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EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INCcpxrm-ex322_2017q1.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INCmsxrm-ex321_2017q1.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INCcpxrm-ex31_2017q1.htm
EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INCmsxrm-ex31x12017q1.htm
EX-10.2 - FORM OF 2017 MIC AGREEMENT - XERIUM TECHNOLOGIES INCex102formof2017micagt.htm
EX-10.1 - THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT - XERIUM TECHNOLOGIES INCex101amendment.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________ 
FORM 10-Q
________________________
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017
Or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File Number 001-32498
 ________________________ 
Xerium Technologies, Inc.
(Exact name of registrant as specified in its charter)
 ________________________ 
 
DELAWARE
42-1558674
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
14101 Capital Boulevard
Youngsville, North Carolina
27596
(Address of principal executive offices)
(Zip Code)
(919) 526-1400
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)
 ________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
£
 
Accelerated filer
 
x
 
Smaller reporting company
 
£
Non-accelerated filer
 
£
 
(Do not check if a smaller reporting company)
 
 
 
Emerging growth company
 
£
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  ¨    No  ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ý    No  ¨



The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 2, 2017 was 16,167,949.
 



TABLE OF CONTENTS
 

2



PART I. FINANCIAL INFORMATION
ITEM 1.
UNAUDITED FINANCIAL STATEMENTS

Xerium Technologies, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands and unaudited)
 
March 31, 2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,138

 
$
12,808

Accounts receivable, net
74,666

 
68,667

Inventories, net
73,997

 
70,822

Prepaid expenses
5,658

 
6,325

Other current assets
17,733

 
15,784

Total current assets
182,192

 
174,406

Property and equipment, net
288,009

 
284,101

Goodwill
58,064

 
56,783

Intangible assets
7,694

 
7,330

Non-current deferred tax asset
12,810

 
10,737

Other assets
8,350

 
8,556

Total assets
$
557,119

 
$
541,913

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Notes payable
$
7,596

 
$
7,328

Accounts payable
42,261

 
36,158

Accrued expenses
52,549

 
64,532

Current maturities of long-term debt
9,403

 
8,600

Total current liabilities
111,809

 
116,618

Long-term debt, net of current maturities
483,981

 
472,923

Liabilities under capital leases
18,216

 
19,236

Non-current deferred tax liability
8,442

 
7,157

Pension, other post-retirement and post-employment obligations
65,183

 
65,026

Other long-term liabilities
9,056

 
7,858

Commitments and contingencies


 


Stockholders’ deficit
 
 
 
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of March 31, 2017 and December 31, 2016

 

Common stock, $0.001 par value, 20,000,000 shares authorized; 16,167,949 and 16,152,946 shares outstanding as of March 31, 2017 and December 31, 2016, respectively
16

 
16

Paid-in capital
431,354

 
430,823

Accumulated deficit
(445,900
)
 
(443,066
)
Accumulated other comprehensive loss
(125,038
)
 
(134,678
)
Total stockholders’ deficit
(139,568
)
 
(146,905
)
Total liabilities and stockholders’ deficit
$
557,119

 
$
541,913



3


Xerium Technologies, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data and unaudited)
 
    
 
Three Months Ended March 31,
 
2017
 
2016
Net Sales
$
119,866

 
$
114,965

Costs and expenses:
 
 
 
Cost of products sold
72,370

 
71,428

Selling
15,674

 
15,721

General and administrative
12,654

 
11,507

Research and development
1,744

 
1,940

Restructuring
3,164

 
2,832

 
105,606

 
103,428

Income from operations
14,260

 
11,537

Interest expense, net
(13,263
)
 
(10,341
)
Loss on extinguishment of debt
(25
)
 

Foreign exchange (loss) gain
(1,125
)
 
24

(Loss) income before provision for income taxes
(153
)
 
1,220

Provision for income taxes
(2,681
)
 
(2,665
)
Net loss
$
(2,834
)

$
(1,445
)
Comprehensive income
$
6,806

 
$
7,373

Net loss per share:
 
 
 
Basic
$
(0.18
)
 
$
(0.09
)
Diluted
$
(0.18
)
 
$
(0.09
)
Shares used in computing net loss per share:
 
 
 
Basic
16,153,113

 
15,789,991

Diluted
16,153,113

 
15,789,991



4


Xerium Technologies, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands and unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Operating activities
 
 
 
Net loss
$
(2,834
)
 
$
(1,445
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Stock-based compensation
531

 
592

Depreciation
7,819

 
7,900

Amortization of intangible assets
273

 
94

Deferred financing cost amortization
899

 
756

Foreign exchange loss on revaluation of debt
627

 
1,120

Deferred taxes
10

 
155

(Gain) loss on disposition of property and equipment
(49
)
 
17

Loss on extinguishment of debt
25

 

Provision (benefit) for doubtful accounts
41

 
(72
)
Change in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
(4,153
)
 
(2,130
)
Inventories
(1,136
)
 
2,232

Prepaid expenses
783

 
(621
)
Other current assets
(1,785
)
 
1,024

Accounts payable and accrued expenses
(7,334
)
 
4,689

Deferred and other long-term liabilities
(940
)
 
792

Net cash (used in) provided by operating activities
(7,223
)
 
15,103

Investing activities
 
 
 
Capital expenditures
(5,285
)
 
(3,550
)
Proceeds from disposals of property and equipment
216

 
20

Net cash used in investing activities
(5,069
)
 
(3,530
)
Financing activities
 
 
 
Proceeds from borrowings
40,476

 
13,313

Principal payments on debt
(29,693
)
 
(16,439
)
Payment of financing fees
(170
)
 
(98
)
Payment of obligations under capital leases
(1,520
)
 
(673
)
Employee taxes paid on equity awards

 
(1,029
)
Net cash provided by (used in) financing activities
9,093

 
(4,926
)
Effect of exchange rate changes on cash flows
529

 
(1,036
)
Net (decrease) increase in cash
(2,670
)
 
5,611

Cash and cash equivalents at beginning of period
12,808

 
9,839

Cash and cash equivalents at end of period
$
10,138

 
$
15,450

 
 
 
 
Noncash capitalized lease asset and liability
$

 
$
1,259




5


Xerium Technologies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
1. Description of Business and Significant Accounting Policies
Description of Business

Xerium Technologies, Inc. (the "Company") is a leading, global provider of industrial consumable products and services including machine clothing, roll coverings, roll repair and mechanical services. These goods and services are used in the production of paper, paperboard, building products and nonwoven materials. Its operations are strategically located in the major paper-making regions of the world, including North America, Europe, Latin America and Asia-Pacific.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements at March 31, 2017 and for the three months ended March 31, 2017 and 2016 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In management’s opinion, these unaudited condensed consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2016 as reported on the Company's Annual Report on Form 10-K filed on March 1, 2017.
Accounting Policies
Inventories, net
Inventories are generally valued at the lower of cost or market using the first-in, first-out (FIFO) method. Raw materials are valued principally on a weighted average cost basis. The Company’s work in process and finished goods are specifically identified and valued based on actual inputs to production. Provisions are recorded as appropriate to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires management to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business, while considering the general aging of inventory and factoring in any new business conditions.
The components of inventories are as follows at:
 
 
March 31, 2017
 
December 31, 2016
Raw materials
$
14,706

 
$
14,089

Work in process
27,205

 
25,879

Finished goods (includes consigned inventory of $6,985 at March 31, 2017 and $6,673 at December 31, 2016)
38,866

 
37,155

Inventory allowances
(6,780
)
 
(6,301
)
 
$
73,997

 
$
70,822

Goodwill
The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles—Goodwill and Other Intangible Assets (“Topic 350”). Topic 350 requires that goodwill and intangible assets that have indefinite lives not be amortized, but instead, must be tested for impairment at least annually or whenever events or business conditions warrant. During the three months ended March 31, 2017, the Company evaluated events and business conditions to determine if a test for an impairment of goodwill was warranted. No such events or business conditions took place during this period, therefore no test was determined to be warranted at March 31, 2017.
Warranties

6


The Company offers warranties on certain roll products that it sells. The specific terms and conditions of these warranties vary depending on the product sold, the country in which the product is sold and arrangements with the customer. The Company estimates the costs that may be incurred under its warranties and records a liability in Accrued Expenses on its Consolidated Balance Sheet for such costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary. The table below represents the changes in the Company’s warranty liability for the three months ended March 31, 2017 and 2016:
 
Beginning Balance
 
Charged to
 Cost
of Sales
 
Effect of Foreign
Currency
Translation
 
Deduction
from
Reserves
 
Ending Balance
Three Months Ended March 31, 2017:
$
2,203

 
$
235

 
$
30

 
$
(179
)
 
$
2,289

Three Months Ended March 31, 2016:
$
2,175

 
$
477

 
$
34

 
$
(189
)
 
$
2,497


Net Loss Per Common Share
Net loss per common share has been computed and presented pursuant to the provisions of ASC Topic 260, Earnings per Share (“Topic 260”). Net loss per share is based on the weighted-average number of shares outstanding during the period. As of March 31, 2017 and 2016, the Company had outstanding restricted stock units (“RSUs”), deferred stock units (“DSUs”) and options.
The following table sets forth the computation of basic and diluted weighted-average shares:
 
Three Months Ended March 31,
 
2017
 
2016
Weighted-average common shares outstanding–basic
16,153,113

 
15,789,991

Dilutive effect of stock-based compensation awards outstanding

 

Weighted-average common shares outstanding–diluted
16,153,113

 
15,789,991

The following table sets forth the aggregate of the potentially dilutive securities that were outstanding in the three months ended March 31, 2017 and 2016, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive:
 
Three Months Ended March 31,
 
2017
 
2016
Anti-dilutive securities
902,988

 
738,294

Impairment
The Company reviews its long-lived assets that have finite lives for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment (“Topic 360”). This topic requires that companies evaluate the fair value of long-lived assets based on the anticipated undiscounted future cash flows to be generated by the assets when indicators of impairment exist to determine if there is impairment to the carrying value. Any change in the carrying amount of an asset as a result of the Company's evaluation has been recorded in either restructuring expense, if it was a result of the Company's restructuring activities, or general and administrative expense for all other impairments in the consolidated statements of operations. For the three months ended March 31, 2017 and 2016, the Company had no impairment charges included in restructuring expense.

New Accounting Pronouncements

In March 2017, the FASB issued Accounting Standards Update No 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 will change how employers that sponsor defined benefit pension and/or other post-retirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in

7


assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The guidance provides a practical expedient for disaggregating the service cost component and other components for comparative periods. The Company is in the process of evaluating this accounting standard update.

In January 2017, the FASB issued Accounting Standards Update No 2017-04, Intangibles—Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under Accounting Standards Codification (ASC) 350. The FASB issued new guidance that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of evaluating this accounting standard update.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 eliminates the exception to the principle in ASC 740, for all intra-entity sales of assets other than inventory, to be deferred, until the transferred asset is sold to a third party or otherwise recovered through use. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update No 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is in the process of evaluating this accounting standard update.

In March of 2016, the FASB issued Accounting Standards Update No 2016-09 Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 will change certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is required to be adopted in January of 2017. The Company early adopted this standard at June 30, 2016. As of March 31, 2017, the adoption of the standard has resulted in the re-classification of $1.0 million of employee taxes paid on equity awards as a financing activity in the statement of cash flows, for the three months ended March 31, 2016. The remaining provisions of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.

In February of 2016, the FASB issued Accounting Standards Update No 2016-02 Leases ("ASU 2016-02"). ASU 2016-02 includes final guidance that requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief. Full retrospective application is prohibited. ASU 2016-02 is effective for public companies with annual periods beginning after 15 December 2018, and interim periods within those years. For all other entities, it is effective for annual periods beginning after 15 December 2019, and interim periods the following year. Early adoption is permitted for all entities. The Company is in the process of evaluating this accounting standard update.

8



In November of 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). This guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. For public companies, the guidance is effective for financial statements issued for annual periods beginning after 15 December 2016 (i.e., 2017 for a calendar-year company) and interim periods within those annual periods. Early adoption of the guidance is permitted. Companies can adopt the guidance either prospectively or retrospectively. The Company early adopted this standard at December 31, 2016, using the prospective method; prior periods were not retrospectively adjusted. The provisions of ASU 2015-17 did not have a material impact on the consolidated financial statements.

In July of 2015, the FASB issued Accounting Standards Update Inventory ("ASU 2015-11"). ASU 2015-11 applies only to first-in, first-out (FIFO) and average cost inventory costing methods and will reduce costs and increase comparability for these methods. There will be no change for last-in, first-out, (LIFO) or retail inventory methods as the costs of transitioning to a new method would outweigh the benefits due to the complexity of these methods. Under this ASU, inventory should be measured at the lower of cost and net realizable value (selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation). When the net realizable value of inventory is less than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. This ASU more closely aligns the measurement of inventory under GAAP with International Financial Reporting Standards guidance. The amendments are effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and for other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively, and early application is permitted as of the beginning of an interim or annual reporting period. The Company implemented this standard during the first quarter of 2016. The provisions of ASU 2015-11 did not have an impact to the financial statements.

In May of 2014, the FASB issued Accounting Standard Update No. 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when it satisfies the performance obligations. The Company will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is required to be adopted in January of 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. The Company has commenced a comprehensive project plan to direct the implementation of the new revenue recognition standards and an assessment of the impact to business processes. The Company intends to adopt the new standard using the modified retrospective transition method effective January 1, 2018.

2. Business Acquisitions
On May 4, 2016, the Company acquired certain assets and liabilities of JJ Plank Corporation/Spencer Johnston (“Spencer Johnston”), a spreader roll company headquartered in Neenah, Wisconsin for an adjusted purchase price of $17.6 million. This acquisition expands the Company's current rolls product offerings, service capabilities and markets served, strengthens its financial profile and grows its customer base. The Company acquired all of the assets and assumed certain liabilities of Spencer Johnston.

Because the transaction was completed on May 4, 2016, the final purchase price allocation at the acquisition date was subject to change with respect to closing date working capital balances and other post-closing adjustments. The measurement period remains open as of March 31, 2017.
The adjusted purchase price of $17.6 million resulted in net assets acquired other than goodwill of $15.7 million and goodwill of $1.9 million. All of the goodwill is allocated to the Rolls Covers business segment. Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed. The goodwill was generated by the synergies the transaction provides.
3. Derivatives and Hedging
Risk Management Objective of Using Derivatives

9


The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. From time to time, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known cash amounts, the value of which are determined by interest rates or foreign exchange rates.
Cash Flow Hedges of Interest Rate Risk
From time to time, the Company uses interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. However, at March 31, 2017, the Company had no interest rate derivatives.
Non-designated Hedges of Foreign Exchange Risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates, but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
The Company, from time to time, may enter into foreign exchange forward contracts to fix currencies at specified rates based on expected future cash flows to protect against the fluctuations in cash flows resulting from sales denominated in foreign currencies. Additionally, to manage its exposure to fluctuations in foreign currency on intercompany balances and certain purchase commitments, the Company from time to time may use foreign exchange forward contracts.
As of March 31, 2017 and December 31, 2016, the Company had outstanding derivatives that were not designated as hedges in qualifying hedging relationships. The value of these contracts is recognized at fair value based on market exchange forward rates and is recorded in other assets or other liabilities on the Consolidated Balance Sheets. The following represents the fair value of these derivatives at March 31, 2017 and December 31, 2016 and the change in fair value included in foreign exchange gain (loss) in the three months ended March 31, 2017 and 2016:
 
March 31, 2017
 
December 31, 2016
Fair value of derivative (liability)
$
(79
)
 
$
(1,461
)
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
Change in fair value of derivative included in foreign exchange (loss) gain
$
145

 
$
1,170


The following represents the notional amounts of foreign exchange forward contracts at March 31, 2017:
 
Notional Sold
 
Notional Purchased  

Non-designated hedges of foreign exchange risk
$

 
$
(987
)
Fair Value of Derivatives Under ASC Topic 820
ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, Topic 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs including fair value of investments that do not have the ability to redeem at net asset value as of the measurement date, or during the first quarter following the measurement date. The derivative assets or liabilities are typically based on an entity’s own assumptions, as there is little, if any, market activity. In instances where the determination of the fair value measurement is

10


based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability. The Company determined that its derivative valuations, which are based on market exchange forward rates, fall within Level 2 of the fair value hierarchy.

4. Long term Debt
At March 31, 2017 and December 31, 2016, long term debt consisted of the following:
 
March 31, 2017
 
December 31, 2016
Notes (Secured), payable semi-annually–U.S. Dollar denominated interest rate fixed at 9.50%. Sold at a price equal to 98.54% of their face value. Matures August of 2021.
$
480,000

 
$
480,000

Notes payable, working capital loan, variable interest rate at 2.05%. Matures June 30, 2017, with one-year rollover option.
7,596

 
7,328

Fixed asset loan contract, variable interest rate of 5.78%. Matures June of 2020.
7,590

 
7,511

Other debt
21,593

 
10,448

Total debt (excluding long-term capital leases and deferred finance fees)
516,779

 
505,287

Less deferred financing costs and debt discount
(15,799
)
 
(16,436
)
Less current maturities of long term debt and notes payable
(16,999
)
 
(15,928
)
Total long term debt
$
483,981

 
$
472,923

On August 9, 2016, the Company closed on $480 million aggregate principal amount of 9.5% Senior Secured Notes due August 2021 (the "Notes"), which were sold at a price equal to 98.54% of their face value. The Notes will pay interest semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017 and will mature on August 15, 2021, unless earlier redeemed or repurchased.
The Company used the net proceeds from the offering to repay all amounts outstanding under its then existing term loan credit facility, to redeem all of its 8.875% Senior Notes due 2018 at a redemption price equal to 102.219% of the principal amount thereof, together with accrued and unpaid interest, to the date of redemption, to pay fees and expenses relating to these transactions, and for working capital and other general corporate purposes.
As of March 31, 2017, an aggregate of $25.3 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $39.4 million under the ABL revolver that is currently collateralized by certain assets of the Company, less $14.1 million of that facility committed for letters of credit or additional borrowings. In addition, the Company had approximately $3.2 million available for borrowings under other small lines of credit.
On May 17, 2013, the Company entered into a Credit and Guaranty Agreement for $200.0 million (increased to $230 million on August 18, 2016) term loan credit facility (the “Term Credit Facility”), net of a discount of $1.0 million, among the Company, certain direct and indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions. This facility was repaid with proceeds from the 9.5% senior secured notes.
On May 17, 2013, the Company also entered into a Revolving Credit and Guaranty Agreement originally for a $40.0 million asset-based revolving credit facility subject to a borrowing base among Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, certain direct and indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions (the "Domestic Revolver"). On March 3, 2014, the Company entered into an amendment to the Revolving Credit and Guaranty Agreement (as amended, the “old ABL Facility,” and collectively with the Term Credit Facility, the “Credit Facility”), increasing the aggregate availability under the old ABL Facility to $55 million. On November 3, 2015, the Company refinanced the old ABL Facility and entered into the ABL Facility with one of its existing ABL lenders. The amount of the ABL Facility continues to provide aggregate availability of $55 million and the collateral pledged thereunder has remained the same. The ABL Facility matures in November of 2020 and accrues interest at either an Alternative Base rate (Prime plus 75 bps) or Fixed LIBOR (LIBOR +175 bps). As of March 31, 2017 these rates were 4.75% and 2.78%, respectively.
The Indenture and the ABL Facility contain certain customary covenants that, subject to exceptions, restrict our ability to, among other things:
declare dividends or redeem or repurchase equity interests;
prepay, redeem or purchase debt;

11


incur liens and engage in sale-leaseback transactions;
make loans and investments;
incur additional indebtedness;
amend or otherwise alter debt and other material agreements;
engage in mergers, acquisitions and asset sales;
transact with affiliates; and
engage in businesses that are not related to the Company's existing business.
On July 17, 2015 (the "Closing Date"), Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of the Company entered into and closed a Fixed Assets Loan Contract (the "Loan Agreement") with the Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch (the “Bank”) with respect to a RMB 58.5 million loan, which was approximately 9.4 million USD on July 17, 2015. The loan is secured by pledged machinery and equipment of Xerium China and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of the Company, pursuant to guarantee agreements (the "Guarantee Agreements"). Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate at March 31, 2017 is approximately 5.8%. The interest rate will be adjusted every 12 months during the term of the loan, based on the benchmark interest rate adjustment. Interest under the loan is payable quarterly in arrears. Principal on the loan is to be repaid in part every six months following the Closing Date, in accordance with a predetermined schedule set forth in the Loan Agreement. Proceeds of the Loan will be used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.
On May 26, 2011, the Company completed a refinancing transaction, which replaced certain of its then outstanding indebtedness with $240 million aggregate principal amount of 8.875% senior unsecured notes. The notes were repaid with proceeds from the 9.5% Senior Secured Notes.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
As of March 31, 2017, the carrying value of the Company’s long term debt was $499.8 million (excluding deferred financing costs) and its fair value was approximately $510.0 million. The Company determined the fair value of its debt utilizing significant other observable inputs (Level 2 of the fair value hierarchy).

Long-term Capitalized Lease Liabilities

As of March 31, 2017, the Company had long-term capitalized lease liabilities totaling $18.2 million. These amounts represent the lease on the corporate headquarters and the Kunshan, China facility, as well as other leases for software, vehicles and machinery and equipment.
5. Income Taxes

The Company utilizes the liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.
For the three months ended March 31, 2017, the provision for income taxes was $2.7 million as compared to $2.7 million for the three months ended March 31, 2016. The slight increase in tax expense in the three months ended March 31, 2017 was primarily attributable to the geographic mix of earnings. Generally, the provision for income taxes is primarily impacted by income earned in tax paying jurisdictions relative to income earned in non-tax paying jurisdictions. The majority of income recognized for purposes of computing the effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.4%; however, permanent income adjustments recorded against pre-tax earnings may result in an effective tax rate that is higher or lower than the statutory tax rate in these jurisdictions. The Company generates losses in certain jurisdictions for which no tax benefit is realized, as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved in the valuation allowance. For this reason, the Company recognizes minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves,

12


the geographic mix of the Company’s pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings.
As the Company continues to reorganize and restructure its operations, it is possible that deferred tax assets, for which no income tax benefit has previously been provided, may more likely than not become realized. The Company continues to evaluate future operations and will record an income tax benefit in the period where it believes it is more likely than not that the deferred tax asset will be able to be realized. The most material unrecognized deferred tax asset relates to the U.S. By 2029, future U.S. earnings ranging between $40 million and $130 million, generated by U.S. earnings from continuing operations or qualified tax planning strategies, would be required in order to fully recognize the U.S. deferred tax asset. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.
As of March 31, 2017, the Company had a gross amount of unrecognized tax benefit of $9.7 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.4 million during the three months ended March 31, 2017, as a result of new positions related to the current year and foreign currency effects.
The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, which were $0.4 million related to the unrecognized tax benefits for the three months ended March 31, 2017. The tax years 2007 through 2016 remain open to examination in a number of the major tax jurisdictions to which the Company and its subsidiaries are subject. The Company believes that it has made adequate provisions for all income tax uncertainties.
6. Pensions, Other Post-retirement and Post-employment Benefits
The Company accounts for its pensions, other post-retirement and post-employment benefit plans in accordance with ASC Topic 715, Compensation—Retirement Benefits (“Topic 715”). The Company has defined benefit pension plans covering substantially all of its U.S. and Canadian employees and employees of certain subsidiaries in other countries. Benefits are generally based on the employee’s years of service and compensation. These plans are funded in conformity with the funding requirements of applicable government regulations. The Company does not fund certain plans, as funding is not required. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. In addition, the Company also intends to fund its U.K. and Canadian defined benefit plans in accordance with local regulations.
As required by Topic 715, the following tables summarize the components of net periodic benefit cost:
Defined Benefit Plans
 
Three Months Ended March 31,
 
2017
 
2016
Service cost
$
376

 
$
405

Interest cost
1,267

 
1,485

Expected return on plan assets
(1,496
)
 
(1,548
)
Amortization of net loss
590

 
558

Net periodic benefit cost
$
737

 
$
900

7. Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income for the three months ended March 31, 2017 (net of tax expense of $109 thousand) and 2016 (net of a tax expense of $67 thousand) is as follows:
 
 
Three Months Ended March 31,
 
2017
 
2016
Net loss
$
(2,834
)
 
$
(1,445
)
Foreign currency translation adjustments
9,765

 
8,460

Pension liability changes under Topic 715
(125
)
 
358

Comprehensive income
$
6,806

 
$
7,373

The components of accumulated other comprehensive loss for the three months ended March 31, 2017 are as follows (net of tax benefits of $5.9 million):

13


 
Foreign
Currency
Translation    
Adjustment
 
Pension
Liability
Changes Under 
Topic 715
 
Accumulated   
Other
Comprehensive
(Loss) Income
Balance at December 31, 2016
$
(95,232
)
 
$
(39,446
)
 
$
(134,678
)
Other comprehensive income before reclassifications
9,765

 
(715
)
 
9,050

Amounts reclassified from other comprehensive loss:
 
 
 
 
 
    Amortization of actuarial losses

 
590

 
590

Net current period other comprehensive income
9,765

 
(125
)
 
9,640

Balance at March 31, 2017
$
(85,467
)
 
$
(39,571
)
 
$
(125,038
)
 
 
 
 
 
 
For the three months ended March 31, 2017, the amortization of actuarial losses is included in cost of products sold and general and administrative expenses in the Consolidated Statements of Operations.


8. Restructuring Expense
For the three months ended March 31, 2017, the Company incurred restructuring expenses of $3.2 million relating to headcount reductions and other costs related to previous plant closures. For the three months ended March 31, 2016, the Company incurred restructuring expenses of $2.8 million. These included $0.7 million of charges related to the closure of the Middletown, Va. facility and $2.1 million of charges relating to headcount reductions and other costs related to previous plant closures.
The following table sets forth the significant components of the restructuring accrual (included in Accrued Expenses on our Consolidated Balance Sheet), including activity under restructuring programs for the three months ended March 31, 2017 and 2016:
  
 
Balance at December 31, 2016
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2017
Severance and other benefits
$
3,805

 
$
2,258

 
$
138

 
$
(1,061
)
 
$
5,140

Facility costs and other
392

 
906

 
14

 
(980
)
 
332

Total
$
4,197

 
$
3,164

 
$
152

 
$
(2,041
)
 
$
5,472


 
 
Balance at December 31, 2015
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2016
Severance and other benefits
$
5,308

 
$
1,390

 
$
62

 
$
(1,804
)
 
$
4,956

Facility costs and other
903

 
1,442

 
63

 
(1,871
)
 
537

Total
$
6,211

 
$
2,832

 
$
125

 
$
(3,675
)
 
$
5,493

Restructuring and impairment expense by segment, which is not included in Segment Earnings in Note 9, is as follows:

14


 
Three Months Ended March 31,
 
2017
 
2016
Clothing
$
2,476

 
$
1,452

Roll Covers
627

 
891

Corporate
61

 
489

Total
$
3,164

 
$
2,832

9. Business Segment Information
The Company is a global manufacturer and supplier of consumable products used primarily in the production of paper and is organized into two reportable segments: clothing and roll covers. The clothing segment represents the manufacture and sale of synthetic textile belts used to transport paper or other materials along the length of papermaking or other industrial machines. The roll covers segment primarily represents the manufacture and refurbishment of covers used on the steel rolls of papermaking or manufacturing machines and the servicing of those rolls. The Company manages each of these operating segments separately.
Management evaluates segment performance based on adjusted earnings before interest, taxes, depreciation and amortization, yet after allocation of corporate charges. Such measure is then adjusted to exclude items that are of an unusual nature and are not used in measuring segment performance or are not segment specific (“Segment Earnings (Loss)”). The accounting policies of these segments are the same as those for the Company as a whole. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.
Summarized financial information for the Company’s reportable segments is presented in the tables that follow for the three months ended March 31, 2017 and 2016.
 
Clothing       
 
Roll
Covers        
 
Corporate     
 
Total
Three months ended March 31, 2017
 
 
 
 
 
 
 
Net Sales
$
72,495

 
$
47,371

 
$

 
$
119,866

Segment Earnings (Loss)
$
20,807

 
$
9,795

 
$
(4,029
)
 
$
26,573

Three months ended March 31, 2016
 
 
 
 
 
 
 
Net Sales
$
71,337

 
$
43,628

 
$

 
$
114,965

Segment Earnings (Loss)
$
18,635

 
$
9,198

 
$
(3,898
)
 
$
23,935

Provided below is a reconciliation of Segment Earnings (Loss) to (Loss) Income before provision for income taxes for the three months ended March 31, 2017 and 2016, respectively.
 
Three Months Ended March 31,
 
2017
 
2016
Segment Earnings (Loss):
 
 
 
Clothing
$
20,807

 
$
18,635

Roll Covers
9,795

 
9,198

Corporate
(4,029
)
 
(3,898
)
Stock-based compensation
(531
)
 
(592
)
Interest expense, net
(13,263
)
 
(10,341
)
Depreciation and amortization
(8,093
)
 
(7,994
)
Loss on extinguishment of debt
(25
)
 

Restructuring expense
(3,164
)
 
(2,832
)
Other non-recurring expense
(45
)
 
(103
)
Plant startup costs
(480
)
 
(877
)
Foreign exchange (loss) gain
(1,125
)
 
24

(Loss) income before provision for income taxes
$
(153
)
 
$
1,220

10. Commitments and Contingencies

15


The Company is involved in various legal matters which have arisen in the ordinary course of business as a result of various immaterial labor claims, taxing authority reviews and other routine legal matters. As of March 31, 2017, the Company accrued an immaterial amount in its financial statements for these matters for which the Company believed the possibility of loss was probable and was able to estimate the damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its financial position, results of operations or cash flow. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of legal matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company.

11. Stock-Based Compensation and Stockholders’ Deficit
The Company records stock-based compensation expense in accordance with ASC Topic 718, Accounting for Stock Compensation and has used the straight-line attribution method to recognize expense for RSUs, options and DSUs. The Company recorded stock-based compensation expense during the three months ended March 31, 2017 and March 31, 2016 as follows: 
 
 
Three Months Ended March 31,
 
 
2017
 
2016
RSU, Options and DSU Awards (1)
 
$
531

 
$
592

 
(1)
Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors.

Summary of Activity Under Long-term Incentive Plans

Long-Term Incentive Program—2015 LTIP and 2014 LTIP

During the first quarter of 2016 the Company performed a valuation on the market-based stock units and estimated payout to be at 0% under both the 2015 and 2014 LTIP plans, reducing stock-based compensation by $0.2 million.
Directors’ Deferred Stock Unit Plan
Under the 2011 non-management directors stock plan ("2011 DSU Plan”), as amended in January of 2015, each director receives an annual retainer of $132 thousand, to be paid on a quarterly basis in arrears. Approximately 54% of the annual retainer is payable in DSUs, with the remaining 46% payable in cash or a mix of both cash and DSUs at the election of each director. The non-management directors were awarded an aggregate of 17,787 DSUs under the 2011 DSU Plan for service during the three months ended March 31, 2017. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 15,003 DSUs were settled in common stock during the three months ended March 31, 2017.

12. Supplemental Guarantor Financial Information
On August 9, 2016, the Company closed on the sale of its Notes. The Notes are secured obligations of the Company and are fully and unconditionally guaranteed on a senior secured basis by all of the domestic wholly owned subsidiaries of the Company (the “Guarantors”). In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, as amended, the following condensed consolidating financial statements present the financial position, results of operations and cash flows of Xerium Technologies, Inc. (referred to as “Parent” for the purpose of this note only) on a stand-alone parent-only basis, the Guarantors on a Guarantors-only basis, the combined non-Guarantor subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantors and non-Guarantor subsidiaries on a consolidated basis.

16


Xerium Technologies, Inc.
Consolidating Balance Sheet—(Unaudited)
At March 31, 2017
(Dollars in thousands)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,056

 
$
66

 
$
8,016

 
$

 
$
10,138

Accounts receivable, net
78

 
21,783

 
52,805

 

 
74,666

Intercompany receivables
(428,202
)
 
428,150

 
52

 

 

Inventories, net

 
17,295

 
57,813

 
(1,111
)
 
73,997

Prepaid expenses
771

 
105

 
4,782

 

 
5,658

Other current assets

 
3,896

 
13,837

 

 
17,733

Total current assets
(425,297
)
 
471,295

 
137,305

 
(1,111
)
 
182,192

Property and equipment, net
8,069

 
66,229

 
213,711

 

 
288,009

Investments
878,223

 
231,443

 

 
(1,109,666
)
 

Goodwill

 
19,614

 
38,450

 

 
58,064

Intangible assets

 
7,019

 
675

 

 
7,694

Non-current deferred tax asset

 

 
12,810

 

 
12,810

Other assets

 
(121
)
 
8,471

 

 
8,350

Total assets
$
460,995

 
$
795,479

 
$
411,422

 
$
(1,110,777
)
 
$
557,119

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Notes payable
$

 
$

 
$
7,596

 
$

 
$
7,596

Accounts payable
2,026

 
12,048

 
28,187

 

 
42,261

Accrued expenses
11,894

 
7,363

 
33,292

 

 
52,549

Current maturities of long-term debt
2,428

 
2,606

 
4,369

 

 
9,403

Total current liabilities
16,348

 
22,017

 
73,444

 

 
111,809

Long-term debt, net of current maturities
475,627

 

 
8,354

 

 
483,981

Liabilities under capital leases
5,281

 
4,093

 
8,842

 

 
18,216

Non-current deferred tax liability
1,301

 

 
7,141

 

 
8,442

Pension, other post-retirement and post-employment obligations
20,258

 
811

 
44,114

 

 
65,183

Other long-term liabilities

 
1,250

 
7,806

 

 
9,056

Intercompany loans
63,376

 
(99,159
)
 
35,783

 

 

Total stockholders’ (deficit) equity
(121,196
)
 
866,467

 
225,938

 
(1,110,777
)
 
(139,568
)
Total liabilities and stockholders’ equity (deficit)
$
460,995

 
$
795,479

 
$
411,422

 
$
(1,110,777
)
 
$
557,119


17


Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2016
(Dollars in thousands)
 
 
Parent        
 
Total
Guarantors    
 
Total Non
Guarantors    
 
Other
Eliminations
 
The
Company      
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,368

 
$
279

 
$
11,161

 
$

 
$
12,808

Accounts receivable, net
70

 
18,787

 
49,810

 

 
68,667

Intercompany receivables
(410,370
)
 
419,192

 
(8,822
)
 

 

Inventories, net

 
17,356

 
54,577

 
(1,111
)
 
70,822

Prepaid expenses
545

 
395

 
5,385

 

 
6,325

Other current assets

 
3,842

 
11,942

 

 
15,784

Total current assets
(408,387
)
 
459,851

 
124,053

 
(1,111
)
 
174,406

Property and equipment, net
8,393

 
67,794

 
207,914

 

 
284,101

Investments
869,508

 
211,897

 

 
(1,081,405
)
 

Goodwill

 
19,614

 
37,169

 

 
56,783

Intangible assets

 
7,265

 
65

 

 
7,330

Non-current deferred tax asset

 

 
10,737

 

 
10,737

Other assets

 

 
8,556

 

 
8,556

Total assets
$
469,514

 
$
766,421

 
$
388,494

 
$
(1,082,516
)
 
$
541,913

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Notes payable
$

 
$

 
$
7,328

 
$

 
$
7,328

Accounts payable
2,279

 
10,307

 
23,572

 

 
36,158

Accrued expenses
26,495

 
8,659

 
29,378

 

 
64,532

Current maturities of long-term debt
2,342

 
2,320

 
3,938

 

 
8,600

Total current liabilities
31,116

 
21,286

 
64,216

 

 
116,618

Long-term debt, net of current maturities
464,494

 

 
8,429

 

 
472,923

Liabilities under capital leases
5,830

 
4,627

 
8,779

 

 
19,236

Non-current deferred tax liability
1,270

 

 
5,887

 

 
7,157

Pension, other post-retirement and post-employment obligations
20,923

 
763

 
43,340

 

 
65,026

Other long-term liabilities

 
1,250

 
6,608

 

 
7,858

Intercompany loans
63,923

 
(97,953
)
 
34,030

 

 

Total stockholders’ (deficit) equity
(118,042
)
 
836,448

 
217,205

 
(1,082,516
)
 
(146,905
)
Total liabilities and stockholders’ equity (deficit)
$
469,514

 
$
766,421

 
$
388,494

 
$
(1,082,516
)
 
$
541,913


18


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income (Unaudited)
For the three months ended March 31, 2017
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
46,945

 
$
81,084

 
$
(8,163
)
 
$
119,866

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold

 
30,948

 
49,585

 
(8,163
)
 
72,370

    Selling
233

 
5,044

 
10,397

 

 
15,674

    General and administrative
2,702

 
974

 
8,978

 

 
12,654

    Research and development
299

 
931

 
514

 

 
1,744

    Restructuring
61

 
642

 
2,461

 

 
3,164

 
3,295

 
38,539

 
71,935

 
(8,163
)
 
105,606

(Loss) income from operations
(3,295
)
 
8,406

 
9,149

 

 
14,260

Interest (expense) income, net
(12,338
)
 
(347
)
 
(578
)
 

 
(13,263
)
Foreign exchange gain (loss)
(472
)
 
65

 
(718
)
 

 
(1,125
)
Equity in subsidiaries income
8,714

 
4,381

 

 
(13,095
)
 

Loss on extinguishment of debt
(25
)
 

 

 

 
(25
)
Dividend income
4,263

 
3,858

 

 
(8,121
)
 

(Loss) income before provision for income taxes
(3,153
)
 
16,363

 
7,853

 
(21,216
)
 
(153
)
Provision for income taxes
319

 
(141
)
 
(2,859
)
 

 
(2,681
)
Net (loss) income
$
(2,834
)
 
$
16,222

 
$
4,994

 
$
(21,216
)
 
$
(2,834
)
Comprehensive (loss) income
$
(3,684
)
 
$
16,230

 
$
15,476

 
$
(21,216
)
 
$
6,806


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive Income (Loss)-(Unaudited)
For the three months ended March 31, 2016
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
40,588

 
$
81,600

 
$
(7,223
)
 
$
114,965

Costs and expenses:

 

 

 

 

    Cost of products sold

 
28,296

 
50,259

 
(7,127
)
 
71,428

    Selling
305

 
5,011

 
10,405

 

 
15,721

    General and administrative
2,691

 
923

 
7,893

 

 
11,507

    Research and development
380

 
1,091

 
469

 

 
1,940

    Restructuring
428

 
1,028

 
1,376

 

 
2,832

 
3,804

 
36,349

 
70,402

 
(7,127
)
 
103,428

(Loss) income from operations
(3,804
)
 
4,239

 
11,198

 
(96
)
 
11,537

Interest (expense) income, net
(9,714
)
 
517

 
(1,144
)
 

 
(10,341
)
Foreign exchange gain (loss)
17

 
(54
)
 
61

 

 
24

Equity in subsidiaries income
9,102

 
7,804

 

 
(16,906
)
 

Dividend income
3,145

 

 

 
(3,145
)
 

(Loss) income before provision for income taxes
(1,254
)
 
12,506

 
10,115

 
(20,147
)
 
1,220

Provision for income taxes
(191
)
 
(2
)
 
(2,472
)
 

 
(2,665
)
Net (loss) income
$
(1,445
)
 
$
12,504

 
$
7,643

 
$
(20,147
)
 
$
(1,445
)
Comprehensive (loss) income
$
(606
)
 
$
12,494

 
$
15,632

 
$
(20,147
)
 
$
7,373



19



Xerium Technologies, Inc.
Consolidating Statement of Cash Flows-(Unaudited)
For the three months ended March 31, 2017 (Dollars in thousands)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(2,834
)
 
$
16,222

 
$
4,994

 
$
(21,216
)
 
$
(2,834
)
Adjustments to reconcile net (loss) income to net cash(used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
531

 

 

 

 
531

Depreciation
579

 
2,069

 
5,171

 

 
7,819

Amortization of intangible assets

 
246

 
27

 

 
273

Deferred financing cost amortization
875

 

 
24

 

 
899

Foreign exchange gain on revaluation of debt
625

 

 
2

 

 
627

Deferred taxes
(321
)
 

 
331

 

 
10

Loss on disposition of property and equipment

 
(37
)
 
(12
)
 

 
(49
)
Loss on extinguishment of debt
25

 

 

 

 
25

Provision for doubtful accounts

 
(15
)
 
56

 

 
41

Undistributed equity in earnings of subsidiaries
(8,714
)
 
(4,381
)
 

 
13,095

 

Change in assets and liabilities which (used) provided cash:
 
 
 
 
 
 
 
 


Accounts receivable
(8
)
 
(2,981
)
 
(1,164
)
 

 
(4,153
)
Inventories

 
62

 
(1,198
)
 

 
(1,136
)
Prepaid expenses
(226
)
 
289

 
720

 

 
783

Other current assets

 
(117
)
 
(1,668
)
 

 
(1,785
)
Accounts payable and accrued expenses
(14,965
)
 
443

 
7,188

 

 
(7,334
)
Deferred and other long-term liabilities
(47
)
 
169

 
(1,062
)
 

 
(940
)
Intercompany loans
17,832

 
(9,010
)
 
(8,822
)
 

 

Net cash (used in) provided by operating activities
(6,648
)
 
2,959

 
4,587

 
(8,121
)
 
(7,223
)
Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(158
)
 
(167
)
 
(4,960
)
 

 
(5,285
)
Intercompany property and equipment transfers, net

 
29

 
(29
)
 

 

Proceeds from disposals of property and equipment

 
211

 
5

 

 
216

Net cash (used in) provided by investing activities
(158
)
 
73

 
(4,984
)
 

 
(5,069
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
36,253

 

 
4,223

 

 
40,476

Principal payments on debt
(25,730
)
 

 
(3,963
)
 

 
(29,693
)
Dividends paid

 
(4,263
)
 
(3,858
)
 
8,121

 

Payment of obligations under capital leases
(656
)
 
(721
)
 
(143
)
 

 
(1,520
)
Payment of financing fees
(187
)
 

 
17

 

 
(170
)
Intercompany loans
(2,186
)
 
1,739

 
447

 

 

Net cash provided by (used in) financing activities
7,494

 
(3,245
)
 
(3,277
)
 
8,121

 
9,093

Effect of exchange rate changes on cash flows

 

 
529

 

 
529

Net increase (decrease) in cash
688

 
(213
)
 
(3,145
)
 

 
(2,670
)
Cash and cash equivalents at beginning of period
$
1,368

 
$
279

 
$
11,161

 
$

 
$
12,808

Cash and cash equivalents at end of period
$
2,056

 
$
66

 
$
8,016

 
$

 
$
10,138





20


Xerium Technologies, Inc.
Consolidating Statement of Cash Flows (Unaudited)
For the three months ended March 31, 2016
(Dollars in Thousands)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(1,445
)
 
$
12,504

 
$
7,643

 
$
(20,147
)
 
$
(1,445
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
603

 

 
(11
)
 

 
592

Depreciation
555

 
2,053

 
5,292

 

 
7,900

Amortization of intangible assets

 
69

 
25

 

 
94

Deferred financing cost amortization
732

 

 
24

 

 
756

Foreign exchange gain on revaluation of debt
1,120

 

 

 

 
1,120

Deferred taxes
173

 

 
(18
)
 

 
155

Asset impairment

 

 

 

 

Loss on disposition of property and equipment

 

 
17

 

 
17

Provision for doubtful accounts

 

 
(72
)
 

 
(72
)
Undistributed equity in earnings of subsidiaries
(9,102
)
 
(7,804
)
 

 
16,906

 

Change in assets and liabilities which (used) provided cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
(555
)
 
842

 
(2,417
)
 

 
(2,130
)
Inventories

 
1,229

 
907

 
96

 
2,232

Prepaid expenses
(872
)
 
170

 
81

 

 
(621
)
Other current assets

 
167

 
857

 

 
1,024

Accounts payable and accrued expenses
6,459

 
(932
)
 
(838
)
 

 
4,689

Deferred and other long-term liabilities
3

 
379

 
410

 

 
792

Intercompany loans
1,925

 
(4,721
)
 
2,796

 

 

Net cash (used in) provided by operating activities
(404
)
 
3,956

 
14,696

 
(3,145
)
 
15,103

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(117
)
 
(938
)
 
(2,495
)
 

 
(3,550
)
Intercompany property and equipment transfers, net
(2
)
 
2

 

 

 

Proceeds from disposals of property and equipment

 
5

 
15

 

 
20

Net cash (used in) investing activities
(119
)
 
(931
)
 
(2,480
)
 

 
(3,530
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
10,992

 

 
2,321

 

 
13,313

Principal payments on debt
(11,547
)
 

 
(4,892
)
 

 
(16,439
)
Dividends paid

 
(3,145
)
 

 
3,145

 

Payments of obligations under capitalized leases
(67
)
 
(517
)
 
(89
)
 

 
(673
)
Payment of deferred financing fees
(116
)
 

 
18

 

 
(98
)
Intercompany loans
1,247

 
637

 
(1,884
)
 

 

Employee taxes paid on equity awards
(1,029
)