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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  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 HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction
of incorporation or organization)
  61-1478870
(I.R.S. Employer
Identification No.)
300 Granite Street, Suite 201 Braintree, MA
(Address of principal executive offices)
  02184
(Zip Code)
 
Registrant’s telephone number, including area code:
 
(781) 917-0600
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.001 par value   NASDAQ Global Market
 
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes þ     No o
 
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 þ     No o
 
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 o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based on the closing price (as reported by NASDAQ) of such common stock on the last business day of the registrant’s most recently completed second fiscal quarter (June 27, 2009) was approximately $109.1 million.
 
As of March 1, 2010, there were 26,825,601 shares of Common Stock, $.001 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the following document are incorporated herein by reference into the Part of the Form 10-K indicated.
 
     
    Part of Form 10-K into
Document
 
which Incorporated
 
Altra Holdings, Inc. Proxy Statement
for the 2010 Annual Meeting of Stockholders
  Part III
 


 

 
TABLE OF CONTENTS
 
             
        Page
 
           
  Business     3  
  Risk Factors     16  
  Unresolved Staff Comments     25  
  Properties     26  
  Legal Proceedings     27  
  Removed and Reserved     27  
           
PART II            
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     27  
  Selected Financial Data     30  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
  Quantitative and Qualitative Disclosures About Market Risk     49  
  Financial Statements and Supplementary Data     51  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     93  
  Controls and Procedures     93  
  Other Information     93  
           
PART III            
  Directors, Executive Officers and Corporate Governance     95  
  Executive Compensation     95  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     95  
  Certain Relationships and Related Transactions, and Director Independence     95  
  Principal Accounting Fees and Services     95  
           
PART IV            
  Exhibits, Financial Statement Schedules     95  
 EX-10.13
 EX-10.14
 EX-10.15
 EX-10.16
 EX-10.17
 EX-10.18
 EX-10.19
 EX-10.20
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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Item 1.   Business
 
Our Company
 
Altra Holdings, Inc. is the parent company of Altra Industrial Motion, Inc., (“Altra Industrial”), and owns 100% of Altra Industrial’s outstanding capital stock. Altra Industrial, directly or indirectly, owns 100% of the capital stock of its 48 subsidiaries. The following chart illustrates a summary of our corporate structure:
 
(CHART)
 
We are a leading global designer, producer and marketer of a wide range of mechanical power transmission, or MPT, and motion control products serving customers in a diverse group of industries, including energy, general industrial, material handling, mining, transportation, and turf and garden. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, belted drives, couplings, engineered bearing assemblies, linear components, electronic drives and other related products. Our products are used in a wide variety of high-volume manufacturing processes, where the reliability and accuracy of our products are critical in both avoiding costly down time and enhancing the overall efficiency of manufacturing operations. Our products are also used in non-manufacturing applications where product quality and reliability are especially critical, such as clutches and brakes for elevators and residential and commercial lawnmowers. For the year ended December 31, 2009, we had net sales of $452.8 million and a net loss of $2.3 million.
 
We market our products under well recognized and established brands, many of which have been in existence for over 50 years. We believe many of our brands, when taken together with our brands in the same product category have achieved the number one or number two position in terms of consolidated market share and brand awareness in their respective product categories. Our products are either incorporated into products sold by original equipment manufacturers, or OEMs, sold to end users directly or sold through industrial distributors.
 
We are led by a highly experienced management team that has established a proven track record of execution, successfully completing and integrating major strategic acquisitions and delivering significant growth in both revenue and profits. We employ a comprehensive business process called the Altra Business System, or ABS, which focuses on eliminating inefficiencies from every business process to improve quality, delivery and cost.
 
Unless the context requires otherwise, in this Annual Report on Form 10-K, the terms “Altra Holdings,” “the Company,” “we,” “us” and “our” refer to Altra Holdings, Inc. and its subsidiaries, except where the context otherwise requires or indicates.


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We file reports and other documents with the Securities and Exchange Commission. You may read and copy documents we file at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC Filings are also available to you on the SEC’s internet site at http://www.sec.gov.
 
Our internet address is www.altramotion.com. By following the link “Investor Relations” and then “SEC filings” on our Internet website, we make available, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “ExchangeAct”) as soon as reasonably practicable after such forms are filed with or furnished to the SEC. We are not including information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
 
History and Acquisitions
 
Although we were incorporated in Delaware in 2004, much of our current business has its roots with the prior acquisition by Colfax Corporation, or Colfax, of the MPT group of Zurn Technologies, Inc. in December 1996. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax’s acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber and Wichita Clutch brands. Colfax formed Power Transmission Holding, LLC or “PTH” in June 2004 to serve as a holding company for all of these power transmission businesses. Boston Gear was established in 1877, Warner Electric, Inc. in 1927, and Wichita Clutch in 1949.
 
On November 30, 2004, we acquired our original core business through the acquisition of PTH from Colfax. We refer to this transaction as the PTH Acquisition.
 
On October 22, 2004, The Kilian Company, or Kilian, a company formed at the direction of Genstar Capital, the largest stockholder of Altra Holdings, acquired Kilian Manufacturing Corporation from Timken U.S. Corporation. At the completion of the PTH Acquisition, (i) all of the outstanding shares of Kilian capital stock were exchanged for shares of our capital stock and Kilian and its subsidiaries were transferred to Altra Industrial.
 
On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Ltd, or Hay Hall. Hay Hall was a UK-based holding company established in 1996 that was focused primarily on the manufacture of couplings and clutch brakes. Hay Hall consisted of five main businesses that were niche focused and had strong brand names and established reputations within their primary markets.
 
Through Hay Hall, we acquired 15 strong brands in complementary product lines, improved customer leverage and expanded geographic presence in over 11 countries. Hay Hall’s product offerings diversified our revenue base and strengthened our key product areas, such as electric clutches, brakes and couplings. Matrix International, Inertia Dynamics and Twiflex, three Hay Hall businesses, combined with Warner Electric, Wichita Clutch, Formsprag Clutch and Stieber, make the consolidated company one of the largest individual manufacturers of industrial clutches and brakes in the world.
 
On May 18, 2006, we acquired substantially all of the assets of Bear Linear Inc, or Warner Linear. Warner Linear manufactures high value-added linear actuators which are electromechanical power transmission devices designed to move and position loads linearly for mobile off-highway and industrial applications. Warner Linear’s product design and engineering expertise, coupled with our sourcing alliance with a low cost country manufacturer, were critical components in our strategic expansion into the motion control market.
 
On April 5, 2007, the Company acquired all of the outstanding shares of TB Wood’s Corporation, or TB Wood’s. TB Wood’s is an established designer, manufacturer and marketer of mechanical and electronic industrial power transmission products.
 
On October 5, 2007, we acquired substantially all of the assets of All Power Transmission Manufacturing, Inc., or All Power.


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Divestitures
 
On December 31, 2007, we sold the TB Wood’s adjustable speed drives business or Electronics Division to Vacon, Inc. for $29.0 million. We sold the Electronics Division in order to continue our strategic focus on our core electro-mechanical power transmission business.
 
Initial Public Offering
 
In December 2006, the Company completed an initial public offering. The Company offered 3,333,334 of its own shares of common stock, $0.001 par value per share. In addition selling stockholders offered 6,666,666 shares of common stock. Proceeds to the Company after the underwriting discount were $41.9 million.
 
Secondary Public Offering
 
In June 2007, we completed a secondary public offering of 12,650,000 shares of our common stock, which included 1,650,000 sold as a result of the underwriters’ exercise of their overallotment option in full at closing. We received proceeds of $48.9 million, net of issuance costs. In the offering, we sold 3,178,494 shares of common stock and certain selling stockholders sold 9,471,506 shares of common stock.
 
Our Industry
 
Based on industry data supplied by Penton Information Services, we estimate that industrial power transmission products generated sales in the United States of approximately $27 billion in 2009. These products are used to generate, transmit, control and transform mechanical energy. The industrial power transmission industry can be divided into three areas: mechanical power transmission, or MPT products; motors and generators; and adjustable speed drives. We compete primarily in the MPT area which, based on industry data, we estimate was a $12.8 billion market in the United States in 2009.
 
The global MPT market is highly fragmented, with over 1,000 small manufacturers. While smaller companies tend to focus on regional niche markets with narrow product lines, larger companies that generate annual sales of over $100 million generally offer a much broader range of products and have global capabilities. The industry’s customer base is broadly diversified across many sectors of the economy and typically places a premium on factors such as quality, reliability, availability and design and application engineering support. We believe the most successful industry participants are those that leverage their distribution network, their products’ reputations for quality and reliability and their service and technical support capabilities to maintain attractive margins on products and gain market share.
 
Our Strengths
 
Leading Market Shares and Brand Names.  We believe we hold the number one or number two market position in key products across many of our core platforms. We believe that over 50% of our sales from continuing operations are derived from products where we hold the number one or number two share and brand recognition, on a consolidated basis with our brands in the same product category, in the markets we serve. In addition, we have recently captured additional market share in several product lines due to our innovative product development efforts and exceptional customer service.
 
Customized, Engineered Products Serving Niche Markets.  We employ approximately 150 non-manufacturing engineers involved with product design, research and development, testing and technical customer support, and we often participate in lengthy design and qualification processes with our customers. Many of our product lines involve a large number of unique parts, are delivered in small order quantities with short lead times, and require varying levels of technical support and responsive customer service. As a result of these characteristics, as well as the essential nature of our products to the efficient operations of our customers, we generate a significant amount of recurring sales with repeat customers.
 
Significant Operating Leverage Driven by Disciplined Cost Reductions.  We have implemented a successful strategy to manage cost through the cycle with demonstrable results. Our disciplined cost saving


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initiatives have included workforce and payroll reductions, facility consolidations, and procurement savings. We estimate that we have realized net savings of approximately $59.0 million through December 2009. We estimate that, once volume returns to prior year levels, between $10.0 and $12.0 million of these savings will be permanent in nature, creating significant operating leverage and improving our cost position.
 
Aftermarket Sales Supported by Large Installed Base.  With a history dating back to 1857 with the formation of TB Wood’s, we believe we benefit from one of the largest installed customer bases in the industry. The moving, wearing nature of our products necessitates regular replacement and our large installed base of products generates significant aftermarket replacement demand. This has created a recurring revenue stream from a diversified group of end-user customers. For 2009, we estimate that approximately 41% of our revenues were derived from aftermarket sales.
 
Diversified End Markets.  Our revenue base has a balanced exposure across a diverse mix of end-user industries, including energy, food processing, general industrial, material handling, mining, transportation, and turf and garden. We believe our diversified end markets insulate us from volatility in any single industry or type of end-user. In 2009, no single industry represented more than 9% of our total sales. In addition, we are geographically diversified with approximately 31% of our sales coming from outside North America during 2009.
 
Strong Relationships with Distributors and OEMs.  We have over 1,000 direct OEM customers and enjoy established, long-term relationships with the leading industrial MPT distributors, critical factors that contribute to our high base of recurring aftermarket revenues. We sell our products through more than 3,000 distributor outlets worldwide. We believe our scale, expansive product lines and end-user preference for our products make our product portfolio attractive to both large and multi-branch distributors, as well as regional and independent distributors in our industry.
 
Experienced, High-Caliber Management Team.  We are led by a highly experienced management team with over 250 years of cumulative industrial business experience and an average of 13 years with our companies. Our CEO, Carl Christenson, has over 28 years of experience in the MPT industry, while our CFO, Christian Storch, has approximately 22 years of experience. Our management team has established a proven track record of execution, successfully completing and integrating major strategic acquisitions and delivering significant growth and profitability.
 
The Altra Business System.  We benefit from an established culture of lean management emphasizing quality, delivery and cost through the ABS. ABS is at the core of our performance-driven culture and drives both our strategic development and operational improvements. We continually evaluate every aspect of our business to identify productivity improvements and cost savings.
 
Our Business Strategy
 
Our long-term strategy is to increase our sales through organic growth, expand our geographic reach and product offerings through strategic acquisitions and improve our profitability through cost reduction initiatives. In the near term, we are focused on cost reduction measures and working capital improvements. We seek to achieve these objectives through the following strategies:
 
Leverage Our Sales and Distribution Network.  We intend to continue to leverage our established, long-term relationships with the industry’s leading national and regional distributors to help maintain and grow our revenues. We seek to capitalize on customer brand preferences for our products to generate pull-through aftermarket demand from our distribution channel. We believe this strategy also allows our distributors to achieve higher profit margins, further enhancing our preferred position with them.
 
Focus our Strategic Marketing on New Growth Opportunities.  We intend to expand our emphasis on strategic marketing to focus on new growth opportunities in key end-user and OEM markets. Through a systematic process that leverages our core brands and products, we seek to identify attractive markets and product niches, collect customer and market data, identify market drivers, tailor product and service solutions to specific market and customer requirements, and deploy resources to gain market share and drive future sales growth.


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Accelerate New Product and Technology Development.  We focus on aggressively developing new products across our business in response to customer needs in various markets. Our extensive application-engineering know-how drives both new and repeat sales and we have an established history of innovation with over 250 granted patents and pending patent applications worldwide. In total, new products developed by us during the past three years generated approximately $58 million in revenues during 2009.
 
Capitalize on Growth and Sourcing Opportunities in the Asia-Pacific Market.  We intend to leverage our established sales offices in the Asia Pacific region and expand into regions where we currently do not have sales representation. We also intend to expand our manufacturing presence in Asia beyond our current plant in Shenzhen, China. During 2009, we sourced approximately 25% of our purchases from low-cost countries, resulting in average cost reductions of approximately 38% for these products. Within the next five years, we intend to utilize our sourcing office in Shanghai to significantly increase our current level of low-cost country sourced purchases. We may also consider additional opportunities to outsource some of our production from North American and Western European locations to Asia or lower cost regions.
 
Continue to Improve Operational and Manufacturing Efficiencies through ABS.  We believe we can continue to improve profitability through cost control, overhead rationalization, global process optimization, continued implementation of lean manufacturing techniques and strategic pricing initiatives. Our operating plan, based on manufacturing centers of excellence, provides additional opportunities to consolidate purchasing processes and reduce costs by sharing best practices across geographies and business lines.
 
Continue to Focus on Cost-Reduction Initiatives.  We intend to generate significant operating leverage by continuing to manage our business through the economic cycle. We continue to effect measures to reduce costs, including the timely implementation of workforce reduction and payroll savings initiatives, engaging the entire organization in pursuing procurement savings and other cost initiatives, and executing as many as six plant consolidations through mid-2010. As a result of these initiatives, at current volume levels, we have generated an estimated net annualized savings of approximately $76.5 million, $10.0 to $12.0 million of which we expect to be permanent in nature once volume returns to prior year levels. We expect these cost reductions will provide a competitive advantage as the industry rebounds.
 
Selectively Pursue Strategic Acquisitions that Complement Our Strong Platform.  While we have a successful track record of identifying, acquiring and integrating acquisitions, our current focus remains centered on cash generation and preservation. However, we believe that in the future there may be a number of attractive potential acquisition candidates, in part due to the fragmented nature of the industry. We plan to continue our disciplined pursuit of strategic acquisitions to strengthen our product portfolio, enhance our industry leadership, leverage fixed costs, expand our global footprint, and create value in products and markets that we know and understand.
 
Products
 
We produce and market a wide variety of mechanical power transmission, or MPT products. Our product portfolio includes industrial clutches and brakes, open and enclosed gearing, couplings, engineered belted drives, engineered bearing assemblies and other related power transmission components which are sold across a wide variety of industries. Our products benefit from our industry leading brand names including Warner Electric, Boston Gear, TB Wood’s, Kilian, Nuttall Gear, Ameridrives, Wichita Clutch, Formsprag Clutch, Bibby Transmissions, Stieber, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Huco Dynatork, Marland Clutch, Delroyd, and Warner Linear. Our products serve a wide variety of end markets including aerospace, energy, food processing, general industrial, material handling, mining, petrochemical, transportation and turf and garden. We primarily sell our products to OEMs and through long-standing relationships with the industry’s leading industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger. The following discussion of our products does not include detailed product category revenue because such information is not individually tracked by our financial reporting system and is not separately reported by our general purpose financial statements. Conducting a detailed product revenue internal assessment and audit would involve unreasonable effort and expense as revenue


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information by product line is not available. We maintain sales information by operating facility, but do not maintain any accounting sales data by product line.
 
Our products, principal brands and markets and sample applications are set forth below:
 
             
Products
  Principal Brands   Principal Markets   Sample Applications
 
Clutches and Brakes
  Warner Electric, Wichita Clutch, Formsprag Clutch, Stieber Clutch, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Marland Clutch   Aerospace, energy, material handling, metals, turf and garden, mining   Elevators, forklifts, lawn mowers, oil well draw works, punch presses, conveyors
Gearing
  Boston Gear, Nuttall Gear, Delroyd   Food processing, material handling, metals, transportation   Conveyors, ethanol mixers, packaging machinery, metal processing equipment
Engineered Couplings
  Ameridrives, Bibby Transmissions, TB Wood’s   Energy, metals, plastics, chemical   Extruders, turbines, steel strip mills, pumps
Engineered Bearing Assemblies   Kilian   Aerospace, material handling, transportation   Cargo rollers, seat storage systems, conveyors
Power Transmission Components   Warner Electric, Boston Gear, Huco Dynatork, Warner Linear, Matrix, Saftek, TB Wood’s   Material handling, metals, turf and garden   Conveyors, lawn mowers, machine tools
Engineered Belted Drives   TB Wood’s   Aggregate, HVAC, material handling   Pumps, sand and gravel conveyors, industrial fans
 
Our products are used in a wide variety of high-volume manufacturing processes, where the reliability and accuracy of our products are critical in both avoiding costly down time and enhancing the overall efficiency of manufacturing operations. Our products are also used in non-manufacturing applications where product quality and reliability are especially critical, such as clutches and brakes for elevators and residential and commercial lawnmowers.
 
Clutches and Brakes.  Clutches are devices which use mechanical, magnetic, 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. We manufacture a variety of clutches and brakes in three main product categories: electromagnetic, overrunning and heavy duty. Our core clutch and brake manufacturing facilities are located in Connecticut, Indiana, Illinois, Michigan, Texas, the United Kingdom, Germany, France and China.
 
  •       Electromagnetic Clutches and Brakes.  Our industrial products include clutches and brakes with specially designed controls for material handling, forklift, elevator, medical mobility, mobile off-highway, baggage handling and plant productivity applications. We also offer a line of clutch and brake products for walk-behind mowers, residential lawn tractors and commercial mowers. While industrial applications are predominant, we also manufacture several vehicular niche applications including on-road refrigeration compressor clutches and agricultural equipment clutches. We market our electromagnetic products under the Warner Electric, Inertia Dynamics and Matrix brand names.


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  •       Overrunning Clutches.  Specific product lines include indexing and backstopping clutches. Primary industrial applications include conveyors, gear reducers, hoists and cranes, mining machinery, machine tools, paper machinery, packaging machinery, pumping equipment and other specialty machinery. We market and sell these products under the Formsprag, Marland and Stieber brand names.
 
  •       Heavy Duty Clutches and Brakes.  Our heavy duty clutch and brake product lines serve various markets including metal forming, off-shore and land-based oil and gas drilling platforms, mining, material handling, marine applications and various off-highway and construction equipment segments. Our line of heavy duty pneumatic, hydraulic and caliper clutches and brakes are marketed under the Wichita Clutch and Twiflex brand names.
 
Gearing.  Gears reduce the output speed and increase the torque of an electric motor or engine to the level required to drive a particular piece of equipment. These products are used in various industrial, material handling, mixing, transportation and food processing applications. Specific product lines include vertical and horizontal gear drives, speed reducers and increasers, high-speed compressor drives, enclosed custom gear drives, various enclosed gear drive configurations and open gearing products such as spur, helical, worm and miter/bevel gears. We design and manufacture a broad range of gearing products under the Boston Gear, Nuttall Gear and Delroyd brand names. We manufacture our gearing products at our facilities in New York and North Carolina and sell to a variety of end markets.
 
Engineered Couplings.  Couplings are the interface between two shafts, which enable power to be transmitted from one shaft to the other. Because shafts are often misaligned, we designed our couplings with a measure of flexibility that accommodates various degrees of misalignment. Our coupling product line includes gear couplings, high-speed disc and diaphragm couplings, elastomeric couplings, grid couplings, universal joints, jaw couplings and spindles. Our coupling products are used in a wide range of markets including power generation, steel and custom machinery industries. We manufacture a broad range of coupling products under the Ameridrives, Bibby and TB Wood’s brand names. Our engineered couplings are manufactured in our facilities in Mexico, Michigan, Pennsylvania, Texas, the United Kingdom and Wisconsin.
 
Engineered Bearing Assemblies.  Bearings are components that support, guide and reduce friction of motion between fixed and moving machine parts. Our engineered bearing assembly product line includes ball bearings, roller bearings, thrust bearings, track rollers, stainless steel bearings, polymer assemblies, housed units and custom assemblies. We manufacture a broad range of engineered bearing products under the Kilian brand name. We sell bearing products to a wide range of end markets, including the general industrial and automotive markets, with a particularly strong OEM customer focus. We manufacture our bearing products at our facilities in New York, Canada and China.
 
Engineered Belted Drives.  Belted drives incorporate both a rubber-based belt and at least two sheaves or sprockets. Belted drives typically change the speed of an electric motor or engine to the level required for a particular piece of equipment. Our belted drive line includes three types of v-belts, three types of synchronous belts, standard and made-to-order sheaves and sprockets, and split taper bushings. We sell belted drives to a wide range of end markets, including aggregate, energy, chemical and material handling. Our engineered belted drives are primarily manufactured under the TB Wood’s brand in our facilities in Pennsylvania and Mexico.
 
Power Transmission Components.  Power transmission components are used in a number of industries to generate, transfer or control motion from a power source to an application requiring rotary or linear motion. Power transmission products are applicable in most industrial markets, including, but not limited to metals processing, turf and garden and material handling applications. Specific product lines include linear actuators, miniature and small precision couplings, air motors, friction materials, hydrostatic drives and other various items. We manufacture or market a broad array of power transmission components under several businesses including Warner Linear, Huco Dynatork, Boston Gear, Warner Electric, TB Wood’s and Matrix. Our core power transmission component manufacturing facilities are located in Illinois, Michigan, North Carolina, the United Kingdom and China.


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  •       Warner Linear.  Warner Linear is a designer and manufacturer of rugged service electromechanical linear actuators for off-highway vehicles, agriculture, turf care, special vehicles, medical equipment, industrial and marine applications.
 
  •       Huco Dynatork.  Huco Dynatork is a leading manufacturer and supplier of a complete range of precision couplings, universal joints, rod ends and linkages.
 
  •       Other Accessories.  Our Boston Gear, Warner Electric, Matrix and TB Wood’s businesses make or market several other accessories such as sensors, sleeve bearings, AC/DC motors, shaft accessories, face tooth couplings, mechanical variable speed drives, and fluid power components that are used in numerous end markets.
 
Research and Development and Product Engineering
 
We closely integrate new product development with marketing, manufacturing and product engineering in meeting the needs of our customers. We have product engineering teams that work to enhance our existing products and develop new product applications for our growing base of customers that require custom solutions. We believe these capabilities provide a significant competitive advantage in the development of high quality industrial power transmission products. Our product engineering teams focus on:
 
  •       lowering the cost of manufacturing our existing products;
 
  •       redesigning existing product lines to increase their efficiency or enhance their performance; and
 
  •       developing new product applications.
 
Our continued investment in new product development is intended to help drive customer growth as we address key customer needs.
 
Sales and Marketing
 
We sell our products in over 70 countries to over 1,000 direct OEM customers and over 3,000 distributor outlets. We offer our products through our direct sales force comprised of 100 company-employed sales associates as well as independent sales representatives. Our worldwide sales and distribution presence enables us to provide timely and responsive support and service to our customers, many of which operate globally, and to capitalize on growth opportunities in both developed and emerging markets around the world.
 
We employ an integrated sales and marketing strategy concentrated on both key industries and individual product lines. We believe this dual vertical market and horizontal product approach distinguishes us in the marketplace allowing us to quickly identify trends and customer growth opportunities and deploy resources accordingly. Within our key industries, we market to OEMs, encouraging them to incorporate our products into their equipment designs, to distributors and to end-users, helping to foster brand preference. With this strategy, we are able to leverage our industry experience and product breadth to sell MPT and motion control solutions for a host of industrial applications.
 
Distribution
 
Our MPT components are either incorporated into end products sold by OEMs or sold through industrial distributors as aftermarket products to end users and smaller OEMs. We operate a geographically diversified business. For the year ended December 31, 2009, we derived approximately 69% of our net sales from customers in North America, 22% from customers in Europe and 9% from customers in Asia and the rest of the world. Our global customer base is served by an extensive global sales network comprised of our sales staff as well as our network of over 3,000 distributor outlets.
 
Rather than serving as passive conduits for delivery of product, our industrial distributors are active participants in influencing product purchasing decisions in the MPT industry. In addition, distributors play a critical role through stocking inventory of our products, which affects the accessibility of our products to


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aftermarket buyers. It is for this reason that distributor partner relationships are so critical to the success of the business. We enjoy strong established relationships with the leading distributors as well as a broad, diversified base of specialty and regional distributors.
 
Competition
 
We operate in highly fragmented and very competitive markets within the MPT market. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, such as helical gear drives and some of our competitors are larger than us and have greater financial and other resources. In particular, we compete with Emerson Power Transmission Manufacturing LP, Rexnord LLC., Regal-Beloit Corporation and Baldor Electric, Inc.. In addition, with respect to certain of our products, we compete with divisions of our OEM customers. Competition in our business lines is based on a number of considerations including quality, reliability, pricing, availability and design and application engineering support. Our customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, regular investment in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection is required. We may have to adjust the prices of some of our products to stay competitive. In addition, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. There is substantial and continuing pressure on major OEMs and larger distributors to reduce costs, including the cost of products purchased from outside suppliers such as us. As a result of cost pressures from our customers, our ability to compete depends in part on our ability to generate production cost savings and, in turn, find reliable, cost-effective outside component suppliers or manufacturers for our products. See “Risk Factors — Risks Related to our Business — We operate in the highly competitive mechanical power transmission industry and if we are not able to compete successfully our business may be significantly harmed.”
 
Intellectual Property
 
We rely on a combination of patents, trademarks, copyright, and trade secret laws in the United States and other jurisdictions, as well as employee and third-party non-disclosure agreements, license arrangements, and domain name registrations to protect our intellectual property. We sell our products under a number of registered and unregistered trademarks, which we believe are widely recognized in the MPT industry. With the exception of Boston Gear, Warner Electric and TB Wood’s, we do not believe any single patent, trademark or trade name is material to our business as a whole. Any issued patents that cover our proprietary technology and any of our other intellectual property rights may not provide us with adequate protection or be commercially beneficial to us and, patents applied for, may not be issued. The issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our competitors could commercialize technologies or products which are substantially similar to ours.
 
With respect to proprietary know-how, we rely on trade secret laws in the United States and other jurisdictions and on confidentiality agreements. Monitoring the unauthorized use of our technology is difficult and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our intellectual property could harm our ability to protect our rights and our competitive position.
 
Some of our registered and unregistered trademarks include: Warner Electric, Boston Gear, TB Wood’s, Kilian, Nuttall Gear, Ameridrives, Wichita Clutch, Formsprag, Bibby Transmissions, Stieber, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Huco Dynatork, Marland, Delroyd, Warner Linear and Saftek.
 
Employees
 
As of December 31, 2009, we had 2,613 full-time employees, of whom approximately 63% were located in North America, 22% in Europe, and 15% in Asia. 11% of our full-time factory North American employees are represented by labor unions. In addition, approximately 37 employees or 57% of our employees


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in our facility in Scotland are represented by a labor union. Additionally, approximately 49 employees in the TB Wood’s production facilities in Mexico are unionized under collective bargaining agreements that are subject to annual renewals. We are a party to four U.S. collective bargaining agreements. Three of the agreements will expire on August 2010, June 2011, and September 2011, respectively. With respect to the fourth collective bargaining agreement, we have entered into a plant closing agreement with labor union employees at our South Beloit Manufacturing facility. We expect the facility to close in the first quarter of 2010.
 
One of the four U.S. collective bargaining agreements contains provisions for additional, potentially significant, lump-sum severance payments to all employees covered by that agreement who are terminated as the result of a plant closing and one of our collective bargaining agreements contains provisions restricting our ability to terminate or relocate operations. See “Risk Factors — Risks Related to Our Business — We may be subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, which could seriously impact our operations and the profitability of our business.”
 
Our European facilities have employees who are generally represented by local and national social works councils which are common in Europe. Social works councils meet with employer industry associations every two to three years to discuss employee wages and working conditions. Our facilities in France and Germany often participate in such discussions and adhere to any agreements reached.
 
Suppliers and Raw Materials
 
We obtain raw materials, component parts and supplies from a variety of sources, generally from more than one supplier. Our suppliers and sources of raw materials are based in both the United States and other countries and we believe that our sources of raw materials are adequate for our needs for the foreseeable future. We do not believe the loss of any one supplier would have a material adverse effect on our business or results of operations. Our principal raw materials are steel, castings and copper. We generally purchase our materials on the open market, where certain commodities such as steel and copper have fluctuated in price significantly in recent years. We have not experienced any significant shortage of our key materials and have not historically engaged in hedging transactions for commodity suppliers.
 
Seasonality
 
We experience seasonality in our turf and garden business, which in recent years has represented approximately 10% of our net sales. As our large OEM customers prepare for the spring season, our shipments generally start increasing in December, peak in February and March, and begin to decline in April and May. This allows our customers to have inventory in place for the peak consumer purchasing periods for turf and garden products. The June-through-November period is typically the low season for us and our customers in the turf and garden market. Seasonality is also affected by weather and the level of housing starts.
 
Regulation
 
We are subject to a variety of government laws and regulations that apply to companies engaged in international operations. These include compliance with the Foreign Corrupt Practices Act, U.S. Department of Commerce export controls, local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings). We maintain controls and procedures to comply with laws and regulations associated with our international operations. In the event we are unable to remain compliant with such laws and regulations, our business may be adversely affected.
 
Environmental and Health and Safety Matters
 
We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those governing health and safety requirements, the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and cleanup contaminated sites that are or were owned, leased, operated or used by us or our predecessors.


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Some of these laws and regulations require us to obtain permits, which contain terms and conditions that impose limitations on our ability to emit and discharge hazardous materials into the environment and periodically may be subject to modification, renewal and revocation by issuing authorities. Fines and penalties may be imposed for non-compliance with applicable environmental laws and regulations and the failure to have or to comply with the terms and conditions of required permits. From time to time, our operations may not be in full compliance with the terms and conditions of our permits. We periodically review our procedures and policies for compliance with environmental laws and requirements. We believe that our operations generally are in material compliance with applicable environmental laws and requirements and that any non-compliance would not be expected to result in us incurring material liability or cost to achieve compliance. Historically, the costs of achieving and maintaining compliance with environmental laws and requirements have not been material.
 
Certain environmental laws in the United States, such as the federal Superfund law and similar state laws, impose liability for the cost of investigation or remediation of contaminated sites upon the current or, in some cases, the former site owners or operators and upon parties who arranged for the disposal of wastes or transported or sent those wastes to an off-site facility for treatment or disposal, regardless of when the release of hazardous substances occurred or the lawfulness of the activities giving rise to the release. Such liability can be imposed without regard to fault and, under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. As a practical matter, however, the costs of investigation and remediation generally are allocated among the viable responsible parties on some form of equitable basis. Liability also may include damages to natural resources. We have not been notified that we are a potentially responsible party in connection with any sites we currently or formerly owned or operated or for liability at any off-site waste disposal facility.
 
However, there is contamination at some of our current facilities, primarily related to historical operations at those sites, for which we could be liable for the investigation and remediation under certain environmental laws. The potential for contamination also exists at other of our current or former sites, based on historical uses of those sites. We currently are not undertaking any remediation or investigations and our costs or liability in connection with potential contamination conditions at our facilities cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the environmental conditions or likely remedial requirements. Currently, other parties with contractual liability are addressing or have plans or obligations to address those contamination conditions that may pose a material risk to human health, safety or the environment. In addition, while we attempt to evaluate the risk of liability associated with our facilities at the time we acquire them, there may be environmental conditions currently unknown to us relating to our prior, existing or future sites or operations or those of predecessor companies whose liabilities we may have assumed or acquired which could have a material adverse effect on our business.
 
We are being indemnified, or expect to be indemnified by third parties subject to certain caps or limitations on the indemnification, for certain environmental costs and liabilities associated with certain owned or operated sites. Accordingly, based on the indemnification and the experience with similar sites of the environmental consultants who we have hired, we do not expect such costs and liabilities to have a material adverse effect on our business, operations or earnings. We cannot assure you, however, that those third parties will in fact satisfy their indemnification obligations. If those third parties become unable to, or otherwise do not, comply with their respective indemnity obligations, or if certain contamination or other liability for which we are obligated is not subject to these indemnities, we could become subject to significant liabilities.


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Executive Officers of Registrant
 
The following sets forth certain information with regard to our executive officers as of March 4, 2010 (ages are as of December 31, 2009):
 
Michael L. Hurt (age 64), P.E. has been our Executive Chairman since January 2009, Prior to his current position, Mr. Hurt served as Chief Executive Officer and a director since our formation in 2004. In November 2006, Mr. Hurt was elected as chairman of our board. During 2004, prior to our formation, Mr. Hurt provided consulting services to Genstar Capital and was appointed Chairman and Chief Executive Officer of Kilian in October 2004. From January 1991 to November 2003, Mr. Hurt was the President and Chief Executive Officer of TB Wood’s Incorporated, a manufacturer of industrial power transmission products. Prior to TB Wood’s, Mr. Hurt spent 23 years in a variety of management positions at the Torrington Company, a major manufacturer of bearings and a subsidiary of Ingersoll Rand. Mr. Hurt holds a B.S. degree in Mechanical Engineering from Clemson University and an M.B.A. from Clemson-Furman University.
 
Carl R. Christenson (age 50) has been our Chief Executive Officer since January 2009. Prior to his current position, Mr. Christenson served as our President and Chief Operating Officer from January 2005 to December 2008. From 2001 to 2005, Mr. Christenson was the President of Kaydon Bearings, a manufacturer of custom-engineered bearings and a division of Kaydon Corporation. Prior to joining Kaydon, Mr. Christenson held a number of management positions at TB Wood’s Incorporated and several positions at the Torrington Company. Mr. Christenson holds a M.S. and B.S. degree in Mechanical Engineering from the University of Massachusetts and an M.B.A. from Rensselaer Polytechnic.
 
Christian Storch (age 50) has been our Chief Financial Officer since December 2007. From 2001 to 2007, Mr. Storch was the Vice President and Chief Financial Officer at Standex International Corporation. Mr. Storch also served on the Board of Directors of Standex International from October 2004 to December 2007. Mr. Storch also served as Standex International’s Treasurer from 2003 to April 2006 and Manager of Corporate Audit and Assurance Services from July 1999 to 2003. Prior to Standex International, Mr. Storch was a Divisional Financial Director and Corporate Controller at Vossloh AG, a publicly held German transport technology company. Mr. Storch has also previously served as an Audit Manager with Deloitte & Touche, LLP. Mr. Storch holds a degree in business administration from the University of Passau, Germany.
 
Glenn Deegan (age 43) has been our Vice President, Legal and Human Resources, General Counsel and Secretary since June 2009. Prior to his current position, Mr. Deegan served as our General Counsel and Secretary since September 2008. From March 2007 to August 2008, Mr. Deegan served as Vice President, General Counsel and Secretary of Averion International Corp., a publicly held global provider of clinical research services. Prior to Averion, from June 2001 to March 2007, Mr. Deegan served as Director of Legal Affairs and then as Vice President, General Counsel and Secretary of MacroChem Corporation, a publicly held specialty pharmaceutical company. From 1999 to 2001, Mr. Deegan served as Assistant General Counsel of Summit Technology, Inc., a publicly held manufacturer of ophthalmic laser systems. Mr. Deegan previously spent over six years engaged in the private practice of law and also served as law clerk to the Honorable Francis J. Boyle in the United States District Court for the District of Rhode Island. Mr. Deegan holds a B.S. from Providence College and a J.D. from Boston College.
 
Gerald Ferris (age 60) has been our Vice President of Global Sales since May 2007 and held the same position with Power Transmission Holdings, LLC, our Predecessor, since March 2002. He is responsible for the worldwide sales of our broad product platform. Mr. Ferris joined our Predecessor in 1978 and since joining has held various positions. He became the Vice President of Sales for Boston Gear in 1991. Mr. Ferris holds a B.A. degree in Political Science from Stonehill College.
 
Todd B. Patriacca (age 40) has been our Vice President of Finance, Corporate Controller and Treasurer since February 2010. Prior to his current position, Mr. Patriacca served as our Vice


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President of Finance, Corporate Controller and Assistant Treasurer since October 2008 and previous to that, as Vice President of Finance and Corporate Controller since May 2007 and as Corporate Controller since May 2005. Prior to joining us, Mr. Patriacca was Corporate Finance Manager at MKS Instrument Inc., a semi-conductor equipment manufacturer since March 2002. Prior to MKS, Mr. Patriacca spent over ten years at Arthur Andersen LLP in the Assurance Advisory practice. Mr. Patriacca is a Certified Public Accountant and holds a B.A. in History from Colby College and an M.B.A. and an M.S. in Accounting from Northeastern University.
 
Craig Schuele (age 46) has been our Vice President of Marketing and Business Development since May 2007 and held the same position with our Predecessor since July 2004. Prior to his current position, Mr. Schuele has been Vice President of Marketing since March 2002, and previous to that he was a Director of Marketing. Mr. Schuele joined our Predecessor in 1986 and holds a B.S. degree in Management from Rhode Island College.


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Item 1A.   Risk Factors
 
Risks Related to Our Business
 
We operate in the highly competitive mechanical power transmission industry and if we are not able to compete successfully our business may be significantly harmed.
 
We operate in highly fragmented and very competitive markets in the MPT industry. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, such as helical gear drives, and some of our competitors are larger than us and have greater financial and other resources. With respect to certain of our products, we compete with divisions of our OEM customers. Competition in our business lines is based on a number of considerations, including quality, reliability, pricing, availability, and design and application engineering support. Our customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, regular investment in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection is required. In the future we may not have sufficient resources to continue to make such investments and may not be able to maintain our competitive position within each of the markets we serve. We may have to adjust the prices of some of our products to stay competitive.
 
Additionally, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. If we are not selected to become one of these preferred providers, we may lose market share in some of the markets in which we compete.
 
There is substantial and continuing pressure on major OEMs and larger distributors to reduce costs, including the cost of products purchased from outside suppliers. As a result of cost pressures from our customers, our ability to compete depends in part on our ability to generate production cost savings and, in turn, find reliable, cost effective outside suppliers to source components or manufacture our products. If we are unable to generate sufficient cost savings in the future to offset price reductions, then our gross margin could be materially adversely affected.
 
Changes in or the cyclical nature of our markets could harm our operations and financial performance.
 
Our financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. Some of the markets we serve are highly cyclical, such as the metals, mining, industrial equipment and energy markets. In addition, these markets may experience cyclical downturns. The present uncertain economic environment may have a significant adverse affect on business cycles in industries we serve as our customers may face significantly decreased sales and an inability to predict future demand. In such an adverse environment, expected cyclical activity or sales may not occur or may be delayed and may result in significant quarter-to-quarter variability in our performance. Any sustained weakness in demand, downturn or uncertainty in cyclical markets may reduce our sales and profitability.
 
We rely on independent distributors and the loss of these distributors could adversely affect our business.
 
In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to our customers. We support an extensive distribution network, with over 3,000 distributor locations worldwide. Rather than serving as passive conduits for delivery of product, our independent distributors are active participants in the overall competitive dynamics in the MPT industry. During the year ended December 31, 2009, approximately 33% of our net sales from continuing operations were generated through independent distributors. In particular, sales through our largest distributor accounted for approximately 7% of our net sales for the year ended December 31, 2009. Almost all of the distributors with whom we transact business offer competitive products and services to our customers. In addition, the distribution agreements we have are typically non-exclusive and cancelable by the distributor after a short notice period. The loss of any major distributor or a substantial number of smaller distributors or an increase in the distributors’ sales of our competitors’ products to our customers could materially reduce our sales and profits.


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We must continue to invest in new technologies and manufacturing techniques; however, our ability to develop or adapt to changing technology and manufacturing techniques is uncertain and our failure to do so could place us at a competitive disadvantage.
 
The successful implementation of our business strategy requires us to continuously invest in new technologies and manufacturing techniques to evolve our existing products and introduce new products to meet our customers’ needs in the industries we serve and want to serve. For example, motion control products offer more precise positioning and control compared to industrial clutches and brakes. If manufacturing processes are developed to make motion control products more price competitive and less complicated to operate, our customers may decrease their purchases of MPT products.
 
Our products are characterized by performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including:
 
  •       product quality and availability;
 
  •       price competitiveness;
 
  •       technical expertise and development capability;
 
  •       reliability and timeliness of delivery;
 
  •       product design capability;
 
  •       manufacturing expertise; and
 
  •       sales support and customer service.
 
Our success depends on our ability to invest in new technologies and manufacturing techniques to continue to meet our customers’ changing demands with respect to the above factors. We may not be able to make required capital expenditures and, even if we do so, we may be unsuccessful in addressing technological advances or introducing new products necessary to remain competitive within our markets. Furthermore, our own technological developments may not be able to produce a sustainable competitive advantage. If we fail to successfully invest in improvements to our technology and manufacturing techniques, our business may be materially adversely affected.
 
Our operations are subject to international risks that could affect our operating results.
 
Our net sales outside North America represented approximately 31% of our total net sales for the year ended December 31, 2009. In addition, we sell products to domestic customers for use in their products sold overseas. We also source a significant portion of our products and materials from overseas, a practice which is increasing. Our business is subject to risks associated with doing business internationally, and our future results could be materially adversely affected by a variety of factors, including:
 
  •       fluctuations in currency exchange rates;
 
  •       exchange rate controls;
 
  •       tariffs or other trade protection measures and import or export licensing requirements;
 
  •       potentially negative consequences from changes in tax laws;
 
  •       interest rates;
 
  •       unexpected changes in regulatory requirements;
 
  •       changes in foreign intellectual property law;
 
  •       differing labor regulations;
 
  •       requirements relating to withholding taxes on remittances and other payments by subsidiaries;


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  •       restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions;
 
  •       potential political instability and the actions of foreign governments; and
 
  •       restrictions on our ability to repatriate dividends from our subsidiaries.
 
As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could materially adversely affect our international operations and, consequently, our operating results.
 
Our operations depend on production facilities throughout the world, many of which are located outside the United States and are subject to increased risks of disrupted production causing delays in shipments and loss of customers and revenue.
 
We operate businesses with manufacturing facilities worldwide, many of which are located outside the United States including in Canada, China, France, Germany, Mexico and the United Kingdom. Serving a global customer base requires that we place more production in emerging markets to capitalize on market opportunities and cost efficiencies. Our international production facilities and operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity or public health concerns, particularly in emerging countries that are not well-equipped to handle such occurrences. Any production disruptions could materially adversely affect our business.
 
We rely on estimated forecasts of our OEM customers’ needs, and inaccuracies in such forecasts could materially adversely affect our business.
 
We generally sell our products pursuant to individual purchase orders instead of under long-term purchase commitments. Therefore, we rely on estimated demand forecasts, based upon input from our customers, to determine how much material to purchase and product to manufacture. Because our sales are based on purchase orders, our customers may cancel, delay or otherwise modify their purchase commitments with little or no consequence to them and with little or no notice to us. For these reasons, we generally have limited visibility regarding our customers’ actual product needs. The quantities or timing required by our customers for our products could vary significantly. Whether in response to changes affecting the industry or a customer’s specific business pressures, any cancellation, delay or other modification in our customers’ orders could significantly reduce our revenue, impact our working capital, cause our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business and we may purchase too much inventory and spend more capital than expected, which may materially adversely affect our business.
 
As a result of slowing global economic growth, the credit market crisis, declining consumer and business confidence, reduced levels of capital expenditures and other challenges currently affecting the global economy, our customers may experience deterioration of their businesses. In addition, due to an inability to predict the duration and severity of the current economic crisis, our customers may not be able to accurately estimate demand forecasts and may scale back orders in an abundance of caution. As a result, existing or potential customers may delay or cancel plans to purchase our products and may not be able to fulfill their obligations to us in a timely fashion. Such cancellations, reductions or inability to fulfill obligations could significantly reduce our revenue, impact our working capital, cause our operating results to fluctuate adversely from period to period and make it more difficult for us to predict our revenue.
 
The materials used to produce our products are subject to price fluctuations that could increase costs of production and adversely affect our profitability.
 
The materials used to produce our products, especially copper and steel, are sourced on a global or regional basis and the prices of those materials are susceptible to price fluctuations due to supply and demand


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trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate and other unforeseen circumstances. From the first quarter of 2004 to the fourth quarter of 2009, the average price of copper and steel has increased approximately 141% and 27%, respectively. If we are unable to continue to pass a substantial portion of such price increases on to our customers on a timely basis, our future profitability may be materially adversely affected. In addition, passing through these costs to our customers may also limit our ability to increase our prices in the future.
 
We face potential product liability claims relating to products we manufacture or distribute, which could result in our having to expend significant time and expense to defend these claims and to pay material damages or settlement amounts.
 
We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently have several product liability claims against us with respect to our products. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or our ability to make payments under our debt obligations when due. In addition, we believe our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products, which would reduce our sales and profitability.
 
We may be subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, which could seriously impact our operations and the profitability of our business.
 
As of December 31, 2009, we had approximately 2,613 full time employees, of whom approximately 44% were employed outside the United States. Approximately 214 of our North American employees and 37 of our employees in Scotland are represented by labor unions. In addition, our employees in Europe are generally represented by local and national social works councils that hold discussions with employer industry associations regarding wage and work issues every two to three years. Our European facilities, particularly those in France and Germany, may participate in such discussions and be subject to any agreements reached with employees. Additionally, approximately 49 employees in the TB Wood’s production facilities in Mexico are unionized under collective bargaining agreements that are subject to annual renewals.
 
We are a party to four U.S. collective bargaining agreements. Three of the agreements will expire on August 2010, June 2011 and September 2011, respectively. We have entered into a plant closing agreement with labor union employees at our South Beloit manufacturing facility. We expect the facility to close in the first quarter of 2010. We may be unable to renew these agreements on terms that are satisfactory to us, if at all. In addition, one of our four U.S. collective bargaining agreements contains provisions for additional, potentially significant, lump-sum severance payments to all employees covered by the agreements who are terminated as the result of a plant closing and one of our collective bargaining agreements contains provisions restricting our ability to terminate or relocate operations.
 
If our unionized workers or those represented by a works council were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our ability to deliver products on a timely basis and could have other negative effects, including decreased productivity and increased labor costs. In addition, if a greater percentage of our work force becomes unionized, our business and financial results could be materially adversely affected. Many of our direct and indirect customers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or their suppliers could result in slowdowns or closures of assembly plants where our products are used and could cause cancellation of purchase orders with us or otherwise result in reduced revenues from these customers.


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Changes in employment laws could increase our costs and may adversely affect our business.
 
Various federal, state and international labor laws govern our relationship with employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers’ compensation rates paid, leaves of absence, mandated health and other benefits, and citizenship requirements. Significant additional government-imposed increases or new requirements in these areas could materially affect our business, financial condition, operating results or cash flow.
 
In the event our employee-related costs rise significantly, we may have to curtail the number of our employees or shut down certain manufacturing facilities. Any such actions would not only be costly but could also materially adversely affect our business.
 
We depend on the services of key executives, the loss of whom could materially harm our business.
 
Our senior executives are important to our success because they are instrumental in setting our strategic direction, operating our business, maintaining and expanding relationships with distributors, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until a suitable replacement could be found. We believe that our senior executives could not easily be replaced with executives of equal experience and capabilities. Although we have entered into employment agreements with certain of our key domestic executives, we cannot prevent our key executives from terminating their employment with us. We do not maintain key person life insurance policies on any of our executives.
 
If we lose certain of our key sales, marketing or engineering personnel, our business may be adversely affected.
 
Our success depends on our ability to recruit, retain and motivate highly skilled sales, marketing and engineering personnel. Competition for these persons in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. If certain of these key personnel were to terminate their employment with us, we may experience difficulty replacing them, and our business could be harmed.
 
We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses.
 
We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and cleanup contaminated sites that are or were owned, leased, operated or used by us or our predecessors. Some of these laws and regulations require us to obtain permits, which contain terms and conditions that impose limitations on our ability to emit and discharge hazardous materials into the environment and periodically may be subject to modification, renewal and revocation by issuing authorities. Fines and penalties may be imposed for non-compliance with applicable environmental laws and regulations and the failure to have or to comply with the terms and conditions of required permits. From time to time, our operations may not be in full compliance with the terms and conditions of our permits. We periodically review our procedures and policies for compliance with environmental laws and requirements. We believe that our operations generally are in material compliance with applicable environmental laws, requirements and permits and that any lapses in compliance would not be expected to result in us incurring material liability or cost to achieve compliance. Historically, the costs of achieving and maintaining compliance with environmental laws, and requirements and permits have not been material; however, the operation of manufacturing plants entails risks in these areas, and a failure by us to comply with applicable environmental laws, regulations, or permits could result in civil or criminal fines, penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control


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equipment or remedial actions. Moreover, if applicable environmental laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated.
 
Certain environmental laws in the United States, such as the federal Superfund law and similar state laws, impose liability for the cost of investigation or remediation of contaminated sites upon the current or, in some cases, the former site owners or operators and upon parties who arranged for the disposal of wastes or transported or sent those wastes to an off-site facility for treatment or disposal, regardless of when the release of hazardous substances occurred or the lawfulness of the activities giving rise to the release. Such liability can be imposed without regard to fault and, under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. As a practical matter, however, the costs of investigation and remediation generally are allocated among the viable responsible parties on some form of equitable basis. Liability also may include damages to natural resources. We have not been notified that we are a potentially responsible party in connection with any sites we currently or formerly owned or operated any liabilities relating to any off-site waste disposal facility.
 
However, there is contamination at some of our current facilities, primarily related to historical operations at those sites, for which we could be liable for the investigation and remediation under certain environmental laws. The potential for contamination also exists at other of our current or former sites, based on historical uses of those sites. We currently are not undertaking any remediation or investigations and our costs or liability in connection with potential contamination conditions at our facilities cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the environmental conditions or likely remedial requirements. Currently, other parties with contractual liability are addressing or have plans or obligations to address those contamination conditions that may pose a material risk to human health, safety or the environment. In addition, while we attempt to evaluate the risk of liability associated with our facilities at the time we acquire them, there may be environmental conditions currently unknown to us relating to our prior, existing or future sites or operations or those of predecessor companies whose liabilities we may have assumed or acquired which could have a material adverse effect on our business.
 
We are being indemnified, or expect to be indemnified by third parties subject to certain caps or limitations on the indemnification, for certain environmental costs and liabilities associated with certain owned or operated sites. Accordingly, based on the indemnification and the experience with similar sites of the environmental consultants who we have hired, we do not expect such costs and liabilities to have a material adverse effect on our business, operations or earnings. We cannot assure you, however, that those third parties will in fact satisfy their indemnification obligations. If those third parties become unable to, or otherwise do not, comply with their respective indemnity obligations, or if certain contamination or other liability for which we are obligated is not subject to these indemnities, we could become subject to significant liabilities.
 
We may face additional costs associated with our post-retirement and post-employment obligations to employees which could have an adverse effect on our financial condition.
 
As part of the acquisition of our original core business through the acquisition of PTH from Colfax Corporation, the PTH Acquisition, we agreed to assume pension plan liabilities for active U.S. employees under the Retirement Plan for Power Transmission Employees of Colfax and the Ameridrives International Pension Fund for Hourly Employees Represented by United Steelworkers of America, Local 3199-10, collectively referred to as the Prior Plans. We have established a defined benefit plan, the Altra Industrial Motion, Inc. Retirement Plan or New Plan, mirroring the benefits provided under the Prior Plans. The New Plan accepted a spin-off of assets and liabilities from the Prior Plans, in accordance with Section 414(l) of the Internal Revenue Code, or the Code, with such assets and liabilities relating to active U.S. employees as of the closing of the PTH Acquisition. Given the funded status of the Prior Plans and the asset allocation requirements of Code Section 414(l), liabilities under the New Plan greatly exceed the assets that were transferred from the Prior Plans. The accumulated benefit obligation (not including accumulated benefit obligations of non-U.S. pension plans in the amount of $3.3 million) was approximately $22.3 million as of December 31, 2009 while the fair value of plan assets was approximately $15.7 million as of December 31, 2009. As the New Plan has a considerable funding deficit, the cash funding requirements are expected to be


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substantial over the next several years, and could have a material adverse effect on our financial condition. As of December 31, 2009, minimum funding requirements are estimated to be zero in 2010, $1.2 million in 2011, $1.2 million in 2012, $0.6 million in 2013, and $1.2 million in 2014. These amounts are based on actuarial assumptions and actual amounts could be materially different.
 
Additionally, as part of the PTH Acquisition, we agreed to assume all pension plan liabilities related to non-U.S. employees. The accumulated benefit obligations of non-U.S. pension plans were approximately $3.3 million as of December 31, 2009. There are no assets associated with these plans.
 
Finally, as part of the PTH Acquisition, we also agreed to assume all post-employment and post-retirement welfare benefit obligations with respect to active U.S. employees. The benefit obligation for post-retirement benefits, which are not funded, was approximately $0.5 million as of December 31, 2009.
 
For a description of the post-retirement and post-employment costs, see Note 9 to our audited financial statements included elsewhere in this Form 10-K.
 
Our future success depends on our ability to integrate acquired companies and manage our growth effectively.
 
Our growth through acquisitions has placed, and will continue to place, significant demands on our management, operational and financial resources. Realization of the benefits of acquisitions often requires integration of some or all of the acquired companies’ sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations. Integration of companies demands substantial attention from senior management and the management of the acquired companies. In addition, we will continue to pursue new acquisitions, some of which could be material to our business if completed. We may not be able to integrate successfully our recent acquisitions, or any future acquisitions, operate these acquired companies profitably, or realize the potential benefits from these acquisitions.
 
We may not be able to protect our intellectual property rights, brands or technology effectively, which could allow competitors to duplicate or replicate our technology and could adversely affect our ability to compete.
 
We rely on a combination of patent, trademark, copyright, and trade secret laws in the United States and other jurisdictions, as well as on license, non-disclosure, employee and consultant assignment and other agreements and domain names registrations in order to protect our proprietary technology and rights. Applications for protection of our intellectual property rights may not be allowed, and the rights, if granted, may not be maintained. In addition, third parties may infringe or challenge our intellectual property rights. In some cases, we rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. In addition, in the ordinary course of our operations, we pursue potential claims from time to time relating to the protection of certain products and intellectual property rights, including with respect to some of our more profitable products. Such claims could be time consuming, expensive and divert resources. If we are unable to maintain the proprietary nature of our technologies or proprietary protection of our brands, our ability to market or be competitive with respect to some or all of our products may be affected, which could reduce our sales and profitability.
 
Goodwill and indefinite-lived intangibles comprises a significant portion of our total assets, and if we determine that goodwill has become impaired in the future, net income in such years may be materially and adversely affected.
 
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Due to the acquisitions we have completed historically, goodwill comprises a significant portion of our total assets. We review goodwill and indefinite-lived intangibles annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. Our prior review of goodwill and indefinite-lived intangibles in December 2008 resulted in a $31.8 million reduction to the value of such assets in our financial statements. Future reviews of goodwill and indefinite-lived intangibles could result in further reductions. Any reduction in net income resulting from the write down or impairment of


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goodwill and indefinite-lived intangibles could adversely affect our financial results. If economic conditions deteriorate we may be required to impair goodwill and indefinite-lived intangibles in future periods.
 
Unplanned repairs or equipment outages could interrupt production and reduce income or cash flow.
 
Unplanned repairs or equipment outages, including those due to natural disasters, could result in the disruption of our manufacturing processes. Any interruption in our manufacturing processes would interrupt our production of products, reduce our income and cash flow and could result in a material adverse effect on our business and financial condition.
 
Our operations are highly dependent on information technology infrastructure and failures could significantly affect our business.
 
We depend heavily on our information technology, or IT, infrastructure in order to achieve our business objectives. If we experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems and address related security concerns.
 
Our leverage could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions.
 
We have incurred indebtedness that is substantial relative to our stockholders’ investment. As of December 31, 2009, we had approximately $220.3 million of indebtedness outstanding and $39.6 million available under lines of credit. Our indebtedness has important consequences; for example, it could:
 
  •       make it more challenging for us to obtain additional financing to fund our business strategy and acquisitions, debt service requirements, capital expenditures and working capital;
 
  •       increase our vulnerability to interest rate changes and general adverse economic and industry conditions;
 
  •       require us to dedicate a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the availability of our cash flow to finance acquisitions and to fund working capital, capital expenditures, research and development efforts and other general corporate activities;
 
  •       make it difficult for us to fulfill our obligations under our credit and other debt agreements;
 
  •       limit our flexibility in planning for, or reacting to, changes in our business and our markets; and
 
  •       place us at a competitive disadvantage relative to our competitors that have less debt.
 
Substantially all of our assets have been pledged as collateral against any outstanding borrowings under the credit agreement governing Altra Industrial’s Senior Revolving Credit Facility. In addition, the Credit Agreement requires us to maintain specified financial ratios and satisfy certain financial condition tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. If an event of default were to occur under the Credit Agreements, then the lenders could declare all amounts outstanding under the senior revolving credit facility with accrued interest, to be immediately due and payable. In addition, our senior revolving credit facility and the indentures governing the 81/8% senior secured notes (the “Senior Secured Notes”) have cross-default provisions such that a default under either one would constitute an event of default on the other.
 
The current economic conditions and severe tightening of credit markets may limit our access to additional capital. In particular, the cost of raising money in the credit markets has increased substantially while the availability of funds from those markets has diminished significantly. While currently these conditions have not impaired our ability to access capital under our credit facility and to finance our operations, there can be no


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assurance that there will not be a further deterioration in the credit markets, a deterioration in the financial condition of our lenders or their ability to fund their commitments or, if necessary, that we will be able to find replacement financing on similar or acceptable terms. An inability to access sufficient capital could have an adverse impact on our operations and thus on our operating results and financial position.
 
Our Senior Secured Notes impose significant operating and financial restrictions, which may prevent us from pursuing our business strategies or favorable business opportunities
 
Subject to a number of important exceptions, the indenture governing our Senior Secured Notes and Altra Industrial’s new senior secured credit facility may limit our and Altra Industrial’s ability to:
 
  •       incur more debt;
 
  •       pay dividends or make other distributions;
 
  •       redeem stock;
 
  •       issue stock of subsidiaries;
 
  •       make certain investments;
 
  •       create liens;
 
  •       reorganize our corporate structure;
 
  •       enter into transactions with affiliates;
 
  •       merge or consolidate; and
 
  •       transfer or sell assets.
 
The restrictions contained in the indenture governing the Senior Secured Notes and Altra Industrial’s new senior secured credit facility may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. A breach of any of these covenants or the inability to comply with the required financial ratios could result in a default under the Senior Secured Notes, Altra Industrial’s new senior secured credit facility, or the indenture governing the Senior Secured Notes, as applicable. If any such default occurs, the lenders under Altra Industrial’s senior secured credit facility and the holders of our Senior Secured Notes may elect to declare all of their respective outstanding debt, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under Altra Industrial’s new senior secured credit facility also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under Altra Industrial’s new senior secured credit facility, the lenders under the facility will have the right to proceed against the collateral granted to them to secure the debt. If the debt under Altra Industrial’s new senior secured credit facility or the Senior Secured Notes were to be accelerated, our assets may not be sufficient to repay in full the Senior Secured Notes and all of our other debt.
 
We are subject to tax laws and regulations in many jurisdictions and the inability to successfully defend claims from taxing authorities related to our current or acquired businesses could adversely affect our operating results and financial position.
 
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.
 
Continued extreme volatility and disruption in global financial markets could significantly impact our customers, weaken the markets we serve and harm our operations and financial performance.
 
Our financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. As widely reported, U.S. and global financial markets have been experiencing extreme disruption recently, including, among other things, concerns regarding the stability and


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viability of major financial institutions, the declining state of the housing markets, a severe tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets. Given the significance and widespread nature of these nearly unprecedented circumstances, the U.S. and global economies could remain significantly challenged in a recessionary state for an indeterminate period of time. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. In addition, the current tightening of credit in financial markets may adversely affect the ability of our customers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services as well as impact the ability of our customers to make payments. Similarly, this tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. These conditions would harm our business by adversely affecting our sales, results of operations, profitability, cash flows, financial condition and long-term anticipated growth rate.
 
We have taken, and continue to take, cost-reduction actions. Our ability to complete these actions and the impact of such actions on our business may be limited by a variety of factors. The cost-reduction actions, in turn, may expose us to additional production risk and have an adverse effect on our sales, profitability and ability to attract and retain employees.
 
We have been reducing our employee population, changing our compensation and benefit programs, and working to reduce our procurement costs. In addition, we also expect to consolidate certain of our manufacturing operations. The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors including, but not limited to: (i) our ability to successfully complete these ongoing efforts; (ii) our ability to generate the level of cost savings we expect or that are necessary to enable us to effectively compete; (iii) delays in implementation of anticipated workforce reductions in highly-regulated locations outside the United States, particularly in Europe; (iv) decline in employee morale and the potential inability to meet operational targets due to the loss of employees; (v) our ability to retain or recruit key employees; and (vi) the adequacy of our manufacturing capacity. While we have business continuity and risk mitigation plans in place in case capacity is significantly reduced or eliminated at a given facility, the reduced number of alternative facilities could cause the duration of any manufacturing disruption to be longer. As a result, we could have difficulties fulfilling our orders and our sales and profits could decline.
 
If we are unable to successfully implement our new ERP system across the company or such implementation is delayed, our operations may be disrupted or become less efficient.
 
We have began the implementation for our operations worldwide of a new Enterprise Resource Planning system entitled “SAP,” with the aim of enabling management to achieve better control over the Company through: improved quality, reliability and timeliness of information; improved integration and visibility of information stemming from different management functions and countries; and optimization and global management of corporate processes The adoption of the new SAP system, which will replace the existing accounting and management systems, poses several challenges relating to, among other things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of data, and the potential instability of the new system. In order to mitigate the impact of such critical issues, the Company decided to implement the new SAP system on a step-by-step basis, both geographically and in terms of processes. As a result, we expect the system implementation process to continue for the next 2 to 2.5 years. However, there can be no assurance that the new SAP system will be successfully implemented and failure to do so could have a material adverse effect on our operations. Further, if implementation of the SAP system is delayed, we would continue to use our current system which may not be sufficient to support our planned operations and significant upgrades to the current system may be warranted or required to meet our business needs pending SAP implementation. However, there can be no assurance that the new SAP system will be successfully implemented and failure to do so could have a material adverse effect on the Company’s operations.
 
Item 1B.   Unresolved Staff Comments
 
None.


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Item 2.   Properties
 
In addition to our leased headquarters in Braintree, Massachusetts, we maintain 25 production facilities, thirteen of which are located in the United States, one in Canada, nine in Europe and one each in China and Mexico. The following table lists all of our facilities, other than sales offices and distribution centers, as of December 31, 2009, indicating the location, principal use and whether the facilities are owned or leased.
 
                         
                Type of
   
Location
  Brand   Major Products   Sq. Ft.   Possession   Expiration
 
United States
                       
Chambersburg,
                       
Pennsylvania
  TB Wood’s   Belted Drives, Couplings, Castings     440,000     Owned   N/A
South Beloit, Illinois
  Warner Electric   Electromagnetic Clutches & Brakes     104,288     Owned   N/A
Syracuse, New York
  Kilian   Engineered Bearing Assemblies     97,000     Owned   N/A
Wichita Falls, Texas
  Wichita Clutch   Heavy Duty Clutches and Brakes     90,400     Owned   N/A
Warren, Michigan
  Formsprag   Overrunning Clutches     79,000     Owned   N/A
Erie, Pennsylvania
  Ameridrives   Engineered Couplings     76,200     Owned   N/A
Chattanooga, Tennessee
  TB Wood’s   Space is leased to a third party     60,000     Owned   N/A
Scotland, Pennsylvania
  TB Wood’s   Space is leased to a third party     51,300     Owned   N/A
San Marcos, Texas
  TB Wood’s   Engineered Couplings     51,000     Owned   N/A
Mt. Pleasant, Michigan
  TB Wood’s   Space is leased to a third party     30,000     Owned   N/A
Columbia City, Indiana
  Warner Electric   Electromagnetic Clutches & Brakes & Coils     51,699     Leased   November 30, 2013
Charlotte, North Carolina
  Boston Gear   Gearing & Power Transmission Components     193,000     Leased   February 28, 2013
Niagara Falls, New York
  Nuttall Gear   Gearing     155,509     Leased   March 31, 2013
New Hartford, Connecticut
  Inertia Dynamics   Electromagnetic Clutches & Brakes     73,206     Leased   July 30, 2019
Braintree, Massachusetts(1)
  Altra       13,804     Leased   November 30, 2016
Belvidere, Illinois
  Warner Linear   Linear Actuators     21,000     Leased   June 30, 2012
New Braunsfels, Texas(3)
  Ameridrives   Vacant     16,200     Leased   December 31, 2009
Green Bay, Wisconsin
  Ameridrives   Engineered Couplings     85,250     Leased   March 31, 2011
International
                       
Heidelberg, Germany
  Stieber   Overrunning Clutches     57,609     Owned   N/A
Saint Barthelemy, France
  Warner Electric   Electromagnetic Clutches & Brakes     50,129     Owned   N/A
Bedford, England
  Wichita Clutch   Heavy Duty Clutches and Brakes     49,000     Owned   N/A
Allones, France
  Warner Electric   Electromagnetic Clutches & Brakes     38,751     Owned   N/A
Toronto, Canada
  Kilian   Engineered Bearing Assemblies     29,000     Owned   N/A
Dewsbury, England
  Bibby Transmissions   Engineered Couplings Power Transmission Components     26,100     Owned   N/A
Stratford, Canada
  TB Wood’s   Vacant     46,000     Owned   N/A
Shenzhen, China
  Warner Electric   Electromagnetic Clutches & Brakes Precision Components     72,000     Leased   April 30, 2014
San Luis Potosi, Mexico
  TB Wood’s   Couplings and Belted Drives     71,800     Leased   June 8, 2014
Brechin, Scotland
  Matrix   Clutch Brakes, Couplings     52,500     Leased   February 28, 2011
Garching, Germany
  Stieber   Overrunning Clutches     32,292     Leased   (2)
Twickenham, England
  Twiflex   Heavy Duty Clutches and Brakes     27,500     Leased   December 24, 2010
Hertford, England
  Huco Dynatork   Couplings, Power Transmission Components     13,565     Leased   July 30, 2012
 
 
(1) Corporate headquarters and selective customer service functions.
 
(2) Must give the lessor twelve months notice for termination.
 
(3) Building was vacated on January 1, 2010.


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Item 3.   Legal Proceedings
 
We are, from time to time, party to various legal proceedings arising out of our business. These proceedings primarily involve commercial claims, product liability claims, intellectual property claims, environmental claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings should not have a material adverse effect on our business, financial condition and results of operations.
 
Item 4.   Removed and Reserved
 
PART II
 
Item 5.   Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock trades on the NASDAQ Global Market under the symbol “AIMC”. As of March 1, 2010, the number of holders of record of our common stock was approximately 36.
 
The following table sets forth, for the periods indicated, the high and low sales price for our common stock as reported on The NASDAQ Global Market. Our common stock commenced trading on the NASDAQ Global Market on December 15, 2006.
 
                 
    High   Low
 
Fiscal 2008:
               
First Quarter
  $ 16.42     $ 11.44  
Second Quarter
  $ 17.79     $ 13.32  
Third Quarter
  $ 18.55     $ 14.35  
Fourth Quarter
  $ 13.98     $ 5.46  
Fiscal 2009:
               
First Quarter
  $ 9.05     $ 3.35  
Second Quarter
  $ 8.40     $ 4.16  
Third Quarter
  $ 11.45     $ 7.57  
Fourth Quarter
  $ 12.68     $ 8.77  
 
Dividends
 
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for use in the operation and expansion of our business and, therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, the Credit Agreement governing the senior revolving credit facility and the indentures governing the Senior Secured Notes limit our ability to pay dividends or other distributions on our common stock. See Note 10 to the consolidated financial statements below.


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Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table presents information concerning our equity compensation plans:
 
             
            Number of Securities
            Remaining Available for
            Future Issuance Under
    Number of Securities to
  Weighted-Average
  Equity Compensation
    be Issued Upon Exercise of
  Exercise Price of
  Plans (Excluding
    Outstanding Options,
  Outstanding Options,
  Securities Reflected
Plan Category
  Warrants and Rights(a)   Warrants and Rights(b)   in Column (a))(c)
 
Equity compensation plans approved by security holders(1)
    $-   614,535
Equity compensation plans not approved by security holders
  n/a   n/a   n/a
Total
    $-   614,535
 
 
(1) The equity compensation plans were approved by the Company’s shareholders prior to the initial public offering.
 
Issuer Repurchases of Equity Securities
 
None


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Performance Graph
 
The following graph compares the cumulative total stockholder return on our common stock since the time of our initial public offering, December 15, 2006, through December 31, 2009, with the cumulative total return on shares of companies comprising the S&P Small Cap 600 index and a special Peer Group Index, in each case assuming an initial investment of $100, assuming dividend reinvestment.
 
(PERFORMANCE GRAPH)
 
                                                                                                                                   
      12/31/2006     3/31/2007     6/30/2007     9/28/2007     12/31/2007     3/31/2008     6/30/2008     9/30/2008     12/31/2008     3/31/2009     6/30/2009     9/30/2009     12/31/2009
                                                                                                                                   
Altra Holdings, Inc. 
      4.07 %       1.56 %       28.00 %       23.48 %       23.19 %       (0.59 )%       23.04 %       12.37 %       (41.41 )%       (71.26 )%       (44.52 )%       (17.11 )%       (8.52 )%
                                                                                                                                   
S&P Small Cap 600
      (0.76 )%       2.20 %       7.25 %       5.05 %       (1.97 )%       (10.20 )%       (8.58 )%       (7.33 )%       (33.33 )%       (44.81 )%       (33.66 )%       (22.21 )%       (17.48 )%
                                                                                                                                   
Peer Group
      0.62 %       1.28 %       17.45 %       7.73 %       3.29 %       (15.01 )%       (1.53 )%       (2.24 )%       (33.36 )%       (46.93 )%       (29.59 )%       (21.85 )%       (16.05 )%
                                                                                                                                   
                                                                                                                                   
 
The Peer Group Index consists of the following publicly traded companies: Franklin Electric Co. Inc., RBC Bearings, Inc., Regal Beloit Corp., Baldor Electric Co., and Kaydon Bearings Corp.


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Item 6.   Selected Financial Data
 
The following table contains our selected historical financial data for the years ended December 31, 2009, 2008, 2007, 2006, and 2005. The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included elsewhere in this Form 10-K.
 
                                                 
    Altra Holdings, Inc.
       
    Amounts in thousands, except per share data        
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
       
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
       
    2009     2008     2007     2006     2005        
 
Net sales
  $ 452,846     $ 635,336     $ 584,376     $ 462,285     $ 363,465          
Cost of sales
    329,825       449,244       419,109       336,836       271,952          
                                                 
Gross profit
    123,021       186,092       165,267       125,449       91,513          
Operating expenses:
                                               
Selling, general and administrative expenses
    81,117       99,185       93,211       83,276       61,579          
Research and development expenses
    6,261       6,589       6,077       4,938       4,683          
Goodwill impairment
          31,810                            
Restructuring costs
    7,286       2,310       2,399                      
Loss (gain) on curtailment of post-retirement benefit plan
    (1,467 )     (925 )     2,745       (3,838 )              
Loss (gain) on disposal of assets
    545       1,584                   (99 )        
                                                 
      93,742       140,553       104,432       84,376       66,163          
Income from operations
    29,279       45,539       60,835       41,073       25,350          
Other non-operating income and expense:
                                               
Interest expense, net
    32,976       28,339       38,554       25,479       19,514          
Other non-operating expense (income), net
    981       (6,249 )     612       856       (17 )        
                                                 
      33,957       22,090       39,166       26,335       19,497          
Income (loss) from continuing operations before income taxes
    (4,678 )     23,449       21,669       14,738       5,853          
Provision (benefit) for income taxes
    (2,364 )     16,731       8,208       5,797       3,349          
                                                 
Income (loss) from continuing operations
    (2,314 )     6,718       13,461       8,941       2,504          
Loss from discontinued operations, net of income taxes of $43 in 2008 and $583 in 2007
          (224 )     (2,001 )                    
                                                 
Net income (loss)
  $ (2,314 )   $ 6,494     $ 11,460     $ 8,941     $ 2,504          
                                                 
Other Financial Data:
                                               
Depreciation and amortization
  $ 22,072     $ 21,068     $ 21,939     $ 14,611     $ 11,533          
Purchases of fixed assets
    9,194       19,289       11,633       9,408       6,199          
Cash flow provided by (used in):
                                               
Operating activities
    59,388       45,114       41,808       11,128       12,023          
Investing activities
    (9,194 )     (3,687 )     (124,672 )     (63,163 )     (5,197 )        
Financing activities
    (54,016 )     (31,760 )     84,537       83,837       (971 )        
Weighted average shares, basic
    25,945       25,496       23,579       1,183       9          
Weighted average shares, diluted
    25,945       26,095       24,630       19,525       18,969          
Basic earnings per share:
                                               
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.57     $ 7.56     $ 278.22          
Net loss from discontinued operations
          (0.01 )     (0.08 )                    
                                                 
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.49     $ 7.56     $ 278.22          
                                                 
Diluted earnings per share:
                                               
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.55     $ 0.46     $ 0.13          
Net loss from discontinued operations
          (0.01 )     (0.08 )                    
                                                 
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.47     $ 0.46     $ 0.13          
                                                 
 


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    December 31,
    December 31,
    December 31,
    December 31,
      December 31,
 
    2009     2008     2007     2006       2005  
 
Balance Sheet Data:
                                         
Cash and cash equivalents
  $ 51,497     $ 52,073     $ 45,807     $ 42,527       $ 10,060  
Total assets
    465,199       513,584       580,525       409,368         297,691  
Total debt
    217,549       261,523       294,066       229,128         173,760  
Long-term liabilities, excluding long-term debt
    41,907       46,870       51,310       29,471         79,168  
 
Comparability of the information included in the selected financial data has been impacted by the acquisitions of Hay Hall and Warner Linear in 2006 and TB Wood’s and All Power in 2007.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company’s current estimates, expectations and projections about the Company’s future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning the Company’s possible future results of operations including revenue, costs of goods sold, and gross margin, business and growth strategies, financing plans, the Company’s competitive position and the effects of competition, the projected growth of the industries in which we operate, and the Company’s ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “may,” “should,” “will,” “would,” “project,” and similar expressions. These forward-looking statements are based upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company’s actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Corporation’s actual results to differ materially from the results referred to in the forward-looking statements the Corporation makes in this report include:
 
  •      the Company’s access to capital, credit ratings, indebtedness, and ability to raise additional financings and operate under the terms of the Company’s debt obligations;
 
  •      the risks associated with our debt leverage;
 
  •      the effects of intense competition in the markets in which we operate;
 
  •      the Company’s ability to successfully execute, manage and integrate key acquisitions and mergers;
 
  •      the Company’s ability to obtain or protect intellectual property rights;
 
  •      the Company’s ability to retain existing customers and our ability to attract new customers for growth of our business;
 
  •      the effects of the loss or bankruptcy of or default by any significant customer, suppliers, or other entity relevant to the Company’s operations;
 
  •      the Company’s ability to successfully pursue the Company’s development activities and successfully integrate new operations and systems, including the realization of revenues, economies of scale, cost savings, and productivity gains associated with such operations;
 
  •      the Company’s ability to complete cost reduction actions and risks associated with such actions;
 
  •      the Company’s ability to control costs;
 
  •      failure of the Company’s operating equipment or information technology infrastructure;

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  •      the Company’s ability to achieve its business plans, including with respect to an uncertain economic environment;
 
  •      changes in employment, environmental, tax and other laws and changes in the enforcement of laws;
 
  •      the accuracy of estimated forecasts of OEM customers and the impact of the current global economic environment on our customers;
 
  •      fluctuations in the costs of raw materials used in our products;
 
  •      the Company’s ability to attract and retain key executives and other personnel;
 
  •      work stoppages and other labor issues;
 
  •      changes in the Company’s pension and retirement liabilities;
 
  •      the Company’s risk of loss not covered by insurance;
 
  •      the outcome of litigation to which the Company is a party from time to time, including product liability claims;
 
  •      changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations;
 
  •      changes in market conditions that would result in the impairment of goodwill or other assets of the Company;
 
  •      changes in market conditions in which we operate that would influence the value of the Company’s stock;
 
  •      the effects of changes to critical accounting estimates; changes in volatility of the Company’s stock price and the risk of litigation following a decline in the price of the Company’s stock price;
 
  •      the cyclical nature of the markets in which we operate;
 
  •      the risks associated with the global recession and volatility and disruption in the global financial markets;
 
  •      political and economic conditions nationally, regionally, and in the markets in which we operate;
 
  •      natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, or other matters beyond the Company’s control;
 
  •      the risks associated with international operations, including currency risks; and
 
  •      other factors, risks, and uncertainties referenced in the Company’s filings with the Securities and Exchange Commission, including the “Risk Factors” set forth in this document
 
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS, ALL OF WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE COMPANY’S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THIS FORM 10-K AND IN OTHER REPORTS FILED WITH THE SEC BY THE COMPANY.
 
The following discussion of the financial condition and results of income(loss) of Altra Holdings, Inc. and its subsidiaries should be read together with the Selected Historical Financial Data, and the consolidated financial statements of Altra Holdings, Inc. and its subsidiaries and related notes included elsewhere in this


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Form 10-K. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Forward-Looking Statements” and “Risk Factors”. Unless the context requires otherwise, the terms “Altra Holdings,” “the Company,” “we,” “us” and “our” refer to Altra Holdings, Inc. and its subsidiaries, except where the context otherwise requires or indicates.
 
General
 
We are a leading global designer, producer and marketer of a wide range of MPT and motion control products with a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct OEM customers and over 3,000 distributor outlets. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, couplings, engineered bearing assemblies, linear components and other related products. Our products serve a wide variety of end markets including energy, general industrial, material handling, mining, transportation and turf and garden. We primarily sell our products to a wide range of OEMs and through long-standing relationships with industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger.
 
While the power transmission industry has undergone some consolidation, we estimate that in 2009 the top five broad-based MPT companies represented approximately 21% of the U.S. power transmission market. The remainder of the power transmission industry remains fragmented with many small and family-owned companies that cater to a specific market niche often due to their narrow product offerings. We believe that consolidation in our industry will continue because of the increasing demand for global distribution channels, broader product mixes and better brand recognition to compete in this industry.
 
Business Outlook
 
Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. During November and December 2008, we saw a significant change in economic conditions both in North America and internationally as most of our end markets experienced dramatic downturns. During the fourth quarter of 2008, we began to see several of our distributors and OEM customers implement inventory reduction programs which continued throughout the first two quarters of 2009. By the end of 2009, it appeared that inventory reduction efforts by our customers began to come to an end as sales to our largest distribution customers improved during the later part of the year.
 
In response to the continued challenging economic conditions of 2009, we took swift and aggressive actions to reduce our expenses and maximize near-term profitability. Our cost-reduction initiatives are centered on three areas: workforce cutbacks, plant consolidations and procurement and other cost reductions. During 2009, we implemented a temporary suspension of our Company contributions to our 401(k) plan, a general hiring freeze, a freeze of all non-union employee salaries and reduced work schedules. During 2009, we incurred $7.3 million of restructuring expense including a $2.5 million non-cash charge primarily related to impairment charges at the Mount Pleasant facility, that closed in 2009 and the South Beloit facility which is expected to have completed the transfer of its manufacturing operations in the first quarter of 2010. The remaining expense relates mainly to severance and moving and relocation costs. We expect to incur between an additional $2.0 and $3.0 million of expenses associated with workforce reduction and consolidation of facilities in 2010. Beginning in 2010, we expect to see annualized savings from our procurement savings, the headcount reductions and consolidation of facilities of approximately $76.5 million. Savings in 2009 were approximately $59.0 million related to these efforts. We estimate that once volume returns to prior year levels, between $10.0 and $12.0 million of these savings will be permanent in nature. In 2010, we expect to return to growth activities but will continue to focus on generating cash flow, executing on plant consolidations, and maintaining a reduced cost base.
 
Critical Accounting Policies
 
The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an on-going basis. Our estimates are based upon historical experience and assumptions that we believe are reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.


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Actual results may vary from what our management anticipates and different assumptions or estimates about the future could change our reported results.
 
We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements.
 
Revenue Recognition.  Product revenues are recognized, net of sales tax collected, at the time title and risk of loss pass to the customer, which generally occurs upon shipment to the customer. Amounts billed for shipping and handling are recorded as revenue. Product return reserves are accrued at the time of sale based on the historical relationship between shipments and returns, and are recorded as a reduction of net sales. Certain large distribution customers receive quantity discounts which are recognized net at the time the sale is recorded.
 
Inventory.  Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method for all of our subsidiaries except TB Wood’s. TB Wood’s inventory is stated at the lower of current cost or market, principally using the last-in, first-out (LIFO) method. Inventory stated using the LIFO method approximates 13% of total inventory. We state inventories acquired by us through acquisitions at their fair values at the date of acquisition as determined by us based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.
 
We periodically review our quantities of inventories on hand and compare these amounts to the historical and expected usage of each particular product or product line. We record as a charge to cost of sales any amounts required to reduce the carrying value of inventories to net realizable value.
 
Retirement Benefits.  Obligations for pension obligations and other post retirement benefits are actuarially determined and are affected by several assumptions, including the discount rate, assumed annual rates of return on plan assets, mortality rates and per capita cost of covered health care benefits. Changes to the discount rate and mortality rate judgments could affect the estimated fair value of the projected benefit obligation. A decrease of 50 basis points in our discount rate assumption would result in an increase of $1.2 million in our projected benefit obligation. An average increase in the average life expectancy assumption of two years would result in an increase of $0.8 million in the pension projected benefit obligation.
 
Goodwill, Intangibles and other long-lived assets.  In connection with our acquisitions, goodwill and intangible assets were identified and recorded at their fair value. We recorded intangible assets for customer relationships, trade names and trademarks, product technology, patents and goodwill. In valuing the customer relationships, trade names, and trademarks, we utilized variations of the income approach. The income approach was considered the most appropriate valuation technique because the inherent value of these assets is their ability to generate current and future income. The income approach relies on historical financial and qualitative information, as well as assumptions and estimates for projected financial information. Projected financial information is subject to risk if our estimates are incorrect. The most significant estimate relates to our projected revenues and profitability. If we do not meet the projected revenues and profitability used in the valuation calculations then the intangible assets could be impaired. In determining the value of customer relationships, we reviewed historical customer attrition rates which were determined to be approximately 5% per year. Most of our customers tend to be long-term customers with very little turnover. While we do not typically have long-term contracts with customers, we have established long-term relationships with customers which make it difficult for competitors to displace us. Additionally, we assessed historical revenue growth within our industry and customers’ industries in determining the value of customer relationships. The value of our customer relationships intangible asset could become impaired if future results differ significantly from any of the underlying assumptions. This could include a higher customer attrition rate or a change in industry trends such as the use of long-term contracts which we may not be able to obtain successfully. Customer relationships and product technology and patents are considered finite-lived assets, with estimated lives ranging from 8 years to 16 years. The estimated lives were determined by calculating the number of years necessary to obtain 95% of the value of the discounted cash flows of the respective intangible asset. Goodwill and trade names and trademarks are considered indefinite lived assets. Trade names and trademarks were determined to


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be indefinite lived assets. Other intangible assets include trade names and trademarks that identify us and differentiate us from competitors, and therefore competition does not limit the useful life of these assets. Additionally, we believe that our trade names and trademarks will continue to generate product sales for an indefinite period.
 
As of December 31, 2008, goodwill was allocated to each of the twenty reporting units we had identified at that time. We conducted an annual impairment review of goodwill and indefinite lived intangible assets as of December 31, 2008 at each of these reporting units.
 
The breakdown of reporting units identified as of December 31, 2008 by acquisition and acquisition dates are as follows:
 
     
Colfax acquisition — November 30, 2004
  12 reporting units
Hay Hall acquisition — February 10, 2006
  5 reporting units (including Huco)
Warner Linear acquisition — May 18, 2006
  1 reporting unit
TB Wood’s acquisition — April 5, 2007
  1 reporting unit
All Power Transmission — October 5, 2007
  1 reporting unit
 
Beginning in the fourth quarter of 2008, almost all of our reporting units were impacted by the general economic decline. The decline in our weekly order rates was significant and almost immediate. Continuation of the significant decrease in order rates in the final weeks of 2008 and into 2009 was a key assumption when developing our long-term revenue and profitability plan for our goodwill impairment analysis as of December 31, 2009. All of our reporting units assumed significantly lower sales and lower profitability for 2009 in their long-term growth plan when compared to the forecast used in the goodwill impairment analysis as of December 31, 2008. The discount rate was not changed significantly from the December 31, 2008 goodwill impairment analysis.
 
As a result of the December 31, 2008 goodwill impairment analysis, we recorded a goodwill impairment charge of $31.8 million at the TB Wood’s, Huco and Warner Linear reporting units. The goodwill remaining at these reporting units, after the adjustment for goodwill impairments, was $23.3 million at TB Wood’s and there was no goodwill remaining at either Warner Linear or Huco. Due to prevailing market conditions at the time of the acquisitions of these three reporting units, the purchase price paid as consideration for these three acquisitions required a higher premium when compared to the prior 2004 Colfax acquisition and therefore created higher goodwill at these reporting units.
 
During 2009, the Company appointed a new Chief Operating Decision Maker (“CODM”) and went through an extensive restructuring plan. As a result of the change in the CODM and our restructuring activities, we re-evaluated our operating segments and reporting unit structure. We identified five operating segments and concluded that the five operating segments can be aggregated into one reportable segment. We also identified twenty-one reporting units. Our reporting units have common manufacturing and production processes. Each unit includes a machine shop which uses similar equipment and manufacturing techniques. Each of our segments uses common raw materials, such as aluminum, steel and copper. The materials are purchased and procurement contracts are negotiated by one global purchasing function. Based on similar long-term average gross profit margins and the fact that all of our products are sold by one global sales force and are marketed by one global marketing function, we haveconcluded that the reporting units could be aggregated into five reporting units when performing the goodwill impairment analysis.
 
In both 2008 and 2009, as part of the annual goodwill impairment assessment we estimated the fair value of each of our reporting units using an income approach. We forecasted future cash flows by reporting unit for each of the next five years and applied a long term growth rate to the final year of forecasted cash flows. The cash flows were then discounted using our estimated discount rate. The forecasts of revenue and profitability growth for use in the long-range plan and the discount rate were the key assumptions in our intangible fair value analysis. The following are the assumptions used in 2008 in the calculation of estimated fair value for the reporting units that recorded a goodwill impairment as of December 31, 2008 (Huco, Warner Linear and TB Wood’s).
 


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    December 31, 2008
Assumption
  Huco   Warner Linear   TB Wood’s
 
Revenue growth (1st year)   (26.2%) decrease   (10.3%) decrease   (18%) decrease
Average revenue growth (2nd —
5th year)
  5.8% increase   5.8% increase   5.8% increase
Profitability growth rate
EBITDA as a percent of sales
(1st year)
  (4%) decrease   6% increase   (1%) decrease
Average profitability growth rate
per year (EBITDA as a percent
of sales) (2nd — 5th year)
  1% increase   0.5% increase   1% increase
Discount Rate   13%   13%   13%
 
We review the difference between the estimated fair value and net book value of each reporting unit. If the difference is less than $1.0 million, the reporting unit could be required to perform an interim goodwill impairment assessment in future periods if the estimated profitability decreased 10% when compared to our forecasts. As of December 31, 2009, each of our reporting units had estimated fair values that were at least $1.0 million greater than the net book value.
 
We considered whether the sum of the fair value of all of our reporting units was reasonable when compared to our market capitalization on the date of the goodwill impairment analysis. As of December 31, 2009 and 2008, our estimated enterprise fair value was $413.6 million and $274.2 million, respectively. As of December 31, 2009 and 2008, our market capitalization was $328.8 million and $208.7 million, respectively. The difference between the fair value of the enterprise and our market capitalization represented a control market premium of between 25% and 35%. We determined that a control market premium of between 25% and 35% was appropriate based on historical experience with purchase and sales transactions, the historical market trends based on our industry and the control market premium paid in relation to these transactions.
 
Management believes the preparation of revenue and profitability growth rates for use in the long-range plan and the discount rate requires significant use of judgment. If any of our aggregated reporting units do not meet our current year forecasted revenue and/or profitability estimates, we could be required to perform an interim goodwill impairment analysis in future periods. In addition, if our discount rate increases, we could be required to perform an interim goodwill impairment analysis. We performed a sensitivity analysis on the estimated fair value of our reporting units by decreasing profitability by 5%, 10% and 15% leaving all other assumptions constant and increasing the discount rate by 5% and 10% leaving all other assumptions constant. We did not identify any reporting units that would be required to perform an interim goodwill impairment analysis.
 
For our indefinite lived intangible assets, mainly trademarks, we estimated the fair value first by estimating the total revenue attributable to the trademarks for each of the reporting units. Second, we estimated an appropriate royalty rate using the return on assets method by estimating the required financial return on our assets, excluding trademarks, less the overall return generated by our total asset base. The return as a percentage of revenue provides an indication of our royalty rate (between 1.5% and 2%). We compared the estimated fair value of our trademarks with the carrying value of the trademarks and did not identify any impairment.
 
Long-lived assets, including definite-lived intangible assets, are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time. We did not identify any events or circumstances that would indicate the carrying amount of a long-lived asset may not be recovered.
 
In 2008, a goodwill impairment was identified and recorded at three reporting units which, in turn, triggered an impairment analysis with respect to long-lived assets at those reporting units. For our definite

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lived intangible assets, mainly customer relationships, we estimated the future cash flows using the excess earnings method, a derivation of the discounted cash flow method. We estimated total revenue attributable to existing customer relationships and projected customer revenue growth for the remainder of the projection period. Existing customer revenue was then multiplied by an attrition curve based on our historical attrition rates percent (approximately 4%) for each reporting unit. We estimated profitability for the customer relationship based on the overall reporting unit’s profitability. We compared the estimated future undiscounted cash flows to the carrying value of the customer relationship for each reporting unit and did not identify any impairment.
 
In 2009, the Company did not identify any impairments related to goodwill, definite lived intangible assets or indefinite lived intangible assets.
 
Income Taxes.  We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. We evaluate the realizability of our net deferred tax assets and assess the need for a valuation allowance on a quarterly basis. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income to realize the assets. We record a valuation allowance to reduce our net deferred tax assets to the amount that may be more likely than not to be realized. To the extent we establish a valuation allowance, an expense will be recorded within the provision for income taxes line on the statement of operations. In periods subsequent to establishing a valuation allowance, if we were to determine that we would be able to realize our net deferred tax assets in excess of our net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.


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Results of Operations
 
                         
    Amounts in thousands  
    Year Ended
    Year Ended
    Year Ended
 
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Net sales
  $ 452,846     $ 635,336     $ 584,376  
Cost of sales
    329,825       449,244       419,109  
                         
Gross profit
    123,021       186,092       165,267  
Gross profit percentage
    27.17 %     29.29 %     28.28 %
Selling, general and administrative expenses
    81,117       99,185       93,211  
Research and development expenses
    6,261       6,589       6,077  
Goodwill impairment
          31,810        
Loss (gain) on curtailment of post-retirement benefit plan
    (1,467 )     (925 )     2,745  
Restructuring costs
    7,286       2,310       2,399  
Loss on sale/disposal of assets
    545       1,584        
                         
Income from operations
    29,279       45,539       60,835  
Interest expense, net
    32,976       28,339       38,554  
Other non-operating (income) expense, net
    981       (6,249 )     612  
                         
Income (loss) from continuing operations before income taxes
    (4,678 )     23,449       21,669  
Provision (benefit) for income taxes
    (2,364 )     16,731       8,208  
                         
Income (loss) from continuing operations
    (2,314 )     6,718       13,461  
Loss from discontinued operations, net of income taxes of $43 in 2008 and $583 in 2007
          (224 )     (2,001 )
                         
Net income (loss)
  $ (2,314 )   $ 6,494     $ 11,460  
                         
 
Year Ended December 31, 2009 Compared with Year Ended December 31, 2008
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Net sales
  $ 452,846     $ 635,336     $ (182,490 )     (28.7 )%
 
Net sales The decrease in sales was almost exclusively due to overall economic decline which has impacted all of our end markets and industries. All of our operating segments saw double digit decreases in sales during 2009. During the fourth quarter of 2009, we began to see modest increases in our order rates, mainly related to our distribution customers, but until worldwide economic conditions improve, we expect continued weakness in our order rates. If the 2009 foreign exchange rates had remained constant when compared to 2008, sales would have decreased $163.6 million or 25.8%.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Gross Profit
  $ 123,021     $ 186,092     $ (63,071 )     (33.9 )%
Gross Profit as a percent of sales
    27.2 %     29.3 %                
 
Gross profit.  The decrease in gross profit was due to the significant decrease in sales. We have taken aggressive actions, including workforce and payroll reductions, facility consolidations and procurement savings to reduce our expenses and maximize near-term profitability. If our sales volume improves in 2010, we expect


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to see an improvement in our gross profit in 2010. If the 2009 foreign exchange rates had remained constant when compared to 2008, gross profit would have decreased $56.2 million or 30.2%. Our Gearings and Belted Drives operating segment’s gross profit as a percentage of sales decreased 5.3% in 2009 when compared to 2008. Gearings and Belted Drives sells into early cycle markets and began to see a large decrease in sales in November 2008. The decrease in sales volume impacted the Gearings and Belted Drives operating segment for almost all of 2009 and impacted that operating segment’s profitability. Our two operating segments that sell into late cycle markets, Global Couplings and Heavy Duty Clutch Brake, did not see a decrease in gross profit percentages in 2009 when compared to 2008. These two operating segments were not impacted by the global economic downturn until the middle of 2009. We expect the Global Couplings and Heavy Duty Clutch Brake operating segments to see decreased profit margins in 2010 when compared to 2009.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Selling, general and administrative expense (“SG&A”)
  $ 81,117     $ 99,185     $ (18,068 )     (18.2 )%
SG&A as a percent of sales
    17.9 %     15.6 %                
 
Selling, general and administrative expenses.  The decrease in SG&A was due to our cost reduction efforts which began in the fourth quarter of 2008. Our cost reduction efforts were focused on headcount reductions and the elimination of non-critical expenses which decreased our overall SG&A costs. As a result of decreased sales volume, we have seen a reduction in outside sales representative commission costs. In addition, during the year, we required certain U.S. personnel to take furloughs. Also, we suspended the Company’s 401(k) match and Company contributions and also temporarily reduced wages for the executive management team and fees for the Board of Directors. However, due to the significant decrease in sales, SG&A as a percent of sales increased despite our cost reduction efforts.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Research and development expenses (“R&D”)
  $ 6,261     $ 6,589     $ (328 )     (5.0 )%
 
Research and development expenses  R&D expenses represented approximately 1% of sales in both periods. We do not expect significant variances in future periods.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Other non-operating (income) expense, net
  $ 981     $ (6,249 )   $ 7,230       (116.0 )%
 
Other non-operating (income) expense.  The $1.0 million of other expense in 2009 is primarily related to $1.1 million of foreign exchange losses recorded during 2009, mainly due to the U.S. Dollar weakening when compared to the British Pound Sterling and Euro. In 2008, the Company recorded $5.0 million of foreign exchange gains due to the significant strengthening of the U.S. Dollar when compared to the British Pound Sterling, Euro and Canadian Dollar. During 2008, we recorded rental income of $0.6 million for facility rentals under lease agreements which were part of the sale of TB Wood’s Electronics Division and have a term of two years, with annual extensions thereafter at the lessee’s, or the Company’s option. In addition, we received $0.3 million in securities as part of a bankruptcy settlement
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Interest Expense, net
  $ 32,976     $ 28,339     $ 4,637       16.4 %


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Interest expense.  Net interest expense increased primarily due to the redemption of our 9% Senior Secured Notes for which we incurred a $5.3 million prepayment premium compared to $1.1 million in 2008. In addition, we wrote off all unamortized deferred financing costs and original issue discount of $5.8 million in 2009 compared to $2.8 million in 2008. These amounts were offset by lower interest expense due to lower average outstanding borrowings in 2009 as compared to previous periods For a more detailed description of the redemption of the 9% Senior Secured Notes and the pay down of the 11.25% Senior Notes, please see Note 11 to our Consolidated Financial Statements in this Form 10-K.
 
Goodwill impairment.  In 2008, we performed our annual impairment review of goodwill and identified a goodwill impairment of $31.8 million. We did not identify a goodwill impairment during our annual impairment review in 2009. If market conditions deteriorate in 2010, we may be required to take impairment charges in future periods.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Restructuring Expense
  $ 7,286     $ 2,310     $ 4,976       215.4 %
 
Restructuring.  During 2007, we adopted two restructuring programs. The first was intended to improve operational efficiency by reducing headcount, consolidating our operating facilities and relocating manufacturing to lower cost areas (the “Altra Plan”). The second was related to the acquisition of TB Wood’s and was intended to reduce duplicative staffing and consolidate facilities (the “TB Wood’s Plan”). We recorded approximately $2.3 million of restructuring expenses in 2008 for moving and relocation, severance and non-cash asset impairment. There were no costs related to the Altra Plan or the TB Wood’s Plan incurred in 2009.
 
In March 2009, we adopted a new restructuring plan (the “2009 Altra Plan”) to improve the utilization of our manufacturing infrastructure and to realign our business with the current economic conditions. The 2009 Altra Plan was intended to improve operational efficiency by reducing headcount and consolidating certain facilities. During 2009, we recorded $7.3 million of restructuring expenses, of which $4.2 million was related to severance, $0.6 million was related to other restructuring charges (primarily moving and relocation costs), and $2.5 million was non-cash impairment charges. We expect to incur between an additional $2.0 and $3.0 million of expenses associated with workforce reduction and consolidation of facilities in 2010. Beginning in 2010, we expect to see annualized savings from the headcount reductions and consolidation of facilities of approximately $52 million.
 
Other post employment benefit plan settlement gain.  In March 2009, we reached a new collective bargaining agreement with the union at our Erie, Pennsylvania facility. One of the provisions of the new agreement eliminated the benefits that employees were entitled to receive through the existing other post employment benefit plan (“OPEB”). OPEB benefits will no longer be available for retired and active employees. This resulted in a non-cash OPEB settlement gain of $1.5 million in 2009.
 
Loss on disposal of assets.  During 2009, we entered into a lease agreement at a new facility in China. As of December 31, 2009, we have exited our previous facility and moved into the new location. We recorded a loss of $0.3 million to dispose of the leasehold improvements associated with the old location.
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2009   2008   Change   %
 
Provision (benefit) for income taxes, continuing operations
  $ (2,364 )   $ 16,731     $ (19,095 )     (114.1 )%
Provision (benefit) for income taxes as a % of income before taxes
    (50.5 )%     71.4 %                
 
Provision for income taxes.  The 2009 benefit for income taxes was primarily due to our loss before income taxes. Additionally, the benefit further increased as a result of changing certain tax elections during 2009 and amending certain prior year returns to reflect those election changes. This benefit was partially offset by the establishment of reserves for uncertain tax positions and interest expense on previously reserved


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amounts. In 2008, we recorded additional tax expense due to the non-tax deductible portion of our goodwill impairment charge. For further discussion, refer to Note 8 in our consolidated financial statements.
 
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
 
                                 
    Amounts in thousands, except percentage data
    Year Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Net sales
  $ 635,336     $ 584,376     $ 50,960       8.7 %
 
Net sales.  For the year ended December 31, 2008, net sales increased $51.0 million compared to 2007. The increase is primarily due to the 2007 acquisitions of TB Wood’s and All Power, which contributed $31.7 million, price increases which contributed $13.0 million, strong after market sales, market share gains, the strength of several key markets, including energy and primary metals. During 2008, the price increases resulting from material cost increases (primarily copper and steel) were across all product lines and impacted all markets served. If the 2008 foreign exchange rates had remained constant when compared to 2007, sales would have increased $50.4 million. During the first nine months of 2008, sales would have increased $57.0 million or if the 2008 foreign exchange rates had remained constant when compared to 2007. If the 2008 foreign exchange rates had remained constant when compared to 2007, sales would have increased $0.1 million in the fourth quarter of 2008. During November and December of 2008, we saw a significant change in economic conditions both in North America and internationally as most of our end markets experienced dramatic downturns, as a result, our fourth quarter sales would have been relatively flat compared to the fourth quarter of 2007, if the 2008 foreign exchange rates had remained constant when compared to 2007.
 
.
 
                                 
    Amounts in thousands, except percentage data
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Gross Profit
  $ 186,092     $ 165,267     $ 20,825       12.6 %
Gross Profit as a percent of sales
    29.29 %     28.28 %                
 
Gross profit.  In 2008 gross profit increased $20.8 million compared to 2007. The increase is primarily related to the 2007 acquisitions of TB Wood’s and All Power, which added incremental gross profit of $8.2 million in 2008. Gross profit of other operations also increased due to price increases which contributed $13.0 million, an increase in low cost country material sourcing and manufacturing which contributed $5.3 million and further manufacturing efficiencies as a result of continued application of the Altra Business System. If the 2008 foreign exchange rates remained constant when compared to 2007, gross profit would have increased $20.6 million. During the first nine months of 2008, gross profit increased $21.2 million or $18.8 million if the 2008 foreign exchange rates remained constant when compared to 2007. During the fourth quarter of 2008 gross profit would have decreased $0.3 million compared to the prior year period. If the 2008 foreign exchange rates remained constant when compared to 2007, gross profit increased $1.8 million in the fourth quarter of 2008. The global economic slowdown experienced during 2008 and particularly during the fourth quarter of 2008 affected our markets and customers. As a result, our sales and therefore gross profit in the fourth quarter would have been flat when compared to the fourth quarter of 2007 if the 2008 foreign exchange rates remained constant compared to 2007.
 
Cost of sales benefited from warehousing fees of $0.3 million billed as a part of a transition services agreement which was entered into in connection with the sale of TB Wood’s Electronics Division. These warehousing services terminated in 2008.
 


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    Amounts in thousands, except percentage data
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Selling, general and administrative expense (“SG&A”)
  $ 99,185     $ 93,211     $ 5,974       6.4 %
SG&A as a percent of sales
    15.6 %     16.0 %                
 
Selling, general and administrative expenses.  The SG&A increase in 2008 was due primarily to the inclusion of TB Wood’s and All Power for the full year which added $4.8 million. The remaining increase resulted from additional amortization of intangible assets associated with the TB Wood’s acquisition, and wage and benefits increases, including healthcare costs and increased professional fees.
 
SG&A was net of a credit $1.1 million in income for billing related to our transition services agreement with Vacon for sales commissions, information technology, accounts payable and payroll services.
 
                                 
    Amounts in thousands, except percentage data
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Research and development expenses (“R&D”)
  $ 6,589     $ 6,077     $ 512       8.4 %
 
Research and development expenses.  R&D increased primarily due to the inclusion of TB Wood’s for a full year ending December 31, 2008, which amounted to $0.4 million incrementally.
 
                                 
    Amounts in thousands, except percentage data
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Other non-operating (income) expense, net
  $ (6,249 )   $ 612     $ (6,861 )     (1121.0 )%
 
Other non-operating (income) expense.  The $6.2 million of other income in 2008 is primarily related to $5.0 million of foreign exchange gains recorded mainly in the fourth quarter of 2008. During the fourth quarter, the U.S. Dollar strengthened significantly versus the British Pound Sterling and Canadian Dollar. In addition, the Euro strengthened significantly versus the British Pound Sterling. During 2008 we recorded rental income of $0.6 million for facility rentals under lease agreements which were part of the sale of TB Wood’s Electronics Division and have a term of two years, with annual extensions thereafter at the lessee’s, or the Company’s option. In addition, we received $0.3 million in securities as part of a bankruptcy settlement.
 
                                 
    Amounts in thousands, except percentage data
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Interest Expense, net
  $ 28,339     $ 38,554     $ (10,215 )     (26.5 )%
 
Interest expense.  Net interest expense decreased due to the lower average outstanding balance of 11.25% Senior Notes during 2008, which resulted in lower interest of $2.9 million compared to the prior year. In addition, in 2007, we incurred an additional $7.1 million of prepayment premiums associated with the pay down of the 11.25% Senior Notes as compared to the prepayment premiums on the pay-down of the 9% Senior Secured Notes in 2008. In addition, in 2007 we recorded $2.0 million related to the write-off of deferred financing fees and $0.5 million related to a bridge fee. This was offset by $1.4 million of additional interest expense in 2008 associated with the additional 9% Senior Secured Notes that were issued in the second quarter of 2007.
 
Goodwill impairment.  We performed our annual impairment review of goodwill during the fourth quarter of 2008. As a result of the annual goodwill impairment review, we determined that the goodwill associated with three reporting units was impaired, and therefore recorded a charge of $31.8 million. We

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believe that the global economic crisis and economic conditions within our industry end-markets during 2008 were the primary factors that led to the impairment of goodwill.
 
Restructuring.  During 2007, we adopted two restructuring programs, the Altra Plan and the TB Wood’s Plan. The total restructuring charge for the years ended December 31, 2008 and 2007 was $2.3 million and $2.4 million, respectively. In 2008, the restructuring expense is comprised of $0.2 million of non-cash asset impairment on fixed assets, $0.7 million of moving and relocation expenses and $1.4 million of severance expenses. In addition, in 2008, as part of the Altra Plan, the manufacturing plant in Erie, Pennsylvania was originally scheduled to close. As part of the plan and the plant closure agreement, employees were offered severance for continued service through their termination date. We were accruing the severance ratably from the communication date through the date of termination. In September 2008, we announced that the plant would not be closing and one manufacturing line would remain in operation at the facility. In connection with the announcement, we reversed $0.5 million of severance through the restructuring line in the income statement, that was no longer due to the employees. In 2007, the restructuring expense was comprised of $0.2 million of non cash fixed asset impairment, $1.3 million of moving and relocation expenses, $0.7 million of severance and $0.2 million of other expenses.
 
Curtailment.  One of our four U.S. collective bargaining agreements expired in September 2007. The negotiations originally resulted in a provision to close the Erie, Pennsylvania plant by December 2008 through the transfer of manufacturing equipment to other existing facilities and a ratable reduction in headcount. The plant closure triggered a special retirement pension feature and plan curtailment.
 
Under the special retirement pension feature, plan participants become eligible for pension benefits at an age earlier than the normal retirement feature would otherwise allow provided that service is broken by permanent shutdown, layoff or disability. The pension benefit is increased by a special supplemental benefit payment on a monthly basis and a special one time payment at the time of retirement. The curtailment and special termination benefits were approximately $2.9 million for the year ended December 31, 2007.
 
In August 2008, an announcement was made that we would no longer be closing the plant in Erie, Pennsylvania and that the Company would continue to employ those employees that had not previously been terminated. As a result of this announcement, the remaining employees are no longer eligible for the special retirement pension feature under the pension plan. An adjustment to the minimum pension liability was recorded in accumulated other comprehensive income, and will be amortized over the average expected remaining life expectancy of the participants of the plan.
 
In connection with the change at the Erie, Pennsylvania plant, as employees were terminated, we recorded a post-retirement benefit plan curtailment gain of $0.3 million and $0.2 million in 2008 and 2007, respectively.
 
During 2008, we entered into a new collective bargaining agreement at one of our plants in Warren, Michigan. The new collective bargaining agreement eliminated post retirement benefits to all employees who were previously eligible. This resulted in a plan curtailment and in the fourth quarter of 2008, we recorded a curtailment gain of $0.6 million.
 
Loss on disposal of assets.  We recognized losses on sale and abandonment of fixed assets at various locations during 2008 totaling $1.6 million.
 
                                 
    Year To Date Ended
    December 31,
  December 31,
       
    2008   2007   Change   %
 
Provision for income taxes, continuing operations
  $ 16,731     $ 8,208     $ 8,523       103.8 %
Provision for income taxes as a % of income before taxes
    71.4 %     37.9 %                
 
Provision for income taxes.  The provision for income taxes was $16.7 million, or 71.4% of income before taxes for 2008, versus a provision of $8.2 million, or 37.9% of income before taxes for 2007. The 2008 provision for income taxes was higher than the 2007 provision for income taxes primarily due to the non-tax deductible portion of the goodwill impairment charge.


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Discontinued Operations.  Loss from discontinued operations in the year to date period ended December 31, 2008, was comprised of a purchase price working capital adjustment, an adjustment to deferred taxes and an adjustment to the tax provision. The tax provision is comprised of taxes on the working capital adjustment and a revision of tax estimates made during 2007 based on the actual amounts filed on the Company’s tax return in 2008.
 
Liquidity and Capital Resources
 
Overview
 
We finance our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our senior secured revolving credit facility. We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, expenditures in connection with restructuring activities and pension plan funding. In the event additional funds are needed, we could borrow additional funds under our senior secured revolving credit facility, attempt to refinance our 81/8% Senior Notes (the “Senior Secured Notes”), or attempt to raise capital in equity markets. Presently, we have capacity under our senior secured revolving credit facility to borrow $50.0 million. Of this total capacity, we can borrow up to $27.1 million without being required to comply with any financial covenants under the agreement. In order to refinance the existing 81/8% Senior Secured Notes, we would incur a pre-payment premium. There can be no assurance however that additional debt financing will be available on commercially acceptable terms, if at all. Similarly, there can be no assurance that equity financing will be available on commercially acceptable terms, if at all.
 
During 2009, Altra Industrial retired the remaining principal balance of the 111/4% Senior Notes (the “Old Senior Notes”), of £3.3 million or $5.0 million of principal amount, plus accrued and unpaid interest. In connection with the redemption, Altra Industrial incurred $0.2 million of pre-payment premium and wrote-off the entire remaining balance of $0.2 million of deferred financing fees, which is recorded as interest expense in the Consolidated Statement of Income (loss).
 
Senior Secured Notes
 
In 2009, we issued $210 million of Senior Secured Notes due December 1, 2016. The Senior Secured Notes are guaranteed by the Company’s U.S. domestic subsidiaries and are secured by a second priority lien, subject to first priority liens securing our senior secured revolving credit facility, on substantially all of our assets and those of our domestic subsidiaries. Interest on the Senior Secured Notes is payable in arrears, semiannually on June 1 and December 1 of each year, commencing on June 1, 2010. The indenture governing the Senior Secured Notes contains covenants which restrict our subsidiaries. These restrictions limit or prohibit, among other things, their ability to incur additional indebtedness; repay subordinated indebtedness prior to stated maturities; pay dividends on or redeem or repurchase stock or make other distributions; make investments or acquisitions; sell certain assets or merge with or into other companies; sell stock in our subsidiaries; and create liens on their assets. We were in compliance with all covenants of the indenture governing the Senior Secured Notes at December 31, 2009
 
Tender Offer
 
We used the proceeds of the offering of the Senior Secured Notes to repurchase or redeem Altra Industrial’s 9% Old Senior Secured Notes. On November 10, 2009, Altra Industrial commenced a cash tender offer to repurchase any and all of the outstanding Old Senior Secured Notes as of the date thereof at a price equal to $1,000.00 per $1,000 principal amount of notes tendered, plus an early tender premium of $25.00 per $1,000 principal amount of notes tendered, payable on notes tendered before the early tender deadline. Holders who tendered their Old Senior Secured Notes also agreed to waive any rights to written notice of redemption. With respect to any Old Senior Secured Notes that were not tendered, we redeemed all Old Senior Secured Notes that remained outstanding after the expiration of the tender offer by issuing a notice of redemption on the early tender deadline. On the early tender deadline, we satisfied and discharged all of our obligations under the indenture governing the Old Senior Secured Notes by depositing funds with the depositary in an amount sufficient to pay and discharge any remaining indebtedness on the Old Senior Secured Notes upon the consummation of the tender offer.


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Borrowings
 
                 
    Amounts in millions  
    December 31,
    December 31,
 
    2009     2008  
 
Debt:
               
Revolving Credit Agreement
  $     $  
Old Revolving Credit Agreement
           
Old TB Wood’s Revolving Credit Agreement
          6.0  
Overdraft agreements
           
Senior Secured Notes
    210.0        
Old Senior Secured Notes
          242.5  
Old Senior Notes
          4.7  
Variable rate demand revenue bonds
    5.3       5.3  
Mortgages
    3.1       2.3  
Capital leases
    1.8       2.6  
                 
Total Debt
  $ 220.2     $ 263.4  
                 
 
Senior Secured Credit Facility
 
Concurrently with the closing of the offering of the Old Senior Secured Notes, Altra Industrial entered into a new Senior Secured Credit Facility (the “Revolving Credit Agreement”), that provides for borrowing capacity in an initial amount of up to $50.0 million (subject to adjustment pursuant to a borrowing base and subject to increase from time to time in accordance with the terms of the credit facility). The Revolving Credit Agreement replaced Altra Industrial’s then existing senior secured credit facility (the “Old Revolving Credit Agreement”), and the TB Wood’s existing credit facility (the“Old TB Wood’s Revolving Credit Agreement”).
 
Altra Industrial and all of its domestic subsidiaries are borrowers, or “Borrowers”, under the Revolving Credit Agreement. Certain of our existing and subsequently acquired or organized domestic subsidiaries which are not Borrowers do and will guarantee (on a senior secured basis) the Revolving Credit Agreement. Obligations of the other Borrowers under the Revolving Credit Agreement and the guarantees are secured by substantially all of Borrowers’ assets and the assets of each of our existing and subsequently acquired or organized domestic subsidiaries that is a guarantor of our obligations under the Revolving Credit Agreement (with such subsidiaries being referred to as the “U.S. subsidiary guarantors”), including but not limited to: (a) a first-priority pledge of all the capital stock of subsidiaries held by Borrowers or any U.S. subsidiary guarantor (which pledge, in the case of any foreign subsidiary, will be limited to 100% of any non-voting stock and 65% of the voting stock of such foreign subsidiary) and (b) perfected first-priority security interests in and mortgages on substantially all tangible and intangible assets of each Borrower and U.S. subsidiary guarantor, including accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, certain real property, cash and proceeds of the foregoing (in each case subject to materiality thresholds and other exceptions).
 
An event of default under the Revolving Credit Agreement would occur in connection with a change of control, among other things, if: (i) Altra Industrial ceases to own or control 100% of each of its borrower subsidiaries, or (ii) a change of control occurs under the Senior Secured Notes, or any other subordinated indebtedness.
 
An event of default under the Revolving Credit Agreement would also occur if an event of default occurs under the indentures governing the Senior Secured Notes or if there is a default under any other indebtedness of any borrower may have involving an aggregate amount of $10 million or more and such default: (i) occurs at final maturity of such debt, (ii) allows the lender there under to accelerate such debt or (iii) causes such debt to be required to be repaid prior to its stated maturity. An event of default would also occur under the Revolving Credit Agreement if any of the indebtedness under the Revolving Credit Agreement ceases with limited exception to be secured by a full lien of the assets of Borrowers and guarantors.


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As of December 31, 2009, we were in compliance with all covenant requirements associated with all of our borrowings. As of December 31, 2009, we had no borrowing and $10.4 million in letters of credit outstanding under the Revolving Credit Agreement.
 
Old TB Wood’s Revolving Credit Agreement
 
As part of the TB Wood’s acquisition in 2007, the Company refinanced $13.0 million of debt associated with TB Wood’s line of credit. As of December 31, 2008, there was $6.0 million of debt outstanding under the Old TB Wood’s Revolving Credit Agreement. As of December 31, 2008 there was $6.0 million of outstanding letters of credit. In connection with the Revolving Credit Agreement described above, the Old TB Wood’s Revolving Credit Agreement was paid in full.
 
Old Revolving Credit Agreement
 
In connection with the PTH Acquisition, we incurred substantial indebtedness. To partially fund the PTH acquisition, Altra Industrial issued $165.0 million of Old Senior Secured Notes and Altra Industrial entered into a $30.0 million senior revolving credit facility, (the “Old Revolving Credit Agreement”). The Old Revolving Credit Agreement provided for senior secured financing of up to $30.0 million, including $10.0 million available for letters of credit. As of the date of refinancing, we were in compliance with all covenant requirements associated with all of our borrowings. The Old Revolving Credit Agreement was terminated in connection with the entering into of the Revolving Credit Agreement.
 
In connection with our acquisition of Hay Hall in February 2006, Altra Industrial issued £33.0 million of Old Senior Notes. Based on an exchange rate of 1.7462 U.S. Dollars to U.K. pounds sterling (as of February 8, 2006), the proceeds from these notes were approximately $57.6 million. The notes were unsecured and were due in 2013. Interest on the Old Senior Notes was payable in U.K. pounds sterling semiannually in arrears on February 15 and August 15 of each year, commencing August 15, 2006. In connection with our acquisition of TB Wood’s in April 2007, Altra Industrial issued an additional $105.0 million of its Old Senior Secured Notes. During 2009, the outstanding Old Senior Notes were redeemed.
 
Net Cash
 
                 
    December 31,
  December 31,
    2009   2008
    (In thousands)
 
Cash and cash equivalents
  $ 51,497     $ 52,073  
 
Highlights:
 
  •      In 2009, we generated significant cash through the reduction of inventory of $28.2 million related to a reduction in purchasing as a result of the economic downturn and we also reduced Accounts Receivable by $19.3 million.
 
  •      In 2009, we issued $210 million of 81/8% Senior Secured Notes due December 2016. We used the proceeds of the offering of the 81/8% Senior Secured Notes to repurchase or redeem $205.3 million of Altra Industrial’s 9% Old Senior Secured Notes and to pay related fees, expenses and other costs of $7.6 million.
 
  •      In 2009, the $6.0 million of debt under the Old TB Wood’s Revolving Credit Agreement was paid in full.
 
  •      During 2009, we retired the remaining principal balance of the 111/4% Old Senior Notes of £3.3 million ($5.0 million) of principal amount, plus accrued and unpaid interest. In connection with the redemption, we incurred $0.2 million of pre-payment premium and wrote-off the entire remaining balance of $0.2 million of deferred financing fees
 
We intend to use our remaining existing cash and cash equivalents and cash flow from operations to provide for our working capital needs and to fund potential future acquisitions, debt services, capital expenditures, and pension funding. We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs. Furthermore, the existing cash balances and the availability of additional borrowings under our Revolving Credit Agreement provide additional potential sources of liquidity should they be required.


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Cash Flows for 2009
 
The primary source of funds for our fiscal year 2009 was cash provided by operating activities of $59.4 million. Net cash used in investing activities of $9.2 million for purchases of property, plant and equipment primarily for investment in manufacturing equipment. Net cash used in financing activities of $54.0 million for 2009 consisted primarily of $242.5 million of payments on the 9% Old Senior Secured Notes, and $5.0 million of payments on the 111/4% Old Senior Notes, offset by $207.3 million of proceeds from the issuance of the 81/8% Senior Secured Notes.
 
Cash Flows for 2008
 
Net cash provided by operating activities for 2008 of $45.1 million, resulted mainly from net income of $6.5 million, non-cash depreciation, amortization of intangibles and deferred financing costs, accretion of debt discount, goodwill impairment charges, loss on the sale of the TB Wood’s Electronics Division, loss on disposal of fixed assets, non-cash stock compensation expense and the provision for deferred taxes of $61.1 million. This was offset by a non-cash gain on foreign exchange, OPEB curtailment gain and a net change in working capital of $22.5 million.
 
Capital Expenditures
 
We made capital expenditures of approximately $9.2 million and $19.3 million in the years ended December 31, 2009 and December 31, 2008, respectively. These capital expenditures will support on-going business needs. In 2010, we expect capital expenditures to be approximately $12.0 million.
 
Pension Plans
 
As of December 31, 2009, we had minimum cash funding requirements associated with our pension plan which we estimated to be zero in 2010, $1.2 million in 2011, $1.2 million in 2012 and $0.6 million in 2013 and $1.2 million in 2014. These amounts represent minimum funding requirements for the previous pension benefits we provided our employees. In addition to the minimum funding requirements, we may choose to make additional supplemental payments to the plan.
 
One of the Company’s four U.S. collective bargaining agreements expired in September 2007. In October 2007, negotiations with the union covered by that agreement resulted in a provision to close the Erie, Pennsylvania plant by December 2008 through the transfer of manufacturing equipment to other existing facilities and a ratable reduction in headcount. The plant closure triggered a special retirement pension feature and plan curtailment.
 
Under the special retirement pension feature, plan participants became eligible for pension benefits at an age earlier than the normal retirement feature would allow, provided that service is broken by permanent shutdown, layoff or disability. The pension benefit was increased by a special supplemental benefit payment on a monthly basis and a special one time payment at the time of retirement. The curtailment and special termination benefits were approximately $2.9 million for the year ended December 31, 2007.
 
In August 2008, an announcement was made that we would no longer close the plant in Erie, Pennsylvania, and would continue to employ those employees that had not previously been terminated and begin to negotiate a new collective bargaining agreement for the remaining employees. As a result of this announcement, the remaining employees are no longer eligible for the special retirement pension feature under the pension plan. An adjustment to the minimum pension liability was recorded in accumulated other comprehensive income, and will be amortized over the average expected remaining life expectancy of the participants of the plan.
 
In March 2009, the Company reached a new collective bargaining agreement with the union at its Erie, Pennsylvania facility. One of the provisions of the new agreement eliminates benefits that employees were entitled to receive through the applicable other post employment benefit plan (“OPEB”). OPEB benefits will no longer be available to retired or active employees. This resulted in a non-cash OPEB settlement gain of $1.5 million in 2009. In addition, no additional years of credited service will be accrued on the defined benefit pension plan effective February 28, 2009. There was no curtailment gain or loss as a result of the change in the pension plan, the plan had no unrecognized prior service cost and there was no change in the projected benefit obligation.


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Also, in connection with the union renegotiation, the post retirement benefit plan for employees at that location have been terminated for all eligible employees who had not retired, or given notice to retire in 2007. As employees terminated their employment, we recognized a non-cash gain of $0.3 million and $0.2 million in the year ended 2008 and 2007, respectively.
 
In September 2008, we reached a new collective bargaining agreement with the labor union at the manufacturing facility in Warren, Michigan. The new collective bargaining agreement eliminated post-retirement healthcare benefits for all employees and retirees. This resulted in a settlement gain of $0.6 million in the year ended 2008.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our consolidated financial statements.
 
Contractual Obligations
 
The following table is a summary of our contractual cash obligations as of December 31, 2009 (in millions):
 
                                                         
    Payments Due by Period  
    2010     2011     2012     2013     2014     Thereafter     Total  
 
Senior Secured Notes(1)
  $     $     $     $     $     $ 210.0     $ 210.0  
Operating leases
    2.6       4.1       3.7       2.2       1.6       2.6       16.8  
Capital leases
    0.9       0.8       0.3                         2.0  
Mortgage(2)
    0.3       0.3       1.5       0.4       0.4       0.2       3.1  
Variable Rate Demand Revenue Bonds(3)
                                  5.3       5.3  
Revolving Credit Agreement(4)
                                         
                                                         
Total contractual cash obligations
  $ 3.8     $ 5.2     $ 5.5     $ 2.6     $ 2.0     $ 218.1     $ 237.2  
                                                         
 
 
(1) We have semi-annual cash interest requirements due on the Senior Secured Notes with $17.1 million payable in 2010 through 2015, and $15.6 million due in 2016.
 
(2) In June, 2006, our German subsidiary entered into a mortgage on its building in Heidelberg, Germany, with a local bank. The mortgage has a principal of €2.2 million as of December 31, 2009, an interest rate of 3.5% and is payable in monthly installments over the next 6 years.
 
(3) In April 2007, as part of the TB Wood’s acquisition, we assumed obligation for payment of interest and principal on the Variable Rate Demand Revenue Bonds. These bonds bear variable interest rates and mature in April 2022 and April 2024.
 
(4) We have up to $50.0 million of borrowing capacity, through November 2012, under our Revolving Credit Agreement (including $30 million available for use for letters of credit). As of December 31, 2009, there were no outstanding borrowings and $10.4 million of outstanding letters of credit under our Revolving Credit Agreement.
 
We have cash funding requirements associated with our pension plan. As of December 31, 2009, these requirements were estimated to be zero for 2010, $1.2 million for 2011, $1.2 million for 2012, $0.6 million for 2013 and $1.2 million for 2014.
 
We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $9.7 million as of December 31, 2009, have been excluded from the contractual obligations table above. For further information on unrecognized tax benefits, see Note 8 to the consolidated financial statements.


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Stock-based Compensation
 
In January 2005, we established the 2004 Equity Incentive Plan that provides for various forms of stock based compensation to our officers and senior level employees.
 
As of December 31, 2009, there were 560,081 shares of unvested restricted stock outstanding under the plan. The remaining compensation cost to be recognized through 2012 is $2.2 million. Based on the stock price at December 31, 2009, of $12.35 per share, the intrinsic value of these awards as of December 31, 2009, was $6.9 million.
 
Income Taxes
 
We are subject to taxation in multiple jurisdictions throughout the world. Our effective tax rate and tax liability will be affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and repatriate income, and changes in law. Generally, the tax liability for each legal entity is determined either (a) on a non-consolidated and non-combined basis or (b) on a consolidated and combined basis only with other eligible entities subject to tax in the same jurisdiction, in either case without regard to the taxable losses of non-consolidated and non-combined affiliated entities. As a result, we may pay income taxes to some jurisdictions even though on an overall basis we incur a net loss for the period.
 
Seasonality
 
We experience seasonality in our turf and garden business, which in recent years has represented approximately 10% of our net sales. As our large OEM customers prepare for the spring season, our shipments generally start increasing in December, peak in February and March, and begin to decline in April and May. This allows our customers to have inventory in place for the peak consumer purchasing periods for turf and garden products. The June-through-November period is typically the low season for us and our customers in the turf and garden market. Seasonality is also affected by weather and the level of housing starts.
 
Inflation
 
Inflation can affect the costs of goods and services we use. The majority of the countries that are of significance to us, from either a manufacturing or sales viewpoint, have in recent years enjoyed relatively low inflation. The competitive environment in which we operate inevitably creates pressure on us to provide our customers with cost-effective products and services.
 
Recent Accounting Pronouncements
 
In December 2008, the Financial Accounting Standards Boards (“FASB”) issued enhanced disclosure requirements for defined benefit pension and other postretirement benefit plan assets. The additional disclosures are intended to provide users of financial statements with an enhanced understanding of (a) how investment allocation decisions are made, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and (e) significant concentrations of risk within plan assets. See Note 9 to consolidated financial statements for our enhanced disclosure.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to various market risk factors such as fluctuating interest rates, changes in foreign currency rates and changes in commodity prices. At present, we do not utilize derivative instruments to manage these risks.
 
Currency translation.  The results of operations of our foreign subsidiaries are translated into U.S. Dollars at the average exchange rates for each period concerned. The balance sheets of foreign subsidiaries are translated into U.S. Dollars at the exchange rates in effect at the end of each period. Any adjustments resulting from the translation are recorded as other comprehensive income. As of December 31, 2009 and 2008, the aggregate total assets (based on book value) of foreign subsidiaries were $76.8 million and $73.5 million, respectively, representing approximately 55.3% and 57.0%, respectively, of our total assets


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(based on book value). Our foreign currency exchange rate exposure is primarily with respect to the Euro and British Pound Sterling. The approximate exchange rates in effect at December 31, 2009 and 2008, were $1.43 and $1.41, respectively to the Euro. The approximate exchange rates in effect at December 31, 2009 and 2008 were $1.59 and $1.45, respectively to the British Pound Sterling.
 
Currency transaction exposure.  Currency transaction exposure arises where actual sales, purchases and financing transactions are made by a business or company in a currency other than its own functional currency. Any transactional differences at an international location are recorded in net income on a monthly basis.
 
Interest rate risk.  The majority of our debt is fixed rate debt, however we are subject to market exposure to changes in interest rates on some of our financing activities. This exposure relates to borrowings under our Revolving Credit Agreement, and our Variable Rate Demand Revenue Bonds. Our Revolving Credit Agreement is payable at prime rate plus 0.25% in the case of prime rate loans, or LIBOR rate plus an applicable spread of 2.75% to 3.25%, in the case of LIBOR rate loans. The applicable spread varies depending on the average amount that is unavailable under the Revolving Credit Agreement during the most recent quarter. As of December 31, 2009, we had no borrowings under our Revolving Credit Agreement and $10.4 million of outstanding letters of credit under our Revolving Credit Agreement. The Variable Rate Demand Revenue Bonds have a variable interest rate that was less than 1% as of December 31, 2009. Due to the minimal amounts of outstanding debt a hypothetical change in interest rates of 1% would not have a material effect on our near-term financial condition or results of operations.
 
Commodity Price Exposure.  We have exposure to changes in commodity prices principally related to metals including steel, copper and aluminum. We primarily mange our risk associated with such increases through the use of surcharges or general pricing increases for the related products. We do not engage in the use of financial instruments to hedge our commodities price exposure.


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Item 8.   Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Altra Holdings, Inc.
Braintree, Massachusetts
 
We have audited the accompanying consolidated balance sheet of Altra Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/  Deloitte & Touche LLP
 
Boston, Massachusetts
March 9, 2010


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
of Altra Holdings, Inc.
 
We have audited the accompanying consolidated balance sheet of Altra Holdings, Inc. as of December 31, 2008, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2008. Our audits also included the consolidated financial statement schedule listed in the index at Item 15(a)(2) for each of the two years in the period ended December 31, 2008. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Altra Holdings, Inc. at December 31, 2008, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule for each of the two years in the period ended December 31, 2008, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for income tax uncertainties with the adoption of the guidance originally issued in Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in FASB ASC Topic 740, Income Taxes) effective January 1, 2007.
 
/s/  Ernst & Young LLP
 
Boston, Massachusetts
March 6, 2009, except for Note 17,
as to which the date is November 4, 2009


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ALTRA HOLDINGS, INC.
 
Consolidated Balance Sheets
Amounts in thousands, except share amounts
 
                 
    December 31,
    December 31,
 
    2009     2008  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 51,497     $ 52,073  
Trade receivable, less allowance for doubtful accounts of $1,434 and $1,277 at December 31, 2009 and 2008, respectively
    52,855       68,803  
Inventories
    71,853       98,410  
Deferred income taxes
    9,265       8,032  
Assets held for sale (See Note 5)
          4,676  
Income tax receivable
    4,754       2,581  
Prepaid expenses and other current assets
    3,647       3,933  
                 
Total current assets
    193,871       238,508  
Property, plant and equipment, net
    105,603       110,220  
Intangible assets, net
    74,905       79,339  
Goodwill
    78,832       77,497  
Deferred income taxes
    679       495  
Other non-current assets
    11,309       7,525  
                 
Total assets
  $ 465,199     $ 513,584  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 27,421     $ 33,890  
Accrued payroll
    12,133       16,775  
Accruals and other current liabilities
    19,971       18,755  
Deferred income taxes
    7,275       6,906  
Current portion of long-term debt
    1,059       3,391  
                 
Total current liabilities
    67,859       79,717  
Long-term debt — less current portion and net of unaccreted discount and premium
    216,490       258,132  
Deferred income taxes
    21,051       23,336  
Pension liabilities
    9,862       11,854  
Other post retirement benefits
    405       2,270  
Long-term taxes payable
    9,661       7,976  
Other long-term liabilities
    928       1,434  
Commitments and contingencies (See Note 15)
           
Stockholders’ equity:
               
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued or outstanding at December 31, 2009 and 2008, respectively)
           
Common stock ($0.001 par value, 90,000,000 shares authorized, 26,057,993 and 25,582,543 issued and outstanding at December 31, 2009 and 2008, respectively)
    26       26  
Additional paid-in capital
    132,552       129,604  
Retained earnings
    21,011       23,325  
Accumulated other comprehensive income
    (14,646 )     (24,090 )
                 
Total stockholders’ equity
    138,943       128,865  
                 
Total liabilities and stockholders’ equity
  $ 465,199     $ 513,584  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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ALTRA HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands, except per share data
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Net sales
  $ 452,846     $ 635,336     $ 584,376  
Cost of sales
    329,825       449,244       419,109  
                         
Gross profit
    123,021       186,092       165,267  
Operating expenses:
                       
Selling, general and administrative expenses
    81,117       99,185       93,211  
Research and development expenses
    6,261       6,589       6,077  
Goodwill impairment
          31,810        
(Gain) loss from settlement/curtailment of post employment benefit and pension plans
    (1,467 )     (925 )     2,745  
Restructuring costs
    7,286       2,310       2,399  
Loss on disposal of assets
    545       1,584        
                         
      93,742       140,553       104,432  
Income from operations
    29,279       45,539       60,835  
Other non-operating income and expense:
                       
Interest expense, net
    32,976       28,339       38,554  
Other non-operating (income) expense, net
    981       (6,249 )     612  
                         
      33,957       22,090       39,166  
Income (loss) from continuing operations before income taxes
    (4,678 )     23,449       21,669  
(Benefit) provision for income taxes
    (2,364 )     16,731       8,208  
                         
Net income (loss) from continuing operations
    (2,314 )     6,718       13,461  
Net loss from discontinued operations, net of income taxes of $43 in 2008 and $583 in 2007
          (224 )     (2,001 )
                         
Net income (loss)
  $ (2,314 )   $ 6,494     $ 11,460  
                         
Consolidated Statement of Comprehensive Income (Loss)
                       
Pension liability adjustment
    514       (2,038 )     482  
Foreign currency translation adjustment
    8,930       (23,975 )     4,505  
                         
Comprehensive income (loss)
  $ 7,130     $ (19,519 )   $ 16,447  
                         
Weighted average shares, basic
    25,945       25,496       23,579  
Weighted average shares, diluted
    25,945       26,095       24,630  
Basic earnings per share:
                       
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.57  
Net loss from discontinued operations
          (0.01 )     (0.08 )
                         
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.49  
                         
Diluted earnings per share:
                       
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.55  
Net loss from discontinued operations
          (0.01 )     (0.08 )
                         
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.47  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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ALTRA HOLDINGS, INC.
 
Consolidated Statements of Stockholders’ Equity
Amounts in thousands
 
                                                 
                            Accumulated Other
       
    Common
          Additional Paid
    Retained
    Comprehensive
       
    Stock     Shares     in Capital     Earnings     Income (Loss)     Total  
 
Balance at December 31, 2006
  $ 21       21,468     $ 76,907     $ 5,552     $ (3,064 )   $ 79,416  
                                                 
Issurance of common stock, net of offering costs
    3       3,178       48,708                   48,711  
Stock based compensation and vesting of restricted stock
    1       483       2,038                   2,039  
Net income
                      11,460             11,460  
Adoption of ASC 740
                      (181 )           (181 )
Cumulative foreign currency translation adjustment, net of $1,873 tax expense
                            4,505       4,505  
Minimum pension liability adjustment, net of $28 tax expense
                            482       482  
                                                 
Balance at December 31, 2007
  $ 25       25,129     $ 127,653     $ 16,831     $ 1,923     $ 146,432  
                                                 
Stock based compensation and vesting of restricted stock
    1       454       1,951                   1,952  
Net income
                            6,494               6,494  
Cumulative foreign currency translation adjustment, net of $1,594 of tax expense
                            (23,975 )     (23,975 )
Minimum pension liability adjustment, net of $1,044 tax benefit
                            (2,038 )     (2,038 )
                                                 
Balance at December 31, 2008
  $ 26       25,583     $ 129,604     $ 23,325     $ (24,090 )   $ 128,865  
                                                 
Stock based compensation and vesting of restricted stock
          475       2,948                   2,948  
Net loss
                            (2,314 )           (2,314 )
Cumulative foreign currency translation adjustment, net of $478 of tax expense
                            8,930       8,930  
Minimum pension liability adjustment, net of $316 tax expense
                            514       514  
                                                 
Balance at December 31, 2009
  $ 26       26,058     $ 132,552     $ 21,011     $ (14,646 )   $ 138,943  
                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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ALTRA HOLDINGS, INC.

Consolidated Statements of Cash Flows
Amounts in thousands
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Cash flows from operating activities
                       
Net income (loss)
  $ (2,314 )   $ 6,494     $ 11,460  
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
                       
Depreciation
    16,534       15,379       16,447  
Amortization of intangible assets
    5,538       5,689       5,492  
Amortization and write-offs of deferred loan costs
    4,062       2,133       3,448  
(Gain) loss on foreign currency, net
    1,104       (5,049 )     732  
Accretion and write-off of debt discount and premium
    1,912       898       774  
Goodwill impairment charges
          31,810        
Amortization of inventory fair value adjustment
                926  
Gain (loss) on sale of Electronics Division
          224       (2,927 )
Loss on disposal/impairment of fixed assets
    2,891       1,584       313  
(Gain) loss on settlement/curtailment of other post retirement benefit and pension plans
    (1,467 )     (925 )     2,745  
Stock based compensation
    3,267       1,951       2,038  
Provision for deferred taxes
    (1,804 )     1,401       5,455  
Changes in assets and liabilities:
                       
Trade receivables
    19,267       (933 )     4,318  
Inventories
    28,180       (2,074 )     (2,277 )
Accounts payable and accrued liabilities
    (17,924 )     (13,268 )     (10,690 )
Other current assets and liabilities
    376       1,269       3,735  
Other operating assets and liabilities
    (234 )     (1,469 )     (181 )
                         
Net cash provided by operating activities
    59,388       45,114       41,808  
                         
Cash flows from investing activities
                       
Purchase of property, plant and equipment
    (9,194 )     (19,289 )     (11,633 )
Proceeds from sale of Electronics Division, net of cash of $1,072
          17,310       10,828  
Payments for prior year acquisitions
          (1,708 )      
Acquisitions, net of $5,222 of cash acquired in 2007
                (123,867 )
                         
Net cash used in investing activities
    (9,194 )     (3,687 )     (124,672 )
                         
Cash flows from financing activities
                       
Proceeds from issuance of 9% Old Senior Secured Notes
                106,050  
Payments on 9% Old Senior Secured Notes
    (242,500 )     (27,500 )      
Payment of debt issuance costs
    (7,561 )           (4,235 )
Payments on 111/4% Old Senior Notes
    (4,950 )     (1,346 )     (58,428 )
Borrowings under revolving credit agreements
                8,315  
Payments on revolving credit agreements
    (6,000 )     (1,723 )     (13,520 )
Payment on mortgages
    (584 )     (266 )     (126 )
Proceeds from secondary public offering
                49,592  
Proceeds from additional borrowings under an existing mortgage
    1,467              
Proceeds from issuance of 81/8% Senior Secured Notes
    207,251              
Shares repurchased for tax withholding
    (319 )            
Payment of public offering costs
                (2,180 )
Payment on capital leases
    (820 )     (925 )     (931 )
                         
Net cash (used in) provided by financing activities
    (54,016 )     (31,760 )     84,537  
                         
Effect of exchange rate changes on cash and cash equivalents
    3,246       (3,401 )     1,607  
                         
Net change in cash and cash equivalents
    (576 )     6,266       3,280  
Cash and cash equivalents at beginning of year
    52,073       45,807       42,527  
                         
Cash and cash equivalents at end of period
  $ 51,497     $ 52,073     $ 45,807  
                         
Cash paid during the period for:
                       
Interest
  $ 27,887     $ 27,253     $ 36,961  
Income taxes
  $ 3,686     $ 17,277     $ 13,277  
Non-cash Financing:
                       
Acquisition of capital equipment under capital lease
  $     $ 352     $ 2,364  
 
The accompanying notes are an integral part of these consolidated financial statements.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements
Amounts in thousands (unless otherwise noted)
 
1.   Description of Business and Summary of Significant Accounting Policies
 
Basis of Preparation and Description of Business
 
Headquartered in Braintree, Massachusetts, Altra Holdings, Inc. (“the Company”), through its wholly-owned subsidiary Altra Industrial Motion, Inc. (“Altra Industrial”) is a leading multi-national designer, producer and marketer of a wide range of mechanical power transmission products. The Company brings together strong brands covering over 40 product lines with production facilities in eight countries and sales coverage in over 70 countries. The Company’s leading brands include Boston Gear, Warner Electric, TB Wood’s, Formsprag Clutch, Ameridrives Couplings, Industrial Clutch, Kilian Manufacturing, Marland Clutch, Nuttall Gear, Stieber Clutch, Wichita Clutch, Twiflex Limited, Bibby Transmissions, Matrix International, Inertia Dynamics, Huco Dynatork and Warner Linear.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
 
Net Income Per Share
 
Basic earnings per share is based on the weighted average number of common shares outstanding, and diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common equivalent shares outstanding. Common equivalent shares are included in the per share calculations when the effect of their inclusion would be dilutive.
 
The following is a reconciliation of basic to diluted net income (loss) per share:
 
                         
    Year Ended December 31,  
    2009     2008     2007  
 
Net income (loss) from continuing operations
  $ (2,314 )   $ 6,718     $ 13,461  
Net loss from discontinued operations
          (224 )     (2,001 )
                         
Net income (loss)
  $ (2,314 )   $ 6,494     $ 11,460  
Shares used in net income per common share — basic
    25,945       25,496       23,579  
Incremental shares of unvested restricted common stock
          599       1,051  
                         
Shares used in net income per common share — diluted
    25,945       26,095       24,630  
Earnings per share — Basic:
                       
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.57  
Net loss from discontinued operations
  $     $ (0.01 )   $ (0.08 )
                         
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.49  
                         
Earnings per share — Diluted:
                       
Net income (loss) from continuing operations
  $ (0.09 )   $ 0.26     $ 0.55  
Net loss from discontinued operations
  $     $ (0.01 )   $ (0.08 )
                         
Net income (loss)
  $ (0.09 )   $ 0.25     $ 0.47  
                         
 
Fair Value of Financial Instruments
 
The carrying values of financial instruments, including accounts receivable, accounts payable and other accrued liabilities, approximate their fair values due to their short-term maturities. The carrying amount of the 81/8% Senior Secured Notes (“Senior Secured Notes”) was $210.0 million as December 31, 2009. The carrying amount of the 9% Senior Secured Notes (“Old Senior Secured Notes”) was $242.5 million December 31, 2008. The carrying amount of the 11.25% Senior Notes (“Old Senior Notes”) was $4.7 million at December 31, 2008. The estimated fair value of the Senior Secured Notes at December 31, 2009 was


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
$215.5 million. The estimated fair value of the Old Senior Secured Notes at December 31, 2008 was $232.8 million based on quoted market prices for such notes. The estimated fair value of the Old Senior Notes was approximately £3.3 million ($4.7 million) as of December 31, 2008.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.
 
Foreign currency translation
 
Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. Dollar are translated into U.S. Dollars using exchange rates at the end of the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period.
 
Foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Net foreign currency transaction gains and losses are included in the results of operations in the period incurred and included in other non-operating expense (income), net in the accompanying statement of operations and comprehensive income (loss).
 
Cash and Cash Equivalents
 
Cash and cash equivalents include all financial instruments purchased with an initial maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value.
 
Trade Receivables
 
An allowance for doubtful accounts is recorded for estimated collection losses that will be incurred in the collection of receivables. Estimated losses are based on historical collection experience, as well as a review by management of the status of all receivables. Collection losses have been within the Company’s expectations.
 
Inventories
 
Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method for all entities excluding one of the Company’s subsidiaries, TB Wood’s. TB Wood’s inventory is stated at the lower of cost or market, principally using the last-in, first-out (“LIFO”) method. Inventory stated using the LIFO method approximates 13% of total inventory. The cost of inventories acquired by the Company in its acquisitions reflect their fair values at the date of acquisition as determined by the Company based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.
 
The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product or product line. The Company records a charge to cost of sales for any amounts required to reduce the carrying value of inventories to its estimated net realizable value.
 
Property, Plant and Equipment
 
Property, plant, and equipment are stated at cost, net of accumulated depreciation.
 
Depreciation of property, plant, and equipment, including capital leases is provided using the straight-line method over the estimated useful life of the asset, as follows:
 
         
Buildings and improvements
    15 to 45 years  
Machinery and equipment
    2 to 15 years  
Capital lease
    Life of lease  


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.
 
Intangible Assets
 
Intangibles represent product technology, patents, tradenames, trademarks and customer relationships. Product technology, patents and customer relationships are amortized on a straight-line basis over 8 to 16 years, which approximates the period of economic benefit. The tradenames and trademarks are considered indefinite-lived assets and are not being amortized. Intangibles are stated at fair value on the date of acquisition. At December 31, 2009 and 2008, intangibles are stated net of accumulated amortization incurred since the date of acquisition and any impairment charges.
 
Goodwill
 
Goodwill represents the excess of the purchase price paid by the Company for Power Transmission Holding, Inc. (“PTH”), The Kilian Company (“Kilian”), Hay Hall Ltd. (“Hay Hall”), Bear Linear Inc. (“Warner Linear”), TB Wood’s, Corporation. (“TB Wood’s”), and All Power Transmission Manufacturing, Inc. (“All Power”) over the fair value of the net assets acquired in each of the acquisitions. Goodwill can be attributed to the value placed on the Company being an industry leader with a market leading position in the Power Transmission industry. The Company’s leadership position in the market was achieved by developing and manufacturing innovative products and management anticipates that its leadership position and profitability will continue to expand, enhanced by cost improvement programs associated with ongoing consolidation and centralization of its operations.
 
The Company evaluates goodwill for impairment at the reporting unit level. The Company establishes its reporting units based on an analysis of the components that comprise each of our operating segments. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. Goodwill is assigned to reporting units as of the date of the related acquisition. To the extent assets and liabilities relate to multiple reporting units, they are allocated to the reporting units based on the relative fair value of each reporting unit. This requires significant use of judgment and estimates.
 
During 2009, the Company appointed a new Chief Operating Decision Maker (“CODM”) and went through an extensive restructuring plan. As a result of the change in the CODM and our restructuring activities, we re-evaluated our operating segments and reporting unit structure. We identified five operating segments and concluded that the five operating segments can be aggregated into one reportable segment. We also identified twenty-one reporting units and concluded that the reporting units could be aggregated into five reporting units when performing the goodwill impairment analysis.
 
Impairment of Goodwill and Indefinite-Lived Intangible Assets
 
The Company conducts an annual impairment review of goodwill and indefinite lived intangible assets in December of each year, unless events occur which trigger the need for an interim impairment review. In connection with the Company’s annual impairment review, goodwill and indefinite lived intangible assets are assessed for impairment by comparing the fair value of the reporting unit to the carrying value using a two step approach. In the first step, the Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate. If the carrying amount of the reporting unit exceeds the estimated fair value, impairment may be present, the Company would then be required to perform a second step in its impairment analysis. In the second step, the Company would evaluate impairment losses based upon the fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimate the implied fair value of the goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded value of the goodwill asset exceeded its calculated fair


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
value. In addition, to the extent the implied fair value of any indefinite-lived intangible asset is less than the assets carrying value, an impairment loss is recognized on those assets.
 
As a result of the annual goodwill impairment review in the fourth quarter of 2008, the Company determined that goodwill was impaired at three of its reporting units and therefore recorded a pre-tax charge of $31.8 million in the consolidated statement of operations. Significant declines in macroeconomic market conditions, substantial declines in global equity valuations and the Company’s market capitalization were the main causes of the goodwill impairment.
 
The Company did not identify any impairment of goodwill in 2009.
 
Preparation of forecasts of revenue and profitability growth for use in the long-range plan and the discount rate require significant use of judgment. Changes to the discount rate and the forecasted profitability could affect the estimated fair value of one or more of the Company’s reporting units and could result in a goodwill impairment charge in a future period.
 
Impairment of Long-Lived Assets Other Than Goodwill and Indefinite-Lived Intangible Assets
 
Long-lived assets, including definite-lived intangible assets, are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time.
 
During the fourth quarter of 2008, a goodwill impairment was identified and recorded at three of our reporting units. This indicated that there could be an impairment of long-lived assets at those reporting units. The Company performed an impairment analysis of our long-lived assets at the three reporting units that recorded a goodwill impairment charge. The undiscounted cash flows relating to the definite-lived assets exceeded the carrying value of those assets and therefore no impairment charge was recorded.
 
Determining fair values based on discounted cash flows requires management to make significant estimates and assumptions, including forecasting of revenue and profitability growth for use in the long-range plan and estimating appropriate discount rates.
 
Debt Issuance Costs
 
Costs directly related to the issuance of debt are capitalized, included in other long-term assets and amortized using the effective interest method over the term of the related debt obligation. The net carrying value of debt issuance costs was approximately $7.6 million and $4.0 million at December 31, 2009 and 2008, respectively.
 
Revenue Recognition
 
Product revenues are recognized, net of sales tax collected, at the time title and risk of loss pass to the customer, which generally occurs upon shipment to the customer. Product return reserves are accrued at the time of sale based on the historical relationship between shipments and returns, and are recorded as a reduction of net sales.
 
Certain large distribution customers receive quantity discounts which are recognized net at the time the sale is recorded.
 
Shipping and Handling Costs
 
Shipping and handling costs associated with sales are classified as a component of cost of sales.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
Warranty Costs
 
Estimated expenses related to product warranties are accrued at the time products are sold to customers. Estimates are established using historical information as to the nature, frequency, and average costs of warranty claims. See Note 7 to the consolidated financial statements.
 
Self-Insurance
 
Certain exposures are self-insured up to pre-determined amounts, above which third-party insurance applies, for medical claims, workers’ compensation, vehicle insurance, product liability costs and general liability exposure. The accompanying balance sheets include reserves for the estimated costs associated with these self-insured risks, based on historic experience factors and management’s estimates for known and anticipated claims. A portion of medical insurance costs are offset by charging employees a premium equivalent to group insurance rates.
 
Research and Development
 
Research and development costs are expensed as incurred.
 
Advertising
 
Advertising costs are charged to selling, general, and administrative expenses as incurred and amounted to approximately $1.3 million, $2.3 million and $2.4 million, for the years ended December 31, 2009, 2008, and 2007, respectively.
 
Stock-Based Compensation
 
The Company established the 2004 Equity Incentive Plan, as amended that provides for various forms of stock based compensation to officers, directors key employees and others who make significant contributions to the success of the Company. Expense associated with equity awards is recognized on a straight-line basis over the requisite service period which typically coincides with the vesting period of the grant.
 
Income Taxes
 
The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company evaluates the realizability of its net deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. The future benefit to be derived from its deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income to realize the assets. The Company records a valuation allowance to reduce its net deferred tax assets to the amount that may be more likely than not to be realized.
 
To the extent the Company establishes a valuation allowance on net deferred tax assets generated from operations, an expense will be recorded within the provision for income taxes. In periods subsequent to establishing a valuation allowance on net deferred assets from operations, if the Company were to determine that it would be able to realize its net deferred tax assets in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.
 
We assess our income tax positions and record tax benefits for all years subject to examination, based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the amount that has a greater than 50% likelihood of being realized upon settlement with the taxing authority that has full


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
knowledge of all relevant information. Interest and penalties are accrued, where applicable. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized.
 
Accumulated Other Comprehensive Income (Loss)
 
The Company’s total accumulated other comprehensive income (loss) is comprised of the following:
 
                         
        Cumulative
  Accumulated
    Minimum
  Foreign Currency
  Other
    Pension
  Translation
  Comprehensive
    Asset/(liability)   Adjustment   Income (Loss)
 
Balance at December 31, 2008
  $ 554     $ (24,644 )   $ (24,090 )
Balance at December 31, 2009
  $ 1,068     $ (15,714 )   $ (14,646 )
 
Reclassifications
 
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to the current period presentation. In the 2008 Consolidated Balance Sheet, the income tax receivable balance has been presented in a separate line in the balance sheet to conform with 2009 presentation.
 
2.   Recent Accounting Pronouncements
 
In December 2008, the Financial Accounting Standards Boards (“FASB”) issued enhanced disclosure requirements for defined benefit pension and other postretirement benefit plan assets. The additional disclosures are intended to provide users of financial statements with an enhanced understanding of (a) how investment allocation decisions are made, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and (e) significant concentrations of risk within plan assets. See Note 9 to consolidated financial statements for the Company’s enhanced disclosure.
 
3.   Discontinued Operations
 
On December 31, 2007, the Company completed the divestiture of its TB Wood’s adjustable speed drives business (“Electronics Division”) to Finland-based Vacon for $29.0 million. The decision to sell the Electronics Division was made to allow the Company to continue its strategic focus on its core electro-mechanical power transmission business.
 
As of December 31, 2007, $11.9 million of cash had been received from Vacon for the purchase of the Electronics Division. The remaining $17.1 million was recorded as a receivable for the sale of Electronics Division on the December 31, 2007 consolidated balance sheet. The Company collected the receivable in January 2008. The Company determined that the Electronics Division became a discontinued operation in the fourth quarter of 2007. Accordingly, the operating results of the Electronics Division were segregated from the continuing operations in the consolidated statements of operations and comprehensive income (loss) for the periods subsequent to the acquisition of TB Wood’s (April 5, 2007) through December 31, 2007.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
The following table summarizes the results from discontinued operations for the periods indicated:
 
         
    April 5 to
 
    December 31,
 
    2007  
 
Sales
  $ 28,715  
Cost of sales
    19,120  
         
Gross Profit
    9,595  
Selling, general and administrative expenses
    5,334  
Research and development
    1,825  
         
Operating income from continuing operations
    2,436  
Interest income, net
    (76 )
Other non-operating income
    (83 )
Gain on the sale of the Electronics Division
    1,513  
         
Total income from discontinued operations before income taxes
    4,108  
         
Income taxes
    6,109  
         
Total net loss from discontinued operations
  $ (2,001 )
         
 
In connection with the acquisition of TB Wood’s stock, all of the assets acquired and liabilities assumed were recorded at fair value on the date of acquisition. Because the transaction was an acquisition of stock, the historical tax basis in the stock acquired was carried over and became the tax basis for the Company resulting in significant book-tax differences. The deferred tax liabilities were not recorded in connection with the non-deductible goodwill resulting from the acquisition. In addition, there were significant differences between the outside and inside basis in the foreign subsidiaries’ stock that was sold as part of the disposal. As a result of these book-tax differences, we realized a significant gain on the sale of the Electronics Division for tax purposes but a much smaller gain for book purposes. As a result, the tax expense on the gain on the discontinued operations was significantly larger than one might expect when compared to the income from discontinued operations before taxes.
 
The Company entered into a transition services agreement to provide services such as sales support, warehousing, accounting and IT services to Vacon. The Company has recorded the income received as an offset to the related expense of providing the service. During 2008, the Company recorded $0.3 million against cost of sales, $1.1 million against SG&A and $0.6 million in other income related to lease payments for the rental of buildings. During 2009, the Company recorded $0.6 million in other income related to lease payments for the rental of buildings.
 
Loss from discontinued operations in the year ended December 31, 2008, was comprised of a purchase price working capital adjustment, net of tax and a revision of tax estimates made in 2007 based on the actual amounts filed on the Company’s tax return in 2008.
 
4.   Inventories
 
Inventories located at certain subsidiaries acquired in connection with the TB Wood’s acquisition are stated at the lower of current cost or market, principally using the last-in, first-out (LIFO) method. All of the Company’s remaining subsidiaries are stated at the lower of cost or market, using the first-in, first-out (FIFO)


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
method. The cost of inventory includes direct materials, direct labor and production overhead. Market is defined as net realizable value. Inventories at December 31, 2009 and 2008 consisted of the following:
 
                 
    December 31,
    December 31,
 
    2009     2008  
 
Raw Materials
  $ 28,539     $ 31,925  
Work in process
    13,711       21,310  
Finished goods
    29,603       45,175  
                 
Inventories, net
  $ 71,853     $ 98,410  
                 
 
Approximately 13% of total inventories at December 31, 2009, were valued using the LIFO method. The Company recorded as a component of cost of sales, a $0.1 million benefit and a provision of $1.1 million in the year ended December 31, 2009 and 2008, respectively. If the LIFO inventory was accounted for using the FIFO method, the inventory balance at December 31, 2009 and 2008, would be $0.4 million and $0.3 million lower, respectively.
 
5.   Property, Plant and Equipment
 
Property, plant and equipment at December 31, 2009 and 2008, consisted of the following:
 
                 
    2009     2008  
 
Land
  $ 13,363     $ 12,923  
Buildings and improvements
    35,030       31,597  
Machinery and equipment
    118,804       110,178  
                 
      167,197       154,698  
Less-Accumulated depreciation
    (61,594 )     (44,478 )
                 
    $ 105,603     $ 110,220  
                 
 
During the fourth quarter of 2007, management entered into a plan to exit the building located in Stratford, Canada. The operations of the facility, which was acquired as part of the TB Wood’s acquisition, were integrated into certain of the Company’s other existing facilities in 2008. In the second quarter of 2009, due to real estate market conditions in Stratford, Canada, the Company reevaluated the classification of this building as an asset held for sale and reclassified the building, with a net book value of $1.2 million, to held and used. As a result of the change in classification, the Company recorded a catch-up depreciation adjustment of $0.1 million in the year ended December 31, 2009.
 
As of December 31, 2008, management planned to exit two buildings, one in Scotland, Pennsylvania and one in Chattanooga, Tennessee. The two buildings were previously the operating facilities for the Electronics Division which was divested on December 31, 2007. The Company leases the space to Vacon. In the first quarter of 2009, due to real estate market conditions in Scotland, Pennsylvania and Chattanooga, Tennessee, the Company reevaluated the classification of these buildings as assets held for sale and reclassified the buildings, with a net book value of $3.5 million, to held and used. As a result of the change in classification, the Company recorded a catch-up depreciation adjustment of $0.2 million in 2009.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
 
6.   Goodwill and Intangible Assets
 
Changes in goodwill during the year ended December 31, 2009 and 2008, were as follows:
 
                 
    2009     2008  
 
Gross goodwill balance as of January 1
  $ 109,307     $ 114,979  
Adjustments to acquisition related tax contingencies
          (1,461 )
Impact of changes in foreign currency
    1,335       (4,211 )
                 
Gross goodwill balance as of December 31
    110,642       109,307  
                 
Accumulated impairment, January 1
    (31,810 )      
Impairment charge during period
          (31,810 )
                 
Accumulated impairment, December 31
    (31,810 )     (31,810 )
                 
Net goodwill balance December 31, 2009
  $ 78,832     $ 77,497  
                 
 
Other intangibles and related accumulated amortization consisted of the following:
 
                                 
    December 31, 2009     December 31, 2008  
          Accumulated
          Accumulated
 
    Cost     Amortization     Cost     Amortization  
 
Other Intangible Assets
                               
Intangible assets not subject to amortization:
                               
Tradenames and trademarks
  $ 30,730     $     $ 30,730     $  
Intangible assets subject to amortization:
                               
Customer relationships
    62,038       19,655       62,038       15,065  
Product technology and patents
    5,435       4,059       5,435       3,111  
Impact of changes in foreign currency
    416             (688 )      
                                 
Total intangible assets
  $ 98,619     $ 23,714     $ 97,515     $ 18,176  
                                 
 
The Company recorded $5.5 million, $5.7 million and $5.5 million of amortization for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Customer relationships, product technology and patents are amortized over their useful lives ranging from 8 to 16 years. The weighted average estimated useful life of intangible assets subject to amortization is approximately 11 years.
 
The estimated amortization expense for intangible assets is approximately $5.5 million in each of the next five years and then $16.3 million thereafter.
 
In 2008 and 2009, as part of the annual goodwill impairment assessment, the Company estimated the fair value of each of the Company’s reporting units using an income approach. The Company forecasted future cash flows by reporting unit for each of the next five years and applied a long-term growth rate to the final year of forecasted cash flows.
 
As a result of the December 31, 2008 goodwill impairment analysis, the Company recorded a goodwill impairment charge of $31.8 million at the TB Wood’s, Huco and Warner Linear reporting units. Due to prevailing market conditions at the time of the acquisitions of these three reporting units, the purchase price paid as consideration for these three acquisitions required a higher premium when compared to the prior 2004 Colfax acquisition and therefore created higher goodwill at these reporting units.
 
The Company did not identify a goodwill impairment in 2009.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
 
7.   Warranty Costs
 
The wholly-owned subsidiaries of Altra Industrial Motion manufacture various products. The contractual warranty period generally ranges from three months to thirty-six months based on the product and application of the product. Estimated expenses related to product warranties are accrued at the time products are sold to customers. 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 the year ended December 31, 2009 and 2008 are as follows:
 
                         
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Balance at beginning of period
  $ 4,254     $ 4,098     $ 2,083  
Accrued current period warranty costs
    1,894       2,919       2,310  
Payments and adjustments
    (2,101 )     (2,763 )     (295 )
                         
Balance at end of period
  $ 4,047     $ 4,254     $ 4,098  
                         
 
8.   Income Taxes
 
Income (loss) from continuing operations before taxes by domestic and foreign locations consists of the following:
 
                         
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Domestic
  $ (5,711 )   $ 2,324     $ 10,190  
Non-U.S. 
    1,033       21,125       11,479  
                         
Total
  $ (4,678 )   $ 23,449     $ 21,669  
                         
 
The components of the provision for income taxes consist of the following:
 
                         
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Current:
                       
Federal
  $ (2,182 )   $ 8,511     $ 781  
State
    314       212       (230 )
Non-U.S. 
    1,308       6,607       2,202  
                         
    $ (560 )   $ 15,330     $ 2,753  
Deferred:
                       
Federal
  $ (1,279 )   $ 128     $ 4,988  
State
    (528 )     200       456  
Non-U.S. 
    3       1,073       11  
                         
      (1,804 )     1,401       5,455  
                         
Provision for income taxes
  $ (2,364 )   $ 16,731     $ 8,208  
                         


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
A reconciliation from the federal statutory rate to the Company’s effective tax rate for income taxes from continuing operations is as follows:
 
                         
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Tax at U.S. federal income tax rate
  $ (1,637 )   $ 8,209     $ 7,584  
State taxes, net of federal income tax effect
    (617 )     486       306  
Change in tax rate
    (19 )     9       (750 )
Foreign taxes
    975       1,091       1,761  
Adjustments to accrued income tax liabilities and uncertain tax positions
    (1,487 )     505       397  
Valuation allowances
    1,726       316          
Interest
    (1,434 )     (1,831 )     (1,365 )
Goodwill impairment
            8,061        
Other
    129       (115 )     275  
                         
Provision for income taxes
  $ (2,364 )   $ 16,731     $ 8,208  
                         
 
The Company adopted the provisions of ASC 740-25, formerly known as FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB 109” (“FIN 48”), at the beginning of fiscal 2007, which resulted in a decrease of approximately $0.2 million to the December 31, 2006 retained earning balance. FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
 
A reconciliation of the gross amount of unrecognized tax benefits excluding accrued interest and penalties is as follows:
 
                         
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007  
 
Balance at beginning of period
  $ 6,213     $ 5,583     $ 922  
Increases related to prior year tax positions
    1,767       2,134       1,916  
Increases related to acquisitions
                3,581  
Decreases related to prior year tax positions
          (46 )     (1,970 )
Increases related to current year tax positions
    87       72       1,785  
Settlements
    (33 )     (398 )      
Lapse of statute of limitations
    (658 )     (1,132 )     (651 )
                         
Balance at end of period
  $ 7,376     $ 6,213     $ 5,583  
                         
 
At December 31, 2009, the Company had unrecognized tax benefits of $9.7 million. If recognized, $9.2 million would reduce the Company’s effective tax rate and $0.5 million would reduce deferred tax assets resulting in no impact to our effective tax rate.
 
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statement of operations. The Company accrued interest and penalties of $0.4 million, $1.4 million and $1.7 million during the years ended December 31, 2009, 2008 and 2007, respectively. The total amount of interest and penalties related to uncertain tax positions at December 31, 2009, 2008 and 2007 was $3.5 million, $3.1 million and $1.7 million, respectively. We do not expect the amount of unrecognized tax benefit disclosed above to change significantly over the next 12 months.


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
The Company and its subsidiaries file a consolidated federal income tax return in the United States as well as consolidated and separate income tax returns in various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in all of these jurisdictions. With the exception of certain state and non U.S. jurisdictions, the Company is no longer subject to income tax examinations for the tax years prior to 2005 in these major jurisdictions. Additionally, the Company has indemnification agreements with the sellers of the Colfax PTH, Kilian and Hay Hall entities, which provides for reimbursement to the Company for payments made in satisfaction of tax liabilities relating to pre-acquisition periods.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities as of December 31, 2009 and 2008 were as follows:
 
                 
    2009     2008  
 
Deferred tax assets:
               
Post-retirement obligations
  $ 2,502     $ 4,538  
Goodwill
    3,550       5,112  
Tax credits
    2,781          
Expenses not currently deductible
    3,585       3,464  
Net operating loss carry forward
    11,369       5,424  
Other
    1,034       186  
                 
Total deferred tax assets
    24,821       18,724  
Valuation allowance for deferred tax assets
    (8,692 )     (5,610 )
                 
Net deferred tax assets
    16,129       13,114  
Deferred tax liabilities:
               
Property, plant and equipment
    16,257       15,279  
Intangible assets
    16,927       18,035  
Other
    1,327       1,515  
                 
Total deferred tax liabilities
    34,511       34,829  
                 
Net deferred tax liabilities
  $ 18,382     $ 21,715  
                 
 
At December 31, 2009, the Company had federal net operating loss (NOL) carryforwards of $12.4 million, which expire in 2029, state NOL carryforwards of $33.8 million, which expire between 2014 and 2029, and non U.S. NOL carryforwards of $17.9 million, of which $17.5 million have an unlimited carryforward period and the remaining $0.4 million expire between 2019 and 2027. The NOL carryforwards available are subject to limitations on their annual usage. The Company also has federal and state tax credits of $2.8 million available to reduce future income taxes that expire between 2013 and 2029.
 
Valuation allowances are established for deferred tax assets that management believes may not be realized. The Company continually reviews the adequacy of the valuation allowance and recognizes tax benefits only as reassessments indicate that it is more likely than not the benefits will be realized. A valuation allowance of $8.7 million and $0.8 million as of December 31, 2009 and 2008, respectively, have been established due to the uncertainty of realizing the benefits of these NOL carryforwards and tax credits.
 
A provision has not been made for U.S. or additional non-U.S. taxes on $13.5 million of undistributed earnings of international subsidiaries that could be subject to taxation if remitted to the U.S. because the


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
Company plans to keep these amounts permanently reinvested outside the U.S. except for instances where the Company can remit such earnings to the U.S. without an associated net tax cost.
 
9.   Pension and Other Employee Benefits
 
Defined Benefit (Pension) and Postretirement Benefit Plans
 
The Company sponsors various defined benefit (pension) and postretirement (medical and life insurance coverage) plans for certain, primarily unionized, active employees (those in the employment of the Company at or hired since November 30, 2004).
 
The following tables represent the reconciliation of the benefit obligation, fair value of plan assets and funded status of the respective defined benefit (pension) and postretirement benefit plans as of December 31, 2009 and 2008:
 
                                 
    Pension Benefits     Other Benefits  
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    December 31,
    December 31,
    December 31,
    December 31,
 
    2009     2008     2009     2008  
 
Change in benefit obligation:
                               
Obligation at beginning of period
  $ 26,676     $ 28,011     $ 2,583     $ 3,482  
Service cost
    111       239       39       58  
Interest cost
    1,418       1,561       118       213  
Curtailments, settlements and special termination benefits
                (1,467 )     (1,029 )
Actuarial (gains) losses
    (1,681 )     (2,240 )     (623 )     224  
Foreign exchange effect
    66       (133 )            
Benefits paid
    (1,027 )     (762 )     (137 )     (365 )
                                 
Obligation at end of period
  $ 25,563     $ 26,676     $ 513     $ 2,583  
                                 
Change in plan assets:
                               
Fair value of plan assets, beginning of period
  $ 14,822     $ 14,580     $     $  
Actual return on plan assets
    785       (2,943 )            
Employer contributions
    1,121       3,947       137       365  
Benefits paid
    (1,027 )     (762 )     (137 )     (365 )
                                 
Fair value of plan assets, end of period
  $ 15,701     $ 14,822     $     $  
                                 
Funded status
  $ (9,862 )   $ (11,854 )   $ (513 )   $ (2,583 )
                                 
Amounts Recognized in the balance sheet consist of:
                               
Non current assets
  $     $             $  
Current liabilities
                (108 )     (313 )
Non-current liabilities
    (9,862 )     (11,854 )     (405 )     (2,270 )
                                 
Total
  $ (9,862 )   $ (11,854 )   $ (513 )   $ (2,583 )
                                 


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ALTRA HOLDINGS, INC.
 
Notes to Consolidated Financial Statements — (Continued)
Amounts in thousands (unless otherwise noted)
 
For all pension plans presented above, the accumulated and projected benefit obligations exceed the fair value of plan assets. The accumulated benefit obligation at December 31, 2009 and 2008 was $25.6 million and $26.7 million, respectively. Non-U.S. pension liabilities recognized in the amounts presented above are $3.3 million and $2.9 million at December 31, 2009 and 2008, respectively.
 
Included in accumulated other comprehensive loss at December 31, 2009 and 2008, is $0.5 million (net of $0.3 million in taxes) and $2.0 million (net of $1.2 million in taxes), respectively, of unrecognized actuarial losses that have not yet been recognized in net periodic pension cost.
 
The weighted average discount rate used in the computation of the respective benefit obligations at December 31, 2009 and 2008, presented above are as follows:
 
                 
    2009   2008
 
Pension benefits
    5.75 %     6.25 %
Other postretirement benefits
    5.75 %     6.25 %
 
The following table represents the components of the net periodic benefit cost associated with the respective plans:
 
                                                 
    Pension Benefits     Other Benefits  
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
 
    2009     2008     2007