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Xerium Technologies, Inc. (NYSE:XRM), a leading global manufacturer of industrial textiles and roll covers used primarily in the paper production process, announced today the results of its operations for the quarter and nine months ended September 30, 2011. For the third quarter of 2011, net sales increased by approximately 9.1%, while income from operations improved 32.8% compared to the third quarter of 2010. For the nine months ended September 30, 2011, net sales and income from operations increased approximately 9.4% and 87.2%, respectively, compared to the nine months ended September 30, 2010. In addition, net income (loss) per diluted share increased to $0.23 from $(0.24) and to $0.38 from $(8.84) for the quarter and nine months ended September 30, 2011 compared to the same periods in 2010.
“We have continued to grow our business in spite of increasing headwinds in the economy and their impact on the paper industry. Our new product and productivity initiatives are partially, but not completely offsetting, cost pressures on raw materials, freight and labor costs. We are pleased with our progress at this point in the recovery cycle but are attentive to the inherent insecurities our customers are feeling about their end markets. Meanwhile, we have begun to use our strong cash flow to reduce our refinanced debt through voluntary prepayments,” said Stephen R. Light, Chairman of the Board, CEO and President of Xerium Technologies.
THIRD QUARTER FINANCIAL HIGHLIGHTS
Net sales for the 2011 third quarter were $148.2 million, a 9.1% increase from net sales for the 2010 third quarter of $135.9 million. Excluding currency effects of $6.4 million, third quarter 2011 net sales increased 4.3% from the third quarter of 2010, with increases of 3.2% and 6.6% in the clothing and roll covers business units, respectively.
Gross margins increased 3.0% to $54.2 million for the third quarter of 2011 from $52.6 million for the third quarter of 2010, primarily as a result of increased net sales volume and favorable currency effects. As a percentage of net sales, gross margins declined to 36.6% of net sales for the third quarter of 2011 as compared to 38.7% of net sales for the third quarter of 2010, primarily as a result of increased material costs, favorable recovery of aged inventories in the third quarter of 2010 which did not occur in 2011 and higher sales growth of lower margin product lines.
The Company’s operating expenses (selling, general and administrative, restructuring and impairments and research and development expenses) of $37.3 million for the third quarter of 2011 declined by $2.6 million, or 6.5%, from operating expenses of $39.9 million in the third quarter of 2010. The decrease in operating expenses during the third quarter of 2011 is primarily the net result of the following:
A decrease in restructuring and impairment expenses of $2.7 million in the third quarter of 2011 as compared to the third quarter of 2010 as a result of reduced restructuring activity;
A decrease of $2.6 million in general and administrative expense due to a decrease in management incentive compensation from 2010 to 2011; and
A decrease of $0.8 million in general and administrative expense due to a decrease in environmental costs from 2010 to 2011.
Partially offsetting these items were:
Unfavorable foreign currency impact of $2.2 million; and
An increase of $1.8 million selling expenses, principally due to increased net sales volume and commissions.
Interest expense decreased $2.1 million from the third quarter of 2010 to the current quarter due to $2.2 million of interest rate swaps amortized in the prior year and $1.4 million lower net interest expense as a result of lower debt balances and interest rates from 2010 to 2011. These decreases were partially offset by $0.8 million higher amortization of deferred financing costs in 2011 and unfavorable currency effects of $0.5 million. The decrease in interest expense and the increase in deferred financing costs were primarily a result of the refinancing in May of 2011.
The decrease in income tax expense in the third quarter of 2011 as compared with the third quarter of 2010 was principally due to changes in the amount of income we earned in tax paying jurisdictions relative to the amount of income we earned in non-tax paying jurisdictions.
Net income for the third quarter of 2011 was $3.5 million or $0.23 per diluted share, compared to a net loss of $(3.7) million or $(0.24) per diluted share for the third quarter of 2010. The increase is primarily a result of the items noted above.
Adjusted EBITDA (as defined by the Company’s credit facility) decreased 1.7%, or $0.5 million, to $28.6 million in the current quarter from $29.1 million in the third quarter of 2010. See “Non-GAAP Financial Measures” below for further discussion.
Unrestricted and restricted cash at September 30, 2011 was $43.0 million, compared to $34.5 million at June 30, 2011 and $52.4 million at December 31, 2010. The increase in the cash balances from June 30, 2011 is primarily due to cash provided by operating activities of $24.1 million and an increase of $5.4 million in proceeds from the sale of the facility in Australia. The increases were partially offset by debt payments of $11.7 million, capital expenditures of $6.9 million and unfavorable currency effects of $2.4 million. The decrease in the cash balances from December 31, 2010 is primarily due to capital expenditures of $18.9 million, the payment of $17.1 million deferred financing fees in connection with the debt refinancing in May of 2011 and net debt payments of $11.7 million. These decreases were partially offset by cash flow from operations of $30.8 million and proceeds from the disposal of property and equipment of $7.7 million.
Total bank debt at September 30, 2011 was $475.4 million, compared to $496.2 million at June 30, 2011 and $481.4 million at December 31, 2010. The decrease of $20.8 million from June 30, 2011 is primarily due to debt payments of $11.7 million and favorable currency effects of $9.1 million in the third quarter of 2011. The decrease of $6.0 million from December 31, 2010 is primarily due to the net debt payments of $11.7 million in 2011, partially offset by unfavorable currency effects of $5.6 million.
Capital expenditures for the nine months ended September 30, 2011 were $18.9 million, consisting of $7.8 million in growth capex and $11.1 million in maintenance capex. That compares to the same period in 2010 when the Company reported $14.4 million of capital spending, consisting of $7.6 million in growth capex and $6.8 million of maintenance capex. The Company currently targets total capital expenditures for 2011 of approximately $30 million.
REPORTING UNIT INFORMATION
The following table presents net sales for the third quarter of 2011 and 2010 by reporting unit and the effect of currency on third quarter 2011 net sales (dollars in millions):
Net Sales For The Three Months EndedSeptember 30,
Currency EffectOf $ Increase
See other Non-GAAP reconciliations in Exhibit 99.3 posted on our website.