As we now know, the recession turned out to be even more severe than we had anticipated. Sales declined 20% in 2009, dropping from $1.09 billion in 2008 to $871 million. But we realized our goal nonetheless. As the year progressed and the recession deepened, profitability improved quarter by quarter. By Q4, even though sales were 7% lower than they had been in Q4 2008, gross profit improved from 30% to 35% of net sales, and Adjusted EBITDA improved by 30%.*

The reason that we left the recession and 2009 as a fundamentally more profitable enterprise, even at substantially lower sales levels, should come as no surprise to our investors: the restructuring program that we launched in 2006 and completed at the end of 2009 fundamentally, structurally, and permanently transformed the company, particularly our Paper Machine Clothing (PMC) business. What had been a fragmented PMC organization with 12 separate profit-centers, 24 plants, overcapacity in the maturing markets of North America and West Europe, and undercapacity in the growth markets of Asia and South America, is now a unified global business, with unified global R&D, procurement, and administrative functions, a soon-to-be-unified global ERP system, and 14 strategically sized manufacturing facilities, including new or expanded high-quality world-class facilities with plenty of room for growth in Hangzhou and Panyu, China, as well as Korea, Mexico, and Brazil. At the same time, Albany Door Systems and PrimaLoft® Products also underwent substantial restructuring, and they too are well positioned to grow as the economy improves while operating at fundamentally lower costs. And Albany Engineered Composites, despite losing several programs to the recession, continued to position itself during 2009
for what should be a decade of dramatic growth. 

From restructuring and recession to cash and grow

With restructuring complete and the recession behind us, Albany International now enters a new phase in its strategic evolution. From restructuring and recession, we return to “cash and grow,” a corporate strategy that began to take form in 2007 and 2008, but took a back seat in 2009 as we concentrated on getting ahead of the recession.

Cash and grow begins with the premise that as a result of those three years of intense restructuring, the Company has become a portfolio of businesses, each with roots in advanced textiles and materials processing. The cash and grow portfolio comprises three components: Global PMC; Albany Door Systems, Engineered Fabrics and PrimaLoft® Products, which together comprise the Applied Technologies Group; and Albany Engineered Composites.

Global PMC remains the Company’s core business and primary cash generator. While the paper industry in our traditional geographic markets suffers from well-documented overcapacity in the publication grades, especially newsprint, the industry continues to grow slightly on a global basis, thanks to the long-term health of packaging and tissue grades, and the rapid expansion of paper consumption and production in Asia and South America. For this reason, although PMC can no longer be considered a market with growth potential, it should remain for the long term a market with significant cash-generating potential. And with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development and field services, we are now well positioned to take advantage of this potential. Our objective in PMC is sustained, long-term cash generation. Our strategy is to maintain the low costs that we achieved through restructuring, while continuing to compete through differentiated products and services that reduce our customers’ total cost of operation, improve their paper quality, or both. 

The businesses that comprise the second component of our cash and grow portfolio, the Applied Technologies Group, share two attributes in common. First, they generate cash as they grow. Second, they are sensitive to the business cycle, tending in recent years to grow faster than the GNP when the cycle is positive, and to shrink faster than the GNP during recession.

Assuming the global economy is returning to a period of steady, slow growth, we expect these businesses to become significant contributors to improvement in Company earnings during the next five years. During the recession, our focus in these three businesses was to reduce fixed costs. Now, as we enter a more positive phase in the economic cycle, Albany Door Systems, Engineered Fabrics, and PrimaLoft® Products will each seek to accelerate growth through a combination of new products and geographic expansion, while preserving the margin improvements achieved during the downturn.

The third component of cash and grow is Albany Engineered Composites (AEC), the business in our portfolio with the greatest growth potential, both near and long term. Our goal is to develop AEC into a second core business by the end of this decade. Our strategy is to grow organically by focusing on high-value aerospace and defense applications that cannot be served effectively by conventional composites. Our unique, proprietary capabilities in composites enable us to offer our customers the opportunity to displace metal components, and, in some cases, conventional composites, with lower-weight, high-strength, and potentially high-temperature composites. Achieving lower weight is the key to improving fuel efficiency, and is thus a critical performance requirement in the aerospace industry and driver of growth in aerospace composites. 

Our most significant aerospace customer is the SAFRAN Group, for whom we make braces for the Boeing 787 main landing gear, outer guide vanes for the CFM-56 engine, and fan blades and other components for the LEAP-X engine. The LEAP-X is the intended replacement engine for the CFM-56, which is produced by a joint venture between GE and SAFRAN and is the largest and most successful engine program in the aircraft engine industry.

While SAFRAN is our most significant customer, and the LEAP-X engine our most significant program, we are also developing applications that will enable AEC to diversify from engine components and landing gear braces to other potentially significant airframe (both civilian and military) and land-based defense applications.

Because of the steepness of the expected AEC growth curve, and the required increases in fixed costs and investment, we expect this business to be cash-flow negative through the first half of the decade. But even with the investment required to grow this business, we expect total capital expenditures for the Company through this period of negative AEC cash flow to be roughly equal to depreciation and amortization.

In sum, three years of intense restructuring and severe recession are now behind us. Our short-term objective, set in the early months of the recession, was to enable the Company to be as profitable in 2010 as it was in 2008, even if sales were to remain well below 2008 levels. The strong results in Q4 2009 suggest that this objective has been met.

Our long-term objective, which we set early in 2006, was to transform Albany from a North American- and European-centric PMC company into a portfolio of cash flow and growth businesses. With a global PMC business positioned to generate substantial and sustained cash flow for the long term, a group of Applied Technologies businesses that tend to grow faster than the GNP while also generating cash, and an aerospace composites business with a unique technology position and exciting growth potential, that long-term objective has also been realized.

So now, in 2010, we shift our focus from transforming the Company to managing the resulting portfolio of businesses in a manner that simultaneously serves the two objectives of greatest importance to our shareholders: generating the cash needed to fuel growth, pay down debt, and continue to deliver dividends, and generating the growth in the near, medium, and long term needed to drive shareholder returns. Success will require that we overcome a whole new set of challenges, but we enter this new phase of the Company’s strategic evolution with a sense of optimism across all of our businesses, competitive momentum in each of our markets, and a great deal of gratitude to all 4,700 Albany employees around the world who embraced the challenge of transformation, fought their way through the depths of recession, and in the process, laid the foundation for a promising future.

Sincerely,
Joseph G. Morone
President & Chief Executive Officer

*Adjusted EBITDA is calculated by adding to EBITDA the costs associated with restructuring and performance improvement initiatives, and then adding or subtracting certain specified losses or gains. See “Non-GAAP Measures” in “Management’s Discussion and Analysis” in the attached Annual Report on Form 10-K.

Joe Morone 
President and Chief Executive Officer

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