Market Overview

Xerium Reports Q2 2018 Results

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Xerium Technologies, Inc. (NYSE:XRM):

Second Quarter Highlights

  • On June 24, 2018, as a result of the previously announced strategic
    alternatives review process, Xerium entered into an Agreement and Plan
    of Merger (the "Merger Agreement"), pursuant to which Andritz AG
    ("Andritz") will acquire Xerium for $13.50 per share through the
    merger of an indirect wholly owned subsidiary of Andritz with and into
    Xerium (the "Merger").
  • Q2 2018 net sales were $125.3 million compared to $120.3 million in
    2017, an increase of 4.1% (see Table 1).
  • Q2 2018 income from operations was $14.7 million, compared to $15.3
    million in 2017, a decrease of 3.7%.
  • Q2 2018 net loss was $(4.3) million compared to Q2 2017 net loss of
    $(3.4) million. Q2 2018 adjusted EBITDA was $27.5 million, compared to
    $27.2 million in Q2 2017 (see Table 2 and Table 3 and "Non-GAAP
    Financial Measures" below).
  • Q2 2018 GAAP net cash provided by operating activities was $20.8
    million, net capital expenditures were $(2.0) million and free cash
    flow was $18.8 million (see Table 4 and "Non-GAAP Financial Measures"
    below).

Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of
industrial consumable products and services, today reported second
quarter 2018 results.

Mark Staton, President and Chief Executive Officer said, "As previously
announced, we have entered into the Merger Agreement with Andritz
pursuant to which Andritz will acquire Xerium. Though we do not
anticipate any complications, the completion of the Merger is subject to
approval by our stockholders, regulatory approvals, and other customary
closing conditions. We expect to close the Merger later in the second
half of 2018.

"From an operational standpoint, we have experienced strong volumes
particularly in our European and Asia Pacific operations with lower
sales, due largely to timing, in our North American operations. The
quarter included some benefit from foreign currency on the top line and
expected margin pressure compared to the prior year due to differences
in the timing of machine clothing production and overhead absorption
recognition as well as some one-time costs in our rolls business."

Quarterly Consolidated Results

Q2 net sales were $125.3 million, an increase of 4.1% year-over-year.
The increase was largely the result of currency effects. Q2 2018 Roll
Covers sales increased 2.5%, to $49.1 million driven by favorable
foreign currency impacts and improved volume in Europe and Latin America
partially offset by lower volumes in North America. Q2 2018 Machine
Clothing sales increased 5.2% to $76.2 million, which largely benefitted
from favorable foreign currency impacts and improved volume in Asia and
Europe. This improvement was partially offset by lower sales in North
America, as Q2 2017 benefitted from the catch-up of sales related to
2016 Machine Clothing production shortfalls. Table 1 summarizes Q2 net
sales and the effect of currency translation rates. Backlog of $179
million as of June 30, 2018 is $7 million higher than backlog as of June
30, 2017 and $2 million lower compared to backlog as of March 31, 2018.
Adjusted for changes in foreign currencies, backlog as of June 30, 2018
was $5 million higher than backlog as of June 30, 2017 and $4 million
higher than backlog as of March 31, 2018.

Q2 2018 consolidated gross profit was $49.0 million, or 39.1% of net
sales, compared to $49.0 million, or 40.7% of net sales, in Q2 2017.
Roll Covers gross margin declined to 34.6% in Q2 2018 from 36.2% in Q2
2017. Machine Clothing gross margin declined to 42.0% compared to 43.8%
in Q2 2017, reflecting favorable fixed cost absorption in the prior year
due to changes in the timing of production and overhead absorption
recognition which did not recur in 2018.

SG&A expenses (including Selling, G&A and R&D expenses) were $34.1
million, or 27.2% of net sales, in Q2 2018, versus $32.9 million, or
27.3% of net sales, in Q2 2017. The decrease in SG&A as a percentage of
net sales was primarily attributable to higher sales in Q2 2018, the
impact of CEO transition costs in Q2 2017 and savings achieved through
the Company's cost-out initiatives related to previously reported 2017
actions, net of inflation, partially offset by the Q2 2018 strategic
alternative review expenses.

GAAP income from operations in the second quarter of 2018 was $14.7
million, or 11.7% of sales, a decrease of 3.7% compared to Q2 2017
income from operations of $15.3 million, or 12.7% of sales. Q2 2018
basic loss per share was $(0.26) versus Q2 2017 basic loss per share of
$(0.21) as a result of Q2 2018 strategic alternative expenses, lower
gross margin percentages and higher foreign currency exchange losses,
partially offset by higher sales, Q2 2017 CEO transition costs, lower
restructuring costs and lower tax expense.

Q2 2018 adjusted EBITDA increased to $27.5 million, or 21.9% of net
sales, compared to $27.2 million, or 22.6% of net sales in 2017. In
addition to interest, taxes, depreciation and amortization, adjusted
EBITDA excludes expenses related to the Company's strategic alternatives
process, restructuring activities, plant start-up costs, stock-based
compensation, unrealized foreign currency gains and losses and other
items the Company does not believe to be indicative of on-going business
trends. For a full reconciliation, refer to Table 3.

Cash taxes were $2.3 million in Q2 2018. Cash taxes are primarily
impacted by income the Company earns in tax-paying jurisdictions
relative to income it earns in non-tax-paying jurisdictions, primarily
the United States.

GAAP net cash provided by operating activities was $20.8 million during
Q2 2018. Q2 net capital expenditures were $(2.0) million, and free cash
flow was $18.8 million. Total debt at the end of Q2 2018 was $504.3
million compared to $508.9 million at the end of Q4 2017. Net debt at
the end of Q2 2018 was $500.7 million, compared to $504.7 million at the
end of Q4 2017. The Company's net debt leverage ratio is flat to the end
of Q4 2017 at 5.0x Adjusted EBITDA as of June 30, 2018 (see Table 5 for
reconciliation).

CONFERENCE CALL

The Company plans to hold a conference call on the following morning:

Date: Friday, July 27, 2018
Start Time: 9:00 a.m. Eastern Time
Domestic Dial-In: +1-844-818-4921
International Dial-In: +1-484-880-4582
Conference ID: 2784824

Webcast: www.xerium.com/investor-relations

 

To participate on the call, please dial in at least 10 minutes prior to
the scheduled start. A live audio webcast and replay of the call may be
found in the investor relations section of the Company's website at www.xerium.com.
To follow along with the presentation that will accompany the Company's
conference call, please join the webcast by going to www.xerium.com/investor-relations.
Click on the webcast link appearing above our conference call details,
then click on the link appearing below "Webcast Presentation" on the
following page. You may also click here
and you will be taken directly to the webcast registration page.

ABOUT XERIUM TECHNOLOGIES, INC.

Xerium Technologies, Inc. (NYSE:XRM) is a leading global provider of
industrial consumable products and services. Its products and services
are consumed during machine operation by its customers. Xerium operates
around the world under a variety of brand names, and utilizes a broad
portfolio of patented and proprietary technologies to provide customers
with tailored solutions and products integral to production, all
designed to optimize performance and reduce operational costs. With 28
manufacturing facilities in 13 countries around the world, Xerium has
approximately 2,850 employees.

 
 
 
 
 

Xerium Technologies, Inc.

Condensed Consolidated Balance Sheets
(Dollars in thousands)
           
June 30, December 31,
2018 2017
ASSETS
Current assets:
Cash and cash equivalents $ 14,782 $ 17,253
Accounts receivable, net 81,629 76,633
Inventories, net 72,630 74,725
Prepaid expenses 13,124 11,335
Other current assets   14,482     15,316  
Total current assets 196,647 195,262
Property and equipment, net 261,989 282,378
Goodwill 64,159 64,783
Intangible assets 5,352 5,965
Non-current deferred tax asset 9,987 10,103
Other assets   9,054     9,358  
Total assets $ 547,188   $ 567,849  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 8,112 $ 8,398
Accounts payable 41,338 39,856
Accrued expenses 65,914 64,155
Current maturities of long-term debt   9,238     10,614  
Total current liabilities 124,602 123,023
Long-term debt, net of current maturities 473,168 473,904
Liabilities under capital leases 13,757 15,952
Non-current deferred tax liability 12,113 12,897
Pension, other post-retirement and post-employment obligations 65,166 69,205
Other long-term liabilities 9,399 9,334

Stockholders' deficit

Preferred stock - -
Common stock 16 16
Paid-in capital 433,048 432,489
Accumulated deficit (460,158 ) (457,712 )
Accumulated other comprehensive loss   (123,923 )   (111,259 )
Total stockholders' deficit   (151,017 )   (136,466 )
Total liabilities and stockholders' deficit $ 547,188   $ 567,849  
 
 
 
 
 
 

Xerium Technologies, Inc.
Consolidated Statements
of Operations and Comprehensive Loss

(Dollars in
thousands, except per share data)

 

        Three Months Ended
June 30,
2018     2017
Net sales $ 125,284     $ 120,339
Costs and expenses:
Cost of products sold 76,310 71,344
Selling 15,249 15,936
General and administrative 17,216 15,263
Research and development 1,613 1,666
Restructuring 206       874  
110,594       105,083  
Income from operations 14,690 15,256
Interest expense, net (13,130 ) (13,281 )
Other components of net periodic benefit cost (262 ) (307 )
Loss on debt extinguishment - (7 )
Foreign exchange loss (3,126 )     (1,246 )
(Loss) income before provision for income taxes (1,828 ) 415
Provision for income taxes (2,516 )     (3,826 )
Net loss $ (4,344 )     $ (3,411 )
Comprehensive loss $ (23,139 )     $ (146 )
Net loss per share:
Basic $ (0.26 )     $ (0.21 )
Diluted $ (0.26 )     $ (0.21 )
Shares used in computing net loss per share:
Basic 16,427,603       16,262,867  
Diluted 16,427,603       16,262,867  
 
 
 
 
 
 
Xerium Technologies, Inc.
Consolidated Statement of Cash Flows
(Dollars in thousands)
        Six Months Ended
June 30,
2018     2017
Operating activities
Net loss $ (2,113 ) $ (6,245 )

Adjustments to reconcile net loss to net cash provided by
operating activities:

Stock-based compensation 618 2,046
Depreciation 15,601 15,662
Amortization of intangibles 613 546
Deferred financing cost amortization 1,864 1,810
Foreign exchange loss on revaluation of debt 425 534
Deferred taxes (742 ) 312
Asset impairment - 55
Gain on disposition of property and equipment (73 ) (85 )
Loss on extinguishment of debt - 32
Provision for doubtful accounts 257 142
Change in assets and liabilities which (used) provided cash:
Accounts receivable (8,863 ) (5,400 )
Inventories (957 ) (3,213 )
Prepaid expenses (2,521 ) (441 )
Other current assets 69 (1,179 )
Accounts payable and accrued expenses 6,115 528
Deferred and other long-term liabilities   (1,646 )   (2,106 )
Net cash provided by operating activities 8,647 2,998
 
Investing activities
Capital expenditures (4,928 ) (8,517 )
Proceeds from disposals of property and equipment   459     290  
Net cash used in investing activities (4,469 ) (8,227 )
 
Financing activities
Proceeds from borrowings 41,625 66,578
Principal payments on debt (44,782 ) (59,282 )
Payment of financing fees - (393 )
Payment of obligations under capital leases (2,670 ) (2,794 )
Employee taxes paid on equity awards   (59 )   (832 )
Net cash (used in) provided by financing activities (5,886 ) 3,277
Effect of exchange rate changes on cash flows   (763 )   203  
Net decrease in cash (2,471 ) (1,749 )
Cash and cash equivalents at beginning of period   17,253     12,808  
Cash and cash equivalents at end of period $ 14,782   $ 11,059  
 
 
 
 
 

NON-GAAP FINANCIAL MEASURES

This press release includes measures of performance that differ from the
Company's financial results as reported under generally accepted
accounting principles ("GAAP"). Management of the Company uses
supplementary non-GAAP measures, including EBITDA, free cash flow, net
debt and adjusted EBITDA, internally to assist in evaluating its
liquidity and financial and operational performance. Therefore, the
Company believes these non-GAAP measures may also be useful to investors
and financial analysts. EBITDA and free cash flow are specifically used
in evaluating the ability to service indebtedness and to fund ongoing
capital expenditures. Net debt presents a view of the overall change in
leverage from quarter to quarter. Adjusted EBITDA excludes certain items
the Company does not believe to be indicative of on-going business
trends in order to better analyze historical and future business trends
on a consistent basis. EBITDA, free cash flow, net debt and adjusted
EBITDA should not be considered in isolation or as a substitute for net
income (loss), net cash (used in) provided by operating activities or
total debt.

For additional information regarding non-GAAP financial measures and a
reconciliation of such measures to the most comparable financial
measures under GAAP, please see the applicable tables within this press
release. In addition, the information in this press release should be
read in conjunction with the corresponding exhibits, financial
statements and footnotes contained in our Report on Form 10-K for the
year ended December 31, 2017 filed with the Securities and Exchange
Commission on February 28, 2018 and our presentation that will accompany
our conference call on the morning of July 27, 2018.

NET SALES

Table 1 summarizes Q2 2018 net sales and the effect of currency
translation rates. The column "$ Change Excluding Currency" is
calculated taking the difference between Q2 2018 net sales at Q2 2017 FX
rates (in US dollars) less Q2 2017 reported net sales.

 
Table 1
       

Net Sales For The

Three Months Ended

                (Dollars in thousands)
June 30,                
2018     2017    

$ Change

    % Change    

$ Change

Excluding

Currency

   

% Change

Excluding

Currency

Roll Covers $ 49,095     $ 47,914 $ 1,181 2.5 % $ (184 ) (0.4 )%
Machine Clothing   76,189         72,425         3,764       5.2 %       1,025       1.4 %
Total $ 125,284       $ 120,339       $ 4,945       4.1 %     $ 841       0.7 %
 
 

ADJUSTED EBITDA

Table 2 summarizes Q2 2018 adjusted EBITDA and the effect of currency
translation rates. The column "$ Change Excluding Currency" is
calculated taking the difference between Q2 2018 adjusted EBITDA at Q2
2017 FX rates (in US dollars) less Q2 2017 reported adjusted EBITDA.

 
Table 2
       

Adjusted EBITDA For the

Three Months Ended

         

(Dollars in thousands)

June 30,                
2018     2017    

$ Change

    % Change    

$ Change

Excluding

Currency

   

% Change

Excluding

Currency

Roll Covers $ 10,117     $ 10,566 $ (449 ) (4.2 )% $ (940 ) (8.9 )%
Machine Clothing 21,744 20,906 838 4.0 % (37 ) (0.2 )%
Corporate   (4,380 )       (4,292 )       (88 )     (2.1 )%       458       10.7 %
Total $ 27,481       $ 27,180       $ 301       1.1 %     $ (519 )     (1.9 )%
 
 

EBITDA AND ADJUSTED EBITDA

EBITDA is defined as net income (loss) before interest expense, income
tax provision (benefit) and depreciation (including non-cash impairment
charges) and amortization.

"Adjusted EBITDA" means, with respect to any period, the total of (A)
the consolidated net income for such period, plus (B) without
duplication, to the extent that any of the following were deducted in
computing such consolidated net income (loss) for such period: (i)
provision for taxes based on income or profits, including, without
limitation, federal, state, provincial, franchise and similar taxes,
including any penalties and interest relating to any tax examinations,
(ii) consolidated interest expense, (iii) consolidated depreciation and
amortization expense, (iv) reserves for inventory in connection with
plant closures, (v) consolidated operational restructuring costs, (vi)
noncash charges resulting from the application of purchase accounting,
including push-down accounting, (vii) non-cash expenses resulting from
the granting of common stock, stock options, restricted stock or
restricted stock unit awards under equity compensation programs solely
with respect to common stock, and cash expenses for compensation
mandatorily applied to purchase common stock, (viii) non-cash items
relating to a change in or adoption of accounting policies, (ix)
non-cash expenses relating to pension or benefit arrangements, (x)
expenses incurred as a result of the repurchase, redemption or retention
of common stock earned under equity compensation programs solely in
order to make withholding tax payments, (xi) amortization or write-offs
of deferred financing costs, (xii) any non-cash losses resulting from
mark to market hedging obligations (to the extent the cash impact
resulting from such loss has not been realized in such period), (xiii)
unrealized foreign currency losses and (xiv) other non-cash losses or
charges (excluding, however, any non-cash loss or charge which
represents an accrual of, or a reserve for, a cash disbursement in a
future period), minus (C) without duplication, to the extent any of the
following were included in computing consolidated net income (loss) for
such period, (i) unrealized foreign currency gains and (ii) non-cash
gains with respect to the items described in clauses (vi), (vii), (ix),
(xi), (xii) and xiv (other than, in the case of clause (xiv), any such
gain to the extent that it represents a reversal of an accrual of, or
reserve for, a cash disbursement in a future period) of clause (B) above
and (iii) provisions for tax benefits based on income or profits.
Notwithstanding the foregoing, Adjusted EBITDA, as defined and
calculated below, may not be comparable to similarly titled measurements
used by other companies.

Consolidated net income (loss) is defined as net income (loss)
determined on a consolidated basis in accordance with GAAP; provided,
however, that the following, without duplication, shall be excluded in
determining consolidated net income (loss): (i) any net after-tax
extraordinary or non-recurring gains, losses or expenses (less all fees
and expenses relating thereto), (ii) the cumulative effect of changes in
accounting principles, (iii) any fees and expenses incurred during such
period in connection with the issuance or repayment of indebtedness, any
refinancing transaction or amendment or modification of any debt
instrument, in each case and (iv) any cancellation of indebtedness
income. Table 3 provides a reconciliation from net loss, which is the
most directly comparable GAAP financial measure, to EBITDA and Adjusted
EBITDA.

 
 
Table 3
(Dollars in thousands)        

Three Months Ended

June 30,

   

Trailing Twelve

Months Ended

June 30, 2018

   

Twelve Months

Ended

December 31,

2017

2018     2017        
Net loss $ (4,344 )     $   (3,411 ) $ (10,514 ) $ (14,646 )
Stock-based compensation 263 328 1,090 1,331
CEO transition stock-based compensation - 1,187 - 1,187
Depreciation 7,647 7,843 31,679 31,740
Amortization of intangibles 306 272 1,432 1,365
Deferred financing cost amortization 932 911 3,688 3,634
Foreign exchange loss (gain) on revaluation of debt 509 (93 ) 1,026 1,135
Deferred tax expense (538 ) 302 7,462 8,516
Asset impairment - 55 52 107
(Gain) loss on disposition of property and equipment (16 ) (36 ) 148 136
Pension settlement loss - - 921 921
Loss on extinguishment of debt - 7 - 32
Net change in operating assets and liabilities   16,047           2,855         (6,620 )       (10,743 )
Net cash provided by operating activities 20,806 10,220 30,364 24,715
Interest expense, excluding amortization 12,198 12,370 48,478 49,181
Net change in operating assets and liabilities (16,047 ) (2,855 ) 6,620 10,743
Current portion of income tax expense 3,054 3,524 3,523 5,123
Stock-based compensation (263 ) (328 ) (1,090 ) (1,331 )
CEO transition stock-based compensation - (1,187 ) - (1,187 )
Pension settlement loss - - (921 ) (921 )
Asset impairment - (55 ) (52 ) (107 )
Foreign exchange (loss) gain on revaluation of debt (509 ) 93 (1,026 ) (1,135 )
Gain (loss) on disposition of property and equipment 16 36 (148 ) (136 )
Loss on extinguishment of debt   -           (7 )       -         (32 )
EBITDA 19,255 21,811 85,748 84,913
Loss on extinguishment of debt - 7 - 32
Stock-based compensation 263 328 1,090 1,331
CEO transition expenses (244 ) 3,039 (63 ) 3,063
Operational restructuring expenses 206 874 4,876 7,884
Strategic alternative expenses 5,118 - 5,238 -
Other non-recurring expenses 8 69 18 122
Plant startup costs 264 166 339 721
Unrealized foreign exchange loss   2,611           886         2,117         2,159  
Adjusted EBITDA $ 27,481       $   27,180       $ 99,363       $ 100,225  
 
 

FREE CASH FLOW

Table 4 summarizes free cash flow which is defined as net cash provided
by operating activities less capital expenditures plus proceeds from
disposals of property and equipment.

 
 
Table 4
(Dollars in thousands)         Three Months Ended June 30,
2018     2017
   
Net cash provided by operating activities $ 20,806 $ 10,220
Capital expenditures (2,418 ) (3,232 )
Proceeds from disposals of property and equipment   371         74  
Free Cash flow $ 18,759       $ 7,062  
 
 

NET DEBT

Table 5 summarizes net debt which is defined as GAAP total debt less
cash plus deferred financing fees and net debt leverage which is defined
as net debt divided by trailing twelve month Adjusted EBITDA.

 
 
Table 5
(Dollars in thousands)         June 30, 2018     December 31, 2017
   
Total debt (including capital leases) $ 504,275 $ 508,868
Less: cash (14,782 ) (17,253 )
Add: deferred financing fees   11,236         13,102  
Net debt $ 500,729 $ 504,717
Trailing twelve month adjusted EBITDA $ 99,363       $ 100,225  
Net debt leverage   5.0         5.0  
 
 

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements. The words
"will", "believe," "estimate," "expect," "intend," "anticipate,"
"goals," variations of such words, and similar expressions identify
forward-looking statements, but their absence does not mean that the
statement is not forward-looking. The forward-looking statements in this
release include statements regarding our full year, gross margins, cash
restructuring, cash tax requirements, cash generation and debt reduction
plans capital expenditures. Forward-looking statements are not
guarantees of future performance, and actual results may vary materially
from the results expressed or implied in such statements. Differences
may result from actions taken by us, as well as from risks and
uncertainties beyond our control. These risks and uncertainties include
the following items: (1) the inability to consummate the Merger within
the anticipated time period, or at all, due to any reason, including the
failure to obtain stockholder approval to adopt the Merger Agreement or
failure to satisfy the other conditions to the consummation of the
Merger; (2) the risk that the Merger Agreement may be terminated in
circumstances requiring us to pay Andritz a termination fee of $25
million and reimburse Andritz for certain expenses; (3) the potential
disruption of management's attention from our ongoing business
operations due to the Merger; (4) the effect of the announcement of the
Merger on our ability to retain and hire key personnel and maintain
relationships with our customers, suppliers and others with whom we do
business, or on our operating results and business generally; (5) the
amount of the costs, fees, expenses and charges related to the Merger
Agreement or the Merger; (6) the risk that our stock price may decline
significantly if the Merger is not consummated; (7) the nature, cost and
outcome of any litigation and other legal proceedings, including any
such proceedings related to the Merger and instituted against us and
others; (8) the fact that receipt of the all-cash Merger consideration
would be taxable to our stockholders that are treated as U.S. holders
for United States federal income tax purposes; (9) the fact that our
stockholders would forego the opportunity to realize the potential
long-term value of the successful execution of our current strategy as
an independent public company; (10) we may not realize the financial
performance we are projecting; (11) our expected sales performance and
our backlog of sales may not be fully realized; (12) our cost reduction
efforts, including our restructuring activities, may not have the
positive impacts we anticipate; (13) our plans to develop and market new
products, enhance operational efficiencies and reduce costs may not be
successful; (14) market improvement in our industry may occur more
slowly than we anticipate, may stall or may not occur at all; (15)
variations in demand for our products, including our new products, could
negatively affect our revenues and profitability; (16) our manufacturing
facilities may be required to quickly increase or decrease production,
which could negatively affect our production facilities, customer order
lead time, product quality, labor relations or gross margin; and (17)
the other risks and uncertainties discussed elsewhere in this press
release, our Annual Report on Form 10-K for the year ended December 31,
2017 filed on February 28, 2018 and our other SEC filings. If any of
these risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary significantly
from what we projected. Any forward-looking statement in this press
release reflects our current views with respect to future events. Except
as required by law, we assume no obligation to publicly update or revise
these forward-looking statements for any reason, whether as a result of
new information, future events, or otherwise. As discussed above, we are
subject to substantial risks and uncertainties related to current
economic conditions, and we encourage investors to refer to our SEC
filings for additional information. Copies of these filings are
available from the SEC and in the investor relations section of our
website at www.xerium.com.

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