Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
1. Description of Business and Significant Accounting Policies
Description of Business
Xerium Technologies, Inc. (the "Company") is a leading global provider of industrial consumables and mechanical services used in the production of paper, paperboard, building products and nonwoven materials. Its operations are strategically located in the major paper-making regions of the world, including North America, Europe, South America and Asia-Pacific.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements at
March 31, 2014
and for the
three
months ended
March 31, 2014
and 2013 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In management’s opinion, these unaudited condensed consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented.These unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended
December 31, 2013
as reported on the Company's Annual Report on Form 10-K filed on March 4, 2014.
Accounting Policies
Inventories, net
Inventories are generally valued at the lower of cost or market using the first-in, first-out (FIFO) method. Raw materials are valued principally on a weighted average cost basis. The Company’s work in process and finished goods are specifically identified and valued based on actual inputs to production. Provisions are recorded as appropriate to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires management to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business, while considering the general aging of inventory and factoring in any new business conditions.
The components of inventories are as follows at:
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March 31,
2014
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December 31,
2013
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Raw materials
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$
|
22,708
|
|
|
$
|
22,009
|
|
Work in process
|
31,907
|
|
|
28,414
|
|
Finished goods (includes consigned inventory of $8,815 at March 31, 2014 and $8,697 at December 31, 2013)
|
42,047
|
|
|
41,845
|
|
Inventory allowances
|
(8,367
|
)
|
|
(8,338
|
)
|
|
$
|
88,295
|
|
|
$
|
83,930
|
|
Goodwill
The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350,
Intangibles—Goodwill and Other Intangible Assets
(“Topic 350”). Topic 350 requires that goodwill and intangible assets that have indefinite lives not be amortized, but instead, must be tested for impairment at least annually or whenever events or business conditions warrant. During the first quarter of 2014, the Company evaluated events and business conditions to determine if a test for an impairment of goodwill was warranted. No such events or business conditions took place during this period, therefore no test was determined to be warranted at
March 31, 2014
.
Warranties
The Company offers warranties on certain rolls products that it sells. The specific terms and conditions of these warranties vary depending on the product sold, the country in which the product is sold and arrangements with the customer. The Company estimates the costs that may be incurred under its warranties and records a liability for such costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary. The table below represents the changes in the Company’s warranty liability for the three months ended March 31, 2014:
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Beginning Balance
|
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Charged to
Cost
of Sales
|
|
Effect of Foreign
Currency
Translation
|
|
Deduction
from
Reserves
|
|
Ending Balance
|
|
$
|
1,629
|
|
|
$
|
327
|
|
|
$
|
(5
|
)
|
|
$
|
(422
|
)
|
|
$
|
1,529
|
|
Net Income Per Common Share
Net income per common share has been computed and presented pursuant to the provisions of ASC Topic 260,
Earnings per Share
(“Topic 260”). Net income per share is based on the weighted-average number of shares outstanding during the period. As of
March 31, 2014
and 2013, the Company had outstanding restricted stock units (“RSUs”), deferred stock units (“DSUs”), warrants and options.
The following table sets forth the computation of basic and diluted weighted-average shares:
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Three Months Ended
March 31,
|
|
2014
|
|
2013
|
Weighted-average common shares outstanding–basic
|
15,391,391
|
|
|
15,312,523
|
|
Dilutive effect of stock-based compensation awards outstanding
|
980,381
|
|
|
68,681
|
|
Weighted-average common shares outstanding–diluted
|
16,371,772
|
|
|
15,381,204
|
|
Dilutive securities aggregating approximately
1.7 million
and
2.5 million
were outstanding for the three months ended
March 31, 2014
and 2013, but were not included in the computation of diluted earnings per share for the three months ended
March 31, 2014
because the impact of including such shares would be anti-dilutive to the earnings per share calculations.
Impairment
The Company reviews its long-lived assets that have finite lives for impairment in accordance with ASC Topic 360,
Property, Plant, and Equipment
(“Topic 360”). This topic requires that companies evaluate the fair value of long-lived assets based on the anticipated undiscounted future cash flows to be generated by the assets when indicators of impairment exist to determine if there is impairment to the carrying value. Any change in the carrying amount of an asset as a result of the Company's evaluation has been recorded in either restructuring expense, if it was a result of the Company's restructuring activities, or general and administrative expense for all other impairments in the consolidated statements of operations. Impairment charges associated with restructuring are discussed in Note 7 "Restructuring Expense". In the first quarter of 2014, the Company had no impairment charges.
Reclassifications
During the first quarter of 2014, while implementing a new financial reporting system, the Company redesigned its chart of accounts in order to provide more consistent internal and external reporting globally. In addition to this change, the Company's corporate management organizational structure was changed from primarily a geographic regional management organization to a more centralized functional management organization. These changes drove certain changes in the mappings of the related accounts in the chart of accounts. As these changes are correctly presented in the 2014 consolidated financial statements, these changes resulted in reclassifications in both the Consolidated Balance Sheet at December 31, 2013 and the Consolidated Statement of Operations for the three months ended March 31, 2013. Management performed a SAB 99
"Materiality"
analysis on these reclassifications, and determined the only reclassification material to the Company's consolidated financial statements as a whole was a
$0.7 million
reclassification from research and development expenses to selling expenses as a result of moving certain personnel from the research and development department to the selling department. This reclassification has been made in the Consolidated Statement of Operations for the three months ended March 31, 2013.
New Accounting Standards
In July of 2013, FASB issued ASU 2013-11 Income Taxes (Topic 740),
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Taskforce)
("ASU 2013-11"). Beginning January 1, 2014, the effective date of this regulation, the Company has adopted the provisions of ASU 2013-11 related to presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The effect on the date of adoption resulted in a decrease in other long term liabilities and a decrease in other assets of
$1.1 million
related to uncertain tax benefits for Canada, Germany, and Italy.
2. Derivatives and Hedging
As required by ASC Topic 815,
Derivatives and Hedging
(“Topic 815”), the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. From time to time, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known cash amounts, the value of which are determined by interest rates or foreign exchange rates.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges protect the Company from increases in interest rates above the strike rate of the interest rate cap. At March 31, 2014, the fair market value of the Company’s interest rate swaps were nominal amounts. Therefore, the financial statements were not exposed to the effects of interest rate fluctuations and these did not have a material impact on its results of operations.
Non-designated Hedges of Foreign Exchange Risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates, but do not meet the strict hedge accounting requirements of Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly to earnings.
The Company, from time to time, may enter into foreign exchange forward contracts to fix currencies at specified rates based on expected future cash flows to protect against the fluctuations in cash flows resulting from sales denominated in foreign currencies. Additionally, to manage its exposure to fluctuations in foreign currency on intercompany balances and certain purchase commitments, the Company from time to time may use foreign exchange forward contracts.
As of
March 31, 2014
and
December 31, 2013
, the Company had outstanding derivatives that were not designated as hedges in qualifying hedging relationships. The value of these contracts is recognized at fair value based on market exchange forward rates and is recorded in other assets or other liabilities on the Consolidated Balance Sheets. The following represents the fair value of these derivatives at
March 31, 2014
and
December 31, 2013
and the change in fair value included in foreign exchange gain in the first quarter of 2014 and 2013:
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March 31, 2014
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December 31, 2013
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Fair value of derivatives
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$
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(935
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)
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$
|
530
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Three Months Ended March 31, 2014:
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Three Months Ended March 31, 2013:
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Change in fair value included in foreign exchange (loss) gain for the three months ended March 31, 2014 and March 31, 2013
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$
|
(1,211
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)
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$
|
103
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|
The following represents the notional amounts of foreign exchange forward contracts at
March 31, 2014
:
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Notional Sold
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Notional Purchased
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Non-designated hedges of foreign exchange risk
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$
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28,596
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$
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(22,259
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)
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Fair Value of Derivatives Under ASC Topic 820
ASC Topic 820,
Fair Value Measurements and Disclosures
(“Topic 820”), emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, Topic 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs including fair value of investments that do not have the ability to redeem at net asset value as of the measurement date, or during the first quarter following the measurement date. The derivative assets or liabilities are typically based on an entity’s own assumptions, as there is little, if any, market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability. The Company determined that its derivative valuations, which are based on market exchange forward rates, fall within Level 2 of the fair value hierarchy.
3. Long-term Debt
At
March 31, 2014
and
December 31, 2013
, long-term debt consisted of the following:
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March 31, 2014
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December 31, 2013
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Senior secured term loan facility, payable quarterly, U.S. Dollar denominated–LIBOR
(minimum 1.25%) plus 4.50% (5.75%) net of $0.9 million discount. Matures May of 2018.
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$
|
197,639
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$
|
198,000
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Senior Notes (Unsecured), payable semi-annually–U.S. Dollar denominated interest rate fixed at 8.875%, matures June of 2018
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236,410
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236,410
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Other long term debt
|
1,926
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|
|
462
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435,975
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434,872
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|
Less current maturities
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2,204
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|
2,166
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Total
|
$
|
433,771
|
|
|
$
|
432,706
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|
On May 17, 2013 (the "Closing Date"), the Company entered into a Credit and Guaranty Agreement for a
$200.0 million
term loan credit facility (the “Term Credit Facility”), net of a discount of
$1.0 million
, among the Company, certain direct an
d indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions. The Company also entered into a Revolving Credit and Guaranty Agreement originally for a
$40.0 million
asset-based revolving credit facility subject to a borrowing base among the Company, Xerium Canada Inc., as Canadian borrower, certain direct and indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions (the "Domestic Revolver"). On March 3, 2014, the Company entered into an amendment to the Revolving Credit and Guaranty Agreement (as amended, the “ABL Facility,” and collectively with the Term Credit Facility, the “Credit Facility”) to add the Company's German subsidiaries as European Borrowers and to provide for an additional
$15 million
European asset-based revolving credit facility subject to a European borrowing base (the "European Revolver"), increasing the aggregate availability under the ABL Facility to
$55 million
.
The Term Credit Facility provides for:
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|
•
|
a six-year
$200 million
senior secured term loan facility, provided the facility would mature in March 2018 if any of the Company's
8.875%
senior unsecured notes due 2018 in the aggregate principal amount of
$240 million
(the “Notes”) remain outstanding at that time;
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•
|
an uncommitted accordion option (the “Incremental Facility”) allowing for increases for borrowings under the Term Credit Facility with the same terms, and borrowing of new tranches of term loans, up to an aggregate principal amount equal to (i)
$75 million
plus (ii) an additional amount (the “Facility Increase”) provided, if after giving effect to such Facility Increase (as well as any other additional term loans), on a pro forma basis, the Senior Secured Leverage Ratio (as defined in the Term Credit Facility) for the most recent four consecutive fiscal quarters does not exceed
2.25
:1; and
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•
|
in connection with the amendment to the ABL Facility, the Term Credit Facility was amended to permit the ABL Facility to be further increased by an additional
$10 million
, to a total aggregate availability of not more than
$65 million
, provided that if the ABL Facility is increased beyond
$55 million
, certain baskets for additional indebtedness and liens otherwise available to the Company under the Term Loan Facility will be reduced dollar-for-dollar by any additional increase to the ABL Facility.
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The Domestic Revolver provides for a
$40 million
senior secured revolving credit facility with a
$20 million
sub-limit on letters of credit. The European Revolver provides for a
$15 million
senior secured revolving credit facility with a
$10 million
sub-limit on letters of credit. Availability under both the Domestic Revolver and the European Revolver is subject to a borrowing base that is based on a specified percentage of eligible accounts receivable and inventory. The term of the ABL Facility is five years, provided that if any of the Notes remain outstanding in March 2018, the ABL Facility would mature at that time.
The Company used the borrowings under the Term Credit Facility to refinance all of its outstanding indebtedness under its previously existing senior secured term loan and revolving credit facility entered into in 2011 (the "2011 Credit Facility"). The Company intends to draw upon the ABL Facility from time-to-time for working capital and general corporate purposes.
The Term Credit Facility will require the Company to make amortization payments (payable in quarterly installments) equal to
1%
of principal per annum with respect to the Term Credit Facility with the remaining amount due at final maturity. Voluntary prepayments will be permitted, in whole or in part, subject to minimum prepayment requirements; provided that prepayments made prior to the date that is six months after the Closing Date of the Term Credit Facility for the purpose of repricing or effectively repricing the term loan facilities must include a
1.0%
prepayment premium; provided, further, that voluntary prepayments of loans bearing interest at the London Interbank Offered Rate (“LIBOR”) on a date other than the last day of the relevant interest period will be subject to the payment of customary breakage costs.
If the total amount of advances outstanding under the ABL Facility exceeds either
$40 million
or the borrowing base, the Company must repay an amount equal to the excess borrowing. If obligations under all outstanding letters of credit exceeds
$20 million
, the Company must cash collateralize its letters of credit in an amount equal to the excess obligations outstanding. Similarly, if the total amount of advances outstanding under the European Revolver exceed either
$15 million
or the European
borrowing base, the Company must repay an amount equal to the excess borrowing. If obligations under all outstanding
European-based letters of credit exceeds
$10 million
, the Company must cash collateralize its letters of credit in an amount
equal to the excess obligations outstanding.
The interest rates under the Term Credit Facility will be calculated, at the Company's option, at either the base rate or LIBOR, plus a margin of
4.00%
and
5.00%
, respectively. Each of the base rate and LIBOR shall be subject to a minimum of
2.25%
and
1.25%
, respectively. If the Company's Senior Secured Leverage Ratio (as defined in the Credit Facility) is less than
2.00
:1 at any quarterly determination date, then the margins over the base rate and LIBOR will be
3.50%
and
4.50%
, respectively.
Depending on whether advances are made in U.S. Dollars or Canadian Dollars, interest rates under the Domestic Revolver will be calculated, at our option, at either a U.S.-based or Canadian-based base rate ("Base Rate Loans") or LIBOR or the Canadian Dealer Offered Rate ("CDOR") (each, "Fixed Rate Loans"), respectively, plus a margin of
0.75%
for Base Rate Loans and a margin of
1.75%
for Fixed Rate Loans. If we draw advances on the Domestic Revolver that are equal to or greater than
33.3%
but less
66.7%
of the
$40 million
limit, then the margins on Base Rate Loans and Fixed Rate Loans increase to
1.00%
and
2.00%
, respectively. The margins rise to
1.25%
and
2.25%
, respectively, if advances under the Domestic Revolver are equal to or greater than
66.7%
of the
$40 million
limit. Interest rates under the European Revolver will be calculated, at either LIBOR or Overnight LIBOR, plus a margin of
1.75%
. If the European Borrowers draw advances on the European Revolver that are equal to or greater than
33.3%
but less than
66.7%
of the
$15 million
limit, then the margin increases to
2.00%
. The margin rises to
2.25%
if advances under the European Revolver are equal to or greater than
66.7%
of the
$15 million
limit. In addition to paying interest on outstanding advances under the ABL Facility, we will be required to pay a commitment fee to the lenders in respect of the unutilized commitments at a rate equal to
0.50%
per annum if advances under the ABL Facility are less than or equal to
50%
of the commitments or a rate equal to
0.375%
per annum if advances under the ABL are more than
50%
of the commitments.
The obligations under the Credit Facility are guaranteed by all of our existing and future direct and indirect subsidiaries that are organized in the United States (subject to certain exceptions in the case of immaterial subsidiaries and joint ventures) and, (i) in the case of the Domestic Revolver, by Xerium Canada Inc. and any future Canadian subsidiaries, provided that non-U.S. guarantors will only be liable for obligations of Xerium Canada Inc. and any other Canadian borrowers and (ii) in the case of the European Revolver, by each other European Borrower, certain other of the Company’s European subsidiaries and any existing or future direct and indirect subsidiaries that become a party to the ABL Facility. The Term Credit Facility is secured by a first-priority perfected security interest in substantially all of the assets of the Company, Xerium Canada Inc. and such subsidiary guarantors (collectively, the “Loan Parties”), in each case, now owned or later acquired, except with respect to the Loan Parties' accounts receivables and inventory, which are secured by a second-priority interest. The ABL Facility is secured by a first-priority perfected security interest in the Loan Parties' accounts receivables and inventory, and a second-priority interest in substantially all of the Loan Parties' other assets. In each case, the security interests are subject to certain exceptions and legal and tax considerations and requirements, including that only
65%
of the voting capital stock of the domestic Loan Parties' “first-tier” non-U.S. subsidiaries is required to be pledged in respect of the obligations of the Company and the U.S. guarantors under the Credit Facility.
The Credit Facility contains certain customary covenants that, subject to exceptions, restrict the Company's ability to, among other things:
•
declare dividends or redeem or repurchase equity interests;
•
prepay, redeem or purchase debt;
•
incur liens and engage in sale-leaseback transactions;
•
make loans and investments;
•
incur additional indebtedness;
•
amend or otherwise alter debt and other material agreements;
•
make capital expenditures in excess of
$42 million
per fiscal year, subject to adjustment;
•
engage in mergers, acquisitions and asset sales;
•
transact with affiliates; and
•
engage in businesses that are not related to the Company's existing business.
The Credit Facility eliminates the interest coverage and leverage coverage ratio maintenance tests that were contained in the Company's 2011 Credit Facility. However, the ABL Facility contains a springing Fixed Charge Coverage Ratio (as defined in the ABL Facility), which must be not less than
1.00
:1 during periods in which our Global Excess Availability (as defined in the ABL Facility) falls below certain minimum thresholds.
The Credit Facility contains certain customary representations and warranties, affirmative covenants and events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain triggering events under U.S. and, in the case of the ABL Facility, Canadian employee benefit plans, material judgments, actual or asserted failures of any guarantee or security document supporting the Credit Facility to be in full force and effect and a change of control. If an event of default occurs, the lenders under the Credit Facility would be entitled to take various enforcement actions, including acceleration of amounts due under the Credit Facility and all actions permitted to be taken by a secured creditor.
On May 26, 2011, the Company completed a refinancing transaction, which replaced certain of its then outstanding indebtedness with the Notes. The Notes contain customary covenants that, subject to certain exceptions, restrict its ability to enter into certain transactions and engage in certain activities. The Company has
$236.4 million
aggregate principal amount outstanding under the Notes. The Notes contain customary covenants that, subject to certain exceptions, restrict its ability to enter into certain transactions and engage in certain activities.
As of
March 31, 2014
, the outstanding balance of the Company's term debt under its Credit Facility and Notes was
$434.0 million
, which is net of a
$0.9 million
discount. In addition, as of March 31 2014, an aggregate of
$37.5 million
is available for additional borrowings under the ABL Facility. This availability represents a borrowing base of
$49.9 million
under the ABL
Facility less
$12.4 million
of that facility committed for letters of credit or additional borrowings. Additionally, at March 31, 2014, the Company had approximately
$5.1 million
available for borrowings under other small lines of credit.
As of
March 31, 2014
and December 31, 2013, the carrying value of the Company’s long-term debt was
$436.0 million
and
$434.9 million
, respectively, and its fair value was approximately
$455.0 million
and
$451.6 million
, respectively. The Company determined the fair value of its debt utilizing significant other observable inputs (Level 2 of the fair value hierarchy).
Capitalized Lease Liabilities
As of
March 31, 2014
, the Company had capitalized lease liabilities totaling
$4.3 million
. These amounts represent the lease on the corporate headquarters and a software licensing agreement.
4. Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes in accordance with ASC Topic 740
, Income Taxes
(“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.
For the three months ended March 31, 2014, the provision for income taxes was
$1,893
as compared to
$2,503
for the three months ended March 31, 2013. The decrease in tax expense was primarily attributable to the geographic mix of earnings for those periods in the three months ended March 31, 2014. The provision for income taxes is primarily impacted by income earned in tax paying jurisdictions relative to income earned in non-tax paying jurisdictions. The majority of income recognized for purposes of computing the effective tax rate is earned in countries where the statutory income tax rates range from
15%
to
39.43%
; however, permanent income adjustments recorded against pre-tax earnings may result in an effective tax rate that is higher or lower than the statutory tax rate in these jurisdictions. The Company generates losses in certain jurisdictions for which no tax benefit is received, as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved in the valuation allowance. For this reason, the Company recognizes minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States, the United Kingdom and Australia. Due to these reserves, the geographic mix of the Company’s pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings. As the Company continues to reorganize and restructure its operations, it is possible that deferred tax assets, for which no income tax benefit has previously been provided, may more likely than not become realized. The Company continues to evaluate future operations and will record an income tax benefit in the period where it believes it is more likely than not that the deferred tax asset will be able to be realized.
As of March 31, 2014, the Company had a gross amount of unrecognized tax benefit of
$7,919
, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately
$428
during the three months ended March 31, 2014, as a result of foreign currency effects, statute expirations, and ongoing changes in currently reserved positions as a result of new facts or information. The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, which were immaterial for the three months ended March 31, 2014 and 2013. The tax years 2000 through 2013 remain open to examination in a number of the major tax jurisdictions to which the Company and its subsidiaries are subject. The Company believes that it has made adequate provisions for all income tax uncertainties.
In July of 2013, FASB issued ASU 2013-11 Income Taxes (Topic 740),
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Taskforce)
("ASU 2013-11"). Beginning January 1, 2014, the effective date of this regulation, the Company has adopted the provisions of ASU 2013-11 related to presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The effect on the date of adoption resulted in a decrease in other long term liabilities and a decrease in other assets of
$1,147
related to uncertain tax benefits for Canada, Germany, and Italy.
In November of 2011, the Federal Revenue Department of the Ministry of Finance of (“FRD”) issued a tax assessment against the Company’s indirect subsidiary, Xerium Technologies Brasil Indústria e Comércio S.A. (“Xerium Brazil”), challenging the goodwill recorded in the 2005 acquisition of Wangner Itelpa and Huyck Indústria e Comércio S.A. by Robec Brasil Participações Ltda., a predecessor to Xerium Brazil. This assessment denied the amortization of that goodwill against net income for the years 2006 through 2010 and sought payment of approximately
$41,086
(subject to currency exchange rates) in
tax, penalties and interest as of March 31, 2014. The Company believes the transactions in question (i) complied with Brazilian tax and accounting rules, (ii) were effected for a legitimate business purpose, to consolidate the Company’s operating activities in Brazil into one legal entity, and (iii) were properly documented and declared to Brazilian tax and corporate authorities. Based on the foregoing, Xerium Brazil filed a response disputing the tax assessment. In December of 2012 an administrative panel at the first administrative appeals level within the FRD rendered a decision upholding the original assessment, but reducing the claimed penalties by
50%
. This decision reduced the total assessed amount as of
March 31, 2014
by approximately
$11,102
to
$29,984
(subject to currency exchange rates). On January 18, 2013, Xerium Brazil appealed the decision of the first administrative panel to the second of three administrative appeals courts potentially available to it within the FRD.
Although there can be no assurances, as of
March 31, 2014
, the Company believes it is more likely than not that it would prevail on every tax position under examination and therefore it did not accrue any amounts related to this assessment. The Company cannot assure a favorable outcome and cannot currently estimate the timing of the final resolution of this matter. The Company believes it has meritorious defenses and will vigorously contest this matter, and if the administrative courts of the FRD do not rule in the Company's favor, the Company intends to appeal its case to the Brazilian judicial courts. However, if management's views of the Company's position and the probable outcome of the assessment changes or the FRD’s initial position is sustained by Brazilian judicial courts, the amount accrued would adversely impact the Company’s financial condition and results of operations in the period in which any such determination or decision is made.
5. Pensions, Other Post-retirement and Post-employment Benefits
The Company accounts for its pensions, other post-retirement and post-employment benefit plans in accordance with ASC Topic 715,
Compensation—Retirement Benefits
(“Topic 715”). The Company has defined benefit pension plans covering substantially all of its U.S. and Canadian employees and employees of certain subsidiaries in other countries. Benefits are generally based on the employee’s years of service and compensation. These plans are funded in conformity with the funding requirements of applicable government regulations. The Company does not fund certain plans, as funding is not required. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. In addition, the Company also intends to fund its U.K. and Canadian defined benefit plans in accordance with local regulations.
As required by Topic 715, the following tables summarize the components of net periodic benefit cost:
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2014
|
|
2013
|
Service cost
|
$
|
816
|
|
|
$
|
973
|
|
Interest cost
|
1,650
|
|
|
1,560
|
|
Expected return on plan assets
|
(1,564
|
)
|
|
(1,412
|
)
|
Amortization of prior service cost
|
—
|
|
|
3
|
|
Amortization of net loss
|
295
|
|
|
572
|
|
Net periodic benefit cost
|
$
|
1,197
|
|
|
$
|
1,696
|
|
6. Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss
Comprehensive (loss) income for the
three
months ended
March 31, 2014
and 2013 is as follows (net of tax benefits of
$32
):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2014
|
|
2013
|
Net income
|
$
|
1,167
|
|
|
$
|
5,485
|
|
Foreign currency translation adjustments
|
(1,669
|
)
|
|
(4,392
|
)
|
Pension liability changes under Topic 715
|
(275
|
)
|
|
1,602
|
|
Change in value of derivative instruments
|
19
|
|
|
32
|
|
Comprehensive (loss) income
|
$
|
(758
|
)
|
|
$
|
2,727
|
|
The components of accumulated other comprehensive loss for the
three
months ended
March 31, 2014
are as follows (net of tax benefits of
$5.1 million
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Pension
Liability
Changes Under
Topic 715
|
|
Change in
Value of
Derivative
Instruments
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Balance at December 31, 2013
|
$
|
(136
|
)
|
|
$
|
(29,681
|
)
|
|
$
|
(235
|
)
|
|
$
|
(30,052
|
)
|
Other comprehensive loss before reclassifications
|
(1,669
|
)
|
|
—
|
|
|
—
|
|
|
(1,669
|
)
|
Amounts reclassified from other comprehensive income
|
|
|
|
|
|
|
|
Amortization of actuarial losses
|
—
|
|
|
(275
|
)
|
|
—
|
|
|
(275
|
)
|
Amortization of interest expense
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
Net current period other comprehensive (loss) income
|
(1,669
|
)
|
|
(275
|
)
|
|
21
|
|
|
(1,923
|
)
|
Balance at March 31, 2014
|
$
|
(1,805
|
)
|
|
$
|
(29,956
|
)
|
|
$
|
(214
|
)
|
|
$
|
(31,975
|
)
|
|
|
|
|
|
|
|
|
For the
three
months ended
March 31, 2014
, the amortization of actuarial losses is included in cost of products sold and general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
7. Restructuring and Impairment Expense
During the three months ended
March 31, 2014
, the Company recorded restructuring expenses of approximately
$4,651
.
These included charges relating to the closure of a roll cover facility in Germany, the reduction of headcount and the second phase of the closure of a clothing facility in Argentina. During the three months ended
March 31, 2013
, the Company recorded restructuring expenses of approximately
$1,255
. These charges were primarily related to headcount reductions, the closure of a roll covering facility in France and the closure of a machine clothing facility in Argentina.
The following table sets forth the significant components and activity under restructuring programs for the three months ended
March 31, 2014
and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2013
|
|
Charges
|
|
Currency
Effects
|
|
Cash
Payments
|
|
Balance at
March 31, 2014
|
Severance and other benefits
|
$
|
6,466
|
|
|
$
|
4,411
|
|
|
$
|
(46
|
)
|
|
$
|
(2,240
|
)
|
|
$
|
8,591
|
|
Facility costs and other
|
1,468
|
|
|
240
|
|
|
(11
|
)
|
|
(312
|
)
|
|
1,385
|
|
Total
|
$
|
7,934
|
|
|
$
|
4,651
|
|
|
$
|
(57
|
)
|
|
$
|
(2,552
|
)
|
|
$
|
9,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2012
|
|
Charges (1)
|
|
Currency
Effects
|
|
Cash
Payments
|
|
Balance at
March 31, 2013
|
Severance and other benefits
|
$
|
15,577
|
|
|
$
|
775
|
|
|
$
|
(451
|
)
|
|
$
|
(4,109
|
)
|
|
$
|
11,792
|
|
Facility costs and other
|
335
|
|
|
410
|
|
|
(10
|
)
|
|
(570
|
)
|
|
165
|
|
Total
|
$
|
15,912
|
|
|
$
|
1,185
|
|
|
$
|
(461
|
)
|
|
$
|
(4,679
|
)
|
|
$
|
11,957
|
|
(1) Amount excludes
$70
impairment charges.
Restructuring and impairment expense by segment, which is not included in Segment Earnings in Note 8, is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Clothing
|
$
|
2,254
|
|
|
$
|
409
|
|
Roll Covers
|
2,397
|
|
|
727
|
|
Corporate
|
—
|
|
|
119
|
|
Total
|
$
|
4,651
|
|
|
$
|
1,255
|
|
8. Business Segment Information
The Company is a global manufacturer and supplier of consumable products used primarily in the production of paper and is organized into two reportable segments: Clothing and Roll Covers. The Clothing segment represents the manufacture and sale of synthetic textile belts used to transport paper along the length of papermaking machines. The Roll Covers segment primarily represents the manufacture and refurbishment of covers used on the steel rolls of papermaking machines and the servicing of those rolls. The Company manages each of these operating segments separately.
Management evaluates segment performance based on earnings before interest, taxes, depreciation and amortization and before allocation of corporate charges. Such measure is then adjusted to exclude items that are of an unusual nature and are not used in measuring segment performance or are not segment specific (“Segment Earnings (Loss)”). The accounting policies of these segments are the same as those for the Company as a whole. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.
Summarized financial information for the Company’s reportable segments is presented in the tables that follow for the
three
months ended
March 31, 2014
and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clothing
|
|
Roll
Covers
|
|
Corporate
|
|
Total
|
Three Months Ended March 31, 2014:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
88,971
|
|
|
$
|
44,413
|
|
|
$
|
—
|
|
|
$
|
133,384
|
|
Segment Earnings (Loss)
|
$
|
19,124
|
|
|
$
|
7,836
|
|
|
$
|
(1,258
|
)
|
|
|
Three Months Ended March 31, 2013:
|
|
|
|
|
|
|
|
Net Sales
|
$
|
89,937
|
|
|
$
|
49,868
|
|
|
$
|
—
|
|
|
$
|
139,805
|
|
Segment Earnings (Loss)
|
$
|
18,062
|
|
|
$
|
14,070
|
|
|
$
|
(2,989
|
)
|
|
|
|
Provided below is a reconciliation of Segment earnings (loss) to income before provision for income taxes for the
three
months ended
March 31, 2014
and 2013, respectively.
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2014
|
|
2013
|
Segment Earnings (Loss):
|
|
|
|
Clothing
|
$
|
19,124
|
|
|
$
|
18,062
|
|
Roll Covers
|
7,836
|
|
|
14,070
|
|
Corporate
|
(1,258
|
)
|
|
(2,989
|
)
|
Stock-based compensation
|
(509
|
)
|
|
(295
|
)
|
Idle facility asset impairment
|
—
|
|
|
(857
|
)
|
Interest expense, net
|
(8,657
|
)
|
|
(9,206
|
)
|
Depreciation and amortization
|
(8,649
|
)
|
|
(9,542
|
)
|
Restructuring expense
|
(4,651
|
)
|
|
(1,255
|
)
|
Plant startup costs
|
(176
|
)
|
|
—
|
|
Income before provision for income taxes
|
$
|
3,060
|
|
|
$
|
7,988
|
|
9. Commitments and Contingencies
The Company is involved in various legal matters which have arisen in the ordinary course of business as a result of various immaterial labor claims, taxing authority reviews and other routine legal matters. As of
March 31, 2014
, the Company accrued an immaterial amount in its financial statements for these matters for which the Company believed the possibility of loss was probable and was able to estimate the damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its financial position, results of operations or cash flow. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of legal matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company. See Note 4 for a discussion of Xerium Brazil’s proceeding with the FRD.
10. Stock-Based Compensation and Stockholders’ Deficit
The Company records stock-based compensation expense in accordance with ASC Topic 718,
Accounting for Stock Compensation
and has used the straight-line attribution method to recognize expense for time-based restricted stock units ("RSUs") and deferred stock units ("DSUs"). The Company recorded stock-based compensation expense during the
three
months ended
March 31, 2014
and
March 31, 2013
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2014
|
|
2013
|
RSU, Options and DSU Awards (1)
|
|
$
|
509
|
|
|
$
|
295
|
|
|
|
(1)
|
Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors.
|
Summary of Activity under the Long-Term Incentive Plans
On May 8, 2012, the Board approved the 2012 Executive Long-Term Incentive Plan (the “2012 Executive LTIP”) under the 2010 Equity Incentive Plan (the "2010 Plan"). Awards under the 2012 Executive LTIP are both time-based and performance-based. A specific target share award is set for each participant in the 2012 Executive LTIP. Awards will be paid in the form of RSUs or shares of common stock of the Company. Time-based awards, or
50%
of the total target award, were granted in the form of
54,750
time-based RSUs under the Company’s 2010 Plan. At March 31, 2014,
13,416
time-based RSUs vested in accordance with the 2012 Executive LTIP and were converted to common stock, net of applicable tax withholdings. The remaining one-third of the time-based RSUs will vest on March 31, 2015, and convert into shares of common stock as they vest. Performance-based awards, which constitute
50%
of the total award, will be determined based on the Company’s performance against a
three
-year cumulative Adjusted EBITDA metric, adjusted for currency fluctuations during the term of the 2012 – 2014 Executive LTIP. The performance-based awards will convert into shares of the Company’s common stock and be paid after the close of the
three
-year performance period. The amount of the payment will be based on a sliding scale ranging from
50%
if the metric is achieved at
85%
of the target up to
200%
if the metric is achieved at or above
115%
of the target.
On June 13, 2013, at the 2013 Annual Meeting of Stockholders of Xerium Technologies, Inc., the stockholders of the Company approved an amendment to the 2010 Plan, which increased the aggregate number of shares of the Company’s common stock that may be delivered under or in satisfaction of awards under such plan from
913,525
to
1,663,525
, increased the number of shares that may be subject to option and stock appreciation right grants and that may be granted as stock awards to any one participant in a calendar year from
150,000
to
500,000
, and set a maximum cash award that may be granted to any one participant in a calendar year at
$2,000
. This amendment was approved by the Company’s Board of Directors on March 12, 2013.
On June 13, 2013, after the stockholders had approved the amendment to the 2010 Plan, the Board approved the granting of awards under the 2013 Executive Long-Term Incentive Plan (the "2013 Executive LTIP") under the 2010 Plan. Awards under the 2013 Executive LTIP are both time-based and performance-based and will be paid in the form of RSUs or shares of common stock of the Company. Time-based awards, or
50%
of the total target award, were granted in the form of
179,571
time-based RSUs under the Company’s 2010 Plan. These time-based awards will cliff vest on March 11, 2016, and will be converted to common stock, net of applicable tax withholdings. Performance-based awards, which constitute the remaining
50%
of the total award, will vest depending on the Company’s stock price performance during the three year participant service period from March 11, 2013 through March 10, 2016. If the awards vest, they will convert into shares of the Company’s common stock and be paid after the close of the
three
-year performance period.
Other Stock Compensation Plans
On August 15, 2012, in connection with the previously announced anticipated retirement of Stephen R. Light, the Board of Directors of the Company appointed Harold C. Bevis to the position of President and Chief Executive Officer, effective immediately, and Mr. Light notified the Company of his resignation, effective as of that date, as the Company's Chairman, President and Chief Executive Officer. The Company granted Mr. Bevis a sign-on award of
204,208
restricted stock units and options to acquire
781,701
shares of the Company's Common Stock, par value
$0.001
per share. Both the restricted stock units and the options will vest over a
three
year period, beginning on the second anniversary of the August 15, 2012 grant date. The options have a
10
-year term and an exercise price of
$4.00
per share, the August 15, 2012 closing price of the Company's common stock on the New York Stock Exchange. In addition, on August 15, 2012, the Company accelerated the vesting of Mr. Light's remaining
50,000
restricted stock units, issuing
27,900
shares of common stock, upon vesting, net of certain tax withholdings.
Directors’ Deferred Stock Unit Plan
Under the 2011 non-management directors stock plan ("2011 DSU Plan”), each director receives an annual retainer of
$112
, to be paid on a quarterly basis in arrears.
Half of the annual retainer is payable in DSUs, with the remaining half payable in DSUs, cash or a mix of both at the election of each director.
The non-management directors were awarded an aggregate of
5,668
DSUs under the 2011 DSU Plan for service during the quarter ended
March 31, 2014
. In addition, in accordance with the 2011 DSU Plan,
4,796
DSUs were settled in Common Stock during the quarter ended
March 31, 2014
.
11. Supplemental Guarantor Financial Information
On May 26, 2011, the Company closed on the sale of its Notes. The Notes are unsecured obligations of the Company and are fully and unconditionally guaranteed on a senior unsecured basis by all of the domestic wholly owned subsidiaries of the Company (the “Guarantors”). In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, as amended, the following condensed consolidating financial statements present the financial position, results of operations and cash flows of Xerium Technologies, Inc. (referred to as “Parent” for the purpose of this note only) on a stand-alone parent-only basis, the Guarantors on a Guarantors-only basis, the combined non-Guarantor subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantors and non-Guarantor subsidiaries on a consolidated basis.
Xerium Technologies, Inc.
Consolidating Balance Sheet—(Unaudited)
At
March 31, 2014
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
685
|
|
|
$
|
(11
|
)
|
|
$
|
17,339
|
|
|
$
|
—
|
|
|
$
|
18,013
|
|
Accounts receivable, net
|
60
|
|
|
23,786
|
|
|
70,774
|
|
|
—
|
|
|
94,620
|
|
Intercompany receivables
|
(111,677
|
)
|
|
108,965
|
|
|
2,712
|
|
|
—
|
|
|
—
|
|
Inventories, net
|
—
|
|
|
18,464
|
|
|
70,727
|
|
|
(896
|
)
|
|
88,295
|
|
Prepaid expenses
|
198
|
|
|
1,287
|
|
|
5,088
|
|
|
—
|
|
|
6,573
|
|
Other current assets
|
—
|
|
|
4,352
|
|
|
10,050
|
|
|
—
|
|
|
14,402
|
|
Total current assets
|
(110,734
|
)
|
|
156,843
|
|
|
176,690
|
|
|
(896
|
)
|
|
221,903
|
|
Property and equipment, net
|
25,018
|
|
|
59,706
|
|
|
232,129
|
|
|
—
|
|
|
316,853
|
|
Investments
|
712,436
|
|
|
288,753
|
|
|
—
|
|
|
(1,001,189
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
17,737
|
|
|
50,199
|
|
|
—
|
|
|
67,936
|
|
Intangible assets
|
11,141
|
|
|
2,710
|
|
|
414
|
|
|
—
|
|
|
14,265
|
|
Other assets
|
5
|
|
|
—
|
|
|
10,101
|
|
|
—
|
|
|
10,106
|
|
Total assets
|
$
|
637,866
|
|
|
$
|
525,749
|
|
|
$
|
469,533
|
|
|
$
|
(1,002,085
|
)
|
|
$
|
631,063
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
1,436
|
|
|
$
|
10,077
|
|
|
$
|
26,360
|
|
|
$
|
—
|
|
|
$
|
37,873
|
|
Accrued expenses
|
13,233
|
|
|
8,464
|
|
|
47,441
|
|
|
—
|
|
|
69,138
|
|
Current notes payable
|
—
|
|
|
—
|
|
|
8,243
|
|
|
|
|
8,243
|
|
Current maturities of long-term debt
|
2,062
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
2,204
|
|
Total current liabilities
|
16,731
|
|
|
18,541
|
|
|
82,186
|
|
|
—
|
|
|
117,458
|
|
Long-term debt, net of current maturities
|
433,163
|
|
|
608
|
|
|
—
|
|
|
—
|
|
|
433,771
|
|
Capitalized lease obligations
|
4,324
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,324
|
|
Deferred taxes
|
609
|
|
|
3,040
|
|
|
12,140
|
|
|
—
|
|
|
15,789
|
|
Pension, other post-retirement and post-employment obligations
|
11,011
|
|
|
1,063
|
|
|
54,653
|
|
|
—
|
|
|
66,727
|
|
Other long-term liabilities
|
126
|
|
|
—
|
|
|
4,621
|
|
|
—
|
|
|
4,747
|
|
Intercompany loans
|
242,251
|
|
|
(359,058
|
)
|
|
116,807
|
|
|
—
|
|
|
—
|
|
Total stockholders’ (deficit) equity
|
(70,349
|
)
|
|
861,555
|
|
|
199,126
|
|
|
(1,002,085
|
)
|
|
(11,753
|
)
|
Total liabilities and stockholders’ equity
|
$
|
637,866
|
|
|
$
|
525,749
|
|
|
$
|
469,533
|
|
|
$
|
(1,002,085
|
)
|
|
$
|
631,063
|
|
Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2013
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,120
|
|
|
$
|
(10
|
)
|
|
$
|
21,606
|
|
|
$
|
—
|
|
|
$
|
25,716
|
|
Accounts receivable, net
|
—
|
|
|
22,188
|
|
|
65,764
|
|
|
—
|
|
|
87,952
|
|
Intercompany receivables
|
(112,848
|
)
|
|
110,434
|
|
|
2,414
|
|
|
—
|
|
|
—
|
|
Inventories, net
|
—
|
|
|
18,077
|
|
|
66,632
|
|
|
(779
|
)
|
|
83,930
|
|
Prepaid expenses
|
398
|
|
|
936
|
|
|
6,845
|
|
|
—
|
|
|
8,179
|
|
Other current assets
|
514
|
|
|
3,729
|
|
|
11,452
|
|
|
—
|
|
|
15,695
|
|
Total current assets
|
(107,816
|
)
|
|
155,354
|
|
|
174,713
|
|
|
(779
|
)
|
|
221,472
|
|
Property and equipment, net
|
15,794
|
|
|
59,250
|
|
|
234,620
|
|
|
—
|
|
|
309,664
|
|
Investments
|
700,697
|
|
|
284,444
|
|
|
—
|
|
|
(985,141
|
)
|
|
—
|
|
Goodwill
|
—
|
|
|
17,737
|
|
|
51,238
|
|
|
—
|
|
|
68,975
|
|
Intangible assets
|
10,964
|
|
|
3,094
|
|
|
412
|
|
|
—
|
|
|
14,470
|
|
Other assets
|
4
|
|
|
—
|
|
|
9,479
|
|
|
—
|
|
|
9,483
|
|
Total assets
|
$
|
619,643
|
|
|
$
|
519,879
|
|
|
$
|
470,462
|
|
|
$
|
(985,920
|
)
|
|
$
|
624,064
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,109
|
|
|
$
|
10,380
|
|
|
$
|
29,731
|
|
|
$
|
—
|
|
|
$
|
42,220
|
|
Accrued expenses
|
9,794
|
|
|
8,172
|
|
|
43,402
|
|
|
—
|
|
|
61,368
|
|
Current notes payable
|
—
|
|
|
—
|
|
|
8,267
|
|
|
—
|
|
|
8,267
|
|
Current maturities of long-term debt
|
2,024
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
2,166
|
|
Total current liabilities
|
13,927
|
|
|
18,552
|
|
|
81,542
|
|
|
—
|
|
|
114,021
|
|
Long-term debt, net of current maturities
|
432,706
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
432,706
|
|
Deferred taxes
|
327
|
|
|
3,040
|
|
|
12,983
|
|
|
—
|
|
|
16,350
|
|
Pension, other post-retirement and post-employment obligations
|
11,212
|
|
|
1,182
|
|
|
54,472
|
|
|
—
|
|
|
66,866
|
|
Other long-term liabilities
|
106
|
|
|
5
|
|
|
5,459
|
|
|
—
|
|
|
5,570
|
|
Intercompany loans
|
233,755
|
|
|
(355,003
|
)
|
|
121,248
|
|
|
—
|
|
|
—
|
|
Total stockholders’ (deficit) equity
|
(72,390
|
)
|
|
852,103
|
|
|
194,758
|
|
|
(985,920
|
)
|
|
(11,449
|
)
|
Total liabilities and stockholders’ equity
|
$
|
619,643
|
|
|
$
|
519,879
|
|
|
$
|
470,462
|
|
|
$
|
(985,920
|
)
|
|
$
|
624,064
|
|
Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive Income (Loss) (Unaudited)
For the three months ended
March 31, 2014
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
Net sales
|
$
|
—
|
|
|
$
|
43,156
|
|
|
$
|
99,265
|
|
|
$
|
(9,037
|
)
|
|
$
|
133,384
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
(419
|
)
|
|
29,999
|
|
|
60,731
|
|
|
(9,093
|
)
|
|
81,218
|
|
Selling
|
113
|
|
|
5,068
|
|
|
12,997
|
|
|
—
|
|
|
18,178
|
|
General and administrative
|
1,884
|
|
|
2,520
|
|
|
10,393
|
|
|
—
|
|
|
14,797
|
|
Research and development
|
276
|
|
|
1,118
|
|
|
552
|
|
|
—
|
|
|
1,946
|
|
Restructuring and impairment
|
(18
|
)
|
|
237
|
|
|
4,432
|
|
|
—
|
|
|
4,651
|
|
|
1,836
|
|
|
38,942
|
|
|
89,105
|
|
|
(9,093
|
)
|
|
120,790
|
|
(Loss) income from operations
|
(1,836
|
)
|
|
4,214
|
|
|
10,160
|
|
|
56
|
|
|
12,594
|
|
Interest expense, net
|
(8,242
|
)
|
|
1,395
|
|
|
(1,810
|
)
|
|
—
|
|
|
(8,657
|
)
|
Foreign exchange loss
|
(12
|
)
|
|
(81
|
)
|
|
(784
|
)
|
|
—
|
|
|
(877
|
)
|
Equity (deficit) in subsidiaries income
|
11,731
|
|
|
5,892
|
|
|
—
|
|
|
(17,623
|
)
|
|
—
|
|
Income before provision for income taxes
|
1,641
|
|
|
11,420
|
|
|
7,566
|
|
|
(17,567
|
)
|
|
3,060
|
|
Provision for income taxes
|
(474
|
)
|
|
(34
|
)
|
|
(1,385
|
)
|
|
—
|
|
|
(1,893
|
)
|
Net income
|
$
|
1,167
|
|
|
$
|
11,386
|
|
|
$
|
6,181
|
|
|
$
|
(17,567
|
)
|
|
$
|
1,167
|
|
Comprehensive income (loss)
|
$
|
1,578
|
|
|
$
|
11,116
|
|
|
$
|
4,115
|
|
|
$
|
(17,567
|
)
|
|
$
|
(758
|
)
|
Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income-(Unaudited)
For the three months ended
March 31, 2013
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
Net sales
|
$
|
—
|
|
|
$
|
46,115
|
|
|
$
|
105,399
|
|
|
$
|
(11,709
|
)
|
|
$
|
139,805
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
(450
|
)
|
|
30,863
|
|
|
66,594
|
|
|
(11,709
|
)
|
|
85,298
|
|
Selling
|
—
|
|
|
5,871
|
|
|
13,350
|
|
|
—
|
|
|
19,221
|
|
General and administrative
|
1,982
|
|
|
807
|
|
|
11,845
|
|
|
—
|
|
|
14,634
|
|
Research and development
|
—
|
|
|
1,359
|
|
|
595
|
|
|
—
|
|
|
1,954
|
|
Restructuring and impairment
|
119
|
|
|
238
|
|
|
898
|
|
|
—
|
|
|
1,255
|
|
|
1,651
|
|
|
39,138
|
|
|
93,282
|
|
|
(11,709
|
)
|
|
122,362
|
|
(Loss) income from operations
|
(1,651
|
)
|
|
6,977
|
|
|
12,117
|
|
|
—
|
|
|
17,443
|
|
Interest (expense) income, net
|
(6,704
|
)
|
|
1,406
|
|
|
(3,908
|
)
|
|
—
|
|
|
(9,206
|
)
|
Foreign exchange gain (loss)
|
183
|
|
|
(13
|
)
|
|
(419
|
)
|
|
—
|
|
|
(249
|
)
|
Equity in subsidiaries income (deficit)
|
13,704
|
|
|
4,754
|
|
|
—
|
|
|
(18,458
|
)
|
|
—
|
|
Dividend income
|
—
|
|
|
1,555
|
|
|
—
|
|
|
(1,555
|
)
|
|
—
|
|
Income before provision for income taxes
|
5,532
|
|
|
14,679
|
|
|
7,790
|
|
|
(20,013
|
)
|
|
7,988
|
|
Provision for income taxes
|
(47
|
)
|
|
106
|
|
|
(2,562
|
)
|
|
—
|
|
|
(2,503
|
)
|
Net income
|
$
|
5,485
|
|
|
$
|
14,785
|
|
|
$
|
5,228
|
|
|
$
|
(20,013
|
)
|
|
$
|
5,485
|
|
Comprehensive income
|
$
|
5,254
|
|
|
$
|
14,562
|
|
|
$
|
2,924
|
|
|
$
|
(20,013
|
)
|
|
$
|
2,727
|
|
Xerium Technologies, Inc.
Consolidating Statement of Cash Flows-(Unaudited)
For the three months ended
March 31, 2014
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1,167
|
|
|
$
|
11,386
|
|
|
$
|
6,181
|
|
|
$
|
(17,567
|
)
|
|
$
|
1,167
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
456
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
509
|
|
Depreciation
|
108
|
|
|
1,850
|
|
|
6,275
|
|
|
—
|
|
|
8,233
|
|
Amortization of intangibles
|
—
|
|
|
384
|
|
|
32
|
|
|
—
|
|
|
416
|
|
Deferred financing cost amortization
|
716
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
716
|
|
Foreign exchange loss on revaluation of debt
|
(1,103
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,103
|
)
|
Deferred tax expense
|
282
|
|
|
—
|
|
|
(1,090
|
)
|
|
—
|
|
|
(808
|
)
|
Loss on disposition of property and equipment
|
—
|
|
|
22
|
|
|
5
|
|
|
—
|
|
|
27
|
|
Provision for doubtful accounts
|
—
|
|
|
165
|
|
|
80
|
|
|
—
|
|
|
245
|
|
Undistributed equity in earnings of subsidiaries
|
(11,731
|
)
|
|
(5,892
|
)
|
|
—
|
|
|
17,623
|
|
|
—
|
|
Change in assets and liabilities which provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(61
|
)
|
|
(1,762
|
)
|
|
(5,229
|
)
|
|
—
|
|
|
(7,052
|
)
|
Inventories
|
—
|
|
|
(387
|
)
|
|
(3,605
|
)
|
|
(56
|
)
|
|
(4,048
|
)
|
Prepaid expenses
|
201
|
|
|
(351
|
)
|
|
1,750
|
|
|
—
|
|
|
1,600
|
|
Other current assets
|
515
|
|
|
(623
|
)
|
|
927
|
|
|
—
|
|
|
819
|
|
Accounts payable and accrued expenses
|
2,767
|
|
|
(11
|
)
|
|
1,446
|
|
|
—
|
|
|
4,202
|
|
Deferred and other long-term liabilities
|
(182
|
)
|
|
(828
|
)
|
|
(1,150
|
)
|
|
—
|
|
|
(2,160
|
)
|
Intercompany loans
|
(1,171
|
)
|
|
1,401
|
|
|
(230
|
)
|
|
—
|
|
|
—
|
|
Net cash (used in) provided by operating activities
|
(8,036
|
)
|
|
5,354
|
|
|
5,445
|
|
|
—
|
|
|
2,763
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures, gross
|
(5,537
|
)
|
|
(922
|
)
|
|
(4,035
|
)
|
|
—
|
|
|
(10,494
|
)
|
Intercompany property and equipment transfers, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Proceeds from disposals of property and equipment
|
—
|
|
|
35
|
|
|
8
|
|
|
—
|
|
|
43
|
|
Net cash used in investing activities
|
(5,537
|
)
|
|
(887
|
)
|
|
(4,027
|
)
|
|
—
|
|
|
(10,451
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
—
|
|
Proceeds from borrowings
|
7,580
|
|
|
|
|
|
|
|
|
7,580
|
|
Principal payments on debt
|
(6,600
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,600
|
)
|
Payment of obligations under capital leases
|
(126
|
)
|
|
(64
|
)
|
|
|
|
|
|
(190
|
)
|
Payment of financing fees
|
(710
|
)
|
|
|
|
|
|
|
|
(710
|
)
|
Intercompany loans
|
9,994
|
|
|
(4,404
|
)
|
|
(5,590
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
10,138
|
|
|
(4,468
|
)
|
|
(5,590
|
)
|
|
—
|
|
|
80
|
|
Effect of exchange rate changes on cash flows
|
—
|
|
|
—
|
|
|
(95
|
)
|
|
—
|
|
|
(95
|
)
|
Net decrease in cash
|
(3,435
|
)
|
|
(1
|
)
|
|
(4,267
|
)
|
|
—
|
|
|
(7,703
|
)
|
Cash and cash equivalents at beginning of period
|
4,120
|
|
|
(10
|
)
|
|
21,606
|
|
|
—
|
|
|
25,716
|
|
Cash and cash equivalents at end of period
|
$
|
685
|
|
|
$
|
(11
|
)
|
|
$
|
17,339
|
|
|
$
|
—
|
|
|
$
|
18,013
|
|
Xerium Technologies, Inc.
Consolidating Statement of Cash Flows (Unaudited)
For the three months ended
March 31, 2013
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Total
Guarantors
|
|
Total Non
Guarantors
|
|
Other
Eliminations
|
|
The
Company
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
5,485
|
|
|
$
|
14,785
|
|
|
$
|
5,228
|
|
|
$
|
(20,013
|
)
|
|
$
|
5,485
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
295
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
295
|
|
Depreciation
|
33
|
|
|
1,903
|
|
|
7,030
|
|
|
—
|
|
|
8,966
|
|
Amortization of intangibles
|
—
|
|
|
553
|
|
|
23
|
|
|
—
|
|
|
576
|
|
Deferred financing cost amortization
|
516
|
|
|
—
|
|
|
193
|
|
|
—
|
|
|
709
|
|
Foreign exchange loss on revaluation of debt
|
—
|
|
|
—
|
|
|
(118
|
)
|
|
—
|
|
|
(118
|
)
|
Deferred tax expense
|
—
|
|
|
—
|
|
|
282
|
|
|
—
|
|
|
282
|
|
Asset impairment
|
208
|
|
|
—
|
|
|
720
|
|
|
|
|
928
|
|
Loss (gain) on disposition of property and equipment
|
1
|
|
|
3
|
|
|
(14
|
)
|
|
—
|
|
|
(10
|
)
|
Intercompany dividend
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Provision for doubtful accounts
|
—
|
|
|
(53
|
)
|
|
88
|
|
|
—
|
|
|
35
|
|
Undistributed equity in (earnings) loss of subsidiaries
|
(13,704
|
)
|
|
(4,754
|
)
|
|
—
|
|
|
18,458
|
|
|
—
|
|
Change in assets and liabilities which provided (used) cash:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
—
|
|
|
(3,595
|
)
|
|
(5,632
|
)
|
|
—
|
|
|
(9,227
|
)
|
Inventories
|
—
|
|
|
529
|
|
|
399
|
|
|
—
|
|
|
928
|
|
Prepaid expenses
|
3
|
|
|
(639
|
)
|
|
1,088
|
|
|
—
|
|
|
452
|
|
Other current assets
|
(2,182
|
)
|
|
(35
|
)
|
|
254
|
|
|
—
|
|
|
(1,963
|
)
|
Accounts payable and accrued expenses
|
5,158
|
|
|
(234
|
)
|
|
(3,533
|
)
|
|
1,555
|
|
|
2,946
|
|
Deferred and other long-term liabilities
|
42
|
|
|
68
|
|
|
(111
|
)
|
|
—
|
|
|
(1
|
)
|
Intercompany loans
|
854
|
|
|
(1,496
|
)
|
|
642
|
|
|
—
|
|
|
—
|
|
Net cash (used in) provided by operating activities
|
(3,291
|
)
|
|
7,035
|
|
|
6,539
|
|
|
—
|
|
|
10,283
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures, gross
|
(1,466
|
)
|
|
(632
|
)
|
|
(1,615
|
)
|
|
—
|
|
|
(3,713
|
)
|
Proceeds from disposals of property and equipment
|
—
|
|
|
—
|
|
|
317
|
|
|
—
|
|
|
317
|
|
Net cash used in investing activities
|
(1,466
|
)
|
|
(632
|
)
|
|
(1,298
|
)
|
|
—
|
|
|
(3,396
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
(313
|
)
|
|
—
|
|
|
(290
|
)
|
|
—
|
|
|
(603
|
)
|
Intercompany loans
|
7,499
|
|
|
(6,449
|
)
|
|
(1,050
|
)
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
7,186
|
|
|
(6,449
|
)
|
|
(1,340
|
)
|
|
—
|
|
|
(603
|
)
|
Effect of exchange rate changes on cash flows
|
—
|
|
|
(1
|
)
|
|
(297
|
)
|
|
—
|
|
|
(298
|
)
|
Net increase (decrease) in cash
|
2,429
|
|
|
(47
|
)
|
|
3,604
|
|
|
—
|
|
|
5,986
|
|
Cash and cash equivalents at beginning of period
|
6,471
|
|
|
36
|
|
|
28,270
|
|
|
—
|
|
|
34,777
|
|
Cash and cash equivalents at end of period
|
$
|
8,900
|
|
|
$
|
(11
|
)
|
|
$
|
31,874
|
|
|
$
|
—
|
|
|
$
|
40,763
|
|