Altra Industrial Motion
Altra Holdings, Inc. (Form: 10-Q, Received: 08/09/2012 14:58:29)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

or

 

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

For the transition period from              to             

Commission File Number: 001-33209

 

 

ALTRA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   61-1478870

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Granite Street, Suite 201, Braintree, MA   02184
(Address of principal executive offices)   (Zip Code)

(781) 917-0600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company.)    Smaller reporting company   ¨

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

As of July 23, 2012, 26,935,783 shares of Common Stock, $0.001 par value per share, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page #  

PART I - FINANCIAL INFORMATION

  

Item 1. Financial Statements

     1   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4. Controls and Procedures

     36   

PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     37   

Item 3. Defaults Upon Senior Securities

     38   

Item 4. Mine Safety Disclosures

     38   

Item 5. Other Information

     38   

Item 6. Exhibits

     39   

SIGNATURES

     40   

EXHIBITS

  

EX-31.1 Section 302 Certification of Chief Executive Officer

  

EX-31.2 Section 302 Certification of Chief Financial Officer

  

EX-32.1 Section 906 Certification of Chief Executive Officer

  

EX-32.2 Section 906 Certification of Chief Financial Officer

  

EX -101 Certain materials formatted in XBRL

  


Table of Contents

PART I—FI NANCIAL INFORMATION

Item 1. Financial Statements

ALTRA HOLDINGS, INC.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 95,235      $ 92,515   

Trade receivables, less allowance for doubtful accounts of $1,467 and $1,092 at June 30, 2012 and December 31, 2011, respectively

     101,823        91,859   

Inventories

     120,973        125,970   

Deferred income taxes

     5,849        5,856   

Income tax receivable

     4,222        7,299   

Prepaid expenses and other current assets

     7,376        7,141   
  

 

 

   

 

 

 

Total current assets

     335,478        330,640   

Property, plant and equipment, net

     129,835        123,464   

Intangible assets, net

     73,328        77,108   

Goodwill

     83,257        83,799   

Deferred income taxes

     1,557        1,614   

Other non-current assets, net

     9,347        13,360   
  

 

 

   

 

 

 

Total assets

   $ 632,802      $ 629,985   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 43,184      $ 52,768   

Accrued payroll

     18,593        19,734   

Accruals and other current liabilities

     32,743        28,798   

Deferred income taxes

     116        118   

Current portion of long-term debt

     21,475        688   
  

 

 

   

 

 

 

Total current liabilities

     116,111        102,106   

Long-term debt - less current portion and net of unaccreted discount

     240,194        263,361   

Deferred income taxes

     36,157        35,798   

Pension liabilities

     11,923        12,896   

Other post retirement benefits

     260        296   

Long-term taxes payable

     1,288        6,227   

Other long-term liabilities

     674        905   

Stockholders’ equity:

    

Common stock ($0.001 par value, 90,000,000 shares authorized, 26,620,698 and 26,600,056 issued and outstanding at June 30, 2012 and December 31, 2011, respectively)

     27        27   

Additional paid-in capital

     151,720        150,234   

Retained earnings

     102,989        83,211   

Accumulated other comprehensive income

     (28,541     (25,076
  

 

 

   

 

 

 

Total stockholders’ equity

     226,195        208,396   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 632,802      $ 629,985   
  

 

 

   

 

 

 

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

 

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ALTRA HOLDINGS, INC.

Condensed Consolidating Statement of Comprehensive Income

Amounts in thousands, except per share data

 

     Quarter Ended     Year to Date Ended  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net sales

   $ 187,943      $ 165,395      $ 380,328      $ 325,242   

Cost of sales

     131,941        116,985        267,653        228,997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     56,002        48,410        112,675        96,245   

Operating expenses:

        

Selling, general and administrative expenses

     31,884        26,912        63,881        52,428   

Research and development expenses

     2,942        2,426        5,969        4,743   
  

 

 

   

 

 

   

 

 

   

 

 

 
     34,826        29,338        69,850        57,171   

Income from operations

     21,176        19,072        42,825        39,074   

Other non-operating (income) expense:

        

Interest expense, net

     6,504        6,153        12,278        11,316   

Other non-operating (income) expense, net

     1,207        (599     1,432        (885
  

 

 

   

 

 

   

 

 

   

 

 

 
     7,711        5,554        13,710        10,431   

Income before income taxes

     13,465        13,518        29,115        28,643   

Provision for income taxes

     2,856        4,600        7,990        9,003   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,609      $ 8,918      $ 21,125      $ 19,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

        

Foreign currency translation adjustment

     (8,742     (149     (3,465     5,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,867      $ 8,769      $ 17,660      $ 25,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares, basic

     26,606        26,491        26,541        26,491   

Weighted average shares, diluted

     26,664        26,613        26,674        26,657   

Net income per share:

        

Basic

   $ 0.40      $ 0.34      $ 0.80      $ 0.74   

Diluted

   $ 0.40      $ 0.34      $ 0.79      $ 0.74   

Cash dividend declared

   $ 0.05      $ —        $ 0.05      $ —     

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

 

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ALTRA HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

 

     Year to Date Ended  
     June 30, 2012     July 2, 2011  
     (Unaudited)     (Unaudited)  

Cash flows from operating activities

    

Net income

   $ 21,125      $ 19,640   

Adjustments to reconcile net income to net cash flows:

    

Depreciation

     9,962        8,420   

Amortization of intangible assets

     3,321        2,863   

Amortization of deferred financing costs

     666        784   

Loss (gain) on foreign currency, net

     340        (158

Accretion of debt discount, net

     1,588        1,045   

Stock-based compensation

     1,543        1,374   

Changes in assets and liabilities:

    

Trade receivables

     (13,198     (22,275

Inventories

     4,179        (8,318

Accounts payable and accrued liabilities

     (2,751     6,301   

Other current assets and liabilities

     170        (625

Other operating assets and liabilities

     (2,646     (1,896
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,299        7,155   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property, plant and equipment

     (16,906     (8,898

Proceeds from sale of Chattanooga facility

     —          1,484   

Acquisition of Bauer, net of $41 cash received

     —          (62,291
  

 

 

   

 

 

 

Net cash used in investing activities

     (16,906     (69,705
  

 

 

   

 

 

 

Cash flows from financing activities

    

Payment of issuance costs for Convertible Notes

     —          (3,414

Proceeds from issuance of Convertible Notes

     —          85,000   

Redemption of variable rate demand revenue bonds related to the Chattanooga facility

     —          (2,290

Redemption of variable rate demand revenue bonds related to the San Marcos facility

     (3,000     —     

Shares surrendered for tax withholdings

     (57     (65

Payment on mortgages

     (678     (197

Net payments on capital leases

     (228     (400
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,963     78,634   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (710     1,680   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     2,720        17,764   

Cash and cash equivalents at beginning of year

     92,515        72,723   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 95,235      $ 90,487   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 9,252      $ 8,737   

Income taxes

   $ 6,639      $ 8,290   

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

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

1. Organization and Nature of Operations

Headquartered in Braintree, Massachusetts, Altra 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 electro-mechanical power transmission and motion control products. The Company brings together strong brands covering over 50 product lines with production facilities in nine 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, Warner Linear, and Bauer Gear Motor.

2. Basis of Presentation

The Company was formed on November 30, 2004 following acquisitions of The Kilian Company (“Kilian”) and certain subsidiaries of Colfax Corporation (“Colfax”). During 2006, the Company acquired Hay Hall Holdings Limited (“Hay Hall”) and Bear Linear. On April 5, 2007, the Company acquired TB Wood’s Corporation (“TB Wood’s”), and on October 5, 2007, the Company acquired substantially all of the assets of All Power Transmission Manufacturing, Inc. On May 29, 2011, the Company acquired substantially all of the assets of Danfoss Bauer GmbH relating to its gear motor business.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2012 and December 31, 2011, results of operations for the quarter and year to date periods ended June 30, 2012 and July 2, 2011, and cash flows for the year to date periods ended June 30, 2012 and July 2, 2011.

The Company follows a four, four, five week calendar per quarter with all quarters consisting of thirteen weeks of operations with the fiscal year end always on December 31.

3. Fair Value of Financial Instruments

The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable and other accrued liabilities, approximate their fair values due to their short-term maturities. The carrying amount of the 8 1 / 8 % Senior Secured Notes (the “Senior Secured Notes”) was $198.0 million at each of June 30, 2012 and December 31, 2011. The estimated fair value of the Senior Secured Notes at June 30, 2012 and December 31, 2011 was $212.9 million and $210.4 million, respectively, based on quoted market prices for such notes (level 2).

The carrying amount of the 2.75% Convertible Senior Notes (the “Convertible Notes”) was $85.0 million at each of June 30, 2012 and December 31, 2011. The estimated fair value of the Convertible Notes at June 30, 2012 and December 31, 2011, was $78.0 million and $79.1 million, respectively, based on quoted market prices for such notes (level 2).

Included in cash and cash equivalents as of June 30, 2012 and December 31, 2011 were money market fund investments of $46.7 million and $48.9 million, respectively, which are reported at fair value based on quoted market prices for such investments (level 1).

4. Net Income per Share

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

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

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

 

     Quarter Ended      Year to Date Ended  
     June 30,
2012
     July 2,
2011
     June 30,
2012
     July 2,
2011
 

Net income

   $  10,609       $ 8,918       $  21,125       $  19,640   

Shares used in net income per common share - basic

     26,606         26,491         26,541         26,491   

Incremental shares of unvested restricted common stock

     58         122         133         166   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares used in net income per common share - diluted

     26,664         26,613         26,674         26,657   

Earnings per share:

           

Basic

   $ 0.40       $ 0.34       $ 0.80       $ 0.74   

Diluted

   $ 0.40       $ 0.34       $ 0.79       $ 0.74   

The Company excluded 3,068,998 shares related to the Convertible Notes (see Note 11) from the above earnings per share calculation as these shares were anti-dilutive.

5. Acquisitions

In May 2011, the Company consummated an agreement to acquire substantially all of the assets and liabilities of Danfoss Bauer GmbH relating to its gear motor business (“Bauer”) for cash consideration of €43.1 million ($62.3 million). This transaction is referred to as the Bauer Acquisition. Following closing, the Company made additional payments in the amount of €4.8 million ($7.0 million) to reflect an adjustment for working capital and €0.1 million ($0.2 million) to reflect an adjustment for pension liability.

The closing date of the Bauer Acquisition was May 29, 2011, and as a result, the Company’s consolidated financial statements reflect Bauer’s results of operations from the beginning of business on May 30, 2011 forward.

The following table sets forth the unaudited pro forma results of operations of the Company for the quarter and year to date periods ended July 2, 2011 as if the Company had acquired Bauer at the beginning of the period. The pro forma information contains the actual operating results of the Company, including Bauer, adjusted to include the pro forma impact of (i) additional depreciation expense as a result of estimated depreciation based on the fair value of fixed assets; (ii) additional expense as a result of the estimated amortization of identifiable intangible assets (iii) additional interest expense associated with the Convertible Notes issued on March 7, 2011 in connection with the Bauer Acquisition; (iv) elimination of certain acquisition related costs; and (v) the elimination of additional expense as a result of fair value adjustment to inventory recorded in connection with the Bauer Acquisition. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred at the beginning of the period or that may be obtained in the future.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

 

     Pro Forma (unaudited)  
     Quarter Ended      Year to Date
Period  Ended
 
     July 2, 2011      July 2, 2011  

Total revenues

   $ 185,153       $ 375,173   

Net income

   $ 11,029       $ 22,521   

Basic earnings per share:

     

Net income

   $ 0.42       $ 0.85   

Diluted earnings per share:

     

Net income

   $ 0.41       $ 0.84   

6. Inventories

Inventories located at certain subsidiaries are stated at the lower of cost or market, principally using the last-in, first-out (“LIFO”) method. The remaining subsidiaries are stated at the lower of cost or market, using the first-in, first-out (“FIFO”) method. Market is defined as net realizable value. Inventories at June 30, 2012 and December 31, 2011 consisted of the following:

 

     June 30,      December 31,  
     2012      2011  

Raw materials

   $ 44,178       $ 45,664   

Work in process

     21,706         23,838   

Finished goods

     55,089         56,468   
  

 

 

    

 

 

 

Inventories

   $ 120,973       $ 125,970   
  

 

 

    

 

 

 

Approximately 11% of total inventories were valued using the LIFO method as of June 30, 2012 and December 31, 2011, respectively. The Company recorded a $0.1 million provision as a component of cost of sales to value the inventory on a LIFO basis for each of the quarters ended June 30, 2012 and July 2, 2011. The Company recorded a $0.2 million adjustment and $0.3 million adjustment as a component of cost of sales to value the inventory on a LIFO basis for the year to date periods ended June 30, 2012 and July 2, 2011, respectively.

As part of the Bauer Acquisition, the Company valued the acquired inventory at estimated fair market value less cost to sell. The resulting valuation increased the carrying value of the inventory by $0.5 million and was included as part of cost of goods sold during the second quarter of 2011.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

7. Goodwill and Intangible Assets

Changes to goodwill from December 31, 2011 through June 30, 2012 were as follows:

 

     2012  

Gross goodwill balance as of January 1

   $ 115,609   

Impact of changes in foreign currency

     (542
  

 

 

 

Gross goodwill balance as of June 30

     115,067   
  

 

 

 

Accumulated impairment as of January 1

     (31,810

Impairment charge during the period

     —     
  

 

 

 

Accumulated impairment as of June 30

     (31,810
  

 

 

 

Net goodwill balance June 30, 2012

   $ 83,257   
  

 

 

 

Other intangible assets as of June 30, 2012 and December 31, 2011 consisted of the following:

 

     June 30, 2012      December 31, 2011  
     Cost     Accumulated
Amortization
     Cost     Accumulated
Amortization
 

Other intangible assets

         

Intangible assets not subject to amortization:

         

Tradenames and trademarks

   $ 34,125      $ —         $ 34,125      $ —     

Intangible assets subject to amortization:

         

Customer relationships

     74,101        32,739         74,312        29,704   

Product technology and patents

     5,651        5,602         5,576        5,316   

Impact of changes in foreign currency

     (2,208     —           (1,885     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 111,669      $ 38,341       $ 112,128      $ 35,020   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company recorded $1.7 million and $1.5 million of amortization expense in each of the quarters ended June 30, 2012 and July 2, 2011, respectively, and recorded $3.3 million and $2.9 million of amortization expense in the year to date periods ended June 30, 2012 and July 2, 2011, respectively.

The estimated amortization expense for intangible assets is approximately $3.3 million for the remainder of 2012, $6.7 million in each of the next four years and then $9.1 million thereafter.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

8. Warranty Costs

The contractual warranty period generally ranges from three months to two years with a few extending up to thirty-six months based on product and application of the product. Changes in the carrying amount of accrued product warranty costs for each of the year to date periods ended June 30, 2012 and July 2, 2011 are as follows:

 

     June 30,
2012
    July 2,
2011
 

Balance at beginning of period

   $ 4,898      $ 3,583   

Additional warranty related to Bauer

     —          825   

Accrued current period warranty expense

     901        262   

Payments

     (998     (975
  

 

 

   

 

 

 

Balance at end of period

   $ 4,801      $ 3,695   
  

 

 

   

 

 

 

9. Income Taxes

The estimated effective income tax rates recorded for the year to date periods ended June 30, 2012 and July 2, 2011, were based upon management’s best estimate of the effective tax rate for the entire year.

The 2012 provision for income taxes, as a percentage of income before taxes, was lower than that of 2011, as result of a favorable New York state income tax settlement in the second quarter of 2012 for which the Company was fully indemnified. This tax benefit was entirely offset by a related $0.9 million expense recorded in Other Non-Operating Expense.

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 foreign jurisdictions, the Company is no longer subject to income tax examinations for the tax years prior to 2007. Additionally, the Company has indemnification agreements with the sellers of the Bauer, Colfax, Kilian and Hay Hall entities, which provide for reimbursement to the Company for payments made in satisfaction of tax liabilities relating to pre-acquisition periods.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense in the condensed consolidated statements of income. At December 31, 2011 and June 30, 2012, the Company had $2.7 million and $0.3 million of accrued interest and penalties, respectively. The reduction of interest and penalties by $2.4 million during the year to date period ended June 30, 2012 was primarily a result of a New York state income tax settlement for which the Company was fully indemnified by the acquired business’ former owner.

10. Pension and Other Employee Benefits

Defined Benefit (Pension) and Post-retirement Benefit Plans

The Company sponsors various defined benefit (pension) and post-retirement (medical, dental and life insurance coverage) plans for certain, primarily unionized employees.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

The following table represents the components of the net periodic benefit cost associated with the respective plans for the quarter and year to date periods ended June 30, 2012 and July 2, 2011:

 

     Quarter Ended  
     Pension Benefits     Other Benefits  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Service cost

   $ 25      $ 25      $ —        $ —     

Interest cost

     273        291        3        4   

Expected return on plan assets

     (268     (266     —          —     

Amortization of prior service income

     —          —          —          —     

Amortization of net gain

     24        7        (13     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 54      $ 57      $ (10   $ (9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year to Date Ended  
     Pension Benefits     Other Benefits  
     June 30,
2012
    July 2,
2011
    June 30,
2012
    July 2,
2011
 

Service cost

   $ 50      $ 50      $ 1      $ 1   

Interest cost

     546        572        7        8   

Expected return on plan assets

     (536     (512     —          —     

Amortization of prior service income

     —          —          (1     (1

Amortization of net gain

     49        25        (26     (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (income)

   $ 109      $ 135      $ (19   $ (18
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no required contributions in the second quarter of 2012, however, the Company made $1.0 million of supplemental payments to the pension plan in the year to date period ended June 30, 2012.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

11. Debt

Outstanding debt obligations at June 30, 2012 and December 31, 2011 were as follows:

 

     June 30,
2012
    December 31,
2011
 

Debt:

    

Revolving Credit Agreement

   $ —        $ —     

Convertible Notes

     85,000        85,000   

Senior Secured Notes

     198,045        198,045   

Variable rate demand revenue bonds

     —          3,000   

Mortgages

     1,030        1,762   

Capital leases

     201        417   
  

 

 

   

 

 

 

Total debt

     284,276        288,224   

Less: debt discount, net of accretion

     (22,607     (24,175
  

 

 

   

 

 

 

Total debt, net of unaccreted discount

   $ 261,669      $ 264,049   
  

 

 

   

 

 

 

Less current portion of long-term debt

     21,475        688   
  

 

 

   

 

 

 

Total long-term debt

   $ 240,194      $ 263,361   
  

 

 

   

 

 

 

Convertible Notes

On March 7, 2011, the Company issued $85.0 million of Convertible Notes due on March 1, 2031. Interest on the Convertible Notes is payable semiannually in arrears, on March 1 and September 1 of each year, commencing on September 1, 2011 at an annual rate of 2.75%.

The Company separately accounted for the debt and equity components of the Convertible Notes to reflect the issuer’s non-convertible debt borrowing rate, which interest costs are to be recognized in subsequent periods. The note payable principal balance at the date of issuance of $85.0 million was bifurcated into a debt component of $60.5 million and an equity component of $24.5 million. The difference between the note payable principal balance and the value of the debt component is being accreted to interest expense over the term of the Convertible Notes. The debt component was recognized at the present value of associated cash flows discounted using a 8.25% discount rate, the borrowing rate at the date of issuance for a similar debt instrument without a conversion feature. The Company paid approximately $3.5 million of issuance costs associated with the Convertible Notes. The Company recorded $1.0 million of debt issuance costs as an offset to additional paid-in capital. As of June 30, 2012, the Company has amortized $0.5 million of debt issuance costs. The balance of $2.0 million of debt issuance costs is classified as other non-current assets on the Condensed Consolidated Balance Sheet and will be amortized over the term of the notes using the effective interest method.

The carrying amount of the equity component and the principal amount of the liability component, the unamortized discount, and the net carrying amount are as follows as of June 30, 2012:

 

     June 30,
2012
 

Principal amount of debt

   $ 85,000   

Unamortized discount

     20,819   
  

 

 

 

Carrying value of debt

   $ 64,181   
  

 

 

 

 

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Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Interest expense associated with the Convertible Notes consisted of the following for the year to date period ended June 30, 2012:

 

     June 30,
2012
 

Contractual coupon rate of interest

   $ 1,169   

Accretion of convertible notes discount and amortization of deferred financing costs

     1,420   
  

 

 

 

Interest expense for the Convertible Notes

   $ 2,589   
  

 

 

 

The effective interest yield of the Convertible Notes due in 2031 is 8.5% at June 30, 2012 and the cash coupon interest rate is 2.75%.

Senior Secured Notes

In November 2009, the Company issued the Senior Secured Notes with a face value of $210.0 million. Interest on the Senior Secured Notes is payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on June 1, 2010 at an annual rate of 8 1 / 8 %. The effective interest rate of the Senior Secured Notes was approximately 8.75% after consideration of the $6.7 million of deferred financing costs (included in other non-current assets), which are being amortized over the term using the effective interest method. The principal balance of the Senior Secured Notes matures on December 1, 2016.

During 2011, the Company repurchased $12.0 million of Senior Secured Notes. The Company repurchased the Senior Secured Notes at a premium of $0.3 million, which was recorded as part of interest expense in the third and fourth quarters of 2011. Due to the repurchase of the Senior Secured Notes, the Company also wrote-off a proportional amount of the deferred financing fees and original issue discount associated with the Senior Secured Notes totaling $0.4 million which was also recorded as part of interest expense in the third and fourth quarters of 2011.

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 the Revolving Credit Agreement, on substantially all of the Company’s assets and those of its domestic subsidiaries. The indenture governing the Senior Secured Notes contains covenants which restrict the Company and its subsidiaries. These restrictions limit or prohibit, among other things, the Company’s ability to incur additional indebtedness; repay subordinated indebtedness prior to stated maturities; pay cash 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 its subsidiaries; and create liens on their assets. There are no financial covenants associated with the Senior Secured Notes.

Revolving Credit Agreement

Concurrently with the closing of the offering of the Senior Secured Notes, Altra Industrial entered into a new senior secured credit facility (the “Revolving Credit Agreement”). In 2011, Altra Industrial amended the Revolving Credit Agreement to increase the borrowing base to $65.0 million (subject to adjustment pursuant to a borrowing base and subject to increase from time to time in accordance with the terms of the amended credit facility) and to extend the term to October 31, 2016. As part of the amendment, additional financing fees of $0.3 million were capitalized and will be amortized over the life of agreement.

Altra Industrial can borrow up to $52.5 million under the Revolving Credit Agreement without being required to comply with any financial covenants under the agreement. Altra Industrial may use up to $30.0 million of its availability under the Revolving Credit Agreement for standby letters of credit issued on its behalf, the issuance of which will reduce the amount of borrowings that would otherwise be available to Altra Industrial. Altra Industrial may re-borrow any amounts paid to reduce the amount of outstanding borrowings; however, all borrowings under the Revolving Credit Agreement must be repaid in full as of October 31, 2016 or the redemption of the Senior Secured Notes, whichever is earlier.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

There were no borrowings under the Revolving Credit Agreement at June 30, 2012 and December 31, 2011, however, the lender had issued $3.9 million and $6.5 million of outstanding letters of credit on behalf of Altra Industrial as of June 30, 2012 and December 31, 2011, respectively.

Altra Industrial and all of its domestic subsidiaries are borrowers, (collectively, “Borrowers”) under the Revolving Credit Agreement. Certain of the Company’s existing and subsequently acquired or organized domestic subsidiaries that 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 the Company’s existing and subsequently acquired or organized domestic subsidiaries that is a guarantor of the Borrower’s 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, and 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 involving an aggregate amount of $10.0 million or more and such default: (i) occurs at final maturity of such debt, (ii) allows the lender thereunder 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 on the assets of Borrowers and guarantors.

Variable Rate Demand Revenue Bonds

In connection with the acquisition of TB Wood’s, the Company assumed obligations for certain Variable Rate Demand Revenue Bonds outstanding as of the acquisition date. TB Wood’s had assumed obligations for approximately $3.0 million and $2.3 million of Variable Rate Demand Revenue Bonds issued under the authority of the industrial development corporations of the City of San Marcos, Texas and the City of Chattanooga, Tennessee, respectively. The Company sold the Chattanooga facility on April 14, 2011 and redeemed the bonds associated with the facility at the time. The Company redeemed the bonds associated with the San Marcos facility during the first quarter of 2012. As of June 30, 2012, the Variable Rate Demand Revenue Bonds have been paid in full.

Mortgage

In June 2006, the Company entered into a mortgage on its building in Heidelberg, Germany with a local bank. In 2009, the Company refinanced the Heidelberg mortgage and increased the amount borrowed by an additional €1.0 million. The new mortgage is payable in monthly installments and is due in 2015. As of June 30, 2012 and December 31, 2011, the mortgage had a remaining principal of €0.8 million or $1.0 million, and €1.3 million or $1.8 million, respectively.

Capital Leases

The Company leases certain equipment under capital lease arrangements, whose obligations are included in both short-term and long-term debt. Capital lease obligations amounted to approximately $0.2 million and $0.4 million at June 30, 2012 and December 31, 2011, respectively. Assets subject to capital leases are included in property, plant and equipment with the related amortization recorded as depreciation expense.

Overdraft Agreements

Certain of the Company’s foreign subsidiaries maintain overdraft agreements with financial institutions. There were no borrowings as of June 30, 2012 and December 31, 2011 under any of the overdraft agreements.

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

12. Stockholders’ Equity

On June 5, 2012, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.05 per share. The dividend of $1.3 million was paid on July 2, 2012 to stockholders of record as of the close of business on June 18, 2012. Future declarations of quarterly cash dividends are subject to approval by the Board of Directors and to the Board’s continuing determination that the declaration of dividends are in the best interest of the Company’s stockholders and are in compliance with all laws and agreements of the Company applicable to the declaration and payment of cash dividends.

Stock-Based Compensation

The Company’s Board of Directors established the 2004 Equity Incentive Plan (the “Plan”) that provides for various forms of stock-based compensation to independent directors, officers and senior-level employees of the Company. The restricted shares of common stock issued pursuant to the Plan generally vest ratably over a period ranging from immediately to 5 years, provided that the vesting of the restricted shares may accelerate upon the occurrence of certain liquidity events, if approved by the Board of Directors in connection with the transactions. Common stock awarded under the Plan is generally subject to restrictions on transfer, repurchase rights, and other limitations and rights as set forth in the applicable award agreements. The shares are valued based on the share price on the date of grant.

The Plan permits the Company to grant restricted stock, among other things, to key employees and other persons who make significant contributions to the success of the Company. The restrictions and vesting schedule for restricted stock granted under the Plan are determined by the Personnel and Compensation Committee of the Board of Directors. Compensation expense recorded during the year to date periods ended June 30, 2012 and July 2, 2011, was $1.5 million and $1.4 million, respectively. Compensation expense recorded during the quarters ended June 30, 2012 and July 2, 2011, was $0.8 million and $0.7 million, respectively. Stock-based compensation has been recorded as an adjustment to selling, general and administrative expenses in the accompanying condensed consolidated statements of income. Stock-based compensation expense is recognized on a straight-line basis over the vesting period.

The following table sets forth the activity of the Company’s unvested restricted stock grants in the year to date period ended June 30, 2012:

 

     Shares     Weighted-average
grant date fair value
 

Restricted shares unvested January 1, 2012

     211,031      $ 13.52   

Shares granted

     128,018        21.27   

Shares for which restrictions lapsed

     (23,964     20.65   
  

 

 

   

 

 

 

Restricted shares unvested June 30, 2012

     315,085      $ 16.09   
  

 

 

   

 

 

 

Total remaining unrecognized compensation cost was $3.5 million as of June 30, 2012, which will be recognized over a weighted average remaining period of three years. The fair market value of the shares for which the restrictions have lapsed during the year to date period ended June 30, 2012 was $0.5 million. Restricted shares granted are valued based on the fair market value of the stock on the date of grant.

13. Concentrations of Credit, Segment Data and Workforce

Financial instruments, which are potentially subject to counter party performance and concentrations of credit risk, consist primarily of trade accounts receivable. The Company manages these risks by conducting credit evaluations of customers prior to delivery or commencement of services. When the Company enters into a sales contract, collateral is normally not required from the customer. Payments are typically due within thirty days of billing. An allowance for potential credit losses is maintained, and losses have historically been within management’s expectations. No customer represented greater than 10% of total sales for each of the quarters ended June 30, 2012 and July 2, 2011.

 

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Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

The Company is also subject to counter party performance risk of loss in the event of non-performance by counterparties to financial instruments, such as cash and investments. Cash and investments are held by international or well established financial institutions.

The Company has six operating segments that are regularly reviewed by its chief operating decision maker. Each of the Company’s six operating segments, which are the same as its reporting units, produce mechanical power transmission products. The Company aggregates all of the operating segments into one reportable segment. The six operating segments have similar long-term average gross profit margins. All of the Company’s products are sold by one global sales force and the Company has one global marketing function. Strategic markets and industries are determined for the entire company and then targeted by the brands. All of the operating segments have common manufacturing and production processes. Each segment includes machine shops which use similar equipment and manufacturing techniques to produce industrial components that transmit and control motion and power. Each of the segments uses common raw materials, such as aluminum, steel and copper. The Company purchases these materials and negotiates procurement contracts using one global purchasing function.

The Company serves the general industrial market by selling to original equipment manufacturers (“OEM”) and distributors. The Company’s OEM and distributor customers serve the general industrial market. Resource allocation decisions such as capital expenditure requirements and headcount requirements are made at a consolidated level and allocated to the individual operating segments.

Discrete financial information is not available by product line at the level necessary for management to assess performance or make resource allocation decisions.

The Company’s chief operating decision maker is currently re-evaluating how the Company’s business is organized, how financial information is reviewed and, as a result, how many operating segments the Company will have.

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

 

     Net Sales      Net Sales  
     Quarter Ended      Year to Date Ended  
     June 30,
2012
     July 2,
2011
     June 30,
2012
     July 2,
2011
 

North America (primarily U.S.)

   $ 121,033       $ 112,058       $ 246,012       $ 229,141   

Europe

     55,077         43,444         112,523         77,539   

Asia and other

     11,833         9,893         21,793         18,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 187,943       $ 165,395       $ 380,328       $ 325,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates.

The net assets of the Company’s foreign subsidiaries at June 30, 2012 and December 31, 2011 were $104.9 million and $100.0 million, respectively.

14. Commitments and Contingencies

General Litigation

The Company is involved in various pending legal proceedings arising out of the ordinary course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims, and workers’ compensation claims. None of these legal proceedings are expected to have a material adverse effect on the results of operations, cash flows, or financial condition of the Company. With respect to these proceedings, management believes that the Company will prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to the Company, there could be a material adverse effect on the results of operations, cash flows, or financial condition of the Company. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. For matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses, individually and in the aggregate, will not have a material effect on our consolidated financial statements.

 

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Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

The Company also risks exposure to product liability claims in connection with products it has sold and those sold by businesses that the Company acquired. Although in some cases third parties have retained responsibility for product liability claims relating to products manufactured or sold prior to the acquisition of the relevant business and in other cases the persons from whom the Company has acquired a business may be required to indemnify the Company for certain product liability claims subject to certain caps or limitations on indemnification, the Company cannot assure that those third parties will in fact satisfy their obligations with respect to liabilities retained by them or their indemnification obligations. If those third parties become unable to or otherwise do not comply with their respective obligations including indemnity obligations, or if certain product liability claims for which the Company is obligated were not retained by third parties or are not subject to these indemnities, the Company could become subject to significant liabilities or other adverse consequences. Moreover, even in cases where third parties retain responsibility for product liability claims or are required to indemnify the Company, significant claims arising from products that have been acquired could have a material adverse effect on the Company’s ability to realize the benefits from an acquisition, could result in the reduction of the value of goodwill that the Company recorded in connection with an acquisition, or could otherwise have a material adverse effect on the Company’s business, financial condition, or operations.

15. Guarantor Subsidiaries

All of the Company’s direct and indirect 100% owned U.S. domestic subsidiaries are guarantors of the Company’s Senior Secured Notes. The following condensed consolidating financial statements present separately the financial position, results of operations, and cash flows for (a) the Company, as parent, (b) the guarantor subsidiaries of the Company consisting of all of the, directly or indirectly, 100% owned U.S. subsidiaries of the Company, (c) the non-guarantor subsidiaries of the Company consisting of all non-domestic subsidiaries of the Company, and (d) eliminations necessary to arrive at the Company’s information on a consolidated basis. These statements are presented in accordance with the disclosure requirements under the Securities and Exchange Commission’s Regulation S-X, Rule 3-10. Separate financial statements of the guarantor subsidiaries are not presented because their guarantees are full and unconditional and joint and several.

In the preparation of our Form 10-Q for the period ended June 30, 2012, errors were identified in the previously reported guarantor subsidiaries footnote. These changes did not impact the condensed consolidated balance sheet, condensed consolidated statement of comprehensive income, or the condensed consolidated statement of cash flows. The nature of the corrections are to properly account for the non-guarantor subsidiaries that consolidate into the guarantor subsidiaries under the equity method of accounting, to properly account for certain intercompany loan transactions and to properly record the impact of certain foreign currency transactions. The tables below provide disclosure of the changes to the guarantor footnote for the condensed consolidating balance sheet as of December 31, 2011, the unaudited condensed consolidating statement of comprehensive income for the quarter and year to date period ended July 2, 2011, and the unaudited condensed consolidating statement of cash flows for the year to date period ended July 2, 2011.

 

     Condensed Consolidating Balance Sheet  
     December 31, 2011  
     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Loans receivable from related parties

             

As reported

   $  259,891       $ —         $ —         $ (259,891   $ —     

As adjusted

     256,976         —           —           (256,976     —     

Investment in subs

             

As reported

     202,463         —           —           (202,463     —     

As adjusted

     205,378         99,983         —           (305,361     —     

Total assets

             

As reported

     469,445         386,405         236,489         (462,354     629,985   

As adjusted

     469,445         486,388         236,489         (562,337     629,985   

Loans payable to related parties

             

As reported

     —           188,595         71,296         (259,891     —     

As adjusted

     —           176,878         80,098         (256,976     —     

Total current liabilities

             

As reported

     2,222         245,390         114,385         (259,891     102,106   

As adjusted

     2,222         233,673         123,187         (256,976     102,106   

Total stockholders’ equity

             

As reported

     208,396         93,678         108,785         (202,463     208,396   

As adjusted

     208,396         205,378         99,983         (305,361     208,396   

Total liabilities and stockholders’ equity

             

As reported

     469,445         386,405         236,489         (462,354     629,985   

As adjusted

   $ 469,445       $  486,388       $  236,489       $ (562,337   $ 629,985   

 

     Unaudited Condensed Consolidating Statement of Comprehensive Income  
     Quarter Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Interest expense, net

            

As reported

   $ 5,913      $ 222       $ 18       $ —        $ 6,153   

As adjusted

     323        5,812         18         —          6,153   

Equity in earnings of subsidiaries

            

As reported

     13,551        —           —           (13,551     —     

As adjusted

     7,872        4,666         —           (12,538     —     

Income before income taxes

            

As reported

     7,638        13,670         5,761         (13,551     13,518   

As adjusted

     7,549        12,746         5,761         (12,538     13,518   

Provision (benefit) for income taxes

            

As reported

     (1,280     4,785         1,095         —          4,600   

As adjusted

     (1,369     4,874         1,095         —          4,600   

Net income

            

As reported

     8,918        8,885         4,666         (13,551     8,918   

As adjusted

   $ 8,918      $ 7,872       $  4,666       $ (12,538   $ 8,918   

 

     Unaudited Condensed Consolidating Statement of Comprehensive Income  
     Year to Date Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Interest expense, net

            

As reported

   $ 10,870      $ 406       $ 40       $ —        $ 11,316   

As adjusted

     528        10,748         40         —          11,316   

Equity in earnings of subsidiaries

            

As reported

     27,776        —           —           (27,776     —     

As adjusted

     17,345        10,597         —           (27,942     —     

Income before income taxes

            

As reported

     16,906        26,430         13,083         (27,776     28,643   

As adjusted

     16,817        26,685         13,083         (27,942     28,643   

Provision (benefit) for income taxes

            

As reported

     (2,734     9,251         2,486         —          9,003   

As adjusted

     (2,823     9,340         2,486         —          9,003   

Net income

            

As reported

     19,640        17,179         10,597         (27,776     19,640   

As adjusted

   $ 19,640      $ 17,345       $ 10,597       $ (27,942   $ 19,640   

 

     Unaudited Condensed Consolidating Statement of Cash Flows  
     Year to Date Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income

            

As reported

   $ 19,640      $ 17,179       $ 6,098       $ (23,277   $ 19,640   

As adjusted

     19,640        17,345         10,597         (27,942     19,640   

Undistributed equity in earnings of subsidiaries

            

As reported

     (23,277     —           —           23,277        —     

As adjusted

     (27,942     —           —           27,942        —     

Net cash provided by (used in) operating activities

            

As reported

     (1,253     4,184         4,224         —          7,155   

As adjusted

     (5,918     4,350         8,723         —          7,155   

Change in affiliate debt

            

As reported

     (80,268    
22,515
  
    
57,753
  
     —          —     

As adjusted

     (75,603     22,349        
53,254
  
     —          —     

Net cash provided by financing activities

            

As reported

     1,253        20,074         57,307         —          78,634   

As adjusted

   $ 5,918      $ 19,908       $ 52,808       $ —        $ 78,634   

 

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Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Unaudited Condensed Consolidating Balance Sheet

June 30, 2012

 

     Issuer      Guarantor
Subsidiaries
     Non Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ —         $ 46,595       $ 48,640       $ —        $ 95,235   

Trade receivables, less allowance for doubtful accounts

     —           59,206         42,617         —          101,823   

Loans receivable from related parties

     262,879         —           —           (262,879     —     

Inventories

     —           73,929         47,044         —          120,973   

Deferred income taxes

     —           5,325         524         —          5,849   

Income tax receivable

     —           4,140         82         —          4,222   

Prepaid expenses and other current assets

     —           2,507         4,869         —          7,376   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     262,879         191,702         143,776         (262,879     335,478   

Property, plant and equipment, net

     —           84,167         45,668         —          129,835   

Intangible assets, net

     —           48,314         25,014         —          73,328   

Goodwill

     —           56,446         26,811         —          83,257   

Deferred income taxes

     —           —           1,557         —          1,557   

Investment in subsidiaries

     220,694         104,895         —           (325,589     —     

Other non-current assets, net

     6,512         1,654         1,181         —          9,347   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 490,085       $ 487,178       $ 244,007       $ (588,468   $ 632,802   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ —         $ 26,969       $ 16,215       $ —        $ 43,184   

Accrued payroll

     —           8,452         10,141         —          18,593   

Accruals and other current liabilities

     3,467         18,091         11,185         —          32,743   

Deferred income taxes

     —           —           116         —          116   

Current portion of long-term debt

     21,000         156         319         —          21,475   

Loans payable to related parties

     —           173,969         88,910         (262,879     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     24,467         227,637         126,886         (262,879     116,111   

Long-term debt - less current portion and net of unacreted discount

     239,423         48         723         —          240,194   

Deferred income taxes

     —           30,072         6,085         —          36,157   

Pension liabilities

     —           6,551         5,372         —          11,923   

Other post employment benefits

     —           260         —           —          260   

Long-term taxes payable

     —           1,288         —           —          1,288   

Other long-term liabilities

     —           628         46         —          674   

Total stockholders’ equity

     226,195         220,694         104,895         (325,589     226,195   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 490,085       $ 487,178       $ 244,007       $ (588,468   $ 632,802   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Condensed Consolidating Balance Sheet

December 31, 2011

 

     Issuer      Guarantor
Subsidiaries
     Non Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ —         $ 49,876       $ 42,639       $ —        $ 92,515   

Trade receivables, less allowance for doubtful accounts

     —           52,706         39,153         —          91,859   

Loans receivable from related parties

     256,976         —           —           (256,976     —     

Inventories

     —           76,632         49,338         —          125,970   

Deferred income taxes

     —           5,325         531         —          5,856   

Income tax receivable

     —           6,868         431         —          7,299   

Prepaid expenses and other current assets

     —           3,096         4,045         —          7,141   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     256,976         194,503         136,137         (256,976     330,640   

Property, plant and equipment, net

     —           79,576         43,888         —          123,464   

Intangible assets, net

     —           50,329         26,779         —          77,108   

Goodwill

     —           56,446         27,353         —          83,799   

Deferred income taxes

     —           —           1,614         —          1,614   

Investment in subs

     205,378         99,983         —           (305,361     —     

Other non-current assets, net

     7,091         5,551         718         —          13,360   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 469,445       $ 486,388       $ 236,489       $ (562,337   $ 629,985   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ —         $ 30,278       $ 22,490       $ —        $ 52,768   

Accrued payroll

     —           9,522         10,212         —          19,734   

Accruals and other current liabilities

     2,222         16,645         9,931         —          28,798   

Deferred income taxes

     —           —           118         —          118   

Current portion of long-term debt

     —           350         338         —          688   

Loans payable to related parties

     —           176,878         80,098         (256,976     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,222         233,673         123,187         (256,976     102,106   

Long-term debt - less current portion and net of unaccreted discount and premium

     258,827         3,060         1,474         —          263,361   

Deferred income taxes

     —           29,595         6,203         —          35,798   

Pension liabilities

     —           7,435         5,461         —          12,896   

Long-term taxes payables

     —           6,227         —           —          6,227   

Other long-term liabilities

     —           1,020         181         —          1,201   

Total stockholders’ equity

     208,396         205,378         99,983         (305,361     208,396   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 469,445       $ 486,388       $ 236,489       $ (562,337   $ 629,985   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

17


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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Unaudited Condensed Consolidating Statement of Comprehensive Income

 

     Year to Date Ended June 30, 2012  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 252,987      $ 151,682      $ (24,341   $ 380,328   

Cost of sales

     —          184,279        107,715        (24,341     267,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          68,708        43,967        —          112,675   

Selling, general and administrative expenses

     —          34,626        29,255        —          63,881   

Research and development expenses

     —          2,874        3,095        —          5,969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     —          31,208        11,617        —          42,825   

Interest (income) expense, net

     (238     12,510        6        —          12,278   

Other non-operating expense, net

     —          1,312        120        —          1,432   

Equity in earnings of subsidiaries

     18,781        8,377        —          (27,158     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     19,019        25,763        11,491        (27,158     29,115   

Provision (benefit) for income taxes

     (2,106     6,982        3,114        —          7,990   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,125        18,781        8,377        (27,158     21,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

          

Foreign currency translation adjustment

     (3,465     (3,465     (3,465     6,930        (3,465
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 17,660      $ 15,316      $ 4,912      $ (20,228   $ 17,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Condensed Consolidating Statement of Comprehensive Income

 

     Year to Date Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 233,802      $ 112,444      $ (21,004   $ 325,242   

Cost of sales

     —          169,729        80,272        (21,004     228,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          64,073        32,172        —          96,245   

Selling, general and administrative expenses

     —          35,044        17,384        —          52,428   

Research and development expenses

     —          2,656        2,087        —          4,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     —          26,373        12,701        —          39,074   

Interest expense, net

     528        10,748        40        —          11,316   

Other non-operating income, net

     —          (463     (422     —          (885

Equity in earnings of subsidiaries

     17,345        10,597        —          (27,942     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     16,817        26,685        13,083        (27,942     28,643   

Provision (benefit) for income taxes

     (2,823     9,340        2,486        —          9,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     19,640        17,345        10,597        (27,942     19,640   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

          

Foreign currency translation adjustment

     5,569        5,569        5,569        (11,138     5,569   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 25,209      $ 22,914      $ 16,166      $ (39,080   $ 25,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Unaudited Condensed Consolidating Statement of Comprehensive Income

 

     Quarter Ended June 30, 2012  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 124,594      $ 76,497      $ (13,148   $ 187,943   

Cost of sales

     —          89,772        55,317        (13,148     131,941   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          34,822        21,180        —          56,002   

Selling, general and administrative expenses

     —          16,381        15,503        —          31,884   

Research and development expenses

     —          1,459        1,483        —          2,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     —          16,982        4,194        —          21,176   

Interest (income) expense, net

     (58     6,557        5        —          6,504   

Other non-operating expense (income), net

     —          1,370        (163     —          1,207   

Equity in earnings of subsidiaries

     9,146        3,258        —          (12,404     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9,204        12,313        4,352        (12,404     13,465   

Provision (benefit) for income taxes

     (1,405     3,167        1,094        —          2,856   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     10,609        9,146        3,258        (12,404     10,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

          

Foreign currency translation adjustment

     (8,742     (8,742     (8,742     17,484        (8,742
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,867      $ 404      $ (5,484   $ 5,080      $ 1,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Condensed Consolidating Statement of Comprehensive Income

 

     Quarter Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 114,241      $ 61,559      $ (10,405   $ 165,395   

Cost of sales

     —          82,066        45,324        (10,405     116,985   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          32,175        16,235        —          48,410   

Selling, general and administrative expenses

     —          17,372        9,540        —          26,912   

Research and development expenses

     —          1,232        1,194        —          2,426   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     —          13,571        5,501        —          19,072   

Interest expense, net

     323        5,812        18        —          6,153   

Other non-operating income, net

     —          (321     (278     —          (599

Equity in earnings of subsidiaries

     7,872        4,666        —          (12,538     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,549        12,746        5,761        (12,538     13,518   

Provision (benefit) for income taxes

     (1,369     4,874        1,095        —          4,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     8,918        7,872        4,666        (12,538     8,918   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

          

Foreign currency translation adjustment

     (149     (149     (149     298        (149
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 8,769      $ 7,723      $ 4,517      $ (12,240   $ 8,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Unaudited Condensed Consolidating Statement of Cash Flows

 

     Year to Date Ended June 30, 2012  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

          

Net income

   $ 21,125      $ 18,781      $ 8,377      $ (27,158   $ 21,125   

Undistributed equity in earnings of subsidiaries

     (27,158     —          —          27,158        —     

Adjustments to reconcile net income to net cash flows:

          

Depreciation

     —          6,192        3,770        —          9,962   

Amortization of intangible assets

     —          2,015        1,306        —          3,321   

Amortization and write-offs of deferred financing costs

     579        87        —          —          666   

Loss on foreign currency, net

     —          —          340        —          340   

Accretion of debt discount, net

     1,588        —          —          —          1,588   

Stock-based compensation

     —          1,543        —          —          1,543   

Changes in assets and liabilities:

          

Trade receivables

     —          (9,048     (4,150     —          (13,198

Inventories

     —          2,703        1,476        —          4,179   

Accounts payable and accrued liabilities

     (102     1,505        (4,154     —          (2,751

Other current assets and liabilities

     —          1,066        (896     —          170   

Other operating assets and liabilities

     —          (2,145     (501     —          (2,646
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (3,968     22,699        5,568        —          24,299   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities

          

Purchase of property, plant and equipment

     —          (10,629     (6,277     —          (16,906
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (10,629     (6,277     —          (16,906
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Redemption of variable rate demand revenue bonds related to the San Marcos facility

     —          (3,000     —          —          (3,000

Shares repurchased for tax withholdings

     —          (57     —          —          (57

Payments on mortgages

     —          —          (678     —          (678

Payments on capital leases

     —          (194     (34     —          (228

Change in affiliate debt

     3,968        (12,100     8,132        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,968        (15,351     7,420        —          (3,963
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          (710     —          (710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     —          (3,281     6,001        —          2,720   

Cash and cash equivalents at beginning of year

     —          49,876        42,639        —          92,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 46,595      $ 48,640      $ —        $ 95,235   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

Unaudited Condensed Consolidating Statement of Cash Flows

 

     Year to Date Ended July 2, 2011  
     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities

          

Net income

   $ 19,640      $ 17,345      $ 10,597      $ (27,942   $ 19,640   

Undistributed equity in earnings of subsidiaries

     (27,942     —          —          27,942        —     

Adjustments to reconcile net income to net cash flows:

             —     

Depreciation

     —          5,422        2,998        —          8,420   

Amortization of intangible assets

     —          2,070        793        —          2,863   

Amortization and write-offs of deferred financing costs

     560        224        —          —          784   

Loss on foreign currency, net

     —          —          (158     —          (158

Accretion of debt discount, net

     1,045        —          —          —          1,045   

Stock-based compensation

     —          1,374        —          —          1,374   

Changes in assets and liabilities:

             —     

Trade receivables

     —          (12,786     (9,489     —          (22,275

Inventories

     —          (3,750     (4,568     —          (8,318

Accounts payable and accrued liabilities

     779        (2,071     7,593        —          6,301   

Other current assets and liabilities

     —          (1,317     692        —          (625

Other operating assets and liabilities

     —          (2,161     265        —          (1,896
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (5,918     4,350        8,723        —          7,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used in investing activities

          

Purchase of property, plant and equipment

     —          (5,179     (3,719     —          (8,898

Acquisition of Bauer net of cash $41 thousand cash received

     —          (1,146     (61,145     —          (62,291

Proceeds from sale of Chattanooga

     —          1,484        —          —          1,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          (4,841     (64,864     —          (69,705
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

          

Proceeds from issuance of Convertible Notes

     85,000        —          —          —          85,000   

Payment of debt issuance costs

     (3,414     —          —          —          (3,414

Shares surrendered for tax withholdings

     (65     —          —          —          (65

Redemption of bonds related to Chattanooga

     —          (2,290     —          —          (2,290

Payments on mortgages

     —          —          (197     —          (197

Payments on capital leases

     —          (151     (249     —          (400

Change in affiliate debt

     (75,603     22,349        53,254        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     5,918        19,908        52,808        —          78,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          1,680          1,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     —          19,417        (1,653     —          17,764   

Cash and cash equivalents at beginning of year

     —          37,125        35,598        —          72,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 56,542      $ 33,945      $ —        $ 90,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ALTRA HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

16. Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

On July 12, 2012, the Company announced that its subsidiary, Altra Industrial Motion Netherlands BV, acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda. (“Lamiflex”) for a cash consideration of 17.4 million Reais (approximately $8.6 million), subject to a post-closing adjustment for net debt. Lamiflex is a Brazilian manufacturer of high-speed disc couplings, providing engineered solutions to a variety of industries, including oil and gas, power generation, metals and mining. Due to the timing of the acquisition, the Company is still in the process of completing the allocation of the purchase price.

On July 31, 2012, the Company redeemed $21.0 million of Senior Secured Notes at a 103% premium. These Senior Secured Notes were classified as current in the accompanying condensed consolidated balance sheet in the quarter ended June 30, 2012. The premium of $0.6 million was accrued and recorded as part of interest expense in the quarter ended June 30, 2012.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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, gross margin, future profitability, future economic improvement, 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 Company’s actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include:

 

   

the Company’s access to capital, credit ratings, indebtedness, and ability to raise additional capital and operate under the terms of the Company’s debt obligations;

 

   

the risks associated with our debt;

 

   

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, including the Bauer Acquisition and the Lamiflex acquisition;

 

   

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, supplier, 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;

 

   

the Company’s ability to achieve its business plans, including with respect to an uncertain economic environment;

 

   

the effects of unanticipated deficiencies, if any, in the disclosure controls and internal controls of Bauer;

 

   

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 and European economic environments 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;

 

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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;

 

   

the cyclical nature of the markets in which we operate;

 

   

the risks associated with the global recession and European economic downturn and volatility and disruption in the global and European 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;

 

   

the risks associated with the Company’s investment in a new manufacturing facility in China; 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

ALL FORWARD-LOOKING STATEMENTS 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 THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011, AND IN OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY.

The following discussion of the financial condition and results of operations of Altra Holdings, Inc. and its subsidiaries should be read together with the audited financial statements of Altra Holdings, Inc. and its subsidiaries and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Unless the context requires otherwise, the terms “Altra Holdings,” “ the Company,” “we,” “us,” and “our” refer to Altra Holdings, Inc. and its subsidiaries.

 

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General

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 57 subsidiaries. The following chart illustrates a summary of our corporate structure:

 

LOGO

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 a series of power transmission businesses. In December 1996, Colfax acquired the electro-mechanical power transmission group of Zurn Technologies, Inc. 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, then 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 (ii) Kilian and its subsidiaries were transferred to Altra Industrial.

On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings Limited, 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.

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.

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 with a history dating back to 1857.

On October 5, 2007, we acquired substantially all of the assets of All Power Transmission Manufacturing, Inc., a manufacturer of universal joints.

 

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On December 31, 2007, we sold the TB Wood’s adjustable speed drives business, or Electronics Division. We sold the Electronics Division in order to continue our strategic focus on our core electro-mechanical power transmission business.

On May 29, 2011, we acquired substantially all of the assets and liabilities of Danfoss Bauer GmbH relating to its gearmotor business (“Bauer”). Bauer is a European manufacturer of high-quality gearmotors, offering engineered solutions to a variety of industries, including material handling, metals, food processing and energy. We refer to this transaction as the Bauer Acquisition.

On July 12, 2012, we announced that our subsidiary, Altra Industrial Motion Netherlands BV, acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda. or Lamiflex. Lamiflex is the premier Brazilian manufacturer of high-speed disc couplings, providing engineered solutions to a variety of industries, including oil and gas, power generation, metals and mining.

We are a leading global designer, producer and marketer of a wide range of electro-mechanical power transmission 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 2012 the top five broad-based electro-mechanical power transmission companies represented approximately 20% 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.

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, Bauer Gear Motor    Food processing, material handling, metals, transportation    Conveyors, ethanol mixers, packaging machinery, metal processing equipment

Engineered Couplings

   Ameridrives, Bibby Transmissions, TB Wood’s, Lamiflex    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, 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

 

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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, as amended (the “Exchange Act”) as soon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Form 10-Q.

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. In the remainder of 2012, we expect to continue to focus on the execution of our long-term growth strategy, and will also continue to focus on maintaining a reduced cost base. Among other items, we expect our strategic initiatives in the second half of 2012 will continue to include investing in organic growth, seeking strategic acquisitions, targeting key underpenetrated geographic regions, entering new high-growth markets, enhancing our efficiency and productivity through the Altra Business System and focusing on the development of our people and processes.

In July 2012, we announced the acquisition of Brazil-based Lamiflex. We believe the Lamiflex acquisition will create business opportunities for us in certain previously underpenetrated geographic regions and will provide us with a platform from which we can further execute our acquisition strategy.

During the first half of 2012, we experienced continued strength across many of our end markets in North America and Asia and continued to gain market share through the development of new products that are in direct alignment with customers’ needs. With the current weakness in Europe, we have accelerated our cost reduction and profit improvement plans across our European operations. We expect sales and profitability growth to moderate as a result of moderating economic conditions in North America and Asia, uncertain conditions in Europe, and substantial changes in exchange rates.

Critical Accounting Policies

The preparation of our condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect our reported amounts of assets, revenues and expenses, as well as related disclosure of contingent assets and liabilities. We base our estimates on past experiences and other assumptions we believe to be appropriate, and we evaluate these estimates on an on-going basis. With the exception of business combinations noted below, management believes there have been no significant changes in our critical accounting policies since December 31, 2011. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Results of Operations

 

     Quarter Ended     Year to Date Ended  
     June 30,     July 2,     June 30,     July 2,  
(In thousands, except per share data)    2012     2011     2012     2011  

Net sales

   $ 187,943