aimc-10q_20180630.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 June 30, 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 (§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      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 the 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 August 1, 2018, there were 29,387,971 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page #

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statement of Operations

 

2

 

 

Condensed Consolidated Statements of Comprehensive Income

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Consolidated Statements of Stockholders’ Equity

 

5

 

 

Notes to Unaudited Condensed Consolidated Interim Financial Statements                                                                               

 

6

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Defaults Upon Senior Securities

 

39

Item 4.

 

Mine Safety Disclosures

 

39

Item 5.

 

Other Information

 

39

Item 6.

 

Exhibits

 

40

 

 

 

 

SIGNATURES

 

41

 

 

 

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,114

 

 

$

51,994

 

Trade receivables, less allowance for doubtful accounts of $4,802 and $4,542 at

   June 30, 2018 and December 31, 2017, respectively

 

 

146,419

 

 

 

135,499

 

Inventories

 

 

149,592

 

 

 

145,611

 

Income tax receivable

 

 

1,832

 

 

 

6,634

 

Prepaid expenses and other current assets

 

 

21,012

 

 

 

17,344

 

Assets held for sale

 

 

701

 

 

 

1,081

 

Total current assets

 

 

357,670

 

 

 

358,163

 

Property, plant and equipment, net

 

 

189,328

 

 

 

191,918

 

Intangible assets, net

 

 

151,639

 

 

 

159,613

 

Goodwill

 

 

203,292

 

 

 

206,040

 

Deferred income taxes

 

 

1,592

 

 

 

2,608

 

Other non-current assets, net

 

 

3,031

 

 

 

2,315

 

Total assets

 

$

906,552

 

 

$

920,657

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

62,935

 

 

$

68,014

 

Accrued payroll

 

 

27,066

 

 

 

32,091

 

Accruals and other current liabilities

 

 

38,475

 

 

 

32,921

 

Income tax payable

 

 

9,032

 

 

 

9,082

 

Current portion of long-term debt

 

 

1,364

 

 

 

384

 

Total current liabilities

 

 

138,872

 

 

 

142,492

 

Long-term debt - less current portion

 

 

260,024

 

 

 

275,587

 

Deferred income taxes

 

 

50,214

 

 

 

52,250

 

Pension liabilities

 

 

24,390

 

 

 

25,038

 

Long-term taxes payable

 

 

5,418

 

 

 

6,322

 

Other long-term liabilities

 

 

14,742

 

 

 

22,263

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value per share, 90,000,000 shares authorized, 29,107,811, and 29,058,117 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively)

 

 

29

 

 

 

29

 

Additional paid-in capital

 

 

224,526

 

 

 

223,336

 

Retained earnings

 

 

241,249

 

 

 

223,204

 

Accumulated other comprehensive loss

 

 

(52,912

)

 

 

(49,864

)

Total stockholders’ equity

 

 

412,892

 

 

 

396,705

 

Total liabilities, and stockholders’ equity

 

$

906,552

 

 

$

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

 

 

Year to Date Ended

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net sales

$

237,323

 

 

$

223,357

 

 

$

477,708

 

 

$

438,792

 

Cost of sales

 

159,068

 

 

 

151,231

 

 

 

325,227

 

 

 

300,499

 

Gross profit

 

78,255

 

 

 

72,126

 

 

 

152,481

 

 

 

138,293

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

43,382

 

 

 

41,619

 

 

 

90,512

 

 

 

82,003

 

Research and development expenses

 

6,258

 

 

 

6,160

 

 

 

12,731

 

 

 

12,383

 

Restructuring and consolidation costs

 

566

 

 

 

1,198

 

 

 

1,509

 

 

 

3,096

 

 

 

50,206

 

 

 

48,977

 

 

 

104,752

 

 

 

97,482

 

Income from operations

 

28,049

 

 

 

23,149

 

 

 

47,729

 

 

 

40,811

 

Other non-operating income and expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on settlement of pension plan

 

 

 

 

 

 

 

5,086

 

 

 

 

Interest expense, net

 

2,065

 

 

 

2,031

 

 

 

3,899

 

 

 

3,736

 

Other non-operating expense/(income), net

 

(282

)

 

 

(136

)

 

 

(428

)

 

 

(666

)

Loss on extinguishment of convertible debt

 

 

 

 

 

 

 

 

 

 

1,797

 

 

 

1,783

 

 

 

1,895

 

 

 

8,557

 

 

 

4,867

 

Income before income taxes

 

26,266

 

 

 

21,254

 

 

 

39,172

 

 

 

35,944

 

Provision for income taxes

 

7,259

 

 

 

5,870

 

 

 

11,164

 

 

 

10,234

 

Net income

$

19,007

 

 

$

15,384

 

 

$

28,008

 

 

$

25,710

 

Weighted average shares, basic

 

28,979

 

 

 

28,978

 

 

 

29,085

 

 

 

28,873

 

Weighted average shares, diluted

 

29,089

 

 

 

29,114

 

 

 

29,245

 

 

 

29,042

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income

$

0.66

 

 

$

0.53

 

 

$

0.96

 

 

$

0.89

 

Diluted net income

$

0.65

 

 

$

0.53

 

 

$

0.96

 

 

$

0.89

 

Cash dividend declared

$

0.17

 

 

$

0.17

 

 

$

0.34

 

 

$

0.32

 

 

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

 

 

Year to Date Ended

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net Income

$

19,007

 

 

$

15,384

 

 

$

28,008

 

 

$

25,710

 

Other Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(16,248

)

 

 

10,275

 

 

 

(8,518

)

 

 

13,827

 

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

 

748

 

 

 

(161

)

 

 

1,078

 

 

 

657

 

Other comprehensive income:

 

(15,500

)

 

 

10,114

 

 

 

(3,048

)

 

 

14,484

 

Comprehensive income

$

3,507

 

 

$

25,498

 

 

$

24,960

 

 

$

40,194

 

 

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

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

28,008

 

 

$

25,710

 

Adjustments to reconcile net income to net operating cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

13,779

 

 

 

12,930

 

Amortization of intangible assets

 

 

4,900

 

 

 

4,685

 

Amortization of deferred financing costs

 

 

299

 

 

 

299

 

Loss on foreign currency, net

 

 

4

 

 

 

132

 

Loss on settlement of pension plan

 

 

5,086

 

 

 

 

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

 

 

298

 

 

 

(74

)

Loss on extinguishment of debt

 

 

 

 

 

1,797

 

Stock based compensation

 

 

2,680

 

 

 

3,153

 

Amortization of inventory fair value adjustment

 

 

 

 

 

2,347

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(12,971

)

 

 

(12,812

)

Inventories

 

 

(5,478

)

 

 

(1,473

)

Accounts payable and accrued liabilities

 

 

2,024

 

 

 

(9,212

)

Other current assets and liabilities

 

 

(3,956

)

 

 

(1,146

)

Other operating assets and liabilities

 

 

(5,564

)

 

 

(380

)

Net cash provided by operating activities

 

 

29,109

 

 

 

25,956

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(14,936

)

 

 

(14,416

)

Working capital settlement from prior year acquisitions

 

 

 

 

 

2,883

 

Acquisition of Aluminum Die Casting, S.r.L.

 

 

(2,663

)

 

 

 

Net cash used in investing activities

 

 

(17,599

)

 

 

(11,533

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on Revolving Credit Facility

 

 

(24,449

)

 

 

(24,054

)

Dividend payments

 

 

(9,972

)

 

 

(8,300

)

Borrowing under Revolving Credit Facility

 

 

11,000

 

 

 

5,000

 

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

 

 

(568

)

 

 

(505

)

Cash paid to redeem Convertible Notes

 

 

 

 

 

(954

)

Shares surrendered for tax withholding

 

 

(1,490

)

 

 

(386

)

Net cash used in financing activities

 

 

(25,479

)

 

 

(29,199

)

Effect of exchange rate changes on cash and cash equivalents

 

 

89

 

 

 

4,639

 

Net change in cash and cash equivalents

 

 

(13,880

)

 

 

(10,137

)

Cash and cash equivalents at beginning of year

 

 

51,994

 

 

 

69,118

 

Cash and cash equivalents at end of period

 

$

38,114

 

 

$

58,981

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3,636

 

 

$

3,752

 

Income taxes

 

 

8,120

 

 

 

11,802

 

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.

Condensed 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

 

 

 

 

 

42

 

 

 

2,765

 

 

 

 

 

 

 

 

 

2,765

 

Net income

 

 

 

 

 

 

 

 

 

 

 

25,710

 

 

 

 

 

 

25,710

 

Conversion of convertible debt

 

 

2

 

 

 

1,748

 

 

 

51,849

 

 

 

 

 

 

 

 

 

51,851

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(9,379

)

 

 

 

 

 

(9,379

)

Change in fair value of Derivative Financial Instruments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

657

 

 

 

657

 

Cumulative foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,827

 

 

 

13,827

 

Balance at June 30, 2017

 

$

29

 

 

$

28,996

 

 

$

222,913

 

 

$

207,439

 

 

$

(61,602

)

 

$

368,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

$

29

 

 

 

29,058

 

 

$

223,336

 

 

$

223,204

 

 

$

(49,864

)

 

$

396,705

 

Stock-based compensation and vesting of restricted stock

 

 

 

 

 

50

 

 

 

1,190

 

 

 

 

 

 

 

 

 

1,190

 

Net income

 

 

 

 

 

 

 

 

 

 

 

28,008

 

 

 

 

 

 

28,008

 

Dividends declared, $0.34 per share

 

 

 

 

 

 

 

 

 

 

 

(9,963

)

 

 

 

 

 

(9,963

)

Change in fair value of Derivative Financial Instruments, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,078

 

 

 

1,078

 

Minimum Pension adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,392

 

 

 

4,392

 

Cumulative foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,518

)

 

 

(8,518

)

Balance at June 30, 2018

 

$

29

 

 

$

29,108

 

 

$

224,526

 

 

$

241,249

 

 

$

(52,912

)

 

$

412,892

 

 

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 12 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 generally accepted accounting principles in the United States, or GAAP. 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, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2018. 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

 

Recent Accounting Pronouncements

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of 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 Tax Cuts and Jobs Act (the “2017 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 2017 U.S. Tax Act. The 2017 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 June 30, 2018, the Company has not completed the accounting for the tax effects of enactment of the 2017 U.S. Tax Act; 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 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 assessment of hedge 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 ASU 2017-12 to have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires management to recognize lease assets and lease liabilities by lessees for all operating leases. ASU 2016-02 is effective for periods beginning after December 15, 2018, including interim periods within those fiscal years on a modified retrospective basis. We have begun the process of reviewing existing agreements and are evaluating the impact of this ASU.  We expect to recognize a significant lease obligation upon adoption.

6


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

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 products are 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), such activities 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 ASU 2014-09 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 June 30, 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”). ASU 2017-07 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.). ASU 2017-07 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 ASU 2017-07 in the first quarter of 2018 using a retrospective transition method. The impact of the adoption was immaterial for the three and six months ended June 30, 2017. The financial statements for the six months ended June 30, 2018 include the impact of the adoption.

 

 

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 ASU 2014-09. 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 that use mechanical, hydraulic, pneumatic, or friction type connections to facilitate engaging or disengaging two rotating members. Brakes are combinations of interacting parts 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.

 

7


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

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 & 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 June 30,

Year to Date Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Couplings, Clutches & Brakes

 

$

122,734

 

 

$

110,969

 

 

$

242,907

 

 

$

217,201

 

Electromagnetic Clutches & Brakes

 

 

65,136

 

 

$

65,281

 

 

$

134,243

 

 

$

129,159

 

Gearing

 

 

51,567

 

 

$

49,149

 

 

$

105,452

 

 

$

96,177

 

Inter-segment eliminations

 

 

(2,114

)

 

$

(2,042

)

 

$

(4,894

)

 

$

(3,745

)

Net sales

 

$

237,323

 

 

$

223,357

 

 

$

477,708

 

 

$

438,792

 

 

Net sales to third parties by geographic region are as follows:

 

 

 

Net Sales

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

North America (primarily U.S.)

 

$

119,023

 

 

$

115,236

 

 

$

244,716

 

 

$

230,376

 

Europe

 

 

91,308

 

 

 

84,983

 

 

 

184,790

 

 

 

168,275

 

Asia and other

 

 

26,992

 

 

 

23,138

 

 

 

48,202

 

 

 

40,141

 

Total

 

$

237,323

 

 

$

223,357

 

 

$

477,708

 

 

$

438,792

 

 

 

 

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

8


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

consider activities related to such warranty, if any, to be a separate performance obligation. For certain of its products, the Company 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 that 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 to). 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 - June 30, 2018

 

 

5,155

 

 

 

146,419

 

Increase/(Decrease)

 

$

2,966

 

 

$

10,920

 

 

The amounts of revenue recognized in the year to date period ended June 30, 2018 that were included in deferred revenue was $5.2 million. This revenue consists primarily of revenue recognized for prepaid shipments of product.

 

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 sheets.

 

 

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 each case 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 in active markets; quoted prices in markets with insufficient volume or infrequent transactions (markets that are not active); or other inputs that are observable or can be corroborated by observable market data.

 

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 2015 Credit Agreement (and defined below in Note 11 Debt) approximates the fair value due to the variable rate and the fact that (i) the 2015 Credit Agreement was renegotiated in December 2016 and (ii) 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, that 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, which 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

9


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

translating future cash flows. See additional discussion of the Company’s use of financial instruments including a cross-currency swap included in Note 16 Derivative Financial Instruments.

 

 

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 Gain/(Loss)

 

 

1,078

 

 

 

577

 

 

 

(8,518

)

 

 

(6,863

)

Reclassification adjustment from loss on partial settlement of pension plan, net of tax

 

 

 

 

 

3,815

 

 

 

 

 

 

3,815

 

Accumulated Other Comprehensive Gain/(Loss) by Component, June 30, 2018

 

$

626

 

 

$

714

 

 

$

(54,252

)

 

$

(52,912

)

 

 

 

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 Gain/(Loss)

 

 

657

 

 

 

(171

)

 

 

13,998

 

 

 

14,484

 

Accumulated Other Comprehensive Gain/(Loss) by Component, June 30, 2017

 

$

11

 

 

$

(5,839

)

 

$

(55,774

)

 

$

(61,602

)

 

 

7. 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.

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

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Net income

$

19,007

 

 

$

15,384

 

 

$

28,008

 

 

$

25,710

 

Shares used in net income per common share - basic

 

28,979

 

 

 

28,978

 

 

 

29,085

 

 

 

28,873

 

Incremental shares of unvested restricted common stock

 

110

 

 

 

136

 

 

 

160

 

 

 

169

 

Shares used in net income per common share - diluted

 

29,089

 

 

 

29,114

 

 

 

29,245

 

 

 

29,042

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income

$

0.66

 

 

$

0.53

 

 

$

0.96

 

 

$

0.89

 

Diluted net income

$

0.65

 

 

$

0.53

 

 

$

0.96

 

 

$

0.89

 

 

 

10


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

8. Inventories

Inventories at June 30, 2018 and December 31, 2017 consisted of the following:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Raw materials

 

$

51,669

 

 

$

49,351

 

Work in process

 

 

20,037

 

 

 

22,914

 

Finished goods

 

 

77,886

 

 

 

73,346

 

 

 

$

149,592

 

 

$

145,611

 

 

 

9. Goodwill and Intangible Assets

Changes in goodwill from January 1, 2018 through June 30, 2018 were as follows:

 

 

 

Couplings,

Clutches &

Brakes

 

 

Electromagnetic Clutches &