YOUNGSVILLE, N.C.--Xerium Technologies, Inc. (NYSE:XRM), a leading, global provider of highly engineered, industrial consumable products and integrated services today reported first quarter 2016 financial results.
First quarter sales were $115.0 million compared to prior-year sales of $121.0 million. On a constant currency basis, sales were down (2.8)%, compared to the first quarter of 2015. Sequentially, sales were approximately flat versus the fourth quarter of 2015. The Company’s performance in the quarter reflected market softness, increasingly offset by higher sales from products associated with the Company’s strategic repositioning initiatives especially rolls sales, which were up 3.5% year-over-year.
First quarter Adjusted EBITDA was $24.0 million, lower than the prior-year of $26.2 million, but a sequential improvement versus $21.3 million in the fourth-quarter of 2015. In Q1 2016, the Company realized a $5.1 million benefit from ongoing cost reduction programs, and began to realize incremental profit contribution from sales associated with its repositioning projects.
Harold Bevis, President and Chief Executive Officer commented, “Our repositioning investments are becoming evident and serving as a catalyst for improved financial performance. Already our roll sales are increasing, as we expected they would. We are pleased to report sequential gains in profitability and a strong year-over-year improvement in free cash flow. We are intently focused on building momentum behind this catalyst, which we expect to offset the declines we are seeing in certain markets and products. We believe we are on a clear path to improved fundamentals, including consistently positive cash generation. We expect to de-lever our balance sheet as we continue our strategic repositioning to best align Xerium for future global demand.”
Bevis continued, “Our acquisition of Spencer Johnston is a modestly sized, but important deal that accelerates our strategic repositioning. Rolls are a special business for us, and it is growing as an industry. This acquisition further expands both our products and our presence. We expect to achieve straight-forward cost-based synergies and generate strong cash flow from this addition. It will also accelerate our de-leveraging process. We are excited to meet our new employees, introduce ourselves to our new customers, and begin integration of their four factories into our operational footprint. This solidly adds new capability to our industry-leading rolls business.”
With regard to overall corporate repositioning, the company made incremental progress on several of its strategic priorities, including:
- Brought new rolls capacity and capabilities on-line at the Neenah, WI facility.
- Successfully field trialing 14 new products which introduce new material technology, product categories, and machine analytics.
- Completed the acquisition of rolls company Spencer Johnston, which accelerates and enhances Xerium’s efforts to reposition its core business, particularly in its stronger performing rolls segment.
- Successfully executed on cost reduction efforts, with $5.1 million of cost-out in Q1 2016 versus prior year. The 2016 full year plan is $25 million for cost-out initiatives.
- Concluded production at the Middletown, VA production facility, bringing total facility closures to nine since 2012. The rolls machines in this plant will be the equipment source for two brand-new rolls plants in growing geographies outside of North America – one in Chile and one in Asia.
Cash Generation and De-leveraging
- Generated $10.5 million of free cash flow in Q1 2016, an improvement of $14.7 million compared to cash flow of $(4.2) million in Q1 2015, marking the completion of an accelerated period of capital investment. The company pulled forward a significant amount of capex to launch its repositioning efforts and that has been completed. Capex will now be lower than normal for several years.
- Post synergies, management expects the Spencer Johnston acquisition to provide $6 million of annual EBITDA and free cash flow at full run-rate and the acquisition is expected to produce an immediate de-leveraging effect on a pro forma basis. This business will require minimal capex on an ongoing basis.
Results of Operations:
Net sales for Q1 2016 were $115.0 million, a decrease of (2.8)% compared to Q1 2015 sales of $121.0 million, on a constant currency basis. The decrease in sales was primarily attributable to lower machine clothing volumes in the Asia and South America markets, and the ongoing shifts of pricing and mix, partially offset by repositioning initiatives. Conversely, rolls sales are increasing as a result of the company’s repositioning program.
Table 1 summarizes Q1 net sales and the effect of currency translation rates.
Net Sales For The
Q1 2016 gross profit was $43.5 million, or 37.9% of net sales, compared to $48.6 million, or 40.1% of net sales in Q1 2015. Machine clothing gross margin, excluding plant startup costs, declined to 40.9% in Q1 2016 from 43.5% in Q1 2015. The decline in gross profit margin is 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. Rolls gross margin, excluding startup costs, declined to 35.0% in Q1 2016, from 35.5% in Q1 2015. The decline was primarily due to unfavorable currency effects.
SG&A expenses (including Selling, G&A and R&D expenses) were $29.2 million, or 25.4% of net sales in Q1 2016, compared to $32.1, or 26.6% of sales in Q1 2015. The improvement in SG&A expense is primarily attributable to savings achieved through the Company’s cost-out initiatives and favorable currency effects.
Q1 2016 Adjusted EBITDA declined 8.4% to $24.0 million, or 20.9% of net sales, compared to Q1 2015 Adjusted EBITDA of $26.2 million, or 21.7% 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.
Q1 2016 basic loss per share was $(0.09) per share compared to Q1 2015 basic income per share of $0.11. Excluding adjustments (see Table 2) earnings per share were $0.07 in Q1 2016, compared to $0.28 in Q1 2015.
Cash taxes were $3.1 million in Q1 2016. For the full year 2016, we expect that cash taxes will be approximately $15.7 million or 60% of pre-tax income. 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 March 31, 2016, the Company had total liquidity of $49 million, and generated free cash flow of $10.5 million during the first quarter of 2016, marking a $14.7 million improvement over the prior year. EVP and Chief Financial Officer, Cliff Pietrafitta said “This significant cash flow positive swing highlights our exit from a period of accelerated repositioning investment. While our work to realign the business continues, we are pleased that future activities will require less capital, supporting our focus on cash generation and de-levering the balance sheet. Further to that point, on April 26, 2016 we announced plans to establish a new roll cover and mechanical services facility located in Concepción, Chile. We are continuing to reposition assets from low-growth to high-growth markets. This new project is very capital efficient in that Xerium already owns the majority of the equipment that will be installed in the new Concepción plant.
Net debt (which is defined as total debt less cash) was $481.9 million at the end of Q1 2016 compared to $480.6 million at the end of Q4 2015. The Company's net debt leverage ratio was 4.8X at March 31, 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 the first full year of pro forma EBITDA of $5.4 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 remain flat to slightly 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.
- As a result of recent developments including the acquisition of Spencer Johnston and a modestly firming end-market outlook, the Company expects 2016 Adjusted EBITDA to be in a range of $107 to $113 million. When fully integrated, the Company expects the acquisition of Spencer Johnston to provide a benefit to Adjusted EBITDA of $6 million on an ongoing basis, assuming no unexpected changes to end-market conditions.
- As a result of lower expected capital expenditures and the inclusion of operating cash flow from Spencer Johnston, the Company expects 2016 free cash flow in a range of $25 million to $30 million. The Company further expects that the Spencer Johnston acquisition will add $6 million of free cash flow, once at full run rates. The Company is targeting 2016 net debt leverage of 4.3x.
The Company plans to hold a conference call on the following morning:
|Date: May 5, 2016|
|Start Time: 8:00 a.m. Eastern Time|
|Domestic Dial-In: +1-844-818-4921|
|International Dial-In: +1-484-880-4582|
|Conference ID: 87951589|
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, our March 31, 2016 Form 10-Q filed with the Securities and Exchange Commission May 4, 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 March 31, 2016 and 2015:
|Three Months Ended|
|Basic net (loss) income per share||$||(0.09||)||$||0.11|
|Brazilian amnesty interest deduction||(0.06||)||—|
|Non-recurring tax reserve adjustment||—||0.07|
|Valuation allowance reversal||—||(0.01||)|
|Plant start-up costs||0.06||0.05|
|Basic adjusted earnings per share||$||0.07||$||0.28|
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||Three Months Ended March 31,|
|Net (loss) income||$||(1,445||)||$||1,733|
|Amortization of intangibles||94||79|
|Deferred financing cost amortization||756||875|
|Foreign exchange loss (gain) on revaluation of debt||1,120||(1,973||)|
|Deferred tax expense||155||979|
|Loss on disposition of property and equipment||17||14|
|Net change in operating assets and liabilities||4,885||(1,691||)|
Net cash provided by operating activities
|Interest expense, excluding amortization||9,585||8,789|
|Net change in operating assets and liabilities||(4,885||)||1,691|
|Current portion of income tax expense||2,510||2,796|
|Foreign exchange gain (loss) on revaluation of debt||(1,120||)||1,973|
|Loss on disposition of property and equipment||(17||)||(14||)|
|Operational restructuring expenses||2,832||2,224|
|Other non-recurring expenses||103||—|
|Plant startup costs||877||750|
Xerium Technologies, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data and unaudited)
|Three Months ended March 31,|
|Costs and expenses:|
|Cost of products sold||71,428||72,476|
|General and administrative||11,507||13,846|
|Research and development||1,940||1,962|
|Income from operations||11,537||14,195|
|Interest expense, net||(10,341||)||(9,664||)|
|Foreign exchange gain||24||977|
|Income before provision for income taxes||1,220||5,508|
|Provision for income taxes||(2,665||)||(3,775||)|
|Net (loss) income||$||(1,445||)||$||1,733|
|Comprehensive income (loss)||$||7,373||$||(29,398||)|
|Net (loss) income per share:|
|Shares used in computing net (loss) income per share:|
|Consolidated Selected Financial Data|
|Cash Flow Data: (in thousands)||Qtr Ended|
|March 31, 2016||March 31, 2015|
|Net cash provided by operating activities||14,074||$||8,001|
|Net cash used in investing activities||(3,530||)||$||(12,123||)|
|Net cash provided by financing activities||(3,897||)||$||3,947|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$||7,994||$||7,242|
|Capital expenditures, gross||(3,550||)||$||(12,155||)|
|Balance Sheet Data: (in thousands)||March 31, 2016||December 31, 2015|
|Cash and cash equivalents||$||15,450||$||9,839|
|Total debt (including capital leases)||$||497,323||$||490,466|
|Total stockholders' deficit||(106,123||)||$||(113,070||)|
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.