Xerium Technologies: Staying alive
Xerium Technologies’ (NYSE:XRM) days as a spendthrift are over. The supplier of products for the paper industry now must save: improve operations, streamline the business and stall capital investment in Asia. If it sticks to its plan, Xerium just may live to tell the tale of life at the brink of bankruptcy.
It’s a scary story, too. Xerium makes two products used in paper production: clothing and roll covers. Clothing products, representing two-thirds of sales, are synthetic textile belts that move paper through a paper-making machine. Roll covers protect the large steel cylinders that flatten the paper and determine paper quality.
The global market for Xerium’s products is about $3 billion, and it has about a 20% share. Roughly 18% of Xerium’s revenues come from the Asia-Pacific, 37% from Europe, 34% from North America and 9% from South America, leaving a tiny amount for the rest of the world.
Lured by the sirens of Asian economic growth, Xerium realized in February that it had overextended itself; in the fourth quarter of 2007, the company built a clothing plant in Vietnam and invested in two roll-cover companies in China. Investors at the time were already concerned about the aggressive growth initiatives given Xerium’s high debt level.
And indeed, Xerium was headed toward a violation of its leverage covenant, or total debt divided by EBITDA, in the first quarter. As the company scrambled to work out credit arrangements — and incorporate its new CEO Stephen Light — it couldn’t come up with its SEC annual report filing on time. In mid-March, it filed a notice of late filing and cancelled its dividend. Shares collapsed, dropping to an all-time low of $0.91 on March 19 from $4.43 on March 17, as possible bankruptcy reared its shaggy head.
Well, Xerium did hammer out new arrangements after it was given a creditor waiver until May 31. It made new agreements — with certain financial restrictions designed to keep it from squandering its allowance again — and auditors removed early this month their regulatory statements noting substantial doubt about Xerium as a going concern.
Shares then soared, closing Friday at $7.18, up seven-fold from the March low and at the high end of the 52-week range of $0.91 to $7.53. The Youngsville, North Carolina-based company has market capitalization of $346 million.
The company's new credit agreement puts an end to Xerium’s spending spree, limiting capital spending through 2012; the company also is barred from reinstating a dividend until then. Xerium must use 75% of its excess cash flow to pay down debt, which was at $670 million at the end of June. The company acknowledges that its high leverage may limit its ability to react to market circumstances.
Now that the restrictions are in place, the focus is on slowing operations in Asia, where paper demand is expected to grow faster than the historical rate of 3% annually. Asia is expected to grow faster than mature markets of North American and Western European, where the bulk of Xerium’s sales take place.
Here’s the plan: ease up in Asia, including delaying production at the new Vietnamese facility. Cancel equipment on order and do not engage in mergers or acquisitions. Concentrate on improving the balance sheet by increasing inventory turns. Keep developing products to stay ahead of the competition.
Focus on improving current plant operations and maximizing employee contributions, which means staff cutbacks. Consider closing additional plants. And ditch the mentality of being the low-cost provider; in other words, improve margins.
Sound business practices, certainly, and enough for optimism from certain analysts.
“Cash generation looks to be gaining ground, and we note clear focus on working capital management/debt reduction, new product introductions and pricing discipline,” said Christopher Glynn at Oppenheimer and Co. in an August 7 report. Glynn looks for a three- to five-year EPS growth rate of 12%.
Glynn said if momentum in pricing continues, margins should begin to begin to benefit. And he also noted that Xerium’s plan to streamline its cost structure seems to be making strides.
In the second quarter through June, Xerium had revenue of $170 million, up 11% from the previous year. Excluding the effect of sales in foreign currencies, sales rose 3%. Xerium also earned $0.31 per diluted share, up from $0.17 in the year-ago period. Removing costs of restructuring and a one-time bonus from an interest rate swap, Glynn estimated that underlying earnings per share were $0.15.
Glynn forecast 2008 earnings at $0.37 per share, putting Xerium’s price/earnings ratio at 19. Two analysts follow the company, with the average forecast $0.42 this year and $0.66 for 2009 — a 57% year-over-year gain.
Xerium still may be a sob story in the making. But if the company stays its new course, this tale just may have a happy ending.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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