Attached files
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 September 26, 2009
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 333-124944
ALTRA INDUSTRIAL MOTION, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
30-0283143 (I.R.S. Employer Identification No.) |
|
300 Granite Street, Suite 201, Braintree, MA (Address of principal executive offices) |
02184 (Zip code) |
(781) 917-0600
(Registrants telephone number, including area code)
(Registrants 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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o | Non-accelerated filer þ | 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 November 1, 2009, 1,000 shares of Common Stock, $.001 par value per share, were
outstanding.
TABLE OF CONTENTS
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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 |
Table of Contents
Item 1. | Financial Statements |
ALTRA INDUSTRIAL MOTION, INC.
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
September 26, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 71,939 | $ | 52,072 | ||||
Trade receivable, less allowance for doubtful accounts of $1,413 and
$1,277 at September 26, 2009 and December 31, 2008, respectively |
58,605 | 68,803 | ||||||
Inventories |
72,255 | 98,410 | ||||||
Deferred income taxes |
8,032 | 8,032 | ||||||
Assets held for sale (See Note 7) |
| 4,676 | ||||||
Prepaid expenses and other current assets |
8,860 | 5,324 | ||||||
Total current assets |
219,691 | 237,317 | ||||||
Property, plant and equipment, net |
107,769 | 110,220 | ||||||
Intangible assets, net |
76,447 | 79,339 | ||||||
Goodwill |
78,955 | 77,497 | ||||||
Deferred income taxes |
495 | 495 | ||||||
Other non-current assets, net |
6,319 | 7,521 | ||||||
Total assets |
$ | 489,676 | $ | 512,389 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 25,819 | $ | 33,890 | ||||
Accrued payroll |
13,438 | 16,775 | ||||||
Accruals and other current liabilities |
25,533 | 18,755 | ||||||
Deferred income taxes |
6,906 | 6,906 | ||||||
Current portion of long-term debt |
995 | 3,391 | ||||||
Total current liabilities |
72,691 | 79,717 | ||||||
Long-term debt less current portion and net of unaccreted discount |
231,633 | 258,132 | ||||||
Deferred income taxes |
23,318 | 23,336 | ||||||
Pension liabilities |
11,730 | 11,854 | ||||||
Other post retirement benefits |
63 | 2,270 | ||||||
Long-term taxes payable |
9,075 | 7,976 | ||||||
Other long-term liabilities |
2,080 | 1,434 | ||||||
Commitments and contingencies (See Note 13) |
| | ||||||
Stockholders equity: |
||||||||
Common Stock (1,000 shares authorized, issued & outstanding, $0.001 par value) |
| | ||||||
Additional paid-in capital |
97,829 | 97,829 | ||||||
Due to Parent |
29,076 | 27,062 | ||||||
Retained earnings |
27,169 | 26,869 | ||||||
Accumulated other comprehensive income |
(14,988 | ) | (24,090 | ) | ||||
Total stockholders equity |
139,086 | 127,670 | ||||||
Total liabilities and stockholders equity |
$ | 489,676 | $ | 512,389 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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ALTRA INDUSTRIAL MOTION, INC.
Condensed Consolidated Statements of Income
Amounts in thousands
(Unaudited)
Condensed Consolidated Statements of Income
Amounts in thousands
(Unaudited)
Quarter Ended | Year to Date Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 104,766 | $ | 159,448 | $ | 341,183 | $ | 490,523 | ||||||||
Cost of sales |
76,194 | 113,627 | 250,950 | 346,517 | ||||||||||||
Gross profit |
28,572 | 45,821 | 90,233 | 144,006 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative expenses |
19,290 | 25,655 | 60,971 | 76,816 | ||||||||||||
Research and development expenses |
1,508 | 1,663 | 4,569 | 5,160 | ||||||||||||
Other post employment benefit plan settlement gain |
| (107 | ) | (1,467 | ) | (276 | ) | |||||||||
Restructuring costs |
1,006 | 81 | 5,360 | 1,149 | ||||||||||||
Loss on disposal of assets |
516 | | 516 | | ||||||||||||
22,320 | 27,292 | 69,949 | 82,849 | |||||||||||||
Income from operations |
6,252 | 18,529 | 20,284 | 61,157 | ||||||||||||
Other non-operating income and expense: |
||||||||||||||||
Interest expense, net |
6,290 | 7,302 | 18,879 | 22,456 | ||||||||||||
Other non-operating (income) expense, net |
(371 | ) | (1,408 | ) | 1,248 | (2,887 | ) | |||||||||
5,919 | 5,894 | 20,127 | 19,569 | |||||||||||||
Income from continuing operations before
income taxes |
333 | 12,635 | 157 | 41,588 | ||||||||||||
Provision (benefit) for income taxes |
(315 | ) | 4,000 | (143 | ) | 14,127 | ||||||||||
Net income from continuing operations |
648 | 8,635 | 300 | 27,461 | ||||||||||||
Net income (loss) from discontinued operations, net of
income taxes of $43 for the year to date period
ended September 27, 2008 |
| 172 | | (224 | ) | |||||||||||
Net income |
$ | 648 | $ | 8,807 | $ | 300 | $ | 27,237 | ||||||||
Consolidated Statement of Comprehensive Income |
||||||||||||||||
Pension Liability Adjustment |
$ | | $ | 1,500 | $ | | $ | 1,500 | ||||||||
Foreign currency translation adjustment |
847 | (6,051 | ) | 9,102 | (8,353 | ) | ||||||||||
Comprehensive income |
$ | 1,495 | $ | 4,256 | $ | 9,402 | $ | 20,384 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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ALTRA INDUSTRIAL MOTION, INC.
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(Unaudited)
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(Unaudited)
Year to date ended | ||||||||
September 26, 2009 | September 27, 2008 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 300 | $ | 27,237 | ||||
Adjustments to reconcile net income to net operating cash flows: |
||||||||
Depreciation |
12,547 | 12,409 | ||||||
Amortization of intangible assets |
4,137 | 4,346 | ||||||
Amortization and write-offs of deferred financing costs |
1,560 | 1,863 | ||||||
Loss (gain) on foreign currency, net |
1,092 | (1,597 | ) | |||||
Accretion of debt discount, net |
621 | 759 | ||||||
Loss on sale of Electronics Division |
| 224 | ||||||
Fixed asset impairment/disposal |
2,563 | 193 | ||||||
Other post employment benefit plan settlement gain |
(1,467 | ) | (276 | ) | ||||
Stock based compensation |
2,273 | 1,516 | ||||||
Changes in assets and liabilities: |
||||||||
Trade receivables |
13,025 | (14,905 | ) | |||||
Inventories |
27,626 | (5,871 | ) | |||||
Accounts payable and accrued liabilities |
(11,929 | ) | 5,887 | |||||
Other current assets and liabilities |
71 | (383 | ) | |||||
Other operating assets and liabilities |
(365 | ) | 234 | |||||
Net cash provided by operating activities |
52,054 | 31,636 | ||||||
Cash flows from investing activities |
||||||||
Purchase of property, plant and equipment |
(5,105 | ) | (12,234 | ) | ||||
Proceeds from sale of Electronics Division |
| 17,310 | ||||||
Net cash provided by (used in) investing activities |
(5,105 | ) | 5,076 | |||||
Cash flows from financing activities |
||||||||
Payments on Senior Notes |
(4,950 | ) | (1,346 | ) | ||||
Payments on Senior Secured Notes |
(22,200 | ) | (27,500 | ) | ||||
Payments on Revolving Credit Agreement |
(3,000 | ) | (1,723 | ) | ||||
Proceeds from additional borrowings under an existing mortgage |
1,467 | | ||||||
Net payments to Parent |
(259 | ) | 11,898 | |||||
Payment on mortgages |
(524 | ) | (228 | ) | ||||
Payment on capital leases |
(614 | ) | (779 | ) | ||||
Net cash used in financing activities |
(30,080 | ) | (19,678 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
2,998 | (1,119 | ) | |||||
Net change in cash and cash equivalents |
19,867 | 15,915 | ||||||
Cash and cash equivalents at beginning of year |
52,072 | 33,906 | ||||||
Cash and cash equivalents at end of period |
$ | 71,939 | $ | 49,821 | ||||
Cash paid during the period for: |
||||||||
Interest |
$ | 12,419 | $ | 21,840 | ||||
Income taxes |
$ | 1,033 | $ | 11,964 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
1. Organization and Nature of Operations
Altra Industrial Motion, Inc. (the Company) is a wholly owned subsidiary of Altra Holdings,
Inc. (the Parent or Holdings) whose common stock trades on the NASDAQ Global Market under the
symbol AIMC. The Company 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 40 product lines with production facilities in eight countries and sales coverage in
over 70 countries. The Companys leading brands include Boston Gear, Warner Electric, TB Woods,
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, and Warner Linear.
2. Basis of Presentation
The Company was formed on November 30, 2004 following acquisitions of certain subsidiaries of
Colfax Corporation (Colfax) and The Kilian Company (Kilian). During 2006, the Company acquired
Hay Hall Holdings Limited (Hay Hall) and Bear Linear (Warner Linear). On April 5, 2007, the
Company acquired TB Woods Corporation (TB Woods), and on October 5, 2007, the Company acquired
substantially all of the assets of All Power Transmission Manufacturing, Inc. (All Power). These
acquisitions are discussed in detail in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008, which is incorporated herein by reference.
The Companys unaudited consolidated condensed 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 Companys Annual Report on Form 10-K for the year ended December 31, 2008. 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 Companys financial position as of September 26, 2009 and December 31, 2008, results of
operations for the quarter ended and year to date period ended September 26, 2009 and September 27,
2008, and cash flows for the year to date periods ended September 26, 2009 and September 27, 2008.
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, accounts payable
and other accrued liabilities, approximate their fair values due to their short-term maturities.
The carrying amount of the 9% Senior Secured Notes was $220.3 million and $242.5 million at
September 26, 2009 and December 31, 2008, respectively. The estimated fair value of the 9% Senior
Secured Notes at September 26, 2009 and December 31, 2008 was $224.7 million and $232.8 million,
respectively based on quoted market prices for such notes.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
4. Discontinued Operations
On December 31, 2007, the Company completed the divestiture of the TB Woods adjustable speed
drives business (the Electronics Division) to Vacon PLC (Vacon) for $29.0 million.
In connection with the sale of the Electronics Division, the Company entered into a
transition services agreement. Pursuant to the transition services agreement, the Company provided
services such as sales support, warehousing, accounting and IT services to Vacon. The Company
recorded the income received as an offset to the related expense of providing the service. During
the quarter and year to date periods ended September 27, 2008, the Company recorded a reduction of
$0.1 million and $0.3 million against cost of sales, respectively, and $0.2 million and $0.9
million as an offset to selling, general and administrative expenses, respectively. No transition
services have been provided in 2009. The Company leases building space to Vacon. The Company
recorded $0.1 million and $0.5 million of lease income in other income in the condensed
consolidated statement of income during the quarter and year to date periods ended September 26,
2009 and September 27, 2008.
Loss from discontinued operations in the year to date period ended September 27, 2008 was
comprised of a working capital adjustment, net of taxes.
5. Inventories
Inventories located at certain subsidiaries acquired in connection with the TB Woods
acquisition 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
September 26, 2009 and December 31, 2008 consisted of the following:
September 26, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials |
28,946 | $ | 31,925 | |||||
Work in process |
14,891 | 21,310 | ||||||
Finished goods |
28,418 | 45,175 | ||||||
Inventories |
$ | 72,255 | $ | 98,410 | ||||
Approximately 13% of total inventories at September 26, 2009 were valued using the LIFO
method. The Company recorded a $0.1 million adjustment and $1.2 million adjustment as a component
of cost of sales to value the inventory on a LIFO basis for the year to date periods ended
September 26, 2009 and September 27, 2008, respectively. For the quarter ended September 27, 2008,
the Company recorded a $0.4 million adjustment as a component of cost of sales to value the
inventory on a LIFO basis.
If the LIFO inventory was accounted for using the FIFO method, the inventory balance at
September 26, 2009 would be $1.5 million higher.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
6. Goodwill and Intangible Assets
Changes to goodwill from December 31, 2008 through September 26, 2009 were as follows:
Balance December 31, 2008 |
77,497 | |||
Impact of changes in foreign currency |
1,458 | |||
Balance September 26, 2009 |
$ | 78,955 | ||
Other intangible assets as of September 26, 2009 and December 31, 2008 consisted of the following:
September 26, 2009 | December 31, 2008 | |||||||||||||||
Accumulated | Accumulated | |||||||||||||||
Other intangible assets | Cost | Amortization | Cost | Amortization | ||||||||||||
Intangible assets not subject to amortization: |
||||||||||||||||
Tradenames and trademarks |
$ | 30,730 | $ | | $ | 30,730 | $ | | ||||||||
Intangible assets subject to amortization: |
||||||||||||||||
Customer relationships |
62,038 | 18,494 | 62,038 | 15,065 | ||||||||||||
Product technology and patents |
5,435 | 3,819 | 5,435 | 3,111 | ||||||||||||
Impact of changes in foreign currency |
557 | | (688 | ) | | |||||||||||
Total intangible assets |
$ | 98,760 | $ | 22,313 | $ | 97,515 | $ | 18,176 | ||||||||
The Company recorded $1.4 million of amortization expense in the quarters ended September 26, 2009
and September 27, 2008, and $4.1 million and $4.3 million for the year to date periods ended
September 26, 2009 and September 27, 2008, respectively.
The estimated amortization expense for intangible assets is approximately $1.4 million for the
remainder of 2009 and $5.5 million in each of the next four years and then $21.8 million
thereafter.
7. Assets Held for Sale
During the fourth quarter of 2007, management entered into a plan to exit its building located
in Stratford, Canada. The operations of the facility, which was acquired as part of the TB Woods
acquisition, were integrated into certain of the Companys other existing facilities in 2008.
In the second quarter of 2009, due to real estate market conditions in Stratford, Canada, the
Company reevaluated the classification of this building as an asset held for sale and reclassified
the building, with a net book value of $1.2 million, to held and used. As a result of the change
in classification, the Company recorded a catch-up depreciation adjustment of $0.1 million in the
second quarter of 2009.
As of December 31, 2008, management planned to exit two buildings, one in Scotland,
Pennsylvania and one in Chattanooga, Tennessee. The two buildings were previously the operating
facilities for the Electronics Division which was divested on December 31, 2007. The Company
leases the space to Vacon.
In
the first fiscal quarter of 2009, due to real estate market conditions in Scotland, Pennsylvania
and Chattanooga, Tennessee, the Company reevaluated the classification of these buildings as assets
held for sale and reclassified the buildings, with a net book value of $3.5 million, to held and
used. As a result of the change in classification, the Company recorded a catch-up depreciation
adjustment of $0.2 million in the first quarter of 2009.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
8. Income Taxes
The estimated effective income tax rates recorded for the quarters ended September 26, 2009
and September 27, 2008 were based upon managements best estimate of the effective tax rate for the
entire year. During the third quarter of 2009, the Company negotiated an agreement with a foreign
taxing authority. The agreement allows the Company to fully deduct certain interest charges that
had previously been classified as non deductible in 2009. The benefit from this deduction resulted
in the Company recording a benefit for income taxes in the year to date and quarter to date period
ended September 26, 2009.
The Company and its subsidiaries file consolidated and separate income tax returns in the U.S.
federal jurisdiction as well as in various state and foreign jurisdictions. In the normal course
of business, the Company is subject to examination by taxing authorities in all 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 2005. 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.
The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the condensed consolidated statements of income. At December
31, 2008 and September 26, 2009, the Company had $2.7 million and $3.4 million of accrued interest
and penalties, respectively. The Company accrued $0.4 million of interest and no penalties during
the year to date period ended September 26, 2009.
9. 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. In March
2009, the Company reached a new collective bargaining agreement with the union at its Erie,
Pennsylvania facility. One of the provisions of the new agreement eliminates benefits that
employees were entitled to receive through the applicable other post employment benefit plan
(OPEB). OPEB benefits will no longer be available to retired or active employees. This resulted
in an OPEB settlement gain of $1.5 million in the year to date period ended September 26, 2009. In
addition, no additional years of credited service will be accrued on the defined benefit pension
plan effective February 28, 2009. There was no curtailment gain or loss as a result of the change
in the pension plan, the plan had no unrecognized prior service cost and there was no change in the
projected benefit obligation.
The following table represents the components of the net periodic benefit cost associated with
the respective plans for the quarters and year to date periods ended September 26, 2009 and
September 27, 2008:
Quarter Ended | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 5 | $ | 16 | $ | 32 | $ | 13 | ||||||||
Interest cost |
267 | 378 | 69 | 50 | ||||||||||||
Expected return on plan assets |
(300 | ) | (326 | ) | | | ||||||||||
Amortization of prior service income |
| | (244 | ) | (244 | ) | ||||||||||
Other post employment benefit plan settlement gain |
| | | (107 | ) | |||||||||||
Amortization of net gain |
| | (33 | ) | (7 | ) | ||||||||||
Net periodic benefit cost (income) |
$ | (28 | ) | $ | 68 | $ | (176 | ) | $ | (295 | ) | |||||
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Year to Date Ended | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 37 | $ | 48 | $ | 38 | $ | 43 | ||||||||
Interest cost |
997 | 1,135 | 107 | 154 | ||||||||||||
Expected return on plan assets |
(954 | ) | (979 | ) | | | ||||||||||
Amortization of prior service income |
| | (732 | ) | (731 | ) | ||||||||||
Other post employment benefit plan settlement gain |
| | (1,467 | ) | (276 | ) | ||||||||||
Amortization of net gain |
| | (47 | ) | (19 | ) | ||||||||||
Net periodic benefit cost (income) |
$ | 80 | $ | 204 | $ | (2,101 | ) | $ | (829 | ) | ||||||
10. Debt
Outstanding debt obligations at September 26, 2009 and December 31, 2008 were as follows:
September 26, | December 31, | |||||||
2009 | 2008 | |||||||
Senior Revolving Credit Agreement |
$ | | $ | | ||||
TB Woods Credit Agreement |
3,000 | 6,000 | ||||||
Overdraft agreements |
| | ||||||
9% Senior Secured Notes |
220,300 | 242,500 | ||||||
11.25% Senior Notes |
| 4,706 | ||||||
Variable Rate Demand Revenue Bonds |
5,300 | 5,300 | ||||||
Mortgages |
3,285 | 2,257 | ||||||
Capital leases |
2,036 | 2,672 | ||||||
Less: debt discount, net |
(1,293 | ) | (1,912 | ) | ||||
Total long-term debt |
$ | 232,628 | $ | 261,523 | ||||
Senior Revolving Credit Agreement
The Company maintains a $30 million revolving borrowings facility with a commercial bank (the
Senior Revolving Credit Agreement). The Senior Revolving Credit Agreement is subject to certain
limitations resulting from the requirement of the Company to maintain certain levels of
collateralized assets, as defined in the Senior Revolving Credit Agreement. The Company may use up
to $10.0 million of its availability under the Senior 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 Senior Revolving
Credit Agreement must be repaid in full as of November 30, 2010.
Substantially all of the Companys assets have been pledged as collateral against outstanding
borrowings under the Senior Revolving Credit Agreement. The Senior Revolving Credit Agreement
requires the Company to maintain a minimum fixed charge coverage ratio of 1.20 for all four quarter
periods when availability under the line falls below $12.5 million. The Companys availability
under the Senior Revolving Credit Agreement has not dropped below $12.5 million during 2009. The
Senior Revolving Credit Agreement imposes customary affirmative covenants and restrictions on the
Company.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
There were no borrowings under the Senior Revolving Credit Agreement at September 26, 2009 or
December 31, 2008. However, the lender had issued $3.2 million and $7.6 million of outstanding
letters of credit as of September 26, 2009 and December 31, 2008, respectively, under the Senior
Revolving Credit Agreement.
The interest rate on any outstanding borrowings on the line of credit are the lenders Prime
Rate plus 25 basis points or LIBOR plus 175 basis points. The rate on all outstanding letters of
credit are 1.5% and .25% on any unused availability under the Senior Revolving Credit Agreement.
TB Woods Revolving Credit Agreement
As of September 26, 2009 and December 31, 2008, there were $6.1 million and $6.0 million of
outstanding letters of credit under the TB Woods Credit Agreement, respectively. All borrowing
under the TB Woods Revolving Credit Agreement are due on
November 30, 2010. The interest rate on any outstanding borrowings on the line of credit are
the lenders prime rate plus 25 basis points or LIBOR plus 175 basis points.
Overdraft Agreements
Certain foreign subsidiaries maintain overdraft agreements with financial institutions. There
were no borrowings as of September 26, 2009 or December 31, 2008 under any of the overdraft
agreements.
9% Senior Secured Notes
The Company issued 9% Senior Secured Notes (the Senior Secured Notes), with a face value of
$270.0 million. Interest on the Senior Secured Notes is payable semi-annually, in arrears, on June
1 and December 1 of each year, at an annual rate of 9%. The Senior Secured Notes mature on December
1, 2011 unless previously redeemed by the Company.
The Senior Secured Notes are guaranteed by the Companys U.S. domestic subsidiaries and are
secured by a second priority lien, subject to first priority liens securing the Senior Revolving
Credit Agreement, on substantially all of the Companys assets. The Senior Secured Notes contain
many terms, covenants and conditions, which impose substantial limitations on the Company.
During the second quarter of 2009, the Company retired $8.3 million aggregate principal amount
of the outstanding Senior Secured Notes at a redemption price of between 94.75% and 97.125% of the
principal amount, plus accrued and unpaid interest. In connection with the redemption, the Company
recorded a gain on the extinguishment of debt of $0.4 million, which is recorded as a reduction in
interest expense in the condensed consolidated statement of income. In addition, the Company
wrote-off $0.1 million of deferred financing costs and original issue discount/premium which is
included in interest expense.
During the third quarter of 2009, the Company retired $14.0 million aggregate principal amount
of the outstanding Senior Secured Notes at a redemption price of between 100.5% and 101.6% of the
principal amount, plus accrued and unpaid interest. In connection with the redemption, the Company
recorded a loss on the extinguishment of debt of $0.2 million, which is recorded as interest
expense in the condensed consolidated statement of income. In addition, the Company wrote-off $0.2
million of deferred financing costs and original issue discount/premium included in interest
expense.
11.25% Senior Notes
The Company issued 11.25% Senior Notes (Senior Notes), with a face value of £33 million.
Interest on the Senior Notes was payable semi-annually, in arrears, on August 15 and February 15 of
each year, at an annual rate of 11.25%.
During the second quarter of 2009, the Company retired the remaining principal balance of the
Senior Notes of £3.3 million or $5.0 million of principal amount, plus accrued and unpaid interest.
In connection with the redemption, the Company incurred $0.2 million of pre-payment premium and
wrote-off the entire remaining balance of $0.1 million of deferred financing fees, which is
recorded as interest expense in the condensed consolidated statement of income.
Variable Rate Demand Revenue Bonds
In connection with the acquisition of TB Woods, the Company assumed the obligation to make
payments due under certain Variable Rate Demand Revenue Bonds outstanding as of the acquisition
date. TB Woods had assumed obligations with respect to approximately $3.0 million and $2.3
million through the issuance of Variable Rate Demand Revenue Bonds under the authority of the
industrial development corporations of the City of San Marcos, Texas and City of the Chattanooga,
Tennessee, respectively. These bonds bear variable interest rates (less than 1% interest on
September 26, 2009), and mature in April 2024 and April 2022, respectively. The bonds were issued
to finance production facilities for TB Woods manufacturing operations in San Marcos and
Chattanooga, and are secured by letters of credit issued under the terms of the TB Woods Credit
Agreement.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
As of December 31, 2008, the Company planned to sell the building in Chattanooga, Tennessee.
According to the terms of the indenture and lease, before the Company can acquire the building,
free of all encumbrances, the outstanding debt under the Variable Rate Demand Revenue Bonds must be
paid in full. As a result, the debt was classified as a current liability on the condensed
consolidated balance sheet as of December 31, 2008.
In the first quarter of 2009, due to real estate market conditions in Chattanooga, the Company
reevaluated the classification of this building as an asset held for sale and reclassified this
building to held and used. As a result of the change in classification, the Company reclassified
$2.3 million of debt associated with the Chattanooga property to long-term debt on the Companys
condensed consolidated balance sheet.
Mortgage
In June 2006, the Company entered into a mortgage on its building in Heidelberg, Germany with
a local bank. In the third quarter of 2009, the Company re-financed the mortgage. The Company
borrowed an additional 1.0 million. The new mortgage has an interest rate of 3.5% and is payable
in monthly installments over three years. As of September 26, 2009 and December 31, 2008, the
mortgage had a remaining principal balance outstanding of 2.2 million, or $3.3 million, and 1.6
million, or $2.3 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.
11. Stockholders Equity
The Company has authorized, issued and outstanding 1,000 shares of $0.001 par-value common
stock, all of which is held by Altra Holdings, Inc., the Companys parent and sole shareholder.
Stock-Based Compensation
In 2005, Holdings approved the 2004 Equity Incentive Plan that provides for various forms of
stock-based compensation to officers, senior-level employees, independent directors and other
persons who make significant contributions to the success of the Company. Awards granted under the
2004 Equity Incentive Plan are for equity instruments of Holdings. As awards are granted in
connection with services performed for the benefit of the Company, the related compensation expense
is recognized in the accompanying financial statements on a straight-line basis over the service
period of the grant. The restricted shares of common stock issued pursuant to the Plan generally
vest ratably over a period of 3.5 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. Shares granted to non-management members of the
Board of Directors generally vest immediately.
All awards to date have been in the form of restricted stock. Compensation expense recorded
during the quarters ended September 26, 2009 and September 27, 2008 was $0.7 million and $0.5
million, respectively. Compensation expense for the year to date periods ended September 26, 2009
and September 27, 2008 was $2.3 million and $1.5 million, respectively. Stock based compensation
is recorded as an adjustment to selling, general and administrative expenses in the accompanying
condensed consolidated statement of income The remaining unrecognized compensation expense is
approximately $3.0 as of September 26, 2009, and will be recognized over a weighted average
remaining period of three years.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
12. 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 managements expectations.
No customer represented greater than 10% of total sales for the quarters ended September 26, 2009
and September 27, 2008.
The Company is also subject to counter party performance risk of loss in the event of
non-performance by counterparties to financial instruments, such as cash and investments. Cash and
investments are held by international or well established financial institutions.
The Company has five 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 five 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.
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 a machine shop which uses similar equipment and manufacturing techniques. Each of
our segments uses common raw materials, such as aluminum, steel and copper. The 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.
Net sales to third parties by geographic region are as follows:
Net Sales | ||||||||||||||||
Quarter Ended | Year to Date Ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
North America (primarily U.S.) |
$ | 74,592 | $ | 110,793 | $ | 247,921 | $ | 347,190 | ||||||||
Europe |
23,536 | 40,028 | 75,046 | 121,289 | ||||||||||||
Asia and other |
6,638 | 8,627 | 18,216 | 22,044 | ||||||||||||
Total |
$ | 104,766 | $ | 159,448 | $ | 341,183 | $ | 490,523 | ||||||||
Net sales to third parties are attributed to the geographic regions based on the country in
which the shipment originates.
The net assets of foreign subsidiaries at September 26, 2009 and December 31, 2008 were $74.7
million and $73.5 million, respectively.
13. Commitments and Contingencies
General Litigation
The Company is involved in various pending legal proceedings arising out of the ordinary
course of business. 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 September 26, 2009 and December 31, 2008, there were no such claims for which
management believed a loss was probable. As a result, no amounts were accrued in the accompanying
consolidated balance sheets for losses related to such claims at those dates.
The Company is indemnified under the terms of certain acquisition agreements for certain
pre-existing matters up to agreed upon limits.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
14. Restructuring, Asset Impairment and Transition Expenses
During 2007, the Company adopted two restructuring programs. The first was intended to improve
operational efficiency by reducing headcount, consolidating operating facilities and relocating
manufacturing to lower cost areas (the Altra Plan). The second was related to the acquisition of
TB Woods and was intended to reduce duplicate staffing and consolidate facilities (the TB Woods
Plan). The TB Woods Plan was initially formulated at the time of the TB Woods acquisition and
therefore the associated accrual was recorded as part of purchase accounting.
The Company has not incurred any additional expenses related to either the Altra Plan or the
TB Woods Plan in 2009. The Companys restructuring expense, by major component for the year to
date period ended September 27, 2008 were as follows:
TB Woods | ||||||||||||
Altra Plan | Plan | Total | ||||||||||
Expenses |
||||||||||||
Other cash expenses |
$ | | $ | | $ | | ||||||
Moving and relocation |
467 | 84 | 551 | |||||||||
Severance |
411 | | 411 | |||||||||
Total cash expenses |
878 | 84 | 962 | |||||||||
Non-cash asset impairment and loss on sale of fixed asset |
187 | | 187 | |||||||||
Total restructuring expenses |
$ | 1,065 | $ | 84 | $ | 1,149 | ||||||
In March 2009, the Company adopted a new 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 is intended to improve operational efficiency by reducing
headcount and consolidating facilities. The Companys total restructuring expense for the quarter
ended September 26, 2009 was $1.0 million.
On April 7, 2009, the Company announced that it would be closing its facility in Mt. Pleasant,
Michigan and relocating the manufacturing to certain of the Companys other facilities. In
connection with this decision, the Company completed an impairment analysis. The facility which
had a carrying value of $1.4 million was written down to the fair value of $0.7 million, resulting
in an impairment charge of $0.7 million. The Company estimated the fair value using observable
inputs (level 2) by reviewing sale prices of comparable buildings in the Mt. Pleasant, Michigan
area. The relocation is expected to be completed by the end of 2009.
On July 7, 2009, the Company announced that it would be closing its manufacturing facility in
South Beloit, Illinois and relocating the manufacturing operations to certain of the Companys
other facilities. In connection with this decision, the Company completed an impairment analysis.
The facility which had a carrying value of $2.1 million was written down to the fair value of $1.5
million, resulting in an impairment charge of $0.6 million. The Company estimated the fair value
using observable inputs (level 2). The Company reviewed sale prices of comparable buildings in the
South Beloit, Illinois area. The relocation is expected to be completed by the first quarter of
2010. In September 2009, the Company negotiated a plant closing agreement with the local union at
the South Beloit facility. The Company has agreed to pay approximately $0.7 million in severance
and performance bonuses to those employees who remain employed through their termination date. The
Company expects to pay these amounts in the fourth quarter of 2009 through the first quarter of
2010.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
The Company expects to move a majority of the assets at this location to certain other
locations. As a result, the Company does not expect to have a significant impairment on these
assets.
The expenses for the year to date period ended September 26, 2009 are classified by major component
as follows:
September 27, 2009 | ||||||||
Year to date | Quarter to date | |||||||
2009 Altra Plan | period ended | period ended | ||||||
Expenses: |
||||||||
Other cash expenses |
$ | 154 | $ | 107 | ||||
Severance |
3,158 | 476 | ||||||
Total cash expenses |
3,312 | 583 | ||||||
Non-cash asset impairment and other non-cash charges |
2,048 | 423 | ||||||
Total restructuring expenses |
$ | 5,360 | $ | 1,006 | ||||
The following is a reconciliation of the accrued restructuring costs between December 31, 2008
and September 26, 2009:
All Plans | ||||
Balance at December 31, 2008 |
$ | 1,321 | ||
Cash restructuring expense incurred |
3,328 | |||
Cash payments |
(3,785 | ) | ||
Balance at September 26, 2009 |
$ | 864 | ||
15. Guarantor Subsidiaries
The following tables present separately the financial position, results of operations, and cash
flows for the Company for: (a) the subsidiaries of the Company that are guarantors of the Notes,
which are all 100% owned U.S. domestic subsidiaries of the Company (Guarantor Subsidiaries), and
(b) the subsidiaries of the Company that are not guaranteeing the Senior Secured Notes, which
include all non-domestic subsidiaries of the Company (Non-Guarantor Subsidiaries). Separate
financial statements of the Guarantor Subsidiaries are not presented because their guarantees are
full and unconditional and joint and several, and the Company believes separate financial
statements and other disclosures regarding the Guarantor Subsidiaries are not material to
investors. The Notes were entered into and issued in connection with the acquisition of Colfax, TB
Woods and Kilian.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited condensed consolidating balance sheet
September 26, 2009
September 26, 2009
Issuer | Guarantor | Non Guarantor | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 37,151 | $ | (1,537 | ) | $ | 36,325 | $ | | $ | 71,939 | |||||||||
Trade receivables, less allowance for doubtful accounts |
| 36,552 | 22,053 | | 58,605 | |||||||||||||||
Loans receivable from related parties |
| 147,145 | | (147,145 | ) | | ||||||||||||||
Inventories |
| 50,154 | 22,101 | | 72,255 | |||||||||||||||
Deferred income taxes |
| 8,032 | | | 8,032 | |||||||||||||||
Assets held for sale |
| | | | | |||||||||||||||
Prepaid expenses and other current assets |
915 | 4,779 | 3,166 | | 8,860 | |||||||||||||||
Total current assets |
38,066 | 245,125 | 83,645 | (147,145 | ) | 219,691 | ||||||||||||||
Property, plant and equipment, net |
838 | 74,777 | 32,154 | | 107,769 | |||||||||||||||
Intangible assets, net |
| 59,397 | 17,050 | | 76,447 | |||||||||||||||
Goodwill |
| 58,015 | 20,940 | | 78,955 | |||||||||||||||
Deferred income taxes |
| | 495 | | 495 | |||||||||||||||
Investment in subs |
434,892 | | | (434,892 | ) | | ||||||||||||||
Other non-current assets |
2,635 | 3,572 | 112 | | 6,319 | |||||||||||||||
Total assets |
$ | 476,431 | $ | 440,886 | $ | 154,396 | $ | (582,037 | ) | $ | 489,676 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 1,411 | $ | 16,252 | $ | 8,156 | $ | | $ | 25,819 | ||||||||||
Accrued payroll |
1,445 | 6,354 | 5,639 | | 13,438 | |||||||||||||||
Accruals and other current liabilities |
7,239 | 9,043 | 9,251 | | 25,533 | |||||||||||||||
Deferred income taxes |
| | 6,906 | | 6,906 | |||||||||||||||
Current portion of long-term debt |
| 641 | 354 | | 995 | |||||||||||||||
Loans payable to related parties |
107,737 | | 39,408 | (147,145 | ) | | ||||||||||||||
Total current liabilities |
117,832 | 32,290 | 69,714 | (147,145 | ) | 72,691 | ||||||||||||||
Long-term debt less current portion and net of unacreted
discount and premium |
219,007 | 9,446 | 3,180 | | 231,633 | |||||||||||||||
Deferred income taxes |
| 20,822 | 2,496 | | 23,318 | |||||||||||||||
Pension liabilities |
| 8,702 | 3,028 | | 11,730 | |||||||||||||||
Other post retirement benefits |
| 63 | | | 63 | |||||||||||||||
Long-term taxes payables |
| 9,075 | | | 9,075 | |||||||||||||||
Other long-term liabilities |
506 | 282 | 1,292 | | 2,080 | |||||||||||||||
Total stockholders equity |
139,086 | 360,206 | 74,686 | (434,892 | ) | 139,086 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 476,431 | $ | 440,886 | $ | 154,396 | $ | (582,037 | ) | $ | 489,676 | |||||||||
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited condensed consolidating balance sheet
December 31, 2008
December 31, 2008
Issuer | Guarantor | Non Guarantor | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 27,134 | $ | (2,702 | ) | $ | 27,640 | $ | | $ | 52,072 | |||||||||
Trade receivable, less allowance for doubtful accounts |
| 41,051 | 27,752 | | 68,803 | |||||||||||||||
Loan receivable from related parties |
| 112,900 | | (112,900 | ) | | ||||||||||||||
Inventories |
| 71,304 | 27,106 | | 98,410 | |||||||||||||||
Deferred income taxes |
| 7,923 | 109 | | 8,032 | |||||||||||||||
Assets held for sale |
| 3,515 | 1,161 | | 4,676 | |||||||||||||||
Prepaid expenses and other current assets |
1,793 | 4,373 | (842 | ) | | 5,324 | ||||||||||||||
Total current assets |
28,927 | 238,364 | 82,926 | (112,900 | ) | 237,317 | ||||||||||||||
Property, plant and equipment, net |
838 | 76,586 | 32,796 | | 110,220 | |||||||||||||||
Intangible assets, net |
| 62,481 | 16,858 | | 79,339 | |||||||||||||||
Goodwill |
| 58,016 | 19,481 | | 77,497 | |||||||||||||||
Deferred income taxes |
| | 495 | | 495 | |||||||||||||||
Investments in subsidiaries |
423,121 | | | (423,121 | ) | | ||||||||||||||
Other non-current assets |
3,857 | 3,628 | 36 | | 7,521 | |||||||||||||||
Total assets |
$ | 456,743 | $ | 439,075 | $ | 152,592 | $ | (536,021 | ) | $ | 512,389 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | 2,292 | $ | 19,813 | $ | 11,785 | $ | | $ | 33,890 | ||||||||||
Accrued payroll |
2,731 | 6,879 | 7,165 | | 16,775 | |||||||||||||||
Accruals and other current liabilities |
3,506 | 8,972 | 6,277 | | 18,755 | |||||||||||||||
Deferred income taxes |
| | 6,906 | | 6,906 | |||||||||||||||
Current portion of long-term debt |
| 2,925 | 466 | | 3,391 | |||||||||||||||
Loans payable to related parties |
75,251 | | 37,649 | (112,900 | ) | | ||||||||||||||
Total current liabilities |
83,780 | 38,589 | 70,248 | (112,900 | ) | 79,717 | ||||||||||||||
Long-term debt less current portion and net of
unacreted discount and premium |
245,293 | 10,640 | 2,199 | | 258,132 | |||||||||||||||
Deferred income taxes |
| 20,822 | 2,514 | | 23,336 | |||||||||||||||
Pension liabilities |
| 8,922 | 2,932 | | 11,854 | |||||||||||||||
Other post retirement benefits |
| 2,270 | | | 2,270 | |||||||||||||||
Long-term taxes payables |
| 7,976 | | | 7,976 | |||||||||||||||
Other long-term liabilities |
| 241 | 1,193 | | 1,434 | |||||||||||||||
Total stockholders equity |
127,670 | 349,615 | 73,506 | (423,121 | ) | 127,670 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 456,743 | $ | 439,075 | $ | 152,592 | $ | (536,021 | ) | $ | 512,389 | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited Condensed Consolidating Statement of Income
Year to Date Period Ended September 26, 2009 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 252,335 | $ | 110,847 | $ | (21,999 | ) | $ | 341,183 | |||||||||
Cost of sales |
| 192,110 | 80,839 | (21,999 | ) | 250,950 | ||||||||||||||
Gross profit |
| 60,225 | 30,008 | | 90,233 | |||||||||||||||
Selling, general and administrative expenses |
| 38,145 | 22,826 | | 60,971 | |||||||||||||||
Research and development expenses |
| 2,872 | 1,697 | | 4,569 | |||||||||||||||
Other post employment benefit plan settlement gain |
| (1,467 | ) | | | (1,467 | ) | |||||||||||||
Restructuring costs |
| 3,122 | 2,238 | | 5,360 | |||||||||||||||
Loss on disposal of assets |
| 120 | 396 | 516 | ||||||||||||||||
Income from operations |
| 17,433 | 2,851 | | 20,284 | |||||||||||||||
Interest expense, net |
18,136 | 670 | 73 | | 18,879 | |||||||||||||||
Other non-operating expense, net |
392 | 184 | 672 | | 1,248 | |||||||||||||||
Equity in earnings of subsidiaries |
11,771 | | | (11,771 | ) | | ||||||||||||||
Income (loss) before income taxes |
(6,757 | ) | 16,579 | 2,106 | (11,771 | ) | 157 | |||||||||||||
Provision (benefit) for income taxes |
(7,057 | ) | 5,988 | 926 | | (143 | ) | |||||||||||||
Net income |
300 | 10,591 | 1,180 | (11,771 | ) | 300 | ||||||||||||||
Unaudited Condensed Consolidating Statement of Income
Quarter Ended September 26, 2009 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 75,377 | $ | 37,206 | $ | (7,817 | ) | $ | 104,766 | |||||||||
Cost of sales |
| 56,971 | 27,040 | (7,817 | ) | 76,194 | ||||||||||||||
Gross profit |
| 18,406 | 10,166 | | 28,572 | |||||||||||||||
Selling, general and administrative expenses |
| 11,885 | 7,405 | | 19,290 | |||||||||||||||
Research and development expenses |
| 909 | 599 | | 1,508 | |||||||||||||||
Restructuring costs |
| 983 | 23 | | 1,006 | |||||||||||||||
Loss on disposal of assets |
| 120 | 396 | | 516 | |||||||||||||||
Income from operations |
| 4,509 | 1,743 | | 6,252 | |||||||||||||||
Interest expense (income), net |
6,095 | 195 | | | 6,290 | |||||||||||||||
Other non-operating expense, net |
106 | 74 | (551 | ) | | (371 | ) | |||||||||||||
Equity in earnings of subsidiaries |
4,117 | | | (4,117 | ) | | ||||||||||||||
Income (loss) before income taxes |
(2,084 | ) | 4,240 | 2,294 | (4,117 | ) | 333 | |||||||||||||
Provision (benefit) for income taxes |
(2,732 | ) | 1,422 | 995 | | (315 | ) | |||||||||||||
Net income |
648 | 2,818 | 1,299 | (4,117 | ) | 648 | ||||||||||||||
16
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited Condensed Consolidating Statement of Income
Year to Date Period Ended September 27, 2008 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 353,805 | $ | 176,919 | $ | (40,201 | ) | $ | 490,523 | |||||||||
Cost of sales |
| 262,405 | 124,313 | (40,201 | ) | 346,517 | ||||||||||||||
Gross profit |
| 91,400 | 52,606 | | 144,006 | |||||||||||||||
Selling, general and administrative expenses |
| 48,034 | 28,782 | | 76,816 | |||||||||||||||
Research and development expenses |
| 3,050 | 2,110 | | 5,160 | |||||||||||||||
Other post employment benefit plan settlement gain |
| (276 | ) | | | (276 | ) | |||||||||||||
Restructuring costs |
| 555 | 594 | | 1,149 | |||||||||||||||
Income from operations |
| 40,037 | 21,120 | | 61,157 | |||||||||||||||
Interest expense, net |
21,033 | 1,237 | 186 | | 22,456 | |||||||||||||||
Other non-operating (income) expense, net |
(517 | ) | (938 | ) | (1,432 | ) | | (2,887 | ) | |||||||||||
Equity in earnings of subsidiaries |
40,765 | | | (40,765 | ) | | ||||||||||||||
Income from continuing operations before income taxes |
20,249 | 39,738 | 22,366 | (40,765 | ) | 41,588 | ||||||||||||||
Provision (benefit) for income taxes |
(6,988 | ) | 13,511 | 7,604 | | 14,127 | ||||||||||||||
Income from continuing operations |
27,237 | 26,227 | 14,762 | (40,765 | ) | 27,461 | ||||||||||||||
Net loss from discontinued operations |
| (224 | ) | | | (224 | ) | |||||||||||||
Net income |
27,237 | 26,003 | 14,762 | (40,765 | ) | 27,237 | ||||||||||||||
Unaudited Condensed Consolidating Statement of Income
Quarter Ended September 27, 2008 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 113,469 | $ | 59,203 | $ | (13,224 | ) | $ | 159,448 | |||||||||
Cost of sales |
| 84,460 | 42,391 | (13,224 | ) | 113,627 | ||||||||||||||
Gross profit |
| 29,009 | 16,812 | | 45,821 | |||||||||||||||
Selling, general and administrative expenses |
| 16,268 | 9,387 | | 25,655 | |||||||||||||||
Research and development expenses |
| 955 | 708 | | 1,663 | |||||||||||||||
Other post employment benefit plan settlement |
| (107 | ) | | | (107 | ) | |||||||||||||
Restructuring costs |
| (228 | ) | 309 | | 81 | ||||||||||||||
Income from operations |
| 12,121 | 6,408 | | 18,529 | |||||||||||||||
Interest expense, net |
7,015 | 274 | 13 | | 7,302 | |||||||||||||||
Other non-operating (income) expense, net |
1,569 | (250 | ) | (2,727 | ) | | (1,408 | ) | ||||||||||||
Equity in earnings of subsidiaries |
13,768 | | | (13,768 | ) | | ||||||||||||||
Income from continuing operations before income taxes |
5,184 | 12,097 | 9,122 | (13,768 | ) | 12,635 | ||||||||||||||
Provision (benefit) for income taxes |
(3,623 | ) | 4,389 | 3,234 | | 4,000 | ||||||||||||||
Net income from continuing operations |
8,807 | 7,708 | 5,888 | (13,768 | ) | 8,635 | ||||||||||||||
Net income from discontinued operations |
| 172 | 172 | |||||||||||||||||
Net income |
8,807 | 7,880 | 5,888 | (13,768 | ) | 8,807 | ||||||||||||||
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited Condensed Consolidating Statement of Cash Flows
Year to Date Period Ended September 26, 2009 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net income |
$ | 300 | $ | 10,591 | $ | 1,180 | $ | (11,771 | ) | $ | 300 | |||||||||
Undistributed equity in earnings of subsidiaries |
$ | (11,771 | ) | $ | | $ | | $ | 11,771 | | ||||||||||
Adjustments to reconcile net income to net cash flows: |
| |||||||||||||||||||
Depreciation |
127 | 8,938 | 3,482 | | 12,547 | |||||||||||||||
Amortization of intangible assets |
| 3,099 | 1,038 | | 4,137 | |||||||||||||||
Amortization and write-offs of deferred loan costs |
1,340 | 220 | | | 1,560 | |||||||||||||||
Loss on foreign currency, net |
270 | | 822 | | 1,092 | |||||||||||||||
Accretion of debt discount and premium, net |
621 | | | | 621 | |||||||||||||||
Fixed asset impairment |
| 1,703 | 860 | | 2,563 | |||||||||||||||
Other post employment benefit plan settlement gain |
| (1,467 | ) | | | (1,467 | ) | |||||||||||||
Stock based compensation |
| 2,273 | | | 2,273 | |||||||||||||||
Changes in assets and liabilities: |
||||||||||||||||||||
Trade receivables |
| 5,950 | 7,075 | | 13,025 | |||||||||||||||
Inventories |
| 21,150 | 6,476 | | 27,626 | |||||||||||||||
Accounts payable and accrued liabilities |
2,036 | (6,963 | ) | (7,002 | ) | | (11,929 | ) | ||||||||||||
Other current assets and liabilities |
878 | (406 | ) | (401 | ) | | 71 | |||||||||||||
Other operating assets and liabilities |
(81 | ) | (123 | ) | (161 | ) | | (365 | ) | |||||||||||
Net cash (used in) provided by operating activities |
(6,280 | ) | 44,965 | 13,369 | | 52,054 | ||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of fixed assets |
(127 | ) | (4,097 | ) | (881 | ) | | (5,105 | ) | |||||||||||
Net cash used in investing activities |
(127 | ) | (4,097 | ) | (881 | ) | | (5,105 | ) | |||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payments on Senior Notes |
(4,950 | ) | | | | (4,950 | ) | |||||||||||||
Payments on Senior Secured Notes |
(22,200 | ) | | | | (22,200 | ) | |||||||||||||
Proceeds
from additional borrowings under and existing mortgage |
| | 1,467 | | 1,467 | |||||||||||||||
Payments on revolving credit agreement |
| (3,000 | ) | | | (3,000 | ) | |||||||||||||
Net payments to Parent |
| (259 | ) | | | (259 | ) | |||||||||||||
Payments on mortgages |
| | (524 | ) | | (524 | ) | |||||||||||||
Change in affiliate debt |
43,574 | (35,966 | ) | (7,608 | ) | | | |||||||||||||
Payment on capital leases |
| (478 | ) | (136 | ) | | (614 | ) | ||||||||||||
Net cash (used in) provided by financing activities |
16,424 | (39,703 | ) | (6,801 | ) | | (30,080 | ) | ||||||||||||
Effect of
exchange rate changes on cash and cash equivalents |
| | 2,998 | | 2,998 | |||||||||||||||
Net change in cash and cash equivalents |
10,017 | 1,165 | 8,685 | | 19,867 | |||||||||||||||
Cash and cash equivalents at beginning of year |
27,134 | (2,702 | ) | 27,640 | | 52,072 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 37,151 | $ | (1,537 | ) | $ | 36,325 | $ | | $ | 71,939 | |||||||||
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ALTRA INDUSTRIAL MOTION, INC.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted
Unaudited Condensed Consolidating Statement of Cash Flows
Year to Date Period Ended September 27, 2008 | ||||||||||||||||||||
Issuer | Guarantor | Non-Guarantor | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||
Net income |
$ | 27,237 | $ | 26,003 | $ | 14,762 | $ | (40,765 | ) | $ | 27,237 | |||||||||
Undistributed equity in earnings of subsidiaries |
$ | (40,765 | ) | $ | | $ | | $ | 40,765 | | ||||||||||
Adjustments to reconcile net income to net cash flows: |
||||||||||||||||||||
Depreciation |
| 8,123 | 4,286 | | 12,409 | |||||||||||||||
Amortization of intangible assets |
| 3,106 | 1,240 | | 4,346 | |||||||||||||||
Amortization and write-offs of deferred loan costs |
1,670 | 193 | | | 1,863 | |||||||||||||||
Loss on foreign currency, net |
(516 | ) | | (1,081 | ) | | (1,597 | ) | ||||||||||||
Accretion of debt discount and premium, net |
759 | | | | 759 | |||||||||||||||
Loss on sale of fixed assets |
| 193 | | | 193 | |||||||||||||||
Other post employment benefit plan settlement gain |
| (276 | ) | | | (276 | ) | |||||||||||||
Loss on sale of Electronics Division |
| 224 | | | 224 | |||||||||||||||
Stock based compensation |
1,516 | | | | 1,516 | |||||||||||||||
Changes in assets and liabilities: |
||||||||||||||||||||
Trade receivables |
| (3,754 | ) | (11,151 | ) | | (14,905 | ) | ||||||||||||
Inventories |
| (3,673 | ) | (2,198 | ) | | (5,871 | ) | ||||||||||||
Accounts payable and accrued liabilities |
4,022 | (3,073 | ) | 4,938 | | 5,887 | ||||||||||||||
Other current assets and liabilities |
119 | (977 | ) | 475 | | (383 | ) | |||||||||||||
Other operating assets and liabilities |
(303 | ) | 319 | 218 | | 234 | ||||||||||||||
Net cash (used in) provided by operating activities |
(6,261 | ) | 26,408 | 11,489 | | 31,636 | ||||||||||||||
Cash flows from investing activities |
||||||||||||||||||||
Purchase of fixed assets |
| (8,831 | ) | (3,403 | ) | | (12,234 | ) | ||||||||||||
Proceeds from the sale of Electronics |
17,310 | | | | 17,310 | |||||||||||||||
Net cash (used in) provided by investing activities |
17,310 | (8,831 | ) | (3,403 | ) | | 5,076 | |||||||||||||
Cash flows from financing activities |
||||||||||||||||||||
Payments on Senior Notes |
(1,346 | ) | | | | (1,346 | ) | |||||||||||||
Payments on Senior Secured Notes |
(27,500 | ) | | | | (27,500 | ) | |||||||||||||
Payments on revolving credit agreement |
| (1,723 | ) | | | (1,723 | ) | |||||||||||||
Payments received from Parent Company |
11,898 | | | | 11,898 | |||||||||||||||
Payments on mortgages |
| | (228 | ) | | (228 | ) | |||||||||||||
Change in affiliate debt |
30,941 | (19,310 | ) | (323 | ) | | 11,308 | |||||||||||||
Payment on capital leases |
| (456 | ) | (11,631 | ) | | (12,087 | ) | ||||||||||||
Net cash (used in) provided by financing activities |
13,993 | (21,489 | ) | (12,182 | ) | | (19,678 | ) | ||||||||||||
Effect of
exchange rate changes on cash and cash equivalents |
| | (1,119 | ) | | (1,119 | ) | |||||||||||||
Net change in cash and cash equivalents |
25,042 | (3,912 | ) | (5,215 | ) | | 15,915 | |||||||||||||
Cash and cash equivalents at beginning of year |
4,571 | (492 | ) | 29,827 | | 33,906 | ||||||||||||||
Cash and cash equivalents at end of period |
$ | 29,613 | $ | (4,404 | ) | $ | 24,612 | $ | | $ | 49,821 | |||||||||
17. Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but
before the financial statements are issued to provide additional evidence relative to certain
estimates or to identify matters that require additional disclosure. The Company evaluated
subsequent events through November 10, 2009 (the date the financial statements were issued).
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Item 2. | Managements 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 Companys current estimates, expectations and
projections about the Companys future results, performance, prospects and opportunities.
Forward-looking statements include, among other things, the information concerning the Companys
possible future results of operations including revenue, costs of goods sold, and gross margin,
business and growth strategies, financing plans, the Companys competitive position and the effects
of competition, the projected growth of the industries in which we operate, and the Companys
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 Companys 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 Corporations actual results to
differ materially from the results referred to in the forward-looking statements the Corporation
makes in this report include:
| the Companys access to capital, credit ratings, indebtedness, and ability to raise additional financings and operate under the terms of the Companys debt obligations; |
| the risks associated with our debt leverage; |
| the effects of intense competition in the markets in which we operate; |
| the Companys ability to successfully execute, manage and integrate key acquisitions and mergers; |
| the Companys ability to obtain or protect intellectual property rights; |
| the Companys 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 Companys operations; |
| the Companys ability to successfully pursue the Companys 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 Companys ability to complete cost reduction actions and risks associated with such actions; |
| the Companys ability to control costs; |
| failure of the Companys operating equipment or information technology infrastructure; |
| the Companys ability to achieve its business plans, including with respect to an uncertain economic environment; |
| 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 Companys ability to attract and retain key executives and other personnel; |
| work stoppages and other labor issues; |
| changes in the Companys pension and retirement liabilities; |
| the Companys 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 Companys stock; |
| the effects of changes to critical accounting estimates; changes in volatility of the Companys stock price and the risk of litigation following a decline in the price of the Companys stock price; |
| 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; |
20
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| 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 Companys control; |
| the risks associated with international operations, including currency risks; and |
| other factors, risks, and uncertainties referenced in the Companys filings with the Securities and Exchange Commission, including the Risk Factors set forth in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. |
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS, ALL OF WHICH
SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY 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 QUARTERLY 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 COMPANYS 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 COMPANYS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2008, AND IN OTHER REPORTS FILED WITH THE SEC BY THE COMPANY.
The following discussion of the financial condition and results of operations of Altra Industrial
Motion, Inc. should be read together with the audited financial statements of Altra Industrial
Motion, Inc. and related notes included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2008. Except where the context otherwise
requires or indicates, Altra Industrial Motion, the
Company, AIM, we, us and
our refer to Altra Industrial Motion, Inc.
General
Altra Holdings, Inc. is the parent company of the Company
and owns 100% of the Companys outstanding capital stock. The Company, directly or indirectly, owns
100% of the capital stock of its 48 subsidiaries. The following chart illustrates a summary of our
corporate structure:
21
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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 Colfaxs 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, 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
our wholly owned subsidiary.
On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings
Limited, or Hay Hall. Hay Hall is a UK-based holding company established in 1996 that is focused
primarily on the manufacture of couplings and clutch brakes. Hay Hall consists of five main
businesses that are niche focused and have 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. Hay Halls product
offerings diversified our revenue base and strengthened our key product areas, such as electric
clutches, brakes, and couplings. Matrix International, Inertia Dynamics, and Twiflex, three Hay
Hall businesses, combined with Warner Electric, Wichita Clutch, Formsprag Clutch, and Stieber, make
the consolidated company one of the largest individual manufacturers of industrial clutches and
brakes in the world.
On May 18, 2006, we acquired substantially all of the assets of Bear Linear. Bear 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. Bear Linears product design and engineering expertise, coupled with our sourcing
alliance with a low cost country manufacturer, were critical components in our strategic expansion
within the motion control market.
On April 5, 2007, the Company acquired all of the outstanding shares of TB Woods. TB Woods
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.
On December 31, 2007, we sold the TB Woods adjustable speed drives business or Electronics
Division, to Vacon, Inc. We sold the Electronics Division in order to continue our strategic focus
on our core electro-mechanical power transmission business.
The subsidiaries of Altra Industrial design, produce and market a wide range of mechanical
power transmission (MPT) and motion control products. The business conducted at our subsidiaries
is organized into five operating segments; Electromagnetic Clutches & Brakes, Heavy Duty Clutches &
Brakes, Overrunning Clutches & Engineered Bearing Assemblies, Engineered Couplings and Gearing &
Belted Drives. We have a presence in over 70 countries. Our global sales and marketing network
includes over 1,000 direct original equipment manufacturers (OEM) and over 3,000 distributor
outlets. We are headquartered in Braintree, Massachusetts.
22
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Our operating segments, principal brands and principal markets are set forth below:
Operating Segment | Principal Brands | Principal Markets | ||
Heavy Duty Clutches & Brakes
|
Wichita Clutch Twiflex Industrial Clutch |
Energy Metals Marine |
||
Electromagnetic Clutches & Brakes
|
Warner Electric Matrix International Inertia Dynamics Warner Linear |
Turf and Garden Forklift Elevator Material Handling |
||
Overrunning Clutches & Bearings
|
Formsprag Stieber Kilian Marland Clutch |
Aerospace Mining Material Handling Transportation |
||
Engineered Couplings
|
TB Woods Ameridrives Bibby Transmission Huco Dynatork All Power Transmission |
Energy Metals Petro/Chem Medical Military and Defense |
||
Gearing & Belted Drives
|
Boston Gear TB Woods Nuttall/Delroyd Centric Clutch |
Food Processing Material Handling Energy Aggregate |
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.
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. During November and December 2008, we saw a
significant change in economic conditions both in North America and internationally as most of our
end markets experienced dramatic downturns. During the fourth quarter of 2008, we began to see
several of our distributors and OEM customers implement inventory reduction programs which
continued throughout the first two quarters of 2009. Beginning in the third quarter of 2009, it
appeared that inventory reduction efforts by our customers began to come to an end as sales to our
largest distribution customers improved during the third quarter. However, we continue to expect
weakness in order rates for the remainder of 2009 as compared with 2008.
In response to the continued challenging economic conditions of 2009, we have taken and
continue to take swift and aggressive actions to reduce our expenses and maximize near-term
profitability. Our cost-reduction initiatives are centered on three areas: workforce cutbacks,
plant consolidations and procurement and other cost reductions. In February 2009, the Companys
discretionary
401(k) match was suspended and a temporary reduction in executive compensation was initiated.
On June 1, 2009, the Company announced the temporary suspension of all Company contributions to the
401(k) plan. We also have announced a general hiring freeze, a freeze of all non-union employee
salaries and reduced work schedules. During the year to date period ended September 26, 2009, we
incurred $5.4 million of restructuring expense including a $2.0 million non-cash charge primarily
related to impairment charges at the Mount Pleasant and South Beloit facilities that are expected
to close in 2009 and in the first quarter of 2010, respectively. The remaining expense relates
mainly to severance. We expect to incur between an additional $2.5 and $3.5 million of expenses
associated with workforce reduction and consolidation of facilities in 2009 and between $1.3
million and $1.9 million of such additional expenses in 2010. Beginning in 2010, we expect to see
annualized savings from the headcount reductions and consolidation of facilities of approximately
$30 million. We expect savings in 2009 to be $17.9 million. Including procurement and other cost
reduction efforts, annualized savings would be approximately $77 million (approximately $60 million
in 2009). We estimate that once volume returns to prior year levels, between $10 and $12 million
of these savings will be permanent in nature.
We will continue our strong focus on working capital management and cash flow generation with
the intent of improving our liquidity by reducing inventory and accounts receivable levels. As of
September 26, 2009, we have a cash balance of $71.9 million.
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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. Management believes there have been no significant changes
in our critical accounting policies since December 31, 2008, except as listed below. See the
discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Goodwill, Intangibles and other long-lived assets. In connection with our acquisitions,
goodwill and intangible assets were identified and recorded at their fair value. We recorded
intangible assets for customer relationships, trade names and trademarks, product technology,
patents and goodwill. In valuing the customer relationships, trade names and trademarks, we
utilized variations of the income approach. The income approach was considered the most appropriate
valuation technique because the inherent value of these assets is their ability to generate current
and future income. The income approach relies on historical financial and qualitative information,
as well as assumptions and estimates for projected financial information. Projected financial
information is subject to risk if our estimates are incorrect. The most significant estimate
relates to our projected revenues and profitability. If we do not meet the projected revenues and
profitability used in the valuation calculations then the intangible assets could be impaired. In
determining the value of customer relationships, we reviewed historical customer attrition rates
which were determined to be approximately 5% per year. Most of our customers tend to be long-term
customers with very little turnover. While we do not typically have long-term contracts with
customers, we have established long-term relationships with customers which make it difficult for
competitors to displace us. Additionally, we assessed historical revenue growth within our industry
and customers industries in determining the value of customer relationships. The value of our
customer relationships intangible asset could become impaired if future results differ
significantly from any of the underlying assumptions. This could include a higher customer
attrition rate or a change in industry trends such as the use of long-term contracts which we may
not be able to obtain successfully. Customer relationships and product technology and patents are
considered finite-lived assets, with estimated lives ranging from 8 years to 16 years. The
estimated lives were determined by calculating the number of years necessary to obtain 95% of the
value of the discounted cash flows of the respective intangible asset. Goodwill and trade names and
trademarks are considered indefinite lived assets. Trade names and trademarks were determined to be
indefinite lived assets. Other intangible assets include trade names and trademarks that identify
us and differentiate us from competitors, and therefore competition does not limit the useful life
of these assets. Additionally, we believe that our trade names and trademarks will continue to
generate product sales for an indefinite period.
As of December 31, 2008, goodwill was allocated to each of our twenty identified reporting
units. We conducted an annual impairment review of goodwill and indefinite lived intangible assets
as of December 31, 2008 at each of these reporting units.
The breakdown of reporting units by acquisition and acquisition date are as follows:
Colfax acquisition November 30, 2004
|
12 reporting units | |
Hay Hall acquisition February 10, 2006
|
5 reporting units (including Huco) | |
Warner Linear acquisition May 18, 2006
|
1 reporting unit | |
TB Woods acquisition April 5, 2007
|
1 reporting unit | |
All Power Transmission October 5, 2007
|
1 reporting unit |
Beginning in the fourth quarter of 2008, almost all of our reporting units were impacted by
the general economic decline. The decline in our weekly order rates was significant and almost
immediate. Between the week of November 7, 2008 and November 14, 2008 order rates declined 21%.
Prior to that week, order rates had been flat or increasing for over a year. On a consolidated
basis weekly order rates from the week of November 14, 2008 through the final full week of the
year, (the week of December 19, 2008) decreased an additional 33%.
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As part of the annual goodwill impairment assessment we estimated the fair value of each of
our reporting units using an income approach. We forecasted future cash flows by reporting unit
for each of the next five years and applied a long term growth rate to the final year of forecasted
cash flows. The cash flows were then discounted using our estimated discount rate. The forecasts
of revenue and profitability growth for use in the long-range plan and the discount rate were the
key assumptions in our intangible fair value analysis. The following are the assumptions used in
2008 and 2007 in the calculation of estimated fair value for the reporting units that recorded a
goodwill impairment as of December 31, 2008 (Huco, Warner Linear and TB Woods) and the reporting
units that are at risk of recording a goodwill impairment in the future (TB Woods, Ameridrives,
Matrix, All Power and Boston Gear). No goodwill remains at Huco or Warner Linear subsequent to the
goodwill impairment in 2008.:
December 31, 2007 Assumptions | ||||||||||||||||||||||||||||
Warner | All | Boston | ||||||||||||||||||||||||||
Assumption | Huco | Linear | TB Woods | Ameridrives | Matrix | Power | Gear | |||||||||||||||||||||
Revenue growth (1st
year) |
13.6% increase | 51% increase | 10.4% increase | (6.7%) decrease | 12.3% increase | 33.0% increase | (1.1%) decrease | |||||||||||||||||||||
Average revenue
growth (2nd 5th
year) |
5.8% increase | 5.8% increase | 5.8% increase | 5.8% increase | 5.8% increase | 5.8% increase | 5.8% increase | |||||||||||||||||||||
Profitability
growth rate EBITDA
as a percent of
sales (1st year) |
3.6% increase | 8.9% increase | (0.7%) decrease | 6.6% increase | 1.7% increase | 2.4% increase | (4.5)% decrease | |||||||||||||||||||||
Average
profitability
growth rate per
year (EBITDA as a
percent of sales)
(2nd 5th year) |
0.8% increase | 0.6% increase | 0.6% increase | 0.8% increase | 0.5% increase | 0.4% increase | 0.7% increase | |||||||||||||||||||||
Discount Rate |
12% | 12% | 12% | 12% | 12% | 12% | 12% |
December 31, 2008 Assumptions | ||||||||||||||||||||||||||||
Warner | All | Boston | ||||||||||||||||||||||||||
Assumption | Huco | Linear | TB Woods | Ameridrives | Matrix | Power | Gear | |||||||||||||||||||||
Revenue growth (1st
year) |
(26.2%) decrease | (10.3%) decrease | (18%) decrease | 2.0% increase | (36.2%) decrease | (5.6%) decrease | (16.5)% decrease | |||||||||||||||||||||
Average revenue
growth (2nd 5th
year) |
5.8% increase | 5.8% increase | 5.8% increase | 5.5% increase | 5.8% increase | 5.5% increase | 5.8% increase | |||||||||||||||||||||
Profitability
growth rate EBITDA
as a percent of
sales (1st year) |
(4%) decrease | 6% increase | (1%) decrease | 7.5% increase | (3.1%) decrease | (5.7%) decrease | (8.1%) decrease | |||||||||||||||||||||
Average
profitability
growth rate per
year (EBITDA as a
percent of sales)
(2nd 5th year) |
1% increase | 0.5% increase | 1% increase | .35% increase | 0.5% increase | 1.4% increase | 1% increase | |||||||||||||||||||||
Discount Rate |
13% | 13% | 13% | 13% | 13% | 13% | 13% |
A continuation of the significant decrease in order rates in the final weeks of 2008 and into
2009 was a key assumption when developing our long-term revenue and profitability plan for our
goodwill impairment analysis as of December 31, 2008. All of our reporting units assumed
significantly lower sales and lower profitability for 2009 in their long-term growth plan when
compared to the
forecast used in the goodwill impairment analysis as of December 31, 2007. The discount rate
was not changed significantly from the December 31, 2007 goodwill impairment analysis.
As a result of the goodwill impairment analysis, we recorded a goodwill impairment charge of
$31.8 million at the TB Woods, Huco and Warner Linear reporting units as of December 31, 2008. The
goodwill remaining at these reporting units, after the adjustment for goodwill impairments, was
$23.5 million at TB Woods and there was no goodwill remaining at either Warner Linear or Huco. Due
to prevailing market conditions at the time of the acquisitions of these three reporting units, the
purchase price paid as consideration for these three acquisitions required a higher premium when
compared to the prior 2004 Colfax acquisition and therefore created higher goodwill at these
reporting units.
Prior to filing our Annual Report on Form 10-K on March 6, 2009, we reviewed the assumptions
used in our goodwill impairment analysis and noted that they had not changed significantly from
when we completed our goodwill impairment assessment.
We considered whether the sum of the fair value of all of our reporting units was reasonable
when compared to our market capitalization on the date of the goodwill impairment analysis. As of
December 31, 2008, our estimated enterprise fair value was $274.4 million. Our market
capitalization was $208.7 million. The difference between the fair value of the enterprise and our
market capitalization represented a control market premium of between 25% and 35%. We determined
that a control market premium of between 25% and 35% was appropriate based on historical experience
with purchase and sales transactions, the historical market trends based on our industry and the
control market premium paid in relation to these transactions.
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Management believes the preparation of revenue and profitability growth rates for use in the
long-range plan and the discount rate requires significant use of judgment. If any of our
reporting units do not meet our current year forecasted revenue and/or profitability estimates, we
could be required to perform an interim goodwill impairment analysis. In addition, if our discount
rate increases, we could be required to perform an interim goodwill impairment analysis. The
following table shows the number of reporting units that could be required to perform an interim
goodwill impairment analysis if forecasted profitability decreases or the estimated discount rate
increases and the goodwill recorded at each of these reporting units. In managements opinion,
these are the reasonably likely scenarios to occur and would have a material effect on the outcome
of the fair value assessment and could result in a material goodwill impairment.
Profitability decrease | Profitability decrease | Profitability decrease | ||||||
5% (all other | 10% (all other | 15% (all other | ||||||
assumptions remain | assumptions remain | assumptions remain | ||||||
constant) | constant) | constant) | ||||||
Number of reporting
units that could be
required to perform
an interim
impairment analysis |
1 | 4 | 5 | |||||
Goodwill as of
December 31, 2008
at reporting units
that would be
required to perform
an interim
impairment analysis |
$23.5 million | $28.3 million | $40.9 million | |||||
Indefinite lived
intangible assets
as of December 31,
2008 that would be
required to perform
an interim
impairment analysis |
$8.0 million | $10.5 million | $14.3 million |
Discount rate increase 50 basis | Discount rate increase 100 basis | |||
points (all other assumptions | points (all other assumptions | |||
remain constant) | remain constant) | |||
Number of reporting
units that could be
required to perform
an interim
impairment analysis |
1 | 1 | ||
Goodwill as of
December 31, 2008
at reporting units
that could be
required to perform
an interim
impairment analysis |
$23.5 million | $23.5 million | ||
Indefinite lived
intangible assets
as of December 31,
2008 that would be
required to perform
an interim
impairment analysis |
$8.0 million | $8.0 million |
There are five reporting units that could be required to perform an interim impairment
analysis if profitability decreased 15% and all other assumptions remain constant. The reporting
units estimated fair value, carrying value and goodwill balance as of December 31, 2008 is as
follows:
Goodwill | ||||||||||||||||
Estimated | Carrying | balance | ||||||||||||||
Reporting Unit | Fair Value | Value | Difference | 12/31/08 | ||||||||||||
Ameridrives |
17,823 | 16,854 | 969 | 3,411 | ||||||||||||
TB Woods |
73,283 | 72,971 | 312 | 23,530 | ||||||||||||
Matrix |
8,989 | 8,223 | 766 | 765 | ||||||||||||
All Power |
16,298 | 14,884 | 1,414 | 628 | ||||||||||||
Boston Gear |
67,516 | 59,799 | 7,718 | 12,602 |
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Long-lived assets, including definite-lived intangible assets, are reviewed for impairment
when events or circumstances indicate that the carrying amount of a long-lived asset may not be
recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset
exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining
useful life. If an asset is considered to be impaired, the impairment is measured by the amount by
which the carrying amount of the asset exceeds its fair value, and is charged to results of
operations at that time.
During the fourth quarter of 2008, a goodwill impairment was identified and recorded at three
reporting units which, in turn, triggered an impairment analysis with respect to long-lived assets
at those reporting units.
For our definite lived intangible assets, mainly customer relationships, we estimated the
future cash flows using the excess earnings method, a derivation of the discounted cash flow
method. We estimated total revenue attributable to existing customer relationships and projected
customer revenue growth for the remainder of the projection period. Existing customer revenue was
then multiplied by an attrition curve based on our historical attrition rates percent
(approximately 4%) for each reporting unit. We estimated profitability for the customer
relationship based on the overall reporting units profitability. We compared the estimated future
undiscounted cash flows to the carrying value of the customer relationship for each reporting unit
and did not identify any impairment.
For our indefinite lived intangible assets, mainly trademarks, we estimated the fair value
first by estimating the total revenue attributable to the trademarks for each of the reporting
units. Second we estimated an appropriate royalty rate using the return on assets method by
estimating the required financial return on our assets, excluding trademarks, less the overall
return generated by our total asset base. The return as a percentage of revenue provides an
indication of our royalty rate (approximately 1.5%). We compared the estimated fair value of our
trademarks with the carrying value of the trademarks and did not identify any impairment.
During 2009, we have not identified any events that required us to perform an interim
impairment analysis.
Results of Operations
Quarter Ended | Year to date ended | |||||||||||||||
September 26, | September 27, | September 26, | September 27, | |||||||||||||
(In thousands, except per share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net sales |
$ | 104,766 | $ | 159,448 | $ | 341,183 | $ | 490,523 | ||||||||
Cost of sales |
76,194 | 113,627 | 250,950 | 346,517 | ||||||||||||
Gross profit |
28,572 | 45,821 | 90,233 | 144,006 | ||||||||||||
Gross profit percentage |
27.27 | % | 28.74 | % | 26.45 | % | 29.36 | % | ||||||||
Selling, general and administrative expenses |
19,290 | 25,655 | 60,971 | 76,816 | ||||||||||||
Research and development expenses |
1,508 | 1,663 | 4,569 | 5,160 | ||||||||||||
Other post employment benefit plan settlement gain |
| (107 | ) | (1,467 | ) | (276 | ) | |||||||||
Restructuring costs |
1,006 | 81 | 5,360 | 1,149 | ||||||||||||
Loss on disposal of assets |
516 | | 516 | | ||||||||||||
Income from operations |
6,252 | 18,529 | 20,284 | 61,157 | ||||||||||||
Interest expense, net |
6,290 | 7,302 | 18,879 | 22,456 | ||||||||||||
Other non-operating (income) expense, net |
(371 | ) | (1,408 | ) | 1,248 | (2,887 | ) | |||||||||
Income from continuing operations before income taxes |
333 | 12,635 | 157 | 41,588 | ||||||||||||
Provision (benefit) for income taxes |
(315 | ) | 4,000 | (143 | ) | 14,127 | ||||||||||
Income from continuing operations |
648 | 8,635 | 300 | 27,461 | ||||||||||||
Net loss from discontinued operations, net of income
taxes of $43 for the year to date period ended
September 27, 2008 |
| 172 | | (224 | ) | |||||||||||
Net income |
$ | 648 | $ | 8,807 | $ | 300 | $ | 27,237 | ||||||||
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Quarter Ended September 26, 2009 compared with Quarter Ended September 27, 2008
(Amounts in thousands unless otherwise noted)
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Net sales |
$ | 104,766 | $ | 159,448 | $ | (54,682 | ) | -34.3 | % |
The decrease in sales was almost exclusively due to the overall economic decline which has
impacted all of our end markets and industries. On a constant currency basis, sales decreased
$50.1 million or 31.5%. Our Heavy Duty Clutch & Brake operating segment and our Global Couplings
operating segment began to see decreases in sales in the second quarter of 2009, which has
continued into the third quarter of 2009. Both of these operating segments sell into late cycle
markets and have been impacted by volume decreases. We have seen some modest increases in our
order rates at our other operating segments but until worldwide economic conditions improve, we
expect continued weakness in our orders.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Gross Profit |
$ | 28,572 | $ | 45,821 | $ | (17,249 | ) | -37.6 | % | |||||||
Gross Profit as a percent of sales |
27.3 | % | 28.7 | % |
The decrease in gross profit was due to the significant decrease in sales. As a result of our
decrease in sales, we have less leverage on our fixed costs. On a constant currency basis, gross
profit decreased $15.8 million or 34.4%. We have taken actions to reduce our expenses and maximize
near-term profitability. We expect our full year 2009 gross profit as a percentage of sales to
decrease when compared to 2008.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Selling, general and administrative expense (SG&A) |
$ | 19,290 | $ | 25,655 | $ | (6,365 | ) | -24.8 | % | |||||||
SG&A as a percent of sales |
18.4 | % | 16.1 | % |
28
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The decrease in SG&A was due to our cost reduction efforts which began in the fourth quarter
of 2008. Our cost reduction efforts were focused on headcount reductions and the elimination of
non-critical expenses which decreased our overall SG&A costs. As a result of decreased sales
volume we have seen a reduction in outside sales representative commission costs. In addition,
during the quarter we required certain U.S. personnel to take furloughs. However, due to the
significant decrease in sales, SG&A as a percent of sales increased despite our cost reductions.
During the remainder of 2009, we expect to continue to reduce our SG&A costs through plant
consolidations, additional headcount reductions and expense elimination.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Research and development expenses (R&D) |
$ | 1,508 | $ | 1,663 | $ | (155 | ) | -9.3 | % |
R&D expenses represented approximately 1% of sales in both periods. We do not expect
significant variances in future periods.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Restructuring expenses |
$ | 1,006 | $ | 81 | $ | 925 | 1142.0 | % |
During 2007, we adopted two restructuring programs. The first was intended to improve
operational efficiency by reducing
headcount, consolidating our operating facilities and relocating manufacturing to lower cost
areas (the Altra Plan). The second was related to the acquisition of TB Woods and was intended
to reduce duplicative staffing and consolidate facilities (the TB Woods Plan). We recorded
approximately $0.1 million of restructuring expenses in the third quarter of 2008 for moving and
relocation, severance and non-cash asset impairment. There were no costs related to the Altra Plan
or the TB Woods Plan incurred in 2009.
In March 2009, we adopted a new restructuring plan (the 2009 Altra Plan) to improve the
utilization of our manufacturing infrastructure and to realign our business with the current
economic conditions. We expect the 2009 Altra Plan to improve operational efficiency by reducing
headcount and consolidating certain facilities. During the third quarter of 2009, we recorded $1.0
million of restructuring expenses, of which $0.5 million was related to severance, $0.1 million was
related to other restructuring charges, (primarily moving and relocation costs) and $0.4 million
was non-cash impairment charges. We expect to incur between an additional $2.5 and $3.5 million of
expenses associated with workforce reduction and consolidation of facilities in 2009 and between
$1.3 million and $1.9 million of such additional expenses in 2010. Beginning in 2010, we expect to
see annualized savings from the headcount reductions and consolidation of facilities of
approximately $30 million. We expect savings in 2009 to be $17.9 million.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Loss on disposal of assets |
$ | 516 | $ | | $ | 516 | N/A |
During 2009, we entered into a lease agreement at a new facility in China. As of September
26, 2009, we have exited our previous facility and moved into the new location. We recorded a loss
to dispose of the leasehold improvements associated with the old location.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Interest Expense, net |
$ | 6,290 | $ | 7,302 | $ | (1,012 | ) | -13.9 | % |
29
Table of Contents
Net interest expense decreased due to the lower average outstanding balance of the Senior
Secured Notes and the Senior Notes, resulting in a reduction of interest expense by $0.9 million.
In addition, in the third quarter of 2008 we paid additional premiums of $0.5 million associated
with the repurchase of Senior Secured Notes.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Other non-operating loss (income), net |
$ | (371 | ) | $ | (1,408 | ) | $ | 1,037 | -74 | % |
Other non-operating income for both quarters included rental income of $0.2 million for
facility rentals under lease agreements which were part of the sale of TB Woods Electronics
Division. The remaining balance in each period relates to changes in foreign currency, primarily
the Pound Sterling and Euro which strengthened significantly in the third quarter of 2008.
Quarter Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Provision (benefit) for income taxes |
$ | (315 | ) | $ | 4,000 | $ | (4,315 | ) | -107.9 | % | ||||||
Provision (benefit) for income taxes
as a % of income from continuing
operations before income taxes |
-94.6 | % | 31.7 | % |
During the third quarter of 2009, the Company negotiated an agreement with a foreign taxing
authority. The agreement allows the Company to fully deduct certain interest charges that had
previously been classified as non-deductible in 2009. The benefit from this deduction resulted in
the Company recording a benefit for income taxes in the quarter to date period ended September 26,
2009.
30
Table of Contents
Year to Date Period Ended September 26, 2009 compared with Year to Date Period Ended September 27,
2008
(Amounts in thousands unless otherwise noted)
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Net sales
|
$ | 341,183 | $ | 490,523 | $ | (149,340 | ) | -30.4 | % |
The decrease in sales is almost exclusively due to the overall economic decline which has
impacted all of our end markets and industries. On a constant currency basis, sales decreased
$126.1 million or 25.7%. We saw substantial decreases in sales at our Heavy Duty Clutch & Brake
operating segment and at our Global Couplings operating segment beginning in the second quarter of
2009, which has continued into the third quarter of 2009. Both of these operating segments sell
into late cycle markets and began to see volume decreases in the second quarter of 2009. As a
result, on a year to date basis Heavy Duty Clutch & Brake sales decreased 20.2% and Global
Couplings decreased 22.1%. We have seen some modest increases in our order rates in our other
operating segments but until worldwide economic conditions improve, we expect continued weakness in
our orders.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Gross Profit |
$ | 90,233 | $ | 144,006 | $ | (53,773 | ) | -37.3 | % | |||||||
Gross Profit as a percent of sales |
26.4 | % | 29.4 | % |
The decrease in gross profit was due to the significant decrease in sales. As a result of our
decrease in sales, we have less leverage on our fixed costs. On a constant currency basis, gross
profit decreased $45.2 million or 31.4%. We have taken actions to reduce our expenses and maximize
near-term profitability. We expect our full year 2009 gross profit as a percentage of sales to
decrease when compared to 2008.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Selling, general and administrative expense (SG&A) |
$ | 60,971 | $ | 76,816 | $ | (15,845 | ) | -20.6 | % | |||||||
SG&A as a percent of sales |
17.9 | % | 15.7 | % |
The decrease in SG&A was due to our cost reduction efforts which began in the fourth quarter
of 2008. Our cost reduction efforts were focused on headcount reductions and the elimination of
non-critical expenses which decreased our overall SG&A costs. As a result of decreased sales
volume we have seen a reduction in outside sales representative commission costs. In addition, we
have suspended the 401(k) company and matching contributions and required furloughs. However, due
to the significant decrease in sales, SG&A as a percent of sales increased despite our cost
reductions. During the remainder of 2009, we expect to continue to reduce our SG&A costs through
plant consolidations, additional headcount reductions and expense elimination.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Research and development expenses (R&D) |
$ | 4,569 | $ | 5,160 | $ | (591 | ) | -11.5 | % |
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R&D expenses represented approximately 1% of sales in both periods. We do not expect
significant fluctuations in future periods.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Restructuring expenses |
$ | 5,360 | $ | 1,149 | $ | 4,211 | 366.5 | % |
As discussed above, during 2007, we adopted the Altra Plan and the TB Woods Plan. We
recorded approximately $1.1 million in the year to date period ended September 27, 2008 of
restructuring expenses for moving and relocation, severance and non-cash asset impairment. There
were no costs related to the Altra Plan or the TB Woods Plan incurred in 2009.
As discussed above, in March 2009, we adopted the 2009 Altra Plan. The 2009 Altra Plan will
improve operational efficiency by reducing headcount and consolidating certain facilities. During
the third quarter of 2009, we recorded $1.0 million of restructuring $0.5 million related to
severance, $0.1 million related to other restructuring charges, mainly moving and relocation costs
and $0.4 million of non-cash impairment charges. We expect to incur between an additional $2.5 and
$3.5 million of expenses associated with workforce reduction and consolidation of facilities in
2009 and between $1.3 million and $1.9 million of such additional expenses in 2010. Beginning in
2010, we expect to see annualized savings from the headcount reductions and consolidation of
facilities of approximately $30 million. We expect savings in 2009 to be $17.9 million.
Year ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Loss on disposal of assets |
$ | 516 | $ | | $ | 516 | N/A |
During 2009, we entered into a lease agreement at a new facility in China. As of September
26, 2009, we have exited our previous facility and moved into the new location. We recorded a
loss to dispose of the leasehold improvements associated with the old location.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Interest Expense, net |
$ | 18,879 | $ | 22,456 | $ | (3,577 | ) | -15.9 | % |
Net interest expense decreased due to the lower average outstanding balance of the Senior
Secured Notes and Senior Notes, resulting in a reduction of interest expense by $2.4 million. In
addition, in the year to date period ended September 27, 2008, we re-paid $27.5 million of the
Senior Secured Notes and $1.3 million of the Senior Notes at a premium of $1.4 million. In the
year to date period ended September 26, 2009, we re-paid $22.2 million of the Senior Secured Notes
and $5.0 million of the Senior Notes at a net premium of $0.1 million.
32
Table of Contents
Other post employment benefit plan settlement gain
In March 2009, we reached a new collective bargaining agreement with the union at our Erie,
Pennsylvania facility. One of the provisions of the new agreement eliminates benefits that
employees were entitled to receive through the existing other post employment benefit plan
(OPEB). OPEB benefits will no longer be available for retired and active employees. This
resulted in an OPEB settlement gain of $1.5 million in the year to date period ended September 26,
2009.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Other non-operating income (loss), net |
$ | 1,248 | $ | (2,887 | ) | $ | 4,135 | -143 | % |
Other non-operating income for both quarters included rental income of $0.3 million for
facility rentals under lease agreements which were part of the sale of the Electronics Division.
This amount is offset by an adjustment to the assets that had previously been held for sale.
During the first quarter of 2009, we reclassified two buildings from assets held for sale to assets
held and used. We recorded a cumulative catch up of depreciation expense of $0.2 million. In
addition, during the second quarter of 2009, we sold Saftek Ltd., Inc. In connection with the sale
we recorded a $0.2 million loss on the sale. The remaining balance in each period relates to
changes in foreign currency, primarily the Pound Sterling and Euro.
Year to Date Period Ended | ||||||||||||||||
September 26, | September 27, | |||||||||||||||
2009 | 2008 | Change | % | |||||||||||||
Provision (Benefit) for income taxes, continuing operations |
$ | (143 | ) | $ | 14,127 | $ | (14,270 | ) | -101.0 | % | ||||||
Provision for income taxes as a % of income before taxes |
-91.1 | % | 34.0 | % |
During 2009, we entered into a lease agreement at a new facility in China. As of September 26,
2009, we have exited our previous facility and moved into the new location. We recorded a loss to
dispose of the leasehold improvements associated with the old location.
Discontinued Operations
On December 31, 2007, the Company completed the divestiture of the TB Woods adjustable speed
drives business (Electronics Division) to Vacon PLC (Vacon) for $29.0 million. The decision to
sell the Electronics Division was made to allow the Company to continue its strategic focus on its
core electro-mechanical power transmission business.
The $0.2 million loss from discontinued operations in the year to date period ended
September 27, 2008 was comprised of a working capital adjustment, net of taxes.
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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 Revolving Credit Agreement. We expect
that our primary ongoing requirements for cash will be for working capital, debt service, capital
expenditures, expenditures in connection with restructuring activities and pension plan funding.
In the event additional funds are needed, we could borrow additional funds under our Senior
Revolving Credit Agreement, attempt to refinance our 9% Senior Secured Notes, or attempt to raise
capital in debt or equity markets. Presently, we have capacity under our Senior Revolving Credit
Agreement to borrow $26.8 million. Of this total capacity, we can borrow up to approximately $14.3
million without being required to comply with any financial covenants under the agreement. In
order to refinance the existing 9% Senior Secured Notes, we would incur a pre-payment premium of
4.5% of the principal balance through December 1, 2009, 2.3% through December 1, 2010 and 0% after
that date. There can be no assurance however that additional debt financing will be available on
commercially acceptable terms, if at all. Similarly, there can be no assurance that equity
financing will be available on commercially acceptable terms, if at all.
Despite a net income of $0.3 million in the first nine months of 2009, during that period we
saw an increase in our cash balance of $19.9 million versus an increase in our cash balance of $4.0
million in the same period in 2008. Our continued focus on managing working capital allowed us to
continue to generate cash flows from operations. We expect to continue to be able to generate cash
flows from operations for the remainder of 2009 primarily from working capital management.
Net Cash
September 26, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 71,939 | $ | 52,073 |
Cash and cash equivalents increased $19.9 million in the year to date period ended September
26, 2009.
Net cash provided by operating activities for the year to date period ended September 26, 2009
was $52.1 million. This resulted primarily from cash provided from net income, the add-back of
non-cash depreciation, amortization, stock based compensation, accretion of net debt discount,
deferred financing costs, non-cash loss on foreign currency and a fixed asset impairment charge all
totaling $25.1 million. In addition, there was a net decrease in working capital of $28.4 million.
The decrease in working capital was mainly due to a decrease in inventory of $27.6 million, due to
a focus on reducing our inventory levels throughout the organization. This was offset by a
non-cash other post employment benefit plan settlement gain of $1.5 million.
Net cash used in investing activities was $5.1 million for the year to date period ended
September 26, 2009. This resulted from the purchase of manufacturing equipment.
Net cash used by financing activities was $30.1 million for the year to date period ended
September 26, 2009. This resulted primarily from repurchases of our Senior Notes of $5.0 million
and our Senior Secured Notes of $22.2 million, payment on our Senior Revolving Credit Agreement of
$3.0 million, payments of capital lease obligations of $0.6 million,$0.5 million of payments on
mortgages and $0.3 million of net payments to our Parent. This was offset by the proceeds from
additional borrowings under an existing mortgage of $1.5 million.
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Liquidity
Amounts in millions | ||||||||||||||||
September 26, | December 31, | |||||||||||||||
2009 | 2008 | |||||||||||||||
Debt: |
||||||||||||||||
Senior Revolving Credit Agreement |
$ | | $ | | ||||||||||||
TB Woods Credit Agreement |
3.0 | 6.0 | ||||||||||||||
Overdraft agreements |
| | ||||||||||||||
9% Senior Secured Notes |
220.3 | 242.5 | ||||||||||||||
11.25% Senior Notes |
| 4.7 | ||||||||||||||
Variable Rate Demand Revenue Bonds |
5.3 | 5.3 | ||||||||||||||
Mortgages |
3.3 | 2.3 | ||||||||||||||
Capital leases |
2.0 | 2.6 | ||||||||||||||
Total Debt |
$ | 233.9 | $ | 263.4 | ||||||||||||
Cash |
$ | 71.9 | $ | 52.1 | ||||||||||||
Net Debt |
$ | 162.0 | 53.6 | % | $ | 211.3 | 62.1 | % | ||||||||
Shareholders Equity |
$ | 140.3 | 46.4 | % | $ | 128.9 | 37.9 | % | ||||||||
Total Capitalization |
$ | 302.3 | 100 | % | $ | 340.2 | 100 | % |
As of September 26, 2009, we had approximately $233.9 million of total indebtedness
outstanding including capital leases and mortgages. Approximately 98% of our borrowings are fixed
rate loans and therefore we do not believe that our vulnerability to interest rate changes is
significant.
Our Senior Revolving Credit Agreement provides for senior secured financing of up to $30.0
million, including $10.0 million available for letters of credit through November 30, 2010. The
Senior Revolving Credit Agreement requires us to comply with a minimum fixed charge coverage ratio
of 1.20 for all four quarter periods when availability falls below $12.5 million. Our availability
under the Senior Revolving Credit Agreement has never dropped below $12.5 million and we do not
believe that it will in the foreseeable future. Our 9% Senior Secured Notes do not contain any
financial covenants. As of September 26, 2009, there were no outstanding borrowings, but there
were $3.2 million of outstanding letters of credit issued under our Senior Revolving Credit
Agreement.
We were in compliance with all financial and non-financial covenants under the Senior
Revolving Credit Agreement and Senior Secured Notes as of September 26, 2009.
We had $3.0 million of principal borrowings outstanding and $6.1 million of outstanding
letters of credit as of September 26, 2009 under the TB Woods Revolving Credit Agreement, which is
due in 2010.
We made capital expenditures of approximately $5.1 million and $12.2 million in the year to
date periods ended September 26, 2009 and September 27, 2008, respectively. These capital
expenditures were used to support on-going manufacturing requirements. We expect to have
additional capital expenditures of between $3.0 million and $4.0 million for the remainder of 2009.
We have cash funding requirements associated with our pension plan which are estimated to be
zero for the remainder of 2009, $0.5 million for 2010, $1.5 million for 2011, $1.5 million for 2012
and $1.5 million for 2013.
Our ability to make scheduled payments of principal and interest, to fund planned capital
expenditures and to meet our pension plan funding obligations will depend on our ability to
generate cash in the future. Based on our current level of operations, we believe that cash flow
from operations and available cash, together with available borrowings under our Senior Revolving
Credit Agreement will be adequate to meet our future liquidity requirements for at least the next
two years. However, our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control.
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There can be no assurance that our business will generate sufficient cash flow from
operations, that any revenue growth or operating improvements will be realized or that future
borrowings will be available under our senior secured credit facility in an amount sufficient to
enable us to service our indebtedness, including the notes, or to fund our other liquidity needs.
In addition, there can be no assurance that we will be able to refinance any of our indebtedness,
including our Senior Revolving Credit Agreement and the Senior Secured Notes as they become due.
Our ability to access capital in the long term will depend, among other things, on the condition of
capital markets and on the availability of capital to us on commercially reasonable terms, if at
all, at the time we are seeking funds. See the Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2008 for further discussion of certain factors that may affect our
liquidity. In addition, our ability to borrow funds under our Senior Revolving Credit Agreement
will depend on our ability to satisfy the financial and non-financial covenants contained in that
agreement.
Contractual Obligations
From time to time, we may repurchase our Senior Secured Notes in open market transactions or
privately negotiated transactions, subject to certain restrictions in our Senior Revolving Credit
Agreement. As of September 26, 2009, the remaining principal balance on our Senior Secured Notes
was $220.3 million. The balance is due December 1, 2011.
Other than repayments of debt, there were no significant changes in our contractual
obligations subsequent to December 31, 2008.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We have exposure to changes in commodity prices principally related to metals including steel,
copper and aluminum. We primarily manage the risk associated with such increases through the use
of surcharges or general pricing increases for the related products. We do not engage in the use
of financial instruments to hedge our commodities price exposure.
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, 2008.
Item 4. | Controls and Procedures |
The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, as amended or the Exchange Act. These rules refer to the
controls and other procedures of a company that are designed to
ensure 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 SECs 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. As of September 26, 2009 or the Evaluation Date, 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.
Based upon that evaluation, our chief executive officer and chief financial officer have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are effective at the
reasonable assurance level.
There has been no change in our internal control over financial reporting (as defined in Rule
13(a)-15(f) under the Exchange Act) that occurred during our fiscal quarter ended September 26,
2009, that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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PART IIOTHER 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, 2008.
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, 2008 filed with the Securities and Exchange Commission. Those
risk factors described elsewhere in this report on Form 10-Q and in our Annual Report on Form 10-K
for the year ended December 31, 2008 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, 2008 are incorporated
herein by reference.
During the reporting period, 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, 2008.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
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) | Certificate of Incorporation of the Registrant. |
||
3.2 | (1) | 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. |
* | Filed herewith. | |
** | Furnished herewith. | |
(1) | Incorporated by reference to Altra Industrial Motion, Inc.s Registration Statement on Form S-4, as amended, filed with the Securities and Exchange Commission on May 16, 2005. |
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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 INDUSTRIAL MOTION, INC. |
||||
November 10, 2009 | By: | /s/ Carl R. Christenson | ||
Name: | Carl R. Christenson | |||
Title: | President and Chief Executive Officer | |||
November 10, 2009 | By: | /s/ Christian Storch | ||
Name: | Christian Storch | |||
Title: | Vice President and Chief Financial Officer | |||
November 10, 2009 | By: | /s/ Todd B. Patriacca | ||
Name: | Todd B. Patriacca | |||
Title: | Vice President of Finance, Corporate Controller and Assistant 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. |
* | Filed herewith. | |
** | Furnished herewith. |
40