260623 3/14/06 3:51 PM Page FC1 2005 Annual Report & Form 10-K 260623 3/14/06 3:51 PM Page IFC2 Vision… “Our vision is to transform Albany into a family of advanced textiles and materials businesses.” Objective… “Our objective is to grow both our core paper machine clothing (PMC) business and our family of emerging businesses.” Who we are... Today, Albany International is the world’s largest producer of custom-designed paper machine fabrics and process belts, which are essential to the manufacture of all grades of paper, from lightweight tissue to containerboard, and are manufactured from monofilaments, multifilaments, and other synthetic materials. In our family of emerging businesses, Albany applies the technologies of paper machine clothing to the development of unique materials and structures for a variety of other industries. These include composite structures for the aerospace industry, belting for corrugator and tannery applications, filtration products for alumina and power generation requirements, high-performance industrial doors, specialty fabrics for nonwovens and fiber cement manufacturers, and PrimaLoft® patented “synthetic down” insulation for the technical outerwear and home furnishings markets. Founded in 1895 and headquartered in Albany, New York, Albany International employs approximately 5,900 employees. On the cover: The businesses of Albany International. The yellow background squares are harness cords for a Jacquard loom, utilized by Albany Engineered Composites. 260623 3/14/06 3:51 PM Page 1 Net Sales by Segment Shareholders’ Comparative Performance* 2005 Financial Highlights Table of Contents Financial Highlights........................................1 Years ended December 31 Letters to Our Shareholders..........................2 ($ millions, except per share amounts) 2005 2004 What Is Paper Machine Clothing?..............6 Net sales $978.7 $919.8 Our Core Business.................Foldout Section Gross profit 392.0 362.1 Paper Industry & Paper Machine Clothing Facts....................9 Restructuring charges, net _ _ 54.1 Operating income 116.0 40.5 Business Segments.......................................10 Net income 71.9 10.4 Business Corridors.........................................14 EPS – basic 2.25 0.32 Form 10-K......................................................15 EPS – diluted 2.22 0.31 1 260623 3/14/06 3:51 PM Page 2 Letters to Our Shareholders From Our Chairman... Last year we told you that we would focus on profitable growth in 2005, and we were not disap- pointed. Our business grew in every important metric, notwith- standing outside threats that might have impeded our progress. As the year unfolded, we faced accelerating energy, raw material, and health care costs, customer strikes, poor economic business cycles in some markets, and a new wave of paper capacity restruc- turing in Europe. Despite these obstacles, we ended several years of right-sizing our business, transitioned into a period of growth, and delivered solid financial performance. Over these last five years, I have been especially proud of the efforts of Albany employees worldwide, who understood the need for change and moved the organization through the largest restructuring effort in our history. It was not an easy task, and I thank each of them for their commitment to the company through these difficult changes. As a result, our compa- ny today is stronger than ever before, poised for growth and already engaged in a new chapter under the direction of a very capable management team led by Joe Morone. (Left) Frank R. Schmeler, Chairman of the Board and Joseph G. Morone, President and CEO 2 260623 3/14/06 3:51 PM Page 3 “Over these last five years, I have been especially proud of the efforts of Albany employees worldwide, who understood the need for change and moved the organization through the largest restructuring From Our effort in our history.” President and CEO... Every company faces chal- When Frank Schmeler lenges and strives to benefit from was named CEO of Albany opportunities. The difference International in 2000, he set out in results lies in the hands of to transform the company, the people. The strength of this and with it, the paper machine company has always been clothing (PMC) industry. By the centered on its employees, and end of 2005, the industry had I am proud of the work we have consolidated from eight major accomplished together. independent suppliers to four, It has been my privilege to be and Albany had restructured its associated with the employees operations in North America of Albany International for these and Europe, introduced value last 42 years. Together we have pricing, and in most markets faced major challenges, over- was earning a significant price come significant obstacles, and premium. In the course of this enjoyed the benefits of realized transformation, the value of opportunities. Albany International stock As I leave involvement in tripled, and the company gener- day-to-day operations of the ated $734 million in cash from company, I am grateful to operating activities, reduced its our employees, customers, net debt from $499 million to and shareholders alike for the $105 million, invested $220 million experience of a lifetime. in plant and equipment, and purchased more than 2.8 million shares of the company’s stock. Now, with Albany in the strongest financial condition of Frank R. Schmeler its 111-year history, we have Chairman of the Board embarked on a new strategic journey. Our vision is to transform Albany into a family of advanced textiles and materials businesses. Our objective is to grow both our core paper machine cloth- ing business and our emerging businesses. And our strategy is to accelerate every aspect of company performance, innovate in every dimension of customer value, and invest for growth in every market in which we compete. 3 260623 3/14/06 3:51 PM Page 4 Accelerate… and the best service. Is such Our emphasis on growth total leadership a realistic places a premium on timely objective? We think it is, and we decision making and clear lines believe the primary obstacles to of accountability and responsibil- its achievement are internal to ity. Late in 2005, we dramatically the company and thus within simplified the structure of our our control. core business, eliminating a layer As we have described in of general management and previous annual reports, the reducing the number of profit pathway to sustained growth, centers and management even in slow-growth markets, teams from twelve to four. The begins with a focus on the value PMC business is now organized we deliver to our customers. In into four primary profit centers: our core business, for example, the Americas, Europe, Pacific, the cost to our customers of and Global Belting. our paper machine clothing is Outside of PMC, each of our dwarfed by the benefits to them emerging businesses must pass generated by that clothing— a simple, three-sided test: Does by the impact on the productivi- it build on a source of long-term ty of their operations, on their sustainable advantage? Does energy consumption, and on the it draw on Albany’s core capa- quality of their products. Our ability to grow this business “Our strategy is to accelerate every aspect hinges on of company performance, innovate in every our ability dimension of customer value, and invest for to grow growth in every market in which we compete.” the value we deliver to our cus- bilities? And does it have a tomers through continuous potential for growth that is improvement and innovation, to substantially greater than PMC’s, demonstrate that growth to our and a potential for return on customers in concrete terms, capital that is at least as good and then to price our products as PMC’s? If the answers are accordingly. We believe precise- affirmative, the question then ly the same logic applies to our becomes, how can we most emerging businesses, from effectively accelerate growth Albany Engineered Composites in that business? to Albany Engineered Fabrics to Albany Door Systems. Innovate… In each of our businesses, our Invest for Growth… primary focus in 2006 is to improve Earlier this year, we announced and innovate continuously in the most ambitious capital every dimension of performance investment plan in our history. that affects customer value. In Over the next four years, we will both our core and emerging invest approximately $350 million, businesses, we are striving to of which $150 million will be offer the best products, fastest directed toward the construction to market, with the highest quali- of a new PMC facility in China ty and consistency, the shortest and the expansion of existing and most reliable delivery times, PMC capacity in Korea, Brazil, 4 260623 3/14/06 3:51 PM Page 5 and China. The logic of this invest- “The pathway to sustained growth, even in ment in PMC slow-growth markets, begins with a focus is simple: The on the value we deliver to our customers.” rapid growth of paper production and con- to explore additional near-term sumption in Latin America and steps to accelerate its develop- Asia is shaping the future of this ment as well as that of our other industry and, therefore, our long- emerging businesses. term cash flow. We must be a force in these emerging markets. We must stay close to our cus- Five years ago, under the tomers, grow with them, and leadership of Frank Schmeler, continue to provide them with Albany International confronted distinctive value, which means the triple challenge of restructur- that we must establish a large- ing the industry, consolidating scale presence in these markets, operations, and enhancing its with world-class operations. financial strength. Our emphasis We are equally committed now is on growth, but only to the growth of our emerging because of the determined, businesses. Our recently sometimes painful, and thor- announced acquisition of Texas oughly successful efforts of Frank, Composite Inc.