XERIUM TECHNOLOGIES INC - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INC	cpxrm-ex322_2017q3.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INC	msxrm-ex321_2017q3.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INC	cpxrm-ex31_2017q3.htm
EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INC	msxrm-ex31x12017q3.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 September 30, 2017



¨	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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of October 30, 2017 was 16,367,743.

TABLE OF CONTENTS



Part I. Financial Information
		Page
Item 1.	Unaudited Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

Part II. Other Information

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

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PART I. FINANCIAL INFORMATION



ITEM 1.	UNAUDITED FINANCIAL STATEMENTS

Xerium Technologies, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data and unaudited)



	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	9,881		$	12,808
Accounts receivable, net	75,721			68,667
Inventories, net	79,302			70,822
Prepaid expenses	11,623			6,325
Other current assets	16,575			15,784
Total current assets	193,102			174,406
Property and equipment, net	288,293			284,101
Goodwill	62,966			56,783
Intangible assets	7,181			7,330
Non-current deferred tax asset	10,443			10,737
Other assets	8,087			8,556
Total assets	$	570,072		$	541,913
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Notes payable	$	8,225		$	7,328
Accounts payable	36,643			36,158
Accrued expenses	50,986			64,532
Current maturities of long-term debt	10,899			8,600
Total current liabilities	106,753			116,618
Long-term debt, net of current maturities	487,832			472,923
Liabilities under capital leases	16,831			19,236
Non-current deferred tax liability	9,794			7,157
Pension, other post-retirement and post-employment obligations	64,538			65,026
Other long-term liabilities	9,256			7,858
Commitments and contingencies	—			—
Stockholders’ deficit
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of September 30, 2017 and December 31, 2016	—			—
Common stock, $0.001 par value, 20,000,000 shares authorized; 16,347,654 and 16,152,946 shares outstanding as of September 30, 2017 and December 31, 2016, respectively	16			16
Paid-in capital	432,220			430,823
Accumulated deficit	(448,162		)	(443,066		)
Accumulated other comprehensive loss	(109,006		)	(134,678		)
Total stockholders’ deficit	(124,932		)	(146,905		)
Total liabilities and stockholders’ deficit	$	570,072		$	541,913

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Xerium Technologies, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollars in thousands, except per share data and unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net Sales	$	118,451		$	119,191		$	358,656		$	358,129
Costs and expenses:
Cost of products sold	74,114			75,385			217,938			222,595
Selling	15,664			15,816			47,274			47,272
General and administrative	11,606			12,644			39,720			37,577
Research and development	1,613			1,786			5,023			5,271
Restructuring	(540		)	2,493			3,498			8,103
	102,457			108,124			313,453			320,818
Income from operations	15,994			11,067			45,203			37,311
Interest expense, net	(13,087		)	(12,216		)	(39,631		)	(33,215		)
Loss on extinguishment of debt	—			(11,736		)	(32		)	(11,736		)
Foreign exchange gain (loss)	56			(429		)	(2,315		)	(476		)
Income (loss) before provision for income taxes	2,963			(13,314		)	3,225			(8,116		)
Provision for income taxes	(1,814		)	(25		)	(8,321		)	(4,557		)
Net income (loss)	$	1,149		$	(13,339	)	$	(5,096	)	$	(12,673	)
Comprehensive income (loss)	$	13,916		$	(10,988	)	$	20,576		$	2,894
Net income (loss) per share:
Basic	$	0.07		$	(0.83	)	$	(0.31	)	$	(0.79	)
Diluted	$	0.07		$	(0.83	)	$	(0.31	)	$	(0.79	)
Shares used in computing net income (loss) per share:
Basic	16,343,151			16,063,140			16,253,740			15,949,816
Diluted	16,612,359			16,063,140			16,253,740			15,949,816

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Xerium Technologies, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands and unaudited)



	Nine Months Ended September 30,
	2017			2016
Operating activities
Net loss	$	(5,096	)	$	(12,673	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation	2,249			2,123
Depreciation	23,630			24,206
Amortization of intangible assets	810			573
Deferred financing cost amortization	2,722			2,234
Foreign exchange loss on revaluation of debt	1,064			43
Deferred taxes	5,362			(3,066		)
Asset impairment	94			—
(Gain) loss on disposition of property and equipment	(127		)	50
Loss on extinguishment of debt	32			11,736
Provision (benefit) for doubtful accounts	537			(74		)
Change in assets and liabilities which (used) provided cash:
Accounts receivable	(3,474		)	1,303
Inventories	(3,430		)	5,400
Prepaid expenses	(5,127		)	(613		)
Other current assets	(694		)	(1,573		)
Accounts payable and accrued expenses	(16,782		)	(9,197		)
Deferred and other long-term liabilities	(2,815		)	1,495
Net cash (used in) provided by operating activities	(1,045		)	21,967
Investing activities
Capital expenditures	(11,205		)	(9,614		)
Proceeds from disposals of property and equipment	676			94
Acquisition costs	—			(16,225		)
Net cash used in investing activities	(10,529		)	(25,745		)
Financing activities
Proceeds from borrowings	101,980			541,500
Net increase in notes payable	—			1,121
Principal payments on debt	(87,837		)	(510,836		)
Payment of financing fees	(378		)	(22,807		)
Payment of obligations under capital leases	(4,448		)	(2,994		)
Employee taxes paid on equity awards	(852		)	(1,791		)
Net cash provided by financing activities	8,465			4,193
Effect of exchange rate changes on cash flows	182			(1,874		)
Net decrease in cash	(2,927		)	(1,459		)
Cash and cash equivalents at beginning of period	12,808			9,839
Cash and cash equivalents at end of period	$	9,881		$	8,380

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 September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 include the accounts of the Company and its wholly-owned subsidiaries. These financial statements 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:



	September 30, 2017			December 31, 2016
Raw materials	$	14,902		$	14,089
Work in process	29,448			25,879
Finished goods (includes consigned inventory of $7,939 at September 30, 2017 and $6,673 at December 31, 2016)	41,877			37,155
Inventory allowances	(6,925		)	(6,301		)
	$	79,302		$	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 and nine months ended September 30, 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 September 30, 2017.

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Warranties

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 nine months ended September 30, 2017 and 2016:



	Beginning Balance		Charged to Cost of Sales		Effect of Foreign Currency Translation		Deduction from Reserves			Ending Balance
Nine Months Ended September 30, 2017:	$	2,203	$	584	$	66	$	(649	)	$	2,204
Nine Months Ended September 30, 2016:	$	2,175	$	1,207	$	70	$	(1,228	)	$	2,224

Net Income (Loss) Per Common Share

Net income (loss) per common share has been computed and presented pursuant to the provisions of ASC Topic 260, Earnings per Share (“Topic 260”). Net income (loss) per share is based on the weighted-average number of shares outstanding during the period. As of September 30, 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 September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Weighted-average common shares outstanding–basic	16,343,151	16,063,140	16,253,740	15,949,816
Dilutive effect of stock-based compensation awards outstanding	269,208	—	—	—
Weighted-average common shares outstanding–diluted	16,612,359	16,063,140	16,253,740	15,949,816

The following table sets forth the aggregate of the dilutive securities that were outstanding in the three and nine months ended September 30, 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 September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Anti-dilutive securities	705,061	919,231	974,269	919,231

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 and nine months ended September 30, 2017 and 2016, the Company had no impairment charges included in restructuring expense.

New Accounting Pronouncements

In August 2017, the FASB issued Accounting Standards Update No 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12). The amendments in ASU 2017-12 provide guidance to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of

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hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update. The Company is in the process of evaluating this accounting standard update.

In May 2017, the FASB issued Accounting Standards Update No 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company is in the process of evaluating this accounting standard update.

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 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.

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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 December 15, 2018, and interim periods within those years. For all other entities, it is effective for annual periods beginning after December 15, 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.

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 has completed an initial contract assessment on a sample of contracts and analyzed the Company's contract portfolio. In addition, the Company is finalizing the accounting positions under ASU 2014-09 and is assessing the potential changes to internal controls. 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 in cash. 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.

The adjusted purchase price of $17.6 million resulted in a final purchase price allocation of 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 and is supported by the anticipated synergies of the transaction.

3. Derivatives and Hedging

Risk Management Objective of Using Derivatives

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 foreign exchange rates.

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 denominated in foreign currencies.

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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 September 30, 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 September 30, 2017 and December 31, 2016 and the change in fair value included in foreign exchange gain (loss) in the three and nine months ended September 30, 2017 and 2016:



	September 30, 2017			December 31, 2016
Fair value of derivative liability	$	(268	)	$	(1,461	)
	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016
Change in fair value of derivative included in foreign exchange gain	$	188		$	24
	Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016
Change in fair value of derivative included in foreign exchange (loss) gain	$	(835	)	$	93

The following represents the notional amounts of foreign exchange forward contracts at September 30, 2017:



	Notional Sold		Notional Purchased
Non-designated hedges of foreign exchange risk	$	21,235	$	(23,974	)

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 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 September 30, 2017 and December 31, 2016, long term debt consisted of the following:

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	September 30, 2017			December 31, 2016
9.5% Senior Notes due August 2021.	$	480,000		$	480,000
Notes payable, working capital loan, variable interest rate at 1.45%. Matures August 31, 2018, with one-year rollover option.	8,225			7,328
Fixed asset loan contract, variable interest rate of 5.23%. Matures June of 2020.	6,986			7,511
Other debt	25,776			10,448
Total debt (excluding long-term capital leases and deferred finance fees)	520,987			505,287
Less deferred financing costs and debt discount	(14,031		)	(16,436		)
Less current maturities of long term debt and notes payable	(19,124		)	(15,928		)
Total long term debt	$	487,832		$	472,923

As of September 30, 2017, the carrying value of the Company’s debt was $515.5 million (excluding deferred financing costs and long-term capitalized lease liabilities) and its fair value was approximately $539.0 million. The Company determined the fair value of its debt utilizing significant other observable inputs (Level 2 of the fair value hierarchy) based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities.

9.5% Secured Notes due 2021

On August 9, 2016, the Company closed on $480.0 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 $230.0 million term loan credit facility, to redeem all of its $240.0 million aggregate principal amount 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.

ABL Revolving Credit Facility

On November 3, 2015, the Company refinanced its prior revolving credit facility by entering into a new Revolving Credit and Guaranty Agreement (the “ABL Facility”) with one of its existing lenders. The amount of the ABL Facility provides an aggregate facility limit of $55.0 million, subject to a borrowing base collateralized by eligible accounts receivable, inventory and equipment of Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, and Huyck.Wagner Germany GmbH, Robec Walzen GmbH, and Stowe Woodward AG, as the European borrowers. 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 September 30, 2017 these rates were 5.00% and 3.02%, respectively.

As of September 30, 2017, an aggregate of $22.5 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $38.6 million under the ABL revolver that is currently collateralized by certain assets of the Company, less $16.1 million of that facility committed for letters of credit or current borrowings. In addition, the Company had approximately $5.7 million available for borrowings under other small lines of credit.

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;

•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

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•engage in businesses that are not related to the Company's existing business.

Fixed Assets Loan Contract

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 September 30, 2017 is approximately 5.2%. 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.

The Company is in compliance with all covenants under the Notes, the ABL Facility, and the Loan Agreement at September 30, 2017.

Long-term Capitalized Lease Liabilities

As of September 30, 2017 and December 31, 2016, the Company had long-term capitalized lease liabilities totaling $16.8 million and $19.2 million, respectively. 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 and nine months ended September 30, 2017, the provision for income taxes was $1.8 million and $8.3 million, respectively, as compared to $0.0 million and $4.6 million for the three and nine months ended September 30, 2016, respectively. The increase in tax expense in the three and nine months ended September 30, 2017 was primarily attributable to the geographic mix of earnings, as well as a change in judgment about realization of German deferred tax assets, an increase in unrecognized tax benefits related to transfer pricing, a reduction in tax benefits allocated to continuing operations, and non-recurring tax benefits in 2016 from interest deductions in Brazil. 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 35.0%; 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, Germany, and Australia. Due to these reserves, 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 $40.0 million and $100.0 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.

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As of September 30, 2017, the Company had a gross amount of unrecognized tax benefit of $11.7 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $2.4 million during the nine months ended September 30, 2017, as a result of new positions related to the current year primarily related to transfer pricing 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 $0.1 million and $0.6 million related to the unrecognized tax benefits for the three and nine months ended September 30, 2017. The tax years 2005 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.

Settlement accounting was triggered during the three months ended September 30, 2017 as a result of wind-up payments being made out of the closed Warwick plant pension plan to former participants. As a result, the Company recorded a non-cash settlement charge of $1.0 million to restructuring expense in the third quarter of 2017 with a decrease to other comprehensive loss.

Curtailment accounting was triggered with the June 30, 2016 freeze of a North America rolls plant's pension plan. As a result, a curtailment gain was recorded in the second quarter of 2016 in the amount of $2.7 million, as a reduction to pension liability and a decrease to other comprehensive loss.

As required by Topic 715, the following tables summarize the components of net periodic benefit cost:

Defined Benefit Plans



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Service cost	$	351		$	308		$	1,047		$	1,131
Interest cost	1,221			1,133			3,567			4,149
Expected return on plan assets	(1,420		)	(1,182		)	(4,189		)	(4,326		)
Amortization of net loss	550			428			1,641			1,561
Net periodic benefit cost	$	702		$	687		$	2,066		$	2,515

7. Comprehensive Income and Accumulated Other Comprehensive Loss

Comprehensive income for the three and nine months ended September 30, 2017 (net of tax benefit of $277 thousand and $57 thousand) and 2016 (net of a tax expense of $803 thousand and $1,541 thousand) is as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016
Net income (loss)	$	1,149	$	(13,339	)	$	(5,096	)	$	(12,673	)
Foreign currency translation adjustments	12,217		1,625			25,232			11,353
Pension liability changes under Topic 715	550		726			440			4,214
Comprehensive income (loss)	$	13,916	$	(10,988	)	$	20,576		$	2,894

Included in foreign currency translation adjustments are foreign currency (losses) gains on intercompany transactions that are considered a long-term investment totaling ($2.5) million and ($4.6) million for the three and nine months ended September 30, 2017, respectively, and $0.5 million and $3.0 million for the three and nine months ended September 30, 2016, respectively.

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The components of accumulated other comprehensive loss for the three months ended September 30, 2017 are as follows (net of tax benefits of $6.1 million):



	Foreign Currency Translation Adjustment			Pension Liability Changes Under Topic 715			Accumulated Other Comprehensive (Loss) Income
Balance at June 30, 2017	$	(82,217	)	$	(39,556	)	$	(121,773	)
Other comprehensive income (loss) before reclassifications	12,217			(1,007		)	11,210
Amounts reclassified from other comprehensive loss:
Amortization of actuarial losses	—			550			550
Pension settlement loss	—			1,007			1,007
Net current period other comprehensive income	12,217			550			12,767
Balance at September 30, 2017	$	(70,000	)	$	(39,006	)	$	(109,006	)

The components of accumulated other comprehensive loss for the nine months ended September 30, 2017 are as follows (net of tax benefits of $6.1 million):



	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 (loss) before reclassifications	25,232			(2,208		)	23,024
Amounts reclassified from other comprehensive loss
Amortization of actuarial losses	—			1,641			1,641
Pension settlement loss	—			1,007			1,007
Net current period other comprehensive income	25,232			440			25,672
Balance at September 30, 2017	$	(70,000	)	$	(39,006	)	$	(109,006	)

For the three and nine months ended September 30, 2017, the amortization of actuarial losses is included in cost of products sold and general and administrative expenses in the Consolidated Statements of Operations. The pension settlement loss is included in restructuring expense in the Consolidated Statements of Operations. Refer to Note 6 for further information.

8. Restructuring Expense

For the nine months ended September 30, 2017, the Company incurred restructuring expenses of $3.5 million relating to headcount reductions and other costs related to previous plant closures partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary. For the nine months ended September 30, 2016, the Company incurred restructuring expenses of $8.1 million. These included $1.4 million of charges related to the closure of the Middletown, Va. facility and $6.7 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 nine months ended September 30, 2017 and 2016:

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	Balance at December 31, 2016		Charges		Currency Effects		Cash Payments			Balance at September 30, 2017
Severance and other benefits	$	3,805	$	551	$	579	$	(3,885	)	$	1,050
Facility costs and other	392		1,940		60		(2,131		)	261
Total	$	4,197	$	2,491	$	639	$	(6,016	)	$	1,311

Not included in the charges for the nine months ended September 30, 2017 in the table above is $1.0 million related to a pension settlement charge. The offset to the charge was accumulated other comprehensive loss. Refer to Notes 6 and 7 for further information.



	Balance at December 31, 2015		Charges		Currency Effects		Cash Payments			Balance at September 30, 2016
Severance and other benefits	$	5,308	$	4,328	$	73	$	(5,010	)	$	4,699
Facility costs and other	903		3,775		12		(4,267		)	423
Total	$	6,211	$	8,103	$	85	$	(9,277	)	$	5,122

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Clothing	$	(1,208	)	$	1,803	$	1,430	$	4,930
Roll Covers	384			637		1,692		2,478
Corporate	284			53		376		695
Total	$	(540	)	$	2,493	$	3,498	$	8,103

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 and nine months ended September 30, 2017 and 2016.

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	Clothing		Roll Covers		Corporate			Total
Three months ended September 30, 2017
Net Sales	$	72,613	$	45,838	$	—		$	118,451
Segment Earnings (Loss)	$	17,852	$	8,976	$	(3,062	)	$	23,766
Three months ended September 30, 2016
Net Sales	$	71,033	$	48,158	$	—		$	119,191
Segment Earnings (Loss)	$	17,499	$	8,826	$	(3,042	)	$	23,283

Nine months ended September 30, 2017
Net Sales	$	217,533	$	141,123	$	—		$	358,656
Segment Earnings (Loss)	$	59,556	$	29,337	$	(11,391	)	$	77,502
Nine months ended September 30, 2016
Net Sales	$	217,189	$	140,940	$	—		$	358,129
Segment Earnings (Loss)	$	57,301	$	28,611	$	(11,035	)	$	74,877

Provided below is a reconciliation of Segment Earnings (Loss) to Income before provision for income taxes for the three and nine months ended September 30, 2017 and 2016, respectively.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Segment Earnings (Loss):
Clothing	$	17,852		$	17,499		$	59,556		$	57,301
Roll Covers	8,976			8,826			29,337			28,611
Corporate	(3,062		)	(3,042		)	(11,391		)	(11,035		)
Stock-based compensation	(203		)	(697		)	(1,062		)	(2,123		)
CEO transition expense	(15		)	—			(3,054		)	—
Interest expense, net	(13,087		)	(12,216		)	(39,631		)	(33,215		)
Depreciation and amortization	(8,232		)	(8,394		)	(24,440		)	(24,779		)
Loss on extinguishment of debt	—			(11,736		)	(32		)	(11,736		)
Restructuring expense	540			(2,493		)	(3,498		)	(8,103		)
Other non-recurring expense	(33		)	(85		)	(147		)	(752		)
Plant startup costs	(37		)	(573		)	(683		)	(1,858		)
Unrealized foreign exchange gain (loss)	264			(403		)	$	(1,730	)	$	(427	)
Income (loss) before provision for income taxes	$	2,963		$	(13,314	)	$	3,225		$	(8,116	)

10. Commitments and Contingencies

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 September 30, 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 and nine months ended September 30, 2017 and September 30, 2016 as follows:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
RSU, Options and DSU Awards⁽¹⁾	$	203	$	697	$	2,249	$	2,123


(1)	Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors. The nine months ended September 30, 2017 includes approx. $1.2 million of expense related to the accelerated vesting on RSU's upon CEO transition. Upon transition 146,134 shares were issued to the former CEO.

Summary of Activity Under Long-term Incentive Plans

Long-Term Incentive Program - 2017 LTIP

On May 30, 2017, the Board of Directors approved the 2017 - 2019 Long-Term Incentive Plan (the "2017 LTIP") which provides for the grant of incentive award opportunities (each, an "Award") payable, if earned, in cash. Because any Award under the 2017 LTIP will be paid in cash, and not equity, the Awards granted under the 2017 LTIP are not made pursuant to the Xerium Technologies, Inc. 2010 Equity Incentive Plan (the "EIP"). Awards will consist of Phantom Stock Units. Each Phantom Stock Unit represents the right to receive a cash amount equal to the Average Value of one share of common stock of the Company as described below:

•125,535 Time-based awards, or 50% of the total target award for each participant, have been granted in the form of time-based units. The time-based units vest on the third anniversary of the date of grant.

•125,535 Performance-based awards, or 50% of the total target award for each participant, have been granted in the form of performance-based units. Of these units, one half will vest based on the financial performance of the Company as measured by Adjusted EBITDA, and one half will vest based on the Return on Net Assets (as defined in the 2017 LTIP) of the Company.

Half of the performance-based units whose vesting is subject to the financial performance of the Company will vest based on the degree to which the Company achieves a targeted three-year cumulative Adjusted EBITDA metric, adjusted for currency fluctuations, over the performance period of January 1, 2017 through December 31, 2019. The amount of units that vest will range from 50% to 200% of the employee's total units.

Half of the performance-based units whose vesting is subject to the financial performance of the Company will vest based on the degree to which the Company achieves an average three-year Return on Net Assets metric over the performance period of January 1, 2017 through December 31, 2019. The amount of units that vest will range from 50% to 200% of the employee's total units.

Long-Term Incentive Program— 2014 LTIP

Awards under the 2014 LTIP vested on May 8, 2017, and were converted to 13,829 shares of common stock, net of withholdings.

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 64,339 DSUs under the 2011 DSU Plan for service during the nine months ended September 30, 2017. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 48,446 DSUs were settled in common stock during the nine months ended September 30, 2017.

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CEO Restricted Stock Unit Award

On June 2, 2017, the Company filed a Registration Statement on Form S-8 for the purpose of registering 600,000 shares of its common stock reserved for issuance in accordance with an Inducement Restricted Stock Unit Award Agreement between the Company and Mark Staton in connection with his appointment as the Company's President and Chief Executive Officer on April 28, 2017. The Inducement Restricted Stock Unit Award Agreement provides Mr. Staton with the opportunity to earn up to 600,000 shares of the Company’s common stock if its stock price attains certain levels within certain time periods, subject to his continued employment with the Company. No compensation expense related to this agreement has been recorded during the nine months ended September 30, 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 Xerium Technologies, Inc. (referred to as “Parent” for the purpose of this note only) and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of the domestic wholly owned subsidiaries, whether directly or indirectly, of the Parent (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 the Parent 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.

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Xerium Technologies, Inc.

Consolidating Balance Sheet

At September 30, 2017

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
ASSETS
Current assets:
Cash and cash equivalents	$	1,731		$	65		$	8,085		$	—		$	9,881
Accounts receivable, net	20			18,849			56,852			—			75,721
Intercompany receivables	(431,252		)	442,218			(10,966		)	—			—
Inventories, net	—			18,097			62,355			(1,150		)	79,302
Prepaid expenses	354			591			10,678			—			11,623
Other current assets	—			3,301			13,274			—			16,575
Total current assets	(429,147		)	483,121			140,278			(1,150		)	193,102
Property and equipment, net	7,374			63,087			217,832			—			288,293
Investments	897,256			281,794			—			(1,179,050		)	—
Goodwill	—			19,614			43,352			—			62,966
Intangible assets	—			6,528			653			—			7,181
Non-current deferred tax asset	—			—			10,443			—			10,443
Other assets	—			—			8,087			—			8,087
Total assets	$	475,483		$	854,144		$	420,645		$	(1,180,200	)	$	570,072

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Notes payable	$	—		$	—		$	8,225		$	—		$	8,225
Accounts payable	1,916			10,069			24,658			—			36,643
Accrued expenses	13,225			8,449			29,312			—			50,986
Current maturities of long-term debt	2,015			2,451			6,433			—			10,899
Total current liabilities	17,156			20,969			68,628			—			106,753
Long-term debt, net of current maturities	480,041			—			7,791			—			487,832
Liabilities under capital leases	4,539			3,301			8,991			—			16,831
Non-current deferred tax liability	1,150			—			8,644			—			9,794
Pension, other post-retirement and post-employment obligations	18,899			1,269			44,370			—			64,538
Other long-term liabilities	—			—			9,256			—			9,256
Intercompany loans	78,864			(110,119		)	31,255			—			—
Total stockholders’ (deficit) equity	(125,166		)	938,724			241,710			(1,180,200		)	(124,932		)
Total liabilities and stockholders’ (deficit) equity	$	475,483		$	854,144		$	420,645		$	(1,180,200	)	$	570,072

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Xerium Technologies, Inc.

Consolidating Balance Sheet

At December 31, 2016

(Dollars in thousands, and unaudited)



	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’ (deficit) equity	$	469,514		$	766,421		$	388,494		$	(1,082,516	)	$	541,913

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Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive Income (Loss)

For the three months ended September 30, 2017

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	41,294		$	82,590		$	(5,433	)	$	118,451
Costs and expenses:
Cost of products sold	—			27,327			52,223			(5,436		)	74,114
Selling	284			5,040			10,340			—			15,664
General and administrative	1,128			1,023			9,455			—			11,606
Research and development	243			866			504			—			1,613
Restructuring	284			387			(1,211		)	—			(540		)
	1,939			34,643			71,311			(5,436		)	102,457
(Loss) income from operations	(1,939		)	6,651			11,279			3			15,994
Interest expense, net	(12,255		)	(551		)	(281		)	—			(13,087		)
Foreign exchange (loss) gain	(75		)	381			(250		)	—			56
Equity in subsidiaries income	13,213			7,760			—			(20,973		)	—
Dividend income (expense), net	2,534			2,533			—			(5,067		)	—
Income (loss) before provision for income taxes	1,478			16,774			10,748			(26,037		)	2,963
Provision for income taxes	(329		)	(107		)	(1,378		)	—			(1,814		)
Net income (loss)	$	1,149		$	16,667		$	9,370		$	(26,037	)	$	1,149
Comprehensive (loss) income	$	(489	)	$	16,631		$	23,811		$	(26,037	)	$	13,916

Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive Income (Loss)

For the three months ended September 30, 2016

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	43,711		$	82,151		$	(6,671	)	$	119,191
Costs and expenses:
Cost of products sold	—			29,367			52,520			(6,502		)	75,385
Selling	175			4,925			10,716			—			15,816
General and administrative	2,009			2,167			8,468			—			12,644
Research and development	273			1,043			470			—			1,786
Restructuring	53			430			2,010			—			2,493
	2,510			37,932			74,184			(6,502		)	108,124
(Loss) income from operations	(2,510		)	5,779			7,967			(169		)	11,067
Interest (expense) income, net	(11,439		)	(47		)	(730		)	—			(12,216		)
Foreign exchange gain (loss)	63			(110		)	(382		)	—			(429		)
Equity in subsidiaries income	8,634			8,415			—			(17,049		)	—
Loss on extinguishment of debt	(11,736		)	—			—			—			(11,736		)
Dividend income (expense), net	3,700			—			—			(3,700		)	—
(Loss) income before provision for income taxes	(13,288		)	14,037			6,855			(20,918		)	(13,314		)
(Provision for) benefit from income taxes	(51		)	(288		)	314			—			(25		)
Net (loss) income	$	(13,339	)	$	13,749		$	7,169		$	(20,918	)	$	(13,339	)
Comprehensive (loss) income	$	(12,773	)	$	13,736		$	8,967		$	(20,918	)	$	(10,988	)

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Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive (Loss) Income

For the nine months ended September 30, 2017

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	134,638		$	244,547		$	(20,529	)	$	358,656
Costs and expenses:
Cost of products sold	58			88,391			149,979			(20,490		)	217,938
Selling	773			15,400			31,101			—			47,274
General and administrative	9,418			2,588			27,714			—			39,720
Research and development	742			2,815			1,466			—			5,023
Restructuring	375			1,236			1,887			—			3,498
	11,366			110,430			212,147			(20,490		)	313,453
(Loss) income from operations	(11,366		)	24,208			32,400			(39		)	45,203
Interest expense, net	(36,881		)	(1,335		)	(1,415		)	—			(39,631		)
Foreign exchange (loss) gain	(1,842		)	599			(1,072		)	—			(2,315		)
Equity in subsidiaries income	28,217			19,211			—			(47,428		)	—
Loss on extinguishment of debt	(32		)	—			—			—			(32		)
Dividend income (expense), net	16,763			9,379			—			(26,142		)	—
(Loss) income before provision for income taxes	(5,141		)	52,062			29,913			(73,609		)	3,225
Benefit from (provision for) income taxes	45			(570		)	(7,796		)	—			(8,321		)
Net (loss) income	$	(5,096	)	$	51,492		$	22,117		$	(73,609	)	$	(5,096	)
Comprehensive (loss) income	$	(8,521	)	$	51,549		$	51,157		$	(73,609	)	$	20,576

Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive (Loss) Income

For the nine months ended September 30, 2016

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	130,379		$	249,137		$	(21,387	)	$	358,129
Costs and expenses:
Cost of products sold	—			88,401			155,441			(21,247		)	222,595
Selling	677			15,067			31,528			—			47,272
General and administrative	8,178			4,137			25,262			—			37,577
Research and development	835			3,062			1,374			—			5,271
Restructuring	695			2,098			5,310			—			8,103
	10,385			112,765			218,915			(21,247		)	320,818
(Loss) income from operations	(10,385		)	17,614			30,222			(140		)	37,311
Interest (expense) income, net	(31,164		)	790			(2,841		)	—			(33,215		)
Foreign exchange (loss) gain	(53		)	(145		)	(278		)	—			(476		)
Equity in subsidiaries income	31,657			24,973			—			(56,630		)	—
Loss on extinguishment of debt	(11,736		)	—			—			—			(11,736		)
Dividend income (expense), net	9,245			—			—			(9,245		)	—
(Loss) income before provision for income taxes	(12,436		)	43,232			27,103			(66,015		)	(8,116		)
Provision for income taxes	(237		)	(550		)	(3,770		)	—			(4,557		)
Net (loss) income	$	(12,673	)	$	42,682		$	23,333		$	(66,015	)	$	(12,673	)
Comprehensive (loss) income	$	(10,174	)	$	45,230		$	33,853		$	(66,015	)	$	2,894

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Xerium Technologies, Inc.

Consolidating Statement of Cash Flows

For the nine months ended September 30, 2017

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Operating activities
Net (loss) income	$	(5,096	)	$	51,492		$	22,117		$	(73,609	)	$	(5,096	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation	2,249			—			—			—			2,249
Depreciation	1,734			6,208			15,688			—			23,630
Amortization of intangible assets	—			737			73			—			810
Deferred financing cost amortization	2,650			—			72			—			2,722
Foreign exchange loss (gain) on revaluation of debt	1,220			—			(156		)	—			1,064
Deferred taxes	(120		)	—			5,482			—			5,362
Asset impairment	—			88			6			—			94
Gain on disposition of property and equipment	—			(69		)	(58		)	—			(127		)
Loss on extinguishment of debt	32			—			—			—			32
Provision for doubtful accounts	—			143			394			—			537
Undistributed equity in earnings of subsidiaries	(28,217		)	(19,211		)	—			47,428			—
Change in assets and liabilities which provided (used) cash:
Accounts receivable	50			(206		)	(3,318		)	—			(3,474		)
Inventories	—			(740		)	(2,729		)	39			(3,430		)
Prepaid expenses	191			(196		)	(5,122		)	—			(5,127		)
Other current assets	—			139			(833		)	—			(694		)
Accounts payable and accrued expenses	(13,582		)	(449		)	(2,751		)	—			(16,782		)
Deferred and other long-term liabilities	(174		)	(744		)	(1,897		)	—			(2,815		)
Intercompany loans	20,883			(23,201		)	2,318			—			—
Net cash (used in) provided by operating activities	(18,180		)	13,991			29,286			(26,142		)	(1,045		)
Investing activities
Capital expenditures	(615		)	(1,023		)	(9,567		)	—			(11,205		)
Intercompany property and equipment transfers, net	(3		)	76			(73		)	—			—
Proceeds from disposals of property and equipment	—			629			47			—			676
Other	470			—			(470		)	—			—
Net cash used in investing activities	(148		)	(318		)	(10,063		)	—			(10,529		)
Financing activities
Proceeds from borrowings	87,132			—			14,848			—			101,980
Principal payments on debt	(73,907		)	—			(13,930		)	—			(87,837		)
Dividends paid	—			(9,772		)	(16,370		)	26,142			—
Payment of obligations under capital leases	(1,999		)	(1,958		)	(491		)	—			(4,448		)
Payment of financing fees	(431		)	—			53			—			(378		)
Intercompany loans	8,748			(2,155		)	(6,593		)	—			—
Employee taxes paid on equity awards	(852		)	—			—			—			(852		)
Net cash provided by (used in) financing activities	18,691			(13,885		)	(22,483		)	26,142			8,465
Effect of exchange rate changes on cash flows	—			(2		)	184			—			182
Net increase (decrease) in cash	363			(214		)	(3,076		)	—			(2,927		)
Cash and cash equivalents at beginning of period	$	1,368		$	279		$	11,161		$	—		$	12,808
Cash and cash equivalents at end of period	$	1,731		$	65		$	8,085		$	—		$	9,881

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Xerium Technologies, Inc.

Consolidating Statement of Cash Flows

For the nine months ended September 30, 2016

(Dollars in thousands, and unaudited)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Operating activities
Net (loss) income	$	(12,673	)	$	42,682		$	23,333		$	(66,015	)	$	(12,673	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Stock-based compensation	2,123			—			—			—			2,123
Depreciation	1,683			6,189			16,334			—			24,206
Amortization of intangible assets	—			501			72			—			573
Deferred financing cost amortization	2,162			—			72			—			2,234
Foreign exchange loss on revaluation of debt	43			—			—			—			43
Deferred taxes	142			—			(3,208		)	—			(3,066		)
Loss on disposition of property and equipment	—			30			20			—			50
Loss on extinguishment of debt	11,736			—			—			—			11,736
Provision for doubtful accounts	—			(70		)	(4		)	—			(74		)
Undistributed equity in earnings of subsidiaries	(31,657		)	(24,973		)	—			56,630			—
Change in assets and liabilities which provided (used) cash:
Accounts receivable	(39		)	1,856			(514		)	—			1,303
Inventories	—			2,372			2,888			140			5,400
Prepaid expenses	(76		)	(77		)	(460		)	—			(613		)
Other current assets	—			475			(2,048		)	—			(1,573		)
Accounts payable and accrued expenses	1,933			(4,537		)	(6,593		)	—			(9,197		)
Deferred and other long-term liabilities	(34		)	908			621			—			1,495
Intercompany loans	289,717			(294,054		)	4,337			—			—
Net cash provided by (used in) operating activities	265,060			(268,698		)	34,850			(9,245		)	21,967
Investing activities
Capital expenditures	(664		)	(2,332		)	(6,618		)	—			(9,614		)
Intercompany property and equipment transfers, net	(2		)	40			(38		)	—			—
Proceeds from disposals of property and equipment	—			5			89			—			94
Acquisition costs	—			(16,225		)	—			—			(16,225		)
Net cash used in investing activities	(666		)	(18,512		)	(6,567		)	—			(25,745		)
Financing activities
Net increase in notes payable	—			—			1,121			—			1,121
Proceeds from borrowings	535,407			—			6,093			—			541,500
Principal payments on debt	(503,806		)	—			(7,030		)	—			(510,836		)
Dividends paid	—			(9,245		)	—			9,245			—
Payments of obligations under capitalized leases	(946		)	(1,743		)	(305		)	—			(2,994		)
Payment of deferred financing fees	(22,861		)	—			54			—			(22,807		)
Intercompany loans	(272,267		)	298,235			(25,968		)	—			—
Employee taxes paid on equity awards	(1,791		)	—			—			—			(1,791		)
Net cash (used in) provided by financing activities	(266,264		)	287,247			(26,035		)	9,245			4,193
Effect of exchange rate changes on cash flows	—			—			(1,874		)	—			(1,874		)
Net (decrease) increase in cash	(1,870		)	37			374			—			(1,459		)
Cash and cash equivalents at beginning of period	3,105			(2		)	6,736			—			9,839
Cash and cash equivalents at end of period	$	1,235		$	35		$	7,110		$	—		$	8,380



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor created by that Act. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Undue reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements. Factors that could materially affect our actual results, levels of activity, performance or achievements include the following items:


•	rate and magnitude of decline in graphical grade paper production;


•	fluctuations in interest rates and currency exchange rates;


•	over-capacity of certain grades of paper, leading to distressed profit situations;


•	execution risk related to the startup of new facilities;


•	local economic conditions in the areas around the world where we conduct business;


•	quality issues with new products that could lead to higher warranty and quality costs;


•	structural shifts in the demand for paper;


•	the effectiveness of our strategies and plans;


•	sudden increase or decrease in production capacity;


•	trend toward extended life in forming fabrics, leading to reduced market size;


•	our development and marketing of new technologies and our ability to compete against new technologies developed by competitors;


•	variations in demand for our products, including our new products;


•	fluctuations in the price of our component supply costs and energy costs;


•	our ability to generate substantial operating cash flow to service our debt and fund growth and unexpected cash needs;


•	occurrences of terrorist attacks or an armed conflict involving the United States or any other country in which we conduct business, or any other domestic or international calamity, including natural disasters;


•	changes in the policies, laws, regulations and practices of the United States and any foreign country in which we operate or conduct business, including changes regarding taxes and the repatriation of earnings; and


•	anti-takeover provisions in our charter documents.

Other factors that could materially affect our actual results, levels of activity, performance or achievements can be found in our “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017. 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 project. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to update or revise

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these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law.

Unless the context requires otherwise, all references in this Quarterly Report to “Xerium”, “the Company”, “we”, “our” and “us” means Xerium Technologies, Inc. and its consolidated subsidiaries.

Company Overview

We are 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. Our operations are strategically located in the major paper-making regions of the world, including North America, Europe, Latin America and Asia-Pacific.

Our products play key roles in the formation and processing of paper along the length of a paper-making machine. Paper producers rely on our products and services to help improve the quality of their paper, differentiate their paper products, operate their paper-making machines more efficiently and reduce production costs. Our products and services typically represent only a small percentage of a paper producer’s overall production costs, yet they can reduce costs by permitting the use of lower-cost raw materials and by reducing energy consumption. Paper producers must replace machine clothing and refurbish or replace roll covers periodically as these products wear down during the paper production process. Our products are designed to withstand high temperatures, chemicals and high pressure conditions and are the result of a substantial investment in research and development and highly sophisticated manufacturing processes.

We operate in two principal business segments: clothing and roll covers. In our clothing segment, we manufacture and sell highly engineered synthetic textile belts that transport paper as it is processed in a paper-making machine. Clothing plays a significant role in the forming, pressing and drying stages of paper production. Because paper-making processes and machine specifications vary widely, the clothing size, form, material and function is custom engineered to fit each individual paper-making machine and process. For the nine months ended September 30, 2017, our clothing segment represented 61% of our net sales.

Our roll cover products provide a surface with the mechanical properties necessary to process the paper sheet in a cost-effective manner that delivers the sheet qualities desired by each paper producer. We tailor our roll covers to individual paper-making machines and processes, using different materials, treatments and finishings. In addition to manufacturing and selling new roll covers, we also provide refurbishment services for previously installed roll covers and we manufacture new and rebuilt spreader rolls. We also provide various related products and services to our customers, both directly and through third party providers, as a growing part of our overall product offering through our roll covers sales channels. For the nine months ended September 30, 2017, our roll cover segment represented 39% of our net sales.

Industry Trends and Outlook

Our global markets are slightly favorable overall in 2017 although they have gone through a tough business cycle. Demand for our products is tied to our customers' production rates and our product’s useful lives. While the majority of our end markets are growing, certain graphical grade paper production market segments have been in decline. Non-declining markets make up approximately 80% of our business model. Production of these grades of paper and board (tissue, paper towels, napkins, cardboard, consumer packaging, consumer durable packaging, e-commerce packaging) is steady and/or increasing globally. Declining grades of paper production are newsprint globally, and printing/writing papers in mature economies with full access to wireless/digital media. These market corrections have been very strong in the last few years and many paper machines dedicated to graphical paper production have been closed. At the same time, new machines have been installed to make the growing grades of paper and board. Both of these trends are continuing. In order to optimize outcomes in this changing environment, we implemented a repositioning program to re-map our people, products, equipment tooling, machine services offered, and plant locations to more naturally align with growing markets both geographically and by type of paper machine serviced.

Net Sales and Expenses

The following factors primarily drive net sales in both our clothing and roll covers segments:

•the volume (tonnage) of worldwide paper production;

•our ability to introduce new products that our customers value and will pay for;


•	advances in technology of our products, which can provide value to our customers by improving the efficiency of paper-making machines and reduce their manufacturing costs;

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•growth in developing markets, particularly in Asia;

•the mix of paper grades being produced;

•our ability to enter and expand our business in non-paper products; and

•the impact of currency fluctuations.

Net sales in our roll covers segment include our mechanical services business. In recent years, we have expanded this business in response to demand from paper producers that we perform work on the internal mechanisms of their rolls while we refurbish or replace a roll cover. In our clothing segment, we conduct a small portion of our business pursuant to consignment arrangements; for these, we do not recognize a sale of a product to a customer until the customer places the product into use, which typically occurs some period after we ship the product to the customer or to a warehouse location near the customer’s facility. As part of the consignment agreement, we deliver the goods to a location designated by the customer. In addition, we agree to a “sunset” date with the customer, which represents the date by which the customer must accept all risks and responsibilities of ownership of the product and payment terms begin. For consignment sales, we recognize revenue on the earlier of the actual product installation date or the “sunset” date.

Our operating cost levels are impacted by total sales volume and mix, raw material costs, the impact of inflation, foreign currency fluctuations and the success of our cost reduction programs.

The level of our cost of products sold is primarily attributable to labor costs, raw material costs, product shipping costs, plant utilization and depreciation, with labor costs constituting the largest component. We invest in facilities and equipment that enable innovative product development and improve production efficiency and costs. Recent examples of capital spending for such purposes include faster weaving and needling looms and seaming machines with accurate electronic controls, automated compound mixing equipment and computer-controlled lathes and mills.

The level of research and development spending is driven by market demand for technology enhancements, including both specific customer needs and general market requirements, as well as by our own analysis of applied technology opportunities. With the exception of purchases of equipment and similar capital items used in our research and development activities, all research and development is expensed as incurred. Research and development expenses were $5.0 million and $5.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Foreign Exchange

A substantial portion of our net sales is denominated in Euros or other currencies. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies affect our reported levels of net sales and profitability as the results are translated into U.S. Dollars for reporting purposes. In particular, decreases in the value of the U.S. Dollar relative to the value of the Euro and these other currencies positively impact our levels of revenue and profitability because the translation of a certain number of Euros or units of such other currencies into U.S. Dollars for financial reporting purposes will represent more U.S. Dollars than it would have prior to the relative decrease in the value of the U.S. Dollar. Conversely, a decline in the value of the Euro will result in a lower number of U.S. Dollars for financial reporting purposes.

For certain transactions, our net sales are denominated in U.S. Dollars, but all or a substantial portion of the associated costs are denominated in a different currency. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies can affect the level of the profitability of these transactions. The largest proportion of such transactions consists of transactions in which the net sales are denominated in or indexed to the U.S. Dollar and all or a substantial portion of the associated costs are denominated in Brazilian Reals or other currencies.

During the nine months ended September 30, 2017, we conducted business in nine foreign currencies. The following table provides the average exchange rate for the nine months ended September 30, 2017 and 2016 of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our operations.



Currency	Nine Months Ended September 30, 2017	Nine Months Ended September 30, 2016
Euro	$1.11 = 1 Euro	$1.12 = 1 Euro
Canadian Dollar	$0.76 = 1 Canadian Dollar	$0.76 = 1 Canadian Dollar
Chinese Renminbi	$0.15 = 1 Chinese Renminbi	$0.15 = 1 Chinese Renminbi
Japanese Yen	$0.01 = 1 Japanese Yen	$0.01 = 1 Japanese Yen

In the nine months ended September 30, 2017, we conducted approximately 31% of our sales in Euros, approximately 6% in the Canadian Dollar, approximately 6% in the Chinese Renminbi and approximately 4% in the Japanese Yen.

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To mitigate the risk that changes in foreign currencies have on our cash flows, we may utilize forward currency contracts in certain circumstances to lock in exchange rates with the objective that the gain or loss on the forward contracts will approximate the loss or gain that results from the transaction or transactions being hedged. We determine whether to enter into hedging arrangements based upon the size of the underlying transaction or transactions, an assessment of the risk of adverse movements in the applicable currencies and the availability of a cost effective hedge strategy. To the extent we do not engage in hedging or such hedging is not effective, changes in the relative value of currencies can affect our cash flows.

Domestic and Foreign Operating Results:

The following is an analysis of our domestic and foreign operations during the three and nine months ended September 30, 2017 and September 30, 2016 and a discussion of the results of operations during those periods (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Domestic income from operations	$	4,712	$	3,269	$	12,842	$	7,229
Foreign income from operations	11,282		7,798		32,361		30,082
Total income from operations	$	15,994	$	11,067	$	45,203	$	37,311

During the three and nine months ended September 30, 2017, domestic income from operations was lower than foreign income from operations primarily due to lower sales, product mix, corporate overhead costs and market differences. We intend for all earnings generated by foreign subsidiaries after 2012 to be remitted to the parent company at some point in the future. U.S. income taxes and foreign withholding taxes have been provided related to those foreign earnings. All other foreign un-remitted earnings generated in years prior to 2013 likely will remain indefinitely reinvested, except for a portion of the earnings generated prior to 2013 related to our Brazilian and Chinese operations.

Cost Reduction Programs

An important part of our strategy is to seek to reduce our overall costs and improve our competitiveness. As a part of this effort, we engage in cost reduction programs, which are designed to improve the cost structure of our global operations in response to changing market conditions. These cost reduction programs include headcount reductions throughout the world as well as plant closures that are intended to rationalize production among our facilities to better enable us to match our cost structure with customer demand. Cost savings have been realized and are expected to be realized in labor costs and other production overhead, other components of costs of products sold, general and administrative expenses and facility costs. The majority of cost savings begin at the time of the headcount reductions and plant closure with remaining cost savings recognized over subsequent periods. Cost savings from headcount reductions have not been and are not expected to be offset by related increases in other expenses. Cost savings related to plant closures have been and are expected to be partially offset by additional costs incurred in the facilities that assumed the operations of the closed facility.

For the nine months ended September 30, 2017, we incurred restructuring expenses of $3.5 million relating to: 1) headcount reductions and 2) other costs related to previous plant closures partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary. For the nine months ended September 30, 2016, we incurred restructuring expenses of $8.1 million. These included $1.4 million of charges related to the closure of the Middletown, Va. facility and $6.7 million of charges relating to headcount reductions and other costs related to previous plant closures.

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Results of Operations

The table that follows sets forth for the periods presented certain consolidated operating results.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)						(in thousands)
Net sales	$	118,451		$	119,191		$	358,656		$	358,129
Costs and expenses:
Cost of products sold	74,114			75,385			217,938			222,595
Selling	15,664			15,816			47,274			47,272
General and administrative	11,606			12,644			39,720			37,577
Research and development	1,613			1,786			5,023			5,271
Restructuring	(540		)	2,493			3,498			8,103
	102,457			108,124			313,453			320,818
Income from operations	15,994			11,067			45,203			37,311
Interest expense, net	(13,087		)	(12,216		)	(39,631		)	(33,215		)
Loss on extinguishment of debt	—			(11,736		)	(32		)	(11,736		)
Foreign exchange gain (loss)	56			(429		)	(2,315		)	(476		)
Income (loss) before provision for income taxes	2,963			(13,314		)	3,225			(8,116		)
Provision for income taxes	(1,814		)	(25		)	(8,321		)	(4,557		)
Net income (loss)	$	1,149		$	(13,339	)	$	(5,096	)	$	(12,673	)
Comprehensive income (loss)	$	13,916		$	(10,988	)	$	20,576		$	2,894

We believe that excluding currency effects on our net sales provides a more accurate measure because it provides insight into whether actual sales activity is going up or down year over year. The difference between net sales for the three and nine months ended September 30, 2017 translated into net sales at the three and nine months ended September 30, 2016 exchange rates and net sales for the three and nine months ended September 30, 2016 demonstrates the currency effects on net sales year over year.

Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016

Net Sales. Net sales for the three months ended September 30, 2017 decreased by $0.7 million, or 0.6%, to $118.5 million from $119.2 million for the three months ended September 30, 2016. Excluding currency effects, net sales were down $2.4 million, or 2.0%. For the three months ended September 30, 2017, approximately 61% of our net sales were in our clothing segment and approximately 39% were in our roll covers segment.

In our clothing segment, net sales for the three months ended September 30, 2017 increased $1.6 million to $72.6 million from $71.0 million for the three months ended September 30, 2016. Excluding currency effects, the net sales increase of $0.6 million, or 0.9%, was driven by higher sales volumes in Latin America partially offset by competitive pricing pressure in certain regions.

In our rolls segment, net sales for the three months ended September 30, 2017 decreased $2.4 million to $45.8 million from $48.2 million for the three months ended September 30, 2016. Excluding currency effects, net sales were down by $3.0 million, or 6.2%, driven by lower sales volumes in North America and Europe.

Cost of Products Sold. Cost of products sold for the three months ended September 30, 2017 decreased to $74.1 million from $75.4 million for the three months ended September 30, 2016.

In our clothing segment, cost of products sold increased $0.2 million in the current quarter compared to the third quarter of 2016, from higher sales volumes partially offset by production efficiencies. Cost of products sold as a percentage of net sales decreased by 1.2 percentage points to 60.8% in the three months ended September 30, 2017 from 62.0% in the three months ended September 30, 2016. This improvement was primarily due to production efficiencies and favorable product mix, partially offset by competitive pricing pressure in certain regions.

In our rolls segment, cost of products sold decreased $1.7 million in the current quarter compared to the third quarter of 2016, primarily as a result of lower sales volumes. Cost of products sold as a percentage of net sales increased by 0.2

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percentage points to 65.3% for the three months ended September 30, 2017 from 65.1% in the three months ended September 30, 2016. The increase was primarily a result of lower sales volumes.

Selling Expenses. For the three months ended September 30, 2017, selling expenses were down slightly, to $15.7 million from 15.8 million for the three months ended September 30, 2016.

General and Administrative Expenses. For the three months ended September 30, 2017, general and administrative expenses decreased by $1.0 million, or 7.9%, to $11.6 million from $12.6 million for the three months ended September 30, 2016, primarily as a result of lower stock based compensation and cost reduction initiatives.

Restructuring Expenses. For the three months ended September 30, 2017, we incurred restructuring expenses of $(0.5) million relating to headcount reductions and other costs related to previous plant closures, which were more than offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary.

Interest Expense, Net. Net interest expense for the three months ended September 30, 2017 was $13.1 million, up $0.9 million from $12.2 million for the three months ended September 30, 2016. The increase was driven primarily by the increase in average debt balances and higher interest rates in the third quarter of 2017 versus the third quarter of 2016 when the refinancing was completed.

Provision for Income Taxes. For the three months ended September 30, 2017 and 2016, the provision for income taxes was $1.8 million and $0.0 million, respectively. The increase in tax expense in the three months ended September 30, 2017, was primarily attributable to the geographic earnings mix, as well as a change in judgment about realization of German deferred tax assets, an increase in unrecognized tax benefits related to transfer pricing and a reduction in tax benefits allocated to continuing operations. Generally, our provision for income taxes is primarily impacted by the income we earn in tax paying jurisdictions relative to the income we earn in non-tax paying jurisdictions. The majority of income recognized for purposes of computing our effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.0%. 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. We generate losses in certain jurisdictions for which we realize no tax benefit as the deferred tax assets in these jurisdictions (including net operating losses) are fully reserved in our valuation allowance. For this reason, we recognize minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States, Germany, and Australia. Due to these reserves, the geographic mix of our pre-tax earnings has a direct correlation with how high or low our annual effective tax rate is relative to consolidated earnings.

Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016

Net Sales. Net sales for the nine months ended September 30, 2017 increased by $0.6 million, or 0.2%, to $358.7 million from $358.1 million for the nine months ended September 30, 2016. Excluding currency effects, net sales were up $2.4 million, or 0.7%. For the nine months ended September 30, 2017, approximately 61% of our net sales were in our clothing segment and approximately 39% were in our roll covers segment.

In our clothing segment, net sales for the nine months ended September 30, 2017 increased $0.3 million to $217.5 million from $217.2 million for the nine months ended September 30, 2016. Excluding currency effects, the net sales increase of $1.6 million, or 0.7% was driven largely by higher sales volumes in the Latin America and North America markets partially offset by lower volumes in Europe and competitive pricing pressure in certain regions.

In our rolls segment, net sales for the nine months ended September 30, 2017 increased $0.2 million to $141.1 million from $140.9 million for the nine months ended September 30, 2016. Excluding currency effects, net sales were up by $0.9 million, or 0.6%, driven by the incremental sales derived from the acquisition of Spencer Johnston partially offset by lower organic sales volumes in the North America, Europe and Asia Pacific markets.

Cost of Products Sold. Cost of products sold for the nine months ended September 30, 2017 decreased to $217.9 million from $222.6 million for the nine months ended September 30, 2016.

In our clothing segment, cost of products sold decreased $3.8 million in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due to production efficiencies partially offset by higher sales volumes. Cost of products sold as a percentage of net sales decreased by 2.0 percentage points to 58.1% in the nine months ended September 30, 2017 from 60.1% in the nine months ended September 30, 2016. This improvement was primarily due to production efficiencies, partially offset by competitive pricing pressure in certain regions.

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In our rolls segment, cost of products sold decreased $0.9 million in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease was primarily a result of production efficiencies. Cost of products sold as a percentage of net sales decreased by 0.5 percentage points to 64.9% for the nine months ended September 30, 2017 from 65.4% for the nine months ended September 30, 2016 due to production efficiencies.

Selling Expenses. For the nine months ended September 30, 2017, selling expenses were flat to the nine months ended September 30, 2016 at $47.3 million.

General and Administrative Expenses. For the nine months ended September 30, 2017, general and administrative expenses increased by $2.1 million, or 5.6%, to $39.7 million from $37.6 million for the nine months ended September 30, 2016, primarily as a result of $3.1 million in CEO transition costs (includes $1.2 million of related stock-based compensation cost) from 2017 and the impact of the Spencer Johnston acquisition in May of 2016 partially offset by cost reduction initiatives and lower stock-based compensation unrelated to the CEO transition.

Restructuring Expenses. For the nine months ended September 30, 2017, we incurred restructuring expenses of $3.5 million relating to headcount reductions and other costs related to previous plant closure partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary.

Interest Expense, Net. Net interest expense for the nine months ended September 30, 2017 was $39.6 million, up $6.4 million from $33.2 million for the nine months ended September 30, 2016. The increase was primarily driven by the increase in average debt balances and higher interest rates thereon for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016 due to the refinancing completed during the third quarter of 2016 and additional debt assumed to finance the Spencer Johnston acquisition in the second quarter of 2016.

Provision for Income Taxes. For the nine months ended September 30, 2017 and 2016, the provision for income taxes was $8.3 million and $4.6 million, respectively. The increase in tax expense in the nine months ended September 30, 2017, was primarily attributable to the geographic earnings mix, as well as a change in judgment about realization of German deferred tax assets, an increase in unrecognized tax benefits related to transfer pricing, a reduction in tax benefits allocated to continuing operations and non-recurring tax benefits in 2016 from interest deductions in Brazil. Generally, our provision for income taxes is primarily impacted by the income we earn in tax paying jurisdictions relative to the income we earn in non-tax paying jurisdictions. The majority of income recognized for purposes of computing our effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.0%. 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. We generate losses in certain jurisdictions for which we realize no tax benefit as the deferred tax assets in these jurisdictions (including net operating losses) are fully reserved in our valuation allowance. For this reason, we recognize minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States, Germany, and Australia. Due to these reserves, the geographic mix of our pre-tax earnings has a direct correlation with how high or low our annual effective tax rate is relative to consolidated earnings.

Liquidity and Capital Resources

Our principal liquidity requirements are for operations, debt service, working capital and capital expenditures. We plan to use cash on hand, cash generated by operations and our revolving credit facility, as our primary sources of liquidity. Our operations are highly dependent upon the paper production industry and the degree to which the paper industry is affected by global economic conditions and the availability of credit. Demand for our products could decline if paper manufacturers are unable to obtain required financing or if economic conditions cause additional mill closures. In addition, an economic recession or unavailability of credit may affect our customers’ ability to pay their debts.

Net cash used in operating activities was $(1.0) million for the nine months ended September 30, 2017 compared to net cash provided by operating activities of $22.0 million for the nine months ended September 30, 2016. The $23.0 million decrease was primarily due to higher interest paid in 2017 as a result of the third quarter 2016 refinancing coupled with an increase in working capital.

Net cash used in investing activities was $(10.5) million for the nine months ended September 30, 2017 and $(25.7) million for the nine months ended September 30, 2016. The decrease in cash used in investing activities of $15.2 million was primarily due to the acquisition of Spencer Johnston in May 2016, partially offset by the purchase of the Changzhou Rolls facility in Q2 of 2017.

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Net cash provided by financing activities was $8.5 million for the nine months ended September 30, 2017 and $4.2 million for the nine months ended September 30, 2016. The increase of $4.3 million was primarily due to a new loan entered into in May 2017 to purchase our Changzhou Rolls facility coupled with lower taxes paid on employee equity awards.

As of September 30, 2017, an aggregate of $22.5 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $38.6 million under the ABL revolver that is currently collateralized by certain assets of the Company, less $16.1 million of that facility committed for letters of credit or current borrowings. In addition, the we had approximately $5.7 million available for borrowings under other small lines of credit. We also had cash and cash equivalents of $9.9 million at September 30, 2017 compared to $12.8 million at December 31, 2016.

We expect to spend cash of approximately $7.0 million related to our restructuring initiatives in 2017. We have spent $6.0 million in the nine months ended September 30, 2017. Actual restructuring costs for 2017 may substantially differ from estimates at this time, depending on the timing of the restructuring activities and the required actions to complete them.

Capital Expenditures

For the nine months ended September 30, 2017, we had capital expenditures of $11.2 million. We are currently targeting capital expenditures for 2017 to be approximately $14.0 million. We analyze our planned capital expenditures, based on investment opportunities available to us and our financial and operating performance, and accordingly, actual capital expenditures may be more or less than this amount. We intend to use existing cash and cash from operations to fund our capital expenditures.

Credit Facilities

9.5% Secured Notes due 2021

On August 9, 2016, we closed on $480.0 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.

We used the net proceeds from the offering to repay all amounts outstanding under its then existing $230.0 million term loan credit facility, to redeem all of its $240.0 million aggregate principal amount 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.

ABL Revolving Credit Facility

On November 3, 2015, we refinanced our prior revolving credit facility by entering into a new Revolving Credit and Guaranty Agreement (the “ABL Facility”) with one of our existing lenders. The amount of the ABL Facility provides an aggregate facility limit of $55.0 million, subject to a borrowing base collateralized by eligible accounts receivable, inventory and equipment of Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, and Huyck.Wagner Germany GmbH, Robec Walzen GmbH, and Stowe Woodward AG, as the European borrowers. 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 September 30, 2017 these rates were 5.00% and 3.02%, respectively.

As of September 30, 2017, an aggregate of $22.5 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $38.6 million under the ABL revolver that is currently collateralized by certain assets of ours, less $16.1 million of that facility committed for letters of credit or current borrowings. In addition, we had approximately $5.7 million available for borrowings under other small lines of credit.

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;

•incur liens and engage in sale-leaseback transactions;

•make loans and investments;

•incur additional indebtedness;

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•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 our existing business.

Fixed Assets Loan Contract

On July 17, 2015 (the "Closing Date"), Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of ours 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 ours, 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 September 30, 2017 is approximately 5.2%. 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.

We are in compliance with all covenants under the Notes, the ABL Facility, and the Loan Agreement at September 30, 2017.

Critical Accounting Policies

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Our significant policies are described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in our Annual Report on Form 10-K for the year ended December 31, 2016.

Non-GAAP Financial Measures

We use EBITDA as supplementary non-GAAP liquidity measure and Adjusted EBITDA as a supplementary non-GAAP financial performance measure. EBITDA is specifically used in evaluating the ability to service indebtedness and to fund ongoing capital expenditures. Adjusted EBITDA excludes certain items the Company does not believe to be indicative of on-going business trends in order to better analyze historical and future business trends on a consistent basis.

Neither EBITDA nor Adjusted EBITDA should be considered in isolation or as a substitute for income (loss) from operations or cash flows (as determined in accordance with U.S. GAAP).

EBITDA is defined as net income (loss) before interest expense, income tax provision (benefit) and depreciation (including non-cash impairment charges) and amortization.

"Adjusted EBITDA" means, with respect to any period, the total of (A) the consolidated net income for such period, plus (B) without duplication, to the extent that any of the following were deducted in computing such consolidated net income for such period: (i) provision for taxes based on income or profits, including, without limitation, federal, state, provincial, franchise and similar taxes, including any penalties and interest relating to any tax examinations, (ii) consolidated interest expense, (iii) consolidated depreciation and amortization expense, (iv) reserves for inventory in connection with plant closures, (v) consolidated operational restructuring costs, (vi) non-cash 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

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resulting from mark to market hedging obligations (to the extent the cash impact resulting from such loss has not been realized in such period), (xiii) unrealized foreign currency losses and (xiv) other non-cash losses or charges (excluding, however, any non-cash loss or charge which represents an accrual of, or a reserve for, a cash disbursement in a future period), minus (C) without duplication, to the extent any of the following were included in computing consolidated net income for such period, (i) unrealized foreign currency gains, (ii) non-cash gains with respect to the items described in clauses (vi), (vii), (ix), (xi), (xii), (xiii) and xiv (other than, in the case of clause (xiv), any such gain to the extent that it represents a reversal of an accrual of, or reserve for, a cash disbursement in a future period) of clause (B) above and (iii) provisions for tax benefits based on income or profits. Notwithstanding the foregoing, Adjusted EBITDA, as defined and calculated below, may not be comparable to similarly titled measurements used by other companies.

Consolidated net income 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 and (iv) any cancellation of indebtedness income. The following table provides a reconciliation from net income and operating cash flows, which are the most directly comparable GAAP financial measures, to EBITDA and Adjusted EBITDA.

Adjusted EBITDA Definition Modification

During the fourth quarter of 2016, we modified our definition of Adjusted EBITDA to exclude unrealized foreign exchange gains and losses from this non-GAAP measure. This change enhances investor insight into the our operational performance. In previous filings, for the three and nine months ended September 30, 2016 Adjusted EBITDA was stated at $22.9 million and $74.5 million, respectively.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	1,149		$	(13,339	)	$	(5,096	)	$	(12,673	)
Stock-based compensation	203			697			1,062			2,123
CEO transition stock-based compensation	—			—			1,187			—
Depreciation	7,968			8,125			23,630			24,206
Amortization of intangible assets	264			269			810			573
Deferred financing cost amortization	911			692			2,722			2,234
Foreign exchange loss (gain) on revaluation of debt	530			(109		)	1,064			43
Deferred tax expense	5,050			(2,269		)	5,362			(3,066		)
Asset impairment	39			—			94			—
(Gain) loss on disposition of property and equipment	(42		)	(29		)	(127		)	50
Loss on extinguishment of debt	—			11,736			32			11,736
Net change in operating assets and liabilities	(20,116		)	(938		)	(31,785		)	(3,259		)
Net cash (used in) provided by operating activities	(4,044		)	4,835			(1,045		)	21,967
Interest expense, excluding amortization	12,176			11,524			36,909			30,981
Net change in operating assets and liabilities	20,116			938			31,785			3,259
Current portion of income tax (benefit) expense	(3,236		)	2,294			2,959			7,623
Stock-based compensation	(203		)	(697		)	(1,062		)	(2,123		)
CEO transition stock-based compensation	—			—			(1,187		)	—
Asset impairment	(39		)	—			(94		)	—
Foreign exchange (loss) gain on revaluation of debt	(530		)	109			(1,064		)	(43		)
Gain (loss) on disposition of property and equipment	42			29			127			(50		)
Loss on extinguishment of debt	—			(11,736		)	(32		)	(11,736		)
EBITDA	24,282			7,296			67,296			49,878
Loss on extinguishment of debt	—			11,736			32			11,736
Stock-based compensation	203			697			1,062			2,123
CEO transition expenses	15			—			3,054			—
Operational restructuring expenses	(540		)	2,493			3,498			8,103
Other non-recurring expenses	33			85			147			752
Plant startup costs	37			573			683			1,858
Unrealized foreign exchange (gain) loss	(264		)	403			1,730			427
Adjusted EBITDA	$	23,766		$	23,283		$	77,502		$	74,877



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our interest rate risks as of September 30, 2017 have not materially changed from December 31, 2016 (see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016). As of September 30, 2017, we had outstanding debt with a carrying amount of $515.5 million (excluding deferred financing costs and long-term capitalized lease liabilities) and an approximate fair value of $539.0 million.



ITEM 4.	CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation, as of September 30, 2017 under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Act”). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the

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Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. No evaluation of disclosure controls and procedures can provide absolute assurance that these controls and procedures will operate effectively under all circumstances. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as set forth above.

(b) Changes in Internal Control over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) occurred during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



ITEM 1.	LEGAL PROCEEDINGS

There have been no material developments to the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2016. See Note 10 to our Unaudited Condensed Consolidated Financial Statements for other routine litigation to which we are subject.



ITEM 1A.	RISK FACTORS

The risks described in our Annual Report on Form 10-K for the year ended December 31, 2016 have not materially changed.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See the exhibit index following the signature page to this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	XERIUM TECHNOLOGIES, INC.
	(Registrant)

October 30, 2017	By:	/s/Clifford E. Pietrafitta
		Clifford E. Pietrafitta
		Executive Vice President and CFO
		(Principal Financial Officer)

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EXHIBIT INDEX



Exhibit Number		Description of Exhibits


31.1		Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

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