Highlights
-Full year 2016 GAAP operating cash flow of $36.5 million and capital expenditures of $13.7 million resulting in free cash flow of $22.8 million.
-Full year 2016 sales of $471.3 million compared to $477.2 million in 2015, a 1% decline.
-Full year operating income of $46.1 million, compared to $46.0 million in 2015, approximately flat.
-Full year adjusted EBITDA of $95.4 million, compared to $101.9 million in the prior year.
-Q4 2016 sales of $113.2 million were down 2% from $115.3 million in Q4 2015. Q4 2016 operating income of $8.8 million and adjusted EBITDA of $20.4 million were flat and down 5.1%, respectively compared to Q4 2015 results.
-Began $100 million debt repayment program in 2016, and reduced total debt to $508.1 million and net debt to $511.7 million at year end 2016.
-End market outlook improving from a 38% decrease in global machine closures and improving end market exposure with greater than 75% of revenue in growing paper grades.
-Centerpiece investment of Xerium’s repositioning program was a new machine clothing plant in China, marking a $35 million investment. 2016 was a successful first year ramp-up for the plant, which is located in the largest end market in the world for Xerium’s products and services.
-New wins program delivered a record $45 million of new business in 2016 and backlog grew by 5% over the prior year. Program success is attributed to an improved geographic footprint and machines tooled to deliver the 90 new products launched since 2013.
-Further accelerated the Company’s repositioning and deleveraging with the Company’s first acquisition in 9 years. The JJ Plank Corporation/Spencer Johnston (“Spencer Johnston”) acquisition is performing in line with expectations.
Xerium Technologies, Inc. (NYSE:XRM), a leading, global provider of industrial consumable products and services, today reported fourth quarter and full year 2016 financial results.
Harold Bevis (photo), President and Chief Executive Officer said, “2016 was a noteworthy year for Xerium as the Company ramped up its first ever machine clothing plant in China, the largest market in the world for its products and services. The China facility was the largest component of our repositioning efforts, and accounted for all of the Company’s above-trend capital spending during 2013 to 2016. The Company’s successful footprint repositioning has been coupled with the global rollout of 90 new product launches during the same timeframe. The Company has secured $94 million of new business wins (sales into new customer machine positions), including a record $45 million of new business wins in 2016, resulting in a strong pipeline and 5% backlog growth over the prior year end. The rate of machine closures dramatically slowed in 2016, and we believe that balance is forming between old machines being shut down and new machines being started up.”
Full-year 2016 Highlights
In 2016 Xerium completed its large one-time repositioning which commenced in 2012, and the Company is now fully engaged with the dual effort of filling this new capacity and, at the same time, paying down debt with its free cash flow. Achievement on these initiatives began in 2016, as the Company generated $22.8 million of free cash flow. The Company utilized this free cash flow to reduce leverage in the fourth-quarter.
As a result of repositioning, the new machine clothing plant in China, and the retooling and debottlenecking of multiple other plants to accommodate its 90 new product introductions, the Company achieved $45 million of new wins in 2016 – a new record. The Company is committed to carefully pursuing and securing sustainable revenue streams with new business in growth markets, setting the stage for further progress in 2017.
In 2016 the Company also completed the acquisition of Spencer Johnston, which brings a new set of best-in-class capabilities to the Company’s rolls business, and is supportive to the de-leveraging initiative. Q4 2016 was the second full quarter of ownership of Spencer Johnston, and this fully integrated business unit is performing in line with expectations providing positive contribution to both current results and the Company’s repositioning efforts.
The Company continued to lower its costs permanently with its Lean Six Sigma program and its total cost reduction initiatives. Delivering high quality products, offsetting negative costs, inflation and mix changes remain a steady-state objective for Xerium. The Company achieved its cost-takeout objectives in 2016 and has a similar program already underway in 2017.
Q4 Financial Highlights:
Q4 net sales were $113.2 million, a decrease of 1.5% year-over-year on a constant currency basis. The decrease was largely due to a (2.7)% machine clothing decline in the quarter, which represented an improvement over the market decline rate of (5)% for the first nine months of the year. Order patterns are improving and backlogs are healthy going into 2017. Table 1 summarizes Q4 net sales and the effect of currency translation rates.
Q4 2016 gross profit was $41.9 million, or 37.1% of net sales, compared to $44.4 million, or 38.5% of net sales in Q4 2015. Machine clothing gross margin, excluding startup costs declined to 40.9% in Q4 2016 from 41.6% in Q4 2015. The decline in gross profit margin was primarily due to negative currency impacts. Rolls and service gross margin, excluding startup costs, declined to 31.7% in Q4 2016, from a gross margin of 34.9% in Q4 2015. The decline was primarily due to unfavorable product mix in Europe.
SG&A expenses (including Selling, G&A and R&D expenses) were $30.9 million, or 27.3% of net sales in Q4 2016, versus $33.3 million, or 28.9% of net sales in Q4 2015. The decrease in SG&A expenses was primarily attributable to savings achieved through the Company’s cost-out initiatives and a lump-sum distribution offered in Q4 2015 to certain US pension participants as part of the Company’s plan to reduce future pension costs.
Q4 2016 basic loss per share was $(0.55) versus Q4 2015 of $(0.40). Excluding adjustments (see Table 3) losses per share were $(0.25) in Q4 2016, compared to $(0.09) in Q4 2015 as a result of lower sales volumes and gross margins, partially offset by lower SG&A costs.
GAAP operating income in the fourth quarter of 2016 was $8.8 million, or 7.8% of sales, approximately flat with the year-ago period. Q4 2016 adjusted EBITDA declined to $20.4 million, or 18.0% of net sales, compared to $21.5 million, or 18.6% of net sales in 2015. In addition to interest, taxes, depreciation and amortization, adjusted EBITDA excludes expenses related to the Company’s restructuring activities, plant start-up costs, stock based compensation, foreign currency gains and losses and non-recurring expenses.
Cash taxes were $1.7 million in Q4 2016. Full year 2016 cash taxes were $13.7 million. Cash taxes are primarily impacted by income the Company earns in tax paying jurisdictions relative to income it earns in non-tax paying jurisdictions, primarily the United States.
The Company generated GAAP operating cash flow of $14.5 million and free cash flow of $10.5 million during the fourth quarter of 2016 and paid down debt with the excess amounts. Net debt was $511.7 million at the end of Q4 2016 compared to $522.9 million at the end of Q3 2016. The Company's net debt leverage ratio on a pro forma basis is 5.1x after factoring in the acquisition of Spencer Johnston (incremental Spencer Johnston pro forma leverage includes incremental debt of $18 million and pro forma full year EBITDA of $6 million). The Company plans to utilize its free cash flow to pay down debt and de-lever over the remainder of its debt maturities.
2017 Outlook
The industry has gone through a hard business cycle in the last few years due to the strong US dollar and a high rate of machine closures. At the same time, the Company has repositioned itself into growth markets with new products versus harvesting its declining legacy positions. The Company has completed the above-trend investment part of this repositioning, and is achieving its objectives of securing sustainable new business in targeted markets.
The high rate of machine closures is abating and this will lessen the pressure on the Company’s legacy financial model. Industry consensus points to similar trends of improving market prospects, and a leading third-party market forecast estimates that a large number of new machines will be built, especially in China. A leading indicator of successful repositioning results is the Company’s New Wins metric, which tracks successful new business secured with growth companies in our targeted areas. The New Wins program is gaining momentum, production bottlenecks are being resolved with regard to the 90 new products, and backlogs are strengthening.
With an improving backdrop and the effect of repositioning to fully offset an uncertain currency outlook and graphical grade pressure the Company expects similar financial outcomes for adjusted EBITDA to 2016. The Company also expects 2017 free cash flow to be modestly lower, as higher cash interest will not be fully offset by improved operational cash flow. The Company does expect strengthening business fundamentals and will update comments regarding this outlook as these events unfold. Given this outlook, the Company is well positioned to execute against its $100 million debt pay down program and achieve a naturally growing company that is attached to growth markets and growth customers.
(Xerium Technologies Inc.)