Xerium Technologies, Inc., a leading global provider of industrial consumable products and services, announced its Q2 2015 results.
Net sales for Q2 2015 were $123.1 million, an increase of $2.1 million, or 1.7%, over net sales of $121.0 million for Q1 2015. On a constant currency basis, net sales increased $3.6 million or 2.7% over Q1 2015 net sales, primarily driven by an increase of 3.2% in machine clothing net sales and an increase of 1.8% in rolls net sales. Constant currency SG&A declined by $1.3 million, or 4.1% to $30.4 million in Q2 2015 from $31.7 million in Q1 2015. Q2 2015 Adjusted EBITDA increased to $28.0 million, up 6.9% from $26.2 million in Q1 2015, driven primarily by the increase in sales volume and the decline in SG&A, partially offset by FX losses in Q2 2015 related to the revaluation of non-functional currency balances. See "Non-GAAP Financial Measures" and "Segment Information" below.
Net sales for Q2 2015 decreased by $(3.9) million, or (2.8)% compared to Q2 2014, on a constant currency basis, primarily driven by the decline in the printing, writing and newsprint markets in North America and lower mechanical services sales in North America. See "Non-GAAP Financial Measures" and "Segment Information" below.
Q2 2015 gross profit was $49.4 million, or 40.2% of net sales, compared to $55.4 million, or 39.6% of net sales in Q2 2014. Machine clothing gross margin improved to 43.9% (excluding $0.9 million of one-time Kunshan, China startup costs) in Q2 2015 from 41.1% in Q2 2014. These improvements were a result of positive currency effects that were partially offset by unfavorable fixed cost absorption. Rolls and service gross margin decreased slightly to 36.0% (excluding $0.2 million of Corlu, Turkey one-time start-up costs) in Q2 2015, from a gross margin of 36.5% in Q2 2014, primarily due to unfavorable currency effects.
SG&A expenses were $30.4 million, or 24.7% of net sales, in Q2 2015, down from Q2 2014 SG&A expenses of $35.4 million, or 25.4% of net sales, primarily due to favorable currency effects and lower management incentive costs.
Q2 2015 basic earnings per share were $(0.05) per share versus Q2 2014 basic earnings per share of $0.05 per share. Excluding non-recurring items such as restructuring costs, plant startup costs, foreign currency gains/(losses) and one-time tax reserve charges, basic adjusted earnings per share were $0.37 in Q2 2015, compared to $0.43 in Q2 2014. See "Basic Adjusted Earnings Per Share" below.
“Despite the current difficult industry trends, our Q2 2015 results demonstrated that our initiatives to improve our cost structure continue to deliver both sequential and YOY improvements in Adjusted EBITDA margins, gross margins and SG&A rates. As our sales growth investment programs come on line, we will begin to generate sales growth despite the decline of graphical grade production,” said Harold Bevis, President and CEO of Xerium Technologies, Inc. "Our 2 1/2 year $87 million sales growth investment program is nearing completion. We have completely renovated our products and factories and it has led to many patentable inventions. The second half of 2015 is a turning point for Xerium, which will enable us to expand our ability to gain sales in the competitive marketplace. We are excited about the progress we are making and expect positive financial returns as we ramp up production in the second half of 2015 and into 2016."
During the second quarter of 2015, the machine clothing and rolls sales environment was more challenging than we had anticipated due to customer shutdowns and curtailments. Consequently, we expect our full-year Adjusted EBITDA will likely be comparable to last year's Adjusted EBITDA, due to this quarter's results as well as our expectation for the remainder of the year. We view this as a temporary dynamic given our multi-year sales growth investments are in the early stages of gaining traction and will increasingly augment our sales growth. We expect the incremental earnings from our sales growth investment programs to more than offset the permanent market declines in graphical paper production.
To further increase our profit rates, we are continuing to take costs out of the business. This includes the recent closure of a machine clothing facility in Warwick, Quebec, Canada. The cost structure at this plant was operating at almost twice the level of our low-cost facilities. We still have other facilities with very large cost reduction opportunities. Beyond our improving cost structure and new geographic footprint, we will also benefit from new product introductions. Currently, we have 425 issued patents and 97 pending patents. Additionally, as our capital expenditures begin to decline, we will begin to pay down our debt with the surplus cash flow.
Sales Growth Investment Program Update
The following sales growth investment programs, totaling $87 million, involve a full gamut of initiatives that will enable Xerium to deliver significant incremental Adjusted EBITDA growth and further increase our earnings potential. Most of our spending is behind us and these multi-year programs are coming on line in the second half of 2015.
$71 Million Global Machine Clothing Sales Growth Investment Program
On July 22, 2015, we announced that our Kunshan, China press felt plant began production. This two year, $47.8 million greenfield press felt plant, is located in the center of the largest paper-making region in the world. This facility significantly improves Xerium's competitive positioning, from both a lead time and cost perspective, enabling Xerium to more closely partner with customers who were previously served from our European plants through a lengthy and costly supply chain. Xerium will conduct business in local currency and local languages and will be able to service the largest pulp, paper, paperboard, and tissue machines in the world, as the main machine in the plant is over 15 meters wide. For some press felt designs, Xerium will be able to make three pieces simultaneously - a first for the Company.
Our Piracicaba, Brazil expansion project remains on track to be completed in late 2015, which after three years and a $9.1 million investment (includes $2.7 million in sales growth capital investment and $6.4 million in restructuring capital investment), will have been expanded to offer higher quality dryers, increased exports for spiral and woven dryers, forming fabrics and non-woven fabrics. In addition, this expansion will result in significantly shorter lead times to our customers, and will enable us to consolidate three mid-sized South American plants into one low-cost plant in Piracicaba, Brazil that is globally competitive.
We continue to remain on schedule with our other second half 2015 initiatives at Kentville, Nova Scotia ($4.4 million investment); Gloggnitz, Austria ($12.9 million investment); and Asahi, Japan ($3.2 million investment). Xerium is expanding its product lines and capacity in these plants to better enable it to grow sales. These plants have either recently been or will soon be commissioned and will ramp up their respective production capabilities throughout the second half of 2015.
$16 Million Global Rolls and Service Sales Growth Investment Program
On July 16, 2015, we announced that our Corlu, Turkey Rolls facility began production. This two year $4.3 million greenfield rolls and service plant is in a key emerging market. This facility is a new regional hub, serving customers in Turkey, Southeast Europe and the Middle East. Xerium has conducted business in these regions for many decades as an exporter, and now will serve as a local low-cost provider with shortened lead times to customers. The plant has one of the largest grinding machines in the region and was built to handle rolls up to 80 metric tonnes in weight. For the first time ever, customers in this under-served region will receive locally provided and locally optimized state-of-the-art rubber extrusion and polyurethane roll covering technology.
While the award-winning Ruston, LA facility completed its expansion late last year ($2.1 million investment); Griffin, GA ($4.1 million investment) and Neenah, WI ($5.5 million investment) expansions will all be completed in the second half of 2015. These facilities will expand Xerium's product lines and capacity to better enable it to grow sales.
Collectively, these programs compliment our legacy business model and enable Xerium to replace sales from declining graphical business segments. We will be close to key customers, with short lead times and low costs. Additionally, we are broadening our product and service offerings to give us a wider aperture into new markets and new machines types. These are key turning points for Xerium's business.
EVP and Chief Financial Officer, Cliff Pietrafitta said: "During the second quarter of 2015 we continued to take costs out of the business with quarterly gross savings of $5.5 million. We spent approximately $21.7 million of cash on capital expenditures and restructuring costs in Q2 2015 and we expect to spend approximately $50 million in 2015 on capital expenditures and between $8 and $10 million on restructuring costs for the entire year of 2015.
As of June 30, 2015, we had an aggregate of $30.3 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $9.2 million. Q2 2015 free cash flow (defined as cash-flow from operations less capital expenditures) decreased $(3.3) million to $(9.1) million from $(5.8) million in Q2 of 2014, primarily as a result of increased capex spend and Q2 2015 sales decreases.
Net debt (which is defined as total debt less cash) increased to $473.4 million in Q2 2015 from $464.7 million in Q1 2015, as a result of increased debt outstanding. Our net debt leverage ratio was 4.1x in Q2 2015, substantially the same as 4.0x in Q1 2015. We expect our Net debt and leverage to improve in the later part of 2015, as free cash flow becomes positive and we begin to pay down debt.
Trade working capital decreased $8.4 million to $123.2 million at June 30, 2015 from $131.6 million at December 31, 2014, primarily as a result of favorable currency impacts. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below.
Our effective income tax rate for Q2 2015 was 117.7% compared to 75.3% in Q2 2014. Excluding the effects of restructuring and a non-recurring tax reserve adjustment, our effective tax rate was 63.2%, compared to 39.2% in Q2 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 Q2 2015 and Q2 2014 by segment and the effect of currency on Q2 2015 net sales (dollars in thousands):
Net Sales For The
of $ Change
The following table presents net sales for Q2 2015 and Q1 2015 by segment and the effect of currency on Q2 2015 net sales (dollars in thousands):
Net Sales For The
of $ Change
TRADE WORKING CAPITAL
The following table presents trade working capital as of June 30, 2015 and December 31, 2014 (in thousands). The change was primarily driven by favorable currency impacts.
|Trade receivables, net (1)||$77,344||$81,998||$4,654|
|Trade accounts payable (2)||(30,319||
(1) Trade Receivables, Net equals Accounts Receivable less Other Receivables of $1.1 million at June 30, 2015 and December 31, 2014.
(2) Trade Accounts Payables equals Accounts Payable less Deposits Received and Other Payables of $9.2 million and $7.9 million at June 30, 2015 and December 31, 2014, respectively.
EFFECTIVE TAX RATE
The following table presents a reconciliation of effective tax rate excluding restructuring expenses and non-recurring tax reserve adjustments to our effective tax rate for the quarter ended June 30, 2015 (in thousands):
|For the quarter ended June 30, 2015|
|Income before provision for income taxes||$||3,977||($4,680||)||($703||)||117.7||%|
|Restructuring expense and non-recurring tax reserve adjustment||(5,509||)||1,319||(4,190||)||23.9||%|
|Income before provision for income taxes excluding restructuring and non-recurring tax reserve adjustment||$||9,486||($5,999||)||$||3,487||63.2||%|
BASIC ADJUSTED EARNINGS PER SHARE (net of taxes)
|Three Months Ended|
|Net (loss) income per share||$||(0.05||)||$||0.05|
|Non-recurring tax reserve adjustment||0.01||—|
|Plant start-up costs||0.07||—|
|Basic adjusted earnings per share||$||0.37||$||0.43|
The Company plans to hold a conference call on the following morning:
Date: August 11, 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: 59989464
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/investor-relations. 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 June 30, 2015 filed with the Securities and Exchange Commission on August 10, 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 3,100 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||Six Months Ended|
|June 30,||June 30,|
|Costs and expenses:|
|Cost of products sold||73,686||84,372||146,162||165,591|
|General and administrative||12,045||14,407||25,890||29,203|
|Research and development||1,892||2,044||3,854||3,990|
|Income from operations||13,567||12,317||27,762||24,910|
|Interest expense, net||(8,705||)||(8,917||)||(18,369||)||(17,574||)|
|Foreign exchange (loss) gain||(885||)||(307||)||92||(1,185||)|
|Income before provision for income taxes||3,977||3,093||9,485||6,151|
|Provision for income taxes||(4,680||)||(2,329||)||(8,454||)||(4,222||)|
|Net (loss) income||$||(703||)||$||764||$||1,031||$||1,929|
|Comprehensive income (loss)||$||6,704||$||2,278||$||(22,693||)||$||1,520|
|Net (loss) income per share:|
|Shares used in computing net (loss) income per share:|
|Consolidated Selected Financial Data|
|Cash Flow Data: (in thousands)||Six Months Ended|
|June 30, 2015||June 30, 2014|
|Net cash provided by operating activities||$14,671||$8,915|
|Net cash used in investing activities||($27,852||)||($22,345||)|
|Net cash provided by financing activities||$12,127||$2,871|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$14,417||$17,586|
|Capital expenditures, gross||($27,914||)||($22,469||)|
|Balance Sheet Data: (in thousands)||June 30, 2015||December 31, 2014|
|Cash and cash equivalents||$9,223||$9,517|
|Total debt (including capital leases)||$482,604||$469,435|
|Total stockholders' deficit||($95,410||)||($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.
Six Months ended
Trailing Twelve Months
Ended June 30,
|Q2 2015||Q1 2015||Q2 2014||2015||2014||2015||2014|
|Net (loss) income||$||(703||)||$1,733||$764||$||1,031||$||1,929||$||(8,282||)||$||7,478|
|Amortization of intangibles||79||79||403||158||819||699||1,630|
|Deferred financing cost amortization||896||875||751||1,771||1,467||3,608||2,812|
|Foreign exchange loss (gain) on revaluation of debt||1,057||(1,973||)||366||(915||)||(737||)||(438||)||(1,952||)|
|Deferred tax expense||628||979||(143||)||1,607||(950||)||(2,300||)||(7,385||)|
|Loss on disposition of property and equipment||13||14||1||28||28||(901||)||513|
|Net change in operating assets and liabilities||(3,200||)||(1,691||)||(5,163||)||(4,894||)||(11,557||)||(13,007||)||(7,957||)|
|Net cash provided by operating activities||6,670||8,001||6,153||14,671||8,915||12,648||31,159|
|Interest expense, excluding amortization||7,809||8,789||8,165||16,598||16,107||34,135||33,124|
|Net change in operating assets and liabilities||3,200||1,691||5,163||4,894||11,557||13,007||7,957|
|Current portion of income tax expense||4,052||2,796||2,472||6,847||5,172||36,614||9,977|
|Foreign exchange (loss) gain on revaluation of debt||(1,057||)||1,973||(366||)||915||737||438||1,952|
|Loss on disposition of property and equipment||(13||)||(14||)||(1||)||(28||)||(28||)||901||(513||)|
|Operational restructuring expenses||5,509||2,224||7,595||7,733||12,246||13,629||21,670|
|Non-restructuring impairment expense||—||—||—||—||—||—||1|
|Inventory write-off related to a closed plant||—||—||—||—||—||—||262|
|Other non-recurring expense||700||—||—||700||—||700||—|
|Plant startup costs||1,132||750||240||1,882||416||2,987||817|
Xerium Technologies, Inc.
Cliff Pietrafitta, 919-526-1444