Harold Bevis, Xerium's President and Chief Executive Officer said:
"2013 was a year of steady trends in the Company's markets that it serves. Paper and board are the largest markets the Company serves and these markets grew between 0% and 1%. Our constant currency sales growth was slightly above that index at 1.7% but a portion of the Company's growth was one-time backlog reduction. This one-time benefit came from reducing our shippable rolls backlog through debottlenecking efforts. Adjusted for that, sales grew about 0.5%, in line with the global market. Geographically, after considering these one-time backlog adjustments, sales were also in line with reported paper and board production. Xerium's rolls business grew almost 5% in 2013. In addition, Xerium's mechanical services business, which resides in the reported rolls segment, grew 14% from 2012 to 2013. Currently, Xerium has a lower market share in Asia than in other geographies. The Company is highly focused on securing this growth opportunity with many initiatives underway."
"Xerium grew faster with its top customers, who added 2.5% in sales from 2012 to 2013, and appear to be in good health going into 2014. They continue to see movement away from newsprint and printing and writing grades of paper. However, as they rededicate and add machines to higher growth grades such as packaging and tissue, we expect that these conversions will be positive for both the paper industry and Xerium. In addition, Xerium has taken actions in 2013 (and will in 2014) to address organic sales growth opportunities in paper and non-paper product areas that have stronger growth prospects or where Xerium currently does not have an optimized product or service offering. These corrective activities are multi-year endeavors. The base market is undergoing permanent change and the Company is reorienting its product and service offerings to continue growing."
"2013 was a very successful transition year for Xerium and a year of regaining credibility in the financial markets. Our 20% improvement in Adjusted EBITDA was directly attributable to a steady base market and $23.5 million of savings related to cost-out actions. The Company spent approximately $65 million of cash on capital expenditures and restructuring costs in 2013. 2014 is expected to be a continuation of this program, and we expect to spend a similar amount to generate a similar amount of cost reduction savings in 2014. In addition, in 2014, we have more spending related to longer payback projects (such as the China machine clothing plant) which will not result in incremental savings or earnings in 2014. While cost-out and restructuring savings initiatives are the centerpiece of Xerium's 2014 business plan, the Company expects that inflation and negative price/mix will combine to limit growth in Adjusted EBITDA to be between $8 to $10 million in 2014."
"From a cash-flow perspective, the completion of the Company's raw material substitution program and additional savings planned for 2014 are expected to generate approximately $6 to $8 million of free cash flow in the second half of 2014."
Cliff Pietrafitta, Xerium's EVP and Chief Financial Officer said:
"On a constant currency basis, Q4 2013 net sales increased slightly above Q4 2012 net sales, with an increase of 6.4% in the roll covers segment partially offset by a decrease of (3.2)% in the machine clothing segment. Gross margins in Q4 2013 improved to 36.7% from 35.1% in Q4 2012. These improved results were largely due to reduced operating costs as a result of restructuring savings and operational efficiencies, partially offset by unfavorable regional and product sales mix." See "Segment Information" and "Non-GAAP Financial Measures" below.
"Our operating expenses (selling, general and administrative and research and development expenses) decreased by $3.3 million, or 8.6% to $35.0 million from operating expenses of $38.3 million in Q4 2012. This decrease is primarily a result of our cost reduction activities, partially offset by the reinstatement of the management incentive program in 2013."
"Our effective income tax rate for the year ended December 31, 2013 was 51.2%, compared to 16.5% in 2012. This effective tax rate reflects the fact that we have losses in certain jurisdictions where we receive no tax benefit, including losses related to restructuring and debt refinancing expenses. The 2013 effective tax rate also includes $6.2 million of tax benefits related to the release of a valuation allowance against Canadian deferred tax assets. Excluding the effects of the release of the valuation allowance against Canadian deferred assets, restructuring and debt refinancing expenses, our effective tax rate was 39%."
"2013 free cash flow declined to $(8.0) million, as capital expenditures increased to $44.1 million and were partially offset by cash provided by operations of $36.1 million, which included $22.3 million of cash restructuring payments. Net debt leverage declined to 3.9x at December 31, 2013 from 4.6x at December 31, 2012, primarily as a result of the improvement in Adjusted EBITDA."
"In 2013, in order to support our on-going restructuring activities, we refinanced our bank term debt credit facility to a "covenant-lite" term loan credit facility, which increased our capacity for capital expenditures and restructuring activities, increased our borrowing capacity and decreased our interest rates. In addition, on March 3, 2014, we amended our ABL Credit facility, adding a Euro tranche and increasing our borrowing limit to $55.0 million from $40.0 million. All other terms remained essentially the same as the existing ABL Credit Facility."
"Trade working capital increased to $136.4 million at December 31, 2013 from $131.0 million at December 31, 2012. This increase was primarily the result of increased sales volume on accounts receivable and a decrease in inventory turns from 2012 to 2013 related to the temporary effect of a global yarn substitution program. Increased accounts payable, as a result of increased capital expenditures included in accounts payable at year-end, partially offset the increase in accounts receivable and inventory." See "Trade Working Capital" below.
"We had a very successful year in restructuring our operations. We are at the final stage of four plant closures and we expect that we will have a fifth plant closed in Q2 of 2014. Total cash spent on restructuring in 2013 was $22.3 million and we expect to spend $24 million in 2014. However, restructuring expenditures are expected to decline to about $10 million in 2015 and 2016, combined."
"In addition to our restructuring efforts, we have partnered with Oracle, and have upgraded our management reporting throughout the organization. We have completed the first phase of this upgrade in January of 2014, and are excited about the dramatic improvement to our plant, regional and segment reporting capabilities."
