Executive Summary / Key Takeaways

• Strategic Amputation in Aerospace: The $147 million CH-53K loss reserve forced management to confront a structural reality: certain aerospace assembly contracts cannot be executed profitably under current terms, triggering a strategic review of the Salt Lake City facility and Gulfstream program exit to refocus on higher-return 3D weaving technology.

• Machine Clothing: The Unsung Cash Engine: Despite 4.4% revenue decline in Q3 2025, the MC segment delivered 31% adjusted EBITDA margins, demonstrating the durability of its global leadership position and pricing power in a consolidating industry.

• AEC's Earnings Power Is Masked: The AEC segment's 9.6% adjusted EBITDA margin in Q3 reflects program-specific execution failures, not a broken business model; excluding CH-53K and Gulfstream, the core LEAP program and defense platforms show healthy growth and margin potential.

• Capital Allocation Signals Confidence: With $428 million in total liquidity, the company repurchased $171 million of stock in nine months while maintaining a 2.22% dividend yield, indicating management believes the market has over-discounted execution risks.

• The Next 12 Months Are Critical: Success hinges on whether AEC can demonstrate double-digit margins post-restructuring and whether MC can stabilize amid China weakness; failure on either front would transform this from a turnaround story into a value trap.

Setting the Scene: Two Businesses, One Weaving Platform

Albany International, founded in 1895 and headquartered in Portsmouth, New Hampshire following its 2025 corporate consolidation, operates two seemingly disparate segments unified by a single technological thread: industrial weaving. The Machine Clothing (MC) segment manufactures the permeable and impermeable belts that form the literal backbone of paper, tissue, and nonwovens production worldwide. The Albany Engineered Composites (AEC) segment applies the same weaving expertise—advanced to 3D structures—to create fan blades and cases for the LEAP engine and components for defense platforms. This duality defines the investment case: a mature, high-margin cash cow funding a growth engine that has recently misfired.

The MC segment commands approximately 30% global market share in paper machine clothing, a position built on 700+ patents and deep customer partnerships spanning decades. These are not commodity products; they are customized, consumable engineered components that directly impact customer productivity, energy consumption, and sustainability metrics. The business model is classic industrial aftermarket: high switching costs, recurring revenue streams, and pricing power derived from performance rather than price. Competitors like Andritz AG (ANDZF) and Valmet Oyj (VALMTY) offer integrated systems but lack Albany's pure-play focus and specialized expertise, while Kadant (KAI)'s broader industrial processing portfolio cannot match Albany's textile engineering depth.

AEC represents the growth thesis. Through its exclusive joint venture with Safran (SAFRY), Albany is the sole global aerospace supplier of 3D woven resin-infused fan blades and cases for the LEAP engine, with over 220,000 blades and 11,000 cases delivered to date. This proprietary technology creates lighter, stronger alternatives to titanium with superior supply chain security. The segment has delivered a 12% organic revenue CAGR over the past decade, positioning it as a key beneficiary of aerospace's composite adoption trend. However, as recent events demonstrate, this growth comes with execution risk that the MC segment simply does not exhibit.

Technology, Products, and Strategic Differentiation: The Weaving Moat

Albany's competitive advantage rests on three pillars of industrial weaving technology that are genuinely difficult to replicate. First, the MC segment's polymer chemistry and fabric structure optimization deliver measurable customer benefits: reduced fiber usage, lower energy consumption, and improved machine efficiency. These are not marketing claims but quantifiable performance metrics that paper mills track daily, creating a switching cost barrier that protects 31% EBITDA margins even when volumes decline.

Second, the 3D weaving technology in AEC represents a step-change in composite manufacturing. Traditional composite layup is labor-intensive and prone to defects; Albany's automated 3D weaving creates near-net-shape preforms with consistent quality and dramatically reduced assembly time. For the LEAP program, this means fan blades that meet the aerospace industry's most stringent certification standards while enabling Safran to ramp production reliably. The "sole global supplier" status is not a marketing phrase—it reflects the decade-long qualification process and proprietary know-how that competitors like Hexcel (HXL) cannot easily duplicate, despite their own composite material expertise.

Third, the company's expansion into dry fiber preforms and resin transfer molding for defense applications leverages the same core competency while addressing titanium supply chain vulnerabilities. Management explicitly positions this as a response to "ongoing titanium shortages and extended lead times," creating a superior alternative in terms of strength, weight, and cost. The JASSM and LRASM missile programs, plus next-generation hypersonic platforms, represent a pipeline of opportunities where Albany's domestic manufacturing capability and faster lead times provide a decisive edge over foreign suppliers.

The strategic review of the Salt Lake City structures assembly business acknowledges where this technology moat does not apply. Large, complex assemblies with multi-tier supply chains expose Albany to execution risks and margin pressure that its core weaving business avoids. Exiting these programs is not a retreat; it is a recognition that the company's competitive advantage lies in engineered components, not system integration.

Financial Performance & Segment Dynamics: Evidence of Strategic Misalignment

The Q3 2025 results provide stark evidence of why the strategic reset is necessary. Consolidated revenue declined 13.3% year-over-year to $261.4 million, but this headline masks two vastly different stories. The MC segment's 4.4% revenue decline to $174.95 million reflects cyclical headwinds, primarily reduced demand in China and a $2.6 million currency translation hit. Yet gross margins held at 46.9%, and adjusted EBITDA margins of 31% remained within the segment's historical range. The "why" matters: lower volumes were partially offset by footprint optimization from the Heimbach integration, which is delivering the expected cost synergies. This is a business managing through a downturn, not a business in structural decline.

The AEC segment's 25% revenue collapse to $86.48 million tells a different story. The entire decline stems from $46 million in revenue adjustments to the CH-53K program, which also drove a $147.3 million increase in life-of-contract cost assumptions. The resulting gross profit was a loss of $132 million, swinging from a $1.46 million profit a year ago. This is not cyclical; it is a fundamental failure to execute on a fixed-price contract. Management's explanation is damning: "without changes to the contract, there is no path to profitability on the program as originally bid." The $147 million loss reserve represents the full expected loss over the next eight years, a clear admission that this program cannot be salvaged.

The segment-level EBITDA margins reveal the underlying health. AEC's 9.6% adjusted EBITDA margin in Q3, while down from 10.3% a year ago, actually improved sequentially from 8.5% in Q2. More importantly, excluding CH-53K and Gulfstream impacts, the core LEAP program and defense platforms are performing well. Sales to Safran grew 13% year-over-year to $46.4 million, and the LEAP program continues to strengthen with higher OEM production levels. The problem is not the technology or market position; it is the execution on specific legacy contracts that are now being exited.

Cash flow performance validates the strategic pivot. Net cash from operations was $78.8 million for the first nine months, down from $140 million a year ago, but this decline reflects the CH-53K losses and an inventory build in AEC. The MC segment continues to generate reliable cash, funding both the dividend ($24.7 million paid year-to-date) and aggressive share repurchases ($171 million). The company's leverage ratio of 1.70x and interest coverage of 9.15x provide ample cushion, while the $427.7 million in total liquidity ensures the restructuring can be executed without financial distress.

Outlook, Management Guidance, and Execution Risk

Management's decision to withdraw full-year 2025 guidance is both a recognition of uncertainty and a signal of strategic seriousness. The stated reason—the potential range and timing of outcomes from the structures assembly review—means investors cannot model AEC earnings with confidence. However, the qualitative outlook provided is instructive. For MC, management expects a stable Americas environment, moderate European recovery, and continued China weakness that "will create a more meaningful headwind" in Q4. This is a realistic assessment that suggests the segment's 31% EBITDA margins are defensible even at lower volumes.

For AEC, the outlook is deliberately conservative. Performance is expected to be "similar to the third quarter," supported by higher LEAP production but weighed down by lower-margin structural work as the company explores options. This is management acknowledging that the strategic review will create near-term margin pressure but ultimately "substantially derisk" the portfolio. The key phrase is "sharpen our focus on higher return opportunities"—code for exiting anything that doesn't leverage the core weaving technology.

The timeline matters. The Gulfstream contract will be completed by year-end 2025, and the CH-53K loss reserve covers eight years of expected losses. This means 2026 should show a "clean" AEC segment, allowing investors to assess its true earnings power. Management intends to reintroduce full-year 2026 guidance with Q4 2025 results, which will be the first real test of whether the strategic reset is working.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is that AEC's execution problems extend beyond the identified programs. The CH-53K failure followed "significant investments in leadership, training, planning, and supply chain," suggesting the issues were not easily diagnosable. If similar cost estimation errors exist in other fixed-price defense contracts, the strategic review may uncover additional loss reserves. The company's admission that the process "may not result in the identification or consummation of any transaction" and "may be disruptive to our operations" acknowledges that exiting these programs could be messy and expensive.

A second risk is that MC's China weakness spreads to other regions. The company saw "further deceleration in China as the third quarter progressed," and while other regions remain stable, a global paper demand downturn could pressure volumes beyond what cost cuts can offset. Competitors like Valmet and Andritz are winning modernization projects in Asia, suggesting Albany is losing share in the higher-growth markets. The Heimbach integration provides some geographic diversification, but Europe's recovery remains "moderate" at best.

The third risk is capital allocation missteps. The aggressive $171 million in share repurchases while facing a $147 million program loss could be seen as misguided. However, the $93.4 million remaining authorization and 2.22% dividend yield suggest management is balancing return of capital with investment in the core business. The bigger concern would be if the company uses its liquidity for a large, dilutive acquisition rather than fixing AEC's internal issues.

On the upside, the asymmetry lies in AEC's underappreciated earnings power. If the strategic review successfully exits the low-margin assembly work, the remaining LEAP and defense programs could support EBITDA margins in the mid-teens, consistent with management's pre-CH-53K guidance. The $1.3 billion backlog (excluding LEAP) provides visibility, and the titanium replacement trend creates a multi-year growth driver. A successful reset would transform AEC from a drag to a growth engine, justifying a higher multiple for the consolidated business.

Valuation Context: Pricing for Execution, Not Fundamentals

At $49.61 per share, Albany International trades at an enterprise value of $1.84 billion, or 1.60x trailing revenue. This multiple reflects the market's skepticism about AEC's earnings power rather than any fundamental weakness in the MC segment. The EV/EBITDA multiple of 31.33x appears elevated, but this is distorted by the CH-53K losses depressing EBITDA. On a normalized basis—assuming MC's $530.6 million in nine-month revenue annualizes to ~$707 million at 31% margins ($219 million EBITDA) and AEC's core business could generate $400 million revenue at 13% margins ($52 million EBITDA)—the combined $271 million EBITDA would imply a more reasonable 6.8x EV/EBITDA.

The price-to-free-cash-flow ratio of 16.37x and price-to-operating-cash-flow of 9.30x provide better valuation anchors. These multiples are in line with industrial peers like Kadant (P/OCF 20.88x) and Hexcel (P/OCF 22.79x), suggesting the market is valuing Albany on its cash generation ability rather than its earnings volatility. The 2.22% dividend yield, supported by MC's reliable cash flow, provides downside protection while investors wait for the AEC reset to play out.

Peer comparisons highlight the valuation opportunity. Hexcel trades at 3.60x EV/revenue despite flat growth and lower margins, while Kadant commands 3.44x EV/revenue with 16.7% operating margins. Albany's 1.60x EV/revenue multiple reflects a conglomerate discount that a successful AEC restructuring would eliminate. The key metric to watch is AEC's adjusted EBITDA margin exiting 2025. If the company can demonstrate a clear path to double-digit margins, the valuation gap should close quickly.

Conclusion: A Turnaround Story with a Strong Core

Albany International's investment thesis hinges on a simple question: Is the AEC segment's poor performance a fixable execution problem or a structural flaw in the business model? The $147 million CH-53K loss reserve and strategic review of the Salt Lake City facility suggest management has finally accepted that certain programs are unfixable and must be exited. This clears the way for AEC to demonstrate its true earnings power, which should be in the low-to-mid-teens EBITDA margin range based on the healthy LEAP and defense programs.

The MC segment provides the foundation for this turnaround. Its 31% EBITDA margins, global leadership position, and resilient cash generation give management the financial flexibility to restructure AEC without jeopardizing the dividend or forcing dilutive equity raises. The Heimbach integration is delivering synergies, and the portfolio optimization is improving margins even as volumes fluctuate.

The next 12 months will determine whether this is a value trap or a compelling turnaround. Investors should watch three signals: (1) AEC's EBITDA margin trajectory in Q4 2025 and Q1 2026 as the problematic programs wind down, (2) management's 2026 guidance, which will reveal their confidence in the reset, and (3) any additional loss reserves that would suggest deeper problems. If AEC can emerge as a focused, profitable growth engine leveraging its 3D weaving monopoly, the current valuation will look like a bargain. If not, Albany remains a high-quality industrial cash cow trading at a fair price—but without the growth premium investors once expected.