The year 2010 was outstanding for Albany International. The Company is fundamentally stronger today than it was when I wrote to you a year ago. The improvement is evident in sales, profitability, orders, working capital, liquidity, the long-term strategic position of each of our businesses, and the condition of the markets in which they operate. The year-over-year performance was particularly strong in Paper Machine Clothing (PMC), Albany Door Systems, and PrimaLoft® Products, which realized dramatic improvements in operating income. Last year was also a pivotal one for Albany Engineered Composites (AEC): its long-term growth prospects were underscored by our announcement that we would build a new plant in Rochester, New Hampshire, to support the CFM LEAP-X engine, and by the Airbus announcement that it would re-engine its single-aisle family of aircraft with LEAP-X as one of two engine options.
In last year’s letter, I wrote that the Company was emerging from the recession as a “cash and grow” portfolio with three components: Paper Machine Clothing, our primary cash generator; Albany Engineered Composites, our long-term growth engine; and a cluster of three businesses — Albany Door Systems, PrimaLoft Products, and Engineered Fabrics — each with the potential to grow faster than GNP, while also generating cash. In 2010, investors had a clear view of that portfolio in action. Together, these three groups of businesses generated the cash needed to sustain our core, invest in our growth, pay down debt, and deliver dividends, while at the same time continuing to lay the foundation for steady growth in the near- to mid-term and potentially dramatic growth in the second half of the decade.
We begin 2011 with each of these three groups strategically well positioned in their respective markets. Our PMC business has strong relationships with the leading papermakers in each region of the world, offers the broadest and deepest portfolio of products and services in the industry, enjoys product leadership in each major paper grade, and has an especially strong presence with new, world-class facilities in the growth markets of Asia and South America. As for Albany Engineered Composites, its unique technology makes it a potential sole-source supplier in a number of promising organic growth opportunities; it is well positioned to grow in the largest segment of the aircraft engine industry; and it enjoys a particularly strong relationship with the SAFRAN Group, one of the largest and most diverse OEMs in the aerospace industry. The same applies to the businesses in the third group in our portfolio: each enjoys a product advantage in the markets it serves, is developing new products to expand that advantage, has successfully developed an array of strategic partnerships, and is developing the capacity and presence required to serve rapidly growing emerging markets.
Our ability to convert this favorable strategic positioning into sustained margins and growing cash flow, in 2011 and beyond, hinges on how effectively we manage what we refer to internally as “the two-front war.” Despite the obvious differences in their respective markets, each of our businesses faces the same underlying challenge: to continue to make the investments in equipment, R&D, talent, and business development required to differentiate on the basis of superior performance, while at the same time continuously improving productivity and striving for the lowest costs possible.
"The year 2010 was outstanding for Albany International. The Company is fundamentally stronger today than it was when I wrote to you a year ago."
In PMC, over the past four years, we have invested a quarter of a billion dollars in new plant and equipment, strengthened our talent even during the recession, spent roughly 4 percent of sales on R&D, and maintained a strong and growing portfolio of intellectual property. The two-front challenge in this business is to sustain these efforts to bring superior products and services to market, while at the same time moving aggressively to head off the growing threat of inflation and to continue to protect against the long-term background risk of price erosion. In a slow-growth business like PMC, inflation is enemy number one, and evidence suggests that inflation in materials and in wages outside North America will be a significant issue over the next several years. The only way to master this twin challenge is by accelerating productivity improvements enabled by our recent advances in process and product technology and investments in new plant and equipment.
In AEC, the twin challenge results not from inflationary pressures in a slow-growth environment, but from the nature of long-term, sole-source contracts in the aerospace industry. AEC must continue to identify and develop new applications for our advanced composites technology, while at the same time driving down the learning curve once those new applications reach production-readiness. As exciting as the future growth prospects of this business are, it will only realize its potential for attractive margins and sharply growing cash generation if it successfully masters the process of continuously driving down costs as volumes increase. It is for this reason that we are placing a priority on reaching positive EBITDA in 2011 and break-even operating income in 2012, even as we continue to expand our pursuit of new growth opportunities.
The twin challenge for the Albany Door Systems, Engineered Fabrics, and PrimaLoft Products segments is to accelerate growth beyond the baseline growth fueled by a positive GNP, while at the same time holding or improving percentage margins. In 2011, this will translate into a continued emphasis on new product development and expansion of strategic alliances, coupled with accelerating efforts to improve productivity and to establish or expand the low-cost manufacturing capability required to supply growth markets in Asia. The latter will be especially important for Engineered Fabrics in 2011, which is unlikely to realize its growth potential without such capability.
"The improvement is evident in sales, profitability, orders, working capital, liquidity, the long-term strategic position of each of our businesses, and the condition of the markets in which they operate.
As we turn from a very successful 2010 to 2011, recession and restructuring are well behind us, the cash-and-grow portfolio is fully in place, and our focus now is on the two-front war — on reducing costs and improving productivity without in any way compromising our commitment to advancing our technology and differentiating ourselves in the marketplace. Particularly in the face of growing inflation, how well we manage this twin challenge will determine whether or not we are able to meet our investors’ expectations for 2011 and beyond.
As always, I would like to thank all 5,000 members of the global Albany International community for their outstanding efforts in 2010, and for their continuing commitment to our customers, to each other, and of course, to you, our shareholders.
Sincerely,
Joseph G. Morone
President & Chief Executive Officer