Altra Industrial Motion
Altra Holdings, Inc. (Form: 10-Q, Received: 11/03/2011 13:42:21)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33209
ALTRA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large Accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a 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 o No þ
As of October 25, 2011, 26,812,883 shares of Common Stock, $.001 par value per share, were outstanding.
 
 

 

 


 

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  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 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT

 

 


Table of Contents

Item 1.   Financial Statements
ALTRA HOLDINGS, INC.
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
                 
    October 1,     December 31,  
    2011     2010  
    (Unaudited)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 90,261     $ 72,723  
Trade receivables, less allowance for doubtful accounts of $2,068 and $1,111 at October 1, 2011 and December 31, 2010, respectively
    103,718       67,403  
Inventories
    123,539       88,217  
Deferred income taxes
    4,434       4,414  
Income tax receivable
    5,871       4,126  
Assets held for sale
          1,484  
Prepaid expenses and other current assets
    5,091       4,168  
 
           
Total current assets
    332,914       242,535  
 
               
Property, plant and equipment, net
    122,650       105,298  
Intangible assets, net
    79,560       69,250  
Goodwill
    84,862       76,897  
Deferred income taxes
    89       82  
Other non-current assets, net
    15,248       14,040  
 
           
Total assets
  $ 635,323     $ 508,102  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 50,636     $ 40,812  
Accrued payroll
    21,741       18,486  
Accruals and other current liabilities
    34,632       24,142  
Deferred income taxes
    61       59  
Current portion of long-term debt
    824       3,393  
 
           
Total current liabilities
    107,894       86,892  
 
               
Commitments and contingencies (Note 15)
               
Long-term debt — less current portion and net of unaccreted discount
    266,417       213,109  
Deferred income taxes
    31,287       20,558  
Pension liablities
    11,754       11,031  
Long-term taxes payable
    6,749       10,892  
Other long-term liabilities
    984       868  
Stockholders’ equity:
               
Common stock ($0.001 par value, 90,000,000 shares authorized, 26,596,145 and 26,466,216 issued and outstanding at October 1, 2011 and December 31, 2010, respectively)
    26       26  
Additional paid-in capital
    149,007       133,861  
Retained earnings
    77,315       45,536  
Accumulated other comprehensive income
    (16,110 )     (14,671 )
 
           
Total stockholders’ equity
    210,238       164,752  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 635,323     $ 508,102  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ALTRA HOLDINGS, INC.
Condensed Consolidated Statements of Income
Amounts in thousands, except per share data
                                 
    Quarter Ended     Year to Date Ended  
    October 1,     October 2,     October 1,     October 2,  
    2011     2010     2011     2010  
    (Unaudited)     (Unaudited)  
Net sales
  $ 177,853     $ 128,930     $ 503,095     $ 389,624  
Cost of sales
    124,824       90,289       353,821       273,453  
 
                       
Gross profit
    53,029       38,641       149,274       116,171  
 
                               
Operating expenses:
                               
Selling, general and administrative expenses
    31,577       22,804       84,005       65,991  
Research and development expenses
    2,801       1,746       7,544       5,156  
Restructuring expense
          510             2,198  
 
                       
 
    34,378       25,060       91,549       73,345  
 
                               
Income from operations
    18,651       13,581       57,725       42,826  
 
                               
Other non-operating (income) expense:
                               
Interest expense, net
    6,698       4,838       18,014       14,734  
Other non-operating (income) expense, net
    216       (272 )     (668 )     750  
 
                       
 
    6,914       4,566       17,346       15,484  
 
                               
Income before income taxes
    11,737       9,015       40,379       27,342  
(Benefit from) Provision for income taxes
    (403 )     2,441       8,600       8,190  
 
                       
 
                               
Net income
  $ 12,140     $ 6,574     $ 31,779     $ 19,152  
 
                       
 
                               
Consolidated Statement of Comprehensive (loss) income
                               
Minimum pension liability adjustment
  $     $ (185 )   $     $ (515 )
Foreign currency translation adjustment
    (7,008 )     12,066       (1,439 )     3,223  
 
                       
Comprehensive income
  $ 5,132     $ 18,455     $ 30,340     $ 21,860  
 
                       
 
                               
Weighted average shares, basic
    26,546       26,414       26,508       26,364  
Weighted average shares, diluted
    26,655       26,495       26,712       26,477  
 
                               
Net income per share:
                               
Basic
  $ 0.46     $ 0.25     $ 1.20     $ 0.73  
Diluted
  $ 0.46     $ 0.25     $ 1.19     $ 0.72  
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  
    October 1, 2011     October 2, 2010  
    (Unaudited)  
Cash flows from operating activities
               
Net income
  $ 31,779     $ 19,152  
Adjustments to reconcile net income to net cash flows:
               
Depreciation
    13,258       12,315  
Amortization of intangible assets
    4,568       3,713  
Amortization and write-offs of deferred financing costs
    1,372       536  
(Gain) loss on foreign currency, net
    (324 )     270  
Accretion of debt discount, net
    1,887       225  
Fixed asset impairment/disposal
          441  
Stock-based compensation
    1,933       1,670  
Changes in assets and liabilities:
               
Trade receivables
    (17,671 )     (18,798 )
Inventories
    (13,873 )     (8,687 )
Accounts payable and accrued liabilities
    9,552       27,429  
Other current assets and liabilities
    880       (752 )
Other operating assets and liabilities
    (4,254 )     (186 )
 
           
Net cash provided by operating activities
    29,107       37,328  
 
           
 
Cash flows from investing activities
               
Purchase of property, plant and equipment
    (13,840 )     (12,725 )
Additional purchase price paid for acquisition
          (1,177 )
Proceeds from sale of Chattanooga Facility
    1,484        
Acquisition of Bauer, net of $41 cash received
    (69,460 )      
 
           
Net cash used in investing activities
    (81,816 )     (13,902 )
 
           
 
Cash flows from financing activities
               
Payment of issuance costs for Convertible Notes
    (3,414 )      
Payment of issuance costs for 8 1 / 8 Senior Secured Notes
          (265 )
Purchase of 8 1 / 8 Senior Secured Notes
    (8,230 )      
Proceeds from issuance of Convertible Notes
    85,000        
Shares surrendered for tax withholdings
    (914 )     (854 )
Redemption of variable rate demand revenue bonds related to Chattanooga facility
    (2,290 )      
Payment on mortgages
    (516 )     (481 )
Net payments on capital leases
    (627 )     (563 )
 
           
Net cash provided by (used in) financing activities
    69,009       (2,163 )
 
           
Effect of exchange rate changes on cash and cash equivalents
    1,238       (599 )
 
           
Net change in cash and cash equivalents
    17,538       20,664  
Cash and cash equivalents at beginning of year
    72,723       51,497  
 
           
Cash and cash equivalents at end of period
  $ 90,261     $ 72,161  
 
           
 
               
Cash paid during the period for:
               
Interest
  $ 10,462     $ 9,676  
Income taxes
  $ 9,685     $ 1,210  
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 mechanical power transmission 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 (“Warner 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. (“All Power”). On May 29, 2011, the Company acquired substantially all of the assets of Danfoss Bauer GmbH relating to its gear motor business (“Bauer”).
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, 2010. 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 October 1, 2011 and December 31, 2010, results of operations for the quarter and year to date periods ended October 1, 2011 and October 2, 2010, and cash flows for the year to date periods ended October 1, 2011 and October 2, 2010.
The December 31, 2010 consolidated balance sheet data presented for 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 $201.8 million and $210.0 million at October 1, 2011 and December 31, 2010, respectively. The estimated fair value of the Senior Secured Notes at October 1, 2011 and December 31, 2010 was $205.8 million and $221.0 million, respectively, based on quoted market prices for such notes (level 1).
The carrying amount of the 2.75% Convertible Notes (the “Convertible Notes”) was $85.0 million at October 1, 2011. The estimated fair value of the Convertible Notes (the at October 1, 2011, was $67.3 million, based on quoted market prices for such notes (level 1).
Included in cash and cash equivalents as of October 1, 2011 and December 31, 2010 are money market fund investments of $52.7 million and $34.0 million, respectively, which are reported at fair value based on quoted market prices for such investments (level 1).
4. Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued guidance to allow entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company is currently evaluating the impact of its pending adoption on the consolidated financial statements.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
5. 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.
The following is a reconciliation of basic to diluted net income per share:
                                 
    Quarter Ended     Year to Date Ended  
    October 1,     October 2,     October 1,     October 2,  
    2011     2010     2011     2010  
 
                               
Net income
  $ 12,140     $ 6,574     $ 31,779     $ 19,152  
 
                               
Shares used in net income per common share — basic
    26,546       26,414       26,508       26,364  
 
                               
Incremental shares of unvested restricted common stock
    109       81       204       113  
 
                       
Shares used in net income per common share — diluted
    26,655       26,495       26,712       26,477  
 
                               
Earnings per share:
                               
Basic
  $ 0.46     $ 0.25     $ 1.20     $ 0.73  
Diluted
  $ 0.46     $ 0.25     $ 1.19     $ 0.72  
The Company excluded 784,890 shares related to the Convertible Notes (See Note 12) from the above earnings per share calculation as these shares were anti-dilutive.
6. 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). We refer to this transaction 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 $0.2 million to reflect an adjustment for pension liability. The total purchase price paid for the Bauer Acquisition was €48.0 million ($69.50 million).
The Company’s payment to reflect the working capital adjustment for Bauer was paid in July 2011. The Company originally included the working capital adjustment as part of the other liabilities in the purchase price allocation instead of included as part of the purchase price of the acquisition. In the quarter ended October 1, 2011, the Company adjusted the table below to reflect the $7.0 million working capital payment as a reduction to other liabilities and an increase in the total purchase price, excluding acquisition costs. This adjustment has no effect on the amount of goodwill acquired as part of the Bauer Acquisition.
In the quarter ended October 1, 2011, the amount of acquired goodwill the Company received from the Bauer acquisition changed by $1.4 million due to changes in the Company’s valuation of fixed assets as well as adjustments to certain reserves.
Through the Bauer Acquisition, the Company acquired a European manufacturer of high-quality gear motors, offering engineered solutions to a variety of industries, including material handling, metals, food processing and energy. With the Bauer Acquisition, in addition to a presence in Germany, the Company acquired Bauer’s well-established sales network in 15 additional countries in Western and Eastern Europe, China, and the United States.
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. Revenue and net income for the Bauer activity included in the quarter ended October 1, 2011 were $30.7 million and $1.0 million, respectively. Revenue and net income for the year to date period ended October 1, 2011 were $39.5 million and $0.1 million, respectively.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The Company is in the process of completing its final purchase price allocation. The value of the acquired assets, assumed liabilities and identified intangibles from the acquisition of Bauer, as presented below, are based upon the Company’s preliminary estimate of the fair value as of the date of the acquisition. The purchase price allocation as of the acquisition date is as follows:
         
Total purchase price, excluding acquisition costs of approximately $3.5 million
  $ 69,501  
Cash and cash equivalents
    41  
Trade receivables, net of $0.7 million for allowance for doubtful accounts
    18,394  
Inventories
    21,397  
Prepaid expenses and other
    2,331  
Property, plant and equipment
    18,045  
Intangible assets
    15,458  
 
     
Total assets acquired
  $ 75,666  
Accounts payable
    3,946  
Accrued expenses and other current liabilities
    7,589  
Other liabilities
    2,910  
 
     
Total liabilities assumed
  $ 14,445  
Net assets acquired
    61,221  
Excess purchase price over fair value of net assets acquired
  $ 8,280  
 
     
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The Company is currently in the process of analyzing tax deductible goodwill for Bauer. The Company expects to develop synergies, such as lower cost country sourcing, global procurement, ability to cross-sell product, as well as penetrating certain geographic areas, as a result of the acquisition of Bauer.
The estimated amounts recorded as intangible assets consist of the following:
         
Customer relationships, subject to amortization
  $ 12,063  
Trade names and trademarks, not subject to amortization
    3,395  
 
     
Total intangible assets
  $ 15,458  
 
     
Customer relationships are subject to amortization, and will be recognized on a straight-line basis over the estimated useful life of 9 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 year and quarter to date periods ended October 1, 2011 and October 2, 2010 as if the Company had acquired Bauer at the beginning of the respective periods. The pro forma information contains the actual operating results of the Company and 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 a fair value adjustment to inventory recorded in connection with the acquisition. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisitions occurred at the beginning of the respective periods 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)     Pro Forma (unaudited)  
    Quarter to Date Period Ended     Year to Date Period Ended  
    October 1, 2011     October 2, 2010     October 1, 2011     October 2, 2010  
Total revenues
  $ 177,853     $ 154,641     $ 553,026     $ 460,488  
Net income
  $ 12,140     $ 6,159     $ 35,020     $ 14,275  
Basic earnings per share:
                               
Net income
  $ 0.46     $ 0.23     $ 1.32     $ 0.54  
Diluted earnings per share:
                               
Net income
  $ 0.46     $ 0.23     $ 1.32     $ 0.54  
7. 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 October 1, 2011 and December 31, 2010 consisted of the following:
                 
    October 1,     December 31,  
    2011     2010  
Raw materials
  $ 46,000     $ 32,826  
Work in process
    25,976       16,223  
Finished goods
    51,563       39,168  
 
           
Inventories
  $ 123,539     $ 88,217  
 
           
Approximately 11% of total inventories were valued using the LIFO method as of October 1, 2011 and approximately 12% of total inventories were valued using the LIFO method as of December 31, 2010. 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 October 1, 2011 and October 2, 2010. The Company recorded a $0.4 million adjustment and $0.2 million adjustment as a component of cost of sales to value the inventory on a LIFO basis for the year to date periods ended October 1, 2011 and October 2, 2010, respectively.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
8. Goodwill and Intangible Assets
Changes to goodwill from December 31, 2010 through October 1, 2011 were as follows:
         
    2011  
Gross goodwill balance as of January 1
  $ 108,707  
Additional goodwill from Bauer acquisition
    8,280  
Impact of changes in foreign currency
    (315 )
 
     
Gross goodwill balance as of October 1
    116,672  
 
     
 
       
Accumulated impairment as of January 1
    (31,810 )
Impairment charge during the period
     
 
     
Accumulated impairment as of October 1
    (31,810 )
 
     
Net goodwill balance October 1, 2011
  $ 84,862  
 
     
Other intangible assets as of October 1, 2011 and December 31, 2010 consisted of the following:
                                 
    October 1, 2011     December 31, 2010  
            Accumulated             Accumulated  
    Cost     Amortization     Cost     Amortization  
Other intangible assets
                               
Intangible assets not subject to amortization:
                               
Tradenames and trademarks
  $ 34,125     $     $ 30,730     $  
Intangible assets subject to amortization:
                               
Customer relationships
    74,101       27,607       62,038       23,821  
Product technology and patents
    5,632       5,701       5,435       4,919  
Impact of changes in foreign currency
    (990 )           (213 )      
 
                       
Total intangible assets
  $ 112,868     $ 33,308     $ 97,990     $ 28,740  
 
                       
Related to the Bauer Acquisition, the Company recorded an additional $15.5 million of intangible assets of which $12.1 million related to customer relationships, which will be amortized on a straight line basis over 9 years, and $3.4 million related to tradenames and trademarks which represents indefinite-lived intangible assets.
The Company recorded $1.7 million and $1.4 million of amortization expense in the quarters ended October 1, 2011 and October 2, 2010, respectively, and recorded $4.6 million and $3.7 million of amortization expense in the year to date periods ended October 1, 2011 and October 2, 2010, respectively.
The estimated amortization expense for intangible assets is approximately $1.7 million for the remainder of 2011, $6.8 million in 2012, and $6.3 million in each of the next three years and then $18.0 million thereafter.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
9. 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 October 1, 2011 and October 2, 2010 are as follows:
                 
    October 1,     October 2,  
    2011     2010  
 
               
Balance at beginning of period
  $ 3,583     $ 4,047  
Additional warranty related to Bauer
    1,720        
Accrued current period warranty expense
    1,618       1,041  
Payments
    (1,645 )     (1,186 )
 
           
Balance at end of period
  $ 5,276     $ 3,902  
 
           
10. Income Taxes
The estimated effective income tax rates recorded for the quarters ended October 1, 2011 and October 2, 2010, were based upon management’s best estimate of the effective tax rate for the entire year.
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 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.
During the quarter ended October 1, 2011, the Company recognized a tax benefit for the reduction of the Company’s reserve for uncertain tax positions due to a favorable New Jersey Supreme Court ruling in a case that did not involve the Company. The reserve consisted of approximately $2.3 million of tax, $1.8 million accrued interest and $0.5 million of penalties. In addition, the Company reversed $1.4 million of deferred tax assets related to the federal benefit of the accrued state reserve . The net benefit to the Company is approximately $3.2 million. In addition, the Company released $0.7 million of a valuation allowance against state income tax attributes. This amount was fully recognized in the Company’s effective rate for the quarter ended October 1, 2011.
11. 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, active 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 October 1, 2011 and October 2, 2010:
                                 
    Quarter Ended  
    Pension Benefits     Other Benefits  
    October 1,     October 2,     October 1,     October 2,  
    2011     2010     2011     2010  
Service cost
  $ 25     $ 50     $ 1     $ 1  
Interest cost
    291       334       4       4  
Expected return on plan assets
    (266 )     (309 )            
Amortization of prior service income
                      (172 )
Amortization of net gain
    7             (13 )     (40 )
 
                       
Net periodic benefit cost (income)
  $ 57     $ 75     $ (8 )   $ (207 )
 
                       
                                 
    Year to Date Ended  
    Pension Benefits     Other Benefits  
    October 1,     October 2,     October 1,     October 2,  
    2011     2010     2011     2010  
Service cost
  $ 75     $ 50     $ 2     $ 2  
Interest cost
    863       962       12       17  
Expected return on plan assets
    (778 )     (919 )            
Amortization of prior service income
                (1 )     (515 )
Amortization of net gain
    32             (39 )     (121 )
 
                       
Net periodic benefit cost (income)
  $ 192     $ 93     $ (26 )   $ (617 )
 
                       
The Company made $2.4 million of payments to the pension plan in the year to date period ended October 1, 2011 of which $0.8 million were required payments.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
12. Debt
Outstanding debt obligations at October 1, 2011 and December 31, 2010 were as follows:
                 
    October 1,     December  
    2011     31, 2010  
 
               
Debt:
               
Revolving Credit Agreement
  $     $  
Convertible Notes
    85,000        
Senior Secured Notes
    201,770       210,000  
Variable rate demand revenue bonds
    3,000       5,300  
Mortgages
    1,918       2,372  
Capital leases
    605       1,257  
 
           
Total debt
    292,293       218,929  
Less: debt discount, net of accretion
    (25,052 )     (2,427 )
 
           
Total long-term debt, net of unaccreted discount
  $ 267,241     $ 216,502  
 
           
Less current portion of long-term debt
    824       3,393  
 
           
Total long-term debt
  $ 266,417     $ 213,109  
 
           
Convertible Senior 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%. Proceeds from the offering were $81.6 million, net of fees and expenses that were capitalized. The proceeds from the offering were used in part to fund the Bauer Acquisition and also to bolster the Company’s cash position.
The Convertible Notes will mature on March 1, 2031, unless earlier redeemed, repurchased by the Company or converted, and are convertible into cash or shares, or a combination thereof, at the Company’s election. The Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate, subject to adjustment, of 36.0985 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $27.70 per share of our common stock), in certain circumstances. Prior to March 1, 2030, the Convertible Notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after June 30, 2011 if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day in the measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; (3) if the Convertible Notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions. On or after March 1, 2030, and ending at the close of business on the second business day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of common stock, or a combination thereof, at the Company’s election. The Company intends to settle the principal amount in cash and any additional amounts in shares of stock.
If a fundamental change occurs, the Convertible Notes are redeemable at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but excluding, the repurchase date. The Convertible Notes are also redeemable on each of March 1, 2018, March 1, 2021, and March 1, 2026 for cash at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but excluding, the option repurchase date.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
On or after March 1, 2015, the Company may call all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a “make-whole premium” payment in cash, shares of the Company’s common stock, or combination thereof, at the Company’s option, equal to the sum of the present values of the remaining scheduled payments of interest on the Convertible Notes to be redeemed through March 1, 2018 to, but excluding, the redemption date, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date the Company provides notice of redemption exceeds 130% of the conversion price in effect on each such trading day. On or after March 1, 2018, the Company may redeem for cash all or a portion of the notes at a redemption price of 100% of the principle amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest (including contingent and additional interest, if any) to, but not including, the redemption date.
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 interests 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 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 $3.4 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. The balance of $2.4 million of debt issuance costs is classified as other non-current assets 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 October 1, 2011:
         
    October 1,  
    2011  
 
       
Principal amount of debt
  $ 85,000  
Unamortized discount
    22,931  
 
     
Carrying value of debt
  $ 62,069  
 
     
Interest expense associated with the Convertible Notes consisted of the following for the year to date period ended October 1, 2011:
         
    October 1,  
    2011  
 
       
Contractual coupon rate of interest
  $ 1,364  
Accretion of convertible notes discount and amortization of deferred financing costs
    1,761  
 
     
Interest expense for the Convertible Notes
  $ 3,125  
 
     
The effective interest yield of the Convertible Notes due in 2031 is 8.5% at October 1, 2011 and the cash coupon interest rate is 2.75%.
Senior Secured Notes
In November 2009, the Company issued 8 1 / 8 % Senior Secured Notes (the “Senior Secured Notes”) with a face value of $210 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.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
During the quarter and year to date period ended October 1, 2011, the Company repurchased $8.2 million of Senior Secured Notes. The Company repurchased the Senior Secured Notes at a premium of $0.2 million, which was recorded as part of interest expense in the quarter ended October 1, 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 $0.3 million which was also recorded as part of interest expense in the quarter ended October 1, 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 our 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”), that provides for borrowing capacity in an initial amount of up to $50.0 million (subject to adjustment pursuant to a borrowing base and subject to increase from time to time in accordance with the terms of the credit facility). The Revolving Credit Agreement replaced Altra Industrial’s then existing senior secured credit facility (the “Old Revolving Credit Agreement”), and TB Wood’s existing credit facility (the “Old TB Wood’s Revolving Credit Agreement”). The Company can borrow up to $37.5 million under the Revolving Credit Agreement without being required to comply with any financial covenants under the agreement. The Company 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 the Company. The Company 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 November 25, 2012.
There were no borrowings under the Revolving Credit Agreement at October 1, 2011 and December 31, 2010, however, the lender had issued $6.6 million and $10.1 million of outstanding letters of credit on behalf of the Company as of October 1, 2011 and December 31, 2010, respectively.
Altra Industrial and all of its domestic subsidiaries are borrowers (collectively, “Borrowers”) under the Revolving Credit Agreement. Certain of our 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 our existing and subsequently acquired or organized domestic subsidiaries that is a guarantor of our obligations under the Revolving Credit Agreement (with such subsidiaries being referred to as the “U.S. subsidiary guarantors”), including but not limited to: (a) a first-priority pledge of all the capital stock of subsidiaries held by Borrowers or any U.S. subsidiary guarantor (which pledge, in the case of any foreign subsidiary, will be limited to 100% of any non-voting stock and 65% of the voting stock of such foreign subsidiary) and (b) perfected first-priority security interests in and mortgages on substantially all tangible and intangible assets of each Borrower and U.S. subsidiary guarantor, including accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, certain real property, 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 million or more and such default: (i) occurs at final maturity of such debt, (ii) allows the lender there under to accelerate such debt or (iii) causes such debt to be required to be repaid prior to its stated maturity. An event of default would also occur under the Revolving Credit Agreement if any of the indebtedness under the Revolving Credit Agreement ceases, with limited exception, to be secured by a full lien on the assets of Borrowers and guarantors.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
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 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 bonds associated with the San Marcos facility bear a variable interest rate (less than 1% as of October 1, 2011) and mature in April 2024. The bonds were issued to finance a production facility for TB Wood’s manufacturing operations in the city of San Marcos and are secured by a letter of credit issued under the terms of the Revolving Credit Agreement.
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 has an interest rate of 2.9% and is payable in monthly installments over the next six years. As of October 1, 2011 and December 31, 2010, the mortgage had a remaining principal of €1.4 million or $1.9 million, and of €1.8 million or $2.4 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 $0.6 million and $1.3 million at October 1, 2011 and December 31, 2010, 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 our foreign subsidiaries maintain overdraft agreements with financial institutions. There were no borrowings as of October 1, 2011 and December 31, 2010 under any of the overdraft agreements.
13. Stockholders’ Equity
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 October 1, 2011 and October 2, 2010 was $1.9 million and $1.7 million, respectively. Compensation expense recorded during the quarter to date periods ended October 1, 2011 and October 2, 2010 was $0.6 million and $0.5 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.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The following table sets forth the activity of the Company’s unvested restricted stock grants in the year to date period ended October 1, 2011:
                 
            Weighted-average  
    Shares     grant date fair value  
 
               
Restricted shares unvested January 1, 2011
    287,586     $ 9.66  
Shares granted
    114,273       21.94  
Shares for which restrictions lapsed
    (185,121 )     12.66  
 
           
Restricted shares unvested October 1, 2011
    216,738     $ 13.57  
 
           
Total remaining unrecognized compensation cost was $2.8 million as of October 1, 2011, which will be recognized over a weighted average remaining period of three years. The fair market value of the shares in which the restrictions have lapsed during the year to date period ended October 1, 2011 was $3.2 million. Restricted shares granted are valued based on the fair market value of the stock on the date of grant.
14. 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 October 1, 2011 and October 2, 2010.
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.
With the acquisition of Bauer, the Company has six operating segments that are regularly reviewed by our chief operating decision maker. Each of these operating segments represents a unit that produces 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 our products are sold by one global sales force and we have one global marketing function with the exception of the newly acquired Bauer gear motor business, for which the Company is developing a plan to integrate sales and marketing activities. Strategic markets and industries are determined for the entire company and then targeted by the brands. All of our operating segments have common manufacturing and production processes. Each segment includes machine shops which use similar equipment and manufacturing techniques. Each of our segments uses common raw materials, such as aluminum, steel and copper. The Company is in the process of converging the purchasing process so that these materials are purchased and procurement contracts are negotiated by one global purchasing function.
We serve the general industrial market by selling to original equipment manufacturers (“OEM”) and distributors. Our 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.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Net sales to third parties by geographic region are as follows:
                                 
    Net Sales     Net Sales  
    Quarter Ended     Year to Date Ended  
    October 1,     October 2,     October 1,     October 2,  
    2011     2010     2011     2010  
 
                               
North America (primarily U.S.)
  $ 107,000     $ 94,335     $ 36,141     $ 286,716  
Europe
    59,565       26,629       137,104       81,204  
Asia and other
    11,288       7,966       29,850       21,704  
 
                       
Total
  $ 177,853     $ 128,930     $ 503,095     $ 389,624  
 
                       
Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates.
The net assets of our foreign subsidiaries at October 1, 2011 and December 31, 2010 were $105.3 million and $92.3 million, respectively.
15. 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. As of October 1, 2011 and December 31, 2010, the Company cannot estimate the likelihood or potential amount of the liability related to these proceedings. As a result, no amounts were accrued in the accompanying condensed consolidated balance sheets for potential litigation losses at those dates.
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.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
16. Restructuring, Asset Impairment and Transition Expenses
In March 2009, the Company adopted a restructuring plan (“2009 Altra Plan”) to improve the utilization of the manufacturing infrastructure and to realign the business with the current economic conditions. The 2009 Altra Plan was intended to improve operational efficiency by reducing headcount and consolidating facilities. The Company’s total restructuring expense was $2.2 million for the year to date period ended October 2, 2010. The Company substantially completed the 2009 Altra Plan in the fourth quarter of 2010.
The Company’s restructuring expense, by major component for the year to date period ended October 2, 2010, was as follows:
         
    Year to Date Ended  
    October 2, 2010  
    2009 Altra  
    Plan  
 
       
Expenses
       
Severance
  $ 1,159  
Moving and relocation
    413  
Other cash expenses
    395  
 
     
 
       
Total cash expenses
    1,967  
 
     
 
       
Non-cash asset impairment and loss on sale of fixed asset
    231  
 
     
 
       
Total restructuring expenses
  $ 2,198  
 
     
The following is a reconciliation of the accrued restructuring costs between December 31, 2010 and October 1, 2011:
         
    2009 Altra Plan  
 
       
Balance at December 31, 2010
  $ 159  
Cash restructuring expense incurred
     
Cash payments
    (50 )
 
     
Balance at October 1, 2011
  $ 109  
 
     
The total restructuring reserve as of October 1, 2011 relates to severance costs to be paid to employees and is recorded in accruals and other current liabilities on the condensed consolidated balance sheet. As of October 1, 2011, the Company has incurred $10.0 million of cumulative expense related to the 2009 Altra Plan. The Company does not expect to incur any additional expenses associated with the consolidation of facilities under the 2009 Altra Plan for the remainder of 2011.
17. 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.

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited Condensed Consolidating Balance Sheet
October 1, 2011
                                         
            Guarantor     Non Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 54,063     $ 36,198     $     $ 90,261  
Trade receivables, less allowance for doubtful accounts
          54,008       49,710             103,718  
Loans receivable from related parties
    267,605                   (267,605 )      
Inventories
          72,933       50,606             123,539  
Deferred income taxes
          3,814       620             4,434  
Income tax receivable
          5,871                   5,871  
Prepaid expenses and other current assets
          2,957       2,134             5,091  
 
                             
Total current assets
    267,605       193,646       139,268       (267,605 )     332,914  
 
                                       
Property, plant and equipment, net
          75,847       46,803             122,650  
Intangible assets, net
          51,295       28,265             79,560  
Goodwill
          56,446       28,416             84,862  
Deferred income taxes
                89             89  
Investment in subsidiaries
    202,650                   (202,650 )      
Other non-current assets
    7,382       7,733       133             15,248  
 
                             
 
                                       
Total assets
  $ 477,637     $ 384,967     $ 242,974     $ (470,255 )   $ 635,323  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 27,594     $ 23,042     $     $ 50,636  
Accrued payroll
          10,037       11,704             21,741  
Accruals and other current liabilities
    5,733       15,634       13,265             34,632  
Deferred income taxes
                61             61  
Current portion of long-term debt
          454       370             824  
Loans payable to related parties
          195,086       72,519       (267,605 )      
 
                             
Total current liabilities
    5,733       248,805       120,961       (267,605 )     107,894  
 
                                       
Long-term debt — less current portion and net of unacreted discount
    261,666       3,110       1,641             266,417  
Deferred income taxes
          22,434       8,853             31,287  
Pension liablities
          5,763       5,991             11,754  
Long-term taxes payable
          6,749                   6,749  
Other long-term liabilities
          778       206             984  
Total stockholders’ equity
    210,238       97,328       105,322       (202,650 )     210,238  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 477,637     $ 384,967     $ 242,974     $ (470,255 )   $ 635,323  
 
                             

 

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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, 2010
                                         
            Guarantor     Non Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                       
Current assets:
                                       
Cash and cash equivalents
  $     $ 37,125     $ 35,598     $     $ 72,723  
Trade receivables, less allowance for doubtful accounts
          44,020       23,383             67,403  
Loans receivable from related parties
    204,667                   (204,667 )      
Inventories
          63,226       24,991             88,217  
Deferred income taxes
          3,813       601             4,414  
Assets held for sale
          1,484                   1,484  
Income tax receivable
          4,126                   4,126  
Prepaid expenses and other current assets
          2,282       1,886             4,168  
 
                             
Total current assets
    204,667       156,076       86,459       (204,667 )     242,535  
 
                                       
Property, plant and equipment, net
          74,956       30,342             105,298  
Intangible assets, net
          54,321       14,929             69,250  
Goodwill
          56,446       20,451             76,897  
Deferred income taxes
                82             82  
Investment in subsidiaries
    163,069                   (163,069 )      
Other non-current assets
    6,020       7,905       115             14,040  
 
                             
 
                                       
Total assets
  $ 373,756     $ 349,704     $ 152,378     $ (367,736 )   $ 508,102  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 26,497     $ 14,315     $     $ 40,812  
Accrued payroll
          12,364       6,122             18,486  
Accruals and other current liabilities
    1,422       15,458       7,262             24,142  
Deferred income taxes
                59             59  
Current portion of long-term debt
          3,028       365             3,393  
Loans payable to related parties
          185,768       18,899       (204,667 )      
 
                             
Total current liabilities
    1,422       243,115       47,022       (204,667 )     86,892  
 
                                       
Long-term debt — less current portion and net of unaccreted discount
    207,582       3,338       2,189             213,109  
Deferred income taxes
          13,043       7,515             20,558  
Pension liablities
          7,596       3,212             10,808  
Other post retirement benefits
          223                   223  
Long-term taxes payables
          10,892                   10,892  
Other long-term liabilities
          762       106             868  
Total stockholders’ equity
    164,752       70,735       92,334       (163,069 )     164,752  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 373,756     $ 349,704     $ 152,378     $ (367,736 )   $ 508,102  
 
                             

 

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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 Income
                                         
    Year to Date Ended October 1, 2011  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 344,731     $ 191,944     $ (33,580 )   $ 503,095  
Cost of sales
          249,795       137,606       (33,580 )     353,821  
 
                             
Gross profit
          94,936       54,338             149,274  
Selling, general and administrative expenses
          51,639       32,366               84,005  
Research and development expenses
          3,962       3,582               7,544  
 
                             
Income from operations
          39,335       18,390             57,725  
Interest expense, net
    17,265       659       90               18,014  
Other non-operating income, net
          (432 )     (236 )             (668 )
Equity in earnings of subsidiaries
    39,581                   (39,581 )      
 
                             
Income before income taxes
    22,316       39,108       18,536       (39,581 )     40,379  
Provision (benefit) for income taxes
    (9,463 )     12,515       5,548               8,600  
 
                             
Net income
  $ 31,779     $ 26,593     $ 12,988     $ (39,581 )   $ 31,779  
 
                             
Unaudited Condensed Consolidating Statement of Income
                                         
    Year to Date Ended October 2, 2010  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 293,134     $ 125,836     $ (29,346 )   $ 389,624  
Cost of sales
          215,547       87,252       (29,346 )     273,453  
 
                             
Gross profit
          77,587       38,584             116,171  
Selling, general and administrative expenses
    46       44,916       21,029             65,991  
Research and development expenses
          3,091       2,065             5,156  
Restructuring costs
          1,207       991             2,198  
 
                             
Income (loss) from operations
    (46 )     28,373       14,499             42,826  
Interest expense, net
    13,526       1,083       125             14,734  
Other non-operating expense, net
          764       (14 )           750  
Equity in earnings of subsidiaries
    26,594                   (26,594 )      
 
                             
Income before income taxes
    13,022       26,526       14,388       (26,594 )     27,342  
Provision (benefit) for income taxes
    (6,130 )     9,284       5,036             8,190  
 
                             
Net income
  $ 19,152     $ 17,242     $ 9,352     $ (26,594 )   $ 19,152  
 
                             

 

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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 Income
                                         
    Quarter Ended October 1, 2011  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 110,929     $ 79,500     $ (12,576 )   $ 177,853  
Cost of sales
          80,066       57,334       (12,576 )     124,824  
 
                             
Gross profit
          30,863       22,166             53,029  
Selling, general and administrative expenses
          16,595       14,982               31,577  
Research and development expenses
          1,306       1,495               2,801  
 
                             
Income from operations
          12,962       5,689             18,651  
Interest expense, net
    6,395       253       50               6,698  
Other non-operating income, net
          30       186               216  
Equity in earnings of subsidiaries
    11,806                   (11,806 )      
 
                             
Income before income taxes
    5,411       12,679       5,453       (11,806 )     11,737  
Provision (benefit) for income taxes
    (6,729 )     3,264       3,062               (403 )
 
                             
Net income
  $ 12,140     $ 9,415     $ 2,391     $ (11,806 )   $ 12,140  
 
                             
Unaudited Condensed Consolidating Statement of Income
                                         
    Quarter Ended October 2, 2010  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales
  $     $ 96,652     $ 42,156     $ (9,878 )   $ 128,930  
Cost of sales
          70,207       29,960       (9,878 )     90,289  
 
                             
Gross profit
          26,445       12,196             38,641  
Selling, general and administrative expenses
          15,702       7,102             22,804  
Research and development expenses
          1,043       703             1,746  
Restructuring costs
          229       281             510  
 
                             
Income from operations
          9,471       4,110             13,581  
Interest expense, net
    4,465       359       14             4,838  
Other non-operating (income) expense, net
          638       (910 )           (272 )
Equity in earnings of subsidiaries
    8,762                   (8,762 )      
 
                             
Income before income taxes
    4,297       8,474       5,006       (8,762 )     9,015  
Provision (benefit) for income taxes
    (2,277 )     2,966       1,752             2,441  
 
                             
Net income
  $ 6,574     $ 5,508     $ 3,254     $ (8,762 )   $ 6,574  
 
                             

 

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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 Cash Flows
                                         
    Year to Date Ended October 1, 2011  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Cash flows from operating activities
                                       
Net income
  $ 31,779     $ 26,593     $ 12,988     $ (39,581 )   $ 31,779  
Undistributed equity in earnings of subsidiaries
    (39,581 )                 39,581        
Adjustments to reconcile net income to net cash flows:
                                     
Depreciation
          5,422       7,836             13,258  
Amortization of intangible assets
          3,089       1,479             4,568  
Amortization and write-offs of deferred financing costs
    1,037       335                   1,372  
(Gain) loss on foreign currency, net
                (324 )           (324 )
Accretion of debt discount, net
    1,887                         1,887  
Stock-based compensation
          1,933                   1,933  
Changes in assets and liabilities:
                                   
Trade receivables
          (9,354 )     (8,317 )           (17,671 )
Inventories
          (9,008 )     (4,865 )           (13,873 )
Accounts payable and accrued liabilities
    4,311       (3,329 )     8,570             9,552  
Other current assets and liabilities
          (675 )     1,555             880  
Other operating assets and liabilities
          (6,364 )     2,110             (4,254 )
 
                             
Net cash provided by (used in) operating activities
    (567 )     8,642       21,032             29,107  
 
                             
 
                                       
Cash flows used in investing activities
                                       
Purchase of property, plant and equipement
          (5,966 )     (7,874 )           (13,840 )
Acquisition of Bauer net of cash $41 thousand cash received
          (1,146 )     (68,314 )           (69,460 )
Proceeds from sale of Chattanooga
          1,484                   1,484  
 
                             
Net cash used in investing activities
          (5,628 )     (76,188 )           (81,816 )
 
                             
 
                                       
Cash flows from financing activities
                                       
 
Proceeds from issuance of Convertible Notes
    85,000                         85,000  
 
Purchase of 8 1 / 8 Senior Secured Notes
    (8,230 )                       (8,230 )
 
Payment of issuance costs for Convertible Notes
    (3,414 )                       (3,414 )
Shares surrendered for tax withholdings
    (914 )                       (914 )
Redemption of variable rate demand revenuebonds related to the Chattanooga facility
          (2,290 )                 (2,290 )
Payments on mortgages
                (516 )           (516 )
Payments on capital leases
          (228 )     (399 )           (627 )
Change in affiliate debt
    (71,875 )     16,442       55,433              
 
                             
Net cash provided by financing activities
    567       13,924       54,518             69,009  
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                1,238             1,238  
 
                             
Net change in cash and cash equivalents
          16,938       600             17,538  
Cash and cash equivalents at beginning of year
          37,125       35,598             72,723  
 
                             
Cash and cash equivalents at end of period
  $     $ 54,063     $ 36,198     $     $ 90,261  
 
                             

 

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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 Cash Flows
                                         
    Year to Date Ended October 2, 2010  
            Guarantor     Non-Guarantor              
    Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Cash flows from operating activities
                                       
Net income
  $ 19,152     $ 17,242     $ 9,352     $ (26,594 )   $ 19,152  
Undistributed equity in earnings of subsidiaries
    (26,594 )                 26,594        
Adjustments to reconcile net income to net cash flows:
                                       
Depreciation
          9,521       2,794             12,315  
Amortization of intangible assets
          3,046       667             3,713  
Amortization and write-offs of deferred financing costs
    536                         536  
Fixed asset impairment/disposal
          92       349             441  
Loss on foreign currency, net
                270             270  
Accretion of debt discount
    225                         225  
Stock based compensation
          1,670                   1,670  
Changes in assets and liabilities:
                                       
Trade receivables
          (11,409 )     (7,389 )           (18,798 )
Inventories
          (5,148 )     (3,539 )           (8,687 )
Accounts payable and accrued liabilities
    5,145       15,287       6,997             27,429  
Other current assets and liabilities
          (352 )     (400 )           (752 )
Other operating assets and liabilities
          (86 )     (100 )           (186 )
 
                             
Net cash provided by (used in) operating activities
    (1,536 )     29,863       9,001             37,328  
 
                             
 
                                       
Cash flows from investing activities
                                       
Purchase of fixed assets
          (10,570 )     (2,155 )           (12,725 )
Additional purchase price paid for acquisition
          (645 )     (532 )           (1,177 )
 
                             
Net cash used in investing activities
          (11,215 )     (2,687 )           (13,902 )
 
                             
 
                                       
Cash flows from financing activities
                                       
Payment of debt issuance costs
    (265 )                       (265 )
Shares surrendered for tax withholdings
    (854 )                       (854 )
Payments on mortgages
                (481 )           (481 )
Change in affiliate debt
    2,654       1,361       (4,015 )            
Payment on capital leases
          (470 )     (93 )           (563 )
 
                             
Net cash (used in) provided by financing activities
    1,535       891       (4,589 )           (2,163 )
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                (599 )           (599 )
 
                             
Net change in cash and cash equivalents
    (1 )     19,539       1,126             20,664  
Cash and cash equivalents at beginning of year
    1       19,744       31,752             51,497  
 
                             
Cash and cash equivalents at end of period
  $     $ 39,283     $ 32,878     $     $ 72,161  
 
                             

 

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ALTRA HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
18. Subsequent Events
In October 2011, the Company repurchased an additional $3.7 million of Senior Secured Notes at a premium of $0.1 million.
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. The Company has evaluated subsequent events through the date the financial statements were issued and determined that with the exception of the above repurchase of Senior Secured Notes, no material subsequent events have occurred that would effect the information presented in these condensed consolidated financial statements or require additional disclosure.

 

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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 Corporation’s actual results to differ materially from the results referred to in the forward-looking statements the Corporation makes in this report include:
    the Company’s access to capital, credit ratings, indebtedness, and ability to raise additional 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;
    the Company’s ability to obtain or protect intellectual property rights;
    the Company’s ability to retain existing customers and our ability to attract new customers for growth of our business;
    the effects of the loss or bankruptcy of or default by any significant customer, suppliers, or other entity relevant to the Company’s operations;
    the Company’s ability to successfully pursue the Company’s development activities and successfully integrate new operations and systems, including the realization of revenues, economies of scale, cost savings, and productivity gains associated with such operations;
    the Company’s ability to complete cost reduction actions and risks associated with such actions;
    the Company’s ability to control costs;
    failure of the Company’s operating equipment or information technology infrastructure;
    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 economic environment on our customers;
    fluctuations in the costs of raw materials used in our products;
    the Company’s ability to attract and retain key executives and other personnel;
    work stoppages and other labor issues;
    changes in the Company’s pension and retirement liabilities;
    the Company’s risk of loss not covered by insurance;
    the outcome of litigation to which the Company is a party from time to time, including product liability claims;
    changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations;
    changes in market conditions that would result in the impairment of goodwill or other assets of the Company;
    changes in market conditions in which we operate that would influence the value of the Company’s stock;

 

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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 volatility and disruption in the global financial markets;
    political and economic conditions nationally, regionally, and in the markets in which we operate;
    natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, or other matters beyond the Company’s control;
    the risks associated with international operations, including currency risks;
    the risks associated with the Company’s planned 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, 2010.
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, 2010, AND IN OTHER REPORTS FILED WITH THE SEC 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, 2010. 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 56 subsidiaries. The following chart illustrates a summary of our corporate structure:
(FLOW CHART)
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 MPT 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., or All Power, 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, the Company acquired substantially all of the assets of Danfoss Bauer GmbH relating to its gear motor 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.
We are a leading global designer, producer and marketer of a wide range of MPT and motion control products with a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct OEM customers and over 3,000 distributor outlets. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, couplings, engineered bearing assemblies, linear components and other related products. Our products serve a wide variety of end markets including energy, general industrial, material handling, mining, transportation and turf and garden. We primarily sell our products to a wide range of OEMs and through long-standing relationships with industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger.
While the power transmission industry has undergone some consolidation, we estimate that in 2010 the top five broad-based MPT 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   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
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 SEC. 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.

 

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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 both the remainder of 2011 and the first portion of 2012, we expect to continue to focus on the execution of our long-term growth strategy and the integration of Bauer. Among other items, we expect our growth initiatives will continue to include investing in organic growth, pursuing 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.
During the remainder of 2011, as a result of the positive demand environment for our products, we expect that early-cycle and late-cycle markets will continue to be strong although growth rates for early-cycle business are moderating as a result of a difficult year-over-year comparison. The Bauer Acquisition has created business opportunities for us in certain previously underpenetrated geographic regions and we believe the Bauer Acquisition will provide us with a platform from which we can further execute our acquisition strategy.
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, 2010. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2010.
Business Combinations
Business combinations are accounted for at fair value. Acquisition costs are generally expensed as incurred and recorded in selling, general and administrative expenses; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets and liabilities acquired. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.

 

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Results of Operations
                                 
    Quarter Ended     Year to Date Ended  
    October 1,     October 2,     October 1,     October 2,  
(In thousands)   2011     2010     2011     2010  
Net sales
  $ 177,853     $ 128,930     $ 503,095     $ 389,624  
Cost of sales
    124,824       90,289       353,821       273,453  
 
                       
Gross profit
    53,029       38,641       149,274       116,171  
Gross profit percentage
    29.82 %     29.97 %     29.67 %     29.82 %
Selling, general and administrative expenses
    31,577       22,804       84,005       65,991  
Research and development expenses
    2,801       1,746       7,544       5,156  
Restructuring costs
          510             2,198  
 
                       
Income from operations
    18,651       13,581       57,725       42,826  
Interest expense, net
    6,698       4,838       18,014       14,734  
Other non-operating (income) expense, net
    216       (272 )     (668 )     750  
 
                       
Income before income taxes
    11,737       9,015       40,379       27,342  
Provision for income taxes
    (403 )     2,441       8,600       8,190  
 
                       
Net income
  $ 12,140     $ 6,574     $ 31,779     $ 19,152  
 
                       
Quarter Ended October 1, 2011 compared with Quarter Ended October 2, 2010
(Amounts in thousands unless otherwise noted)
                                 
    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Net sales
  $ 177,853     $ 128,930     $ 48,923       37.9 %
The increase in sales during the third quarter of 2011 is primarily due to approximately $30.7 million of additional sales related to the acquisition of Bauer, improvements in the end markets we serve compared to 2010, and $1.7 million is related to the impact of foreign exchange rate increases attributed to the increase in the Euro and British Pound rates compared to 2010. We expect that demand of our late-cycle markets will remain strong and that we will see further improvement from many of our late-cycle markets, such as mining, power generation, and oil production, as the year progresses. We expect to see continued increases in sales in 2011 compared to 2010.

 

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    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Gross Profit
  $ 53,029     $ 38,641     $ 14,388       37.2 %
Gross Profit as a percent of sales
    29.8 %     30.0 %                
The decrease in gross profit as a percentage of sales was primarily due to higher material costs in the third quarter of 2011, primarily relating to copper and steel, and the inclusion of Bauer results. This has been offset by the effect of price increases of $2.4 million. We expect to be able to offset the majority of material cost increases with price increases and surcharges to our customers during future periods. We expect our gross profit as a percentage of sales to improve in the fourth quarter of 2011 as price increases continue to be implemented.
                                 
    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Selling, general and administrative expense (“SG&A”)
  $ 31,577     $ 22,804     $ 8,773       38.5 %
SG&A as a percent of sales
    17.8 %     17.7 %                
SG&A increased compared to the third quarter of 2010 due to additional headcount to meet increased demand, higher wage rates, and higher commissions related to the increase in sales, $0.6 million of costs associated with the acquisition of Bauer, as well as the impact of foreign exchange of $0.2 million. During the remainder of 2011, we expect SG&A as a percentage of sales to remain consistent with the third quarter of 2011.
                                 
    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Restructuring Expense
  $     $ 510     $ (510 )     -100.0 %
In March 2009, we adopted a restructuring plan to continue to improve the utilization of our manufacturing infrastructure and to realign our business with economic conditions by consolidating certain facilities. We substantially concluded our restructuring efforts as of the fourth quarter 2010 and expect no additional expense associated with this restructuring effort going forward.
                                 
    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Interest Expense, net
  $ 6,698     $ 4,838     $ 1,860       38.4 %
Net interest expense increased due to the issuance of $85 million of Convertible Notes in March 2011 as well as the repurchase of $8.2 million of Senior Secured Notes in the third quarter of 2011 at a premium of $0.2 million, which was recorded as part of interest expense in the third quarter 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 $0.3 million which was also recorded as part of interest expense in the third quarter of 2011.

 

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    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Other non-operating (income) expense, net
  $ 216     $ (272 )   $ 488       -179.4 %
Other non-operating (income) expense in both the third quarter 2011 and 2010 relates primarily to changes in foreign currency, primarily the British Pound Sterling and Euro.
                                 
    Quarter Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Provision for income taxes
  $ (403 )   $ 2,441     $ (2,844 )     -116.5 %
Provision for income taxes as a % of income before income taxes
    -3.4 %     27.1 %                
The 2011 third quarter provision for income taxes, as a percentage of income before taxes, was lower than that of the third quarter 2010. The income tax rate before discrete items was 31.8% in the third quarter of 2011. The primary reason for the decrease in tax provision is due to discrete items. The Company recognized a tax benefit for the reduction of the Company’s reserve for uncertain tax positions due to a favorable New Jersey Supreme Court ruling in a case that did not involve the Company. The reserve amount consisted of approximately $2.3 million of tax, $1.8 million accrued interest and $0.5 million of penalties. In addition, the Company reversed $1.4 million of deferred tax assets related to the federal benefit of the accrued state reserve. The net benefit to the Company is approximately $3.2 million. In addition, the Company released $0.7 million of a valuation allowance against state income tax attributes. This amount was fully recognized in the Company’s effective rate for the quarter ended October 1, 2011.

 

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Year to Date Period Ended October 1, 2011 compared with the Year to Date Period Ended October 2, 2010
(Amounts in thousands unless otherwise noted)
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Net sales
  $ 503,095     $ 389,624     $ 113,471       29.1 %
The majority of the increase in sales during 2011 is due to improvements in nearly all of the end markets we serve compared to 2010 and to a lesser extent, the acquisition of Bauer. Of the increase in sales, approximately $39.5 million relates to the additional sales related to the acquisition of Bauer, $6.5 million relates to the impact of foreign exchange rate increases attributed to the increase in the Euro and British Pound rates compared to 2010, and approximately $5.9 million relates to the impact of price increases. We expect to see continued increases in sales in 2011 compared to 2010.
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Gross Profit
  $ 149,274     $ 116,171     $ 33,103       28.5 %
Gross Profit as a percent of sales
    29.7 %     29.8 %                
The decrease in gross profit as a percentage of sales was primarily due to increases in material costs, specifically related to the price of copper and steel. Gross profit was favorably impacted by the effect of foreign exchange of $2.3 million when compared to 2010, primarily related to the increase in the Euro and British Pound exchange rates, off-set by the incorporation of four months of results for Bauer which includes an inventory fair value charge of $0.6 million. We expect our full year 2011 gross profit as a percentage of sales to increase when compared to 2010 as we expect to continue to implement price increases to offset material costs.
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Selling, general and administrative expense (“SG&A”)
  $ 84,005     $ 65,991     $ 18,014       27.3 %
SG&A as a percent of sales
    16.7 %     16.9 %                
SG&A increased due to the acquisition of Bauer as well as the reinstatement of certain employee benefits that were temporarily suspended during 2009 and not reinstated until July 2010. The increase in SG&A costs is also attributed to approximately $2.7 million of acquisition costs related to the Bauer acquisition as well as the effect of foreign exchange of $1.4 million. However, due to our cost reduction efforts over the past two years that were focused on headcount reductions and the elimination of non-critical expenses, SG&A as a percentage of sales decreased in the year to date period ended October 1, 2011 when compared to the year to date period ended October 2, 2010. During the remainder of 2011, we expect to focus on maintaining our reduced cost base and to develop synergies as we incorporate Bauer into our corporate structure.

 

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    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Restructuring expenses
  $     $ 2,198     $ (2,198 )     -100.0 %
In March 2009, we adopted a restructuring plan to continue to improve the utilization of our manufacturing infrastructure and to realign our business with economic conditions by consolidating certain facilities. We substantially concluded our restructuring efforts as of the fourth quarter 2010 and expect no additional expense associated with this restructuring effort going forward.
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Interest Expense, net
  $ 18,014     $ 14,734     $ 3,280       22.3 %
Net interest expense increased due to the issuance of $85.0 million of Convertible Notes in March 2011, as well as the repurchase of $8.2 million of Senior Secured Notes in the third quarter of 2011 at a premium of $0.2 million, which was recorded as part of interest expense in the year to date period ended October 1, 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 $0.3 million which was also recorded as part of interest expense in the year to date period ended October 1, 2011.
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Other non-operating (income) expense, net
  $ (668 )   $ 750     $ (1,418 )     -189.1 %
Other non-operating (income) expense in both the year to date periods ended October 1, 2011 and October 2, 2010 primarily relates to changes in foreign currency, primarily the British Pound Sterling and Euro.
                                 
    Year to Date Period Ended  
    October 1,     October 2,              
    2011     2010     Change     %  
 
                               
Provision for income taxes
  $ 8,600     $ 8,190     $ 410       5.0 %
Provision for income taxes as a % of income before income taxes
    21.3 %     30.0 %                
The 2011 year to date provision for income taxes, as a percentage of income before taxes, was lower than 2010. The income tax rate before discrete items was 32.3%. The decrease in the amount of the provision for income taxes as a percentage of income from operations before income taxes from 2010 to 2011 is primarily due to discrete items. The Company recognized a tax benefit for the reduction of the Company’s reserve for uncertain tax positions due to a favorable New Jersey Supreme Court ruling in a case that did not involve the Company. The reserve amount consisted of approximately $2.3 million of tax, $1.8 million accrued interest and $0.5 million of penalties. In addition, the Company reversed $1.4 million of deferred tax assets related to the federal benefit of the accrued state reserve. The net benefit to the Company is approximately $3.2 million. In addition, the Company released $0.7 million of a valuation allowance against state income tax attributes. This amount was fully recognized in the Company’s effective rate for the quarter ended October 1, 2011. Also, there was a refund of foreign taxes paid of $0.6 million that was previously determined to be more likely than not to be uncollectible during the first quarter of 2011.

 

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Liquidity and Capital Resources
Overview
We finance our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our senior secured revolving credit facility (“Revolving Credit Agreement”). We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, acquisitions and pension plan funding. In the event additional funds are needed, we could borrow additional funds under our Revolving Credit Agreement, or attempt to raise capital in the equity and debt markets. Presently, we have capacity under our Revolving Credit Agreement to borrow up to $50.0 million, based on monthly asset collateral calculations, including letters of credit of which we currently have $6.6 million outstanding. Of this total capacity, we can currently borrow up to an additional $30.9 million without being required to comply with any financial covenants under the agreement. There can be no assurance however that additional debt financing will be available on commercially acceptable terms, or at all. Similarly, there can be no assurance that equity financing will be available on commercially acceptable terms, or at all.
Borrowings
                 
    Amounts in millions  
    October 1,     December 31,  
    2011     2010  
 
               
Debt:
               
Revolving Credit Agreement
  $     $  
Convertible Notes
    85.0        
Senior Secured Notes
    201.8       210.0  
Variable rate demand revenue bonds
    3.0       5.3  
Mortgages
    1.9       2.4  
Capital leases
    0.6       1.3  
 
           
Total Debt
  $ 292.3     $ 219.0  
 
           
Convertible Senior Notes
In March 2011, the Company issued Convertible Senior Notes (the “Convertible Notes”) due March 1, 2031. The Convertible Notes are guaranteed by the Company’s U.S. domestic subsidiaries and are secured by a second priority lien, subject to first priority liens securing our Revolving Credit Agreement, on substantially all of our assets and those of our domestic subsidiaries. Interest on the Convertible Notes is payable semi-annually in arrears, on March 1 and September 1 of each year, commencing on September 1, 2011 at an annual rate of 2.75%. Proceeds from the offering were $81.6 million, net of fees and expenses that were capitalized. The proceeds from the offering were used to fund the Bauer Acquisition, as well as bolster the Company’s cash position.

 

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Senior Secured Notes
In November 2009, the Company issued $210 million of 8 1 / 8 % Senior Secured Notes (the “Senior Secured Notes”). During the quarter and year to date period ending October 1, 2011, the Company repurchased $8.2 million of Senior Secured Notes. The Company repurchased the Senior Secured Notes at a premium of $0.2 million, which was recorded as part of interest expense in the quarter ended October 1, 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 $0.3 million which was also recorded as part of interest expense in the quarter ended October 1, 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 our Revolving Credit Agreement, on substantially all of our assets and those of our domestic subsidiaries. Interest on the Senior Secured Notes is payable in arrears, semi-annually on June 1 and December 1 of each year, commencing on June 1, 2010. The indenture governing the Senior Secured Notes contains covenants which restrict the Company and our subsidiaries. These restrictions limit or prohibit, among other things, the ability to incur additional indebtedness; repay subordinated indebtedness prior to stated maturities; pay dividends on or redeem or repurchase stock or make other distributions; make investments or acquisitions; sell certain assets or merge with or into other companies; sell stock in our subsidiaries; and create liens on their assets. We were in compliance in all material respects with all covenants of the indenture governing the Senior Secured Notes at October 1, 2011.
Revolving Credit Agreement
Concurrently with the closing of the offering of the Senior Secured Notes, Altra Industrial entered into the Revolving Credit Agreement, which provides for borrowing capacity in an initial amount of up to $50.0 million (subject to adjustment pursuant to a borrowing base and subject to increase from time to time in accordance with the terms of the credit facility). The Revolving Credit Agreement replaced Altra Industrial’s then existing senior secured credit facility and the TB Wood’s existing credit facility.
Altra Industrial and all of its domestic subsidiaries are borrowers, or “Borrowers”, under the Revolving Credit Agreement. Certain of our existing and subsequently acquired or organized domestic subsidiaries 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 our existing and subsequently acquired or organized domestic subsidiaries that is a guarantor of our obligations under the Revolving Credit Agreement (with such subsidiaries being referred to as the “U.S. subsidiary guarantors”), including but not limited to: (a) a first-priority pledge of all the capital stock of subsidiaries held by Borrowers or any U.S. subsidiary guarantor (which pledge, in the case of any foreign subsidiary, will be limited to 100% of any non-voting stock and 65% of the voting stock of such foreign subsidiary) and (b) perfected first-priority security interests in and mortgages on substantially all tangible and intangible assets of each Borrower and U.S. subsidiary guarantor, including accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, certain real property, cash and proceeds of the foregoing (in each case subject to materiality thresholds and other exceptions).
An event of default under the Revolving Credit Agreement would occur in connection with a change of control, among other things, if: (i) Altra Industrial ceases to own or control 100% of each of its Borrower subsidiaries, or (ii) a change of control occurs under the Senior Secured Notes, or any other subordinated indebtedness.
An event of default under the Revolving Credit Agreement would also occur if an event of default occurs under the indentures governing the Senior Secured Notes or if there is a default under any other indebtedness that any Borrower may have involving an aggregate amount of $10 million or more and such default: (i) occurs at final maturity of such debt, (ii) allows the lender there under to accelerate such debt or (iii) causes such debt to be required to be repaid prior to its stated maturity. An event of default would also occur under the Revolving Credit Agreement if any of the indebtedness under the Revolving Credit Agreement ceases with limited exception to be secured by a full lien of the assets of Borrowers and guarantors.
As of October 1, 2011, we were in compliance in all material respects with all covenant requirements associated with all of our borrowings. As of October 1, 2011, we had no borrowings and $6.6 million in letters of credit outstanding under the Revolving Credit Agreement.

 

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Cash and Cash Equivalents
                                 
    Year to Date Period Ended  
    October 1,     December 31,              
(in thousands)   2011     2010     Change     %  
 
                               
Cash and cash equivalents
  $ 90,261     $ 72,723     $ 17,538       24.1 %
Cash Flows for year to date period ended October 1, 2011
The primary sources of funds provided by operating activities of $29.1 million for the year to date period ended October 1, 2011 resulted from cash provided from net income of $31.8 million, which was offset by the net impact of the add-back of non-cash depreciation, amortization, stock-based compensation, accretion of debt discount, deferred financing costs, non-cash gain on foreign currency offset by a net increase in working capital all totaling $2.7 million. While a variety of factors can influence our ability to project future cash flow, we expect to continue to see positive cash flows from operating activities during the remainder of 2011.
Net cash used in investing activities was $81.8 million for the year to date period ended October 1, 2011. The increase from 2010 primarily relates to the acquisition of Bauer for $69.5 million as well as capital expenditures of $13.8 million offset by proceeds from the sale of our Chattanooga facility of $1.5 million. We expect to incur between $4.0 million and $6.0 million of additional capital expenses in 2011.
Net cash provided by financing activities was $69.0 million for the year to date period ended October 1, 2011. This resulted primarily from the proceeds of the issuance of $85.0 million in Convertible Notes, offset by the payments of capital lease obligations of $0.6 million, $0.5 million of payments on mortgages, $2.3 million related to the redemption of bonds in connection with the sale of our Chattanooga facility, $8.2 million related to the purchase of Senior Secured Notes, $0.9 million of shares repurchased to satisfy employee tax withholdings upon vesting, and $3.4 million of costs associated with the issuance of the Convertible Notes.
We intend to use our remaining existing cash and cash equivalents and cash flow from operations to provide for our working capital needs, to fund potential future acquisitions, debt service, capital expenditures, pension funding, and to repay our debt. We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs. Furthermore, the existing cash balances and the availability of additional borrowings under our Revolving Credit Agreement provide additional potential sources of liquidity should they be required.
Contractual Obligations
There were no significant changes in our contractual obligations subsequent to December 31, 2010, with the exception of the issuance of $85.0 million of Convertible Notes in March 2011, 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%. Interest payments on these notes will be approximately $1.9 million in 2011 and approximately $2.3 million of interest will be due each year from 2012 through 2031 when the Convertible Notes become due.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risk factors such as fluctuating interest rates, changes in foreign currency rates, and changes in commodity prices. At present, we do not utilize derivative instruments to manage these risks. During the reporting period, there have been no material changes to the quantitative and qualitative disclosures regarding our market risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 4.   Controls and Procedures
Disclosure Controls and Procedures
As of October 1, 2011, our management, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act, such as this Form 10-Q, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of October 1, 2011, our disclosure controls and procedures are effective at a reasonable assurance level.

 

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Changes in Internal Control Over Financial Reporting
With the exception changes resulting from the Bauer Acquisition that occurred during the quarter ended July 2, 2011, there has been no change in our internal control over financial reporting (as defined in Rule 13a—15(f) under the Exchange Act) that occurred during our fiscal quarter ended October 1, 2011, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Note Regarding Acquisition
In making its assessment of disclosure controls and procedures and of changes in internal control over financial reporting as of October 1, 2011, management has excluded the operations of various legal entities which make up the Bauer Acquisition (consolidated by the Company as of May 30, 2011). The Company is currently assessing the control environment of this acquired business.
The Company’s consolidated financial statements reflect Bauer’s results of operations from the beginning of business on May 30, 2011 forward. The acquired business’ total revenue were less than 10% of the Company’s total revenue at October 1, 2011.
PART II—OTHER INFORMATION
Item 1.   Legal Proceedings
We are, from time to time, party to various legal proceedings arising out of our business. During the reporting period, there have been no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 1A.   Risk Factors
The reader should carefully consider the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarters ended April 2, 2011 and July 2, 2011 filed with the Securities and Exchange Commission. Those risk factors described below, elsewhere in this report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarters ended April 2, 2011 and July 2, 2011 are not the only ones we face, but are considered to be the most material. These risk factors could cause our actual results to differ materially from those stated in forward looking statements contained in this Form 10-Q and elsewhere. All risk factors stated in our Annual Report on Form 10-K for the year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarters ended April 2, 2011 and July 2, 2011 are incorporated herein by reference.
During the reporting period, except as set forth below, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010 and our Quarterly Reports on Form 10-Q for the quarters ended April 2, 2011 and July 2, 2011.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our share repurchase activity by month for the quarter ended October 1, 2011.
                                 
                    Total Number of     Dollar Value of  
    Total Number     Average     Shares Purchased as     Shares That May Yet be  
    of Shares     Price Paid per     Part of Publicly     Purchased Under  
Approximate Period   Purchased (1)     Share     Announced Plans or Programs     The Plans or Programs  
July 3, 2011 to July 30, 2011
        $           $  
July 31, 2011 to August 27, 2011
    41,118     $ 17.64           $  
August 28, 2011 to October 1, 2011
    10,682     $ 15.52           $  
     
(1)   We repurchased these shares of common stock in connection with the vesting of certain stock awards to cover minimum statutory withholding taxes.

 

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Item 3.   Defaults Upon Senior Securities
None.
Item 4.   (Removed and Reserved)
Item 5.   Other Information
None.

 

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Item 6.   Exhibits
The following exhibits are filed as part of this report:
         
Exhibit    
Number   Description
       
 
  3.1 (1)  
Second Amended and Restated Certificate of Incorporation of the Registrant.
       
 
  3.2 (2)  
Second Amended and Restated Bylaws of the Registrant.
       
 
  31.1 *  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2 *  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1 **  
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2 **  
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101 ***  
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Statement of Earnings, (ii) the Unaudited Condensed Consolidated Balance Sheet, (iii) the Unaudited Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.
     
*   Filed herewith.
 
**   Furnished herewith.
 
***   As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended.
 
(1)   Incorporated by reference to Altra Holdings, Inc.’s Registration Statement on Form S-1/A, as amended, filed with the Securities and Exchange Commission on December 4, 2006.
 
(2)   Incorporated by reference to Altra Holdings, Inc.’s Current Report on form 8-K filed with the Securities and Exchange Commission on October 27, 2008.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  ALTRA HOLDINGS, INC.
 
 
November 3, 2011  By:   /s/ Carl R. Christenson    
    Name:   Carl R. Christenson   
    Title President and Chief Executive Officer   
     
November 3, 2011  By:   /s/ Christian Storch    
    Name:   Christian Storch   
    Title:   Vice President and Chief Financial Officer   
     
November 3, 2011  By:   /s/ Todd B. Patriacca    
    Name:   Todd B. Patriacca   
    Title:   Vice President of Finance,
Corporate Controller and Treasurer 
 

 

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EXHIBIT INDEX
         
Exhibit    
Number   Description
       
 
  31.1    
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  101 ***  
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Statement of Earnings, (ii) the Unaudited Condensed Consolidated Balance Sheet, (iii) the Unaudited Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.
     
*   Filed herewith.
 
**   Furnished herewith.
 
***   As provided in Rule 406T of Regulation S-T, this information is furnished herewith and not filed for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended.

 

43

EXHIBIT 31.1
Certification of Chief Executive Officer
I, Carl R. Christenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Altra Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: November 3, 2011  By:   /s/ Carl R. Christenson    
    Name:   Carl R. Christenson   
    Title:   President and Chief Executive Officer   

 

 

EXHIBIT 31.2
Certification of Chief Financial Officer
I, Christian Storch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Altra Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: November 3, 2011  By:   /s/ Christian Storch    
    Name:   Christian Storch   
    Title:   Vice President and Chief Financial Officer   

 

 

Exhibit 32.1
Certification of Chief Executive Officer
In connection with the Quarterly Report of Altra Holdings, Inc. (the “Company”) on Form 10-Q for the period ended October 1, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carl R. Christenson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: November 3, 2011  By:   /s Carl R. Christenson    
    Name:   Carl R. Christenson   
    Title:   President and Chief Executive Officer   

 

 

Exhibit 32.2
Certification of Chief Financial Officer
In connection with the Quarterly Report of Altra Holdings, Inc. (the “Company”) on Form 10-Q for the period ended October 1, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christian Storch, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: November 3, 2011  By:   /s/ Christian Storch    
    Name:   Christian Storch   
    Title:   Vice President and Chief Financial Officer