We expect to complete our three-year restructuring on schedule, by the end of 2009; our short-term performance was indeed stronger in 2008 because of that restructuring effort, with earnings per share before special items at $2.39, compared to $1.88 in 2007; and as I have described in our most recent quarterly earnings releases, we continue to be optimistic about the prospects of our cash and grow portfolio beyond 2009, and of our ability to generate strong and growing cash flows well into the future. 

 But what a difference a year makes! As I write this letter in early March 2009, with the economy in the deepest recession since the Great Depression and the stock market reeling, our 2008 performance seems almost irrelevant. What matters is the global recession, how we are responding to it, and what our expectations are about our performance in the face of it . . . for 2009 and beyond. If the trends we were seeing at the end of 2008 and the beginning of 2009 persist, sales during the recession could be down as much as 15% compared to 2008 levels.

 The obvious response to such a deep and sudden decline in sales, for us and any other company, is to cut costs. Our approach has been to emphasize cost reductions that are permanent and structural in nature.

As I explained in February in our Q4 2008 earnings release, once the increasing severity of the recession became clear to us late in 2008, we began to accelerate the final steps in our three-year global restructuring process, and simultaneously, to initiate additional cost-reduction measures that, under ordinary circumstances, we would have pursued more gradually over several years. 

At the same time, we also began to put much more emphasis on cash: freeing up working capital, reducing our exposure to high-credit-risk customers, and wherever we could do so without an impact on our competitive-ness, delaying or cancelling capital expenditures. The initial impact of these efforts was already apparent in Q4, as cash from operations improved from $42 million in Q4 2007 to $52 million in Q4 2008, our leverage ratio declined from 2.62 in Q3 2008 to 2.54 in Q4, and our planned capital expenditures for 2009 declined to $50 million from peak levels of $149 million in 2007 and $130 million in 2008. 

As a result of these actions, and assuming that the sales patterns of late 2008 and early 2009 persist through the year, we expect:

• For 2009, high restructuring costs and progressively improving margins; 

 • For 2010, even if the 15% downtrend in sales continues through the year,

 • higher margins,

 • sharply lower restructuring charges,

 • capital expenditures at or below depreciation, and

                • lower levels of working capital. 

 So even if the recession persists, we should leave 2009 as a fundamentally more profitable company, with the three-year restructuring effort behind us, and with a prospect of strong and sustained cash flow ahead of us. And yes, for those of you who study our quarterly releases, we expect to be reporting simpler releases with fewer charges for restructuring and performance improvement.

 This brings me back to our performance in 2008. We are able to face the prospect of such a long and deep global recession with such confidence about our future precisely because of the progress we made in 2008 and early 2009. Although this progress was overshadowed by the impact of the recession, each of our businesses took major strides forward in 2008.

 In Paper Machine Clothing (PMC):

• All three of our Asian plant expansions were successfully completed. The greenfield plant in Hangzhou, China, started up in October 2008, and should be at full production by mid-2009. In our view, the Hangzhou plant, and the expanded plants in Chungju, Korea, and Panyu, China, are the best-equipped plants of their kind in the world. These will play a critical role in our global PMC business as we eliminate exports from Europe to Asia, supply products to emerging markets outside of Asia that had been served by our European plants, and of course, once Asian economies begin to grow again, meet the growing demand locally.

 • The critical contract negotiations with the two largest papermakers in Europe were successfully completed.In both instances, we gained a significantly higher share of volume, and just as importantly, strengthened our long-term relationships.

• In each of our major product lines, market trials of major new products were successfully completed. In every case, the products being tested offer better performance to our customers. 

 • And as the year progressed, and restructuring, process improvement, and shared services started to take hold, gross margins improved even while revenue declined, and selling, technical, general, and research expenses declined. These trends should continue through 2009.

 In Albany Doors Systems, progress in 2008 and early 2009 came on three fronts, each of which also improves our prospects for coming out of 2009 in strong shape with good cash flow:

 • The 24% growth in sales in 2008 compared to 2007 was fueled in large measure by new product introductions, particularly in the machine protection market, as well as the full-year effect of the July 2007 R-Bac acquisition. Late in 2008, we completed the acquisition of Aktor GmbH, a producer of low-cost high-performance doors for the food market. While we expect overall product sales to be down sharply in 2009 because of the recession, we do expect sales from our Aktor line to grow rapidly through the recession.

 • We continued to expand our aftermarket presence, with aftermarket sales growing 19% in 2008 compared to 2007. Aftermarket sales should continue to grow during the recession, and will help to offset the likely decline in product sales.

 • A number of process-simplification and cost-reduction activities were initiated during 2008, and these should begin to contribute to profitability as 2009 progresses.

Turning to Composites, 2008 was a disappointing year because of the failure of our largest source of near-term revenue, Eclipse Aviation. And results for 2009 are also likely to be soft, because of the impact of the recession on several of our other customers, who have ramped down production of their engines and aircraft. But underlying the weak sales picture is a strengthening prospect of new business development and of the long-term annuity-like streams of revenue associated with such development. Both 2008 and early 2009 were marked by the expansion of our portfolio of development projects. We are now working on or exploring a broader array of engine parts for a broader array of new engines, a growing number of applications for a growing number of new airframes,
and a small but significant number of new projects in the defense sector.

As I discussed in our Q4 2008 earnings release, Engineered Fabrics (EF) had a disappointing 2008. Sales were flat for the year, dragged down by a very weak fourth quarter. But more importantly, profitability was down sharply for the year, and the business lost money in Q4. The weak performance triggered an extensive restructuring of the business in late 2008 and early 2009; the goal of these efforts is to bring about improvement in the profitability of this business to levels above historical margins. And as with our other businesses, while the restructuring is underway, we continue to pursue our strategic initiatives, which in the case of EF, focus on new product development and geographic expansion into emerging markets.

 As for the PrimaLoft^® Products segment, it had a strong 2008, growing by 24% to $21 million in sales. Profitability was ahead of expectations, but margins eroded as the year progressed and the recession deepened. And so, as with all of our businesses, in Q4 2008, we began to restructure our manufacturing operations and reduce fixed costs, in anticipation of a long and deep recession.

In sum, while there is a good story to be told about Albany’s 2008 performance, by the time I wrote this letter in March of 2009, all of us were far more focused on what lay ahead for Albany in this time of severe economic uncertainty than on what we accomplished in 2008. And yet, it is precisely because of those accomplishments that we are confident that even if the recession extends well beyond this year, we will end 2009 as a fundamentally more profitable company, in stronger competitive positions in each of our markets, and with the capacity to generate healthy cash flows in 2010 and beyond. 

Finally, I would like to close this letter with a word about the people that I work with here at Albany International. As it has been for so many companies, the past several months have been brutally painful, for both investors and employees (many of whom are also investors). All of that pain is measured in human terms, from the loss of wealth by all of us who are shareholders, to the loss of jobs by so many of our former colleagues. Nearly 1,000 of our people around the world, many of them longtime employees, will have left the company as a consequence of our three-year restructuring effort. And so even though we look to our future with a sense of confidence and growing momentum, we do so with mixed emotions, and with an acute sense of loss for the colleagues who have had to leave the company, and gratitude for their many contributions to Albany International and its shareholders.

Sincerely,
Joseph G. Morone
President & Chief Executive Officer