Altra Industrial Motion
Altra Industrial Motion Corp. (Form: 10-Q, Received: 10/25/2017 17:04:32)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2017

or

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

For the transition period from                      to

Commission File Number: 001-33209

 

ALTRA INDUSTRIAL MOTION CORP.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1478870

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

300 Granite Street, Suite 201, Braintree, MA

 

02184

(Address of principal executive offices)

 

(Zip Code)

 

(781) 917-0600

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large Accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company.)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of October 20, 2017, 29,275,362 shares of Common Stock, $0.001 par value per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page #

PART I - FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

Item 2.

 

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

 

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

33

Item 1A.

 

Risk Factors

 

33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

Item 3.

 

Defaults Upon Senior Securities

 

33

Item 4.

 

Mine Safety Disclosures

 

33

Item 5.

 

Other Information

 

33

Item 6.

 

Exhibits

 

34

 

 

 

 

SIGNATURES

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


PART I - FINANCI AL INFORMATION

Item 1. Financial Statements (unaudited)

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,151

 

 

$

69,118

 

Trade receivables, less allowance for doubtful accounts of $5,479 and $3,114 at

   September 30, 2017 and December 31, 2016, respectively

 

 

136,511

 

 

 

120,319

 

Inventories

 

 

153,014

 

 

 

139,840

 

Income tax receivable

 

 

7,822

 

 

 

607

 

Prepaid expenses and other current assets

 

 

16,671

 

 

 

10,429

 

Assets held for sale

 

 

364

 

 

 

3,874

 

Total current assets

 

 

367,533

 

 

 

344,187

 

Property, plant and equipment, net

 

 

190,455

 

 

 

177,043

 

Intangible assets, net

 

 

160,939

 

 

 

154,683

 

Goodwill

 

 

203,574

 

 

 

188,841

 

Deferred income taxes

 

 

1,383

 

 

 

2,510

 

Other non-current assets, net

 

 

2,147

 

 

 

2,560

 

Total assets

 

$

926,031

 

 

$

869,824

 

LIABILITIES, AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

59,624

 

 

$

60,845

 

Accrued payroll

 

 

29,761

 

 

 

31,302

 

Accruals and other current liabilities

 

 

38,137

 

 

 

35,080

 

Income tax payable

 

 

8,887

 

 

 

706

 

Current portion of long-term debt

 

 

380

 

 

 

43,690

 

Total current liabilities

 

 

136,789

 

 

 

171,623

 

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

 

 

295,223

 

 

 

325,969

 

Deferred income taxes

 

 

57,471

 

 

 

61,084

 

Pension liabilities

 

 

27,269

 

 

 

23,691

 

Other long-term liabilities

 

 

25,714

 

 

 

4,109

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value, 90,000,000 shares authorized, 29,054,378 and

   27,206,162 issued and outstanding at September 30, 2017 and December 31, 2016,

   respectively)

 

 

29

 

 

 

27

 

Additional paid-in capital

 

 

222,605

 

 

 

168,299

 

Retained earnings

 

 

215,766

 

 

 

191,108

 

Accumulated other comprehensive loss

 

 

(54,835

)

 

 

(76,086

)

Total stockholders’ equity

 

 

383,565

 

 

 

283,348

 

Total liabilities, and stockholders’ equity

 

$

926,031

 

 

$

869,824

 

 

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

 

 

1


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Operations

Amounts in thousands, except per share data

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net sales

 

$

214,623

 

 

$

173,132

 

 

$

653,415

 

 

$

536,259

 

Cost of sales

 

 

145,610

 

 

 

118,957

 

 

 

446,109

 

 

 

369,254

 

Gross profit

 

 

69,013

 

 

 

54,175

 

 

 

207,306

 

 

 

167,005

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

41,009

 

 

 

36,142

 

 

 

123,012

 

 

 

105,548

 

Research and development expenses

 

 

6,051

 

 

 

4,267

 

 

 

18,434

 

 

 

13,345

 

Restructuring costs

 

 

680

 

 

 

3,397

 

 

 

3,776

 

 

 

6,591

 

 

 

 

47,740

 

 

 

43,806

 

 

 

145,222

 

 

 

125,484

 

Income from operations

 

 

21,273

 

 

 

10,369

 

 

 

62,084

 

 

 

41,521

 

Other non-operating income and expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

1,811

 

 

 

2,815

 

 

 

5,547

 

 

 

8,615

 

Other non-operating expense (income), net

 

 

696

 

 

 

45

 

 

 

30

 

 

 

(438

)

Loss on extinguishment of convertible debt

 

 

 

 

 

 

 

 

1,797

 

 

 

 

 

 

 

2,507

 

 

 

2,860

 

 

 

7,374

 

 

 

8,177

 

Income before income taxes

 

 

18,766

 

 

 

7,509

 

 

 

54,710

 

 

 

33,344

 

Provision for income taxes

 

 

5,489

 

 

 

2,196

 

 

 

15,723

 

 

 

9,872

 

Net income

 

$

13,277

 

 

$

5,313

 

 

$

38,987

 

 

$

23,472

 

Weighted average shares, basic

 

 

29,008

 

 

 

25,726

 

 

 

28,912

 

 

 

25,684

 

Weighted average shares, diluted

 

 

29,074

 

 

 

26,021

 

 

 

29,001

 

 

 

25,813

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income

 

$

0.46

 

 

$

0.21

 

 

$

1.35

 

 

$

0.91

 

Diluted net income

 

$

0.46

 

 

$

0.20

 

 

$

1.34

 

 

$

0.91

 

Cash dividend declared

 

$

0.17

 

 

$

0.15

 

 

$

0.49

 

 

$

0.45

 

 

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

 

 

2


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Comprehensive Income

Amounts in thousands

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Net Income

 

$

13,277

 

 

$

5,313

 

 

$

38,987

 

 

$

23,472

 

Other Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

6,673

 

 

 

90

 

 

 

21,157

 

 

 

(1,000

)

Change in defined benefit pension plans

 

 

65

 

 

 

14

 

 

 

(232

)

 

 

134

 

Change in fair value of derivative financial instruments, net of tax

 

 

(331

)

 

 

 

 

 

326

 

 

 

 

Other comprehensive income (loss):

 

 

6,407

 

 

 

104

 

 

 

21,251

 

 

 

(866

)

Comprehensive income

 

$

19,684

 

 

$

5,417

 

 

$

60,238

 

 

$

22,606

 

 

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

 

 

3


ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

 

 

 

Year to Date Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

38,987

 

 

$

23,472

 

Adjustments to reconcile net income to net operating cash flows:

 

 

 

 

 

 

 

 

Depreciation

 

 

19,764

 

 

 

16,235

 

Amortization of intangible assets

 

 

7,139

 

 

 

6,384

 

Amortization of deferred financing costs

 

 

449

 

 

 

590

 

Loss/(Gain) on foreign currency, net

 

 

241

 

 

 

(130

)

Accretion of debt discount, net

 

 

 

 

 

2,970

 

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

 

 

(36

)

 

 

582

 

Loss on extinguishment of debt

 

 

1,797

 

 

 

 

Stock based compensation

 

 

4,543

 

 

 

3,370

 

Amortization of inventory fair value adjustment

 

 

2,347

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

 

(9,701

)

 

 

(10,461

)

Inventories

 

 

(9,478

)

 

 

(837

)

Accounts payable and accrued liabilities

 

 

(8,799

)

 

 

3,226

 

Other current assets and liabilities

 

 

(2,392

)

 

 

728

 

Other operating assets and liabilities

 

 

(1,572

)

 

 

765

 

Net cash provided by operating activities

 

 

43,289

 

 

 

46,894

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(23,261

)

 

 

(15,684

)

Proceeds from sale of Altra Industrial Motion Changzhou

 

 

3,221

 

 

 

 

Working capital settlement from prior year acquisitions

 

 

2,883

 

 

 

 

Net cash used in investing activities

 

 

(17,157

)

 

 

(15,684

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on 2015 Revolving Credit Facility

 

 

(39,036

)

 

 

(30,870

)

Dividend payments

 

 

(13,256

)

 

 

(7,784

)

Borrowing under 2015 Revolving Credit Facility

 

 

7,000

 

 

 

3,000

 

Payments of equipment and working capital notes

 

 

(913

)

 

 

(3,181

)

Cash paid to redeem Convertible Notes

 

 

(954

)

 

 

 

Proceeds from mortgages and other debt

 

 

 

 

 

2,893

 

Shares surrendered for tax withholding

 

 

(2,089

)

 

 

(1,288

)

Purchases of common stock under share repurchase program

 

 

 

 

 

(4,713

)

Net cash used in financing activities

 

 

(49,248

)

 

 

(41,943

)

Effect of exchange rate changes on cash and cash equivalents

 

 

7,149

 

 

 

178

 

Net change in cash and cash equivalents

 

 

(15,967

)

 

 

(10,555

)

Cash and cash equivalents at beginning of year

 

 

69,118

 

 

 

50,320

 

Cash and cash equivalents at end of period

 

$

53,151

 

 

$

39,765

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

5,413

 

 

$

5,856

 

Income taxes

 

 

18,505

 

 

 

7,665

 

Non-cash Financing and Investing

 

 

 

 

 

 

 

 

Conversion of Convertible Notes to common stock

 

$

51,851

 

 

$

 

 

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

 

 

4


ALTRA INDUSTRIAL MOTION CORP.

Consolidated Statements of Stockholders’ Equity

Amounts in thousands

(Unaudited)

 

 

 

Common

Stock

 

 

Shares

 

 

Additional

Paid

in Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive Income

(Loss)

 

 

Total

 

Balance at January 1, 2016

 

$

26

 

 

 

25,773

 

 

$

124,834

 

 

$

181,539

 

 

$

(63,832

)

 

$

242,567

 

Stock-based compensation and vesting

   of restricted stock

 

 

 

 

 

89

 

 

 

2,082

 

 

 

 

 

 

 

 

 

2,082

 

Net income

 

 

 

 

 

 

 

 

 

 

 

23,472

 

 

 

 

 

 

23,472

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(11,667

)

 

 

 

 

 

(11,667

)

Changes in Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(866

)

 

 

(866

)

Repurchases of common

   stock - 177,053 shares

 

 

 

 

 

(177

)

 

 

(4,713

)

 

 

 

 

 

 

 

 

(4,713

)

Balance at September 30, 2016

 

$

26

 

 

 

25,685

 

 

$

122,203

 

 

$

193,344

 

 

$

(64,698

)

 

$

250,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

27

 

 

 

27,206

 

 

$

168,299

 

 

$

191,108

 

 

$

(76,086

)

 

$

283,348

 

Stock-based compensation and vesting

   of restricted stock

 

 

 

 

 

100

 

 

 

2,457

 

 

 

 

 

 

 

 

 

2,457

 

Net income

 

 

 

 

 

 

 

 

 

 

 

38,987

 

 

 

 

 

 

38,987

 

Conversion of convertible debt

 

 

2

 

 

 

1,748

 

 

 

51,849

 

 

 

 

 

 

 

 

 

51,851

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(14,329

)

 

 

 

 

 

(14,329

)

Changes in Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,251

 

 

 

21,251

 

Balance at September 30, 2017

 

$

29

 

 

 

29,054

 

 

$

222,605

 

 

$

215,766

 

 

$

(54,835

)

 

$

383,565

 

 

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

 

 

 

5


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

1. Organization and Nature of Operations

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

 

 

2. Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position for the interim periods presented, and cash flows for the interim periods presented.  The results are not necessarily indicative of future results.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

 

 

3. Recent Accounting Standards

 

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

 

In October 2016, the FASB issued Accounting Standards Update ("ASU") 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). This ASU requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred until the asset is sold to a third party or recovered through use. This guidance will be effective for the Company on January 1, 2018. We are currently evaluating this guidance and the impact it will have on our consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments (a consensus of the emerging issues task force) (“ASU 2016-15”). This ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Company on January 1, 2018. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In February 2015, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The ASU requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. We are currently evaluating the impact this guidance will have on our consolidated financial statements and expect to recognize a significant lease obligation upon adoption.

6


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides a single principles-ba sed, five-step model to be applied to all contracts with customers. The five steps are to (i) identify the contracts with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the tran saction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. ASU 2014-09 will be effective for the Company beginning on January 1, 2018.  The Company commenced its assessment of ASU 2014-09 during the second half of 2015 and developed a project plan to guide the implementation. The project plan includes analyzing the ASU’s impact on the Company’s contract portfolio, surveying the Company’s business units and discussing the various revenue streams, completing contract reviews, comparing historical account ing policies and practices to the requirements of the new guidance, identifying potential differences from applying the requirements of the new guidance to its contracts and updating and providing training on its accounting policy. As the Company continues its evaluation, it is also identifying and preparing to implement changes to accounting policies, business processes and internal controls to support the new accounting and disclosure requirements. The Company expects to adopt this new guidance using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption. The company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.

Recently Adopted Accounting Standards

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The updated guidance revises aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance on January 1, 2017 which resulted in the recognition of excess tax benefits in our provision for income taxes with the Unaudited Condensed Consolidated Statements of Operations rather than paid-in capital and was not material for the quarter ended September 30, 2017. Additionally, our Unaudited Condensed Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity, effective January 1, 2017. Finally, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award. The adoption of this ASU did not have a material impact to our Unaudited Condensed Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). Under this guidance, entities utilizing the first-in-first-out (“FIFO”) or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance on January 1, 2017. The adoption of this ASU did not have a material impact to our Unaudited Condensed Consolidated Financial Statements.

 

 

4. Fair Value of Financial Instruments

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

 

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

 

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

 

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

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

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

7


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability o f the Company or the financial counterparty to perform. For interest rate and cross currency swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. For forward foreign curr ency contracts, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. See additional discussion of the Company’s use of financial instruments i ncluding a cross-currency swap included in Note 15.

 

 

 

5. Changes in Accumulated Other Comprehensive Loss by Component

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

 

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plans

 

 

Cumulative

Foreign

Currency

Translation

Adjustment

 

 

Total

 

Accumulated Other Comprehensive Loss by Component,

   January 1, 2017

 

$

(646

)

 

$

(5,668

)

 

$

(69,772

)

 

$

(76,086

)

Net current-period Other Comprehensive Income (Loss)

 

 

326

 

 

 

(232

)

 

 

21,157

 

 

 

21,251

 

Accumulated Other Comprehensive Loss by Component,

   September 30, 2017

 

$

(320

)

 

$

(5,900

)

 

$

(48,615

)

 

$

(54,835

)

 

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plans

 

 

Cumulative

Foreign

Currency

Translation

Adjustment

 

 

Total

 

Accumulated Other Comprehensive Loss by

   Component, January 1, 2016

 

$

(140

)

 

$

(5,807

)

 

$

(57,885

)

 

$

(63,832

)

Net current-period Other Comprehensive Income (Loss)

 

 

 

 

 

134

 

 

 

(1,000

)

 

 

(866

)

Accumulated Other Comprehensive Loss by Component,

   September 30, 2016

 

$

(140

)

 

$

(5,673

)

 

$

(58,885

)

 

$

(64,698

)

 

 

6. Acquisitions

 

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

As of September 30, 2017, the allocation of the purchase price for the Stromag Acquisition remains preliminary as the company continues to evaluate the fair value of certain inventories located in foreign jurisdictions. The fair value of all the acquired identifiable assets and liabilities is provisional pending finalization of the Company’s acquisition accounting. The Company believes that such preliminary allocations provide a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize fair value. The Company recorded certain immaterial measurement period adjustments during the quarter ended September 30, 2017. The preliminary purchase price allocations below include such adjustments.

8


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

 

 

Preliminary Purchase Price Allocation

 

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

 

$

191,852

 

Cash and cash equivalents

 

 

8,758

 

Trade receivables

 

 

24,087

 

Inventories

 

 

22,935

 

Property, plant and equipment

 

 

40,343

 

Intangible assets

 

 

74,795

 

Prepaid expenses and other current assets

 

 

778

 

Total assets acquired

 

$

171,696

 

Accounts payable

 

 

(15,370

)

Accrued payroll

 

 

(7,171

)

Accrued expenses and other current liabilities

 

 

(4,357

)

Income tax payable

 

 

(2,525

)

Deferred tax liability

 

 

(27,859

)

Other long-term liabilities

 

 

(1,255

)

Pension liability

 

 

(15,283

)

Total liabilities assumed

 

$

(73,820

)

Net assets acquired

 

 

97,876

 

Excess purchase price over fair value of net assets acquired

 

$

93,976

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is not deductible for income tax purposes. The Company expects to develop synergies, such as lower cost country sourcing, global procurement, the ability to cross-sell product, and the ability to penetrate certain geographic areas, as a result of the acquisition of Stromag.

During the second quarter, the Company and the seller completed the working capital adjustment under the sale and purchase agreement which reduced the purchase price by $2.9 million.

 

 

Intangible assets acquired consist of:

 

 

 

 

Customer relationships

 

$

56,019

 

Trade names and trademarks

 

 

18,776

 

Total intangible assets

 

$

74,795

 

 

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

 

The following table sets forth the unaudited pro forma results of operations of the Company for the quarter and year to date periods ended September 30, 2016, as if the Company had acquired Stromag at the beginning of the period. The pro forma information contains the actual operating results of the Company, including Stromag, 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 and; (ii) additional expense as a result of the estimated amortization of identifiable intangible assets; (iii) additional interest expense for borrowings under the Credit Agreement associated with the Stromag Acquisition and (iv) inventory fair value adjustment. 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.

 

9


ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

 

 

 

Proforma (unaudited)

 

 

 

Quarter Ended

 

 

Year to date Period Ended

 

 

 

September 30, 2016

 

 

September 30, 2016

 

Total revenues

 

$

206,424

 

 

$

644,361

 

Net income

 

$

7,057

 

 

$

29,250

 

Basic earnings per share

 

$

0.27

 

 

$

1.13

 

Diluted earnings per share

 

$

0.27

 

 

$

1.13

 

 

 

7. Net Income per Share

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

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

 

 

 

Quarter Ended

 

 

Year to Date Ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Net income

 

$

13,277

 

 

$

5,313

 

 

$

38,987

 

 

$

23,472

 

Shares used in net income per common share - basic

 

 

29,008

 

 

 

25,726

 

 

 

28,912

 

 

 

25,684

 

Dilutive effect of the equity premium on Convertible Notes at the average price of common stock

 

 

 

 

 

295

 

 

 

 

 

 

123

 

Incremental shares of unvested restricted common stock

 

 

66

 

 

 

 

 

 

89

 

 

 

6

 

Shares used in net income per common share - diluted

 

 

29,074

 

 

 

26,021

 

 

 

29,001

 

 

 

25,813

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income

 

$

0.46

 

 

$

0.21

 

 

$

1.35

 

 

$

0.91

 

Diluted net income

 

$

0.46

 

 

$

0.20

 

 

$

1.34

 

 

$

0.91

 

 

 

8. Inventories

Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Raw materials

 

$

50,976

 

 

$

45,507

 

Work in process

 

 

24,359

 

 

 

20,128

 

Finished goods

 

 

77,679

 

 

 

74,205

 

 

 

$

153,014

 

 

$

139,840

 

 

 

9. Goodwill and Intangible Assets

Changes in goodwill from January 1, 2017 through September 30, 2017 were as follows:

 

 

 

Couplings,

Clutches &

Brakes

 

 

Electromagnetic Clutches &

Brakes

 

 

Gearing

 

 

Total

 

Net goodwill balance January 1, 2017

 

$

104,465

 

 

$

37,161

 

 

$

47,215

 

 

$

188,841

 

Measurement period adjustment related to acquisition of Stromag, including working capital settlement (See Note 6)

 

$

738

 

 

$

113

 

 

$

-

 

 

$

851

 

Impact of changes in foreign currency and other

 

 

12,378

 

 

 

623

 

 

 

881

 

 

 

13,882

 

Net goodwill balance September 30, 2017

 

$

117,581

 

 

$

37,897

 

 

$

48,096

 

 

$

203,574

 

 

10


ALTRA INDUSTRIAL