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XRM > SEC Filings for XRM > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for XERIUM TECHNOLOGIES INC



Quarterly Report


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:

• we are subject to the risk of weaker paper industry and general economic conditions in the locations around the world where we conduct business, including the impact of price pressures and cost reduction strategies by our customers in the paper industry;

• our strategies and plans, including, but not limited to, those relating to developing and successfully marketing new products, enhancing our operational efficiencies and reducing costs, may not result in the anticipated benefits;

• we may be required to incur significant costs to reorganize or restructure our operations in response to market changes in the paper industry;

• our financial results could be adversely affected by fluctuations in interest rates and currency exchange rates;

• our manufacturing facilities may be required to quickly increase or decrease production capacity, which could negatively affect our production, customer order lead time, product quality, labor relations or gross margin;

• we may not be successful in developing and marketing new technologies or in competing against new technologies developed by competitors;

• variations in demand for our products, including our new products, could negatively affect our net sales and profitability;

• we are subject to fluctuations in the price of our component supply costs;

• due to our high degree of leverage and significant debt service obligations, we need to generate substantial operating cash flow to fund growth and unexpected cash needs;

• our credit facility contains restrictive covenants, such as the covenants requiring compliance with minimum interest coverage and maximum leverage ratios, which become more restrictive over time, that may require us to increasingly improve our performance over time to remain compliant;

• we are subject to the risk of terrorist attacks or an outbreak or escalation of any insurrection or 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;

• we are subject to the impact of 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 could make it more difficult for a third-party to acquire us.

Other factors that could materially affect our actual results, levels of activity, performance or achievements can be found in our "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 14, 2012, in our Quarterly Reports on Form 10-Q for the quarters ended March 30, 2012 and June 30, 2012 filed with the SEC on May 9, 2012 and August 7, 2012, respectively, and 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 publicly 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.

All references in this Quarterly Report to "Xerium", "the Company", "we", "our" and "us" means Xerium Technologies, Inc. and its subsidiaries.

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Company Overview
We are a leading global manufacturer and supplier of two types of consumable products used primarily in the production of paper-clothing and roll covers. Our operations are strategically located in the major paper-producing regions of North America, Europe, South 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 clothing and refurbish or replace roll covers periodically as these products wear down during the paper production process. Our products are designed to withstand high temperatures, chemicals, and high pressure conditions, and are the result of a substantial investment in research and development and highly sophisticated manufacturing processes. We operate in two principal business segments: clothing and roll covers. In our clothing segment, we manufacture and sell highly engineered synthetic textile belts that transport paper as it is processed in a paper-making machine. Clothing plays a significant role in the forming, pressing and drying stages of paper production. Because paper-making processes and machine specifications vary widely, the clothing size, form, material and function is custom engineered to fit each individual paper-making machine and process. For the nine months ended September 30, 2012, our clothing segment represented 66% 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 the paper producer. Roll covers are tailored to individual paper-making machines and processes, using different materials, treatments and finishings. In addition to manufacturing and selling new roll covers, we also provide refurbishment services for previously installed roll covers and we manufacture new and rebuilt spreader rolls. We also provide various related products and services to our customers, both directly and through third party providers, as a growing part of our overall product offering through our roll covers sales channels. For the nine months ended September 30, 2012, our roll cover segment represented 34% of our net sales. Industry Trends and Outlook
Historically, demand for our products has been driven primarily by the volume (tonnage) of paper produced on a worldwide basis. Industry forecasters predict the growth of global paper production from 2012 to 2015 to be between 2% and 4% per annum. Generally, and over time, we expect growth in paper production to be greater in Asia-Pacific, South America and Eastern Europe than in the more mature North American and Western European regions where demand may decline. Between the second half of 2008 and 2009, the global paper industry experienced a sharp reduction in production levels, caused by the general slowdown in economic activity and related paper consumption during the same period. In 2010 and 2011, global paper and board production began to recover from the economic recession and show growth, particularly in developing countries, although growth slowed in the second half of 2011 and has continued to slow through 2012. The profitability of paper producers has historically been highly cyclical due to wide swings in the price of paper, driven to a high degree by the oversupply of paper during periods when paper producers have more aggregate capacity than the market requires. A sustained downturn in the paper industry, either globally or in a particular region, can cause paper manufacturers to reduce production or cease operations, which could adversely affect our net sales and profitability. Since 2000, paper producers have taken actions that seek to structurally improve the balance between the supply of, and demand for, paper. As part of these efforts, they have permanently shut down many paper-making machines or entire manufacturing facilities. However, many paper producers continue to experience low levels of profitability. We believe that further consolidation among papermakers, reduction in the number of paper producers, and shutdowns of paper-making machines or facilities will continue in Europe and North America until there is a better balance between supply and demand for paper and the profit levels of paper producers improve. This rebalancing has been accelerated since the most recent global economic recession. Over a number of years, paper consumption growth, particularly in South America and Asia-Pacific, is expected to drive an increase in the global production rates required to maintain balance between supply and demand. It is highly likely, however, that the recession-led consumption slow-down and related effect on global paper production will continue in the near term. Also affecting machine curtailments are structural productivity gains from improved products that we and our competitors supply that enable paper producers to manufacture more paper with fewer machines.

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The impact of e-commerce and digitalization has resulted in a prolonged decline in specific paper grades, such as newsprint, printing and writing grades of paper. Fortunately, the decline has been partially offset by increases in the production of packaging grades, both as a consequence of globalization of manufacturing and as a result of the increase of tissue/personal care products which have increased as global GDP has risen, particularly in the developing world.
Global paper production growth would be moderated by the level of industry consolidation and paper-machine shutdown activity that is a continuing underlying trend in North America and Western Europe. We also believe that, in addition to industry consolidation and paper machine shutdown activity in North America and Western Europe, the trend towards new paper machine designs which have fewer rolls and market recognition of the extended life of our roll cover products has been and will continue to negatively impact demand for these products and their volume potential. Additionally, we are seeing a trend that paper producers are placing an increasing emphasis on maintenance cost reduction and, as a result, are extending the life of roll covers through additional maintenance cycles before replacing them. However, we believe volume declines would be at least partially offset by our introduction of new products with the extended life qualities that our customer's desire and increasing market share of proprietary products such as our SmartRoll™.
We anticipate that pricing pressure for our products may continue with the consolidation among paper producers and as the shift of paper production growth in Asia-Pacific develops. In response to this pricing pressure, we expect to focus our research and development efforts on new products that deliver increased value to our customers and for which they will pay increased prices. In addition, we will continue to enhance and deploy our value added selling approach as part of our strategy to differentiate our products, while at the same time we remain focused on cost reduction and efficiency programs. The negative paper industry trends described above are likely to continue. We believe that the paper industry will experience increased emphasis on cost reduction, continued paper-machine shutdown activity, and reduced availability of credit than would have been the case in the absence of the economic downturn. These industry dynamics could negatively impact our business, results of operations and financial condition.
Net Sales and Expenses
Net sales in both our clothing and roll covers segments are primarily driven by the following factors:

Ÿ The volume (tonnage) of worldwide paper production;

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

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

Ÿ Our ability to provide products and services which reduce paper-making machine downtime while at the same time allowing the manufacture of high quality paper products;

Ÿ The mix of paper grades being produced; and

Ÿ The impact of currency fluctuations.

Net sales in our roll covers segment include our mechanical services business. 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, a small portion of our business has been conducted pursuant to consignment arrangements under which 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 the product is shipped to the customer or to a warehouse location near the customer's facility. As part of the consignment agreement we deliver the goods to a location designated by the customer. In addition, we agree to a "sunset" date with the customer, which represents the date by which the customer must accept all risks and responsibilities of ownership of the product and payment terms begin. For consignment sales, revenue is recognized on the earlier of the actual product installation date or the "sunset" date.
Our operating cost levels are impacted by total sales volume, raw material costs, the impact of inflation, foreign currency fluctuations and the success of cost reduction programs.

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The level of our cost of products sold is primarily attributable to labor costs, raw material costs, product shipping costs, plant utilization and depreciation, with labor costs constituting the largest component. We invest in facilities and equipment that enable innovative product development and improve production efficiency and costs. Recent examples of capital spending for such purposes include faster weaving 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 $8.5 million and $8.9 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Foreign Exchange
We have a geographically diverse customer base. In the nine months ended September 30, 2012, we generated approximately 38% of our net sales in North America, 31% in Europe, 9% in South America, 19% in Asia-Pacific and 3% in the rest of the world.
A substantial portion of our net sales is denominated in Euros or other currencies. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies affect our reported levels of net sales and profitability as the results are translated into U.S. Dollars for reporting purposes. In particular, decreases in the value of the U.S. Dollar relative to the value of the Euro and these other currencies positively impact our levels of revenue and profitability because the translation of a certain number of Euros or units of such other currencies into U.S. Dollars for financial reporting purposes will represent more U.S. Dollars than it would have prior to the relative decrease in the value of the U.S. Dollar. Conversely, a decline in the value of the Euro will result in a lower number of U.S. Dollars for financial reporting purposes. For certain transactions, our net sales are denominated in U.S. Dollars but all or a substantial portion of the associated costs are denominated in a different currency. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies can affect the level of the profitability of these transactions. The largest proportion of such transactions consists of transactions in which the net sales are denominated in or indexed to the U.S. Dollar and all or a substantial portion of the associated costs are denominated in Brazilian Reals or other currencies.
Currency fluctuations have a greater effect on the level of our net sales than on the level of our income (loss) from operations. For example, in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, the change in the value of the U.S. Dollar against most of the currencies we conduct our business in resulted in net currency decreases in net sales of $17.7 million, yet income from operations currency effects increased by $3.6 million. Although the nine months ended September 30, 2012 results reflect a period in which the value of the U.S. Dollar increased against the Euro as compared to the nine months ended September 30, 2011, we would expect an opposite effect in a period in which the value of the U.S. Dollar decreases.
During the nine months ended September 30, 2012, we conducted business in 9 foreign currencies. The following table provides the average exchange rate for the nine months ended September 30, 2012 and the nine months ended September 30, 2011 of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our operations.

                             Average exchange rate of     Average exchange rate of
                                       the                          the
                             U.S. Dollar in the nine      U.S. Dollar in the nine
                                   months ended                 months ended
Currency                        September 30, 2012           September 30, 2011
Euro                        $1.28 = 1 Euro               $1.41 = 1 Euro
Brazilian Real              $0.52 = 1 Brazilian Real     $0.61 = 1 Brazilian Real
Canadian Dollar             $1.00 = 1 Canadian Dollar    $1.02 = 1 Canadian Dollar
Australian Dollar           $1.04 = 1 Australian         $1.04 = 1 Australian
                            Dollar                       Dollar

In the nine months ended September 30, 2012, we conducted approximately 35% of our operations in Euros, approximately 9% in the Australian Dollar, approximately 8% in the Brazilian Real (although a significant portion of Brazil net sales are in U.S. Dollars) and approximately 6% in the Canadian Dollar.

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

Domestic and Foreign Operating Results:
The following is an analysis of our domestic and foreign operations during the
three and nine months ended September 30, 2012 and September 30, 2011 and a
discussion of the results of operations during those periods (in thousands):

                                    Three Months Ended           Nine Months Ended
                                       September 30,               September 30,
                                     2012           2011         2012         2011
Domestic income from operations $      864        $  3,615    $    1,262    $  5,924
Foreign income from operations       5,552          13,299        21,228      42,464
Total income from operations    $    6,416        $ 16,914    $   22,490    $ 48,388

During the three and nine months ended September 30, 2012, domestic income from operations was lower than foreign income from operations, primarily due to product mix and market differences. Cash flows from the above foreign income from operations typically remains reinvested in the foreign subsidiaries. However, there is no legal restriction or material adverse consequence for repatriating the cash flows to the domestic subsidiaries to assist in debt repayment, capital expenditures and other expenses of our operations.

Cost Reduction Programs
An important part of our strategy is to seek to reduce our overall costs and improve our competitiveness. As a part of this effort, we engage in cost reduction programs, which are designed to improve the cost structure of our global operations in response to changing market conditions. These cost reduction programs include headcount reductions throughout the world as well as plant closures that have rationalized production among our facilities to better enable us to meet customer demands. Cost savings have been 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 the cost savings are recognized at the time of the headcount reductions and plant closure, with the remaining cost savings recognized over subsequent periods. Cost savings from headcount reductions have not been offset by related increases in other expenses. Cost savings related to plant closures have been partially offset by the reduction of revenues associated with those closed facilities in subsequent periods and additional costs incurred in the facilities that assumed the operations of the closed facility.
In July of 2012, we announced a voluntary redundancy program at our press felt facility in Buenos Aires, Argentina in connection with the relocation of our Huyck Wangner press felt capacity. The production of press felts and fiber cement felts will be transferred to our facilities in Brazil. During the third quarter of 2012, we completed the voluntary redundancy program and severance payments totaling $0.9 million were made to the employees. In addition, during the third quarter of 2012, management did an extensive review of the assets at the Argentina clothing facility, including the land and building, to determine which assets would be redeployed to other facilities, which assets would be sold and which assets would be scrapped, and consequently, recorded an impairment charge of $1.1 million. We plan to sell the majority of the land and building, and do not expect to impair either the land or building, under the requirements of ASC 360 "Impairment and Disposal of Long-Lived Assets".
Also in July of 2012, we initiated consultation proceedings with our works' council at our rolls cover facility in Meyzieu, France regarding a proposal to cease operations there, transferring the roll cover production of this facility to our rolls facilities in Germany and Italy. In October of 2012, we completed negotiations with our works' council and signed an agreement which allowed us to formally give notice to employees. All employees were fully aware of the benefits they would receive in the upcoming months. Therefore, severance charges of $2.6 million were accrued at September 30, 2012. In addition, during the third quarter of 2012, management did an extensive review of fixed assets at the France rolls facility to determine which assets would be redeployed to other facilities, which assets would be sold and which assets would be scrapped, and consequently,

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recorded an impairment charge of $0.5 million. We plan to sell the land and building, and do not expect to impair either the land or building, under the requirements of ASC 360 "Impairment and Disposal of Long-Lived Assets". In addition to the above restructuring and impairment activities, during 2012, we terminated sales agency contracts in Europe, transferred certain machinery and equipment from downsized facilities and reduced headcount, which resulted in $5.8 million in related restructuring charges.

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

                                          Three Months Ended                 Nine Months Ended
                                                September 30,                      September 30,
                                             2012              2011            2012              2011
                                                (in thousands)                    (in thousands)
Net sales                              $     134,231       $  148,227     $    404,973       $  441,771
Cost of products sold                         85,079           94,010          258,396          275,768
Selling expenses                              18,546           19,817           57,104           59,848
General and administrative expenses           15,650           14,002           47,509           47,560
Research and development expenses              2,700            2,907            8,531            8,920
Restructuring and impairment expenses          5,840              577           10,943            1,287
Income from operations                         6,416           16,914           22,490           48,388
Interest expense, net                         (9,777 )         (9,873 )        (28,494 )        (29,709 )
Loss on extinguishment of debt                     -                -                -           (2,926 )
Foreign exchange (loss) gain                    (202 )           (289 )            157             (284 )
(Loss) income before provision for
income taxes                                  (3,563 )          6,752           (5,847 )         15,469
Provision for income taxes                       (94 )         (3,264 )         (3,105 )         (9,711 )
. . .
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