ALBANY INTERNATIONAL CORP /DE/ Q3 FY2026 earnings call

• Strategic Review Completion: Albany completed its strategic review, resolving legacy issues with Sikorsky regarding the CH-53K program, which improves economics and stabilizes the Salt Lake City manufacturing site.
• Portfolio Focus: The company is shifting from addressing legacy challenges to building for growth, leveraging proprietary 3D weaving and material science capabilities across commercial aerospace, defense, missiles, and hypersonics.
• New Business Wins: Secured an IBAS award of $21.2 million for ceramics matrix composites and entered a teaming agreement with Lockheed Martin for hypersonic missile development, creating a vertically integrated facility for high-temperature needs.
• Machine Clothing Optimization: The segment emerged from integration activities with optimized global footprint. While facing secular decline in publication rates, it maintains strong market share and delivers consistent margins through disciplined cost management.
• Operational Execution: Engineered Composites saw stronger execution with improved program visibility and a growing pipeline. The CH-53K renegotiation removed uncertainty and validated the transformation of the business toward profitable growth.

Machine Clothing: Revenue was $170 million (approx. 48.6% of total revenue), down modestly from the prior year due to weakness in the Americas from customer consolidation. Adjusted EBITDA was $46.3 million with a margin of approximately 27.2%. Engineered Composites: Revenue reached a record $179.7 million (approx. 51.4% of total revenue), driven by higher production rates on LEAP, Boeing platforms, CH-53K, and missile programs. Adjusted EBITDA was $65.6 million with a margin of 36.5%, significantly improved from a loss in the prior year.

• Fourth Quarter 2026 Revenue: Expected in the range of $325 million to $335 million.
• Fourth Quarter 2026 EPS: Anticipated adjusted diluted EPS between $0.65 and $0.75 per share.
• Tax Rate: Effective tax rate expected to be approximately 29.5% for Q4.
• Full Year Machine Clothing: Management expects full-year revenue to be slightly down compared to 2025 due to mixed demand and customer consolidation.
• Long-term Margins: Target for Engineered Composites EBITDA margin is mid-teens by the end of 2027, starting from a base of ~12.5% in late 2026/early 2027 before ramping up.

• Demand Volatility: Mixed demand environment in Machine Clothing, with softness in North and South America and limited visibility in China.

• Legacy Program Risks: Although mitigated, the CH-53K program previously caused significant losses ($147.3 million charge); successful renegotiation was critical to current performance. -> Operational Disruptions: Past equipment failures in Machine Clothing impacted volumes; while recovery is planned by year-end, such disruptions pose operational risks.

• Integration Challenges: Ongoing integration activities in Machine Clothing require careful management to maintain efficiency and cash flow generation.

Q: Analyst asked for the underlying EBITDA margin profile of Engineered Composites after adjusting for CH-53K contract impacts and tariff refunds, and whether the ~12.5% margin is a reasonable baseline for early 2027. / A: CFO confirmed that excluding discrete items and contract adjustments, the underlying EBITDA margin was approximately 12.5%. He stated this is a reasonable starting point for Q4 2026 and early 2027, with expectations for margin expansion as new contracts take effect, volume increases, and legacy contracts are renegotiated or exited. The long-term goal is to reach mid-teens margins by the end of 2027.

Q: Analyst inquired about the capacity and CAPEX requirements for missile and hypersonic ramps, noting recent CAPEX reductions, and how the $21.2M IBAS award supports build-out. / A: CEO explained that the IBAS award funds in-house capabilities including machining, inspection, and densification for Ceramics Matrix Composites, requiring limited additional capital from Albany. Current CAPEX reductions reflect facility optimization rather than lack of investment. Future capacity expansions will involve a mix of internal investment and customer/government funding, particularly as Rochester facilities approach capacity limits.

Q: Analyst asked about the timeline for qualifying new components versus ramping existing missile programs and when financial impact would be visible. / A: CEO noted that while traditional qualification takes 12-36 months, current defense needs drive accelerated schedules. Impact is expected sooner, potentially in 2027 and 2028, rather than the typical 30-month horizon. The IBAS contract broadens scope, maximizing impact three years out, but near-term revenue contributions from existing programs like JASSM and LRASM are already ramping.

Q: Analyst requested insights on steady-state cash dynamics for Albany exiting 2026, given strong Q3 generation and working capital needs. / A: CFO indicated that strong cash flow is expected to continue into Q4 2026 and Q1 2027, consistent with historical patterns and Q3 results. While specific targets will be detailed at the December Investor Day, management emphasized a high degree of focus on cash flow improvement across the business, supported by the positive impacts of the CH-53K renegotiation rolling through future quarters.