Xerium Technologies, Inc. (NYSE:XRM), a leading global manufacturer
of clothing and roll covers used primarily in the paper production
process, today reported results for its third quarter ended
September 30, 2008. �As we completed the third quarter of our
fiscal year, the first full quarter in which we were able to focus
on operations improvement rather than debt restructuring, our
served markets began to feel the current global economic strain,�
said Stephen Light, President, Chief Executive Officer and
Chairman. �We are pleased that our strategy of generating cash to
reduce debt, developing new products that help our customers
produce high quality paper at lower costs and our reliance on the
talent and commitment of our people, have positioned us well for
this situation to date. In the third quarter, we continued to
execute according to our plans, made meaningful improvements to our
operations, achieved measurable traction in our focus on working
capital reduction, and substantially reduced our debt. Our view is
that the global economy is likely to continue deteriorating over
the coming months before a recovery begins, with the potential to
directly impact our customers around the globe. Our ongoing
contingency planning is identifying additional actions we can take
to maximize our operating efficiencies and further reduce working
capital and leverage. Simultaneously, we have increased provisions
for bad debts and slow-moving and obsolete inventory in
anticipation of the potential increased strain on our customers.
Additionally, and in line with our broad risk reduction
initiatives, we reached a settlement with respect to the
shareholder litigation suit against the Company that has been
ongoing since June 2006, subject to court approval. The Company did
not admit to liability of any kind in connection with the
settlement, which will be covered by insurance. Responding to our
significantly improved risk profile and much improved balance
sheet, we were recently given an increased credit rating from
Standard & Poor�s, which we believe is a reflection of how far
we have come since we were downgraded this spring, and supports the
appropriateness of our strategy for these challenging times.� THIRD
QUARTER FINANCIAL HIGHLIGHTS For the third quarter 2008, compared
to the third quarter 2007: Net sales for the 2008 quarter were
$159.3 million, a 3.7% increase from net sales for the 2007 quarter
of $153.6 million. Excluding the currency effects shown in the
table below, third quarter 2008 net sales increased 0.3% from the
third quarter of 2007, with a decline of 2.4% and an increase of
6.0% in the clothing and roll covers segments, respectively. Gross
margins were $52.8 million or 33.1% of net sales for the 2008
quarter, compared to $63.3 million or 41.2% of net sales for the
2007 quarter. The decline is mostly due to an $8.7 million ($8.1
million and $0.6 million in clothing and roll covers respectively)
increase in provisions for slow moving and obsolete inventory, in
light of our assessment of the impact of the current global
economic slowdown on our customers and our industry. Additionally,
the decline was due to approximately a 1.2% market price reduction
and approximately a 2% reduction due to currency effect on pricing
related to sales prices indexed in U.S. Dollars by certain non-U.S.
operations. Excluding the effect of the increased provisions for
slow moving and obsolete inventory recorded in the third quarter,
the gross margin for the 2008 quarter was 38.2%. (See Non-GAAP
Financial Measures �Impact of Significant Third Quarter 2008
Events� below). The recorded restructuring and impairment expenses
of $3.6 million in the third quarter 2008 was an increase of $2.8
million from the 2007 quarter related to the Company�s long-term
strategy to streamline our operating structure and to improve
long-term competitiveness by closing and/or transferring production
from certain of our manufacturing facilities and through headcount
reductions. Income from operations increased 57.3% to $37.9 million
for the 2008 quarter from $24.1 million for the 2007 quarter. The
increase primarily stems from the Company�s previously announced
changes to certain of its U.S. pension plans and postretirement
benefit plans, resulting in one-time pre-tax curtailment/settlement
gains of $40.0 million, partially offset by the previously
mentioned provision for slow moving and obsolete inventory of $8.7
million, provisions for bad debts of $7.9 million and a provision
for environmental remediation in Australia of $4.1 million.
Excluding the effect of the U.S. pension and post-retirement
benefit plan curtailment/settlement gains, the increased provisions
for slow moving and obsolete inventory, the increased provisions
for bad debts, and the provision for environmental remediation,
income from operations for the third quarter 2008 would have been
$18.1 million. (See Non-GAAP Financial Measures �Impact of
Significant Third Quarter 2008 Events� below). Net income increased
to $21.5 million or $.46 per diluted share from $7.1 million or
$.16 per diluted share. The increase is largely the result of the
previously mentioned pre-tax curtailment/settlement gains partially
offset by the increased provisions noted in the previous paragraph.
Excluding the effect of those items, net income for the third
quarter 2008 would have been a loss of $1.4 million. The Company
determined that it did not qualify for hedge accounting in the
third quarter of 2007 and net income for that period includes a
$2.7 million expense related to a mark-to-market decrease in the
fair value of the Company�s interest rate swaps. (See Non-GAAP
Financial Measures �Impact of Significant Third Quarter 2008
Events� below). Net cash generated by operating activities was
$11.8 million for the 2008 third quarter, compared to $18.4 million
for the 2007 third quarter, partially as a result of increased
interest expense of $2.2 million in the quarter. Adjusted EBITDA
(as defined by the Company�s amended credit facility) was $54.2
million for the 2008 third quarter, compared to $38.4 million for
the 2007 third quarter. See �EBITDA and Adjusted EBITDA
Reconciliation� below. In order to improve performance, the Company
continues to target a reduction in days of receivables and
increases in inventory turns and days of payables outstanding.
During the 2008 quarter, as compared with the 2007 quarter, the
Company reported that accounts receivables, as measured as a ratio
of days of receivables, improved from 66 days to 56 days, inventory
turns improved to 4.4 versus 3.1, and days of payables were 34 days
compared to 36 days. These numbers reflect the $6.0 million of
additional provisions for bad debts on trade receivables and $8.0
million additional provisions for slow moving and obsolete
inventory that were recorded in the third quarter of 2008. Cash on
hand at September 30, 2008 was $18.4 million, compared to cash on
hand at June 30, 2008 of $25.4 million. Cash on hand at September
30, 2007 was $32.5 million. In addition to its scheduled quarterly
debt payments of approximately $2.3 million, the Company made a
voluntary prepayment in the third quarter of 2008 of approximately
$6.1 million. For the first nine months of 2008, the Company has
made senior debt repayments of $21.6 million, which compares to
debt repayments of $9.5 million for the first nine months of 2007.
Capital expenditures during the 2008 quarter were $8.3 million,
compared to $8.9 million during the 2007 quarter. Capital
expenditures for the nine months ended September 30, 2008 were
$29.1 million. The Company expects capital expenditures to be in
the range of $44 to $47 million for fiscal 2008. The Company also
expects that capital expenditures in 2009 will be significantly
lower than those for 2008. OTHER HIGHLIGHTS The Company remained in
compliance with all financial covenants, including covenants
requiring compliance with minimum interest coverage, fixed charge
coverage ratios and maximum leverage ratios. On September 29, 2008,
Standard & Poor's raised its ratings on the Company, including
raising the long-term corporate credit rating, from 'CCC+' to 'B-'.
The Company released an additional $29.6 million in �trapped cash�
during the third quarter, having freed $1.9 million in trapped cash
in the second quarter of 2008. The Company defines �trapped cash�
as the amount of working capital on its balance sheet that is in
excess of 50 days of outstanding accounts receivable, 6 inventory
turns and 48 days of accounts payable outstanding. Included in the
calculation of �trapped cash� released during the third quarter of
2008 were $6.0 million of additional provisions for bad debts on
trade receivables and $8.0 million additional provisions against
inventories for slow moving and obsolete stock. These increased
provisions reflect our assessment of the global economic slowdown
on our customers and our industry and the lack of credit
availability which may affect our customers� demand for products
and their ability to pay their debts. In connection with the
Company�s amended credit facility, as of September 30, 2008 the
weighted average interest rate on its effectively fixed portion of
the term loan facility was 9.74%; and the weighted average interest
rate on the portion of its term loan facility that is not
effectively fixed by interest rate swap contracts, based on the
90-day LIBOR, was 9.64%. As previously noted, the Company has
prepared a reconciliation of Non-GAAP Financial Measures �Impact of
Significant Third Quarter 2008 Events� below to illustrate how
management views the underlying operating results for the period.
In summary, what is described in this reconciliation is the
financial performance net of the effect of the substantial gains
due to changes to certain of its U.S. pension plans and
postretirement benefit plans and the impact of certain provisions
for environmental matters and increased provisions for bad debts
and slow-moving and obsolete inventory. The latter two items
reflect the risk associated with our assessment of the global
credit crisis and the potential impact on our customers. SEGMENT
INFORMATION The following table presents net sales for the third
quarter of 2008 and 2007 by segment and the effect of currency on
pricing and translation on third quarter 2008 net sales: (in
millions): � � Net Sales Three Months Ended Sep. 30, � � � �
Increase in net sales from Q3 2007 to Q3 2008 � � � � � Increase in
Q3 2008 net sales due to currency translation (a) � Percent
increase (decrease) in net sales from Q3 2007 to Q3 2008 � � � � �
� � 2008 � 2007 � � � � Total � Excluding currency translation
effect � (b) Change in Q3 2008 net sales due to currency effects on
pricing � � Percent increase (decrease) in net sales from Q3 2007
to Q3 2008 excluding effect of currency on pricing and translation
Clothing � $ 104.4 � $ 104.0 � $ 0.4 � $ 6.0 � 0.4% � (5.4)% � $
(3.1) � (2.4)% Roll Covers � 54.9 � 49.6 � 5.3 � 2.3 � 10.7% � 6.0%
� - � 6.0% Total � $ 159.3 � $ 153.6 � $ 5.7 � $ 8.3 � 3.7% �
(1.7)% � $ (3.1) � 0.3% (a) Increase in third quarter 2008 net
sales due to currency translation is calculated by subtracting (i)
an amount equal to net sales for the third quarter of 2007 from
(ii) net sales for the third quarter of 2007 at the applicable
average foreign currency exchange rate for the third quarter of
2008. � (b) Change in the third quarter 2008 net sales due to
currency effect on pricing relates to sales prices indexed in U.S.
Dollars by certain non-U.S. operations and is calculated based on
the difference in the exchange rate from the time of pricing
commitment to the customer and the point at which the sale
transaction is recorded. CLOTHING SEGMENT HIGHLIGHTS Clothing
segment sales increased $0.4 million or 0.4% to $104.4 million from
$104.0 million in the year-ago quarter. The current quarter
benefited from favorable currency effects of $6.0 million as well
as from increased sales in Asia-Pacific. The increase was partially
offset by an unfavorable currency impact on pricing, and decreased
sales in North America and Europe. Excluding the effects of
currency, net sales decreased approximately 2.4%. Overall pricing
levels in the clothing segment decreased approximately 1.5% during
the quarter, compared to the prior-year period. Clothing segment
earnings for the quarter increased 42% to $39.5 million for the
2008 quarter, compared to the prior-year quarter driven heavily by
the positive effect of the pension and retiree medical program
changes we implemented. ROLL COVERS SEGMENT HIGHLIGHTS Roll covers
segment sales increased 10.7% to $54.9 million from $49.6 million
in the 2007 quarter. The increase is partially the result of $2.3
million in favorable currency effects from non-U.S. Dollar sales,
and sales from our Chinese facilities acquired in the 2007 fourth
quarter, and increased roll cover sales in North America. Overall
pricing levels in the roll covers segment decreased by less than 1%
in the third quarter, compared to the prior year period. Roll
covers segment earnings for the quarter increased 26.0% to $16.5
million for the 2008 quarter, compared to the prior-year quarter
benefiting from the pension and retiree medical program changes we
implemented. CONFERENCE CALL The Company plans to hold a conference
call to discuss these results tomorrow morning: Date: � Tuesday,
November 11, 2008 Start Time: 8:00 a.m. Eastern Time Domestic
Dial-In: +1-800-240-8621 International Dial-In: +1-303-262-2141 To
participate on the call, please dial in at least 10 minutes prior
to the scheduled start. NON-GAAP FINANCIAL MEASURES This press
release includes measures of performance that differ from the
Company�s financial results as reported under generally accepted
accounting principles (�GAAP�). The Company uses supplementary
non-GAAP measures, including EBITDA and Adjusted EBITDA, to assist
in evaluating liquidity and financial performance, specifically in
evaluating the Company's ability to service indebtedness and to
fund ongoing capital expenditures. The Company�s credit facility
includes covenants based upon Adjusted EBITDA. If Adjusted EBITDA
declines below certain levels, the Company could go into default
under the credit facility or be required to prepay the credit
facility. Neither Adjusted EBITDA nor EBITDA should be considered
in isolation or as a substitute for net cash provided by operating
activities (as determined in accordance with GAAP) or income 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 below. The information in this
press release should be read in conjunction with the financial
statements and footnotes contained in our documents to be filed
with the Securities and Exchange Commission. About Xerium
Technologies Xerium Technologies, Inc. (NYSE: XRM) is a leading
global manufacturer and supplier of two types of consumable
products used primarily in the production of paper: clothing and
roll covers. The Company, 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 35
manufacturing facilities in 15 countries around the world, Xerium
has approximately 3,700 employees. FORWARD-LOOKING STATEMENTS This
press contains forward-looking statements. 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 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: (i) our
revenues and profitability could be adversely affected by
fluctuations in currency exchange rates; (ii) our profitability
would be reduced by a decline in the prices of our products; (iii)
our profitability could be adversely affected by fluctuations in
interest rates; (iv) we may not be able to develop and market new
products successfully or we may not be successful in competing
against new technologies developed by competitors; (v) our credit
facility contains restrictive covenants, including covenants
requiring compliance with minimum interest coverage and fixed
charge coverage ratios and maximum leverage ratios, that will
require us to improve our performance over time in order to comply
therewith; (vi) we may have insufficient cash to fund growth and
unexpected cash needs after satisfying our debt service obligations
due to our high degree of leverage and significant debt service
obligations; (vii) we are subject to the risk of weaker economic
conditions in the locations around the world where we conduct
business, including without limitation the current turmoil in the
credit markets and the impact of the current global economic crisis
on the paper industry; (viii) we may be required to incur
significant costs to reorganize our operations in response to
market changes in the paper industry; (ix) we are subject to the
risk of terrorist attacks or an outbreak or escalation of any
insurrection or armed conflict involving the United States or any
other country in which we conduct business, or any other national
or international calamity; (x) we are subject to any future changes
in government regulation; (xi) we are subject to any changes in
U.S. or foreign government policies, laws and practices regarding
the repatriation of funds or taxes and (xii) those other risks
described under the heading "Risk Factors" in the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
2008 filed with the Securities and Exchange Commission and
subsequent 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. 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. Xerium Technologies, Inc. Condensed
Consolidated Balance Sheets--(Unaudited) (dollars in thousands,
except per share data) � September 30, 2008 � December 31, 2007
ASSETS Current assets: Cash and cash equivalents $ 18,449 $ 24,218
Accounts receivable (net of allowance for doubtful accounts of
$10,392 at September 30, 2008 and $5,367 at December 31, 2007)
97,732 113,256 Inventories 96,245 113,136 Prepaid expenses 6,712
6,287 Other current assets � 16,428 � � 29,441 � Total current
assets 235,566 286,338 Property and equipment, net 400,316 421,470
Goodwill 156,027 159,892 Intangible assets 34,168 17,381 Other
assets � 6,111 � � 6,360 � Total assets $ 832,188 � $ 891,441 � �
LIABILITIES AND STOCKHOLDERS� EQUITY (DEFICIT) Current liabilities:
Notes payable $ 8 $ 1,676 Accounts payable 39,968 44,842 Accrued
expenses 78,961 61,070 Current maturities of long-term debt 20,388
19,253 Long-term debt classified as current � � � � 641,179 � Total
current liabilities 139,325 768,020 Long-term debt, net of current
maturities and long-term debt classified as current 609,241 4,693
Deferred and long-term taxes 13,202 23,114 Pension, other
postretirement and postemployment obligations 54,189 90,749 Other
long-term liabilities 5,532 5,917 Commitments and contingencies
Stockholders� equity (deficit) Preferred stock, $0.01 par value,
1,000,000 shares authorized; no shares outstanding as of September
30, 2008 and December 31, 2007 � � Common stock, $0.01 par value,
150,000,000 shares authorized; 46,173,921 and 46,028,003 shares
outstanding as of September 30, 2008 and December 31, 2007,
respectively 462 460 Paid-in capital 216,860 216,360 Accumulated
deficit (214,566 ) (245,511 ) Accumulated other comprehensive
income � 7,943 � � 27,639 � Total stockholders� equity (deficit) �
10,699 � � (1,052 ) Total liabilities and stockholders� equity
(deficit) $ 832,188 � $ 891,441 � Xerium Technologies, Inc.
Condensed Consolidated Income Statements - (Unaudited) (dollars in
thousands, except per share data) � � Three Months Ended September
30, � Nine Months Ended September 30, � 2008 � � � 2007 � � 2008 �
� � 2007 � Net sales $ 159,307 $ 153,592 $ 488,687 $ 451,210 Costs
and expenses: Cost of products sold 106,513 90,272 303,763 262,934
Selling 20,125 19,747 62,437 59,138 General and administrative
28,265 16,291 70,322 50,337 Restructuring and impairments 3,612 805
6,862 6,158 Research and development 2,910 2,356 9,109 7,617
Curtailment/ settlement gains � (39,968 ) � � � � (39,968 ) � � � �
121,457 � � 129,471 � � 412,525 � � 386,184 � Income from
operations 37,850 24,121 76,162 65,026 Interest expense (16,963 )
(14,386 ) (43,513 ) (38,223 ) Interest income 733 391 1,296 886
Foreign exchange gain (loss) � 710 � � 158 � � 3,344 � � (681 )
Income before provision for income taxes 22,330 10,284 37,289
27,008 Provision for income taxes � 794 � � 3,208 � � 6,344 � �
9,213 � Net income $ 21,536 � $ 7,076 � $ 30,945 � $ 17,795 � Net
income per share: Basic $ 0.47 � $ 0.16 � $ 0.67 � $ 0.40 � Diluted
$ 0.46 � $ 0.16 � $ 0.67 � $ 0.40 � Shares used in computing net
income per share: Basic � 46,163,605 � � 44,977,352 � � 46,111,390
� � 44,477,059 � Diluted � 46,327,233 � � 45,028,634 � � 46,208,018
� � 44,576,009 � � Cash dividends per common share: $ � � $ 0.1125
� $ � � $ 0.45 � Xerium Technologies, Inc. Condensed Consolidated
Statements of Cash Flows - (Unaudited) (dollars in thousands) � �
Nine Months Ended September 30, � 2008 � � � 2007 � Operating
activities Net income $ 30,945 $ 17,795 Adjustments to reconcile
net income to net cash provided by operating activities:
Stock-based compensation 774 1,773 Depreciation 33,311 30,358
Amortization of intangibles 2,386 3,336 Deferred financing cost
amortization 3,539 2,732 Unrealized foreign exchange (gain) loss on
revaluation of debt (2,510 ) 518 Deferred taxes (9,419 ) 3,550
Asset impairment 472 389 Gain on disposition of property and
equipment (2,637 ) (1,223 ) Change in fair value of interest rate
swaps (1,998 ) 4,205 Curtailment/settlement gain (39,968 ) � Change
in assets and liabilities which provided (used) cash: Accounts
receivable 11,570 4,856 Inventories 13,150 (4,671 ) Prepaid
expenses (596 ) (2,489 ) Other current assets 373 1,686 Accounts
payable and accrued expenses 15,155 (13,458 ) Deferred and other
long-term liabilities � (1,713 ) � (854 ) Net cash provided by
operating activities 52,834 48,503 � Investing activities Capital
expenditures, gross (29,145 ) (23,320 ) Proceeds from disposals of
property and equipment 3,566 2,798 Proceeds from (payment for)
acquisition, net of cash acquired 144 (511 ) Other � (1,700 ) � (4
) Net cash used in investing activities (27,135 ) (21,037 ) �
Financing activities Net increase in borrowings (maturities of 90
days or less) (1,768 ) (881 ) Proceeds from borrowings (maturities
longer than 90 days) 2,381 5,680 Principal payments on debt (22,205
) (9,132 ) Cash dividends on common stock � (9,426 ) Other � (8,794
) � (1,787 ) Net cash used in financing activities (30,386 )
(15,546 ) � Effect of exchange rate changes on cash flows � (1,082
) � 3,797 � Net (decrease) increase in cash (5,769 ) 15,717 Cash
and cash equivalents at beginning of period � 24,218 � � 16,816 �
Cash and cash equivalents at end of period $ 18,449 � $ 32,533 �
Supplemental schedule of noncash investing and financing
activities: � Common stock issued in lieu of cash dividends
pursuant to the Dividend Reinvestment Plan $ � � $ 10,487 � Xerium
Technologies, Inc. Non-GAAP Financial Measures EBITDA and Adjusted
EBITDA Reconciliation EBITDA is defined as net income (loss) before
interest expense, income tax provision (benefit) and depreciation
and amortization. Adjusted EBITDA is defined in our credit facility
and is EBITDA plus (i) restructuring or related impairment costs
(not to exceed $12.0 million in the aggregate for 2007 and $5.0
million in the aggregate in each year thereafter), (ii) reserves
for inventory in connection with plant closings, (iii) stock-based
and other non-cash compensation charges, charges from forgiveness
of loans made to employees in connection with the purchase of
equity and any tax gross-up payments made in respect of such loan
forgiveness in connection with or prior to the completion of our
initial public offering, (iv) certain transaction costs, including
costs incurred in connection with our initial public offering and
the related debt financing, the legal reorganization of Brazilian
subsidiaries and the preparation and closing of the existing credit
agreement, (v) consolidated amendment/termination costs, which
consist of costs incurred in connection with the consummation of
the fourth and fifth amendments to the senior credit facility and
the termination of the employment contract of the former Chief
Executive Officer and transition to the new Chief Executive
Officer, not to exceed $8.0 million in the aggregate, (vi) costs
associated with payments to management prior to the completion of
our initial public offering in connection with the termination of
incentive plans, (vii) non-cash charges resulting from the
application of purchase accounting, (viii) non-cash expenses
resulting from the granting of stock options, restricted stock or
restricted stock unit awards under equity compensation programs
solely with respect to our common stock and (ix) expenses incurred
not exceeding $7 million per year as a result of the repurchase,
redemption or retention of our own common stock earned under equity
compensation programs solely in order to make withholding tax
payments. For certain historical periods, the amended credit
agreement specified Adjusted EBITDA is $35,610, $36,514 and $38,431
for the quarters ended March 31, 2008, December 31, 2007 and
September 30, 2007, respectively. For the quarter ended March 31,
2008, the amount reflects an increase of $800 over the originally
disclosed amount in the first quarter of 2008, related to the
transition to the new Chief Executive Officer. Adjusted EBITDA, as
defined in the credit facility and calculated below, may not be
comparable to similarly titled measurements used by other
companies. The following table provides reconciliation from net
cash provided by operating activities, which is the most directly
comparable GAAP financial measure, to EBITDA and Adjusted EBITDA. �
Three Months Ended September 30, (in thousands) � 2008 � � � 2007 �
Net cash provided by operating activities $ 11,821 $ 18,424
Interest expense, net 16,230 13,995 Net change in operating assets
and liabilities (26,673 ) 2,531 Income tax provision 794 3,208
Stock-based compensation (500 ) (578 ) Deferred financing cost
amortization (1,195 ) (914 ) Deferred taxes 6,407 2,230 Asset
impairment (405 ) � Gain on disposition of property and equipment
2,368 78 Unrealized foreign exchange gain on indebtedness, net
1,034 (519 ) Change in fair value of interest rate swaps 450 (2,711
) Curtailment/settlement gains � 39,968 � � � � EBITDA 50,299
35,744 Unrealized foreign exchange gain on indebtedness, net (D) �
519 Amendment/termination costs (F) 483 � Change in fair value of
interest rate swaps (E) 450 � Change in fair value of other
derivatives � (451 ) Restructuring expenses (G) 1,817 805 Non-cash
impairment charges (A) 405 � Growth program costs (B) � 1,255
Inventory write-offs under restructuring programs 199 (21 )
Non-cash compensation and related expenses 500 578 Non-recurring
expenses resulting from cost reduction programs (C) � � � � � �
Adjusted EBITDA $ 54,153 � $ 38,429 � � � Nine Months Ended
September 30, (in thousands) � 2008 � � � 2007 � Net cash provided
by operating activities $ 52,834 $ 48,503 Interest expense, net
42,217 37,337 Net change in operating assets and liabilities
(37,939 ) 14,930 Income tax provision 6,344 9,213 Stock-based
compensation (774 ) (1,773 ) Deferred financing cost amortization
(3,539 ) (2,732 ) Deferred taxes 9,419 (3,550 ) Asset impairment
(472 ) (389 ) Gain on disposition of property and equipment 2,637
1,223 Unrealized foreign exchange gain on indebtedness, net 2,510
(518 ) Change in fair value of interest rate swaps 1,998 (4,205 )
Curtailment/settlement gains � 39,968 � � � � EBITDA 115,203 98,039
Unrealized foreign exchange gain on indebtedness, net (D) (1,985 )
518 Amendment/termination costs (F) 6,480 � Change in fair value of
interest rate swaps (E) 14,154 � Change in fair value of other
derivatives (2,126 ) (451 ) Restructuring expenses (G) 5,000 5,769
Non-cash impairment charges (A) 472 389 Growth program costs (B)
1,764 3,459 Inventory write-offs under restructuring programs 199
73 Non-cash compensation and related expenses 774 1,773
Non-recurring expenses resulting from cost reduction programs (C) �
� � � (68 ) Adjusted EBITDA $ 139,935 � $ 109,501 � (A) In
accordance with the definition of Adjusted EBITDA in our credit
facility, non-cash impairment charges resulting from application of
Statement of Financial Accounting Standards Nos. 142 and 144 have
been added back to Adjusted EBITDA. (B) In accordance with the
definition of Adjusted EBITDA in our credit facility, as amended on
May 30, 2008, growth program costs are not added back to Adjusted
EBITDA for periods beginning after the quarter ended March 31,
2008. Prior to that period, growth programs were added back to
Adjusted EBITDA based upon the credit facility agreement as in
effect at that time. Growth programs were those intended to
increase productivity and economic efficiency or the market share
capacity of the Company, reduce cost structure, improve equipment
utilization or provide additional regional capacity to better serve
growth markets. These growth program costs for the nine months
ended September 30, 2008 and for the three and nine months ended
September 30, 2007 included expenses incurred for our lean
manufacturing initiatives, expansion into Vietnam and other growth
programs. (C) In accordance with the definition of Adjusted EBITDA
in our credit facility, as amended on May 30, 2008, non-recurring
expenses resulting from cost reduction programs are not added back
to Adjusted EBITDA for periods beginning after the quarter ended
March 31, 2008. Prior to that period, cost reduction programs were
added back to Adjusted EBITDA based upon the credit facility
agreement as in effect at that time and were comprised of the
following: (in thousands) � Three Months Ended September 30, 2008 �
Three Months Ended September 30, 2007 � Nine Months Ended September
30, 2008 � Nine Months Ended September 30, 2007 � Environmental
charges in connection with facilities closures pursuant to cost
reduction programs (1) $ n/a $ � $ � $ (200 ) � Certain operating
costs incurred in connection with the transition of production
operations from closed facilities to other facilities (2) n/a � � �
� � 132 � Total $ n/a $ � $ � $ (68 ) (1) For the nine months ended
September 30, 2007, reflects the reversal of amounts accrued in
prior periods. (2) For the nine months ended September 30, 2007,
the amount includes added operating costs related to facility
closures in Italy. (D) In accordance with the definition of
Adjusted EBITDA in our credit facility, as amended on May 30, 2008,
unrealized foreign exchange gains and losses on indebtedness are
not added back to Adjusted EBITDA for periods beginning after the
quarter ended March 31, 2008. Prior to that period, such gains and
losses are added back to Adjusted EBITDA based upon the credit
facility as in effect at that time. (E) In accordance with the
definition of Adjusted EBITDA in our credit facility agreement, as
amended on May 30, 2008, interest expense added back to calculate
Adjusted EBITDA excludes, for periods beginning after the quarter
ended March 31, 2008, the effect of any non-cash gains and losses
resulting from the marking to market of hedging obligations that
has been charged to interest expense. Had this amended definition
been in place for all periods presented, Adjusted EBITDA would have
been $12.2 million lower for the nine months ended September 30,
2008, $4.2 million lower for the nine months ended September 30,
2007 and $2.7 million lower for the three months ended September
30, 2007. (F) For the nine months ended September 30, 2008,
amendment/termination costs include $5.7 million of costs incurred
in connection with the consummation of the fourth and fifth
amendments to the credit facility during the second quarter of 2008
and a $0.8 million increase to Adjusted EBITDA for the first
quarter of 2008, in accordance with the agreement with our lenders.
(G) Restructuring and related impairment costs that can be added
back to determine Adjusted EBITDA were capped at $5 million for
2008 and $12 million for 2007. Impact of Significant Third Quarter
2008 Events Due to the significant impact each of the items
detailed below had on the Company�s third quarter 2008 results,
management believes the following Non-GAAP financial schedule
provides useful information to investors regarding the Company�s
results of operations and Adjusted EBITDA. (in thousands) � Three
Months Ended September 30, 2008 � Nine Months Ended September 30,
2008 As Reported � Adjustments � Adjusted As Reported � Adjustments
� Adjusted � Net sales $ 159,307 $ � $ 159,307 $ 488,687 $ � $
488,687 Costs and expenses: Cost of products sold (1) 106,513
(8,000 ) 98,513 303,763 (8,000 ) 295,763 Selling 20,125 � 20,125
62,437 � 62,437 General and administrative (2) 28,265 (12,200 )
16,065 70,322 (12,200 ) 58,122 Restructuring and impairments 3,612
� 3,612 6,862 � 6,862 Research and development 2,910 � 2,910 9,109
� 9,109 Curtailment/settlement gains (3) � (39,968 ) � 39,968 � � �
� � (39,968 ) � 39,968 � � � � � 121,457 � � 19,768 � � 141,225 � �
412,525 � � 19,768 � � 432,293 � Income (loss) from operations
37,850 (19,768 ) 18,082 76,162 (19,768 ) 56,394 Interest expense
(16,963 ) � (16,963 ) (43,513 ) � (43,513 ) Interest income 733 �
733 1,296 � 1,296 Foreign exchange gain � 710 � � � � � 710 � �
3,344 � � � � � 3,344 � Income (loss) before provision for income
taxes 22,330 (19,768 ) 2,562 37,289 (19,768 ) 17,521 Provision for
income taxes (4) � 794 � � 3,200 � � 3,994 � � 6,344 � � 3,200 � �
9,544 � Net income (loss) $ 21,536 � $ (22,968 ) $ (1,432 ) $
30,945 � $ (22,968 ) $ 7,977 � � � Three Months Ended September 30,
2008 Nine Months Ended September 30, 2008 Adjusted EBITDA Further
Adjustments Adjusted EBITDA as Adjusted Adjusted EBITDA Further
Adjustments Adjusted EBITDA as Adjusted � Adjusted EBITDA (5) $
54,153 � $ (19,768 ) $ 34,385 � $ 139,935 � $ (19,768 ) $ 120,167 �
(1) The Company's 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. Our assessment of the global economic slowdown on our
customers and our industry and the lack of credit availability may
affect our customers� demand for products and their ability to pay
their debts; consequently, during the third quarter, the Company
increased the reserve for slow moving and obsolete inventory by
$8.0 million. (2) As a result of our assessment of the global
economic slowdown on our customers and our industry described
above, the Company also increased its provision for bad debts by
$8.1 million. Additionally during the third quarter, the Company,
while evaluating its facility in Australia, discovered the
possibility of contamination at that facility. Subsequently the
Company had a preliminary evaluation performed, which confirmed the
existence of contamination and estimated preliminary costs to
remediate the contamination at this facility. Based upon this
evaluation, the Company has accrued $4.1 million as its best
estimate of the remediation costs it expects to incur. (3) During
the third quarter of 2008, the Company made and communicated the
following decisions related to certain of its U.S. pension plans,
postretirement benefit plans and 401(k) plans: a) Freezing benefit
pension accruals under its Pension Plan for U.S. Salaried and
Non-Union Hourly Employees (the �Pension Plan�) effective December
31, 2008 so that future service beyond December 31, 2008 will no
longer be credited under the Pension Plan. Employees who are vested
as of December 31, 2008 will be entitled to their benefit earned as
of December 31, 2008. Current employees who are not vested as of
December 31, 2008 will be entitled to their benefit earned as of
December 31, 2008 upon five years of continuous employment from
date of hire. b) No longer sponsoring or funding, as of December
31, 2008, its U.S. retiree health insurance program under which the
Company currently offers health care benefits to a certain group of
retired U.S. employees and their covered dependents and
beneficiaries. c) The Company will increase its 401(k) plan match
in the United States from 4% of eligible compensation to 6% as of
January 1, 2009. The decisions resulted in curtailment/settlement
gains of approximately $40 million. (4) The income tax impact of
these adjustments was significantly less than the statutory rates
because the majority of the curtailments/settlement gains were in
the United States and the environmental matter was in Australia;
jurisdictions for which we have net operating loss carryforwards
and have established valuation allowances against deferred tax
assets. (5) The Company uses supplementary non-GAAP measures,
including EBITDA and Adjusted EBITDA, to assist in evaluating
liquidity and financial performance, specifically in evaluating the
Company's ability to service indebtedness, to fund ongoing capital
expenditures and to evaluate compliance with its bank covenants. As
such, the Company believes that showing the impact of significant
third quarter 2008 events on Adjusted EBITDA provides useful
information to investors because it illustrates how the Company
would have performed for purposes of its covenant compliance absent
these unusual events. The "Significant Third Quarter 2008 Events"
impacted the "Net change in operating assets and liabilities",
"Income tax provision", "Deferred taxes", and
"Curtailment/settlement gains" line items within the "EBITDA and
Adjusted EBITDA reconciliation".
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