aimc-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

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: 001-33209

 

ALTRA INDUSTRIAL MOTION CORP.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1478870

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

300 Granite Street, Suite 201, Braintree, MA

 

02184

(Address of principal executive offices)

 

(Zip Code)

 

(781) 917-0600

(Registrant’s telephone number, including area code)

 

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      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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company.)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 9, 2018, 29,383,365 shares of Common Stock, $0.001 par value per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page #

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3.

 

Defaults Upon Senior Securities

 

35

Item 4.

 

Mine Safety Disclosures

 

35

Item 5.

 

Other Information

 

35

Item 6.

 

Exhibits

 

36

 

 

 

 

SIGNATURES

 

37

 

 

 

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,396

 

 

$

51,994

 

Trade receivables, less allowance for doubtful accounts of $4,815 and $4,542 at

   March 31, 2018 and December 31, 2017, respectively

 

 

150,794

 

 

 

135,499

 

Inventories

 

 

148,684

 

 

 

145,611

 

Income tax receivable

 

 

4,872

 

 

 

6,634

 

Prepaid expenses and other current assets

 

 

17,745

 

 

 

17,344

 

Assets held for sale

 

 

1,119

 

 

 

1,081

 

Total current assets

 

 

369,610

 

 

 

358,163

 

Property, plant and equipment, net

 

 

194,293

 

 

 

191,918

 

Intangible assets, net

 

 

160,767

 

 

 

159,613

 

Goodwill

 

 

209,722

 

 

 

206,040

 

Deferred income taxes

 

 

1,669

 

 

 

2,608

 

Other non-current assets, net

 

 

2,466

 

 

 

2,315

 

Total assets

 

$

938,527

 

 

$

920,657

 

LIABILITIES, AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

62,363

 

 

$

68,014

 

Accrued payroll

 

 

26,244

 

 

 

32,091

 

Accruals and other current liabilities

 

 

43,131

 

 

 

32,921

 

Income tax payable

 

 

9,948

 

 

 

9,082

 

Current portion of long-term debt

 

 

1,430

 

 

 

384

 

Total current liabilities

 

 

143,116

 

 

 

142,492

 

Long-term debt - less current portion

 

 

278,282

 

 

 

275,587

 

Deferred income taxes

 

 

52,342

 

 

 

52,250

 

Pension liabilities

 

 

25,749

 

 

 

25,038

 

Long-term taxes payable

 

 

5,419

 

 

 

6,322

 

Other long-term liabilities

 

 

20,655

 

 

 

22,263

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value, 90,000,000 shares authorized, 29,103,205, and

   29,058,117 issued and outstanding at March 31, 2018 and December 31, 2017,

   respectively)

 

 

29

 

 

 

29

 

Additional paid-in capital

 

 

223,149

 

 

 

223,336

 

Retained earnings

 

 

227,198

 

 

 

223,204

 

Accumulated other comprehensive loss

 

 

(37,412

)

 

 

(49,864

)

Total stockholders’ equity

 

 

412,964

 

 

 

396,705

 

Total liabilities, and stockholders’ equity

 

$

938,527

 

 

$

920,657

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

 

 

1


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Operations

Amounts in thousands, except per share data

 

 

 

Quarter Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net sales

 

$

240,385

 

 

$

215,435

 

Cost of sales

 

 

166,159

 

 

 

149,268

 

Gross profit

 

 

74,226

 

 

 

66,167

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

47,130

 

 

 

40,384

 

Research and development expenses

 

 

6,473

 

 

 

6,223

 

Restructuring costs

 

 

943

 

 

 

1,898

 

 

 

 

54,546

 

 

 

48,505

 

Income from operations

 

 

19,680

 

 

 

17,662

 

Other non-operating income and expense:

 

 

 

 

 

 

 

 

Loss on settlement of pension plan

 

 

5,086

 

 

 

 

 

Interest expense, net

 

 

1,834

 

 

 

1,705

 

Other non-operating expense, net

 

 

(146

)

 

 

(530

)

Loss on extinguishment of convertible debt

 

 

 

 

 

1,797

 

 

 

 

6,774

 

 

 

2,972

 

Income before income taxes

 

 

12,906

 

 

 

14,690

 

Provision for income taxes

 

 

3,905

 

 

 

4,364

 

Net income

 

$

9,001

 

 

$

10,326

 

Weighted average shares, basic

 

 

29,073

 

 

 

28,763

 

Weighted average shares, diluted

 

 

29,225

 

 

 

28,897

 

Net income per share:

 

 

 

 

 

 

 

 

Basic net income

 

$

0.31

 

 

$

0.36

 

Diluted net income

 

$

0.31

 

 

$

0.36

 

Cash dividend declared

 

$

0.17

 

 

$

0.15

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

 

 

2


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Comprehensive Income

Amounts in thousands

 

 

 

Quarter Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net Income

 

$

9,001

 

 

$

10,326

 

Other Comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

7,730

 

 

 

3,912

 

Reclassification adjustment from loss on partial settlement of pension

   plan, net of tax

 

 

3,815

 

 

 

 

 

Change in defined benefit pension plans, net of tax

 

 

577

 

 

 

 

Change in fair value of derivative financial instruments

 

 

330

 

 

 

818

 

Other comprehensive income:

 

 

12,452

 

 

 

4,730

 

Comprehensive income

 

$

21,453

 

 

$

15,056

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

 

 

3


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

 

 

 

Year to Date Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

9,001

 

 

$

10,326

 

Adjustments to reconcile net income to net operating cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

6,923

 

 

 

6,461

 

Amortization of intangible assets

 

 

2,480

 

 

 

2,345

 

Amortization of deferred financing costs

 

 

150

 

 

 

149

 

Loss on foreign currency, net

 

 

(113

)

 

 

(144

)

Loss on settlement of pension plan

 

 

5,086

 

 

 

 

(Gain)/Loss on disposal / impairment of fixed assets

 

 

125

 

 

 

(58

)

Loss on extinguishment of debt

 

 

 

 

 

1,797

 

Stock based compensation

 

 

1,303

 

 

 

1,751

 

Amortization of inventory fair value adjustment

 

 

 

 

 

2,347

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(12,906

)

 

 

(11,348

)

Inventories

 

 

(515

)

 

 

(1,365

)

Accounts payable and accrued liabilities

 

 

(5,919

)

 

 

(6,997

)

Other current assets and liabilities

 

 

47

 

 

 

(4,052

)

Other operating assets and liabilities

 

 

(1,998

)

 

 

1,810

 

Net cash provided by operating activities

 

 

3,664

 

 

 

3,022

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(6,975

)

 

 

(7,333

)

Net cash used in investing activities

 

 

(6,975

)

 

 

(7,333

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on Revolving Credit Facility

 

 

(4,903

)

 

 

(13,459

)

Dividend payments

 

 

(4,977

)

 

 

(3,904

)

Borrowing under Revolving Credit Facility

 

 

8,000

 

 

 

5,000

 

Payments of equipment, working capital notes, mortgages, and other debts

 

 

(288

)

 

 

(267

)

Cash paid to redeem Convertible Notes

 

 

 

 

 

(954

)

Shares surrendered for tax withholding

 

 

(1,490

)

 

 

(163

)

Net cash used in financing activities

 

 

(3,658

)

 

 

(13,747

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1,371

 

 

 

1,877

 

Net change in cash and cash equivalents

 

 

(5,598

)

 

 

(16,181

)

Cash and cash equivalents at beginning of year

 

 

51,994

 

 

 

69,118

 

Cash and cash equivalents at end of period

 

$

46,396

 

 

$

52,937

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

1,755

 

 

$

1,797

 

Income taxes

 

 

2,642

 

 

 

2,937

 

Non-cash Financing and Investing

 

 

 

 

 

 

 

 

Conversion of Convertible Notes to common stock

 

$

 

 

$

51,851

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

 

 

4


ALTRA INDUSTRIAL MOTION CORP.

Consolidated Statements of Stockholders’ Equity

Amounts in thousands

(Unaudited)

 

 

 

Common

Stock

 

 

Shares

 

 

Additional

Paid

in Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive Income

(Loss)

 

 

Total

 

Balance at January 1, 2017

 

$

27

 

 

$

27,206

 

 

$

168,299

 

 

$

191,108

 

 

$

(76,086

)

 

$

283,348

 

Stock-based compensation and vesting

   of restricted stock

 

 

 

 

 

31

 

 

 

1,588

 

 

 

 

 

 

 

 

 

1,588

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,326

 

 

 

 

 

 

10,326

 

Conversion of convertible debt

 

 

2

 

 

 

1,748

 

 

 

51,849

 

 

 

 

 

 

 

 

 

 

 

51,851

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(4,396

)

 

 

 

 

 

(4,396

)

Change in fair value of interest rate

   swap, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

818

 

 

 

818

 

Cumulative foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,912

 

 

 

3,912

 

Balance at March 31, 2017

 

$

29

 

 

$

28,985

 

 

$

221,736

 

 

$

197,038

 

 

$

(71,356

)

 

$

347,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

$

29

 

 

$

29,058

 

 

$

223,336

 

 

$

223,204

 

 

$

(49,864

)

 

$

396,705

 

Stock-based compensation and

   vesting of restricted stock

 

 

 

 

 

45

 

 

 

(187

)

 

 

 

 

 

 

 

 

(187

)

Net income

 

 

 

 

 

 

 

 

 

 

 

9,001

 

 

 

 

 

 

9,001

 

Dividends declared, $0.17 per share

 

 

 

 

 

 

 

 

 

 

 

(5,007

)

 

 

 

 

 

(5,007

)

Change in fair value of interest rate

   swap, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

330

 

 

 

330

 

Minimum Pension adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,392

 

 

 

4,392

 

Cumulative foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,730

 

 

 

7,730

 

Balance at March 31, 2018

 

$

29

 

 

$

29,103

 

 

$

223,149

 

 

$

227,198

 

 

$

(37,412

)

 

$

412,964

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

 

 

 

5


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

1. Organization and Nature of Operations

Headquartered in Braintree, Massachusetts, Altra Industrial Motion Corp. (the “Company”, “we”, or “our”) is a leading multi-national designer, producer and marketer of a wide range of electro-mechanical power transmission products. The Company brings together strong brands covering over 42 product lines with production facilities in twelve countries. Altra’s leading brands include Ameridrives Couplings, Bauer Gear Motor, Bibby Turboflex, Boston Gear, Delroyd Worm Gear, Formsprag Clutch, Guardian Couplings, Huco, Industrial Clutch, Inertia Dynamics, Kilian Manufacturing, Lamiflex Couplings, Marland Clutch, Matrix, Nuttall Gear, Stieber Clutch, Stromag, Svendborg Brakes, TB Wood’s, Twiflex, Warner Electric, Warner Linear, and Wichita Clutch.

 

 

2. Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position for the interim periods presented, and cash flows for the interim periods presented.  The results are not necessarily indicative of future results.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

 

 

3. Recent Accounting Standards

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of generally accepted accounting principles in the United States, or GAAP, in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Act. The ultimate impact of the U.S. Tax Act may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, and guidance that may be issued and actions we may take in response to the U.S. Tax Act. The U.S. Tax Act is highly complex and we will continue to assess the impact that various provisions will have on our business. Any subsequent adjustment to these amounts will be recorded to current tax expense in the period when the analysis is complete.

 

As of March 31, 2018, the Company has not completed the accounting for the tax effects of enactment of this legislation; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances, the one-time transition tax and provisional state taxes on future repatriations. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of $7.4 million under SAB 118 as a component of income tax expense in the year ended December 31, 2017.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows companies to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings in their consolidated financial statements. This guidance is effective for years beginning after December 31, 2018 (fiscal 2020 for Company), including interim periods within those fiscal years. We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

 

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). This ASU provides new guidance about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. The entire change in fair value for qualifying hedge instruments included in the effectiveness will be recorded in other comprehensive income (OCI) and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. The guidance will be effective for interim and annual periods for the Company on January 1, 2019, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

6


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The ASU requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. We are currently evaluating the impact this guidance will have on our consolidated financial statements and expect to recognize a significant lease obligation upon adoption.

Recently Adopted Accounting Standards

 

On January 1, 2018 The Company adopted ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) (“ASU 2014-09”) and all the related amendments using the modified retrospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods, which has been discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

The Company recognizes revenue under the core principle of depicting the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

Our sales revenue for product sales is recognized based on a point in time model, at the point control transfers to our customers, which is generally when products are shipped from our manufacturing facilities or when delivered to the customer’s named location. When the Company performs shipping and handling activities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities and, accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. See Note 4 Revenue Recognition for further disclosures and detail regarding revenue.

The adoption of Topic 606 was not material to the Company and, as such, there was no cumulative effect upon the January 1, 2018 adoption date. As the impact of the new revenue standard is not material to the Company, there is no impact disclosure presented as of and for the quarter ended March 31, 2018.

 

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (“Topic 715”): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This ASU changes the income statement presentation of defined benefit and post-retirement benefit plan expense by requiring separation between operating expense (service cost component of net periodic benefit expense) and non-operating expense (all other components of net periodic benefit expense, including but not limited to interest cost, amortization of prior service cost, curtailments and settlements, etc.). The guidance became effective for interim and annual periods for the Company on January 1, 2018. The operating expense component is reported with similar compensation costs while the non-operating components are reported outside of operating income. The Company adopted the amendments in the first quarter of 2018 using a retrospective transition method. The impact of the adoption was immaterial for the three months ended March 31, 2017. The financial statements for the three months ended March 31, 2018 include the impact of the adoption.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (“ASU 2016-18”).  The amendments in ASU 2016-18 require that the statement of cash flows explain the change in total cash, cash equivalents and restricted cash. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this ASU did not have a material impact on our unaudited condensed consolidated financial statements.

 

 

4. Revenue Recognition

 

The following disclosure represents the Company’s effort to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers in accordance with Topic 606. The Company operates through three business segments that are aligned with key product types and end markets served:

 

Couplings, Clutches & Brakes.     Couplings are the interface between two shafts, which enable power to be transmitted from one shaft to the other. Clutches in this segment are devices which use mechanical, hydraulic, pneumatic, or friction type connections to facilitate engaging or disengaging two rotating members. Brakes are combinations of interacting parts

7


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

 

that work to slow or stop machinery.  Products in this segment are generally used in heavy industrial applications and energy markets.

 

Electromagnetic Clutches & Brakes.    Products in this segment include brakes and clutches that are used to electronically slow, stop, engage or disengage equipment utilizing electromagnetic friction type connections.   Products in this segment are used in industrial and commercial markets including agricultural machinery, material handling, motion control, and turf & garden.

 

Gearing.    Gears are utilized to reduce the speed and increase the torque of an electric motor or engine to the level required to drive a particular piece of equipment. Gears produced by the Company are primarily utilized in industrial applications.

 

We distribute our products through three primary distribution channels: Industrial distributors, original equipment manufacturers (OEMs), and direct to end users. Each of these segments sells similar products, which are balanced across end-user industries including, without limitation, energy, food processing, general industrial, material handling, mining, transportation, and turf and garden.

 

The following table disaggregates our revenue for each reportable segment. The Company believes that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors:

 

 

 

Quarter Ended March 31,

 

 

 

2018

 

 

2017

 

Net Sales:

 

 

 

 

 

 

 

 

Couplings, Clutches & Brakes

 

$

120,173

 

 

$

106,232

 

Electromagnetic Clutches & Brakes

 

 

69,107

 

 

 

63,878

 

Gearing

 

 

53,885

 

 

 

47,028

 

Inter-segment eliminations

 

 

(2,780

)

 

 

(1,703

)

Net sales

 

$

240,385

 

 

$

215,435

 

 

The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts with a customer. The Company’s contracts with customers are generally for product only, and do not include other performance obligations such as professional services, extended warranties, or other material rights. In situations where sales are to a distributor, the Company has concluded that its contracts are with the distributor as the Company holds a contract bearing enforceable rights and obligations only with the distributor. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promises to transfer products, each of which is distinct, to be the identified performance obligations. In determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or delivery to the customer’s named location. In determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers, which would generally result in the transfer of control over time.  The Company has evaluated the amount of revenue subject to recognition over time and concluded that it is immaterial.  

 

At times, the Company receives orders for products to be delivered over multiple dates that may extend across reporting periods. The Company invoices for each delivery upon shipment and recognizes revenues for each distinct product delivered, assuming transfer of control has occurred. As scheduled delivery dates are within one year, under the optional exemption provided by ASC 606-10-50-14 revenues allocated to future shipments of partially completed contracts are not disclosed.

 

The Company generally provides an assurance warranty that its products will substantially conform to the published specifications for twelve months from the date of shipment. The Company’s liability typically is limited to either a credit equal to the purchase price or replacement of the defective part. Returns under warranty have historically been immaterial. The Company does not consider activities related to such warranty, if any, to be a separate performance obligation. For certain of its products, the Company

8


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

will separately sell extended warranty and service policies to its customers. These policies typically are for periods ranging from one to three years. Payments received are deferred and recognized over the policy period. For all periods presented, the revenue recognized and the revenue deferred under these policies is not material to the unaudited condensed consolidated financial statements.

 

The payment terms and conditions in our customer contracts vary. In some cases, customers will partially prepay for their goods; in other cases, after appropriate credit evaluations, payment will be due in arrears. In addition, there are constraints which cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, surcharges, and other customer consolidation. When the timing of the Company’s recognition of revenue is different from the timing of payments made by the customer, the Company recognizes either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance or is in excess of estimates of what the Company expects to be entitled). Contracts with payment in arrears are recognized as receivables. The opening and closing balances of the Company’s contract asset, contract liability, and receivables are as follows:

 

 

 

Deferred Revenue (Current)

 

 

Accounts Receivable

 

Beginning - January 1, 2018

 

$

2,189

 

 

$

135,499

 

Closing - March 31, 2018

 

 

7,034

 

 

 

150,794

 

Increase/(Decrease)

 

$

4,845

 

 

$

15,295

 

 

The amounts of revenue recognized in the period that were included in deferred revenue was $7.0. This revenue consists primarily of revenue recognized for shipments of product which were prepaid.

 

The Company has concluded that none of the costs it has incurred to obtain and fulfill its contracts meet the capitalization criteria, and as such, there are no costs deferred and recognized as assets on the unaudited condensed consolidated balance sheet.

 

 

5. Fair Value of Financial Instruments

Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

 

Level 1- Quoted prices in active markets for identical assets or liabilities.

 

Level 2- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived,

 

Level 3- Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, and other accrued liabilities approximate fair value. Debt under the Company’s 2015 Credit Agreement approximates the fair value due to the variable rate and the fact that the agreement was renegotiated in December 2016 and there have been no significant changes in our credit rating or pricing of similar debt.

The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of the Company or the financial counterparty to perform. For interest rate and cross currency swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. For forward foreign currency contracts, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. See additional discussion of the Company’s use of financial instruments including a cross-currency swap included in Note 16.

 

 

9


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

6. Changes in Accumulated Other Comprehensive Loss by Component

The following is a reconciliation of changes in accumulated other comprehensive loss by component for the periods presented:

 

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plans

 

 

Cumulative

Foreign

Currency

Translation

Adjustment

 

 

Total

 

Accumulated Other Comprehensive Loss by Component,

   January 1, 2018

 

$

(452

)

 

$

(3,678

)

 

$

(45,734

)

 

$

(49,864

)

Net current-period Other Comprehensive Income (Loss)

 

 

330

 

 

 

577

 

 

 

7,730

 

 

 

8,637

 

Reclassification adjustment from loss on partial

   settlement of pension plan, net of tax

 

 

 

 

 

3,815

 

 

 

 

 

 

3,815

 

Accumulated Other Comprehensive Loss by Component,

   March 31, 2018

 

$

(122

)

 

$

714

 

 

$

(38,004

)

 

$

(37,412

)

 

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plans

 

 

Cumulative

Foreign

Currency

Translation

Adjustment

 

 

Total

 

Accumulated Other Comprehensive Loss by

   Component, January 1, 2017

 

$

(646

)

 

$

(5,668

)

 

$

(69,772

)

 

$

(76,086

)

Net current-period Other Comprehensive Income (Loss)

 

 

818

 

 

 

(234

)

 

 

4,146

 

 

 

4,730

 

Accumulated Other Comprehensive Loss by Component,

   March 31, 2017

 

$

172

 

 

$

(5,902

)

 

$

(65,626

)

 

$

(71,356

)

 

 

7. Acquisitions

 

On December 30, 2016, we acquired the shares and certain assets and liabilities of the Stromag business from GKN plc., and as a result, the Company’s unaudited condensed consolidated financial statements reflect Stromag’s results of operations from the beginning of business on December 30, 2016 forward. Stromag is a leading global manufacturer of highly engineered clutches and brakes, couplings, and limit switches for use in a variety of end markets including renewable energy, crane & hoist, and marine. We refer to this transaction as the Stromag Acquisition.

10


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

As of December 31, 2017, the allocation of the Company’s acquisition accounting is complete and the calculation of fair value, of all the acquired identifiable assets and liabilities, for the Stromag Acquisition is final.  The measurement period adjustments which reflected new information obtained about facts and circumstances that existed as of the acquisition date were not material.  The final purchase price allocation was finalized as of December 31, 2017, see the table below:

 

 

 

Final Purchase

Price Allocation

 

Total purchase price, excluding acquisition costs of approximately $2.9 million

 

$

191,852

 

Cash and cash equivalents

 

 

8,758

 

Trade receivables

 

 

24,087

 

Inventories

 

 

22,039

 

Property, plant and equipment

 

 

40,343

 

Intangible assets

 

 

74,795

 

Prepaid expenses and other current assets

 

 

778

 

Total assets acquired

 

$

170,800

 

Accounts payable

 

 

(15,370

)

Accrued payroll

 

 

(7,171

)

Accrued expenses and other current liabilities

 

 

(4,496

)

Income tax payable

 

 

(2,525

)

Deferred tax liability

 

 

(27,783

)

Other long-term liabilities

 

 

(1,255

)

Pension liability

 

 

(15,283

)

Total liabilities assumed

 

$

(73,883

)

Net assets acquired

 

 

96,917

 

Excess purchase price over fair value of net assets acquired

 

$

94,935

 

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is generally not deductible for income tax purposes with the exception of approximately $12.8 million which relates to certain assets acquired in the United States.

 

Intangible assets acquired consist of:

 

 

 

 

Customer relationships

 

$

56,019

 

Trade names and trademarks

 

 

18,776

 

Total intangible assets

 

$

74,795

 

 

Customer relationships are subject to amortization and will be amortized on a straight-line basis over their estimated useful lives of 15 years, which represents the anticipated period over which the Company estimates it will benefit from the acquired assets.

 

8. Net Income per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding, and diluted earnings per share is based on the weighted average number of shares of common stock outstanding and all potentially dilutive common stock equivalents outstanding. Common stock equivalents are included in the per share calculations when the effect of their inclusion is dilutive.

11


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

The following is a reconciliation of basic to diluted net income per share:

 

 

 

Quarter Ended

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Net income

 

$

9,001

 

 

$

10,326

 

Shares used in net income per common share - basic

 

 

29,073

 

 

 

28,763

 

Incremental shares of unvested restricted common stock

 

 

152

 

 

 

134

 

Shares used in net income per common share - diluted

 

 

29,225

 

 

 

28,897

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic net income

 

$

0.31

 

 

$

0.36

 

Diluted net income

 

$

0.31

 

 

$

0.36

 

 

 

9. Inventories

Inventories at March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Raw materials

 

$

53,548

 

 

$

49,351

 

Work in process

 

 

23,860

 

 

 

22,914

 

Finished goods

 

 

71,276

 

 

 

73,346

 

 

 

$

148,684

 

 

$

145,611

 

 

 

10. Goodwill and Intangible Assets

Changes in goodwill from January 1, 2018 through March 31, 2018 were as follows:

 

 

 

Couplings,

Clutches &

Brakes

 

 

Electromagnetic Clutches &

Brakes

 

 

Gearing

 

 

Total

 

Net goodwill balance January 1, 2018

 

$

119,963

 

 

$

37,905

 

 

$

48,172

 

 

$

206,040

 

Impact of changes in foreign currency and other

 

 

3,397

 

 

 

152

 

 

 

133

 

 

 

3,682

 

Net goodwill balance March 31, 2018

 

$

123,360

 

 

$

38,057

 

 

$

48,305

 

 

$

209,722

 

 

Other intangible assets as of March 31, 2018 and December 31, 2017 consisted of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradenames and trademarks

 

$

56,035

 

 

$

 

 

$

56,035

 

 

$

54,883

 

 

$

 

 

$

54,883

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

180,399

 

 

 

76,348

 

 

 

104,051

 

 

 

177,207

 

 

 

72,970

 

 

 

104,237

 

Product technology and patents

 

 

6,085

 

 

 

5,404

 

 

 

681

 

 

 

5,853

 

 

 

5,360

 

 

 

493

 

Total intangible assets

 

$

242,519

 

 

$

81,752

 

 

$

160,767

 

 

$

237,943

 

 

$

78,330

 

 

$

159,613

 

 

The Company recorded $2.5 million and $2.3 million of amortization expense in the quarters ended March 31, 2018 and 2017 respectively.

The estimated amortization expense for intangible assets is approximately $7.1 million for the remainder of 2018, $9.6 million in each of the next four years and then $59.2 million thereafter.

 

 

12


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

11. Warranty Costs

The contractual warranty period of the Company's products generally ranges from three months to two years with certain warranties extending for longer periods. Estimated expenses related to product warranties are accrued at the time products are sold to customers and are recorded in accruals and other current liabilities on the unaudited condensed consolidated balance sheet. Estimates are established using historical information as to the nature, frequency and average costs of warranty claims. Changes in the carrying amount of accrued product warranty costs for each of the quarters ended March 31, 2018 and March 31, 2017 are as follows:

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Balance at beginning of period

 

$

7,479

 

 

$

9,158

 

Accrued current period warranty expense

 

 

514

 

 

 

122

 

Payments and adjustments

 

 

(429

)

 

 

(110

)

Balance at end of period

 

$

7,564

 

 

$

9,170

 

 

 

12. Debt

Outstanding debt obligations at March 31, 2018 and December 31, 2017 were as follows.

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Debt:

 

 

 

 

 

 

 

 

Revolving Credit Facility

 

$

266,581

 

 

$

262,915