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AIMC > SEC Filings for AIMC > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ALTRA HOLDINGS, INC.



Quarterly Report

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


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

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

the risks associated with our debt;

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

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

the Company's ability to obtain or protect intellectual property rights;

the Company's ability to retain existing customers and our ability to attract new customers for growth of our business;

the effects of the loss or bankruptcy of or default by any significant customer, supplier, or other entity relevant to the Company's operations;

the Company's ability to successfully pursue the Company's development activities and successfully integrate new operations and systems, including the realization of revenues, economies of scale, cost savings, and productivity gains associated with such operations;

the Company's ability to complete cost reduction actions and risks associated with such actions;

the Company's ability to control costs;

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

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

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

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

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

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

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

work stoppages and other labor issues;

changes in the Company's pension and retirement liabilities;

the Company's risk of loss not covered by insurance;

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

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

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

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

the effects of changes to critical accounting estimates;

changes in volatility of the Company's stock price and the risk of litigation following a decline in the price of the Company's stock;

the cyclical nature of the markets in which we operate;

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

political and economic conditions nationally, regionally, and in the markets in which we operate;

natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, or other matters beyond the Company's control;

the risks associated with international operations, including currency risks;

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

other factors, risks, and uncertainties referenced in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.


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

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Altra Holdings, Inc. is the parent company of Altra Industrial Motion, Inc. ("Altra Industrial"), and owns 100% of Altra Industrial's outstanding capital stock. Altra Industrial, directly or indirectly, owns 100% of the capital stock of its 57 subsidiaries. The following chart illustrates a summary of our corporate structure:

[[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 a series of power transmission businesses. In December 1996, Colfax acquired the electro-mechanical power transmission group of Zurn Technologies, Inc. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax's acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber, and Wichita Clutch brands. Colfax formed Power Transmission Holding LLC, or "PTH", in June 2004 to serve as a holding company for all of these power transmission businesses. Boston Gear was established in 1877, Warner Electric, Inc. in 1927, and Wichita Clutch in 1949.

On November 30, 2004, we acquired our original core business through the acquisition of PTH from Colfax. We refer to this transaction as the PTH Acquisition.

On October 22, 2004, The Kilian Company, or Kilian, a company formed at the direction of Genstar Capital, then the largest stockholder of Altra Holdings, acquired Kilian Manufacturing Corporation from Timken U.S. Corporation. At the completion of the PTH Acquisition, (i) all of the outstanding shares of Kilian capital stock were exchanged for shares of our capital stock and (ii) Kilian and its subsidiaries were transferred to Altra Industrial.

On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings Limited, or Hay Hall. Hay Hall was a UK-based holding company established in 1996 that was focused primarily on the manufacture of couplings and clutch brakes.

On May 18, 2006, we acquired substantially all of the assets of Bear Linear Inc., or Warner Linear. Warner Linear manufactures high value-added linear actuators which are electromechanical power transmission devices designed to move and position loads linearly for mobile off-highway and industrial applications.

On April 5, 2007, 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 and electronic industrial power transmission products with a history dating back to 1857.

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

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

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

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

We are a leading global designer, producer and marketer of a wide range of electro-mechanical power transmission and motion control products with a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct OEM customers and over 3,000 distributor outlets. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, couplings, engineered bearing assemblies, linear components and other related products. Our products serve a wide variety of end markets including energy, general industrial, material handling, mining, transportation and turf and garden. We primarily sell our products to a wide range of OEMs and through long-standing relationships with industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger.

While the power transmission industry has undergone some consolidation, we estimate that in 2012 the top five broad-based electro-mechanical power transmission companies represented approximately 20% of the U.S. power transmission market. The remainder of the power transmission industry remains fragmented with many small and family-owned companies that cater to a specific market niche often due to their narrow product offerings. We believe that consolidation in our industry will continue because of the increasing demand for global distribution channels, broader product mixes and better brand recognition to compete in this industry.

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

 Products                 Principal Brands    Principal Markets   Sample Applications

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

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

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

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

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

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

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

As a result of continued sluggish demand in Europe and general global economic conditions, we have begun to take actions to improve profitability in the coming quarters. We are currently evaluating restructuring activities primarily within Europe to improve operational efficiency. We expect to have formalized a restructuring plan by the end of 2012.

These actions, which we expect to accelerate during the next few quarters, include reducing headcount, limiting discretionary spending, moving certain product line manufacturing to low-cost countries and raising pricing in certain end markets. We expect sales and profitability growth to continue to moderate as a result of moderating economic conditions in North America and Asia and continued weakness in Europe. Given that our Senior Secured Notes become callable December 1, 2012, and the current conditions in the credit markets, we currently are evaluating potential refinancing options.

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, 2011.

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
(In thousands, except per share      September 29,          October 1,          September 29,          October 1,
data)                                    2012                  2011                 2012                  2011
Net sales                           $       174,488        $    177,853        $       554,816        $    503,095
Cost of sales                               122,477             124,824                390,130             353,821

Gross profit                                 52,011              53,029                164,686             149,274
Gross profit percentage                       29.81 %             29.82 %                29.68 %             29.67 %
Selling, general and
administrative expenses                      30,785              31,577                 94,666              84,005
Research and development
expenses                                      2,823               2,801                  8,792               7,544

Income from operations                       18,403              18,651                 61,228              57,725

Interest expense, net                         6,637               6,698                 18,915              18,014
Other non-operating (income)
expense, net                                    402                 216                  1,834                (668 )

Income before income taxes                   11,364              11,737                 40,479              40,379
Provision for income taxes                    2,846                (403 )               10,836               8,600

Net income                          $         8,518        $     12,140        $        29,643        $     31,779

Quarter Ended September 29, 2012 compared with Quarter Ended October 1, 2011

(Amounts in thousands, unless otherwise noted)

                                              Quarter Ended
                         September 29,       October 1,
                             2012               2011          Change         %

            Net sales   $       174,488     $    177,853     $ (3,365 )      -1.9 %

The decrease in sales during the quarter ended September 29, 2012 was due to the negative impact of foreign exchange rate changes of $5.6 million primarily related to the Euro and British Pound Sterling rates compared to 2011 and a decrease in our European sales due to the softening of the European economy. The negative impact of foreign exchange was offset by an increase in sales due to the acquisition of Lamiflex of $1.4 million and the Company's performance in North America and Asia. We expect to see a continued softening in our order rates in the remainder of 2012, particularly in Europe.

                                                                    Quarter Ended
                                           September 29,          October 1,
                                               2012                  2011             Change           %

Gross Profit                              $        52,011        $     53,029        $ (1,018 )        -1.9 %
Gross Profit as a percent of sales                   29.8 %              29.8 %

Gross profit as a percentage of sales remained consistent with prior year despite a decrease in sales, primarily due to the price increases implemented during the past twelve months, low cost country sourcing and productivity improvements. We expect our full year 2012 gross profit as a percentage of sales to continue to be consistent with 2011.

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                                                                    Quarter Ended
                                            September 29,          October 1,
                                                2012                  2011            Change           %

Selling, general and administrative
expense ("SG&A")                           $        30,785        $     31,577        $  (792 )        -2.5 %
SG&A as a percent of sales                            17.6 %              17.8 %

The decrease in SG&A is due primarily to the impact of the change in foreign exchange rates, particularly the Euro. In addition, in the quarter to date period ended October 1, 2011, we incurred one-time acquisition related expense of $0.7 million related to the acquisition of Bauer. SG&A as a percentage of sales decreased when compared to 2011 due to the profit improvement plans in place at our Bauer business and a decrease in certain employee benefit costs.

                                                                     Quarter Ended
                                               September 29,         October 1,
                                                   2012                 2011           Change          %

Research and development expenses ("R&D")     $         2,823       $      2,801       $    22         0.8 %

R&D expenses as a percentage of sales remained consistent with prior year. We do not forecast significant variances in future periods.

                                                    Quarter Ended
                               September 29,       October 1,
                                   2012               2011          Change         %

      Interest Expense, net   $         6,637     $      6,698     $    (61 )      -0.9 %

Net interest expense is consistent with the quarter ended October 1, 2011. In both 2011 and 2012, we redeemed a portion of our Senior Secured Notes. As a result of the redemption we recorded a write off of deferred financing costs and the original issue discount of $0.7 million and $0.3 million in the quarters ended September 29, 2012 and October 1, 2011, respectively. As a result of our Senior Secured Notes becoming callable on December 1, 2012 and the prevailing credit markets, we are currently evaluating refinancing alternatives.

                                                         Quarter Ended
                                     September 29,       October 1,
                                         2012               2011          Change        %

 Other non-operating expense, net   $           402     $        216     $    186       86.1 %

The increase in other non-operating expense is due to changes in foreign currency, primarily the British Pound Sterling and Euro from the prior year period.

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                                                                    Quarter Ended
                                            September 29,         October 1,
                                                2012                 2011            Change           %

Provision for income taxes                 $         2,846        $      (403 )      $ 3,249         -806.2 %
Provision for income taxes as a % of
income before income taxes                            25.0 %             -3.4 %

The prior year period provision for income taxes, as a percentage of income before taxes, was significantly higher than that of the quarter ended September 29, 2012 primarily due to the 2011 recognition of benefits of certain significant discrete items described below. 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 amount released in the quarter ended October 1, 2011 as the result of the ruling consisted of . . .

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