Xerium Technologies, Inc. (NYSE:XRM), a leading global provider of industrial consumable products and services announced its Q3 2014 results.
Third-Quarter Financial Highlights
- Adjusted EBITDA for Q3 2014 was $31.5 million or 22.7% of net sales. This was an increase of 15.8% compared to $27.2 million in Q3 2013. Trailing Twelve Month ("TTM") Adjusted EBITDA at September 30, 2014 was $110.7 million, up 6.5% compared to $103.9 million of TTM Adjusted EBITDA at September 30, 2013. See "Non-GAAP Financial Measures" below.
- Q3 2014 Year-over-Year Adjusted EBITDA improvement (constant currency) was split roughly 50/50 between sales growth and operating efficiencies. Increased sales led to $1.3 million of additional Adjusted EBITDA and operating efficiencies led to $1.1 million of additional Adjusted EBITDA. See "Segment Information" and "Non-GAAP Financial Measures" below.
- Net sales for Q3 2014, excluding currency effects, improved 3.4% to $138.9 million compared to $134.2 million in Q3 2013. See "Segment Information" and "Non-GAAP Financial Measures" below. Rolls sales, mechanical services sales and emerging market PMC sales outperformed graphical paper and mature market sales declines.
- Q3 2014 loss per share was $(1.32) per share versus Q3 2013 earnings per share of $0.14 per share. The decrease of $(1.46) per share was primarily driven by a Brazilian tax charge of $(1.56) per share, partially offset by increased income from operations and the change in FX gains/(losses) in Q3 2014 from Q3 2013. See "Adjusted Earnings Per Share" below for further discussion.
- Excluding non-recurring items such as the one-time settlement for the Brazilian tax matter and restructuring costs, earnings per share were $0.43 in Q3 2014, compared to $0.36 in Q3 2013 and $1.73 for the trailing twelve months ended September 30, 2014, compared to $1.24 for the trailing twelve months ended September 30, 2013. See "Adjusted Earnings Per Share" below for further discussion.
- Q3 2014 gross profit was $55.5 million, or 40.0% of net sales, compared to $53.4 million, or 39.5% of net sales in Q3 2013. Machine Clothing gross margin improved to 40.9% in Q3 2014 from 40.6% in Q3 2013, and roll covers gross margin improved to 38.5% in Q3 2014, from a gross margin of 37.5% in Q3 2013.
- Selling, general and administrative and research and development (SG&A) expenses were $34.2 million, or 24.7% of net sales, in Q3 2014, down from Q3 2013 SG&A expenses of $34.9 million, or 25.8% of net sales.
CEO Comments
"Xerium performed well in the quarter, with sales growth globally and significant margin expansion," said Harold Bevis, President and CEO of Xerium Technologies, Inc. "The transforming global pulp and paper market is volatile, but many opportunities exist, and Xerium is pursuing these opportunities aggressively. Part and parcel to pursuing these opportunities are the re-alignment of our global operational footprint and product lineup. The expansion of Xerium's large plants in Gloggnitz, Austria; Asia; and Ruston, La. were completed in the quarter, while large-scale construction projects are still underway in Ba Cheng, China; Corlu, Turkey; and Piracicaba, Brazil. Xerium is orienting its cost structure more firmly towards low-cost country production. This balance was evident in the quarter with year-over-year improvement roughly split equally between sales growth and cost reductions. The quarter was on track with Xerium's stated improvement framework."
Constant currency net sales grew by 3.4%, out-pacing total annual market growth of 1-2%
Healthy sales growth in North America of 8.7%, Asia of 4.3% and South America of 12.4% contributed to positive growth in the quarter, while sales in Europe declined by 4.9%, primarily driven by weakness in the Nordic region and the challenging demand in newsprint and printing and writing grades of paper. See "Segment Information" and "Non-GAAP Financial Measures" below.
Sales growth programs remain on track
Xerium is repositioning its sales growth profile. Specific measurable programs are aimed at profitable growth in rolls, mechanical services, SMART machine automation, emerging markets, and new products. Some programs require capital investment and some do not.
Cost reduction programs remain on track
Xerium is repositioning its cost profile towards low-cost countries and low-cost operations. We have nine primary cost programs underway, including plant closures and operational excellence programs directed at waste, quality, productivity, procurement initiatives and a lean SG&A program. As a result of these efforts, total cost savings for Q3 2014 were $6.9 million, up $0.5 million from Q2 2014. Cost savings for the full year of 2014 are estimated to be over $25 million, which would represent a total of $49 million in cost reduction savings in 2013 and 2014. In Q3 2014, we announced the closure of the Joao Pessoa, Brazil facility and consolidation into two other Xerium plants. That work is fully underway.
CFO Comments
EVP and Chief Financial Officer, Cliff Pietrafitta said: "Q3 2014 constant currency net sales were 3.4% above Q3 2013. Constant currency rolls net sales increased by 12.6% from Q3 2013, primarily driven by an increase of 23.7% in North America, an increase of 19.4% in South America and an increase of 14.7% in Asia. These increases were partially offset by a decline of (4.3)% in Europe. Constant currency machine clothing sales decreased slightly by (1.5)% from Q3 2013, primarily driven by a decrease of (5.2)% in Europe and a decrease of (4.1)% in North America. These decreases were partially offset by increases of 11.4% in South America and 1.3% in Asia." See "Segment Information" and "Non-GAAP Financial Measures" below for further discussion.
Income from operations in Q3 2014 increased by $2.3 million, due to increased net sales and gross margins and reductions in SG&A, partially offset by increased restructuring expenses. Improved gross margins and reductions in SG&A were driven primarily by our restructuring initiatives and operating efficiency programs. Adjusted EBITDA in Q3 2014 was $31.5 million, or 22.7% of net sales, and was 15.8% above Q3 2013 Adjusted EBITDA of $27.2 million, or 20.2% of net sales. See "Non-GAAP Financial Measures" below.
Q3 2014 was a successful quarter related to cost-out actions. The third quarter included cost out savings of $6.9 million and we expect cost out savings for the full year to be over $25 million. The Company spent approximately $18.6 million of cash on capital expenditures and restructuring costs in Q3 2014. For the full year, we expect to spend approximately $70 million in both of these areas. In addition, in 2014, we have more spending related to longer payback projects (such as the Ba Cheng China machine clothing plant), which will not result in incremental savings or earnings in 2014. Cost-out and restructuring savings initiatives are the centerpiece of Xerium's 2014 business plan, and we still expect Adjusted EBITDA to come in at approximately $116 - 120 million, assuming foreign exchange rate assumptions and stability in market demand.
As of Q3 2014, we had an aggregate of $41.8 million available for additional borrowings under our Credit Facility and smaller lines of credit and our cash balances totaled $19.8 million. YTD 2014 free cash flow (defined as cash-flow from operations less capital expenditures) decreased $(47.2) million to $(32.3) million from $14.9 million, primarily as a result of the tax payment of $25.0 million made in August of 2014 to settle a Brazilian tax assessment and $18.1 million of increased capital expenditures from 2013 to 2014.
Capital expenditures and cash restructuring payments in Q3 2014 totaled $11.2 million and $7.4 million, respectively. Capital expenditures primarily related to longer term payback projects, such as the new plant in Ba Cheng, China. Restructuring payments primarily related to headcount reductions and the closure of the João Pessoa, Heidenheim, France and Spain facilities.
Our 2014 restructuring initiatives remain on track with the recent announcement of the closing of a sixth plant in João Pessoa, Brazil. This large-scale restructuring program is a multi-year endeavor which has included 6 plant closures and the start up of a new machine clothing plant in China and a new rolls plant in Turkey.
Trade working capital increased to $141.9 million in Q3 2014 from $141.3 million in Q4 2013. This increase was primarily the result of an increase of $2.5 million in inventory, primarily due to higher levels of work in progress to support higher sales. Partially offsetting this increase was an increase in accounts payable of $1.9 million, due to improvement in negotiated payment terms in Q3 2014 and favorable currency effects. See "Trade Working Capital Information" and "Non-GAAP Financial Measures" below for further discussion.
Net debt (which is defined as total debt less cash) increased to $455.5 million in Q3 2014 from $437.0 million in Q2 2014, primarily as a result of $30 million of new borrowings under the term loan to settle the Brazilian tax assessment. However, our net debt leverage ratio remained at 4.1x in Q3 2014 compared to 4.1x in Q2 2014 as a result of higher trailing twelve month Adjusted EBITDA.
Our effective income tax rate for Q3 2014 was 334% compared to 59.3% in Q3 2013. Excluding the effects of restructuring and the settlement of a tax assessment in Brazil, our effective tax rate was 38.0%. In Q3 2014, we incurred a one-time charge of $25 million to settle a tax assessment in Brazil. See "Effective Tax Rate" and "Non-GAAP Financial Measures" below for further discussion.
As disclosed during the prior quarter, we had been actively litigating a Brazilian tax case since Q4 2011. In Q3 2014 we chose to participate in a tax amnesty program offered by the Brazilian Revenue Department that was open to taxpayers until August 25, 2014. By electing to pay a lump sum amount, we received a reduction of 100% of the penalties and a 45% reduction of interest accrued on our tax assessment relating to tax years 2006 through 2010. As a result of entering into the amnesty program, we withdrew our appeal of the Brazilian tax case, closing out a matter that relates back to a 2005 transaction. Because tax amnesty and voluntary disclosure programs were open for tax years beyond the time period of our particular assessment, we also included in our payment to the Brazilian government amounts relating to tax years 2011 through 2013, and we adjusted tax payments related to the 2014 tax year, all of which corresponded to the same tax deductions under review in our assessment for tax years 2006 through 2010. In settling the assessed and unassessed tax debts with the Brazilian government for 2006 through 2014, we paid principal and interest totaling $18.3 million and $6.7 million, respectively. We borrowed an additional $30.0 million under our Credit Facility primarily to fund this tax settlement payment.