Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - XERIUM TECHNOLOGIES INCxrm-ex322_20171231xq4.htm
EX-32.1 - EXHIBIT 32.1 - XERIUM TECHNOLOGIES INCxrm-ex321_20171231xq4.htm
EX-31.2 - EXHIBIT 31.2 - XERIUM TECHNOLOGIES INCxrm-ex312_20171231xq4.htm
EX-31.1 - EXHIBIT 31.1 - XERIUM TECHNOLOGIES INCxrm-ex311_20171231xq4.htm
EX-23.1 - EXHIBIT 23.1 - XERIUM TECHNOLOGIES INCa12312017xeriumconsent.htm
EX-21.1 - EXHIBIT 21.1 - XERIUM TECHNOLOGIES INCexhibit211_xeriumsubsidiar.htm
EX-10.32 - EXHIBIT 10.32 - XERIUM TECHNOLOGIES INCweimerservicecontractex.htm
EX-10.30 - EXHIBIT 10.30 - XERIUM TECHNOLOGIES INCxerium2018micexhibit.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
 
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)
(919) 526-1400
Registrant’s telephone number (including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No  X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  X
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  X    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  X    No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
Smaller reporting company
 
¨

Non-accelerated filer
 
¨
 
(Do not check if a smaller reporting company)
 
 
 
Emerging growth company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  X
The aggregate market value of the voting common stock held by non-affiliates of the registrant on June 30, 2017, the last business day in the second fiscal quarter, was approximately $99,621,427. There were 16,341,266 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of June 30, 2017.
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  X    No  
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A, is incorporated by reference in Part III to the extent described therein.




TABLE OF CONTENTS
 
 
 
 
 
 
PAGE
PART I.
 
 
ITEM 1.
Business
4
ITEM 1A.
Risk Factors
11
ITEM 1B.
Unresolved Staff Comments
26
ITEM 2.
Properties
26
ITEM 3.
Legal Proceedings
26
ITEM 4.
Mine Safety Disclosures
27
 
 
 
PART II.
 
 
ITEM 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
ITEM 6.
Selected Financial Data
29
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
41
ITEM 8.
Financial Statements and Supplementary Data
43
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
43
ITEM 9A.
Controls and Procedures
43
ITEM 9B.
Other Information
46
 
 
 
PART III.
 
 
ITEM 10.
Directors, Executive Officers and Corporate Governance
46
ITEM 11.
Executive Compensation
46
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
46
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
46
ITEM 14.
Principal Accounting Fees and Services
46
 
 
 
PART IV.
 
 
ITEM 15.
Exhibits, Financial Statement Schedules
47
SIGNATURES
48


 

 


2


This Annual Report on Form 10-K 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 at our customers;
               
execution risk related to our expansion projects;
               
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 share;
          
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 debt reduction, 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.

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 Annual Report on Form 10-K 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 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 Annual Report to “Xerium”, “the Company”, “we”, “our” and “us” means Xerium Technologies, Inc. and its subsidiaries.

3


PART I
ITEM 1.
BUSINESS
General
Xerium Technologies, Inc. (the "Company") is a leading, global provider of industrial consumable products and services including machine clothing, roll coverings, roll repair and mechanical services. These goods and services are used in the production of paper, paperboard, building products and nonwoven materials. Our operations are strategically located in the major paper-making regions of the world, including North America, Europe, Latin America and Asia-Pacific. We market our products through the following industry-recognized brands:
 
 
 
 
 
 
Brand
  
Product Category
  
Geographic Region
Huyck Wangner
  
Machine Clothing
  
Worldwide, other than North America
Weavexx
  
Machine Clothing
  
North America
Stowe Woodward
  
Roll Covers & Spreader Rolls
  
Worldwide
Mount Hope
  
Spreader Rolls
  
Worldwide
Robec
  
Spreader Rolls
  
Europe
IRGA
  
Spreader Rolls
  
Southern Europe and Indonesia
Xibe/Stowe
  
Roll Covers
  
China
JJ Plank
 
Specialty Services & Embossing,
 
North America
 
 
Watermark & Dandy Rolls
 
 
Spencer Johnston
 
Spreader Rolls
 
North America, Japan, Latin America
We have an extensive global footprint of 28 manufacturing facilities in 13 countries, strategically located in the major paper-producing regions of North America, Europe, Latin America and Asia Pacific, and have approximately 2,850 employees worldwide. We market our products, primarily using our direct sales force, to the paper industry’s leading producers. In 2017, we generated net sales of $481.0 million.
Company Overview
Our machine clothing and roll cover products are primarily installed on pulp and paper-making machines and play key roles in the process by which raw materials are converted into finished paper. A fundamental characteristic of our products is that they are consumed in the paper production process and must be regularly replaced. This positions us to make recurring sales to our customers, and accordingly, the number of paper machines in operation throughout the world and the amount of paper, pulp and board produced globally each year are primary drivers of the demand for our products. In addition, our products are also installed in other industrial applications such as nonwoven and fiber cement machines.
Paper-making machines utilize different processes and have different requirements depending on the design of the machine, the raw materials used, the type of paper being made and the preferences of individual production managers. We employ our broad portfolio of patented and proprietary product and manufacturing technologies, as well as our extensive industry experience, to provide our customers with tailored solutions designed to optimize the performance of their equipment and significantly reduce the costs of their operations. We systematically track and report the impact of these customized solutions to our customers through our ValueResults™ program which quantifies the optimization process on their machines.
Our machine clothing products are highly engineered synthetic textile belts that transport and filter paper as it is processed in a paper-making machine. Machine clothing plays a significant role in the forming, pressing and drying stages of paper production. Our machine clothing segment represented 60% of our net sales for the year ended December 31, 2017, 61% in 2016 and 63% in 2015.
Roll cover products cover the rolls on a paper-making machine, which are the large steel cylinders over which machine clothing is mounted and between which the paper travels as it is processed. Our roll covers provide a surface with the mechanical properties necessary to process the paper in a cost-effective manner that delivers the sheet qualities desired by the paper producer. We currently use several hundred chemical compounds in our roll cover manufacturing process. Our roll cover segment represented 40% of our net sales for the year ended December 31, 2017, 39% in 2016 and 37% in 2015.
Our products are in constant contact with the paper during the manufacturing process. As a result, our products have a significant effect on paper quality and the ability of a paper producer to differentiate its products, two factors that we believe

4


are increasingly important to paper producers. In addition, while machine clothing and roll covers represent only approximately 3%, on average, of a typical paper producer’s production costs, they can help a paper producer improve productivity and reduce overall costs. Our machine clothing and roll covers facilitate the paper producers' use of less expensive raw materials, their ability to run paper-making machines faster and with fewer interruptions and their ability to decrease the amount of energy required in the expensive drying portion of the paper-making process. We have found that, in certain cases, our products and services provide paper producers with cost savings that substantially offset the costs of such products and services.
We estimate that there are over 8,300 paper-making machines worldwide, all of which require a regular supply of machine clothing and roll covers. Machine clothing and roll covers must be replaced regularly to sustain high quality paper output and operate efficiently. Roll covers also require regular refurbishment, a service that we provide to our customers. Paper producers typically replace machine clothing multiple times per year, replace roll covers every two to five years and refurbish roll covers several times between each replacement.
We have a reputation for technological innovation in the paper-making industry. In our machine clothing segment, in recent years we have focused our research and development efforts on higher value-added, technologically advanced products, such as forming fabrics and press felts, which offer paper producers greater potential for differentiating their products through quality improvements and increasing their operating efficiency. Historically, we have pioneered a number of technologies that have become industry standards, including in our machine clothing business, synthetic forming fabrics (which replaced bronze wire technology), double-layer and triple-layer forming fabrics, and, most recently, single-base press felts, both seamed and endless.
In our roll covers segment, we have introduced a number of innovations to our roll cover and spreader roll products, including (1) SMARTTechnology, the first continuous pressure sensing paper machine roll that enables the papermaker to maximize performance by knowing the pressure of the paper machine while the machine is running; (2) composite calendar roll covers that use nanoparticle technology to improve roll cover durability and paper gloss; (3) covers that use an improved polyurethane to increase abrasion and moisture resistance as well as responsiveness and stability; and (4) uniquely designed and proprietary grooving patterns that improve machine performance and reduce energy consumption.
Our portfolio of patented and proprietary product and manufacturing technologies differentiates our product offerings from others in the market and allows us to deliver high value products and services to our customers. As of December 31, 2017, we had approximately 451 issued patents and over 51 pending patent applications. Our patents and patent applications cover approximately 62 invention families. We currently license certain of our patents and technologies to some of our competitors, which we believe helps further demonstrate our technological leadership in the industry. We believe that the technological sophistication of the products needed in our business and the capital-intensive nature of our business present significant challenges to any potential new competitors in our field.
We organized our business in 1999 in connection with the acquisition of the paper technology group of Invensys plc. We completed our initial public offering on May 19, 2005.
Recent Developments

New Technology
In the fourth quarter of 2017 we introduced Maximus, a totally new portfolio of press felt technology for today’s most demanding press positions. Maximus’ single-base structure design with lower fabric caliper delivers immediate start-up without the typical long break-in periods often required for conventional technology. In addition, its innovative drainage channels and special warp-bound weave concept provide maximum dimensional stability and compaction resistance which ensures high-performance dewatering, longer running life and excellent end-product quality. Maximus technology is ideal for machines producing containerboard, packaging, and graphical paper grades.
Global Trends in Paper Demand
Our global markets were slightly favorable overall in 2017 although they have gone through a tough business cycle. Demand for our products is tied to our customers' production rates and our product’s useful lives. While the majority of our end-markets are growing, certain graphical grade paper production market segments have been in decline. Declining graphical grades include newsprint and printing/writing papers which only represent approximately 25% of our sales. These market corrections have been very strong in the last few years and many paper machines dedicated to graphical paper production have been closed. In order to optimize outcomes in this changing environment, we implemented a repositioning program to re-map our people, products, equipment tooling, machine services offered, and plant locations to more naturally align with growing markets both geographically and by type of paper machine serviced. This repositioning program is largely complete.

5




Business Strategy

Pay down debt and deleverage the Company - as the majority of repositioning activities have been completed, use excess free cash flow to pay down debt over a multi-year period in order to deleverage the Company.

Continue to emphasize investment and resources toward growth grades and markets while supporting and leveraging sales to the graphical grades - focus new product development and sales resources on growing areas.

Introduce new products and services in order to secure new business in growth grades and regions - 32 patents were granted in 2017.

Create a unified, low-cost business model with one set of value-add processes - eliminate redundancy between regions and amongst product groups, supplement and top-grade our team in certain areas, unify business systems and connect data streams into cohesive value-added processes with a focus on improving execution.

Products
We operate through two principal business segments, machine clothing and roll covers. Our machine clothing segment products include various types of industrial textiles used on paper-making machines and for other industrial applications. Through our roll covers segment, we manufacture various types of roll covers, refurbish previously installed roll covers, provide mechanical services for the internal mechanisms of rolls used on paper-making machines and manufacture spreader rolls. For additional financial information about our machine clothing and roll covers segments, please see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 "Business Segment Information" to the accompanying audited consolidated financial statements.
Machine Clothing Products
Our machine clothing segment products are large, highly engineered synthetic textile belts that transport paper or other material as it is processed in a paper machine or for other industrial applications. Machine clothing products must be tailored to each machine because all paper or other industrial applications have different physical configurations and operating parameters. Machine clothing generally ranges in size from approximately 7 feet to over 30 feet wide and 24 feet to more than 460 feet long and operates on paper-making machines that run at speeds up to 7,500 feet per minute.
We manufacture three general types of machine clothing products primarily used on paper-making machines—forming fabrics, press felts and dryer fabrics—each of which is located in a different section of a paper machine. Forming fabrics and press felts are typically replaced multiple times a year, but replacement frequency varies significantly by the grade of paper being produced, the manner in which the paper-making machine is operated and the quality of raw materials used in the paper stock. Dryer fabrics are replaced less frequently, with replacement typically taking place approximately once per year.
Forming fabrics. Forming fabrics are used at the beginning of paper-making machines, where highly diluted paper stock is deposited on the forming fabric while the fabric is traveling at a very high speed. Forming fabrics allow water to drain from the paper stock, creating an initial wet sheet. Forming fabrics must be sufficiently porous to allow water to drain evenly and quickly, yet tight enough to retain and align the fiber and other materials that form the sheet of paper. They must also be strong enough to withstand high mechanical stresses. Forming fabrics are custom-manufactured in single, double and triple layer designs in a variety of meshes to suit particular machines and paper grades. Customers are increasingly demanding the higher-priced triple layer designs that remove more moisture and produce higher quality paper. In 2017, forming fabrics accounted for approximately 33% of net sales in our machine clothing segment.
Press felts. Press felts are used to carry the paper sheet through a series of press rolls that mechanically press water from the sheet under high pressure. Press felts are designed to maximize water removal, which reduces the amount of water that must be removed during the expensive energy-intensive drying section of the production process. Press felts must maximize water removal while maintaining the orientation of the fibers and the consistency of the thickness of the paper, without removing chemicals or fillers from the paper.
Press felts differ from forming fabrics and dryer fabrics due to the addition of several layers of staple fiber that are needled into the fabric base. The staple fiber provides a smooth surface to meet the wet sheet of paper and creates a wicking effect to remove water from the paper sheet as it is pressed under high pressure between press rolls. Press felts are

6


manufactured in a variety of designs, including lightweight single layer felts, multi-layer laminated endless felts and seamed felts that allow for reduced installation times. In 2017, press felts accounted for approximately 48% of net sales in our machine clothing segment.
Dryer fabrics. Dryer fabrics are used to transport the paper sheet through the drying section of paper-making machines, where high temperatures from large, steam-heated dryer cylinders evaporate the remaining moisture from the paper sheet. Dryer fabrics, which are less technically advanced than forming fabrics or press felts, are woven from heat-resistant yarns with a coarser mesh than forming fabrics. In 2017, dryer fabrics accounted for approximately 5% of net sales in our machine clothing segment.
Industrials and Other. We manufacture other fabrics used in other industrial applications, such as pulp, non-woven textiles, fiber cement, tannery sludge de-watering and textiles manufacturing. In 2017, net sales for such industrial applications accounted for 14% of net sales in our machine clothing segment.

New Machine Clothing Products. The major goal of research and development is to create customer value and solutions by combining latest technologies with excellent quality and unique product characteristics. This commitment will improve our competitive position and ensures a continuously optimized product portfolio. In recent years, we have focused our research and development efforts on higher performance, value-added, sustainable product solutions throughout our entire machine clothing offering. Our efforts have resulted in several innovative and revolutionary new forming fabric and press felt product solutions, which prove their performance benefits globally every day.
Roll Covers and Services
In our roll covers segment (or "rolls segment"), the majority of our sales are generated through the replacement and refurbishment of roll covers and spreader rolls, the manufacturing of new spreader rolls and general mechanical maintenance and repair services for the internal mechanisms of rolls.
Roll covers. We manufacture, refurbish and replace covers of all types of roll applications used in paper or other industrial applications, such as press section rolls including suction rolls, lump breaker rolls, coater rolls, sizing rolls, calendar rolls and all purpose conveying rolls. There can be up to approximately 170 rolls that require covering in a paper-making machine. These metal rolls, which can be up to 39 feet long, 6 feet in diameter and weigh 500 to 140,000 pounds, are covered with an exterior layer of rubber, polyurethane, composite or ceramic, each of which is designed for use in a particular phase of the paper-making process. Roll covers operate in temperatures up to 300 degrees Fahrenheit, under pressures up to 12,000 pounds per square inch and at speeds up to 10,000 feet per minute. Roll covers are typically replaced every two to five years.
Roll cover replacement is performed at the manufacturing facility of the supplier, such as Xerium, which necessitates removing the roll from the paper-making machine, transporting it to the supplier’s site and using a spare roll in the interim. In general, each roll on a paper-making machine is unique due to its dimensions, specific design and cover material, and generally not interchangeable with other rolls. Because of their large size, paper producers generally maintain only one spare roll for each position on a paper-making machine. It is important that the roll cover replacement be completed quickly, because damage or a malfunction of the spare roll could render the paper-making machine inoperable.
Due to the large size and weight of a roll, transportation to and from a supplier’s site can be costly and is occasionally subject to regulations on road use that restrict available routes and times of travel, and that may require safety escorts. Round-trip transcontinental travel can take several weeks and intercontinental travel is rare. We offer an extensive network of manufacturing facilities worldwide, often in close proximity to our customers, which we believe is a significant competitive advantage.
Roll covers accounted for approximately 53% of our total net sales in our roll covers segment in 2017.
Services. Roll covers are typically refurbished several times over the two to five years they are in service before needing to be replaced. Refurbishment typically includes the regrinding of the roll cover to standard specifications and inspecting the bearings and other mechanical components of the roll. As with roll cover replacement, refurbishment is performed at the supplier’s manufacturing facility. Similar to the paper producer’s selection of a roll cover supplier, the selection of a refurbishment provider is influenced by the time and expense of transporting a roll cover.
We offer a wide range of mechanical maintenance and repair services for the internal mechanisms of rolls. Paper producers are increasingly finding it economical to have the company that refurbishes or replaces a roll cover also perform work on the internal roll mechanisms at the same time, which avoids having multiple suppliers and incurring additional time and transportation charges. We have begun performing such services to meet the demands of our customers and gain a competitive advantage. As of December 31, 2017, we provide major mechanical services at ten locations around the world.

7


Roll cover refurbishment services and mechanical services accounted for approximately 25% of our total net sales in our roll covers segment in 2017.
Spreader rolls. We manufacture and repair spreader rolls, which are small-diameter curved rolls used throughout a paper-making machine to stretch, smooth and remove wrinkles from the paper and machine clothing. There are approximately five to seven spreader rolls in a typical paper-making machine. Spreader rolls and related services accounted for approximately 18% of our total net sales in our roll covers segment in 2017.
New Roll Products. We have introduced a number of innovations to our roll cover and spreader roll products in recent years, including composite calendar roll covers that use nanoparticle technology to improve roll cover durability and paper gloss, as well as covers that use an improved polyurethane to increase abrasion and moisture resistance as well as responsiveness and stability. We are evaluating new products, which will use different materials and utilize different sales channels and provide enhancements to our existing product line. The acquisition of Spencer Johnston in May of 2016 broadened the Company's capabilities with respect to spreader rolls, dandy rolls, and tissue embossing rolls. Sales generated by these new and other roll products account for approximately 4% of our total net sales in our roll covers segment in 2017.
Customers
We supply leading paper producers worldwide. Our top ten customers accounted for 27% of net sales in 2017 and individually, no customer accounted for more than 6% of 2017 net sales. In 2017, we generated 39% of our net sales in North America, 32% in Europe, 11% in Latin America and 18% in Asia-Pacific. See Note 12 "Business Segment Information" to the accompanying audited consolidated financial statements for geographic information related to net sales and long-lived assets. Due to competitive market forces, we offer our customers payment terms similar to those offered by our competitors. Also, agreements with certain customers require us to maintain modest amounts of finished machine clothing inventory to assure those customers of supply continuity. We do not maintain finished rolls inventories.
Competition

Our largest competitors are the two leading manufacturers of paper-making machines and one independent machine clothing producer. In addition, we also face competition from smaller regional suppliers.
We compete primarily based on the value, price and production lead times of our products. Competition with respect to both machine clothing and roll covers, particularly as it relates to our technologically advanced forming fabrics, press felts and roll covers, is based primarily on the value that the products deliver to the paper producer through the ability of such products to reduce production costs and improve paper quality. Also, because our customers operate continuously, we aim to offer competitive delivery schedules from customer order to placement in their machines.
Competition in the machine clothing and roll covers market is also based on a supplier’s ability to deliver engineering and technical services. Many paper producers have been reducing their in-house engineering and technical staff and increasingly expect their suppliers to provide such services. While smaller suppliers often lack the resources necessary to invest in and provide this level of engineering and technical service, we have made investments in order to provide the following services to the paper producers: specialist advice and resident engineers, installation support, on-call “trouble-shooting” and performance monitoring and analysis of paper-making machines.
In the roll covers market, competition is also based on a supplier’s proximity to the paper producer’s facilities, which affects the transportation time and expense associated with refurbishing or replacing a roll cover, and on the supplier’s ability to provide mechanical services to a roll’s internal mechanisms while the roll cover is being refurbished or replaced. We offer an extensive network of facilities throughout the world and provide mechanical services at the majority of our locations.
Research and Development
Our continuing ability to deliver value depends on developing product innovations. As we create new and improved products, we are often able to obtain patent protection for our innovations, which is indicative of our technical capabilities and creativity. Although we do not consider any single patent to be material to our business, we believe that, in the aggregate, our patents and other intellectual property provide us with a competitive advantage. At December 31, 2017, we have approximately 451 domestic and foreign patents outstanding and approximately 51 pending patent applications. Our patents and patent applications cover approximately 62 invention families. Some of our competitors license our technology in exchange for royalty payments, although such licensing does not represent a material amount of our business. Research and development expenses totaled $6.6 million in 2017, $7.1 million in 2016 and $7.4 million 2015, and were approximately 1.4%, 1.5% and 1.6% of our net sales in 2017, 2016 and 2015, respectively.

8


Production
Machine Clothing Production Process
The following diagram represents the machine clothing production process.
clothingproductiona02.jpg
 
The machine clothing production process begins with the spinning of synthetic fiber threads to produce yarn, which is then twisted in preparation for the manufacturing of machine clothing. Yarn, which companies sometimes purchase as a raw material, is then wound on large spools prior to installation on the loom. The yarn is drawn through needles in preparation for weaving.
With the yarn prepared for weaving, a weave pattern can be installed in the loom controller. The nature of the weave pattern is critical to how the machine clothing performs in the paper-making process. The yarn is then woven to the desired length.
Technological advancements have resulted in weaving becoming an almost entirely automated process. Following weaving of a forming or dryer fabric, the two ends are permanently joined to form a continuous loop of machine clothing. Although significant automation has occurred in the joining process, it remains the most labor intensive element of the machine clothing production process.
Press felts are woven in a continuous loop and undergo a process that is not necessary for forming and dryer fabrics. An additional layer of fibers is added to the outside surface with the use of an advanced needling machine, such that a very smooth felt surface is created.
All machine clothing then undergoes heat setting and chemical treating. Heat setting tightens the machine clothing giving it the necessary mechanical properties for the paper-making process. Finally, the machine clothing is meticulously inspected prior to being shipped to the customer.
The machine clothing production process is capital intensive and requires a variety of equipment, including warping equipment, weaving looms, heat set equipment, joining equipment, needle looms and finishing machines.
Roll Cover Production Process
The following diagram represents the roll covering production process.
rollcoverproductiona02.jpg

The covering on the rolls used in the paper-making process wear over time and must be periodically replaced for the roll to function properly. Rolls are removed from the paper-making machine and delivered to one of our facilities for re-covering. During this time, a spare roll is placed in the paper machine to enable continuous operations.

9


The roll covering process begins with the removal of the old cover. A lathe and belt grinder are used to remove the old cover, exposing the roll shell. The shell is cleaned with a pressure washer and blasted with solid particles to increase the shell’s surface area for bonding of the new cover. Following the blasting process, the shell is ready to be re-covered.
The shell is then coated with proprietary bonding agents that affix the new roll cover to the shell. Each type of cover material is applied with a different process. Rubber and composite covers are extruded in a slow spinning lathe. Polyurethane covers are typically cast on the core using a mold, and ceramic covering is expelled onto the shell at high pressure.
Following application of the core material, the cover undergoes a curing process. Rubber covers are cured for 12 to 28 hours in vulcanizers under high temperature and pressure, whereas polyurethane and composite materials are cured in a hot air oven. After curing, the roll cover is ground with belts and grinding stones. Depending on the type of roll, a proprietary pattern of holes and grooves is then drilled into the cover to aid in water removal. Finally, the roll is balanced for proper spinning motion and meticulously checked for quality before being returned to the customer.
The roll cover production process is capital intensive and requires a variety of equipment, including lathes, belt grinders, polyurethane casting molds (for polyurethane roll covers), extruders, mix stations, vulcanizers, ovens and balancing equipment.
Raw Materials
The primary raw materials used in our machine clothing production are synthetic yarns and fibers. The primary raw materials used in our roll cover products are synthetic and natural rubber, monomers, epoxy resins and polyurethane. A number of suppliers provide the materials used in our product lines, so availability has not posed a significant concern. Since both the machine clothing and primary roll cover materials are based on petroleum and natural gas derivatives, their prices are subject to changes in supply/demand and the price of petroleum and natural gas and their derivatives. The global average price for petroleum bottomed out at $38/barrel two years ago and reached $63/barrel in December 2017. The U.S. Energy Information Administration’s latest forecast is for pricing to be about $5/barrel higher in 2018 than 2017. We have recently seen the impact of this rise in energy prices, coupled with supply/demand issues of certain raw materials, causing an increase in certain synthetic yarn materials. Pricing for these raw materials are expected to be less volatile in 2018 than they were in 2017. Natural rubber prices tend to be influenced directly by the weather in the Asian crop regions and by demand in China.
Environmental
Our operations and facilities are subject to a number of national, state and local laws and regulations protecting the environment and human health in the United States and foreign countries that govern, among other things, the handling, storage and disposal of hazardous materials, discharges of pollutants into the air and water and workplace safety. Because of our operations, the history of industrial uses at some of our facilities, the operations of predecessor owners or operators of some of the businesses, and the use and release of hazardous substances at these sites, the liability provisions of environmental laws may affect us.
We believe that any liability in excess of amounts provided in Note 9 "Commitments and Contingencies" to the accompanying audited consolidated financial statements which may result from the resolution of such matters will not have a material adverse effect on our financial condition, liquidity or cash flow.
Employees
As of December 31, 2017 we had approximately 2,850 employees worldwide, of which approximately 69% were manufacturing employees. As of December 31, 2017, 1,961, or 69%, of our employees are members of labor unions, trade unions, employee associations or workers' councils. We believe that we have good relations with our employees and the various groups that represent our employees.
Our Corporate Information
We are subject to the information requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). Therefore, we file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at https://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We maintain a website at www.xerium.com to provide information to the general public and our shareholders on our products and services, along with general information on Xerium. We make our periodic and current reports available, free of charge, on our website as soon as reasonably practicable after these reports are filed with, or furnished to, the SEC. Our corporate code of business conduct and ethics, our corporate governance guidelines, and the charters of each of the Audit,

10


Compensation and Nominating and Corporate Governance Committees of our Board of Directors are also made available, free of charge, on our website. Our corporate code of business conduct and ethics, which includes our code of ethics, and related waivers (if any) are posted on our website and we intend to post on our website and (if required) file on Form 8-K all disclosures required by applicable law or the rules of the SEC concerning any amendment to, or waiver from, our code of ethics. Copies of these documents may be obtained, free of charge, by writing Investor Relations, Xerium Technologies, Inc., 14101 Capital Boulevard, Youngsville, NC 27596, or telephoning us at 919-526-1444.

ITEM 1A.
RISK FACTORS
Our business, results of operations and financial condition, and an investment in our securities, are subject to various risks. Investors should carefully consider the risks described below in conjunction with the other information in this Form 10-K, including our Consolidated Financial Statements and related notes. If any of the following risks or other risks which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. This could cause the value of our securities to decline and holders could lose part or all of their investment. This section does not describe all risks applicable to us, our business or industry, and it is intended only as a summary of certain material factors.
Risks Relating to Our Business and the Industry

The results of our restructuring actions and expansion projects may not be successful and could negatively affect our production, customer lead time, product quality, labor relations and gross margins.
Since 2012 we have repositioned the company by engaging in various operational restructuring measures and expansion projects. These repositioning efforts include a reduction of our cost structure and a realignment of our manufacturing footprint in order to move the focus of our manufacturing capacity away from paper with declining demand to paper with growing demand and from mature paper markets with limited growth to geographies experiencing higher rates of growth and paper demand. While we believe we have completed our major repositioning activities, if and when circumstances warrant we may take further actions in the future.
Our operational restructuring measures have included or may include plant closures and workforce reductions meant to reduce or eliminate excess manufacturing capacity particularly for graphical grades of paper. These measures have caused or will cause us to incur significant costs. We may be unsuccessful in fully realizing the benefits of these cost reduction efforts. For instance, our profitability may decline if our restructuring efforts do not sufficiently reduce our future costs while at the same time positioning us to maintain or increase our sales and gross margins.
In addition, these restructuring measures may result in operational disruptions such as delays or failures in the transition of production from a closed facility to our other facilities or our inability to meet customer demand with our remaining manufacturing facilities and strains in our labor relations. For instance, if we must operate our remaining manufacturing facilities at capacity for long periods in order to meet customer demand, we may experience increased equipment failures or other reliability problems, which may result in production shutdowns or periods of reduced production. Such disruptions could have an adverse effect on our operations and financial results. In addition, insufficient manufacturing capacity or other delays may cause our customer order times to increase and our product quality to decrease, which may increase warranty costs and negatively affect customer demand for our products and customer relations generally. Operating our facilities at or near capacity may also negatively affect relations with our employees, which could result in higher employee turnover, labor disputes and other disruptions in our operations. On the other hand, if we anticipate or experience a significant decrease in demand for our products, we may choose to temporarily decrease production or idle manufacturing facilities and employees. While decreasing production may mitigate some of the risks of operating at or near capacity discussed above, a significant drop off in production to meet lower demand, including idling facilities or employees, may negatively impact our gross margin.
Our expansion projects have included or may include construction of new facilities and significant expansions of existing facilities to meet perceived growth opportunities or to relocate production from high cost regions to lower cost regions. The completion and ramp up of these projects is dependent upon a number of factors, many of which may be beyond our control. For instance, we may experience significant delays in obtaining appropriate permits or encounter unanticipated complications with the installation and implementation of systems and equipment. We also may be unable to attract a sufficient number of skilled workers to meet the needs of the new or expanded facilities.
In addition, the cost to implement expansion projects ultimately may prove to be greater than originally anticipated.  We have spent significant capital and managerial resources on these new facilities and expansions. Furthermore, our assessment of

11


the projected benefits associated with the construction of these new facilities and expansions is subject to a number of estimates and assumptions, which in turn are subject to significant economic, competitive and other uncertainties that are beyond our control. If we incur unanticipated costs in connection with our expansion projects, are not able to complete them in a timely manner or at all, or otherwise are unable to achieve the anticipated benefits from these projects, our business, results of operations and financial position could be materially adversely affected.

New developments and trends in the paper industry, either globally or in a particular region, could cause our paper manufacturing customers to reduce production, cease operations or takes steps to extend the life of our products, each of which would adversely affect our net sales and profitability.
Because demand for our products has been driven primarily by the volume of paper produced on a worldwide basis, trends that affect the production level of the paper industry will impact our business and financial results.
One trend we have experienced, and we believe our industry in general has experienced, is a significant decline in sales to the graphical grade industry due primarily to the increased adoption of digital media.  We expect such declines to continue for the foreseeable future, and unless we are successful in increasing our sales to industries other than the printing and writing and newsprint industries, such declines may adversely affect our net sales and profitability.
In response to these and other changes in the sector negatively affecting the demand for paper, paper producers have sought to reduce production capacity to maintain profits, and as part of these efforts, they have permanently shut down many paper-making machines or entire manufacturing facilities. Should papermakers continue to experience low levels of profitability, we would expect further consolidation among papermakers reducing the number of paper producers, and shutdowns of paper-making machines or facilities could occur (particularly in Europe and North America) until profit levels of paper producers improve. Even the global paper production growth seen in developing markets such as Asia and Latin America could be moderated by the level of industry consolidation and paper machine shutdown activity that may occur in developed markets.
We also have observed that paper producers are focusing on cost reduction strategies and are extending the life of roll covers and machine clothing products through additional maintenance cycles before replacing them. Market recognition of the extended life of our roll cover products negatively impacts the demand for these products. We also have seen a trend towards new paper-making machine designs that have fewer rolls, also negatively impacting the demand for our roll cover products. If we are not able to offset these negative impacts on the demand for our roll cover products with growth from new roll cover products, the sale of roll cover products in regions which we believe have high growth potential such as China, or from other sources, the volume of our roll cover sales will be adversely affected.
Price competition in our industry could adversely affect our gross margins and net sales.
Historically, we and our competitors have been able to sell machine clothing and roll cover products and services at favorable prices that reflect the value they deliver to customers. This favorable pricing has been particularly derived from our more technologically advanced products, such as forming fabrics, press felts and advanced roll covers. In the event that competition increases due to global economic conditions, overcapacity in the paper manufacturing industry, or for other reasons, we may be required to reduce our prices, which would negatively affect our gross margins and could negatively impact our net sales.
Some of our competitors are larger, financially stronger and more established than we are and are able to bundle products, which may limit our ability to compete.

The paper-making consumables industry is highly competitive. Some of our competitors are larger than us, have greater financial and other resources and are well-established suppliers to the markets we serve. For example, while we have recently expanded our business in China, we face substantial competition from manufacturers already operating there that are more established and familiar with the Chinese marketplace. In addition, some of our competitors also manufacture paper-making machines and have the ability to initially package sales of their machine clothing and roll cover products with the sale of their machines and/or to tie the warranties on their machines to the use of their machine clothing and roll cover products. Due to these and other factors such as price or product innovation by our competitors, our products may not be able to compete successfully with the products of our competitors, which could result in a loss of customers and, as a result, decreased net sales and profitability.

The loss of major customers or the shut down of a mill or mills by one of our customers could have a material adverse effect on our net sales and profitability.

12


Our top ten customers generated 27% of our net sales during 2017. The loss of one or more major customers or a substantial decrease in such customers’ purchases from us, for instance through the closure of mills, could have a material adverse effect on our net sales and profitability. Because we do not generally have binding long-term purchasing agreements with our customers, there can be no assurance that our existing customers will continue to purchase products from us.
We may experience supply constraints due to a limited number of suppliers of certain raw materials and equipment.
There are a limited number of suppliers of certain raw materials used in our machine clothing and roll cover businesses. The limited number of suppliers of these items creates the potential for disruptions in supply. Lack of supply, delivery delays, or quality problems relating to supplied raw materials could harm our production capacity, and could require us to attempt to qualify one or more additional suppliers, which could be a lengthy, expensive and uncertain process. Such disruptions could make it difficult to supply our customers with products on time, which could have a negative impact on our business, financial condition, and results of operations.
Energy price increases may negatively impact our results of operations.
Certain of the components that we use in our manufacturing activities are petroleum-based. In addition, we, along with our suppliers and customers, rely on various energy sources (including oil) in our transportation activities. Energy prices can fluctuate dramatically and significant increases could cause an increase to our raw material and transportation costs. In addition, our suppliers could pass their increased transportation costs to us and we may not be able to increase our prices to offset these increased costs without adversely affecting the demand for our products. In addition, any increase in our prices may reduce our future customer orders and profitability.
Natural disasters could disrupt our operations making it difficult for us to supply our products to customers.
We have production facilities that are vulnerable to flooding, storm surge, wind damage and earthquakes. In addition, our rolls and machine clothing facilities, respectively, are not capable of producing all product lines from their sister facilities. If one or more of our facilities suffered significant damage from a natural disaster, we could experience a material interruption in our operations and may be unable to timely meet our supply obligations to customers. Even if our facility does not suffer direct damage from a natural disaster or other business interruption event in an area where we have a facility, we may be affected by disruptions in local transportation and public utilities on which such locations are reliant, and our employees may also be hindered from reporting for work. Although we carry property and business interruption insurance to help mitigate the risk of property loss or business interruption that could result from the occurrence of such events, such coverage may not be adequate to compensate us for all loss or damage that we may incur.
Fluctuations in currency exchange rates could adversely affect our net sales, profitability and compliance with our debt covenants.
Our foreign operations expose us to fluctuations in currency exchange rates and currency devaluations. We report our financial results in U.S. Dollars, but a substantial portion of our sales and expenses are denominated in Euros and other currencies. As a result, changes in the relative values of U.S. Dollars, Euros and other currencies will affect our levels of net sales and profitability. Currency fluctuations, as they pertain to the Euro, generally have a greater effect on the level of our net sales due to the amount of business we conduct in Euros. An increase in the U.S. Dollar against the Euro generally results in a decrease to net sales and net income. Increases in the U.S. Dollar against other currencies, such as the Brazilian Real, would not impact consolidated net sales as much, as a significant portion of sales in that country is denominated in or indexed to U.S. Dollars, but generally would increase net income as local currency costs would be translated into lower U.S. Dollar expenses for financial reporting purposes. We would expect a similar but opposite effect in a period in which the value of the U.S. Dollar decreases against these currencies. Although in certain circumstances we may attempt to hedge our cash exposure to fluctuations in currency exchange rates, our hedging strategies may not be effective.
We may not be able to continue to innovate and improve our products to remain competitive in the market.
We compete primarily based on the value our products delivered to our customers. Our value proposition is based on a combination of price, technology and performance of our products, including the ability of our products to help reduce our customers’ production costs and increase the quality of the products they produce. Our ability to retain our customers and increase our business depends on our ability to continually develop new, technologically superior products that support our value proposition. We cannot guarantee that our investments in technological development will be sufficient, that we will be able to create and market new products, that such new products will be accepted by our customers or that we will be successful in competing against new technologies developed by competitors. In addition, either we or our competitors could develop new technologies that increase the useful life of machine clothing or roll covers, which could reduce the frequency with which our customers would need to replace their machine clothing and refurbish or replace their roll covers, and consequently lead to reduced sales.

13


We may fail to adequately protect our proprietary technology, which would allow competitors or others to take advantage of our research and development efforts.
We rely upon trade secrets, proprietary know-how, and continuing technological innovation to develop new products and remain competitive. If our competitors learn of our proprietary technology, they may use this information to produce products that are equivalent or superior to our products, which could reduce the net sales of our products. Our employees, consultants, and corporate collaborators may breach their obligations not to reveal our confidential information, and any remedies available to us may be insufficient to compensate our damages. Even in the absence of such breaches, our trade secrets and proprietary know-how may otherwise become known to our competitors, or be independently discovered by our competitors, which could adversely affect our competitive position.
Our success and ability to compete in the future may depend upon obtaining sufficient patent protection for proprietary technology.
Our patent applications may not result in issued patents, and even if they result in issued patents, the patents may not have claims of the scope we seek. Whether or not a patent is issued, the patent applications will or may become publicly available and proprietary information disclosed in the applications will become available to others. In addition, any issued patents may be challenged, invalidated or declared unenforceable. The term of any issued patent in the United States is 20 years from its filing date, and if our applications are pending for a long time period, we may have a correspondingly shorter term for any patent that may be issued. Our present and future patents may provide only limited protection for our technology and may not be sufficient to provide competitive advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively, could develop similar or more advantageous technologies on their own or design around our patents. Also, patent protection in certain foreign countries may not be available or may be limited in scope and any patents obtained may not be as readily enforceable as in the United States, making it difficult for us to effectively protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to obtain and enforce our intellectual property rights in some countries may harm our business. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important.
Because we have substantial operations outside the United States, we are subject to the economic and political conditions of foreign nations.
We have 28 manufacturing facilities in 13 foreign countries. In 2017, we sold products in over 60 countries other than the United States, which represented approximately 67% of our net sales. Operating in foreign countries presents challenges unique to each country such as in hiring employees, our relations with various parties, including suppliers and governmental agencies, and in production.
Furthermore, we may decide to do business in countries where we have not previously done business. In such countries, we face the additional uncertainty of entering a new market and dealing with its social customs, laws and practices. Should these challenges be realized, our operating results could be adversely impacted and our business or production may be delayed.
Our foreign operations are subject to a number of risks and uncertainties, including risks that:
foreign governments may impose limitations on our ability to repatriate funds;
foreign governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase;
an outbreak or escalation of any insurrection or armed conflict may occur;
foreign governments may impose or increase investment barriers or other restrictions affecting our business; or
changes in and interpretations of policies or laws of foreign governments may adversely affect our foreign subsidiaries.
The occurrence of any of these conditions could disrupt our business in particular countries or regions of the world, or prevent us from conducting business in particular countries or regions, which could adversely affect our net sales and profitability. In addition, we rely on dividends and other payments or distributions from our subsidiaries to meet our debt obligations. If foreign governments impose limitations on our ability to repatriate funds or impose or increase taxes on remittances or other payments to us, the amount of dividends and other distributions we receive from our subsidiaries could be reduced, which could reduce the amount of cash available to us to meet our debt obligations.
We may be liable for product defects or other claims relating to our products.

14


Our products could be defective, fail to perform as designed or otherwise cause harm to our customers, their equipment or their products. If any of our products are defective, we may be required to recall the products and/or repair or replace them, which could result in substantial expenses and affect our profitability. Any problems with the performance of our products could harm our reputation, which could result in a loss of sales to customers and/or potential customers. In addition, if our customers believe that they have suffered harm caused by our products, such as damage to a paper-making machine, they could bring claims against us that could result in significant liability. Any claims brought against us by customers may result in:
diversion of management’s time and attention;
expenditure of large amounts of cash on legal fees, expenses, and payment of damages;
decreased demand for our products and services; and
injury to our reputation.
Our insurance may not sufficiently cover a large judgment against us or a large settlement payment, and is subject to customary deductibles, limits and exclusions.
The failure to minimize and mitigate cybersecurity threats could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
In the ordinary course of our business, we collect and store sensitive data, including, for instance, intellectual property, our proprietary business information and that of our customers, and personally identifiable information of our employees, in our information technology (IT) systems. Our IT systems are, and will likely continue to be, subject to cybersecurity threats, none of which have been, individually or in the aggregate, material to the company.
In general, cybersecurity threats are the various methods by which a party attempts to gain unauthorized access to our IT systems. These methods include electronic hacking, phishing attacks aimed at employees or through employee oversight, error, or malfeasance. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), our IT systems could still suffer a significant breach. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could disrupt our operations and, in certain cases, the services we provide to customers, damage our reputation, and result in legal claims or proceedings, all of which could adversely affect our competitiveness and results of operations.
We may be adversely affected if we fail to attract and retain key personnel.
Our future success depends on the continued contributions of our key senior management personnel, including members of our senior sales staff and research and development team. The loss of services of any one or more of our key personnel might significantly delay or prevent the achievement of our business objectives and could cause us to incur additional costs to recruit replacements. Each member of our executive management team may terminate his or her employment at any time. We do not maintain “key person” life insurance with respect to any of our executives.
We could incur substantial costs as a result of violations of or liabilities under laws protecting the environment and human health.
Our operations and facilities are subject to a number of national, state and local laws and regulations protecting the environment and human health in the United States and foreign countries that govern, among other things, the handling, storage and disposal of hazardous materials, discharges of pollutants into the air and water and workplace safety. The U.S. Federal Comprehensive Environmental Response, Compensation and Liability Act, as amended, provides for responses to, and, in some instances, joint and several liability for releases of hazardous substances into the environment. Environmental laws also hold current owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants, including petroleum and petroleum products. Because of our operations, the history of industrial uses at some of our facilities, the operations of predecessor owners or operators of some of the businesses and the use and release of hazardous substances at these sites, the liability provisions of environmental laws may affect us. Many of our facilities have experienced some level of regulatory scrutiny in the past and are or may be subject to further regulatory inspections, future requests for investigation or liability for regulated materials management practices.
We cannot assure that we have been or will be at all times in complete compliance with all laws and regulations applicable to us which are designed to protect the environment and human health. We could incur substantial costs, including clean-up costs, fines and sanctions and third party property damage or personal injury claims, as a result of violations of or

15


liabilities under environmental laws, relevant common law or the environmental permits required for our operations or under workplace safety laws. While we believe that the current level of reserves is adequate, the adequacy of these reserves may change in the future due to new developments in particular matters.
Adverse labor relations could harm our operations and reduce our profitability.
We are subject to risk of work stoppages and other labor relations matters because a significant portion of our workforce is unionized. As of December 31, 2017, we had approximately 2,850 employees worldwide, approximately 13% of whom were subject to protection of various North American collective bargaining agreements and approximately 54% of whom were subject to job protection as members of European or South American trade unions, employee associations or workers’ councils. As of December 31, 2017, approximately 5% of the employees subject to North American collective bargaining agreements (or approximately 0.7% of our total employees) were covered by an agreement that is set to expire prior to December 31, 2018. We cannot be certain that we will be able to renew the collective bargaining agreement set to expire this year, or enter into a new collective bargaining agreement that does not adversely affect our operating results or that we will be without production interruptions, including labor stoppages. In addition, all of our European and South American employees subject to job protection as members of trade unions, employee associations or workers’ councils are subject to arrangements that typically result in higher negotiated or mandated salary increases on either an annual or biannual basis. We cannot be certain that the terms of employment applicable to such employees will not change in the future in a manner which could adversely affect our operating results. We cannot be certain that we will not experience disruptions in our operations as a result of labor disputes or experience other labor relations issues. If we are unable to maintain good relations with our employees, our ability to produce our products and provide services to our customers could be reduced and/or our production costs could increase, either of which could disrupt our business and reduce our net sales and profitability.
We may be subject to assessment of income taxes for which we have not accrued any liability.
We accrue for certain known and reasonably anticipated income tax obligations after assessing the likely outcome. In the event that actual results differ from these accruals or if we become subject to a tax obligation for which we have made no accrual, we may need to make adjustments, which could materially impact our financial condition and results of operations. For example, taxing authorities may disagree with our tax accounting methodologies and may subject us to inquiries regarding such taxes, which potentially could result in additional income tax assessments against us. In accordance with accounting rules, we do not accrue for potential income tax obligations if we deem a particular tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. In making our determination, we assume that the taxing authorities will have access to all relevant facts and information.
Risks Relating to Our Capital Structure
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to plan for and react to changes in the economy, our industry or our business and prevent us from meeting our debt obligations.
We are significantly leveraged. As of December 31, 2017, our total indebtedness (excluding deferred financing costs) was approximately $522.0 million. Our substantial degree of leverage could have negative consequences to us, including the following:

limit our ability to obtain additional capital through debt or equity financing on attractive terms or at all;

limit our operations, capital expenditures and other business opportunities since a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes;

increase our exposure to interest rate increases since certain of our borrowings, including borrowings under our ABL Facility (defined in “Management Discussion & Analysis of Financial Conditions & Results of Operations & Credit Facility and Notes”), are at variable rates of interest;

limit our ability to refinance our debt on attractive terms or at all;

limit our flexibility in planning for, or our ability to adjust to, changes in our business or the industry in which we operate, and place us at a competitive disadvantage compared to our competitors that have less leverage; and

increase our vulnerability to a downturn in general economic conditions or in our industry.

16



Despite current indebtedness levels, we may still incur a significant amount of additional debt. This could further exacerbate the risks associated with our substantial leverage.
We may incur substantial additional indebtedness in the future. Although the terms of our ABL Facility and our indenture ("Indenture") governing our 9.50% senior secured notes due 2021 (the "Notes") place limits on our ability to incur additional indebtedness, we, under certain circumstances, could incur substantial additional indebtedness in compliance with these limits. To the extent that we incur additional debt, the risks associated with our substantial leverage, including our possible inability to service our debt, would increase. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Credit Facility and Notes” for a more complete description of the terms and features of the ABL Facility and the Notes.
The Indenture to the Notes and the ABL Facility include a number of significant restrictions and covenants that limit our flexibility in operating our business.
The Indenture and the ABL Facility include a number of customary and significant restrictions and covenants, subject to certain exceptions, that limit 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.
A breach of any of these covenants could result in a default under our Notes and ABL Facility. Upon the occurrence of an event of default under the Notes or ABL Facility, our creditors could elect to declare all amounts outstanding thereunder to be immediately due and payable. If we were unable to repay those amounts, our creditors could proceed against the collateral granted to them to secure the Notes and ABL Facility. We have pledged a significant portion of our assets as collateral under the Notes and ABL Facility. If our creditors accelerate repayment, there can be no assurance that we will have sufficient assets to repay the Notes and ABL Facility, or be able to borrow sufficient funds to refinance the Notes and ABL Facility. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. There can be no assurance that our future operating performance will generate sufficient cash flows to support our cash requirements. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. There can be no assurance that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including the ABL Facility or the Indenture. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Indenture restricts our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or obtain the proceeds which we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.
If we cannot make scheduled payments on our debt, we will be in default and, as a result our debt holders could declare all outstanding debt to be due and payable; the lenders under our ABL Facility could terminate their commitments to lend us money, declare all outstanding amounts there under due and payable and foreclose against the assets securing their borrowings; and we could be forced into bankruptcy or liquidation, which could result in our security holders’ loss of their investment.

17


Risks Relating to Our Common Stock
We do not anticipate paying a dividend on our common stock in the foreseeable future, which may adversely affect the market price of our common stock.
Our ABL Facility and the Indenture governing our Notes limits the payment of dividends on our common stock. Accordingly, we do not anticipate paying dividends on our common stock for the foreseeable future. The lack of dividend payments may adversely affect the market price of our common stock.
The market price of our common stock has been volatile and may continue to be volatile.
Shares of our common stock may continue to experience substantial price volatility, including significant decreases, in response to a number of events, including:
future announcements concerning our business;
the failure of securities analysts to cover our common stock and/or changes in financial estimates and recommendations by securities analysts;
actions of competitors;
fluctuations in foreign currency exchange rates;
sales of our common stock by principal stockholders;
issuances of our common stock;
changes in U.S. and foreign government regulation;
general market, economic and political conditions; and
natural disasters, terrorist attacks and acts of war.
On December 29, 2017, the last trading day in 2017, the closing price of our common stock was $4.26 as compared with $5.62 as of December 30, 2016. During the twelve months ended December 31, 2017, the lowest trading price of our common stock was $3.76 and the highest trading price was $7.54.
Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. Such lawsuits, should they be filed against us in the future, could result in substantial costs and a diversion of management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.
Certain shareholders have significant influence over our business and significant transactions.
We have a director nomination agreement with Carl Marks Strategic Investments, LP (together with its affiliates, "Carl Marks") pursuant to which Carl Marks may designate one individual for nomination to our Board of Directors, so long as Carl Marks continues to own at least 50% of the common stock issued to it under the plan of reorganization in connection with our bankruptcy in 2010. As of February 28, 2018, Carl Marks owned 13.0% of the outstanding shares of our common stock. Mr. James F. Wilson, who is a general partner of Carl Marks Management Company, is also our Chairman of the Board. As a result, Carl Marks has a strong ability to influence our business, policies and affairs, and we cannot be certain that its interests will be consistent with the interests of other holders of our common stock.
Anti-takeover provisions could make it more difficult for a third-party to acquire us.
Our Board of Directors has the authority to issue up to one million shares of preferred stock (of which 20,000 shares have been designated as Series A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of our company without further action by the stockholders and may adversely affect the voting and other rights of the holders of our common stock. For instance, we previously adopted a shareholder rights plan, which has since lapsed, that if implemented could have substantially diluted the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors. Our Board of Directors could choose to adopt a stockholder rights plan in the future that may have the effect of making it more difficult for a third party to acquire us (or a

18


significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition.
Further, some provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of our company, which could have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control of our company.

If securities or industry analysts downgrade our common shares or publish misleading or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our common shares is influenced in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of these analysts downgrades our shares or publishes misleading or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, demand for our shares could decrease, which could cause our share price or trading volume to decline.
We are exposed to risks relating to evaluations of our internal controls required by Section 404 of the Sarbanes-Oxley Act.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. We are required to provide reliable financial statements and reports to our shareholders. To monitor the accuracy and reliability of our financial reporting, we have established an internal audit function that oversees our internal controls. In addition, we have developed policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting. While we have undertaken substantial work to comply with Section 404 of the Sarbanes-Oxley Act, we cannot be certain that we will be successful in maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement. If we fail to comply with proper overall controls, we could be materially harmed or fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency in our internal controls could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, leading to a substantial decline in the market price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of December 31, 2017, we operate 28 manufacturing facilities in the following 13 countries: Argentina, Austria, Australia, Brazil, Canada, China, Finland, Germany, Italy, Japan, Mexico, Turkey and the United States. Of the 28 manufacturing facilities that we operate, 10 are clothing manufacturing facilities and 18 are rolls manufacturing facilities; five of our facilities are leased and twenty-three are owned by the Company. We believe that the production capacity under these facilities is adequate to meet our operational needs for 2018. Additionally, the Company is underway with construction of its 29th plant located in Chile to serve that local market.
 
ITEM 3.
LEGAL PROCEEDINGS
We and our subsidiaries are involved in various legal matters, which have arisen in the ordinary course of business as a result of various labor claims, taxing authority reviews and other legal matters. As of December 31, 2017, we accrued an immaterial amount in our financial statements for these matters for which we believed the possibility of loss was either

19


probable or possible, and we were able to estimate the damages or, under applicable income tax accounting guidance, it was more likely than not we would not be able to sustain a particular income tax position. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings.
Governmental Proceedings and Undertakings.
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the New York Stock Exchange under the symbol “XRM”. On February 27, 2018, there were approximately 76 stockholders of record of our common stock, and the closing price of our common stock as reported by the New York Stock Exchange was $5.82 per share. The following table lists the high and low sales prices for our common stock within the two most recent fiscal years.
 
Period
 
High
 
Low
2017
 
 
 
 
Fourth quarter
 
$
5.26

 
$
3.76

Third quarter
 
$
7.50

 
$
4.63

Second quarter
 
$
7.54

 
$
6.29

First quarter
 
$
6.58

 
$
4.73

2016
 
 
 
 
Fourth quarter
 
$
8.23

 
$
5.20

Third quarter
 
$
8.96

 
$
6.42

Second quarter
 
$
7.59

 
$
4.26

First quarter
 
$
12.23

 
$
4.98

The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

Since 2007, we have not declared or paid cash dividends on our common stock. Under the Indenture governing our Notes and our ABL Facility, we are prohibited from paying cash dividends, and therefore we currently do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.


20


chart-3d82f9168e015e469e3.jpg
* $100 invested on 12/31/2012 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

21




ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our financial statements and the related Notes to Consolidated Financial Statements.
 
 
Year ended December 31,
  
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(in thousands, except per share data)
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
481,048

 
$
471,317

 
$
477,243

 
$
542,932

 
$
546,892

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Cost of products sold
 
296,199

 
293,842

 
288,512

 
327,161

 
337,256

Selling
 
62,850

 
62,810

 
64,414

 
73,002

 
73,348

General and administrative
 
52,752

 
51,063

 
56,250

 
56,539

 
60,214

Research and development
 
6,581

 
7,100

 
7,404

 
7,903

 
7,858

Restructuring
 
7,884

 
10,362

 
14,649

 
18,142

 
14,844

Total operating costs and expenses
 
426,266

 
425,177

 
431,229

 
482,747

 
493,520

Income from operations
 
54,782

 
46,140

 
46,014

 
60,185

 
53,372

Other (expense) income:
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(52,815
)
 
(46,155
)
 
(38,413
)
 
(36,768
)
 
(40,681
)
Loss on extinguishment of debt
 
(32
)
 
(11,938
)
 
(388
)
 

 
(3,123
)
Foreign exchange (loss) gain
 
(2,942
)
 
(383
)
 
1,872

 
(719
)
 
(1,052
)
(Loss) income before provision for income taxes
 
(1,007
)
 
(12,336
)
 
9,085

 
22,698

 
8,516

Provision for income taxes
 
(13,639
)
 
(9,282
)
 
(13,465
)
 
(30,080
)
 
(4,363
)
Net (loss) income
 
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)
 
$
(7,382
)
 
$
4,153

 
 
 
 
 
 
 
 
 
 
 
Net (loss) income per common share—basic
 
$
(0.90
)
 
$
(1.35
)
 
$
(0.28
)
 
$
(0.48
)
 
$
0.27

Net (loss) income per common share—diluted
 
$
(0.90
)
 
$
(1.35
)
 
$
(0.28
)
 
$
(0.48
)
 
$
0.26

Cash dividends per common share
 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
Balance sheet data (at end of period):
 
 
 
 
 
 
 
 
 
 
Unrestricted cash and cash equivalents
 
$
17,253


$
12,808

 
$
9,839

 
$
9,517

 
$
25,716

Total assets
 
$
567,849


$
541,913

 
$
550,374

 
$
584,273

 
$
612,986

Total debt
 
$
508,868

 
$
508,087

 
$
483,173

 
$
469,435

 
$
443,139

Total stockholders’ deficit
 
$
(136,466
)
 
$
(146,905
)
 
$
(113,070
)
 
$
(74,110
)
 
$
(11,449
)
Cash flow data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
24,715

 
$
36,509

 
$
33,287

 
$
8,834

 
$
36,232

Net cash used in investing activities
 
$
(11,736
)
 
$
(29,814
)
 
$
(47,605
)
 
$
(41,788
)
 
$
(41,869
)
Net cash (used in) provided by financing activities
 
$
(7,902
)
 
$
(2,326
)
 
$
14,450

 
$
18,751

 
$
(3,392
)
Other financial data:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
33,105

 
$
32,956

 
$
29,250

 
$
34,292

 
$
36,403

Capital expenditures
 
$
13,033

 
$
13,706

 
$
50,871

 
$
45,218

 
$
44,145





22


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the section titled “Risk Factors,” the Consolidated Financial Statements and related Notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.

Company Overview
We are a leading global manufacturer and supplier of two types of consumable products used primarily in the production of paper. 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: machine clothing and roll covers. In our machine clothing segment, we manufacture and sell highly engineered synthetic textile belts that transport raw material as it is processed in a paper or other industrial application. 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 machine clothing size, form, material and function is custom engineered to fit each individual paper-making machine and process. For the year ended December 31, 2017, our machine clothing segment represented 60% 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 the 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 mechanical and refurbishment services for previously installed roll covers and we manufacture new and rebuilt spreader rolls. We also provide various related mechanical services both directly and through third party providers. For the year ended December 31, 2017, our roll cover segment represented 40% of our net sales.
Industry Trends and Outlook
      
Our global markets were slightly favorable overall in 2017 although they have gone through a tough business cycle. Demand for our products is tied to our customers' production rates and our product’s useful lives. While the majority of our end-markets are growing, certain graphical grade paper production market segments have been in decline. Declining graphical grades include newsprint and printing/writing papers which only represent approximately 25% of our sales. These market corrections have been very strong in the last few years and many paper machines dedicated to graphical paper production have been closed. In order to optimize outcomes in this changing environment, we implemented a repositioning program to re-map our people, products, equipment tooling, machine services offered, and plant locations to more naturally align with growing markets both geographically and by type of paper machine serviced. This repositioning program is largely complete.
Net Sales and Expenses
Net sales in both our machine clothing and roll covers segments are primarily driven by the following factors:
 
 
Ÿ
 
the volume (tonnage) of worldwide paper production;
 
Ÿ
 
our ability to introduce new products that our customers value and will pay for;
 
Ÿ
 
advances in the technology of our products, which can provide value to our customers by improving the efficiency of our customers' machines and reducing their manufacturing costs;
 
Ÿ
 
growth in developing markets, particularly in Asia-Pacific;

23


 
Ÿ
 
the mix of paper grades being produced;
 
Ÿ
 
our ability to enter and expand our business in non-paper products; and
 
Ÿ
 
the impact of currency fluctuations.
Net sales in our roll covers segment include our mechanical services business. We have expanded this business in response to demand from paper producers. We perform work on the internal mechanisms of their rolls while we refurbish or replace a roll cover. In our machine clothing segment, a small portion of our business has been conducted 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 the product is shipped 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, revenue is recognized 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 $6.6 million in 2017, $7.1 million in 2016 and $7.4 million in 2015.
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. For example, decreases in the value of the U.S. Dollar relative to the value of the Euro 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 year ended December 31, 2017, we conducted business primarily in nine foreign currencies. The following table provides the average exchange rate for the year ended December 31, 2017 and the year ended December 31, 2016 of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our sales.
 
Currency
 
Average exchange rate of the
U.S. Dollar in the year
December 31, 2017
 
Average exchange rate of the
U.S. Dollar in the year
December 31, 2016
Euro
 
$1.13 = 1 Euro
 
$1.11 = 1 Euro
Canadian Dollar
 
$0.77 = 1 Canadian Dollar
 
$0.76 = 1 Canadian Dollar
Chinese Renminbi
 
$0.15 = 1 Chinese Renminbi
 
$0.15 = 1 Chinese Renminbi
Japanese Yen
 
$0.01 = 1 Japanese Yen
 
$0.01 = 1 Japanese Yen

24


For the year ended December 31, 2017,  we conducted approximately 32% of our sales in Euros, approximately 6% in the Canadian Dollar, approximately 6% in the Chinese Renminbi and approximately 4% in the Japanese Yen.
To mitigate the risk that changes in foreign currencies have on our cash flows, 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 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 successful, changes in the relative value of currencies can affect our cash flows.

Domestic and Foreign Operating Results
The following is an analysis of our domestic and foreign operations during the year ended December 31, 2017 and 2016 and a discussion of the results of operations during those periods (in thousands): 
 
Twelve Months Ended December 31,
 
2017
 
2016
Domestic income from operations
$
36,822

 
$
11,335

Foreign income from operations
17,960

 
34,805

Total income from operations
$
54,782

 
$
46,140


During the year ended December 31, 2017, domestic income from operations was higher than foreign income from operations primarily due to higher intercompany charges to foreign entities, partially offset by lower sales, product mix, corporate overhead costs and market differences. In light of U.S. taxation upon repatriation of foreign earnings under the Tax Cuts & Jobs Act ("the Tax Act"), we intend for all earnings generated by foreign subsidiaries to be remitted to the parent company at some point in the future. Foreign withholding taxes have been provided related to those foreign earnings.
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 continue 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 or plant closure with remaining cost savings recognized over subsequent periods. Cost savings from headcount reductions are expected to be partially offset by related increases in other expenses, such as wage inflation. 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.

During 2017, we incurred restructuring expenses of $7.9 million relating to: 1) headcount reductions and 2) other costs related to previous plant closures partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary. During the fourth quarter of 2017, we implemented a cost-out initiative which reduced headcount in North America and Europe. Implementation costs are expected to be approximately $2.4 million, of which we have incurred $2.2 million as of December 31, 2017. Annual savings from the program will be approximately $8 million per year, which is expected to largely offset inflation and keep our cost structure flat to current levels in 2018. The savings will impact our cost of products sold and selling, general and administrative expenses.

During 2016, we incurred restructuring expenses of $10.4 million. These included $1.8 million of charges related to the closure of the Middletown, VA facility and $8.6 million of charges related to headcount reductions and other costs relating to previously announced plant closures.

During 2015, we incurred restructuring expenses of $14.6 million. These included $4.4 million of charges related to the closure of the Joao Pessoa, Brazil machine clothing facility; $4.9 million of charges related to the closure of the Warwick, Canada machine clothing facility; and $6.4 million of charges relating to headcount reductions, and other costs relating to previously announced plant closures. The costs were partially offset by a gain of $1.1 million on the sale of the Joao Pessoa, Brazil machine clothing facility in the fourth quarter of 2015.
      



25


Results of Operations
The table that follows sets forth for the periods presented certain consolidated operating results.
 
 
Year Ended
December 31,
 
2017
 
2016
 
2015
 
(in thousands)
Net sales
$
481,048

 
$
471,317

 
$
477,243

Costs and expenses:
 
 
 
 
 
Cost of products sold
296,199

 
293,842

 
288,512

Selling
62,850

 
62,810

 
64,414

General and administrative
52,752

 
51,063

 
56,250

Research and development
6,581

 
7,100

 
7,404

Restructuring
7,884

 
10,362

 
14,649

 
426,266

 
425,177

 
431,229

Income from operations
54,782

 
46,140

 
46,014

Interest expense, net
(52,815
)
 
(46,155
)
 
(38,413
)
Loss on extinguishment of debt
(32
)
 
(11,938
)
 
(388
)
Foreign exchange (loss) gain
(2,942
)
 
(383
)
 
1,872

(Loss) income before provision for income taxes
(1,007
)
 
(12,336
)
 
9,085

Provision for income taxes
(13,639
)
 
(9,282
)
 
(13,465
)
Net loss
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
Net Sales. Net sales for the year ended December 31, 2017 increased by $9.7 million, or 2.1%, to $481.0 million from $471.3 million for the year ended December 31, 2016. Favorable currency effects were $1.7 million. For the year ended December 31, 2017, 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 year ended December 31, 2017 increased $1.9 million, or 0.7%, to $288.3 million from $286.4 million for the year ended December 31, 2016. Excluding favorable currency effects of $0.9 million, the $1.0 million increase was driven largely by higher sales volumes in Latin America, Europe and Asia partially offset by competitive pricing pressure in certain regions.
In our rolls segment, net sales for the year ended December 31, 2017 increased by $7.9 million, or 4.2%, to $192.8 million from $184.9 million for the year ended December 31, 2016. Excluding favorable currency effects of $0.9 million, the $7.0 million increase was driven by the acquisition of Spencer Johnston along with higher sales volume in Latin America.
Cost of Products Sold. Cost of products sold for the year ended December 31, 2017 increased by $2.4 million, or 0.8%, to $296.2 million from $293.8 million for the year ended December 31, 2016.
In our clothing segment, cost of products sold decreased $1.1 million in the year ended December 31, 2017 compared to the year ended December 31, 2016. This decrease was primarily due to production efficiencies. Cost of products sold as a percentage of net sales decreased by 0.8 percentage points to 59.1% in the year ended December 31, 2017 from 59.9% in the year ended December 31, 2016. This improvement was primarily due to production efficiencies, partially offset by competitive pricing pressure in certain regions.
In our rolls segment, cost of products sold increased $3.5 million in the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily as a result of increased sales volume, partially offset by production efficiencies. Cost of products sold as a percentage of net sales decreased by 0.9 percentage points to 65.3% in the year ended December 31, 2017 from 66.2% in the year ended December 31, 2016, due to production efficiencies, partially offset by product and customer mix.
Selling Expenses. In the year ended December 31, 2017, selling expenses of $62.9 million were flat to the year ended December 31, 2016.


26


General and Administrative Expenses. For the year ended December 31, 2017, general and administrative expenses increased by $1.7 million, or 3.3%, to $52.8 million from $51.1 million for the year ended December 31, 2016, primarily as a result of $3.1 million in CEO transition costs (which includes $1.2 million of related stock-based compensation cost) in 2017 and the impact of the Spencer Johnston acquisition in May of 2016, partially offset by cost reduction initiatives and lower stock-based compensation unrelated to the CEO transition.
Restructuring Expenses. For the year ended December 31, 2017, we incurred restructuring expenses of $7.9 million relating to headcount reductions and other costs related to previous plant closures, partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary.
Interest Expense, Net. Net interest expense for the year ended December 31, 2017 was $52.8 million, up $6.6 million from $46.2 million for the year ended December 31, 2016. The increase was primarily driven by the higher interest rates for the year ended December 31, 2017 versus the year ended December 31, 2016 due to the refinancing completed during the third quarter of 2016 and additional debt assumed to finance the Spencer Johnston acquisition in the second quarter of 2016.

Provision for Income Taxes. For the years ended December 31, 2017 and 2016, the provision for income taxes was $13.6 million and $9.3 million, respectively. The increase in tax expense in the year ended December 31, 2017, was primarily attributable to establishing a valuation allowance against certain German deferred tax assets and a reduction in tax benefits allocated to continuing operations, partially offset by the geographic mix of earnings. The Tax Act had no impact on the provision for income taxes in 2017. 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 35.0%. 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, Germany, 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.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Net Sales. Net sales for the year ended December 31, 2016 decreased by $(5.9) million, or (1.2)%, to $471.3 million from $477.2 million for the year ended December 31, 2015. Unfavorable currency effects were $(2.5) million. For the year ended December 31, 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 year ended December 31, 2016 decreased $(13.6) million, or (4.5)%, to $286.4 million from $300.0 million for the year ended December 31, 2015. Excluding favorable currency effects of $0.4 million, the $(14.0) million decrease was primarily due to a global machine clothing market decline.
In our rolls segment, net sales for the year ended December 31, 2016 increased by $7.6 million, or 4.3%, to $184.9 million from $177.3 million for the year ended December 31, 2015. Excluding unfavorable currency effects of $(2.9) million, the $10.5 million increase was driven by the acquisition of Spencer Johnston.
Cost of Products Sold. Cost of products sold for the year ended December 31, 2016 increased by $5.3 million, or 1.8%, to $293.8 million from $288.5 million for the year ended December 31, 2015.
In our clothing segment, cost of products sold decreased $(2.8) million in the year ended December 31, 2016 compared to the year ended December 31, 2015. This decrease was primarily due to decreased sales volume and favorable currency effects. Cost of products sold as a percentage of net sales increased by 1.9 percentage points to 59.8% in the year ended December 31, 2016 from 57.9% in the year ended December 31, 2015. This decrease was primarily due to a weak economic environment in Brazil and margin compression in certain regions, partially offset by favorable currency effects.
In our rolls segment, cost of products sold increased $8.1 million in the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of increased sales volume and unfavorable currency effects. Cost of products sold as a percentage of net sales increased by 1.8 percentage points to 66.2% in the year ended December 31, 2016 from 64.4% in the year ended December 31, 2015, due to negative product mix.

27


Selling Expenses. In the year ended December 31, 2016, selling expenses decreased by $(1.6) million, or (2.5)%, to $62.8 million from $64.4 million in the year ended December 31, 2015. This decrease was primarily driven by favorable currency and decreased sales commissions on lower sales volume.

General and Administrative Expenses. For the year ended December 31, 2016, general and administrative expenses decreased by $(5.2) million, or (9.2)%, to $51.1 million from $56.3 million for the year ended December 31, 2015, primarily as a result of cost reduction programs, net of inflation, favorable currency effects and a 2015 pension settlement charge. These decreases were partially offset by the addition of expenses from the recently acquired Spencer Johnston business.
Restructuring Expenses. For the year ended December 31, 2016, restructuring expense declined by $(4.2) million or (28.8)%, to $10.4 million from $14.6 million in 2015. These included $1.8 million of charges related to the closure of the Middletown, VA facility and $8.6 million of charges related to headcount reductions and other costs relating to previously announced plant closures.
Interest Expense, Net. Net interest expense for the year ended December 31, 2016 was $46.2 million, up $7.8 million from $38.4 million for the year ended December 31, 2015. The increase was driven by the higher interest rate on the new bonds issued in the refinancing and a higher average debt balance during 2016 versus 2015.

Provision for Income Taxes. For the years ended December 31, 2016 and 2015, the provision for income taxes was $9.3 million and $13.5 million, respectively. The decrease in tax expense in the year ended December 31, 2016, was primarily attributable to the geographic mix of earnings, as well as tax benefits from interest deductions in Brazil. 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. 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.


Liquidity and Capital Resources
Our principal liquidity requirements are for debt service, working capital and capital expenditures. We plan to use cash on hand, cash generated by operations and access to 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.
Net cash provided by operating activities was $24.7 million for the year ended December 31, 2017 and $36.5 million for the year ended December 31, 2016. The $(11.8) million decrease was due primarily to higher cash interest, partially offset by decreases in cash taxes and cash restructuring. Net cash provided by operating activities was $36.5 million for the year ended December 31, 2016 and $33.3 million for the year ended December 31, 2015. The $3.2 million increase was due primarily to decreased working capital, partially offset by lower earnings.
Net cash used in investing activities was $11.7 million for the year ended December 31, 2017 and $29.8 million for the year ended December 31, 2016. The decrease of $18.1 million was primarily due to the acquisition of Spencer Johnston in 2016 along with higher property and equipment sales in 2017. Net cash used in investing activities was $29.8 million for the year ended December 31, 2016 and $47.6 million for the year ended December 31, 2015. The decrease of $17.8 million was primarily due to a decrease in capital expenditures, partially offset by the acquisition of Spencer Johnston.
Net cash used in financing activities was $(7.9) million for the year ended December 31, 2017 and $(2.3) million for the year ended December 31, 2016. The increase in net cash used of $(5.6) million in 2017 was driven by higher scheduled payments made on debt and capital leases. Net cash (used in) provided by financing activities was $(2.3) million for the year ended December 31, 2016 and $14.5 million for the year ended December 31, 2015. The decrease of $(16.8) million was driven

28


by lower capital expenditures in 2016 compared to 2015, partially offset by the acquisition of Spencer Johnston and higher capital lease payments.
As of December 31, 2017, an aggregate of $34.1 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $36.9 million under the ABL revolver that is currently collateralized by certain of our assets, less $2.8 million of that facility committed for letters of credit or current borrowings. In addition, we had approximately $5.8 million available for borrowings under other small lines of credit. We also had cash and cash equivalents of $17.3 million at December 31, 2017 compared to $12.8 million at December 31, 2016.
We expect to pay approximately between $4.0 million and $6.0 million related to the continuation of our restructuring initiatives in 2018. Actual restructuring costs for 2018 may substantially differ from estimates at this time, depending on the timing of the restructuring activities.
Capital Expenditures
We use the term “capital expenditures” to refer to costs incurred to purchase or significantly upgrade property and equipment. The majority of our capital expenditures relate to purchases of machinery and equipment used in the manufacturing of our products. Capital expenditures were funded from net cash provided by operating activities and borrowings under our ABL Facility. For the year ended December 31, 2017, we had capital expenditures of $13.0 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. We target capital expenditures for 2018 to be approximately $15.0 million.
See “Credit Facility and Notes” below for a description on limitations on capital expenditures imposed by our ABL Facility and Indenture.
Credit Facilities
9.5% Secured Notes due 2021
On August 9, 2016, we closed on $480.0 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.
We used the net proceeds from the offering to repay all amounts outstanding under our then existing $230.0 million term loan credit facility, to redeem all of its $240.0 million aggregate principal amount 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.
ABL Revolving Credit Facility
On November 3, 2015, we refinanced our prior revolving credit facility by entering into a new Revolving Credit and Guaranty Agreement (the “ABL Facility”) with one of our existing lenders. The amount of the ABL Facility provides an aggregate facility limit of $55.0 million, subject to a borrowing base collateralized by eligible accounts receivable, inventory and equipment of Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, and Huyck.Wagner Germany GmbH, Robec Walzen GmbH, and Stowe Woodward AG, as the European borrowers. 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 December 31, 2017 these rates were 5.25% and 3.37%, respectively.
The Indenture 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;

29


transact with affiliates; and
engage in businesses that are not related to our existing business.
Fixed Assets Loan Contract
On July 17, 2015 (the "Closing Date"), Xerium China, Co., Ltd. ("Xerium China"), a wholly-owned subsidiary of ours 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 and guaranteed by Xerium Asia Pacific (Shanghai) Limited and Stowe Woodward (Changzhou) Roll Technologies Co. Ltd., which are wholly-owned subsidiaries of ours, 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 December 31, 2017 is approximately 5.2%. 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 were 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 Indenture and ABL Facility at December 31, 2017, and expect to remain in compliance in 2018.
Contractual Obligations and Commercial Commitments
The following tables provide aggregated information about our contractual obligations as of December 31, 2017.
 
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
 
(in millions)
Long-term debt obligations
 
$
501.2

 
$
14.2

 
$
6.8

 
$
480.2

 
$

Capital leases
 
20.7

 
4.8

 
5.7

 
1.5

 
8.7

Interest expense on long-term debt and capital leases (1)
 
173.1

 
47.4

 
93.4

 
29.9

 
2.4

Operating leases
 
5.9

 
1.7

 
2.7

 
1.5

 

Purchase obligations (2)
 
13.7

 
8.7

 
4.0

 
1.0

 

Pension and other post-retirement obligations (3)
 
46.3

 
6.8

 
12.8

 
13.7

 
13.0

Total contractual cash obligations (4)
 
$
760.9

 
$
83.6

 
$
125.4

 
$
527.8

 
$
24.1

 
(1)
Interest expense shown above is based on the effective interest rate at December 31, 2017.
(2)
Includes obligations with respect to raw material purchases, repairs and maintenance services, utilities and other capital expenditures.
(3)
Amounts include expected benefit payments to be made by us on our unfunded pension plans plus expected minimum contributions on our funded pension plans. Expected minimum contributions of $3.7 million per year, for years 1-5, have been included in the table above and are based upon our December 31, 2017 assumptions that were used to estimate our 2018 contributions. Refer to Note 8 for further information.
(4)
Not included in the above table are other long-term liabilities primarily related to our uncertain income tax liabilities which have either no fixed payment dates or are not settled in cash. See Note 7 to our consolidated financial statements for further information.

Off-Balance Sheet Financing
During the year ended December 31, 2017, we did not engage in any off-balance sheet activities, including the use of structured finance or special purpose entities.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. 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

30


date of the financial statements and the reported amounts of net sales and expenses. Actual results could differ from those estimates. We have formal accounting policies in place including those that address critical and complex accounting areas. Note 2 "Accounting Policies" to the Consolidated Financial Statements included elsewhere in this Annual Report identifies the significant accounting policies used in preparation of the Consolidated Financial Statements. The most significant areas involving management judgments and estimates are described below.
Derivatives and Hedging. Effective January 1, 2009, we adopted ASC Topic 815-10-65-1, Transition and Effective Date Related to FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“Topic 815-10-65-1”) for disclosures related to derivatives and hedging. Topic 815-10-65-1 amends and expands the disclosure requirements to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Topic 815-10-65-1 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative instruments.
As required by Topic 815-10-65-1, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or if we elect not to apply hedge accounting under Topic 815.
We have measured our derivative assets and liabilities under ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), and have classified our interest rate swaps in Level 2 of the Topic 820 fair value hierarchy, as the significant inputs to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value a derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. We use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For our derivatives, all of which traded in liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment.
To comply with the provisions of Topic 820, we performed a review of the necessity to incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements of our derivatives and determined these adjustments to be immaterial to the fair value derivative assets/(liabilities) recorded on our Consolidated Balance Sheet at December 31, 2017.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2017.
Impairment of Goodwill. We account for acquired goodwill and goodwill impairment in accordance with Topic 350, which requires considerable judgment in the valuation of acquired goodwill and the ongoing evaluation of goodwill impairment. Topic 350 requires that goodwill not be amortized but, instead, must be tested at least annually for impairment or whenever events or business conditions warrant.
We account 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 at least annually for impairment or whenever events or business conditions warrant. We first assessed qualitative factors to determine whether it was more likely than not that the fair value of its single reporting unit was less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill

31


impairment test.  Our assessment is that the two-step goodwill impairment test is not necessary for the year ending December 31, 2017 for either our clothing or rolls reporting units.  If the qualitative factors had indicated that it was more likely than not that the fair value of the reporting units was less than its carrying amount, we would have tested goodwill for impairment at the reporting unit level using a two-step approach.
Step 1 involves comparing the fair value of the our reporting unit to its carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit carrying amount is greater than the fair value then the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of the net assets of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
We have two reporting units: machine clothing and roll covers. For the purpose of performing the annual impairment test, we allocate all shared assets and liabilities to the reporting units based on the percentage of each reporting unit’s revenue to total revenue. Shared operating expenses are allocated to the reporting unit to the extent necessary to allow them to operate as independent businesses. To determine if impairment exists, the fair value of each reporting unit is compared to its carrying value. The fair value of our reporting unit is determined by using a weighted combination of both a market multiple approach and an income approach. The market multiple approach utilizes ours and our competitors’ proprietary information that is used to value its reporting units. The income approach is a present value technique used to measure the fair value of future cash flows produced by each reporting unit. During the fourth quarter of 2016, we voluntarily changed the date of our annual goodwill impairment testing from December 31, the last day of the fiscal year, to October 1.  The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or avoid an impairment charge. This change was not applied retrospectively, as it would have required application of significant estimates and assumptions with the use of hindsight.  Accordingly, the change was applied prospectively. As a result of the annual tests for goodwill impairment performed as of October 1, 2017 and October 1, 2016, we determined that no goodwill impairment exists.
Pension Expense - Selection of Assumptions. We have defined benefit pension plans covering substantially all of our 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. Annual pension expense consists of several components:
Service Cost, which represents the present value of benefits attributed to services rendered in the current year, measured by expected future salary levels.
Interest Cost, which represents the accretion cost on the liability that has been discounted to its present value.
Expected Return on Assets, which represents the expected investment return on pension plan assets.
Amortization of Prior Service Cost and Actuarial Gains and Losses, which represent components that are recognized over time rather than immediately.
These components are calculated annually to determine the pension expense that is reflected in our results of operations. Management believes the selection of assumptions related to the annual pension expense is a critical accounting estimate due to the high degree of volatility in the expense dependent on selected assumptions. The key assumptions are as follows:
The discount rate is the rate used to present value the pension obligation and represents the current rate at which the pension obligations could be effectively settled.
The rate of compensation increase is used to project the pay-related pension benefit formula and should estimate actual future compensation levels.
The expected long-term return on plan assets is used to estimate future asset returns and should reflect the average rate of long-term earnings on assets already invested.

Management’s selection of the discount rate is based on an analysis that estimates the current rate of return for high-quality, fixed-income investments with maturities matching the payment of pension benefits that could be purchased to settle the obligations. At December 31, 2017, we selected a discount rate assumption of 3.10%.

Management’s selection of the rate of future compensation increase is generally based on our historical salary increases, including cost of living adjustments and merit and promotion increases, giving consideration to any known future trends. A higher rate of increase will result in a higher pension expense. We selected an actual rate of compensation increase assumption of 3.47%.

32



Management’s selection of the expected long term return on plan assets is based on a building-block approach, whereby the components are weighted based on the allocation of pension plan assets. Given that these returns are long-term, there are generally not significant fluctuations in the expected rate of return from year to year. We selected a rate of return assumption of 6.23%.

Using these assumptions, the 2017 pension expense was $3.8 million (including the impact of a $0.9 million settlement loss). A change in the assumptions would have had the following impact on the 2017 expense. An increase of 1% in the discount rate would have changed 2017 expense by approximately $0.6 million. An increase of 1% in the expected long-term rate of return on assets would have changed the 2017 expense by approximately $0.9 million.

Contingencies. We are subject to various claims and contingencies associated with lawsuits, insurance, tax, environmental and other issues arising out of the normal course of business. Our Consolidated Financial Statements reflect the treatment of claims and contingencies based on management’s view of the expected outcome. We consult with legal counsel on those issues related to litigation with respect to matters in the ordinary course of business. If the likelihood of an adverse outcome is probable and the amount is estimable, we accrue a liability in accordance with ASC Topic 450, Contingencies. While we believe that the current level of reserves is adequate, the adequacy of these reserves may change in the future due to new developments in particular matters.
Income Taxes. We utilize the asset and liability method for accounting for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and statutes that will be in effect when the differences are expected to reverse and the effects of such remeasurement are recorded in the period of enactment.

We record net deferred tax assets to the extent we believe that it is more likely than not that these assets will be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In light of our accumulated loss position in certain tax jurisdictions, and the uncertainty of taxability in future periods, we recorded a valuation allowance against all U.S. deferred tax assets and against certain of our foreign deferred tax assets primarily related to net operating loss carry-forwards in Australia, Spain, Germany, Sweden, the United Kingdom, China, Turkey and France. We believe that a portion of the German deferred tax assets, primarily related to net operating loss carry-forwards, will more likely than not expire unutilized based upon available forecasts, and a valuation allowance was recorded thereon.

On December 22, 2017, significant tax legislation was signed into U.S. law under the Tax Cuts & Jobs Act (“the Tax Act”). Key features of the Tax Act include a reduction of the corporate income tax rate from 35% to 21%; limitations on the deductibility of future interest expense; and the transition of the U.S. system for international taxation from a worldwide tax regime to a modified-territorial tax regime, including the imposition of a tax on unrepatriated earnings of foreign subsidiaries (the “transition tax”). In response, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, or in circumstances where estimates cannot be made,to not report any impact and to disclose and recognize at a later date..

As of December 31, 2017, management has not completed its accounting related to the enactment of the Tax Act, as follows:

1.Remeasurement of U.S. deferred tax assets - We have recorded a provisional estimate of $31.8 million discrete deferred tax expense related to the remeasurement of the U.S. deferred tax assets as a result of the reduction in the corporate income tax rate. A corresponding tax benefit was recorded related to the reduction in valuation allowance.

2. Transition tax - We have recorded a provisional estimate related to accounting for the transition tax and its impact on tax accounting for unrepatriated foreign earnings and other foreign income inclusions. The provisional estimate results in $0 current or deferred tax impact primarily as a result of the historic tax loss carry-forwards and the corresponding valuation allowance against related deferred tax assets. In order to complete the accounting, we will continue to analyze foreign earnings calculations as well as to await clarification of certain provisions of the Tax Act.

3. Deferred tax accounting on outside basis differences of controlled foreign corporations - We have recorded a provisional estimate related to the deferred tax accounting for basis differences associated with foreign subsidiaries. We have

33


historically accrued U.S. deferred taxes in connection with certain foreign earnings which were not considered to be permanently reinvested as these earnings were expected to be distributed to the U.S. However, the transition tax has resulted in immediate U.S. taxation of our previously untaxed foreign earnings. As a result, we have reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, we have recorded a provisional estimate for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. No additional U.S. income taxes have been provided in connection with any remaining untaxed foreign earnings or any additional outside basis difference with respect to our investments in foreign subsidiaries as we assess whether any investments should be considered as indefinitely reinvested in our foreign operations.

4. Global Intangible Low-Taxed Income (“GILTI”) - The deferred tax accounting is incomplete for basis differences associated with foreign subsidiaries as it relates to GILTI, a new provision under the Tax Act. No provisional estimate has been provided. Relevant to the current financial statements, our election of an accounting policy with respect to deferred tax accounting for GILTI will depend, in part, on analyzing foreign income to estimate future GILTI inclusions, as well as clarification of certain provisions of the Tax Act. Until such analyses and clarifications are made, we have not made a policy decision regarding tax accounting for the GILTI provision.

5. State and Local Income Taxes - We have recorded a provisional estimate related to the tax accounting for state and local income taxes upon enactment of the Tax Act. We continue to gather and analyze information available related to the impact of the Tax Act on state and local taxes. In order to complete the accounting, we await clarification from the municipalities.

To the extent a provisional estimate was made, we utilized previously issued guidance for the Tax Act in order to reach an estimate. However, these estimates are not capable of finalization given the lack of statutory and regulatory guidance in many areas, as well as the complexity in acquiring the data required to calculate the impact on the tax accounts. We will revise and conclude the accounting as and when additional information is obtained, which in many cases is contingent on the timing of issuance of guidance. For these reasons, the ultimate impact may differ from these provisional amounts due to, among other things, additional information, changes in interpretations and assumptions management has made, and changes based on additional statutory and regulatory guidance that may be issued. Acknowledging this uncertainty, accounting for the impacts of the Tax Act will be completed within the next twelve months.

In light of the enactment of the Tax Act, we evaluated the recoverability of the U.S. deferred tax assets. It remains more likely than not that the deferred tax assets in connection with our U.S. operations will not be realized. Although projections of future U.S. taxable income indicate realization of the primary U.S. deferred tax asset (the tax loss carry-forwards) as a result of limitations on the deductibility of future interest expense, such limitations will have a corresponding increase to deferred tax assets. As we continue to reorganize and restructure our 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. We continue to evaluate future operations and will record an income tax benefit in the period where we believe it is more likely than not that the deferred tax asset will be able to be realized.
In addition, we operate within multiple taxing jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues and rely on estimates and assumptions. These audits may require an extended period of time to resolve and may cover multiple years. We adopted the uncertain tax provisions of Topic 740 on January 1, 2007. ASC Topic 740-10-25 relates to uncertain tax positions and prescribes a two-step process to determine the amount of tax benefit to be recognized as it relates to uncertain tax positions. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all relevant information.

We accrue for certain known and reasonably anticipated income tax obligations after assessing the likely outcome. Although we believe that the estimates and assumptions are reasonable, the final determination of tax audits and any related litigation could be different than that which is reflected in historical income tax provisions and recorded assets and liabilities.

With respect to all jurisdictions, we believe we have made adequate provision for all income tax uncertainties.

34


We have a net deferred tax liability of $2.8 million at December 31, 2017 and $3.6 million deferred tax asset at December 31, 2016. The net deferred tax asset relates principally to pension and post-retirement benefits, net operating loss carry-forwards and differences between the book and tax treatment of accrued expenses.
Undistributed earnings of our foreign subsidiaries amounted to approximately $138.5 million at December 31, 2017. Earnings generated prior to 2013 were considered to be indefinitely reinvested for continued use in foreign operations except for a portion of the earnings generated by our Brazil and China operations. All earnings generated in all foreign subsidiaries after 2012 were not considered to be permanently reinvested, because of our desire to manage global cash and liquidity related to ongoing financial obligations, capital expenditures, restructuring payments and other changes in business conditions going forward. However, the transition tax has resulted in immediate U.S. taxation of our previously untaxed foreign earnings. As a result, we have reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, we have recorded a provisional estimate for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. Foreign withholding taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable.


Non-GAAP Financial Measures
We use EBITDA as supplementary non-GAAP liquidity measure and Adjusted EBITDA as a supplementary non-GAAP financial performance measure. EBITDA is specifically used in evaluating the ability to service indebtedness and to fund ongoing capital expenditures. Adjusted EBITDA excludes certain items the Company does not believe to be indicative of on-going business trends in order to better analyze historical and future business trends on a consistent basis.
Neither EBITDA nor Adjusted EBITDA should be considered in isolation or as a substitute for income (loss) from operations or cash flows (as determined in accordance with U.S. GAAP).
EBITDA is defined as net income (loss) before interest expense, income tax provision (benefit) 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), (xiii) unrealized foreign currency losses and (xiv) 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) unrealized foreign currency gains, (ii) non-cash gains with respect to the items described in clauses (vi), (vii), (ix), (xi), (xii), (xiii) and xiv (other than, in the case of clause (xiv), 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 (iii) provisions for tax benefits based on income or profits. Notwithstanding the foregoing, Adjusted EBITDA, as defined and calculated below, may not be comparable to similarly titled measurements used by other companies.
Consolidated net income is defined as net income (loss) 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 and (iv) any cancellation of indebtedness income. The following table provides a reconciliation from

35


net income and operating cash flows, which are the most directly comparable GAAP financial measures, to EBITDA and Adjusted EBITDA.


 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
 
(in thousands)
Net loss
 
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)
Stock-based compensation
 
1,331

 
2,612

 
3,298

CEO transition stock-based compensation
 
1,187

 

 

Depreciation
 
31,740

 
32,115

 
28,952

Amortization of other intangibles
 
1,365

 
841

 
298

Deferred financing cost amortization
 
3,634

 
3,063

 
3,462

Foreign exchange loss (gain) on revaluation of debt
 
1,135

 
(3,267
)
 
(3,426
)
Deferred taxes
 
8,516

 
219

 
(2,785
)
Asset impairments
 
107

 

 
1,536

Loss (gain) on disposition of property and equipment
 
136

 
50

 
(1,383
)
Pension settlement losses
 
921

 

 
1,108

Loss on extinguishment of debt
 
32

 
11,938

 
388

Change in assets and liabilities which (used) provided cash
 
(10,743
)
 
10,556

 
6,219

Net cash provided by operating activities
 
24,715

 
36,509

 
33,287

Interest expense, excluding amortization
 
49,181

 
43,092

 
34,951

Net change in operating assets and liabilities
 
10,743

 
(10,556
)
 
(6,219
)
Current portion of income tax expense
 
5,123

 
9,063

 
16,250

Stock-based compensation
 
(1,331
)
 
(2,612
)
 
(3,298
)
CEO transition stock-based compensation
 
(1,187
)
 

 

Pension settlement losses
 
(921
)
 

 
(1,108
)
Foreign exchange (loss) gain on revaluation of debt
 
(1,135
)
 
3,267

 
3,426

Asset impairments
 
(107
)
 

 
(1,536
)
(Loss) gain on disposition of property and equipment
 
(136
)
 
(50
)
 
1,383

Loss on extinguishment of debt
 
(32
)
 
(11,938
)
 
(388
)
EBITDA
 
84,913

 
66,775

 
76,748

Operational restructuring expenses
 
7,884

 
10,362

 
14,649

Loss on extinguishment of debt
 
32

 
11,938

 
388

Stock-based compensation
 
1,331

 
2,612

 
3,298

CEO transition expense
 
3,063

 

 

Pension settlement losses
 

 

 
1,108

Non-restructuring impairment charges
 

 

 
494

Plant startup costs
 
721

 
2,176

 
3,886

Inventory write-off of closed facilities
 

 

 
587

Other non-recurring expenses
 
122

 
1,116

 
2,569

Unrealized foreign exchange loss (gain)
 
2,159

 
313

 
(1,912
)
Adjusted EBITDA
 
$
100,225

 
$
95,292

 
$
101,815



ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates and foreign currency rates are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates and foreign currency rates. Actual future

36


results may differ materially from those presented. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and the Notes to Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.
Foreign Currency Hedging
Our earnings and cash flows are subject to foreign currency exposures resulting from operations located in Asia Pacific, Europe, Canada and Latin America. To mitigate the cash risks associated with these exposures, we often use forward currency contracts to lock in exchange rates of the affected underlying net cash exposures.  When effectively hedged, the gains or losses on net cash exposures due to changes in foreign currencies will be offset by the gains or losses on the forward contracts.  We determine whether or not to enter into hedging arrangements based upon the size of the underlying net cash exposures, the potential losses due to adverse foreign currency movements, and the availability of cost-effective hedging strategies.  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.
The value of these contracts is recognized at fair value based on market exchange forward rates and amounted to a net liability position of $0.6 million at December 31, 2017. These contracts mature at various dates through December of 2018.
As of December 31, 2017, we had open foreign currency exchange contracts maturing through December of 2018 with total net notional amounts of approximately $5.4 million. At December 31, 2017, a hypothetical adverse exchange rate movement of 10% against our forward foreign exchange contracts would have resulted in a potential net loss in fair value of these contracts of approximately $0.5 million. The calculation assumes that each exchange rate would change in the same direction relative to the U.S. Dollar. In addition to the direct effects of changes in exchange rates, such changes may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices.
For additional information about the risks associated with fluctuations in currency exchange rates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Foreign Exchange.”

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed under this Item 8, other than selected quarterly financial data, are filed as Appendix A hereto, are listed under Item 15(a) and are incorporated herein by this reference.
Selected quarterly financial data are included under Item 6 and are incorporated herein by reference.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of December 31, 2017, under the supervision of our principal executive officer and principal financial officer, and with the participation of our management, we have evaluated 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 Exchange 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 Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’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 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.

37



Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in Internal Control—Integrated Framework. Our management concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2017. Ernst & Young LLP, our independent registered public accounting firm, has issued its report on the effectiveness of internal control over financial reporting as of December 31, 2017, which appears in this 2017 Form 10-K.
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In May 2013, COSO issued its Internal Control - Integrated Framework (the “2013 Framework”). While the 2013 Framework’s internal control components (i.e., control environment, risk assessment, control activities, information and communication and monitoring activities) are the same as those in the 1992 Framework, the new framework requires companies to assess whether 17 principles are present and functioning in determining whether their system of internal control is effective. The Company adopted the 2013 Framework during the fiscal year ending December 31, 2015.



























38



Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Xerium Technologies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Xerium Technologies, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Xerium Technologies, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Xerium Technologies, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedule and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 28, 2018

ITEM 9B.
OTHER INFORMATION

None.

39




ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders.

ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders.
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders.
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2018 Annual Meeting of Shareholders.



40



PART IV

ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following documents are filed as Appendix A hereto and are included as part of this Annual Report on Form 10-K:
Financial Statements of Xerium Technologies, Inc.:
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements and Schedule
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules. The following financial statement schedule is included as part of this Annual Report on Form 10-K:
Schedule II, Valuation and Qualifying Accounts
Certain schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.
(a) (3) Exhibits. The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such exhibits, and are incorporated herein by this reference. We have identified with plus symbols in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K.


41



EXHIBIT INDEX
Exhibit No.
Description of Exhibit
Joint Prepackaged Plan of Reorganization, as confirmed by the bankruptcy court on May 12, 2010.
Confirmation Order, dated May 12, 2010.
Second Amended and Restated Certificate of Incorporation of Xerium Technologies, Inc.
Amended and Restated By-Laws of Xerium Technologies, Inc.
Form of Stock Certificate.
Dividend Reinvestment Plan.
Indenture among the Company, the guarantor parties thereto and U.S. Bank National Association as Trustee, dated August 9, 2016.
Form of 9.500% Senior Secured Notes due 2021 (included in exhibit 4.3).
Pledge and Security Agreement among the Company, the grantor parties thereto and U.S. Bank National Association as Collateral Agent, dated August 9, 2016.
Director Nomination Agreement entered into by and among the Company, Carl Marks Strategic Investments, L.P., and Carl Marks Strategic Opportunities Fund, L.P., dated May 25, 2010.
Amendment No. 1 to 2010 Equity Incentive Plan.
Amendment No. 2 to 2010 Equity Incentive Plan.
Form of Independent Director Indemnification Agreement entered into between the Registrant and certain independent directors.
Directors’ Deferred Stock Unit Plan.
Employment Agreement with Harold C. Bevis.
Employment Agreement with Clifford E. Pietrafitta.
Amended and Restated Employment Agreement with David Pretty.
Amendment to Amended and Restated Employment Agreement with David Pretty.
Amendment No. 3 to Employment Agreement with David Pretty.
Employment Agreement with Eduardo Fracasso.
Form of December 2011 Amendment to Employment Agreements with senior executive officers.
Employment Agreement with Michael Bly.
Employment Agreement with William Butterfield.
2014-2016 Executive Long Term Incentive Plan and Form of Agreement
Form of 2015 Long Term Incentive Plan Award Agreement
Translated version of Fixed Asset Loan Agreement by and between Xerium China, Co., Ltd and Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch dated July 17, 2015.
Translated version of Guarantee Agreement between Stowe Woodward (Changzhou) Roll Technologies Co. Ltd. and Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch dated July 17, 2015.
Translated version of Guarantee Agreement between Xerium Asia Pacific (Shanghai) Limited and Industrial and Commercial Bank of China Limited, Shanghai-Jingan Branch dated July 17, 2015.
Revolving Credit and Guarantee Agreement, dated as of November 3, 2015
Amendment No. 1 to Revolving Credit and Guarantee Agreement, dated as of February 19, 2016
Amendment No. 2 to Revolving Credit and Guarantee Agreement, dated as of August 9, 2016
Amendment No. 3 to Revolving Credit and Guarantee Agreement, dated as of November 30, 2016
2016-2018 Executive Long Term Incentive Plan and Form of Agreement
Third Amendment to Revolving Credit Agreement
Form of 2017 MIC Agreement
Employment Agreement with Mark Staton.
Restricted Stock Unit Agreement with Mark Staton
Form of 2017 Long Term Incentive Plan
Form of 2018 MIC Agreement (filed herewith)
Form of 2018 Long Term Incentive Plan

42



Exhibit No.
Description of Exhibit
Employment Agreement with Harald Weimer (filed herewith)
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification Statement of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification Statement of 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.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

(1)
Filed as Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 14, 2010, and incorporated herein by reference.
(2)
Filed as Exhibit 2.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 14, 2010, and incorporated herein by reference.
(3)
Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 28, 2010, and incorporated herein by reference.
(4)
Filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 11, 2015, and incorporated herein by reference.
(5)
Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 28, 2010, and incorporated herein by reference.
(6)
Filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on February 20, 2007, and incorporated herein by reference.
(7)
Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on August 9, 2016, and incorporated herein by reference.
(8)
Filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on August 9, 2016, and incorporated herein by reference.
(9)
Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 9, 2016, and incorporated herein by reference.
(10)
Filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on May 28, 2010, and incorporated herein by reference.
(11)
Filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 9, 2011, and incorporated herein by reference.
(12)
Filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2013, and incorporated herein by reference.
(13)
Filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 10, 2008, and incorporated herein by reference.
(14)
Filed as Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2011 and incorporated herein by reference.
(15)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2012, and incorporated herein by reference.
(16)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2011, and incorporated herein by reference.
(17)
Filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2009, and incorporated herein by reference.
(18)
Filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2011, and incorporated herein by reference.

43



(19)
Filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2012, and incorporated herein by reference.
(20)
Filed as Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K filed on March 26, 2010, and incorporated herein by reference.
(21)
Filed as Exhibit 10.56 to the Registrant’s Registration Statement on Form S-4 filed on December 22, 2011, and incorporated herein by reference.
(22)
Filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on August 1, 2013, and incorporated herein by reference.
(23)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 6, 2013, and incorporated herein by reference.
(24)
Filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on August 5, 2014, and incorporated herein by reference.
(25)
Filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed on May 11, 2015, and incorporated herein by reference.
(26)
Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 22, 2015, and incorporated herein by reference.
(27)
Filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on July 22, 2015, and incorporated herein by reference.
(28)
Filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on July 22, 2015, and incorporated herein by reference.
(29)
Filed as Exhibit 10.54 to the Registrant’s Annual Report on Form 10-K filed on March 14, 2016, and incorporated herein by reference.
(30)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on October 27, 2016, and incorporated herein by reference.
(31)
Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on October 27, 2016, and incorporated herein by reference.
(32)
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 10, 2016, and incorporated herein by reference.
(33)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 2, 2016, and incorporated herein by reference.
(34)
Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 3, 2017, and incorporated herein by reference.
(35)
Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 3, 2017, and incorporated herein by reference.
(36)
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 1, 2017, and incorporated herein by reference.
(37)
Filed as Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 filed on June 2, 2017, and incorporated herein by reference.
(38)
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2017, and incorporated herein by reference.
(39)
Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 30, 2018, and incorporated herein by reference.
+
Management contract or compensatory arrangement or plan.
*
The following exhibits to the Joint Prepackaged Plan of Reorganization were filed with the bankruptcy court, which, as permitted by Item 601(b)(2) of Regulation S-K, have been omitted from this Annual Report on Form 10-K. We will furnish supplementally a copy of any exhibit to the Joint Prepackaged Plan of Reorganization to the Securities and Exchange Commission upon request.
 
 
 
 
Exhibit A
Amended and Restated Credit Facility
 
Exhibit B
Commitment Letter
 
Exhibit C
New Management Incentive Plan
 
Exhibit D
New Warrants
 
Exhibit E
Executory Contracts and Unexpired Leases to be Rejected
 
Exhibit F
Amended and Restated Pledge and Security Agreement
 
Exhibit G
Austria Contribution Agreement

44



 
Exhibit H
Austria Note
 
Exhibit I
Austria Purchase Agreement
 
Exhibit J
Canada Direction Letter Agreement
 
Exhibit K
Exit Facility Credit Agreement
 
Exhibit L
Exit Facility Pledge and Security Agreement
 
Exhibit M
Germany Assumption Agreement
 
Exhibit N
Intercreditor Agreement
 
Exhibit O
Nominating Agreement
 
Exhibit P
Registration Rights Agreement
 
Exhibit Q
Restated Bylaws of each Reorganized Debtor
 
Exhibit R
Restated Charters of each Reorganized Debtor
 
Exhibit S
Shareholder Rights Plan
 
Exhibit T
U.S. Direction Letter Agreement
 
Exhibit U
Initial Directors and Initial Officers of the Reorganized Debtors
 
Exhibit V
Retained Actions
 
Exhibit W
Additional Intercompany Transactions
 
 
 

45






Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Youngsville, North Carolina, on February 28, 2018.
 
 
 
 
XERIUM TECHNOLOGIES, INC.
 
 
By:
  
/s/    MARK STATON       
 
  
Mark Staton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities indicated on February 28, 2018.
 
 
 
 
Signature
  
Title
 
 
/S/     MARK STATON        
           Mark Staton
  
President, Chief Executive Officer and Director (Principal Executive Officer)
 
 
/S/     CLIFFORD E. PIETRAFITTA        
          Clifford E. Pietrafitta
  
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
 
 
/S/     AMBASSADOR APRIL H. FOLEY        
         Ambassador April H. Foley
  
Director
 
 
/S/     JAY GURANDIANO        
         Jay Gurandiano
  
Director
 
 
/S/     JOHN F. MCGOVERN        
         John F. McGovern
  
Director
 
 
/S/     ROGER A. BAILEY        
          Roger A. Bailey
  
Director
 
 
/S/     MITCHELL I. QUAIN       
          Mitchell I. Quain
 
Director

 
 
/S/     ALEXANDER TOELDTE       
          Alexander Toeldte
 
Director

 
 
 
/S/     JAMES F. WILSON        
         James F. Wilson
  
Chairman



46





Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Xerium Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Xerium Technologies, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ending December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Raleigh, North Carolina
February 28, 2018




47



XERIUM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
 
December 31,
 
2017
 
2016
 
(dollars in thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,253

 
$
12,808

Accounts receivable, (net of allowance for doubtful accounts of $4,106 in 2017 and $3,620 in 2016)
76,633

 
68,667

Inventories
74,725

 
70,822

Prepaid expenses
11,335

 
6,325

Other current assets
15,316

 
15,784

Total current assets
195,262

 
174,406

Property and equipment, net
282,378

 
284,101

Goodwill
64,783

 
56,783

Intangible assets
5,965

 
7,330

Non-current deferred tax asset
10,103

 
10,737

Other assets
9,358

 
8,556

Total assets
$
567,849

 
$
541,913

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Notes payable
$
8,398

 
$
7,328

Accounts payable
39,856

 
36,158

Accrued expenses
64,155

 
64,532

Current maturities of long-term debt
10,614

 
8,600

Total current liabilities
123,023

 
116,618

Long-term debt, net of current maturities and deferred financing costs
473,904

 
472,923

Liabilities under capital lease
15,952

 
19,236

Non-current deferred tax liability
12,897

 
7,157

Pension, other post-retirement and post-employment obligations
69,205

 
65,026

Other long-term liabilities
9,334

 
7,858

Commitments and contingencies (Note 9)

 

Stockholders’ deficit:

 

Preferred stock, $0.001 par value, 1,000,000 shares authorized; no shares outstanding as of December 31, 2017 and December 31, 2016

 

Common stock, $0.001 par value, 20,000,000 shares authorized; 16,367,743 and 16,152,946 shares outstanding as of December 31, 2017 and December 31, 2016, respectively
16

 
16

Paid-in capital
432,489

 
430,823

Accumulated deficit
(457,712
)
 
(443,066
)
Accumulated other comprehensive loss
(111,259
)
 
(134,678
)
Total stockholders’ deficit
(136,466
)
 
(146,905
)
Total liabilities and stockholders’ deficit
$
567,849

 
$
541,913

See accompanying notes.




48



XERIUM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Year ended December 31,
 
2017
 
2016
 
2015
 
(dollars in thousands, except per share data)
Net sales
$
481,048

 
$
471,317

 
$
477,243

Costs and expenses:
 
 
 
 
 
Cost of products sold
296,199

 
293,842

 
288,512

Selling
62,850

 
62,810

 
64,414

General and administrative
52,752

 
51,063

 
56,250

Research and development
6,581

 
7,100

 
7,404

Restructuring
7,884

 
10,362

 
14,649

 
426,266

 
425,177

 
431,229

Income from operations
54,782

 
46,140

 
46,014

Interest expense, net
(52,815
)
 
(46,155
)
 
(38,413
)
Loss on extinguishment of debt
(32
)
 
(11,938
)
 
(388
)
Foreign exchange (loss) gain
(2,942
)
 
(383
)
 
1,872

(Loss) income before provision for income taxes
(1,007
)
 
(12,336
)
 
9,085

Provision for income taxes
(13,639
)
 
(9,282
)
 
(13,465
)
Net loss
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)
Net loss per share:
 
 
 
 
 
Basic and diluted
$
(0.90
)
 
$
(1.35
)
 
$
(0.28
)
Shares used in computing net loss per share:
 
 
 
 
 
Basic and diluted
16,282,536

 
15,994,467

 
15,640,836

  
 

See accompanying notes.

49



XERIUM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Year ended December 31,
 
2017
 
2016
 
2015
 
 
Net loss
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)
Other comprehensive (loss) income before income taxes:

 


 

Foreign currency translation adjustments
27,100

 
(7,959
)
 
(50,980
)
Unrealized gain on derivative instruments

 

 
1,126

Defined benefit pension plan

 


 


   Amortization of net loss
2,133

 
1,949

 
2,140

   Net (loss) gain on liability
(7,243
)
 
(12,883
)
 
14,643

   Net gain (loss) on asset
3,975

 
4,406

 
(5,466
)
   Settlement loss
921

 

 
1,324

          Currency translation impact
(3,127
)
 
2,471

 
2,592

       Defined benefit pension plan, net
(3,341
)
 
(4,057
)
 
15,233

Other comprehensive income (loss), before income taxes
23,759

 
(12,016
)
 
(34,621
)
Income tax provision related to components of other comprehensive income (loss)
(340
)
 
(970
)
 
(1,133
)
Other comprehensive income (loss), net of tax
23,419

 
(12,986
)
 
(35,754
)
Comprehensive income (loss), net of tax
$
8,773

 
$
(34,604
)
 
$
(40,134
)
See accompanying notes.



50





XERIUM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT 

 
Common Stock
 
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Deficit
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Balance at December 31, 2014
15,560,627

 
$
16

 
$
428,880

 
$
(417,068
)
 
$
(85,938
)
 
$
(74,110
)
Net loss

 

 

 
(4,380
)
 

 
(4,380
)
Other comprehensive loss

 

 

 

 
(35,754
)
 
(35,754
)
Issuance of common stock
185,287

 

 
(2,124
)
 

 

 
(2,124
)
Stock-based compensation

 

 
3,298

 

 

 
3,298

Balance at December 31, 2015
15,745,914

 
16

 
430,054

 
(421,448
)
 
(121,692
)
 
(113,070
)
Net loss

 

 

 
(21,618
)
 

 
(21,618
)
Other comprehensive loss

 

 

 

 
(12,986
)
 
(12,986
)
Issuance of common stock
407,032

 

 
(1,843
)
 

 

 
(1,843
)
Stock-based compensation

 

 
2,612

 

 

 
2,612

Balance at December 31, 2016
16,152,946

 
16

 
430,823

 
(443,066
)
 
(134,678
)
 
(146,905
)
Net loss

 

 

 
(14,646
)
 

 
(14,646
)
Other comprehensive income

 

 

 

 
23,419

 
23,419

Issuance of common stock
214,797

 

 
(852
)
 

 

 
(852
)
Stock-based compensation

 

 
2,518

 

 

 
2,518

Balance at December 31, 2017
16,367,743

 
$
16

 
$
432,489

 
$
(457,712
)
 
$
(111,259
)
 
$
(136,466
)
  
 

See accompanying notes.

51



XERIUM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
 
(dollars in thousands)
Operating activities
 
 
 
 
 
 
Net loss
 
$
(14,646
)
 
$
(21,618
)
 
$
(4,380
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
2,518

 
2,612

 
3,298

Depreciation
 
31,740

 
32,115

 
28,952

Amortization of other intangibles
 
1,365

 
841

 
298

Deferred financing cost amortization
 
3,634

 
3,063

 
3,462

Foreign exchange loss (gain) on revaluation of debt
 
1,135

 
(3,267
)
 
(3,426
)
Deferred taxes
 
8,516

 
219

 
(2,785
)
Asset impairments
 
107

 

 
1,536

Loss (gain) on disposition of property and equipment
 
136

 
50

 
(1,383
)
Pension settlement losses
 
921

 

 
1,108

Loss on extinguishment of debt
 
32

 
11,938

 
388

Provision for doubtful accounts
 
574

 
275

 
1,117

Change in assets and liabilities which (used) provided cash:
 
 
 
 
 
 
Accounts receivable
 
(4,424
)
 
1,677

 
5,234

Inventories
 
1,477

 
3,746

 
2,985

Prepaid expenses
 
(4,941
)
 
332

 
757

Other current assets
 
656

 
(1,284
)
 
(3,219
)
Accounts payable and accrued expenses
 
(737
)
 
4,504

 
5,300

Deferred and other long-term liabilities and assets
 
(3,348
)
 
1,306

 
(5,955
)
Net cash provided by operating activities
 
24,715

 
36,509

 
33,287

Investing activities
 
 
 
 
 
 
Capital expenditures
 
(13,033
)
 
(13,706
)
 
(50,871
)
Proceeds from disposals of property and equipment
 
2,496

 
117

 
3,266

Acquisition costs
 
(1,199
)
 
(16,225
)
 

Net cash used in investing activities
 
(11,736
)
 
(29,814
)
 
(47,605
)
Financing activities
 
 
 
 
 
 
Proceeds from borrowings
 
108,889

 
565,553

 
99,948

Increase in note payable
 

 
1,121

 
6,759

Principal payments on debt
 
(109,587
)
 
(539,711
)
 
(88,058
)
Payment of obligations under capital leases
 
(5,985
)
 
(3,950
)
 
(1,413
)
Payment of deferred financing fees
 
(367
)
 
(23,496
)
 
(662
)
Employee taxes paid on equity awards
 
(852
)
 
(1,843
)
 
(2,124
)
Net cash (used in) provided by financing activities
 
(7,902
)
 
(2,326
)
 
14,450

Effect of exchange rate changes on cash flows
 
(632
)
 
(1,400
)
 
190

Net increase in cash
 
4,445

 
2,969

 
322

Cash and cash equivalents at beginning of year
 
12,808

 
9,839

 
9,517

Cash and cash equivalents at end of year
 
$
17,253

 
$
12,808

 
$
9,839

 
 
 
 
 
 
 
Cash paid for interest
 
$
49,798

 
$
28,692

 
$
34,129

Cash paid for income taxes
 
$
9,700

 
$
13,666

 
$
10,517

Non-cash accrual for new facility
 
$

 
$

 
$
1,937

Non-cash capitalized leases
 
$
1,505

 
$
11,008

 
$
8,725

 
 
 
 
 
 
 




See accompanying notes.

52


Xerium Technologies, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
1. Company Description
Xerium Technologies, Inc. (the "Company") is a leading, global provider of industrial consumable products and services including machine clothing, roll coverings, roll repair and mechanical services. These goods and services are 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.
2. Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("U.S. GAAP"). The consolidated financial statements include the accounts of Xerium Technologies, Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery including transfer of title has occurred and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains written purchase authorizations from customers for a specific product or service at a specified price and considers delivery and transfer of title to have occurred in accordance with our shipping terms. Revenue is recorded net of applicable allowances, including estimated allowances for returns, rebates and other discounts. In the machine clothing segment, a small portion of the business has been conducted pursuant to consignment arrangements under which the Company does not recognize a sale of a product to a customer until the customer places the product into use, which typically occurs some period after the product is shipped to the customer or to a warehouse location near the customer’s facility. As part of the consignment agreement, the Company delivers the goods to a location designated by the customer. In addition, the customer and the Company agree to a “sunset” date, which represents the date by which the customer must accept all risks and rewards of ownership of the product and payment terms begin. For consignment sales, revenue is recognized on the earlier of the actual product installation date or the “sunset” date.
Classification of Costs and Expenses
Cost of products sold includes raw materials, manufacturing labor, direct and indirect overhead costs, product freight, and depreciation of manufacturing plant and equipment. Warehousing costs incurred as a result of customer-specific delivery terms are also included in cost of products sold.
Selling expenses include direct sales force salaries, commissions, travel and entertainment expenses and other expenses as well as agents’ commissions and fees, other warehousing costs, advertising costs and marketing costs.
General and administrative expenses include costs relating to management and administrative staff such as employee compensation and benefits, travel and entertainment (non-sales), non-manufacturing facility occupancy costs, including rent expense and professional fees, as well as depreciation on non-manufacturing equipment and office supplies and expenses.
Research and development expenses are comprised of engineering staff wages and associated fringe benefits, as well as the cost of prototypes, testing materials and non-capitalizable testing equipment.
Advertising Costs
Selling expenses include advertising expenses of $0.9 million, $1.1 million and $1.2 million in 2017, 2016 and 2015, respectively. The Company expenses all advertising costs as incurred.
Translation of Financial Statements
The reporting currency of the Company is U.S. Dollars. Assets and liabilities of non-U.S. operations are translated at year-end rates of exchange and the Consolidated Statements of Operations and Cash Flows are translated at the average rates of exchange during the year. Gains and losses resulting from translating non-U.S. Dollar denominated financial statements are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ deficit.

53




Foreign Exchange
Foreign exchange gains and losses arising out of transactions denominated in currencies other than a subsidiary’s functional currency are recorded in the Consolidated Statements of Operations. Net foreign exchange gains and losses are recorded in “Foreign exchange (loss) gain” and amounted to a (loss) gain of $(2,942), $(383) and $1,872 for the years ended December 31, 2017, 2016 and 2015, respectively. Certain intercompany loans have been determined to be permanent, and accordingly, foreign exchange gains or losses related to such loans are recorded in accumulated other comprehensive loss within equity.
Derivatives and Hedging
As required by ASC Topic 815, Derivatives and Hedging (“Topic 815”), the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company has not elected hedge accounting for any of its hedging activities. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under Topic 815. See Note 6 "Derivatives and Hedging" for further discussion on the Company’s derivatives.
Freight Costs
The Company incurred $11.2 million, $10.3 million and $10.2 million in freight costs in the years ended December 31, 2017, 2016 and 2015, respectively. These costs are includes in cost of good sold in the Consolidated Income Statements.
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term investments with maturities of three months or less when acquired. Short-term investments consist of time deposits or money market accounts at investment-grade banks.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at cost and do not bear interest. Bad debt provisions are included in general and administrative expense. The amounts recorded are derived based upon the general aging of receivables, specific customer credit history and payment trends and new business conditions.
 
Inventories
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:

54



 
 
 
December 31,
 
 
2017
 
2016
Raw materials
 
$
13,881

 
$
14,089

Work in process
 
27,819

 
25,879

Finished goods (includes consigned inventory of $7,757 in 2017 and $6,673 in 2016)
 
39,798

 
37,155

Inventory allowances
 
(6,773
)
 
(6,301
)
 
 
$
74,725

 
$
70,822

Financial Instruments
The carrying value of cash and cash equivalents, trade receivables, other current assets, accounts payable, notes payable and amounts included in accruals meeting the definition of a financial instrument under U.S. GAAP approximate fair value due to their short-term nature. The carrying value of long-term debt is less than its fair value (see Note 5 "Long-term Debt"). The Company determines estimated fair values based upon quoted market values where applicable or management estimates.
Long-lived Assets
Property and equipment
Property and equipment are recorded at cost. Property and equipment acquired in connection with acquisitions are recorded at fair value as of the date of the acquisition, and subsequent additions are recorded at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:
 
 
 
 
 
 
Asset
  
Years
Buildings and improvements
  
3-50
Machinery and equipment
 
— Heavy
  
16-25
 
 
— General
  
13-15
 
 
— Light
  
6-12
 
 
— Molds, tools, office and computers
  
2-5

Property and equipment consist of the following at:
 
 
December 31,
 
 
2017
 
2016
Land
 
$
22,072

 
$
21,323

Building and improvements
 
155,566

 
142,435

Machinery and equipment
 
659,641

 
610,586

Construction in progress
 
7,493

 
6,827

Assets under capital lease
 
20,742

 
19,605

Total
 
865,514

 
800,776

Less accumulated depreciation
 
(583,136
)
 
(516,675
)
 
 
$
282,378

 
$
284,101

The Company recorded $31.7 million, $32.1 million and $29.0 million in depreciation expense in 2017, 2016 and 2015, respectively. Amortization related to assets under capital lease is included in depreciation expense.
Assets held for sale or sold
During the first quarter of 2016, the Company determined that the Middletown, VA. facility, with a NBV of $3.0 million met the criteria under ASC Topic 360, Property, Plant, and Equipment (“Topic 360”) to be classified as held for sale. Accordingly, the related assets were reclassified out of property, plant and equipment to other assets in the Company's Consolidated Balance Sheet. This facility had not been sold as of December 31, 2017.

55



During 2015, the Company determined that the Warwick, Quebec, Canada machine clothing facility, with a NBV of $0.5 million met the criteria under ASC Topic 360, Property, Plant, and Equipment (“Topic 360”) to be classified as held for sale. This facility had not been sold as of December 31, 2017.
During 2013, a rolls facility in Charlotte, NC was classified as held for sale. This property had a carrying value of $0.5 million. Accordingly, the related assets were reclassified out of property, plant and equipment to other assets in the Company's Consolidated Balance Sheet. This facility was sold during 2017.

Impairment
The Company reviews its long-lived assets that have finite lives for impairment in accordance with Topic 360. This topic requires that companies evaluate the fair value of long-lived assets based on the anticipated un-discounted 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 as a component of income from operations in the Consolidated Statements of Operations. Impairment charges associated with restructuring are discussed in Note 11 "Restructuring Expense".
Intangible assets
Intangible assets consist of patents, licenses, trademarks, and customer relationships. Patents, licenses, trademarks, and customer relationships are amortized on a straight-line basis over their useful lives, which range from seven to fifteen years.
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 at least annually for impairment or whenever events or business conditions warrant. The Company first assessed qualitative factors to determine whether it was more likely than not that the fair value of its reporting units were less than the carrying amounts as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  The Company’s assessment is that the two-step goodwill impairment test was not necessary for the year ending December 31, 2017 and 2016 for either its clothing or rolls reporting units.  If the qualitative factors had indicated that it was more likely than not that the fair value of the reporting units was less than its carrying amount, the Company would have tested goodwill for impairment at the reporting unit level using a two-step approach.
Step 1 involves comparing the fair value of the Company’s reporting unit to its carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit carrying amount is greater than the fair value then the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of the net assets of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.
The Company performs an annual test for goodwill impairment as of October 1 at the reporting unit level. The Company has two reporting units: machine clothing and roll covers. For the purpose of performing the annual impairment test, the Company allocates all shared assets and liabilities to the reporting units based on the percentage of each reporting unit’s revenue to total revenue. Shared operating expenses are allocated to the reporting unit to the extent necessary to allow them to operate as independent businesses. To determine if impairment exists, the fair value of each reporting unit is compared to its carrying value. The fair value of the Company’s reporting unit is determined by using a weighted combination of both a market multiple approach and an income approach. The market multiple approach utilizes the Company’s and its competitors’ proprietary information that is used to value its reporting units. The income approach is a present value technique used to measure the fair value of future cash flows produced by each reporting unit. During the fourth quarter of 2016, the Company voluntarily changed the date of its annual goodwill impairment testing from December 31, the last day of the fiscal year, to October 1.  The voluntary change in accounting principle related to the annual testing date did not delay, accelerate or avoid an impairment charge. This change was not applied retrospectively, as it would have required application of significant estimates and assumptions with the use of hindsight.  Accordingly, the change was applied prospectively. As a result of the annual tests for goodwill impairment performed as of October 1, 2017 and October 1, 2016, the Company determined that no goodwill impairment exists.
Stock-Based Compensation
The Company records stock-based compensation expense in accordance with ASC Topic 718, Compensation—Stock Compensation (“Topic 718”) which generally requires that such transactions be recognized in the statement of operations based

56



on their fair values at the date of grant. See Note 10 "Long-term Incentive and Stock-Based Compensation" for further discussion.
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 December 31, 2017, 2016 and 2015, the Company had outstanding restricted stock units (“RSUs”) (See Note 10 "Long-term Incentive and Stock-Based Compensation"). Diluted average shares outstanding were computed using (i) the average market price for time-based RSUs and (ii) the actual grant date market price for non-employee director RSUs. The calculation of diluted earnings per share excludes the Company’s performance-based RSUs that are based on Adjusted EBITDA targets whose performance criteria have not been contingently achieved and therefore the RSUs have not been issued or are not contingently issuable. For the years ended December 31, 2017, 2016, and 2015 the dilutive effect of potential future issuances of common stock underlying the Company’s RSUs was excluded from the calculation of diluted average shares outstanding because their effect would have been anti-dilutive as the Company incurred a net loss.

 
 
2017
 
2016
 
2015
Weighted-average common shares outstanding—basic
 
16,282,536

 
15,994,467

 
15,640,836

Dilutive effect of stock-based compensation awards outstanding
 

 

 

Weighted-average common shares outstanding—diluted
 
16,282,536

 
15,994,467

 
15,640,836

Dilutive securities aggregating approximately 1.0 million, 0.9 million and 1.1 million outstanding during the years ended December 31, 2017, 2016 and 2015, respectively, were not included in the computation of diluted earnings per share because the impact would be anti-dilutive to the earnings per share calculation.

Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“Topic 740”), which requires the recognition of deferred tax assets and liabilities for the expected future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, representing future tax benefits, are reduced by a valuation allowance when the determination can be made that it is “more likely than not” that all or a portion of the related tax asset will not be realized. The deferred tax provision or benefit represents the annual change in deferred tax assets and liabilities, excluding any amounts accounted for as components of goodwill or accumulated other comprehensive loss, including the effect of foreign currency translation thereon. While the Company believes it has adequately provided for its income tax receivable or liabilities and its deferred tax assets or liabilities in accordance with Topic 740 income tax guidance, adverse determination by taxing authorities or changes in tax laws and regulations could have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Income taxes are further discussed in Note 7.
Warranties
The Company offers warranties on certain rolls 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 estimates the costs that may be incurred under its warranties and records a liability 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 included in accrued expenses for 2017 and 2016:
 
 
 
Balance at
Beginning
of Year
 
Charged to
Cost
of Products Sold
 
Effect of Foreign
Currency
Translation
 
Deduction
from
Reserves
 
Balance at
End of
Year
For the year ended December 31, 2017
 
$
2,203

 
$
1,202

 
$
75

 
$
(1,010
)
 
$
2,470

 
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2016
 
$
2,175

 
$
1,616

 
$
26

 
$
(1,614
)
 
$
2,203


57



Commitments and Contingencies
The Company provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Costs accrued have been estimated based on consultation with legal counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes.

Acquisitions

Acquired businesses are accounted for using the acquisition method of accounting (ASC 805-10-50), which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in our consolidated financial statements after the date of acquisition.

New Accounting Standards
In February 2018, the FASB issued Accounting Standards Update No 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued and for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company is in the process of evaluating this accounting standard update.
In August 2017, the FASB issued Accounting Standards Update No 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12). The amendments in ASU 2017-12 provide guidance to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update. The Company is in the process of evaluating this accounting standard update.

In May 2017, the FASB issued Accounting Standards Update No 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.

In March 2017, the FASB issued Accounting Standards Update No 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 will change how employers that sponsor defined benefit pension and/or other post-retirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The guidance provides a practical expedient for disaggregating the service

58



cost component and other components for comparative periods. The adoption of this guidance in 2018 is not expected to have a material impact on net income, and financial position. No changes to cash flows are expected from adoption.

In January 2017, the FASB issued Accounting Standards Update No 2017-04, Intangibles—Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under Accounting Standards Codification (ASC) 350. The FASB issued new guidance that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of evaluating this accounting standard update.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 eliminates the exception to the principle in ASC 740, for all intra-entity sales of assets other than inventory, to be deferred, until the transferred asset is sold to a third party or otherwise recovered through use. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update No 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company's 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 December 15, 2018, and interim periods within those years. For all other entities, it is effective for annual periods beginning after December 15, 2019, and interim periods the following year. Early adoption is permitted for all entities. The Company has commenced a comprehensive project plan to direct the implementation of the new leases standard and an assessment of the impact to business processes.

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. The Company intends to adopt the new standard using the modified retrospective transition method effective January 1, 2018 and the adoption of this guidance is not expected to have a material impact on the Company's financial statements.

3. Goodwill and Intangible Assets

59



At December 31, 2017 and 2016, the Company had cumulative goodwill impairment of $265.9 million. The following table provides changes in the carrying amount of goodwill by segment for the years ended December 31, 2017 and 2016:
 
 
 
Clothing
 
Roll
Covers
 
Total
Balance at December 31, 2015
 
$
40,943

 
$
17,656

 
$
58,599

Spencer Johnston acquisition
 

 
1,877

 
1,877

Foreign currency translations
 
(3,445
)
 
(248
)
 
(3,693
)
Balance at December 31, 2016
 
37,498

 
19,285

 
56,783

Foreign currency translations
 
7,125

 
875

 
8,000

Balance at December 31, 2017
 
$
44,623

 
$
20,160

 
$
64,783

 
 
 
 
 
 
 
The components of intangible assets are summarized as follows at:
 
 
December 31,
 
 
2017
 
2016
Patents and licenses
 
$
32,625

 
$
32,535

Less accumulated amortization
 
(31,786
)
 
(31,421
)
Net patents and licenses
 
839

 
1,114

Trademarks
 
19,088

 
19,088

Less accumulated amortization
 
(18,945
)
 
(18,934
)
Net trademarks
 
143

 
154

Customer relationships and other intangibles
 
7,455

 
7,446

Less accumulated amortization
 
(2,472
)
 
(1,384
)
Net customer relationships and other intangibles
 
4,983

 
6,062

Net amortizable intangible assets
 
$
5,965

 
$
7,330

Amortization expense for patents, licenses, trademarks, customer relationships and other intangibles amounted to $1.4 million, $0.8 million and $0.3 million for the years ended December 31, 2017 and 2016 and 2015, respectively. During 2016, definite-lived intangible assets of $6.6 million were recorded in the Spencer Johnston acquisition. Refer to Note 15 for further discussion.
As of December 31, 2017, the estimated amortization expense for patents, licenses, trademarks, customer relationships and other intangibles for each of the following periods total $6.0 million as follows:
 
 

2018
$
1,223

2019
1,223

2020
1,223

2021
962

2022 and thereafter
1,334


The weighted average amortization period for the net amortizable intangible assets is 5.1 years.

4. Notes Payable

At December 31, 2017 and 2016, the balance of the Austrian working capital loan is $8.4 million and $7.3 million, respectively. At December 31, 2017, this loan bears interest at a variable rate of 1.45% and has a maturity date of August 31, 2018, with a one-year roll-over option.

60




5. Long-Term Debt
At December 31, 2017 and 2016, long-term debt consisted of the following:
 
December 31, 2017
 
December 31, 2016
9.5% Senior Notes due August 2021
$
480,000

 
$
480,000

Capital leases
20,749

 
24,314

Notes payable, working capital loan, variable interest rate at 1.45%. Matures August 31, 2018, with one-year rollover option.
8,398

 
7,328

Fixed asset loan contract, variable interest rate of 5.23%. Matures June of 2020.
6,761

 
7,511

Other debt
6,062

 
5,370

Total debt (excluding deferred finance costs and debt discount)
521,970

 
524,523

Less deferred financing costs and debt discount
(13,102
)
 
(16,436
)
Less current maturities of long term debt and notes payable
(19,012
)
 
(15,928
)
Total long term debt including capital leases
$
489,856

 
$
492,159

 
 
 
 
Balance sheet classification of total long-term debt including capital leases
 
 
 
Long-term debt, net of current maturities and deferred financing costs
473,904

 
472,923

Liabilities under capital lease, non-current
15,952

 
19,236

Total long term debt including capital leases
$
489,856

 
$
492,159

    
During 2017, 2016 and 2015, the Company recorded $52.8 million, $46.2 million and $38.4 million in interest expense, respectively.
As of December 31, 2017, the carrying value of the Company’s debt (excluding deferred financing costs and debt discount) was $508.9 million and its fair value was approximately $530.4 million. The Company determined the fair value of its debt utilizing significant other observable inputs (Level 2 of the fair value hierarchy) based on the quoted market prices for the same issues or on the current rates offered for debt of similar remaining maturities and estimates.
9.5% Secured Notes due 2021
On August 9, 2016, the Company closed on $480.0 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 Company used the net proceeds from the offering to repay all amounts outstanding under its then existing $230.0 million term loan credit facility, to redeem all of its $240.0 million aggregate principal amount 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.
ABL Revolving Credit Facility
On November 3, 2015, the Company refinanced its prior revolving credit facility by entering into a new Revolving Credit and Guaranty Agreement (the “ABL Facility”) with one of its existing lenders. The amount of the ABL Facility provides an aggregate facility limit of $55.0 million, subject to a borrowing base collateralized by eligible accounts receivable, inventory and equipment of Xerium Technologies, Inc., as a US borrower, Xerium Canada Inc., as Canadian borrower, and Huyck.Wagner Germany GmbH, Robec Walzen GmbH, and Stowe Woodward AG, as the European borrowers. 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 December 31, 2017 these rates were 5.25% and 3.37%, respectively.
As of December 31, 2017, an aggregate of $34.1 million is available for additional borrowings under the $55.0 million Revolving Credit and Guaranty Agreement ("ABL Facility"). This availability represents $36.9 million under the ABL revolver that is currently collateralized by certain assets of the Company, less $2.8 million of that facility committed for letters of credit or current borrowings. In addition, the Company had approximately $5.8 million available for borrowings under other small lines of credit.

61



The Indenture and the ABL Facility contain certain customary covenants that, subject to exceptions, restrict the Company's 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.
Fixed Assets Loan Contract
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 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 December 31, 2017 is approximately 5.2%. 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 were used by Xerium China to purchase production equipment. The Loan Agreement contains certain customary representations and warranties and provisions relating to events of default.
The Company is in compliance with all covenants under the Notes, the ABL Facility, and the Loan Agreement at December 31, 2017.

 
Capitalized Lease Liabilities

As of December 31, 2017, the Company had capitalized lease liabilities totaling $20.7 million. These amounts represent the lease on the corporate headquarters and the Kunshan, China facility, as well as other leases for machinery and equipment, software and vehicles that expire at various dates through 2027.

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.


Estimated Minimum Annual Payments

Estimated minimum annual repayments of long-term debt and capital leases based upon current exchange rates for the next five years are:


62



 
Long-Term Debt
 
Capital Leases
2018
$
14,209

 
$
4,803

2019
3,705

 
3,991

2020
3,047

 
1,694

2021
480,092

 
901

2022
97

 
583

Thereafter
71

 
8,777

Total payments
$
501,221

 
$
20,749


6. 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
The Company’s objectives when using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may use interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges protect the Company from increases in interest rates above the strike rate of the interest rate cap. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counter-party in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company settled all hedges of interest rate risk contracts in 2016.
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 Topic 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly to 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 cash 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 December 31, 2017 and 2016, 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 December 31, 2017 and 2016 and the change in fair value included in foreign exchange loss in the years ended December 31, 2017 and 2016:
 
December 31, 2017
 
December 31, 2016
Fair value of derivative liability
$
(591
)
 
$
(1,461
)
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Change in fair value of derivative included in foreign exchange loss
$
(1,357
)
 
$
(2,761
)
The following represents the notional amounts sold and purchased for the year ended December 31, 2017:
 

63



Foreign Currency Derivative
 
Notional Sold
 
Notional Purchased
Non-designated hedges of foreign exchange risk
 
$
20,164

 
$
(25,590
)
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.
To comply with Topic 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counter-parties. However, as of December 31, 2017 and 2016, respectively, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy. The Company does not have any derivatives valued using significant unobservable inputs (Level 3) as of December 31, 2017 or 2016. The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016, aggregated by the level in the fair value hierarchy within which those measurements fall.
As of December 31, 2017
Liabilities
 
Total
 
Quoted Prices  in
Active Markets for
Identical Assets
(Level 1)
 
Significant  Other
Observables
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Derivatives
 
$
(591
)
 
$

 
$
(591
)
 
$

Total
 
$
(591
)
 
$

 
$
(591
)
 
$


  As of December 31, 2016
Liabilities
 
Total
 
Quoted Prices  in
Active Markets
for Identical Assets
(Level 1)
 
Significant  Other
Observables
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Derivatives
 
$
(1,461
)
 
$

 
$
(1,461
)
 
$

Total
 
$
(1,461
)
 
$

 
$
(1,461
)
 
$




64



7. Income Taxes
The components of domestic and foreign (loss) income before the provision for income taxes are as follows:
 
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
U.S.
 
$
(15,427
)
 
$
(43,041
)
 
$
(38,240
)
Foreign
 
14,420

 
30,705

 
47,325

Total
 
$
(1,007
)
 
$
(12,336
)
 
$
9,085

The components of the income tax provision (benefit) are as follows:
 
 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
 
U.S.
 
$
1,002

 
$
929

 
$
1,196

Foreign
 
4,121

 
8,134

 
15,054

Total current
 
5,123

 
9,063

 
16,250

Deferred:
 
 
 
 
 
 
U.S.
 
1,640

 
(1,707
)
 
(195
)
Foreign
 
6,876

 
1,926

 
(2,590
)
Total deferred
 
8,516

 
219

 
(2,785
)
Total provision
 
$
13,639

 
$
9,282

 
$
13,465


For the years ended December 31, 2017 and 2016, the provision for income taxes was $13.6 million and $9.3 million respectively. The Company's effective income tax rate is primarily impacted by income the Company earns in tax-paying jurisdictions relative to income it earns in non-tax-paying jurisdictions. The majority of income recognized for purposes of computing the Company's effective tax rate is earned in countries where the statutory income tax rates range from 15.0% to 35.0%. The Company generates losses in certain jurisdictions for which it receives no tax benefit as the deferred tax assets in these jurisdictions (including the net operating losses) are fully reserved by a 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, Germany and Australia. Due to these reserves, the geographic mix of its pre-tax earnings has a direct correlation with how high or low its annual effective tax rate is relative to consolidated earnings.

On December 22, 2017, significant tax legislation was signed into U.S. law under the Tax Cuts & Jobs Act (“the Tax Act”). Key features of the Tax Act include a reduction of the corporate income tax rate from 35% to 21%; limitations on the deductibility of future interest expense; and the transition of the U.S. system for international taxation from a worldwide tax regime to a modified-territorial tax regime, including the imposition of a tax on unrepatriated earnings of foreign subsidiaries (the “transition tax”). In response, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, or in circumstances where estimates cannot be made, to not report any impact and to disclose and recognize at a later date.

As of December 31, 2017, the Company has not completed its accounting related to the enactment of the Tax Act, as follows:

1. Remeasurement of U.S. deferred tax assets - The Company has recorded a provisional estimate of $31.8 million discrete deferred tax expense related to the remeasurement of the U.S. deferred tax assets as a result of the reduction in the corporate income tax rate. A corresponding tax benefit was recorded related to the reduction in valuation allowance.

2. Transition tax - The Company has recorded a provisional estimate related to accounting for the transition tax and its impact on tax accounting for unrepatriated foreign earnings and other foreign income inclusions. The provisional estimate results in $0 current or deferred tax impact primarily as a result of the historic tax loss carry-forwards and the corresponding valuation allowance against related deferred tax assets. In order to complete the accounting, the Company will continue to analyze foreign earnings calculations as well as to await clarification of certain provisions of the Tax Act.


65



3. Deferred tax accounting on outside basis differences of controlled foreign corporations - The Company has recorded a provisional estimate related to the deferred tax accounting for basis differences associated with foreign subsidiaries. Historically, the Company has accrued U.S. deferred taxes in connection with certain foreign earnings which were not considered to be permanently reinvested as these earnings were expected to be distributed to the U.S. However, the transition tax has resulted in immediate U.S. taxation of previously untaxed foreign earnings. As a result, the Company has reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, a provisional estimate has been recorded for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. No additional U.S. income taxes have been provided in connection with any remaining untaxed foreign earnings or any additional outside basis difference with respect to investments in foreign subsidiaries as the Company assesses whether any investments should be considered as indefinitely reinvested in foreign operations.

4. Global Intangible Low-Taxed Income (“GILTI”) - The deferred tax accounting is incomplete for basis differences associated with foreign subsidiaries as it relates to GILTI, a new provision under the Tax Act. No provisional estimate has been provided. Relevant to the current financial statements, the election of an accounting policy with respect to deferred tax accounting for GILTI will depend, in part, on analyzing foreign income to estimate future GILTI inclusions, as well as clarification of certain provisions of the Tax Act. Until such analyses and clarifications are made, the Company has not made a policy decision regarding tax accounting for the GILTI provision.

5. State and Local Income Taxes - The Company has recorded a provisional estimate related to the tax accounting for state and local income taxes upon enactment of the Tax Act. The Company continues to gather and analyze information available related to the impact of the Tax Act on state and local taxes and awaits clarification from the municipalities in order to complete the accounting.

To the extent a provisional estimate was made, the Company utilized previously issued guidance for the Tax Act in order to reach an estimate. However, these estimates are not capable of finalization given the lack of statutory and regulatory guidance in many areas, as well as the complexity in acquiring the data required to calculate the impact on the tax accounts. The Company will revise and conclude the accounting as and when additional information is obtained, which in many cases is contingent on the timing of issuance of guidance. For these reasons, the ultimate impact may differ from these provisional amounts due to, among other things, additional information, changes in interpretations and assumptions management has made, and changes based on additional statutory and regulatory guidance that may be issued. Acknowledging this uncertainty, accounting for the impacts of the Tax Act will be completed within the next twelve months.
 
The provision for income taxes differs from the amount computed by applying the U.S. statutory tax rate of 35% to income before income taxes, due to the following: 
 
Year ended December 31,
 
2017
 
2016
 
2015
Book income at U.S. 35% statutory rate
$
(352
)
 
$
(4,318
)
 
$
3,180

State income and other taxes due, net of federal benefit
1,362

 
1,168

 
1,556

Foreign tax rate differential
(2,716
)
 
(2,305
)
 
(1,927
)
Dividends and other foreign (loss) income
(18,756
)
 
11,233

 
11,079

Change in valuation allowance
(944
)
 
4,922

 
(544
)
Tax rate changes
32,730

 
290

 
(103
)
Tax credits and refunds
(613
)
 
(91
)
 
(372
)
Change in unrecognized tax benefits
1,627

 
2,097

 
(372
)
Provision to return adjustments
(74
)
 
(1,001
)
 
(68
)
Non-deductible expenses
1,350

 
2,246

 
1,246

Other, net
(1,395
)
 
(2,913
)
 
(455
)
Other foreign permanent items
1,420

 
(2,046
)
 
(314
)
Settlement of tax assessments

 

 
559

Total
$
13,639

 
$
9,282

 
$
13,465


The effective tax rate on continuing operations for the year ended December 31, 2017 varied from the statutory rate of 35% primarily due to the tax effect of intra-period tax allocations, tax rate changes, dividends and other foreign income, and

66



changes in valuation allowances. Included in the effective tax rate is a benefit of $0.5 million from the impact on intra-period tax allocations, included in the Other, net line in the table above. Intra-period tax allocation rules require that all items, including other comprehensive income and discontinued operations, be considered for purposes of determining the amount of tax benefit that results from a loss in continuing operations. As a result, an income tax benefit was recorded in continuing operations for the year ended December 31, 2017, with offsets of income tax expense in other comprehensive income. The amount for tax rate changes of $32.7 million is primarily related to the remeasurement of U.S. deferred taxes under the Tax Act. The amount for dividends and other foreign income of $(18.8) million was primarily related to a change in deferred taxes on foreign unremitted earnings resulting from the Tax Act. The change in the valuation allowance primarily relates to a decrease in the U.S. valuation allowance partially offset by establishing a valuation allowance against certain German deferred tax assets.

The effective tax rate on continuing operations for the year ended December 31, 2016 varied from the statutory rate of 35% primarily due to the tax effect of intra-period tax allocations, dividends and other foreign income, foreign rate differentials and changes in valuation allowances. Included in the effective tax rate is a benefit of $(2.2) million from the impact on intra-period tax allocations, included in the Other, net line in the table above. Intra-period tax allocation rules require that all items, including other comprehensive income and discontinued operations, be considered for purposes of determining the amount of tax benefit that results from a loss in continuing operations. As a result, an income tax benefit was recorded in continuing operations for the year ended December 31, 2016, with offsets of income tax expense in other comprehensive income. The amount for dividends and other foreign income of $11.2 million was primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested. The foreign rate differential arises as a result of income earned in countries where the statutory income tax rates vary from the U.S. statutory rate of 35%, for which Austria creates the Company’s largest tax rate benefit. The change in the valuation allowance is $4.6 million from US and $0.3 million from an increase of pre-tax losses generated in other foreign jurisdictions for which the Company has determined no benefit should be recorded.

The effective tax rate on continuing operations for the year ended December 31, 2015 varied from the statutory rate of 35% primarily due to the tax effect of dividends and other foreign income, foreign rate differentials and changes in valuation allowances. The amount for dividends and other foreign income of $11.1 million was primarily related to residual U.S. taxes provided on foreign earnings no longer considered permanently reinvested. The foreign rate differential arises as a result of income earned in countries where the statutory income tax rates vary from the U.S. statutory rate of 35%, for which Austria creates the Company’s largest tax rate benefit. The change in the valuation allowance of $(0.5) million relates primarily to a decrease in domestic deferred tax assets of $(0.4) million, a removal of a portion of the Australian valuation allowance of $(1.1) million and an increase of pre-tax losses generated in other foreign jurisdictions for which the Company has determined no benefit should be recorded.
For the years ended December 31, 2017 and 2016, tax expense included a benefit of approximately $54 and $32 for a Chinese tax holiday that expired in the year ending December 31, 2017.
The Company utilizes the asset and 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.

The tax effect of temporary differences which give rise to deferred income tax assets and liabilities are as follows:


67



 
Year Ended December 31,
 
2017
 
2016
Deferred tax assets arising from:
 
 
 
Loss carryforwards
$
94,881

 
$
117,485

Intangible assets, net
204

 
161

Pension and other benefit accruals
10,678

 
14,604

Tax credits
1,838

 
1,488

Investments
2,506

 
2,082

Interest and finance fees
1,261

 
972

Other allowances and accruals, net
10,948

 
10,676

Total
122,316

 
147,468

Deferred tax liabilities arising from:
 
 
 
Property and equipment, net
18,689

 
21,096

Intangible assets, net
2,377

 
2,074

Foreign income inclusions
1,590

 
21,243

Other allowances and accruals, net
250

 
1,616

Total
22,906

 
46,029

Valuation allowance
102,204

 
97,859

Net deferred tax (asset) liability
$
2,794

 
$
(3,580
)
Deferred taxes are recorded as follows in the consolidated balance sheets:
 
 
December 31,
 
2017
 
2016
Non-current deferred tax asset, net
$
10,103

 
$
10,737

Non-current deferred tax liability, net
12,897

 
7,157

Net deferred tax (asset) liability
$
2,794

 
$
(3,580
)
As of December 31, 2017, the Company has pre-tax net operating loss carry-forwards for U.S. federal income tax purposes of approximately $234.9 million that expire on various dates from 2025 through 2037 and federal tax credits of approximately $166 that either expire on various dates or can be carried forward indefinitely. As of December 31, 2017, the Company has pre-tax net operating loss carry-forwards for U.S. state income tax purposes of approximately $257.7 million that expire on various dates from 2018 through 2037. As of December 31, 2017, the U.S. federal and U.S. state net operating loss carry-forwards and federal tax credits are fully reserved in our valuation allowance. The Company has foreign federal net operating loss carry-forwards of approximately $126.7 million and capital loss carry forwards of $7.7 million, the majority of which can be carried forward indefinitely, and federal and provincial tax credits of approximately $1.7 million that begin to expire primarily in 2024 or are carried forward indefinitely. As of December 31, 2017, $103.8 million, $7.7 million and $0.2 million, of foreign federal net operating loss carry-forwards, capital loss carry-forwards and federal and provincial tax credits, respectively, are reserved in our valuation allowance. Historic and future ownership changes could potentially reduce the amount of net operating loss carry-forwards available for use.
As of December 31, 2017, the Company had a valuation allowance in place for certain of its deferred tax assets due to the Company’s accumulated loss position and its uncertainty around the future profitability in certain of its tax jurisdictions. The valuation allowance primarily relates to deferred tax assets for available net operating loss carry forwards in the United States, the U.K., Germany, Sweden, France, Australia, China, Turkey and Spain. While the Company believes it has adequately provided for its income tax assets and liabilities in accordance with Topic 740, it recognizes that adverse determinations by taxing authorities, or changes in tax laws and regulations could have a material adverse effect on its consolidated financial position, results of operations or cash flows.
During the year ended December 31, 2017, the Company reassessed its valuation allowance requirements related to its German operations, evaluating all available evidence in its analysis, both positive and negative, including historical and projected income and losses before the provision for income taxes, as well as reversals of temporary differences.  The Company also considered tax planning strategies.  During the year ended December 31, 2017, the Company recorded $4.2 million of tax expense related to establishing a valuation allowance against certain of its German deferred tax assets.  The Company believes

68



that it is more likely than not for the deferred tax assets to remain unrealized based on estimates of future taxable income generated by future earnings of its German businesses.

In light of the enactment of the Tax Act, the Company evaluated the recoverability of the U.S. deferred tax assets. It remains more likely than not that the deferred tax assets in connection with our U.S. operations will not be realized. Although projections of future U.S. taxable income indicate realization of the primary U.S. deferred tax asset (the tax loss carry-forwards) as a result of limitations on the deductibility of future interest expense, such limitations will have a corresponding increase to deferred tax assets. 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.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $138.5 million at December 31, 2017. Prior to enactment of the Tax Act, earnings generated prior to 2013 were considered to be indefinitely reinvested for continued use in foreign operations except for a portion of the earnings generated by our Brazil and China operations. All earnings generated in all foreign subsidiaries after 2012 were not considered to be permanently reinvested, because of the Company's desire to manage global cash and liquidity related to ongoing financial obligations, capital expenditures, restructuring payments and other changes in business conditions going forward. However, the transition tax has resulted in immediate U.S. taxation of our previously untaxed foreign earnings. As a result, the Company has reversed the U.S. deferred taxes previously recognized on those foreign earnings that were not considered to be permanently reinvested. Additionally, future repatriation of foreign earnings (even those previously considered to be permanently reinvested) would not be expected to give rise to U.S. tax under the Tax Act’s territorial regime. Therefore, the Company has recorded a provisional estimate for deferred taxes on unrepatriated foreign earnings assuming none of the earnings are permanently reinvested. Foreign withholding taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable.
The Company accrues for certain known and reasonably anticipated income tax obligations after assessing the likely outcome. In the event that actual results differ from these accruals or if the Company becomes subject to a tax obligation for which the Company has made no accrual, the Company may need to make adjustments, which could materially impact the financial condition and results of operations. For example, taxing authorities may disagree with the Company’s tax accounting methodologies and may subject the Company to inquiries regarding such taxes, which potentially could result in additional income tax assessments. In accordance with ASC 740-10-25-6, the Company does not accrue for potential income tax obligations if management deems a particular tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. In making this determination, the Company assumes that the taxing authorities will have access to all relevant facts and information in accordance with ASC 740-10-25-7.
As of December 31, 2017, the Company had a gross unrecognized tax benefit of $10.0 million, exclusive of interest and penalties. The unrecognized tax benefit increased by approximately $0.7 million and $1.8 million during the years ended December 31, 2017 and 2016, respectively. The unrecognized tax benefit increased primarily as a result of current year positions related to transfer pricing policies and currency effects.
A reconciliation of the balances of the unrecognized tax benefits is as follows, excluding interest and penalties:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Balance as of January 1
$
9,285

 
$
7,527

 
$
7,502

Gross increases (decreases)-tax positions in prior period-other
(1,942
)
 
849

 
(104
)
Gross decreases-related to lapse in statute of limitations
(172
)
 
(115
)
 
(209
)
Gross increases-tax positions in current period
2,342

 
1,046

 
688

Currency effects
499

 
(22
)
 
(350
)
Balance at December 31
$
10,012

 
$
9,285

 
$
7,527


The Company’s policy is to recognize interest and penalties related to income tax matters as income tax expense, and accordingly, the Company recorded a $0.2 million expense, including currency effects, and a $0.9 million expense, including currency effects, for interest and penalties during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the Company had accrued interest and penalties related to uncertain tax positions of approximately $2.3 million and $1.7 million, respectively. If the Company were to prevail on all unrecognized tax benefits recorded, approximately $7.9 million would benefit the effective tax rate. During the next twelve months, management estimates a range between $0 and $10 of the Company's gross unrecognized tax benefit will reverse due to expected settlements

69



and statute of limitations expiring which relate to various items and will benefit the effective tax rate. The Company regularly evaluates, assesses and adjusts the related liabilities in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period.
The tax years 2005 through 2017 remain open to examination in the Company's U.S. Federal jurisdiction, and the tax years 2001 through 2017 remain open to examination in the Company's U.S. state jurisdictions. The tax years 2003 through 2017 remain open to examination in the major foreign tax jurisdictions to which the Company and its subsidiaries are subject. There are currently no U.S. Federal audits or examinations underway. The Company has ongoing audits or tax litigation in Italy. During 2017, tax audits related to the German Rolls business were closed, with no significant changes.
The Company believes that it has made adequate provisions for all income tax uncertainties.
8. Pensions and Other Post Retirement Benefits
Pension Plans
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. Approximately $47.1 million of the total underfunded status of $67.1 million and $43.1 million of the total underfunded status of $64.8 million relate to these unfunded pension plans as of December 31, 2017 and 2016, respectively. 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. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the plans.
In accordance with the provisions of Topic 715, the measurement date for defined benefit plans is December 31.
Benefit Obligations and Plan Assets
A summary of the changes in benefit obligations and plan assets as of December 31, 2017 and 2016 is presented below.
 

70



 
 
Defined Benefit Plans
 
 
 
2017
 
2016
 
Change in benefit obligation
 
 
 
 
 
Benefit obligation at beginning of year
 
$
153,256

 
$
149,108

 
Service cost
 
1,523

 
1,668

 
Interest cost
 
4,595

 
5,133

 
Plan participants’ contributions
 
15

 
22

 
Actuarial loss
 
7,243

 
15,583

 
Currency translation impact
 
10,148

 
(7,796
)
 
Administrative expenses paid
 
(237
)
 
(191
)
 
Settlement/curtailment
 
(6,531
)
 
(2,700
)
 
Benefits paid
 
(7,652
)
 
(7,571
)
 
Benefit obligation at end of year
 
162,360

 
153,256

 
Change in plan assets
 
 
 
 
 
Fair value of plan assets at beginning of year
 
88,468

 
86,313

 
Actual return on plan assets
 
9,387

 
9,789

 
Employer contributions
 
6,809

 
5,460

 
Plan participants’ contributions
 
15

 
22

 
Settlement
 
(6,531
)
 

 
Administrative expenses paid
 
(237
)
 
(191
)
 
Currency translation impact
 
5,040

 
(5,354
)
 
Benefits paid
 
(7,652
)
 
(7,571
)
 
Fair value of plan assets at end of year
 
95,299

 
88,468

 
Funded status
 
$
(67,061
)
 
$
(64,788
)
 
 
 
 
 
 
 
Balance sheet classification of funded status
 
 
 
 
 
Other assets - non-current
 
$
1,390

 
$

 
Accrued expenses
 
$
(3,124
)
 
$
(3,080
)
 
Pension, other post-retirement and post-employment obligations
 
$
(65,327
)
 
$
(61,708
)
 
Funded status
 
$
(67,061
)
 
$
(64,788
)
 
 
 
The total accumulated benefit obligation was $158.8 million and $150.0 million as of the years ended December 31, 2017 and 2016, respectively.
All of the Company’s pension plans that comprise the pension obligation amounts above, with the exception of Canada in 2017, have a projected benefit obligation equal to or in excess of plan assets. Information for pension plans with an accumulated benefit obligation in excess of plan assets is as follows:
 
 
 
December 31,
 
 
2017
 
2016
Projected benefit obligation
 
$
141,452

 
$
153,256

Accumulated benefit obligation
 
$
137,918

 
$
150,005

Fair value of plan assets
 
$
73,001

 
$
88,468



71



Components of Net Periodic Benefit Cost
 
 
 
Defined Benefit Plan
 
 
 
2017
 
2016
 
2015
 
Service cost
 
$
1,523

 
$
1,668

 
$
3,256

 
Interest cost
 
4,595

 
5,133

 
5,656

 
Expected return on plan assets
 
(5,412
)
 
(5,383
)
 
(6,221
)
 
Settlement losses
 
921

 

 
1,108

 
Amortization of net loss
 
2,133

 
1,949

 
2,139

 
Net periodic benefit cost
 
$
3,760

 
$
3,367

 
$
5,938

 
The total unrecognized net loss recorded in Other Comprehensive Loss at December 31, 2017 is $46.3 million, gross of tax. For defined benefit plans, the estimated net loss to be amortized from accumulated other comprehensive loss during 2018 is expected to be $2.3 million.
 
Additional Information
 
Defined Benefit Plans
 
 
 
2017
 
2016
 
Change in funded status included in accumulated other comprehensive loss, net of tax
 
$
2,664

 
$
3,687

 
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:
 
 
 
Defined Benefit Plans
 
 
 
2017
 
2016
 
Discount rate
 
2.75
%
 
3.10
%
 
Rate of compensation increase
 
3.48
%
 
3.47
%
 
 
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are as follows:
 
 
 
Defined Benefit Plans
 
 
 
2017
 
2016
 
Discount rate
 
3.10
%
 
3.67
%
 
Expected long-term return on plan assets
 
6.23
%
 
6.42
%
 
Rate of compensation increase
 
3.47
%
 
3.50
%
 
The expected long-term return on plan assets is calculated based on a building-block approach, whereby the components are weighted based on the long-term allocation of pension plan assets.
Plan Assets
The percentage of fair value of total plan assets for funded plans are invested as follows:
 
 
 
Plan Assets at December 31,
Asset Category
 
2017
 
2016
Marketable equities
 
56
%
 
56
%
Fixed income securities
 
44
%
 
44
%
Total
 
100
%
 
100
%

72



The Company’s plan assets are invested in the U.S., the U.K. and Canada. Plan asset investments are accounted for at cost on the trade date and are reported at fair value, using the net asset value per share practical expedient. Canadian plan assets totaling $22.3 million, U.K. plan assets totaling $37.0 million and U.S. plan assets totaling $36.0 million are classified as Level 2 within the fair value hierarchy. Level 2 valuations are based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
In general, plan assets are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to the level of risk associated with certain investments, it is reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the plan assets. The investment objective of the plans is to maximize the return on plan assets over a long time horizon, while meeting the plan obligations. Investment risk is substantially reduced by diversification of investments within particular asset classes. The expected future rate of return on plan assets is based on historic performance of bonds and equities and the higher returns expected by equity-based capital relative to debt capital. The agreements with the fund managers include a number of restrictions which are designed to ensure that only suitable investments are held. Generally, investment performance is provided to and reviewed by the Company on a quarterly basis. If any changes take place in the legal, regulatory or tax environment which impact the investment of the portfolios or the investment returns, the fund manager is expected to notify the Company immediately and to advise on their anticipated impact.
Details relating to the Company’s plan assets are as follows:
U.S. Plan Assets: The Company’s U.S. plan assets are 51% invested in marketable equity securities and 49% invested in fixed income securities managed by the fund manager. This allocation is in accordance with the strategic allocation adopted by the Company’s pension committee comprising of approximately 50% equity investment and 50% bond investment.
U.K. Plan Assets: The Company’s U.K. plan assets are 52% invested in marketable equity securities and 48% invested in fixed income securities managed by the fund manager. The trustees of the U.K. pension plan have adopted a strategic allocation comprising of 50% equity investment and 50% bond investment.
Canadian Plan Assets: The Company’s Canadian plan assets are 71% invested in marketable equity securities and 29% invested in fixed income securities managed by the fund manager. The Company’s pension committee has adopted a strategic allocation comprising of approximately 65% equity investment and 35% bond investment.
Contributions and Benefit Payments
The Company expects to make contributions to its funded defined benefit plans and benefit payments to its unfunded defined benefit plans totaling approximately $6.8 million in 2018.
Estimated Future Benefit Payments
The following benefit payments related to both the Company's funded and unfunded defined benefit plans, which reflect expected future service, as appropriate, are expected to be paid:
 
 
 
Defined Benefit Plans
 
2018
 
$
7,049

 
2019
 
6,846

 
2020
 
7,088

 
2021
 
8,058

 
2022
 
7,729

 
Years 2023 and thereafter
 
39,610

 
The Company sponsors various unfunded defined contribution plans that provide for retirement benefits to employees, some in accordance with local government requirements. The Company also maintains a funded retirement savings plan for U.S. employees which is qualified under Section 401(k) of the U.S. Internal Revenue Code. The plan allows eligible employees to contribute up to 99% of their compensation (subject to certain Internal Revenue Service limitations), with the Company matching up to 4% of employee compensation. The following represents the approximate matching contribution expense for the years ended December 31, 2017, 2016 and 2015:
 

73



 
 
Year ended December 31,
 
 
2017
 
2016
 
2015
Matching contribution expense
 
$
1,834

 
$
1,590

 
$
1,333


9. Commitments and Contingencies
Operating Leases
The Company leases office buildings, vehicles and computer equipment for its worldwide operations. Minimum rent is expensed on a straight-line basis over the term of the leases. Operating lease rental expense was $2.3 million, $2.4 million, and $3.2 million during the years ended December 31, 2017, 2016 and 2015, respectively. These leases expire at various dates through 2023. At December 31, 2017, future minimum rental payments due under non-cancelable operating leases were as follows:
 
 
 
2018
$
1,748

2019
1,541

2020
1,144

2021
888

2022
554

Thereafter
38

 
 
Total minimum operating lease payments
$
5,913

 
 


Collective Bargaining and Union Agreements
Approximately 69% of the Company’s employees either are subject to various collective bargaining agreements or are members of trade unions, employee associations or workers councils predominantly outside of the United States. Approximately 1.0% of those employees subject to collective bargaining agreements, or 0.7% of the Company’s total employees, are covered by agreements that are set to expire during 2018.
Legal Proceedings
The Company and its subsidiaries are involved in various legal matters, which have arisen in the ordinary course of business as a result of various labor claims, taxing authority reviews and other legal matters. As of December 31, 2017, the Company had accrued an immaterial amount in its financial statements for these matters for which (1) management believed the possibility of loss was either probable or possible and (2) was able to estimate the damages. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of our strategies related to these proceedings.
Environmental Matters
The Company’s operations and facilities are subject to a number of national, state and local laws and regulations protecting the environment and human health in the United States and foreign countries that govern, among other things, the handling, storage and disposal of hazardous materials, discharges of pollutants into the air and water and workplace safety. Because of the Company’s operations, the history of industrial uses at some of these facilities, the operations of predecessor owners or operators of some of the businesses, and the use and release of hazardous substances at these sites, the liability provisions of environmental laws may affect the Company. The Company is not aware of any material unasserted claims.
The Company believes that any additional liability in excess of amounts provided which may result from the resolution of such matters will not have a material adverse effect on the financial condition, liquidity or cash flow of the Company.

10. Long-term Incentive and Stock-Based Compensation
The Company records stock-based compensation expense in accordance with ASC Topic 718, Accounting for Stock Compensation ("Topic 718") and has used the straight-line attribution method to recognize expense for time-based restricted

74



stock units ("RSUs") and deferred stock units ("DSUs") and recognizes expense for the performance and market-based restricted stock units based on management's estimate of performance against the targets in each plan. The Company recorded stock-based compensation expense during the years ended December 31, 2017, 2016 and 2015 as follows: 
 
 
 
For the Years Ended December 31,
 
 
 
2017
2016
2015
RSU and DSU Awards (1)
 
 
$
2,518

$
2,240

$
2,740

Other Awards (2)
 
 

372

558

Total
 
 
$
2,518

$
2,612

$
3,298

 
(1)
Related to RSUs, Options and DSUs awarded to certain employees and non-employee directors. The year ended December 31, 2017 includes approximately $1.2 million of expense related to the accelerated vesting on RSU's upon CEO transition. Upon transition 146,134 shares were issued to the former CEO.

(2)
This amount relates to options awarded on August 15, 2012 to the former CEO.

Long-Term Incentive Program - 2017 LTIP

On May 30, 2017, the Board of Directors approved the 2017 - 2019 Long-Term Incentive Plan (the "2017 LTIP") which provides for the grant of incentive award opportunities (each, an "Award") payable, if earned, in cash. Because any Award under the 2017 LTIP will be paid in cash, and not equity, the Awards granted under the 2017 LTIP are not made pursuant to the Xerium Technologies, Inc. 2010 Equity Incentive Plan (the "EIP"). As of December 31, 2017, the total fair market value of these awards was $1.1 million of which $0.2 million was recorded in general and administrative expense in the Consolidated Statement of Operations for the year ended December 31, 2017. Awards will consist of Phantom Stock Units. Each Phantom Stock Unit represents the right to receive a cash amount equal to the Average Value of one share of common stock of the Company as described below:
125,535 Time-based awards, or 50% of the total target award for each participant, have been granted in the form of time-based units. The time-based units vest on the third anniversary of the date of grant.

125,535 Performance-based awards, or 50% of the total target award for each participant, have been granted in the form of performance-based units. Of these units, one half will vest based on the financial performance of the Company as measured by Adjusted EBITDA, and one half will vest based on the Return on Net Assets (as defined in the 2017 LTIP) of the Company.

Half of the performance-based units whose vesting is subject to the financial performance of the Company 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, 2017 through December 31, 2019. The amount of units that vest will range from 50% to 200% of the employee's total units.

Half of the performance-based units whose vesting is subject to the financial performance of the Company will vest based on the degree to which the Company achieves an average three-year Return on Net Assets metric over the performance period of January 1, 2017 through December 31, 2019. The amount of units that vest will range from 50% to 200% of the employee's total units.

Long-Term Incentive Program—2016 LTIP, 2015 LTIP and 2014 LTIP

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:


75



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.
On August 2, 2016 an additional amount of 8,562 time-based awards and 15,900 performance based awards were granted under the 2016-2018 LTIP.

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 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, 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

On March 2, 2015, the Board of Directors approved the 2015-2017 Long-Term Incentive Plan (the “2015 - 2017 LTIP”) under the 2010 Equity Incentive Plan (the “2010 Plan”). Awards under the 2015 - 2017 LTIP are time-based, performance-based and market-based. A specific target share award has been set for each participant in the 2015-2017 LTIP. Awards will be paid in the form of shares of common stock of the Company, as described below:

76



52,601 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.
97,681 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, half will vest based on the financial performance of the Company and the other half will vest based on the stock price performance of the Company.

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, 2015 through December 31, 2017. 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 0% to 100% of the employee's total financial stock units. Upon attainment of cumulative Adjusted EBITDA equal to 80% or less of the targeted Adjusted EBITDA, none of the financial stock units will vest. Upon attainment of more than 80% of the targeted Adjusted EBITDA, the financial stock units will begin vesting on a straight-line basis from 0% of the financial stock units at 80% 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 100% of the financial stock units.

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 March 2, 2015 through March 2, 2018 (“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 March 2, 2018. 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 March 2, 2018. The amount of units that vest will range from 0% to 100% 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. TSR performance between the 35th and 55th 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 100%.
          
Long-Term Incentive Program—2014 LTIP

Awards under the 2014 LTIP vested on May 8, 2017, and were converted to 13,829 shares of common stock, net of withholdings. This excludes shares that vested upon the termination of the prior CEO during 2017.

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, 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 98,809 DSUs under the 2011 DSU Plan for service during the year ended December 31, 2017. In addition, in accordance with the 2011 DSU Plan, as amended in January of 2015, 70,987 DSUs were settled in common stock during the year ended December 31, 2017.
CEO Restricted Stock Unit Award

On June 2, 2017, the Company filed a Registration Statement on Form S-8 for the purpose of registering 600,000 shares of its common stock reserved for issuance in accordance with an Inducement Restricted Stock Unit Award Agreement between the Company and Mark Staton in connection with his appointment as the Company's President and Chief Executive Officer on April 28, 2017. The Inducement Restricted Stock Unit Award Agreement provides Mr. Staton with the opportunity to earn up to

77



600,000 shares of the Company’s common stock if its stock price attains certain levels within certain time periods, subject to his continued employment with the Company and other qualifying terms. No compensation expense related to this agreement has been recorded during the year ended December 31, 2017.
Other Stock Compensation Plans
On August 15, 2012, the Company granted the Company's former 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 vested 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 the restricted stock units and options vested. The former CEO received 35,539 shares of common stock, net of withholdings as a result of the restricted stock unit vesting and additionally exercised his vested options, and received 68,106 shares of common stock, in a cashless exercise, net of withholdings. This compensation plan has been completed, and the former CEO exercised all of his options to purchase stock.
A summary of RSUs outstanding as of December 31, 2017 and their vesting dates is as follows.
 
Plan Description
 
Remaining Vesting Dates
 
Number of RSUs
DSU's
 
Vested immediately upon grant, on a quarterly basis
 
92,418

Executive time-based RSUs granted during 2015
 
March 2, 2018
 
17,534

Executive market and performance based RSUs granted during 2015
 
March 2, 2018
 
32,560

Executive time-based RSUs granted during 2016
 
May 5, 2019 and August 2, 2019
 
76,026

Executive market and performance based RSUs granted during 2016
 
May 5, 2019 and August 2, 2019
 
141,192

CEO RSU Award
 
October 28, 2020
 
600,000

 
 
 
 
959,730

 
 
 
 
 

RSU activity during years ended December 31, 2017, 2016 and 2015, are presented below.
 
 
Number  of
RSUs
 
Price Range of Grant-
Date
Fair Value Per RSU
 
Weighted
Average  Grant-Date Fair
Value Price Per RSU
Outstanding, December 31, 2014
 
738,724

 
$4.04  –  $21.69
 
$
8.61

Granted
 
181,831

 
$9.71  –  $15.97
 
$
14.93

Forfeited
 
(282
)
 
$8.25
 
$
8.25

Issued or withheld for tax withholding purposes
 
(104,917
)
 
$4.04  –  $9.71
 
$
5.35

Outstanding, December 31, 2015
 
815,356

 
$4.04  –  $21.69
 
$
10.93

Granted
 
619,669

 
$5.02  –  $7.95
 
$
5.24

Forfeited
 
(40,468
)
 
$5.02  –  $15.97
 
$
7.94

Issued or withheld for tax withholding purposes
 
(520,820
)
 
$2.90  –  $15.97
 
$
8.62

Outstanding, December 31, 2016
 
873,737

 
$2.90  –  $24.05
 
$
8.40

Granted
 
698,809

 
$4.26  –  $7.19
 
$
6.76

Forfeited
 
(253,846
)
 
$5.02  –  $15.97
 
$
6.78

Issued or withheld for tax withholding purposes
 
(358,970
)
 
$4.26  –  $15.97
 
$
9.56

Outstanding, December 31, 2017
 
959,730

 
$2.90  –  $24.05
 
$
7.20

Exercisable, December 31, 2017 (1)
 
92,418

 
$2.90  –  $24.05
 
$
8.34

 

78



(1)
The Company had 92,418 non-employee director DSUs that have vested, but have not yet been converted to common stock. These DSUs have a weighted average grant-date fair value price per share of $8.34 and a total grant-date fair value of $0.8 million. As the non-employee director can elect to defer the receipt of these DSUs until six months following their retirement from the Board of Directors, there is no definite weighted average life of these DSUs.

Assumptions
In accordance with Topic 718, the Company uses the following assumptions in determining compensation expense:
Grant-Date Fair Value
The Company calculates the grant-date fair value of time-based RSUs, performance-based RSUs and non-employee directors’ DSUs based on the closing price of the Company’s common stock on the date of grant.
Forfeitures
As the time-based and performance-based RSUs require continued employment or service up to the time of vesting, the amount of stock-based compensation recognized during a period can include an estimate of forfeitures. Under ASU 2016-09 Improvements to Employee Share-Based Payment Accounting, entities will have to elect whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur (e.g., when an award does not vest because the employee leaves the company) or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is no longer probable that the employee will fulfill the service condition, as is currently required. For awards with performance conditions, an entity will continue to follow ASC 718 and assess the probability that a performance condition will be achieved at each reporting period to determine whether and when to recognize compensation cost, regardless of its policy election for forfeitures.
No estimate of forfeitures has been made for RSUs and DSU’s awarded to non-employee directors because they vest immediately upon grant. Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is related to employee attrition and based on a historical analysis of its employee turnover. This analysis is re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will be only for those shares that meet the requirements of continued employment up to the time of vesting. As of December 31, 2017, the forfeiture rates for the 2015, 2016 and 2017 plans are estimated at 0%.
 
As of December 31, 2017, there was approximately $1.0 million of total unrecognized compensation expense related to un-vested share-based awards which is expected to be recognized over a weighted average period of 2.10 years.
Dividends
The Company’s Indenture to the Notes and ABL Facility generally prohibit the payment of dividends. No such payments were made during the years ended December 31, 2017 and 2016.

11. Restructuring Expense
Restructuring expense included in the Company’s statements of operations are the result of its long-term strategy to reduce production costs and improve long-term competitiveness. Restructuring and impairments expense consists principally of severance costs related to reductions in work force and of facility costs and impairments of assets principally related to closing facilities and/or the relocation of production to another facility. Impairment amounts for assets held for sale reflect estimated selling prices less costs to sell and are considered to be a Level 2 within the fair value hierarchy. Facility costs are principally comprised of costs to relocate assets to the Company’s other facilities and other associated costs.
           
During 2017, the Company incurred restructuring expenses of $7.9 million relating to headcount reductions and other costs related to previous plant closures partially offset by the reversal of a reserve for a potential exposure that was deemed no longer necessary.

During 2016, the Company incurred restructuring expenses of $10.4 million. These included $1.8 million of charges related to the closure of the Middletown, VA facility and $8.6 million of charges related to headcount reductions and other costs relating to previously announced plant closures.
During 2015, we incurred restructuring expenses of $14.6 million. These included $4.4 million of charges related to the closure of the Joao Pessoa, Brazil clothing facility; $4.9 million of charges related to the closure of the Warwick, Canada machine clothing facility; and $6.4 million of charges relating to headcount reductions, and other costs relating to previously

79



announced plant closures. The costs were partially offset by a gain of $1.1 million on the sale of the Joao Pessoa, Brazil machine clothing facility in the fourth quarter of 2015.

The Company expects to continue to review its business to determine if additional actions will be taken to further improve its cost structure. Restructuring expenses of approximately $1.0 million to $3.0 million are estimated during 2018, primarily related to the continuation of streamlining the operating structure and improving long-term competitiveness of the Company. Actual restructuring costs for 2018 may substantially differ from estimates at this time, depending on actual operating results in 2018 and the timing of the restructuring activities.

The table below sets forth the significant components and activity in the restructuring program during the years ended December 31, 2017, 2016 and 2015:

2017
Balance at
December 31, 
2016
 
Charges (1)
 
Currency    
Effects
 
Cash
Payments    
 
Balance at    
December 31,
2017 (2)
Severance
$
3,805

 
$
3,549

 
$
685

 
$
(5,353
)
 
$
2,686

Facility costs and other
392

 
3,359

 
71

 
(3,089
)
 
733

Total
$
4,197

 
$
6,908

 
$
756

 
$
(8,442
)
 
$
3,419

(1) Not included in the charges for 2017 in the table above is $0.9 million related to a pension settlement charge. The offset to the charge was accumulated other comprehensive loss. The settlement accounting was triggered as a result of wind-up payments being made out of the closed Warwick plant pension plan to former participants during 2017.
(2) Amount included in Accrued Expenses on the Consolidated Balance Sheets at December 31, 2017.
 
2016
Balance at
December 31, 
2015
 
Charges (1)
 
Currency    
Effects
 
Cash
Payments    
 
Balance at    
December 31,
2016 (2)
Severance
$
5,308

 
$
5,646

 
$
(146
)
 
$
(7,003
)
 
$
3,805

Facility costs and other
903

 
4,716

 
(25
)
 
(5,202
)
 
392

Total
$
6,211

 
$
10,362

 
$
(171
)
 
$
(12,205
)
 
$
4,197

(1) There are no impairment charges, other non-cash charges, or (gains)/losses included in the current year amounts.
(2) Amount included in Accrued Expenses on the Consolidated Balance Sheets at December 31, 2016.

2015
Balance at
December 31, 
2014
 
Charges (1)
 
Currency    
Effects
 
Cash
Payments    
 
Balance at    
December 31,
2015
Severance
$
4,880

 
$
8,006

 
$
(728
)
 
$
(6,850
)
 
$
5,308

Facility costs and other
818

 
6,486

 
(122
)
 
(6,279
)
 
903

Total
$
5,698

 
$
14,492

 
$
(850
)
 
$
(13,129
)
 
$
6,211

(1) Amount excludes $1.0 million related to impairment charges, $0.2 million in other non-cash charges and $(1.1) million related to the gain on sale of certain assets.
Restructuring by reportable segments is as follows for years ended December 31, 2017, 2016 and 2015. The below amounts include the impacts of the pension settlement charge in 2017 as well as the impairment and other non-cash charges/gains from 2015.

80



 
2017
 
2016
 
2015
Clothing
$
4,210

 
$
6,266

 
$
4,318

Roll Covers
3,288

 
3,063

 
1,833

Corporate
386

 
1,033

 
8,498

Total
$
7,884

 
$
10,362

 
$
14,649


12. 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 or other materials along the length of papermaking or other industrial machines. The roll covers segment primarily represents the manufacture and refurbishment of covers used on the steel rolls of papermaking or manufacturing 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 as described in Note 2. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.
The corporate column consists of the Company’s headquarters, related assets and expenses that are not allocable to reportable segments. Significant corporate assets include cash, investments in subsidiaries and deferred financing costs. Corporate depreciation and amortization consists primarily of deferred financing costs. Corporate segment earnings (loss) consists of general and administrative expenses. The eliminations column represents eliminations of investments in subsidiaries.
Summarized financial information for the Company’s reportable segments is presented in the tables that follow for each of the three years ended December 31, 2017.
 
 
Clothing
 
Roll
Covers
 
Corporate
 
Eliminations
 
Total
2017
 
 
 
 
 
 
 
 
 
Net sales
$
288,269

 
$
192,779

 
$

 
$

 
$
481,048

Depreciation and amortization (1)
$
19,934

 
$
10,861

 
$
2,310

 
$

 
$
33,105

Restructuring
$
4,210

 
$
3,288

 
$
386

 
$

 
$
7,884

Segment earnings (loss)
$
76,600

 
$
40,060

 
$
(16,435
)
 
$

 
$
100,225

Total assets
$
572,717

 
$
472,268

 
$
320,139

 
$
(797,275
)
 
$
567,849

Capital expenditures
$
4,450

 
$
7,721

 
$
862

 
$

 
$
13,033

2016
 
 
 
 
 
 
 
 
 
Net sales
$
286,373

 
$
184,944

 
$

 
$

 
$
471,317

Depreciation and amortization (1)
$
20,452

 
$
10,253

 
$
2,251

 
$

 
$
32,956

Restructuring
$
6,266

 
$
3,063

 
$
1,033

 
$

 
$
10,362

Segment earnings (loss)
$
75,114

 
$
36,458

 
$
(16,280
)
 
$

 
$
95,292

Total assets
$
519,176

 
$
450,314

 
$
315,040

 
$
(742,617
)
 
$
541,913

Capital expenditures
$
7,644

 
$
5,118

 
$
944

 
$

 
$
13,706

2015
 
 
 
 
 
 
 
 
 
Net sales
$
299,991

 
$
177,252

 
$

 
$

 
$
477,243

Depreciation and amortization (1)
$
18,889

 
$
8,754

 
$
1,607

 
$

 
$
29,250

Restructuring
$
4,318

 
$
1,833

 
$
8,498

 
$

 
$
14,649

Segment earnings (loss)
$
81,813

 
$
35,901

 
$
(15,899
)
 
$

 
$
101,815

Total assets
$
441,742

 
$
228,477

 
$
627,121

 
$
(746,966
)
 
$
550,374

Capital expenditures
$
25,560

 
$
17,914

 
$
7,397

 
$

 
$
50,871


81



 
(1)
Depreciation and amortization excludes amortization of financing costs, included in interest expense of $3.6 million, $3.1 million, and $3.5 million for 2017, 2016 and 2015, respectively.


Provided below is a reconciliation of Segment earnings (loss) to (loss) income before provision for income taxes for each of the three years in the period ended December 31:
 
2017
 
2016
 
2015
Segment earnings (loss):
 
 
 
 
 
Clothing
$
76,600

 
$
75,114

 
$
81,813

Roll Covers
40,060

 
36,458

 
35,901

Corporate
(16,435
)
 
(16,280
)
 
(15,899
)
Stock-based compensation
(1,331
)
 
(2,612
)
 
(3,298
)
CEO transition expense
(3,063
)
 

 

Inventory write-off related to closed facilities

 

 
(587
)
Non-restructuring impairment charges

 

 
(494
)
Pension settlement losses

 

 
(1,108
)
Plant startup costs
(721
)
 
(2,176
)
 
(3,886
)
Other non-recurring expenses
(122
)
 
(1,116
)
 
(2,569
)
Interest expense, net
(52,815
)
 
(46,155
)
 
(38,413
)
Depreciation and amortization (1)
(33,105
)
 
(32,956
)
 
(29,250
)
Restructuring expenses
(7,884
)
 
(10,362
)
 
(14,649
)
Loss on debt extinguishment
(32
)
 
(11,938
)
 
(388
)
Unrealized foreign exchange (loss) gain
(2,159
)
 
(313
)
 
1,912

(Loss) income before provision for income taxes
$
(1,007
)
 
$
(12,336
)
 
$
9,085

 
(1) Excludes amortization of deferred finance costs that are charged to interest expense.
Information concerning principal geographic areas is set forth below. Net sales amounts are for the years ended December 31, 2017, 2016 and 2015 and property, plant and equipment amounts are as of December 31, 2017, 2016 and 2015.
 
North
America
 
Europe
 
Asia-
Pacific
 
Latin
America
 
Total
2017
 
 
 
 
 
 
 
 
 
Net sales
$
188,406

 
$
151,551

 
$
87,738

 
$
53,353

 
$
481,048

Property, plant and equipment
$
84,886

 
$
95,184

 
$
67,592

 
$
34,716

 
$
282,378

2016
 
 
 
 
 
 
 
 
 
Net sales
$
182,978

 
$
149,039

 
$
90,171

 
$
49,129

 
$
471,317

Property, plant and equipment
$
94,177

 
$
91,076

 
$
62,919

 
$
35,929

 
$
284,101

2015
 
 
 
 
 
 
 
 
 
Net sales
$
179,725

 
$
154,180

 
$
91,471

 
$
51,867

 
$
477,243

Property, plant and equipment
$
96,789

 
$
100,022

 
$
69,164

 
$
31,108

 
$
297,083

The Company did not have any one customer that accounted for more than 10% of its total revenues.


13. Supplemental Guarantor Financial Information

On August 9, 2016, the Company closed on the sale of its Notes. The Notes are secured obligations of Xerium Technologies, Inc. (referred to as “Parent” for the purpose of this note only) and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of the domestic 100% owned subsidiaries of the Parent (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 the Parent on a stand-alone parent-only basis, the Guarantors on a Guarantors-only basis, the combined non-Guarantor

82



subsidiaries and elimination entries necessary to arrive at the information for the Parent, the Guarantors and non-Guarantor subsidiaries on a consolidated basis.


83



Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2017
(Dollars in thousands)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,578

 
$
57

 
$
13,618

 
$

 
$
17,253

Accounts receivable, net
20

 
19,721

 
56,892

 

 
76,633

Intercompany (payable) receivable
(452,873
)
 
475,864

 
(22,991
)
 

 

Inventories

 
16,618

 
59,047

 
(940
)
 
74,725

Prepaid expenses
266

 
316

 
10,753

 

 
11,335

Other current assets
175

 
3,338

 
11,803

 

 
15,316

Total current assets
(448,834
)
 
515,914

 
129,122

 
(940
)
 
195,262

Property and equipment, net
7,044

 
60,382

 
214,952

 

 
282,378

Investments
901,275

 
271,278

 

 
(1,172,553
)
 

Goodwill

 
19,614

 
45,169

 

 
64,783

Intangible assets

 
5,961

 
4

 

 
5,965

Non-current deferred tax asset

 

 
10,103

 

 
10,103

Other assets

 

 
9,358

 

 
9,358

Total assets
$
459,485

 
$
873,149

 
$
408,708

 
$
(1,173,493
)
 
$
567,849

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Notes payable
$

 
$

 
$
8,398

 
$

 
$
8,398

Accounts payable
1,963

 
11,431

 
26,462

 

 
39,856

Accrued expenses
26,186

 
8,214

 
29,755

 

 
64,155

Current maturities of long-term debt
1,800

 
2,329

 
6,485

 

 
10,614

Total current liabilities
29,949

 
21,974

 
71,100

 

 
123,023

Long-term debt, net of current maturities and deferred financing costs
467,605

 

 
6,299

 

 
473,904

Liabilities under capital lease
4,159

 
2,831

 
8,962

 

 
15,952

Non-current deferred tax liability
3,439

 

 
9,458

 

 
12,897

Pension, other post-retirement and post-employment obligations
21,402

 
1,434

 
46,369

 

 
69,205

Other long-term liabilities

 

 
9,334

 

 
9,334

Intercompany loans
71,692

 
(108,319
)
 
36,627

 

 

Total stockholders’ (deficit) equity
(138,761
)
 
955,229

 
220,559

 
(1,173,493
)
 
(136,466
)
Total liabilities and stockholders’ equity (deficit)
$
459,485

 
$
873,149

 
$
408,708

 
$
(1,173,493
)
 
$
567,849


84



Xerium Technologies, Inc.
Consolidating Balance Sheet
At December 31, 2016
(Dollars in thousands)
 
 
Parent
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
Company
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,368

 
$
279

 
$
11,161

 
$

 
$
12,808

Accounts receivable, net
70

 
18,787

 
49,810

 

 
68,667

Intercompany (payable) receivable
(410,370
)
 
419,192

 
(8,822
)
 

 

Inventories

 
17,356

 
54,577

 
(1,111
)
 
70,822

Prepaid expenses
545

 
395

 
5,385

 

 
6,325

Other current assets

 
3,842

 
11,942

 

 
15,784

Total current assets
(408,387
)
 
459,851

 
124,053

 
(1,111
)
 
174,406

Property and equipment, net
8,393

 
67,794

 
207,914

 

 
284,101

Investments
869,508

 
211,897

 

 
(1,081,405
)
 

Goodwill

 
19,614

 
37,169

 

 
56,783

Intangible assets

 
7,265

 
65

 

 
7,330

Non-current deferred tax asset

 

 
10,737

 

 
10,737

Other assets

 

 
8,556

 

 
8,556

Total assets
$
469,514

 
$
766,421

 
$
388,494

 
$
(1,082,516
)
 
$
541,913

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Notes payable
$

 
$

 
$
7,328

 
$

 
$
7,328

Accounts payable
2,279

 
10,307

 
23,572

 

 
36,158

Accrued expenses
26,495

 
8,659

 
29,378

 

 
64,532

Current maturities of long-term debt
2,342

 
2,320

 
3,938

 

 
8,600

Total current liabilities
31,116

 
21,286

 
64,216

 

 
116,618

Long-term debt, net of current maturities and deferred financing costs
464,494

 

 
8,429

 

 
472,923

Liabilities under capital lease
5,830

 
4,627

 
8,779

 

 
19,236

Non-current deferred tax liability
1,270

 

 
5,887

 

 
7,157

Pension, other post-retirement and post-employment obligations
20,923

 
763

 
43,340

 

 
65,026

Other long-term liabilities

 
1,250

 
6,608

 

 
7,858

Intercompany loans
63,923

 
(97,953
)
 
34,030

 

 

Total stockholders’ (deficit) equity
(118,042
)
 
836,448

 
217,205

 
(1,082,516
)
 
(146,905
)
Total liabilities and stockholders’ equity (deficit)
$
469,514

 
$
766,421

 
$
388,494

 
$
(1,082,516
)
 
$
541,913





85



Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the year ended December 31, 2017
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
178,413

 
$
328,998

 
$
(26,363
)
 
$
481,048

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold
58

 
117,344

 
205,330

 
(26,533
)
 
296,199

    Selling
1,055

 
20,014

 
41,781

 

 
62,850

    General and administrative
10,950

 
(15,623
)
 
57,425

 

 
52,752

    Research and development
980

 
3,595

 
2,006

 

 
6,581

    Restructuring
386

 
2,832

 
4,666

 

 
7,884

 
13,429

 
128,162

 
311,208

 
(26,533
)
 
426,266

(Loss) income from operations
(13,429
)
 
50,251

 
17,790

 
170

 
54,782

Interest expense, net
(49,160
)
 
(1,836
)
 
(1,819
)
 

 
(52,815
)
Loss on extinguishment of debt
(32
)
 

 

 

 
(32
)
Equity in subsidiaries income (loss)
32,236

 
(1,122
)
 

 
(31,114
)
 

Foreign exchange (loss) gain
(2,134
)
 
695

 
(1,503
)
 

 
(2,942
)
Dividend income (expense)
19,574

 
11,537

 

 
(31,111
)
 

(Loss) income before provision for income taxes
(12,945
)
 
59,525

 
14,468

 
(62,055
)
 
(1,007
)
Provision for income taxes
(1,701
)
 
(941
)
 
(10,997
)
 

 
(13,639
)
Net (loss) income
$
(14,646
)
 
$
58,584

 
$
3,471

 
$
(62,055
)
 
$
(14,646
)
Comprehensive (loss) income
$
(22,385
)
 
$
58,691

 
$
34,522

 
$
(62,055
)
 
$
8,773


Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the year ended December 31, 2016
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
172,405

 
$
327,732

 
$
(28,820
)
 
$
471,317

Costs and expenses:
 
 
 
 
 
 
 
 
 
    Cost of products sold
(58
)
 
116,369

 
206,165

 
(28,634
)
 
293,842

    Selling
970

 
19,916

 
41,924

 

 
62,810

    General and administrative
12,409

 
2,698

 
35,956

 

 
51,063

    Research and development
1,146

 
3,916

 
2,038

 

 
7,100

    Restructuring
1,033

 
2,671

 
6,658

 

 
10,362

 
15,500

 
145,570

 
292,741

 
(28,634
)
 
425,177

(Loss) income from operations
(15,500
)
 
26,835

 
34,991

 
(186
)
 
46,140

Interest (expense) income, net
(43,543
)
 
646

 
(3,258
)
 

 
(46,155
)
Loss on extinguishment of debt
(11,938
)
 

 

 

 
(11,938
)
Equity in subsidiaries income
32,444

 
22,602

 

 
(55,046
)
 

Foreign exchange gain (loss)
436

 
(217
)
 
(602
)
 

 
(383
)
Dividend income (expense)
14,858

 
3,413

 

 
(18,271
)
 

(Loss) income before provision for income taxes
(23,243
)
 
53,279

 
31,131

 
(73,503
)
 
(12,336
)
Benefit from (provision for) income taxes
1,625

 
(847
)
 
(10,060
)
 

 
(9,282
)
Net (loss) income
$
(21,618
)
 
$
52,432

 
$
21,071

 
$
(73,503
)
 
$
(21,618
)
Comprehensive (loss) income
$
(25,476
)
 
$
54,949

 
$
9,426

 
$
(73,503
)
 
$
(34,604
)

86




Xerium Technologies, Inc.
Consolidating Statement of Operations and Comprehensive (Loss) Income
For the year ended December 31, 2015
(Dollars in thousands)
 
 
Parent    
 
Total
Guarantors
 
Total  Non
Guarantors
 
Other
Eliminations
 
The
Company
Net sales
$

 
$
167,986

 
$
343,024

 
$
(33,767
)
 
$
477,243

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of products sold
(290
)
 
116,041

 
206,379

 
(33,618
)
 
288,512

Selling
1,073

 
19,804

 
43,537

 

 
64,414

General and administrative
14,022

 
4,968

 
37,260

 

 
56,250

Research and development
921

 
4,526

 
1,957

 

 
7,404

Restructuring
8,498

 
1,537

 
4,614

 

 
14,649

 
24,224

 
146,876

 
293,747

 
(33,618
)
 
431,229

(Loss) income from operations
(24,224
)
 
21,110

 
49,277

 
(149
)
 
46,014

Interest (expense) income, net
(38,239
)
 
3,732

 
(3,906
)
 

 
(38,413
)
Loss on extinguishment of debt
(388
)
 

 

 

 
(388
)
Equity in subsidiaries income
41,480

 
27,828

 

 
(69,308
)
 

Foreign exchange (loss) gain
(73
)
 
(410
)
 
2,355

 

 
1,872

Dividend income (expense)
17,204

 

 

 
(17,204
)
 

(Loss) income before provision for income taxes
(4,240
)
 
52,260

 
47,726

 
(86,661
)
 
9,085

Provision for income taxes
(140
)
 
(861
)
 
(12,464
)
 

 
(13,465
)
Net (loss) income
$
(4,380
)
 
$
51,399

 
$
35,262

 
$
(86,661
)
 
$
(4,380
)
Comprehensive (loss) income
$
(1,925
)
 
$
53,194

 
$
(4,742
)
 
$
(86,661
)
 
$
(40,134
)


























87



Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2017
(Dollars in thousands)  
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(14,646
)
 
$
58,584

 
$
3,471

 
$
(62,055
)
 
$
(14,646
)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
2,518

 

 

 

 
2,518

Depreciation
2,312

 
8,262

 
21,166

 

 
31,740

Amortization of other intangibles

 
1,304

 
61

 

 
1,365

Deferred financing cost amortization
3,538

 

 
96

 

 
3,634

Pension settlement losses

 

 
921

 

 
921

Foreign exchange loss on revaluation of debt
968

 

 
167

 

 
1,135

Deferred taxes
1,641

 

 
6,875

 

 
8,516

Asset impairment

 
88

 
19

 

 
107

Gain on disposition of property and equipment

 
138

 
(2
)
 

 
136

Provision for doubtful accounts

 
118

 
456

 

 
574

Loss on extinguishment of debt
32

 

 

 

 
32

Undistributed equity in (earnings of) loss from subsidiaries
(32,236
)
 
1,122

 

 
31,114

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
50

 
(1,053
)
 
(3,421
)
 

 
(4,424
)
Inventories

 
738

 
909

 
(170
)
 
1,477

Prepaid expenses
279

 
(116
)
 
(5,104
)
 

 
(4,941
)
Other current assets
(175
)
 
104

 
727

 

 
656

Accounts payable and accrued expenses
(567
)
 
677

 
(847
)
 

 
(737
)
Deferred and other long-term liabilities
(186
)
 
620

 
(3,782
)
 

 
(3,348
)
Intercompany loans
42,503

 
(56,882
)
 
14,379

 

 

Net cash provided by (used in) operating activities
6,031

 
13,704

 
36,091

 
(31,111
)
 
24,715

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(862
)
 
(1,257
)
 
(10,914
)
 

 
(13,033
)
Intercompany property and equipment transfers, net
(3
)
 
676

 
(673
)
 

 

Proceeds from disposals of property and equipment

 
775

 
1,721

 

 
2,496

Acquisition costs

 
(1,199
)
 

 

 
(1,199
)
Other investing activities
470

 

 
(470
)
 

 

Net cash used in investing activities
(395
)
 
(1,005
)
 
(10,336
)
 

 
(11,736
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
93,788

 

 
15,101

 

 
108,889

Principal payments on debt
(93,888
)
 

 
(15,699
)
 

 
(109,587
)
Payment of deferred financing fees
(440
)
 

 
73

 

 
(367
)
Payment of obligations under capital leases
(2,626
)
 
(2,623
)
 
(736
)
 

 
(5,985
)
Dividends paid

 
(11,930
)
 
(19,181
)
 
31,111

 

Intercompany loans
592

 
1,632

 
(2,224
)
 

 

Employee taxes paid on equity awards
(852
)
 

 

 

 
(852
)
Net cash (used in) provided by financing activities
(3,426
)
 
(12,921
)
 
(22,666
)
 
31,111

 
(7,902
)
Effect of exchange rate changes on cash flows

 

 
(632
)
 

 
(632
)
Net increase (decrease) in cash
2,210

 
(222
)
 
2,457

 

 
4,445

Cash and cash equivalents at beginning of year
1,368

 
279

 
11,161

 

 
12,808

Cash and cash equivalents at end of year
$
3,578

 
$
57

 
$
13,618

 
$

 
$
17,253



88




Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2016
(Dollars in thousands)
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(21,618
)
 
$
52,432

 
$
21,071

 
$
(73,503
)
 
$
(21,618
)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
2,612

 

 

 

 
2,612

Depreciation
2,250

 
8,188

 
21,677

 

 
32,115

Amortization of other intangibles

 
747

 
94

 

 
841

Deferred financing cost amortization
2,967

 

 
96

 

 
3,063

Foreign exchange gain on revaluation of debt
(3,267
)
 

 

 

 
(3,267
)
Deferred taxes
(1,707
)
 

 
1,926

 

 
219

Loss on disposition of property and equipment

 
30

 
20

 

 
50

Loss on extinguishment of debt
11,938

 

 

 

 
11,938

Provision for doubtful accounts

 
(57
)
 
332

 

 
275

Undistributed equity in earnings of subsidiaries
(32,444
)
 
(22,602
)
 

 
55,046

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
(50
)
 
2,461

 
(734
)
 

 
1,677

Inventories

 
256

 
3,304

 
186

 
3,746

Prepaid expenses
(34
)
 
907

 
(541
)
 

 
332

Other current assets

 
713

 
(1,997
)
 

 
(1,284
)
Accounts payable and accrued expenses
15,635

 
(3,513
)
 
(7,618
)
 

 
4,504

Deferred and other long-term liabilities
136

 
780

 
390

 

 
1,306

Intercompany loans
299,828

 
(305,386
)
 
5,558

 

 

Net cash provided by (used in) operating activities
276,246

 
(265,044
)
 
43,578

 
(18,271
)
 
36,509

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(944
)
 
(2,907
)
 
(9,855
)
 

 
(13,706
)
Intercompany property and equipment transfers, net
26

 
42

 
(68
)
 

 

Proceeds from disposals of property and equipment

 
5

 
112

 

 
117

Acquisition Costs

 
(16,225
)
 

 

 
(16,225
)
Net cash used in investing activities
(918
)
 
(19,085
)
 
(9,811
)
 

 
(29,814
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
557,032

 

 
8,521

 

 
565,553

Increase in notes payable

 

 
1,121

 

 
1,121

Principal payments on debt
(532,249
)
 

 
(7,462
)
 

 
(539,711
)
Payment of obligations under capital leases
(1,428
)
 
(2,137
)
 
(385
)
 

 
(3,950
)
Payment of deferred financing fees
(23,567
)
 

 
71

 

 
(23,496
)
Dividends paid

 
(14,858
)
 
(3,413
)
 
18,271

 

Intercompany loans
(275,010
)
 
301,405

 
(26,395
)
 

 

Employee taxes paid on equity awards
(1,843
)
 

 

 

 
(1,843
)
Net cash (used in) provided by financing activities
(277,065
)
 
284,410

 
(27,942
)
 
18,271

 
(2,326
)
Effect of exchange rate changes on cash flows

 

 
(1,400
)
 

 
(1,400
)
Net (decrease) increase in cash
(1,737
)
 
281

 
4,425

 

 
2,969

Cash and cash equivalents at beginning of year
3,105

 
(2
)
 
6,736

 

 
9,839

Cash and cash equivalents at end of year
$
1,368

 
$
279

 
$
11,161

 
$

 
$
12,808




89




Xerium Technologies, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2015
(Dollars in thousands)  
 
Parent    
 
Total
Guarantors
 
Total Non
Guarantors
 
Other
Eliminations
 
The
 Company 
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(4,380
)
 
$
51,399

 
$
35,262

 
$
(86,661
)
 
$
(4,380
)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Stock-based compensation
3,007

 

 
291

 

 
3,298

Depreciation
1,545

 
7,180

 
20,227

 

 
28,952

Amortization of other intangibles

 
275

 
23

 

 
298

Deferred financing cost amortization
3,367

 

 
95

 

 
3,462

Foreign exchange gain on revaluation of debt
(3,426
)
 

 

 

 
(3,426
)
Deferred taxes
(196
)
 

 
(2,589
)
 

 
(2,785
)
Asset impairment
61

 
421

 
1,054

 

 
1,536

Loss (gain) on disposition of property and equipment
4

 
(45
)
 
(1,342
)
 

 
(1,383
)
Pension settlement losses

 
1,108

 

 

 
1,108

Loss on extinguishment of debt
388

 

 

 

 
388

Provision for doubtful accounts

 
266

 
851

 

 
1,117

Undistributed equity in earnings of subsidiaries
(41,480
)
 
(27,828
)
 

 
69,308

 

Change in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
 
 
Accounts receivable
29

 
3,508

 
1,697

 

 
5,234

Inventories

 
2,615

 
220

 
150

 
2,985

Prepaid expenses
36

 
139

 
582

 

 
757

Other current assets

 
(620
)
 
(2,599
)
 

 
(3,219
)
Accounts payable and accrued expenses
2,105

 
2,254

 
941

 

 
5,300

Deferred and other long-term liabilities
459

 
1,282

 
(7,696
)
 

 
(5,955
)
Intercompany loans
(14,972
)
 
(6,050
)
 
21,022

 

 

Net cash (used in) provided by operating activities
(53,453
)
 
35,904

 
68,039

 
(17,203
)
 
33,287

Investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
(7,396
)
 
(11,788
)
 
(31,687
)
 

 
(50,871
)
Intercompany property and equipment transfers, net
8,588

 
(1,568
)
 
(7,020
)
 

 

Proceeds from disposals of property and equipment
157

 
117

 
2,992

 

 
3,266

Net cash provided by (used) in investing activities
1,349

 
(13,239
)
 
(35,715
)
 

 
(47,605
)
Financing activities
 
 
 
 
 
 
 
 
 
Proceeds from borrowings
73,094

 
4,076

 
22,778

 

 
99,948

Increase in notes payable

 

 
6,759

 

 
6,759

Principal payments on debt
(75,318
)
 

 
(12,740
)
 

 
(88,058
)
Payment of obligations under capital leases
(597
)
 
(708
)
 
(108
)
 

 
(1,413
)
Payment of deferred financing fees
(893
)
 

 
231

 

 
(662
)
Dividends paid

 
(15,410
)
 
(1,793
)
 
17,203

 

Intercompany loans
54,942

 
(10,610
)
 
(44,332
)
 

 

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
54,604

 
(22,652
)
 
(34,705
)
 
17,203

 
14,450

Effect of exchange rate changes on cash flows

 

 
190

 

 
190

Net increase (decrease) in cash
2,500

 
13

 
(2,191
)
 

 
322

Cash and cash equivalents at beginning of year
605

 
(15
)
 
8,927

 

 
9,517

Cash and cash equivalents at end of year
$
3,105

 
$
(2
)
 
$
6,736

 
$

 
$
9,839


90




14. Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
Comprehensive income (loss) for the years ended December 31, 2017 and 2016 is as follows (net of taxes):
 
 
Years Ended
December 31,
 
2017
 
2016
Net loss
$
(14,646
)
 
$
(21,618
)
Foreign currency translation adjustments
26,083

 
(9,299
)
Pension liability changes under Topic 715
(2,664
)
 
(3,687
)
Comprehensive income (loss)
$
8,773

 
$
(34,604
)

Included in foreign currency translation adjustments are foreign currency (losses) gains on intercompany transactions that are considered a long-term investment totaling ($5.8) million and $0.7 million for the years ended December 31, 2017 and 2016, respectively.

The components of accumulated other comprehensive loss for the year ended December 31, 2017 are as follows (current year activity is net of tax expense of $0.3 million in 2017).


 
Foreign Currency Translation Adjustment
 
Pension Liability Changes Under Topic 715
 
Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2016
$
(95,232
)
 
$
(39,446
)
 
$
(134,678
)
Other comprehensive income (loss) before reclassifications
26,083

 
(5,718
)
 
20,365

Amounts reclassified from other comprehensive income (loss):
 
 
 
 
 
    Amortization of actuarial losses

 
2,133

 
2,133

    Pension settlement loss

 
921

 
921

Net current period other comprehensive income (loss)
26,083

 
(2,664
)
 
23,419

Balance at December 31, 2017
$
(69,149
)
 
$
(42,110
)
 
$
(111,259
)
 
 
 
 
 
 


91



15. Business Acquisitions
On May 4, 2016, the Company acquired certain assets and liabilities of JJ Plank Corporation/Spencer Johnston (“Spencer Johnston”), a spreader roll company headquartered in Neenah, Wisconsin for an adjusted purchase price of approximately $17.5 million in cash. This acquisition expands the Company's current rolls product offerings, service capabilities and markets served, strengthens its financial profile and grows its customer base. The Company acquired all of the assets and assumed certain liabilities of Spencer Johnston.

The adjusted purchase price of approximately $17.5 million resulted in net assets acquired other than goodwill of $15.7 million and goodwill of $1.9 million. All of the goodwill is allocated to the Rolls Covers business segment. Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed and is supported by the anticipated synergies of the transaction.
The Company incurred approximately $0.8 million of transaction related expenses during the year ended December 31, 2016. These expenses were charged to selling, general and administrative expense in the period incurred.


16. Quarterly Financial Data (Unaudited)

The following table presents our unaudited consolidated statements of operations data for each quarter in the two years ended December 31, 2017. We believe that all necessary adjustments, consisting only of normal recurring adjustments, have been made to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and the notes thereto appearing elsewhere in this document. These operating results are not necessarily indicative of the results of operations that may be expected for any future period.
 
 
 
For the Three Months Ended
 
 
Dec. 31, 2017
 
Sept. 30, 2017
 
June 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
 
Mar. 31, 2016
 
 
 
 
 
 
(in thousands, except per share data)
 
 
 
 
Net sales
 
$
122,392

 
$
118,451

 
$
120,339

 
$
119,866

 
$
113,188

 
$
119,191

 
$
123,973

 
$
114,965

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
 
78,261

 
74,114

 
71,454

 
72,370

 
71,247

 
75,385

 
75,782

 
71,428

Selling
 
15,576

 
15,664

 
15,936

 
15,674

 
15,538

 
15,816

 
15,735

 
15,721

General and administrative
 
13,032

 
11,606

 
15,460

 
12,654

 
13,486

 
12,644

 
13,427

 
11,507

Research and development
 
1,558

 
1,613

 
1,666

 
1,744

 
1,829

 
1,786

 
1,545

 
1,940

Restructuring
 
4,386

 
(540
)
 
874

 
3,164

 
2,259

 
2,493

 
2,777

 
2,832

Total operating costs and expenses
 
112,813

 
102,457

 
105,390

 
105,606

 
104,359

 
108,124

 
109,266

 
103,428

Income from operations
 
9,579

 
15,994

 
14,949

 
14,260

 
8,829

 
11,067

 
14,707

 
11,537

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
(13,184
)
 
(13,087
)
 
(13,281
)
 
(13,263
)
 
(12,940
)
 
(12,216
)
 
(10,658
)
 
(10,341
)
Loss on extinguishment of debt
 

 

 
(7
)
 
(25
)
 
(202
)
 
(11,736
)
 

 

Foreign exchange (loss) gain
 
(627
)
 
56

 
(1,246
)
 
(1,125
)
 
94

 
(429
)
 
(72
)
 
24

Income before provision for income taxes
 
(4,232
)
 
2,963

 
415

 
(153
)
 
(4,219
)
 
(13,314
)
 
3,977

 
1,220

Provision for income taxes
 
(5,318
)
 
(1,814
)
 
(3,826
)
 
(2,681
)
 
(4,725
)
 
(25
)
 
(1,867
)
 
(2,665
)
Net (loss) income
 
$
(9,550
)
 
$
1,149

 
$
(3,411
)
 
$
(2,834
)
 
$
(8,944
)
 
$
(13,339
)
 
$
2,110

 
$
(1,445
)
Comprehensive (loss) income
 
$
(11,803
)
 
$
13,916

 
$
(146
)
 
$
6,806

 
$
(37,497
)
 
$
(10,988
)
 
$
6,507

 
$
7,373

Net (loss) income per common share—basic
 
$
(0.58
)
 
$
0.07

 
$
(0.21
)
 
$
(0.18
)
 
$
(0.55
)
 
$
(0.83
)
 
$
0.13

 
$
(0.09
)
Net (loss) income per common share—diluted
 
$
(0.58
)
 
$
0.07

 
$
(0.21
)
 
$
(0.18
)
 
$
(0.55
)
 
$
(0.83
)
 
$
0.13

 
$
(0.09
)


92



XERIUM TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)


ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the years ended:
 
Balance at Beginning of Year
 
Charged to Cost and Expense
 
Effect of Foreign Currency Translation
 
Deduction from Reserves
 
Balance at End of Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
$
3,620

 
$
574

 
$
281

 
$
(369
)
 
$
4,106

2016
$
5,184

 
$
275

 
$
27

 
$
(1,866
)
 
$
3,620

2015
$
5,002

 
$
1,117

 
$
(641
)
 
$
(294
)
 
$
5,184


ALLOWANCE FOR SALES RETURNS
For the years ended:
 
Balance at Beginning of Year
 
Charged to Revenue
 
Effect of Foreign Currency Translation
 
Deduction from Reserves
 
Balance at End of Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
$
4,159

 
$
1,858

 
$
249

 
$
(1,680
)
    
$
4,586

2016
$
4,036

   
$
2,258

   
$
139

   
$
(2,274
)
    
$
4,159

2015
$
5,052

 
$
2,173

 
$
(687
)
 
$
(2,502
)
 
$
4,036


ALLOWANCE FOR CUSTOMER REBATES
For the years ended:
 
Balance at Beginning of Year
 
Charged to Revenue
 
Effect of Foreign Currency Translation
 
Deduction from Reserves
 
Balance at End of Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
$
1,082

 
$
1,175

 
$
118

 
$
(874
)
 
$
1,501

2016
$
1,685

 
$
36

 
$
(20
)
 
$
(619
)
 
$
1,082

2015
$
1,595

 
$
1,296

 
$
(101
)
 
$
(1,105
)
 
$
1,685


INCOME TAX VALUATION ACCOUNT
For the years ended:
 
Balance at Beginning of Year
 
Charged to (Credited to) Income Tax Provision
 
Effect of Foreign Currency Translation (1)
 
Deduction from Reserves
 
Balance at End of Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
$
97,859

 
$
(1,678
)
 
$
6,023

 
$

 
$
102,204

2016
$
94,330

 
$
6,473

 
$
(1,982
)
 
$
(962
)
 
$
97,859

2015
$
102,795

 
$
2,422

 
$
(8,932
)
 
$
(1,955
)
 
$
94,330


(1) This includes amounts recorded to accumulated other comprehensive income (loss).
 


93