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Text: Let me provide highlights on our 2020 performance, share my expectations for 2021 and comment on our strategy going forward.
And then Stephen will cover our fourth quarter results and guidance for 2021 in more depth.
We finished the year strong with fourth quarter results much better than expected.
We delivered another solid quarter in a pandemic year that was challenging and unpredictable.
Our operations demonstrated agility and a relentless focus to deliver great bottom line results, despite pressure on the top line and downturns in some of the end markets that we serve.
And this was our story throughout the year.
Beginning in early 2020, we took swift action to ensure the safety and well-being of our employees.
Our teams worked tirelessly to reset our manufacturing and supply chains at many times during the year to meet our customers' needs as they changes.
We did a great job for customers and continue to drive efficiency and productivity improvements.
We took early action to manage our costs well.
And consequently, we were able to deliver outstanding margins for our shareholders and generate solid free cash flow and add to our strong balance sheet.
Also notable, our customer performance metrics are at record levels for service, on-time delivery and quality.
Our safety performance ended the year as the best in the history of the company.
Our factory productivity and supply chain initiatives contributed to our bottom line success.
And we managed to launch a number of employee training and development initiatives.
I'm most proud of how our employees found ways to work safely and how they've innovated to not only do our work, but to improve how we do it.
It's not an accident that we completed well over 100 Lean Kaizen improvement projects in 2020 despite the restraints of social distancing, working remote and following precautions for COVID-19.
In December, we recognized these accomplishments by our employees, and we're pleased to award all of our employees around the world, excluding the executive team, with a $1,000 bonus of gratitude.
As I've said, I'm proud of how our employees pulled together to support one another and work safely during this pandemic and continue to do a great job for customers.
Now let me make a few comments about the outlook for this year and beyond.
Our Machine Clothing segment's end markets appear to be gaining strength.
We exited last year with a solid order book, which bodes well for this year and beyond as the global economy improves.
As a leader in machine clothing, we're well positioned to grow with our customers, especially in the higher growth areas of tissue and packaging.
Our long-standing strategy of continuous investment in technology and product development, along with our operating discipline, has served us well during the worst market downturn in more than a decade.
Consider this: in the middle of a global pandemic recession, our MC segment expanded its adjusted EBITDA margin by 170 basis points in 2020.
And more impressive, since 2015, our MC segment has expanded its adjusted EBITDA margin by more than 500 basis points.
We're also optimistic about our Engineered Composites segment's future, although it's longer term since 2021 still portends to face headwinds from the pandemic and the downturn in commercial aerospace and airline travel.
Through 2021, we're planning for slower production on some lines in AEC because of excess inventory in our facilities and inventory and the supply chain of our customers, particularly for components for the Boeing 737 MAX, the 787, and to a lesser degree the F-35.
To continue managing our costs, and because of the recent downward revision by Boeing for 787 demand, we just yesterday implemented a reduction in our Salt Lake City workforce where we produce 787 frames.
While 2021 is expected to be slower because of inventory destocking, we expect growth in Engineered Composites to resume longer term.
We're well positioned in both military and commercial markets with solid programs such as the CH-53K, the JASSM missile, the F-35 and LEAP.
And our position on LEAP engines with Safran should see early growth in the recovery since narrow body aircraft, which the LEAP engine powers, are expected to lead commercial aerospace out of the recession as domestic air travel is expected to recover first.
Next, let me say a few words about our strategy.
Albany International has a 125-year history of innovation and developing new materials that add value for our customers.
We're committed to continuing this legacy with a focus on developing the next generation of engineered materials and advanced composites to help our customers improve their products and production processes.
Our Machine Clothing segment is the leader in PMC because it offers a full range of the most advanced material belts used on paper machines, which operate at high speeds in a severe environment.
We've earned a reputation for constantly improving our belt's technology, durability and performance.
And because of our advancements, our customers are able to produce higher quality paper products reliably at lower overall cost of production under demanding conditions.
This is a technology-intensive collaborative partnership that our customers value.
In our Engineered Composites segment, we continue to advance the state of the art in advanced composites, including our proprietary 3D woven composite material used in the LEAP engine, fan blades and fan cases.
In 2020, despite the pandemic, we worked closely with Safran to continue improving our 3D woven composite materials and to reduce our cost of manufacturing them so as commercial aerospace rebounds, we'll be even more competitive.
We also expanded our collaboration with new customers and for new applications to diversify our customer base and develop future growth areas.
Our technology development on the Wing of Tomorrow program with Airbus has continued through the pandemic.
While this program is longer term, it's imperative that we get an early seat at the table and bring our technology to design the next generation of aircraft.
In the medium and near term, we have other ongoing R&D development efforts, what I call incubator projects, in both military and commercial areas.
For example, our R&D team is supporting a major prime OEM in the development of next-generation hypersonic materials and structures using our proprietary 3D woven composite materials.
We also have projects in unmanned vehicles, higher temperature materials and thermal plastics.
We believe the current downturn in commercial aerospace is transitory and that market forces in the long term will drive energy efficiency and ongoing replacement of metallic components with lighter composites.
This trend will gain in importance as the industry seeks to reduce its environmental impact with the next generation of more efficient aircraft.
Our 3D woven composite technology is commercially proven can meet the need for lighter weight and high strength, and we intend to grow our participation in the most demanding structural applications in aerospace.
As a company, we remain committed to investing in technology and product development of advanced materials for organic growth.
In fact, we're increasing our R&T budgets in both segments in 2021.
And this is a critical part of our capital allocation strategy.
Organic growth has been driven by not only our investment in hard capital such as new products, tooling and production equipment, but also by our investment in intellectual capital, the expertise, the time and effort that are necessary for successfully developing new products and process know-how over time.
We're disciplined in how we invest in the criteria we use to measure success.
We guide our capital investment decisions based on expected returns to shareholders, and we direct capital to those programs with the best risk-adjusted returns.
In summary, we're optimistic about the future.
We have a solid balance sheet and strong free cash flow generation, which enables continued investment to grow.
So with that, I'll hand it over to Stephen.
I will talk first about the results for the quarter and then about our initial outlook for our business in the coming year.
For the fourth quarter, total company net sales were $226.9 million, a decrease of 12% compared to the $257.7 million delivered in the same quarter last year.
Adjusting for currency translation effects, net sales declined by 13.6% year-over-year in the quarter.
In Machine Clothing, also adjusting for currency translation effects, net sales were down 6.6% year-over-year, driven by declines across most major grades of product, partially offset by growth in engineered fabrics.
Once again, the most significant decline of over 21% on a constant currency basis was in publication grades, which represented about 17% of our MC sales in the quarter.
However, we do see signs of a generally improving machine clothing market.
First, while we did see year-over-year declines in packaging and tissue grades in the quarter, driven by the same factors that we discussed on our third quarter call, the year-over-year declines we saw on those grades in the fourth quarter were considerably smaller than we had seen in the third quarter.
Second, segment net sales in the fourth quarter were sequentially higher than the third quarter and modestly exceeded our expectations.
Engineered Composites net sales, again, after adjusting for currency translation effects, declined by 23.5% compared to last year, primarily caused by significant reductions in LEAP and Boeing 787 program revenue, partially offset by growth on the F-35 and CH-53K platforms.
During the quarter, the ASC LEAP program generated revenue of a little under $25 million compared to $48 million in the same quarter last year.
However, this quarter's ASC LEAP revenue was up significantly on a sequential basis, 48% higher than the third quarter, driven by the fact that all three of our ASC LEAP facilities were operational for the full fourth quarter.
Fourth quarter gross profit for the company was $91.3 million, a reduction of 5.5% from the comparable period last year.
The overall gross margin increased by 280 basis points from 37.5% to 40.3% of net sales.
Within the MC segment, gross margin improved from 50.2% to 50.9% of net sales, driven by favorable foreign currency exchange rates, increased efficiencies and product mix.
AEC gross margin improved from 19.6% to 21.7% of net sales, driven primarily by a favorable mix in program revenues, partially offset by a lower net favorable change in the profitability of long-term contracts.
While we did recognize a net favorable change in the estimated profitability of long-term contracts this quarter of about $500,000, this compares to a $3.3 million improvement recognized in the fourth quarter of 2019.
Fourth quarter selling, technical, general and research expenses increased from $51.3 million in the prior year quarter to $54.8 million in the current quarter and increased as a percentage of net sales from 19.9% to 24.1%.
The increase in the amount of the expense was driven primarily by higher incentive compensation expense and an increase in foreign currency revaluation losses from $1.4 million in Q4 of 2019 to $3.0 million this quarter.
These items were partially offset by lower travel expenses in the fourth quarter of 2020 compared to the same period in 2019.
I would like to note that the higher incentive compensation expense that we recorded in both the third and fourth quarters of 2020 included accruals at corporate totaling $3.9 million across both quarters combined for the special $1,000 employee bonus that Bill referenced.
Total operating income for the company was $35.0 million, down from $43.6 million in the prior year quarter.
Machine Clothing operating income decreased by $4.9 million, caused by lower gross profit, higher STG&R expense and higher restructuring expense, while AEC operating income fell by $2.1 million, caused by lower gross profit and higher STG&R expense, partially offset by lower restructuring expense.
Other income and expense in the quarter netted to about income of $490,000 compared to an expense of about $350,000 in the same period last year.
The improvement was driven primarily by a more beneficial foreign currency revaluation effect in the quarter.
The income tax rate for this quarter was 13.5% compared to 24.8% in the prior year quarter.
As a result of a foreign currency revaluation gain at an entity where no tax provision is required, the tax rate associated with our adjusted earnings per share is somewhat higher at 17.8%.
That 17.8% tax rate is significantly lower than the tax rate for the full year.
In 2020 as a whole, our tax rate, excluding discrete items, was 28.4%, which compares to 28%, excluding discrete items, for 2019 as a whole.
The lower rate this quarter, due mainly to a true-up of earlier quarters' provisions, increased adjusted earnings per share by $0.12 this quarter.
Had we known the final full year rate earlier in the year, that $0.12 would have been recognized as additional adjusted earnings per share in those earlier quarters.
Net income attributable to the company for the quarter was 27.5% (sic) $27.5 million, a reduction of 5.5% from $29.1 million last year.
The reduction was primarily driven by the lower operating income, partially offset by the lower tax rate and improved other income and expense.
Earnings per share was $0.85 in this quarter compared to $0.90 last year.
After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, pension curtailment charges and expenses associated with the CirComp acquisition and integration, adjusted earnings per share was $0.89 this quarter compared to $0.97 last year.
Adjusted EBITDA fell 10.4% to $57.3 million for the most recent quarter compared to the same period last year.
Machine Clothing adjusted EBITDA was $50.9 million, or 35.3% of net sales this year, down from $52.8 million, or 35.1% of net sales, in the prior year quarter.
AEC adjusted EBITDA was $21.3 million, or 25.7% of net sales, down from last year's $24.2 million, or 22.6% of net sales.
Turning to our balance sheet.
Net debt declined by about $46 million during the fourth quarter.
As a result, our absolute leverage ratio declined from 0.89 at the end of Q3 to 0.74 at the end of Q4.
The reduction in net debt was principally caused by strong operating cash flow generation in the Machine Clothing segment and lower capital expenditures during the quarter, due principally to a reduction of capital expenditures on the LEAP program.
I would now like to turn toward the coming year by comparing it to 2020 and by providing our resulting initial financial guidance for 2021.
We expect to deliver another strong year -- another year of strong performance in the Machine Clothing segment.
For the full year 2020, we delivered net sales of about $573 million, down 5% from about $601 million in 2019.
Orders in the fourth quarter of 2020 were up about 6% compared to the fourth quarter of 2019.
This was a marked change from the first three quarters of the year when cumulative orders in the segment had been down compared to the same period in 2019.
This gives us some comfort as we head into 2021.
In particular, we do expect that sales in Q1 of 2021 will be up compared to the relatively low level of sales delivered in Q1 of 2020.
We are providing initial net sales guidance for the segment of $570 million to $590 million.
From a profitability perspective, Machine Clothing had a very strong year in 2020, delivering $216 million of adjusted EBITDA.
However, there are three effects that will make it hard to replicate those results in 2021.
First, as we have previously disclosed, we benefited from very favorable foreign exchange rates in 2020, particularly with respect to the weakness of the Brazilian real and Mexican peso, both of which are currencies in which we are short in that we have more expenses than revenues in both.
Overall, net favorable foreign exchange rates contributed over $6 million of adjusted EBITDA in 2020 compared to the prevailing foreign exchange rates in 2019.
However, some of those favorable effects had dissipated by the end of the year.
For example, the Mexican peso had weakened from under 20 pesos per U.S. dollar in Q1 of 2020 to almost 25 pesos per dollar in Q2, but by the end of the year, the rate was back under 20 pesos.
Second, in 2020 due to the COVID-19 pandemic, we incurred a significantly lower level of travel expense in the segment than in prior years.
While this helped the bottom line to the tune of about $6 million, this was not ideal from a business perspective, as we depend on strong customer relationships to develop insight into customer needs and to drive product development and support.
We are expecting to resume our prior level of travel during 2021, although in Q1, travel will likely continue to suffer from some COVID effects.
Third, we continue to see pressure on input costs, particularly right now with respect to logistics where sea, rail and air freight costs are all considerably higher than they were 12 months ago.
In the typical year, we see over $4 million of input cost pressure, and there is reason to believe that in 2021, this could be higher.
While as is typical, we believe that we will be unlikely to be able to recover all of that increased cost through pricing increases.
We will, of course, work to implement cost improvement initiatives to offset as much of the remainder as possible.
Notwithstanding these three pressures on profitability, we expect the Machine Clothing segment to deliver another strong year of profit performance and are providing initial adjusted EBITDA guidance for the segment of $195 million to $205 million.
Turning to Engineered Composites, 2020 was a challenging year for the segment from a revenue perspective.
Overall, revenue in the segment declined by about $125 million in 2020 compared to 2019, driven principally by lower sales on LEAP, 787 and other commercial programs, offset by growth in military programs.
Unfortunately, in 2021, we are going to see a continuation of some of the same trends with 2021 shaping up to be a year of finished goods inventory destocking across our customers' supply chains.
On the ASC LEAP program, we expect to continue to produce components for the LEAP-1B variant, which powers the 737 MAX, at very low levels.
While the 737 MAX is now reentering service, there is considerable finished goods inventory in the channel at Boeing, at Safran and in our own facilities on which we have already recognized revenue as we recognize revenue at the time of production, not delivery.
In 2021, we currently expect to make components for fewer than 150 LEAP-1B engines, far below the 1,000-plus engine shipsets we would expect to deliver annually in the long term.
On LEAP-1A, there is a much lower level of finished goods inventory in the channel, and we expect to produce components for well over 500 engine shipsets in 2021.
Overall, while the total number of ASC LEAP engine shipsets produced in 2021 is expected to be somewhat higher than that produced in 2020, this is offset by the absence of certain recoverable nonrecurring expenses that were recognized as revenue in 2020, resulting in roughly flat revenues for ASC from 2020 to 2021.
Our next largest commercial program to produce frames for the Boeing 787 also has finished goods inventory destocking challenges.
In 2020, we had already seen some effect from Boeing's decision to reduce the 787 build rate, and our revenues from the program in 2020 were down over 20% from 2019.
However, as Boeing reduced the 787 build rate further, there has been an increased buildup of our finished goods in Boeing supply chain, resulting in drastic reductions in order quantities for delivery in 2021.
In addition, we expect our start-up of production of the 787 aft fuselage frames will now shift from late 2021 into mid- 2022 as it will take longer to consume the parts already in the supply chain that were produced by the previous supplier.
Overall, in 2021, we expect our revenues on the 787 frames program to be $30 million to $35 million lower than we recognized in 2020.
On the military side, we support the Lockheed Martin F-35 through several contracts for different parts, including wing skins, edge seals and engine components at both our Salt Lake City and Boerne locations.
F-35 has been and remains a very important platform for us.
In 2020, we recognized over $85 million of revenue on the platform overall, up more than 25% from what was recognized in 2019.
However, during 2020, Lockheed Martin produced finished F-35s at a rate lower than they had originally predicted due to supply chain issues caused by the pandemic and consumed fewer sustainment parts.
As a result, during 2020, there was a buildup of our finished goods in the F-35 supply chain; a situation that we expect will reverse itself in 2021.
This year, to rebalance the supply chain, we expect that our build rate will be lower than the rate at which Lockheed Martin is completing aircraft.
We now expect our F-35 revenues in 2021 to be more than $15 million lower than we recognized in 2020.
We see similar patterns in several smaller commercial programs across the segment where the revenue on those programs in 2021 will be close to $15 million lower than recognized in 2020.
All of these reductions will be offset by growth on other programs, most notably on the CH-53K.
Overall for the Engineered Composites segment, we are providing initial guidance for net sales of $275 million to $295 million.
Turning to the Engineered Composites segment profitability, 2020 was a strong year with adjusted EBITDA margins of over 26%, largely enabled by three factors: one, strong operating performance in the period as evidenced by about $10 million in net favorable adjustment to long-term contract profitability; two, a sales mix benefit as the majority of the revenue declined from 2019 to 2020 was on the ASC LEAP program, which is a lower than average profit margin; and 3, despite the decline in revenue, there was limited loss of fixed cost absorption as the cost-plus nature of the ASC LEAP program allowed us to still recover all of the fixed costs of operating our three ASC facilities.
Unfortunately, those factors will not help us again in 2021.
First, the lower revenue in 2021 at our non-ASC facilities, most notably our Salt Lake City operation where all of our 787 work and the bulk of our F-35 work is performed, will create upward pressure on plant overhead rates.
While, as Bill mentioned, we have announced a workforce reduction of our Salt Lake City facility, that alone will not offset these rate pressures.
In such an environment, it will be difficult for us to achieve the lower unit production costs required to deliver significant improvements to long-term contract profitability.
This is a change from the past few years when a growing revenue base at our non-ASC facilities created a tailwind to long-term contract profitability.
Second, in 2021, we will see a product mix hit as a roughly $40 million to $50 million revenue decline we expect this year is on fixed price programs, which have a higher than average profit margin.
And third, unlike 2020, we will suffer from a loss of fixed cost absorption due to the fixed price nature of the programs with declining revenues.
As a result, the decremental margins will be much larger than the average margins on those programs.
In fact, it is not atypical for our fixed price programs to have EBITDA contribution margins in the 30% to 40% range.
As a result of the impact of those three factors in 2021, not only do we expect the top line reduction I discussed earlier, but we also expect the EBITDA margins for the segment to fall from the 26.1% level delivered in 2020 into the low 20s.
Therefore, we are providing initial 2021 guidance for Engineered Composites adjusted EBITDA of $55 million to $65 million.
At the total company level, we are providing initial 2021 guidance as follows: revenue of between $850 million and $890 million; effective income tax rate of 28% to 30%; depreciation and amortization of between $70 million and $75 million; capital expenditures in the range of $50 million to $60 million; GAAP and adjusted earnings per share of between $2.40 and $2.80; and adjusted EBITDA of between $195 million and $220 million.
While we are not providing explicit cash flow guidance for 2021, we do expect that the free cash flow we generate in 2021 will be well above the roughly $100 million generated in 2020.
I would also like to note that in 2021, we expect R&D expenses to be more than 25% higher than they were in 2020, reflecting the ongoing investments in both segments that Bill referenced earlier.
Returning to the present, we are very pleased with how the company performed in 2020 overall.
Despite the challenging operating environments, both segments met our customers' needs and delivered outstanding performance, all while maintaining a safe working environment.
While it does appear that we have one more year of channel destocking ahead of us before we return to growth in the Engineered Composites segment, we remain very excited about the future prospects for both segments.

user
q4 earnings per share $0.85.
q4 sales fell 12 percent to $226.9 million.
q4 adjusted earnings per share $0.89.
sees fy 2021 revenue $850 million to $890 million.
sees 2021 gaap and adjusted earnings per share of between $2.40 and $2.80.
sees 2021 capital expenditures in range of $50 million to $60 million.

assistant