aimc-10qa_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

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

For the quarterly period ended September 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 every Interactive Data File required to be submitted 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 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

 

 

 

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 October 29, 2018, there were 64,440,696 outstanding shares of the registrant’s common stock, $0.001 par value per share.

 


 


EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (this “Amendment No. 1”) amends the Quarterly Report on Form 10-Q of Altra Industrial Motion Corp. for the three and nine months ended September 30, 2018, as filed by the registrant on November 7, 2018 (the “Original Filing”).The sole purpose of this Amendment No. 1 is to correct Item 6 that inadvertently omitted certain exhibit descriptions as part of the Edgarization process. No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

 


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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

Item 3.

 

Defaults Upon Senior Securities

 

43

Item 4.

 

Mine Safety Disclosures

 

43

Item 5.

 

Other Information

 

43

Item 6.

 

Exhibits

 

44

 

 

 

 

SIGNATURES

 

46

 

 

 

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,097

 

 

$

51,994

 

Trade receivables, less allowance for doubtful accounts of $4,545 and $4,542 at

   September 30, 2018 and December 31, 2017, respectively

 

 

139,863

 

 

 

135,499

 

Inventories

 

 

157,049

 

 

 

145,611

 

Income tax receivable

 

 

1,548

 

 

 

6,634

 

Prepaid expenses and other current assets

 

 

21,215

 

 

 

17,344

 

Assets held for sale

 

 

696

 

 

 

1,081

 

Total current assets

 

 

370,468

 

 

 

358,163

 

Property, plant and equipment, net

 

 

187,800

 

 

 

191,918

 

Intangible assets, net

 

 

148,389

 

 

 

159,613

 

Goodwill

 

 

202,114

 

 

 

206,040

 

Deferred income taxes

 

 

1,542

 

 

 

2,608

 

Other non-current assets, net

 

 

2,256

 

 

 

2,315

 

Total assets

 

$

912,569

 

 

$

920,657

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

61,466

 

 

$

68,014

 

Accrued payroll

 

 

31,139

 

 

 

32,091

 

Accruals and other current liabilities

 

 

53,169

 

 

 

32,921

 

Income tax payable

 

 

11,115

 

 

 

9,082

 

Current portion of long-term debt

 

 

1,306

 

 

 

384

 

Total current liabilities

 

 

158,195

 

 

 

142,492

 

Long-term debt - less current portion

 

 

255,161

 

 

 

275,587

 

Deferred income taxes

 

 

49,929

 

 

 

52,250

 

Pension liabilities

 

 

24,520

 

 

 

25,038

 

Long-term taxes payable

 

 

5,418

 

 

 

6,322

 

Other long-term liabilities

 

 

2,186

 

 

 

22,263

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value per share, 90,000,000 shares authorized, 29,167,951, and 29,058,117 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

29

 

 

 

29

 

Additional paid-in capital

 

 

224,316

 

 

 

223,336

 

Retained earnings

 

 

248,534

 

 

 

223,204

 

Accumulated other comprehensive loss

 

 

(55,719

)

 

 

(49,864

)

Total stockholders’ equity

 

 

417,160

 

 

 

396,705

 

Total liabilities, and stockholders’ equity

 

$

912,569

 

 

$

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

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net sales

$

228,483

 

 

$

214,623

 

 

$

706,191

 

 

$

653,415

 

Cost of sales

 

156,543

 

 

 

145,610

 

 

 

481,770

 

 

 

446,109

 

Gross profit

 

71,940

 

 

 

69,013

 

 

 

224,421

 

 

 

207,306

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

44,860

 

 

 

41,009

 

 

 

135,372

 

 

 

123,012

 

Research and development expenses

 

5,733

 

 

 

6,051

 

 

 

18,464

 

 

 

18,434

 

Restructuring and consolidation costs

 

610

 

 

 

680

 

 

 

2,119

 

 

 

3,776

 

 

 

51,203

 

 

 

47,740

 

 

 

155,955

 

 

 

145,222

 

Income from operations

 

20,737

 

 

 

21,273

 

 

 

68,466

 

 

 

62,084

 

Other non-operating income and expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on settlement of pension plan

 

 

 

 

 

 

 

5,086

 

 

 

 

Interest expense, net

 

1,958

 

 

 

1,811

 

 

 

5,857

 

 

 

5,547

 

Other non-operating expense/(income), net

 

644

 

 

 

696

 

 

 

216

 

 

 

30

 

Loss on extinguishment of convertible debt

 

 

 

 

 

 

 

 

 

 

1,797

 

 

 

2,602

 

 

 

2,507

 

 

 

11,159

 

 

 

7,374

 

Income before income taxes

 

18,135

 

 

 

18,766

 

 

 

57,307

 

 

 

54,710

 

Provision for income taxes

 

5,822

 

 

 

5,489

 

 

 

16,986

 

 

 

15,723

 

Net income

$

12,313

 

 

$

13,277

 

 

$

40,321

 

 

$

38,987

 

Weighted average shares, basic

 

29,010

 

 

 

29,008

 

 

 

29,101

 

 

 

28,912

 

Weighted average shares, diluted

 

29,049

 

 

 

29,074

 

 

 

29,178

 

 

 

29,001

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income

$

0.42

 

 

$

0.46

 

 

$

1.39

 

 

$

1.35

 

Diluted net income

$

0.42

 

 

$

0.46

 

 

$

1.38

 

 

$

1.34

 

Cash dividend declared

$

0.17

 

 

$

0.17

 

 

$

0.51

 

 

$

0.49

 

 

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

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net Income

$

12,313

 

 

$

13,277

 

 

$

40,321

 

 

$

38,987

 

Other Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,652

)

 

 

6,673

 

 

 

(11,170

)

 

 

21,157

 

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

 

 

 

 

 

 

 

3,815

 

 

 

 

Change in defined benefit pension plans, net of tax

 

 

 

 

65

 

 

 

577

 

 

 

(232

)

Change in fair value of derivative financial instruments

 

(155

)

 

 

(331

)

 

 

923

 

 

 

326

 

Other comprehensive income:

 

(2,807

)

 

 

6,407

 

 

 

(5,855

)

 

 

21,251

 

Comprehensive income

$

9,506

 

 

$

19,684

 

 

$

34,466

 

 

$

60,238

 

 

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

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

40,321

 

 

$

38,987

 

Adjustments to reconcile net income to net operating cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

20,735

 

 

 

19,764

 

Amortization of intangible assets

 

 

7,296

 

 

 

7,139

 

Amortization of deferred financing costs

 

 

449

 

 

 

449

 

Loss on foreign currency, net

 

 

204

 

 

 

241

 

Loss on settlement of pension plan

 

 

5,086

 

 

 

 

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

 

 

293

 

 

 

(36

)

Loss on extinguishment of debt

 

 

 

 

 

1,797

 

Stock based compensation

 

 

3,830

 

 

 

4,543

 

Amortization of inventory fair value adjustment

 

 

 

 

 

2,347

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(7,550

)

 

 

(9,701

)

Inventories

 

 

(13,828

)

 

 

(9,478

)

Accounts payable and accrued liabilities

 

 

7,129

 

 

 

(8,799

)

Other current assets and liabilities

 

 

(4,256

)

 

 

(2,392

)

Other operating assets and liabilities

 

 

(730

)

 

 

(1,572

)

Net cash provided by operating activities

 

 

58,979

 

 

 

43,289

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(21,129

)

 

 

(23,261

)

Working capital settlement from prior year acquisitions

 

 

 

 

 

2,883

 

Proceeds from sale of Altra Industrial Motion (Changzhou) Co. Ltd.

 

 

 

 

 

3,221

 

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

 

 

(2,663

)

 

 

 

Net cash used in investing activities

 

 

(23,792

)

 

 

(17,157

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on 2015 Revolving Credit Facility

 

 

(36,673

)

 

 

(39,036

)

Dividend payments

 

 

(14,964

)

 

 

(13,256

)

Borrowing under 2015 Revolving Credit Facility

 

 

19,000

 

 

 

7,000

 

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

 

 

(1,132

)

 

 

(913

)

Cash paid to redeem Convertible Notes

 

 

 

 

 

(954

)

Shares surrendered for tax withholding

 

 

(2,848

)

 

 

(2,089

)

Net cash used in financing activities

 

 

(36,617

)

 

 

(49,248

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(467

)

 

 

7,149

 

Net change in cash and cash equivalents

 

 

(1,897

)

 

 

(15,967

)

Cash and cash equivalents at beginning of year

 

 

51,994

 

 

 

69,118

 

Cash and cash equivalents at end of period

 

$

50,097

 

 

$

53,151

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

6,257

 

 

$

5,413

 

Income taxes

 

 

11,388

 

 

 

18,505

 

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, 2018

 

$

29

 

 

 

29,058

 

 

$

223,336

 

 

$

223,204

 

 

$

(49,864

)

 

$

396,705

 

Stock-based compensation and vesting of restricted stock

 

 

 

 

 

110

 

 

 

980

 

 

 

 

 

 

 

 

 

980

 

Net income

 

 

 

 

 

 

 

 

 

 

 

40,321

 

 

 

 

 

 

40,321

 

Dividends declared, $0.51 per share

 

 

 

 

 

 

 

 

 

 

 

(14,991

)

 

 

 

 

 

(14,991

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

923

 

 

 

923

 

Minimum Pension adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,392

 

 

 

4,392

 

Cumulative foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,170

)

 

 

(11,170

)

Balance at September 30, 2018

 

$

29

 

 

 

29,168

 

 

$

224,316

 

 

$

248,534

 

 

$

(55,719

)

 

$

417,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

$

29

 

 

 

29,108

 

 

$

224,526

 

 

$

241,249

 

 

$

(52,912

)

 

$

412,892

 

Stock-based compensation and vesting of restricted stock

 

 

 

 

 

60

 

 

 

(210

)

 

 

 

 

 

 

 

 

(210

)

Net income

 

 

 

 

 

 

 

 

 

 

 

12,313

 

 

 

 

 

 

12,313

 

Dividends declared, $0.17 per share

 

 

 

 

 

 

 

 

 

 

 

(5,028

)

 

 

 

 

 

(5,028

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(155

)

 

 

(155

)

Cumulative foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,652

)

 

 

(2,652

)

Balance at September 30, 2018

 

$

29

 

 

 

29,168

 

 

$

224,316

 

 

$

248,534

 

 

$

(55,719

)

 

$

417,160

 

 

Balance at January 1, 2017

 

$

27

 

 

 

27,206

 

 

$

168,299

 

 

$

191,108

 

 

$

(76,086

)

 

$

283,348

 

Stock-based compensation and vesting of restricted stock

 

 

 

 

 

100

 

 

 

2,457

 

 

 

 

 

 

 

 

 

2,457

 

Net income

 

 

 

 

 

 

 

 

 

 

 

38,987

 

 

 

 

 

 

38,987

 

Conversion of convertible debt

 

 

2

 

 

 

1,748

 

 

 

51,849

 

 

 

 

 

 

 

 

 

51,851

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(14,329

)

 

 

 

 

 

(14,329

)

Changes in Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,251

 

 

 

21,251

 

Balance at September 30, 2017

 

$

29

 

 

 

29,054

 

 

$

222,605

 

 

$

215,766

 

 

$

(54,835

)

 

$

383,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

 

$

29

 

 

 

28,996

 

 

$

222,913

 

 

$

207,439

 

 

$

(61,602

)

 

$

368,779

 

Stock-based compensation and vesting of restricted stock

 

 

 

 

 

58

 

 

 

(308

)

 

 

 

 

 

 

 

 

(308

)

Net income

 

 

 

 

 

 

 

 

 

 

 

13,277

 

 

 

 

 

 

13,277

 

Dividends declared, $0.17 per share

 

 

 

 

 

 

 

 

 

 

 

(4,950

)

 

 

 

 

 

(4,950

)

Changes in Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,767

 

 

 

6,767

 

Balance at September 30, 2017

 

$

29

 

 

$

29,054

 

 

$

222,605

 

 

$

215,766

 

 

$

(54,835

)

 

$

383,565

 

 

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”, “Altra”, “we”, or “our”) is a premier industrial manufacturer of highly engineered power transmission, motion control and engine braking systems and components. Altra’s portfolio consists of 27 well-respected brands including Bauer Gear Motor, Boston Gear, Jacobs Vehicle Systems, Kollmorgen, Portescap, Stromag, Svendborg Brakes, TB Wood’s, Thomson, and Warner Electric. Altra has approximately 9,300 employees and over 50 production facilities in sixteen countries around the world.

 

 

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 September 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 and amounts deferred in other comprehensive income 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”), which will require, among other items, lessees to recognize a right-of-use asset and lease liability for most leases. The standard also requires lessees and lessors to disclose the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for periods beginning after January 1, 2019, (with early adoption permitted), and it also provides for certain practical expedients that we plan to elect. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provides an additional transition method that allows the initial application of the lease standard at the adoption date using a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  The Company will adopt this standard as of January 1, 2019 utilizing the new transition

6


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

method.  We are in the process of assessing the impact of the standard and designing related internal control procedures. Based on our efforts to date, we expect to recognize a significant lease obligation upon adoption.

Recently Adopted Accounting Standards

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

 

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 September 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 nine months ended September 30, 2017. The financial statements for the nine months ended September 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

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 & 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

Year to Date Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Couplings, Clutches & Brakes

 

$

118,662

 

 

$

110,109

 

 

$

361,569

 

 

$

327,310

 

Electromagnetic Clutches & Brakes

 

 

57,915

 

 

 

58,304

 

 

 

192,158

 

 

 

187,463

 

Gearing

 

 

54,198

 

 

 

48,368

 

 

 

159,650

 

 

 

144,545

 

Inter-segment eliminations

 

 

(2,292

)

 

 

(2,158

)

 

 

(7,186

)

 

 

(5,903

)

Net sales

 

$

228,483

 

 

$

214,623

 

 

$

706,191

 

 

$

653,415

 

 

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

 

 

 

Net Sales

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

North America (primarily U.S.)

 

$

115,133

 

 

$

101,569

 

 

$

359,849

 

 

$

331,945

 

Europe

 

 

90,015

 

 

 

87,866

 

 

 

274,805

 

 

 

256,142

 

Asia and other

 

 

23,335

 

 

 

25,188

 

 

 

71,537

 

 

 

65,328

 

Total

 

$

228,483

 

 

$

214,623

 

 

$

706,191

 

 

$

653,415

 

 

 

 

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

8


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

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 be free from defects in material and workmanship for twelve months from the date of shipment. The Company’s liability typically is limited to either the repair 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 will separately offer extended warranty and service policies to its customers. These policies typically are for periods ranging from one to five 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 are 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 - September 30, 2018

 

 

4,167

 

 

 

139,863

 

Increase/(Decrease)

 

$

1,978

 

 

$

4,364

 

 

The amount of revenue recognized in the year to date period ended September 30, 2018 that were included in deferred revenue was $4.2 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.