Xerium Technologies Reports First Quarter 2008 Results

Xerium Technologies, Inc. (NYSE: XRM), a leading global manufacturer of clothing and roll covers used primarily in the paper production process, today reported results for the first quarter ended March 31, 2008. Highlights for the quarter include:

• Net sales for the first quarter of 2008 were $159.0 million, a 10.4% increase from net sales of $144.0 million for the first quarter of 2007. Excluding currency effects described below, first quarter 2008 net sales increased 2.4% from the first quarter of 2007, with growth of 2.7% and 1.6% in the clothing and roll covers segments, respectively.
• Income from operations increased by 21.2% to $20.6 million in the first quarter of 2008 from $17.0 million in the first quarter of 2007. Restructuring and impairment expenses in the first quarter of 2008 were $0.5 million, as compared to $4.1 million in the first quarter of 2007.
• Xerium recorded a net loss of $4.7 million, or $0.10 per diluted share, for the first quarter of 2008. Significant items contributing to the net loss were a $12.2 million pre-tax, non-cash charge to interest expense reflecting the mark-to-market decrease in the fair value of the Company’s interest rate swaps in the first quarter of 2008, compared to a $1.6 million charge in the first quarter of 2007 (see below for additional detail) and a provision for income taxes of $3.6 million in the first quarter of 2008, compared to $1.4 million in the first quarter of 2007. Net income for the first quarter 2007 was $3.0 million, or $0.07 per diluted share.
• Net cash generated by operating activities was $29.8 million for the first quarter of 2008, compared to $15.3 million in the same quarter last year, resulting primarily from improvements in working capital.
• Adjusted EBITDA (as defined in the Company’s credit facility) was $34.8 million for the first quarter of 2008, compared to $32.8 million for the first quarter of 2007. See “EBITDA and Adjusted EBITDA Reconciliation” below.
• Cash on hand at March 31, 2008 was $31.0 million compared to cash on hand of $17.7 million at March 31, 2007. Cash on hand at December 31, 2007 was $24.2 million. Total debt principal and interest payments amounted to $24.8 million during the first quarter of 2008 as compared with $13.7 million during the first quarter of 2007.
• As a result of the Company’s credit facility issues (see Credit Facility Update below), the Company’s balance sheet as of March 31, 2008 includes a reclassification to current debt of $658.8 million, the portion of the long-term debt under the senior credit facility that would have been in default of the credit agreement had the Company not obtained the temporary waiver. Additionally, because this debt is potentially payable prior to the expiration of the underlying interest rate swaps, hedge accounting under SFAS No. 133 was no longer applicable for the Company’s interest rate swaps and the mark-to-market decrease in their fair value of $12.2 million was recorded as a non-cash charge to interest expense during the first quarter of 2008.

Credit Facility Update

Xerium’s credit facility requires the Company to meet certain operating requirements and financial ratios in order to avoid a default or event of default under the facility. Although the Company expects it would generate cash flow from operations sufficient to service the debt under the credit facility prior to the stated maturity of the debt if there is not otherwise an event of default and acceleration of the maturity of the debt, the Company did not satisfy the leverage ratio covenant for the period ended March 31, 2008. Failure to satisfy the covenant would constitute a default under its credit facility absent a waiver from its lenders. As previously reported, Xerium’s independent registered public accounting firm included an explanatory paragraph in its report on the 2007 consolidated financial statements related to the uncertainty in the Company’s ability to continue as a going concern. The going concern notation also constitutes a default under the Company’s credit facility absent a waiver. On April 8, 2008, the Company obtained a temporary waiver from the lenders for these defaults. The waiver is in effect until May 31, 2008. Because the existing financial ratio covenants become more restrictive over time, the Company does not expect to be in compliance with certain financial ratio covenants for future periods as well. The Company is currently seeking to secure a permanent waiver and to amend the financial covenants and other parameters in its credit facility.

As disclosed on March 18, 2008, the Company determined not to declare a cash dividend on its common stock for the first quarter of 2008. The credit facility waiver described above amends the credit facility to prohibit the payment of dividends on the Company’s common stock.

Stephen Light, President and Chief Executive Officer of Xerium Technologies, said, “Our operating results for the first quarter were solid, despite ongoing challenges in portions of the paper industry. Importantly, net cash generated by operating activities improved significantly as our initial efforts to enhance working capital began to take hold.”

He added, “We remain in active discussions with our lending group to secure amendments to the Company’s credit facility to avoid default and allow Xerium greater financial and operating flexibility going forward. In concert with these discussions, we are finalizing a revised, long-range business plan designed to increase cash generation over the next few years through improved operating efficiencies and working capital reductions, and to apply that cash to the repayment of debt. We believe the achievement of these measures will significantly enhance the Company’s operations and results in the future.”

ADDITIONAL QUARTERLY FINANCIAL HIGHLIGHTS

• Capital expenditures for the first quarter of 2008 were $12.1 million, compared to $7.1 million for the first quarter of 2007. Approximately $9.8 million of capital expenditures in this year’s quarter were directed toward projects designed to support the Company’s growth objectives, with the remaining $2.3 million used to sustain the Company’s existing operations and facilities. Less than $1 million of new capital expenditures was committed during the quarter.
• The Company recorded a foreign exchange gain in the first quarter of 2008 of $3.5 million, compared to a foreign exchange loss of $0.4 million in the first quarter of 2007. Foreign exchange gains and losses are primarily the result of intercompany activity and hedging thereon.
• The Company recorded a provision for income taxes of $3.6 million in the first quarter of 2008 resulting primarily from tax liability in countries outside of the United States, compared to $1.4 million in the first quarter of 2007.
• During the first quarter of 2008, Xerium made total debt principal repayments of $12.0 million, compared to $6.0 million in the first quarter 2007.

The following table presents net sales for the first quarters of 2008 and 2007 by segment and the effect of currency on pricing and translation on first quarter 2008 net sales:

* Increase in first quarter 2008 net sales due to currency translation is calculated by subtracting (i) an amount equal to net sales for the first quarter of 2007 from (ii) net sales for the first quarter of 2007 at the applicable average foreign currency exchange rate for the first quarter of 2008.

** Change in the first quarter 2008 net sales due to currency effect on pricing relates to sales prices indexed in U.S. dollars by certain non-U.S. operations and is calculated based on the difference in the exchange rate from the time of pricing commitment to the customer and the point at which the sale transaction is recorded.

Clothing Segment Commentary

• Clothing segment sales during the first quarter of 2008 increased 11.0% to $103.6 million from $93.3 million in the comparable period of 2007, reflecting favorable currency effects and increased sales in Asia-Pacific and Europe, partially offset by reduced sales volumes in North and South America. Excluding the currency effects on translation and pricing described above, clothing segment sales for the first quarter of 2008 would have increased 2.7% as compared with the first quarter of 2007.
• Overall pricing levels for the clothing segment in the first quarter of 2008 decreased approximately 1.0% compared with first quarter 2007 levels.
• Clothing segment earnings for the first quarter of 2008 of $23.9 million remained relatively constant compared to the prior year quarter at $23.7 million.

Roll Covers Segment Commentary

• Roll covers segment sales duri