| ALBANY INTERNATIONAL CORP /DE/ Item 1A RISK FACTORS The Company’s business, operations and financial condition are subject to various risks |
| Some of these risks are described below and in the documents incorporated by reference and investors should take these risks into account in evaluating any investment decision involving the Company |
| This section does not describe all risks applicable to the Company, its industry or business, and it is intended only as a summary of certain material factors |
| Risks relating to the Company’s business and industry Failure to remain competitive in the industry in which the Company’s Paper Machine Clothing segment does business could adversely affect the Company’s business, financial condition and results of operations The industry in which the Company’s Paper Machine Clothing segment does business is very competitive |
| The Company’s Paper Machine Clothing segment, which accounted for 75dtta8prca, 75dtta7prca and 78dtta1prca of the Company’s consolidated net sales in 2005, 2004 and 2003, respectively, includes the Company’s paper machine clothing and process belts products |
| While some competitors in this industry tend to compete more on the basis of price, and others attempt to compete more on the basis of technology, both are significant competitive factors in this industry |
| The Company’s strategy for addressing competition in this industry is to focus on continuous improvement in the technical performance of the Company’s products and services in order to deliver greater value to customers than the Company’s competitors |
| During the past three years, the Company has spent an average of 3prca of the Company’s consolidated net sales on research and development, and the Company expects to spend similar amounts in future periods |
| Failure to maintain or increase the technical performance of the Company’s products in future periods, or to maintain or increase the overall product and service value delivered to customers, could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Consolidation in the industry in which the Company’s Paper Machine Clothing segment does business has changed the nature of competition in that segment, which could have a negative effect on the Company’s net sales and cash flows from operations One of the Company’s competitors in the Paper Machine Clothing segment has the capability to make and sell paper machines and papermaking equipment as well as other engineered fabrics |
| While customers historically have viewed the purchase of paper machine clothing and the purchase of paper machines as separate purchasing decisions, the ability to coordinate research and development efforts and to market machines and fabrics together could be perceived as providing a competitive advantage |
| This underscores the importance of the Company’s ability to maintain the technical competitiveness and value of the Company’s products, and a real or perceived failure to do so could have a material adverse effect on the Company’s business, financial condition and results of operations |
| Moreover, the Company cannot predict how the nature of competition in this segment may continue to evolve as a result of further consolidation among the Company’s competitors, or consolidation involving the Company’s competitors and other suppliers to the Company’s customers |
| The Company may significantly increase capital expenditures and other expenses in future periods to support growth, and may not receive the benefit of any return on the Company’s investments The past several years have seen the closure of paper mills in North America and elsewhere, while new papermaking capacity has been added in Asia and parts of Europe |
| During this same period, the Company closed and consolidated manufacturing facilities in North America and Europe |
| The Company expects to continue to make investments in regions of the world, including Asia, where the Company anticipates growth |
| The Company had capital expenditures of dlra43dtta3 million, dlra57dtta1 million and dlra51dtta8 million in 2005, 2004 and 2003, respectively |
| In January 2006, the Company announced a major strategic investment program for paper machine clothing growth |
| Approximately dlra150 million will be invested over the next four years in the construction of a new paper machine clothing manufacturing facility in China, in additional forming fabric capacity in Korea and Brazil, and in additional dryer fabric capacity at the Company’s existing plant in Panyu, China |
| The new facility in China will serve as the headquarters of the Company’s Pacific Business Corridor and will initially house world-class manufacturing operations for forming and press fabrics |
| 25 _________________________________________________________________ The Company currently expects that capital expenditures for ongoing operations will be approximately dlra50 million per year in 2006, 2007, and 2008 |
| Additionally, the Company expects that approximately dlra40 million of the dlra150 million paper machine clothing investment program will be incurred in 2006 |
| The balance of that investment will occur over the following three years, with the largest impact in 2007 |
| The Company may also incur additional costs to support new hiring in key areas |
| The Company may not be successful in achieving any of the benefits that it hopes to gain from these investments |
| If the Company is not successful, it could have a negative impact on the growth strategy and the Company’s business, financial condition and results of operation |
| The Company may conduct a greater part of the Company’s operations in emerging markets in the future, which could involve many uncertainties for the Company in addition to the general risks the Company face doing business in those markets As part of the Company’s growth strategy, the Company plans to continue to expand the Company’s operations, particularly in Asia |
| The Company also currently has manufacturing facilities in 13 countries; in 2005, 64dtta4prca of consolidated net sales were generated by the Company’s non-US subsidiaries |
| Operations outside of the US are subject to a number of risks and uncertainties, including risks that: governments may impose limitations on the Company’s ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments to the Company, or the amount of any such taxes may increase; an outbreak or escalation of any insurrection or armed conflict may occur; governments may seek to nationalize the Company’s assets; or governments may impose or increase investment barriers or other restrictions affecting the Company’s business |
| In addition, emerging markets pose additional uncertainties, including the protection of the Company’s intellectual property, pressure on the pricing of the Company’s products and risks of political instability |
| The occurrence of any of these conditions could disrupt the Company’s business or prevent it from conducting business in particular countries or regions of the world |
| These risks could increase if the Company shifted more manufacturing capacity to emerging market economies, such as those in parts of Asia |
| If the Company is not successful in managing these risks, it could have a negative effect on the Company’s business, financial condition and results of operations |
| The Company receives dividends and other payments or distributions from the Company’s non-US operating subsidiaries |
| If governments were to impose or increase limitations on the Company’s ability to repatriate funds or impose or increase taxes on remittances or other payments, the amount of dividends and other distributions the Company receives from these subsidiaries could be reduced, which could reduce the amount of cash available to satisfy debt obligations and pay dividends |
| The Company may incur substantially more debt, which could restrict the Company’s ability to pay dividends or make other distributions, among other restrictions The Company may incur a substantial amount of additional indebtedness in the future |
| As of December 31, 2005, the Company had no borrowings under its dlra460 million credit facility |
| Under this facility, the Company must maintain a leverage ratio (as defined in the agreement) of not greater than 3dtta00 to 1dtta00, and an interest coverage ratio (as defined in the agreement) of at least 3dtta00 to 1dtta00 |
| As of December 31, 2005, the Company’s leverage ratio was 0dtta61 to 1dtta00 and its interest coverage ratio was 13dtta45 to 1dtta00 |
| The Company may not purchase its Class A common stock or pay dividends unless the Company’s leverage ratio remains at or below 2dtta25 to 1dtta00 and may not make acquisitions if the Company’s leverage ratio would exceed 2dtta50 to 1dtta00 after giving pro forma effect to the acquisition |
| Based on the maximum leverage ratio permitted under these facilities, and the Company’s consolidated EBITDA (as defined in the agreement) for 2005, the Company currently could incur an additional dlra410 million of indebtedness |
| Any additional indebtedness incurred could increase the risks associated with substantial leverage |
| These risks include limiting the Company’s ability to make acquisitions or capital expenditures to grow the Company’s business, limiting the Company’s ability to withstand business and economic downturns, limiting the Company’s ability to invest the Company’s operating cash flow in the Company’s business, and limiting the Company’s ability to pay dividends |
| In addition, any such indebtedness could contain terms that are more restrictive than the Company’s current facilities |
| 26 _________________________________________________________________ The loss of a few major customers could have a material adverse effect on the Company’s business, financial condition and results of operations While supply agreements with terms of more than a year are not uncommon in the industry in which the Company’s Paper Machine Clothing segment does business, they do not typically obligate the customer to purchase any products |
| Therefore, it is common for competitors in this industry to approach customers offering new products, lower prices, or both, in an attempt to displace the current supplier or suppliers |
| In addition, a production disruption at one of the Company’s customers in a particular country or region, due to work stoppages, lack of raw materials, or other factors, could have a negative impact on net sales in the Company’s Paper Machine Clothing segment |
| While in 2005, no individual customer accounted for more than 10prca of consolidated net sales, the loss of a few major customers, or a substantial decrease in such customers’ purchases from the Company, could have a material adverse effect on the Company’s business, financial condition and results of operations |
| There can be no assurance that the growth in sales in the Applied Technologies segment will be continued The Applied Technologies segment has experienced significant growth in net sales during the last two to three years, due to the introduction of new products and growth in demand and application of previously existing products |
| While the Company continues to make investments for acquisitions and capital investments to grow the Applied Technologies segment, there can be no assurance that the growth in sales enjoyed during the last two to three years will continue |
| Sales in the Company’s Albany Door Systems segment depend on capital expenditures of its customers The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, in particular, to customers in Europe |
| The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending |
| If the weak economic conditions in Europe in recent years continue, customers may reduce levels of capital expenditures, which could have a negative effect on sales in the Albany Door Systems segment |
| The large amount of revenue derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be more sensitive to changes in currency rates than the other segments of the Company |
| The Company may experience supply constraints due to the Company’s reliance on a limited number of suppliers The Company has relied on a number of suppliers to supply polymer monofilaments, key raw materials that the Company uses in the manufacture of paper machine clothing |
| For the Company’s European production facilities, the Company purchases monofilament from third parties |
| For the Company’s North American and Asian production facilities, the Company currently produces a significant portion of the Company’s own monofilament needs |
| While the Company has always been able to meet its raw material needs in the past, the limited number of producers of polymer monofilaments creates the potential for disruption in supply |
| In addition, if the Company’s own monofilament production facility were to shut down or cease production for any reason, including due to natural disaster, labor problems or otherwise, there is no guarantee that the Company would be able to replace any shortfall |
| Lack of supply, delivery delays or quality problems relating to supplied raw materials could harm the Company’s production capacity and make it difficult to supply the Company’s customers with products on time, which could have a negative impact on the Company’s business, financial condition and results of operations |
| The Company is exposed to the risk of increased costs because of higher petroleum and energy prices Polymer monofilaments are petroleum-based |
| In recent years, petroleum and energy prices have increased significantly |
| This increase has led to a corresponding increase in the Company’s raw materials costs |
| Future increases or sustained high prices for petroleum could lead to additional increases in or sustained high levels of raw material costs, which could have a material adverse effect on the Company’s results of operations |
| Fluctuations in currency exchange rates could adversely affect the Company’s business, financial condition and results of operations The Company operates in many geographic regions of the world and more than half of the Company’s business is in countries outside the United States |
| A substantial portion of the Company’s sales is denominated in euros or 27 _________________________________________________________________ other foreign currencies |
| As a result, changes in the relative values of US dollars, euros and such other currencies impact reported net sales and operating income |
| If the value of the euro or other currencies were to decline relative to the US dollar, the Company’s reported net sales and operating income could decline |
| In some locations, the profitability of transactions is affected by the fact that sales are denominated in a currency different from the currency in which the costs to manufacture and distribute the products are denominated |
| These sales are typically denominated in US dollars while the manufacturing costs are based mainly on currencies that have in the past strengthened, and may in the future strengthen, against the US dollar |
| While the Company may enter into foreign currency or other derivative contracts from time to time in order to mitigate volatility in the Company’s earnings that can be caused by changes in currency exchange rates, these mitigation measures may not be effective |
| If the Company acquires other businesses, the Company may not be able successfully to integrate them into the Company’s operations and/or the expected benefits of such acquisitions may not be realized The Company’s growth strategy, particularly in the Applied Technologies segment, may involve the acquisition of one or more businesses |
| Any such acquisition could involve numerous risks, which may include difficulty in assimilating the operations, technologies, products and key employees of the acquired businesses; the Company’s inability to maintain the existing customers of the acquired businesses or succeed in selling the products or services of the acquired businesses to the Company’s existing customers; a diversion of management’s attention from other business concerns; the Company’s entry into markets in which competitors have a better established market position than the businesses the Company acquires; the incurrence of significant expenses in completing the acquisitions; and the assumption of significant liabilities, some of which may be unknown at the time of the acquisitions |
| The Company’s inability to successfully execute any acquisitions or integrate acquired businesses could have an adverse effect on the Company’s business, financial condition and results of operations |
| The Company has been named as defendant in suits relating to the actual or alleged exposure to asbestos-containing products As of February 10, 2006, the Company and certain of the Company’s subsidiaries were defending against 20cmam023 asbestos-related claims in various courts in the United States |
| The Company’s subsidiary, Brandon Drying Fabrics, Inc, is also a separate defendant with respect to 9cmam564 of these claims as of February, 10, 2006 |
| The Company anticipates that additional claims will be filed against the Company and Brandon in the future but are unable to predict the number and timing of such future claims |
| While, based on information currently known, the Company does not currently anticipate any material adverse effect relating to the resolution of these asbestos claims in excess of currently existing insurance limits, litigation is inherently uncertain, particularly when the outcome is dependent primarily on determinations of factual matters to be made by juries |
| Numerous other defendants in asbestos cases, as well as others, who claim to have knowledge and expertise on the subject, have found it difficult to anticipate the outcome of asbestos litigation, the volume of future asbestos claims and the anticipated settlement or judgment values of those claims |
| Nevertheless, the Company has approximately dlra130 million in confirmed insurance coverage that should be available with respect to current and future asbestos claims, as well as additional insurance coverage that it should be able to access |
| The Company’s insurance carrier paid 99prca of the Company’s settlement costs to date and a comparable percentage of the Company’s legal costs under a standard reservation of rights |
| There can be no assurance that current confirmed coverage will be sufficient for all claims to which the Company or Brandon may be subject or that the Company’s or Brandon’s insurance carriers will not in the future attempt to deny coverage for some or all pending and future asbestos claims |
| In such an event, the Company might be required to sue the carriers in order to establish coverage, and there can be no assurance that the Company would prevail in such a suit |
| In addition, with respect to those cases in which the Company has been named a successor-in-interest to Mt |
| Vernon Mills, Mt |
| Vernon Mills may decide to cease defending these claims or be financially unable to do so |
| For each of these reasons, there can be no assurance that asbestos litigation will not ultimately have an adverse impact on the Company’s business, financial condition or results of operations |
| 28 _________________________________________________________________ Legislation recently under consideration in the US Senate regarding asbestos litigation could have a material adverse effect on the Company’s financial condition and results of operations Legislation has been introduced in the United States Senate that is intended to address asbestos litigation by creating a privately funded trust to provide compensation to persons injured as the result of exposure to asbestos |
| The Fairness In Asbestos Injury Resolution Act Of 2005 (“Fair Act”) was introduced on April 19, 2005 and approved by the Senate Judiciary Committee on May 26, 2005 |
| If enacted into law, the Company would be required to make payments of up to dlra500cmam000 per year for up to 30 years to the privately funded, publicly administered trust fund |
| The payments would not be covered by any of the Company’s insurance policies |
| After floor debate in February 2006, a procedural vote to move the Fair Act closer to a vote failed, and its future is uncertain |
| A number of Senators have spoken publicly of alternative legislation |
| The Company cannot predict whether the Fair Act, or any asbestos legislation, will ultimately be enacted into law |
| Conditions in the paper industry, in the Company’s industry, or in the economy in general may require the Company to reorganize its operations, which could require significant charges and could pose risks to the Company’s operations During 2003 and 2004, the Company engaged in significant restructuring of the global operations of the Company’s Paper Machine Clothing segment, closing a number of manufacturing facilities in the United States and Europe |
| This restructuring was part of a continuing effort to match the Company’s manufacturing capacity to shifting global demand |
| This effort, combined with lesser restructuring initiatives relating to the Company’s other segments, resulted in a reduction of approximately 600 employees, as well as restructuring charges of dlra21dtta8 million in 2003 and dlra54dtta1 million in 2004 |
| Future shifting of customer demand, the need to reduce costs to increase or even maintain profitability, or other factors could cause the Company to determine in the future that additional restructuring steps are required |
| The Company may also need to incur additional costs in the future if the Company needs to add additional employees following any such restructuring |
| Restructuring involves risks such as employee work stoppages, slowdowns or strikes, which can threaten uninterrupted production, maintenance of high product quality and the meeting of customers’ delivery deadlines |
| Increases in output in remaining manufacturing operations can likewise impose stress on these remaining facilities as they undertake the manufacture of a greater volume and, in some cases, a greater variety of products |
| Competitors can be quick to attempt to exploit these situations |
| Although the Company considers these risks, plans each step of the process carefully and works to reassure customers who could be affected by any such matters that their requirements will continue to be met, the Company could lose customers and associated revenues if the Company fails to plan properly or if the foregoing tactics are ineffective |
| Failure to retain and recruit qualified technical personnel may hinder the Company’s growth The Company competes for qualified personnel in the industry in which the Company’s Paper Machine Clothing segment does business, and recruiting qualified personnel is difficult |
| The Company’s continued success in developing technological improvements to the products of the Company’s Paper Machine Clothing segment and in seeking new applications for the technologies of the Company’s Paper Machine Clothing segment depends on the Company’s ability to recruit and retain highly skilled employees |
| If the Company is unable to attract and retain qualified technical personnel with adequate skills and expertise, the Company’s growth may be hindered and the Company’s development programs may be delayed or aborted |
| Cyclicality in the paper industry causes price competition in that industry, which could have a negative impact on demand for the Company’s products The worldwide pulp and paper industry tends to be cyclical, with periods of healthy paper prices followed by increases in new capacity, which then leads to price competition among the Company’s customers |
| Although sales of the Company’s products do not tend to be as cyclical, if paper companies respond to this competition by curtailing their production, it could have a negative impact on demand for the products of the Company’s Paper Machine Clothing segment |
| 29 _________________________________________________________________ There are a number of factors inhibiting growth in the industry in which the Company’s Paper Machine Clothing segment competes While the Company is often able to charge higher prices for new and improved paper machine clothing, the Company may not always be able to do so |
| These increased prices may not always be sufficient to offset this reduced demand |
| After adjusting for currency translation effects, while net sales of the Company’s Paper Machine Clothing segment increased during 2005, such net sales declined during each of 2002, 2003 and 2004 |
| The trend towards a decrease in the ratio of paper machine clothing consumed to paper produced may have been a significant contributor to this decline |
| If these trends were to continue, they could have a negative long-term impact on the Company’s business, financial condition and results of operations |
| A fundamental change in the papermaking process could reduce demand for paper machine clothing The basic papermaking process, while it has undergone dramatic increases in efficiency and speed, has always relied on paper machine clothing |
| In the event that a paper machine builder or other person were able to develop a commercially viable manner of paper manufacture that did not require paper machine clothing, sales of the Company’s products in this segment could be expected to decline significantly |
| A substantial portion of the Company’s assets includes goodwill and impairment in the value of the Company’s goodwill could adversely affect the Company’s assets and net income As of December 31, 2005, goodwill represented 14dtta1prca of the Company’s total assets |
| The Company reviews goodwill and other long-lived assets for impairment whenever events such as significant changes in the business climate, plant closures, changes in product offerings or other circumstances indicate that the carrying value may not be recoverable |
| The Company performs a test for goodwill impairment at least annually, in the second quarter of each year |
| If the Company is required to record an impairment charge, it will have the effect of decreasing the Company’s earnings (or increasing the Company’s losses), and the Company’s stock price may decline as a result |
| Changes in assumptions used to estimate the Company’s pension and postretirement benefit costs and liabilities could adversely affect the Company’s liabilities and net income The Company has pension and postretirement benefit costs and liabilities that are developed from actuarial valuations |
| Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis |
| The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions |
| Changes in the related pension and postretirement benefit costs or credits may occur in the future due to changes in the assumptions |
| The amount of annual pension plan funding and annual expense is subject to many variables, including the investment return on pension plan assets and interest rates |
| Weakness in investment returns and low interest rates could result in the need to make greater pension plan contributions in future years |