Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INCcpxrm-ex322_2018q2.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INCmsxrm-ex321_2018q2.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INCcpxrm-ex31_2018q2.htm
EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INCmsxrm-ex311_2018q2.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 June 30, 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 July 26, 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)
 
 
 
June 30, 2018
 
December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
14,782

 
$
17,253

Accounts receivable, net
81,629

 
76,633

Inventories, net
72,630

 
74,725

Prepaid expenses
13,124

 
11,335

Other current assets
14,482

 
15,316

Total current assets
196,647

 
195,262

Property and equipment, net
261,989

 
282,378

Goodwill
64,159

 
64,783

Intangible assets
5,352

 
5,965

Non-current deferred tax asset
9,987

 
10,103

Other assets
9,054

 
9,358

Total assets
$
547,188

 
$
567,849

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Notes payable
$
8,112

 
$
8,398

Accounts payable
41,338

 
39,856

Accrued expenses
65,914

 
64,155

Current maturities of long-term debt
9,238

 
10,614

Total current liabilities
124,602

 
123,023

Long-term debt, net of current maturities
473,168

 
473,904

Liabilities under capital leases
13,757

 
15,952

Non-current deferred tax liability
12,113

 
12,897

Pension, other post-retirement and post-employment obligations
65,166

 
69,205

Other long-term liabilities
9,399

 
9,334

Commitments and contingencies

 

Stockholders’ deficit
 
 
 
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of June 30, 2018 and December 31, 2017

 

Common stock, $0.001 par value, 20,000,000 shares authorized; 16,427,603 and 16,367,743 shares outstanding as of June 30, 2018 and December 31, 2017, respectively
16

 
16

Paid-in capital
433,048

 
432,489

Accumulated deficit
(460,158
)
 
(457,712
)
Accumulated other comprehensive loss
(123,923
)
 
(111,259
)
Total stockholders’ deficit
(151,017
)
 
(136,466
)
Total liabilities and stockholders’ deficit
$
547,188

 
$
567,849

See accompanying notes.

3


Xerium Technologies, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(Dollars in thousands, except per share data and unaudited)
 
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net Sales
$
125,284

 
$
120,339

 
$
251,359

 
$
240,205

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold
76,310

 
71,344

 
155,152

 
143,584

Selling
15,249

 
15,936

 
30,926

 
31,610

General and administrative
17,216

 
15,263

 
30,313

 
27,686

Research and development
1,613

 
1,666

 
3,181

 
3,410

Restructuring
206

 
874

 
1,030

 
4,038

 
110,594

 
105,083

 
220,602

 
210,328

Income from operations
14,690

 
15,256

 
30,757

 
29,877

Interest expense, net
(13,130
)
 
(13,281
)
 
(25,895
)
 
(26,544
)
Other components of net periodic pension cost
(262
)
 
(307
)
 
(528
)
 
(668
)
Loss on extinguishment of debt

 
(7
)
 

 
(32
)
Foreign exchange loss
(3,126
)
 
(1,246
)
 
(2,594
)
 
(2,371
)
(Loss) income before provision for income taxes
(1,828
)
 
415

 
1,740

 
262

Provision for income taxes
(2,516
)
 
(3,826
)
 
(3,853
)
 
(6,507
)
Net loss
$
(4,344
)

$
(3,411
)

$
(2,113
)

$
(6,245
)
Comprehensive (loss) income
$
(23,139
)
 
$
(146
)
 
$
(14,777
)
 
$
6,660

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.26
)
 
$
(0.21
)
 
$
(0.13
)
 
$
(0.39
)
Diluted
$
(0.26
)
 
$
(0.21
)
 
$
(0.13
)
 
$
(0.39
)
Shares used in computing net loss per share:
 
 
 
 
 
 
 
Basic
16,427,603

 
16,262,867

 
16,412,921

 
16,208,293

Diluted
16,427,603

 
16,262,867

 
16,412,921

 
16,208,293












See accompanying notes.

4


Xerium Technologies, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands and unaudited)
 
 
Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net loss
$
(2,113
)
 
$
(6,245
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation
618

 
2,046

Depreciation
15,601

 
15,662

Amortization of intangible assets
613

 
546

Deferred financing cost amortization
1,864

 
1,810

Foreign exchange loss on revaluation of debt
425

 
534

Deferred taxes
(742
)
 
312

Asset impairment

 
55

Gain on disposition of property and equipment
(73
)
 
(85
)
Loss on extinguishment of debt

 
32

Provision for doubtful accounts
257

 
142

Change in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
(8,863
)
 
(5,400
)
Inventories
(957
)
 
(3,213
)
Prepaid expenses
(2,521
)
 
(441
)
Other current assets
69

 
(1,179
)
Accounts payable and accrued expenses
6,115

 
528

Deferred and other long-term liabilities
(1,646
)
 
(2,106
)
Net cash provided by operating activities
8,647

 
2,998

Investing activities
 
 
 
Capital expenditures
(4,928
)
 
(8,517
)
Proceeds from disposals of property and equipment
459

 
290

Net cash used in investing activities
(4,469
)
 
(8,227
)
Financing activities
 
 
 
Proceeds from borrowings
41,625

 
66,578

Principal payments on debt
(44,782
)
 
(59,282
)
Payment of financing fees

 
(393
)
Payment of obligations under capital leases
(2,670
)
 
(2,794
)
Employee taxes paid on equity awards
(59
)
 
(832
)
Net cash (used in) provided by financing activities
(5,886
)
 
3,277

Effect of exchange rate changes on cash flows
(763
)
 
203

Net decrease in cash
(2,471
)
 
(1,749
)
Cash and cash equivalents at beginning of period
17,253

 
12,808

Cash and cash equivalents at end of period
$
14,782

 
$
11,059

 
 
 
 







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 June 30, 2018 and for the three and six months ended June 30, 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:
 
 
June 30, 2018
 
December 31, 2017
Raw materials
$
14,452

 
$
13,881

Work in process
28,263

 
27,819

Finished goods (includes consigned inventory of $6,208 at June 30, 2018 and $7,757 at December 31, 2017)
36,405

 
39,798

Inventory allowances
(6,490
)
 
(6,773
)
 
$
72,630

 
$
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 and six months ended June 30, 2018, the Company evaluated events and business conditions to determine if a test for an impairment of goodwill was warranted. On June 24, 2018 the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Andritz AG ("Andritz") will acquire the Company for a price in excess of it's carrying amount through the merger of an indirect wholly owned subsidiary of Andritz with and into the Company (the "Merger"). Completion of the Merger is subject to approval by the Company's

6


stockholders, regulatory approvals, and other customary closing conditions. No goodwill impairment test was necessary as of June 30, 2018 as a result of this pending Merger.

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 six months ended June 30, 2018 and 2017:
 
Beginning Balance
 
Charged to
 Cost
of Sales
 
Effect of Foreign
Currency
Translation
 
Deduction
from
Reserves
 
Ending Balance
Six Months Ended June 30, 2018:
$
2,470

 
$
414

 
$
(72
)
 
$
(556
)
 
$
2,256

Six Months Ended June 30, 2017:
$
2,203

 
$
271

 
$
29

 
$
(501
)
 
$
2,002


Net Loss Per Common Share
Net loss per common share has been computed and presented pursuant to the provisions of ASC Topic 260, Earnings per Share (“Topic 260”). Net loss per share is based on the weighted-average number of shares outstanding during the period. As of June 30, 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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average common shares outstanding–basic
16,427,603

 
16,262,867

 
16,412,921

 
16,208,293

Dilutive effect of stock-based compensation awards outstanding

 

 

 

Weighted-average common shares outstanding–diluted
16,427,603

 
16,262,867

 
16,412,921

 
16,208,293

The following table sets forth the aggregate of the dilutive securities that were outstanding in the three and six months ended June 30, 2018 and 2017, but were not included in the computation of diluted loss per share because the impact would have been anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Anti-dilutive securities
743,514

 
988,100

 
743,514

 
988,100

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 and Comprehensive (Loss) Income. For the three and six months ended June 30, 2018 and 2017, the Company had no impairment charges included in restructuring expense.




7





Recently Adopted Accounting Pronouncements

In March 2018, the Financial Accounting Standard Board ("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.

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 historical financial statements and notes thereto, 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 $0.3 million and $0.7 million of pension cost (interest cost, expected return on plan assets, and amortization of net loss) for the three and six months ended June 30, 2017, respectively, out of operating income into other components of net periodic pension cost, a component of non-operating expenses on the Consolidated Statements of Operations and Comprehensive (Loss) Income. 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.


8


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 was 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.


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

9


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 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 and Comprehensive (Loss) Income 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 and six months ended June 30, 2018 and 2017 was as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Commission expense (1)
$
2,574

 
$
3,564

 
$
5,832

 
$
7,098


(1) During the second quarter of 2018, the Company modified the commission structure for both the split between base pay and incentive compensation and the definition of commissionable sales in its North American operations. This resulted in a lower commission expense compared to the prior year.

The Company has net accounts receivable balances from customers of $81.6 million and $76.6 million as of June 30, 2018 and December 31, 2017, respectively. The Company does not have any contract receivable balance as of June 30, 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 $1.1 million and $0.5 million as of June 30, 2018 and December 31, 2017, respectively. The corresponding balances as of June 30, 2017 and December 31, 2016 were $0.4 million and $1.1 million, respectively. Minimal revenue was recognized on these contract liabilities during the three and six months ended June 30, 2018 and 2017.

3. Derivatives and Hedging
Risk Management Objective of Using Derivatives

10


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 June 30, 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 June 30, 2018 and December 31, 2017 and the change in fair value included in foreign exchange loss in the three and six months ended June 30, 2018 and 2017:
 
June 30, 2018
 
December 31, 2017
Fair value of derivative liability
$
(1,757
)
 
$
(591
)
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
Change in fair value of derivative included in foreign exchange loss
$
(2,211
)
 
$
(1,169
)
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Change in fair value of derivative included in foreign exchange loss
$
(1,784
)
 
$
(1,023
)

The following represents the notional amounts of foreign exchange forward contracts at June 30, 2018:
 
Notional Sold
 
Notional Purchased  

Non-designated hedges of foreign exchange risk
$
19,555

 
$
(23,033
)
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

11


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 June 30, 2018 and December 31, 2017, long term debt consisted of the following:
 
June 30, 2018
 
December 31, 2017
9.5% Senior Notes due August 2021.
$
480,000

 
$
480,000

Capital leases
18,259

 
20,749

Notes payable, working capital loan, variable interest rate at 1.45%. Matures August 31, 2018, with one-year rollover option.
8,112

 
8,398

Fixed asset loan contract, variable interest rate of 5.23%. Matures June of 2020.
5,186

 
6,761

Other debt
3,954

 
6,062

Total debt
515,511

 
521,970

Less deferred financing costs and debt discount
(11,236
)
 
(13,102
)
Less current maturities of long term debt and notes payable
(17,350
)
 
(19,012
)
Total long term debt including capital leases
$
486,925

 
$
489,856

 
 
 
 
Balance sheet classification of total long-term debt including capital leases
 
 
 
Long-term debt, net of current maturities and deferred financing costs
473,168

 
473,904

Liabilities under capital lease, non-current
13,757

 
15,952

Total long term debt including capital leases
$
486,925

 
$
489,856

As of June 30, 2018, the carrying value of the Company’s debt was $504.3 million (including a credit for deferred financing costs and debt discount) and its fair value was approximately $540.7 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. On June 19, 2018, the Company amended the ABL Facility to, among other things, reduce the applicable margin used to determine the interest rate for the Alternative Base rate prime loans in certain jurisdictions. No changes were made to the interest rate margin on the LIBOR loans. The ABL Facility matures in November of 2020 and accrues interest at either an Alternative Base rate (Prime -100 bps or Prime) or Fixed LIBOR (LIBOR +175 bps). As of June 30, 2018, after the amendment discussed above, these rates were 4.00% to 5.00% for the Alternative Base rate and 3.92% for the Fixed LIBOR rate.
As of June 30, 2018, an aggregate of $31.4 million was available for additional borrowings under the ABL Facility. This availability represents $34.3 million under the ABL Facility currently collateralized by certain assets of the Company, less $2.9

12


million committed for letters of credit or current borrowings. In addition, the Company had approximately $6.0 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;
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 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 based on the exchange rate in effect 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 June 30, 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 June 30, 2018.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
Long-term Capitalized Lease Liabilities

As of June 30, 2018 and December 31, 2017, the Company had capitalized lease liabilities totaling $18.3 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 and six months ended June 30, 2018, the provision for income taxes was $2.5 million and $3.9 million, respectively, as compared to $3.8 million and $6.5 million for the three and six months ended June 30, 2017, respectively. The decrease in tax expense in the three and six months ended June 30, 2018 was primarily attributable to the geographic mix of earnings and a release of valuation allowance previously established against certain China deferred tax assets. 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

13


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 June 30, 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 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 second 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.

14


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 June 30, 2018, the Company had a gross amount of unrecognized tax benefit of $10.3 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.3 million during the six months ended June 30, 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 or benefit, which was $0.1 million of tax benefit for both the three and six months ended June 30, 2018, and was primarily attributable to currency fluctuations. The tax years 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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
360

 
$
320

 
$
743

 
$
696

Interest cost
1,042

 
1,079

 
2,130

 
2,346

Expected return on plan assets
(1,345
)
 
(1,273
)
 
(2,750
)
 
(2,769
)
Amortization of net loss
565

 
501

 
1,148

 
1,091

Net periodic benefit cost
$
622

 
$
627

 
$
1,271

 
$
1,364


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 and Comprehensive (Loss) Income.
7. Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss
Comprehensive (loss) income for the three and six months ended June 30, 2018 (net of tax expense of $1.5 million and $1.4 million, respectively) and 2017 (net of a tax expense of $0.1 million and $0.2 million, respectively) is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(4,344
)
 
$
(3,411
)
 
$
(2,113
)
 
$
(6,245
)
Foreign currency translation adjustments
(20,677
)
 
3,250

 
(14,600
)
 
13,015

Pension liability changes under Topic 715
1,882

 
15

 
1,936

 
(110
)
Comprehensive (loss) income
$
(23,139
)
 
$
(146
)
 
$
(14,777
)
 
$
6,660



15


Included in foreign currency translation adjustments are foreign currency gains (losses) on intercompany transactions that are considered a long-term investment totaling $2.9 million and $1.8 million for the three and six months ended June 30, 2018 and $(1.3) million and $(2.1) million for the three and six months ended June 30, 2017, respectively.

The components of accumulated other comprehensive loss for the three months ended June 30, 2018 are as follows (net of tax benefits of $4.3 million):

 
Foreign
Currency
Translation    
Adjustment
 
Pension
Liability
Changes Under 
Topic 715
 
Accumulated   
Other
Comprehensive
Income (Loss)
Balance at March 31, 2018
$
(63,072
)
 
$
(42,056
)
 
$
(105,128
)
Other comprehensive (loss) income before reclassifications
(20,677
)
 
1,317

 
(19,360
)
Amounts reclassified from Other Comprehensive loss:
 
 
 
 
 
     Amortization of actuarial losses

 
565

 
565

Net current period other comprehensive (loss) income
(20,677
)
 
1,882

 
(18,795
)
Balance at June 30, 2018
$
(83,749
)
 
$
(40,174
)
 
$
(123,923
)

The components of accumulated other comprehensive loss for the six months ended June 30, 2018 are as follows (net of tax benefits of $4.3 million):
 
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 (loss) income before reclassifications
(14,600
)
 
788

 
(13,812
)
Amounts reclassified from other comprehensive loss
 
 
 
 
 
     Amortization of actuarial losses

 
1,148

 
1,148

Net current period other comprehensive (loss) income
(14,600
)
 
1,936

 
(12,664
)
Balance at June 30, 2018
$
(83,749
)
 
$
(40,174
)
 
$
(123,923
)
For the three and six months ended June 30, 2018, the amortization of actuarial losses is included in other components of net periodic pension cost in the Consolidated Statements of Operations and Comprehensive (Loss) Income.

8. Restructuring Expense
For the six months ended June 30, 2018 and 2017, the Company incurred restructuring expenses of $1.0 million and $4.0 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.

16



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 six months ended June 30, 2018 and 2017:
  
 
Balance at December 31, 2017
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
June 30, 2018
Severance and other benefits
$
2,686

 
$
320

 
$
(23
)
 
$
(1,622
)
 
$
1,361

Facility costs and other
733

 
710

 
(6
)
 
(967
)
 
470

Total
$
3,419

 
$
1,030

 
$
(29
)
 
$
(2,589
)
 
$
1,831



 
 
Balance at December 31, 2016
 
Charges
 
Currency    
Effects
 
Cash
Payments    
 
Balance at
June 30, 2017
Severance and other benefits
$
3,805

 
$
2,626

 
$
311

 
$
(3,316
)
 
$
3,426

Facility costs and other
392

 
1,412

 
32

 
(1,581
)
 
255

Total
$
4,197

 
$
4,038

 
$
343

 
$
(4,897
)
 
$
3,681

Restructuring expense by segment, which is not included in Segment Earnings in Note 9, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Clothing
$
141

 
$
162

 
$
327

 
$
2,638

Roll Covers
52

 
681

 
690

 
1,308

Corporate
13

 
31

 
13

 
92

Total
$
206

 
$
874

 
$
1,030

 
$
4,038

9. Business Segment Information
The Company is a global manufacturer and supplier of consumable products used primarily in the production of paper, paperboard, building products and nonwoven materials, 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 and six months ended June 30, 2018 and 2017.

17


 
Clothing       
 
Roll
Covers        
 
Corporate     
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
Net Sales
$
76,189

 
$
49,095

 
$

 
$
125,284

Segment Earnings (Loss)
$
21,744

 
$
10,117

 
$
(4,380
)
 
$
27,481

Three months ended June 30, 2017
 
 
 
 
 
 
 
Net Sales
$
72,425

 
$
47,914

 
$

 
$
120,339

Segment Earnings (Loss)
$
20,906

 
$
10,566

 
$
(4,292
)
 
$
27,180

 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 
 
 
Net Sales
$
151,946

 
$
99,413

 
$

 
$
251,359

Segment Earnings (Loss)
$
40,656

 
$
20,873

 
$
(8,655
)
 
$
52,874

Six months ended June 30, 2017
 
 
 
 
 
 
 
Net Sales
$
144,920

 
$
95,285

 
$

 
$
240,205

Segment Earnings (Loss)
$
41,704

 
$
20,361

 
$
(8,329
)
 
$
53,736

Provided below is a reconciliation of Segment Earnings (Loss) to (Loss) income before provision for income taxes for the three and six months ended June 30, 2018 and 2017, respectively.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Segment Earnings (Loss):
 
 
 
 
 
 
 
Clothing
$
21,744

 
$
20,906

 
$
40,656

 
$
41,704

Roll Covers
10,117

 
10,566

 
20,873

 
20,361

Corporate
(4,380
)
 
(4,292
)
 
(8,655
)
 
(8,329
)
Stock-based compensation
(263
)
 
(328
)
 
(618
)
 
(859
)
CEO transition expense
244

 
(3,039
)
 
87

 
(3,039
)
Interest expense, net
(13,130
)
 
(13,281
)
 
(25,895
)
 
(26,544
)
Depreciation and amortization
(7,953
)
 
(8,115
)
 
(16,214
)
 
(16,208
)
Loss on extinguishment of debt

 
(7
)
 

 
(32
)
Restructuring expense
(206
)
 
(874
)
 
(1,030
)
 
(4,038
)
Strategic alternative expenses (1)
(5,118
)
 

 
(5,238
)
 

Other non-recurring expense
(8
)
 
(69
)
 
(10
)
 
(114
)
Plant startup costs
(264
)
 
(166
)
 
(264
)
 
(646
)
Unrealized foreign exchange loss
(2,611
)
 
(886
)
 
(1,952
)
 
(1,994
)
(Loss) income before provision for income taxes
$
(1,828
)
 
$
415

 
$
1,740

 
$
262


(1) On March 19, 2018, the Company’s Board of Directors initiated a review of strategic alternatives for the Company. As a result of the strategic alternatives review, on June 24, 2018, the Company entered into the Merger Agreement, pursuant to which Andritz will acquire the Company for $13.50 per share in cash. Completion of the Merger is subject to approval by the Company's stockholders, regulatory approvals, and other customary closing conditions. The Company expects to close the Merger during the second half of 2018. Strategic alternatives expenses include legal, investment banking, incremental management LTIP compensation and other costs related to the strategic alternatives process. These expenses are recorded as a component of general and administrative expense on the statement of operations.
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 June 30, 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

18


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 and six months ended June 30, 2018 and June 30, 2017 as follows: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
RSU and DSU Awards (1)
 
$
263

 
$
1,515

 
$
618

 
$
2,046

 
(1)
Related to RSUs and DSUs awarded to certain employees and non-employee directors. The second quarter of 2017 includes approximately $1.2 million of expense related to the accelerated vesting on RSU's upon the transition of the Company's former Chief Executive Officer ("CEO"). Upon transition 146,134 shares were issued to the former CEO.

Summary of Recent Activity for Company Stock and Long-term Incentive Plans

On June 24, 2018 the Company entered into the Merger Agreement, pursuant to which Andritz will acquire the Company for $13.50 per share in cash. Completion of the Merger is subject to approval by the Company's stockholders, regulatory approvals, and other customary closing conditions. The Company expects to close the Merger during the second half of 2018.

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.



19


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 six months ended June 30, 2018. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 14,424 DSUs, and 28,357 DSUs were settled in common stock during the six months ended June 30, 2018 and June 30, 2017, respectively. Pursuant to terms of the Merger Agreement, the Company has ceased issuing DSU's to directors for director fees.
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 and other qualifying terms.  As a result of certain performance conditions being met on this award during the six months ended June 30, 2018, the Company recorded $0.2 million of related stock-based compensation expense.

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.



20


Xerium Technologies, Inc.
Consolidating Balance Sheet
At June 30, 2018
(Dollars in thousands, and unaudited)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,816

 
$
48

 
$
9,918

 
$

 
$
14,782

Accounts receivable, net
39

 
19,068

 
62,522

 

 
81,629

Intercompany receivables
(487,606
)
 
504,108

 
(16,502
)
 

 

Inventories, net

 
15,454

 
58,050

 
(874
)
 
72,630

Prepaid expenses
991

 
131

 
12,002

 

 
13,124

Other current assets
150

 
3,709

 
10,623

 

 
14,482

Total current assets
(481,610
)
 
542,518

 
136,613

 
(874
)
 
196,647

Property and equipment, net
5,748

 
58,047

 
198,194

 

 
261,989

Investments
929,139

 
262,229

 

 
(1,191,368
)
 

Goodwill

 
19,614

 
44,545

 

 
64,159

Intangible assets

 
5,349

 
3

 

 
5,352

Non-current deferred tax asset

 

 
9,987

 

 
9,987

Other assets

 

 
9,054

 

 
9,054

Total assets
$
453,277

 
$
887,757

 
$
398,396

 
$
(1,192,242
)
 
$
547,188

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

 
$

 
$
8,112

 
$

 
$
8,112

Accounts payable
3,041

 
12,173

 
26,124

 

 
41,338

Accrued expenses
28,852

 
8,138

 
28,924

 

 
65,914

Current maturities of long-term debt
1,584

 
2,347

 
5,307

 

 
9,238

Total current liabilities
33,477

 
22,658

 
68,467

 

 
124,602

Long-term debt, net of current maturities
469,353

 

 
3,815

 

 
473,168

Liabilities under capital leases
3,344

 
1,829

 
8,584

 

 
13,757

Non-current deferred tax liability
3,654

 

 
8,459

 

 
12,113

Pension, other post-retirement and post-employment obligations
19,826

 
1,783

 
43,557

 

 
65,166

Other long-term liabilities

 

 
9,399

 

 
9,399

Intercompany loans
61,823

 
(107,195
)
 
45,372

 

 

Total stockholders’ (deficit) equity
(138,200
)
 
968,682

 
210,743

 
(1,192,242
)
 
(151,017
)
Total liabilities and stockholders’ (deficit) equity
$
453,277

 
$
887,757

 
$
398,396

 
$
(1,192,242
)
 
$
547,188


21


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











22


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the three months ended June 30, 2018
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
42,262

 
$
88,285

 
$
(5,263
)
 
$
125,284

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold

 
27,470

 
54,169

 
(5,329
)
 
76,310

    Selling
65

 
4,449

 
10,735

 

 
15,249

    General and administrative
6,816

 
(3,353
)
 
13,753

 

 
17,216

    Research and development
294

 
840

 
479

 

 
1,613

    Restructuring
13

 
90

 
103

 

 
206

 
7,188

 
29,496

 
79,239

 
(5,329
)
 
110,594

(Loss) income from operations
(7,188
)
 
12,766

 
9,046

 
66

 
14,690

Interest expense, net
(12,089
)
 
(457
)
 
(584
)
 

 
(13,130
)
Foreign exchange loss
(2,259
)
 
(197
)
 
(670
)
 

 
(3,126
)
Equity in subsidiaries income
15,891

 
4,847

 

 
(20,738
)
 

Other components of net periodic pension cost
(129
)
 
(191
)
 
58

 

 
(262
)
Dividend income
859

 
859

 

 
(1,718
)
 

(Loss) income before provision for income taxes
(4,915
)
 
17,627

 
7,850

 
(22,390
)
 
(1,828
)
Benefit from (provision for) income taxes
571

 
(222
)
 
(2,865
)
 

 
(2,516
)
Net (loss) income
$
(4,344
)
 
$
17,405

 
$
4,985

 
$
(22,390
)
 
$
(4,344
)
Comprehensive (loss) income
$
(1,808
)
 
$
17,568

 
$
(16,509
)
 
$
(22,390
)
 
$
(23,139
)

Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the three months ended June 30, 2017
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
45,920

 
$
80,736

 
$
(6,317
)
 
$
120,339

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold
58

 
29,544

 
48,016

 
(6,274
)
 
71,344

Selling
256

 
5,317

 
10,363

 

 
15,936

General and administrative
5,453

 
496

 
9,314

 

 
15,263

Research and development
200

 
1,017

 
449

 

 
1,666

Restructuring and impairment
31

 
207

 
636

 

 
874

 
5,998

 
36,581

 
68,778

 
(6,274
)
 
105,083

(Loss) income from operations
(5,998
)
 
9,339

 
11,958

 
(43
)
 
15,256

Interest expense, net
(12,289
)
 
(436
)
 
(556
)
 

 
(13,281
)
Foreign exchange (loss) gain
(1,296
)
 
152

 
(102
)
 

 
(1,246
)
Equity in subsidiaries income
6,289

 
19,453

 

 
(25,742
)
 

Other components of net periodic pension cost
(133
)
 
(188
)
 
14

 

 
(307
)
Loss on extinguishment of debt
(7
)
 

 

 

 
(7
)
Dividend income
9,966

 
(1,275
)
 
12,384

 
(21,075
)
 

(Loss) income before provision for income taxes
(3,468
)
 
27,045

 
23,698

 
(46,860
)
 
415

Benefit from (provision for) income taxes
57

 
(322
)
 
(3,561
)
 

 
(3,826
)
Net (loss) income
$
(3,411
)
 
$
26,723

 
$
20,137

 
$
(46,860
)
 
$
(3,411
)
Comprehensive (loss) income
$
(4,346
)
 
$
26,808

 
$
24,252

 
$
(46,860
)
 
$
(146
)

23


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive Income (Loss)
For the six months ended June 30, 2018
(Dollars in thousands, and unaudited)
 
Parent    
 
Total Guarantors
 
Total  Non Guarantors
 
Other Eliminations
 
The Company
Net sales
$

 
$
88,416

 
$
173,294

 
$
(10,351
)
 
$
251,359

Costs and expenses:

 

 

 

 

    Cost of products sold

 
57,405

 
108,164

 
(10,417
)
 
155,152

    Selling
116

 
9,165

 
21,645

 

 
30,926

    General and administrative
6,871

 
(7,116
)
 
30,558

 

 
30,313

    Research and development
630

 
1,656

 
895

 

 
3,181

    Restructuring
13

 
533

 
484

 

 
1,030

 
7,630

 
61,643

 
161,746

 
(10,417
)
 
220,602

(Loss) income from operations
(7,630
)
 
26,773

 
11,548

 
66

 
30,757

Interest expense, net
(23,996
)
 
(897
)
 
(1,002
)
 

 
(25,895
)
Foreign exchange (loss) gain
(1,659
)
 
110

 
(1,045
)
 

 
(2,594
)
Equity in subsidiaries income
27,864

 
7,129

 

 
(34,993
)
 

Other components of net periodic pension cost
(257
)
 
(383
)
 
112

 

 
(528
)
Dividend income
3,367

 
3,369

 

 
(6,736
)
 

(Loss) income before provision for income taxes
(2,311
)
 
36,101

 
9,613

 
(41,663
)
 
1,740

Benefit from (provision for) income taxes
198

 
(221
)
 
(3,830
)
 

 
(3,853
)
Net (loss) income
$
(2,113
)
 
$
35,880

 
$
5,783

 
$
(41,663
)
 
$
(2,113
)
Comprehensive income (loss)
$
3

 
$
36,013

 
$
(9,130
)
 
$
(41,663
)
 
$
(14,777
)

Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the six months ended June 30, 2017
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
92,990

 
$
161,830

 
$
(14,615
)
 
$
240,205

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold
57

 
60,525

 
97,574

 
(14,572
)
 
143,584

    Selling
489

 
10,361

 
20,760

 

 
31,610

    General and administrative
8,023

 
1,375

 
18,288

 

 
27,686

    Research and development
499

 
1,948

 
963

 

 
3,410

    Restructuring
92

 
848

 
3,098

 

 
4,038

 
9,160

 
75,057

 
140,683

 
(14,572
)
 
210,328

(Loss) income from operations
(9,160
)
 
17,933

 
21,147

 
(43
)
 
29,877

Interest expense, net
(24,627
)
 
(784
)
 
(1,133
)
 

 
(26,544
)
Foreign exchange (loss) gain
(1,767
)
 
218

 
(822
)
 

 
(2,371
)
Equity in subsidiaries income
15,003

 
11,451

 

 
(26,454
)
 

Other components of net periodic pension cost
(265
)
 
(376
)
 
(27
)
 

 
(668
)
Loss on extinguishment of debt
(32
)
 

 

 

 
(32
)
Dividend income
14,229

 
6,846

 

 
(21,075
)
 

(Loss) income before provision for income taxes
(6,619
)
 
35,288

 
19,165

 
(47,572
)
 
262

Benefit from (provision for) income taxes
374

 
(463
)
 
(6,418
)
 

 
(6,507
)
Net (loss) income
$
(6,245
)
 
$
34,825

 
$
12,747

 
$
(47,572
)
 
$
(6,245
)
Comprehensive (loss) income
$
(8,031
)
 
$
34,918

 
$
27,345

 
$
(47,572
)
 
$
6,660


24


Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the six months ended June 30, 2018
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(2,113
)
 
$
35,880

 
$
5,783

 
$
(41,663
)
 
$
(2,113
)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
618

 

 

 

 
618

Depreciation
1,153

 
3,935

 
10,513

 

 
15,601

Amortization of intangible assets

 
611

 
2

 

 
613

Deferred financing cost amortization
1,776

 

 
88

 

 
1,864

Foreign exchange (gain) loss on revaluation of debt
(136
)
 

 
561

 

 
425

Deferred taxes
(531
)
 

 
(211
)
 

 
(742
)
Loss (gain) on disposition of property and equipment

 
101

 
(174
)
 

 
(73
)
Provision for doubtful accounts

 
30

 
227

 

 
257

Undistributed equity in earnings of subsidiaries
(27,864
)
 
(7,129
)
 

 
34,993

 

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


Accounts receivable
(19
)
 
623

 
(9,467
)
 

 
(8,863
)
Inventories

 
1,163

 
(2,054
)
 
(66
)
 
(957
)
Prepaid expenses
(725
)
 
185

 
(1,981
)
 

 
(2,521
)
Other current assets
25

 
(371
)
 
415

 

 
69

Accounts payable and accrued expenses
3,713

 
641

 
1,761

 

 
6,115

Deferred and other long-term liabilities
(545
)
 
349

 
(1,450
)
 

 
(1,646
)
Intercompany loans
34,733

 
(28,182
)
 
(6,551
)
 

 

Net cash provided by (used in) operating activities
10,085

 
7,836

 
(2,538
)
 
(6,736
)
 
8,647

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(325
)
 
(1,072
)
 
(3,531
)
 

 
(4,928
)
Intercompany property and equipment transfers, net
438

 
(109
)
 
(329
)
 

 

Proceeds from disposals of property and equipment

 
22

 
437

 

 
459

Net cash provided by (used in) investing activities
113

 
(1,159
)
 
(3,423
)
 

 
(4,469
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
29,311

 

 
12,314

 

 
41,625

Principal payments on debt
(29,343
)
 

 
(15,439
)
 

 
(44,782
)
Dividends paid

 
(3,367
)
 
(3,369
)
 
6,736

 

Payment of obligations under capital leases
(965
)
 
(1,399
)
 
(306
)
 

 
(2,670
)
Intercompany loans
(7,904
)
 
(1,918
)
 
9,822

 

 

Employee taxes paid on equity awards
(59
)
 

 

 

 
(59
)
Net cash (used in) provided by financing activities
(8,960
)
 
(6,684
)
 
3,022

 
6,736

 
(5,886
)
Effect of exchange rate changes on cash flows

 
(2
)
 
(761
)
 

 
(763
)
Net increase (decrease) in cash
1,238

 
(9
)
 
(3,700
)
 

 
(2,471
)
Cash and cash equivalents at beginning of period
3,578

 
57

 
13,618

 

 
17,253

Cash and cash equivalents at end of period
$
4,816

 
$
48

 
$
9,918

 
$

 
$
14,782





25


Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the six months ended June 30, 2017
(Dollars in thousands, and unaudited)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(6,245
)
 
$
34,825

 
$
12,747

 
$
(47,572
)
 
$
(6,245
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
2,046

 

 

 

 
2,046

Depreciation
1,157

 
4,136

 
10,369

 

 
15,662

Amortization of intangible assets

 
492

 
54

 

 
546

Deferred financing cost amortization
1,762

 

 
48

 

 
1,810

Foreign exchange loss on revaluation of debt
819

 

 
(285
)
 

 
534

Deferred taxes
(438
)
 

 
750

 

 
312

Asset impairment

 
49

 
6

 

 
55

Loss on disposition of property and equipment

 
(72
)
 
(13
)
 

 
(85
)
Loss on extinguishment of debt
32

 

 

 

 
32

Provision for doubtful accounts

 
(12
)
 
154

 

 
142

Undistributed equity in earnings of subsidiaries
(15,003
)
 
(11,451
)
 

 
26,454

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
40

 
(3,705
)
 
(1,735
)
 

 
(5,400
)
Inventories

 
(490
)
 
(2,766
)
 
43

 
(3,213
)
Prepaid expenses
(904
)
 
402

 
61

 

 
(441
)
Other current assets

 
(39
)
 
(1,140
)
 

 
(1,179
)
Accounts payable and accrued expenses
(1,800
)
 
1,229

 
1,099

 

 
528

Deferred and other long-term liabilities
(71
)
 
337

 
(2,372
)
 

 
(2,106
)
Intercompany loans
21,928

 
(20,713
)
 
(1,215
)
 

 

Net cash provided by (used in) operating activities
3,323

 
4,988

 
15,762

 
(21,075
)
 
2,998

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(407
)
 
(568
)
 
(7,542
)
 

 
(8,517
)
Intercompany property and equipment transfers, net
(3
)
 
32

 
(29
)
 

 

Proceeds from disposals of property and equipment

 
258

 
32

 

 
290

Net cash used in investing activities
(410
)
 
(278
)
 
(7,539
)
 

 
(8,227
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
55,213

 

 
11,365

 

 
66,578

Principal payments on debt
(49,556
)
 

 
(9,726
)
 

 
(59,282
)
Dividends paid

 
(7,238
)
 
(13,837
)
 
21,075

 

Payments of obligations under capitalized leases
(1,322
)
 
(1,296
)
 
(176
)
 

 
(2,794
)
Payment of deferred financing fees
(427
)
 

 
34

 

 
(393
)
Intercompany loans
(6,003
)
 
3,557

 
2,446

 

 

Employee taxes paid on equity awards
(832
)
 

 

 

 
(832
)
Net cash (used in) provided by financing activities
(2,927
)
 
(4,977
)
 
(9,894
)
 
21,075

 
3,277

Effect of exchange rate changes on cash flows

 
(1
)
 
204

 

 
203

Net decrease in cash
(14
)
 
(268
)
 
(1,467
)
 

 
(1,749
)
Cash and cash equivalents at beginning of period
1,368

 
279

 
11,161

 

 
12,808

Cash and cash equivalents at end of period
$
1,354

 
$
11

 
$
9,694

 
$

 
$
11,059


26


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, all references in this Quarterly Report on Form 10-Q to “Xerium”, “the Company”, “we”, “our” and “us” means Xerium Technologies, Inc. and its consolidated subsidiaries.
Strategic Alternatives Update

As communicated on March 19, 2018, our Board of Directors initiated a review of strategic alternatives for the Company. On June 24, 2018, we entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Andritz AG ("Andritz") will acquire the Company for $13.50 per share in cash through the Merger of an indirect wholly owned subsidiary of Andritz with and into the Company (the "Merger"). Completion of the Merger is subject to approval by our stockholders, regulatory approvals, and other customary closing conditions. We expect to close the Merger during the second half of 2018.

Cautionary Statement Regarding Forward-Looking Statements
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:

the inability to consummate the Merger within the anticipated time period, or at all, due to any reason, including the failure to obtain stockholder approval to adopt the Merger Agreement or failure to satisfy the other conditions to the consummation of the Merger;

the risk that the Merger Agreement may be terminated in circumstances requiring us to pay Andritz a termination fee of $25 million and reimburse Andritz for certain expenses;

the potential disruption of management’s attention from our ongoing business operations due to the Merger;

the effect of the announcement of the Merger on our ability to retain and hire key personnel and maintain relationships with our customers, suppliers and others with whom we does business, or on our operating results and business generally;

the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger;

the risk that our stock price may decline significantly if the Merger is not consummated;

the nature, cost and outcome of any litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against us and others;

the fact that receipt of the all-cash Merger consideration would be taxable to our stockholders that are treated as U.S. Holders for United States federal income tax purposes;

the fact that our stockholders would forego the opportunity to realize the potential long-term value of the successful execution of our current strategy as an independent public company;

rate and magnitude of decline in graphical grade paper production;

fluctuations in interest rates and currency exchange rates;

27


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 the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018 and the "Risk Factors" section of this Quarterly Report on Form 10-Q. 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 these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law.
Company Overview
We are 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. 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

28


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 six months ended June 30, 2018, our clothing segment represented approximately 60% 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 six months ended June 30, 2018, our roll cover segment represented approximately 40% of our net sales.
Industry Trends and Outlook

Our global markets are growing overall although they have gone through a tough business cycle in past years. 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 75% 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;
growth in developing markets, particularly in Asia-Pacific;
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 many cases, we generally 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 generally 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 area of expense. We invest in facilities and equipment that enable innovative product development and improve production efficiency and costs. Recent examples of capital spending

29


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 $3.2 million and $3.4 million for the six months ended June 30, 2018 and 2017, respectively.
Foreign Exchange
A substantial portion of our operations is denominated in currencies other than the U.S. Dollar, such as the Euro, for example. 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 or other currencies in which our operations are denominated 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 six months ended June 30, 2018, we conducted business primarily in nine foreign currencies. The following table provides the average exchange rate for the six months ended June 30, 2018 and 2017 of the U.S. Dollar against each of the four foreign currencies that have the largest net exposure on our operations.
 
Currency
  
Six Months Ended June 30, 2018
  
Six Months Ended June 30, 2017
Canadian Dollar
  
$0.78 = 1 Canadian Dollar
 
$0.75 = 1 Canadian Dollar
Brazilian Real
  
$0.29 = 1 Brazilian Real
 
$0.31 = 1 Brazilian Real
Australian Dollar
  
$0.77 = 1 Australian Dollar
 
$0.75 = 1 Australian Dollar
Japanese Yen
 
$0.01 = 1 Japanese Yen
 
$0.01 = 1 Japanese Yen
In the six months ended June 30, 2018, our largest foreign currency net revenue (long) exposures are against the Canadian Dollar and the Japanese Yen. Our largest foreign currency net cost (short) exposures are against the Brazilian Real and the Australian Dollar.
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 successful, 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 six months ended June 30, 2018 and June 30, 2017 and a discussion of the results of operations during those periods (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Domestic income from operations
$
5,578

 
$
3,341

 
$
19,143

 
$
8,773

Foreign income from operations
9,112

 
11,915

 
11,614

 
21,104

Total income from operations
$
14,690

 
$
15,256

 
$
30,757

 
$
29,877


30


During the three months ended June 30, 2018, domestic income from operations was lower than foreign income from operations primarily due to lower sales, product mix, corporate overhead costs and market differences, partially offset by higher intercompany charges to foreign entities. During the six months ended June 30, 2018, domestic income from operations was higher than foreign income from operations primarily due to higher intercompany charges to foreign entities, partially offset by lower sales, product mix, corporate overhead costs and market differences. In light of U.S. taxation upon repatriation of foreign earnings under the Tax Cuts and Jobs Act, we intend for all earnings generated by foreign subsidiaries to be remitted to the parent company at some point in the future. Foreign withholding taxes have been provided related to those foreign earnings.
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 six months ended June 30, 2018 and 2017, we incurred restructuring expenses of $1.0 million and $4.0 million, respectively, relating to headcount reductions and other costs related to previous plant closures.

We expect to continue to review our business to determine if additional actions will be taken to further improve our 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 our long-term competitiveness. 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.

During the fourth quarter of 2017, we implemented a cost-out initiative which reduced headcount in North America and Europe. The cost-out initiative is completed and implementation costs were approximately $2.4 million. Annual savings from the program are anticipated to be approximately $8.0 million per year, which is expected to largely offset inflation and keep our cost structure flat to 2017 levels in 2018. The anticipated savings would reduce our cost of products sold and selling, general and administrative expenses.

31



Results of Operations

The table that follows sets forth for the periods presented certain consolidated operating results.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Net sales
$
125,284

 
$
120,339

 
$
251,359

 
$
240,205

Costs and expenses:
 
 
 
 
 
 
 
Cost of products sold
76,310

 
71,344

 
155,152

 
143,584

Selling
15,249

 
15,936

 
30,926

 
31,610

General and administrative
17,216

 
15,263

 
30,313

 
27,686

Research and development
1,613

 
1,666

 
3,181

 
3,410

Restructuring
206

 
874

 
1,030

 
4,038

 
110,594

 
105,083

 
220,602

 
210,328

Income from operations
14,690

 
15,256

 
30,757

 
29,877

Interest expense, net
(13,130
)
 
(13,281
)
 
(25,895
)
 
(26,544
)
Other components of net periodic pension cost
(262
)
 
(307
)
 
(528
)
 
(668
)
Loss on extinguishment of debt

 
(7
)
 

 
(32
)
Foreign exchange loss
(3,126
)
 
(1,246
)
 
(2,594
)
 
(2,371
)
(Loss) income before provision for income taxes
(1,828
)
 
415

 
1,740

 
262

Provision for income taxes
(2,516
)
 
(3,826
)
 
(3,853
)
 
(6,507
)
Net loss
$
(4,344
)
 
$
(3,411
)
 
$
(2,113
)
 
$
(6,245
)
Comprehensive (loss) income
$
(23,139
)
 
$
(146
)
 
$
(14,777
)
 
$
6,660


Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
Net Sales. Net sales for the three months ended June 30, 2018 increased by $4.9 million, or 4.1%, to $125.3 million from $120.3 million for the three months ended June 30, 2017. Excluding currency effects, net sales increased $0.8 million, or 0.7%. For the three months ended June 30, 2018, 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 June 30, 2018 increased $3.8 million to $76.2 million from $72.4 million for the three months ended June 30, 2017. Excluding currency effects, net sales increased by $1.0 million, or 1.4%, as a result of improved volume in Asia and Europe partially offset by a reduction in North America. In the prior year, sales in North America benefited from the catchup of sales related to 2016 machine clothing production shortfalls.
In our rolls segment, net sales for the three months ended June 30, 2018 increased $1.2 million to $49.1 million from $47.9 million for the three months ended June 30, 2017. Excluding currency effects, net sales decreased by $0.2 million, or 0.4%, driven primarily by lower sales volumes in North America, partially offset by higher sales volumes in Europe and Latin America.
Cost of Products Sold. Cost of products sold for the three months ended June 30, 2018 increased $5.0 million to $76.3 million from $71.3 million for the three months ended June 30, 2017.
In our clothing segment, cost of products sold increased $3.5 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017, due to higher sales in the second quarter of 2018 coupled with favorable production variance amortization in the prior year. Cost of products sold as a percentage of net sales increased by 1.8 percentage points to 58.0% in the three months ended June 30, 2018 from 56.2% in the three months ended June 30, 2017. Gross margin was unfavorably impacted by favorable fixed cost absorption in the prior year due to changes in the timing of production and flow through of inventory which did not recur in 2018.
In our rolls segment, cost of products sold increased $1.5 million in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The increase was primarily a result of currency effects and timing of production costs.

32


Cost of products sold as a percentage of net sales increased by 1.6 percentage points to 65.4% for the three months ended June 30, 2018 from 63.8% for the three months ended June 30, 2017 primarily due to timing of production costs.
Selling Expenses. For the three months ended June 30, 2018, selling expenses of $15.2 million were $0.7 million lower than the $15.9 million of selling expenses for the three months ended June 30, 2017. Selling expenses as a percent of sales decreased 1.0 percentage points to 12.2% for the three months ended June 30, 2018 from 13.2% for the three months ended June 30, 2017 primarily as a result of savings achieved through our cost-out initiatives.

General and Administrative Expenses. For the three months ended June 30, 2018, general and administrative expenses increased by $2.0 million, or 12.8%, to $17.2 million from $15.3 million for the three months ended June 30, 2017, primarily as a result of strategic initiative costs in the second quarter of 2018 partially offset by CEO transition costs in the second quarter of 2017.

Restructuring Expenses. For the three months ended June 30, 2018, we incurred restructuring expenses of $0.2 million relating to headcount reductions and other costs related to previous plant closures.

Interest Expense, Net. Net interest expense for the three months ended June 30, 2018 was $13.1 million, $0.2 million lower than $13.3 million for the three months ended June 30, 2017. The decrease was primarily driven by lower average debt balances for the three months ended June 30, 2018 versus the three months ended June 30, 2017.
Provision for Income Taxes. For the three months ended June 30, 2018 and 2017, the provision for income taxes was $2.5 million and $3.8 million, respectively. The decrease in tax expense in the three months ended June 30, 2018, was primarily attributable to the geographic earnings mix and a release of valuation allowance previously established against certain China deferred tax assets. 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 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. 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.

Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
Net Sales. Net sales for the six months ended June 30, 2018 increased by $11.2 million, or 4.6%, to $251.4 million from $240.2 million for the six months ended June 30, 2017. Excluding currency effects, net sales were flat to the six months ended June 30, 2017. For the six months ended June 30, 2018, approximately 60% of our net sales were in our clothing segment and approximately 40% were in our roll covers segment.
In our clothing segment, net sales for the six months ended June 30, 2018 increased $7.0 million to $151.9 million from $144.9 million for the six months ended June 30, 2017. Excluding currency effects, net sales decreased by $0.3 million, or 0.2%, which was driven by lower sales in North America, as the first half of 2017 benefited from the catchup of sales related to 2016 machine clothing production shortfalls, partially offset by higher sales volumes in Asia Pacific and Europe.
In our rolls segment, net sales for the six months ended June 30, 2018 increased $4.1 million to $99.4 million from $95.3 million for the six months ended June 30, 2017. Excluding currency effects, net sales increased by $0.4 million, or 0.4%, driven primarily by higher sales volumes in Latin America and Europe, partially offset by lower North America sales volumes.
Cost of Products Sold. Cost of products sold for the six months ended June 30, 2018 increased to $155.2 million from $143.6 million for the six months ended June 30, 2017.
In our clothing segment, cost of products sold increased $8.4 million in the six months ended June 30, 2018 compared to the six months ended June 30, 2017, primarily due to negative currency impacts and unfavorable production variance amortization activity. Cost of products sold as a percentage of net sales increased by 2.9 percentage points to 59.5% in the six months ended June 30, 2018 from 56.6% in the six months ended June 30, 2017. Gross margin was unfavorably impacted by approximately 170 basis points in the current year from (i) favorable fixed cost absorption in the prior year due to changes in the timing of production and flow through of inventory which did not recur in 2018, and (ii) planned inventory reductions in

33


the fourth quarter of 2017 that drove unfavorable overhead absorption into the first quarter of 2018. Additionally, there was negative product mix in the current year in Asia Pacific, partially offset by positive product mix in Europe.
In our rolls segment, cost of products sold increased $3.2 million in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase was primarily a result of negative currency impacts and timing of production costs. Cost of products sold as a percentage of net sales increased by 0.5 percentage points to 65.1% for the six months ended June 30, 2018 from 64.6% for the six months ended June 30, 2017 primarily due to timing of production costs.
Selling Expenses. For the six months ended June 30, 2018, selling expenses of $30.9 million were $0.7 million lower than the six months ended June 30, 2017 at $31.6 million as lower costs were partially offset by negative foreign exchange impacts. Selling expenses as a percent of sales decreased 0.9 percentage points to 12.3% for the six months ended June 30, 2018 from 13.2% for the six months ended June 30, 2017 primarily as a result of savings achieved through our cost-out initiatives.

General and Administrative Expenses. For the six months ended June 30, 2018, general and administrative expenses increased by $2.6 million, or 9.5%, to $30.3 million from $27.7 million for the six months ended June 30, 2017, primarily as a result of strategic initiative costs in the second quarter of 2018 partially offset by CEO transition costs in the second quarter of 2017.

Restructuring Expenses. For the six months ended June 30, 2018, we incurred restructuring expenses of $1.0 million relating to headcount reductions and other costs related to previous plant closures.

Interest Expense, Net. Net interest expense for the six months ended June 30, 2018 was $25.9 million, $0.6 million lower than $26.5 million for the six months ended June 30, 2017. The decrease was primarily driven by lower average debt balances for the six months ended June 30, 2018 versus the six months ended June 30, 2017.
Provision for Income Taxes. For the six months ended June 30, 2018 and 2017, the provision for income taxes was $3.9 million and $6.5 million, respectively. The decrease in tax expense in the six months ended June 30, 2018, was primarily attributable to the geographic earnings mix and a release of valuation allowance previously established against certain China deferred tax assets. 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 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. 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 provided by operating activities was $8.6 million for the six months ended June 30, 2018 compared to net cash provided by operating activities of $3.0 million for the six months ended June 30, 2017. The $5.6 million increase in cash provided was primarily due to favorable working capital and lower restructuring payments in the six months ended June 30, 2018.
Net cash used in investing activities was $4.5 million for the six months ended June 30, 2018 and $8.2 million for the six months ended June 30, 2017. The decrease in cash used in investing activities of $3.8 million was primarily due to lower capital expenditures in the six months ended June 30, 2018.
Net cash used in financing activities was $5.9 million for the six months ended June 30, 2018 compared to net cash provided by financing activities of $3.3 million for the six months ended June 30, 2017. The increased use of cash of $9.2 million was due to lower net borrowing on the ABL Facility for the six months ended June 30, 2018, the issuance of the Changzhou rolls facility loan in the second quarter of 2017 and timing of scheduled principal payments on non-ABL debt, partially offset by lower employee taxes paid on equity awards.

34


As of June 30, 2018, an aggregate of $31.4 million is available for additional borrowings under our ABL Facility. This availability represents $34.3 million under the ABL Facility currently collateralized by certain of our assets, less $2.9 million of that facility committed for letters of credit or current borrowings. In addition, we had approximately $6.0 million available for borrowings under other small lines of credit. We also had cash and cash equivalents of $14.8 million at June 30, 2018 compared to $17.3 million at December 31, 2017.
We expect to spend cash of between $4.0 million and $6.0 million related to the continuation of our restructuring initiatives in 2018. We have spent $2.6 million in the six months ended June 30, 2018. Actual restructuring costs for 2018 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 six months ended June 30, 2018, we had capital expenditures of $4.9 million. We are currently targeting capital expenditures for 2018 to be approximately $15.0 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 issued $480.0 million aggregate principal amount of 9.5% Senior Secured Notes due August 2021 for a price equal to 98.54% of their face value. Interest on the Notes is 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.
We used the net proceeds from the offering to repay all amounts outstanding under our then existing $230.0 million term loan credit facility, to redeem all of our $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 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 the Company, as US borrower, Xerium Canada Inc., as Canadian borrower, and Huyck.Wagner Germany GmbH, Robec Walzen GmbH, and Stowe Woodward AG, as the European borrowers. On June 19, 2018, we amended our ABL Facility to, among other things, reduce the applicable margin used to determine the interest rate for the Alternative Base rate prime loans in certain jurisdictions. No changes were made to the interest rate margin on the LIBOR loans. The ABL Facility matures in November of 2020 and accrues interest at either an Alternative Base rate (Prime -100 bps or Prime) or Fixed LIBOR (LIBOR +175 bps). As of June 30, 2018, after the amendment discussed above, these rates were 4.00% to 5.00% for the Alternative Base rate and 3.92% for the Fixed LIBOR rate.
The Indenture governing our 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;
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.

35


Fixed Assets Loan Contract
On July 17, 2015, Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of ours, entered into 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 based on the exchange rate in effect 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. Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate at June 30, 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.

We were in compliance with all covenants under the Notes, the ABL Facility, and the Loan Agreement at June 30, 2018.
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, 2017. 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, 2017.
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 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

36


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.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(4,344
)
 
$
(3,411
)
 
$
(2,113
)
 
$
(6,245
)
Stock-based compensation
263

 
328

 
618

 
859

CEO transition stock-based compensation

 
1,187

 

 
1,187

Depreciation
7,647

 
7,843

 
15,601

 
15,662

Amortization of intangible assets
306

 
272

 
613

 
546

Deferred financing cost amortization
932

 
911

 
1,864

 
1,810

Foreign exchange loss (gain) on revaluation of debt
509

 
(93
)
 
425

 
534

Deferred tax expense
(538
)
 
302

 
(742
)
 
312

Asset impairment

 
55

 

 
55

Gain on disposition of property and equipment
(16
)
 
(36
)
 
(73
)
 
(85
)
Loss on extinguishment of debt

 
7

 

 
32

Net change in operating assets and liabilities
16,047

 
2,855

 
(7,546
)
 
(11,669
)
Net cash provided by operating activities
20,806

 
10,220

 
8,647

 
2,998

Interest expense, excluding amortization
12,198

 
12,370

 
24,031

 
24,734

Net change in operating assets and liabilities
(16,047
)
 
(2,855
)
 
7,546

 
11,669

Current portion of income tax expense
3,054

 
3,524

 
4,595

 
6,195

Stock-based compensation
(263
)
 
(328
)
 
(618
)
 
(859
)
CEO transition stock-based compensation

 
(1,187
)
 

 
(1,187
)
Asset impairment

 
(55
)
 

 
(55
)
Foreign exchange (loss) gain on revaluation of debt
(509
)
 
93

 
(425
)
 
(534
)
Gain on disposition of property and equipment
16

 
36

 
73

 
85

Loss on extinguishment of debt

 
(7
)
 

 
(32
)
EBITDA
19,255

 
21,811

 
43,849

 
43,014

Loss on extinguishment of debt

 
7

 

 
32

Stock-based compensation
263

 
328

 
618

 
859

CEO transition expense
(244
)
 
3,039

 
(87
)
 
3,039

Operational restructuring expenses
206

 
874

 
1,030

 
4,038

Strategic alternative expenses
5,118

 

 
5,238

 

Other non-recurring expenses
8

 
69

 
10

 
114

Plant startup costs
264

 
166

 
264

 
646

Unrealized foreign exchange loss
2,611

 
886

 
1,952

 
1,994

Adjusted EBITDA
$
27,481

 
$
27,180

 
$
52,874

 
$
53,736


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk

37


Our interest rate risks as of June 30, 2018 have not materially changed from December 31, 2017 (see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2017). As of June 30, 2018, we had outstanding debt with a carrying amount of $504.3 million (including a credit for deferred financing costs and debt discount) and an approximate fair value of $540.7 million.
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation 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 as of June 30, 2018 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 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 June 30, 2018 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, 2017. See Note 10 to our Unaudited Condensed Consolidated Financial Statements for other routine litigation to which we are subject.

ITEM 1A.
RISK FACTORS
The risk factors presented below supplement the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Our inability to complete the Merger, or to complete the Merger in a timely manner, including as a result of the failure to obtain stockholder approval to adopt the Merger Agreement or failure to satisfy the other conditions to the consummation of the Merger, could negatively affect our business and the market price of our common stock.

The Merger is subject to various closing conditions such as the approval of our stockholders, as well as certain regulatory approvals in the United States and other jurisdictions, among other customary closing conditions. It is possible that our stockholders will not approve the Merger or that a government entity may prohibit, enjoin or refuse to grant approval for the consummation of the Merger. If any condition to the closing of the Merger is not satisfied or, if permissible, waived, the Merger will not be completed. In addition, satisfying the conditions to the closing of the Merger may take longer than we expect. There can be no assurance that any of the conditions to closing will be satisfied or waived or that other events will not intervene to delay or result in the failure to consummate the Merger.

If the Merger is not completed for any reason, our stockholders would not receive any payment for their shares in connection with the Merger, and we would remain an independent public company, with our shares continuing to be traded on the New York Stock Exchange. Depending on the circumstances that would have caused the Merger not to be completed, the price of our common stock may decline materially. If that were to occur, it is uncertain when, if ever, our common stock would return to the price levels at which the shares currently trade.


38


Failure to complete the Merger could trigger the payment of a termination fee, and, whether or not the Merger is consummated, we have incurred and will continue to incur significant costs, fees and expenses relating to professional services and transaction fees.

Under the Merger Agreement, we may be required to pay to Andritz a termination fee of $25.0 million, plus the actual and documented out-of-pocket expenses incurred by Andritz in connection with the Merger Agreement and the transactions contemplated thereby (up to a cap of $5.0 million), if the Merger Agreement is terminated under specified circumstances, including if our Board of Directors changes its recommendation in favor of the Merger Agreement or fails to reaffirm its recommendation after announcement of an exchange or tender offer, if we terminate the Merger Agreement to enter into a superior acquisition agreement, or if the Merger Agreement is terminated because the Merger is not consummated by the deadline provided in the Merger Agreement and we accept an acquisition proposal, subject to certain conditions, within nine months of such termination. There can be no assurance that the Merger Agreement will not be terminated under the circumstances triggering these termination fee obligations. Furthermore, whether or not the Merger is consummated, we have incurred, and will continue to incur, significant costs, fees and expenses relating to professional services and transaction fees in connection with the proposed Merger. Payment of these fees and costs could materially adversely affect our business, financial condition and results of operations.

Uncertainties associated with the Merger may cause us to lose key customers or suppliers and make it more difficult to retain and hire key personnel, and management’s attention may be disrupted from our ongoing business operations during the pendency of the Merger.

As a result of the uncertainty surrounding the conduct of our business during the pendency of the Merger, we may lose key customers and suppliers, and our relationships with other parties with whom we maintain business relationships may be materially adversely affected. Parties with whom we maintain business relationships may experience uncertainty about our future and seek alternative relationships with third parties, seek to alter their business relationships with us or fail to extend an existing relationship with us.

In addition, our employees, including key personnel, may be uncertain about their future roles and relationships with us following the completion of the Merger, which may adversely affect our ability to retain them or to hire new employees, and, during the pendency of the Merger, the potential disruption of management’s attention from our ongoing business operations could materially adversely affect our business, financial condition and results of operations.

Restrictions imposed on us pursuant to the Merger Agreement may prevent us from pursuing business opportunities, which could have a material adverse effect on our business, financial condition and results of operations.

The Merger Agreement restricts us from taking certain actions without Andritz’s consent while the Merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, making certain investments or acquisitions, selling assets, engaging in capital expenditures, incurring certain indebtedness or making certain other changes to our business. These restrictions could have a material adverse effect on our business, financial condition and results of operations.
 
ITEM 6. EXHIBITS

39


Exhibit  
Number   
 
Description of Exhibits
 
 
 
Agreement and Plan of Merger, dated as of June 24, 2018, by and among Xerium Technologies, Inc., Andritz AG and XYZ Merger Sub, Inc.* (incorporated by reference to Ex. 2.1 to the Company’s Current Report on Form 8-K filed on June 25, 2018)
 
 
 
 
Fourth Amendment to Revolving Credit and Guaranty Agreement, dated June 19, 2018 (incorporated by reference to Ex. 10.1 to the Company’s Current Report on Form 8-K filed on June 22, 2018)
 
 
 
 
Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
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

* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules and exhibits upon request by the SEC.
 

40




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)
 
 
 
July 26, 2018
By:              
/s/Clifford E. Pietrafitta
 
 
Clifford E. Pietrafitta
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)



41