Jul 31, 2017   SOURCE: BusinessWire

Xerium Reports Q2 2017 Results

Xerium Technologies, Inc. (NYSE:XRM), a leading, global provider of industrial consumable products and services, today reported second quarter 2017 financial results.

Mark Staton, President and Chief Executive Officer said, “We reported a strong result in the second quarter of 2017, marking a notable margin improvement as our restructuring efforts wind down and our global facilities shift to execution and efficiency. This led to a solid adjusted EBITDA result of $27.2 million during the period, with a 30 basis point improvement in margin to 22.6%.”

Staton added, “We are now better positioned in the right geographies with enhanced capabilities in growing end-markets, and our business generates attractive adjusted EBITDA margins. Going forward our priorities are very clear, to maximize adjusted EBITDA growth and free cash flow from our enhanced platform, and aggressively pursue balance sheet improvement.”

Q2 Financial Highlights:

Q2 net sales were $120.3 million, a decrease of (1.2%) year-over-year on a constant currency basis (see Table 1). The decrease was driven by a constant currency sales decrease of (0.9%) in roll covers and (1.4%) in machine clothing. The sales decline relative to the prior-year period was due to weaker spreader roll sales in Europe and competitive pricing pressure in our Asian machine clothing business.

Q2 2017 gross profit was $48.9 million, or 40.6% of net sales, compared to $48.2 million, or 38.9% of net sales, in Q2 2016. Machine clothing gross margin improved to 43.7% in Q2 2017 from 41.6% in Q2 2016. The increase in gross profit margin was primarily due to production efficiencies partially offset by competitive pricing pressure in Asia. Rolls and service gross margin improved to 36.1% in Q2 2017 from a gross margin of 34.7% in Q2 2016 due to production efficiencies.

SG&A expenses (including Selling, G&A and R&D expenses) were $33.1 million, or 27.5% of net sales, in Q2 2017 versus $30.7 million, or 24.8% of net sales, in Q2 2016. The increase in SG&A expenses was due to incremental one-time CEO transition costs of $3.0 million incurred in Q2 of 2017, partially offset by cost-reduction initiatives.

Q2 2017 basic loss per share was $(0.21) versus Q2 2016 basic earnings per share of $0.13. Basic adjusted earnings per share (see Table 3) were $0.08 in Q2 2017 compared to $0.31 in Q2 2016 as a result of higher interest and income tax expenses, partially offset by improved operations.

GAAP income from operations in the second quarter of 2017 was $14.9 million, or 12.4% of sales, up $0.2 million, or 1.7% compared to Q2 2016. Q2 2017 adjusted EBITDA declined to $27.2 million, or 22.6% of net sales, due to negative currency effects, compared to $27.7 million, or 22.3% of net sales in 2016. Adjusted EBITDA increased 1.1% on a constant currency basis (see Table 2). The slight operational increase was driven by operational efficiencies, partially offset by lower sales. In addition to interest, taxes, depreciation and amortization, adjusted EBITDA excludes expenses related to the Company’s restructuring activities, plant start-up costs, stock-based compensation, unrealized foreign currency gains and losses and non-recurring expenses, including CEO transition costs. For a full reconciliation, refer to Table 4.

Cash taxes were $3.0 million in Q2 2017, compared to $3.9 million in Q2 of 2016. 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.

Net cash provided by operating activities was $10.2 million and free cash flow was $7.1 million (see Table 5) during the second quarter of 2017. Free cash flow is expected to improve substantially in the second half of 2017, as a result working capital reductions, lower capital expenditures, and lower cash restructuring costs.

Net debt was $519.7 million at the end of Q2 2017 compared to $511.7 million at the end of Q4 2016. The Company's net debt leverage ratio is 5.3x (see Table 6). The Company plans to utilize its free cash flow to pay down debt and de-lever over the remainder of its debt maturities.

2017 Outlook

The first half of 2017 demonstrated a stable market environment, coupled with modestly improving sales trends. In the second half of 2017, the Company currently expects continued stability with some moderating influences to margin performance and volume. The Company reiterates previously disclosed guidance for 2017 full-year adjusted EBITDA to approximate at least 2016 levels.

Free cash flow for 2017 will be impacted by several discrete factors including CEO transition costs incurred during the period. As a result, the Company now expects full-year free cash flow to be in the low-teens range, with second half improvement driven by working capital reductions, reduced capital expenditures, and lower cash restructuring costs.

CONFERENCE CALL

The Company plans to hold a conference call this evening:

 
Date: July 31, 2017
Start Time: 5:00 p.m. Eastern Time
Domestic Dial-In: +1-844-818-4921
International Dial-In: +1-484-880-4582
Conference ID: 45785479

Webcast: www.xerium.com/investorrelations

 

 

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/investorrelations. 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 2,950 employees.

 
Xerium Technologies, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands and unaudited)
       
June 30, December 31,
2017 2016
ASSETS
Current assets:
Cash and cash equivalents $ 11,059 $ 12,808
Accounts receivable, net 76,245 68,667
Inventories, net 76,497 70,822
Prepaid expenses 6,892 6,325
Other current assets   17,022     15,784  
Total current assets 187,715 174,406
Property and equipment, net 284,884 284,101
Goodwill 60,598 56,783
Intangible assets 7,426 7,330
Non-current deferred tax asset 12,776 10,737
Other assets   8,105     8,556  
Total assets $ 561,504   $ 541,913  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 7,837 $ 7,328
Accounts payable 37,989 36,158
Accrued expenses 65,144 64,532
Current maturities of long-term debt   10,780     8,600  
Total current liabilities 121,750 116,618
Long-term debt, net of current maturities 479,773 472,923
Liabilities under capital lease 17,464 19,236
Non-current deferred tax liability 8,661 7,157
Pension, other post-retirement and post-employment obligations 64,217 65,026
Other long-term liabilities 8,671 7,858
 

Stockholders' deficit

Preferred stock - -
Common stock 16 16
Paid-in capital 432,036 430,823
Accumulated deficit (449,311 ) (443,066 )
Accumulated other comprehensive loss   (121,773 )   (134,678 )
Total stockholders' deficit   (139,032 )   (146,905 )
Total liabilities and stockholders' deficit $ 561,504   $ 541,913  
 
 
Xerium Technologies, Inc.
Consolidated Statement of Operations and Comprehensive (Loss) Income
(Dollars in thousands, except per share data and unaudited)
 
    Three Months Ended

June 30,

2017     2016
Net Sales $ 120,339 $ 123,973
Costs and expenses:
Cost of products sold 71,454 75,782
Selling 15,936 15,735
General and administrative 15,460 13,427
Research and development 1,666 1,545
Restructuring   874     2,777  
  105,390     109,266  
Income from operations 14,949 14,707
Interest expense, net (13,281 ) (10,658 )
Loss on extinguishment of debt (7 ) -
Foreign exchange loss   (1,246 )   (72 )
Income before provision for income taxes 415 3,977
Provision for income taxes   (3,826 )   (1,867 )
Net (loss) income $ (3,411 ) $ 2,110  
Comprehensive (loss) income $ (146 ) $ 6,508  
Net (loss) income per share:
Basic $ (0.21 ) $ 0.13  
Diluted $ (0.21 ) $ 0.13  
Shares used in computing net (loss) income per share:
Basic   16,262,867     15,995,071  
Diluted   16,262,867     16,619,082  
 
 
Xerium Technologies, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands and unaudited)
       
Six Months Ended
June 30,
2017 2016
Operating activities
Net (loss) income $ (6,245 ) $ 665
Adjustments to reconcile net (loss) income to net cash provided by

operating activities:

Stock-based compensation 2,046 1,426
Depreciation 15,662 16,082
Amortization of intangibles 546 304
Deferred financing cost amortization 1,810 1,542
Foreign exchange loss on revaluation of debt 534 151
Deferred taxes 312 (797 )
Asset impairment 55 -
(Gain) loss on disposition of property and equipment (85 ) 78
Loss on extinguishment of debt 32 -
Provision (benefit) for doubtful accounts 142 (16 )
Change in assets and liabilities which (used) provided cash:
Accounts receivable (5,400 ) 1,003
Inventories (3,213 ) 2,353
Prepaid expenses (441 ) (851 )
Other current assets (1,179 ) 71
Accounts payable and accrued expenses 528 (5,413 )
Deferred and other long-term liabilities   (2,106 )   533  
Net cash provided by operating activities 2,998 17,131
 
Investing activities
Capital expenditures (8,517 ) (5,972 )
Proceeds from disposals of property and equipment 290 117
Acquisition costs   -     (16,225 )
Net cash used in investing activities (8,227 ) (22,080 )
 
Financing activities
Proceeds from borrowings 66,578 39,864
Principal payments on debt (59,282 ) (29,703 )
Payment of financing fees (393 ) (24 )
Payment of obligations under capital leases (2,794 ) (1,726 )
Employee taxes paid on equity awards   (832 )   (1,031 )
Net cash provided by financing activities 3,277 7,380
Effect of exchange rate changes on cash flows   203     (1,679 )
Net (decrease) increase in cash (1,749 ) 752
Cash and cash equivalents at beginning of period   12,808     9,839  
Cash and cash equivalents at end of period $ 11,059   $ 10,591  
 

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 Adjusted EBITDA, Free Cash Flow, Net Debt and Adjusted EPS, 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. Adjusted 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 EPS 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. Adjusted EBITDA, Free Cash Flow, Net Debt and Adjusted EPS should not be considered in isolation or as a substitute for net income (loss), net cash provided (used in) by operating activities, total debt or net income (loss) per share.

When we provide our expectations for adjusted EBITDA on a forward-looking basis, we exclude certain significant items. A reconciliation of differences between this non-GAAP expectation and the corresponding GAAP measure (expected net income (loss)) generally is not available without unreasonable effort due to potentially high variability, complexity and low visibility as to the significant items, such as taxes, that would be included in the GAAP measure of net income (loss). This item is uncertain and depends on various factors. The variability of the excluded item may have a significant, and potentially unpredictable, impact on our future GAAP results. For the same reasons, the company is unable to address the probable significance of the unavailable information, which could be material to the company’s future financial results. Our expectation of full year Free Cash Flow of low-teens assumes operating cash flow of mid-twenties and capital expenditures of low-teens.

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 Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 1, 2017, our Form 10-Q for the quarter ended June 30, 2017 filed with the Securities and Exchange Commission on July 31, 2017, and our presentation that will accompany our conference call.

NET SALES

Table 1 summarizes Q2 net sales and the effect of currency translation rates. The column “$ Change Excluding Currency” is calculated taking the difference between Q2 2017 net sales at Q2 2016 FX rates (in US dollars) less Q2 2016 reported net sales

 
Table 1
   

Net Sales For The
Three Months Ended

               

June 30,
2017

 

June 30,
2016

 

$ Change

  % Change  

$ Change
Excluding
Currency

 

% Change
Excluding
Currency

Roll Covers $ 47,914   $ 49,154   $ (1,240 )   -2.5 %   $ (436 )   -0.9 %
Machine Clothing   72,425       74,819       (2,394 )     -3.2 %       (1,032 )   -1.4 %
Total $ 120,339     $ 123,973     $ (3,634 )     -2.9 %     $ (1,468 )   -1.2 %
 

ADJUSTED EBITDA

Table 2 summarizes Q2 adjusted EBITDA and the effect of currency translation rates. The column “$ Change Excluding Currency” is calculated taking the difference between Q2 2017 adjusted EBITDA at Q2 2016 FX rates (in US dollars) less Q2 2016 reported adjusted EBITDA.

                   
Table 2

Adjusted EBITDA For the
Three Months Ended

               

June 30,
2017

 

June 30,
2016

 

$ Change

   

% Change

   

$ Change
Excluding
Currency

 

% Change
Excluding
Currency

Roll Covers $ 10,566 $ 10,594 $ (28 ) -0.3 % $ 221 2.1 %
Machine Clothing 20,906 21,186 (280 ) -1.3 % 299 1.4 %
Corporate   (4,292 )   (4,088 )   (204 )   5.0 %     (209 )   5.1 %
Total $ 27,180     $ 27,692     $ (512 )   -1.8 %   $ 311     1.1 %
 

BASIC ADJUSTED EARNINGS PER SHARE

Table 3 represents a reconciliation of basic net (loss) income per share to basic adjusted earnings per share for the three months ended June 30, 2017 and 2016:

     
Table 3
Three Months Ended
June 30,
2017     2016
Basic net (loss) income per share $ (0.21 )     $ 0.13

 

Adjustments:
CEO transition expenses 0.19 -
Brazilian amnesty interest deduction - (0.02 )
Restructuring expense 0.04 0.14
Plant start-up costs 0.01 0.03
Unrealized foreign exchange loss 0.05 -
Other non-recurring expenses -       0.03  
Basic adjusted earnings per share $ 0.08       $ 0.31  
 

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 4 provides a reconciliation from net income (loss), which is the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA.

Adjusted EBITDA Definition Modification

During the 4th quarter of 2016, the Company modified its definition of Adjusted EBITDA to exclude foreign exchange gains and losses from this non-GAAP measure. This change enhances investor insight into the Company’s operational performance. In previous filings, Q2 2016 Adjusted EBITDA was stated at $27.6 million based on the definition previously used.

               
Table 4
Three Months Ended June 30,

Trailing
Twelve
Months
Ended
June 30,
2017

Twelve
Months
Ended
December 31,
2016

2017     2016        
Net (loss) income $ (3,411 ) $ 2,110 $ (28,528 ) $ (21,618 )
Stock-based compensation 328 834 2,045 2,612
CEO transition stock-based compensation 1,187 - 1,187 -
Depreciation 7,843 8,182 31,695 32,115
Amortization of intangibles 272 210 1,083 841
Deferred financing cost amortization 911 785 3,331 3,063
Foreign exchange gain on revaluation of debt (93 ) (968 ) (2,884 ) (3,267 )
Deferred tax expense 302 (953 ) 1,328 219
Asset impairment 55 - 55 -
(Gain) loss on disposition of property and equipment (36 ) 62 (113 ) 50
Loss on extinguishment of debt 7 - 11,970 11,938
Net change in operating assets and liabilities   2,855         (8,234 )       1,207         10,556  
Net cash provided by operating activities 10,220 2,028 22,376 36,509
Interest expense, excluding amortization 12,370 9,873 48,369 43,092
Net change in operating assets and liabilities (2,855 ) 8,234 (1,207 ) (10,556 )
Current portion of income tax expense 3,524 2,820 9,929 9,063
Stock-based compensation (328 ) (834 ) (2,045 ) (2,612 )
CEO transition stock-based compensation (1,187 ) - (1,187 ) -
Asset impairment (55 ) - (55 ) -
Foreign exchange gain on revaluation of debt 93 968 2,884 3,267
Gain (loss) on disposition of property and equipment 36 (62 ) 113 (50 )
Loss on extinguishment of debt   (7 )       -         (11,970 )       (11,938 )
EBITDA 21,811 23,027 67,207 66,775
Loss on extinguishment of debt 7 - 11,970 11,938
Stock-based compensation 328 834 2,045 2,612
CEO transition expenses 3,039 - 3,039 -
Operational restructuring expenses 874 2,777 8,791 10,362
Other non-recurring expenses 69 433 562 1,116
Plant startup costs 166 539 1,537 2,176
Unrealized foreign exchange loss   886         82         2,283         313  
Adjusted EBITDA $ 27,180       $ 27,692       $ 97,434       $ 95,292  
 

FREE CASH FLOW

Table 5 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 5
    Three Months Ended June 30,
2017   2016
 
Net cash provided by operating activities $ 10,220 $ 2,028
Capital expenditures (3,232 ) (2,422 )
Proceeds from disposals of property and equipment   74         97  
Free Cash flow $ 7,062       $ (297 )
 

NET DEBT

Table 6 summarizes net debt which is defined as GAAP total debt less cash and deferred financing fees and net debt leverage which is defined as net debt divided by trailing twelve month Adjusted EBITDA.

       
Table 6            
June 30, 2017     December 31, 2016
 
Total debt (including capital leases) $ 515,854 $ 508,087
less cash (11,059 ) (12,808 )
less deferred financing fees   14,946         16,436  
Net debt $ 519,741 $ 511,715
Trailing twelve month adjusted EBITDA $ 97,434       $ 95,292  
Net debt leverage   5.3         5.4  
 

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 EBITDA and adjusted EBITDA performance, anticipated sales performance, capital expenditures, cost savings measures, future efforts to improve overall performance and free cash flow. 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) we may not realize the EBITDA and adjusted EBITDA performance we are projecting; (2) our expected sales performance and our backlog of sales may not be fully realized; (3) our cost reduction efforts, including our restructuring activities, may not have the positive impacts we anticipate; (4) our plans to develop and market new products, enhance operational efficiencies and reduce costs may not be successful; (5) market improvement in our industry may occur more slowly than we anticipate, may stall or may not occur at all; (6) variations in demand for our products, including our new products, could negatively affect our revenues and profitability; (7) 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 (8) the other risks and uncertainties discussed elsewhere in this press release, our Form 10-K for the year ended December 31, 2016 filed on March 1, 2017 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.