Adjusted EBITDA improves over 2013 Q2 and Q1 2014
No change to full year 2014 guidance range of $116 to $120 million Adjusted EBITDA
YOUNGSVILLE, N.C., Aug. 5, 2014 (GLOBE NEWSWIRE) -- Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of industrial consumable products and services, reported Q2 2014 net income of $0.8 million, including restructuring charges of $7.6 million and currency revaluation losses of $0.3 million. Q2 2013 net loss was $(6.9) million, including costs related to a debt refinancing of $6.8 million and restructuring charges of $4.2 million.
Second-Quarter Financial Highlights
- Adjusted EBITDA for Q2 2014 was $29.4 million, up 9.3% compared to $26.9 million in Q2 2013.
- Net sales at constant currency were $139.7 million, an increase of 0.4% compared to Q2 2013.
- Q2 2014 earnings per share was $0.05 per share. This result was reduced by restructuring charges of $0.37 per share and foreign currency revaluation losses of $0.01 per share. Q2 2013 loss per share was $(0.45) per share. This result was reduced by costs related to a debt refinancing of $0.44 per share, restructuring charges of $0.33 per share and a one-time inventory write off of $0.05 per share related to a closed facility.
- Q2 2014 gross profit was $55.4 million, or 39.6% of net sales, compared to $52.7 million, or 38.1% of net sales in the same period in 2013. Machine Clothing gross margin improved to 41.2% in Q2 2014 from 39.1% in Q2 2013. Roll covers gross margin also improved to 36.4% in Q2 2014, from a gross margin of 36.1% in Q2 2013.
- Selling, general and administrative and research (SG&A) expenses were $35.4 million, or 25.3% of net sales, in Q2 2014. In Q2 2013, SG&A expenses were $35.7 million, or 25.8% of net sales.
President and Chief Executive Officer Harold Bevis, said, "In Q2 2014, Rolls rebounded and Machine Clothing continued to progress. Gross margins and Adjusted EBITDA improved, reflecting the success of our restructuring and operational efficiency programs. Both businesses performed well and in line with expectations, and orders remained strong as a result of base market health and the Company's growth programs. Q2 2014 performance with our key customers in each region of the world remains strong, and our outlook remains unchanged. The primary risk factor, both upside and down, continues to be the health of the global economy. In sum, barring sales volatility and foreign exchange risk, both the Rolls and Machine Clothing businesses are on track to meet combined full-year performance of $116 - $120 million Adjusted EBITDA, which is consistent with our previous guidance."
Sales improved over the prior year; macro environment has improved from Q1 2014
The weak Q1 2014 sales environment in North America, related to reduced production of containerboard and the harsh winter, abated as net sales in Q2 improved by 2.3% over the prior year period. Healthy sales growth in Asia of 3.5% and South America of 7.3% over the prior year period also contributed to the positive sales variance, while sales in Europe declined by 5.3% over the prior year period, primarily driven by weakness in the Nordic region and declining demand for newsprint, printing and writing grades and OEM spreader roll business.
Asian market growth and Asian sales continue to be a bright spot for the Company.
According to RISI, the leading trade publication, 70% of the global industry's growth will be in Asia over the next 5 years. Q2 2014 Asia sales grew 3.5%, on a constant currency basis, compared to the same quarter in the prior year, which we believe is in line with market growth in the region. The Company is building a new plant in Ba Cheng, China to make high-end press felts to continue this growth vector and construction is underway, with the facility expected to hit run-rate output in the first quarter of 2016. In addition, the Company is expanding output and capabilities in all 4 of its Asian plants and is also adding sophisticated rolls & service engineers in China. China is the largest trade market in the world for paper and board production.
Our cost reduction activities are evident as gross profit margins continue to trend higher in 2014 and SG&A rates continue to trend lower.
Plant efficiency programs, which are waste reduction, procurement programs, productivity and logistics programs, accounted for approximately 60% of the year to date 2014 cost reduction savings while restructuring programs accounted for the remaining 40%. Additional actions, including the recently announced closure of the João Pessoa, Brazil facility, are underway in the second half of 2014.
We have invested heavily to enable future growth.
We will spend approximately $68 million from 2013 through 2015 on committed projects implemented to provide revenue and earnings growth. While this spending will have minimal benefit in 2014, it sets the Company up to continue the recent trend of improvements in Adjusted EBITDA. Our spending has touched all regions, however we have focused on those markets and products where the highest opportunities for growth exist. Specifically, our investment is targeted at a number of areas including (1) China production to service our current and future customers in the region; (2) expanded high profile press felt capacity to service growing demand in the tissue market; (3) expanded mechanical services capability to service growing need in the North American market; and (4) expanded capacity in press felt, fiber cement, non-woven and dryer fabrics. Currently, the fiber cement and non woven markets are providing greater percentage growth opportunities than our core business. Xerium is a participant in these markets and has taken actions to achieve its fair share of the growth in these markets.
EVP and Chief Financial Officer, Cliff Pietrafitta said, "Q2 2014 constant currency net sales were 0.4% above Q2 2013. Constant currency rolls net sales increased by 2.1% from Q2 2013, primarily driven by an increase of 8.2% in North America, an increase of 5.0% in South America and an increase of 3.1% in Asia. These increases were partially offset by a decline of (7.7)% in Europe. Constant currency machine clothing sales decreased slightly by (0.6)% from Q2 2013, primarily driven by a decrease of (4.0)% in Europe, and a decrease of (2.8)% in North America. These decreases were partially offset by increases of 7.7% in South America and 3.6% in Asia." See "Segment Information" and "Non-GAAP Financial Measures" below for further discussion.
Income from operations in Q2 2014 declined by $0.5 million, due to higher restructuring costs, partially offset by increased net sales, gross margins and decreased SG&A costs. Improved gross margins and reductions in SG&A were driven primarily by our restructuring initiatives. Adjusted EBITDA in Q2 2014 was $29.4 million, or 21.0% of net sales, and was 9.3% above Q2 2013 Adjusted EBITDA of $26.9 million or 19.5% of net sales. See "Non-GAAP Financial Measures" below.
Q2 2014 was a successful quarter related to cost-out actions. The second quarter included cost out savings of $6.7 million and we expect cost out savings for the full year to exceed $25 million. The Company spent approximately $16.9 million of cash on capital expenditures and restructuring costs in Q2 2014. For the full year, we expect to spend approximately $70 million. In addition, in 2014, we have more spending related to longer payback projects (such as the Ba Cheng China machine clothing plant), which will not result in incremental savings or earnings in 2014. While cost-out and restructuring savings initiatives are the centerpiece of Xerium's 2014 business plan, the Company still expects that current market conditions and inflation will combine to limit growth in Adjusted EBITDA to approximately $116 - $120 million, assuming foreign exchange rate assumptions and stability in market demand.
As of Q2 2014, we had an aggregate of $37.8 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $15.0 million. Q2 2014 free cash flow (defined as cash-flow from operations less capital expenditures) improved to $(5.8) million from $(7.7) million at Q1 2014. This improvement was primarily the result of improved cash flows from operations, partially offset by increased capital expenditures.
Capital expenditures and cash restructuring payments in Q2 2014 totaled $12.0 million and $4.9 million, respectively. Capital expenditures primarily related to longer term payback projects, such as the new plant in Ba Cheng, China. Restructuring payments primarily related to headcount reductions, the closure of the João Pessoa plant in Brazil, the termination of a sales agency contract in Italy, the elimination of machine clothing production in Argentina and the closure of the Heidenheim facility.
Our 2014 restructuring initiatives remain on track with the recent announcement of the closing of a sixth plant in João Pessoa, Brazil. This large-scale restructuring program is a multi-year endeavor which has included 6 plant closures and the start up of a new machine clothing plant in China.
Trade working capital increased to $146.5 million in Q2 2014 from $140.9 million in Q4 2013. This increase was primarily the result of an increase of $6.7 million in inventory, primarily due to higher levels of work in progress to support higher sales. Accounts receivable increased $3.9 million, primarily due to an increase in sales in the quarter. Partially offsetting these increases was an increase in accounts payable of $4.9 million, due to improvement in negotiated payment terms in Q2 2014. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below for further discussion.
Net debt increased to $437.0 million in Q2 2014 from $430.5 million in Q1 2014, primarily as a result of increased trade working capital and higher capital expenditures. However, our net debt leverage ratio decreased to 4.1x in Q2 2014 from 4.15x in Q1 2014 as a result of higher trailing twelve month Adjusted EBITDA.
Our effective income tax rate for Q2 2014 was 75.3% compared to 102.9% in 2013. Excluding the effects of restructuring, our effective tax rate was 39.2%. This overall effective tax rate reflects the fact that we have losses in certain jurisdictions where we receive no tax benefit, including losses related to restructuring. See "Effective Tax Rate" and "Non-GAAP Financial Measures" below for further discussion.
Finally, we would like to provide an update on our Brazilian tax litigation matter that we have previously disclosed in our financial statements. We have been actively litigating this case for some time and we analyzed, but did not change our ASC 740-10 position at June 30, 2014. However, we are currently evaluating the costs and benefits of participating in a tax amnesty program offered by the Brazilian Revenue Department. This amnesty is open to taxpayers during a short window until August 25, 2014 and represents a settlement opportunity. The rules for participation were finalized and only issued on August 1, 2014. This amnesty program offers significant reductions on the penalties and interest that have been assessed against us depending on how quickly the agreed amount is paid.
At this time, there can be no assurance that we will or will not participate in this amnesty program. If we choose to participate in this amnesty program, are able to secure necessary financing and are accepted into the amnesty, then we would anticipate taking a charge against net income in the third quarter of 2014 in the range of approximately $26 million to $29 million (subject to currency exchange rates). This charge would not affect Adjusted EBITDA and would close out and settle a matter that relates back to a 2005 transaction.
The following table presents net sales for Q2 2014 and Q2 2013 by segment and the effect of currency on Q2 2013 net sales (dollars in thousands):
|Net Sales For The Quarter Ended|
| Currency Effect of $ |
| % Change Excluding |
|Machine Clothing||$ 89,505||$ 89,414||$ 91||$ 609||0.7%||(0.6)%|
|Total||$ 139,723||$ 138,324||$ 1,399||$ 902||0.7%||0.4%|
The following table presents net sales for the six months ended June 30, 2014 and 2013 by segment and the effect of currency on the six months ended June 30, 2013 net sales (dollars in thousands):
|Net Sales For The Year Ended|
| Currency Effect of $ |
| % Change Excluding |
|Machine Clothing||$ 178,476||$ 179,351||$ (875)||$ 436||0.2%||(0.7)%|
|Total||$ 273,107||$ 278,129||$ (5,022)||$ 902||0.3%||(2.1)%|
TRADE WORKING CAPITAL
The following table presents trade working capital as of June 30, 2014 and December 31, 2013 (in thousands):
|Trade Receivables, Net (1)||$ 90,468||$ 86,584||$ (3,884)|
|Trade Accounts Payable (2)||(34,560)||(29,662)||4,898|
|Total||$ 146,494||$ 140,852||$ (5,642)|
(1) Trade Receivables, Net equals Accounts Receivable less Other Receivables of $1,210 and $1,368 at June 30, 2014 and December 31, 2013, respectively.
(2) Trade Accounts Payables equals Accounts Payable less Deposits Received and Other Payables of $5,016 and $12,558 at June 30, 2014 and December 31, 2013, respectively. The Trade Accounts Payable amount at 12/31/2013 has been restated to exclude $4.5 million of capital expenditure accruals, as going forward we have revised our definition of Trade Accounts Payable to exclude payables related to capital equipment.
EFFECTIVE TAX RATE
The following table presents a reconciliation of effective tax rate excluding restructuring to our effective tax rate for the three months ended June 30, 2014 (in thousands):
|For the three months ended June 30, 2014|
|Pre-tax amounts||Tax effect||After-tax effect||Effective Tax Rate|
|Income (loss) before provision for income taxes||$ 3,093||$ (2,329)||$ 764||75.3%|
| Income (loss) before provision for income taxes excluding restructuring ||$ 10,688||$ (4,189)||$ 6,499||39.2%|
The Company plans to hold a conference call on the following morning:
|Date: August 6, 2014|
|Start Time: 9:00 a.m. Eastern Time|
|Domestic Dial-In: +1-866-270-6057|
|International Dial-In: +1-617-213-8891|
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 excluding 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" 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-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 4, 2014, our Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 5, 2014 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 12 countries around the world, Xerium has approximately 3,200 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 proposed new facility in China; (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, 2013 filed on March 4, 2014 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 Income (Loss)|
| (Dollars in thousands, except per share data) |
| Three Months Ended |
| Six Months Ended |
|Net Sales||$ 139,723||$ 138,324||$ 273,107||$ 278,129|
|Costs and expenses:|
|Cost of products sold||84,372||85,674||165,591||170,972|
|General and administrative||14,407||15,506||29,203||30,140|
|Research and development||2,044||2,089||3,990||4,089|
|Income from operations||12,317||12,795||24,910||30,238|
|Interest expense, net||(8,917)||(13,112)||(17,574)||(22,318)|
|Loss on extinguishment of debt||—||(3,123)||—||(3,123)|
|Foreign exchange (loss) gain||(307)||50||(1,185)||(198)|
|Income (loss) before provision for income taxes||3,093||(3,390)||6,151||4,599|
|Provision for income taxes||(2,329)||(3,489)||(4,222)||(5,992)|
|Net income (loss)||$ 764||$ (6,879)||$ 1,929||$ (1,393)|
|Comprehensive income (loss)||$ 2,278||$ (9,245)||$ 1,520||$ (6,517)|
|Net income (loss) per share:|
|Basic||$ 0.05||$ (0.45)||$ 0.13||$ (0.09)|
|Diluted||$ 0.05||$ (0.45)||$ 0.12||$ (0.09)|
|Shares used in computing net income (loss) per share:|
| Consolidated Selected Financial Data |
|Cash Flow Data: (in thousands)||Six Months Ended|
|June 30, 2014||June 30, 2013|
|Net cash provided by operating activities||$ 8,915||$ 12,275|
|Net cash used in investing activities||$ (22,345)||$ (8,103)|
|Net cash provided by (used) in financing activities||$ 2,871||$ (2,120)|
|Other Financial Data: (in thousands)|
|Depreciation and amortization||$ 17,586||$ 18,628|
|Capital expenditures, gross||$ (22,469)||$ (8,457)|
|Balance Sheet Data: (in thousands)||June 30, 2014||December 31, 2013|
|Cash and cash equivalents||$ 14,956||$ 25,716|
|Total assets||$ 633,389||$ 624,064|
|Total debt||$ 451,971||$ 443,139|
|Total stockholders' deficit||$ (8,909)||$ (11,449)|
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, subject to annual limitations provided for in our credit facility, (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.
| Three Months Ended |
| Six Months Ended |
|Net income (loss)||$ 764||$ (6,879)||$ 1,929||$ (1,393)|
|Amortization of intangibles||403||385||819||961|
|Deferred financing cost amortization||751||909||1,467||1,618|
|Foreign exchange loss (gain) on revaluation of debt||366||3,039||(737)||1,324|
|Deferred tax expense||(143)||466||(950)||748|
|Loss (gain) on disposition of property and equipment||1||3||28||(7)|
|Loss on extinguishment of debt||—||3,123||—||3,123|
|Net change in operating assets and liabilities||(5,163)||(6,610)||(11,557)||(13,439)|
|Net cash provided by operating activities||6,153||3,588||8,915||12,275|
|Interest expense, excluding amortization||8,165||12,203||16,107||20,700|
|Net change in operating assets and liabilities||5,163||6,610||11,557||13,439|
|Current portion of income tax expense||2,472||3,023||5,172||5,244|
|Foreign exchange (loss) gain on revaluation of debt||(366)||(3,039)||737||(1,324)|
|(Loss) gain on disposition of property and equipment||(1)||(3)||(28)||7|
|Loss on extinguishment of debt||—||(3,123)||—||(3,123)|
|Loss on extinguishment of debt||—||3,123||—||3,123|
|Operational restructuring expenses||7,595||4,165||12,246||5,420|
|Non-restructuring impairment expense||—||(191)||—||666|
|Inventory write off due to a plant closure||—||692||—||692|
|Plant startup costs||240||—||416||—|
|Adjusted EBITDA||$ 29,421||$ 26,898||$ 55,122||$ 56,041|
CONTACT: Phillip B. Kennedy Investor Relations 919-526-1444 IR@xerium.com
Source:Xerium Technologies, Inc.