Albany International saw another strong year in 2012. Despite a particularly challenging environment in Europe, and a disappointingly slow start to the year, adjusted EBITDA grew almost 3 percent, both businesses performed well, and the balance sheet strengthened dramatically, with net debt declining to $129 million from $256 million at the end of 2011, and unfunded pension liabilities to $45 million from $101 million.
In many respects, the short-term performance of our two businesses in 2012 mirrored their long-term potential. As I have written before and discussed with many of you at investor conferences, while the market for Machine Clothing offers little if any potential for growth, Albany is the industry’s clear market leader, with twice the market share of the next largest competitor, a significant price premium in most markets, a broad and deep product portfolio and technology pipeline, a global manufacturing footprint with world-class capacity in the geographic segments that are growing (Asia and South America), and disproportionate strength in the product segments that are growing (tissue, packaging, pulp, and nonwovens). For all of these reasons, we view Machine Clothing as a long-term core business with potential for strong margins and steady adjusted EBITDA and cash generation, but at continuing risk of little or negative sales growth, due mainly to downward pressure on revenue in Europe as the result of overcapacity in the paper and machine clothing industries.
All of these long-term attributes were on display in 2012. Sales, adjusted EBITDA, and cash generation were steady around the world except for Europe, which, for all the familiar reasons, ended the year with sales 15 percent lower than 2011. Global market share grew; market share among the leading papermakers in each region of the world held steady or improved; the R&D and product pipeline strengthened and then was further enhanced with our decision late in the year to invest $15 million in a rapid scale-up facility for new technology in our plant in Kaukauna, Wisconsin; and Albany was again selected by Procter & Gamble as one of its top eight suppliers, out of a base of some 75,000 suppliers.
For Albany Engineered Composites, 2012 was all about building capacity for rapid future growth. AEC revenue grew from $48 million in 2011 to $68 million in 2012. Half of this total revenue and virtually all of the growth were associated with development of new opportunities. Development activities associated with the LEAP fan module accounted for a third of total 2012 revenue, and two-thirds of the growth.
One of the highlights of this accelerating development effort was the launch of construction of two manufacturing facilities for the production of parts for the LEAP engine. Plant 1, which is located in Rochester, New Hampshire, is scheduled for start-up in the fourth quarter of 2013; start-up of Plant 2, in Commercy, France, is scheduled for 2014. Other highlights included production of LEAP parts for testing by Safran; continued maturation of the production process for the LEAP program; continued development of the AEC organization, processes, and systems; great success in hiring new staff, particularly in manufacturing and engineering; the completion of a 45,000-square-foot R&D rapid prototyping facility; and the further advancement and expansion of the portfolio of new business opportunities beyond the four parts currently being developed for the LEAP fan module. The most promising of these opportunities are several potential additional parts for subsequent versions of the LEAP engine, extrapolations of the LEAP fan module to larger and smaller engine configurations, the ceramic matrix composite engine exhaust nozzle for Boeing, and a number of other airframe applications.
Outlook
As I write this letter in March 2013, I do not foresee any significant changes to the objectives or strategy that we pursued in 2012. We are confident that the optimal path to creation of shareholder value is to stay the course in 2013 and beyond. For the foreseeable future:
• Our objective in Machine Clothing is stable adjusted EBITDA, year over year; our strategy combines (a) a continued focus on and investment in differentiating ourselves through superior products and field service with the leading papermakers in the growing product segments and regions around the world, and (b) continued efforts to match capacity to demand around the world and to steadily and incrementally enhance productivity.
• Our objective in AEC is to establish Albany as the leading Tier 2 supplier of highly engineered composites to the aerospace industry, and to realize its growth potential of $300 million to $500 million in revenue by 2020; our strategy is to (a) continue to build the organization, talent, systems, and processes required to ramp up production of parts for the LEAP engine on time, with high yield and healthy margins, and (b) continue to expand the pipeline of growth opportunities beyond the first wave of parts for the LEAP engine.
• In pursuing these two sets of objectives, we intend to utilize our strong balance sheet and cash flow to take full advantage of the organic growth opportunities in AEC, sustain our global product leadership in Machine Clothing, and continue to return capital to our shareholders in the form of incrementally growing dividends.
Each of our two businesses faces its own unique set of challenges and risks; for the one, it is the never-ending journey of extending market leader-ship and preserving margins in a mature industry with downward price pressure; for the other, it is the equally intense process of preparing for a ramp up of a new technology at a pace and scale never experienced in the history of commercial aviation. During 2012, we managed to meet both challenges, while further strengthening our balance sheet. I am hopeful that we will continue to do so in the months and years ahead.
U.S. Vice President Joe Biden listens as Albany President & CEO Joe Morone explains the benefits of the company’s composite technology. Also pictured (left to right) are AEC Senior Vice President Brian Coffenberry, former New Hampshire Governor John Lynch, Great Bay Community College President Will Arvelo, and Safran Group Chairman & CEO Jean-Paul Herteman.
My optimism is grounded in a simple reality, which was in full view in 2012: This Company comprises an outstanding group of professionals. To my 4,000 colleagues around the world, many of whom are themselves shareholders, thank you for your fine efforts, year in and year out, on behalf of your fellow shareholders.
*EBITDA from continuing operations, excluding restructuring charges, revaluation effects, pension settlement charges, and gains from building sales.
