Xerium cancels dividend, shares dive

Youngsville company strategizes to avoid bankruptcy as equipment sales slow

Shares of Xerium Technologies plunged 74 percent Tuesday after the Youngsville company said it was staring at a possible bankruptcy.

Xerium, whose sales of equipment used in paper production have been sluggish, said it was taking several steps aimed at avoiding a bankruptcy filing.

The company canceled its dividend and will use the cash to pay down debt, which was $647 million as of Sept. 30. It's also seeking a private sale of stock to investors to raise money and is talking to lenders about making changes to its credit agreement.

"The management team is focused on resolving this near-term issue," CEO Stephen R. Light said.

The stock market's dramatic reaction was understandable: Xerium's announcement followed investment bank Bear Stearns' collapse because of the credit crunch, analyst Ned Borland of Next Generation Research said. "People just don't want to hear about credit problems in any industry," he said.

Shares closed at $1.15, down $3.28. Shares fetched $12 in the fall of 2006.

Typically, if a publicly traded company seeks bankruptcy protection, shareholders see the value of their shares nearly evaporate.

Xerium has 35 manufacturing facilities in 15 countries and 3,800 employees, including about 50 at its headquarters in Youngsville, a Franklin County town about 21 miles northeast of Raleigh. The company closed a plant in Wake Forest in 2003, a move that put 133 people out of work.

Light said Xerium has ample cash to make its debt payments and run its business, but it faces the possibility of defaulting on its agreement with lenders. The problem, Light said, is the company's leverage ratio -- total debt divided by its earnings before interest, taxes, depreciation and amortization, a common way to measure the performance of corporations with significant debt.

Light declined to discuss what led the company to this situation.

Eroding dollar blamed

Citigroup analyst Chip Dillon said part of the problem was the company's performance, but the eroding value of the dollar also played a role. Some of the company's debt is in euros, which costs the company more dollars as the dollar's value declines, he said.

Dillon downgraded Xerium shares from "buy" to "hold."

But Dillon rates the odds of the company filing for bankruptcy as low, especially because Light, who only recently joined the company, previously engineered a successful turnaround of Flow International, a Kent, Wash., maker of high-pressure water equipment. Light stepped down as CEO at Flow in the summer.

Xerium posted $17.8 million in profit over the first three quarters of last year, down from $27.8 million a year earlier. Sales during that period rose 1 percent to $451.2 million.

Last year, Xerium was the No. 1 producer of roll covers for the large steel cylinders used on paper machines, which accounts for about one-third of sales. It also ranked second in worldwide market share of synthetic textile belts, similar to conveyor belts, that transport paper as it is processed.

Borland speculated that weak first-quarter sales of roll covers, which have been on the decline, are potentially pushing the company toward bankruptcy. Consolidation among paper manufacturers has depressed the market for roll covers, and manufacturers are better maintaining rollers so that they last longer, he said.

If Xerium sells stock to a private investor, it could significantly dilute the shares of existing investors, analysts said. Xerium's reduced share price means the company would have to sell more stock to raise the cash it needs.

"There is no real good option available," Borland said.

New CEO has full plate

Tuesday's announcement came a little more than a month after Light was named president and chief executive officer, succeeding Thomas Gutierrez.

Gutierrez was CEO for six years and led the company through its initial public offering of stock in 2005 and the move of its headquarters to Youngsville from Massachusetts in 2006.

Asked if he was blind-sided by Xerium's financial situation, Light replied: "I did extensive due diligence on the company before I joined the firm, and I'm very optimistic about the long-term prospects of the company, while being realistic about the near-term challenges."

Xerium also notified the U.S. Securities and Exchange Commission that it would be late in filing its annual report. It expects to file no later than April 1.