Xerium (XRM) 8-K Other Events

0

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

Challenges and Solutions of Managing

Risk: A Return to Enhancing

Shareholder Value

NYSE Panel Discussion –

“The Company Crystal Ball: the Art and Science of

Preventing Catastrophic Loss”

Stephen R. Light

Exhibit 99.1

1

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

Risk Assessment Process

Identify and Validate the Risks

Identified Xerium’s most critical risks through interviews with Board of Directors

,

CEO, CFO, Four Division Presidents, Controllers, Outside Consul,

External

Auditors

Assess the Risks

19 risks were identified

Results were presented to the Board of Directors

Expanded scope of participants in the risk assessment to include

Plant

Managers and Engineers in early 2009

2

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

IMPACT –

The potential for negative consequences of a risk event, without regard to

anything that may be in place to deal with such events.  Impact can be expressed in both

financial and non-financial arenas such as Reputation, Legal/Regulatory, Customer,

Employees, or Operations.

•

High

(5):

Event

would

threaten

the

effectiveness

of

a

major

process

or

function

of

the

Xerium.

•

Medium

(3):

Event

would

require

significant

intervention

by

management

to

remediate. 

•

Low (1):

Event could threaten operational effectiveness or efficiency,

VULNERABILITY –

The existence and effectiveness of mechanisms currently in place to

manage this risk, including People/Organization, Prevention, Detection,

Correction/Recovery, and Testing/Auditing of these mechanisms.

•

High

(5):

Some

risk

management

activities

may

be

incomplete

or

ineffective,

and

collectively

the activities provide minimal management of this risk.

•

Medium

(3):

Certain

risk

management

activities

may

be

incomplete

or

ineffective,

but

collectively the activities provide acceptable management of this risk.

•

Low (1):

Risk management activities are in place and effective in all the above areas.

SPEED OF ONSET  –

How quickly could this risk occur?

•

High:

Very rapid onset; little or no warning, instantaneous

•

Medium:

Moderate onset; Several days or weeks to occur

•

Low:

Slow; Several months or years to occur

Risk Assessment Criteria

3

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

DRAFT –

For Discussion Purposes Only

Assessing Risk Approach Considering Impact and

Vulnerability

Vulnerability

Low

High

High

Low

Measure for Cumulative Impact

Enhance Risk Mitigation

•

Confirm management ownership and accountability

for resolution

•

Audit timetable, progress milestones, and

effectiveness

•

Validates corrective actions are implemented

•

Assess ongoing risk monitoring process

•

Determine any significant damages

•

Assess for frequency of occurrence and

aggregated impacts  

•

Audit planning should focus on monitoring key

trouble signals and trend analysis

Assurance of Preparedness

Redeploy Resources

•

Audit/inspect/test existing risk mitigation measures

•

Confirm completion of risk mitigation action plans

•

Test compliance with risk controls and ongoing risk

monitoring process

•

Management reviews the efficiency of existing risk

mitigation approach

•

Lower priority audit attention

•

Advisory support to management to rationalize

more efficient control measures

Basic Risk Response Guidance

4

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

DRAFT –

For Discussion Purposes Only

A

B

C

D

E

F

G

H

I

L

K

J

M

N

O

P

Q

R

S

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Risk Assessment Results

VULNERABILITY

5

Confidential / Company Use Only

DRAFT

–

For

Discussion

Purposes

Only

Risks: Tier One (Priority Attention & Mitigation Actions)

Risk Name

ID

Risk Description

Survey Comments

Owner

V

S

I

DEBT

MANAGEMENT

RISK

C

Risk of breaching loan

covenants

-

Economic environment increases risk significantly

-

Markets are weak and cause cash flow falls and the ability to

create money for departments weakens

-

Breach could lead to bankruptcy

-

Perception

in

marketplace

of

Xerium’s

financial

viability

CFO

3.8

3.7

4.1

MARKET RISK

D

Volatility of external

markets may affect

business

-

Unprecedented negative market conditions globally

-

Competitors are more flexible

-

Shrinking pool of customers

-

Sufficiency of controls as the market continues to down size

CEO

3.6

3.6

3.8

NEW PRODUCT

DEVELOPMENT

RISK

J

Inability to be innovative in

new technologies and/or

standardize current

products to improve

efficiency of production

and reduce cycle time

-

Currently too conservative in approach to research

-

Innovation is the key to our success

-

Engineering has limited resources

-

Our technologies and machineries may be outdated

-

Not reacting quickly to new opportunities now, which affects

future

CTO

3.3

3.2

4.0

FORECASTING

RISK

O

Unreliable and/or lack of

information needed to

forecast and make

business decisions

-

Lack of sufficiently accurate sales forecast

-

Talent and tools lacking

Division

Presidents

3.2

3.2

3.6

PEOPLE RISK

A

Not having the right people

in the right jobs and

mapped to the right

incentives

-

Inconsistent HR policies/infrastructure across company

-

Confusion around bonus and incentive compensation process

-

Concern for people moving to competitors

-

Lack of training programs across company

-

Inconsistent succession planning for key people/ positions

-

Operations are unique, new hires require significant training

-

Junior personnel in the mills may not have the correct

background, experience and training

-

Career development path is not defined and perception

among employees that promotions are not tied to 

performance

-

Need to have right personnel with the right skills for the

business in right positions (all levels)

CEO

3.0

2.9

3.4

V= Vulnerability

S= Speed of Onset

I = Impact

6

Confidential / Company Use Only

Risk

Event

Backlog

Forecasted

Head Room

below $16M

Book to

Bill Ratio

Forecasted

Cash / Short

Term Debt

Position below

$17M

Adjusted

EBITDA

Paper Capacity Fluctuations

Paper Inventory Fluctuations

Paper Pricing Fluctuations

Trigger Events

Leading

Indicator 

Mill Operating Curtailments

“20 Box”

Covenant

Non-

Compliance

Intermediate Events

Administrative/

Accounting /

Reporting

Performance

Targets

Not

Achieved

Leading Indicator -

External

Debt Management Risk –

Pre Covenant Breach

Mitigation Activities

Pricing Trends

Plant Capacity Fluctuations

Labor Pricing

Raw Material Pricing

Leading Indicator -

Internal 

Management Response/ Corrective

Action

Competitor Capacity Announcements

Customer Financial Reports

Paper Machine Clothing Inventory

Industry Analyst Reports

Missed Bookings Forecast

Other Competitor Intelligence

Cash Flow Forecast

Cash

Generation

Bookings Data

Key Staff Turnover

Currency Fluctuations

Covenant

Breach

Other

Default 

Events

Leverage 

Coverage

CapEx

Limitations

Fixed

Charge

Coverage

Interest   

Coverage

OPERATIONAL

•Contingency List

•Layoffs

•Short Term Work Schedule

•Delayed Capex

•Delayed Product

Development

•Wage Roll Back

•Financial Performance

/ Execution

Effective?

Monitor

Mitigation

YES

NO

CAPITAL

STRUCTURE

•Sell part of the

Company

•Sell Equity

•Debt Payment

Acceleration

•RCF Draw

CONTRACTUAL

•Amend Credit

Agreement

7

Confidential / Company Use Only

DRAFT

–

For

Discussion

Purposes

Only

Debt Management Risk –

Post Covenant Breach

Covenant

Breach

Curable?

NO

YES

CONTRACTUAL

•Amended Credit Agreement

CAPITAL STRUCTURE

•Sell part of the Company

•Sell Equity

•Debt Payment Acceleration

•Sell Company/ Equity Under

Duress

Amendment Under Duress

Reorganization

Effective?

Monitor and

Manage

Mitigations

NO

YES

Risk Event

Cure

Consequence

8

Confidential / Company Use Only

DRAFT –

For Discussion Purposes Only

DRAFT –

For Discussion Purposes Only

Risk Event

Unintended Loss

of Talent

Training and Development

Succession Planning

Recruiting

Compensation & Benefits Benchmark 

Leading Indicators

Intermediate Events

Leading Indicator -

External

People Risk –

Event Tree

Mitigation

Activities

Employee Attrition Rate

Leading Indicator -

Internal 

Industry Benchmarks

Employee Satisfaction Survey

Other Competitor Intelligence

Recruiting

% of Open Positions

Reputation in Marketplace

Recruitment Cycle Time

Training Hours per FTE

Key Staff Turnover

Employee Morale

Consequence

HR Strategy and

Policies

Recognition Programs

CIA, etc

Compensation &

Benefits Structure

Event

Loss of Institutional Knowledge

Loss of Critical Skills

Costly Learning Curve

Management Response /

Corrective Action

Training

Cross Functional

Assignments

Team Tasking

Increased

Communication

Annual Manpower

Review

Investment in Key

Positions are Lost

Customer Issues

Quality Issues

Pay for

Performance