YOUNGSVILLE, N.C.--(BUSINESS WIRE)--
Xerium Technologies, Inc. (XRM), a leading, global provider of industrial consumable products and services, today reported fourth quarter and full year 2016 financial results.
Harold Bevis, President and Chief Executive Officer said, “2016 was a noteworthy year for Xerium as the Company ramped up its first ever machine clothing plant in China, the largest market in the world for its products and services. The China facility was the largest component of our repositioning efforts, and accounted for all of the Company’s above-trend capital spending during 2013 to 2016. The Company’s successful footprint repositioning has been coupled with the global rollout of 90 new product launches during the same timeframe. The Company has secured $94 million of new business wins (sales into new customer machine positions), including a record $45 million of new business wins in 2016, resulting in a strong pipeline and 5% backlog growth over the prior year end. The rate of machine closures dramatically slowed in 2016, and we believe that balance is forming between old machines being shut down and new machines being started up.”
Full-year 2016 Highlights
In 2016 Xerium completed its large one-time repositioning which commenced in 2012, and the Company is now fully engaged with the dual effort of filling this new capacity and, at the same time, paying down debt with its free cash flow. Achievement on these initiatives began in 2016, as the Company generated $22.8 million of free cash flow. The Company utilized this free cash flow to reduce leverage in the fourth-quarter.
As a result of repositioning, the new machine clothing plant in China, and the retooling and debottlenecking of multiple other plants to accommodate its 90 new product introductions, the Company achieved $45 million of new wins in 2016 – a new record. The Company is committed to carefully pursuing and securing sustainable revenue streams with new business in growth markets, setting the stage for further progress in 2017.
In 2016 the Company also completed the acquisition of Spencer Johnston, which brings a new set of best-in-class capabilities to the Company’s rolls business, and is supportive to the de-leveraging initiative. Q4 2016 was the second full quarter of ownership of Spencer Johnston, and this fully integrated business unit is performing in line with expectations providing positive contribution to both current results and the Company’s repositioning efforts.
The Company continued to lower its costs permanently with its Lean Six Sigma program and its total cost reduction initiatives. Delivering high quality products, offsetting negative costs, inflation and mix changes remain a steady-state objective for Xerium. The Company achieved its cost-takeout objectives in 2016 and has a similar program already underway in 2017.
Q4 Financial Highlights:
Q4 net sales were $113.2 million, a decrease of 1.5% year-over-year on a constant currency basis. The decrease was largely due to a (2.7)% machine clothing decline in the quarter, which represented an improvement over the market decline rate of (5)% for the first nine months of the year. Order patterns are improving and backlogs are healthy going into 2017. Table 1 summarizes Q4 net sales and the effect of currency translation rates.
|Net Sales For The|
|$ Impact of||% Change|
Q4 2016 gross profit was $41.9 million, or 37.1% of net sales, compared to $44.4 million, or 38.5% of net sales in Q4 2015. Machine clothing gross margin, excluding startup costs declined to 40.9% in Q4 2016 from 41.6% in Q4 2015. The decline in gross profit margin was primarily due to negative currency impacts. Rolls and service gross margin, excluding startup costs, declined to 31.7% in Q4 2016, from a gross margin of 34.9% in Q4 2015. The decline was primarily due to unfavorable product mix in Europe.
SG&A expenses (including Selling, G&A and R&D expenses) were $30.9 million, or 27.3% of net sales in Q4 2016, versus $33.3 million, or 28.9% of net sales in Q4 2015. The decrease in SG&A expenses was primarily attributable to savings achieved through the Company’s cost-out initiatives and a lump-sum distribution offered in Q4 2015 to certain US pension participants as part of the Company’s plan to reduce future pension costs.
Q4 2016 basic loss per share was $(0.55) versus Q4 2015 of $(0.40). Excluding adjustments (see Table 3) losses per share were $(0.25) in Q4 2016, compared to $(0.09) in Q4 2015 as a result of lower sales volumes and gross margins, partially offset by lower SG&A costs.
GAAP operating income in the fourth quarter of 2016 was $8.8 million, or 7.8% of sales, approximately flat with the year-ago period. Q4 2016 adjusted EBITDA declined to $20.4 million, or 18.0% of net sales, compared to $21.5 million, or 18.6% of net sales in 2015. In addition to interest, taxes, depreciation and amortization, adjusted EBITDA excludes expenses related to the Company’s restructuring activities, plant start-up costs, stock based compensation, foreign currency gains and losses and non-recurring expenses. For a full reconciliation, refer to Table 4.
Cash taxes were $1.7 million in Q4 2016. Full year 2016 cash taxes were $13.7 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.
The Company generated GAAP operating cash flow of $14.5 million and free cash flow of $10.5 million during the fourth quarter of 2016 and paid down debt with the excess amounts. Net debt was $511.7 million at the end of Q4 2016 compared to $522.9 million at the end of Q3 2016. The Company's net debt leverage ratio on a pro forma basis is 5.1x 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 million). The Company plans to utilize its free cash flow to pay down debt and de-lever over the remainder of its debt maturities.
The industry has gone through a hard business cycle in the last few years due to the strong US dollar and a high rate of machine closures. At the same time, the Company has repositioned itself into growth markets with new products versus harvesting its declining legacy positions. The Company has completed the above-trend investment part of this repositioning, and is achieving its objectives of securing sustainable new business in targeted markets.
The high rate of machine closures is abating and this will lessen the pressure on the Company’s legacy financial model. Industry consensus points to similar trends of improving market prospects, and a leading third-party market forecast estimates that a large number of new machines will be built, especially in China. A leading indicator of successful repositioning results is the Company’s New Wins metric, which tracks successful new business secured with growth companies in our targeted areas. The New Wins program is gaining momentum, production bottlenecks are being resolved with regard to the 90 new products, and backlogs are strengthening.
With an improving backdrop and the effect of repositioning to fully offset an uncertain currency outlook and graphical grade pressure the Company expects similar financial outcomes for adjusted EBITDA to 2016. The Company also expects 2017 free cash flow to be modestly lower, as higher cash interest will not be fully offset by improved operational cash flow. The Company does expect strengthening business fundamentals and will update comments regarding this outlook as these events unfold. Given this outlook, the Company is well positioned to execute against its $100 million debt pay down program and achieve a naturally growing company that is attached to growth markets and growth customers.
The Company plans to hold a conference call on the following morning:
|Date: March 2, 2017|
|Start Time: 9:00 a.m. Eastern Time|
|Domestic Dial-In: +1-844-818-4921|
|International Dial-In: +1-484-880-4582|
|Conference ID: 65969116|
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.
ABOUT XERIUM TECHNOLOGIES, INC.
Xerium Technologies, Inc. (XRM) is a leading, global provider of industrial consumable products and services. Its products and services are consumed during machine operation by its customers. Xerium operates around the world under a variety of brand names, and 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 2,950 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, Free Cash Flow, Net Debt and currency effects on Net Sales, to assist in evaluating its 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 tables 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, 2016 filed with the Securities and Exchange Commission on March 1, 2017 and our presentation that will accompany our conference call tomorrow.
CONSTANT CURRENCY NET SALES
Table 2 summarizes YTD net sales and the effect of changes in currency translation rates:
|Net Sales For The Year|
|$ Impact of||% Change|
BASIC ADJUSTED NET LOSS PER SHARE (net of taxes)
Table 3 represents a reconciliation of basic net loss per share to basic adjusted loss per share for the three months ended December 31, 2016 and 2015:
|Three Months Ended|
Basic net loss per share
|Pension settlement loss||—||0.07|
|Non-recurring tax reserve adjustment||0.13||(0.04||)|
|Valuation allowance adjustment||—||0.05|
|Plant start-up costs||0.02||0.05|
|Impairment of idle machinery and equipment||—||0.02|
|Inventory write-down at a closed plant||—||0.01|
|Loss on debt extinguishment||0.01||0.02|
|Foreign exchange loss||—||0.01|
|Basic adjusted loss per share||$||(0.25||)||$||(0.09||)|
Net debt is defined as GAAP total debt less cash and deferred finance fees.
FREE CASH FLOW
Free cash flow is defined as GAAP operating cash flow less capital expenditures.
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 (loss) 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), (xiii) foreign currency losses and (xiv) 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 (loss) for such period, (i) foreign currency gains and (ii) non-cash gains with respect to the items described in clauses (vi), (vii), (ix), (xi), (xii) and xiv (other than, in the case of clause (xiv), 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 (iii) 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 (loss) 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 (loss): (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 4 provides a reconciliation from net income and operating cash flows, which are the most directly comparable GAAP financial measures, to EBITDA and Adjusted EBITDA.
Adjusted EBITDA Definition Modification
During the 4th quarter of 2016, the Company modified its definition of Adjusted EBITDA to exclude foreign exchange gains and losses from this non-GAAP measure. This change enhances investor insight into the Company’s operational performance. In previous filings, Q4 and full year 2015 Adjusted EBITDA were stated at $21.3 million and $103.7 million, respectively.
|Q4 2016||Q4 2015||YTD 2016||YTD 2015|
|Amortization of other intangibles||269||70||841||298|
|Deferred financing cost amortization||830||821||3,063||3,462|
|Unrealized foreign exchange gain on revaluation of debt||(3,310||)||(1,311||)||(3,267||)||(3,426||)|
|(Gain) loss on disposition of property and equipment||—||(1,298||)||50||(1,383||)|
|Pension settlement losses||—||1,108||—||1,108|
|Loss on extinguishment of debt||202||388||11,938||388|
|Change in assets and liabilities which provided (used) cash||13,816||5,545||10,556||6,219|
|Net cash provided by operating activities||14,542||6,308||36,509||33,287|
|Interest expense, excluding amortization||12,110||9,448||43,092||34,951|
|Change in assets and liabilities which (provided) used cash||(13,816||)||(5,545||)||(10,556||)||(6,219||)|
|Current portion of income tax expense||1,439||5,466||9,063||16,250|
|Pension settlement loss||—||(1,108||)||—||(1,108||)|
|Unrealized foreign exchange gain on revaluation of debt||3,310||1,311||3,267||3,426|
|Gain (loss) on disposition of property and equipment||—||1,298||(50||)||1,383|
|Loss on extinguishment of debt||(202||)||(388||)||(11,938||)||(388||)|
|Loss on extinguishment of debt||202||388||11,938||388|
|Pension settlement losses||—||1,108||—||1,108|
|Non-restructuring impairment charges||—||345||—||494|
|Plant startup costs||320||776||2,176||3,886|
|Inventory write-off of closed facilities||—||121||—||587|
|Foreign exchange (gain) loss||(94||)||278||383||(1,872||)|
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, 2016 filed on March 1, 2017 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.
|Xerium Technologies, Inc.|
|Consolidated Statements of Operations and Comprehensive Loss|
|(Dollars in thousands, except per share data)|
|Three Months Ended||Year Ended|
|December 31,||December 31,|
|Costs and expenses:|
|Cost of products sold||71,247||71,099||293,842||288,512|
|General and administrative||13,486||15,987||51,063||56,250|
|Research and development||1,829||1,709||7,100||7,404|
|Income from operations||8,829||8,866||46,140||46,014|
|Interest expense, net||(12,940||)||(10,269||)||(46,155||)||(38,413||)|
|Loss on debt extinguishment||(202||)||(388||)||(11,938||)||(388||)|
|Foreign exchange gain (loss)||94||(278||)||(383||)||1,872|
|Loss before provision for income taxes||(4,219||)||(2,069||)||(12,336||)||9,085|
|Provision for income taxes||(4,725||)||(4,256||)||(9,282||)||(13,465||)|
|Net loss per share:|
|Shares used in computing net loss per share:|
|Consolidated Selected Financial Data|
|Cash Flow Data: (in thousands)||Year Ended|
|December 31, 2016||December 31, 2015|
|Net cash provided by operating activities||$||36,509||$||33,287|
|Net cash used in investing activities||$||(29,814||)||$||(47,605||)|
|Net cash (used in) provided by financing activities||$||(2,326||)||$||14,450|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$||32,956||$||29,250|
|Capital expenditures, gross||$||(13,706||)||$||(50,871||)|
|Balance Sheet Data: (in thousands)||December 31, 2016||December 31, 2015|
|Cash and cash equivalents||$||12,808||$||9,839|
|Total stockholders' deficit||$||(146,905||)||$||(113,070||)|