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AIMC > SEC Filings for AIMC > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for ALTRA INDUSTRIAL MOTION CORP.

Form 10-Q for ALTRA INDUSTRIAL MOTION CORP.


29-Apr-2014

Quarterly Report


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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company's current estimates, expectations and projections about the Company's future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning the Company's possible future results of operations including revenue, costs of goods sold, gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, the Company's competitive position and the effects of competition, the projected growth of the industries in which we operate, and the Company's ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may," "should," "will," "would," "project," and similar expressions. These forward-looking statements are based upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company's actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company's actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include:

the effects of intense competition in the markets in which we operate;

the cyclical nature of the markets in which we operate;

changes in market conditions in which we operate that would influence the value of the Company's stock;

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

the risks associated with international operations, including currency risks;

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 complete cost reduction actions and risks associated with such actions;

the Company's ability to control costs;

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 Company's risk of loss not covered by insurance;

the accuracy of estimated forecasts of OEM customers and the impact of the current global and European economic environment on our customers;

the risks association with certain minimum purchase agreements we have with suppliers;

fluctuations in the costs of raw materials used in our products;

the outcome of litigation to which the Company is a party from time to time, including product liability claims;

work stoppages and other labor issues;

changes in employment, environmental, tax and other laws and changes in the enforcement of laws;

the Company's ability to attract and retain key executives and other personnel;

changes in the Company's pension and retirement liabilities;

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 obtain or protect intellectual property rights;

the risks associated with the portion of the Company's total assets comprised of goodwill and indefinite lived intangibles;

changes in market conditions that would result in the impairment of goodwill or other assets of the Company;

changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations;

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

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;


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failure of the Company's operating equipment or information technology infrastructure;

the Company's ability to implement our new ERP system;

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 risks associated with the Company's exposure to variable interest rates and foreign currency exchange rates;

the risks associated with interest rate swap contracts;

the risks associated with the potential dilution of our common stock as a result of our convertible bonds;

the risks associated with the Company's exposure to renewable energy markets;

the risks related to regulations regarding conflict minerals;

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

the Company's ability to successfully execute, manage and integrate key acquisitions and mergers, including the Lamiflex Acquisition and the Svendborg Acquisition;

the risks associated with the Company's investment in a new manufacturing facility in China; and

other factors, risks, and uncertainties referenced in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" set forth in this document


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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, 2013, AND IN OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY.

The following discussion of the financial condition and results of operations of Altra Industrial Motion Corp. and its subsidiaries should be read together with the audited financial statements of Altra Industrial Motion Corp. and its subsidiaries and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Unless the context requires otherwise, the terms "Altra Industrial Motion Corp.," "the Company," "we," "us," and "our" refer to Altra Industrial Motion Corp. and its subsidiaries.


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General

Altra Industrial Motion Corp. ("Altra" or the "Company") (formerly Altra Holdings, Inc.) is the parent company of Altra Power Transmission, Inc. ("APT") (formerly Altra Industrial Motion, Inc.) and owns 100% of APT's outstanding capital stock. APT, directly or indirectly, owns 100% of the capital stock of 67 of its subsidiaries and 85% of the capital stock of one of its subsidiaries located in Brazil. The following chart illustrates a summary of our corporate structure:

[[Image Removed: LOGO]]

Although we were incorporated in Delaware in 2004, much of our current business has its roots with the prior acquisition by Colfax Corporation, or Colfax, of the MPT (mechanical power transmission) group of Zurn Technologies, Inc. in December 1996. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax's acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber, and Wichita Clutch brands. Colfax formed Power Transmission Holding, LLC or "PTH" in June 2004 to serve as a holding company for all of these power transmission businesses. 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, 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 APT.

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. Hay Hall consisted of five main businesses that were niche focused and had strong brand names and established reputations within their primary markets. Through Hay Hall, we acquired 15 strong brands in complementary product lines, improved customer leverage and expanded geographic presence in over 11 countries.

On May 18, 2006, we acquired substantially all of the assets of Bear Linear Inc., now known as 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, we 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 industrial power transmission products. In December 2007, the Company divested the TB Wood's electronics division.

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.

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

On July 11, 2012, we acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda., now known as Lamiflex Do Brasil Equipamentos Industriais S.A., or Lamiflex. Lamiflex is one of the premier Brazilian manufacturer of high-speed disc couplings, providing engineered solutions to a variety of industries, including oil and gas, power generation, metals and mining.

On November 22, 2013, we changed our legal corporate name from Altra Holdings, Inc. to Altra Industrial Motion Corp.


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On December 17, 2013, we completed the acquisition of Svendborg Brakes A/S, now known as Svendborg Brakes ApS, and S.B. Patent Holding ApS (together "Svendborg"). We acquired all the issued and outstanding shares of Svendborg from Friction Holding A/S. Svendborg is the leading global manufacturer of premium quality caliper brakes.

We are a leading global designer, producer and marketer of a wide range of electromechanical power transmission 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, gear motors, 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 2013 the top five broad-based electromechanical power transmission companies represented approximately 20% of the U.S. power transmission market. The remainder of the power transmission industry remains fragmented with many small and family-owned companies that cater to a specific market niche often due to their narrow product offerings. We believe that consolidation in our industry will continue because of the increasing demand for global distribution channels, broader product mixes and better brand recognition to compete in this industry.

Our products, principal brands and markets and sample applications are set forth below:

Products                  Principal Brands        Principal Markets       Sample Applications
Clutches and Brakes      Warner Electric,      Aerospace, energy,         Elevators,
                         Wichita Clutch,       material handling,         forklifts, lawn
                         Formsprag Clutch,     metals, turf and garden,   mowers, oil well
                         Stieber Clutch,       mining                     draw works,
                         Svendborg Brakes,                                punch presses,
                         Matrix, Inertia                                  conveyors
                         Dynamics, Twiflex,
                         Industrial Clutch,
                         Marland Clutch

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

Engineered Couplings     Ameridrives, Bibby    Energy, metals,            Extruders,
                         Transmissions, TB     plastics, chemical         turbines, steel
                         Wood's, PowerFlex                                strip mills,
                                                                          pumps

Engineered Bearing       Kilian                Aerospace, material        Cargo rollers,
Assemblies                                     handling, transportation   seat storage
                                                                          systems,
                                                                          conveyors

Power Transmission       Warner Electric,      Material handling,         Conveyors, lawn
Components               Boston Gear, Huco     metals, turf and garden    mowers,
                         Dynatork, Warner                                 machine tools
                         Linear, Matrix, TB
                         Wood's

Engineered Belted        TB Wood's             Aggregate, HVAC,           Pumps, sand and
Drives                                         material handling          gravel
                                                                          conveyors,
                                                                          industrial fans


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Our Internet address is www.altramotion.com. By following the link "Investor Relations" and then "SEC filings" on our Internet website, we make available, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Form 10-Q.

Business Outlook

Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S., European, and global economies in general.

We have noted improvement in the activity levels of many of our end markets. We believe we are well positioned to capitalize on this improving environment. We also continue to make steady progress on profit improvement initiatives, which should continue to contribute positively to our performance going forward. In addition, we expect Svendborg to make a greater contribution to the bottom line as we proceed through the remainder of 2014.

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. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes in the identification or application of the Company's critical accounting policies during the quarter ended March 31, 2014.


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Results of Operations

(Amounts in thousands, unless otherwise noted)



                                                                    Quarter Ended
                                                             March 31,         March 30,
                                                                2014              2013
Net sales                                                    $  210,138        $  185,150
Cost of sales                                                   148,342           129,651

Gross profit                                                     61,796            55,499
Gross profit percentage                                            29.4 %            30.0 %
Selling, general and administrative expenses                     38,262            32,442
Research and development expenses                                 3,889             2,934
Restructuring costs                                                  -                320

Income from operations                                           19,645            19,803
Interest expense, net                                             3,019             2,605
Other non-operating expense (income), net                           534               (47 )

Income before income taxes                                       16,092            17,245
Provision for income taxes                                        4,729             5,386

Net income                                                       11,363            11,859
Net loss attributable to non-controlling interest                     2                21

Net income attributable to Altra Industrial Motion Corp.     $   11,365        $   11,880

Quarter Ended March 31, 2014 compared with Quarter Ended March 30, 2013

Amounts in thousands, except percentage data                     Quarter-Ended
                                               March 31,      March 30,
                                                  2014           2013         Change        %

Net sales $ 210,138 $ 185,150 $ 24,988 13.5 %

The increase in sales during the quarter ended March 31, 2014 was due to the acquisition of Svendborg, positive foreign exchange rates, profit improvement initiatives and slightly higher sales levels than in the quarter ended March 30, 2013. Of the increase in sales, approximately $20.0 million relates to the inclusion of additional sales related to the acquisition of Svendborg for the quarter, $1.3 million is related to the impact of foreign exchange rate increases attributed to the increase in the Euro and British Pound rates compared to 2013, and the impact of profit improvement initiatives of $1.2 million. We expect our order rates to remain stable throughout the remainder of 2014.

Amounts in thousands, except percentage data                      Quarter Ended
                                                March 31,        March 30,
                                                  2014             2013          Change        %

Gross Profit                                   $    61,796      $    55,499      $ 6,297       11.3 %
Gross Profit as a percent of sales                    29.4 %           30.0 %


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Gross profit as a percentage of sales decreased due to the impact of acquired inventory related to the Svendborg acquisition which was recorded at fair value rather than cost. Without this charge of $2.2 million, gross profit as a percentage of sales would be 30.4% for the quarter ended March 31, 2014.

Amounts in thousands, except percentage data                                  Quarter Ended
                                                  March 31, 2014          March 30, 2013          Change           %

Selling, general and administrative expense
("SG&A")                                          $        38,262         $        32,442         $ 5,820          17.9 %
SG&A as a percent of sales                                   18.2 %                  17.5 %

The entire increase in SG&A is due to the inclusion of SG&A related to the acquisition of Svendborg.

Amounts in thousands, except percentage data                           Quarter Ended
                                                March 31, 2014       March 30, 2013       Change        %

Research and development expenses ("R&D")      $          3,889     $          2,934     $    955       32.5 %

Of the increase in R&D, approximately $0.4 million relates to the inclusion of R&D related to the acquisition of Svendborg for the quarter.

R&D expenses as a percentage of sales excluding the impact of Svendborg remained consistent with prior year at approximately 1.6%-1.7% of sales. We do not forecast significant variances in future periods.

Amounts in thousands, except percentage data                          Quarter Ended
                                                March 31, 2014       March 30, 2013      Change        %

Restructuring                                  $             -      $            320     $  (320 )      -

During the quarter ended December 31, 2012, we adopted a restructuring plan (the "2012 Altra Plan") to improve profitability in Europe. These actions include reducing headcount, moving and relocating equipment and limiting discretionary spending. The Company did not incur any additional expenses under the plan in the quarter ended March 31, 2014 and does not expect to incur any additional expenses associated with the 2012 Altra Plan during the remainder of 2014.

Amounts in thousands, except percentage data                           Quarter Ended
                                                March 31, 2014       March 30, 2013       Change        %

Interest Expense, net                          $          3,019     $          2,605     $    414       15.9 %

Net interest expense increased during the quarter ended March 31, 2014 over the comparable 2013 period, primarily due to the borrowing of approximately additional 54.5 million Euros for the acquisition of Svendborg and the purchase of land and building in Esslingen Germany during the quarter ended December 31, 2013.

Amounts in thousands, except
percentage data                                                   Quarter Ended
                                      March 31, 2014         March 30, 2013          Change            %

Other non-operating expense
(income), net                        $            534       $            (47 )      $    581         -1236.2 %

Other non-operating expense (income) in each period in the chart above relates primarily to changes in foreign currency.


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Amounts in thousands, except percentage
data                                                               Quarter Ended
                                             March 31,          March 30,
                                               2014               2013            Change            %

Provision for income taxes                  $     4,729        $     5,386        $  (657 )        -12.2 %
Provision for income taxes as a % of
income before income taxes                         29.4 %             31.2 %

The provision for income taxes, as a percentage of income before taxes, during the quarter ended March 31, 2014 was lower than that of the quarter ended March 30, 2013 primarily due to the impact of certain discrete items combined with the impact of favorable statutory tax rate reductions in the United Kingdom along with the favorable statutory tax rates in jurisdictions in which the newly acquired Svenborg acquisition operates in.


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Liquidity and Capital Resources

Overview

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