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EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INCmsxrm-ex31x12018q1.htm
EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INCcpxrm-ex322_2018q1.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INCmsxrm-ex321_2018q1.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INCcpxrm-ex31_2018q1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________ 
FORM 10-Q
________________________
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
Or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from             to             
Commission File Number 001-32498
 ________________________ 
Xerium Technologies, Inc.
(Exact name of registrant as specified in its charter)
 ________________________ 
 
DELAWARE
42-1558674
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
14101 Capital Boulevard
Youngsville, North Carolina
27596
(Address of principal executive offices)
(Zip Code)
(919) 526-1400
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)
 ________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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 April 30, 2018 was 16,427,603.
 



TABLE OF CONTENTS
 

2



PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

Xerium Technologies, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
(Unaudited)
 
 
 
March 31, 2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,901

 
$
17,253

Accounts receivable, net
82,473

 
76,633

Inventories, net
76,647

 
74,725

Prepaid expenses
13,685

 
11,335

Other current assets
16,845

 
15,316

Total current assets
199,551

 
195,262

Property and equipment, net
281,442

 
282,378

Goodwill
67,178

 
64,783

Intangible assets
5,658

 
5,965

Non-current deferred tax asset
11,198

 
10,103

Other assets
9,211

 
9,358

Total assets
$
574,238

 
$
567,849

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Notes payable
$
8,622

 
$
8,398

Accounts payable
40,256

 
39,856

Accrued expenses
51,082

 
64,155

Current maturities of long-term debt
9,855

 
10,614

Total current liabilities
109,815

 
123,023

Long-term debt, net of current maturities
484,929

 
473,904

Liabilities under capital leases
15,189

 
15,952

Non-current deferred tax liability
13,601

 
12,897

Pension, other post-retirement and post-employment obligations
68,901

 
69,205

Other long-term liabilities
9,944

 
9,334

Commitments and contingencies

 

Stockholders’ deficit
 
 
 
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of March 31, 2018 and December 31, 2017

 

Common stock, $0.001 par value, 20,000,000 shares authorized; 16,413,179 and 16,367,743 shares outstanding as of March 31, 2018 and December 31, 2017, respectively
16

 
16

Paid-in capital
432,785

 
432,489

Accumulated deficit
(455,814
)
 
(457,712
)
Accumulated other comprehensive loss
(105,128
)
 
(111,259
)
Total stockholders’ deficit
(128,141
)
 
(136,466
)
Total liabilities and stockholders’ deficit
$
574,238

 
$
567,849

See accompanying notes.

3


Xerium Technologies, Inc.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share data and unaudited)
 
    
 
Three Months Ended March 31,
 
2018
 
2017
Net Sales
$
126,075

 
$
119,866

Costs and expenses:
 
 
 
Cost of products sold
78,842

 
72,240

Selling
15,677

 
15,674

General and administrative
13,097

 
12,423

Research and development
1,568

 
1,744

Restructuring
824

 
3,164

 
110,008

 
105,245

Income from operations
16,067

 
14,621

Interest expense, net
(12,765
)
 
(13,263
)
Other components of net periodic pension cost
(266
)
 
(361
)
Loss on extinguishment of debt

 
(25
)
Foreign exchange gain (loss)
532

 
(1,125
)
Income (loss) before provision for income taxes
3,568

 
(153
)
Provision for income taxes
(1,337
)
 
(2,681
)
Net income (loss)
$
2,231


$
(2,834
)
Comprehensive income
$
8,362

 
$
6,806

Net income (loss) per share:
 
 
 
Basic
$
0.14

 
$
(0.18
)
Diluted
$
0.13

 
$
(0.18
)
Shares used in computing net income (loss) per share:
 
 
 
Basic
16,398,076

 
16,153,113

Diluted
16,655,850

 
16,153,113












See accompanying notes.

4


Xerium Technologies, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands and unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
2,231

 
$
(2,834
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Stock-based compensation
355

 
531

Depreciation
7,954

 
7,819

Amortization of intangible assets
307

 
273

Deferred financing cost amortization
932

 
899

Foreign exchange (gain) loss on revaluation of debt
(84
)
 
627

Deferred taxes
(204
)
 
10

Gain on disposition of property and equipment
(57
)
 
(49
)
Loss on extinguishment of debt

 
25

Provision for doubtful accounts
305

 
41

Change in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
(4,583
)
 
(4,153
)
Inventories
(956
)
 
(1,136
)
Prepaid expenses
(2,388
)
 
783

Other current assets
(1,345
)
 
(1,785
)
Accounts payable and accrued expenses
(13,793
)
 
(7,334
)
Deferred and other long-term liabilities
(833
)
 
(940
)
Net cash used in operating activities
(12,159
)
 
(7,223
)
Investing activities
 
 
 
Capital expenditures
(2,510
)
 
(5,285
)
Proceeds from disposals of property and equipment
88

 
216

Net cash used in investing activities
(2,422
)
 
(5,069
)
Financing activities
 
 
 
Proceeds from borrowings
31,133

 
40,476

Principal payments on debt
(22,513
)
 
(29,693
)
Payment of financing fees

 
(170
)
Payment of obligations under capital leases
(1,424
)
 
(1,520
)
Employee taxes paid on equity awards
(59
)
 

Net cash provided by financing activities
7,137

 
9,093

Effect of exchange rate changes on cash flows
92

 
529

Net decrease in cash
(7,352
)
 
(2,670
)
Cash and cash equivalents at beginning of period
17,253

 
12,808

Cash and cash equivalents at end of period
$
9,901

 
$
10,138

 
 
 
 








See accompanying notes.

5


Xerium Technologies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data and unaudited)
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 and mechanical services. These goods and services are used in the production of paper, paperboard, building products and nonwoven materials. Its operations are strategically located in the major paper-making regions of the world, including North America, Europe, Latin America and Asia-Pacific.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements at March 31, 2018 and for the three months ended March 31, 2018 and 2017 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, 2017 as reported on the Company's Annual Report on Form 10-K filed on February 28, 2018.
Accounting Policies
Inventories, net
Inventories are generally valued at the lower of cost or market using the first-in, first-out (FIFO) method. Raw materials are valued principally on a weighted average cost basis. The Company’s work in process and finished goods are specifically identified and valued based on actual inputs to production. Provisions are recorded as appropriate to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires management to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business, while considering the general aging of inventory and factoring in any new business conditions.
The components of inventories are as follows at:
 
 
March 31, 2018
 
December 31, 2017
Raw materials
$
15,128

 
$
13,881

Work in process
30,222

 
27,819

Finished goods (includes consigned inventory of $7,029 at March 31, 2018 and $7,757 at December 31, 2017)
38,074

 
39,798

Inventory allowances
(6,777
)
 
(6,773
)
 
$
76,647

 
$
74,725

Goodwill
The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles—Goodwill and Other Intangible Assets (“Topic 350”). Topic 350 requires that goodwill and intangible assets that have indefinite lives not be amortized, but instead, must be tested for impairment at least annually or whenever events or business conditions warrant. During the three months ended March 31, 2018, the Company evaluated events and business conditions to determine if a test for an impairment of goodwill was warranted. No such events or business conditions took place during this period, therefore no test was determined to be warranted at March 31, 2018.



6


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 three months ended March 31, 2018 and 2017:
 
Beginning Balance
 
Charged to
 Cost
of Sales
 
Effect of Foreign
Currency
Translation
 
Deduction
from
Reserves
 
Ending Balance
Three Months Ended March 31, 2018:
$
2,470

 
$
359

 
$
37

 
$
(239
)
 
$
2,627

Three Months Ended March 31, 2017:
$
2,203

 
$
235

 
$
30

 
$
(179
)
 
$
2,289


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 March 31, 2018 and 2017, the Company had outstanding restricted stock units (“RSUs”) and deferred stock units (“DSUs”).
The following table sets forth the computation of basic and diluted weighted-average shares:
 
Three Months Ended March 31,
 
2018
 
2017
Weighted-average common shares outstanding–basic
16,398,076

 
16,153,113

Dilutive effect of stock-based compensation awards outstanding
257,774

 

Weighted-average common shares outstanding–diluted
16,655,850

 
16,153,113

The following table sets forth the aggregate of the dilutive securities that were outstanding in the three months ended March 31, 2018 and 2017, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive or because a contingency for issuance was not yet satisfied in the period:
 
Three Months Ended March 31,
 
2018
 
2017
Anti-dilutive securities
686,208

 
902,988

Impairment
The Company reviews its long-lived assets that have finite lives for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment (“Topic 360”). This topic requires that companies evaluate the fair value of long-lived assets based on the anticipated undiscounted future cash flows to be generated by the assets when indicators of impairment exist to determine if there is impairment to the carrying value. Any change in the carrying amount of an asset as a result of the Company's evaluation has been recorded in either restructuring expense, if it was a result of the Company's restructuring activities, or general and administrative expense for all other impairments in the consolidated statements of operations. For the three months ended March 31, 2018 and 2017, the Company had no impairment charges included in restructuring expense.

Recently Adopted Accounting Pronouncements

In March 2018, the FASB issued Accounting Standards Update No 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118). The amendments in ASU 2018-05 codified the amendments from SAB 118 which related to the income tax accounting implications of the Tax Cuts and Jobs Act. The Company already adopted SAB 118 as of December 31, 2017. Refer to Note 5 Income Taxes.


7


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 adoption of this guidance effective January 1, 2018 did not have a material impact on the Company's financial statements.

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. The Company elected the practical expedient that allowed it to estimate amounts for comparative periods using the information previously disclosed in its pension and other postretirement benefit plan note which reasonably reflects the effect of the capitalized amount of net periodic benefit cost for the prior comparative periods. The Company adopted this guidance effective January 1, 2018 and, as a result, reclassified $0.4 million of Q1 2017 pension cost (interest cost, expected return on plan assets, and amortization of net loss) out of operating income into other components of net periodic pension cost, a component of non-operating expenses on the consolidated statements of operations. The adoption of this standard did not have a material impact on the Company's net income or financial position. Also, no changes to cash flows resulted from adoption of this standard.

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 adopted this guidance effective January 1, 2018 which resulted in an increase in 2018 opening accumulated deficit of $0.3 million representing the cumulative net impact from (1) the write-off of unamortized tax expense previously deferred in income tax receivable under the previous guidance and (2) recognition of the previously unrecognized deferred tax assets, net of any necessary valuation allowance. The adoption of this standard did not have a material impact on the Company's net income or financial position. Also, no changes to cash flows resulted from adoption of this standard.

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. The adoption of this guidance effective January 1, 2018 did not have a material impact on the Company's financial statements.

In May of 2014, the FASB issued Accounting Standard Update No. 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when it satisfies the performance obligations. The Company will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is required to be adopted in January of 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. The Company adopted this new standard effective January 1, 2018 using the modified retrospective transition method. The adoption of this standard did not result in adjustment to the Company's financial statements.




8


Recently Issued Accounting Pronouncements

In February 2018, the FASB issued Accounting Standards Update No 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company is in the process of evaluating this accounting standard update.
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 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 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 February 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 has commenced a comprehensive project plan to direct the implementation of the new leases standard and an assessment of the impact to business processes.

2. Revenue from Contracts with Customers

The Company operates through two principal business segments, machine clothing and roll covers. The machine clothing segment performance obligations generally include the production of various types of industrial textiles used on paper-making machines and on other industrial applications. In the Company's roll covers segment, the performance obligations generally include the manufacturing of various types of roll covers, spreader rolls, refurbishment of previously installed roll covers, and providing mechanical services for the internal mechanisms of rolls used on paper-making machines. The contract

9


and order economics and risks are determined to be at the segment level. Within each segment the contracts are similar. Total revenues by segment for the reporting periods on the Consolidated Statements of Operations are disclosed in Note 9.

Revenue from the Company's performance obligations to customers is recognized at the point in time when control is transferred to the customer. Control is generally transferred to the customer when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery including transfer of title has occurred and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains written purchase authorizations from customers for a specific product or service performance obligation at a specified price and considers delivery and transfer of title to have occurred in accordance with its shipping terms. Payment is generally due in accordance with customary payment terms once the transfer of control has occurred. Revenue is recorded net of applicable allowances, including estimated allowances for returns, rebates and other discounts. Allowances are generally estimated based upon customer trends. In the machine clothing segment, a small portion of the business has been conducted pursuant to consignment arrangements under which the Company does not recognize a sale of a product to a customer until the customer places the product into use, which typically occurs some period after the product is shipped to the customer or to a warehouse location near the customer’s facility. As part of the consignment agreement, the Company delivers the goods to a location designated by the customer. In many cases, the customer and the Company generally agree to a “sunset” date, which represents the date by which the customer must accept all risks and rewards of ownership of the product and payment terms begin. For consignment sales, revenue is generally recognized on the earlier of the actual product installation date or the “sunset” date.

The costs to fulfill the Company's performance obligations at a point in time are included in inventory. Refer to balances and further discussion in Note 1. Commissions are generally earned at the point in time the performance obligation is satisfied by the Company and are expensed as incurred. Commission expense for the three months ended March 31, 2018 and 2017 was $3.3 million and $3.5 million, respectively.

The Company has net accounts receivable balances from customers of $82.5 million and $76.6 million as of March 31, 2018 and December 31, 2017, respectively. The Company does not have any contract receivable balance as of March 31, 2018 and December 31, 2017. The Company had minimal contract liability balances which primarily relate to customer prepayments for certain products in its North American rolls business of $0.8 million and $0.5 million as of March 31, 2018 and December 31, 2017, respectively. The corresponding balances as of March 31, 2017 and December 31, 2016 were $0.6 million and $1.1 million, respectively. Minimal revenue was recognized on these contract liabilities during the three months ended March 31, 2018 and 2017.

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. Additionally, to manage its exposure to fluctuations in foreign currency on intercompany balances and certain purchase commitments, the Company from time to time may use foreign exchange forward contracts.
As of March 31, 2018 and December 31, 2017, the Company had outstanding derivatives that were not designated as hedges in qualifying hedging relationships. The value of these contracts is recognized at fair value based on market exchange forward rates and is recorded in other assets or other liabilities on the Consolidated Balance Sheets. The following represents the fair value of these derivatives at March 31, 2018 and December 31, 2017 and the change in fair value included in foreign exchange gain in the three months ended March 31, 2018 and 2017:

10


 
March 31, 2018
 
December 31, 2017
Fair value of derivative liability
$
(39
)
 
$
(591
)
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Change in fair value of derivative included in foreign exchange gain
$
427

 
$
145


The following represents the notional amounts of foreign exchange forward contracts at March 31, 2018:
 
Notional Sold
 
Notional Purchased  

Non-designated hedges of foreign exchange risk
$
18,372

 
$
(24,476
)
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 March 31, 2018 and December 31, 2017, long term debt consisted of the following:

11


 
March 31, 2018
 
December 31, 2017
9.5% Senior Notes due August 2021.
$
480,000

 
$
480,000

Capital leases
19,914

 
20,749

Notes payable, working capital loan, variable interest rate at 1.45%. Matures August 31, 2018, with one-year rollover option.
8,622

 
8,398

Fixed asset loan contract, variable interest rate of 5.23%. Matures June of 2020.
6,996

 
6,761

Other debt
15,235

 
6,062

Total debt
530,767

 
521,970

Less deferred financing costs and debt discount
(12,172
)
 
(13,102
)
Less current maturities of long term debt and notes payable
(18,477
)
 
(19,012
)
Total long term debt including capital leases
$
500,118

 
$
489,856

 
 
 
 
Balance sheet classification of total long-term debt including capital leases
 
 
 
Long-term debt, net of current maturities and deferred financing costs
484,929

 
473,904

Liabilities under capital lease, non-current
15,189

 
15,952

Total long term debt including capital leases
$
500,118

 
$
489,856

As of March 31, 2018, the carrying value of the Company’s debt was $518.6 million (excluding deferred financing costs and debt discount) and its fair value was approximately $546.4 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 and estimates.
9.5% Secured Notes due 2021
On August 9, 2016, the Company issued $480.0 million aggregate principal amount of 9.5% Senior Secured Notes due August 2021 (the "Notes") for a price equal to 98.54% of their face value. Interest payments are due semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017 and the Notes 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 March 31, 2018, these rates were 5.50% and 3.75%, respectively.
As of March 31, 2018, an aggregate of $25.4 million was available for additional borrowings under the ABL Facility. This availability represents $37.8 million under the ABL currently collateralized by certain assets of the Company, less $12.4 million committed for letters of credit or current borrowings. In addition, the Company had approximately $6.4 million available for borrowings under other small lines of credit.
The Indenture governing the Notes 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;

12


amend or otherwise alter debt and other material agreements;
engage in mergers, acquisitions and asset sales;
transact with affiliates; and
engage in businesses that are not related to the Company's existing business.
Fixed Assets Loan Contract
On July 17, 2015, 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. Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate at March 31, 2018 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, 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 was in compliance with all covenants under the Notes, the ABL Facility, and the Loan Agreement at March 31, 2018.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
Long-term Capitalized Lease Liabilities

As of March 31, 2018 and December 31, 2017, the Company had capitalized lease liabilities totaling $19.9 million and $20.7 million, respectively. These amounts represent the lease on the corporate headquarters and the Kunshan, China facility, as well as other leases for machinery and equipment, software and vehicles that expire at various dates through 2027.
5. Income Taxes

The Company utilizes the liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.
For the three months ended March 31, 2018, the provision for income taxes was $1.3 million, as compared to $2.7 million for the three months ended March 31, 2017, respectively. The decrease in tax expense in the three months ended March 31, 2018 was primarily attributable to the geographic mix of earnings. Generally, the provision for income taxes is primarily impacted by income earned in tax paying jurisdictions relative to income earned in non-tax paying jurisdictions. The majority of income recognized for purposes of computing the effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 34.8%; 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 of March 31, 2018, the Company has not completed its accounting related to the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), as follows:

1. Remeasurement of U.S. deferred tax assets - During the fourth quarter of 2017, the Company recorded a provisional estimate of $31.8 million discrete deferred tax expense related to the remeasurement of the U.S. deferred tax assets as a result

13


of the reduction in the corporate income tax rate. A corresponding tax benefit was recorded related to the reduction in valuation allowance.

2. Transition tax - During the fourth quarter of 2017, the Company recorded a provisional estimate related to accounting for the transition tax and its impact on tax accounting for unrepatriated foreign earnings and other foreign income inclusions. The provisional estimate resulted in $0 current or deferred tax impact primarily as a result of the historic tax loss carry-forwards and the corresponding valuation allowance against related deferred tax assets. In order to complete the accounting, the Company will continue to analyze foreign earnings calculations as well as to await clarification of certain provisions of the Tax Act.

3. Deferred tax accounting on outside basis differences of controlled foreign corporations - Consistent with the provisional estimates made during the fourth quarter of 2017, the Company has recorded a provisional estimate related to the deferred tax accounting for basis differences associated with foreign subsidiaries. Historically, the Company has accrued U.S. deferred taxes in connection with certain foreign earnings which were not considered to be permanently reinvested as these earnings were expected to be distributed to the U.S. However, the transition tax has resulted in immediate U.S. taxation of previously untaxed foreign earnings. As a result, the Company has reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, a provisional estimate has been recorded for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. No additional U.S. income taxes have been provided in connection with any remaining untaxed foreign earnings or any additional outside basis difference with respect to investments in foreign subsidiaries as the Company assesses whether any investments should be considered as indefinitely reinvested in foreign operations.

4. Global Intangible Low-Taxed Income (“GILTI”) - In the first quarter of 2018, the Company has recorded a provisional estimate related to its GILTI inclusion, and the provisional estimate reduces U.S. tax loss carryforwards and the corresponding valuation allowance. In order to complete the accounting, the Company will await clarification of certain provisions. The deferred tax accounting for basis differences associated with foreign subsidiaries as it relates to GILTI remains incomplete and no provisional estimate has been provided. The election of an accounting policy with respect to deferred tax accounting for GILTI will depend, in part, on analyzing foreign income to estimate future GILTI inclusions, as well as clarification of certain provisions of the Tax Act. Until such analyses and clarifications are made, the Company has not made a policy decision regarding deferred tax accounting for the GILTI provision.

5. Interest Deduction Limitation - The Company has recorded a provisional estimate related to the limitation on U.S. interest expense as a result of the Tax Act. The estimate reduces the U.S. tax loss carryforwards but establishes indefinite-lived deferred tax assets for the interest that is limited. In order to complete the accounting, the Company will await clarification of certain provisions.

6. State and Local Income Taxes - The Company has recorded a provisional estimate related to the tax accounting for state and local income taxes upon enactment of the Tax Act. The Company continues to gather and analyze information available related to the impact of the Tax Act on state and local taxes and awaits clarification from the municipalities in order to complete the accounting.

To the extent a provisional estimate was made, the Company utilized previously issued guidance for the Tax Act in order to reach an estimate. However, these estimates are not capable of finalization given the lack of statutory and regulatory guidance in many areas, as well as the complexity in acquiring the data required to calculate the impact on the tax accounts. The Company will revise and conclude the accounting as and when additional information is obtained, which in many cases is contingent on the timing of issuance of guidance. For these reasons, the ultimate impact may differ from these provisional amounts due to, among other things, additional information, changes in interpretations and assumptions management has made, and changes based on additional statutory and regulatory guidance that may be issued. Acknowledging this uncertainty, accounting for the impacts of the Tax Act will be completed within the twelve months of the use of the estimates.
As of March 31, 2018, the Company had a gross amount of unrecognized tax benefit of $10.2 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.2 million during the three months ended March 31, 2018, 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 less than $0.1 million related to the unrecognized tax benefits for the three months ended March 31, 2018. The tax years

14


2005 through 2017 remain open to examination in a number of the major tax jurisdictions to which the Company and its subsidiaries are subject. The Company believes that it has made adequate provisions for all income tax uncertainties.
6. Pensions, Other Post-retirement and Post-employment Benefits
The Company accounts for its pensions, other post-retirement and post-employment benefit plans in accordance with ASC Topic 715, Compensation—Retirement Benefits (“Topic 715”). The Company has defined benefit pension plans covering substantially all of its U.S. and Canadian employees and employees of certain subsidiaries in other countries. Benefits are generally based on the employee’s years of service and compensation. These plans are funded in conformity with the funding requirements of applicable government regulations. The Company does not fund certain plans, as funding is not required. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. In addition, the Company also intends to fund its U.K. and Canadian defined benefit plans in accordance with local regulations.
As required by Topic 715, the following tables summarize the components of net periodic benefit cost:
Defined Benefit Plans
 
Three Months Ended March 31,
 
2018
 
2017
Service cost
$
383

 
$
376

Interest cost
1,088

 
1,267

Expected return on plan assets
(1,405
)
 
(1,496
)
Amortization of net loss
583

 
590

Net periodic benefit cost
$
649

 
$
737


Service costs are included as a component of operating income while interest cost, expected return on plan assets and amortization of net loss are included as a component of non-operating expense in other components of net periodic pension cost on the consolidated statements of operations.
7. Comprehensive Income and Accumulated Other Comprehensive Loss
Comprehensive income for the three months ended March 31, 2018 (net of tax benefit of $0.1 million) and 2017 (net of a tax expense of $0.1 million) is as follows:
 
 
Three Months Ended March 31,
 
2018
 
2017
Net income (loss)
$
2,231

 
$
(2,834
)
Foreign currency translation adjustments
6,077

 
9,765

Pension liability changes under Topic 715
54

 
(125
)
Comprehensive income
$
8,362

 
$
6,806


Included in foreign currency translation adjustments are foreign currency losses on intercompany transactions that are considered a long-term investment totaling $1.1 million for the three months ended March 31, 2018 and $0.9 million for the three months ended March 31, 2017, respectively.
The components of accumulated other comprehensive loss for the three months ended March 31, 2018 are as follows (net of tax benefits of $5.8 million):

15


 
Foreign
Currency
Translation    
Adjustment
 
Pension
Liability
Changes Under 
Topic 715
 
Accumulated   
Other
Comprehensive
(Loss) Income
Balance at December 31, 2017
$
(69,149
)
 
$
(42,110
)
 
$
(111,259
)
Other comprehensive income (loss) before reclassifications
6,077

 
(529
)
 
5,548

Amounts reclassified from other comprehensive loss
 
 
 
 
 
     Amortization of actuarial losses

 
583

 
583

Net current period other comprehensive income
6,077

 
54

 
6,131

Balance at March 31, 2018
$
(63,072
)
 
$
(42,056
)
 
$
(105,128
)
For the three months ended March 31, 2018, the amortization of actuarial losses is included in other components of net periodic pension cost in the consolidated statements of operations.

8. Restructuring Expense
For the three months ended March 31, 2018 and 2017, the Company incurred restructuring expenses of $0.8 million and $3.2 million, respectively, relating to headcount reductions and other costs related to previous plant closures.

The Company expects to continue to review its business to determine if additional actions will be taken to further improve its cost structure. Restructuring expenses of approximately $1.0 million to $3.0 million are estimated during 2018, primarily related to the continuation of streamlining the operating structure and improving long-term competitiveness of the Company. Actual restructuring costs for 2018 may substantially differ from estimates at this time, depending on actual operating results in 2018 and the timing of the restructuring activities.

The following table sets forth the significant components of the restructuring accrual (included in Accrued Expenses in the Company's Consolidated Balance Sheet), including activity under restructuring programs for the three months ended March 31, 2018 and 2017:
  
 
Balance at December 31, 2017
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2018
Severance and other benefits
$
2,686

 
$
183

 
$
44

 
$
(987
)
 
$
1,926

Facility costs and other
733

 
641

 
12

 
(950
)
 
436

Total
$
3,419

 
$
824

 
$
56

 
$
(1,937
)
 
$
2,362



 
 
Balance at December 31, 2016
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
March 31, 2017
Severance and other benefits
$
3,805

 
$
2,258

 
$
138

 
$
(1,061
)
 
$
5,140

Facility costs and other
392

 
906

 
14

 
(980
)
 
332

Total
$
4,197

 
$
3,164

 
$
152

 
$
(2,041
)
 
$
5,472

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

16


 
Three Months Ended March 31,
 
2018
 
2017
Clothing
$
186

 
$
2,476

Roll Covers
638

 
627

Corporate

 
61

Total
$
824

 
$
3,164

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. Such measure is then adjusted to exclude items that are of an unusual nature and are not used in measuring segment performance or are not segment specific (“Segment Earnings (Loss)”). The accounting policies of these segments are the same as those for the Company as a whole. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.
Summarized financial information for the Company’s reportable segments is presented in the tables that follow for the three months ended March 31, 2018 and 2017.
 
Clothing       
 
Roll
Covers        
 
Corporate     
 
Total
Three months ended March 31, 2018
 
 
 
 
 
 
 
Net Sales
$
75,757

 
$
50,318

 
$

 
$
126,075

Segment Earnings (Loss)
$
18,912

 
$
10,756

 
$
(4,275
)
 
$
25,393

Three months ended March 31, 2017
 
 
 
 
 
 
 
Net Sales
$
72,495

 
$
47,371

 
$

 
$
119,866

Segment Earnings (Loss)
$
20,798

 
$
9,795

 
$
(4,037
)
 
$
26,556

Provided below is a reconciliation of Segment Earnings (Loss) to Income (Loss) before provision for income taxes for the three months ended March 31, 2018 and 2017, respectively.
 
Three Months Ended March 31,
 
2018
 
2017
Segment Earnings (Loss):
 
 
 
Clothing
$
18,912

 
$
20,798

Roll Covers
10,756

 
9,795

Corporate
(4,275
)
 
(4,037
)
Stock-based compensation
(355
)
 
(531
)
CEO transition expense
(157
)
 

Interest expense, net
(12,765
)
 
(13,263
)
Depreciation and amortization
(8,261
)
 
(8,093
)
Loss on extinguishment of debt

 
(25
)
Restructuring expense
(824
)
 
(3,164
)
Other non-recurring expense
(122
)
 
(45
)
Plant startup costs

 
(480
)
Unrealized foreign exchange gain (loss)
659

 
(1,108
)
Income (loss) before provision for income taxes
$
3,568

 
$
(153
)


17


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 March 31, 2018, 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 that 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. Long-term Incentive and Stock-Based Compensation
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, and DSUs. The Company recorded stock-based compensation expense during the three months ended March 31, 2018 and March 31, 2017 as follows: 
 
 
Three Months Ended March 31,
 
 
2018
 
2017
RSU and DSU Awards (1)
 
$
355

 
$
531

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

Summary of Recent Activity Under Long-term Incentive Plans

Long-Term Incentive Program - 2018 LTIP

On January 30, 2018, the Board of Directors approved the 2018 - 2020 Long-Term Incentive Plan (the "2018 LTIP") which provides for the grant of incentive award opportunities (each, an "Award") payable, if earned, in cash. Because any Award under the 2018 LTIP will be paid in cash, and not equity, the Awards granted under the 2018 LTIP are not made pursuant to the Xerium Technologies, Inc. 2010 Equity Incentive Plan. 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:
282,240 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.

282,240 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 2018 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, 2018 through December 31, 2020. The amount of units that will vest between the target threshold and target ceiling will range from 50% to 200% of the employee's total units granted. Below the target threshold 0% of the units will vest.

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, 2018 through December 31, 2020. The amount of units that will vest between the target threshold and target ceiling will range from 50% to 200% of the employee's total units granted. Below the target threshold 0% of the units will vest.





18


Long-Term Incentive Program— 2015 LTIP

Awards under the 2015 LTIP vested on March 2, 2018, and were converted to 22,895 shares of common stock, after 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 22,763 DSUs under the 2011 DSU Plan for service during the three months ended March 31, 2018. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 14,424 DSUs, and 15,003 DSUs were settled in common stock during the three months ended March 31, 2018 and March 31, 2017, respectively.


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 100% owned subsidiaries 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.



19


Xerium Technologies, Inc.
Consolidating Balance Sheet
At March 31, 2018
(Dollars in thousands, and unaudited)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,882

 
$
50

 
$
7,969

 
$

 
$
9,901

Accounts receivable, net
51

 
21,668

 
60,754

 

 
82,473

Intercompany receivables
(473,425
)
 
489,224

 
(15,799
)
 

 

Inventories, net

 
15,400

 
62,187

 
(940
)
 
76,647

Prepaid expenses
566

 
232

 
12,887

 

 
13,685

Other current assets
150

 
3,515

 
13,180

 

 
16,845

Total current assets
(470,776
)
 
530,089

 
141,178

 
(940
)
 
199,551

Property and equipment, net
6,238

 
59,469

 
215,735

 

 
281,442

Investments
913,248

 
286,184

 

 
(1,199,432
)
 

Goodwill

 
19,614

 
47,564

 

 
67,178

Intangible assets

 
5,655

 
3

 

 
5,658

Non-current deferred tax asset

 

 
11,198

 

 
11,198

Other assets

 

 
9,211

 

 
9,211

Total assets
$
448,710

 
$
901,011

 
$
424,889

 
$
(1,200,372
)
 
$
574,238

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

 
$

 
$
8,622

 
$

 
$
8,622

Accounts payable
1,595

 
12,240

 
26,421

 

 
40,256

Accrued expenses
12,638

 
7,622

 
30,822

 

 
51,082

Current maturities of long-term debt
1,561

 
2,485

 
5,809

 

 
9,855

Total current liabilities
15,794

 
22,347

 
71,674

 

 
109,815

Long-term debt, net of current maturities
477,744

 

 
7,185

 

 
484,929

Liabilities under capital leases
3,727

 
2,286

 
9,176

 

 
15,189

Non-current deferred tax liability
3,541

 

 
10,060

 

 
13,601

Pension, other post-retirement and post-employment obligations
20,673

 
1,605

 
46,623

 

 
68,901

Other long-term liabilities

 

 
9,944

 

 
9,944

Intercompany loans
63,885

 
(111,609
)
 
47,724

 

 

Total stockholders’ (deficit) equity
(136,654
)
 
986,382

 
222,503

 
(1,200,372
)
 
(128,141
)
Total liabilities and stockholders’ (deficit) equity
$
448,710

 
$
901,011

 
$
424,889

 
$
(1,200,372
)
 
$
574,238


20


Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2017
(Dollars in thousands, and unaudited)
 
 
Parent        
 
Total
Guarantors    
 
Total Non
Guarantors    
 
Other
Eliminations
 
The
Company      
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,578

 
$
57

 
$
13,618

 
$

 
$
17,253

Accounts receivable, net
20

 
19,721

 
56,892

 

 
76,633

Intercompany receivables
(452,873
)
 
475,864

 
(22,991
)
 

 

Inventories, net

 
16,618

 
59,047

 
(940
)
 
74,725

Prepaid expenses
266

 
316

 
10,753

 

 
11,335

Other current assets
175

 
3,338

 
11,803

 

 
15,316

Total current assets
(448,834
)
 
515,914

 
129,122

 
(940
)
 
195,262

Property and equipment, net
7,044

 
60,382

 
214,952

 

 
282,378

Investments
901,275

 
271,278

 

 
(1,172,553
)
 

Goodwill

 
19,614

 
45,169

 

 
64,783

Intangible assets

 
5,961

 
4

 

 
5,965

Non-current deferred tax asset

 

 
10,103

 

 
10,103

Other assets

 

 
9,358

 

 
9,358

Total assets
$
459,485

 
$
873,149

 
$
408,708

 
$
(1,173,493
)
 
$
567,849

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

 
$

 
$
8,398

 
$

 
$
8,398

Accounts payable
1,963

 
11,431

 
26,462

 

 
39,856

Accrued expenses
26,186

 
8,214

 
29,755

 

 
64,155

Current maturities of long-term debt
1,800

 
2,329

 
6,485

 

 
10,614

Total current liabilities
29,949

 
21,974

 
71,100

 

 
123,023

Long-term debt, net of current maturities
467,605

 

 
6,299

 

 
473,904

Liabilities under capital leases
4,159

 
2,831

 
8,962

 

 
15,952

Non-current deferred tax liability
3,439

 

 
9,458

 

 
12,897

Pension, other post-retirement and post-employment obligations
21,402

 
1,434

 
46,369

 

 
69,205

Other long-term liabilities

 

 
9,334

 

 
9,334

Intercompany loans
71,692

 
(108,319
)
 
36,627

 

 

Total stockholders’ (deficit) equity
(138,761
)
 
955,229

 
220,559

 
(1,173,493
)
 
(136,466
)
Total liabilities and stockholders’ (deficit) equity
$
459,485

 
$
873,149

 
$
408,708

 
$
(1,173,493
)
 
$
567,849




21


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive Income (Loss)
For the three months ended March 31, 2018
(Dollars in thousands, and unaudited)
 
Parent    
 
Total Guarantors
 
Total  Non Guarantors
 
Other Eliminations
 
The Company
Net sales
$

 
$
46,063

 
$
85,093

 
$
(5,081
)
 
$
126,075

Costs and expenses:

 

 

 

 

    Cost of products sold

 
29,843

 
54,080

 
(5,081
)
 
78,842

    Selling
51

 
4,716

 
10,910

 

 
15,677

    General and administrative
56

 
(3,763
)
 
16,804

 

 
13,097

    Research and development
335

 
817

 
416

 

 
1,568

    Restructuring

 
443

 
381

 

 
824

 
442

 
32,056

 
82,591

 
(5,081
)
 
110,008

(Loss) income from operations
(442
)
 
14,007

 
2,502

 

 
16,067

Interest expense, net
(11,907
)
 
(440
)
 
(418
)
 

 
(12,765
)
Foreign exchange gain (loss)
601

 
306

 
(375
)
 

 
532

Equity in subsidiaries income
11,973

 
2,283

 

 
(14,256
)
 

Other components of net periodic pension cost
(129
)
 
(192
)
 
55

 

 
(266
)
Dividend income (expense), net
2,508

 
2,510

 

 
(5,018
)
 

Income (loss) before provision for income taxes
2,604

 
18,474

 
1,764

 
(19,274
)
 
3,568

(Provision for) benefit from income taxes
(373
)
 
2

 
(966
)
 

 
(1,337
)
Net income (loss)
$
2,231

 
$
18,476

 
$
798

 
$
(19,274
)
 
$
2,231

Comprehensive income (loss)
$
1,812

 
$
18,445

 
$
7,379

 
$
(19,274
)
 
$
8,362


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

 
$
46,945

 
$
81,084

 
$
(8,163
)
 
$
119,866

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold

 
30,855

 
49,548

 
(8,163
)
 
72,240

    Selling
233

 
5,044

 
10,397

 

 
15,674

    General and administrative
2,570

 
879

 
8,974

 

 
12,423

    Research and development
299

 
931

 
514

 

 
1,744

    Restructuring
61

 
642

 
2,461

 

 
3,164

 
3,163

 
38,351

 
71,894

 
(8,163
)
 
105,245

(Loss) income from operations
(3,163
)
 
8,594

 
9,190

 

 
14,621

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

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

 
(718
)
 

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

 
4,381

 

 
(13,095
)
 

Other components of net periodic pension cost
(132
)
 
(188
)
 
(41
)
 

 
(361
)
Loss on extinguishment of debt
(25
)
 

 

 

 
(25
)
Dividend income (expense), net
4,263

 
3,858

 

 
(8,121
)
 

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

 
7,853

 
(21,216
)
 
(153
)
Benefit from (provision for) income taxes
319

 
(141
)
 
(2,859
)
 

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

 
$
4,994

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

 
$
15,476

 
$
(21,216
)
 
$
6,806


22


Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the three months ended March 31, 2018
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net income (loss)
$
2,231

 
$
18,476

 
$
798

 
$
(19,274
)
 
$
2,231

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
355

 

 

 

 
355

Depreciation
573

 
1,998

 
5,383

 

 
7,954

Amortization of intangible assets

 
306

 
1

 

 
307

Deferred financing cost amortization
888

 

 
44

 

 
932

Foreign exchange (gain) loss on revaluation of debt
(180
)
 

 
96

 

 
(84
)
Deferred taxes
101

 

 
(305
)
 

 
(204
)
Loss (gain) on disposition of property and equipment

 
101

 
(158
)
 

 
(57
)
Provision for doubtful accounts

 
1

 
304

 

 
305

Undistributed equity in earnings of subsidiaries
(11,973
)
 
(2,283
)
 

 
14,256

 

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


Accounts receivable
(31
)
 
(1,948
)
 
(2,604
)
 

 
(4,583
)
Inventories

 
1,218

 
(2,174
)
 

 
(956
)
Prepaid expenses
(300
)
 
84

 
(2,172
)
 

 
(2,388
)
Other current assets
25

 
(178
)
 
(1,192
)
 

 
(1,345
)
Accounts payable and accrued expenses
(13,948
)
 
193

 
(38
)
 

 
(13,793
)
Deferred and other long-term liabilities
(214
)
 
171

 
(790
)
 

 
(833
)
Intercompany loans
20,552

 
(13,403
)
 
(7,149
)
 

 

Net cash (used in) provided by operating activities
(1,921
)
 
4,736

 
(9,956
)
 
(5,018
)
 
(12,159
)
Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(176
)
 
(740
)
 
(1,594
)
 

 
(2,510
)
Intercompany property and equipment transfers, net
380

 
(61
)
 
(319
)
 

 

Proceeds from disposals of property and equipment

 
23

 
65

 

 
88

Net cash provided by (used in) investing activities
204

 
(778
)
 
(1,848
)
 

 
(2,422
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
26,189

 

 
4,944

 

 
31,133

Principal payments on debt
(16,943
)
 

 
(5,570
)
 

 
(22,513
)
Dividends paid

 
(2,508
)
 
(2,510
)
 
5,018

 

Payment of obligations under capital leases
(604
)
 
(670
)
 
(150
)
 

 
(1,424
)
Intercompany loans
(8,562
)
 
(788
)
 
9,350

 

 

Employee taxes paid on equity awards
(59
)
 

 

 

 
(59
)
Net cash provided by (used in) financing activities
21

 
(3,966
)
 
6,064

 
5,018

 
7,137

Effect of exchange rate changes on cash flows

 
1

 
91

 

 
92

Net decrease in cash
(1,696
)
 
(7
)
 
(5,649
)
 

 
(7,352
)
Cash and cash equivalents at beginning of period
3,578

 
57

 
13,618

 

 
17,253

Cash and cash equivalents at end of period
$
1,882

 
$
50

 
$
7,969

 
$

 
$
9,901





23


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

 
$
4,994

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

 

 

 

 
531

Depreciation
579

 
2,069

 
5,171

 

 
7,819

Amortization of intangible assets

 
246

 
27

 

 
273

Deferred financing cost amortization
875

 

 
24

 

 
899

Foreign exchange loss on revaluation of debt
625

 

 
2

 

 
627

Deferred taxes
(321
)
 

 
331

 

 
10

Loss on disposition of property and equipment

 
(37
)
 
(12
)
 

 
(49
)
Loss on extinguishment of debt
25

 

 

 

 
25

Provision for doubtful accounts

 
(15
)
 
56

 

 
41

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

 
13,095

 

Change in assets and liabilities which (used) provided cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
(8
)
 
(2,981
)
 
(1,164
)
 

 
(4,153
)
Inventories

 
62

 
(1,198
)
 

 
(1,136
)
Prepaid expenses
(226
)
 
289

 
720

 

 
783

Other current assets

 
(117
)
 
(1,668
)
 

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

 
7,188

 

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

 
(1,062
)
 

 
(940
)
Intercompany loans
17,832

 
(9,010
)
 
(8,822
)
 

 

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

 
4,587

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