XERIUM TECHNOLOGIES INC (Form: 10-K, Received: 02/28/2018 16:43:27)

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



	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

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.

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

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) SMART ^™ Technology, 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.

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

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.

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.

Production

Machine Clothing Production Process

The following diagram represents the machine clothing production process.

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.

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.

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

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,

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

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.

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.

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.

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

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.

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.

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

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

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.

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



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



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

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;



	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

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.

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 .

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.

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

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;

• 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

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

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 %.

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

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.

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

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

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.

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.

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.



ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE