and applications in their respective markets.
Company-funded research expenses totaled $31.4 million in 2022, $29.6 million in 2021, and $25.8 million in 2020. In 2022, these costs were 3.0 percent of total Company Net sales, including $15.4 million, or 3.6 percent of Net sales, in our AEC segment. Research and development in the AEC segment includes both Company-sponsored and customer-funded activities. Some customer funded research and development may be on a cost sharing basis, in which case, amounts charged to the collaborating entity are credited against research and development costs. For customer-funded research and development in which we anticipate funding to exceed expenses, we include amounts charged to the customer in Net sales. Cost of sales associated with customer-funded research was $5.2 million in 2022, $5.2 million in 2021, and $5.1 million in 2020.
We have developed, and continue to develop, proprietary intellectual property germane to the industries we serve. Our intellectual property takes many forms, including patents, trademarks, trade names and domains, and trade secrets. Our trade secrets include, among other things, manufacturing know-how and unique processes and equipment. Because intellectual property in the form of patents is published, we often forgo patent protection and preserve the intellectual property as trade secrets. We aggressively protect our proprietary intellectual property, pursuing patent protection when appropriate. Our active portfolio currently contains over 2,300 patents, and approximately 160 new patents are typically granted each year. While we consider our total portfolio of intellectual property, including our patents, to be an important competitive advantage, we do not believe that any single patent is critical to the continuation of our business. All brand names and product names are trade names of Albany International Corp. or its subsidiaries. We have from time to time licensed some of our patents and/or know-how to one or more competitors, and have been licensed under some competitors’ patents, in each case mainly to enhance customer acceptance of new products. The revenue from such licenses is less than 1 percent of consolidated net sales.
Raw Materials
Primary raw materials for our MC products are polymer monofilaments and fibers, which have generally been available from a number of suppliers. In addition, we manufacture polymer monofilaments, a basic raw material for all types of machine clothing, at our facility in Homer, New York, which supplies approximately 24 percent of our worldwide monofilament requirements. In the AEC segment, the primary raw materials are carbon fiber and resin. While there are a number of potential suppliers of carbon fiber and other raw materials used by AEC, the use of certain suppliers may be mandated by customer agreements, and alternative suppliers would be subject to material
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qualification or other requirements that may preclude or delay their availability. In the case of mandated suppliers, AEC endeavors to enter into long-term supply agreements to help mitigate price and availability risks. Currently, the primary raw materials used in each segment are derived from petroleum, and are therefore sensitive to changes in the price of petroleum and petroleum intermediates.
Competition
In the paper machine clothing market, we believe that we had a worldwide market share of approximately 30 percent in 2022.
Price and technology are the primary means of competitive differentiation in the industry. Albany’s Machine Clothing product portfolio is broad and deep, with products for every part of the machine and a wide range of machine types and paper grades. The Company’s research and development team works closely with the sales and technical organization to develop new products to meet changes in customer needs, and also pursues targeted joint development activities with customers and equipment manufacturers to create new products. Albany’s experienced sales and technical team members – many of whom have worked in the industries that we serve - work closely with each customer to acquire deep understanding of the customer’s combination of raw materials, manufacturing equipment, manufacturing processes, and paper, pulp, nonwovens or other product being produced – a combination that is unique to each customer, plant and machine. This experience and knowledge, combined with knowledge of and experience with the Company’s own extensive product portfolio, allows the sales and technical teams to ensure that the appropriate machine clothing products are being supplied for each part of the machine, to customize those products as needed for best performance, and to continuously propose new products that offer each customer the possibility of even better performance and increased savings. Our paper machine clothing solutions enable our customers to reduce energy consumption, improve resource efficiency, and help maintain and improve water quality. These efforts – which effectively integrate the Company’s experience and technological expertise into each product we sell – are reflected in the Company’s strong competitive position in the marketplace. Some of the Company’s paper machine clothing competitors also supply paper machines, papermaking equipment, and aftermarket parts and services, and often bundle clothing with original or rebuilt machines and/or aftermarket services.
The primary competitive factors in the markets in which our Albany Engineered Composites segment competes are product performance, delivery performance, quality, and price. Achieving lower weight without sacrificing strength is the key to improving fuel efficiency, which helps reduce the carbon footprint of global aviation, and is a critical performance requirement in the aerospace industry. Our broad array of capabilities in composites enables us to offer customers the opportunity to displace metal components and, in some cases, conventional composites with lower-weight, high-strength, and potentially high-temperature resistant composites. The dominant competitive factor is the relative importance the customer places on these performance benefits, which include fuel savings/ emissions reductions due to lower weight, against the possible cost advantage of more traditional metal and composite components.
Human Capital Resources
Albany International recognizes that its long, successful history and future opportunities are directly linked to dedicated, engaged and diverse employees that serve the Company in all business operations. Albany currently employs approximately 4,100 people, with significant operations in North America, South America, Europe and Asia. Wages and benefits are competitive with those of other manufacturers in the geographic areas in which our facilities are located. A number of hourly employees outside of the United States are members of various unions. In general, we consider our relations with employees to be excellent. Employees participate in regular training programs appropriate for their responsibility and extensive optional training programs have been developed for those who seek professional and personal growth opportunities. All employees are required to participate in safety training on a regular basis. We have systematically and continuously reduced our Total Recordable Incident Rate (TRIR) by approximately 65% since 2019 to 0.48 in 2022.
The Company’s Executive Vice President- Human Resources and Chief Human Resources Officer meets regularly with the Chief Executive Officer to align Human Capital strategy, plan and initiatives with business strategy and goals. Albany’s Human Capital Resources plan ensures that we provide a rewarding employee experience across the company. We continuously review our Human Capital Resources metrics, including safety metrics and action plans, to promote an emotionally and physically safe and inclusive working environment.
Our Diversity, Equity and Inclusion (DE&I) Council develops a holistic and actionable DE&I strategy that seeks diversity, nurtures inclusion, amplifies innovation and empowers champions. Our hiring strategy recruits candidates from a broad range of hiring sources that target people with diverse backgrounds and skills to fill open positions within
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the Company. Approximately 26% of our global workforce were women in 2022. Our Empowering Women Leaders Network aims to continue increasing representation of women at all levels to contribute to the Company’s business success through relationships, and partnerships.
Executive Officers of the Registrant
The following table sets forth certain information with respect to the executive officers of the Company as of February 24, 2023:
A. William Higgins, 64, President and Chief Executive Officer, joined the Company in 2020. He has served the Company as President and Chief Executive Officer since January 2020. He has been a director of the Company since 2016 and served as Chairman of the Board from February 2019 until January 2020. From 2005 to 2012 he served CIRCOR International, Inc. in a variety of senior organizational positions, including Chief Executive Officer and Chairman. Prior to joining CIRCOR, he held a variety of senior management positions with Honeywell International and AlliedSignal.
Stephen M. Nolan, 53, Chief Financial Officer and Treasurer, joined the Company in 2019. He has served the Company as Chief Financial Officer and Treasurer since April 2019. Prior to joining the Company, he served as Chief Financial Officer of Esterline and previously held the same role at Vista Outdoor, Inc. He previously worked in a number of strategic and operational management roles at ATK, including Senior Vice President for Strategy and Business Development and several business unit leadership positions. Earlier in his career, Mr. Nolan served in corporate development and strategy roles at Raytheon Company and as a strategy consultant at McKinsey & Company.
Daniel A. Halftermeyer, 61, President – Machine Clothing, joined the Company in 1987. He has served the Company as President – Machine Clothing since February 2012. He previously served the Company as President – Paper Machine Clothing and Engineered Fabrics from August 2011 to February 2012, as President – Paper Machine Clothing from January 2010 until August 2011, Group Vice President – Paper Machine Clothing Europe from 2005 to August 2008, Vice President and General Manager – North American Dryer Fabrics from 1997 to March 2005, and Technical Director – Dryer Fabrics from 1993 to 1997. He held various technical and management positions in St. Stephen, South Carolina, and Sélestat, France, from 1987 to 1993.
Greg Harwell, 59, President – Albany Engineered Composites, joined the Company in 2019. He has served the Company as President - Albany Engineered Composites since November 2019. Prior to joining the company, he served as President of Aerostructures for Precision Castparts (PCC) managing all aspects of the organization for the Aerostructures division. He also served as Vice President and General Manager in charge of Global Operations Strategy at Alcoa Fastening Systems and Rings, and before November 2014 was responsible for multiple operations within Alcoa Fastening Systems. From June 2019 until he joined Albany International, Mr. Harwell was a consultant to Arlington Capital Partners, providing M&A advisory services.
Alice McCarvill, 58, Executive Vice President- Human Resources and Chief Human Resources Officer, joined the Company in 2018. She has served the Company as Executive Vice President- Human Resources and Chief Human Resources Officer since February 2019. She joined the Company in March 2018 as Executive Vice President- Human Resources. Prior to 2018 she was Group VP Human Resources for Arconic Engineered Products and Solutions.
Joseph M. Gaug, 59, Vice President- General Counsel and Secretary, joined the Company in 2004. He has served the Company as Vice President- Secretary and General Counsel since May 2020. He previously served as Associate General Counsel from 2004 and as Associate General Counsel and Assistant Secretary from 2006 to May 2020. Prior to 2004 he was a principal at McNamee, Lochner, Titus & Williams, PC.
Robert A. Hansen, 65, Senior Vice President and Chief Technology Officer, joined the Company in 1981. He has served the Company as Senior Vice President and Chief Technology Officer since January 2010. He previously served as Vice President – Corporate Research and Development from April 2006 to January 2010, and Director of Technical and Marketing – Europe Press Fabrics from 2004 to April 2006. From 2000 to 2004, he served as Technical Director – Press Fabrics, Göppingen, Germany. Before 2000, he served the Company in a number of technical management and research and development positions in Europe and the U.S.
Elisabeth Indriani, 47, Vice President – Controller, joined the Company in 2021. Prior to joining the Company, she was the Global Controller at Century Aluminum Company, where she oversaw accounting and financial reporting, led global policy and process transformation initiatives, and was a business partner in financial planning and analysis,
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M&A due diligence, investor relations, treasury, financing and tax structuring transactions. Earlier in her career, Ms. Indriani served as an Audit Senior Manager with Deloitte and Touche LLP – as a member of the Industry Professional Practice Director group, she authored Deloitte interpretive accounting guides and was a frequent speaker at Deloitte accounting and advisory events, in addition to advising clients on the application of accounting standards on complex transactions.
Governance
We are incorporated under the laws of the State of Delaware and are the successor to a New York corporation originally incorporated in 1895, which was merged into the company in August 1987 solely for the purpose of changing the domicile of the corporation. References to the Company that relate to any time prior to the August 1987 merger should be understood to refer to the predecessor New York corporation.
We embrace uncompromising honesty and behave ethically and fairly. We are committed to following the laws, regulations, standards, and ethical practices everywhere we do business. Ethics and compliance play an integral part in our decision making and business operations. Our Corporate Governance Guidelines, Business Ethics Policy, and Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and Controller, and the charters of the Audit, Compensation, and Governance Committees of the Board of Directors are available at the Corporate Governance section of our website (www.albint.com).
Data security is a top priority at the Company. To protect our Company and customer data, we employ industry best practices and adhere to the CIS 20 and NIST SP 800-171 cyber security frameworks. Our Data Security strategy is overseen by the Audit Committee of our Board of Directors, regularly reviewed at the executive level, directed by our Chief Information Officer, and managed by our Enterprise Cyber Security (ECS) team. Information on our approach to data security is available in the Sustainability section of our website (www.albint.com).
Our current reports on Form 8-K, quarterly reports on Form 10-Q, and annual reports on Form 10-K are electronically filed with the Securities and Exchange Commission (the “SEC”), and all such reports and amendments to such reports filed subsequent to November 15, 2002, have been and will be made available, free of charge, through our website (www.albint.com) as soon as reasonably practicable after such filing. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reading Room at 100 F Street, N.E., Room 1580, Washington, D.C. The public may obtain information on the operation of the Public Reading Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy, information statements, and other information regarding issuers that file electronically with the SEC.
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Item 1A. RISK FACTORS
The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing the Company. This list is not all-inclusive or necessarily in order of importance. If any of the events contemplated by the following risks occur, our business, financial condition, or results of operations could be materially adversely affected. Some of these risks are described below and in the documents incorporated by reference, and investors should take these risks into account when evaluating any investment decision involving the Company.
Risks related to our business and operations
The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events on our business, operating results, financial condition and cash flows are uncertain
The public health crisis caused by the COVID-19 pandemic and the measures being taken by governments, businesses, and the public at large to limit COVID-19's spread has had, and are expected to continue to have, certain negative effects on the markets we serve. These effects include deteriorating general economic conditions in many regions of the world, increased unemployment, decreases in disposable income, decline in consumer confidence, and changes in consumer spending habits. In the U.S. and in several other countries these effects appear to be on the wane. Nevertheless, the evolution of the pandemic, governments’ responses to the pandemic, and individuals’ behavior in response to the pandemic and its effects, in aggregate, continue to impact business conditions in varied and unpredictable ways. Certain adverse impacts specific to the Company include, without limitation:
• During 2022, some employees in various plants contracted the COVID-19 virus, which led to workforce absences of employees that contracted the virus and others that may have been exposed. Highly contagious diseases such as COVID-19 create the risk that we may need to shut down one of our facilities for an extended period of time, which could increase our costs and affect our ability to meet commitments to customers. In 2022, although we did not shut down any of our plants due to COVID-19, production at some plants was affected by government shutdown orders in areas adjacent to those plants. There is no guarantee that future government shutdown orders, or our own future shutdowns, should they occur, will not have a more significant impact on our production.
• Behavioral changes that have occurred during the pandemic have impacted demand for various products that are made with MC fabrics. The above effects could have an adverse impact on demand for publication paper grades, and perhaps other grades of paper, including without limitation packaging paper grades, as well as on demand for non-woven fabrics and fiber cement products used in the construction industry; such impacts would in turn adversely impact demand for the MC products used to manufacture such paper grades or building products. A decline in revenues would lead to lower gross profit on those products and the possibility of unabsorbed fixed manufacturing costs.
• The Albany Engineered Composites segment generates a significant portion of its revenue from commercial aerospace programs and contracts for the U.S. Department of Defense. The COVID-19 pandemic has significantly impacted passenger air travel which, in turn, has impacted and is likely to continue to impact the commercial aerospace programs that provide a source of revenue for the Company. Such programs could be delayed or canceled which, in addition to a loss of revenue and gross profit, could lead to write-offs for Company investments for those programs. The pandemic has resulted in significant costs for the U.S. government, which could lead to program delays or cancellations, and a corresponding decrease in our revenues.
• Disruptions in supply chains have placed constraints on our ability to source key raw materials and services which could impact our ability to deliver products to customers as scheduled. Additionally, manufacturing or delivery costs could increase.
• While we do not anticipate material impairments on our assets as a result of COVID-19, changes in our expectations for net sales, earnings potential and cash flows associated with our intangible assets and goodwill that fall below our current projections could result in such assets being impaired.
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A number of industry factors have had, and in future periods could have, an adverse impact on sales, profitability and cash flow in the Company’s MC and AEC segments
Significant consolidation and rationalization in the paper industry in recent years have reduced global consumption of paper machine clothing in certain markets and for certain grades. Developments in digital media have adversely affected demand for newsprint and for printing and writing grades of paper, which has had, and is likely to continue to have, an adverse effect on demand for paper machine clothing in those markets. At the same time, technological advances in papermaking, including in paper machine clothing, while contributing to the papermaking efficiency of customers, have in some cases lengthened the useful life of our products and reduced the number of pieces required to produce the same volume of paper. These factors have had, and in the future are likely to have, an adverse effect on paper machine clothing sales.
The market for paper machine clothing in recent years has been characterized by continuous pressure to provide more favorable commercial terms, which has continued to place pressure on our operating results. We expect such pressure to remain intense in all paper machine clothing markets, especially during periods of customer consolidation, plant closures, or when major contracts are being renegotiated. The emergence of Chinese competitors exacerbates this risk.
Similar pressures exist in the markets in which AEC competes. During 2019, Net sales under the LEAP contract exceeded $210 million. Due to the grounding of the Boeing 737 MAX, the destocking of the supply chain and the impact of the pandemic on air travel, Net sales generated by the LEAP contract were approximately $100 milllion in each of 2020 and 2021, before improving to $165 million in 2022.
Additionally, many of AEC’s customers, as well as the companies supplied by our customers are under pressure to achieve acceptable returns on their substantial investments in recent years in new technologies, new programs and new product introductions. This has contributed to a relentless focus on reducing costs, resulting in continuous pressure for cost reduction and pricing improvement throughout the supply chain. The recent wave of consolidation in the aerospace industry could continue or intensify these pressures.
The long-term organic growth prospects of AEC are subject to a number of risks
The prospect of future successful organic growth in AEC depends in large part on its ability to maintain and grow a healthy pipeline of potential new products and applications for its technologies, to transform a sufficient number of those potential opportunities into commercial supply agreements, and to then execute its obligations under such agreements. In addition, existing and future supply agreements, especially for commercial and defense aerospace, are subject to the same curtailment or cancellation risks as the programs they support.
AEC is currently working on a broad portfolio of potential new product applications in the aerospace industry. These development projects may or may not result in commercial supply opportunities. In the event that AEC succeeds in developing products and securing contracts to manufacture and supply them, it will face the same industrialization and manufacturing ramp-up risks that it currently faces in its existing contracts, and AEC may or may not be successful in meeting its obligations under these contracts. Failure to manage these development, commercialization and execution risks could have a material adverse impact on AEC’s prospects for revenue growth.
In addition to dealing with these development and manufacturing execution risks, future AEC growth will likely require increasingly larger amounts of cash to fund the investments in equipment, capital, and development efforts needed to achieve this growth. Until AEC is able to consistently generate cash flows sufficient to fund its existing operations and any future investment to support its growth, it will remain dependent on the MC segment’s ability to generate cash. A significant decline in MC sales, operating income or cash flows could therefore have a material adverse impact on AEC’s growth.
The U.S. Government’s Department of Defense (“DoD”) Cybersecurity Maturity Model Certification (“CMMC”) program introduces new and unique risks for DoD contractors
Under the applicable federal regulations for DoD contractors, AEC is required to comply with the agencies current cybersecurity regulations. In addition to these current regulations, AEC will be required to comply with the new CMMC program requirements on future contracts as they are flowed down from our DoD prime customers in the coming years. Given the current and planned future portfolio of U.S. Government-related business, AEC expects to be required to comply fully with the highest levels of the planned CMMC framework and will potentially be subject to third-party or U.S. Government audit to certify our compliance. The CMMC compliance requirements are complex and the costs are significant. To the extent that AEC is unable to comply with the CMMC or other related cybersecurity
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requirements, AEC may be unable to maintain or grow its business on programs with the DoD and its prime customers.
AEC is subject to significant risks related to the potential manufacture and sale of defective or non-conforming products
AEC manufactures and sells products that are incorporated into commercial and military aircraft. If AEC were to supply products with manufacturing defects, or products that failed to conform to contractual requirements, we could be required to recall and/or replace them, and could also be subject to substantial contractual damages or warranty claims from our customers. AEC could also be subject to product liability claims if such failures were to cause death, injury or losses to third parties, or damage claims resulting from the grounding of aircraft into which such defective or non-conforming products had been incorporated. We are required to meet, and maintain continuous independent certification, to certain international industry standards including AS/EN9100 quality management system standards and Nadcap Special Processes certifications that are designed to assure rigorous quality standards are maintained throughout the aerospace industry supply chain. Additionally, we maintain product liability insurance and other insurance at levels we believe to be prudent and consistent with industry practice to help mitigate these risks, these coverages may not be sufficient to fully cover AEC’s exposure for such risks, which could have a material adverse effect on AEC’s results of operations and cash flows.
Deterioration of global economic conditions could have an adverse impact on the Company’s business and results of operations
The Company identifies in this section a number of risks, the effects of which may be exacerbated by an unfavorable economic climate. For example, a recession could lead to lower consumption in all paper grades including tissue and packaging, which would not only reduce consumption of paper machine clothing but could also increase the risk of greater price competition in the machine clothing industry.
Similarly, in the Company’s AEC segment, a decline in global or regional economic conditions could result in lower orders for aircraft or aircraft engines, or the cancellation of existing orders, which would in turn result in reduced demand for the AEC components utilized on such aircraft or engines. Demand for AEC’s light-weight composite aircraft components is driven by demand for the lighter, more fuel-efficient aircraft engine and other applications into which they are incorporated, such as the CFM LEAP engine. Fuel costs are a significant part of operating costs for airlines and, in many cases, may constitute a carrier’s single largest operating expense. A sustained drop in oil prices, and related decline in the price of jet fuel, could prompt airlines to defer orders or delivery dates for such newer, more fuel-efficient airframes and aircraft engines, as the urgency to reduce fuel consumption may be lessened. In addition, any economic conditions that led to sustained high interest rates could affect the airline’s ability to finance new aircraft and engine orders.
Weak or unstable economic conditions also increase the risk that one or more of our customers could be unable to pay outstanding accounts receivable, whether as the result of bankruptcy or an inability to obtain working capital financing from banks or other lenders. Furthermore, both the MC and AEC business segments manufacture products that are custom-designed for a specific customer application. In the event of a customer liquidity issue, the Company could also be required to write off amounts that are included in Contract assets,net or Inventories. In the case of AEC, such write-offs could also include investments in equipment, tooling, and non-recurring engineering, some of which could be significant depending on the program.
The Company continues to experience increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures
The Company is a significant user of raw materials that are based on petroleum or petroleum derivatives. Increases in the prices of petroleum or petroleum derivatives, particularly in regions that are experiencing higher levels of inflation, could increase our costs, and we may not be able to fully offset the effects through price increases, productivity improvements, and cost-reduction programs.
There is a limited number of suppliers of polymer fiber and monofilaments, key raw materials used in the manufacture of machine clothing, and of carbon fiber and carbon resin, key raw materials used by AEC. In addition, there are a limited number of suppliers of some of the equipment used in each of the MC and AEC segments. The risks associated with limited suppliers increased as a result of the COVID-19 pandemic, which has put pressure on the supply chain in general, and transportation companies that deliver raw materials to us and our products to customers, in particular. While we have been able to meet our raw material and equipment needs, the limited number
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of suppliers of these items creates the potential for disruptions in supply. AEC currently relies on single suppliers under contracts they have with SAFRAN to meet the carbon fiber and carbon resin requirements for the LEAP program. Lack of supply, delivery delays, or quality issues relating to supplied raw materials or for our key manufacturing equipment could harm our production capacity. Such could require the Company to attempt to qualify one or more additional suppliers, which could be a lengthy, expensive and uncertain process. These disruptions could make it difficult to supply our customers with products on time, which could have a negative impact on our business, financial condition, and results of operations.
The Company also relies on the labor market in many regions of the world to meet our operational requirements, advance our technology and differentiate products. Low rates of unemployment in key geographic areas in which the Company operates can lead to high rates of turnover and loss of critical talent, which could in turn lead to higher labor costs.
Our ability to attract and retain business and employees may depend on our reputation in the marketplace
We believe our brand names and our reputation are important corporate assets that help distinguish our products and services from those of our competitors and also contribute to our efforts to recruit and retain talented employees. However, our reputation is susceptible to material damage by events such as disputes with customers or competitors, cybersecurity incidents or service outages, internal control deficiencies, delivery failures, compliance violations, government investigations or legal proceedings. We may also experience reputational damage from employees, advocacy groups, regulators, investors and other stakeholders that disagree with the way we conduct our business. Similarly, our reputation could be damaged by actions or statements by current or former customers, suppliers, employees, competitors, joint venture partners, adversaries in legal proceedings, legislators or government regulators, as well as members of the investment community or the media, including social media influencers.
Our brand and reputation are also associated with our public commitments to various corporate environmental, social and governance (“ESG”) initiatives, including our goals for sustainability and inclusion and diversity. Our failure to achieve our commitments could harm our reputation and adversely affect our relationships with customers and suppliers or our talent recruitment and retention efforts. In addition, positions we take or do not take on social issues may be unpopular with some of our employees or with our customers or potential customers, which may in the future impact our ability to attract or retain employees or customers. We also may choose not to conduct business with potential customers or suppliers or discontinue or not expand business with existing customers due to these positions.
There is a risk that negative or inaccurate information about the Company, even if based on rumor or misunderstanding, could adversely affect our business. Damage to our reputation could be difficult, expensive and time-consuming to repair, could make potential or existing customers reluctant to select us for new opportunities or could negatively impact our relationships with existing customers and suppliers, resulting in a loss of business, and could adversely affect our talent recruitment and retention efforts. Damage to our reputation could also reduce investor confidence in us, materially adversely affecting our share price.
Some of the Company’s competitors in the MC segment have the capability to make and sell paper machines and papermaking equipment as well as other engineered fabrics
Although customers historically have tended to view the purchase of paper machine clothing and the purchase of paper machines as separate purchasing decisions, the ability to bundle fabrics with new machines and after-market services could provide an advantage to our competitors. This underscores the importance of our ability to maintain the technological competitiveness and value of our products, and a failure to do so could have a material adverse effect on our business, financial condition, and results of operations.
Moreover, we cannot predict how the nature of competition in this segment may continue to evolve as a result of future consolidation among our competitors, or consolidation involving our competitors and other suppliers to our customers.
Conditions in the paper industry have required, and could further require, the Company to reorganize its operations, which could result in significant expense and could pose risks to the Company’s operations
In the recent past, we engaged in significant restructuring that included the closing of manufacturing operations. These restructuring activities were intended to match manufacturing capacity to shifting global demand, and also to improve the efficiency of manufacturing and administrative processes. Future shifting of customer demand, the need to reduce costs, or other factors could cause us to determine in the future that additional restructuring steps are required. Restructuring involves risks such as employee work stoppages, slowdowns, or strikes, which can threaten
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uninterrupted production, maintenance of high product quality, meeting of customers’ delivery deadlines, and maintenance of administrative processes. Increases in output in remaining manufacturing operations can likewise impose stress on these remaining facilities as they undertake the manufacture of greater volume and, in some cases, a greater variety of products. Competitors can be quick to attempt to exploit these situations. Although we plan each step of the process carefully, and work to reassure customers who could be affected that their requirements will continue to be met, we could lose customers and associated revenues if we fail to execute properly.
Natural disasters at one or more of our facilities could make it difficult for us to meet our supply obligations to our customers
AEC’s production of LEAP engine components is currently located in three facilities. A natural disaster at any of these locations could have a significant adverse effect on AEC’s ability to timely satisfy orders for LEAP components. Production of almost all of AEC’s other legacy and growth programs – including components for the F-35, fuselage components for the Boeing 787, components for the CH-53K helicopter, and missile bodies for Lockheed Martin’s JASSM air-to-surface missiles – is located primarily in facilities in Salt Lake City, Utah or Boerne, Texas.
Significant consolidation of manufacturing operations in our MC segment over the past decade has reduced the number of facilities available to produce our products, and increased utilization significantly at remaining facilities. Not all product lines are produced at, or capable of being produced at, all facilities. We have Machine Clothing facilities located near Mexico City, which has been identified as an area vulnerable to flood, storm surge and earthquake risks, and in the Pearl River Delta area of China, which has been identified as vulnerable to flood, storm and storm surge risks.
A significant interruption in the operation of any one or more of our plants, whether as the result of a natural disaster or other causes, could significantly impair our ability to timely meet our supply obligations to customers being supplied from an affected facility. While the occurrence of a natural disaster or other business interruption event in an area where we have a facility may not result in any direct damage to the facility itself, it may cause disruptions in local transportation and public utilities on which such locations are reliant, and may also hinder the ability of affected employees to report for work. Although we carry property and business interruption insurance to help mitigate the risk of property loss or business interruption that could result from the occurrence of such events, such coverage may not be adequate to compensate us for all loss or damage that we may incur.
The Company’s insurance coverage may be inadequate to cover other significant risk exposures
See "The Company is subject to legal proceedings and legal compliance risks, and has been named as defendant in a large number of suits relating to the actual or alleged exposure to asbestos-containing products." In addition to asbestos-related claims, the Company may be exposed to other liabilities related to the products and services we provide. AEC is engaged in designing, developing, and manufacturing components for commercial jet aircraft and defense and technology systems and products. We expect this portion of the business to grow in future periods. Although we maintain insurance for the risks associated with this business, there can be no assurance that the amount of our insurance coverage will be adequate to cover all claims or liabilities. In addition, there can be no assurance that insurance coverage will continue to be available to us in the future at a cost that is acceptable. Any material liability not covered by insurance could have a material adverse effect on our business, financial condition, and results of operations.
The Company has significant manufacturing operations outside of the U.S., which could involve many uncertainties
We currently have manufacturing facilities outside the U.S. In 2022, 43% percent of consolidated Net sales were generated by our non-U.S. subsidiaries. Operations outside of the U.S. are subject to a number of risks and uncertainties, including: governments may impose limitations on our ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments from our non-U.S. operations, or the amount of any such taxes may increase; an outbreak or escalation of any insurrection or armed conflict may occur; governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business. In addition, emerging markets pose other uncertainties, including the protection of our intellectual property, pressure on the pricing of our products, and risks of political instability. The occurrence of any of these conditions could disrupt our business or prevent us from conducting business in particular countries or regions of the world.
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The military invasion of Ukraine by Russia, and the ensuing sanctions are likely to continue to have an impact on our business. We have already stopped shipping our products to Russia and are in the process of winding down a small joint venture in that country which supplied dryer fabrics to local papermakers, resulting in lost sales and possible future write-offs. However, we also expect that there could be further indirect impacts. For instance, the conflict has already caused disruption in the availability of shipping options between Asia and Europe. Supply chain disruptions could make it more difficult to find favorable pricing and reliable sources for the raw materials we need, putting upward pressure on our costs and increasing the risk that we may be unable to acquire the materials or services we need to continue to make and deliver certain products. Moreover, these same pressures could hinder our customers’ ability to source materials needed for their own manufacturing efforts, thereby reducing or slowing their demand for our products. There can be no assurance that we will be able to pass through input cost increases to our customers or to fully offset them via operational efficiencies. If we are unsuccessful in managing such cost increases, they could have a material adverse effect on our business, financial position, results of operations, and liquidity.
Geopolitical tensions have heightened elsewhere as well, including between China and Taiwan. MC has significant manufacturing operations in China and vendors that support AEC import significant materials from China, and any escalation in this region could also disrupt our business.
Changes in U.S. trade policy with foreign countries, or other changes in U.S. laws and policies governing foreign trade, as well as any responsive or retaliatory changes in regulations or policies by such countries, could have an adverse impact on our business, either directly or in the form of increased costs due to their impacts on our supply chain. While the direct impact to date of recent developments in global trade and tariff policy has not been significant, there is a risk that the impact of such developments on companies in our supply chain will be reflected in higher costs from affected suppliers.
In addition, our global presence subjects us to certain risks, including controls on foreign exchange and the repatriation of funds. While we have been able to repatriate current earnings in excess of working capital requirements from certain countries in which we operate without substantial governmental restrictions, there can be no assurance that we will be able to cost effectively repatriate foreign earnings in the future.
We might not be successful at acquiring, investing in or integrating businesses, entering into joint ventures or divesting businesses
We have a history of making acquisitions and we expect to opportunistically seek to make acquisitions in the future. We are subject to numerous risks as a result of our acquisition strategy, including, but not limited to, the following:
•We may invest time and capital pursuing acquisitions that do not materialize
•We may incur costs and expenses associated with any unidentified or potential liabilities of the acquired companies
•We may not achieve anticipated revenue and cost benefits from the acquisitions
•We may encounter unforeseen difficulties in integrating the acquired operations into our existing operations
Our past or future acquisitions might not ultimately improve our competitive position and business.
We also periodically evaluate, and have engaged in, the disposition of assets and businesses. Divestitures could involve difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention, the disruption of our business and the potential loss of key employees. After reaching an agreement with a buyer for the disposition of a business, the transaction may be subject to the satisfaction of pre-closing conditions, including obtaining necessary regulatory and government approvals, which, if not satisfied or obtained, may prevent us from completing the transaction. Divestitures may also involve continued financial involvement in or liability with respect to the divested assets and businesses, such as indemnities or other financial obligations, in which the performance of the divested assets or businesses could impact our results of operations. Any divestiture we undertake could adversely affect our results of operations.
Risks related to our contracts
AEC is subject to significant financial risk related to potential quality escapes that could cause customer recalls, or production shortfalls that could cause delays in customer deliveries
AEC manufactures critical aerospace parts and must meet increasingly demanding quality, delivery, and cost targets across a broad spectrum of programs and facilities. AEC’s ability to realize its full financial objectives will depend on how effectively it meets these challenges. Failure to accomplish these customer quality, delivery, and cost
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targets on any key program could result in material losses to the Company and have a material adverse impact on the amount and timing of anticipated AEC revenues, segment operating income, and cash flows, which could in turn have a material adverse impact on our consolidated financial results.
Long-term supply contracts in our Albany Engineered Composites segment pose certain risks
AEC has a number of long-term contracts with fixed pricing, and is likely to enter into similar contracts in the future. While long-term contracts provide an opportunity to realize steady and reliable revenues for extended periods, they pose a number of risks, such as program cancellations, reductions or delays in orders by AEC’s customers under these contracts, the termination of such contracts or orders, or the occurrence of similar events over which AEC has no or limited control.
Accounting for long-term contracts and related assets requires estimates and judgments related to our progress toward completion and the long-term performance on the contract. Significant judgments include potential risks associated with the ability and cost to achieve program schedule, including customer-directed delays or reductions in scheduled deliveries, and technical and other specific contract requirements including customer activity levels and variable consideration based upon that activity. Due to the size and long-term nature of many of AEC contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Management must make assumptions and estimates regarding contract revenue and cost (which may include estimates of variable consideration, including award fees and penalties), including, but not limited to, labor productivity and availability, complexity and scope of the work to be performed, availability and cost of materials, length of time to complete the performance obligation, availability and timing of funding from our customers, as well as overhead cost rates. Because of the significance of management’s judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.
Sales of components for a number of programs that are currently considered to be important to the future revenue-growth of AEC are pursuant to short-term purchase orders for a finite period or number of parts, or short-term supply agreements with terms of one to four years. Such programs include airframe components for the F-35, forward fuselage frames for the Boeing 787, and aft transition assembly including skins and longerons for the CH-53K helicopter. As a result, while AEC reasonably expects to continue as a supplier on these programs as long as it meets its obligations, there can be no assurance that this will be the case, or that, in programs where it is currently a sole supplier, this sole supplier status will continue. Even if AEC’s status as a supplier is extended or renewed, there can be no assurance that such extension or renewal will be on the same or similar commercial or other terms. Any failure by AEC to maintain its current supplier status under these programs, or any material change in their commercial or other terms, could have a material adverse effect on AEC’s future revenues and segment operating income.
AEC derives a significant portion of its revenue from contracts with the U.S. Government's Department of Defense, which are subject to unique risks
The funding of DoD programs is subject to congressional appropriations. Many of the DoD programs in which we participate may last several years, but they are normally funded annually. Changes in military strategy and priorities may affect future opportunities and/or existing programs. Long-term DoD contracts and related orders are subject to cancellation, delay or restructure, if appropriations for subsequent performance periods are not made. The termination or reduction of funding for existing or new DoD programs could result in a material adverse effect on our earnings, cash flow and financial position.
Additionally, our business funded by the U.S. Government is subject to extensive federal and DoD agency acquisition regulations. As a result, specific business systems and processes, as well as our proposed contract costs, are subject to audits by U.S. Government agencies. U.S. Government representatives may audit our compliance with these required federal regulations, and such audits could result in adjustments to allowable contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded. Certain business systems or processes found to be non-compliant to federal and agency regulations could result in a suspension of work until such compliance issues are corrected. If any audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government. Realization of any of these risks could result in a material adverse effect on our earnings, cash flow and financial position.
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See also “The U.S. Government’s Department of Defense Cybersecurity Maturity Model Certification (“CMMC”) program introduces new and unique risks for DoD contractors”
The loss of one or more major customers could have a material adverse effect on sales and profitability
One customer (SAFRAN) accounted for approximately 40 percent of Net sales in the AEC segment in 2022, substantially all of which was under an exclusive long-term supply agreement relating to parts for the LEAP engine. Although we are an exclusive supplier of such parts, our customer is not obligated to purchase any minimum quantity of parts, and cancellation or significant reduction in demand for the LEAP program would have a material adverse impact on AEC’s Net sales and profitability. LEAP engines are currently used on the Boeing 737 MAX, Airbus A320neo and COMAC 919 aircraft. The grounding of the Boeing 737 MAX led to lower deliveries of parts, resulting in lower revenues during 2021 and 2022. While the grounding has now been lifted, the Boeing 737 MAX orders and deliveries have yet to return to pre-grounding levels, which could result in longer than expected return to such levels in the future and in lower LEAP revenues for a longer period.
The LEAP long-term supply agreement contains certain events of default that, if triggered, could result in termination of the agreement by the customer, which would also have a material adverse impact on segment sales and profitability.
A substantial portion of AEC’s non-LEAP revenue in the near term, and revenue growth opportunity in the longer term, is dependent upon a small number of customers and programs. Unlike the 3D-woven composite components supplied by ASC, parts supplied for such non-LEAP programs are capable of being made by a number of other suppliers. Such programs include airframe components for the F-35, forward fuselage frames for the Boeing 787, and sponsons, tail-rotor pylons, horizontal stabilizers and struts for the CH-53K helicopter. Any failure by AEC to maintain its current supplier status under these programs, or any material change in their commercial or other terms, could have a material adverse effect on AEC’s future sales and operating income.
Our top ten customers in the MC segment accounted for a significant portion of our Net sales in 2022. The loss of one or more of these customers, or a significant decrease in the amount of machine clothing they purchase from us, could have a material adverse impact on MC's net sales and profitability. We could also be subject to similar impacts if one or more such customers were to suffer financial difficulties and be unable to pay us for products they have purchased. While we normally enter into long-term supply agreements with significant MC customers, the agreements generally do not obligate the customer to purchase any products from us, and may be terminated by the customer at any time with appropriate notice.
Risks related to information technology and cybersecurity
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our locations around the world and with our employees, customers and suppliers. The failure to prevent attacks on our operational systems or infrastructure could result in disruptions to our businesses, loss or disclosure of regulated data, or the loss or disclosure of confidential and proprietary intellectual property or other assets
As the breadth and complexity of this infrastructure continues to grow, including the increasing reliance on, and use of, mobile technologies and cloud-based services, and as many of our employees continue to work remotely following the coronavirus pandemic, the risk of security incidents and cyberattacks has increased. Cybersecurity threats are constantly expanding and evolving, becoming increasingly sophisticated and complex, increasing the difficulty of detecting and defending against them and maintaining effective security measures and protocols.
Our information technology systems, processes and sites may suffer interruptions or failures which may affect our ability to conduct our business
Our information technology systems may be damaged or cease to function properly due to any number of causes, such as catastrophic events, power outages and security breaches (including destructive malware such as ransomware) resulting in unauthorized access or cyber-attacks. If our business continuity plans, incident response capabilities, and security controls do not function effectively, we may experience partial or complete interruptions in our operations, which may adversely impact our business, financial condition, results of operations and cash flows.
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We face legal, reputational and financial risks from any failure to protect customer and/or Company data from security incidents or cyberattacks
Such incidents could lead to shutdowns or disruptions of or damage to our systems and those of our customers and suppliers, and unauthorized disclosure of sensitive or confidential information, potentially including personal data and proprietary business information. Unauthorized disclosure of, denial of access to, or other incidents involving sensitive or confidential Company, employee, customer or supplier data, whether through systems failure, employee negligence, fraud, misappropriation, or cybersecurity, ransomware or malware attacks, or other intentional or unintentional acts, could damage our reputation and our competitive positioning in the marketplace, disrupt our or our customer’s business, cause us to lose customers and result in significant financial exposure and legal liability.
We are subject to numerous laws and regulations designed to protect this information, such as the European Union’s General Data Protection Regulation (“GDPR”) and the United Kingdom’s GDPR, as well as various other U.S. federal and state laws governing the protection of privacy, health or other personally identifiable information and data privacy and cybersecurity laws in other regions. We are subject to U.S. federal procurement regulations such as the DFARS clause 252.204-7012, based on the NIST 800-171 framework whose goal is protecting controlled unclassified information in non-federal systems and organizations. In 2022 we continued efforts to comply with the U.S. Department of Defense Cybersecurity Maturity Model Certification (CMMC) which will impact us in the coming years as it is incorporated into DFARS 252.204-7012 clauses in our contracts for government programs.
These laws and regulations continue to evolve, are increasing in complexity and number and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and cost for us. Various privacy laws impose compliance obligations regarding the handling of personal data, including the cross-border transfer of data, and significant financial penalties for noncompliance. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to Company, employee, customer or supplier data, or otherwise mismanages or misappropriates that data, we could be subject to significant litigation, monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions. These monetary damages might not be subject to a contractual limit of liability or an exclusion of consequential or indirect damages and could be significant. In addition, our liability insurance, which includes cyber insurance, might not be sufficient in type or amount to cover us against claims related to security incidents, cyberattacks and other related incidents.
Risks related to our financial matters
Fluctuations in currency exchange rates could adversely affect the Company’s business, financial condition, and results of operations
We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. The effect of currency rate changes on gross profit in the MC segment can be difficult to anticipate because we use a global sourcing and manufacturing model. Under this model, while some non-U.S. sales and associated costs are in the same currency, other non-U.S. sales are denominated in currencies other than the currency in which most costs of such sales are incurred. At the same time, the geographic sources of materials purchased (and the currencies in which these purchases are denominated) can vary depending on market forces, and the Company may also shift production of its products between manufacturing locations, which can result in a change in the currency in which certain costs to produce such products are incurred.
Changes in exchange rates can result in revaluation gains and losses that are reflected in our Consolidated Statements of Income. Revaluation gains and losses occur when our business units hold financial assets or liabilities denominated in a currency other than their functional currency. Operating results can also be affected by the translation of sales and costs from each non-U.S. subsidiary’s functional currency to the U.S. dollar.
Changes in the value of foreign currencies relative to the U.S. dollar could impact the reported level, in U.S. dollars, of Net Sales and operating expenses which are denominated in those currencies.
Changes in currency exchange rates could adversely affect the Company’s business, financial condition or results of operations.
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We have a substantial amount of indebtedness. At December 31, 2022, the Company had outstanding long-term debt of $439 million
At December 31, 2022, our leverage ratio (as defined in our primary borrowing agreement) was 1.25, and we had borrowed $439 million under our $700 million revolving credit facility. While we feel that we generate sufficient cash from operations and have sufficient borrowing capacity to make required capital expenditures to maintain and grow our business, any decrease in our cash generation could result in higher leverage. Higher leverage could hinder our ability to make acquisitions, capital expenditures, or other investments in our businesses, pay dividends, or withstand business and economic downturns. Our primary borrowing agreement contains a number of covenants and financial ratios that the Company is required to satisfy. The most restrictive of these covenants pertain to prescribed leverage and interest coverage ratios and asset dispositions. Any breach of any such covenants or restrictions would result in a default under such agreement that would permit the lenders to declare all borrowings under such agreement to be immediately due and payable and, through cross-default provisions, could entitle other lenders to accelerate their loans. In such an event, the Company would need to modify or restructure all or a portion of such indebtedness. Depending on prevailing economic conditions at the time, the Company might find it difficult to modify or restructure the debt on attractive terms, or at all.
We use interest rate swaps to manage the interest cost associated with our borrowings. Borrowings under the revolving credit facility and the interest rate swaps are currently based on LIBOR, which is expected to be phased out and replaced starting in 2024. Future changes in the interest rate benchmark could affect the Company’s cost of borrowing and its cash flows, or the effectiveness of the hedges, which could have an effect on net income.
As of December 31, 2022, we had approximately $261 million of additional borrowing capacity under our $700 million revolving credit facility. Incurrence of additional indebtedness could increase the above-described risks associated with higher leverage. In addition, any such indebtedness could contain terms that are more restrictive than our current facilities.
Significant changes in critical estimates and assumptions related to pension and other postretirement benefit (“OPEB”) costs and liabilities could affect our earnings and pension contributions in future periods
The determination of our pension and other postretirement benefit plans’ expense or income involves significant judgments, specifically related to our discount rate, long-term return on assets, and other actuarial assumptions. We establish our discount rate assumption annually and review whether to change our long-term return on assets assumption annually. These estimates and actuarial assumptions could change significantly as a result to changes in economic, legislative, and/or demographic profiles. Such changes could result in unfavorable changes to our pension and OPEB expense and funded status, and our cash contributions thereof, which could have a negative impact on our results of operations. Further, the difference between actual investment returns and our long-term return on asset assumptions would result in a change to our pension and OPEB expense, funded status, as well as our required contributions to the plans. We manage our plan assets in accordance with our investment management objectives, and they are subject to market volatility and other conditions. Differences may also arise due to changes in regulatory, accounting and other requirements applicable to pension plans.
The Company is exposed to the risk of increased expense in health-care related costs
We are largely self-insured for some employee and business risks, including health care programs in the United States. Losses under all of these programs are accrued based upon estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries and service providers. However, these liabilities are difficult to assess and estimate due to unknown factors, including the severity of an illness and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals to be adequate. The Company also maintains stop-loss insurance policies to protect against catastrophic claims above certain limits. If actual results significantly differ from estimates, our financial condition, results of operations, and cash flows could be materially impacted by losses under these programs, as well as higher stop-loss premiums in future periods.
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Unanticipated changes in tax laws or exposure to additional tax liabilities could affect our future profitability
We are subject to income taxes in both the United States and various non-U.S. jurisdictions. Unanticipated changes in foreign and domestic tax laws, regulations, or policies, or their interpretation and application by regulatory bodies, or exposure to additional tax liabilities could affect our future profitability and cash flows. Our domestic and international tax liabilities are dependent upon the distribution of income among these jurisdictions. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, as well as changes in the overall profitability of the Company, tax legislation, and generally accepted accounting principles.
As of December 31, 2022, we have approximately $50.1 million net operating loss (“NOL”) carryforward in various taxing jurisdictions. Our ability to utilize the NOL carryforward could be adversely impacted by several factors, including but not limited to significant changes to tax legislation and lower than expected future earnings of the Company.
We are subject to tax audits by various tax authorities in many jurisdictions. The open tax years in these jurisdictions range from approximately 2014 to 2022. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. The results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of our tax exposures could materially affect our financial results.
Risks related to our legal and regulatory environment
The Company may fail to adequately protect its proprietary technology, which would allow competitors or others to take advantage of its research and development efforts
Proprietary trade secrets are a source of competitive advantage in each of our segments. If our trade secrets were to become available to competitors, it could have a negative impact on our competitive strength. We employ measures to maintain the confidential nature of these secrets, including maintaining employment and confidentiality agreements; maintaining clear policies intended to protect such trade secrets; educating our employees about such policies; clearly identifying proprietary information subject to such agreements and policies; and vigorously enforcing such agreements and policies. Despite such measures, our employees, consultants, and third parties to whom such information may be disclosed in the ordinary course of our business may breach their obligations not to reveal such information, and any legal remedies available to us may be insufficient to compensate our damages.
The Company is subject to legal proceedings and legal compliance risks
We are subject to a variety of legal proceedings. Litigation is an inherently unpredictable process and unanticipated negative outcomes are always possible. An adverse outcome in any period could have an adverse impact on the Company’s operating results for that period.
We are also subject to a variety of legal compliance risks. While we believe that we have adopted appropriate risk management and compliance programs, the global and diverse nature of our operations means that legal compliance risks will continue to exist and related legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, are likely to arise from time to time. Failure to resolve successfully any legal proceedings related to compliance matters could have an adverse impact on our results in any period.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business
We are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anti corruption, import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, ESG initiatives, anti-competition, anti-money-laundering, data privacy and protection, government compliance, wage-and-hour standards, employment and labor relations and human rights. The global nature of our operations further increases the difficulty of compliance.
Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business could result in significant fines, enforcement actions or criminal sanctions against us and/or our employees, prohibitions on doing business and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our
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customers also could result in liability for significant monetary damages, fines, enforcement actions and/or criminal prosecution or sanctions, unfavorable publicity and other reputational damage and restrictions on our ability to effectively carry out our contractual obligations and thereby expose us to potential claims from our customers. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may not be well developed or provide sufficiently clear guidance and may be insufficient to protect our rights.
In particular, in many parts of the world, including countries in which we operate and/or seek to expand, practices in the local business community might not conform to international business standards and could violate anti corruption laws, or regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010. The Company provides and all employees must participate in regular training activities with respect to the Company's business ethics standards and expectations. Our employees, subcontractors, suppliers, and agents, any companies we may acquire and their employees, subcontractors, suppliers and agents, and other third parties with which we associate, could take actions that violate policies or procedures designed to promote legal and regulatory compliance or applicable anti corruption laws or regulations. Violations of these laws or regulations by us, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether or not we participated or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and suspension or disqualification from work, including U.S. federal contracting, any of which could materially adversely affect our business, including our results of operations and our reputation.
Increasing stakeholder environmental, social and governance (ESG) expectations, physical and transition risks associated with climate change, emerging ESG regulation, contractual requirements, and policy requirements may pose risk to our market outlook, brand and reputation, financial outlook, cost of capital, global supply chain and production continuity, which may impact our ability to achieve long-term business objectives. Changes in environmental and climate change laws or regulations could lead to additional operational restrictions and compliance requirements upon us or our products, require new or additional investment in product designs, result in carbon offset investments or otherwise could negatively impact our business and/or competitive position. Increasing industry performance standards, increasing sustainability disclosure requirements in the U.S. and globally, and requirements on manufacturing and product air pollutant emissions, especially greenhouse gas (GHG) emissions, may result in increased costs or reputational risks and could limit our ability to manufacture and/or market certain of our products at acceptable costs, or at all. Physical impacts of climate change, increasing global chemical restrictions and bans, and water and waste requirements may drive increased costs to us and our suppliers and impact our production continuity and data facilities.
Changes in laws and regulations could also mandate significant and costly changes to the way we conduct our business or could impose additional taxes. Such changes may result in contracts being terminated, greater costs to us, or could have a negative impact on our ability to obtain future work from government customers.
Certain provisions of our Certificate of Incorporation, our Bylaws and Delaware law could hinder, delay or prevent a change in control of us that you might consider favorable, which could also adversely affect the price of our Class A Common Stock
Certain provisions under our Certificate of Incorporation, our Bylaws and Delaware law could discourage, delay or prevent a transaction involving a change in control of the Company, even if doing so would benefit our stockholders. These provisions could delay or prevent a change in control and could limit the price that investors might be willing to pay in the future for shares of our Class A Common Stock.
Our Certificate of Incorporation authorizes our board of directors to issue new series of preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the reaction of the market to the series, the rights or value of our Class A Common Stock could be negatively affected. For example, subject to applicable law, our board of directors could create a series of preferred stock with superior voting rights to our existing common stock. The ability of our board of directors to issue this new series of preferred stock could also prevent or delay a third party from acquiring us, even if doing so would be beneficial to our stockholders.
We may not pay cash dividends on our Common Stock
It is our current practice to pay cash dividends on our common stock. There can be no assurance, however, that we will pay dividends in the future in the amounts that we have in the past, or at all. Our board of directors may change the timing and amount of any future dividend payments or eliminate the payment of future dividends in its sole discretion, without any prior notice to our stockholders. Our ability to pay dividends will depend upon many factors, including our financial position and liquidity, results of operations, legal requirements, restrictions that may be imposed by the terms of our current and future credit facilities and other debt obligations and other factors deemed relevant by
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our board of directors. For example, we have a substantial amount of indebtedness and while we feel that we generate sufficient cash from operations and have sufficient borrowing capacity to make required capital expenditures to maintain and grow our business, any decrease in our cash generation could result in higher leverage. Higher leverage could hinder our ability to make acquisitions, capital expenditures, or other investments in our businesses, pay dividends, or withstand business and economic downturns.
In the future, we may also enter into other credit agreements or other borrowing arrangements or issue debt securities that, in each case, restrict or limit our ability to pay cash dividends on our Common Stock. In addition, since a significant portion of our cash is generated from operations of our subsidiaries, our ability to pay dividends is in part dependent on the ability of our subsidiaries – some of which are located outside of the United States – to make distributions to us. Such distributions will be subject to their operating results, cash requirements and financial condition, as well as our ability to repatriate cash held by non-U.S. subsidiaries. Any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our Common Stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline
The trading market for our Class A Common Stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our Class A Common Stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Class A Common Stock could decrease, which could cause our stock price and trading volume to decline.
Future sales of shares by us or our existing stockholders could cause our stock price to decline
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline or might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of February 17, 2023 we had 31.1 million shares of Class A Common Stock outstanding and no shares of Class B Common Stock outstanding. In addition, shares of Class A Common Stock are issuable upon the exercise of outstanding stock options or the vesting of outstanding equity awards, and certain shares are reserved for future issuance under our equity compensation plans.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our principal manufacturing facilities are located in Brazil, Canada, China, France, Germany, Italy, Mexico, South Korea, Sweden, the United Kingdom, and the United States. The aggregate square footage of our operating facilities in the United States is approximately 2.0 million square feet, of which 1.1 million square feet are owned and 0.9 million square feet are leased. Our facilities located outside the United States comprise approximately 3.5 million square feet, of which 3.0 million square feet are owned and 0.5 million square feet are leased. We consider these facilities to be in good condition and suitable for our purpose. The capacity associated with these facilities is adequate to meet production levels required and anticipated through 2023.
Item 3. LEGAL PROCEEDINGS
The information set forth above is described in Note 21 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.
Item 4. MINE SAFETY DISCLOSURES
None.
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PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
We have two classes of Common Stock, Class A Common Stock and Class B Common Stock, each with a par value of $0.001 and equal liquidation rights. Our Class A Common Stock is principally traded on the New York Stock Exchange under the symbol AIN. According to Broadridge, as of December 31, 2022, there were over 20,000 beneficial owners of our Class A Common Stock, including employees owning shares through our 401(k) defined contribution plan. Our Class B Common Stock does not trade publicly. As of December 31, 2022, there were no outstanding Class B shares. Dividends are paid equally on shares of each class. Our cash dividends, and the high and low prices per share of our Class A Common Stock, were as follows for the periods presented:
Quarter Ended | March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
Cash dividends per share | $ | 0.21 | $ | 0.21 | $ | 0.21 | $ | 0.25 | ||||||||||||||||||
Class A Common Stock prices: | ||||||||||||||||||||||||||
High | $ | 91.25 | $ | 87.91 | $ | 97.20 | $ | 104.34 | ||||||||||||||||||
Low | $ | 80.84 | $ | 75.94 | $ | 77.50 | $ | 81.62 | ||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||
Cash dividends per share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.21 | ||||||||||||||||||
Class A Common Stock prices: | ||||||||||||||||||||||||||
High | $ | 88.01 | $ | 92.26 | $ | 88.88 | $ | 89.92 | ||||||||||||||||||
Low | $ | 69.52 | $ | 81.80 | $ | 75.13 | $ | 79.31 | ||||||||||||||||||
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The graph below matches the cumulative 5-Year total return of holders of Albany International Corp.’s common stock with the cumulative total returns of the Russell 2000 index and a customized peer group of eighteen companies included in the customized peer group which are: Barnes Group Inc, Bwx Technologies Inc, Curtiss-Wright Corp, Enpro Industries Inc, Esco Technologies Inc, Franklin Electric Co Inc, Graco Inc, Heico Corp, Hexcel Corp, Kadant Inc, Kaman Corp, Mercury Systems Inc, Nordson Corp, Spx Technologies Inc, Teledyne Technologies Inc, Trimas Corp, Triumph Group Inc and Woodward Inc. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on December 31, 2017 and tracks it through December 31, 2022.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
*$100 invested on 12/31/17 in stock or index, including reinvestment of dividends.
Copyright© 2023 Russell Investment Group. All rights reserved.
Fiscal year ending December 31.
December 31, | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||
Albany International Corp. | 100.00 | 102.66 | 126.05 | 123.64 | 150.38 | 169.27 | ||||||||||||||||||||||||||||||||
Russell 2000 | 100.00 | 88.99 | 111.70 | 134.00 | 153.85 | 122.41 | ||||||||||||||||||||||||||||||||
Peer Group | 100.00 | 91.25 | 124.78 | 133.75 | 158.91 | 150.66 | ||||||||||||||||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Restrictions on dividends and other distributions are described in Note 17 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.
Disclosures of securities authorized for issuance under equity compensation plans are included under Item 12 of this Form 10-K.
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Issuer Purchases of Equity Securities during the year ended December 31, 2022
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Approx. dollar value of shares that may yet be purchased under the program (in thousands) | ||||||||||
| January 1 to January 31, 2022 | 140,879 | $ | 85.24 | 140,879 | $ | 163,722 | ||||||||
| February 1 to February 28, 2022 | 145,164 | 86.29 | 145,164 | 151,244 | ||||||||||
| March 1 to March 31, 2022 | 228,643 | 85.51 | 228,643 | 131,688 | ||||||||||
| April 1 to April 30, 2022 | 236,091 | 82.21 | 236,091 | 112,418 | ||||||||||
| May 1 to May 31, 2022 | 271,940 | 80.98 | 271,940 | 90,561 | ||||||||||
| June 1 to June 30, 2022 | — | — | — | 90,561 | ||||||||||
| July 1 to July 31, 2022 | — | — | — | 90,561 | ||||||||||
| August 1 to August 31, 2022 | — | — | — | 90,561 | ||||||||||
| September 1 to September 30, 2022 | — | — | — | 90,561 | ||||||||||
| October 1 to October 31, 2022 | — | — | — | 90,561 | ||||||||||
| November 1 to November 30, 2022 | — | — | — | 90,561 | ||||||||||
| December 1 to December 31, 2022 | — | — | — | 90,561 | ||||||||||
| Total | 1,022,717 | 1,022,717 | 90,561 | |||||||||||
In 2021, the Company's Board of Directors authorized the Company to repurchase shares of up to $200 million through open market purchases, privately negotiated transactions or otherwise, and to determine the prices, times and amounts. The program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or terminated at any time at the Company's discretion. The share repurchase program does not have an expiration date. The timing and amount of any share repurchases will be based on the Company’s liquidity, general business and market conditions, debt covenant restrictions and other factors, including alternative investment opportunities and capital structure. In total the Company has repurchased 1,308,003 shares for a total cost of $109.4M, of which 1,022,717 shares were repurchased in 2022 for $85.1 million and 285,286 shares were repurchased in 2021 for $24.3 million.
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Item 6. SELECTED FINANCIAL DATA
The following selected historical financial data have been derived from our Consolidated Financial Statements in Item 8. The data should be read in conjunction with those financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7.
| (in thousands, except per share amounts) | 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||
| Summary of Operations | |||||||||||||||||
| Net sales (3) (4) | $ | 1,034,887 | $ | 929,240 | $ | 900,610 | $ | 1,054,132 | $ | 982,479 | |||||||
| Cost of goods sold (3) (4) (5) | 645,105 | 550,849 | 529,538 | 656,431 | 632,730 | ||||||||||||
| Restructuring and other (6) | 106 | 1,331 | 5,736 | 2,905 | 15,570 | ||||||||||||
| Operating income/(loss) (1) (3) (5) | 181,022 | 178,011 | 166,080 | 193,576 | 137,408 | ||||||||||||
| Interest expense, net | 14,000 | 14,891 | 13,584 | 16,921 | 18,124 | ||||||||||||
| Income from continuing operations | 96,508 | 118,768 | 97,243 | 133,383 | 83,019 | ||||||||||||
| Net income attributable to the Company | 95,762 | 118,478 | 98,589 | 132,398 | 82,891 | ||||||||||||
| Earnings per share attributable to Company Shareholders- Basic | 3.06 | 3.66 | 3.05 | 4.10 | 2.57 | ||||||||||||
| Earnings per share attributable to Company Shareholders- Diluted | 3.04 | 3.65 | 3.05 | 4.10 | 2.57 | ||||||||||||
| Dividends declared per share | 0.88 | 0.81 | 0.77 | 0.73 | 0.69 | ||||||||||||
| Weighted average number of shares outstanding - basic | 31,339 | 32,348 | 32,329 | 32,296 | 32,252 | ||||||||||||
| Capital expenditures, including software | 96,348 | 53,699 | 42,390 | 67,955 | 82,886 | ||||||||||||
| Financial position | |||||||||||||||||
| Cash | $ | 291,776 | $ | 302,036 | $ | 241,316 | $ | 195,540 | $ | 197,755 | |||||||
| Property, plant and equipment, net (2) (3) | 445,658 | 436,417 | 448,554 | 466,462 | 462,055 | ||||||||||||
| Total assets (1) (2) (3) (4) | 1,642,255 | 1,556,064 | 1,549,936 | 1,474,368 | 1,417,992 | ||||||||||||
| Current liabilities (2) (3) | 211,316 | 208,166 | 190,863 | 202,719 | 189,306 | ||||||||||||
| Long-term debt (2) | 439,000 | 350,000 | 398,000 | 424,009 | 523,707 | ||||||||||||
| Total noncurrent liabilities (2) (3) | 563,396 | 470,293 | 539,208 | 568,960 | 620,406 | ||||||||||||
| Total liabilities (2) (3) (4) | 774,712 | 678,459 | 730,071 | 771,679 | 809,712 | ||||||||||||
| Total equity (1) (2) (4) | 867,543 | 877,605 | 819,865 | 702,689 | 608,280 | ||||||||||||
(1) In 2020, we adopted the provisions of ASC 326, Current Expected Credit Losses (CECL), using the
modified retrospective (or cumulative effect) method for transition. Under this transition method, periods prior to 2020 were not restated and the cumulative effect of initially applying the new standard was recorded as an adjustment to Retained earnings at January 1, 2020.
(2) In 2019, we adopted the provisions of ASC 842, “Leases”, using the modified retrospective (or cumulative
effect) method 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.
(3) In 2019, we acquired the outstanding shares of CirComp GmbH for net cash of $36.3 million, which includes
approximately $5.5 million of deferred payments.
(4) In 2018, we adopted the provisions of ASC 606, “Revenue from contracts with customers”, using the modified
retrospective (or cumulative effect) method for transition. Under this transition method, periods prior to 2018
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, 2018.
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(5) In 2018, we adopted the provisions of ASU 2017-07, “Compensation – Retirement Benefits: improving the
presentation of net periodic pension cost and net periodic postretirement benefit cost”. This update resulted in
some pension costs being presented on different line items in the Consolidated Statement of Income. As
required by that update, we have reclassified pension costs for periods prior to 2018.
(6) During the period 2018 through 2022, we recorded restructuring charges related to organizational changes
and cost reduction initiatives.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8 of this Form 10-K.
The MD&A generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, incorporated herein by reference.
Business Environment Overview and Trends
Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”) draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities.
The MC segment is the Company’s long-established core business and primary generator of cash. While it has been negatively impacted by well-documented declines in publication grades in the Company’s traditional markets, there has been some offsetting effect due to growth in demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets. Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future. MC has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.
The AEC segment provides significant longer term growth potential for the Company. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group ("SAFRAN") and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net sales in 2022. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787, and vacuum waste tanks for Boeing 7-Series aircraft. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2022, approximately 46 percent of AEC sales were related to U.S. government contracts or programs.
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Consolidated Results of Operations
Net sales
The following table summarizes our Net sales by business segment:
(in thousands, except percentages) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 609,461 | $ | 619,015 | $ | 572,955 | ||||||||||||||
Albany Engineered Composites | 425,426 | 310,225 | 327,655 | |||||||||||||||||
Total | $ | 1,034,887 | $ | 929,240 | $ | 900,610 | ||||||||||||||
% change | 11.4 | % | 3.2 | % | -14.6 | % | ||||||||||||||
Changes in currency translation rates had the effect of decreasing 2022 Net sales by $28.5 million (3% of Net sales) driven by the weaker Euro, as compared to 2021.
Excluding the effect of changes in currency translation rates: consolidated Net sales increased 14.4%, Net sales in MC increased 1.8% compared to 2021, driven by increased sales of packaging, pulp and tissue grades, and AEC experienced significant growth during 2022, with Net sales increasing 39.6%, primarily driven by CH-53K and LEAP programs.
Backlog
Backlog in the MC segment was $172 million at December 31, 2022 and $190 million December, 31 2021. Backlog in the AEC segment increased to $414 million at December 31, 2022, compared to $347 million at December 31, 2021. The increase in AEC’s backlog was primarily due to increased demand on the CH-53K program. All of the backlog in MC and approximately 65% of the AEC backlog is expected to be invoiced during the next 12 months.
Gross Profit
The following table summarizes Gross profit by business segment:
(in thousands, except percentages) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 312,285 | $ | 322,457 | $ | 301,144 | ||||||||||||||
Albany Engineered Composites | 77,497 | 55,934 | 69,928 | |||||||||||||||||
Total | $ | 389,782 | $ | 378,391 | $ | 371,072 | ||||||||||||||
% of Net Sales | 37.7 | % | 40.7 | % | 41.2 | % | ||||||||||||||
The increase in 2022 Gross profit, as compared to 2021, was principally due to increased Net sales at AEC. Gross profit as a percentage of sales:
•At MC, decreased from 52.1% in 2021 to 51.2% in 2022 in MC, due to an increase in input costs
•At AEC, was largely in line with the prior year, increasing from 18.0% in 2021 to 18.2% in 2022
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Selling, Technical, General, and Research (STG&R)
Selling, technical, general and research (STG&R) expenses include selling, general, administrative, technical, product engineering and research expenses.
The following table summarizes STG&R by business segment:
(in thousands, except percentages) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 105,979 | $ | 105,602 | $ | 107,594 | ||||||||||||||
Albany Engineered Composites | 45,918 | 39,742 | 35,571 | |||||||||||||||||
Corporate expenses | 56,757 | 53,705 | 56,091 | |||||||||||||||||
Total | $ | 208,654 | $ | 199,049 | $ | 199,256 | ||||||||||||||
% of Net Sales | 20.2 | % | 21.4 | % | 22.1 | % | ||||||||||||||
Consolidated STG&R expenses increased 5% as compared to 2021, but represented a smaller percentage of Net Sales.
•At MC, STG&R remained largely in line with the prior year.
•At AEC, Selling and general expenses increased $3.7 million related to investments in business development activities, and Research expense increased $2.5 million related to investments in new technologies and enhanced capabilities.
Research and Development
The following table is a subset of the STG&R table above and summarizes expenses associated with internally funded research and development by business segment:
(in thousands) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 16,060 | $ | 16,710 | $ | 15,922 | ||||||||||||||
Albany Engineered Composites | 15,353 | 12,891 | 9,828 | |||||||||||||||||
Total | $ | 31,413 | $ | 29,601 | $ | 25,750 | ||||||||||||||
Restructuring
In addition to the items discussed above affecting Gross profit and STG&R expenses, operating income was affected by restructuring expense, net, which was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods. For more information on our restructuring charges, see Note 5 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.
Operating Income
The following table summarizes operating income/(loss) by business segment:
(in thousands) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Machine Clothing | $ | 206,214 | $ | 215,654 | $ | 190,805 | ||||||||||||||
Albany Engineered Composites | 31,579 | 16,160 | 31,536 | |||||||||||||||||
Corporate expenses | (56,771) | (53,803) | (56,261) | |||||||||||||||||
Total | $ | 181,022 | $ | 178,011 | $ | 166,080 | ||||||||||||||
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Other Earnings Items
(in thousands) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Interest expense, net | $ | 14,000 | $ | 14,891 | $ | 13,584 | ||||||||||||||
| Pension settlement expense | 49,128 | — | — | |||||||||||||||||
| AMJP grant | — | (5,832) | — | |||||||||||||||||
Other (income)/expense, net | (14,086) | 3,021 | 13,422 | |||||||||||||||||
Income tax expense | 35,472 | 47,163 | 41,831 | |||||||||||||||||
Net income/(loss) attributable to the noncontrolling interest | 746 | 290 | (1,346) | |||||||||||||||||
Interest Expense
Interest expense, net, decreased over the prior year as a result of higher interest earned on Cash and cash equivalents, in addition to decreased interest expense on Finance leases during the fourth quarter. See the Working Capital, Liquidity and Capital Structure section for further discussion of borrowings and interest rates.
Pension settlement expense
In the third quarter of 2022, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million. No similar charges were incurred in the prior year. See Note 4 to the Consolidated Financial Statements for additional information.
AMJP grant
During the third quarter of 2021, the Company was awarded an Aviation Manufacturing Jobs Protection Program ("AMJP") grant of $5.8 million, under the American Rescue Plan of the U.S. Department of Transportation. No such award was granted during 2022. See Note 1 to the Consolidated Financial Statements for additional information.
Other (income)/expense, net
In 2022, Other (income)/expense, net included gains related to the revaluation of nonfunctional-currency balances of $10.0 million, as compared to a gain of $1.2 million during 2021, principally resulting from a weaker Euro throughout the course of 2022. Also in 2022, the Company recorded a gain of $3.4 million on the sale of IP addresses that the Company had no future critical need to retain. There were no similar gains of this nature in the previous two years.
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Income Taxes
Significant items that impacted the effective tax rate in the years 2022, 2021 and 2020, included the following (percentages reflect the effect of each item as a percentage of income before income taxes):
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | Tax Amount | % | Tax Amount | % | Tax Amount | % | ||||||||||||||||||||||||||||||||
| Continuing Operations (Excluding Discrete Items) | $ | 40,497 | 30.7% | $ | 50,045 | 30.2% | $ | 39,544 | 28.4% | |||||||||||||||||||||||||||||
| Changes in uncertain tax positions | (780) | (0.6) | 232 | 0.1 | 252 | 0.2 | ||||||||||||||||||||||||||||||||
| Impact of amended tax returns | (98) | (0.1) | (2,098) | (1.2) | 500 | 0.3 | ||||||||||||||||||||||||||||||||
| Tax effect of non-deductible foreign exchange loss on intercompany loan | — | — | — | — | 3,801 | 2.7 | ||||||||||||||||||||||||||||||||
| Changes in opening valuation allowance | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Provision for/adjustment to beginning of year valuation allowances | (802) | (0.6) | 957 | 0.6 | 168 | 0.1 | ||||||||||||||||||||||||||||||||
| True-up of prior year estimated taxes | (1,436) | (1.1) | (1,584) | (1.0) | (2,420) | (1.8) | ||||||||||||||||||||||||||||||||
| Enacted tax legislation and rate change | (587) | (0.4) | 352 | 0.2 | — | — | ||||||||||||||||||||||||||||||||
| US Pension Plan and interest rate swap settlements - Release of Residual Tax Effect | (4,926) | (3.8) | — | — | — | — | ||||||||||||||||||||||||||||||||
| Foreign withholding on incremental earnings repatriation | 1,518 | 1.2 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Impact of non-election of high tax exclusion under GILTI * | 1,723 | 1.3 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Other tax adjustments | 363 | 0.3 | (741) | (0.5) | (14) | 0.2 | ||||||||||||||||||||||||||||||||
| Effective Tax Rate | $ | 35,472 | 26.9% | $ | 47,163 | 28.4% | $ | 41,831 | 30.1% | |||||||||||||||||||||||||||||
* Global Intangible Low-Taxed Income | ||||||||||||||||||||||||||||||||||||||
Our tax planning initiatives included repatriating additional earnings to the U.S. and managing overall cash taxes in the short term. Such initiatives resulted in discrete adjustments that increased our 2022 effective tax rate, partially offset by true ups of prior year estimated taxes and the release of residual tax effects due to termination of our U.S. Pension Plan and settlements of interest rate swaps.
For more information on income tax, see Note 7 to the Consolidated Statements in item 8.
Segment Results of Operations
Machine Clothing Segment
Machine Clothing is our primary business segment and accounted for 59 percent of our consolidated revenues during 2022. MC products are purchased primarily by manufacturers of paper and paperboard. We believe we are well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand. Additionally, we face pricing pressures in all of our markets.
The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in
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all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
Review of Operations
(in thousands, except percentages) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Net sales | $ | 609,461 | $ | 619,015 | $ | 572,955 | ||||||||||||||
% change from prior year | -1.5 | % | 8.0 | % | -4.7 | % | ||||||||||||||
Gross profit | 312,285 | 322,457 | 301,144 | |||||||||||||||||
% of net sales | 51.2 | % | 52.1 | % | 52.6 | % | ||||||||||||||
STG&R expenses | 105,979 | 105,602 | 107,594 | |||||||||||||||||
Operating income | 206,214 | 215,654 | 190,805 | |||||||||||||||||
Net Sales
Net sales decreased 1.5%. Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $20.8 million compared to 2021. Excluding the effect of changes in currency translation rates, Net sales in MC increased 1.8% compared to 2021, driven by growth in sales of packaging, pulp and tissue grades.
Gross Profit
The decrease in MC Gross profit was primarily driven by changes in currency translation rates, principally the weaker Euro, as well as increases in input costs, causing a decrease in Gross margin from 52.1% in 2021 to 51.2% in 2022.
Operating Income
The decrease in Operating income was principally due to the decrease in Gross profit. STG&R expenses remained largely in line with the prior year.
Albany Engineered Composites Segment
The Albany Engineered Composites (“AEC”) segment, provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. The segment includes Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group, owns a 10 percent noncontrolling interest, AEC, through ASC, is the exclusive supplier to the LEAP program of advanced composite fan blades and fan cases under a long-term supply contract. The LEAP engine is used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft. AEC’s largest aerospace customer is SAFRAN and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 16 percent of the Company’s consolidated Net sales in 2022. Other significant programs by AEC include the Sikorsky CH-53K, F-35, JASSM, and Boeing 787 programs. AEC also supplies vacuum waste tanks for the Boeing 7-Series programs, and specialty components for the Rolls Royce lift fan on the F-35, as well as the fan case for the GE9X engine. In 2022, approximately 46 percent of AEC sales were related to U.S. government contracts or programs.
Review of Operations
(in thousands, except percentages) | ||||||||||||||||||||
| Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Net sales | $ | 425,426 | $ | 310,225 | $ | 327,655 | ||||||||||||||
% change from prior year | 37.1 | % | -5.3 | % | -27.7 | % | ||||||||||||||
Gross profit | 77,497 | 55,934 | 69,928 | |||||||||||||||||
% of net sales | 18.2 | % | 18.0 | % | 21.3 | % | ||||||||||||||
STG&R expenses | 45,918 | 39,742 | 35,571 | |||||||||||||||||
Operating income/(loss) | 31,579 | 16,160 | 31,536 | |||||||||||||||||
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Net Sales
AEC experienced significant growth during 2022, with Net sales increasing approximately $115 million, primarily due to CH-53K and LEAP programs. Excluding the effect of changes in currency translation rates, the increase in Net sales was 39.6%.
AEC has contracts with certain customers, including its contract for the LEAP program, where revenue is determined by a cost-plus-fee agreement. Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for 2022 and 2021. LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.
In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses. Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.
Gross Profit
The increase in Gross profit was primarily due to increased Net Sales due to growth on CH-53K and LEAP programs. Gross margin remained largely in line with the prior year.
Operating Income/(Loss)
Operating income nearly doubled year over year, increasing $15.4 million in 2022, principally due to an increase in Gross profit, as described above, partially offset by an increase in Selling and general expenses of $3.7 million related to investments in business development activities, and an increase in Research expense of $2.5 million related to investments in new technologies and enhanced capabilities.
Working Capital, Liquidity and Capital Structure
Working Capital
Payment terms granted to paper industry and other machine clothing customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation. In some markets, customer agreements require us to maintain significant amounts of finished goods inventory to assure continuous availability of our products.
In addition to supplying paper, paperboard, and tissue companies, the MC segment is a leading supplier to the nonwovens (which includes the manufacture of products such as diapers, personal care, and household wipes), building products, and tannery and textile industries. These non-paper industries have a wide range of customers, with markets that vary from industrial applications to consumer use products. The AEC segment primarily serves customers in the commercial and defense aerospace market through both engine and airframe applications. AEC's working capital levels rose sharply in the last few years in line with the segment's growth.
In the MC segment, the Chinese New Year, summer months, and the end of the year are often periods of lower production for some of our customers, which, in the past contributed to seasonal variation in sales and orders. In recent years, shorter order cycles and lower inventory levels throughout the supply chain have become a more significant factor in quarterly sales. The impact of these combined factors on any quarter can be difficult to predict, and can make quarterly comparisons less meaningful than annual comparisons. While seasonality is generally not a significant factor in the Albany Engineered Composites segment, the commercial terms of the supply agreement governing the LEAP program resulted in fourth quarter sales volatility in recent years.
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Cash Flow Summary
(in thousands) | ||||||||||||||||||||
For the years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||
Net income | $ | 96,508 | $ | 118,768 | $ | 97,243 | ||||||||||||||
Depreciation and amortization | 69,049 | 74,255 | 72,705 | |||||||||||||||||
Changes in working capital(a) | (63,478) | 16,488 | (60,727) | |||||||||||||||||
Changes in long-term liabilities, deferred taxes and other credits | (18,629) | (1,532) | 8,664 | |||||||||||||||||
| Non-cash portion of pension settlement expense | 42,657 | — | 411 | |||||||||||||||||
Other operating items | 2,107 | 9,496 | 21,957 | |||||||||||||||||
Net cash provided by operating activities | 128,214 | 217,475 | 140,253 | |||||||||||||||||
Net cash used in investing activities | (96,348) | (53,699) | (42,390) | |||||||||||||||||
| Net cash used in financing activities | (23,652) | (99,635) | (60,669) | |||||||||||||||||
Effect of exchange rate changes on cash flows | (18,474) | (3,421) | 8,582 | |||||||||||||||||
Increase/(decrease) in cash and cash equivalents | (10,260) | 60,720 | 45,776 | |||||||||||||||||
Cash and cash equivalents at beginning of year | 302,036 | 241,316 | 195,540 | |||||||||||||||||
Cash and cash equivalents at end of year | $ | 291,776 | $ | 302,036 | $ | 241,316 | ||||||||||||||
_________________________
(a)Includes Accounts receivable, Contract assets, Inventories, Accounts payable and Accrued liabilities.
Net cash provided by operating activities was $128.2 million in 2022, compared to $217.5 million in the same period last year. The decrease in net cash provided by operating activities was driven primarily by the following. AEC generated working capital cash inflows in Accounts receivable and Contract assets during 2021 (due to significant deliveries of LEAP components throughout the year), while during 2022, AEC invested in working capital as it prepared to execute on its expanded CH-53K scope of work. The Company made contributions of approximately $12.6 million to the U.S. pension plan during 2022, in connection with the termination of such plan (see discussion in Note 4 to the Consolidated Financial Statements). In addition, the timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during 2022 compared to the same period in 2021, contributed to reduced net cash provided by operating activities.
We strategically deploy our cash with a focus on investing in our business and new technologies to provide our customers with enhanced capabilities, increase shareholder value, and position ourselves to take advantage of new business opportunities as they arise. Based on such strategy, we have continued to invest in our business and technologies through capital expenditures, research and development, and when appropriate, selective business acquisitions. Our capital expenditures totaled $96.3 million and $53.7 million for 2022 and 2021, respectively, comprised of both sustaining and return seeking projects. In the recent past, a portion of our capital expenditures consisted of investments to improve operational productivity, in addition to producing a meaningful impact on energy and resource efficiency.
Net cash used in financing activities during 2022 was $23.7 million compared to $99.6 million in 2021, driven by increased borrowings during the current year that were partially used to fund repurchases of shares.
Liquidity and Capital Structure
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend to be insignificant.
Under our $700 million unsecured credit agreement, $439 million of borrowings were outstanding as of December 31, 2022. We believe cash flows from operations and availability under our Credit Agreement will be adequate to cover our operations and business needs over the next twelve months. As of December 31, 2022, we had cash and cash equivalents of $292 million and availability under our Credit Agreement of $261 million, for a total liquidity of approximately $553 million. For more information on the revolving credit agreement, see Note 13 to the Consolidated Financial Statements.
As of December 31, 2022, $273.2 million of our total cash and cash equivalents was held by non-U.S. subsidiaries. The accumulated undistributed earnings of the Company’s foreign operations not targeted for
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repatriation to the U.S. were in excess of $201 million at December 31, 2022, and are intended to remain indefinitely invested in foreign operations. Our cash planning strategy includes repatriating current earnings in excess of working capital requirements from certain countries in which our subsidiaries operate. While we have been successful in such endeavor to date, there can be no assurance that we will be able to cost effectively repatriate funds in the future. Repatriating such cash from certain jurisdictions may also result in additional withholding taxes.
We have also returned cash to shareholders through dividends and share repurchases. During 2022, we paid $26.5 million in dividends and repurchased 1 million shares of our Class A Common shares at a cost of $85 million under the $200 million share repurchase program that our Board approved in October 2021.
At December 31, 2022, we had no off-balance sheet arrangements. We have contractual commitments to repay debt, make payments under leases, contribute to our pension and postretirement plans, and settle obligations related to agreements to purchase goods and services, income taxes, compensation plans, and as applicable, interest rate swaps. We estimate these contractual commitments amount to approximately $588 million as of December 31, 2022, of which we expect to pay $44 million within the next year. Such commitments are not representative of all our future cash requirements, which will vary based on future needs.
Critical Accounting Policies and Estimates
For the discussion of our accounting policies, see Note 1 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements. Each of these assumptions is subject to uncertainties and changes in those assumptions or judgments which can affect our results of operations. In addition to the accounting policies stated in Item 8, financial statement amounts and disclosures are significantly influenced by market factors, judgments and estimates as described below.
Revenue Recognition
Contracts with customers in the Machine Clothing segment have various terms that can affect the point in time when revenue is recognized. The contractual terms are closely monitored in order to ensure revenue is recognized in the proper period.
Products and services provided under long-term contracts represent a significant portion of sales in the Albany Engineered Composites segment. AEC’s largest source of revenue is derived from the LEAP contract under a cost-plus-fee agreement. The fee is variable based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is significant judgment involved in determining applicable contract costs and the amount of revenue to be recognized.
We also have fixed price long-term contracts, for which we use the percentage of completion (incurred cost to total 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.
AEC has long-term aerospace contracts under which there are two phases: a phase during which the production part is designed and tested, and a phase of supplying production parts. During the design and testing phases, we perform pre-production or nonrecurring engineering services, which are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized in Other assets. The capitalized costs are amortized into Cost of goods sold over the period which the asset is expected to contribute to future cash flows, including anticipated renewal periods. Accumulated capitalized costs are written-off when those costs are determined to be unrecoverable.
For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract loss provisions include contract options that are probable of exercise, excluding any profitable options that might be expected to follow. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative costs, which are treated as period expenses. We are required to limit our estimate of contract values to the period of the legally enforceable contract. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, the contract period may result in a loss contract provision at the inception of the contract.
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Pension and Postretirement Liabilities
We sponsor several pension and postretirement benefit plans. Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets. We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate.
Discount Rate Selection
We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero coupon bonds. We use the RATE: Link 60-90 model (the "RATE Link"). We believe the projected cash flows used to determine RATE Link provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustments to RATE Link has been made.
Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments. The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefit obligation. Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligation.
Long-term Rate of Return on Plan Assets Assumption
Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes. Our analysis gives consideration to recent plan performance and historical returns; however, the assumptions are primarily based on long-term, prospective rates of return. The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 3.2% for 2022.
Based on information provided by actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and postretirement benefits are reasonable; however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.
Income Taxes
We regularly assess the likelihood that deferred tax assets are expected to be realized through the reversal of existing temporary differences and/or future taxable income. To the extent we believe that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. The amount of a valuation allowance is based upon our best estimate of our ability to realize the deferred tax assets.
Goodwill and Intangible assets
Goodwill is not amortized, but is tested for impairment at least annually. Estimating the fair value of reporting units requires the use of estimates and significant judgments, including but not limited to revenue growth rates, operating margins, discount rates, and future market conditions. It is possible that these judgments and estimates could change in future periods.
The determination of the fair value of intangible assets acquired in a business acquisition is subject to many estimates and assumptions. Among such estimates and assumptions are royalties, discount rate and useful life. We review amortizable intangible asset groups for impairment whenever events and changes in circumstances indicate that the related carrying amounts may not be recoverable.
Recent Pronouncements
In March 2022, the SEC issued a proposed rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies. The proposed rules are intended to provide more consistent, comparable and decision-useful information so that investors can better evaluate the Company’s exposure to cybersecurity risks, incidents, and strategies to mitigate risks and incidents. We will continue to monitor developments around this proposed rule.
Also in March 2022, the SEC issued a proposed rule that would enhance and standardize the climate-related disclosures provided by public companies. Under the proposed rule, we would be required to provide quantitative and qualitative disclosures in registration statements and annual reports that include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of
37
which would be presented in a footnote to the financial statements. Such disclosures would also be subject to management's internal control over financial reporting ("ICFR") and external audit. As a Company, we have long been committed to sustainable practices and corporate social responsibility and have more recently taken steps to articulate our values and goals, some of which are summarized in our published sustainability report that is included at our website www.albint.com. In 2020, we began establishing more formalized and scalable approaches to our sustainability practices, reporting and systems, in order to ensure we prioritize efforts that are impactful to our business and stakeholders. We have begun to incorporate certain climate-related disclosures and risk factors in our existing disclosures to this point. We will continue to monitor developments around this proposed rule, which once finalized, is expected to allow for a multi-year phased transition to achieving compliance.
In October 2022, the SEC adopted final rules regarding the recovery of erroneously awarded incentive-based
executive compensation. The rules direct US securities exchanges to establish standards to require listed
issuers to develop and implement a written policy providing for the recovery of incentive-based compensation
received by current and former executive officers in the event of a required accounting restatement when that
compensation was based on an erroneously reported financial reporting measure. The new rule and related amendments include a number of new disclosure requirements, including requiring issuers to file their recovery policy as an exhibit to their annual reports and establishing new cover page disclosures on Forms 10-K indicating whether the financial statements included in the filing reflect the correction of an error and whether the error correction required an incentive-based compensation recovery analysis. The exchanges must file proposed listing standards to implement the SEC’s directive no later than February 26, 2023 (which is 90 days after the final rules were published in the Federal Register), and those listing standards must be effective no later than November 28, 2023. We will be required to adopt a recovery policy no later than 60 days after the listing standards become effective.
In November 2022, the Federal Acquisition Regulatory Council proposed new rules that would require many federal contractors to provide certain climate-related disclosures. The proposed rule has a stated intent of prompting
suppliers to take action on measuring and managing greenhouse gas (GHG) emissions reductions via public
transparency. The proposal would require “major” federal contractors, as defined, to provide public disclosure of:
• scope 1, scope 2, and relevant scope 3 GHG emissions;
• climate-related financial risk factors based on the Task Force on Climate-Related Financial Disclosures (TCFD)
framework; and
• GHG reduction targets established in line with the Science Based Targets initiative (SBTi). Major contractors
without existing targets would be required to establish them.
Smaller contractors, defined as “significant,” would be required to provide disclosure of scope 1 and scope 2
GHG emissions. “Major” contractors are those receiving more than $50 million in federal contracts, while
“significant” contractors are those receiving from $7.5 to $50 million in federal contracts. These thresholds are
based on the size of contracts awarded and not on related revenue in any given year. There are also limited
exceptions. Based on our business with the federal government, we are highly likely to be considered a "significant" or "major" federal contractor in a given year and would be subject to the requirements in this proposal, if passed. We will continue to monitor developments around this proposed rule, which if finalized, is expected to allow for a multi-year phased transition to achieving compliance.
Non-GAAP Measures
This Form 10-K contains certain non-GAAP measures that should not be considered in isolation or as a substitute for the related GAAP measures. Such non-GAAP measures include net sales and percent change in net sales, excluding the impact of currency translation effects; EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin; Net debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). Management believes that these non-GAAP measures provide additional useful information to investors regarding the Company’s operational performance.
Presenting Net sales and change in Net sales, after currency effects are excluded, provides management and investors insight into underlying sales trends. Net sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period.
EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations. The Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance. Such excluded costs or benefits do not consist of normal,
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recurring cash items necessary to generate revenues or operate our business. Adjusted EBITDA margin represents Adjusted EBITDA expressed as a percentage of net sales.
The Company defines Adjusted EPS as basic earnings per share (GAAP), adjusted by the after tax per share amount of costs or benefits not reflective of the Company’s ongoing or expected future operational performance. The income tax effects are calculated using the applicable statutory income tax rate of the jurisdictions where such costs or benefits were incurred or the effective tax rate applicable to total company results.
The Company’s Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted EPS may not be comparable to similarly titled measures of other companies.
Net debt aids investors in understanding the Company’s debt position if all available cash were applied to pay down indebtedness.
Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt.
We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.
The following tables show the calculation of EBITDA and Adjusted EBITDA:
Consolidated results | (in thousands) | |||||||||||||||||||||||||
Years ended December 31, | 2022 | 2021 | 2020 | |||||||||||||||||||||||
Net income (GAAP) | $ | 96,508 | $ | 118,768 | $ | 97,243 | ||||||||||||||||||||
Interest expense, net | 14,000 | 14,891 | 13,584 | |||||||||||||||||||||||
Income tax expense | 35,472 | 47,163 | 41,831 | |||||||||||||||||||||||
Depreciation and amortization expense | 69,049 | 74,255 | 72,705 | |||||||||||||||||||||||
EBITDA (non-GAAP) | 215,029 | 255,077 | 225,363 | |||||||||||||||||||||||
| Restructuring expenses, net | 106 | 1,331 | 5,736 | |||||||||||||||||||||||
Foreign currency revaluation (gains)/losses | (9,829) | (1,442) | 15,444 | |||||||||||||||||||||||
| Dissolution of business relationships in Russia | 2,275 | — | — | |||||||||||||||||||||||
| Pension settlement expense | 49,128 | — | — | |||||||||||||||||||||||
| IP address sales | (3,420) | — | — | |||||||||||||||||||||||
| Aviation Manufacturing Jobs Protection (AMJP) grant | — | (4,731) | — | |||||||||||||||||||||||
| Former CEO termination costs | — | — | 2,742 | |||||||||||||||||||||||
| Acquisition/integration costs | 1,057 | 1,166 | 1,272 | |||||||||||||||||||||||
| Pre-tax (income)/loss attributable to noncontrolling interest | (817) | (510) | 1,348 | |||||||||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 253,529 | $ | 250,891 | $ | 251,905 | ||||||||||||||||||||
39
(in thousands) | ||||||||||||||||||||||||||
Year ended December 31, 2022 | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||||||||||||||
| Net income/(loss) (GAAP) | 206,214 | 31,579 | (141,285) | 96,508 | ||||||||||||||||||||||
| Interest expense, net | — | — | 14,000 | 14,000 | ||||||||||||||||||||||
| Income tax expense | — | — | 35,472 | 35,472 | ||||||||||||||||||||||
| Depreciation and amortization expense | 19,483 | 46,202 | 3,364 | 69,049 | ||||||||||||||||||||||
| EBITDA (non-GAAP) | 225,697 | 77,781 | (88,449) | 215,029 | ||||||||||||||||||||||
| Restructuring expenses, net | 92 | — | 14 | 106 | ||||||||||||||||||||||
| Foreign currency revaluation (gains)/losses (a) | (520) | 672 | (9,981) | (9,829) | ||||||||||||||||||||||
| Dissolution of business relationships in Russia | 1,494 | — | 781 | 2,275 | ||||||||||||||||||||||
| Pension settlement expense | — | — | 49,128 | 49,128 | ||||||||||||||||||||||
| IP address sales | — | — | (3,420) | (3,420) | ||||||||||||||||||||||
| Acquisition/integration costs | — | 1,057 | — | 1,057 | ||||||||||||||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (817) | — | (817) | ||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 226,763 | $ | 78,693 | $ | (51,927) | $ | 253,529 | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Year ended December 31, 2021 | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||||||||||||||
| Net income/(loss) (GAAP) | $ | 215,654 | $ | 16,160 | $ | (113,046) | $ | 118,768 | ||||||||||||||||||
| Interest expense, net | — | — | 14,891 | 14,891 | ||||||||||||||||||||||
| Income tax expense | — | — | 47,163 | 47,163 | ||||||||||||||||||||||
| Depreciation and amortization expense | 20,191 | 50,402 | 3,662 | 74,255 | ||||||||||||||||||||||
| EBITDA (non-GAAP) | 235,845 | 66,562 | (47,330) | 255,077 | ||||||||||||||||||||||
| Restructuring expenses, net | 1,202 | 32 | 97 | 1,331 | ||||||||||||||||||||||
| Foreign currency revaluation (gains)/losses (a) | (307) | 50 | (1,185) | (1,442) | ||||||||||||||||||||||
| AMJP grant | — | 1,101 | (5,832) | (4,731) | ||||||||||||||||||||||
| Acquisition/integration costs | — | 1,166 | — | 1,166 | ||||||||||||||||||||||
| Pre-tax (income) attributable to noncontrolling interest | — | (510) | — | (510) | ||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 236,740 | $ | 68,401 | $ | (54,250) | $ | 250,891 | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Year ended December 31, 2020 | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||||||||||||||||
Net income/(loss) (GAAP) | $ | 190,805 | $ | 31,536 | $ | (125,098) | $ | 97,243 | ||||||||||||||||||
Interest expense, net | — | — | 13,584 | 13,584 | ||||||||||||||||||||||
Income tax expense | — | — | 41,831 | 41,831 | ||||||||||||||||||||||
Depreciation and amortization expense | 20,304 | 48,496 | 3,905 | 72,705 | ||||||||||||||||||||||
EBITDA (non-GAAP) | 211,109 | 80,032 | (65,778) | 225,363 | ||||||||||||||||||||||
Restructuring expenses, net | 2,746 | 2,821 | 169 | 5,736 | ||||||||||||||||||||||
| Foreign currency revaluation (gains)/losses (a) | 1,743 | 130 | 13,571 | 15,444 | ||||||||||||||||||||||
| Former CEO termination costs | — | — | 2,742 | 2,742 | ||||||||||||||||||||||
| Acquisition/integration costs | — | 1,272 | — | 1,272 | ||||||||||||||||||||||
| Pre-tax loss attributable to noncontrolling interest | — | 1,348 | — | 1,348 | ||||||||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 215,598 | $ | 85,603 | $ | (49,296) | $ | 251,905 | ||||||||||||||||||
40
The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying earnings and are financial performance metrics commonly used by investors. The Company calculates the per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the earnings per share effect of certain income and expense items:
(in thousands, except per share amounts) | ||||||||||||||||||||||||||
Year ended December 31, 2022 | Pre tax Amounts | Tax Effect | After tax Effect | Per Share Effect | ||||||||||||||||||||||
| Restructuring expenses, net | $ | 106 | $ | 34 | $ | 72 | $ | 0.01 | ||||||||||||||||||
| Foreign currency revaluation (g | ||||||||||||||||||||||||||