Management's Discussion and Analysis ("MD&A") is intended to help the reader
understand the results of operations and financial condition of the Company.
MD&A is provided as a supplement to, and should be read in conjunction with, our
Consolidated Financial Statements and the accompanying Notes.
Forward-looking statements
This quarterly report and the documents incorporated or deemed to be
incorporated by reference in this quarterly report contain statements concerning
our future results and performance and other matters that are "forward-looking"
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
words "believe," "expect," "anticipate," "intend," "estimate," "project," "look
for," "will," "should," "guidance," "guide" and similar expressions identify
forward-looking statements, which generally are not historical in nature.
Because forward-looking statements are subject to certain risks and
uncertainties, (including, without limitation, those set forth in the Company's
most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q)
actual results may differ materially from those expressed or implied by such
forward-looking statements.
There are a number of risks, uncertainties, and other important factors that
could cause actual results to differ materially from the forward-looking
statements, including, but not limited to:
•Conditions in the industries in which our Machine Clothing and Albany
Engineered Composites segments compete, along with the general risks associated
with macroeconomic conditions;
•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; and continuation of coronavirus effects for an extended
period;
•In the Albany Engineered Composites segment, extended weakness in commercial
aerospace activity, further delays in the Boeing 737 MAX return to service, or
unanticipated reductions in demand, delays, technical difficulties, or
delays/cancellations in other aerospace programs;
•Failure to achieve or maintain anticipated profitable growth in our Albany
Engineered Composites segment; and
•Other risks and uncertainties detailed in this report.
Further information concerning important factors that could cause actual events
or results to be materially different from the forward-looking statements can be
found in "Business Environment Overview and Trends" sections of this quarterly
report, as well as in Item 1A-"Risk Factors" section of our most recent Annual
Report on Form 10-K. Although we believe the expectations reflected in our other
forward-looking statements are based on reasonable assumptions, it is not
possible to foresee or identify all factors that could have a material and
negative impact on our future performance. The forward-looking statements
included or incorporated by reference in this report are made on the basis of
our assumptions and analyses, as of the time the statements are made, in light
of our experience and perception of historical conditions, expected future
developments, and other factors believed to be appropriate under the
circumstances.
Except as otherwise required by the federal securities laws, we disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained or incorporated by reference in this report
to reflect any change in our expectations with regard thereto or any change in
events, conditions, or circumstances on which any such statement is based.
Business Environment Overview and Trends
Our reportable segments, Machine Clothing ("MC") and Albany Engineered
Composites ("AEC"), draw on the same advanced textiles and materials processing
capabilities, and compete on the basis of product-based advantage that is
grounded in those core capabilities.
The MC segment is the Company's long-established core business and primary
generator of cash. While it has suffered from well-documented declines in
publication grades in the Company's traditional markets, the paper and
paperboard industry has stabilized in recent years, driven by 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 now 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
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technology. Because of pricing pressures and industry overcapacity, the machine
clothing and paper industries will continue to face top line pressure. Despite
continued market pressure on revenue, the business retains the potential for
maintaining stable earnings in the future. It 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 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 long-term growth potential for our Company. Our
strategy is to grow by focusing our proprietary 3D-woven technology, as well as
our non-3D technology capabilities, on high-value aerospace (both commercial and
defense) applications, while at the same time performing successfully on our
portfolio of growth programs. AEC (including Albany Safran Composites, LLC
("ASC"), in which our customer SAFRAN Group owns a 10 percent noncontrolling
interest) supplies a number of customers in the aerospace industry. AEC's
largest aerospace customer is the SAFRAN Group and sales to SAFRAN, through ASC,
(consisting primarily of fan blades and cases for CFM's LEAP engine) accounted
for approximately 22 percent of the Company's consolidated Net sales in 2019.
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
F-35, fuselage components for the Boeing 787, components for the CH-53K
helicopter, vacuum waste tanks for Boeing 7-Series aircraft, and missile bodies
for Lockheed Martin's JASSM air-to-surface missiles. AEC is actively engaged in
research to develop new applications in both commercial and defense aircraft
engine and airframe markets. In 2019, approximately 25 percent of AEC sales were
related to U.S. government contracts or programs.
A number of countries, including the United States, have issued orders grounding
Boeing 737 MAX aircraft. If these groundings cause a further decrease in demand
in production for this aircraft, it could have an adverse impact on demand for
LEAP engines, which, in turn, could have an adverse impact on demand for our
LEAP engine parts. The Company is continuing to monitor developments with our
customer. Considerable uncertainty exists with respect to the return-to-service
of the 737-MAX and the subsequent ramp-up in our production of LEAP-1B
components, which may lead to additional impacts to our revenues from LEAP-1B
components in 2020 and future periods. The nature of our cost-plus fee
arrangement, however, should somewhat mitigate the impact of such factors on
gross margin rate in such future periods. In April 2020, the Company announced
the temporary closure of all three of its LEAP production facilities, resulting
from depressed demand, due to the ongoing Boeing 737 MAX situation and a pause
in production of the Airbus A320neo family. As a result, the year-over-year
comparisons for LEAP revenue in the fourth quarter are expected to continue to
be unfavorable.
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Consolidated Results of Operations
Net sales
The following table summarizes our Net sales by business segment:

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