YOUNGSVILLE, N.C.--Xerium Technologies, Inc. (NYSE:XRM), a leading, global provider of highly engineered, industrial consumable products and integrated services today reported third quarter 2016 financial results.
Third quarter sales were $119.2 million compared to prior-year sales of $117.7 million. On a constant currency basis, sales were up 0.9%, compared to the third quarter of 2015. Higher sales during the period reflect a 7.3% year-over-year increase in the Company’s Rolls segment, mostly from the recent acquisition of Spencer Johnston. Higher Rolls segment volume was partially offset by a 3.0% decrease in Machine Clothing segment sales on a constant currency basis, due in part to temporary production output issues that the Company is addressing.
GAAP operating income in the third quarter of 2016 was $11.1 million, or 9.3% of sales, an increase from $9.4 million, or 8.0% of sales in the year-ago period due to lower restructuring, startup and overhead costs, partially offset by lower gross margins. Third quarter Adjusted EBITDA was $22.9 million, down $(5.4) million, or (19.1%) from Q3 2015 due to $(3.0) million of unfavorable currency impacts, a weak Brazilian economy, and temporary production output issues that drove unfavorable product mix and margin compression in certain areas. These headwinds were partially offset by the impact of the Spencer Johnston acquisition. On a constant currency basis, Adjusted EBITDA is down (8.5%) from Q3 2015.
During Q3, the Company refinanced its debt and extended its maturities to August 2021 by closing on a $480 million in aggregate principal amount of 9.5% Senior Secured Notes. The Company used the net proceeds to repay all debt outstanding under its term debt facility and its 8.875% Senior Notes due 2018. This refinancing marks an important strategic milestone by extending the Company’s debt maturity to August 2021 and provides the framework for the Company’s debt pay down strategy.
At September 30, 2016, the Company had total liquidity of $34.5 million, and generated free cash flow of $1.2 million during the third quarter of 2016, marking a $3.5 million improvement over the prior year’s quarter. Net debt (which is defined as total debt less cash and excluding deferred finance fees) was $522.9 million at the end of Q3 2016 compared to $499.5 million at the end of Q2 2016. The increase was primarily due to costs of the Company’s refinancing. The Company's net debt leverage ratio on a pro forma basis is 5.2X 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 pay down debt and de-lever over the remainder of the year and its debt maturities.
Harold Bevis, President and Chief Executive Officer commented, “Our strategic initiatives to reposition Xerium into better performing end-market segments continue to gain momentum and are evidenced by improving order patterns and an increase in backlog compared to the prior-year. Looking forward, we expect this pattern to continue as we gain market penetration with 49 new product introductions.”
Bevis continued “We are pleased to have extended the maturity of our long-term debt, which substantially de-risks our business and provides runway to execute the Company’s debt reduction initiative. We are equally pleased with the orders and backlog that we are developing due to the success of our commercial repositioning program. We are disappointed by the temporary back-order situation that we have in certain of our high-margin plants, but have taken the steps to redistribute that production over the next few quarters. Currency movements are impacting our US dollar reported results and we are taking the necessary actions to mitigate this as well.
Based on current plans, our net-debt peaked in the third quarter due to debt refinancing costs, and we expect debt levels to decline going forward. In the third quarter we generated our third consecutive quarter of positive free cash flow which keeps us on track to meet our full-year cash flow guidance.”
With regard to overall corporate repositioning, the company made progress on several of its strategic priorities, including:
- Successfully field-trialed 14 new products to achieve new wins and introduce new material technology, product category expansion, and machine analytics.
- Took multiple steps to implement extra capacity for successful new products, which had become bottlenecked in the quarter.
- In our second quarter of ownership, the Spencer Johnston acquisition is performing in line with expectations, and provided a positive contribution to the quarter.
Cash Generation and Debt Paydown
- Generated $12.4 million of free cash flow in the first three quarters of 2016, an improvement of $25.8 million compared to negative free cash flow of $(13.4) million in the same period in 2015. This improvement is the result of the completion of investment projects to reposition Xerium into better performing end markets. As previously announced, capital expenditures will be at a significantly lower spending level both for this year and for the next several years.
- The company has ample opportunity to continue to significantly lower the costs of the company and therefore improve its EBITDA through investment projects. However, it will pace those efforts in conjunction with meeting its debt repayment goals.
Results of Operations:
Net sales for Q3 2016 were $119.2 million, an increase of 0.9% compared to Q3 2015 sales of $117.7 million, on a constant currency basis. The increase in sales was primarily attributable to rolls sales increases related to the acquisition of Spencer Johnston, partially offset by lower machine clothing volumes in North America, due in part to temporary production output issues that the Company is addressing.
Table 1 summarizes Q3 net sales and the effect of currency translation rates.
|Net Sales For The Quarter Ended|
Q3 2016 gross profit was $43.8 million, or 36.8% of net sales, compared to $46.5 million, or 39.5% of net sales in Q3 2015. Machine clothing gross margin, excluding plant startup costs, was 38.6% in Q3 2016 compared to 42.9% in Q3 2015. The decline in gross profit margin reflects a weak Brazilian economy, temporary missed production of certain high-margin products which drove unfavorable product mix and margin compression in certain regions. Rolls gross margin, excluding startup costs, was 35.2% in Q3 2016, from 38.1% in Q3 2015. The decline was primarily due to unfavorable product mix and a weak Brazilian economy.
SG&A expenses (including Selling, G&A and R&D expenses) were $30.2 million, or 25.4% of net sales in Q3 2016, compared to $32.1 million, or 27.1% of sales in Q3 2015. The decline in SG&A expense is primarily attributable to savings achieved through the Company’s cost-out initiatives.
Q3 2016 Adjusted EBITDA declined to $22.9 million, or 19.2% of net sales, compared to Q3 2015 Adjusted EBITDA of $28.3 million, or 24.0% 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.
Q3 2016 basic loss per share was $(0.83) compared to Q3 2015 basic income per share of $0.06. Excluding adjustments (see Table 2) earnings per share were $0.05 in Q3 2016, compared to $0.30 in Q3 2015.
Cash taxes were $4.9 million in Q3 2016. For the full year 2016, we expect that cash taxes will be approximately $14 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.
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 decline relative to the prior year, as the Company brings on new volume from plant investments and new products to offset the declines in legacy businesses.
- The Company continues to expect 2016 free cash flow to be in the range of $25 to $30 million. As a result of economic weakness in Latin America, persistently unfavorable foreign exchange impacts, and margin compression, the Company now expects full-year adjusted EBITDA to approximate $100 million, assuming our current sales, production and currency outlooks.
The Company plans to hold a conference call the evening of the earnings release as follows:
|Date: October 27, 2016|
|Start Time: 5:00 p.m. Eastern Time|
|Domestic Dial-In: +1-844-818-4921|
|International Dial-In: +1-484-880-4582|
|Conference ID: 84269198|
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 28 manufacturing facilities in 13 countries around the world, Xerium has approximately 2,900 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 September 30, 2016 Form 10-Q filed with the Securities and Exchange Commission on October 27, 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 September 30, 2016 and 2015:
|Three Months Ended|
|Basic net income (loss) per share||$||(0.83)||$||0.06|
|Impairment of idle machinery/equipment||—||0.01|
|Inventory write-down at a closed plant||—||0.02|
|Valuation allowance reversal||(0.6)||(0.12)|
|Plant start-up costs||0.04||0.09|
|Basic adjusted earnings per share||$||0.05||$||0.30|
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 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 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.
Xerium Technologies, Inc.
Non-GAAP Measure - Adjusted EBITDA
(Dollars in thousands, except per share data and unaudited)
Three Months Ended
|Net (loss) income||
|Amortization of intangibles||269||69|
|Deferred financing cost amortization||692||870|
|Foreign exchange loss (gain) on revaluation of debt||(109)||(1,200)|
|Deferred tax expense||(2,269)||(3,179)|
|Loss on disposition of property and equipment||(29)||(69)|
|Loss on extinguishment of debt||11,736||-|
|Net change in operating assets and liabilities||(938)||3,441|
|Net cash provided by operating activities||4,835||10,184|
|Interest expense, excluding amortization||11,524||8,905|
|Net change in operating assets and liabilities||938||(3,441)|
|Current portion of income tax expense||2,294||3,934|
|Foreign exchange gain (loss) on revaluation of debt||109||1,200|
|(Loss) on disposition of property and equipment||29||69|
|Loss on extinguishment of debt||(11,736)||-|
|Loss on extinguishment of debt||11,736||-|
|Operational restructuring expenses||2,493||5,001|
|Inventory write off||-||465|
|Non-restructuring impairment expense||-||149|
|Other non-recurring expenses||85||1,552|
|Plant startup costs||573||1,378|
Xerium Technologies, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data and unaudited)
|Three Months Ended September 30,|
|Costs and expenses:|
|Cost of products sold||75,385||71,252|
|General and administrative||12,644||14,370|
|Research and development||1,786||1,841|
|Income from operations||11,067||9,386|
|Interest expense, net||(12,216)||(9,775)|
|Loss on extinguishment of debt||(11,736)||-|
|Foreign exchange (loss) gain||(429)||2,059|
|(Loss) income before provision for income taxes||(13,314)||1,670|
|Provision for income taxes||(25)||(755)|
|Net (loss) income||(13,339)||915|
|Comprehensive (loss) income||(10,988)||(11,012)|
|Net (loss) income per share:|
|Shares used in computing net (loss) income per share:|
Xerium Technologies, Inc.
|Consolidated Selected Financial Data|
|Cash Flow Data: (in thousands)||Nine Months Ended|
|September 30, 2016||September 30, 2015|
|Net cash provided by operating activities||$||21,967||$||26,980|
|Net cash used in investing activities||$||(25,745)||$||(40,272)|
|Net cash provided by financing activities||$||4,193||$||15,585|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$||24,779||$||21,625|
|Capital expenditures, gross||$||(9,614)||$||(40,376)|
|Balance Sheet Data: (in thousands)||September 30, 2016||December 31, 2015|
|Cash and cash equivalents||$||8,380||$||9,839|
|Total debt (including capital leases)||$||514,556||$||483,173|
|Total stockholders' deficit||$||(109,844)||$||(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/.