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, 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
•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.
General risks associated with macroeconomic conditions, as noted above, have
changed during the first nine months of 2022. The Russia-Ukraine war has had and
may continue to have profound effects on macroeconomic business conditions
around the world, including in our Machine Clothing and Albany Engineered
Composites segments. Certain COVID-19 related disruptions and risks have
persisted during the current year, causing inflationary pressure connected to
global supply chain bottlenecks and elevated energy price pressures. These
challenges have only increased as a result of the Russia-Ukraine war, which also
has quickly prompted a global imposition of stringent sanctions that have
resulted in a sharp decline in trade with Russia. Correspondingly, and in union
with the global community, we voluntarily decided to dissolve business
relationships in Russia during the first quarter of 2022, despite the associated
cost to our investment and the loss of future revenue in the region. While our
Albany Engineered Composites segment does not have significant direct exposure
in this region of the world, and our Machine Clothing segment has now
significantly reduced its exposure, the broader economic ramifications of this
war will indirectly affect all sectors of the economy. This conflict, including
imposed sanctions, has amplified inflationary pressures, driving higher prices
for global oil, natural gas, agricultural and metal prices, as well as causing
additional supply-chain disruptions.
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
23
--------------------------------------------------------------------------------
Index
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 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 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 12 percent of the Company's
consolidated Net sales in 2021. 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 2021,
approximately 47 percent of AEC sales were related to U.S. government contracts
or programs.
Effect of Russia-Military Conflict
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 generates 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 $1.6
million expense in cost of goods sold and in Selling, Administrative, and
General expense, representing reserves against the risk of obsolescence of
certain inventory destined for Russian customers and uncollectible receivables
from Russian customers, respectively. 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 during the first quarter of 2022.
We anticipate approximately $10.0 million reduction in future annual net sales
in the MC segment, due to our cessation of doing business in Russia.
For the year-to-date ended September 30, 2022, our segments saw higher input
costs due to increased energy costs, tight supply market, and global logistics
challenges.
24
--------------------------------------------------------------------------------
Index
During the quarter ended September 30, 2022, our MC segment experienced higher
energy prices, driven by energy surcharges supporting increased raw material
prices. Such was due to capacity constraints, due to limited opportunity to move
supply globally from Europe. 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 those pre-pandemic.
We anticipate inflationary pressure to remain for the balance of this fiscal
year and energy cost escalation to be a primary input cost pressure in the near
term.
The ultimate financial impact due to the war between Russia and Ukraine, the
ongoing COVID-19 pandemic, and inflationary environment is difficult to predict.
After consideration of possible offsets through corresponding price increases to
our customers and productivity improvements, we estimate a net increase to the
MC segment input costs of between $8.0 million and $10.0 million for the year
ending December 31, 2022, or an unfavorable impact to the segment gross margin
of up to 140 basis points for the year ending December 31, 2022.
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. Due to the nature of AEC's contracts with its customers, we
currently anticipate passing through a majority of such cost increases to the
customers.
Until the effects of the war between Russia and Ukraine, as well as the COVID-19
pandemic, on the economic and global financial 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.
25
--------------------------------------------------------------------------------
Index
© Edgar Online, source Glimpses
ALBANY INTERNATIONAL CORP. 
