Albany International : Quarterly Report for Quarter Ending 2026-03-31 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes.

Forward-looking Statements

This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "believe," "expect," "anticipate," "intend," "estimate," "project," "forecast," "look for," "will," "should," "guidance," "guide" and similar expressions identify forward-looking statements, which generally are not historical in nature. Because forward-looking statements are subject to certain risks and uncertainties, (including, without limitation, those set forth in the Company's most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by such forward-looking statements.

There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:

•Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including higher interest rates, inflationary pressures, or the effects of another pandemic, for an extended period of time;

•Across the entire Company, increasing labor, raw material, energy, or logistics and costs due to supply chain constraints and inflationary pressures. These challenges have only increased as a result of the ongoing Russia-Ukraine war and the conflict in the Middle East;

•Across both segments, potential port strikes could cause additional disruptions to our supply chain;

•Harm caused by changes in our relationships or contracts with suppliers and customers;

•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;

•Inability of our Machine Clothing or Albany Engineered Composites segments to create additional production capacity in a timely manner or the occurrence of other manufacturing or supply difficulties (including as a result of geopolitical crises, natural disaster, public health crises and epidemics/pandemics, regulatory or otherwise);

•Changes in geopolitical conditions impacting countries where the Company does or intends to do business;

•Failure to achieve or maintain anticipated profitable growth;

•Failure to achieve our strategic initiatives and other goals, including, but not limited to, our sustainability goals;

•In the Albany Engineered Composites segment, the estimates and expectations based on aircraft production rates provided by Airbus, Boeing and others;

•In the Albany Engineered Composites segment, risks and uncertainties associated with the successful implementation and ramp up of significant new programs, including the ability to manufacture the products to the detailed specifications required and recover start-up costs and other investments in the programs;

•In the Albany Engineered Composites segment, risks associated with changes in estimates and assumptions that could result in a decline in program gross margins or turn a profitable program into a loss program;

•Assets classified as held for sale may be sold for proceeds lower than currently estimated, or not sold within expected terms or timing;

•Adverse impacts from inflation, an economic slowdown or recession and by disruption in capital and credit markets that might impede our access to credit, increase our borrowing costs and impair the financial soundness of our customers and suppliers;

•Proposed tariffs that may significantly and adversely impact our results of operations;

•Expectations regarding our ability to attract, motivate, and retain the workforce necessary to execute our business strategy and other goals;

•Adverse impacts from fluctuations in foreign currency exchange rates;

•Harm caused by customer purchase reductions, payment defaults or contract non-renewal;

•In the Albany Engineered Composites segment, future funding and compliance risks associated with our contracts with government entities, OEM customers or prime contractors on contracts with governmental agencies;

•Costly and disruptive legal disputes and settlements;

•Future levels of indebtedness and capital expenditures;

•Adverse impacts from changes in tax legislation or challenges to our tax positions;

•Cybersecurity incidents or significant computer system compromises or data breaches;

•Significant problems with information systems or networks;

•Failure to successfully integrate the Heimbach Group companies into our business systems and processes within the expected timeframe or, failure to or delayed realization of anticipated benefits of the acquisition could adversely impact the Company's business, financial condition and results of operations; 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 the "Business Environment Overview and Trends" sections of this quarterly report, as well as in the 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

We conduct our business under two reportable segments: Machine Clothing ("MC") and Albany Engineered Composites ("AEC") each rooted in similar materials sciences know-how that forms a common approach to customer value proposition in design and manufacturability. MC competes on the basis of its deep industry knowledge, customer reputation and customer service and global advanced textile manufacturing capabilities, which has enabled it to develop a robust and market leading product offering that can be tailored to customer-specific requirements. AEC competes on the basis of its innovative technology solutions, extensive composite manufacturing capabilities and capacity that enable it to offer high quality specific part and assembly solutions that achieve its customers' application performance requirements.

Also, please refer to the Business Environment Overview and Trends in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2025. The Annual Report on Form 10-K, along with the Company's other filings, can be found on the Securities and Exchange Commission's website, www.sec.gov, as well as on the Company's website: www.albint.com.

General

Global, economic, and political conditions, changes in raw material and commodity prices and supply, labor availability and costs, inflation, interest rates, potential changes in U.S. government policy positions, including changes in Department of Defense policies or priorities, geopolitical conflicts and strained international relations, U.S. and non-

U.S. tax law changes, foreign currency exchange rates, sanctions, tariffs, energy costs and supply, and the impact from natural disasters and weather conditions create uncertainties that could impact our businesses.

Machine Clothing Segment

The MC segment continues to deliver resilient performance, with several areas performing well despite uneven market dynamics. In Asia, softer demand-across Paper Machine Clothing & Engineered Fabrics-continues to contribute to regional pressure. Packaging and Tissue continue to perform well, supported by growth across most regions. Looking ahead to the remainder of 2026, we expect Packaging and Tissue to remain positive contributors, with sales in Europe and the Americas holding broadly stable, while Asia's trajectory remains uncertain. Publication grades remained under structural pressure, and the MC segment expects publication grade paper demand to continue declining through 2026 and beyond, offset by growing demand for tissue grade products.

We believe the MC segment is 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 MC's products are sold are expected to have volume trends that are in line with global GDP. Despite pricing and demand pressures on revenue growth, the MC segment is expected to improve earnings in the future through technological innovations, manufacturing productivity efficiencies and cost controls.

The MC segment has been a significant generator of operating cash inflows for the Company. The Company seeks to maintain the cash-generating potential of this business by vigorously using our differentiated and technically superior products to reduce our customers' total cost of operation while improving their paper quality, and by maintaining lower costs through a continued focus on cost-reduction initiatives and strategic investment.

Albany Engineered Composites Segment

The AEC segment's strategy is to continue to build on its global brand by leveraging its industry leading performance to drive future growth through technology differentiation. This includes continued investment in AEC's proprietary 3D-woven technology to accelerate solutions that can be offered across a set of broader applications; and by leveraging the AEC's non-3D technology capabilities and capacity, on high-value aerospace (both commercial and defense) applications, and other emerging markets such as space and advanced air mobility ("AAM"). The AEC segment provides longer-term growth potential for the Company as it ramps current production programs and captures new commercial and defense opportunities.

The AEC segment (including Albany Safran Composites, LLC ("ASC"), in which our customer SAFRAN Group owns a 10% 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 International's LEAP engine) accounted for approximately 15% of the Company's consolidated Net revenues in 2025. The AEC segment, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. Outside of ASC, the AEC segment also supplies 3D-woven composite vanes for the F-35 Liftfan.

The AEC segment'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 aircraft, vacuum waste tanks for Boeing commercial aircraft and components and structures for other commercial, defense, and space and AAM programs. In 2025, approximately 35% of AEC net revenues were related to U.S. government contracts or programs.

The AEC segment is dependent on global supply chains and has experienced disruptions in recent years. In addition, higher inflation levels increased material costs, higher labor rates and other supplier costs that have impacted the AEC segment's results of operations. The AEC segment attempts to mitigate raw material and supplier costs by entering into long-term supply agreements. However, in some cases, higher raw material and supplier costs adversely impacted certain firm-fixed price programs resulting in lower program gross margins. In addition, as the AEC segment ramps-up larger complex programs, such as those associated with the CH-53 program, it continues to face challenges in staffing and training its workforce to support production rates, which has impacted operational productivity, particularly at its Salt Lake City facility, and contributed to increased labor and scrap costs.

During the fourth quarter of 2025, we announced that we will commence a strategic review of the Amelia Earhart Drive facility in Salt Lake City. This review is expected to be completed by the end of 2026, and management expects the review to result in a sale of the facility, including the CH-53K contract work. As of December 31, 2025, we determined that the assets and liabilities of this group meet the held-for-sale criteria, and they have been classified as such within

our consolidated balance sheets for all periods presented. Upon classification as held for sale, the Company ceased depreciation and amortization of the related long-lived assets in accordance with applicable accounting guidance.

Consolidated Results of Operations

Net Revenues and Gross Profit

The following table summarizes our Consolidated Net revenues and Gross profit:

			Three Months Ended March 31,
(in thousands, except percentages)			2026			2025
Net revenues			$	311,333		$	288,774
Gross profit			99,794			96,486
Gross profit margin			32.1		%	33.4		%

Net revenues for the three months ended March 31, 2026 increased 7.8% as compared to the three months ended March 31, 2025 primarily due to higher volume in the AEC segment partially offset by softness in the US region and temporary production interruptions in the MC business. Additionally, changes in currency translation rates increased comparative segment net revenues by $9.3 million as compared to the prior year.

The increase in gross profit for the three months ended March 31, 2026, as compared to the three months ended March 31, 2025, was driven by the increased sales volume in AEC. Despite the favorable change to gross profit, increased production costs resulting from changes in the product mix within the MC business are the primary driver for the slight gross profit margin decrease to 32.1% from 33.4% for the three months ended March 31, 2026 and March 31, 2025, respectively.

Operating Expenses

The following table summarizes Consolidated Operating expenses by classification:

			Three Months Ended March 31,
(in thousands, except percentages)			2026			2025
Selling, general and administrative expenses			$	58,299		$	53,812
Technical and research expenses			12,957			11,896
Restructuring expenses, net			3,165			2,515
Total operating expenses			$	74,421		$	68,223
Total operating expenses as a % of net revenues			23.9		%	23.6		%

Consolidated Selling, general and administrative ("SG&A") expenses increased $4.5 million or 8.3% as compared to the three months ended March 31, 2025. The overall changes are primarily the result of higher personnel costs as well as costs incurred related to the strategic review of the Amelia Earhart Drive facility.

Consolidated Technical and research expenses increased by $1.1 million as compared to the three months ended March 31, 2025, primarily due to new business ventures initiatives in 2026.

Restructuring expenses, net, of $3.2 million in the three months ended March 31, 2026, increased by $0.7 million compared to $2.5 million in the three months ended March 31, 2025. The change in restructuring actions for the three month period are a result of workforce reductions and global production consolidation activities.

Operating Income

See the Segment Results of Operations section of this Management Discussion and Analysis of Financial Condition and Results of Operations for significant drivers of Operating income/(loss) for each business segment.

Other Earnings Items

			Three Months Ended March 31,
(in thousands, except percentages)			2026			2025
Interest expense/(income), net			$	5,467		$	3,655
Other (income)/expense, net			(3,193)			983
Income tax expense			7,650			6,276
Net income/(loss) attributable to the noncontrolling interest			168			(6)

Interest Expense, net

Interest expense, net, increased over the prior year primarily due to higher average debt balances as well as a lower amount of interest income earned on cash equivalents during the current year.

Other (Income)/Expense, net

Other (income)/expense, net, included foreign currency related transactions which resulted in gains of $(2.2) million in the three months ended March 31, 2026, as compared to losses of $3.2 million in the same period last year. These changes were primarily the result of unrealized gains and losses on intercompany loans. In addition, changes in the fair value of derivative instruments included gains of $1.2 million in the three months ended March 31, 2026, as compared to gains of $2.5 million for the three months ended March 31, 2025. Unrealized gains and losses on both derivative instruments and intercompany loans were driven by currency rate movements, most notably the Brazilian Real and Mexican Peso. See Note 6, Other (Income)/Expense, net, in the Notes to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

Effective Income Tax Rate

			Three months ended March 31,
			2026			2025
Effective income tax rate			33.1		%	26.6		%

The Company has operations that constitute a taxable presence in 22 countries outside of the United States. The majority of these countries had income tax rates that were above the United States federal tax rate of 21 percent during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges.

The tax rate is affected by recurring items, such as the income tax rate in the U.S. and non-U.S. jurisdictions and the mix of pre-tax income earned in those jurisdictions. The tax rate is also affected by U.S. tax costs on foreign pre-tax earnings, and by discrete items that may occur in any given year but are not consistent from year to year. The Company's effective tax rate for the first quarter of 2026 was 33.1%, compared to 26.6% for the same period in 2025, mainly due to favorable discrete tax adjustments in the prior period. For more information, see Note 7, Income Taxes, in the Notes to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15 percent intended to be effective on January 1, 2024. While the U.S. has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation. As currently designed, Pillar Two will ultimately apply to our worldwide operations. Although we do not expect these rules to materially increase our global tax costs in 2026, there remains uncertainty as to the final Pillar Two model rules. We will continue to monitor U.S. and global legislative action related to Pillar Two for potential impacts.

Segment Results of Operations

Machine Clothing Segment

The MC segment accounted for 53.3% of our consolidated revenues for the three months ended March 31, 2026. A summary of MC's selected financial results is as follows:

			Three Months Ended March 31,
(in thousands, except percentages)			2026			2025
Net revenues			$	165,952		$	174,697
Gross profit			75,062			79,902
% of net revenues			45.2		%	45.7		%
SG&A expenses			33,249			32,881
Technical and research expenses			7,185			7,243
Restructuring expenses, net			2,676			1,347
Operating income			31,952			38,431
% of net revenues			19.3		%	22.0		%

Net revenues

Net revenues for the three months ended March 31, 2026 decreased 5.0% as compared to the three months ended March 31, 2025, driven by reduced sales volume in the US region, primarily due to temporary production interruptions, including scheduled maintenance at certain plants. This decline is slightly offset by a strong performance within the European market, particularly related to the Engineered Fabrics program. Further, changes in currency translation rates had the effect of increasing Net revenues by $6.1 million for the three months ended March 31, 2026, as compared to this period in 2025.

Gross Profit

Gross profit for the three months ended March 31, 2026 decreased by $4.8 million as compared to the three months ended March 31, 2025, primarily driven by the volume declines noted above; with gross profit margin also decreasing slightly from 45.7% to 45.2% in the three months ended March 31, 2025 and 2026, respectively.

Operating Income

Operating income for the three months ended March 31, 2026 decreased $6.5 million or 16.9% as compared to the three months ended March 31, 2025, primarily as a result of gross profit declines and restructuring costs. Incremental restructuring expenses were primarily a result of manufacturing footprint optimization in connection with the Heimbach acquisition.

Albany Engineered Composites Segment

The AEC segment accounted for 46.7% of our consolidated net revenues for the three months ended March 31, 2026. 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 33% and 35% of segment revenue for the three months ended March 31, 2026 and 2025, respectively.

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.

A summary of AEC's selected financial results is as follows:

			Three Months Ended March 31,
(in thousands, except percentages)			2026			2025
Net revenues			$	145,381		$	114,077
Gross profit			24,732			16,584
% of net revenues			17.0		%	14.5		%
SG&A expenses			11,586			10,126
Technical and research expenses			4,548			3,674
Restructuring expenses, net			-			1,168
Operating income			8,598			1,616
% of net revenues			5.9		%	1.4		%

Net revenues

Net revenues for the three months ended March 31, 2026 increased 27.4%, primarily driven by higher activity levels on various programs including ASC, GE LEAP Platforms, and B787 Frames, as well as lower unfavorable long-term contract adjustments. Further, changes in currency translation rates had the effect of increasing Net revenues by $3.1 million for the three months ended March 31, 2026, as compared to this period in 2025.

Gross Profit

Gross profit for the three months ended March 31, 2026 increased $8.1 million as compared to the three months ended March 31, 2025, and Gross profit margin increased from 14.5% to 17.0% in the three months ended March 31, 2025 and 2026, respectively. The change was driven primarily by increases in revenue, as well as performance improvements on various programs, resulting in lower unfavorable EAC adjustments.

Operating Income/(Loss)

Operating income for the three months ended March 31, 2026 increased $7.0 million as compared to the three months ended March 31, 2025, principally due to favorable changes to Gross profit as noted above and the conclusion of restructuring activities from 2025. This was slightly offset by an increase in SG&A expenses of $1.5 million from the prior period, driven by personnel-related costs. Additionally, Technical and research expenses increased $0.9 million for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025, driven by increased consulting costs to assist with continued innovation within the segment.

Working Capital, Liquidity and Capital Structure

Cash Flow Summary

			Three months ended March 31,
(in thousands)			2026			2025
Net income/(loss)			$	15,449		$	17,349
Depreciation and amortization			17,129			21,291
Changes in working capital (a)			(10,785)			(25,847)
Changes in other noncurrent liabilities and deferred taxes			2,431			2,532
Other operating items			(18,581)			(13,206)
Net cash provided by operating activities			5,643			2,119
Net cash used in investing activities			(9,290)			(15,597)
Net cash provided by financing activities			13,769			15,091
Effect of exchange rate changes on cash and cash equivalents			85			2,458
Increase in cash and cash equivalents			10,207			4,071
Cash and cash equivalents at beginning of year			112,350			115,283
Cash and cash equivalents at end of period			$	122,557		$	119,354

(a)Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.

Net cash provided by operating activities during the three months ended March 31, 2026 was $5.6 million, compared to $2.1 million in the three months ended March 31, 2025. The increase was primarily driven by improved working capital management primarily driven by favorable cash collection activities at AEC.

Net cash used in investing activities included capital expenditures totaling $9.3 million and $15.6 million for the three months ended March 31, 2026 and March 31, 2025, respectively, with continued maintenance capital and capital designed to improve operating efficiencies across the Company.

Net cash provided by financing activities was $13.8 million for the three months ended March 31, 2026 as compared to net cash used of $15.1 million for the three months ended March 31, 2025. During 2026, we had net borrowings of $23.0 million as compared to $94.0 million of borrowings in the prior year, which were offset by share repurchases of $69.2 million. Additionally, the Company has returned cash to shareholders through dividends of $7.9 million in the first three months of 2026.

Liquidity and Capital Structure

We finance our business activities principally with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. As of March 31, 2026, $476.5 million of borrowings were outstanding under our $800 million unsecured committed Amended Credit Agreement.

As of March 31, 2026, we had cash and cash equivalents of $122.6 million and borrowing capacity under our Amended Credit Agreement of $323.5 million, for a total liquidity of approximately $446.0 million. We believe cash flows from operations and the availability of funds under our Amended Credit Agreement will be adequate to fund our operations and business needs over the next twelve months.

As of March 31, 2026, $101.2 million of our total cash and cash equivalents were held by non-U.S. subsidiaries. The accumulated undistributed earnings of the Company's foreign operations not targeted for repatriation to the U.S. were in excess of $158.9 million, as of March 31, 2026 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, which is currently considered to be indefinitely reinvested in foreign operations, may also result in additional taxes.

Off-Balance Sheet Arrangements

The Company is party to certain off-balance sheet arrangements, including certain guarantees. The Company provides financial assurance, such as payment guarantee and letters of credit and surety bonds, primarily to support workers' compensation programs and customs clearance, of less than $11 million. There were no material changes in the Company's off-balance sheet arrangements during the first quarter of 2026.