Albany International Corp. Class A Aktie

Thank you for standing by. My name is Cass, and I will be your operator for today. At this time, I would like to welcome everyone to the First Quarter 2026 Albany International Corp. Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Karen Blomquist, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Albany International's First Quarter 2026 Earnings Call. As a reminder for those listening on the call, please refer to our press release issued this morning detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Additionally, our remarks today may reference our earnings presentation, which is available on the Investor Relations section of our website, albint.com.

Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to both our earnings release of April 30, 2026, as well as our SEC filings, including our 10-Q and our 10-K.

Now I'll turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, Karen. Good morning, and welcome, everyone. Thank you for joining our first quarter earnings call. We entered 2026 as a more focused and disciplined organization with a clear strategy centered on our core strengths. Our culture begins with caring for our people, and it was an honor to recently have our Engineered Composites segment recognized as one of America's safest companies. Safety is a priority at Albany and is embedded in how we design processes and operate each day. And a strong safety culture translates to a strong quality culture.

This operational philosophy is also manifested in our outstanding on-time delivery performance. Our focus on safety, quality and operational excellence creates a solid foundation for our reliable operations, while our value proposition remains grounded in our shared expertise in industrial weaving and material science, which connects our two businesses and differentiates us in the markets we serve.

I'd like to take a minute to address the conflict in the Middle East. We're continuously monitoring and working closely with our suppliers and customers. And to date, we have not seen any impact and have made only slight adjustment to delivery routes. Raw materials are generally protected by either long-term contracts or customer-directed contracts. We will continue to monitor and work to minimize any supply chain risk. At the same time, we're seeing increased demand on our weapons programs and are maximizing production on key programs.

In Machine Clothing, the team did an outstanding job taking corrective actions to make up the downtime of a machine malfunction, and we expect that recovery to be completed in the back half of the year. More broadly, demand conditions across our end markets stabilized in the first quarter.

In Engineered Composites, our focus remains on refining our operating model and prioritizing higher value-add applications, particularly within our advanced weaving technologies, including 3D weaving, braiding, winding and resin transfer molding that serve end markets such as commercial and defense propulsion systems, missile production and space exploration. We're seeing volume increase across key programs, reflecting both higher production rates and the benefit of the actions we have taken over the past 12 months. Importantly, we're winning new business with new and existing customers and demand remains strong across defense platforms and the LEAP production continues to increase.

Our current pipeline of new business opportunities remains robust and continues to expand as we focus on new applications where our expertise and products offer greater strength and lighter-weight solutions. We believe the actions we have taken and the trends we see across both segments position us well to drive strong free cash generation and build on the baseline we established exiting 2025. This provides us with the flexibility to continue allocating capital in a balanced and disciplined manner, including reinvesting in the business to support long-term growth while also returning cash to shareholders.

Turning to the quarter. We're off to a solid start to 2026 with revenue of $311 million, up 7.8% year-over-year, which translated to adjusted EBITDA of $48 million.

In Machine Clothing, revenue for the quarter was $166 million and came in ahead of our expectations across all regions, including North America, Europe and China. Despite the recent stabilization in China and improved order rates, which are positive developments, visibility beyond the near term remains limited.

As we previously disclosed, at the start of the first quarter, we experienced an equipment failure at one of our facilities, and I'm pleased to report that we were able to recover more of the lost production related to the unplanned downtime than we initially anticipated in the first quarter. Assuming the equipment continues to operate as expected, we believe we are well positioned to recover the remaining lost volume by the end of the year. We are actively managing the situation and are relocating a machine from a closed facility to have a long-term solution in place by year-end.

Adjusted EBITDA margin for MC was 25.9%. On a constant currency, margins were stable, driven by a meaningful improvement across Europe as we continue to realize the benefits of integration activities.

Turning to Engineered Composites. Revenue for the quarter was $145 million compared to $114 million in the prior year. The increase was driven by broad-based growth across our programs with incremental contribution from F-35 Missile Systems, LEAP, 787 and the CH-53K. Segment adjusted EBITDA was $17 million or 11.7% of sales compared to $15 million or 13.5% of sales in the prior year. The increase in EBITDA reflects higher overall volume, while the margins in line with expectations were driven by mix, primarily the impact of CH-53K AFT program revenue, which is now booked at 0 margin following the actions taken in the third quarter of 2025.

In new business developments, we're excited to announce our new contract with Pratt & Whitney for composite engine components for their Geared Turbofan. The Turbofan relies extensively on advanced composite materials to achieve its fuel efficiency, noise reduction and weight targets, which strongly leverages AEC's strengths in high-performance composite structures. For both JASSM and LRASM missiles, we have been requested by our customer to increase production, bringing output to the highest level achievable within our current capabilities, including through the use of overtime.

Turning to the strategic review of the Amelia Earhart facility in Salt Lake City, which houses the CH-53K program. We continue to make progress and have completed the stand-alone analysis with PwC. While it is still too early in the process for us to share any conclusions, we remain on schedule and look forward to providing an update as we move towards the resolution.

As we look ahead, our priorities remain clear: disciplined execution, continued progress across both segments and driving improved profitability and cash generation. In Machine Clothing, we saw stabilization in key markets and remain focused on execution and margin recovery. In Engineered Composites, we're scaling the business, refining our operating model and prioritizing higher-value application to support long-term growth and margin expansion.

We believe Albany is well positioned to deliver sustainable value for our customers and shareholders, supported by our differentiated capabilities and a more focused, disciplined approach. I would like to thank our employees for their continued dedication as well as our customers, partners and shareholders for their ongoing support.

With that, I will turn the call over to Will to review the financial results in more detail.

Thank you, Gunnar, and good morning. Before turning to the financials, I would like to remind you that a reconciliation of GAAP to non-GAAP measures discussed today can be found in this morning's press release.

First quarter revenue was $311.3 million, representing growth of 7.8% year-over-year. This increase was driven primarily by high volumes in Engineered Composites as key programs continue to ramp, partially offset by lower volumes in Machine Clothing, particularly in China. Adjusted EBIT for the quarter was $48.2 million compared to $55.7 million in the prior year, reflecting a margin of 15.5%. The year-over-year decline in margin was primarily driven by a higher mix of revenue from Engineered Composites, which carry structurally lower margins as well as lower volumes in Machine Clothing and the impact of foreign exchange.

In Machine Clothing, results reflect continued softness in Asia markets, particularly in China, resulting in a modest year-over-year decline in revenue to $166 million compared to $174.7 million in the prior year. Despite this headwind, underlying trends remained stable and operational execution was solid.

Adjusted EBITDA for the segment was $43 million with a margin of 25.9%. The year-over-year decline was driven primarily by foreign exchange impacts and lower volume in Asia. On a constant currency basis, margins were stable overall, supported by efficiency initiatives and integration progress.

In Engineered Composites, performance was solid above our internal expectations. The revenue increased to $145.4 million from $114.1 million in the prior year. The growth was driven by higher volumes across multiple programs, including commercial aerospace platforms such as LEAP as well as defense program. The outperformance reflects both the timing of program ramps and strong execution, which enabled us to meet higher-than-anticipated demand in the quarter.

Adjusted EBITDA for the segment was $16.9 million compared to $15.4 million last year. While margins declined to 11.7%, this reflects the impact of prior year items and mix, including 0 margin revenues associated with actions taken on the CH-53K AFT program in 2025.

Gross profit for the quarter was $99.8 million with a margin of 32.1% compared to 33.4% in the prior year. The change reflects revenue mix with a greater contribution from Engineered Composites.

Operating income was $25.4 million, representing a margin of 8.1% compared to 9.8% last year. The decline was driven by higher nonrecurring and restructuring expenses. Net interest expense increased to $5.5 million, reflecting higher borrowing costs. Other income was at a net benefit of $3.2 million, driven primarily by foreign currency and derivative impacts. The effective tax rate for the quarter was 33.1% compared to 26.6% in the prior year, largely due to the absence of favorable discrete items.

Free cash flow was at a net use of $3.6 million compared to a net use of $13.5 million in the prior year period. The year-over-year improvement reflects timely customer collections. Capital expenditures totaled $9.3 million, focused on facility optimization and investments tied to key customer programs. R&D expense was $13 million, reflecting our continued commitment to innovation. We ended the quarter with $122.6 million in cash and $477 million in total debt, resulting in net debt of approximately $354 million. Including revolver availability, we have approximately $446 million of available capital, providing flexibility to support ongoing investments and return capital to shareholders.

Looking ahead, current trends support a stable outlook across both segments. In Machine Clothing, we expect modest sequential improvement in volume in the second quarter following typical first quarter seasonality. Assuming no additional equipment downtime, we expect to recover the remainder of lost volume as the year progresses. In Engineered Composites, we expect continued growth supported by ongoing program ramps across both commercial and defense platforms.

For the second quarter, we expect consolidated revenue in the range of $335 million to $345 million. We anticipate adjusted EPS in the range of $0.70 to $0.80 and an effective tax rate of approximately 31.5%.

For the full year, in Machine Clothing, we continue to see stable demand in Europe and the Americas. And while China shows signs of stabilization, we still have limited visibility for the remainder of the year. In Engineered Composites, we expect continued growth driven by key platforms with margin levels normalizing relative to the prior year.

Now I'd like to open the call up for questions.

[Operator Instructions] And your first question comes from the line of Peter Arment with Baird.

Gunnar, maybe you could just give us an update on Salt Lake and discussions around CH-53K, what you can say about planned divestiture or any kind of -- anything you could kind of highlight? I know it's obviously challenging given there's ongoing negotiations.

Yes. Arment, I think that the -- our performance out of our Salt Lake facility, as you can see with the performance in the first quarter has been very, very good. We stay very close to our customer and continue to deliver both for our customer on the CH-53 program as well as all the other programs as well as the war fighter. So that is the commitment that we have given through this process.

The process of the strategic review is progressing to our schedule. We've -- we're in the process of finalizing the marketing material so that we can go more directly to the interested parties that have already contacted us and Guggenheim. So I would say we -- just like Will said, we are on schedule, and we are staying connected with our customer throughout this process.

Appreciate that color. And if I could just ask a follow-up, unrelated, on the MC business, could you just give us a little more color on the overcapacity issue in Asia? The MC business has been such a resilient business over the years. And obviously, you've got different regions that it's in. But could you just give us a little more color on what's driving the overcapacity? Is it just economic activity or something specific?

Yes. The investment in paper machines and new machines in China specifically has been very high in the last several years. And as you know, Peter, we -- to run a paper machine profitably, it needs to run at high speeds. That's where we come in, and we are -- we have the best belts for that, but they overproduced. And that overproduction, that's what we are uncertain about. How long does it take to get the paper back to a normal level so that production can pick up again. Then the other uncertainty is, is there too much production capability in China? And is this a cycle that they're going to go through because we see new builds there.

The positive that we're seeing there is on tissue. We're seeing an increase in tissue and some of our process belts that are being used there continue to be in favor. So that's what we saw in the first quarter, the stabilization. We're taking a conservative outlook for the year in what's happening in China.

I'm not showing any further questions in the queue. I will now turn it back over to Gunnar Kleveland for closing remarks.

All right. Thank you, Cass, and thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany. Thank you, and have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

So, okay. So let's get started. I'm Chigusa Katoku. I'm multi-industry analyst at JPMorgan. Today, I'm very excited to have with me Willard Station CFO of Albany International.

So I think I have a bunch of questions. So we'll just jump right in.

So yes, aerospace is obviously really topical right now. So a lot of my questions are going to be focused on AEC. So maybe just first starting off with the most recent quarter, the fourth quarter. The top line at AEC was really strong at 45% organic growth. Can you kind of unpack this for us between the material pull forward that you commented on, some accounting nuances and then -- and what's like the actual underlying demand trends that you're seeing here?

Sure. Overall, we had a solid Q4 within our AEC business. And the way to think about it, there were 3 primary drivers. First being we had across the portfolio, we just had solid performance across each of our programs across the portfolio. And that was largely driven by LEAP, Beta and then our Boeing one-piece frame.

Secondly, I would say we had a quarter finally with no EAC adjustments or cost growth, which impacted our performance that we saw in the prior year. And then third, I would say we have the material pull forward, which was aligned with the ramp-up that we're seeing in our overall business.

If you look at our current production rate, we're expecting revenues to be about $120 million per quarter. In Q4, we're at $143 million. And we're not expecting that to repeat as we look into fiscal '26, but we will continue to see some steady improvements in ramp-up throughout the year. But overall, the business performed very well in Q4, and we're really pleased with those results.

Okay. That's great to hear. So if there weren't those nuances like the material pull forward [indiscernible] all, do you -- can you break down how much the organic growth was or not something that you would break out?

Yes. I would say if you want to think about it, I would break it into 1/3. I would say 1/3 of it was just solid performance with the programs. We had 1/3 of it driven by the fact that we didn't have any material EAC growth in the quarter. And then 1/3 was just the accounting treatment with a material pull forward. Surely, we're seeing some organic growth driven by the ramp-up in LEAP and then there are some rate-ups in Beta as well. But I will look at it in 1/3s.

All right. That's super helpful.

Yes.

And then shifting to the first quarter, AEC organic growth is implied around 5% at the high end of guidance. And so compared to the fourth quarter, this kind of deceleration, but what is driving this?

What's driving the growth?

Yes. The first quarter, you gave guidance for the first quarter AEC organic growth, and it's implied around 5%, even at the high end of the guidance. So is this conservatism? Or how do you -- what's driving this deceleration from the fourth quarter?

Yes. I think so -- I think what we provided in Q1 is more reflective of the ramp-up that we're going to see throughout the year. So we're going to start Q1 with a modest growth rate. And again, it's driven by the program ramps. And as those programs ramp up throughout the year, we'll continue to see stronger growth throughout the year.

But the pacing item for AEC in Q1 specifically is just we're aligning with the program ramps. And so the growth we provided is in line with the ramps that we expect to see across the programs for Q1. And then again, it's going to ramp up as we perform throughout the remainder of the year.

That's super helpful. So for the full year, do you expect about high single-digit range organic growth for AEC?

Not going to. No, I don't think [indiscernible].

Okay. You're not going to comment. Okay. Okay. That's fine. And then moving on to margins. I think on the conference call, you mentioned 10% margins.

Yes.

Can you clarify what that -- what part of the business that is about?

Yes. So we're referring to AEC. And so if you go back to Q3, our margins are in at about 9.7%. And then in Q4, we came in at 13%. And again, Q4 was driven by some of the performance items I mentioned earlier. As we look across -- we look at our performance for the full year, we're expecting our range to be within that 10% to 13% for our AEC business.

Now once we make it through and complete the strategic review of our Salt Lake City site, we will have better quality of earnings for the remaining programs. And obviously, we got to go through a transition period where we work through the fixed costs and the stranded costs. But once we complete that, we're expecting the overall margins for that business to be in the mid- to upper teens for AEC, which is solid performance, very solid performance.

Sounds great. And that's a great segue. So maybe just talk about the progress on the structure assembly business exit. Maybe can you talk about first a reasonable time line here?

We're -- I would just say that it is the top priority for the business. We believe divesting this business is going to drive greater value for Albany and our shareholders as well as drive greater value for that site itself. We have invested in that space quite a bit. It's a well-capitalized site, tons of automation and technology. And I'll tell you, the team there, strong manufacturing, strong operational background, and we continue to deliver to our customers and support the war fighter, which we're very proud of what we've done at that site.

And so as we look forward, once we divest the Salt Lake City business, which is, again, a top priority for us, we're then going to start working through those stranded costs, those overhead lingering costs and then focus more on the high-growth areas aligned with our 3D weaving technology where we see very strong economics, and we see very strong market demand.

Our strategy is to really focus on that technology that distinguish us from our competitors, where we have strong IP and where we're seeing a lot of demand for it. The margin profile for our programs aligned with that technology is solid and we're going to continue to invest and grow that and make that a focus as we move forward for the business.

Okay. That's great. I have a few follow-ups on that. Firstly, so can you comment -- can we expect maybe by year-end? Is that kind of a reasonable time frame?

I don't -- I mean, like I say, it's a top priority. So we're all focused on it. We have strategics, private equity, we've seen a lot of interest in that space, well-capitalized site, a lot of capability. There's over 11 autoclaves at that site.

And so it's a top priority for us. We're going to keep pushing forward. I can't comment to say we'll be done by the end of the year, but we're giving all our efforts to make sure we can transition and divest this space as quickly as we possibly can.

Okay. Sounds good. And then on the stranded cost comment, about how big do you expect that to be? And how many months do you expect to take to drive that down?

That's a good question. We're still working through that. We've hired an accounting firm to help us kind of work through identifying the stranded costs. They're in the final stages of completing their analysis. And then it's just going to be a focus, right? Working through that stranded cost is going to be a key focus for us. We're anxious to share and show the true value of the business once you separate Salt Lake City and really look at what's remaining. It's a strong quality of earnings. We know that. But we have to work through the stranded costs.

And so it's a top priority for us. We're not going to do it incrementally. So we're not going to wait until we divest the site and then start tackling the stranded costs. We're going to start tackling as soon as we get through the analysis from the accounting firm and start positioning ourselves to be ahead of the curve instead of behind the curve as we work through the divestiture.

Okay. That sounds good. So this year, margins is probably in the 10% to 13% range even as you kind of...

Absent any additional EAC issues.

Okay. Absent -- and although you maybe start to work down some of the stranded costs beforehand. And then ultimately, maybe it's not right after you divest in 2027, but maybe 2028 onwards, your AEC margins could potentially be in the mid- to high teens range.

Yes. Yes.

Okay. That's helpful. And then just building off of that, can you kind of help us understand the AEC business composition today a little bit better. We know that LEAP is about 35% of AEC sales and then CH-53K is the second largest. Can you remind us of the revenue contribution from CH-53K today?

Yes. I don't think we've shared revenue by program. So that's not something that we've shared. I can say, though, as we work through the divestiture, obviously, LEAP will be a larger portion of the company's revenue as we move forward. And then in addition to that, we're seeing a lot of interest coming in for additional 3D weaving opportunities for the business. So the pipeline is strong in terms of growth and opportunity as we move forward. But we haven't shared any program-related revenue by business. And so we won't share it.

Okay. That's fair. Then maybe can you kind of rank contribution after LEAP and CH-53K, maybe if you can rank the contribution from Boeing one-piece frame, GNX engine, F-35, JASSM or LRASM, AM space, hypersonics, all these businesses, if there's any way you could help us.

So the Boeing one-piece frame will be part of the -- so you think about the site and what we are divesting for the AED site, right? And so you have some of the Beta, large structure Beta work will be part of the divestiture. Boeing one-piece frame will be part of the site and the divestiture there. Obviously, you got the CH-53K and you got a little of the F-35 work. We have Beta and F-35 work at our Boerne, Texas site as well, so it can get a little bit confusing.

And so Boeing one-piece frame won't be part of what I would say will be the growth as we move forward. JASSM, LRASM, LSRO, missiles, obviously, will be part of our growth as we move forward along with LEAP. I would say each of those programs are adding tremendous value to our business. LEAP, obviously, with the projected rate up over the next few years, is going to take a bigger -- be a bigger portion of our revenue for the overall business. But any further breakdown we haven't provided with JASSM or LRASM, LRSO and all the other remaining programs. We haven't provided that level of detail.

Yes. That's fair. So after the structures business assembly exit, your portfolio -- your AEC portfolio is going to be close to half LEAP is what I estimate. And then you also mentioned some like missile exposure. So -- and I think -- and maybe I just wanted to dig into this. Is there any way -- maybe you could help us understand your percent exposure to missiles and space too? These are kind of really growthy markets.

I would say space and missiles; they are a meaningful and growing portion of our business. And obviously, we're seeing new business opportunities as we look forward. We haven't provided any percentage breakdowns of what that looks like for us. And so we're not ready to talk it at that level. But we're seeing a tremendous amount of opportunities there. And again, it's just another example of where we're leveraging our 3D weaving technology in growing markets that have great returns.

And so we're excited about what we're seeing in that space. We're excited about the role that we're playing today. And we're looking forward to capturing those new businesses opportunities that are on the horizon. And so I think we're well positioned there. The business today, I would say it's steady, but we're seeing a lot of opportunities for growth.

Makes sense. So it's maybe like still low single-digit percent exposure.

You try to get an answer out of me. No, [indiscernible], I'm not sharing.

Yes. Okay. That's fair. And then, yes, so said you touched on the 3D weaving opportunities. Maybe can we get an update on how it stands right now in terms of how big they are? I think LEAP is the biggest. And then when Boeing 777X begins full-scale production, you'll be supplying 2 fan cases for GE9X.

Yes.

And you have EV tool space, hypersonics, et cetera, but if you can give us an update on how big this 3D weaving is today and how big it could get?

I'll say this. It's a healthy pipeline. As you mentioned, with the 777X, the fan case there, we're excited for the opportunity to be a part of that. Obviously, with LEAP, I think year-to-date, we provided over 200,000 or so LEAP fan blades. So you think about that, over 200,000 times, we have replaced titanium with our composite 3D weaving capabilities. It's exciting. And we're seeing additional applications as we move forward.

We have interest from all the major engine OEMs. We haven't obviously done any business with them yet, but we have interest coming in from all, I'll say, the major engine OEMs. And we've seen a very healthy pipeline.

And if you think about the strategic review and the position we took with our structured business, a lot of that was we see more value, greater value, greater returns, greater growth when we focus on that 3D weaving technology. And the marketplace seems to be responding very well to our technology. We are in a position with leading capabilities. We believe we can drive the price point that we desire in this space. And -- we're just looking forward to the growth opportunities. Looking forward to the growth opportunity.

Yes, it's really exciting. And I visited your 3D weaving facility, and it was very impressive. I feel like for you, more the near-term execution, especially given you've had those AEC adjustments for the past year. So I think -- I think people pretty much agree that the long-term story is very exciting. And so I think it's more about the near-term execution.

Yes, we have to get through the strategic review with the CH-53K program. The good thing, as I mentioned earlier, we stabilized the site. We're delivering today. Our team, strong team, they're producing the [indiscernible] section. They're meeting our commitments on the legacy contract that we have there with sponsons, horizontal HTAP, et cetera. The team is performing well today, and we have very, very strong operators, and it's a well-capitalized site.

But when you think about us and our strategy and where we want to focus and grow as a business, it's just not aligned with that focus and growth. And our goal is to unlock the maximum amount of value we can for our shareholders. And so yes, working through that strategic review is going to be a top priority for us. It is the key focus for us. We have -- since we mentioned it in Q3 till today, we have made it a top priority as a business. All the leaders within the business are focused on divesting that site.

Sounds good. So in the third quarter, you recorded a charge for the remainder of the life of CH-53K. It was a pretty meaningful charge, but it was very nice to see in the fourth quarter, you didn't have any EAC adjustments. And I guess my question is, so is that comprehensive, the charge that you took in the third quarter so that we won't see...

Yes. It's -- so with -- it's a firm fixed price development program for those who are not familiar with it. And under the rules, once you get into a loss position, you have to recognize those losses for the duration of the program. And so what we estimated in Q3 was estimating 8 years out what our labor and material impacts would be for that program.

And I'll say we did it in a very conservative way. We removed any type of performance improvements that were already baked into the estimates. And we assume that we were going to get hit by the majority of the labor and material cost growth. And so we want to be conservative. We want to ensure that we covered our cost exposure for the next 8 years, and that's the approach that we took.

I believe it was the right approach because as you mentioned, we had Q4 and there was no additional EAC issues or growth on that program, which now allows us to really showcase, okay, here's what the rest of the business looks like, right? And so in Q4, we had margins of about 13% for AEC. I believe we're going to finish this year in that 10% to 13% range. And then once we exit out of the strategic review and work through those stranded costs, we'll be mid- to upper teens.

And so our goal is to really give our investors an insight of what the remaining business looks like and how -- looks like and how healthy the 3D weaving technology is for us and how well we are performing. And so we conservatively went into that Q3 [ reach ] forward loss. We want to kind of get rid of the noise that was around CH-53K, which really was hindering showcasing just how well the team is performing.

Yes. That sounds great. So maybe we'll shift a little bit. Maybe on the raw material topic, just to touch on this because inflation has been topical recently. Can you talk about your raw material basket and kind of if you're seeing any impacts to margins from this?

We're not seeing -- I'll say this, and it goes back, I hate to keep talking CH-53K. At some point, we're going to stop talking CH-53K. But when you think about our business, CH-53K is the one program where I would say we are locked into a firm fixed price agreement over -- it was a 10-year contract, meaning whereas we saw our cost increase, whether it be material costs, labor costs, we really didn't have any remedies in the contract to adjust and reprice.

As we look at the remaining business, we don't have that type of condition. We don't have any long 10-year type fixed price agreements. And so as we continue -- we see cost pressure, inflation, whether it be all whatever, we see any type of those type of cost pressures moving forward, we will have the ability to reprice in our current agreements.

And so there could be some near-term increases in cost, but we're not expecting it to be meaningful. But on a long-term basis, contractually, we have the remedies in place where we can go in and reprice and acknowledge that cost growth and make sure that we're passing that cost growth over to the customers and not absorbing it as a company.

Make sense. Is there like a lag, a typical lag that you can talk to it through pass-through point?

We're not seeing any -- today, I would say, right now, we're not seeing any signs of any lags today. There could potentially be some in the future. But right now, we're not seeing anything that will suggest that we will have any type of meaningful EAC impacts to our business.

Okay. That sounds good. And then maybe touching a little bit on your other business, which is actually bigger at 60% of sales. Machine Clothing was off to -- it starts off slow in 2026. And you mentioned that you can make up lost volumes for the remainder of the year. Do you expect this business to grow this year or it's...

I would like for it to grow. I like all our businesses to grow.

When you look at Q1, I think you got to keep in mind, we had a significant equipment failure, right? And we discussed it on the call. We had an equipment failure for Machine Clothing in Q1. and that's impacting our performance for Q1. We're expecting to recover that throughout the year. So far today, we have the equipment up and running, and it's performing fine, which is good. So we expect that to recover again for the remainder of the year.

I would say, overall, there's kind of mixed demand across the geographies in Machine Clothing. In North America, we have stability through the fourth quarter, but our order intake was pressured during that same period due to the industry consolidations. In Europe, we saw a strong recovery in the fourth quarter and signs of stability coming from a down cycle.

It's really what we're seeing in Asia, particularly in China, where you have that overcapacity, and we have a limited view of what's going to take place within China for the remainder of the year. We can say that we saw stability in Q4, which was good. And we're expecting as we think about fiscal '26 and the performance of that business in fiscal '26, we're expecting it to be flat to what we saw in fiscal '25. And that being said, Machine Clothing is a steady, predictable cash flow business, and we're expecting that cash flow to be similar to what we saw in '25 in fiscal '26.

Okay. So MC top line flat versus 2025?

Yes. That's what we're expecting.

That's helpful. And then, yes, you touched on the cash point. So certainly, MC has very good cash conversion.

Yes.

And AEC was bit more a user of cash. But how is that profile now versus MC versus AEC?

I think as we -- AEC is the growth business. MC, as you say, strong cash flow, stable business. We're leading in the marketplace, performing well. Customers love what we do on the Machine Clothing side of the business. AEC is where we see a tremendous amount of growth. We expect the cash conversion to be slightly below 100% as we move forward. And that's largely driven by the fact that we're going to continue to invest in our AEC business. It's a high-growth business with strong economics, and we're going to overweight our investments there.

We expect at some point as the programs ramp up and mature and we get to a steady rate that we'll see an improvement in the cash flow for our AEC space, but that's going to take a little time. And we recognize that, that's going to take a little time. But we do believe with the strategic review and the decisions we made with the Salt Lake facility, our AED site specifically, we do believe that's going to allow us to get to the other side a lot faster when it comes to our AEC business and overall performance.

Okay. Great. So right now, is AEC a use of cash? Or is it just...

It's -- yes. Yes, it's historically use of cash. Yes.

Yes. That makes sense. Okay. And then -- so maybe just to talk about the portfolio. So you're trading at a discount to some of the parts. And so as you clean up these cost overrun issues and you're looking ahead, you have a cleaner aero portfolio. So it's not generating cash now, but are there any opportunities? Or do you get any interest for -- like a split up because your aero asset is pretty attractive and MC is also stable cash cow.

I would say, no, I'm not aware of any opportunities for a split up. And quite frankly, we don't believe that, that will maximize value for our shareholders. The way to think about our business is, yes, it's disparate end markets, right? So the end markets are definitely different, but the technology is the same. It's the exact technology. And the technology that's making us successful and position us for growth in our aerospace business that was born in Machine Clothing.

Sometimes when I walk through Machine Clothing part of our business and aerospace part of our business where we're doing a 3D weaving, sometimes I just close my eyes. And when I close my eyes, I hear the exact same thing. I hear the exact same thing. You hear the weaving, you hear the looming. It's the exact same thing.

And so we're excited about having these 2 businesses together. We believe from a technology standpoint, from a financial standpoint, it makes a lot of sense to keep these 2 businesses together. And we're looking forward to the growth opportunities for both. Machine Clothing, yes, we've had some challenges, I would say, these past couple of years, but we have plans to grow in that business just as well as we're going to grow in our aerospace business.

But I don't think from a shareholder value standpoint, we will create greater value separating the 2. The 2 belong together, the technology is the same. And I would say, overall, when you think about us, we find markets, attractive markets with strong returns where we can land and expand our technology, we're going to look for opportunities to land and expand that technology. It doesn't necessarily tie us to one space, which I think is good for us, good for our shareholders and it's good for growth.

And so yes, I mean, the 2 are joined. There is a connective tissue between the 2. Many people don't understand it. But if you walk through a Machine Clothing production facility and the AEC production facility and you just close your eyes for a bit, it sounds the exact same. Sounds the exact same.

Yes. It's amazing. Yes, the AEC technology is definitely coming from Machine Clothing. I guess the end market exposure, it's different and the strategic initiatives are probably different too, because one side is growing very quickly and the other side is more stable.

And for example, at MC, you guys bought Heimbach a few years ago. But I guess the integration process and the margins that you're getting for it is kind of being masked by the overcapacity issues in China.

Yes.

And just how do you prioritize -- how do you have focused strategic and capital allocation decisions for these 2 businesses because they're pretty different.

Yes. I would say the AEC capital allocation historically has been focused on growth. It has been largely focused on growth, which is what you would see, for instance, with the Salt Lake facility and while I say it's well capitalized with 11 autoclaves, it has been focused on growth, also been focused on growth in Rochester and where we're doing our 3D weaving and expanding that technology.

MC business was more or less focused historically on sustainment, right? Maintenance and sustainment, let's just make sure none of the equipment fails, right? Because if it fails, it could be very impactful to the business. As we look forward, we're looking for growth opportunities within MC as well. We're continuing to make advancements with our technology. We're continuing to see additional applications for that technology.

And so one thing that we're doing now is we're challenging both segments to grow. For MC, we want top line growth. We're not going to get into '26. I already mentioned that. But for MC, we want to position that group for top line growth. And so we're making investments in this space to achieve it. And then for AEC, it's the quality of the earnings, right? We want to improve the quality of the earnings.

Yes, we've demonstrated we can generate top line growth, has to be profitable growth. The economics have to make sense, has to be cash flow -- positive cash flow. And so we're continuing to invest in both. The focus is a little different for each of the segments, but growth is definitely a top priority for the businesses as we move forward.

That's helpful. And maybe just stepping back, so you started -- how many months has it been?

It feels like it's been a few years.

That is [indiscernible]...

I'm 6 months in. 6 months in.

6 months in.

Yes. Still learning. I got a lot to learn.

Yes, there must be. Just like what do you think you could bring to Albany that's different because it has obviously been in a situation for the past year with these cash overrun issues, but to kind of move it in the right direction.

Yes. I will say this. I think, one, I'll say I'm very proud to have the opportunity to be a part of this team. This team was already a strong team well before I got here. Gunnar, our CEO, when he came in, he recognized some of the challenges and some of the strengths and where we have weaknesses, he brought in leaders to kind of advance the business and move the business forward. And that was probably one of the final pieces of that vision for him.

We have very, very strong operators within Albany. Many of them have been here for years and for decades and they have set us up to do some tremendous things as we look forward. The leaders that I'll say we have on the leadership team now, I think we all bring a tremendous amount of experience coming from larger companies. So I came from Boeing. We have folks there from Lockheed. Believe it or not, you got Lockheed and Boeing people working together. I never thought that happened.

But we're working together. We're teaming together. We're partnering. We're bringing in our expertise. We're aligning that with the folks who have been here before us, and we're making some tremendous improvements. I'm excited about where we're headed. I'm excited -- really excited about the technology and the focus on the technology.

We're focusing on the things that really differentiate us in the marketplace, and that's how people should think about us. And as we make that the primary focus, and we're getting attention from OEMs, and all sorts of different opportunities are coming forward. Now it's about how quickly can we execute on those and really show what we can do as a company. But it's been 6 months. It's been a fun 6 months. I have learned a ton. And I'm really excited about the team that we have, the culture that we have in Albany, the technology. It's just a great place. It's a great place. I'm fortunate to be here.

Yes. The runway is definitely exciting. So it just really all comes back to how the CH-53K. This is going to work out. And maybe I just have a quick follow-up on this. So would you -- would a renegotiation of the contract terms with Lockheed be kind of necessary for a sale to either to occur?

Contractually no. Contractually there is...

Would there be interest with the current contract structure with Lockheed from the buyers?

I think so. Yes. I think when you look at -- so one, it's an 8-year program, right? So there's 8 more years left on that contract. Two, it's a well-capitalized site. And so for some strategic buyers, it makes a lot of sense. Try to get 11 autoclaves into a space up and running, it will take a few years to get there, and this has it today.

And so would a buyer want to renegotiate the contract with Lockheed, they could. Do I necessarily have to renegotiate the contract to sell it? I don't. I don't. I think we are positioned to divest that regardless of how the contract sits with Lockheed today. It could be part of the buyer strategy, but it's not something that's a requirement for us as we move forward.

That's because regardless of the contract structure of the asset, but the...

I think the facility is very, very attractive facility when you think about the capabilities, the automation that's there. Like I say, we had several strategics who are interested into the space now. And it's a very -- I think it's a very attractive facility. Yes.

Okay. Interesting. And then in theory, let's say you are not able to sell it. Given that you have already recorded these charges in the third quarter, will we not see any charges going forward even if you are -- you still have it?

I hope your theory is completely wrong. We need to -- it's less of -- I'll say this, we believe we did a really nice job estimating the labor and material cost growth over the next 8 years. We believe we did a really nice job estimating that. Could there be some additional exposure or cost growth on that program? Sure. That's with all programs. I can't predict what the future is going to look like 8 years from now.

But right now, it looks like our estimate aligns with our production capabilities, and we're feeling confident in where we sit today. But there's always the risk with a fixed price long-term agreement of additional cost growth, especially if you don't have any natural remedies built into the program, which -- into the contract, which we don't today.

Okay. That makes sense. Okay. So I think we are at 12:05.

All right.

And thank you so much for coming.

Thanks for having me. Thanks for having us out.

Thank you.

Okay. Thanks.

Ladies and gentlemen, thank you for standing by. Hello, and welcome to Q4 2025 Albany International Corp. Earnings Conference Call.

[Operator Instructions]

I would now like to turn the conference over to our Director of Investor Relations, Karen Blomquist. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to Albany International's fourth quarter 2025 earnings conference call. As a reminder for those listening on the call, please refer to our press release issued this morning detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliations to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Additionally, our remarks today may reference our earnings presentation, which is available on the Investor Relations section of our website, albint.com.

Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied. For a full discussion of these risks and uncertainties, please refer to our earnings release on February 24, 2026.

Now, I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks.

Thank you, Karen. Good morning, and welcome, everyone. Thank you for joining our fourth quarter earnings call. Before turning to the business update, I want to thank the members of the Albany team who continue to inspire me with their energy and enthusiasm around innovation. This year, we introduced our internal innovation awards program, and in its inaugural year, we received 86 submissions from teams across the company. Awards span technical innovation, operational excellence, and customer service. The strong response reflects the innovative culture we have and continue to build at Albany.

Innovation is central to our long-term growth strategy, and we're proud of this culture. I would like to congratulate all of our award winners and participants this year. That focus on innovation is directly connected to what makes Albany a differentiated company and underpins our long-term strategy.

Albany is built around industrial weaving technology and material science that are deeply embedded in our customers' products. These capabilities have been developed over decades and are not easily replicated, forming the foundation of our two complementary businesses. Machine Clothing is the backbone of the company, providing stable global platform with strong margins and cash generation. Our products are mission-critical to customers' operations and enable improvements in productivity, efficiency, and sustainability.

Engineered Composites built on the same core strengths and serves as our long-term growth engine. Through proprietary technologies and advanced materials, we support high-value applications across commercial, aerospace, defense, and emerging platforms, with meaningful opportunities for growth and margin expansion. These emerging markets focus on our 3D weaving, braiding, winding, and resin transfer molding in end markets that include engines, space, missiles, ceramic matrix composites, and titanium replacement. Together, these businesses create a balanced and resilient model that allows us to invest with discipline and adapt to changing market conditions.

Over the past 12 months, we have sharpened our strategic focus on high-value applications where we hold clear competitive advantages while exiting non-core activities. As part of that effort, last quarter, we announced the initiation of a strategic review of our Amelia Earhart facility in Salt Lake City. Since then, we have made substantial progress evaluating a range of options for the site, and we have retained Guggenheim as an advisor to guide us through the process.

Taken together, the impact of these actions became evident in the fourth quarter as we delivered our strongest financial performance of the year. We reported total consolidated sales of $321.2 million, up 12% year-over-year, driven by higher sales in our Engineered Composites business, partially offset by softer demand in Machine Clothing, particularly in China. Improved volume translated into stronger profitability with Adjusted EBITDA of $57.3 million, representing 17.8% of sales, compared to $50 million or 17.4% of sales in the year-ago period.

Turning to our segments and beginning with Machine Clothing. Sales were down mid-single digits year-over-year, driven by lower volumes in China and were generally in line with our expectations. Demand conditions remain mixed across regions, with largely stable fourth quarter volume in North America, but some pressure to order rates following consolidation and mill closures. In Europe, overall volume was stable. In Asia, paper overcapacity continued to pressure our segment-level results, as we saw in the third quarter, primarily in China. While we did not see a further deceleration in the fourth quarter.

By grade, tissue remains a bright spot globally. This is a market where we are an industry leader and will continue to invest. We also saw pockets of strength in packaging, particularly in Europe. Publication grades continued a secular decline as anticipated, while pulp and engineered fabrics were broadly stable. Operationally, in January, we experienced an equipment failure on one of our critical machines in North America facility, which will unfavorably impact our first quarter results that we'll detail in our guidance.

Our team was able to bring the machine back online in February, and we expect to recover the lost production through higher output from the site as well as product manufactured at other North American sites. We already had plans to add equipment to permanently de-risk the facility, which is expected to be installed in late 2026.

In Engineered Composites, we delivered a strong performance with sales of $143.7 million, compared to $98.8 million in the year ago period. Higher sales were driven by broad-based volume increases across multiple programs. In particular, the LEAP program, which is the backbone of commercial single-aisle fleets, continues to be a solid program for us, with projected double-digit growth over the next couple of years, based on OEM target production. We expect volume to continue to build as OEMs increase production rate. We also expect incremental contributions from Beta as they progress through the certification process. In defense markets, F-35 remained a strong and stable contributor, while missile programs continued to build volumes.

Turning to capital allocation. We generated approximately $81 million of free cash flow in 2025, providing the flexibility to invest in the business, return capital to shareholders, and maintain a strong financial position. We continue to invest with discipline in areas that strengthen our long-term competitive position. During the year, we invested approximately $72 million in capital expenditures and $48 million in R&D, focused on innovation, advanced manufacturing capabilities, and operational efficiency across both segments. We also remain focused on returning capital to shareholders.

Over the course of the year, we returned approximately $218 million through a combination of share repurchases and dividends, including the repurchase of roughly 10% of shares outstanding. This balanced approach allows us to invest for growth, maintain financial flexibility, and consistently create long-term value for shareholders.

In 2025, we undertook a deliberate transition of the business with a clear focus on profitability, innovation, and long-term value creation. This marks an important transition for Albany. And as we enter 2026, we are focused on disciplined execution, continued innovation, and delivering sustainable value for our customers and shareholders. We also completed our corporate relocation to Portsmouth, New Hampshire, which positions us well to attract and retain talent across a broad and highly skilled corridor stretching from Boston to Portland.

We're pleased with the team we have assembled and confident in their ability to lead the company into the next phase of growth. I would like to thank our employees for their dedication and commitment throughout the year, as well as our customers, partners, and shareholders for their continued support.

With that, I'll turn the call over to Will to review the financial results in more detail.

Thank you, Gunnar. Good morning, everyone. Before providing a financial review of the fourth quarter, I'd like to begin with a brief perspective on my first 6 months in the role. The strength of our culture and the depth of the team across the organization have been particularly evident. Further, we operate with world-class manufacturing capabilities, a strong track record of execution in highly demanding industries. These strengths form the foundation of our long-term success and value creation. Over the past six months, we have sharpened our strategy to focus more clearly on our core competitive advantages. That focus is guiding how we operate the business and how we allocate capital with a clear objective of investing where we can generate attractive returns and maximize long-term value for our shareholders.

Operationally, the business performed well across both segments in the fourth quarter, and we followed through on the actions we outlined last quarter. As these actions take hold, we believe Albany will emerge as a stronger company with a more attractive operating profile and a clear platform to drive long-term growth, particularly in high-value and emerging applications.

Before turning to the financials for the quarter, I want to note that all the results I will be discussing are non-GAAP, unless otherwise noted, and a full GAAP to non-GAAP reconciliation can be found in our press release issued this morning.

Overall, we delivered our strongest financial performance of 2025 in the fourth quarter. Our reported fourth quarter revenue was $321.2 million, up 12% year-over-year, compared to $286.9 million in the same period last year. The increase was driven primarily by higher volumes in our Engineered Composites business as multiple programs continued to ramp. These increases were partially offset by lower volumes in Machine Clothing, primarily in China.

Adjusted EBITDA for the fourth quarter was $57.3 million, compared to $50 million in the year ago period, reflecting an Adjusted EBITDA margin of 17.8%, up from 17.4% last year. The improvement was driven by higher sales and improved margin performance, primarily in Engineered Composites.

Moving to our segments and starting with Machine Clothing. Segment revenue was $177.5 million, compared to $188.1 million in the prior year period. The year-over-year decline was driven by continued weakness in Asian markets, particularly China, as well as certain strategic business exits in Europe. Importantly, revenue was stable sequentially, reflecting quarter-over-quarter stability even in China. All other regions remained largely stable during the quarter. Adjusted EBITDA for Machine Clothing was $48.6 million, compared to $53.7 million in the prior year period, reflecting an Adjusted EBITDA margin of 27.4% compared to 28.5% last year. The decline was driven primarily by lower volumes in Asia and was partially offset by the benefit from efficiencies and integration initiatives.

Turning to Engineered Composites segment, revenue was $143.7 million, compared to $98.8 million in the prior year period. The increase was driven by higher volumes across multiple ramping programs, as well as the absence of program adjustments that impacted the prior year. In the fourth quarter, we also benefited from higher-than-expected material receipts and factory outputs ahead of our plan, which we do not expect to recur in the first quarter. Adjusted EBITDA for the segment was $18.5 million, compared to $6 million last year. The year-over-year improvement reflects the higher revenue base and improved margin performance, primarily driven by program ramps and the absence of program-related impacts in the period.

Moving down the income statement, gross profit for the quarter was $99.9 million, compared to $90.3 million in the same period last year, reflecting a gross margin of 31.1% compared to 31.5% in the prior year period.

Gross margins declined modestly year-over-year, reflecting lower margins in Machine Clothing due to volume pressure, partially offset by higher margins in Engineered Composites, driven by improved mix and program execution. Operating income for the quarter was $29.9 million, compared to $24.3 million in the prior year period, representing an operating margin of 9.3% compared to 8.5% last year. The improvement was driven by higher gross profit and leverage on sales volume. Interest expense for the quarter was $5.9 million, compared to $3.9 million in the prior year period, reflecting higher borrowing costs. Other income and expense was a net expense of $900,000, compared to a net benefit of $4.2 million in the year-ago period as a result of foreign currency revaluation impact.

In the fourth quarter, our effective tax rate was 39.3%, compared to 28% in the year-ago period. The increase in tax rate was due to expiration of a Foreign Tax Credit and a less favorable discrete tax adjustment compared to the fourth quarter of 2024.

Turning to the cash flow and the balance sheet. We generated free cash flow of $51 million in the quarter, compared to $59.3 million in the same period last year. The year-over-year change mainly reflects higher capital spending this quarter, as well as working capital investments to support several ramping programs. We also continued to return capital to shareholders through both dividends and share repurchases. During the quarter, we repurchased $16.8 million of our common stock and declared a regular quarterly dividend of $0.28 per share.

Capital expenditures totaled $22.7 million, up from $19.1 million in the fourth quarter of 2024, with a spending focus primarily on facility optimization and investments tied to key customer programs. R&D expense came in at $12.1 million, underscoring our ongoing commitment to innovation and to advancing proprietary technologies across both Machine Clothing and Engineered Composites.

We ended the quarter with $112.4 million of cash and $456 million of total debt, resulting in net debt of roughly $343 million. Including availability under our revolver, we have over $456.4 million of available capital, which, combined with the strong cash generation of the business, provide ample flexibility and liquidity to support our ongoing investments while continuing to return cash to shareholders.

Turning to our outlook, as we continue to progress through our strategic review, we will be providing guidance on a quarterly basis, along with qualitative commentary on the full year. Importantly, our quarterly guidance includes the revenues and associated margins of the Amelia Earhart facility, consistent with how we are currently operating the business. For the first quarter, we expect consolidated revenue to be in the range of $275 million to $285 million, with Adjusted EPS in the range of $0.50 to $0.60. We also expect our effective tax rate for the quarter to be approximately 27% and for the full year to be approximately 24.3%. We expect our first quarter results to be the lowest of the year as we absorb the costs associated with the downtime in our Machine Clothing facility that Gunnar detailed. The downtime will have a $0.10 to $0.15 impact on EPS in the first quarter. We expect to make up the lost volume over the balance of the year.

In Engineered Composites, we anticipate a year-over-year growth on higher overall volume in the first quarter, but at a moderate pace compared to the fourth quarter, as the growth rate in the fourth quarter benefited from several discrete items that are not expected to recur.

Looking to the full year, current visibility supports the following by segment. In Machine Clothing, we are seeing stable demand conditions in Europe and North America, with continued weakness in China. Volumes in China stabilized in the fourth quarter at a lower overall level. We currently expect this run rate to persist through 2026.

Consistent with this demand profile, we expect margin levels to remain generally in line with what we saw in the second half of 2025, recognizing that visibility remains limited and market conditions in China continue to evolve. In Engineered Composites, we expect continued growth across key platforms, including LEAP, engine program, and missile applications. Based on the current program ramps, we anticipate strong segment-level growth in 2026, with normalized margin level compared to the prior year.

Now, I would like to open the call up for questions. Operator?

[Operator Instructions] And we will take our first question from Michael Ciarmoli from Truist Securities.

Maybe, Will, just on those last comments, you gave some sort of, I guess, directional color on 2026. It sounds like maybe this Machine Clothing, you've got the weakness that persists in Asia. Just to calibrate us, I mean, should we think about this run rate sort of holding through the year? I guess with AEC, the strong growth, you still have the Salt Lake City in there. Can you give us a sense of what the underlying for AEC revenues and margins look like?

Sure. For Machine Clothing, we fully expect that we're going to recover from the equipment failure. The equipment has been restored. It's up and it's operating, and the team is closely monitoring it to make sure that we don't have any additional impacts. For Q1, there is the risk of the $0.10 to $0.15, which I outlined in the earnings report, but we're expecting to recover all of that by the end of the year. Things are starting to look stable, but we are cautious about how much of that we can recover in Q1.

As we think about the AEC business, we had a strong quarter, which we're proud of. We expect that, you know, from an AEV standpoint, we've completely resolved the issues around CH-53K. We think we've covered that in the [indiscernible] loss that we took in Q3. And the team is continuing to operate at about a 10% overall margin, which we think we're going to continue to see for the remainder of 2026. The recovery is looking good within AEC, and we're expecting to continue those strong margins as we look forward for 2026.

I think, Michael, you know, yes. That site continues to grow because of the CH-53K and the Boeing program there. The growth that you're seeing in the rest of the business is primarily on our missile programs as well as the LEAP. And LEAP is growing significantly both this year and next year.

Okay. Yes, I wanted to come to LEAP. Can you give us any sense? I mean, we've got, I think, GE calling for 15% increase in deliveries. Are you aligned with production? Is there still some level of destock going on there or any color you could shed on LEAP?

Yes. We're definitely aligned with production. If you look at, you know, year-over-year, I think our volume is up about 27% on that program, and our factory is fully operating and supporting the ramps that we're seeing with the OEM. We're completely aligned there.

Okay. Okay. Last one, just housekeeping, Will. The European exits, in Machine Clothing, how much of a drag was that on revenue or will it be on revenue?

I think we spelled some of that out in Q3. I think some of it, as we mentioned in Q3, was intentional. We had some low-margin businesses that we exited out. Some of it was we were optimizing the network, so we're closing some of the facilities. All of that was part of the synergies with Heimbach, and so it was part of our synergies there, and we've executed very well to that plan so far.

Our next question comes from the line of Ron Epstein from Bank of America.

Gunnar, you mentioned CMCs. What are you guys doing in CMCs? That's the first time at least I've heard you talk about it. What are you doing there? And where do you think that can go?

We have been investing in high-temperature composites using our proprietary 3D weaving and then carbonizing those near-net shape parts. We've been working with several OEMs. We are going to be announcing more about this, here in Rochester, we have now the full capability to make carbon-carbon and various ceramic matrix composites. I expect that to be a strong growth engine for us on R&D in the short term and as part of our production in the short to medium term, definitely in the longer term. Lots of investment there, anywhere from large acreage hypersonic missiles to nozzles and exhausts on traditional missiles. Lots of opportunity happening.

When you do like carbon-carbon near-net shape parts, does that mean that they just have to be machined less than like otherwise, it to just get a block of carbon-carbon?

That is exactly it. Because of our ability to weave a near-net shape, we can also carbonize and finalize a part that is near-net shape, which prevents the machining, to your point. And that is exactly it. We've worked with this. We have to set up a very large looms in our facility, and we're creating parts and working with customers on this. The benefit, of course, with our parts is that you do not have to machine away very expensive carbon.

Yes. Interesting. Yes, then if I can, maybe just one more. Is there anything else you can say or give us detail on the reorg and, or what's going on in Salt Lake, with that facility?

Yes. So first of all, we are operating the facility at the level that is expected from all of our customers. The site is performing well. We're tightly aligned with especially with Sikorsky, to make sure that we're delivering to them. We've started the process. As we have mentioned before, there's been a lot of interest in the site. Now I can share that it's both from private equity as well as strategics. It is clear that our capacity in autoclave at that site is very attractive. It is not where we want to grow, but it is attractive and we think we will be able to go through this process, you know. Well, the process will take what it takes. We're well on our way. We'll be announcing more throughout the spring.

Our next question comes from the line of Steve Tusa from JPMorgan.

This is Chigusa on for Steve. It's really nice to see a quarter with no charges, and it's good to hear that you think you completely resolved the CH-53K issues with the $147 recorded last quarter. I just wanted to better understand. How comfortable are you that going forward, we'll continue to see quarters like this, where you won't see any negative EAC charges?

It's a good point. We took a large charge, and we did that to de-risk the program. We're seeing the performance at the expectations that we set. We, as we talked about last quarterly call, we also removed one of the programs with Gulfstream from our portfolio. The remaining programs are performing very well. There are give-and-takes in EACs, as you know, we do not expect to have any large charges as we continue through the year.

I think, so free of charges, your underlying margins for AEC is at 13% this quarter, is this a reasonable margin run rate for this business when thinking about 2026?

I think so. I think that's right in the range, we have seen these last couple of quarters. We expect to be there until we complete the strategic review of Salt Lake. I think that's in line with what we're expecting to see.

Okay, great. Just a quick follow-up on that. You mentioned that the Amelia Earhart Facility is about 10% margins, but is the CH-53K in particular, call it, about 20% of your AEC business, making losses in the rest of the AEC business in the mid-to-high teens range? Is that kind of the right way to think about it?

Yes. Well, one thing I will correct, with the charge we took in Q3, we won't see CH-53K having losses going forward. We, we've covered that in Q3. As you think about the remaining parts of the business, you know, our goal is to get it to the mid to low teens. That's what we are aiming for, clearly, we have to resolve the strategic review and divest of the site before we can, we can get there. We have some work to do before we can make that happen, but you're thinking about it the right way.

There are no more further questions. I will now turn the call back over to our President and CEO, Gunnar Kleveland, for closing remarks.

Thank you, Dustin, and thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you. Have a good day.

The meeting has now concluded. Thank you all for joining. You may now disconnect.

Thank you for standing by. My name is Rochelle, and I'll be your operator today. At this time, I would like to welcome everyone to the Q3 2025 Albany International Corp. Earnings Conference Call. [Operator Instructions] I will now turn the conference call over to Joseph Gaug. Please go ahead.

Thank you, Rochelle, and good morning, everyone. Welcome to Albany International's Third Quarter 2025 Earnings Conference Call. As a reminder to those listening on the call, please refer to our press release issued last night detailing our quarterly financial results.

Contained in the text of that release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning.

Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied.

For a full disclosure of these risks and uncertainties, please refer to both our earnings release of November 5, 2025, as well as our SEC filings, including our 10-K. Now I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Thank you, Joe. Good morning, and welcome, everyone. Thank you for joining our third quarter earnings call. On today's call, I'd like to begin with a recap of some important developments that we have announced, followed by a high-level review of our go-forward strategy and conclude with an update by segment on our end markets and business developments.

I will then turn the call over to Will to take you through the numbers. On October 28, we announced a strategic review of our structures assembly business at our Amelia Earhart Drive facility in Salt Lake City, which could include the sale of the site.

Together with our Board, we have determined this is in the best interest of stakeholders for 2 primary reasons. First, structures assemblies do not align with our long-term strategic priority to focus on 3D woven technology and engineered components, where we have a distinct competitive advantage through proprietary technology.

Second, typically, this type of work is characterized by large long-term contracts with complex supply chains, higher risk, and lower margins. As a result of these 2 factors, because they do not align with our strategic goals, we have decided to explore options for our structure assembly work.

Alongside these decisions, we've also taken a loss reserve and the program adjustment to recognize a full expected loss on the CH-53K program of $147 million over the next 8 years.

This follows a period of significant effort by our team taking decisive action over the past year to address program challenges, including upgrading the leadership, bringing in people with experience in planning, procuring, and executing structural assemblies and addressing material availability.

Despite these efforts, we now recognize that without changes to the contract, there is no path to profitability on the program as originally bid. In addition to these charges and our strategic review, we're also engaging with our customer to discuss potential solutions through the duration of the program.

Similarly, we also announced today we have reached definitive agreement with Gulfstream to complete our current contract at the end of 2025. We're working to deliver the remaining components to Gulfstream by year-end and look forward to a successful closeout of the program.

Importantly, these 2 programs have primarily been responsible for the continued cost estimate adjustments over the past 16 months. Exiting these programs would mean our remaining portfolio is substantially derisked from future charges.

All of our remaining programs are performing well and carry attractive margin profiles. Following the conclusion of these activities, we expect to be a more focused and integrated company with 2 segments built around our core competency of industrial weaving technology.

Our machine clothing business continues to be the backbone of Albany International. We're the global leader in paper machine clothing and process belts, serving every major grade of paper production. We also hold a leading position in engineered fabrics, supporting a range of other industrial applications like nonwoven, fiber cement and corrugated packaging.

This is a business built on decades of technology leadership and deep customer partnership supported by more than 700 worldwide patents. Our products are essential to how efficiently our customers' machines run, improving fiber use, reducing energy and chemical consumption, and helping them hit their quality and sustainability goals.

The segment delivered strong EBITDA margins in excess of 30% with exceptional cash generation, which gives us the flexibility to reinvest in innovation and support growth across the company.

Our competitive edge comes from the high consistency and quality of our products, our global service network and continual investment in innovation. Our Engineered Composite business complements our expertise in weaving technology and is a long-term growth engine.

Over the past decade, it's delivered an impressive 12% organic revenue CAGR, and we see meaningful runway ahead as adoption of our proprietary technology continues to accelerate.

The Engineered Composite business grew organically from our deep roots in weaving and process engineering, evolving into a leading global supplier of aerospace engine and structural composite components. Through our joint venture with Safran, we have industrialized proprietary 3D weaving technology used in LEAP and GE9X engines, making us the sole global aerospace supplier of 3D woven resin-infused parts.

As of today, we have delivered in excess of 220,000 fan blades and 11,000 cases to our customers. Outside the joint venture, we're expanding our dry fiber, 3D weaving and resin transfer molding capabilities, enabling the replacement of titanium components with lighter, stronger composite alternatives.

We're also advancing high-temperature ceramic matrix and carbon-carbon solutions, which open doors in hypersonics, missiles and next-generation defense platforms, areas that are in high demand and rich with bidding activity.

Our 3D woven parts offer superior strength to weight performance, faster lead times with full domestic sourcing, which helps customers reduce supply chain risk while improving performance.

We're also leveraging our braiding and winding technologies and industry-leading resin transfer capabilities to support programs in missiles, engines, advanced air mobility and defense programs.

As our differentiated programs scale and improve our overall mix, we expect continued margin expansion and sustained profitable growth. Taken together, these complementary businesses deliver strong consistent cash flow driven by the market-leading position of machine clothing and the growth of engineered composites.

This is supported by our balanced capital allocation strategy as we invest for growth while returning cash to shareholders. Over the past 12 months, we have deployed about $68 million in CapEx and $47 million in R&D, while returning more than $200 million to shareholders, including repurchasing roughly 8% of shares outstanding and $32 million of dividends.

Together, these strengths give us the flexibility to invest in for the future, return capital to shareholders and continue building long-term value through disciplined execution.

Turning to the conditions in each of our segments and end markets. I'll begin with Machine Clothing, where third quarter dynamics were mixed across regions. In North America, shipments improved sequentially though order intake remained soft, reflecting the impact of ongoing packaging and corrugator mill closures tied to industry consolidation.

The weakness was partially offset by continued stability in the tissue market, which remains a solid and resilient end use. In Europe, the market recovery continued but showed signs of moderating. Meanwhile, Asia remained challenged with overall demand at low levels, largely due to overcapacity.

Our strategic focus on the tissue market remains a key source of strength, supported by several new investments to build on our market-leading position.

Turning to Engineered Composites. As I noted, we announced a strategic review of our structures assembly business, including the related production side as well as the planned closeout of Gulfstream program. These actions substantially reduce future program risk and allow us to sharpen our focus on higher return opportunities.

All of our remaining programs are performing well with solid execution across both defense and commercial aerospace platforms. On the commercial side, the LEAP program continues to strengthen, supported by higher OEM production levels heading into 2026.

In defense, we remain well positioned on the F-35 platform as well as the JASSM and LRASM missile programs, and we're continuing to invest in next-generation hypersonic capabilities and other missile programs.

We're also proud to support Beta Technologies as they advances aircraft certification and ramps production in the advanced air mobility market.

Looking ahead, our pipeline of new business opportunities remain strong, spanning commercial engines, defense, space, and advanced air mobility. Across all of these areas, we're focused on leveraging Albany's differentiated materials, processes and engineering expertise to drive high-value long-term growth.

Overall, we made a lot of progress in this year of transition to simplify the business and to strengthen our focus. We're positioned around 2 great material science businesses linked by expertise in weaving.

Machine Clothing, our foundation and cash generator and Engineered Composites, our engine for long-term growth. Together, they give a solid platform for continued improvement and value creation. With that, I'll hand it over to Will to walk through the financials.

Thank you, Gunnar, and good morning, everyone. Before reviewing our third quarter results, I'd like to offer a few brief observations since arriving at Albany. It's clear to me that this is a company built on a strong foundation, one defined by technical excellence, customer trust and a disciplined approach to execution.

In my early discussions across the organization, I've seen firsthand the depth of our expertise and the consistency of our performance-driven culture. Our technology portfolio is differentiated and deeply embedded with customers in markets where reliability and precision matters most.

That creates a durable competitive advantage and position us well for sustainable growth. Equally important, our teams bring a high level of professionalism and accountability. There is a shared understanding of what it means to deliver for our customers and our shareholders.

As I step into my role, my focus is on reinforcing that foundation and partnering with Gunnar as we sharpen our portfolio, drive operational discipline, and allocate capital in ways to strengthen long-term value creation.

While I'm still early in my tenure, I have strong confidence in the capability of our people, the quality of our assets and the opportunities ahead of us.

Turning to our financials for the quarter. We have taken important steps to refine our business to create an even stronger foundation for profitable growth going forward.

The strategic decision to restructure our exit business lines that are not contributing to our bottom line will enable our team to focus on profitable growth that is in line with our core strength. This led to some significant charges in the quarter.

So let me provide some color on the third quarter financial results. Third quarter revenue was $261.4 million compared to $298.4 million in the prior year period. The decline reflects a $46 million revenue charge associated with the CH-53K program loss reserve and program adjustments.

Excluding this impact, revenue was modestly lower year-over-year, primarily due to softer demand in select machine clothing market in Asia and partially offset by stronger engineering composite volumes on the LEAP program.

We reported a GAAP net loss of $97.8 million or $3.37 per diluted share versus net income of $18 million or $0.57 per share in the prior year. The prior year quarter net income included a tax benefit of $7 million or $0.24 per diluted share.

On an adjusted basis, net income was $20.6 million or $0.71 per diluted share compared to $35.2 million or $1.12 per diluted share in Q3 of 2024. In both periods, the impact of CH-53K program adjustments are excluded.

Adjusted EBITDA was $56.2 million, representing an 18.3% margin versus a 21.5% in the third quarter of 2024 after excluding the effects of the CH-53K program charges in the prior year.

Despite lower revenue, underlying performance remains resilient, supported by disciplined cost management and solid operational execution.

Moving to our segments and starting with Machine Clothing. Revenue was $175 million, a 4% decline from the prior year, reflecting softer demand in Asia and strategic business exits in Europe, while other regions remained stable. Adjusted EBITDA was 31% compared to 33.2% last year as lower volumes in Asia were partially offset by ongoing benefits from footprint optimization.

Turning to Engineering Composites. Revenue was $86.5 million compared to $115.4 million last year. The decline was driven entirely by the CH-53K charge. Excluding this impact, the revenue was $132.5 million, up from $128.7 million in the prior year, supported by higher LEAP program volumes. Adjusted EBITDA margin was 9.6% compared to 10.3% a year ago.

Switching to the consolidated results and moving down the income statement. Gross profit for the quarter was a loss of $49.9 million compared with profit of $90.4 million last year. Excluding CH-53K impact, gross margins was 31.7%, down modestly from 33.3% due to lower machine clothing volumes.

Interest expense increased $5.9 million, reflecting higher borrowing costs. We reported a pretax loss of $122.1 million. The effective tax rate for the quarter was 20%, while in the prior year, it was closer to 7%, primarily due to a tax benefit of $7 million related to the release of a valuation reserve.

Turning to cash flow and the balance sheet. Free cash was $25.7 million compared to $31.2 million last year. The change primarily reflects higher capital expenditures and working capital investments supporting key program ramp-ups.

We remain focused on disciplined capital deployment. During the quarter, we repurchased $50.5 million of common stock and declared our regular quarterly dividend of $0.27 per share. At quarter end, approximately $93 million remained under our current authorization.

Capital expenditures were $18.3 million, up from $15.4 million last year, primarily related to facility optimization and key customer programs. R&D expense was $11.5 million for the quarter, underscoring our ongoing commitment to innovation and to advancing proprietary technologies across both Machine Clothing and Engineering Composites.

We ended the quarter with $108 million in cash and $481 million in total debt, resulting in a net debt of approximately $372 million. With more than $400 million in available liquidity, we remain well positioned to fund growth initiatives and return capital to our shareholders.

Given the ongoing strategic review of our structured business, we are withdrawing our full year 2025 guidance. The potential range and timing of outcomes from this process makes it difficult to provide a full year outlook that will meaningfully represent the range of expected outcomes.

We intend to reinforce full year guidance when we report our fourth quarter results, which will include a comprehensive 2026 outlook and an update to our strategic review. In the meantime, I'll share a few qualitative assumptions to frame how we see the balance of the year.

At the total company level, we expect underlying trends from the third quarter to persist into the fourth quarter. In Machine Clothing, we continue to see a generally stable operating environment in the Americas and a moderate pace of recovery in Europe and continued weakness in China.

Importantly, we saw further deceleration in China as the third quarter progressed, and we expect that to create a more meaningful headwind to our 4Q results.

In Engineering Composites, we expect a performance similar to the third quarter, supported by higher LEAP production volumes. However, lower margin structural work will continue to weigh on profitability as we explore options for the business.

Taken together, these dynamics suggest a quarter broadly consistent with recent trends as we remain focused on execution, operational improvement and positioning the business for stronger long-term growth following this transition year. With that, I'll turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Peter Arment with Baird.

Gunnar, maybe just to start, if you could just take us through kind of how you evaluated the ability to kind of move on from the CH-53K. I remember you upgrading the leadership there and thought that might be enough to kind of reset things and turn things around. Maybe if you could just take us -- give us a little more color on the program.

Yes, Peter. Thanks. What we saw last fall was a need to upgrade the leadership, but also to upgrade our ability to plan, procure and execute on a program like the CH-53K, which is really a departure for what we do at all of our other facilities.

The effort to do that was significant, and that's what we've talked about for several quarters. And we have been able to deliver to our customer. It's been a recovery all along. And by this summer, what we saw was that we had alignment of material. We had people that were trained well, and we had a good planning for how we were going to go and execute.

And as we did that and with Will coming in, we took a hard look at what this program would be and look like for the next 8 years. And remember, we're only 6% into this program.

But as we looked at it and the learning curve with all the material available with the people in station and us working each of the monuments that we have there, we saw that there was no way for us to make it a profitable program the way it was bid.

And so we decided to take the charge. I think the -- and I've talked about this program now, for every quarter, the last 4 quarters and how different it is from what we're doing.

So the decision then became, is this too much of a distraction for us to really grow the business the way we want to grow the business, and we made a decision to take a strategic look up and to include selling the site.

Got it. Okay. That's helpful. Maybe just to switch to something more positive on that. Can you talk about some of the opportunities, I guess, on the 3D side, what you consider core technology, where you're seeing opportunities to win?

I know you've talked about hypersonics in the past and defense. Are you seeing more opportunities because of Golden Dome or other things? Maybe you could just give us some more color there.

Yes. I think there's a lot -- or there is a lot of activity due to the Golden Dome. We have inbounds from all of the OEMs, and we have a capability that they are interested in. We are able to make a near net shape carbon-carbon part for our customers at a very attractive price point. And we have made the investments over the last 3 years to industrialize it.

We also have shown that we can industrialize 3D woven by making 220,000 blades for the LEAP program, which right now, I think the whole industry is looking for how can we accelerate missile production. And we stand very, very ready to be able to do that.

So yes, lots of inbounds, a lot of activity, probably one of the areas over the next 3 to 5 years that will have the highest growth for us. We're also seeing more interest in our 3D woven titanium replacement.

We'll be announcing more about that as we go through next year, but we have opportunity both at the -- with AAM as well as defense programs and longer-term commercial programs.

Your next question comes from the line of Jordan Lyonnais with Bank of America.

I guess for the prior 2026 targets that were put out there, does anything there change after doing this strategic review outside of the CH-53K? Are you taking the review process there looking at the other programs that we should think about?

As we look at 2026, we are a more focused company focused around our technology. The programs that we have today are solid, good return programs that we will continue to have. We are addressing, as we have shown, the programs that are not meeting our expectations on profitability.

And as we look at new programs, we've set up the guardrails, and I've talked about this before, the guardrails around how we set up a contract and what the expectation is from a contract, and that's the business we're going after. So that's what you should expect, Jordan.

[Operator Instructions] Your final question comes from the line of Sam Struhsaker with Truist Securities.

So I guess looking at Machine Clothing, it seems to me that, if I'm looking at this correctly, margins have kind of actually trended down a little bit in that business over the last couple of years. But I know you guys mentioned sort of some footprint rationalization acting as a bit of a margin tailwind in this quarter.

And then I guess I was just kind of hoping you could give some more detail on kind of how to think about the trajectory for that business margin-wise going forward, kind of looking at the weakening aspects in Asia combined with what you guys are doing in terms of margin expansion initiatives internally.

Yes. Thank you. We -- on Machine Clothing, the impact that you're seeing is primarily from Asia. But remember also that we did select to exit parts of the business, Heimbach that we bought that were not profitable. So that was around $15 million worth of top line.

And then we had one business in Asia that exaggerated the impact that we've had in Asia around $8 million that went bankrupt. That was also Heimbach.

And so those 2 together with all the headwind that we've seen accelerating through the third quarter due to overproduction in China is the impact on the top line, and that has affected our bottom line because it is a -- it has a good return, obviously, the programs that we have in Asia as well.

So going forward, we are continuing to rationalize our footprint to get the cost where we want it and be as efficient as we can in the Americas, in Europe and in Asia. And that activity has -- there's been significant activity. I've talked about it in the other calls.

That is going to improve our cost position and our margins as the market comes back in Asia because I believe it is a correction due to overproduction and then they'll build up.

When that happens, I can't predict right now. And clearly, the global trade has an impact here. So we'll watch and see what happens there as well.

Great. And then, Gunnar, if I could squeeze in another one. Just curious, as the LEAP program kind of continues to ramp, I don't know if you guys could give any details on kind of how you're seeing pull rates for that program.

And also if there's going to be any sort of kind of improved absorption and margins as that program continues to increase in scale.

Yes. It is a significant ramp-up over 2026 and 2027 based on the input that we're getting from Safran and GE. We will be -- in the last call, I said we have -- we're at the inventory level that we need to be at, and we're managing that as Safran is pulling parts from our inventory. That's how the contract is constructed.

Remember, though, that this is also a cost-plus contract. So our margins are going to be steady as we go through this. And we will follow the ramp-up of our customers.

But it is significant going into 2026 and their projections for '27 is another significant ramp-up. So this program will be solid and provide nice returns for us.

That ends our Q&A session. I will now turn the call back over to Gunnar Kleveland for closing remarks. Please go ahead.

Thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you all and have a good day.

Gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good morning, and welcome to the Albany International Second Quarter 2025 Earnings Call. I am Frans, and I'll be the operator assisting you today. [Operator Instructions]

I would now like to turn the call over to J.C. Chetnani, Interim CFO and Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Frans, and good morning, everyone. Welcome to Albany International's Second Quarter 2025 Earnings Conference Call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their reconciliation to GAAP.

For the purposes of this conference call, those same statements apply to our verbal remarks this morning. Today, we will make statements that are forward-looking and contain a number of risks and uncertainties, which could cause actual results to differ from those expressed or implied.

For a full discussion of these risks and uncertainties, please refer to both our earnings release of July 30, 2025, as well as our SEC filings, including our second quarter Form 10-Q and our 2024 Form 10-K.

Now I will turn the call over to Gunnar Kleveland, our President and CEO, who will provide opening remarks. Gunnar?

Good morning, and thank you for joining us as we review our second quarter 2025 results. Overall, I'm encouraged with our progress this year, a year that we have said would be a transition year. Our business segment leaders are performing well as they restructure, invest and strengthen their operations, all while remaining agile in addressing near-term challenges.

Our second quarter financial results lagged our expectations. But as I'll cover, the performance was largely impacted by certain timing and operational issues, and we're confident in our recovery. We continue to monitor the tariff situation and secondary effects that could impact regional market dynamics or customer behaviors.

To date, we have not realized any direct material headwinds. Our mostly regional setup for both suppliers and customers largely insulate our operations from direct impact of tariffs. Also, while we were cautious about the tariff impact in our outlook, we now expect global growth to continue as the tariff environments get more predictable.

Increasing activity in the defense sector, particularly hypersonics and new programs is expected to result in accelerated growth at AEC in addition to our growth in commercial aerospace over the next several years. In Machine Clothing, despite some second quarter timing and market headwinds, the business delivered expected returns on the lower volume and showed growth from the first quarter.

We've commenced 2 additional facility closures in the quarter as we remain focused on optimizing our global production footprint to best serve our customers. AEC delivered strong sequential quarter growth and continues to accelerate its disciplined long-term operational strategy. We're investing in operational excellence to transform how we execute our current portfolio of programs, allowing us to grow profitably with our continuing new business wins.

We're making good progress driving process improvements across all of our sites and with emphasis on our CH-53K program. At our last visit to Salt Lake City, it was encouraging to see planning and supply chain aligned with the rapid growth of this program. The EAC adjustment in the quarter reflects our investment in program ramp readiness that we will cover in more detail later.

For the quarter, we reported revenues of $311 million and overall adjusted EBITDA margin of 16.7% and an adjusted diluted EPS of $0.57. We returned capital to our shareholders through both a regular quarterly dividend and share repurchase program. In the first half of the year, we repurchased $119 million worth of shares, including $50 million in the second quarter. We currently have $143 million of capacity remaining under our latest share repurchase authorization.

Turning to our individual businesses. For the quarter, Machine Clothing reported revenues of $181 million and adjusted EBITDA margin of 28.8%. As a reminder, comparisons to prior year are impacted by certain intentional and strategic business exits of approximately $5 million per quarter. In terms of grades, while longer-term secular trends in packaging remains strong, the effect of customer consolidations in North America created a delivery headwind in second quarter compared to the prior year.

Tissue remains a bright spot globally with expected new machine investments, while pulp and engineered fabrics remain stable. North America had a slight decline in deliveries in the second quarter, mainly due to packaging machine production curtailments. We're working closely with our customers to solidify our positions where consolidations have impacted their capacity.

Overall, Europe continues to show solid signs of recovery with good deliveries and orders, offsetting weakening conditions in Asia. In particular, in China, we're seeing softer demand and continue to await machine restarts from the legacy Heimbach customer that we discussed in the prior quarter.

Overall, we continue to follow a disciplined sales approach to mitigate these market dynamics. Our global MC order backlog remains healthy and gives us confidence for a stronger second half of the year. Operationally, we initiated the process to shut 2 additional facilities in the quarter, St. Union, France and Manchester, U.K.

While we are executing to plan, the transfer of production and equipment across facilities does challenge how quickly we can ramp up at the new location. In the second quarter, the performance at our Duran facility lagged as it took on new production, resulting in some temporary sales and profit shortfalls. During the second quarter, we also experienced temporary operational disruption in one of our U.S. facilities due to unplanned equipment downtime, which led to delayed shipments in the quarter.

Turning to Engineered Composites segment. Revenues for the quarter were $130 million with an adjusted EBITDA margin of 8.5%. Revenue grew sequentially by 14% from the first quarter, reflecting continued ramping on our key programs, but profitability remains lower than our expectation as we continued our investment in disciplined operational improvements.

We recorded a total EAC adjustment of $7.2 million for the quarter. The EAC is mainly driven by continued investment in our labor force, which led to higher-than-projected overhead rates. We're seeing the progress from our investment in frontline leader coaching and operator training through improved output and reduced scrap and rework. Our planning and supply chain improvements are evident in material being available for assembly needs on the CH-53K program.

On LEAP, we're at the contractual inventory levels and well aligned to meet Safran's production schedule as Boeing and Airbus single-aisle delivery rates continue to recover. We have ample capacity to meet any upside to the demand and now expect growth in the second half. The emerging Advanced Air Mobility market remains attractive for our business with continued sequential quarter growth and expected strong demand through the course of 2025 with our key customer beta. Advanced Air Mobility will be a significant source of growth for AEC.

As previously highlighted, our new long-term agreement on the Bell 525 program is an attractive new win where we are already delivering to customer expectations. We have invested in additional equipment in preparation for the JASSM program growth, where we also deliver at 100% on time.

Having achieved critical milestone at our dedicated facility, we're seeing momentum with customers in hypersonic parts development. We continue to invest in our capabilities and remain very positive in the medium and long-term attractiveness of this segment.

Also, as I highlighted in our last quarter earnings release, our application development team continues to evaluate where AEC's differentiated 3D woven technology in composite parts can be superior alternative to titanium with stronger relative strength to weight benefits. This was highlighted at the Paris Air Show, where our display showed examples of parts that we are currently supplying or in the process of developing for various customers.

The response at the show was positive with customers and others seeing our keen focus on the technology that grew out of our weaving expertise and this technology is growing strategic uses and value. As we presented in last quarter's call, our solution can be delivered at a fraction of the titanium lead time with domestic materials and a production capacity proven to deliver 100% on time, which is in stark contrast to the challenges in the titanium supply.

We successfully completed our S/4HANA upgrade across the entire company in May. This investment improves our systems and operational efficiencies and will deliver enhanced analytics to improve our business agility.

Finally, I'm excited to announce that Will Station has accepted the role of CFO at Albany International. Will comes to us from McKesson Medical-Surgical, where he was Senior Vice President of Primary Care Sales, leading a team of more than 1,200 account executives. Prior to that, he was the subsidiary's Chief Financial Officer and Senior Vice President of Finance.

Will's career also includes 16 years at the Boeing Company from 2005 until 2021, where he held a number of increasingly senior finance roles, notably Vice President and Chief Financial Officer for the Commercial Derivatives Airplanes from 2014 to 2021 and Director of Financial Operations for Boeing Commercial Airplanes from 2011 to 2014. He's a great addition to the team and complements the leadership team with large OEM experience as well as his commercial finance and business expertise.

I also want to take this opportunity to thank J.C. for stepping up to take on the role as Interim CFO and making the transition seamless. J.C. will continue to support the transition as Will on boards.

And with that, I'll now hand it over to J.C. to provide more detail on the quarter. J.C.?

Thank you, Gunnar. I will review our second quarter results and then discuss our outlook for the balance of 2025. Consolidated net sales were $311 million, down 6.2% from $332 million in the second quarter of last year. Machine Clothing net sales were $181 million, a decrease of 6.5% versus the second quarter of last year.

After adjusting for the effects of planned strategic business exits, the decrease is approximately 4%. This is mainly driven by lower volumes in the quarter from unplanned equipment downtime in the U.S. facility, a lag in ramping transfer production as part of our footprint rationalization and softness in Asia, especially China.

The majority of the current quarter production shortfall is expected to recover in the second half. AEC net sales of $130 million were lower by 5.7% versus the second quarter of 2024, primarily due to the unfavorable cumulative catch-up impacts from the EAC adjustments, offset by growth in our new programs.

Consolidated gross profit was $98 million or 31.3% of sales, down from $112 million in the prior year or 33.9% of sales. Machine Clothing gross profit of $84 million decreased from $89 million in the prior year, while gross margin improved by 40 basis points to 46.3%. Overall, this performance reflects improved operating efficiencies.

AEC gross profit of $14 million decreased from $24 million, largely reflecting the impact of the cumulative EAC adjustment for the quarter. Of the $7.2 million of EAC charges for the quarter, $8.1 million was related to the CH-53K program, partially offset by a positive $1.6 million Gulfstream reserve adjustment with the balance spread across other programs.

Net R&D expenses at 4% in the second quarter is higher versus the prior year, reflecting our emphasis in material science and new business ventures. Consolidated SG&A expenses were $59 million for the quarter, up versus $56 million in the prior year due to weakening of the U.S. dollar and higher professional fees, partially offset by lower personnel-related costs.

The effective tax rate for the quarter was 31.3% versus 27.9% in the prior year. The higher rate is mainly due to favorable discrete tax adjustments in the prior year resulting from the release of uncertain tax positions. GAAP net income attributable to the company for the quarter was $9.2 million compared to $24.6 million last year, while GAAP diluted EPS was $0.31 per share in this quarter versus $0.39 in the same period last year.

After adjustments primarily related to foreign currency revaluation and net restructuring costs as detailed in our non-GAAP reconciliation, the adjusted diluted EPS was $0.57 versus $0.89 in the same period last year. Consolidated adjusted EBITDA was $52 million for the quarter versus $63 million in the prior year period, while for Machine Clothing adjusted EBITDA was $52 million versus $59 million in the prior year.

Adjusted EBITDA margin decreased to 28.9% versus 30.4% in the prior year, driven primarily by the margin impact from lower shipments due to slower-than-expected ramp of transfer production, unplanned equipment downtime and softness in Asia. AEC adjusted EBITDA was $11 million as compared to $20 million in the prior year period. Margin at AEC was 8.5% of sales versus 14.3% in the prior year, primarily reflecting the current period AEC cumulative catch-up adjustments.

Moving to free cash flow. Free cash flow has improved sequentially and was positive $18 million in the second quarter versus a negative $14 million in the first quarter. For the first half of 2025, total free cash flow of $4 million is down versus the prior year of $46 million. This was partially driven by investment in working capital as we ramp up new programs in 2025. And our balance sheet remains strong with a cash balance of $107 million and $355 million of borrowing capacity under our current cumulative credit facility.

In terms of full year guidance, we expect the second half to be stronger than the first half. We project continued ramping programs at AEC, recovery in shipments at MC as well as bottom line improvement from continued operational efficiencies across both businesses. Accordingly, we are reaffirming our full year guide.

Now I'd like to open the call up for questions. Frans?

[Operator Instructions]

And your first question comes from the line of Peter Arment from Baird.

Gunnar, can you talk about where you are in terms of like overall build rates in aerospace, maybe not calling out specifically, but just in general, where you are matching up with the OE rates and the planned production?

Yes. I think we're getting -- as Boeing is ramping up and destocking as they have been bringing material in, we're seeing our ramp-up slowly occurring, both on the Boeing and then as I mentioned on the LEAP program, we have seen -- we have reached our contractual level of inventory, and we're building to match how Safran is pulling from that inventory. So I would say, overall, there is a momentum towards the prior level of production.

And is there anything we should kind of be thinking about for the second half that could either put you at the low end or the high end of the range of the revenue range?

Yes. I think what you need to look at, if you see Machine Clothing, the Heimbach synergies are driving a lot of this, together with recapturing the lost revenue from the machine down as well as the transition. At AEC, the increase in commercial programs is a major factor to growth and profitability as well as the higher return programs coming back in -- at AEC. Now there's -- the improved performance is part of our guide. We expect our performance in the second half to be better.

[ CH-53K ], can you just maybe on just kind of the latest adjustments that you've made. It seems like, obviously, some of this was all strategically planned for -- to support your move into low rate production. But maybe just give us your latest thoughts on that program.

And Peter, I missed the program.

The CH-53K, sorry.

Okay. CH-53, yes. So the ramp-up there, we're taking a very controlled approach to how we're ramping that up, like I've said, the investment in that program, both in how we lead our team and how we train our team. I wouldn't say that it's taking longer, but we're putting a lot of effort into it as the program grows. We are continuing to grow each of the monuments, if you want, the biggest one being the Aft, which is the latest transition that we had.

But I can tell you that I was there. I saw all of our jigs in -- at the facility, and we have parts in all of the jigs, which gives me the confidence that we're building and working towards that 2 per month rate that we're going to be at towards the end of this year.

[Operator Instructions] And your next question comes from Steve Tusa from JPMorgan.

This is Chigusa Katoku on for Steve. So firstly, just digging in a little bit more into the AEC margins. So I think in your most recent update, it sounded like things were turning the corner here and things are improving on Boeing to versus a couple of quarters ago. So I just was wondering if you could provide some additional color on what happened here that you kind of need to make additional investments in the labor.

The AEC has -- is performing very well across all of the programs. Our challenge has remained at the CH-53K program, primarily because it's a very different program from all of the other parts that we provide at AEC. So the focus has been there. It has taken us longer to do the ramp, and it has taken more resources. And as we looked at the performance in the second half, we realized that we had underestimated our overhead charges there.

And I think also what is important to remember is that this is a 10-year program. So when you do a small adjustment in the overhead rate, it has a very large impact to the EACs. So we are investing in this program. We're seeing the result of the investment in the program.

More importantly, the investment in both our planning and supply chain now has us filling up our tools, tool jigs with parts, giving our teams the ability to perform, which has been an issue, right? If you don't have the parts, it's hard to show your performance. With all the parts available, you have a chance to show how you can perform, and that is turning the corner, as you say, we're seeing coming into the third quarter.

Okay. Great. And then as a follow-up, so you reaffirmed your full year guidance, which implies that it's maybe like a 30% half-over-half ramp in EBITDA. So if you can kind of just dig in a little bit deeper into what kind of -- what you expect will ramp in the second half that gives you confidence to reiterate the guidance?

Yes. It's fair because we see not only better returns, but we also see higher sales in the third and fourth quarter, which is what's giving us the confidence to say that we'll keep the guide. Heimbach synergies, again, is a big part. They're becoming cumulative as well as some of the timing at MC. For AEC, it's really the growth that we're seeing both on the commercial side and the defense with CH-53K and performance there. That gives us the confidence to say we're holding the guide.

And your next question comes from Michael Ciarmoli from Truist Securities.

Just to stay on that topic of the guidance. I mean, a couple of challenges here. I mean, what were the drivers in -- or the decision-making in not lowering the guidance? And then even the bridge for AEC, I mean, that second half range implies that revenues could be down 11% versus first half or up 9%. What are the swing factors that are going to take you to the high end and the low end of those guidance ranges? I mean it just seems like a pretty wide range, especially in the context of the recent performance.

Yes. And -- Michael, the -- I'm not addressing the range itself, but it's really about getting the performance on the program to the level that we believe that the program has, which is -- it's the EACs that is driving the low performance, right? So if we can perform at the level that we believe we have the ability to do now with parts at hand and with the team trained and continued ramp is where we see the high end of the range.

The low end of the range, obviously, is we're not able to achieve that. So for AEC, it is really around the CH-53K program. But the reason why we held it is because we have confidence that the team has come to a point where we will see the results of all of this impact. We see it gradually, right? We see it with less quality issues. We see it with less hours being spent on each operation. And so the progress is there in the short term.

Okay. I mean is anything else ramping up? I mean, your pipeline, maybe other programs that you've secured, do you have to relook at other contracts and other assumptions across other defense programs? I mean, how do we get comfortable with the AEC profile on a go-forward basis? What's potentially in that pipeline that we don't really know yet?

We have -- there's both existing and new programs that are ramping up in the second half. And we've not talked that much about it, Bell, obviously, as a part of that. The LEAP program is growing, and we had kept that flat for the year. And at this point, we're saying that it's growing as we are matching what Safran is building. The JASSM-LRASM program continues to grow. The -- and when I was in Salt Lake recently, we've invested quite significantly in that program and continue to deliver on time. So that is a growth for the back half as well.

I would say Joint Strike Fighter, I would keep flat for now, and we're watching where Lockheed Martin is going on that. And then the engine programs at our Bernie facility and our Queretaro facility, as both Airbus and Boeing are ramping up, there is an increase in orders to us. So the second half does have growth in it across both commercial and military programs.

[Operator Instructions] and your next question comes from Alex Preston from Bank of America.

So I wanted to touch on the 3D woven composite parts and the replacing titanium. You mentioned you got a good reception in Paris. Maybe if you could just go a little deeper and sort of where that program stands? Maybe how long do you expect until certification might be in play, a go-to-market strategy? Maybe just a little more detail on that would be really helpful.

Yes. You will see more information about this for each quarter as we expand our target opportunity there. But I think a good example here is at the Paris Air Show, if you went to the Safran display, they had the landing gear of A350 there, and they had a brake brace. It takes 4 per landing gear, and they had 2 of ours and 2 in titanium on that display.

And clearly, it's a perfect example of how we are replacing a part that is titanium today that can be replaced with a 3D woven part at a lower weight. That is a great example, and we were excited that they -- both Airbus and Safran were aligned there with us. And we're developing that certification is in the next 18 months or so, I would say.

So some of these commercial programs or military programs when we are actually replacing current titanium will take some time. So our focus has been around the new programs. Beta is a great example. We use 3D woven technology to help them design their lift blade. We had that in Paris as well.

And then we are meeting with the developer of the new aircraft, military aircraft to show where we can replace titanium on new development programs. And then, of course, we're using the 3D woven technology in our hypersonic development, which would replace not titanium, but use our technology to get a near net shape rather than the current box type that has to be machined.

So 3D woven is our focus. We're going to put a lot of effort on it over the next several years. I think we'll have opportunity to replace titanium on current programs, but we'll have a big place in new programs.

There are no further questions at this time. And now I would like to turn the call back over to Gunnar Kleveland for closing remarks. Please go ahead.

Thank you, and thank you, everyone, for joining us on the call today. We appreciate your continued interest in Albany International. Thank you, and have a good day.