Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of
industrial consumable products and services, today announced its Q1
2014 results.
Q1 2014 roll sales were weaker than expected in North
America and Europe
Weather conditions and a market inventory correction in
containerboard drove weaker than expected roll sales in the quarter
in North America and Europe. We expected and planned for sales to
be weak, and they were. We believe these market conditions were
temporary, and indeed orders were as expected in the quarter,
growing 5.8% to $146.0 million. Rolls sales were in line in the
rest of the world, outside North America and Europe. Constant
currency machine clothing sales declined 0.9%, while machine
clothing Adjusted EBITDA increased from $18.1 million in Q1 2013 to
$19.1 million in Q1 2014. See "Segment Information" and "Non-GAAP
Financial Measures" below.
The Company's sales growth and cost reduction programs
are on track to deliver expected results for the year
The Company is underway with a balanced program of sales growth
and cost reduction. The cost reduction programs are comprised of a
plant repositioning program and operational excellence programs.
The plant repositioning program will dramatically reposition our
assets to mirror forward growth activities – geographically and by
product type – and at the same time increase our competitiveness by
being leaner and more nimble. The plant repositioning program
includes:
- 6 plant closures – 5 are underway
- 11 plant expansions – all 11 are underway
- 2 new greenfield plants – both are underway
The operational excellence programs involve all 28 Xerium plants
globally. Every single plant has a site specific program to address
the following initiatives:
- Waste reduction
- Bidding out procured items and finding new low cost
suppliers
- Implementing throughput best practices
- Installing a new lower cost logistics network
- New safety program
- Capital projects to lower costs
These programs have been centralized globally in order to spread
best practices uniformly across all regions. Implemented in
parallel with these foundational moves is an equally sized set of
sales growth programs. The programs are comprised of new people,
industry specialists with additive knowledge to Xerium's current
commercial team, a new R&D program, new R&D tools, new
machines with capabilities the Company has never had, and a new
product program with 11 specific programs. The first wave of new
products (4 in total) is rolling out right now and they are:
- EnerVent – a brand new highly engineered and machined roll
cover optimized for tissue machines
- Smart 6.0 – the industry's first load sensing roll cover for
suction box applications
- Shoe press belt – the Company has received its first order for
a very innovative approach to this application
- TAD (through air drying) fabrics – the Company's first offering
for high-end tissue machine applications
The Company is shifting with the market – a smaller market in
the global printing & writing market (now just ~23% of the
global pulp & paper market), and a larger position in the
growing markets for tissue, packaging papers, boxboard, fiber
cement, non-woven belts, rolls for the flexible packaging industry,
and rolls for the film production industry. Xerium continues to
advance its position and increase market share globally in the
growing non-paper markets such as fiber cement and nonwovens, with
a dedicated team, allocated resources, and advanced product
offerings. Fiber cement demand in North America alone is forecast
to rise 8.5% annually through 2017, driven by recovery in
residential construction. Global growth also is benefiting from a
shift from asbestos based production to fiber cement based
production. Global demand for nonwovens is forecasted to rise at
least 5.4% annually and demand in developing countries is
forecasted to increase even higher at 7.2% annually through
2017.
2014 Full Year Adjusted EBITDA guidance of $116 - $120
million remains on track
The Company is reducing its costs at the same time that it
repositions its commercial programs and capacities to mirror growth
opportunities geographically and by product. These plans are on
track and are back-end loaded in 2014. We see the same amount of
upside and downside to our business. Furthermore, we expect to pay
down some debt in the second half of 2014.
Harold Bevis, Xerium's CEO and President, said:
"Xerium's growth story remains the same - we intend to grow in
Asia, the Americas and in Europe. We are putting in place the
machines and people to grow in new non-paper product areas.
Already, mechanical services alone are almost 9% of our sales and
growing. Our sales of non-paper products are already over $100
million of our sales profile, and we are investing heavily to
increase this proportion. We are also investing to deepen and
expand the value we bring to the paper market. The declining
printing & writing segment of the market gets a lot of
attention and has a tendency to be both exaggerated and
extrapolated to the rest of the market. But, approximately 77% of
the global pulp & paper market is healthy and growing. We
intend to remain a strong participant in this market over the long
term. The first major investment program aimed at sales growth will
begin in the second half of 2014 when the ~$10 million expansion of
our Gloggnitz press felt plant is completed. The primary machine
for this project was ordered in the first quarter of 2013. Sales
growth in our markets is long-cycle while cost reduction is shorter
cycle. The Company expects to again achieve year-over-year sales
growth in 2014 as well as in 2015 and in 2016. In addition, Xerium
will be very cash generative as we exit this expensive
repositioning program and we will continue to pay down debt."
Cliff Pietrafitta, Xerium's EVP and Chief Financial Officer,
said:
"Q1 2014 sales were 4.6% below a strong Q1 2013. Constant
currency rolls sales lagged behind machine clothing sales,
declining 11.3%. This reduction was primarily driven by decreases
in North America of 5.0%, and Europe of 6.0%, due to weaker
industry demand in both regions. Machine clothing sales declined
0.9%, on a constant currency basis. Geographically, sales increased
in South America by 4.4% or $0.5 million, while sales declined in
North America by 5.0% or $2.6 million, Europe by 6.0% or $2.9
million and Asia by 5.0% or $1.4 million." See "Segment
Information" below.
"Operating income in Q1 2014 declined by $4.9 million, due to
lower sales volume and higher restructuring costs, partially offset
by decreased SG&A costs, increased gross margins and the impact
of favorable foreign currency exchange rates. Reductions in
SG&A costs and improved gross margins were largely a result of
our restructuring initiatives. Adjusted EBITDA in Q1 2014 was $25.7
million, or 19.3% of sales, but was 11.7% below Q1 2013 Adjusted
EBITDA of $29.1 million, primarily due to lower sales volume." See
"Non-GAAP Financial Measures" below.
"Q1 2014 was a successful quarter related to cost-out actions.
The Company spent approximately $13 million of cash on capital
expenditures and restructuring costs in Q1 2014. For the full year
we expect to spend $68 million, or a similar amount to 2013, to
generate approximately $25 million of cost reduction savings in
2014. In addition, in 2014, we have more spending related to longer
payback projects (such as the China machine clothing plant), which
will not result in incremental savings or earnings in 2014. While
cost-out and restructuring savings initiatives are the centerpiece
of Xerium's 2014 business plan, the Company still expects that
current market conditions, inflation and negative price/mix will
combine to limit growth in Adjusted EBITDA to approximately $116 -
$120 million, assuming the current foreign exchange rate outlook
and market demand."
"As of Q1 2014, we had an aggregate of $42.6 million available
for additional borrowings under our Credit Facility and smaller
lines of credit and our cash balances totaled $18.0 million. Q1
2014 free cash flow (defined as cash-flow from operations less
capital expenditures) declined to $(7.7) million from $6.6 million
as capital expenditures increased $6.8 million to $10.5 million and
trade working capital increased due to an increase in sales late in
the quarter and its impact on accounts receivables as well as
temporary inventory builds in our machine clothing business.
However, we expect our free cash flow to improve in the second half
of the year which will allow us to pay down approximately $6 - $8
million of debt by year-end."
"Capital expenditures and cash restructuring payments in Q1 2014
totaled $10.5 million and $2.6 million. Capital expenditures
primarily related to longer term payback projects, such as the new
plant in Ba Cheng, China. Restructuring payments primarily related
to headcount reductions and the elimination of machine clothing
production in Argentina."
"Trade working capital increased to $149.1 million in Q1 2014
from $136.4 million in Q4 2013. This increase was primarily the
result of an increase of $7.3 million in accounts receivable due to
an increase in sales late in the quarter. Day's sales outstanding,
however, were slightly favorable compared to Q4 2013. In addition,
inventory increased by $4.4 million due to increased levels of
European produced machine clothing caused by lower sales volumes in
Q1 2014, while accounts payable remained essentially the same from
year-end." See "Trade Working Capital" below.
"Net debt increased to $430.5 million in Q1 2014 from $417.4
million in Q4 2013, primarily as a result of increased trade
working capital, higher capital expenditures and the execution of a
capital lease on our corporate headquarters. In addition, our net
debt leverage ratio increased to 4.15x in Q1 2014 from 3.9x in Q4
2013."
"Our effective income tax rate for Q1 2014 was 61.9% compared to
31.3% in 2013. Excluding the effects of restructuring, our
effective tax rate was 40.0%. This overall effective tax rate
reflects the fact that we have losses in certain jurisdictions
where we receive no tax benefit, including losses related to
restructuring."
"We are off to a great start in our 2014 restructuring
initiatives, and are underway with a program to restructure our
plant network. As part of this plan, we are in the final stages of
four plant closures, in the middle of a fifth plant closure and in
process with a plant opening in China. This large-scale
restructuring effort is a multi-year endeavor, and we see a
continuous stream of operational improvement opportunities."
SEGMENT INFORMATION
The following table presents net sales for Q1 2014 and Q1 2013
by segment and the effect of currency on Q1 2013 net sales (dollars
in thousands):
|
Net Sales For The
Quarter Ended |
|
|
3/31/14 |
3/31/13 |
$ Change |
Currency Effect of $
Change |
% Change |
% Change Excluding
Currency |
Machine Clothing |
$88,971 |
$89,937 |
$(966) |
$(173) |
(1.1)% |
(0.9)% |
Roll Covers |
44,413 |
49,868 |
(5,455) |
174 |
(10.9)% |
(11.3)% |
Total |
$133,384 |
$139,805 |
$(6,421) |
$1 |
(4.6)% |
(4.6)% |
TRADE WORKING CAPITAL
The following table presents trade working capital as of March
31, 2014 and December 31, 2013 (in thousands):
|
|
|
3/31/2014 |
12/31/2013 |
Fav/(Unfav)
Change |
Trade Receivables, Net (1) |
$93,894 |
$86,584 |
$(7,310) |
Inventories, Net |
88,295 |
83,930 |
(4,365) |
Trade Accounts Payable (2) |
(33,130) |
(34,112) |
(982) |
Total |
$149,059 |
$136,402 |
$(12,657) |
(1) Trade Receivables, Net equals Accounts
Receivable less Other Receivables of $726 and $1,368 at March 31,
2014 and December 31, 2013, respectively. |
(2) Trade Accounts Payables equals Accounts
Payable less Deposits Received and Other Payables of $4,743 and
$8,108 at March 31, 2014 and December 31, 2013,
respectively. |
CONFERENCE CALL
The Company plans to hold a conference call on the following
morning:
Date: Friday, May 9, 2014 Start Time: 9:00 a.m.
Eastern Time Domestic Dial-In: +1-866-515-2915 International
Dial-In: +1-617-399-5129 Passcode: 13757074
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.
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"). The Company uses
supplementary non-GAAP measures, including EBITDA, Adjusted EBITDA,
currency effects on Net Sales and Trade Working Capital to assist
in evaluating its liquidity and financial performance. EBITDA and
Adjusted EBITDA are specifically used in evaluating the ability to
service indebtedness and to fund ongoing capital expenditures.
Neither Adjusted EBITDA nor EBITDA should be considered in
isolation or as a substitute for income (loss) or cash flows from
operations (as determined in accordance with GAAP).
For additional information regarding non-GAAP financial measures
and a reconciliation of such measures to the most comparable
financial measures under GAAP, please see "Segment Information" and
"Trade Working Capital" above and our Selected Financial Data
below. In addition, the information in this press release should be
read in conjunction with the corresponding exhibits, financial
statements and footnotes contained in our Report on Form 10-K for
the year ended December 31, 2013 filed with the Securities and
Exchange Commission on March 4, 2014 and our Report on Form 10-Q
for the quarter ended March 31, 2014 filed with the SEC on May 8,
2014.
About Xerium Technologies
Xerium Technologies, Inc. (NYSE:XRM) is a leading global
provider of industrial consumable products and services. Xerium,
which operates around the world under a variety of brand names,
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 12 countries
around the world, Xerium has approximately 3,200 employees.
FORWARD-LOOKING STATEMENTS
This press release contains forward-looking statements. The
words "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 Adjusted EBITDA performance, anticipated sales performance,
capital expenditures, cost savings measures, future efforts to
improve overall performance and backlog. 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 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) we are subject to execution risk related to the
startup of our proposed new facility in China; (5) our plans to
develop and market new products, enhance operational efficiencies
and reduce costs may not be successful; (6) market improvement in
our industry may occur more slowly than we anticipate, may stall or
may not occur at all; (7) variations in demand for our products,
including our new products, could negatively affect our revenues
and profitability; (8) 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 (9) the other risks
and uncertainties discussed elsewhere in this press release, our
Form 10-K for the year ended December 31, 2013 filed on March 4,
2014 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.
Selected Financial Data Follows
Xerium Technologies,
Inc. Consolidated Statements of
Operations (dollars in thousands, except per share
data) |
|
|
|
|
|
|
|
Quarter ended
March 31, |
|
2014 |
2013 |
Net sales |
$ 133,384 |
$ 139,805 |
Costs and expenses: |
|
|
Cost of products sold |
81,218 |
85,298 |
Selling |
18,178 |
19,221 |
General and administrative |
14,797 |
14,634 |
Research and development |
1,946 |
1,954 |
Restructuring |
4,651 |
1,255 |
|
120,790 |
122,362 |
Income from operations |
12,594 |
17,443 |
Interest expense, net |
(8,657) |
(9,206) |
Foreign exchange loss |
(877) |
(249) |
Income before provision for income taxes |
3,060 |
7,988 |
Provision for income taxes |
(1,893) |
(2,503) |
Net income |
$ 1,167 |
$ 5,485 |
Net income per share: |
|
|
Basic |
$ 0.08 |
$ 0.36 |
Diluted |
$ 0.07 |
$ 0.36 |
Shares used in computing net income per
share: |
|
|
Basic |
15,391,391 |
15,312,523 |
Diluted |
16,371,772 |
15,381,204 |
|
|
|
|
|
|
Consolidated Selected
Financial Data |
|
|
|
Cash Flow Data: (in
thousands) |
Quarter ended
March 31, |
|
2014 |
2013 |
Net cash provided by operating
activities |
$ 2,763 |
$ 10,283 |
Net cash used in investing activities |
$ (10,451) |
$ (3,396) |
Net cash provided by (used) in financing
activities |
$ 80 |
$ (603) |
|
|
|
Other Financial Data: (in
thousands) |
|
|
|
|
|
Depreciation and amortization |
$ 8,649 |
$ 9,542 |
Capital expenditures, gross |
$ (10,494) |
$ (3,713) |
|
|
|
Balance Sheet Data: (in
thousands) |
March 31, 2014 |
December 31,
2013 |
|
|
|
Cash and cash equivalents |
$ 18,013 |
$ 25,716 |
Total assets |
$ 631,063 |
$ 624,064 |
Total debt |
$ 448,542 |
$ 443,139 |
Total stockholders' deficit |
$ (11,753) |
$ (11,449) |
EBITDA and Adjusted EBITDA Non-GAAP
Measures
Non-GAAP Financial Measures
We use EBITDA and Adjusted EBITDA (as defined in our credit
facility) as supplementary non-GAAP liquidity measures to assist us
in evaluating our liquidity and financial performance, specifically
our ability to service indebtedness and to fund ongoing capital
expenditures. Neither EBITDA nor Adjusted EBITDA should be
considered in isolation or as a substitute for income (loss) or
cash flows from operations (as determined in accordance with
GAAP).
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
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,
subject to annual limitations provided for in our credit facility,
(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) and
(xiii) 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 for such period,
(i) non-cash gains with respect to the items described in
clauses (vi), (vii), (ix), (xi), (xii) and (xiii) (other
than, in the case of clause (xiii), 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
(ii) provisions for tax benefits based on income or profits.
Notwithstanding the foregoing, Adjusted EBITDA, as defined in the
credit facility and calculated below, may not be comparable to
similarly titled measurements used by other companies.
Consolidated net income 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:
(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, as permitted
under the credit facility and (iv) any cancellation of
indebtedness income.
The following table provides reconciliation from net income and
operating cash flows, which are the most directly comparable GAAP
financial measures, to EBITDA and Adjusted EBITDA.
|
Three
Months Ended March 31, |
|
|
2014 |
2013 |
Net income |
$ 1,167 |
$ 5,485 |
Stock-based compensation |
509 |
295 |
Depreciation |
8,233 |
8,966 |
Amortization of intangibles |
416 |
576 |
Deferred financing cost amortization |
716 |
709 |
Foreign exchange loss on revaluation of
debt |
(1,103) |
(118) |
Deferred taxes |
(808) |
(282) |
Asset impairment |
— |
928 |
(Loss) Gain on disposition of property
and equipment |
27 |
(10) |
Net change in operating assets and
liabilities |
(6,394) |
(6,830) |
Net cash provided by operating
activities |
2,763 |
10,283 |
Interest expense, excluding
amortization |
7,941 |
8,497 |
Net change in operating assets and
liabilities |
6,394 |
6,830 |
Current portion of income tax
expense |
2,700 |
2,221 |
Stock-based compensation |
(509) |
(295) |
Foreign exchange loss on revaluation of
debt |
1,103 |
118 |
Asset impairment |
— |
(928) |
Loss on disposition of property and
equipment |
(27) |
(10) |
EBITDA |
20,365 |
26,736 |
Stock-based compensation |
509 |
295 |
Operational restructuring expenses |
4,651 |
1,255 |
Non-restructuring impairment expense |
— |
857 |
Plant startup costs |
176 |
— |
Adjusted EBITDA |
$
25,701 |
$
29,143 |
CONTACT: Phillip B. Kennedy
Investor Relations
919-526-1444
IR@xerium.com
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