XERIUM TECHNOLOGIES INC - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INC	cpxrm-ex322_2016q3.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INC	hbxrm-ex321_2016q3.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INC	cpxrm-ex31_2016q3.htm
EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INC	hbxrm-ex31x12016q3.htm
EX-10.2 - EXHIBIT 10.2 - XERIUM TECHNOLOGIES INC	abl2ndamendxrm-ex10x22016q3.htm
EX-10.1 - EXHIBIT 10.1 - XERIUM TECHNOLOGIES INC	abl1stamendxrm-ex10x12016q3.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________



ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-32498

________________________

Xerium Technologies, Inc.

(Exact name of registrant as specified in its charter)

________________________



DELAWARE	42-1558674
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

14101 Capital Boulevard Youngsville, North Carolina	27596
(Address of principal executive offices)	(Zip Code)

(919) 526-1400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	£		Accelerated filer	x
Non-accelerated filer	£	(Do not check if a smaller reporting company)	Smaller reporting company	£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes ¨ No ý

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No ¨

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of October 26, 2016 was 16,125,868

TABLE OF CONTENTS



Part I. Financial Information
		Page
Item 1.	Unaudited Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II. Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

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PART I. FINANCIAL INFORMATION



ITEM 1.	UNAUDITED FINANCIAL STATEMENTS

Xerium Technologies, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands and unaudited)



	September 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	8,380		$	9,839
Accounts receivable, net	72,485			68,562
Inventories, net	72,466			71,698
Prepaid expenses	7,520			6,649
Other current assets	18,515			16,869
Total current assets	179,366			173,617
Property and equipment, net	301,721			297,083
Goodwill	59,991			58,599
Intangible assets	7,894			1,547
Non-current deferred tax asset	12,224			9,325
Other assets	11,366			10,203
Total assets	$	572,562		$	550,374
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Notes payable	$	7,840		$	6,556
Accounts payable	35,834			40,696
Accrued expenses	55,641			56,076
Current maturities of long-term debt	6,771			5,410
Total current liabilities	106,086			108,738
Long-term debt, net of current maturities	479,579			462,470
Liabilities under capital leases	20,366			8,737
Non-current deferred tax liability	10,401			8,770
Pension, other post-retirement and post-employment obligations	60,018			63,606
Other long-term liabilities	5,956			11,123
Commitments and contingencies
Stockholders’ deficit
Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of September 30, 2016 and December 31, 2015	—			—
Common stock, $0.001 par value, 20,000,000 shares authorized; 16,125,868 and 15,745,914 shares outstanding as of September 30, 2016 and December 31, 2015, respectively	16			16
Paid-in capital	430,386			430,054
Accumulated deficit	(434,121		)	(421,448		)
Accumulated other comprehensive loss	(106,125		)	(121,692		)
Total stockholders’ deficit	(109,844		)	(113,070		)
Total liabilities and stockholders’ deficit	$	572,562		$	550,374

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Xerium Technologies, Inc.

Consolidated Statements of Operations

(Dollars in thousands, except per share data and unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net Sales	$	119,191		$	117,739		$	358,129		$	361,896
Costs and expenses:
Cost of products sold	75,385			71,252			222,595			217,413
Selling	15,816			15,889			47,272			48,645
General and administrative	12,644			14,370			37,577			40,261
Research and development	1,786			1,841			5,271			5,695
Restructuring	2,493			5,001			8,103			12,734
	108,124			108,353			320,818			324,748
Income from operations	11,067			9,386			37,311			37,148
Interest expense, net	(12,216		)	(9,775		)	(33,215		)	(28,144		)
Loss on extinguishment of debt	(11,736		)	—			(11,736		)	—
Foreign exchange (loss) gain	(429		)	2,059			(476		)	2,150
(Loss) income before provision for income taxes	(13,314		)	1,670			(8,116		)	11,154
Provision for income taxes	(25		)	(755		)	(4,557		)	(9,209		)
Net (loss) income	$	(13,339	)	$	915		$	(12,673	)	$	1,945
Comprehensive (loss) income	$	(10,988	)	$	(11,012	)	$	2,894		$	(33,706	)
Net (loss) income per share:
Basic	$	(0.83	)	$	0.06		$	(0.79	)	$	0.12
Diluted	$	(0.83	)	$	0.06		$	(0.79	)	$	0.12
Shares used in computing net (loss) income per share:
Basic	16,063,140			15,667,103			15,949,816			15,595,793
Diluted	16,063,140			16,567,070			15,949,816			16,440,525

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Xerium Technologies, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands and unaudited)



	Nine Months Ended September 30,
	2016			2015
Operating activities
Net (loss) income	$	(12,673	)	$	1,945
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	2,123			2,690
Depreciation	24,206			21,397
Amortization of intangible assets	573			228
Deferred financing cost amortization	2,234			2,641
Foreign exchange loss (gain) on revaluation of debt	43			(2,115		)
Deferred taxes	(3,066		)	(1,571		)
Asset impairment	—			1,178
Loss on disposition of property and equipment	50			(85		)
Loss on extinguishment of debt	11,736			—
(Benefit) provision for doubtful accounts	(74		)	857
Change in assets and liabilities which provided (used) cash:
Accounts receivable	1,303			(2,789		)
Inventories	5,400			3,640
Prepaid expenses	(613		)	(717		)
Other current assets	(1,573		)	(2,025		)
Accounts payable and accrued expenses	(9,197		)	7,257
Deferred and other long-term liabilities	1,495			(5,551		)
Net cash provided by operating activities	21,967			26,980
Investing activities
Capital expenditures	(9,614		)	(40,376		)
Proceeds from disposals of property and equipment	94			104
Acquisition costs	(16,225		)	—
Net cash used in investing activities	(25,745		)	(40,272		)
Financing activities
Proceeds from borrowings	541,500			57,428
Net increase in notes payable	1,121			6,759
Principal payments on debt	(510,836		)	(45,573		)
Payment of financing fees	(22,807		)	(18		)
Payment of obligations under capital leases	(2,994		)	(887		)
Employee taxes paid on equity awards	(1,791		)	(2,124		)
Net cash provided by financing activities	4,193			15,585
Effect of exchange rate changes on cash flows	(1,874		)	(1,106		)
Net (decrease) increase in cash	(1,459		)	1,187
Cash and cash equivalents at beginning of period	9,839			9,517
Cash and cash equivalents at end of period	$	8,380		$	10,704

Accrued construction in process	$	—		$	1,952

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

1. Description of Business and Significant Accounting Policies

Description of Business

Xerium Technologies, Inc. (the "Company") is a leading global provider of industrial consumables and mechanical services used in the production of paper, paperboard, building products and nonwoven materials. Its operations are strategically located in the major paper-making regions of the world, including North America, Europe, Latin America and Asia-Pacific.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements at September 30, 2016 and for the three and nine months ended September 30, 2016 and 2015 include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In management’s opinion, these unaudited condensed consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2015 as reported on the Company's Annual Report on Form 10-K filed on March 14, 2016.

Accounting Policies

Inventories, net

Inventories are generally valued at the lower of cost or market using the first-in, first-out (FIFO) method. Raw materials are valued principally on a weighted average cost basis. The Company’s work in process and finished goods are specifically identified and valued based on actual inputs to production. Provisions are recorded as appropriate to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires management to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business, while considering the general aging of inventory and factoring in any new business conditions.

The components of inventories are as follows at:



	September 30, 2016			December 31, 2015
Raw materials	$	15,065		$	12,389
Work in process	26,465			25,203
Finished goods (includes consigned inventory of $6,565 at September 30, 2016 and $6,513 at December 31, 2015)	37,828			40,058
Inventory allowances	(6,892		)	(5,952		)
	$	72,466		$	71,698

Goodwill

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Intangibles—Goodwill and Other Intangible Assets (“Topic 350”). Topic 350 requires that goodwill and intangible assets that have indefinite lives not be amortized, but instead, must be tested for impairment at least annually or whenever events or business conditions warrant. During the three and nine months ended September 30, 2016, the Company evaluated events and business conditions to determine if a test for an impairment of goodwill was warranted. No such events or business conditions took place during this period, therefore no test was determined to be warranted at September 30, 2016.

Warranties

The Company offers warranties on certain roll products that it sells. The specific terms and conditions of these warranties vary depending on the product sold, the country in which the product is sold and arrangements with the customer. The Company

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estimates the costs that may be incurred under its warranties and records a liability in Accrued Expenses on its Consolidated Balance Sheet for such costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary. The table below represents the changes in the Company’s warranty liability for the nine months ended September 30, 2016 and 2015:



	Beginning Balance		Charged to Cost of Sales		Effect of Foreign Currency Translation			Deduction from Reserves			Ending Balance
Nine Months Ended September 30, 2016:	$	2,175	$	1,207	$	70		$	(1,228	)	$	2,224
Nine Months Ended September 30, 2015:	$	2,685	$	1,184	$	(144	)	$	(1,580	)	$	2,145

Net (Loss) Income Per Common Share

Net (loss) income per common share has been computed and presented pursuant to the provisions of ASC Topic 260, Earnings per Share (“Topic 260”). Net (loss) income per share is based on the weighted-average number of shares outstanding during the period. As of September 30, 2016 and 2015, the Company had outstanding restricted stock units (“RSUs”), deferred stock units (“DSUs”) and options.

The following table sets forth the computation of basic and diluted weighted-average shares:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Weighted-average common shares outstanding–basic	16,063,140	15,667,103	15,949,816	15,595,793
Dilutive effect of stock-based compensation awards outstanding	—	899,967	—	844,732
Weighted-average common shares outstanding–diluted	16,063,140	16,567,070	15,949,816	16,440,525

The following table sets forth the aggregate of the potentially dilutive securities that were outstanding in the three and nine months ended September 30, 2016 and 2015, but were not included in the computation of diluted earnings per share because the impact would have been anti-dilutive:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Anti-dilutive securities	919,231	24,002	919,231	20,237

Impairment

The Company reviews its long-lived assets that have finite lives for impairment in accordance with ASC Topic 360, Property, Plant, and Equipment (“Topic 360”). This topic requires that companies evaluate the fair value of long-lived assets based on the anticipated undiscounted future cash flows to be generated by the assets when indicators of impairment exist to determine if there is impairment to the carrying value. Any change in the carrying amount of an asset as a result of the Company's evaluation has been recorded in either restructuring expense, if it was a result of the Company's restructuring activities, or general and administrative expense for all other impairments in the consolidated statements of operations. For the three and nine months ended September 30, 2016 and 2015, the Company had no impairment charges included in restructuring expense.

New Accounting Pronouncements

In March of 2016, the FASB issued Accounting Standards Update No 2016-09 Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 will change certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is required to be adopted in January of 2017. The Company early adopted this standard at June 30, 2016. As of September 30, 2016, the adoption of the standard has resulting in the classification of $1.8 million and $2.2 million of employee taxes paid on equity awards as a financing activity in the statement of cash flows, for the nine months ended September 30, 2016

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and September 30, 2015 respectively. The remaining provisions of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.

In February of 2016, the FASB issued Accounting Standards Update No 2016-02 Leases ("ASU 2016-02"). ASU 2016-02 includes final guidance that requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief. Full retrospective application is prohibited. ASU 2016-02 is effective for public companies with annual periods beginning after 15 December 2018, and interim periods within those years. For all other entities, it is effective for annual periods beginning after 15 December 2019, and interim periods the following year. Early adoption is permitted for all entities. The Company is in the process of evaluating this accounting standard update.

In November of 2015, the FASB issued ASU 2015-17 Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). This guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. For public companies, the guidance is effective for financial statements issued for annual periods beginning after 15 December 2016 (i.e., 2017 for a calendar-year company) and interim periods within those annual periods. For all other entities, the guidance is effective for financial statements issued for annual periods beginning after 15 December 2017 (i.e., 2018 for a calendar-year company), and interim periods within annual periods beginning a year later. Early adoption of the guidance is permitted. Companies can adopt the guidance either prospectively or retrospectively. The Company is in the process of evaluating this accounting standard update and does not expect that adopting ASU 2015-17 will have a material impact on its consolidated financial statements.

In July of 2015, the FASB issued Accounting Standards Update Inventory ("ASU 2015-11"). ASU 2015-11 applies only to first-in, first-out (FIFO) and average cost inventory costing methods and will reduce costs and increase comparability for these methods. There will be no change for last-in, first-out, (LIFO) or retail inventory methods as the costs of transitioning to a new method would outweigh the benefits due to the complexity of these methods. Under this ASU, inventory should be measured at the lower of cost and net realizable value (selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation). When the net realizable value of inventory is less than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. This ASU more closely aligns the measurement of inventory under GAAP with International Financial Reporting Standards guidance. The amendments are effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and for other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively, and early application is permitted as of the beginning of an interim or annual reporting period. The Company is in the process of evaluating this accounting standard update.

In May of 2014, the FASB issued Accounting Standard Update No. 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when it satisfies the performance obligations. The Company will also be required to disclose information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is required to be adopted in January of 2018. Retrospective application is required either to all periods presented or with the cumulative effect of initial adoption recognized in the period of adoption. In addition, in March of 2016, the FASB issued Accounting Standard Update No. 2016-08 Principal versus Agent Considerations (Reporting Revenue Gross vs. Net) ("ASU 2016-08"). ASU 2016-08 amends the principal versus agent guidance in ASU 2014-09, and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transfered to the customer. ASU 2014-09 is required to be adopted in January of 2018. The Company is in the process of evaluating this accounting standard update.

2. Business Acquisitions

On May 4, 2016, the Company acquired JJ Plank Corporation/Spencer Johnston (“Spencer Johnston”), a spreader roll company headquartered in Neenah, Wisconsin for a total purchase price of $18.0 million. This acquisition adds diversity to Xerium’s growing rolls business in North America and will expand its current product offerings, service capabilities and its

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markets served, strengthen its financial profile and grow its customer base. The Company acquired all of the assets and assumed certain liabilities of Spencer Johnston and obtained one hundred percent of the voting equity interest.

Because the transaction was completed on May 4, 2016, the final purchase price allocation is preliminary and subject to change based on additional reviews performed, such as asset verification. Specific accounts subject to ongoing purchase accounting adjustments include but are not limited to working capital and goodwill. Therefore, the measurement period remains open as of September 30, 2016. The Company anticipates completing these purchase price accounting adjustments during the fourth quarter of 2016.

The purchase price of $18.0 million resulted in net assets acquired other than goodwill of $15.3 million and goodwill of $2.7 million. All of the goodwill is allocated to the Rolls business segment. The Company made $0.9 million in goodwill reductions during the quarter ending September 30, 2016, a $0.4 million purchase price adjustment (working capital true-up) and a $0.5 million inventory valuation adjustment.

Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed. The goodwill was generated by the synergies the transaction provides.

The Company incurred roughly $0.7 million of transaction related expenses during the nine months ended September 30, 2016. These expenses were charged to SG&A expense in the period incurred.

3. Derivatives and Hedging

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. From time to time, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known cash amounts, the value of which are determined by interest rates or foreign exchange rates.

Cash Flow Hedges of Interest Rate Risk

From time to time, the Company uses interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate movements. However, at September 30, 2016, the Company had no interest rate swaps.

Non-designated Hedges of Foreign Exchange Risk

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates, but do not meet the strict hedge accounting requirements of ASC Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

The Company, from time to time, may enter into foreign exchange forward contracts to fix currencies at specified rates based on expected future cash flows to protect against the fluctuations in cash flows resulting from sales denominated in foreign currencies. Additionally, to manage its exposure to fluctuations in foreign currency on intercompany balances and certain purchase commitments, the Company from time to time may use foreign exchange forward contracts.

As of September 30, 2016 and December 31, 2015, the Company had outstanding derivatives that were not designated as hedges in qualifying hedging relationships. The value of these contracts is recognized at fair value based on market exchange forward rates and is recorded in other assets or other liabilities on the Consolidated Balance Sheets. The following represents the fair value of these derivatives at September 30, 2016 and December 31, 2015 and the change in fair value included in foreign exchange gain (loss) in the three and nine months ended September 30, 2016 and 2015:

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	September 30, 2016			December 31, 2015
Fair value of derivative (liability)	$	(739	)	$	(1,188	)
	Three Months Ended September 30, 2016			Three Months Ended September 30, 2015
Change in fair value of derivative included in foreign exchange (loss) gain	$	24		$	(743	)
	Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2015
Change in fair value of derivative included in foreign exchange (loss) gain	$	93		$	(2,197	)

The following represents the notional amounts of foreign exchange forward contracts at September 30, 2016:



	Notional Sold		Notional Purchased
Non-designated hedges of foreign exchange risk	$	4,116	$	(60,334	)

Fair Value of Derivatives Under ASC Topic 820

ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, Topic 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs including fair value of investments that do not have the ability to redeem at net asset value as of the measurement date, or during the first quarter following the measurement date. The derivative assets or liabilities are typically based on an entity’s own assumptions, as there is little, if any, market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the asset or liability. The Company determined that its derivative valuations, which are based on market exchange forward rates, fall within Level 2 of the fair value hierarchy.

4. Long term Debt

At September 30, 2016 and December 31, 2015, long term debt consisted of the following:

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	September 30, 2016			December 31, 2015
Notes (Secured), payable semi-annually–U.S. Dollar denominated interest rate fixed at 9.50%. Sold at a price equal to 98.54% of their face value. Matures August of 2021.	$	480,000		$	—
Senior secured term loan facility, payable quarterly, U.S. Dollar denominated–LIBOR (minimum 1.25%) plus 5.0% (6.25%) net of $0.6 million discount. Matures May of 2019.	$	—		$	223,937
Senior Notes (Unsecured), payable semi-annually–U.S. Dollar denominated interest rate fixed at 8.875%. Matures June of 2018.	—			236,410
Notes payable, working capital loan, variable interest rate at 2.05%. Matures June 30, 2017, with one-year rollover option.	7,840			6,556
Fixed asset loan contract, variable interest rate of 5.78%. Matures June of 2020.	8,044			8,548
Other debt	15,077			6,278
Total debt	510,961			481,729
Less deferred financing costs and debt discount	(16,771		)	(7,293		)
Less current maturities of long term debt and notes payable	(14,611		)	(11,966		)
Total long term debt	$	479,579		$	462,470

On August 9, 2016, the Company closed on $480 million aggregate principal amount of 9.5% Senior Secured Notes due August 2021 (the "Notes"), which were sold at a price equal to 98.54% of their face value. The Notes will pay interest semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017 and will mature on August 15, 2021, unless earlier redeemed or repurchased.

The Indenture to the Notes and the ABL Facility contain certain customary covenants that, subject to exceptions, restrict our ability to, among other things:


•	declare dividends or redeem or repurchase equity interests;

•prepay, redeem or purchase debt;

• incur liens and engage in sale-leaseback transactions;

• make loans and investments;

• incur additional indebtedness;

•amend or otherwise alter debt and other material agreements;

•engage in mergers, acquisitions and asset sales;

•transact with affiliates; and

•engage in businesses that are not related to the Company's existing business.

The Company used the net proceeds from the offering to repay all amounts outstanding under its existing term loan credit facility, to redeem all of its 8.875% Senior Notes due 2018 at a redemption price equal to 102.219% of the principal amount thereof, together with accrued and unpaid interest, to the date of redemption, to pay fees and expenses relating to these transactions, and for working capital and other general corporate purposes.

On May 17, 2013, The Company also entered into a Revolving Credit and Guaranty Agreement originally for a $40.0 million asset-based revolving credit facility subject to a borrowing base among Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, certain direct and indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions (the "Domestic Revolver"). On March 3, 2014, the Company entered into an amendment to the Revolving Credit and Guaranty Agreement (as amended, the “ABL Facility,” and collectively with the Term Credit Facility, the “Credit Facility”), increasing the aggregate availability under the ABL Facility to $55 million. On November 3, 2015, the Company refinanced its then existing ABL Facility and entered into a new Revolving Credit and Guaranty Agreement (as amended, the "ABL Facility") with one of its existing ABL lenders. The amount of the ABL Facility continues to provide aggregate availability of $55 million and the collateral pledged thereunder has remained the same. The ABL Facility matures in November of 2020 and accrues interest at either an Alternative Base rate (Prime plus 75 bps) or Fixed LIBOR (LIBOR +175 bps). As of September 30, 2016 these rates were 4.25% and 2.40%, respectively.

On July 17, 2015 (the "Closing Date"), Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of the Company entered into and closed a Fixed Assets Loan Contract (the "Loan Agreement") with the Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch (the “Bank”) with respect to a RMB 58.5 million loan, which was approximately $9.4 million USD on July 17, 2015. The loan is secured by pledged machinery and equipment of Xerium China

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and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of the Company, pursuant to guarantee agreements (the "Guarantee Agreements"). Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate at September 30, 2016 is approximately 5.8%. The interest rate will be adjusted every 12 months during the term of the loan, based on the benchmark interest rate adjustment. Interest under the loan is payable quarterly in arrears. Principal on the loan is to be repaid in part every six months following the Closing Date, in accordance with a predetermined schedule set forth in the Loan Agreement. Proceeds of the Loan will be used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.

On May 26, 2011, the Company completed a refinancing transaction, which replaced certain of its then outstanding indebtedness with $240 million aggregate principal amount of 8.875% senior unsecured notes. The notes were repaid with proceeds from the 9.5% senior secured notes.

On May 17, 2013, the Company entered into a Credit and Guaranty Agreement for a $200.0 million (increased to $230 million on August 18, 2016) term loan credit facility (the “Term Credit Facility”), net of a discount of $1.0 million, among the Company, certain direct and indirect U.S. subsidiaries of the Company as guarantors and certain financial institutions. This facility was repaid with proceeds from the 9.5% senior secured notes.

As of September 30, 2016, the outstanding balance of the Company's term debt under its ABL Facility and Notes was $480.0 million. In addition, as of September 30, 2016, an aggregate of $22.1 million is available for additional borrowings. This availability represents a borrowing base of $34.2 million less $12.1 million of that facility committed for letters of credit or additional borrowings.

As of September 30, 2016, the carrying value of the Company’s long term debt was $496.4 million and its fair value was approximately $503.6 million. The Company determined the fair value of its debt utilizing significant other observable inputs (Level 2 of the fair value hierarchy).

Capitalized Lease Liabilities

As of September 30, 2016, the Company had capitalized lease liabilities totaling $20.4 million. These amounts represent the lease on the corporate headquarters and the Kunshan, China facility, as well as other leases for software, vehicles and machinery and equipment. In addition, in April of 2016, the Company entered into sales - lease back arrangements totaling $6.0 million for various machinery and equipment in North America. The proceeds were used to partially fund the Spencer Johnston acquisition, which closed in May of 2016.

5. Income Taxes

The Company utilizes the liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under Topic 740, deferred tax assets and liabilities are determined based on the difference between their financial reporting and tax basis. The assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces its deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making this determination, the Company evaluates all available information including the Company’s financial position and results of operations for the current and preceding years, as well as any available projected information for future years.

For the three and nine months ended September 30, 2016, the provision for income taxes was $0.0 million and $4.6 million as compared to $0.8 million and $9.2 million for the three and nine months ended September 30, 2015. The decrease in tax expense in the three and nine months ended September 30, 2016 was primarily attributable to the geographic mix of earnings, as well as tax benefits from interest deductions in Brazil and the impact of the intra-period allocation as a result of the loss from continuing operations and income from other comprehensive income. Generally, the provision for income taxes is primarily impacted by income earned in tax paying jurisdictions relative to income earned in non-tax paying jurisdictions. The majority of income recognized for purposes of computing the effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.4%; however, permanent income adjustments recorded against pre-tax earnings may result in an effective tax rate that is higher or lower than the statutory tax rate in these jurisdictions. The Company generates losses in certain jurisdictions for which no tax benefit is realized, as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved in the valuation allowance. For this reason, the Company recognizes minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves, the geographic mix of the Company’s pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings.

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As the Company continues to reorganize and restructure its operations, it is possible that deferred tax assets, for which no income tax benefit has previously been provided, may more likely than not become realized. The Company continues to evaluate future operations and will record an income tax benefit in the period where it believes it is more likely than not that the deferred tax asset will be able to be realized. The most material unrecognized deferred tax asset relates to the U.S. By 2029, future U.S. earnings ranging between $40 million and $120 million, generated by U.S. earnings from continuing operations or qualified tax planning strategies, would be required in order to fully recognize the U.S. deferred tax asset. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.

As of September 30, 2016, the Company had a gross amount of unrecognized tax benefit of $7.9 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.4 million during the nine months ended September 30, 2016, as a result of new positions related to the current year and foreign currency effects.

The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, which were $0.1 million and $0.1 million related to the unrecognized tax benefits for the three and nine months ended September 30, 2016. The tax years 2002 through 2015 remain open to examination in a number of the major tax jurisdictions to which the Company and its subsidiaries are subject. The Company believes that it has made adequate provisions for all income tax uncertainties.

6. Pensions, Other Post-retirement and Post-employment Benefits

The Company accounts for its pensions, other post-retirement and post-employment benefit plans in accordance with ASC Topic 715, Compensation—Retirement Benefits (“Topic 715”). The Company has defined benefit pension plans covering substantially all of its U.S. and Canadian employees and employees of certain subsidiaries in other countries. Benefits are generally based on the employee’s years of service and compensation. These plans are funded in conformity with the funding requirements of applicable government regulations. The Company does not fund certain plans, as funding is not required. The Company plans to continue to fund its U.S. defined benefit plans to comply with the Pension Protection Act of 2006. In addition, the Company also intends to fund its U.K. and Canadian defined benefit plans in accordance with local regulations.

Curtailment accounting was triggered with the June 30, 2016 freeze of a North America rolls plant’s pension plan. As a result, a curtailment gain was recorded in the second quarter of 2016 in the amount of $2.7 million, as a reduction to pension liability, and a decrease to other comprehensive loss.

As required by Topic 715, the following tables summarize the components of net periodic benefit cost:

Defined Benefit Plans



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Service cost	$	308		$	765		$	1,131		$	2,155
Interest cost	1,133			1,506			4,149			4,273
Expected return on plan assets	(1,182		)	(1,638		)	(4,326		)	(4,645		)
Amortization of net loss	428			676			1,561			1,932
Net periodic benefit cost	$	687		$	1,309		$	2,515		$	3,715

7. Comprehensive (Loss) Income and Accumulated Other Comprehensive Loss

Comprehensive (loss) income for the three and nine months ended September 30, 2016 (net of tax expense of $803 thousand and $1,541 thousand) and 2015 (net of a tax benefit of $97 thousand and net of tax expense of $183 thousand) is as follows:

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net (loss) income	$	(13,339	)	$	915		$	(12,673	)	$	1,945
Foreign currency translation adjustments	1,625			(14,333		)	11,353			(40,701		)
Pension liability changes under Topic 715	726			2,320			4,214			4,797
Change in value of derivative instruments	—			86			—			253
Comprehensive (loss) income	$	(10,988	)	$	(11,012	)	$	2,894		$	(33,706	)

The components of accumulated other comprehensive loss for the three months ended September 30, 2016 are as follows (net of tax benefits of $5.5 million):



	Foreign Currency Translation Adjustment			Pension Liability Changes Under Topic 715			Change in Value of Derivative Instruments		Accumulated Other Comprehensive (Loss) Income
Balance at June 30, 2016	$	(76,254	)	$	(32,271	)	$	49	$	(108,476	)
Other comprehensive income before reclassifications	1,625			298			—		1,923
Pension curtailment	—			—					—
Amounts reclassified from other comprehensive loss:
Amortization of actuarial losses	—			428			—		428
Net current period other comprehensive income	1,625			726			—		2,351
Balance at September 30, 2016	$	(74,629	)	$	(31,545	)	$	49	$	(106,125	)

The components of accumulated other comprehensive loss for the nine months ended September 30, 2016 are as follows (net of tax benefits of $5.5 million):



	Foreign Currency Translation Adjustment			Pension Liability Changes Under Topic 715			Change in Value of Derivative Instruments		Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2015	$	(85,982	)	$	(35,759	)	$	49	$	(121,692	)
Other comprehensive income before reclassifications	11,353			(48		)	—		11,305
Pension curtailment	—			2,701			—		2,701
Amounts reclassified from other comprehensive loss:
Amortization of actuarial losses	—			1,561			—		1,561
Net current period other comprehensive income	11,353			4,214			—		15,567
Balance at September 30, 2016	$	(74,629	)	$	(31,545	)	$	49	$	(106,125	)

For the three and nine months ended September 30, 2016, the amortization of actuarial losses is included in cost of products sold and general and administrative expenses in the Consolidated Statements of Operations.

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8. Restructuring Expense

For the nine months ended September 30, 2016, the Company incurred restructuring expenses of $8.1 million. These included $1.4 million of charges related to the closure of the Middletown, Va. facility and $6.7 million of charges relating to headcount reductions and other costs related to previous plant closures. For the nine months ended September 30, 2015, the Company incurred restructuring expenses of $12.7 million. These included charges of $4.1 million relating to the closure of the Joao Pessoa, Brazil plant $4.5 million charges related to the closure of Warwick, Canada machine clothing facility, and $4.1 million of charges relating to headcount reductions and other costs related to previous plant closures.

The following table sets forth the significant components of the restructuring accrual (included in Accrued Expenses on our Consolidated Balance Sheet), including activity under restructuring programs for the nine months ended September 30, 2016 and 2015:



	Balance at December 31, 2015		Charges		Currency Effects		Cash Payments			Balance at September 30, 2016
Severance and other benefits	$	5,308	$	4,328	$	73	$	(5,010	)	$	4,699
Facility costs and other	903		3,775		12		(4,267		)	423
Total	$	6,211	$	8,103	$	85	$	(9,277	)	$	5,122



	Balance at December 31, 2014		Charges (1)		Currency Effects			Cash Payments			Balance at September 30, 2015
Severance and other benefits	$	4,880	$	6,007	$	(469	)	$	(4,744	)	$	5,674
Facility costs and other	818		5,741		(76		)	(5,588		)	895
Total	$	5,698	$	11,748	$	(545	)	$	(10,332	)	$	6,569

(1) Excludes $1.0 million of impairment expense.

Restructuring and impairment expense by segment, which is not included in Segment Earnings in Note 9, is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Clothing	$	1,803	$	4,414	$	4,930	$	11,516
Roll Covers	637		540		2,478		827
Corporate	53		47		695		391
Total	$	2,493	$	5,001	$	8,103	$	12,734

9. Business Segment Information

The Company is a global manufacturer and supplier of consumable products used primarily in the production of paper and is organized into two reportable segments: clothing and roll covers. The clothing segment represents the manufacture and sale of synthetic textile belts used to transport paper along the length of papermaking machines. The roll covers segment primarily represents the manufacture and refurbishment of covers used on the steel rolls of papermaking machines and the servicing of those rolls. The Company manages each of these operating segments separately.

Management evaluates segment performance based on adjusted earnings before interest, taxes, depreciation and amortization, yet after allocation of corporate charges. Such measure is then adjusted to exclude items that are of an unusual nature and are not used in measuring segment performance or are not segment specific (“Segment Earnings (Loss)”). The accounting policies of these segments are the same as those for the Company as a whole. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.

Summarized financial information for the Company’s reportable segments is presented in the tables that follow for the three and nine months ended September 30, 2016 and 2015.

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	Clothing		Roll Covers		Corporate			Total
Three months ended September 30, 2016
Net Sales	$	71,033	$	48,158	$	—		$	119,191
Segment Earnings (Loss)	$	17,287	$	8,613	$	(3,020	)	$	22,880
Three months ended September 30, 2015
Net Sales	$	72,536	$	45,203	$	—		$	117,739
Segment Earnings (Loss)	$	22,230	$	9,685	$	(3,654	)	$	28,261

Nine months ended September 30, 2016
Net Sales	$	217,189	$	140,940	$	—		$	358,129
Segment Earnings (Loss)	$	57,222	$	28,514	$	(11,286	)	$	74,451
Nine months ended September 30, 2015
Net Sales	$	228,971	$	132,925	$	—		$	361,896
Segment Earnings (Loss)	$	66,076	$	26,864	$	(10,467	)	$	82,473

Provided below is a reconciliation of Segment Earnings (Loss) to (Loss) Income before provision for income taxes for the three and nine months ended September 30, 2016 and 2015, respectively.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Segment Earnings (Loss):
Clothing	$	17,287		$	22,230		$	57,222		$	66,076
Roll Covers	8,613			9,685			28,514			26,864
Corporate	(3,020		)	(3,654		)	(11,286		)	(10,467		)
Stock-based compensation	(697		)	(1,064		)	(2,123		)	(2,690		)
Inventory write-off related to closed facilities	—			(465		)	—			(465		)
Idle equipment asset impairment	—			(149		)	—			(149		)
Interest expense, net	(12,216		)	(9,775		)	(33,215		)	(28,144		)
Depreciation and amortization	(8,394		)	(7,207		)	(24,779		)	(21,625		)
Loss on extinguishment of debt	(11,736		)	—			(11,736		)	—
Restructuring expense	(2,493		)	(5,001		)	(8,103		)	(12,734		)
Other non-recurring expense	(85		)	(1,552		)	(752		)	(2,402		)
Plant startup costs	(573		)	(1,378		)	(1,858		)	(3,110		)
(Loss) Income before provision for income taxes	$	(13,314	)	$	1,670		$	(8,116	)	$	11,154

10. Commitments and Contingencies

The Company is involved in various legal matters which have arisen in the ordinary course of business as a result of various immaterial labor claims, taxing authority reviews and other routine legal matters. As of September 30, 2016, the Company accrued an immaterial amount in its financial statements for these matters for which the Company believed the possibility of loss was probable and was able to estimate the damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its financial position, results of operations or cash flow. The Company believes that any additional liability in excess of amounts provided which may result from the resolution of legal matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company.

11. Stock-Based Compensation and Stockholders’ Deficit

The Company records stock-based compensation expense in accordance with ASC Topic 718, Accounting for Stock Compensation and has used the straight-line attribution method to recognize expense for RSUs, options and DSUs. The Company recorded stock-based compensation expense during the three months ended September 30, 2016 and September 30, 2015 as follows:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
RSU, Options and DSU Awards (1)	$	697	$	1,064	$	2,123	$	2,690


(1)	Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors.

Long-Term Incentive Program—2016 LTIP

On May 4, 2016, the Board of Directors approved the 2016 - 2018 Long-Term Incentive Plan (the “2016 - 2018 LTIP”) under the 2010 Equity Incentive Plan (the “2010 Plan”). Awards under the 2016 - 2018 LTIP are time-based, performance-based and market-based. A specific target share award has been set for each participant in the 2016 - 2018 LTIP. Awards will be paid in the form of shares of common stock of the Company, as described below:


•	182,190 Time-based awards, or 35% of the total target award for each participant, have been granted in the form of time-based restricted stock units under the Company’s 2010 Plan. The time-based restricted stock units vest on the third anniversary of the date of grant.

•

338,354 Performance-based and Market-based awards, 65% of the total target award for each participant, have been granted in the form of performance-based stock units under the 2010 Plan. Of these units, one third will vest based on the financial performance of the Company as measured by Adjusted EBITDA, one third will vest based on the free cash flow of the Company and the other one third will vest based on the stock price performance of the Company.

Half of the performance-based stock units whose vesting is subject to the financial performance of the Company (the “financial stock units”) will vest based on the degree to which the Company achieves a targeted three-year cumulative Adjusted EBITDA metric, adjusted for currency fluctuations, over the performance period of January 1, 2016 through December 31, 2018. Financial stock units that vest will convert into shares of the Company’s common stock and be paid after the close of a three-year performance period. The amount of units that vest will range from 50% to 200% of the employee's total financial stock units. Upon attainment of cumulative Adjusted EBITDA equal to 90% or less of the targeted Adjusted EBITDA, none of the financial stock units will vest. Upon attainment of more than 90% of the targeted Adjusted EBITDA, the financial stock units will begin vesting on a straight-line basis from 50% of the financial stock units at 90% of the targeted Adjusted EBITDA to 100% of the financial stock units at 100% of the targeted Adjusted EBITDA, up to a maximum payout of 200% of the financial stock units at 110% of the targeted Adjusted EBITDA.

Half of the performance-based stock units whose vesting is subject to the financial performance of the Company (the “financial stock units”) will vest based on the degree to which the Company achieves a targeted three-year cumulative Free Cash Flow metric, adjusted for currency fluctuations, over the performance period of January 1, 2016 through December 31, 2018. Financial stock units that vest will convert into shares of the Company’s common stock and be paid after the close of a three-year performance period. The amount of units that vest will range from 50% to 200% of the employee's total financial stock units. Upon attainment of cumulative Free Cash Flow equal to 88% or less of the targeted Free Cash Flow, none of the financial stock units will vest. Upon attainment of more than 88% of the targeted Free Cash Flow, the financial stock units will begin vesting on a straight-line basis from 50% of the financial stock units at 88% of the targeted Free Cash Flow to 100% of the financial stock units at 100% of the targeted Free Cash Flow, up to a maximum payout of 200% of the financial stock units at 113% of the targeted Free Cash Flow.

The market-based stock units whose vesting is subject to stock price performance of the Company (the “market-based stock units”) will vest based on the Company's total stock price change (plus dividends) over the three-year performance period of May 4, 2016 through May 4, 2019 (“TSR”) relative to the TSR over the same performance period of companies listed on the S&P Global Small Cap Index on the third anniversary of the grant date, or May 4, 2019. Market-based stock units that vest will convert into shares of the Company’s common stock and will be paid after the third anniversary of the grant date, or May 4, 2019. The amount of units that vest will range from 50% to 200% of the employee's total market-based stock units. If the Company’s TSR over the performance period is less than the 35th percentile TSR of companies in the S&P Global Small Cap Index, then no market-based units will vest. If the Company’s TSR over the performance period is equal to the 35th percentile TSR of the companies in the S&P Global Small Cap Index, then 50% of the market-based stock units will vest. Full payout at 100% of the market-based stock units will be made if the Company’s TSR over the performance period is equal to the 55th percentile TSR of companies in the S&P Global Small Cap Index and payout of 200% of the market-based stock units made if the Company's TSR over the performance period is equal to the 75th percentile TSR of companies in the S&P Global Small

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Cap Index. TSR performance between the 35th and 75th percentile TSR of companies in the S&P Global Small Cap Index will result in an interpolated payout percentage of the market-based stock units between 50% and 200%.

Subject to early acceleration and payment under certain circumstances consistent with the terms of the Company’s 2016 - 2018 LTIP and LTIP Share Agreement thereunder, delivery of shares of common stock underlying the time-based and performance-based and market-based awards that become vested are subject to the participant’s continued service to the Company through May 4, 2019.

Long-Term Incentive Program—2015 LTIP and 2014 LTIP

During the nine months ended September 30, 2016, based on the current stock price of the Company, management performed a valuation on the market-based stock units, and determined the estimated payout to be at 0% under both the 2015 and 2014 LTIP plans, and reduced stock compensation by $0.2 million in accordance with ASC Topic 718, Compensation—Stock Compensation.

Long-Term Incentive Program—2013 LTIP

Awards under the 2013 LTIP vested on March 15, 2016, and were converted to 207,385 shares of common stock, net of withholdings.

Directors’ Deferred Stock Unit Plan

Under the 2011 non-management directors stock plan ("2011 DSU Plan”), as amended in January of 2015, each director receives an annual retainer of $132 thousand, to be paid on a quarterly basis in arrears. Approximately 54% of the annual retainer is payable in DSUs, with the remaining 46% payable in cash or a mix of both cash and DSUs at the election of each director. The non-management directors were awarded an aggregate of 54,294 DSUs under the 2011 DSU Plan for service during the nine months ended September 30, 2016. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 45,843 DSUs were settled in common stock during the nine months ended September 30, 2016. In addition, in March of 2016, 22,234 DSU's were settled in common stock in connection with the retirement of a director in September of 2015.

Other Stock Compensation Plans

On August 15, 2012, the Company granted Harold Bevis, the Company's CEO, an award of 204,208 restricted stock units and options to acquire 781,701 shares of the Company's common stock, par value $0.001 per share. Both the restricted stock units and the options vest over a three year period, with the first, second, and third tranches having vested on August 15, 2014, 2015, and 2016, respectively. The options have a 10-year term and exercise price of $4.00 per share, the August 15, 2012 closing price of the Company's common stock on the New York Stock Exchange. On August 15, 2016, one third of Mr. Bevis's restricted stock units and options vested. Mr. Bevis received 35,539 shares of common stock, net of withholdings as a result of the restricted stock unit vesting. In addition, Mr. Bevis exercised his vested options, and received 68,106 shares of common stock, in a cashless exercise, net of withholdings.

12. Supplemental Guarantor Financial Information

On August 9, 2016, the Company closed on the sale of its Notes. The Notes are secured obligations of the Company and are fully and unconditionally guaranteed on a senior secured basis by all of the domestic wholly owned subsidiaries of the Company (the “Guarantors”). In accordance with Rule 3-10 of Regulation S-X promulgated under the Securities Act of 1933, as amended, the following condensed consolidating financial statements present the financial position, results of operations and cash flows of Xerium Technologies, Inc. (referred to as “Parent” for the purpose of this note only) on a stand-alone parent-only basis, the Guarantors on a Guarantors-only basis, the combined non-Guarantor subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantors and non-Guarantor subsidiaries on a consolidated basis.

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Xerium Technologies, Inc.

Consolidating Balance Sheet—(Unaudited)

At September 30, 2016

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
ASSETS
Current assets:
Cash and cash equivalents	$	1,235		$	35		$	7,110		$	—		$	8,380
Accounts receivable, net	59			19,459			52,967			—			72,485
Intercompany receivables	(400,258		)	407,759			(7,501		)	—			—
Inventories, net	—			15,241			58,290			(1,065		)	72,466
Prepaid expenses	586			1,407			5,527			—			7,520
Other current assets	—			2,373			16,142			—			18,515
Total current assets	(398,378		)	446,274			132,535			(1,065		)	179,366
Property and equipment, net	8,648			72,117			220,956			—			301,721
Investments	868,721			243,196			—			(1,111,917		)	—
Goodwill	—			19,237			40,754			—			59,991
Intangible assets	—			7,806			88			—			7,894
Non-current deferred tax asset	—			—			12,224			—			12,224
Other assets	—			772			10,594			—			11,366
Total assets	$	478,991		$	789,402		$	417,151		$	(1,112,982	)	$	572,562

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Notes payable	$	—		$	—		$	7,840		$	—		$	7,840
Accounts payable	2,343			10,098			23,393			—			35,834
Accrued expenses	14,851			7,843			32,947			—			55,641
Current maturities of long-term debt	2,287			2,359			2,125			—			6,771
Total current liabilities	19,481			20,300			66,305			—			106,086
Long-term debt, net of current maturities	471,118			—			8,461			—			479,579
Liabilities under capital leases	6,337			4,929			9,100			—			20,366
Non-current deferred tax liability	(1,373		)	1,243			10,531			—			10,401
Pension, other post-retirement and post-employment obligations	18,438			1,600			39,980			—			60,018
Other long-term liabilities	—			1,336			4,620			—			5,956
Intercompany loans	68,167			(106,822		)	38,655			—			—
Total stockholders’ (deficit) equity	(103,177		)	866,816			239,499			(1,112,982		)	(109,844		)
Total liabilities and stockholders’ equity	$	478,991		$	789,402		$	417,151		$	(1,112,982	)	$	572,562

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Xerium Technologies, Inc.

Consolidating Balance Sheet

At December 31, 2015

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
ASSETS
Current assets:
Cash and cash equivalents	$	3,105		$	(2	)	$	6,736		$	—		$	9,839
Accounts receivable, net	20			18,585			49,957			—			68,562
Intercompany receivables	(110,541		)	113,736			(3,195		)	—			—
Inventories, net	—			14,694			57,929			(925		)	71,698
Prepaid expenses	510			1,330			4,809			—			6,649
Other current assets	—			2,849			14,020			—			16,869
Total current assets	(106,906		)	151,192			130,256			(925		)	173,617
Property and equipment, net	9,518			68,075			219,490			—			297,083
Investments	837,064			207,443			—			(1,044,507		)	—
Goodwill	—			17,737			40,862			—			58,599
Intangible assets	—			1,389			158			—			1,547
Non-current deferred tax asset	—			—			9,325			—			9,325
Other assets	—			—			10,203			—			10,203
Total assets	$	739,676		$	445,836		$	410,294		$	(1,045,432	)	$	550,374

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Notes payable	$	—		$	—		$	6,556		$	—		$	6,556
Accounts payable	2,642			11,100			26,954			—			40,696
Accrued expenses	12,661			9,668			33,747			—			56,076
Current maturities of long-term debt	2,663			1,937			810			—			5,410
Total current liabilities	17,966			22,705			68,067			—			108,738
Long-term debt, net of current maturities	451,923			—			10,547			—			462,470
Liabilities under capital leases	3,276			4,425			1,036			—			8,737
Non-current deferred tax liability	(1,515		)	1,243			9,042			—			8,770
Pension, other post-retirement and post-employment obligations	19,950			2,619			41,037			—			63,606
Other long-term liabilities	—			—			11,123			—			11,123
Intercompany loans	341,412			(403,154		)	61,742			—			—
Total stockholders’ (deficit) equity	(93,336		)	817,998			207,700			(1,045,432		)	(113,070		)
Total liabilities and stockholders’ equity	$	739,676		$	445,836		$	410,294		$	(1,045,432	)	$	550,374

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Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive (Loss) Income (Unaudited)

For the three months ended September 30, 2016

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	43,711		$	82,151		$	(6,671	)	$	119,191
Costs and expenses:
Cost of products sold	—			29,367			52,520			(6,502		)	75,385
Selling	175			4,925			10,716			—			15,816
General and administrative	2,009			2,167			8,468			—			12,644
Research and development	273			1,043			470			—			1,786
Restructuring	53			430			2,010			—			2,493
	2,510			37,932			74,184			(6,502		)	108,124
(Loss) income from operations	(2,510		)	5,779			7,967			(169		)	11,067
Interest (expense) income, net	(11,439		)	(47		)	(730		)	—			(12,216		)
Foreign exchange gain (loss)	63			(110		)	(382		)	—			(429		)
Equity in subsidiaries income	8,634			8,415			—			(17,049		)	—
Loss on Extinguishment of Debt	(11,736		)	—			—			—			(11,736		)
Dividend income	3,700			—			—			(3,700		)	—
(Loss) income before provision for income taxes	(13,288		)	14,037			6,855			(20,918		)	(13,314		)
Provision for income taxes	(51		)	(288		)	314			—			(25		)
Net (loss) income	$	(13,339	)	$	13,749		$	7,169		$	(20,918	)	$	(13,339	)
Comprehensive (loss) income	$	(12,773	)	$	13,736		$	8,967		$	(20,918	)	$	(10,988	)

Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive Income (Loss)-(Unaudited)

For the three months ended September 30, 2015

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	41,978		$	80,090		$	(4,329	)	$	117,739
Costs and expenses:
Cost of products sold	38			28,157			47,439			(4,382		)	71,252
Selling	248			4,940			10,701			—			15,889
General and administrative	4,403			1,658			8,309			—			14,370
Research and development	259			1,118			464			—			1,841
Restructuring	47			307			4,647			—			5,001
	4,995			36,180			71,560			(4,382		)	108,353
(Loss) income from operations	(4,995		)	5,798			8,530			53			9,386
Interest (expense) income, net	(9,613		)	877			(1,039		)	—			(9,775		)
Foreign exchange gain (loss)	404			(26		)	1,681			—			2,059
Equity in subsidiaries income	10,415			9,460			—			(19,875		)	—
Dividend income	4,769			—			—			(4,769		)	—
Income (loss) before provision for income taxes	980			16,109			9,172			(24,591		)	1,670
Provision for income taxes	(65		)	(19		)	(671		)	—			(755		)
Net income (loss)	$	915		$	16,090		$	8,501		$	(24,591	)	$	915
Comprehensive income (loss)	$	1,084		$	16,391		$	(3,896	)	$	(24,591	)	$	(11,012	)

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Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive (Loss) Income (Unaudited)

For the nine months ended September 30, 2016

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	130,379		$	249,137		$	(21,387	)	$	358,129
Costs and expenses:
Cost of products sold	—			88,401			155,441			(21,247		)	222,595
Selling	677			15,067			31,528			—			47,272
General and administrative	8,178			4,137			25,262			—			37,577
Research and development	835			3,062			1,374			—			5,271
Restructuring	695			2,098			5,310			—			8,103
	10,385			112,765			218,915			(21,247		)	320,818
(Loss) income from operations	(10,385		)	17,614			30,222			(140		)	37,311
Interest (expense) income, net	(31,164		)	790			(2,841		)	—			(33,215		)
Foreign exchange (loss) gain	(53		)	(145		)	(278		)	—			(476		)
Equity in subsidiaries income	31,657			24,973			—			(56,630		)	—
Loss on Extinguishment of Debt	(11,736		)	—			—			—			(11,736		)
Dividend income	9,245			—			—			(9,245		)	—
(Loss) income before provision for income taxes	(12,436		)	43,232			27,103			(66,015		)	(8,116		)
Provision for income taxes	(237		)	(550		)	(3,770		)	—			(4,557		)
Net (loss) income	$	(12,673	)	$	42,682		$	23,333		$	(66,015	)	$	(12,673	)
Comprehensive (loss) income	$	(10,174	)	$	45,230		$	33,853		$	(66,015	)	$	2,894

Xerium Technologies, Inc.

Consolidating Statement of Operations and Comprehensive Income (Loss)-(Unaudited)

For the nine months ended September 30, 2015

(Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Net sales	$	—		$	126,416		$	251,958		$	(16,478	)	$	361,896
Costs and expenses:
Cost of products sold	(291		)	85,079			148,954			(16,329		)	217,413
Selling	787			14,790			33,068			—			48,645
General and administrative	9,285			4,539			26,437			—			40,261
Research and development	732			3,508			1,455			—			5,695
Restructuring	8,313			622			3,799			—			12,734
	18,826			108,538			213,713			(16,329		)	324,748
(Loss) income from operations	(18,826		)	17,878			38,245			(149		)	37,148
Interest (expense) income, net	(28,303		)	3,009			(2,850		)	—			(28,144		)
Foreign exchange gain (loss)	246			(261		)	2,165			—			2,150
Equity in subsidiaries income	38,843			21,009			—			(59,852		)	—
Dividend income	10,856			—			—			(10,856		)	—
Income (loss) before provision for income taxes	2,816			41,635			37,560			(70,857		)	11,154
Provision for income taxes	(871		)	(89		)	(8,249		)	—			(9,209		)
Net income (loss)	$	1,945		$	41,546		$	29,311		$	(70,857	)	$	1,945
Comprehensive income (loss)	$	3,439		$	42,462		$	(8,750	)	$	(70,857	)	$	(33,706	)

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Xerium Technologies, Inc.

Consolidating Statement of Cash Flows-(Unaudited)

For the nine months ended September 30, 2016 (Dollars in thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Operating activities
Net (loss) income	$	(12,673	)	$	42,682		$	23,333		$	(66,015	)	$	(12,673	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation	2,123			—			—			—			2,123
Depreciation	1,683			6,189			16,334			—			24,206
Amortization of intangible assets	—			501			72			—			573
Deferred financing cost amortization	2,162			—			72			—			2,234
Foreign exchange gain on revaluation of debt	43			—			—			—			43
Deferred taxes	142			—			(3,208		)	—			(3,066		)
Loss on disposition of property and equipment	—			30			20			—			50
Loss on extinquishment of debt	11,736			—			—			—			11,736
Provision for doubtful accounts	—			(70		)	(4		)	—			(74		)
Undistributed equity in earnings of subsidiaries	(31,657		)	(24,973		)	—			56,630			—
Change in assets and liabilities which provided (used) cash:
Accounts receivable	(39		)	1,856			(514		)	—			1,303
Inventories	—			2,372			2,888			140			5,400
Prepaid expenses	(76		)	(77		)	(460		)	—			(613		)
Other current assets	—			475			(2,048		)	—			(1,573		)
Accounts payable and accrued expenses	1,933			(4,537		)	(6,593		)	—			(9,197		)
Deferred and other long-term liabilities	(34		)	908			621			—			1,495
Intercompany loans	289,717			(294,054		)	4,337			—			—
Net cash provided by (used in) operating activities	265,060			(268,698		)	34,850			(9,245		)	21,967
Investing activities
Capital expenditures	(664		)	(2,332		)	(6,618		)	—			(9,614		)
Intercompany property and equipment transfers, net	(2		)	40			(38		)	—			—
Proceeds from disposals of property and equipment	—			5			89			—			94
Acquisition costs				(16,225		)				—			(16,225		)
Net cash used in investing activities	(666		)	(18,512		)	(6,567		)	—			(25,745		)
Financing activities
Net increase in notes payable	—			—			1,121			—			1,121
Proceeds from borrowings	535,407			—			6,093			—			541,500
Principal payments on debt	(503,806		)	—			(7,030		)	—			(510,836		)
Dividends paid	—			(9,245		)	—			9,245			—
Payment of obligations under capital leases	(946		)	(1,743		)	(305		)	—			(2,994		)
Payment of financing fees	(22,861		)	—			54			—			(22,807		)
Intercompany loans	(272,267		)	298,235			(25,968		)	—			—
Employee taxes paid on equity awards	(1,791		)	—			—			—			(1,791		)
Net cash (used in) provided by financing activities	(266,264		)	287,247			(26,035		)	9,245			4,193
Effect of exchange rate changes on cash flows	—			—			(1,874		)	—			(1,874		)
Net (decrease) increase in cash	(1,870		)	37			374			—			(1,459		)
Cash and cash equivalents at beginning of period	$	3,105		$	(2	)	$	6,736		$	—		$	9,839
Cash and cash equivalents at end of period	$	1,235		$	35		$	7,110		$	—		$	8,380

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Xerium Technologies, Inc.

Consolidating Statement of Cash Flows (Unaudited)

For the nine months ended September 30, 2015

(Dollars in Thousands)



	Parent			Total Guarantors			Total Non Guarantors			Other Eliminations			The Company
Operating activities
Net income (loss)	$	1,945		$	41,546		$	29,311		$	(70,857	)	$	1,945
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Stock-based compensation	2,506			—			184			—			2,690
Depreciation	1,110			5,292			14,995			—			21,397
Amortization of intangible assets	—			206			22			—			228
Deferred financing cost amortization	2,570			—			71			—			2,641
Foreign exchange gain on revaluation of debt	(2,115		)	—			—			—			(2,115		)
Deferred taxes	661			—			(2,232		)	—			(1,571		)
Asset impairment	—			149			1,029			—			1,178
Loss on disposition of property and equipment	4			27			(116		)	—			(85		)
Provision for doubtful accounts	—			276			581			—			857
Undistributed equity in earnings of subsidiaries	(38,843		)	(21,009		)	—			59,852			—
Change in assets and liabilities which provided (used) cash:
Accounts receivable	(70		)	(409		)	(2,310		)	—			(2,789		)
Inventories	—			1,074			2,417			149			3,640
Prepaid expenses	(700		)	(94		)	77			—			(717		)
Other current assets	—			(252		)	(1,773		)	—			(2,025		)
Accounts payable and accrued expenses	4,422			1,774			1,061			—			7,257
Deferred and other long-term liabilities	(238		)	1,023			(6,336		)	—			(5,551		)
Intercompany loans	(12,996		)	(7,108		)	20,104			—			—
Net cash (used in) provided by operating activities	(41,744		)	22,495			57,085			(10,856		)	26,980
Investing activities
Capital expenditures	(6,276		)	(7,862		)	(26,238		)	—			(40,376		)
Intercompany property and equipment transfers, net	8,612			(220		)	(8,392		)	—			—
Proceeds from disposals of property and equipment	3			26			75			—			104
Net cash provided by (used in) investing activities	2,339			(8,056		)	(34,555		)	—			(40,272		)
Financing activities
Net increase in notes payable	—			—			6,759			—			6,759
Proceeds from borrowings	37,408			—			20,020			—			57,428
Principal payments on debt	(34,371		)	—			(11,202		)	—			(45,573		)
Dividends paid	—			(9,950		)	(906		)	10,856			—
Payments of obligations under capitalized leases	(486		)	(401		)	—			—			(887		)
Payment of deferred financing fees	(63		)	—			45			—			(18		)
Intercompany loans	36,646			(4,078		)	(32,568		)	—			—
Other financing activities	5,500			—			(5,500		)				—
Employee taxes paid on equity awards	(2,124		)	—			—			—			(2,124		)
Net cash provided by (used in) financing activities	42,510			(14,429		)	(23,352		)	10,856			15,585
Effect of exchange rate changes on cash flows	—			—			(1,106		)	—			(1,106		)
Net increase (decrease) in cash	3,105			10			(1,928		)	—			1,187
Cash and cash equivalents at beginning of period	605			(14		)	8,926			—			9,517
Cash and cash equivalents at end of period	$	3,710		$	(4	)	$	6,998		$	—		$	10,704



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:


•	rate and magnitude of decline in graphical grade paper production;


•	fluctuations in interest rates and currency exchange rates;


•	over-capacity of certain grades of paper, leading to distressed profit situations;


•	execution risk related to the startup of our new facilities;


•	local economic conditions in the areas around the world where we conduct business;


•	quality issues with new products that could lead to higher warranty and quality costs;


•	structural shifts in the demand for paper;


•	the effectiveness of our strategies and plans;


•	sudden increase or decrease in production capacity;


•	trend toward extended life in forming fabrics, leading to reduced market size;


•	our development and marketing of new technologies and our ability to compete against new technologies developed by competitors;


•	variations in demand for our products, including our new products;


•	fluctuations in the price of our component supply costs and energy costs;


•	our ability to generate substantial operating cash flow to fund growth and unexpected cash needs;


•	occurrences of terrorist attacks or an 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;


•	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 in our charter documents.

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, 2015, filed with the SEC on March 14, 2016. 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

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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.

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 machine 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, 2016, our clothing segment represented 61% 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 each paper producer. We tailor our roll covers 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, 2016, our roll cover segment represented 39% of our net sales.

Industry Trends and Outlook

The Company's global markets are slightly favorable overall in the third quarter of 2016, but with a lot of grade and geographical differences. However, the global tissue and containerboard markets will continue to grow at a modest rate. In response to these trends, we are repositioning our assets, sales teams and value additive technologies to the tissue, packaging, services and non-paper segments around the world, entering new or under-served markets that present long term revenue growth opportunities.

Net Sales and Expenses

The following factors primarily drive net sales in both our clothing and roll covers segments:

•the volume (tonnage) of worldwide paper production;

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


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

•growth in developing markets, particularly in Asia;

•the mix of paper grades being produced;

•our ability to enter and expand our business in non-paper products; and

•the impact of currency fluctuations.

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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, we conduct a small portion of our business pursuant to consignment arrangements; for these, 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 we ship the product 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, we recognize revenue 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 our cost reduction programs.

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 $5.3 million and $5.7 million for the nine months ended September 30, 2016 and 2015, respectively.

Foreign Exchange

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.

During the nine months ended September 30, 2016, we conducted business in nine foreign currencies. The following table provides the average exchange rate for the nine months ended September 30, 2016 and 2015 of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our operations.



Currency	Nine Months Ended September 30, 2016	Nine Months Ended September 30, 2015
Euro	$1.12 = 1 Euro	$1.12 = 1 Euro
Brazilian Real	$0.28 = 1 Brazilian Real	$0.32 = 1 Brazilian Real
Australian Dollar	$0.74 = 1 Australian Dollar	$0.76 = 1 Australian Dollar
Chinese Yuan	$0.15 = 1 Chinese Yuan	$0.16 = 1 Chinese Yuan

In the nine months ended September 30, 2016, we conducted approximately 32% of our operations in Euros, approximately 8% 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 7% in the Chinese Yuan.

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

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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, 2016 and September 30, 2015 and a discussion of the results of operations during those periods (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Domestic income (loss) from operations	$	3,269	$	803	$	7,229	$	(948	)
Foreign income from operations	7,798		8,583		30,082		38,096
Total income from operations	$	11,067	$	9,386	$	37,311	$	37,148

During the three and nine months ended September 30, 2016, domestic income from operations was lower than foreign income from operations primarily due to product mix, market differences and various unallocated corporate expenses. All earnings generated by foreign subsidiaries after 2012 will be remitted to the parent company at some point in the future. U.S. income taxes and foreign withholding taxes have been provided related to those foreign earnings. All other foreign un-remitted earnings generated in years prior to 2013 will remain indefinitely reinvested, except for a portion of the earnings generated prior to 2013 related to our Brazil 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 are intended to rationalize production among our facilities to better enable us to match our cost structure with customer demand. Cost savings have been realized and are expected to be 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 cost savings begin at the time of the headcount reductions and plant closure with remaining cost savings recognized over subsequent periods. Cost savings from headcount reductions have not been and are not expected to be offset by related increases in other expenses. Cost savings related to plant closures have been and are expected to be partially offset by additional costs incurred in the facilities that assumed the operations of the closed facility.

For the nine months ended September 30, 2016, the Company incurred restructuring expenses of $8.1 million. These included $1.4 million of charges related to the closure of the Middletown, Va. facility and $6.7 million of charges relating to headcount reductions and other costs related to previous plant closures. For the nine months ended September 30, 2015, the Company incurred restructuring expenses of $12.7 million. These included charges of $4.1 million relating to the closure of the Joao Pessoa, Brazil plant, $4.5 million charges related to the closure of Warwick, and headcount reductions of $4.1 million.

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Results of Operations

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)						(in thousands)
Net sales	$	119,191		$	117,739		$	358,129		$	361,896
Costs and expenses:
Cost of products sold	75,385			71,252			222,595			217,413
Selling	15,816			15,889			47,272			48,645
General and administrative	12,644			14,370			37,577			40,261
Research and development	1,786			1,841			5,271			5,695
Restructuring	2,493			5,001			8,103			12,734
	108,124			108,353			320,818			324,748
Income from operations	11,067			9,386			37,311			37,148
Interest expense, net	(12,216		)	(9,775		)	(33,215		)	(28,144		)
Loss on extinguishment of debt	(11,736		)	—			(11,736		)	—
Foreign exchange gain	(429		)	2,059			(476		)	2,150
Income before provision for income taxes	(13,314		)	1,670			(8,116		)	11,154
Provision for income taxes	(25		)	(755		)	(4,557		)	(9,209		)
Net (loss) income	$	(13,339	)	$	915		$	(12,673	)	$	1,945
Comprehensive income (loss)	$	(10,988	)	$	(11,012	)	$	2,894		$	(33,706	)

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

Net Sales. Net sales for the three months ended September 30, 2016 increased by $1.5 million, or 1.2%, to $119.2 million from $117.7 million for the three months ended September 30, 2015. Excluding currency effects, sales were up $1.1 million, or 0.9%. For the three months ended September 30, 2016, approximately 60% of our net sales were in our clothing segment and approximately 40% were in our roll covers segment.

In our clothing segment, net sales for the three months ended September 30, 2016 decreased $(1.5) million to $71.0 million from $72.5 million for the three months ended September 30, 2015. Excluding favorable currency effects of $0.7 million, the sales decrease of $(2.2) million, or (3.0)% was driven largely by lower sales volumes in the North America market, due to temporary production output issues, that the Company is addressing.

In our rolls segment, net sales for the three months ended September 30, 2016 increased $3.0 million to $48.2 million from $45.2 million for the three months ended September 30, 2015. Excluding unfavorable currency effects of $(0.3) million, sales were up by $3.3 million or 7.3%, driven by the acquisition of Spencer Johnston.

Cost of Products Sold. Cost of products sold for the three months ended September 30, 2016 increased to $75.4 million from $71.3 million for the three months ended September 30, 2015.

In our clothing segment, cost of products sold increased $1.2 million in the current quarter compared to the third quarter of 2015. Cost of products sold as a percentage of net sales increased by 2.9 percentage points to 61.9% in the three months ended September 30, 2016 from 59.0% in the three months ended September 30, 2015, primarily driven by a weak Brazilian economy, temporary missed production of certain high-margin products which drove unfavorable product mix and margin compression in certain regions.

In our rolls segment, cost of products sold increased $2.9 million in the current quarter compared to the third quarter of 2015, primarily as a result of increased sales volume. Cost of products sold as a percentage of net sales increased by 2.1 percentage points to 65.2% for the three months ended September 30, 2016 from 63.1% for the three months ended September 30, 2015, primarily due to unfavorable product mix and a weak Brazilian economy.

Selling Expenses. For the three months ended September 30, 2016, selling expenses decreased by $(0.1) million, or (0.6)%, to $15.8 million from $15.9 million for the three months ended September 30, 2015. This decrease was primarily attributable to savings achieved through the Company's cost-out initiatives, net of inflation.

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General and Administrative Expenses. For the three months ended September 30, 2016, general and administrative expenses decreased by $(1.8) million, or (12.5)%, to $12.6 million from $14.4 million for the three months ended September 30, 2015, primarily as a result of decreased cost related to headcount reduction, net of inflation, partially offset by G&A expenses of Spencer Johnston, acquired on May 4, 2016.

Restructuring Expenses. For the three months ended September 30, 2016, we incurred restructuring expenses of $2.5 million. These included $0.2 million of charges related to the closure of the Middletown, Va. facility and $2.3 million of charges relating to headcount reductions and other costs related to previous plant closures.

Interest Expense, Net. Net interest expense for the three months ended September 30, 2016 was $12.2 million, up $2.4 million from $9.8 million for the three months ended September 30, 2015. The increase was driven by the higher interest rate on the new bonds issued in the refinancing (9.50% vs 6.25% and 8.875%) and increased average debt balances in the third quarter of 2016 versus the third quarter of 2015.

Provision for Income Taxes. For the three months ended September 30, 2016 and 2015, the provision for income taxes was $0.0 million and $0.8 million, respectively. The decrease in tax expense in the three months ended September 30, 2016, was primarily attributable to the geographic earnings mix, as well as tax benefits from interest deductions in Brazil and the impact of the intra-period allocation as a result of the loss from continuing operations and income from other comprehensive income. Generally, our provision for income taxes is primarily impacted by the income we earn in tax paying jurisdictions relative to the income we earn in non-tax paying jurisdictions. The majority of income recognized for purposes of computing our effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.4%. However, permanent income adjustments recorded against pre-tax earnings may result in an effective tax rate that is higher or lower than the statutory tax rate in these jurisdictions. We generate losses in certain jurisdictions for which we realize no tax benefit as the deferred tax assets in these jurisdictions (including net operating losses) are fully reserved in our valuation allowance. For this reason, we recognize minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves, the geographic mix of our pre-tax earnings has a direct correlation with how high or low our annual effective tax rate is relative to consolidated earnings.

Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

Net Sales. Net sales for the nine months ended September 30, 2016 decreased by $(3.8) million, or (1.0)%, to $358.1 million from $361.9 million for the nine months ended September 30, 2015. Excluding currency effects of $(2.0) million, sales were down $(1.8) million, or (0.5)%. For the nine months ended September 30, 2016, approximately 61% of our net sales were in our clothing segment and approximately 39% were in our roll covers segment.

In our clothing segment, net sales for the nine months ended September 30, 2016 decreased $(11.8) million to $217.2 million from $229.0 million for the nine months ended September 30, 2015. Excluding favorable currency effects of $0.4 million, the sales decline of $(12.2) million, or (5.3)% was primarily driven by volume declines in all regions, due to temporary production output issues that the Company is addressing.

In our rolls segment, net sales for the nine months ended September 30, 2016 increased $8.0 million to $140.9 million compared to $132.9 million for the nine months ended September 30, 2015. Excluding unfavorable currency effects, sales were up by $10.4 million or 7.8%, driven by the acquisition of Spencer Johnston and the Company's new growth initiatives.

Cost of Products Sold. Cost of products sold for the nine months ended September 30, 2016 increased to $222.6 million from $217.4 million for the nine months ended September 30, 2015.

In our clothing segment, cost of products sold decreased $(1.6) million in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily driven by decreased sales volume and favorable currency effects. Cost of products sold as a percentage of net sales increased by 2.4 percentage points to 60.1% in the nine months ended September 30, 2016 from 57.7% in the nine months ended September 30, 2015. This increase was primarily due to a weak economic environment in Brazil, the effect of the ongoing shift in product mix and margin compression in certain regions.

In our rolls segment, cost of products sold increased $7.1 million in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily as a result of increased sales volume. Cost of products sold as a percentage of net sales increased by 1.3 percentage points to 65.4% for the nine months ended September 30, 2016 from 64.1% for the nine months ended September 30, 2015, due to negative product mix and a weak economic environment in Brazil.

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Selling Expenses. For the nine months ended September 30, 2016, selling expenses decreased by $(1.3) million, or (2.7)%, to $47.3 million from $48.6 million for the nine months ended September 30, 2015. was primarily attributable to favorable currency and savings achieved through the Company's cost-out initiatives, net of inflation.

General and Administrative Expenses. For the nine months ended September 30, 2016, general and administrative expenses decreased by $(2.7) million, or (6.7)%, to $37.6 million from $40.3 million for the nine months ended September 30, 2015, primarily as a result of cost reduction programs, partially offset by inflation and favorable currency effects. These decreases are partially offset by G&A expenses of recently acquired Spencer Johnston.

Restructuring Expenses. For the nine months ended September 30, 2016, we incurred restructuring expenses of $8.1 million. These included $1.4 million of charges related to the closure of the Middletown, Va. facility and $6.7 million of charges relating to headcount reductions and other costs related to previous plant closures.

Interest Expense, Net. Net interest expense for the nine months ended September 30, 2016 was $33.2 million, up $5.1 million from $28.1 million for the nine months ended September 30, 2015. The increase was driven by the higher interest rate on the new bonds issued in the refinancing (9.50% vs 6.25% and 8.875%) and a higher average debt balance during 2016 versus 2015.

Provision for Income Taxes. For the nine months ended September 30, 2016 and 2015, the provision for income taxes was $4.6 million and $9.2 million, respectively. The decrease in tax expense in the nine months ended September 30, 2016, was primarily attributable to the geographic mix of earnings, as well as tax benefits from interest deductions in Brazil and the impact of the intra-period allocation as a result of the loss from continuing operations and income from other comprehensive income. Generally, our provision for income taxes is primarily impacted by the income we earn in tax paying jurisdictions relative to the income we earn in non-tax paying jurisdictions. The majority of income recognized for purposes of computing our effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.4%. However, permanent income adjustments recorded against pre-tax earnings may result in an effective tax rate that is higher or lower than the statutory tax rate in these jurisdictions. We generate losses in certain jurisdictions for which we realize no tax benefit as the deferred tax assets in these jurisdictions (including net operating losses) are fully reserved in our valuation allowance. For this reason, we recognize minimal income tax expense or benefit in these jurisdictions, of which the most material jurisdictions are the United States and Australia. Due to these reserves, the geographic mix of our pre-tax earnings has a direct correlation with how high or low our annual effective tax rate is relative to consolidated earnings.

Liquidity and Capital Resources

Our principal liquidity requirements are for debt service, restructuring payments, working capital and capital expenditures. We plan to use cash on hand, cash generated by operations and our revolving credit facility, as our primary sources of liquidity. Our operations are highly dependent upon the paper production industry and the degree to which the paper industry is affected by global economic conditions and the availability of credit. Demand for our products could decline if paper manufacturers are unable to obtain required financing or if economic conditions cause additional mill closures. In addition, an economic recession or unavailability of credit may affect our customers’ ability to pay their debts.

Net cash provided by operating activities was $22.0 million for the nine months ended September 30, 2016 and $27.0 million for the nine months ended September 30, 2015. The $(5.0) million decrease was primarily due to the increase in cash interest paid as a result of the refinancing.

Net cash used in investing activities was $(25.7) million for the nine months ended September 30, 2016 and $(40.3) million for the nine months ended September 30, 2015. The decrease in cash used in investing activities of $14.6 million was primarily due to the decrease in capital expenditures, partially offset by the acquisition of Spencer Johnston in Q2 of 2016.

Net cash provided by financing activities was $4.2 million for the nine months ended September 30, 2016 and $15.6 million for the nine months ended September 30, 2015. The decrease of $11.4 million was due largely to lower capital expenditures, partially offset by increased payments of capital lease obligations.

We expect to spend cash of approximately $11.0 million related to our restructuring initiatives in 2016. We have spent $9.3 million in the nine months ended September 30, 2016. Actual restructuring costs for 2016 may substantially differ from estimates at this time, depending on the timing of the restructuring activities and the required actions to complete them.

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Capital Expenditures

For the nine months ended September 30, 2016, we had capital expenditures of $9.6 million. We are currently targeting capital expenditures for 2016 to be approximately $16 million. We analyze our planned capital expenditures, based on investment opportunities available to us and our financial and operating performance, and accordingly, actual capital expenditures may be more or less than this amount. We intend to use existing cash and cash from operations to fund our capital expenditures.

Credit Facility and Notes

The Indenture to the Notes and the ABL Facility contain certain customary covenants that, subject to exceptions, restrict our ability to, among other things:


•	declare dividends or redeem or repurchase equity interests;

•prepay, redeem or purchase debt;

• incur liens and engage in sale-leaseback transactions;

• make loans and investments;

• incur additional indebtedness;

•amend or otherwise alter debt and other material agreements;

•engage in mergers, acquisitions and asset sales;

•transact with affiliates; and

•engage in businesses that are not related to the Company's existing business.

On November 3, 2015, the we refinanced our then existing ABL Facility and entered into a new Revolving Credit and Guaranty Agreement (as amended, the "ABL Facility") with one of our existing ABL lenders, JPMorgan Chase Bank, N.A. Under the ABL Facility, JPMorgan will become the lead domestic agent and will continue as the European agent. The amount of the ABL Facility continues to provide aggregate availability of $55 million and the collateral pledged thereunder will also remains the same, however the ABL Facility as amended, (1) provides increased flexibility for operations; (2) an extended maturity date of November, 2020; and (3) lower interest rates.

On July 17, 2015, Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of the Company closed a Fixed Assets Loan Contract (the "Loan Agreement") with the Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch with respect to a RMB 58.5 million loan, which was approximately $9.4 million USD on July 17, 2015, based on an exchange rate of 6.21 RMB per 1.00 USD. The loan is secured by pledged machinery and equipment of Xerium China and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of the Company, pursuant to guarantee agreements (the "Guarantee Agreements"). Interest on the outstanding principal balance of the loan accrues at a benchmark rate plus a margin. The current interest rate is approximately 5.8%. The interest rate will be adjusted every 12 months during the term of the loan, based on the benchmark interest rate adjustment. Interest under the loan is payable quarterly in arrears. Principal on the loan is to be repaid in part every six months following the Closing Date, in accordance with a predetermined schedule set forth in the Loan Agreement. Proceeds of the Loan will be used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.

We are in compliance with all covenants under the Notes and ABL Facility at September 30, 2016.

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Critical Accounting Policies

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Our significant policies are described in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015. Judgments and estimates of uncertainties are required in applying our accounting policies in many areas. There have been no material changes to the critical accounting policies affecting the application of those accounting policies as noted in our Annual Report on Form 10-K for the year ended December 31, 2015.

Non-GAAP Financial Measures

We use EBITDA and Adjusted EBITDA (each as defined in the Credit Facility) as supplementary non-GAAP liquidity measures to assist us in evaluating our liquidity and financial performance, specifically our ability to service indebtedness and to fund ongoing capital expenditures. Neither EBITDA nor Adjusted EBITDA should be considered in isolation or as a substitute for income from operations or cash flows (as determined in accordance with GAAP).

EBITDA is defined as net income before interest expense, income tax provision and depreciation (including non-cash impairment charges) and amortization.

“Adjusted EBITDA” means, with respect to any period, the total of (A) the consolidated net income for such period, plus (B) without duplication, to the extent that any of the following were deducted in computing such consolidated net income for such period: (i) provision for taxes based on income or profits, including, without limitation, federal, state, provincial, franchise and similar taxes, including any penalties and interest relating to any tax examinations, (ii) consolidated interest expense, (iii) consolidated depreciation and amortization expense, (iv) reserves for inventory in connection with plant closures, (v) consolidated operational restructuring costs, (vi) non-cash charges resulting from the application of purchase accounting, including push-down accounting, (vii) non-cash expenses resulting from the granting of common stock, stock options, restricted stock or restricted stock unit awards under equity compensation programs solely with respect to common stock, and cash expenses for compensation mandatorily applied to purchase common stock, (viii) non-cash items relating to a change in or adoption of accounting policies, (ix) non-cash expenses relating to pension or benefit arrangements, (x) expenses incurred as a result of the repurchase, redemption or retention of common stock earned under equity compensation programs solely in order to make withholding tax payments, (xi) amortization or write-offs of deferred financing costs, (xii) any non-cash losses resulting from mark to market hedging obligations (to the extent the cash impact resulting from such loss has not been realized in such period) and (xiii) other non-cash losses or charges (excluding, however, any non-cash loss or charge which represents an accrual of, or a reserve for, a cash disbursement in a future period), minus (C) without duplication, to the extent any of the following were included in computing consolidated net income for such period, (i) non-cash gains with respect to the items described in clauses (vi), (vii), (ix), (xi), (xii) and (xiii) (other than, in the case of clause (xiii), any such gain to the extent that it represents a reversal of an accrual of, or reserve for, a cash disbursement in a future period) of clause (B) above and (ii) provisions for tax benefits based on income or profits. Notwithstanding the foregoing, Adjusted EBITDA, as defined in the Credit Facility and calculated below, may not be comparable to similarly titled measurements used by other companies.

Consolidated net income is defined as net income determined on a consolidated basis in accordance with GAAP; provided, however, that the following, without duplication, shall be excluded in determining consolidated net income: (i) any net after-tax extraordinary or non-recurring gains, losses or expenses (less all fees and expenses relating thereto), (ii) the cumulative effect of changes in accounting principles, (iii) any fees and expenses incurred during such period in connection with the issuance or repayment of indebtedness, any refinancing transaction or amendment or modification of any debt instrument, in each case, as permitted under the Credit Facility and (iv) any cancellation of indebtedness income.

The following table provides reconciliation from net income and operating cash flows, which are the most directly comparable GAAP financial measures, to EBITDA and Adjusted EBITDA.

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net (loss) income	$	(13,339	)	$	915		$	(12,673	)	$	1,945
Stock-based compensation	697			1,064			2,123			2,690
Depreciation	8,125			7,138			24,206			21,397
Amortization of intangible assets	269			69			573			228
Deferred financing cost amortization	692			870			2,234			2,641
Foreign exchange loss (gain) on revaluation of debt	(109		)	(1,200		)	43			(2,115		)
Deferred tax expense	(2,269		)	(3,179		)	(3,066		)	(1,571		)
Asset impairment	—			1,135			—			1,178
Loss on disposition of property and equipment	(29		)	(69		)	50			(85		)
Loss on extinguishment of debt	11,736			—			11,736			—
Net change in operating assets and liabilities	(938		)	3,441			(3,259		)	672
Net cash provided by operating activities	4,835			10,184			21,967			26,980
Interest expense, excluding amortization	11,524			8,905			30,981			25,503
Net change in operating assets and liabilities	938			(3,441		)	3,259			(672		)
Current portion of income tax expense	2,294			3,934			7,623			10,780
Stock-based compensation	(697		)	(1,064		)	(2,123		)	(2,690		)
Asset impairment	—			(1,135		)	—			(1,178		)
Foreign exchange gain (loss) on revaluation of debt	109			1,200			(43		)	2,115
(Loss) on disposition of property and equipment	29			69			(50		)	85
Loss on extinguishment of debt	(11,736		)	—			(11,736		)	—
EBITDA	7,296			18,652			49,878			60,923
Loss on extinguishment of debt	11,736			—			11,736			—
Stock-based compensation	697			1,064			2,123			2,690
Operational restructuring expenses	2,493			5,001			8,103			12,734
Inventory write off	—			465			—			465
Non-restructuring impairment expense	—			149			—			149
Other non-recurring expenses	85			1,552			752			2,402
Plant startup costs	573			1,378			1,858			3,110
Adjusted EBITDA	$	22,880		$	28,261		$	74,450		$	82,473



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our interest rate risks as of September 30, 2016 have not materially changed from December 31, 2015 (see Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015). As of September 30, 2016, we had outstanding long term debt with a carrying amount of $496.4 million with an approximate fair value of $503.6 million.



ITEM 4.	CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation, as of September 30, 2016 under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Act”). Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. No evaluation of disclosure controls and procedures can provide absolute assurance that these controls and procedures will operate effectively

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under all circumstances. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level as set forth above.

(b) Changes in Internal Control over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



ITEM 1.	LEGAL PROCEEDINGS

There have been no material developments to the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2015. See Note 10 to our Unaudited Condensed Consolidated Financial Statements for other routine litigation to which we are subject.



ITEM 1A.	RISK FACTORS

The risks described in our Annual Report on Form 10-K for the year ended December 31, 2015 have not materially changed.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See the exhibit index following the signature page to this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	XERIUM TECHNOLOGIES, INC.
	(Registrant)

October 27, 2016	By:	/s/Clifford E. Pietrafitta
		Clifford E. Pietrafitta
		Executive Vice President and CFO
		(Principal Financial Officer)

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EXHIBIT INDEX



Exhibit Number		Description of Exhibits

10.1		First Amendment to Revolving Credit and Guaranty Agreement by and among the Company, certain Guarantor subsidiaries, and JP Morgan, dated February 19, 2016.

10.2		Second Amendment to Revolving Credit and Guaranty Agreement by and amount the Company, certain Guarantor subsidiaries, and JP Morgan, dated August 9, 2016.

31.1		Certification Statement of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification Statement of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

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