XRM Xerium Technologies New (delisted)

Highlights

• Q2 2016 Sales of $124.0 million compared to $123.1 in the prior-year; up 6.1% sequentially on constant currency basis. Repositioning efforts starting to take traction.
• GAAP operating income of $14.7 million, an increase of 8.4% year-over-year.
• Adjusted EBITDA of $27.6 million; essentially flat compared to the prior year period and up 15% sequentially due to increased sales volumes.
• Q2 2016 free cash flow of $0.6 million, net of a $10.7 million semi-annual interest payment; a $9.7 million year-over-year improvement due to the completion of the repositioning investments.
• Acquired JJ Plank/Spencer Johnston (“Spencer Johnston”), a maker of specialty rolls and holder of excellent positions in Xerium targeted growth markets.
• Received pricing to refinance all existing Senior Unsecured Notes and Term Debt, extending maturities approximately to August of 2021. The Company plans significant debt reduction during tenor of these securities.
• Company reiterates full year EBITDA and cash flow guidance, leverage guidance increase to 4.5x on a pro-forma basis from 4.3x due to effects of refinancing.

Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of highly engineered, industrial consumable products and integrated services today reported second quarter 2016 financial results.

Second quarter sales were $124.0 million compared to prior-year sales of $123.1 million. On a constant currency basis, sales were up 0.4%, compared to the second quarter of 2015. Sequentially, sales were up $9.0 million, or 7.8% and up 6.1% on a constant currency basis. Rolls sales are up sequentially by 11.0% due to sales of products associated with the Company’s strategic repositioning initiatives and the acquisition of Spencer Johnston and PMC sales are up 3.0%, both on a constant currency basis. Regionally, strength in the quarter was led by a sharp increase in North America sales, increasing 8.7% year-over-year on a constant currency basis, driven by stronger Q2 operational performance and incremental Spencer Johnston sales of $2.6 million.

GAAP operating income in the second quarter of 2016 was $14.7 million, or 11.9% of sales, an increase from $13.6 million, or 11.0% of sales in the year-ago period. Second quarter Adjusted EBITDA was $27.6 million (including a Spencer Johnston contribution of $0.5 million), up sequentially $3.6 million, or 15.2% and slightly lower than the prior-year of $28.0 million. In Q2 2016, the Company realized a $7.2 million benefit from ongoing cost reduction programs, and continued to realize incremental profit contribution from sales associated with its repositioning projects.

On July 26, 2016, the Company received pricing on $480 million aggregate principal amount of 9.5% Senior Secured Notes due 2021 (the "Notes"). The Notes will be issued at a price equal to 98.54% of their face value. The Notes will pay interest semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017 and will mature on August 15, 2021, unless earlier redeemed or repurchased.

The Company intends to use the net proceeds from the offering to repay all amounts outstanding under its existing term loan credit facility, to redeem all of its 8.875% Senior Notes due 2018 at a redemption price equal to 102.219% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of redemption, to pay fees and expenses relating to these transactions, and for working capital and other general corporate purposes. The Company expects to close on the transaction on or about August 9, 2016.

Harold Bevis, President and Chief Executive Officer commented, “We are pleased with our results during the quarter as Xerium executed well both operationally and financially. Our repositioning efforts are taking hold as we generated our second straight quarter of positive free cash flow, and saw sequentially stronger sales and profitability. We are encouraged by improving order patterns and backlogs which will aid revenues in the second half of the year. Our strategic investments and cost reductions will continue to improve our operations in the coming quarters and benefit our operating results. We have $50 million of growth capacity installed coupled with 49 new product introductions.” Bevis continued, “Additionally we have received pricing on $480 million of senior secured notes to refinance all of our existing Senior Unsecured Notes and Term Debt which are due in June of 2018 and May of 2019, respectively. The new Senior Secured Notes will mature in August of 2021. With maturities now extended to August 2021, the Company’s goal is to increase our credit rating with a sustained multi-year debt pay-down program, beginning this year.”

With regard to overall corporate repositioning, the company made incremental progress on several of its strategic priorities, including:

Sales Repositioning

• Brought new rolls capacity and capabilities on-line at the Neenah, WI facility.
• Successfully Field-trialed 14 new products to achieve New Wins and which introduce new material technology, product category expansion, and machine analytics.
• In our first quarter of ownership, the Spencer Johnston acquisition is performing in line with expectations, and was a positive contribution to the quarter.

Cost Reductions

• Successfully executed on cost reduction efforts, with $7.2 million of cost-out in Q2 2016 versus prior year. The Company remains on track to achieve $24 million in cost-out initiatives for the full year.
• Concluded production at the Middletown, VA production facility, bringing total facility closures to eight since 2012. The machines from these closures are being used to reposition Xerium into new growth markets. The rolls machines from the Virginia plant will be used to equip two new rolls plants in growing geographies outside of North America – one in Chile and one in Asia.

Cash Generation and De-leveraging

• Generated $11.2 million of free cash in the first half of 2016, an improvement of $24.2 million compared to cash flow of $(13.0) million in the first half of 2015, marking the completion of an accelerated period of capital investment in order to strongly reposition Xerium for future growth. As previously announced capex will now be at a significantly lower run rate over the next several years.

Post synergies, management expects the Spencer Johnston acquisition to provide $6 million of annual EBITDA and $6 million of free cash flow at full run-rate and the acquisition has produced an immediate de-leveraging effect on a pro forma basis. On an ongoing basis, Spencer Johnston will require minimal capex.

Results of Operations:

Net sales for Q2 2016 were $124.0 million, an increase of 0.4% compared to Q2 2015 sales of $123.1 million, on a constant currency basis. The increase in sales was primarily attributable to rolls sales increases as a result of the company’s repositioning program and the acquisition of Spencer Johnston, partially offset by lower machine clothing volumes in South America and Asia markets, and the ongoing shift of product mix towards growth grades.

Table 1 summarizes Q2 net sales and the effect of currency translation rates.

Table 1                           Net Sales For The Quarter Ended             6/30/2016   6/30/2015  

$ Change

 

Currency

Effect of $

Change

  % Change  

% Change

Excluding

Currency

Roll Covers $ 49,154   $ 43,977   $ 5,177   ($403 )   11.8 % 12.7 % Machine Clothing   74,819     79,151     ($4,332 )   $ 765       -5.5 % -6.4 % Total $ 123,973   $ 123,128   $ 845     $ 362       0.7 % 0.4 %

Table 2 summarizes Q2 to Q1 net sales and the effect of currency translation rates.

Table 2                             Net Sales For The Quarter Ended               6/30/2016   3/31/2016  

$ Change

 

Currency

Effect of $

Change

  % Change  

% Change

Excluding

Currency

Roll Covers $49,154   $43,628   $5,526   $710   12.7%   11.0% Machine Clothing 74,819   71,337   $3,482   $1,330     4.9%   3.0% Total $123,973   $114,965   $9,008   $2,040     7.8%   6.1%

Q2 2016 gross profit was $48.2 million, or 38.9% of net sales, compared to $49.4 million, or 40.2% of net sales in Q2 2015. Machine clothing gross margin, excluding plant startup costs, was 42.2% in Q2 2016 compared to 43.8% in Q2 2015. The decline in gross profit margin is primarily due to the effect of the ongoing shift in product mix, partially offset by cost reduction initiatives, net of inflation and favorable currency effects. Rolls gross margin, excluding startup costs, was 34.9% in Q2 2016, from 36.1% in Q2 2015. The decline was primarily due to unfavorable currency effects and negative product mix.

SG&A expenses (including Selling, G&A and R&D expenses) were $30.7 million, or 24.8% of net sales in Q2 2016, compared to $30.4 million, or 24.7% of sales in Q2 2015. The slight increase in SG&A expense is primarily attributable to increased management incentive compensation partially offset by savings achieved through the Company’s cost-out initiatives and favorable currency effects.

Q2 2016 Adjusted EBITDA declined by (1.4%) to $27.6 million, or 22.3% of net sales, compared to Q2 2015 Adjusted EBITDA of $28.0 million, or 22.7% of net sales. Adjusted EBITDA excludes expenses related to the Company’s restructuring activities, plant start-up costs, stock based compensation, and non-recurring expenses. For a full reconciliation, refer to table 3.

Q2 2016 basic earnings per share were $0.13 per share compared to Q2 2015 basic loss per share of $(0.05). Excluding adjustments (see Table 2) earnings per share were $0.31 in Q2 2016, compared to $0.37 in Q2 2015.

Cash taxes were $3.9 million in Q2 2016. For the full year 2016, we expect that cash taxes will be approximately $14.9 million. Cash taxes are primarily impacted by income the company earns in tax paying jurisdictions relative to income it earns in non-tax paying jurisdictions, primarily the United States.

At June 30, 2016, the Company had total liquidity of $33.9 million, and generated free cash flow of $0.6 million during the second quarter of 2016, marking a $9.7 million improvement over the prior year. Net debt (which is defined as total debt less cash and excluding deferred finance fees) was $499.5 million at the end of Q2 2016 compared to $481.9 million at the end of Q1 2016. The increase was primarily due to the acquisition of Spencer Johnston. The Company's net debt leverage ratio was 4.9X at June 30, 2016 and 4.7X on a pro forma basis after factoring in the acquisition of Spencer Johnston (incremental Spencer Johnston pro forma leverage includes incremental debt of $18 million and pro forma full year EBITDA of $6.0 million). The Company plans to utilize its free cash flow to de-lever over the remainder of the year.

Updated 2016 Outlook

• Consistent with the Company’s previous communications, the Company expects continuing sales volume growth in its rolls segment for the full year. In the machine clothing segment, sales are expected to be negative relative to the prior year, as the company brings on new volume from plant investments and new products to offset the impact of declining markets and grades.Despite the negative impact of currency changes since the beginning of the year, the Company continues to expect 2016 Adjusted EBITDA to be in a range of $107 to $113 million and free cash flow in a range of $25 to $30 million.

• On a pro forma full year basis, the effect of refinancing will increase the Company’s interest expense by approximately $10 million. As the Company pays down debt, this impact will be reduced.

CONFERENCE CALL

The Company plans to hold a conference call the evening of the earnings release as follows:

Date: August 2, 2016 Start Time: 4:30 p.m. Eastern Time Domestic Dial-In: +1-844-818-4921 International Dial-In: +1-484-880-4582 Conference ID: 49430194

Webcast:

www.xerium.com/investorrelations

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

ABOUT XERIUM TECHNOLOGIES, INC.

Xerium Technologies, Inc. (NYSE:XRM) is a leading global provider of industrial consumable products and services. Xerium, which operates around the world under a variety of brand names, utilizes a broad portfolio of patented and proprietary technologies to provide customers with tailored solutions and products integral to production, all designed to optimize performance and reduce operational costs. With 30 manufacturing facilities in 13 countries around the world, Xerium has approximately 3,000 employees.

NON-GAAP FINANCIAL MEASURES

This press release includes measures of performance that differ from the Company's financial results as reported under generally accepted accounting principles ("GAAP"). The Company uses supplementary non-GAAP measures, including Adjusted EPS, EBITDA, Adjusted EBITDA, currency effects on Net Sales, Effective Tax Rate and the effects of Restructuring and Trade Working Capital to assist in evaluating its liquidity and financial performance. EBITDA and Adjusted EBITDA are specifically used in evaluating the ability to service indebtedness and to fund ongoing capital expenditures. Neither Adjusted EBITDA nor EBITDA should be considered in isolation or as a substitute for income (loss) or cash flows from operations (as determined in accordance with GAAP).

For additional information regarding non-GAAP financial measures and a reconciliation of such measures to the most comparable financial measures under GAAP, please see the applicable table within this press release. In addition, the information in this press release should be read in conjunction with the corresponding exhibits, financial statements and footnotes contained in our Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 14, 2016, and our June 30, 2016 Form 10-Q filed with the Securities and Exchange Commission on August 2, 2016 and our presentation that will accompany our conference call tomorrow.

BASIC ADJUSTED EARNINGS PER SHARE (net of taxes)

Table 2 represents a reconciliation of basic net (loss) earnings per share to basic adjusted earnings per share for the three months ended June 30, 2016 and 2015:

Table 2     Three Months Ended June 30, 2016 2015 Basic net income (loss) per share $ 0.13 $ (0.05) Adjustments: Brazilian amnesty interest deduction (0.02 ) — Non-recurring tax reserve adjustment — 0.01 Restructuring expense 0.14 0.26 Non-recurring expenses 0.03 0.04 Plant start-up costs 0.03 0.07 FX loss —   0.04 Basic adjusted earnings per share $ 0.31   $ 0.37

EBITDA AND ADJUSTED EBITDA

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

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

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

Table 3 - Adjusted EBITDA Three Months Ended June 30, 2016  

2015

Net (loss) income 2,110 (703 ) Stock-based compensation 834 804 Depreciation 8,182 7,096 Amortization of intangibles 210 79 Deferred financing cost amortization 785 896 Foreign exchange loss (gain) on revaluation of debt (968 ) 1,057 Deferred tax expense (953 ) 628 Loss (gain) on disposition of property and equipment 62 13 Net change in operating assets and liabilities (7,205 ) (3,200 ) Net cash provided by operating activities 3,057 6,670 Interest expense, excluding amortization 9,873 7,809 Net change in operating assets and liabilities 7,205 3,200 Current portion of income tax expense 2,820 4,052 Stock-based compensation (834 ) (804 ) Foreign exchange gain (loss) on revaluation of debt 968 (1,057 ) (Loss) gain on disposition of property and equipment (62 ) (13 ) EBITDA 23,027 19,857 Stock-based compensation 834 804 Operational restructuring expenses 2,777 5,509 Other non-recurring expenses 434 700 Plant startup costs 539   1,132   Adjusted EBITDA 27,611   28,002  

Xerium Technologies, Inc.

Consolidated Statements of Operations

(Dollars in thousands, except per share data and unaudited)

  Three Months Ended June 30, 2016   2015 Net Sales 123,973 123,128 Costs and expenses: Cost of products sold 75,782 73,686 Selling 15,735 16,429 General and administrative 13,427 12,045 Research and development 1,545 1,892 Restructuring   2,777     5,509     109,266     109,561   Income from operations 14,707 13,567 Interest expense, net (10,658 ) (8,705 ) Foreign exchange gain (loss)   (72 )   (885 ) Income before provision for income taxes 3,977 3,977 Provision for income taxes   (1,867 )   (4,680 ) Net (loss) income   2,110     (703 ) Comprehensive income (loss)   6,508     6,704   Net income (loss) per share: Basic $ 0.13   $ (0.05 ) Diluted $ 0.13   $ (0.05 ) Shares used in computing net (loss) income per share: Basic   15,995,071     15,593,668   Diluted   16,619,082     15,593,668     Consolidated Selected Financial Data   Cash Flow Data: (in thousands) Six Months Ended June 30, 2016   June 30, 2015 Net cash provided by operating activities 17,131 $ 14,905 Net cash used in investing activities (22,080 ) $ (27,852 ) Net cash provided by financing activities 7,380 $ 11,893   Other Financial Data: (in thousands)   Depreciation and amortization $ 16,386 $ 14,417 Capital expenditures, gross (5,972 ) $ (27,914 )   Balance Sheet Data: (in thousands) June 30, 2016   December 31, 2015   Cash and cash equivalents $ 10,591 $ 9,839 Total assets $ 575,577 $ 550,374 Total debt (including capital leases) $ 504,302 $ 483,173 Total stockholders' deficit (98,794 ) $ (113,070 )

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements. The words "will", "believe," "estimate," "expect," "intend," "anticipate," "goals," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding our full year EBITDA and Adjusted EBITDA performance, anticipated sales performance, capital expenditures, cost savings measures, future efforts to improve overall performance and free cash flow. Forward-looking statements are not guarantees of future performance, and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by us, as well as from risks and uncertainties beyond our control. These risks and uncertainties include the following items: (1) we may not realize the EBITDA and Adjusted EBITDA performance we are projecting (2) our expected sales performance and our backlog of sales may not be fully realized; (3) our cost reduction efforts, including our restructuring activities, may not have the positive impacts we anticipate; (4) we are subject to execution risk related to the startup of our new facilities in China and Turkey and expansion projects elsewhere; (5) our plans to develop and market new products, enhance operational efficiencies and reduce costs may not be successful; (6) market improvement in our industry may occur more slowly than we anticipate, may stall or may not occur at all; (7) variations in demand for our products, including our new products, could negatively affect our revenues and profitability; (8) our manufacturing facilities may be required to quickly increase or decrease production, which could negatively affect our production facilities, customer order lead time, product quality, labor relations or gross margin; and (9) the other risks and uncertainties discussed elsewhere in this press release, our Form 10-K for the year ended December 31, 2015 filed on March 14, 2016 and our other SEC filings. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement in this press release reflects our current views with respect to future events. Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise. As discussed above, we are subject to substantial risks and uncertainties related to current economic conditions, and we encourage investors to refer to our SEC filings for additional information. Copies of these filings are available from the SEC and in the investor relations section of our website at www.xerium.com.

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Xerium Technologies, Inc.Cliff Pietrafitta, 919-526-1444Investor RelationsIR@xerium.com