UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ________________________  
FORM 10-Q
________________________
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016
Or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File Number 001-32498
  ________________________  
Xerium Technologies, Inc.
(Exact name of registrant as specified in its charter)
  ________________________  
 
DELAWARE
42-1558674
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
14101 Capital Boulevard
Youngsville, North Carolina
27596
(Address of principal executive offices)
(Zip Code)
(919) 526-1400
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)
  ________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
   £
 
 
 
Accelerated filer
 
   x
Non-accelerated filer
 
   £
 
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
   £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ¨     No   ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes   ý     No   ¨
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 1, 2016 was 15,994,057
 



TABLE OF CONTENTS
 

2



PART I. FINANCIAL INFORMATION
ITEM 1.
UNAUDITED FINANCIAL STATEMENTS

Xerium Technologies, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands and Unaudited)
 
March 31, 2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,450

 
$
9,839

Accounts receivable, net
72,174

 
68,562

Inventories, net
71,366

 
71,698

Prepaid expenses
7,390

 
6,649

Other current assets
15,952

 
16,869

Total current assets
182,332

 
173,617

Property and equipment, net
301,682

 
297,083

Goodwill
59,302

 
58,599

Intangible assets
1,455

 
1,547

Non-current deferred tax asset
9,467

 
9,325

Other assets
10,358

 
10,203

Total assets
$
564,596

 
$
550,374

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Notes payable
$
6,721

 
$
6,556

Accounts payable
39,019

 
40,696

Accrued expenses
64,098

 
56,076

Current maturities of long-term debt
6,433

 
5,410

Total current liabilities
116,271

 
108,738

Long-term debt, net of current maturities
459,436

 
462,470

Liabilities under capital leases
18,137

 
8,737

Non-current deferred tax liability
9,255

 
8,770

Pension, other post-retirement and post-employment obligations
63,722

 
63,606

Other long-term liabilities
3,898

 
11,123

Commitments and contingencies


 


Stockholders’ deficit
 
 
 
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of March 31, 2016 and December 31, 2015

 

Common stock, $0.001 par value, 20,000,000 shares authorized; 15,994,057 and 15,745,914 shares outstanding as of March 31, 2016 and December 31, 2015, respectively
16

 
16

Paid-in capital
429,628

 
430,054

Accumulated deficit
(422,893
)
 
(421,448
)
Accumulated other comprehensive loss
(112,874
)
 
(121,692
)
Total stockholders’ deficit
(106,123
)
 
(113,070
)
Total liabilities and stockholders’ deficit
$
564,596

 
$
550,374



3


Xerium Technologies, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data and unaudited)
 
    
 
Three Months ended March 31,
 
2016
 
2015
Net Sales
$
114,965

 
$
121,029

Costs and expenses:
 
 
 
Cost of products sold
71,428

 
72,476

Selling
15,721

 
16,326

General and administrative
11,507

 
13,846

Research and development
1,940

 
1,962

Restructuring
2,832

 
2,224

 
103,428

 
106,834

Income from operations
11,537

 
14,195

Interest expense, net
(10,341
)
 
(9,664
)
Foreign exchange gain
24

 
977

Income before provision for income taxes
1,220

 
5,508

Provision for income taxes
(2,665
)
 
(3,775
)
Net (loss) income
$
(1,445
)

$
1,733

Comprehensive income (loss)
$
7,373

 
$
(29,398
)
Net (loss) income per share:
 
 
 
Basic
$
(0.09
)
 
$
0.11

Diluted
$
(0.09
)
 
$
0.11

Shares used in computing net (loss) income per share:
 
 
 
Basic
15,789,991

 
15,560,995

Diluted
15,789,991

 
16,479,368

 
 
 
 
 
 
 
 


4


Xerium Technologies, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands and unaudited)
 
 
Three Months ended March 31,
 
2016
 
2015
Operating activities
 
 
 
Net (loss) income
$
(1,445
)
 
$
1,733

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation
592

 
822

Depreciation
7,900

 
7,163

Amortization of intangibles
94

 
79

Deferred financing cost amortization
756

 
875

Foreign exchange loss (gain) on revaluation of debt
1,120

 
(1,973
)
Deferred taxes
155

 
979

Loss on disposition of property and equipment
17

 
14

Provision for doubtful accounts
(72
)
 
472

Change in assets and liabilities which provided (used) cash:
 
 
 
Accounts receivable
(2,130
)
 
(592
)
Inventories
2,232

 
1,436

Prepaid expenses
(621
)
 
25

Other current assets
1,024

 
(1,679
)
Accounts payable and accrued expenses
3,660

 
2,218

Deferred and other long-term liabilities
792

 
(3,571
)
Net cash provided by operating activities
14,074

 
8,001

Investing activities
 
 
 
Capital expenditures
(3,550
)
 
(12,155
)
Proceeds from disposals of property and equipment
20

 
32

Net cash used in investing activities
(3,530
)
 
(12,123
)
Financing activities
 
 
 
Proceeds from borrowings
13,313

 
22,568

Principal payments on debt
(16,439
)
 
(18,331
)
Payment of financing fees
(98
)
 
(25
)
Payment of obligations under capital leases
(673
)
 
(265
)
Net cash (used in) provided by financing activities
(3,897
)
 
3,947

Effect of exchange rate changes on cash flows
(1,036
)
 
(516
)
Net increase (decrease) in cash
5,611

 
(691
)
Cash and cash equivalents at beginning of period
9,839

 
9,517

Cash and cash equivalents at end of period
$
15,450

 
$
8,826

 
 
 
 
Non-cash capitalized lease asset and liability
$
1,259

 
$

Accrued construction in process
$

 
$
1,519




5


Xerium Technologies, Inc.
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, 2016 and for the three ended March 31, 2016 and 2015 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 condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2015 as reported on the Company's Annual Report on Form 10-K filed on March 14, 2016.
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:
 
 
March 31,
2016
 
December 31,
2015
Raw materials
$
12,343

 
$
12,389

Work in process
26,695

 
25,203

Finished goods (includes consigned inventory of $6,496 at March 31, 2016 and $6,513 at December 31, 2015)
38,727

 
40,058

Inventory allowances
(6,399
)
 
(5,952
)
 
$
71,366

 
$
71,698

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 three months ended March 31, 2016 , 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, 2016 .
Warranties
The Company offers warranties on certain roll 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

6


estimates the costs that may be incurred under its warranties and records a liability in Accrued Expenses on its Consolidated Balance Sheet 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, 2016 and 2015:
 
Beginning Balance
 
Charged to
 Cost
of Sales
 
Effect of Foreign
Currency
Translation
 
Deduction
from
Reserves
 
Ending Balance
Three Months Ended March 31, 2016:
$
2,175

 
$
477

 
$
34

 
$
(189
)
 
$
2,497

Three Months Ended March 31, 2015:
$
2,685

 
$
336

 
$
(118
)
 
$
(578
)
 
$
2,325


Net (Loss) Income Per Common Share
Net (loss) income per common share has been computed and presented pursuant to the provisions of ASC Topic 260, Earnings per Share (“Topic 260”). Net (loss) income per share is based on the weighted-average number of shares outstanding during the period. As of March 31, 2016 and 2015, the Company had outstanding restricted stock units (“RSUs”), deferred stock units (“DSUs”) and options.
The following table sets forth the computation of basic and diluted weighted-average shares:
 
Three Months ended March 31,
 
2016
 
2015
Weighted-average common shares outstanding–basic
15,789,991

 
15,560,995

Dilutive effect of stock-based compensation awards outstanding

 
918,373

Weighted-average common shares outstanding–diluted
15,789,991

 
16,479,368

The following table sets forth the aggregate of the dilutive securities that were outstanding in the three ended March 31, 2016 and 2015, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive:
 
Three Months ended March 31,
 
2016
 
2015
Anti-dilutive securities
738,294

 
21,957

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. For the three months ended March 31, 2016 and 2015, the Company had no impairment charges included in restructuring expense.

New Accounting Pronouncements
       
In March of 2016, t he FASB issued Accounting Standards Update No 2016-09 Improvements to Employee Share-Based Payment Accounting ("ASC 2016-09"). ASC 2016-09 will change certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2014-09 is required to be adopted in January of 2017. The Company is in the process of evaluating this accounting standard update.


7


In February of 2016, the FASB issued Accounting Standards Update No 2016-02 Leases ("ASC 2016-02"). ASC 2016-02 includes final guidance that requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief. Full retrospective application is prohibited. ASC 2016 - 02 is effective for public companies with annual periods beginning after 15 December 2018, and interim periods within those years. For all other entities, it is effective for annual periods beginning after 15 December 2019, and interim periods the following year. Early adoption is permitted for all entities. The Company is in the process of evaluating this accounting standard update.

In November of 2015, the FASB issued ASC 2015-17 Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes ("ASC 2015-17"). This guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. For public companies, the guidance is effective for financial statements issued for annual periods beginning after 15 December 2016 (i.e., 2017 for a calendar-year company) and interim periods within those annual periods. For all other entities, the guidance is effective for financial statements issued for annual periods beginning after 15 December 2017 (i.e., 2018 for a calendar-year company), and interim periods within annual periods beginning a year later. Early adoption of the guidance is permitted. Companies can adopt the guidance either prospectively or retrospectively. The Company is in the process of evaluating this accounting standard update and does not expect that adopting ASC 2015-17 will have a material impact on its consolidated financial statements.

In July of 2015, the FASB issued Accounting Standards Update Inventory ("ASU 2015-11"). ASU 2015-11 applies only to first-in, first-out (FIFO) and average cost inventory costing methods and will reduce costs and increase comparability for these methods. There will be no change for last-in, first-out, (LIFO) or retail inventory methods as the costs of transitioning to a new method would outweigh the benefits due to the complexity of these methods. Under this ASU, inventory should be measured at the lower of cost and net realizable value (selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation). When the net realizable value of inventory is less than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. This ASU more closely aligns the measurement of inventory under GAAP with International Financial Reporting Standards guidance. The amendments are effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and for other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively, and early application is permitted as of the beginning of an interim or annual reporting period.The Company is in the process of evaluating this accounting standard update.

In May of 2014, the FASB issued Accounting Standard Update No. 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when it satisfies the performance obligations. The Company will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is required to be adopted in January of 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. In addition, in March of 2016, the FASB issued Accounting Standard Update No. 2016-08 P rincipal versus Agent Considerations (Reporting Revenue Gross vs. Net) ("ASU 2016-08"). ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09, and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transfered to the customer. ASU 2014-09 is required to be adopted in January of 2018. The Company is in the process of evaluating this accounting standard update.
2. Derivatives and Hedging
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.

8


Cash Flow Hedges of Interest Rate Risk
From time to time, the Company uses interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. However, at March 31, 2016 , the Company had no interest rate swaps.
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 ASC Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in 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, 2016 and December 31, 2015 , 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, 2016 and December 31, 2015 and the change in fair value included in foreign exchange gain (loss) in the three months ended March 31, 2016 and 2015:
 
March 31, 2016
 
December 31, 2015
Fair value of derivative asset (liability)
$
468

 
$
(1,188
)
 
Three Months Ended March 31, 2016:
 
Three Months Ended March 31, 2015:
Change in fair value of derivative included in foreign exchange loss
$
1,170

 
$
(2,059
)
The following represents the notional amounts of foreign exchange forward contracts at March 31, 2016 :
 
 
Notional Sold
 
Notional Purchased  

Non-designated hedges of foreign exchange risk
$
3,983

 
$
(49,902
)
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

9


At March 31, 2016 and December 31, 2015 , long term debt consisted of the following:
 
March 31, 2016
 
December 31, 2015
Senior secured term loan facility, payable quarterly, U.S. Dollar denominated–LIBOR
(minimum 1.25%) plus 5.0% (6.25%) net of $0.6 million discount. Matures May of 2019.
$
223,424

 
$
223,937

Senior Notes (Unsecured), payable semi-annually–U.S. Dollar denominated interest rate fixed at 8.875%. Matures June of 2018.
236,410

 
236,410

Notes payable, working capital loan, variable interest rate at 2.05%. Matures June 30, 2016, with one-year rollover option.
6,721

 
6,556

Fixed asset loan contract, variable interest rate of 5.78%. Matures June of 2020.
8,515

 
8,548

Other debt
4,116

 
6,278

Total debt
479,186

 
481,729

Less deferred financing costs
(6,596
)
 
(7,293
)
Less current maturities of long term debt and notes payable
(13,154
)
 
(11,966
)
Total long term debt
$
459,436

 
$
462,470

On May 17, 2013, 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 and 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 Xerium Technologies, Inc., as a US borrower, 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”), increasing the aggregate availability under the ABL Facility to $55 million . On November 3, 2015, the Company refinanced its existing ABL Facility and entered into a new Revolving Credit and Guaranty Agreement (as amended, the "New ABL Facility") with one of its existing ABL lenders. The amount of the ABL Facility continues to provide aggregate availability of $55 million and the collateral pledged thereunder will has remained the same. The New ABL Facility matures in November of 2020 and accrues interest at LIBOR plus a margin of 75 basis points, and is 4.50% at March 31, 2016.
On August 18, 2014, the Company entered into the Second Amendment to Credit and Guaranty Agreement (the “Second Amendment”). Under the Second Amendment, the Company borrowed an additional $30.0 million by utilizing the Incremental Facility. The $30.0 million in additional borrowings was used to finance a tax amnesty payment in Brazil. The Second Amendment made no changes to the repayment and other previously disclosed terms of 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.

On July 17, 2015 (the "Closing Date"), Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of the Company entered into and closed a Fixed Assets Loan Contract (the "Loan Agreement") with the Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch (the “Bank”) with respect to a RMB 58.5 million loan, which was approximately $9.4 million USD on July 17, 2015. The loan is secured by pledged machinery and equipment of Xerium China and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of the Company, pursuant to guarantee agreements (the "Guarantee Agreements"). Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate at March 31, 2016 is approximately 5.8% . The interest rate will be adjusted every 12 months during the term of the loan, based on

10


the benchmark interest rate adjustment. Interest under the loan is payable quarterly in arrears. Principal on the loan is to be repaid in part every six months following the Closing Date, in accordance with a predetermined schedule set forth in the Loan Agreement. Proceeds of the Loan will be used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.
As of March 31, 2016 , the outstanding balance of the Company's term debt under its Credit Facility and Notes was $459.8 million , which is net of a $0.6 million discount. In addition, as of March 31, 2016 , an aggregate of $33.9 million is available for additional borrowings. This availability represents a borrowing base of $36.9 million less $3.0 million of that facility committed for letters of credit or additional borrowings.
As of March 31, 2016 , the carrying value of the Company’s long term debt was $466.0 million and its fair value was approximately $419.2 million . 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, 2016 , the Company had capitalized lease liabilities totaling $18.1 million . These amounts represent the lease on the corporate headquarters and the Kunshan, China facility, as well as other leases for software, vehicles and machinery and equipment. In addition, in April of 2016, the Company entered into sales - lease back arrangements totaling $6.0 for various machinery and equipment in North America. The proceeds were used to fund the JJ Plank acquisition, which closed in May of 2016.
4. Income Taxes

The Company utilizes the 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, 2016 , the provision for income taxes was $2,665 as compared to $3,775 for the three months ended March 31, 2015 . The decrease in tax expense in the three months ended March 31, 2016 was primarily attributable to decreased earnings in 2016, as well as a tax benefit in the current quarter related to additional interest deductions resulting from the 2014 Brazil tax assessments, as compared to tax expense in the prior quarter resulting from an increase in the unrecognized tax benefit due to the effects of income tax audits. Generally, 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 15.0% to 35.4% ; 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 realized, 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 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. The most material unrecognized deferred tax asset relates to the U.S. By 2029, future U.S. earnings ranging between $30 million and $120 million , generated by U.S. earnings from continuing operations or qualified tax planning strategies, would be required in order to fully recognize the U.S. deferred tax asset. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.
As of March 31, 2016 , the Company had a gross amount of unrecognized tax benefit of $7,791 , exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $264 during the three months ended March 31, 2016 , as a result of new positions related to the current year and foreign currency effects.
The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, which were $40 related to the unrecognized tax benefits for the three months ended March 31, 2016 . The tax years 2002 through 2015

11


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.
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,
 
2016
 
2015
Service cost
$
405

 
$
842

Interest cost
1,485

 
1,670

Expected return on plan assets
(1,548
)
 
(1,815
)
Amortization of net loss
558

 
755

Net periodic benefit cost
$
900

 
$
1,452

6. Comprehensive Loss and Accumulated Other Comprehensive Loss
Comprehensive loss for the three months ended March 31, 2016 (net of tax expense of $67 ) and 2015 (net of tax expense of $851 ) is as follows:
 
 
Three Months ended March 31,
 
2016
 
2015
Net (loss) income
$
(1,445
)
 
$
1,733

Foreign currency translation adjustments
8,460

 
(32,857
)
Pension liability changes under Topic 715
358

 
1,684

Change in value of derivative instruments

 
42

Comprehensive income (loss)
$
7,373

 
$
(29,398
)
The components of accumulated other comprehensive loss for the three months ended March 31, 2016 are as follows (net of tax benefits of $6,954 ):

12


 
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, 2015
$
(85,982
)
 
$
(35,759
)
 
$
49

 
$
(121,692
)
Other comprehensive loss before reclassifications
8,460

 

 

 
8,460

Amounts reclassified from other comprehensive loss
 
 
 
 
 
 
 
    Amortization of actuarial losses

 
358

 

 
358

Net current period other comprehensive loss (income)
8,460

 
358

 

 
8,818

Balance at March 31, 2016
$
(77,522
)
 
$
(35,401
)
 
$
49

 
$
(112,874
)
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016 , the amortization of actuarial losses is included in cost of products sold and general and administrative expenses in the Consolidated Statements of Operations.

7. Restructuring Expense
    
For the three months ended March 31, 2016 , the Company incurred restructuring expenses of $2.8 million . These included $0.7 million of charges related to the closure of the Middletown, Va. facility and $2.1 million of charges relating to headcount reductions and other costs related to previous plant closures. For the three months ended March 31, 2015, the Company incurred restructuring expenses of $2.2 million . These included charges of $1.3 million relating to the closure of the Joao Pessoa, Brazil plant and headcount reductions of $0.9 million .
The following table sets forth the significant components of the restructuring accrual (included in Accrued Expenses on our Consolidated Balance Sheet), including activity under restructuring programs for the three months ended March 31, 2016 and 2015:
   
 
Balance at
December 31, 
2015
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2016
Severance and other benefits
$
5,308

 
$
1,390

 
$
62

 
$
(1,804
)
 
$
4,956

Facility costs and other
903

 
1,442

 
63

 
(1,871
)
 
537

Total
$
6,211

 
$
2,832

 
$
125

 
$
(3,675
)
 
$
5,493


 
 
Balance at
December 31, 
2014
 
Charges 
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2015
Severance and other benefits
$
4,880

 
$
881

 
$
(243
)
 
$
(1,286
)
 
$
4,232

Facility costs and other
818

 
1,343

 
(365
)
 
(1,796
)
 

Total
$
5,698

 
$
2,224

 
$
(608
)
 
$
(3,082
)
 
$
4,232

Restructuring and impairment expense by segment, which is not included in Segment Earnings in Note 8, is as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
Clothing
$
1,452

 
$
2,092

Roll Covers
891

 
101

Corporate
489

 
31

Total
$
2,832

 
$
2,224


13


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 adjusted earnings before interest, taxes, depreciation and amortization, yet after 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, 2016 and 2015.
 
Clothing       
 
Roll
Covers        
 
Corporate     
 
Total
Three Months Ended March 31, 2016:
 
 
 
 
 
 
 
Net Sales
$
71,337

 
$
43,628

 
$

 
$
114,965

Segment Earnings (Loss)
$
18,638

 
$
9,258

 
$
(3,937
)
 
$
23,959

Three Months Ended March 31, 2015:
 
 
 
 
 
 
 
Net Sales
$
77,284

 
$
43,745

 
$

 
$
121,029

Segment Earnings (Loss)
$
21,766

 
8,091

 
(3,647
)
 
$
26,210

Provided below is a reconciliation of Segment Earnings (Loss) to income before provision for income taxes for the three months ended March 31, 2016 and 2015, respectively.
 
Three Months ended March 31,
 
2016
 
2015
Segment Earnings:
 
 
 
Clothing
$
18,638

 
$
21,766

Roll Covers
9,258

 
8,091

Corporate
(3,937
)
 
(3,647
)
Stock-based compensation
(592
)
 
(822
)
Interest expense, net
(10,341
)
 
(9,664
)
Depreciation and amortization
(7,994
)
 
(7,242
)
Restructuring expense
(2,832
)
 
(2,224
)
Other non-recurring expense
(103
)
 

Plant startup costs
(877
)
 
(750
)
Income before provision for income taxes
$
1,220

 
$
5,508

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, 2016 , 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.

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 RSUs, options and DSUs. The

14


Company recorded stock-based compensation expense during the three months ended March 31, 2016 and March 31, 2015 as follows:  
 
 
Three Months ended March 31,
 
 
2016
 
2015
RSU, Options and DSU Awards (1)
 
$
592

 
$
822

 
(1)
Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors.

Long-Term Incentive Program—2015 LTIP and 2014 LTIP

At March 31, 2016, based on the current stock price of the Company, management performed a valuation on the market-based stock units, and determined the estimated payout to be at 0% under both the 2015 and 2014 LTIP plans, and reduced stock compensation by $0.2 million in accordance with ASC Topic 718, Compensation—Stock Compensation.

Long-Term Incentive Program—2013 LTIP

Awards under the 2013 LTIP vested on March 15, 2016, and were converted to 207,385 shares of common stock, net of withholdings.
Directors’ Deferred Stock Unit Plan
Under the 2011 non-management directors stock plan ("2011 DSU Plan”), as amended in January of 2015, each director receives an annual retainer of $132 , to be paid on a quarterly basis in arrears. Approximately half of the annual retainer is payable in DSUs, with the remaining half payable in cash or a mix of both cash and DSUs at the election of each director. The non-management directors were awarded an aggregate of 21,938 DSUs under the 2011 DSU Plan for service during the quarter ended March 31, 2016 . In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 18,524 DSUs were settled in common stock during the quarter ended March 31, 2016 . In addition, in March of 2016, 22,234 DSU's were settled in common stock in connection with the retirement of a director in September of 2015.

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.

15


Xerium Technologies, Inc.
Consolidating Balance Sheet—(Unaudited)
At March 31, 2016
(Dollars in thousands)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,062

 
$
(2
)
 
$
13,390

 
$

 
$
15,450

Accounts receivable, net
575

 
17,742

 
53,857

 

 
72,174

Intercompany receivables
(112,466
)
 
118,426

 
(5,960
)
 

 

Inventories, net

 
13,466

 
58,921

 
(1,021
)
 
71,366

Prepaid expenses
1,383

 
1,160

 
4,847

 

 
7,390

Other current assets

 
2,682

 
13,270

 

 
15,952

Total current assets
(108,446
)
 
153,474

 
138,325

 
(1,021
)
 
182,332

Property and equipment, net
9,082

 
68,922

 
223,678

 

 
301,682

Investments
846,166

 
226,119

 

 
(1,072,285
)
 

Goodwill

 
17,737

 
41,565

 

 
59,302

Intangible assets

 
1,320

 
135

 

 
1,455

Non-current deferred tax asset

 

 
9,467

 

 
9,467

Other assets

 

 
10,358

 

 
10,358

Total assets
$
746,802

 
$
467,572

 
$
423,528

 
$
(1,073,306
)
 
$
564,596

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
2,486

 
$
10,523

 
$
26,010

 
$

 
$
39,019

Accrued expenses
19,416

 
9,313

 
35,369

 

 
64,098

Notes payable

 

 
6,721

 

 
6,721

Current maturities of long-term debt
2,591

 
2,300

 
1,542

 

 
6,433

Total current liabilities
24,493

 
22,136

 
69,642

 

 
116,271

Long-term debt, net of current maturities
451,948

 

 
7,488

 

 
459,436

Liabilities under capital leases
3,208

 
5,513

 
9,416

 

 
18,137

Non-current deferred tax liability
(1,342
)
 
1,243

 
9,354

 

 
9,255

Pension, other post-retirement and post-employment obligations
19,460

 
2,998

 
41,264

 

 
63,722

Other long-term liabilities

 

 
3,898

 

 
3,898

Intercompany loans
343,403

 
(404,580
)
 
61,177

 

 

Total stockholders’ (deficit) equity
(94,368
)
 
840,262

 
221,289

 
(1,073,306
)
 
(106,123
)
Total liabilities and stockholders’ equity
$
746,802

 
$
467,572

 
$
423,528

 
$
(1,073,306
)
 
$
564,596


16


Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2015
(Dollars in thousands)
 
 
Parent        
 
Total
Guarantors    
 
Total Non
Guarantors    
 
Other
Eliminations
 
The
Company      
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,105

 
$
(2
)
 
$
6,736

 
$

 
$
9,839

Accounts receivable, net
20

 
18,585

 
49,957

 

 
68,562

Intercompany receivables
(110,541
)
 
113,736

 
(3,195
)
 

 

Inventories, net

 
14,694

 
57,929

 
(925
)
 
71,698

Prepaid expenses
510

 
1,330

 
4,809

 

 
6,649

Other current assets

 
2,849

 
14,020

 

 
16,869

Total current assets
(106,906
)
 
151,192

 
130,256

 
(925
)
 
173,617

Property and equipment, net
9,518

 
68,075

 
219,490

 

 
297,083

Investments
837,064

 
207,443

 

 
(1,044,507
)
 

Goodwill

 
17,737

 
40,862

 

 
58,599

Intangible assets

 
1,389

 
158

 

 
1,547

Non-current deferred tax asset

 

 
9,325

 
 
 
9,325

Other assets

 

 
10,203

 

 
10,203

Total assets
$
739,676

 
$
445,836

 
$
410,294

 
$
(1,045,432
)
 
$
550,374

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
2,642

 
$
11,100

 
$
26,954

 
$

 
$
40,696

Accrued expenses
12,661

 
9,668

 
33,747

 

 
56,076

Notes payable

 

 
6,556

 

 
6,556

Current maturities of long-term debt
2,663

 
1,937

 
810

 

 
5,410

Total current liabilities
17,966

 
22,705

 
68,067

 

 
108,738

Long-term debt, net of current maturities
451,923

 

 
10,547

 

 
462,470

Liabilities under capital leases
3,276

 
4,425

 
1,036

 

 
8,737

Non-current deferred tax liability
(1,515
)
 
1,243

 
9,042

 

 
8,770

Pension, other post-retirement and post-employment obligations
19,950

 
2,619

 
41,037

 

 
63,606

Other long-term liabilities

 

 
11,123

 

 
11,123

Intercompany loans
341,412

 
(403,154
)
 
61,742

 

 

Total stockholders’ (deficit) equity
(93,336
)
 
817,998

 
207,700

 
(1,045,432
)
 
(113,070
)
Total liabilities and stockholders’ (deficit) equity
$
739,676

 
$
445,836

 
$
410,294

 
$
(1,045,432
)
 
$
550,374


17


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income (Unaudited)
For the three months ended March 31, 2016
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
40,588

 
$
81,600

 
$
(7,223
)
 
$
114,965

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold

 
28,296

 
50,259

 
(7,127
)
 
71,428

    Selling
305

 
5,011

 
10,405

 

 
15,721

    General and administrative
2,691

 
923

 
7,893

 

 
11,507

    Research and development
380

 
1,091

 
469

 

 
1,940

    Restructuring
428

 
1,028

 
1,376

 

 
2,832

 
3,804

 
36,349

 
70,402

 
(7,127
)
 
103,428

(Loss) income from operations
(3,804
)
 
4,239

 
11,198

 
(96
)
 
11,537

Interest (expense) income, net
(9,714
)
 
517

 
(1,144
)
 

 
(10,341
)
Foreign exchange gain (loss)
17

 
(54
)
 
61

 

 
24

Equity in subsidiaries income
9,102

 
7,804

 

 
(16,906
)
 

Dividend income
3,145

 

 

 
(3,145
)
 

(Loss) income before provision for income taxes
(1,254
)
 
12,506

 
10,115

 
(20,147
)
 
1,220

Provision for income taxes
(191
)
 
(2
)
 
(2,472
)
 

 
(2,665
)
Net (loss) income
$
(1,445
)
 
$
12,504

 
$
7,643

 
$
(20,147
)
 
$
(1,445
)
Comprehensive (loss) income
$
(606
)
 
$
12,494

 
$
15,632

 
$
(20,147
)
 
$
7,373


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive Income (Loss)-(Unaudited)
For the three months ended March 31, 2015
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
42,850

 
$
81,688

 
$
(3,509
)
 
$
121,029

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold
(348
)
 
29,378

 
46,860

 
(3,414
)
 
72,476

    Selling
268

 
4,801

 
11,257

 

 
16,326

    General and administrative
2,828

 
1,411

 
9,607

 

 
13,846

    Research and development
232

 
1,196

 
534

 

 
1,962

    Restructuring
7,952

 
175

 
(5,903
)
 

 
2,224

 
10,932

 
36,961

 
62,355

 
(3,414
)
 
106,834

(Loss) income from operations
(10,932
)
 
5,889

 
19,333

 
(95
)
 
14,195

Interest (expense) income, net
(9,399
)
 
1,160

 
(1,425
)
 

 
(9,664
)
Foreign exchange gain (loss)
213

 
(141
)
 
905

 

 
977

Dividend income
700

 

 

 
(700
)
 

Equity in subsidiaries income
21,669

 
6,623

 

 
(28,292
)
 

Income before provision for income taxes
2,251

 
13,531

 
18,813

 
(29,087
)
 
5,508

Provision for income taxes
(518
)
 
(29
)
 
(3,228
)
 

 
(3,775
)
Net income
$
1,733

 
$
13,502

 
$
15,585

 
$
(29,087
)
 
$
1,733

Comprehensive income (loss)
$
1,631

 
$
14,143

 
$
(16,085
)
 
$
(29,087
)
 
$
(29,398
)



18





Xerium Technologies, Inc.
Consolidating Statement of Cash Flows-(Unaudited)
For the three months ended March 31, 2016 (Dollars in thousands)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(1,445
)
 
$
12,504

 
$
7,643

 
$
(20,147
)
 
$
(1,445
)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
603

 

 
(11
)
 

 
592

Depreciation
555

 
2,053

 
5,292

 

 
7,900

Amortization of intangibles

 
69

 
25

 

 
94

Deferred financing cost amortization
732

 

 
24

 

 
756

Foreign exchange gain on revaluation of debt
1,120

 

 

 

 
1,120

Deferred taxes
173

 

 
(18
)
 

 
155

Loss on disposition of property and equipment

 

 
17

 

 
17

Provision for doubtful accounts

 

 
(72
)
 

 
(72
)
Undistributed equity in earnings of subsidiaries
(9,102
)
 
(7,804
)
 

 
16,906

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 


Accounts receivable
(555
)
 
842

 
(2,417
)
 

 
(2,130
)
Inventories

 
1,229

 
907

 
96

 
2,232

Prepaid expenses
(872
)
 
170

 
81

 

 
(621
)
Other current assets

 
167

 
857

 

 
1,024

Accounts payable and accrued expenses
5,430

 
(932
)
 
(838
)
 

 
3,660

Deferred and other long-term liabilities
3

 
379

 
410

 

 
792

Intercompany loans
1,925

 
(4,721
)
 
2,796

 

 

Net cash (used in) provided by operating activities
(1,433
)
 
3,956

 
14,696

 
(3,145
)
 
14,074

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(117
)
 
(938
)
 
(2,495
)
 

 
(3,550
)
Intercompany property and equipment transfers, net
(2
)
 
2

 

 

 

Proceeds from disposals of property and equipment

 
5

 
15

 

 
20

Net cash used in investing activities
(119
)
 
(931
)
 
(2,480
)
 

 
(3,530
)
Financing activities
 
 
 
 
 
 
 
 

Proceeds from borrowings
10,992

 

 
2,321

 

 
13,313

Principal payments on debt
(11,547
)
 

 
(4,892
)
 

 
(16,439
)
Dividends paid

 
(3,145
)
 

 
3,145

 

Payment of obligations under capital leases
(67
)
 
(517
)
 
(89
)
 

 
(673
)
Payment of financing fees
(116
)
 

 
18

 

 
(98
)
Intercompany loans
1,247

 
637

 
(1,884
)
 

 

Net cash provided by (used in) financing activities
509

 
(3,025
)
 
(4,526
)
 
3,145

 
(3,897
)
Effect of exchange rate changes on cash flows

 

 
(1,036
)
 

 
(1,036
)
Net (decrease) increase in cash
(1,043
)
 

 
6,654

 

 
5,611

Cash and cash equivalents at beginning of period
3,105

 
(2
)
 
6,736

 

 
9,839

Cash and cash equivalents at end of period
$
2,062

 
$
(2
)
 
$
13,390

 
$

 
$
15,450


19



Xerium Technologies, Inc.
Consolidating Statement of Cash Flows (Unaudited)
For the three months ended March 31, 2015
(Dollars in Thousands)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net income (loss)
$
1,733

 
$
13,502

 
$
15,585

 
$
(29,087
)
 
$
1,733

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
752

 

 
70

 

 
822

Depreciation
361

 
1,719

 
5,083

 

 
7,163

Amortization of intangibles

 
69

 
10

 

 
79

Deferred financing cost amortization
852

 

 
23

 

 
875

Foreign exchange gain on revaluation of debt
(1,973
)
 

 

 

 
(1,973
)
Deferred taxes
511

 

 
468

 

 
979

Loss (gain) on disposition of property and equipment

 
25

 
(11
)
 

 
14

Provision for doubtful accounts

 
49

 
423

 

 
472

Undistributed equity in earnings of subsidiaries
(21,669
)
 
(6,623
)
 

 
28,292

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
(47
)
 
231

 
(776
)
 

 
(592
)
Inventories

 
1,047

 
294

 
95

 
1,436

Prepaid expenses
(1,328
)
 
543

 
810

 

 
25

Other current assets

 
326

 
(2,005
)
 

 
(1,679
)
Accounts payable and accrued expenses
5,618

 
(947
)
 
(2,453
)
 

 
2,218

Deferred and other long-term liabilities
(42
)
 
347

 
(3,876
)
 

 
(3,571
)
Intercompany loans
(4,290
)
 
(3,343
)
 
7,633

 

 

Net cash (used in) provided by operating activities
(19,522
)
 
6,945

 
21,278

 
(700
)
 
8,001

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(4,697
)
 
(1,103
)
 
(6,355
)
 

 
(12,155
)
Intercompany property and equipment transfers, net

 
191

 
(191
)
 

 

Proceeds from disposals of property and equipment

 
26

 
6

 

 
32

Net cash (used in) provided by investing activities
(4,697
)
 
(886
)
 
(6,540
)
 

 
(12,123
)
Financing activities
 
 
 
 
 
 
 
 

Net increase in notes payable

 

 
3,526

 
 
 
3,526

Proceeds from borrowings
13,516

 

 
5,526

 

 
19,042

Principal payments on debt
(14,059
)
 

 
(4,272
)
 

 
(18,331
)
Dividends paid

 
(700
)
 
 
 
700

 

Payments of obligations under capitalized leases
(161
)
 
(101
)
 
(3
)
 

 
(265
)
Payment of deferred financing fees
(34
)
 

 
9

 

 
(25
)
Intercompany loans
19,587

 
(5,258
)
 
(14,329
)
 

 

Other financing activities
5,500

 

 
(5,500
)
 
 
 

Net cash provided by (used in) financing activities
24,349

 
(6,059
)
 
(15,043
)
 
700

 
3,947

Effect of exchange rate changes on cash flows

 

 
(516
)
 

 
(516
)
Net (decrease) increase in cash
130

 

 
(821
)
 

 
(691
)
Cash and cash equivalents at beginning of period
605

 
(14
)
 
8,926

 

 
9,517

Cash and cash equivalents at end of period
$
735

 
$
(14
)
 
$
8,105

 
$

 
$
8,826


20


12. Subsequent Events

On May 3, 2016, the Company signed an agreement to acquire J.J. Plank Corporation ("JJ Plank") for approximately $18 million ( $16.0 million payable at closing, with the remainder due upon certain post-closing milestones). JJ Plank is a specialty rolls & services company primarily serving targeted markets of the Company’s commercial repositioning program, and has products and services that the Company does not provide today.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by that Act. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Undue reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements. Factors that could materially affect our actual results, levels of activity, performance or achievements include the following items:

rate and magnitude of decline in graphical grade paper production;

fluctuations in interest rates and currency exchange rates;
over-capacity of certain grades of paper, leading to distressed profit situations;            
execution risk related to the startup of our proposed new facilities in China and Turkey and our expansion projects;
               
local economic conditions in the areas around the world where we conduct business;

quality issues with new products that could lead to higher warranty and quality costs;
               
structural shifts in the demand for paper;
               
the effectiveness of our strategies and plans;
                             
sudden increase or decrease in production capacity;
               
trend toward extended life in forming fabrics, leading to reduced market size;

our development and marketing of new technologies and our ability to compete against new technologies developed by competitors;
               
variations in demand for our products, including our new products;
               
fluctuations in the price of our component supply costs and energy costs;
               
our ability to generate substantial operating cash flow to fund growth and unexpected cash needs;
               
occurrences of terrorist attacks or an armed conflict involving the United States or any other country in which we conduct business, or any other domestic or international calamity, including natural disasters;
               
 changes in the policies, laws, regulations and practices of the United States and any foreign country in which we operate or conduct business, including changes regarding taxes and the repatriation of earnings; and
               
 anti-takeover provisions in our charter documents.

21



Other factors that could materially affect our actual results, levels of activity, performance or achievements can be found in our “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 14, 2016. 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 project. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. 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, except as required by law.
All references in this Quarterly Report to “Xerium”, “the Company”, “we”, “our” and “us” means Xerium Technologies, Inc. and its subsidiaries.

Company Overview
We are a leading global manufacturer and supplier of two types of consumable products used primarily in the production of paper—clothing and roll covers. Our operations are strategically located in the major paper-producing regions of North America, Europe, South America and Asia-Pacific.
Our products play key roles in the formation and processing of paper along the length of a paper-making machine. Paper producers rely on our products and services to help improve the quality of their paper, differentiate their paper products, operate their paper-making machines more efficiently and reduce production costs. Our products and services typically represent only a small percentage of a paper producer’s overall production costs, yet they can reduce costs by permitting the use of lower-cost raw materials and by reducing energy consumption. Paper producers must replace machine clothing and refurbish or replace roll covers periodically as these products wear down during the paper production process. Our products are designed to withstand high temperatures, chemicals and high pressure conditions and are the result of a substantial investment in research and development and highly sophisticated manufacturing processes.
We operate in two principal business segments: clothing and roll covers. In our clothing segment, we manufacture and sell highly engineered synthetic textile belts that transport paper as it is processed in a paper-making machine. Clothing plays a significant role in the forming, pressing and drying stages of paper production. Because paper-making processes and machine specifications vary widely, the clothing size, form, material and function is custom engineered to fit each individual paper-making machine and process. For the three months ended March 31, 2016 , our clothing segment represented 62% of our net sales.
Our roll cover products provide a surface with the mechanical properties necessary to process the paper sheet in a cost-effective manner that delivers the sheet qualities desired by each paper producer. We tailor our roll covers to individual paper-making machines and processes, using different materials, treatments and finishings. In addition to manufacturing and selling new roll covers, we also provide refurbishment services for previously installed roll covers and we manufacture new and rebuilt spreader rolls. We also provide various related products and services to our customers, both directly and through third party providers, as a growing part of our overall product offering through our roll covers sales channels. For the three months ended March 31, 2016 , our roll cover segment represented 38% of our net sales.
Industry Trends and Outlook

The Company's global markets are slightly favorable, overall in the first quarter of 2016, but with a lot of grade and geographical differences. However, the global tissue and containerboard markets still remain very viable and are growing. In response to these trends, we are repositioning our assets, sales teams and value additive technologies to the tissue, packaging, services and non-paper segments around the world, entering new or under-served markets that present long term revenue growth opportunities.
Net Sales and Expenses
The following factors primarily drive net sales in both our clothing and roll covers segments:
the volume (tonnage) of worldwide paper production;
our ability to introduce new products that our customers value and will pay for;
advances in technology of our products, which can provide value to our customers by improving the efficiency of paper-making machines and reduce their manufacturing costs;
growth in developing markets, particularly in Asia;

22


the mix of paper grades being produced;
our ability to enter and expand our business in non-paper products; and
the impact of currency fluctuations.
  
  Net sales in our roll covers segment include our mechanical services business. We have expanded this business in response to demand from paper producers that we perform work on the internal mechanisms of their rolls while we refurbish or replace a roll cover. In our clothing segment, we conduct a small portion of our business pursuant to consignment arrangements; for these, we do not recognize a sale of a product to a customer until the customer places the product into use, which typically occurs some period after we ship the product to the customer or to a warehouse location near the customer’s facility. As part of the consignment agreement, we deliver the goods to a location designated by the customer. In addition, we agree to a “sunset” date with the customer, which represents the date by which the customer must accept all risks and responsibilities of ownership of the product and payment terms begin. For consignment sales, we recognize revenue on the earlier of the actual product installation date or the “sunset” date.
Our operating cost levels are impacted by total sales volume, raw material costs, the impact of inflation, foreign currency fluctuations and the success of our cost reduction programs.
The level of our cost of products sold is primarily attributable to labor costs, raw material costs, product shipping costs, plant utilization and depreciation, with labor costs constituting the largest component. We invest in facilities and equipment that enable innovative product development and improve production efficiency and costs. Recent examples of capital spending for such purposes include faster weaving looms and seaming machines with accurate electronic controls, automated compound mixing equipment and computer-controlled lathes and mills.
The level of research and development spending is driven by market demand for technology enhancements, including both specific customer needs and general market requirements, as well as by our own analysis of applied technology opportunities. With the exception of purchases of equipment and similar capital items used in our research and development activities, all research and development is expensed as incurred. Research and development expenses were $1.9 million and $2.0 million for the three months ended March 31, 2016 and 2015, respectively.
Foreign Exchange
A substantial portion of our net sales is denominated in Euros or other currencies. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies affect our reported levels of net sales and profitability as the results are translated into U.S. Dollars for reporting purposes. In particular, decreases in the value of the U.S. Dollar relative to the value of the Euro and these other currencies positively impact our levels of revenue and profitability because the translation of a certain number of Euros or units of such other currencies into U.S. Dollars for financial reporting purposes will represent more U.S. Dollars than it would have prior to the relative decrease in the value of the U.S. Dollar. Conversely, a decline in the value of the Euro will result in a lower number of U.S. Dollars for financial reporting purposes.
For certain transactions, our net sales are denominated in U.S. Dollars, but all or a substantial portion of the associated costs are denominated in a different currency. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies can affect the level of the profitability of these transactions. The largest proportion of such transactions consists of transactions in which the net sales are denominated in or indexed to the U.S. Dollar and all or a substantial portion of the associated costs are denominated in Brazilian Reals or other currencies.
During the three months ended March 31, 2016 , we conducted business in nine foreign currencies. The following table provides the average exchange rate for the three months ended March 31, 2016 and 2015 of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our operations.
 
Currency
  
Three months ended March 31, 2016
  
Three months ended March 31, 2015
Euro
  
$1.10 = 1 Euro
  
$1.13 = 1 Euro
Brazilian Real
  
$0.26 = 1 Brazilian Real
  
$0.35 = 1 Brazilian Real
Canadian Dollar
  
$0.73 = 1 Canadian Dollar
  
$0.80 = 1 Canadian Dollar
Australian Dollar
  
$0.72 = 1 Australian Dollar
  
$0.79 = 1 Australian Dollar
In the three months ended March 31, 2016 , we conducted approximately 33% of our operations in Euros, approximately 7% in the Australian Dollar, approximately 8% in the Brazilian Real (although a significant portion of Brazil net sales are in U.S. Dollars) and approximately 5% in the Canadian Dollar.

23


To mitigate the risk of transactions in which a sale is made in one currency and associated costs are denominated in a different currency, we may utilize forward currency contracts in certain circumstances to lock in exchange rates with the objective that the gain or loss on the forward contracts will approximate the loss or gain that results from the transaction or transactions being hedged. We determine whether to enter into hedging arrangements based upon the size of the underlying transaction or transactions, an assessment of the risk of adverse movements in the applicable currencies and the availability of a cost effective hedge strategy. To the extent we do not engage in hedging or such hedging is not effective, changes in the relative value of currencies can affect our profitability.

Domestic and Foreign Operating Results:
The following is an analysis of our domestic and foreign operations during the three months ended March 31, 2016 and March 31, 2015 and a discussion of the results of operations during those periods (in thousands):
 
 
Three Months Ended March 31,
 
2016
 
2015
Domestic income (loss) from operations
$
435

 
$
(5,043
)
Foreign income from operations
11,102

 
19,238

Total income from operations
$
11,537

 
$
14,195

During the three months ended March 31, 2016 , domestic income from operations was lower than foreign income from operations primarily due to product mix, market differences and various unallocated corporate expenses. All earnings generated by foreign subsidiaries after 2012 will be remitted to the parent company at some point in the future. U.S. income taxes and foreign withholding taxes have been provided related to those foreign earnings. All other foreign un-remitted earnings generated in years prior to 2013 will remain indefinitely reinvested, except for a portion of the earnings generated prior to 2013 related to our Brazil operations.
Cost Reduction Programs
An important part of our strategy is to seek to reduce our overall costs and improve our competitiveness. As a part of this effort, we engage in cost reduction programs, which are designed to improve the cost structure of our global operations in response to changing market conditions. These cost reduction programs include headcount reductions throughout the world as well as plant closures that are intended to rationalize production among our facilities to better enable us to match our cost structure with customer demand. Cost savings have been realized and are expected to be realized in labor costs and other production overhead, other components of costs of products sold, general and administrative expenses and facility costs. The majority of cost savings begin at the time of the headcount reductions and plant closure with remaining cost savings recognized over subsequent periods. Cost savings from headcount reductions have not been and are not expected to be offset by related increases in other expenses. Cost savings related to plant closures have been and are expected to be partially offset by additional costs incurred in the facilities that assumed the operations of the closed facility.
      
For the three months ended March 31, 2016 , the Company incurred restructuring expenses of $2.8 million . These included $0.7 million of charges related to the closure of the Middletown, Va. facility and $2.1 million of charges relating to headcount reductions and other costs related to previous plant closures. For the three months ended March 31, 2015, the Company incurred restructuring expenses of $2.2 million . These included charges of $1.3 million relating to the closure of the Joao Pessoa, Brazil plant and headcount reductions of $0.9 million .

24



Results of Operations

The table that follows sets forth for the periods presented certain consolidated operating results.
 
Three Months Ended
March 31,
 
2016
 
2015
 
(in thousands)
Net sales
$
114,965

 
$
121,029

Costs and expenses:
 
 
 
Cost of products sold
71,428

 
72,476

Selling
15,721

 
16,326

General and administrative
11,507

 
13,846

Research and development
1,940

 
1,962

Restructuring
2,832

 
2,224

 
103,428

 
106,834

Income from operations
11,537

 
14,195

Interest expense, net
(10,341
)
 
(9,664
)
Foreign exchange gain
24

 
977

Income before provision for income taxes
1,220

 
5,508

Provision for income taxes
(2,665
)
 
(3,775
)
Net (loss) income
$
(1,445
)
 
$
1,733

Comprehensive income (loss)
$
7,373

 
$
(29,398
)
Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
Net Sales.  Net sales for the three months ended March 31, 2016 decreased by $(6.0) million, or (5.0)%, to $115.0 million from $121.0 million for the three months ended March 31, 2015 . Excluding currency effects, sales were down $3.4 million, or 2.8%. For the three months ended March 31, 2016 , approximately 62% of our net sales were in our clothing segment and approximately 38% were in our roll covers segment.
In our clothing segment, net sales for the three months ended March 31, 2016 decreased $(6.0) million to $71.3 million from $77.3 million for the three months ended March 31, 2015 . Excluding unfavorable currency effects of $(1.1) million, the sales decline of $4.9 million, or 6.3% was primarily due to price reductions in Asia due to softening of China and Indonesia markets, volume declines in South America due to a weakening Brazil economy and timing of North America shipments.
In our rolls segment, net sales for the three months ended March 31, 2016 remained essentially flat at $43.6 million compared to $43.7 million for the three months ended March 31, 2015 . Excluding unfavorable currency effects, sales were up by $1.5 million or 3.5%, driven by the Company's new growth initiatives.
Cost of Products Sold. Cost of products sold for the three months ended March 31, 2016 decreased to $71.4 million from $72.5 million for the three months ended March 31, 2015 .
In our clothing segment, cost of products sold decreased $(1.2) million in the current quarter compared to the first quarter of 2015, primarily driven by decreased sales volume, discrete production inefficiencies, and unfavorable fixed cost absorption and mix, partially offset by favorable currency and cost reductions, net of inflation. Cost of products sold as a percentage of net sales increased by (3.0)% to 59.9% in the three months ended March 31, 2016 from 56.9% in the three months ended March 31, 2015 . This increase was primarily due to discrete production inefficiencies, unfavorable fixed cost absorption and the effect of the ongoing shift in pricing and mix, partially offset by cost reduction initiatives, net of inflation and favorable currency effects.
In our rolls segment, cost of products sold increased $0.4 million in the current quarter compared to the first quarter of 2015, primarily as a result of increased sales volume, partially offset by cost reduction initiatives, net of inflation and favorable currency effects. Cost of products sold as a percentage of net sales increased by 1.0% to 65.8% for the three months ended March 31, 2016 from 64.8% for the three months ended March 31, 2015 , primarily as a result of unfavorable currency effects.

25


Selling Expenses. For the three months ended March 31, 2016 , selling expenses decreased by $(0.6) million, or (3.7)%, to $15.7 million from $16.3 million for the three months ended March 31, 2015 . This decrease was primarily driven by favorable currency effects.

General and Administrative Expenses. For the three months ended March 31, 2016 , general and administrative expenses decreased by $(2.3) million, or (16.7)%, to $11.5 million from $13.8 million for the three months ended March 31, 2015 , primarily as a result of cost reduction programs, offset by inflation, decreased bad debt reserves, decreased management incentive expense and favorable currency effects.

Restructuring Expenses. For the three months ended March 31, 2016 , we incurred restructuring expenses of $2.8 million.These included $0.7 million of charges related to the closure of the Middletown, Va. facility and $2.1 million of charges relating to headcount reductions and other costs related to previous plant closures.

Interest Expense, Net.  Net interest expense for the three months ended March 31, 2016 was $10.3 million , up $0.6 million from $9.7 million for the three months ended March 31, 2015. The increase was primarily due to increased average debt balances and increased average interest rates in the first quarter of 2016 versus the first quarter of 2015.
Provision for Income Taxes . For the three months ended March 31, 2016 and 2015, the provision for income taxes was $2.7 million and $3.8 million , respectively. The decrease in tax expense in the three months ended March 31, 2016, was primarily attributable to decreased earnings in 2016, as well as a one time tax benefit in the current quarter related to a Brazilian tax issue, as compared to tax expense in quarter ended March 31, 2015 resulting from an increase in the unrecognized tax benefit due to the effects of income tax audits. Generally, our provision for income taxes is primarily impacted by the income we earn in tax paying jurisdictions relative to the income we earn in non-tax paying jurisdictions. The majority of income recognized for purposes of computing our effective tax rate is earned in countries where the statutory income tax rates range from 15% to 35.36%. 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. We generate losses in certain jurisdictions for which we realize no tax benefit as the deferred tax assets in these jurisdictions (including net operating losses) are fully reserved in our valuation allowance. For this reason, we recognize minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves, the geographic mix of our pre-tax earnings has a direct correlation with how high or low our annual effective tax rate is relative to consolidated earnings.
Liquidity and Capital Resources
Our principal liquidity requirements are for debt service, restructuring payments, working capital and capital expenditures. We plan to use cash on hand, cash generated by operations and our revolving credit facility, as our primary sources of liquidity. Our operations are highly dependent upon the paper production industry and the degree to which the paper industry is affected by global economic conditions and the availability of credit. Demand for our products could decline if paper manufacturers are unable to obtain required financing or if economic conditions cause additional mill closures. In addition, an economic recession or unavailability of credit may affect our customers’ ability to pay their debts.
Net cash provided by operating activities was $14.1 million for the three months ended March 31, 2016 and $8.0 million for the three months ended March 31, 2015 . The $6.1 million increase was primarily due to the reduction in working capital in the first quarter of 2016.
Net cash used in investing activities was $(3.5) million for the three months ended March 31, 2016 and $(12.1) million for the three months ended March 31, 2015 . The decrease in cash used in investing activities of $(8.6) million was primarily due to the decrease in capital expenditures.
Net cash used by financing activities was $(3.9) million for the three months ended March 31, 2016 and net cash provided by financing activities was $3.9 million for the three months ended March 31, 2015, respectively. The decrease of $(7.8) million was due to a decrease of $(9.3) million in proceeds from borrowings, partially offset by a decrease of $(1.5) million principal payments on debt and payments under capital leases.
As of March 31, 2016 , the outstanding balance of the Company's term debt under its Credit Facility and Notes was $459.8 million, which is net of a $0.6 million discount. In addition, as of March 31, 2016 , an aggregate of $33.9 million is available for additional borrowings. This availability represents a borrowing base of $36.9 million less $3.0 million of that facility committed for letters of credit or additional borrowings.

26


We expect to spend cash of approximately $11.0 million related to our restructuring initiatives in 2016. We have spent $3.7 million in the three months ended March 31, 2016 . Actual restructuring costs for 2016 may substantially differ from estimates at this time, depending on the timing of the restructuring activities and the required actions to complete them.
Capital Expenditures
For the three months ended March 31, 2016 , we had capital expenditures of $3.6 million . We are currently targeting capital expenditures for 2016 to be approximately $20.0 million. We analyze our planned capital expenditures, based on investment opportunities available to us and our financial and operating performance, and accordingly, actual capital expenditures may be more or less than this amount. We intend to use existing cash and cash from operations to fund our capital expenditures.
See “Credit Facility and Notes” below for a description on limitations on capital expenditures imposed by our Credit Facility.
Credit Facility and Notes

On November 3, 2015, the we refinanced our existing ABL Facility and entered into a new Revolving Credit and Guaranty Agreement (as amended, the "New ABL Facility") with one of our existing ABL lenders, JPMorgan Chase Bank, N.A.   Under the New ABL Facility, JPMorgan will become the lead domestic agent and will continue as the European agent.  The amount of the ABL Facility will continue to provide aggregate availability of $55 million and the collateral pledged thereunder will also remain the same, however the New ABL Facility (1) provides increased flexibility for operations; (2) an extended maturity date of November, 2020; and (3) lower interest rates.
On July 17, 2015, Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of the Company closed a Fixed Assets Loan Contract (the "Loan Agreement") with the Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch with respect to a RMB 58.5 million loan, which was approximately $9.4 million USD on July 17, 2015, based on an exchange rate of 6.21 RMB per 1.00 USD. The loan is secured by pledged machinery and equipment of Xerium China and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of the Company, pursuant to guarantee agreements (the "Guarantee Agreements"). Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate is approximately 5.8%. The interest rate will be adjusted every 12 months during the term of the loan, based on the benchmark interest rate adjustment. Interest under the loan is payable quarterly in arrears. Principal on the loan is to be repaid in part every six months following the Closing Date, in accordance with a predetermined schedule set forth in the Loan Agreement. Proceeds of the Loan will be used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.
On May 17, 2013, 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 and 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 Xerium Technologies, Inc., as a US borrower, 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”), increasing the aggregate availability under the ABL Facility to $55 million. On November 3, 2015, the Company refinanced its existing ABL Facility and entered into a new Revolving Credit and Guaranty Agreement (as amended, the "New ABL Facility") with one of its existing ABL lenders. The amount of the ABL Facility continues to provide aggregate availability of $55 million and the collateral pledged thereunder will has remained the same. The New ABL Facility matures in November of 2020 and accrues interest at LIBOR plus a margin of 75 basis points, and is 4.50% at March 31, 2016.
On August 18, 2014, the Company entered into the Second Amendment to Credit and Guaranty Agreement (the “Second Amendment”). Under the Second Amendment, the Company borrowed an additional $30.0 million by utilizing the Incremental Facility. The $30 million in additional borrowings was used to finance a tax amnesty payment in Brazil. The Second Amendment made no changes to the repayment and other previously disclosed terms of the Credit Facility.
The Credit Facility contains certain customary covenants that, subject to exceptions, restrict our 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;

27


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.
We are in compliance with all covenants under the Notes and Credit Facility at March 31, 2016 .
Critical Accounting Policies
The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Our significant policies are described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in our Annual Report on Form 10-K for the year ended December 31, 2015.
Non-GAAP Financial Measures
We use EBITDA and Adjusted EBITDA (each as defined in the 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 from operations or cash flows (as determined in accordance with GAAP).
EBITDA is defined as net income before interest expense, income tax provision 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, (vi) non-cash 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 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.

28


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,
 
2016
 
2015
Net (loss) income
$
(1,445
)
 
$
1,733

Stock-based compensation
592

 
822

Depreciation
7,900

 
7,163

Amortization of intangibles
94

 
79

Deferred financing cost amortization
756

 
875

Foreign exchange loss (gain) on revaluation of debt
1,120

 
(1,973
)
Deferred tax expense
155

 
979

Loss on disposition of property and equipment
17

 
14

Net change in operating assets and liabilities
4,885

 
(1,691
)
Net cash provided by operating activities
14,074

 
8,001

Interest expense, excluding amortization
9,585

 
8,789

Net change in operating assets and liabilities
(4,885
)
 
1,691

Current portion of income tax expense
2,510

 
2,796

Stock-based compensation
(592
)
 
(822
)
Foreign exchange gain (loss) on revaluation of debt
(1,120
)
 
1,973

Loss on disposition of property and equipment
(17
)
 
(14
)
EBITDA
19,555

 
22,414

Stock-based compensation
592

 
822

Operational restructuring expenses
2,832

 
2,224

Other non-recurring expenses
103

 

Plant startup costs
877

 
750

Adjusted EBITDA
$
23,959

 
$
26,210

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our interest rate risks as of March 31, 2016 have not materially changed from December 31, 2015 (see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015). As of March 31, 2016 , we had outstanding long term debt with a carrying amount of $466.0 million with an approximate fair value of $419.2 million.
ITEM 4.
CONTROLS AND PROCEDURES
(a)  Evaluation of Disclosure Controls and Procedures . We have carried out an evaluation, as of March 31, 2016 under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Act”). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. No evaluation of disclosure controls and procedures can provide absolute assurance that these controls and procedures will operate effectively under all circumstances. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as set forth above.
(b)  Changes in Internal Control over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


29


PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
There have been no material developments to the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2015. See Note 9 to our Unaudited Condensed Consolidated Financial Statements for other routine litigation to which we are subject.

ITEM 1A.
RISK FACTORS
The risks described in our Annual Report on Form 10-K for the year ended December 31, 2015 have not materially changed.
   
ITEM 6.    EXHIBITS
See the exhibit index following the signature page to this Quarterly Report on Form 10-Q.
 

30




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
XERIUM TECHNOLOGIES, INC.
 
(Registrant)
 
 
 
May 4, 2016
By:              
/s/Clifford E. Pietrafitta
 
 
Clifford E. Pietrafitta
 
 
Executive Vice President and CFO
 
 
(Principal Financial Officer)


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EXHIBIT INDEX
 
Exhibit  
Number   
 
Description of Exhibits
 
 
31.1
 
Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
 
Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1
 
Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
32.2
 
Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document







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