YOUNGSVILLE, N.C.--(BUSINESS WIRE)--Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of industrial consumable products and services, announced its Q3 2015 results.
Net sales for Q3 2015 were $118 million, a decrease of $(9.9) million, or (7.1)% compared to Q3 2014, on a constant currency basis, driven by the decline in sales to commodity grade paper producers, particularly in North America. These decreases were partially offset by increases in rolls sales outside of North America. See "Non-GAAP Financial Measures" and "Segment Information" below.
Q3 2015 gross profit was $48.3 million, or 41% of net sales, excluding one-time start-up costs of a new machine clothing plant in China; a new rolls plant in Turkey; and plant closure costs.
SG&A expenses were $32.1 million, or 27.3% of net sales in Q3 2015, a decline versus Q3 2014 expenses of $34.2 million, or 24.6% of net sales.
Adjusted EBITDA was $28.3 in Q3 2015, sequentially flat to Q2 2015. Q3 2015 TTM Adjusted EBITDA was $111.9 million, an increase of $1.2 million over Q3 2014 TTM Adjusted EBITDA.
Q3 2015 basic earnings per share were $0.06 per share versus a loss per share of $(1.32) in Q3 2014. Excluding the non-recurring items and foreign currency gains, basic adjusted earnings per share were $0.30 in Q3 2015, compared to $0.43 in Q3 2014 as a result of lower sales volumes and gross margins, partially offset by favorable currency effects and improved SG&A. See "Basic Adjusted Earnings Per Share" below.
"Commodity grade paper production declined strongly in Q3, particularly in North America due in part to the strong dollar. Xerium is exposed to this set of market dynamics and it is a key reason for its multi-year 10 project sales repositioning program. This program remains on track with 8 of the 10 projects completed and the majority of the spending completed," said Harold Bevis, President and CEO of Xerium Technologies, Inc. “Our largest sales growth projects are both on line now – new machine clothing plant in China to pursue Asian board, packaging and tissue; and a new rolls plant in Turkey to pursue board, packaging and tissue in that region.
In October 2015, we announced the closure of a rolls plant in North America in order to initiate our 11th sales repositioning project. We will move that equipment into a new rolls plant in a new geography focused on the growing pulp market. These initiatives are part of our firm commitment to move Xerium into growing grades and geographies. This will increase our earnings potential.
Winning new business for this new capacity is paramount and is based upon technical performance on our customer’s machines. Xerium has developed 39 new products and created over 150 new patents in this endeavor. The sales repositioning programs will be a main driver of our ongoing success. At the same time, we are repositioning the company’s cost structure. As a result, the company has systematically improved its gross margin rates and EBITDA rates.
8 of the first 10 sales repositioning projects have been completed and the other 2 projects will be completed in Q4. The majority of the spending on these projects has been completed as well. Free cash flow is expected to improve ~$30 million year-over-year and this progress will continue into 2016."
We expect currency market dynamics and currency exchange rates to remain the same in Q4 2015. Consequently, adjusted EBITDA is now expected to be approximately $110 million for 2015. This is confirmation of the importance of the company’s repositioning program. The economic payback of these investments will become increasingly apparent as we move forward. Furthermore, with the most significant capital investments behind us, we will improve the company's free cash flow as we go forward.
Sales Growth Repositioning Program
The company has completed 17 of the 19 plant repositioning projects in its 3 year program. This transformation program has the goal of realigning our geographic footprint, cost structure and machine re-purposing with market growth opportunities. In June, we announced that the closure of the machine clothing plant in Canada was due to its high cost structure. Those machines are moving to Asia. In addition, in October, we announced that we were closing the Virginia rolls plant due to it being redundant to other North American facilities and Xerium having strong alternate use for those assets in a brand-new high-growth market location (new location not yet announced).
For at least the next 2 years, the company will be repurposing and relocating its machine clothing and roll assets and personnel to new growing market positions.
Machine Clothing Sales Growth Repositioning
We have completed the company’s sales growth repositioning program at 10 machine clothing plants.
- 4 plant closures in Spain, Argentina, Canada, and Brazil
- 5 plant expansions in Canada, Austria, Japan, and Brazil
- 1 new plant in China
This 3 year refitting program will better position Xerium to pursue machine clothing sales in growing grades and regions that are outpacing global industry growth. In addition, this global renovation program helped reconfigure our machine clothing plants into a unified global network that eliminates redundancy, standardizes on best practices and shortens lead times. The company has a few more remaining steps to complete its machine clothing repositioning program (those steps not yet announced).
The most significant project was building the company’s new machine clothing in China and it began production in August of 2015. The Asia team has already won new incremental business for Q4 2015 and beyond. Its strategic location in the world’s largest paper-making region is ideal. Over half of the world’s paper machines are in Asia, and over half of those machines are in China specifically. This is the company’s first machine clothing plant in China. It has the company’s newest equipment and newest product designs.
Rolls Sales Growth Repositioning
The company is also on track to complete in Q4 the company’s sales growth repositioning at 9 rolls plants.
- 4 plant closures in France, Germany, United States
- 4 plant expansions in China, United States
- 1 new plant in Turkey
This 3 year refitting program will better position Xerium to pursue roll sales in growing grades and regions that are outpacing global industry growth. The company has installed its first working roll plant in China and is winning new business and moving existing production from Europe to China. The China plant has the company’s newest equipment and newest product designs.
EVP and Chief Financial Officer, Cliff Pietrafitta said: "We spent approximately $16.8 million of cash on capital expenditures and restructuring costs in Q3 2015 and we expect to spend cash of approximately $50 million in 2015 on capital expenditures and approximately $13 million on restructuring costs for the entire year of 2015. Our estimated restructuring costs have increased from prior guidance, due to the acceleration of the Middletown, VA closure and other cost out initiatives, as we are proactively addressing the ongoing weakness in the commodity grade markets.
As of September 30, 2015, we had an aggregate of $33.0 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $10.7 million. In addition, Q3 2015 free cash flow (defined as cash flow from operations less capital expenditures) improved $1.3 million to $(2.3) million from $(3.6) million in Q2 of 2015, primarily as a result of improved cash flow from operations in Q3 2015.
Net debt (which is defined as total debt less cash) increased to $478.7 million in Q3 2015 from $473.4 million in Q2 2015, primarily as a result of negative free cash flow and unfavorable currency effects. Our net debt leverage ratio was 4.3x in Q3 2015, compared to 4.1x in Q2 2015. We expect our net debt and leverage to improve in 2016, as we utilize free cash flow to pay down debt.
On November 3, 2015 we completed a refinancing of our existing ABL revolver. This new $55 million facility extends the maturity date to November of 2020 and provides more flexible terms at a lower overall cost of borrowing. The terms of this new facility will provide us additional optionality as we continue our strategic initiatives.
Trade working capital decreased $15.6 million to $116.0 million at September 30, 2015 from $131.6 million at December 31, 2014, primarily as a result of favorable currency impacts. Net of favorable currency, trade working capital improved $2.6 million. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below.
Our effective income tax rate for Q3 2015 was 45.2% compared to 334.0% in Q3 2014. Excluding the effects of settling a tax assessment in Brazil in 2014, restructuring, non-recurring tax reserve adjustment and the Australian valuation allowance release, our effective tax rate was 55.9%, compared to 38.0% in Q3 2014, primarily due to the mix of earnings in tax paying jurisdictions versus earnings in non-tax paying jurisdictions. See "Effective Tax Rate" below."
The following table presents net sales for Q3 2015 and Q3 2014 by segment and the effect of currency on Q3 2015 net sales (dollars in thousands):
Net Sales For The
of $ Change
TRADE WORKING CAPITAL
The following table presents trade working capital as of September 30, 2015 and December 31, 2014 (in thousands). The change was primarily driven by favorable currency effects.
|Trade receivables, net (1)||$76,244||$81,998||$5,754|
|Trade accounts payable (2)||(32,021||)||(33,962||)||(1,941||)|
(1) Trade Receivables, Net equals Accounts Receivable less Other Receivables of $1.6 million and $1.1 million at September 30, 2015 and December 31, 2014.
(2) Trade Accounts Payables equals Accounts Payable less Deposits Received and Other Payables of $6.0 million and $7.9 million at September 30, 2015 and December 31, 2014, respectively.
EFFECTIVE TAX RATE
The following table presents a reconciliation of effective tax rate excluding restructuring expenses, non-recurring tax reserve adjustments and the Australian valuation allowance release, to our effective tax rate for the quarter ended September 30, 2015 (in thousands):
|For the quarter ended September 30, 2015|
|Income before provision for income taxes||$1,670||($755||)||$915||45.2||%|
|Non-recurring tax adjustments||(5,001||)||2,972||(2,029||)||59.4||%|
|Income before provision for income taxes excluding non-recurring tax adjustments||$6,671||($3,727||)||$2,944||55.9||%|
BASIC ADJUSTED EARNINGS PER SHARE (net of taxes)
|Three Months Ended|
|Net income (loss) per share||$||0.06||$||(1.32||)|
|Brazilian Tax Charge||—||1.56|
|Valuation allowance reversal||(0.12||)||—|
|Plant start-up costs||0.09||0.03|
|Impairment of idle machinery and equipment||0.01||—|
|Inventory write-down at a closed plant||0.02||—|
|Basic adjusted earnings per share||$||0.30||$||0.43|
The Company plans to hold a conference call on the following morning:
|Date: November 5, 2015|
|Start Time: 9:00 a.m. Eastern Time|
Domestic Dial-In: +1-844-818-4921
International Dial-In: +1-484-880-4582
Conference ID: 39761772
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. You may also click here and you will be taken directly to the webcast registration page.
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, 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 "Segment Information," "Trade Working Capital", "Basic Adjusted earnings Per Share" and "Effective Tax Rate" above and our Selected Financial Data below. 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-Q for the quarter ended September 30, 2015 filed with the Securities and Exchange Commission on November 4, 2015 and our presentation that will accompany our conference call tomorrow.
About Xerium Technologies
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 27 manufacturing facilities in 13 countries around the world, Xerium has approximately 3,000 employees.
This press release contains forward-looking statements. The words "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 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 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, 2014 filed on March 4, 2015 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.
Selected Financial Data Follows
|Xerium Technologies, Inc.|
|Consolidated Statements of Operations and Comprehensive Loss|
|(Dollars in thousands, except per share data)|
|Three Months Ended||Nine Months Ended|
|September 30,||September 30,|
|Costs and expenses:|
|Cost of products sold||71,252||83,364||217,413||248,954|
|General and administrative||14,370||14,133||40,261||43,337|
|Research and development||1,841||1,909||5,695||5,899|
|Income from operations||9,386||17,791||37,148||42,701|
|Interest expense, net||(9,775||)||(9,412||)||(28,144||)||(26,985||)|
|Foreign exchange gain (loss)||2,059||367||2,150||(818||)|
|Income before provision for income taxes||1,670||8,746||11,154||14,898|
|Provision for income taxes||(755||)||(29,218||)||(9,209||)||(33,440||)|
|Net income (loss)||$||915||$||(20,472||)||$||1,945||$||(18,542||)|
|Net income (loss) per share:|
|Shares used in computing net income (loss) per share:|
|Consolidated Selected Financial Data|
|Cash Flow Data: (in thousands)||Nine Months Ended|
|September 30, 2015||September 30, 2014|
|Net cash provided by operating activities||$24,856||$1,317|
|Net cash used in investing activities||($40,272||)||($33,503||)|
|Net cash provided by financing activities||$17,709||$26,713|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$21,625||$26,180|
|Capital expenditures, gross||($40,376||)||($33,666||)|
|Balance Sheet Data: (in thousands)||September 30, 2015||December 31, 2014|
|Cash and cash equivalents||$10,704||$9,517|
|Total debt (including capital leases)||$489,383||$469,435|
|Total stockholders' deficit||($107,251||)||($74,110||)|
EBITDA and Adjusted EBITDA Non-GAAP Measures
Non-GAAP Financial Measures
We use EBITDA and Adjusted EBITDA (as defined in our credit facility) as supplementary non-GAAP liquidity measures to assist us in evaluating our liquidity and financial performance, specifically our ability to service indebtedness and to fund ongoing capital expenditures. Neither EBITDA nor Adjusted EBITDA should be considered in isolation or as a substitute for income (loss) or cash flows from operations (as determined in accordance with GAAP). 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.
The following table provides reconciliation from net income and operating cash flows, which are the most directly comparable GAAP financial measures, to EBITDA and Adjusted EBITDA.
Nine Months ended
Trailing Twelve Months
Ended September 30,
|Q3 2015||Q2 2015||Q3 2014||2015||2014||2015||2014|
|Net income (loss)||$||915||$||(703||)||$||(20,472||)||$||1,945||$||(18,542||)||$||13,104||$||(15,098||)|
|Amortization of intangibles||69||79||231||228||1,230||538||1,454|
|Deferred financing cost amortization||870||896||942||2,641||2,409||3,536||3,079|
|Foreign exchange (gain) loss on revaluation of debt||(1,200||)||1,057||396||(2,115||)||(340||)||(2,033||)||(260||)|
|Deferred tax expense||(3,179||)||628||2,460||(1,571||)||1,509||(7,938||)||(5,516||)|
|(Gain) loss on disposition of property and equipment||(69||)||13||(33||)||(85||)||(4||)||(1,116||)||43|
|Net change in operating assets and liabilities||3,441||(3,200||)||(292||)||(1,452||)||(12,030||)||(9,276||)||(13,235||)|
|Net cash provided by (used in) operating activities||10,184||6,670||(7,599||)||24,856||1,317||30,431||7,001|
|Interest expense, excluding amortization||8,905||7,809||8,650||25,503||24,576||34,390||33,071|
|Net change in operating assets and liabilities||(3,441||)||3,200||292||1,452||12,030||9,276||13,235|
|Current portion of income tax expense||3,934||4,052||26,758||10,780||31,931||13,788||34,263|
|Foreign exchange gain (loss) on revaluation of debt||1,200||(1,057||)||(396||)||2,115||340||2,033||260|
|Gain (loss) on disposition of property and equipment||69||(13||)||33||85||4||1,116||(40||)|
|Operational restructuring expenses||5,001||5,509||3,466||12,734||15,712||15,164||22,102|
|Inventory write-off related to a closed plant||465||—||—||465||—||465||262|
|Non-restructuring impairment expense||149||—||—||149||—||149||—|
|Other non-recurring expense||1,552||700||—||2,402||—||2,402||—|
|Plant startup costs||1,378||1,132||537||3,110||953||3,677||1,058|