10-K 1 d408016d10k.htm 10-K 10-K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

  OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

  OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to                 

Commission file number: 001-33209

 

 

ALTRA HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   61-1478870

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Granite Street, Suite 201 Braintree, MA   02184
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(781) 917-0600

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value   NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ

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  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨

          Accelerated filer    þ                    Non-accelerated filer    ¨   Smaller reporting company    ¨
                                                   (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  ¨         No  þ

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based on the closing price (as reported by the NASDAQ Global Market) of such common stock on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2012) was approximately $406.3 million.

As of February 19, 2013, there were 26,903,056 shares of Common Stock, $0.001 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the following document are incorporated herein by reference into the Part of the Form 10-K indicated.

 

Document

 

Part of Form 10-K into

which Incorporated

Altra Holdings, Inc. Proxy Statement

for the 2013 Annual Meeting of Stockholders

  Part III

 

 

 


TABLE OF CONTENTS

 

         Page  

PART I

    

Item 1.

 

Business

     3   

Item 1A.

 

Risk Factors

     14   

Item 1B.

 

Unresolved Staff Comments

     25   

Item 2.

 

Properties

     26   

Item 3.

 

Legal Proceedings

     27   

Item 4.

 

Mine Safety Disclosures

     27   

PART II

    

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27   

Item 6.

 

Selected Financial Data

     30   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 8.

 

Financial Statements and Supplementary Data

     47   

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     78   

Item 9A.

 

Controls and Procedures

     78   

Item 9B.

 

Other Information

     81   

PART III

    

Item 10.

 

Directors, Executive Officers and Corporate Governance

     81   

Item 11.

 

Executive Compensation

     81   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      81   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     81   

Item 14.

 

Principal Accounting Fees and Services

     81   

PART IV

    

Item 15.

 

Exhibits, Financial Statement Schedules

     81   

 

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Item 1. Business

Our Company

Altra Holdings, Inc. is the parent company of Altra Industrial Motion, Inc., or Altra Industrial, and owns 100% of Altra Industrial’s outstanding capital stock. Altra Industrial, directly or indirectly, owns 100% of the capital stock of 55 of its subsidiaries and 85% of the capital stock of one of its subsidiaries located in Brazil. The following chart illustrates a summary of our corporate structure:

 

LOGO

We are a leading global designer, producer and marketer of a wide range of mechanical power transmission, or MPT, and motion control products serving customers in a diverse group of industries, including energy, general industrial, material handling, mining, transportation, and turf and garden. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, belted drives, couplings, engineered bearing assemblies, linear components, gear motors, electronic drives and other related products. Our products are used in a wide variety of high-volume manufacturing processes, where the reliability and accuracy of our products are critical in both avoiding costly down time and enhancing the overall efficiency of manufacturing operations. Our products are also used in non-manufacturing applications where product quality and reliability are especially critical, such as clutches and brakes for elevators and residential and commercial lawnmowers. For the year ended December 31, 2012, we had net sales of $732.0 million and net income attributable to Altra Holdings, Inc. of $24.3 million.

We market our products under well recognized and established brands, many of which have been in existence for over 50 years. We believe many of our brands, when taken together with our brands in the same product category have achieved the number one or number two position in terms of consolidated market share and brand awareness in their respective product categories. Our products are either incorporated into products sold by original equipment manufacturers, or OEMs, sold to end users directly or sold through industrial distributors.

We are led by a highly experienced management team that has established a proven track record of execution, successfully completing and integrating major strategic acquisitions and delivering significant growth in both revenue and profits. We employ a comprehensive business process called the Altra Business System, or ABS, which focuses on eliminating inefficiencies from business processes to improve quality, delivery and cost.

In this Annual Report on Form 10-K, the terms “Altra Holdings,” “the Company,” “we,” “us” and “our” refer to Altra Holdings, Inc. and its subsidiaries, except where the context otherwise requires or indicates.

We file reports and other documents with the Securities and Exchange Commission. You may read and copy documents we file at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC Filings are also available to you on the SEC’s internet site at http://www.sec.gov.

 

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

History and Acquisitions

Although we were incorporated in Delaware in 2004, much of our current business has its roots with the prior acquisition by Colfax Corporation, or Colfax, of the MPT (mechanical power transmission) group of Zurn Technologies, Inc. in December 1996. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax’s acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber and Wichita Clutch brands. Colfax formed Power Transmission Holding, LLC or “PTH” in June 2004 to serve as a holding company for all of these power transmission businesses. Boston Gear was established in 1877, Warner Electric, Inc. in 1927, and Wichita Clutch in 1949.

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

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

On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings Limited, or Hay Hall. Hay Hall was a UK-based holding company established in 1996 that was focused primarily on the manufacture of couplings and clutch brakes. Hay Hall consisted of five main businesses that were niche focused and had strong brand names and established reputations within their primary markets. Through Hay Hall, we acquired 15 strong brands in complementary product lines, improved customer leverage and expanded geographic presence in over 11 countries.

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

On April 5, 2007, the Company acquired all of the outstanding shares of TB Wood’s Corporation, or TB Wood’s. TB Wood’s is an established designer, manufacturer and marketer of mechanical industrial power transmission products. In December 2007, the Company divested the TB Wood’s electronics division.

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

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

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

 

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Our Industry

Based on industry data supplied by Penton Information Services, we estimate that industrial power transmission products generated sales in the United States of approximately $36.3 billion in 2012. These products are used to generate, transmit, control and transform mechanical energy. The industrial power transmission industry can be divided into three areas: MPT products; motors and generators; and adjustable speed drives. We compete primarily in the MPT area which, based on industry data, we estimate was a $19.0 billion market in the United States in 2012.

The global MPT market is highly fragmented, with over 1,000 small manufacturers. While smaller companies tend to focus on regional niche markets with narrow product lines, larger companies that generate annual sales of over $100 million generally offer a much broader range of products and have global capabilities. Buyers of MPT products are broadly diversified across many sectors of the economy and typically place a premium on factors such as quality, reliability, availability, and design and application engineering support. We believe the most successful industry participants are those that leverage their distribution network, their products’ reputations for quality and reliability and their service and technical support capabilities to maintain attractive margins on products and gain market share.

Our Strengths

Leading Market Shares and Brand Names.    We believe we hold the number one or number two market position in key products across many of our core platforms. We believe that almost 50% of our sales are derived from products where we hold the number one or number two share and brand recognition, assuming our brands in the same product category are taken together, in the markets we serve. In addition, we believe we have recently captured additional market share in several product lines due to our innovative product development efforts and exceptional customer service.

Customized, Engineered Products Serving Niche Markets.    We employ approximately 208 non-manufacturing engineers involved with product design, research and development, testing and technical customer support, and we often participate in lengthy design and qualification processes with our customers. Many of our product lines involve a large number of unique parts, are delivered in small order quantities with short lead times, and require varying levels of technical support and responsive customer service. As a result of these characteristics, as well as the essential nature of our products to the efficient operations of our customers, we generate a significant amount of recurring sales with repeat customers.

Aftermarket Sales Supported by Large Installed Base.    With a history dating back to 1857 with the formation of TB Wood’s, we believe we benefit from one of the largest installed customer bases in the industry. The moving, wearing nature of our products necessitates regular replacement and our large installed base of products generates significant aftermarket replacement demand. This has created a recurring revenue stream from a diversified group of end-user customers. For 2012, we estimate that approximately 40% of our revenues were derived from aftermarket sales.

Diversified End Markets.    Our revenue base has a balanced exposure across a diverse mix of end-user industries, including energy, food processing, general industrial, material handling, mining, transportation, and turf and garden. We believe our diversified end markets insulate us from volatility in any single industry or type of end-user. In 2012, no single industry represented more than 11% of our total sales. In addition, we are geographically diversified with approximately 42% of our sales coming from outside North America during 2012.

Strong Relationships with Distributors and OEMs.    We have over 1,000 direct OEM customers and enjoy established, long-term relationships with the leading industrial MPT distributors, critical factors that contribute to our high base of recurring aftermarket revenues. We sell our products through more than 3,000 distributor outlets worldwide. We believe our scale, expansive product lines and end-user preference for our products make our product portfolio attractive to both large and multi-branch distributors, as well as regional and independent distributors in our industry.

Experienced, High-Caliber Management Team.    We are led by a highly experienced management team with over 250 years of cumulative industrial business experience and an average of 15 years with our companies. Our CEO, Carl Christenson, has over 30 years of experience in the MPT industry, while our CFO, Christian

 

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Storch, has approximately 25 years of experience. Our management team has established a proven track record of execution, successfully completing and integrating major strategic acquisitions and delivering significant growth and profitability.

The Altra Business System.    We benefit from an established culture of lean management emphasizing quality, delivery and cost through the Altra Business System, or ABS. ABS is at the core of our performance-driven culture and drives both our strategic development and operational improvements. We continually evaluate every aspect of our business to identify productivity improvements and cost savings.

Our Business Strategy

Our long-term strategy is to increase our sales through organic growth, expand our geographic reach and product offerings through strategic acquisitions and improve our profitability through cost reduction initiatives. We seek to achieve these objectives through the following strategies:

Leverage Our Sales and Distribution Network.    We intend to continue to leverage our established, long-term relationships with the industry’s leading national and regional distributors to help maintain and grow our revenues. We seek to capitalize on customer brand preferences for our products to generate pull-through aftermarket demand from our distribution channel. We believe this strategy also allows our distributors to achieve higher profit margins, further enhancing our preferred position with them.

Focus Our Strategic Marketing on New Growth Opportunities.    We intend to expand our emphasis on strategic marketing to focus on new growth opportunities in key end-user and OEM markets. Through a systematic process that leverages our core brands and products, we seek to identify attractive markets and product niches, collect customer and market data, identify market drivers, tailor product and service solutions to specific market and customer requirements, and deploy resources to gain market share and drive future sales growth.

Accelerate New Product and Technology Development.    We focus on aggressively developing new products across our business in response to customer needs in various markets. Our extensive application-engineering know-how drives both new and repeat sales and we have an established history of innovation with over 200 granted patents and pending patent applications worldwide. In total, new products developed by us during the past three years generated approximately $63.2 million in revenues during 2012.

Capitalize on Growth and Sourcing Opportunities in the Asia-Pacific Market.    We intend to leverage our established sales offices in the Asia Pacific region and expand into regions where we currently do not have sales representation. We are expanding our manufacturing presence in Asia beyond our current plant in Shenzhen, China, with the construction of our new manufacturing facility in Changzhou, China, which was completed during the fourth quarter of 2012. During 2012, we sourced approximately 26% of our purchases from low-cost countries, resulting in average cost reductions of approximately 41% for these products. Within the next five years, we intend to utilize our sourcing resources in China to increase our current level of low-cost country sourced purchases. We may also consider additional opportunities to outsource some of our production from North American and Western European locations to Asia or lower cost regions.

Continue to Improve Operational and Manufacturing Efficiencies through ABS.    We believe we can continue to improve profitability through cost control, overhead rationalization, global process optimization, continued implementation of lean manufacturing techniques and strategic pricing initiatives. Our operating plan, based on manufacturing centers of excellence, provides additional opportunities to consolidate purchasing processes and reduce costs by sharing best practices across geographies and business lines.

Selectively Pursue Strategic Acquisitions that Complement Our Strong Platform.    We have a successful track record of identifying, acquiring and integrating acquisitions. We believe that in the future there may be a number of attractive potential acquisition candidates, in part due to the fragmented nature of the industry. We plan to continue our disciplined pursuit of strategic acquisitions to strengthen our product portfolio, enhance our industry leadership, leverage fixed costs, expand our global footprint, and create value in products and markets that we know and understand.

 

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Products

We produce and market a wide variety of MPT products. Our product portfolio includes industrial clutches and brakes, open and enclosed gearing, couplings, engineered belted drives, engineered bearing assemblies and other related power transmission components which are sold across a wide variety of industries. Our products benefit from our industry leading brand names including Warner Electric, Boston Gear, TB Wood’s, Kilian, Nuttall Gear, Ameridrives, Wichita Clutch, Formsprag Clutch, Bibby Transmissions, Stieber, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Huco Dynatork, Marland Clutch, Delroyd, Warner Linear, Bauer Gear Motor, and PowerFlex. Our products serve a wide variety of end markets including aerospace, energy, food processing, general industrial, material handling, mining, petrochemical, transportation and turf and garden. We primarily sell our products to OEMs and through long-standing relationships with the industry’s leading industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger. The following discussion of our products does not include detailed product category revenue because such information is not individually tracked by our financial reporting system and is not separately reported by our general purpose financial statements. Conducting a detailed product revenue internal assessment and audit would involve unreasonable effort and expense as revenue information by product line is not available. We maintain sales information by operating facility, but do not maintain any accounting sales data by product line.

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

 

Products

  

Principal Brands

   Principal Markets    Sample Applications

Clutches and Brakes

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

Gearing

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

Engineered Couplings

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

Engineered Bearing Assemblies

  

Kilian

 

  

 

Aerospace, material
handling,
transportation

   Cargo rollers, seat
storage systems,
conveyors

Power Transmission Components

  

 

Warner Electric, Boston Gear, Huco Dynatork, Warner Linear, Matrix, TB Wood’s

  

 

Material handling,
metals, turf and garden

  

 

Conveyors, lawn
mowers, machine tools

Engineered Belted Drives

  

TB Wood’s

 

  

 

Aggregate, HVAC,
material handling

   Pumps, sand and gravel
conveyors, industrial fans

Our products are used in a wide variety of high-volume manufacturing processes, where the reliability and accuracy of our products are critical in both avoiding costly down time and enhancing the overall efficiency of manufacturing operations. Our products are also used in non-manufacturing applications where product quality and reliability are especially critical, such as clutches and brakes for elevators and residential and commercial lawnmowers.

 

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Clutches and Brakes.    Clutches are devices which use mechanical, magnetic, hydraulic, pneumatic, or friction type connections to facilitate engaging or disengaging two rotating members. Brakes are combinations of interacting parts that work to slow or stop machinery. We manufacture a variety of clutches and brakes in three main product categories: electromagnetic, overrunning and heavy duty. Our core clutch and brake manufacturing facilities are located in Connecticut, Indiana, Illinois, Michigan, Texas, the United Kingdom, Germany, France and China.

 

   

Electromagnetic Clutches and Brakes.    Our industrial products include clutches and brakes with specially designed controls for material handling, forklift, elevator, medical mobility, mobile off-highway, baggage handling and plant productivity applications. We also offer a line of clutch and brake products for walk-behind mowers, residential lawn tractors and commercial mowers. While industrial applications are predominant, we also manufacture several vehicular niche applications including on-road refrigeration compressor clutches and agricultural equipment clutches. We market our electromagnetic products under the Warner Electric, Inertia Dynamics and Matrix brand names.

 

   

Overrunning Clutches.    Specific product lines include indexing and backstopping clutches. Primary industrial applications include conveyors, gear reducers, hoists and cranes, mining machinery, machine tools, paper machinery, packaging machinery, pumping equipment and other specialty machinery. We market and sell these products under the Formsprag, Marland and Stieber brand names.

 

   

Heavy Duty Clutches and Brakes.    Our heavy duty clutch and brake product lines serve various markets including metal forming, off-shore and land-based oil and gas drilling platforms, mining, material handling, marine applications and various off-highway and construction equipment segments. Our line of heavy duty pneumatic, hydraulic and caliper clutches and brakes are marketed under the Wichita Clutch and Twiflex brand names.

Gearing.    Gears reduce the output speed and increase the torque of an electric motor or engine to the level required to drive a particular piece of equipment. These products are used in various industrial, material handling, mixing, transportation and food processing applications. Specific product lines include vertical and horizontal gear drives, speed reducers and increasers, high-speed compressor drives, enclosed custom gear drives, various enclosed gear drive and gear motor configurations and open gearing products such as spur, helical, worm and miter/bevel gears. We design and manufacture a broad range of gearing products under the Boston Gear, Nuttall Gear, Delroyd, and Bauer Gear Motor brand names. We manufacture our gearing products at our facilities in New York, North Carolina, Germany, Slovakia, and China, and sell to a variety of end markets.

Engineered Couplings.    Couplings are the interface between two shafts, which enable power to be transmitted from one shaft to the other. Because shafts are often misaligned, we design our couplings with a measure of flexibility that accommodates various degrees of misalignment. Our coupling product line includes gear couplings, high-speed disc and diaphragm couplings, elastomeric couplings, grid couplings, universal joints, jaw couplings and spindles. Our coupling products are used in a wide range of markets including power generation, steel and custom machinery industries. We manufacture a broad range of coupling products under the Ameridrives, Bibby, Lamiflex and TB Wood’s brand names. Our engineered couplings are manufactured in our facilities in China, Brazil, Mexico, Pennsylvania, Texas, the United Kingdom and Wisconsin.

Engineered Bearing Assemblies.    Bearings are components that support, guide and reduce friction of motion between fixed and moving machine parts. Our engineered bearing assembly product line includes ball bearings, roller bearings, thrust bearings, track rollers, stainless steel bearings, polymer assemblies, housed units and custom assemblies. We manufacture a broad range of engineered bearing products under the Kilian brand name. We sell bearing products to a wide range of end markets, including the general industrial and automotive markets, with a particularly strong OEM customer focus. We manufacture our bearing products at our facilities in New York, Canada and China.

Power Transmission Components.    Power transmission components are used in a number of industries to generate, transfer or control motion from a power source to an application requiring rotary or linear motion. Power transmission products are applicable in most industrial markets, including, but not limited to metals

 

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processing, turf and garden and material handling applications. Specific product lines include linear actuators, miniature and small precision couplings, air motors, friction materials, hydrostatic drives and other various items. We manufacture or market a broad array of power transmission components under several businesses including Warner Linear, Huco Dynatork, Boston Gear, Warner Electric, TB Wood’s and Matrix. Our core power transmission component manufacturing facilities are located in Illinois, Pennsylvania, North Carolina, the United Kingdom and China.

 

   

Warner Linear.    Warner Linear is a designer and manufacturer of rugged service electromechanical linear actuators for off-highway vehicles, agriculture, turf care, special vehicles, medical equipment, industrial and marine applications.

 

   

Huco Dynatork.    Huco Dynatork is a leading manufacturer and supplier of a complete range of precision couplings, universal joints, rod ends and linkages.

 

   

Other Accessories.    Our Boston Gear, Warner Electric, Matrix and TB Wood’s businesses make or market several other accessories such as sensors, sleeve bearings, AC/DC motors, shaft accessories, face tooth couplings, mechanical variable speed drives, and fluid power components that are used in numerous end markets.

Engineered Belted Drives.    Belted drives incorporate both a rubber-based belt and at least two sheaves or sprockets. Belted drives typically change the speed of an electric motor or engine to the level required for a particular piece of equipment. Our belted drive line includes three types of v-belts, three types of synchronous belts, standard and made-to-order sheaves and sprockets, and split taper bushings. We sell belted drives to a wide range of end markets, including aggregate, energy, chemical and material handling. Our engineered belted drives are primarily manufactured under the TB Wood’s brand in our facilities in Pennsylvania and Mexico.

Research and Development and Product Engineering

We closely integrate new product development with marketing, manufacturing and product engineering in meeting the needs of our customers. We have product engineering teams that work to enhance our existing products and develop new product applications for our growing base of customers that require custom solutions. We believe these capabilities provide a significant competitive advantage in the development of high quality industrial power transmission products. Our product engineering teams focus on:

 

   

lowering the cost of manufacturing our existing products;

 

   

redesigning existing product lines to increase their efficiency or enhance their performance; and

 

   

developing new product applications.

Our continued investment in new product development is intended to help drive customer growth as we address key customer needs.

Sales and Marketing

We sell our products in over 70 countries to over 1,000 direct OEM customers and over 3,000 distributor outlets. We offer our products through our direct sales force comprised of 139 company-employed sales associates as well as independent sales representatives. Our worldwide sales and distribution presence enables us to provide timely and responsive support and service to our customers, many of which operate globally, and to capitalize on growth opportunities in both developed and emerging markets around the world.

We employ an integrated sales and marketing strategy concentrated on both key industries and individual product lines. We believe this dual vertical market and horizontal product approach distinguishes us in the marketplace allowing us to quickly identify trends and customer growth opportunities and deploy resources accordingly. Within our key industries, we market to OEMs, encouraging them to incorporate our products into their equipment designs, to distributors and to end-users, helping to foster brand preference. With this strategy, we are able to leverage our industry experience and product breadth to sell MPT and motion control solutions for a host of industrial applications.

 

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Distribution

Our MPT components are either incorporated into end products sold by OEMs or sold through industrial distributors as aftermarket products to end users and smaller OEMs. We operate a geographically diversified business. For the year ended December 31, 2012, we derived approximately 58% of our net sales from customers in North America, 29% from customers in Europe and 13% from customers in Asia and the rest of the world. Our global customer base is served by an extensive global sales network comprised of our sales staff as well as our network of over 3,000 distributor outlets.

Rather than serving as passive conduits for delivery of product, our industrial distributors are active participants in influencing product purchasing decisions in the MPT industry. In addition, distributors play a critical role through stocking inventory of our products, which amplifies the accessibility of our products to aftermarket buyers. It is for this reason that distributor partner relationships are so critical to the success of the business. We enjoy strong established relationships with the leading distributors as well as a broad, diversified base of specialty and regional distributors.

Competition

We operate in highly fragmented and very competitive markets within the MPT market. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, such as helical gear drives, and some of our competitors are larger than us and have greater financial and other resources. In particular, we compete with Emerson Power Transmission Manufacturing LP, Rexnord Corporation., and Regal-Beloit Corporation. In addition, with respect to certain of our products, we compete with divisions of our OEM customers. Competition in our business lines is based on a number of considerations including quality, reliability, pricing, availability and design and application engineering support. Our customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, regular investment in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection is required. We may have to adjust the prices of some of our products to stay competitive. In addition, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. There is substantial and continuing pressure on major OEMs and larger distributors to reduce costs, including the cost of products purchased from outside suppliers such as us. As a result of cost pressures from our customers, our ability to compete depends in part on our ability to generate production cost savings and, in turn, find reliable, cost-effective outside component suppliers or manufacturers for our products. See “ Risk Factors — Risks Related to our Business — We operate in the highly competitive mechanical power transmission industry and if we are not able to compete successfully our business may be significantly harmed.”

Intellectual Property

We rely on a combination of patents, trademarks, copyright, and trade secret laws in the United States and other jurisdictions, as well as employee and third-party non-disclosure agreements, license arrangements, and domain name registrations to protect our intellectual property. We sell our products under a number of registered and unregistered trademarks, which we believe are widely recognized in the MPT industry. With the exception of Boston Gear, Warner Electric, TB Wood’s, and Bauer we do not believe any single patent, trademark or trade name is material to our business as a whole. Any issued patents that cover our proprietary technology and any of our other intellectual property rights may not provide us with adequate protection or be commercially beneficial to us and, patents applied for, may not be issued. The issuance of a patent is not conclusive as to its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our competitors could commercialize technologies or products which are substantially similar to ours.

With respect to proprietary know-how, we rely on trade secret laws in the United States and other jurisdictions and on confidentiality agreements. Monitoring the unauthorized use of our technology is difficult and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our intellectual property could harm our ability to protect our rights and our competitive position.

 

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Some of our registered and unregistered trademarks include: Warner Electric, Boston Gear, TB Wood’s, Kilian, Nuttall Gear, Ameridrives, Wichita Clutch, Formsprag, Bibby Transmissions, Stieber, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Huco Dynatork, Marland, Delroyd, Warner Linear, Bauer Gear Motor and PowerFlex.

Employees

As of December 31, 2012, we had 3,617 full-time employees, of whom approximately 55% were located in North America (primarily U.S.), 31% in Europe, and 14% in Asia and the rest of the world. Approximately 17% of our full-time factory U.S. employees are represented by labor unions. In addition, approximately 664 employees or 59% of our European employees are represented by labor unions or works councils. Approximately 70 employees in the Kilian production facilities in Toronto, Canada are unionized under a collective bargaining agreement. Approximately 30 employees in the Lamiflex production facilities in Brazil are represented by a works council. Additionally, approximately 58 employees in the TB Wood’s production facilities in Mexico are unionized under collective bargaining agreements that are subject to annual renewals.

We are a party to four U.S. collective bargaining agreements. The agreements will expire in July 2013, October 2013, June 2014, and, October 2014, respectively. With respect to the collective bargaining agreement scheduled to expire in July 2013, we have entered into a plant closing agreement with labor union employees at our South Beloit Manufacturing facility. The facility is substantially closed with the exception of one remaining product line.

We are also party to a collective bargaining agreement with union employees at our Toronto, Canada manufacturing facility. That agreement will expire in July 2015.

One of the four U.S. collective bargaining agreements contains provisions for additional, potentially significant, lump-sum severance payments to all employees covered by that agreement who are terminated as the result of a plant closing and one of our collective bargaining agreements contains provisions restricting our ability to terminate or relocate operations. See “Risk Factors — Risks Related to Our Business — We may be subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, which could seriously impact our operations and the profitability of our business.”

Our facilities in Europe and Brazil have employees who are generally represented by local or national social works councils. Social works councils meet with employer industry associations periodically to discuss employee wages and working conditions. Our facilities in France, Germany, Slovakia, and Brazil often participate in such discussions and adhere to any agreements reached.

Suppliers and Raw Materials

We obtain raw materials, component parts and supplies from a variety of sources, generally from more than one supplier. Our suppliers and sources of raw materials are based in both the United States and other countries and we believe that our sources of raw materials are adequate for our needs for the foreseeable future. We do not believe the loss of any one supplier would have a material adverse effect on our business or results of operations. Our principal raw materials are steel and copper. We generally purchase our materials on the open market, where certain commodities such as steel and copper have fluctuated in price significantly in recent years. We have not experienced any significant shortage of our key materials and have not historically engaged in hedging transactions for commodity suppliers.

Our ability, including manufacturing or distribution capabilities, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. Damage or disruption to our or their manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, excessive demand, raw material shortages, or other reasons, could impair our ability, and that of our suppliers, to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.

Seasonality

We experience seasonality in our turf and garden business, which in recent years has represented approximately 7% of our net sales. As our large OEM customers prepare for the spring season, our shipments

 

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generally start increasing in December, peak in February and March, and begin to decline in April and May. This allows our customers to have inventory in place for the peak consumer purchasing periods for turf and garden products. The June-through-November period is typically the low season for us and our customers in the turf and garden market. Seasonality can also be affected by weather and the level of housing starts.

Regulation

We are subject to a variety of government laws and regulations that apply to companies engaged in international operations. These include compliance with the Foreign Corrupt Practices Act, U.S. Department of Commerce export controls, local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings). We maintain controls and procedures to comply with laws and regulations associated with our international operations. In the event we are unable to remain compliant with such laws and regulations, our business may be adversely affected.

Environmental and Health and Safety Matters

We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those governing health and safety requirements, the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and cleanup contaminated sites that are or were owned, leased, operated or used by us or our predecessors. Some of these laws and regulations require us to obtain permits, which contain terms and conditions that impose limitations on our ability to emit and discharge hazardous materials into the environment and periodically may be subject to modification, renewal and revocation by issuing authorities. Fines and penalties may be imposed for non-compliance with applicable environmental laws and regulations and the failure to have or to comply with the terms and conditions of required permits. From time to time, our operations may not be in full compliance with the terms and conditions of our permits. We periodically review our procedures and policies for compliance with environmental laws and requirements. We believe that our operations generally are in material compliance with applicable environmental laws and requirements and that any non-compliance would not be expected to result in us incurring material liability or cost to achieve compliance. Historically, the costs of achieving and maintaining compliance with environmental laws and requirements have not been material.

Certain environmental laws in the United States, such as the federal Superfund law and similar state laws, impose liability for the cost of investigation or remediation of contaminated sites upon the current or, in some cases, the former site owners or operators and upon parties who arranged for the disposal of wastes or transported or sent those wastes to an off-site facility for treatment or disposal, regardless of when the release of hazardous substances occurred or the lawfulness of the activities giving rise to the release. Such liability can be imposed without regard to fault and, under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. As a practical matter, however, the costs of investigation and remediation generally are allocated among the viable responsible parties on some form of equitable basis. Liability also may include damages to natural resources. We have not been notified that we are a potentially responsible party in connection with any sites we currently or formerly owned or operated. From time to time, we are notified that we are a potentially responsible party and may have liability in connection with off-site disposal facilities. To date, we have generally resolved matters involving off-site disposal facilities for a nominal sum although there can be no assurance that we will be able to resolve pending and future matters in a similar fashion.

Executive Officers of Registrant

The following sets forth certain information with regard to our executive officers as of February 19, 2013 (ages are as of December 31, 2012):

Michael L. Hurt (age 67) , P.E. has been our Executive Chairman since January 2009, Prior to his current position, Mr. Hurt served as Chief Executive Officer and a director since our formation in 2004. In November 2006, Mr. Hurt was elected as chairman of our board. During 2004, prior to our formation, Mr. Hurt provided consulting services to Genstar Capital and was appointed Chairman and Chief Executive Officer of Kilian in October 2004. From January 1991 to November 2003, Mr. Hurt was the President and Chief Executive Officer of TB Wood’s Incorporated, a manufacturer of industrial

 

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power transmission products. Prior to TB Wood’s, Mr. Hurt spent 23 years in a variety of management positions at the Torrington Company, a major manufacturer of bearings and a subsidiary of Ingersoll Rand. Mr. Hurt holds a B.S. degree in Mechanical Engineering from Clemson University and an M.B.A. from Clemson-Furman University.

Carl R. Christenson (age 53) has been our Chief Executive Officer since January 2009 and a director since July 2007. Prior to his current position, Mr. Christenson served as our President and Chief Operating Officer from January 2005 to December 2008. From 2001 to 2005, Mr. Christenson was the President of Kaydon Bearings, a manufacturer of custom-engineered bearings and a division of Kaydon Corporation. Prior to joining Kaydon, Mr. Christenson held a number of management positions at TB Wood’s Incorporated and several positions at the Torrington Company. Mr. Christenson holds a M.S. and B.S. degree in Mechanical Engineering from the University of Massachusetts and an M.B.A. from Rensselaer Polytechnic.

Christian Storch (age 53) has been our Chief Financial Officer since December 2007. From 2001 to 2007, Mr. Storch was the Vice President and Chief Financial Officer at Standex International Corporation. Mr. Storch also served on the Board of Directors of Standex International from October 2004 to December 2007. Mr. Storch also served as Standex International’s Treasurer from 2003 to April 2006 and Manager of Corporate Audit and Assurance Services from July 1999 to 2001. Prior to Standex International, Mr. Storch was a Divisional Financial Director and Corporate Controller at Vossloh AG, a publicly held German transport technology company. Mr. Storch has also previously served as an Audit Manager with Deloitte & Touche, LLP. Mr. Storch holds a degree in business administration from the University of Passau, Germany.

Glenn Deegan (age 46) has been our Vice President, Legal and Human Resources, General Counsel and Secretary since June 2009. Prior to his current position, Mr. Deegan served as our General Counsel and Secretary since September 2008. From March 2007 to August 2008, Mr. Deegan served as Vice President, General Counsel and Secretary of Averion International Corp., a publicly held global provider of clinical research services. Prior to Averion, from June 2001 to March 2007, Mr. Deegan served as Director of Legal Affairs and then as Vice President, General Counsel and Secretary of MacroChem Corporation, a publicly held specialty pharmaceutical company. From 1999 to 2001, Mr. Deegan served as Assistant General Counsel of Summit Technology, Inc., a publicly held manufacturer of ophthalmic laser systems. Mr. Deegan previously spent over six years engaged in the private practice of law and also served as law clerk to the Honorable Francis J. Boyle in the United States District Court for the District of Rhode Island. Mr. Deegan holds a B.S. from Providence College and a J.D. from Boston College.

Gerald Ferris (age 63) has been our Vice President of Global Sales since May 2007 and held the same position with Power Transmission Holdings, LLC, our Predecessor, since March 2002. He is responsible for the worldwide sales of our broad product platform. Mr. Ferris joined our Predecessor in 1978 and since joining has held various positions. He became the Vice President of Sales for Boston Gear in 1991. Mr. Ferris holds a B.A. degree in Political Science from Stonehill College.

Todd B. Patriacca (age 43) has been our Vice President of Finance, Corporate Controller and Treasurer since February 2010. Prior to his current position, Mr. Patriacca served as our Vice President of Finance, Corporate Controller and Assistant Treasurer since October 2008 and previous to that, as Vice President of Finance and Corporate Controller since May 2007 and as Corporate Controller since May 2005. Prior to joining us, Mr. Patriacca was Corporate Finance Manager at MKS Instrument Inc., a semi-conductor equipment manufacturer since March 2002. Prior to MKS, Mr. Patriacca spent over ten years at Arthur Andersen LLP in the Assurance Advisory practice. Mr. Patriacca is a Certified Public Accountant and holds a B.A. in History from Colby College and an M.B.A. and an M.S. in Accounting from Northeastern University.

Craig Schuele (age 49) has been our Vice President of Marketing and Business Development since May 2007 and held the same position with our Predecessor since July 2004. Prior to his current position, Mr. Schuele has been Vice President of Marketing since March 2002, and previous to that he was a Director of Marketing. Mr. Schuele joined our Predecessor in 1986 and holds a B.S. degree in Management from Rhode Island College.

 

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Item 1A. Risk Factors

Risks Related to Our Business

We operate in the highly competitive mechanical power transmission industry and if we are not able to compete successfully our business may be significantly harmed.

We operate in highly fragmented and very competitive markets in the MPT industry. Some of our competitors have achieved substantially more market penetration in certain of the markets in which we operate, such as helical gear drives, and some of our competitors are larger than us and have greater financial and other resources. With respect to certain of our products, we compete with divisions of our OEM customers. Competition in our business lines is based on a number of considerations, including quality, reliability, pricing, availability, and design and application engineering support. Our customers increasingly demand a broad product range and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, regular investment in manufacturing, customer service and support, marketing, sales, research and development and intellectual property protection is required. In the future we may not have sufficient resources to continue to make such investments and may not be able to maintain our competitive position within each of the markets we serve. We may have to adjust the prices of some of our products to stay competitive.

Additionally, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase in order to increase their efficiency. If we are not selected to become one of these preferred providers, we may lose market share in some of the markets in which we compete.

There is substantial and continuing pressure on major OEMs and larger distributors to reduce costs, including the cost of products purchased from outside suppliers. As a result of cost pressures from our customers, our ability to compete depends in part on our ability to generate production cost savings and, in turn, to find reliable, cost effective outside suppliers to source components or manufacture our products. If we are unable to generate sufficient cost savings in the future to offset price reductions, then our gross margin could be materially adversely affected.

Changes in or the cyclical nature of our markets could harm our operations and financial performance.

Our financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. Some of the markets we serve are highly cyclical, such as the metals, mining, industrial equipment and energy markets. In such an environment, expected cyclical activity or sales may not occur or may be delayed and may result in significant quarter-to-quarter variability in our performance. Any sustained weakness in demand, downturn or uncertainty in cyclical markets may reduce our sales and profitability.

We rely on independent distributors and the loss of these distributors could adversely affect our business.

In addition to our direct sales force and manufacturer sales representatives, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to our customers. We support an extensive distribution network, with over 3,000 distributor locations worldwide. Rather than serving as passive conduits for delivery of product, our independent distributors are active participants in the overall competitive dynamics in the MPT industry. During the year ended December 31, 2012, approximately 33% of our net sales from continuing operations were generated through independent distributors. In particular, sales through our largest distributor accounted for approximately 8% of our net sales for the year ended December 31, 2012. Almost all of the distributors with whom we transact business offer competitive products and services to our customers. In addition, the distribution agreements we have are typically non-exclusive and cancelable by the distributor after a short notice period. The loss of any major distributor or a substantial number of smaller distributors or an increase in the distributors’ sales of our competitors’ products to our customers could materially reduce our sales and profits.

 

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We must continue to invest in new technologies and manufacturing techniques; however, our ability to develop or adapt to changing technology and manufacturing techniques is uncertain and our failure to do so could place us at a competitive disadvantage.

The successful implementation of our business strategy requires us to continuously invest in new technologies and manufacturing techniques to evolve our existing products and introduce new products to meet our customers’ needs in the industries we serve and want to serve. For example, motion control products offer more precise positioning and control compared to industrial clutches and brakes. If manufacturing processes are developed to make motion control products more price competitive and less complicated to operate, our customers may decrease their purchases of MPT products.

Our products are characterized by performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including:

 

   

product quality and availability;

 

   

price competitiveness;

 

   

technical expertise and development capability;

 

   

reliability and timeliness of delivery;

 

   

product design capability;

 

   

manufacturing expertise; and

 

   

sales support and customer service.

Our success depends on our ability to invest in new technologies and manufacturing techniques to continue to meet our customers’ changing demands with respect to the above factors. We may not be able to make required capital expenditures and, even if we do so, we may be unsuccessful in addressing technological advances or introducing new products necessary to remain competitive within our markets. Furthermore, our own technological developments may not be able to produce a sustainable competitive advantage. If we fail to invest successfully in improvements to our technology and manufacturing techniques, our business may be materially adversely affected.

Our operations are subject to international risks that could affect our operating results.

Our net sales outside North America represented approximately 42% of our total net sales for the year ended December 31, 2012. In addition, we sell products to domestic customers for use in their products sold overseas. We also source a significant portion of our products and materials from overseas, a practice which is increasing. Our business is subject to risks associated with doing business internationally, and our future results could be materially adversely affected by a variety of factors, including:

 

   

fluctuations in currency exchange rates;

 

   

exchange rate controls;

 

   

tariffs or other trade protection measures and import or export licensing requirements;

 

   

potentially negative consequences from changes in tax laws;

 

   

interest rates;

 

   

unexpected changes in regulatory requirements;

 

   

changes in foreign intellectual property law;

 

   

differing labor regulations;

 

   

requirements relating to withholding taxes on remittances and other payments by subsidiaries;

 

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restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions;

 

   

potential political instability and the actions of foreign governments; and

 

   

restrictions on our ability to repatriate dividends from our subsidiaries.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could materially adversely affect our international operations and, consequently, our operating results.

Our operations depend on production facilities throughout the world, many of which are located outside the United States and are subject to increased risks of disrupted production causing delays in shipments and loss of customers and revenue.

We operate businesses with manufacturing facilities worldwide, many of which are located outside the United States including in Brazil, Canada, China, France, Germany, Mexico, Russia, Slovakia, and the United Kingdom. Serving a global customer base requires that we place more production in emerging markets to capitalize on market opportunities and cost efficiencies. Our international production facilities and operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity or public health concerns, particularly in emerging countries that are not well-equipped to handle such occurrences. Any production disruptions could materially adversely affect our business.

We rely on estimated forecasts of our OEM customers’ needs, and inaccuracies in such forecasts could materially adversely affect our business.

We generally sell our products pursuant to individual purchase orders instead of under long-term purchase commitments. Therefore, we rely on estimated demand forecasts, based upon input from our customers, to determine how much material to purchase and product to manufacture. Because our sales are based on purchase orders, our customers may cancel, delay or otherwise modify their purchase commitments with little or no consequence to them and with little or no notice to us. For these reasons, we generally have limited visibility regarding our customers’ actual product needs. The quantities or timing required by our customers for our products could vary significantly. Whether in response to changes affecting the industry or a customer’s specific business pressures, any cancellation, delay or other modification in our customers’ orders could significantly reduce our revenue, impact our working capital, cause our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business and we may purchase too much inventory and spend more capital than expected, which may materially adversely affect our business.

From time to time, our customers may experience deterioration of their businesses. In addition, during periods of economic difficulty, our customers may not be able to accurately estimate demand forecasts and may scale back orders in an abundance of caution. As a result, existing or potential customers may delay or cancel plans to purchase our products and may not be able to fulfill their obligations to us in a timely fashion. Such cancellations, reductions or inability to fulfill obligations could significantly reduce our revenue, impact our working capital, cause our operating results to fluctuate adversely from period to period and make it more difficult for us to predict our revenue.

Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.

Our ability, including manufacturing or distribution capabilities, and that of our suppliers, business partners and contract manufacturers, to make, move and sell products is critical to our success. Damage or disruption to our or their manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, excessive demand, raw

 

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material shortages, or other reasons, could impair our ability, and that of our suppliers, to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, as well as require additional resources to restore our supply chain.

The materials used to produce our products are subject to price fluctuations that could increase costs of production and adversely affect our profitability.

The materials used to produce our products, especially copper and steel, are sourced on a global or regional basis and the prices of those materials are susceptible to price fluctuations due to supply and demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate and other unforeseen circumstances. From the first quarter of 2004 to the fourth quarter of 2012, the average price of copper and steel has increased approximately 168% and 78%, respectively. If we are unable to continue to pass a substantial portion of such price increases on to our customers on a timely basis, our future profitability may be materially adversely affected. In addition, passing through these costs to our customers may also limit our ability to increase our prices in the future.

We face potential product liability claims relating to products we manufacture or distribute, which could result in our having to expend significant time and expense to defend these claims and to pay material damages or settlement amounts.

We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently have several product liability claims against us with respect to our products. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could exceed any insurance that we maintain and could have a material adverse effect on our business, financial condition, results of operations or our ability to make payments under our debt obligations when due. In addition, we believe our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products, which would reduce our sales and profitability.

We also risk exposure to product liability claims in connection with products sold by businesses that we acquire. Although in some cases third parties have retained responsibility for product liabilities relating to products manufactured or sold prior to our acquisition of the relevant business and in other cases the persons from whom we have acquired a business may be required to indemnify us for certain product liability claims subject to certain caps or limitations on indemnification, we cannot assure you that those third parties will in fact satisfy their obligations to us with respect to liabilities retained by them or their indemnification obligations. If those third parties become unable to or otherwise do not comply with their respective obligations including indemnity obligations, or if certain product liability claims for which we are obligated were not retained by third parties or are not subject to these indemnities, we could become subject to significant liabilities or other adverse consequences. Moreover, even in cases where third parties retain responsibility for product liabilities or are required to indemnify us, significant claims arising from products that we have acquired could have a material adverse effect on our ability to realize the benefits from an acquisition, could result in our reducing the value of goodwill that we have recorded in connection with an acquisition, or could otherwise have a material adverse effect on our business, financial condition, or operations.

We may be subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, which could seriously impact our operations and the profitability of our business.

As of December 31, 2012, we had 3,617 full-time employees, of whom approximately 55% were located in North America (primarily U.S.), 31% in Europe, and 14% in Asia and the rest of the world. Approximately 17% of our full-time factory U.S. employees are represented by labor unions. In addition, approximately 664 employees or 59% of our European employees are represented by labor unions or works

 

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councils. Approximately 70 employees in the Kilian production facilities in Toronto, Canada are unionized under a collective bargaining agreement. Approximately 30 employees in the Lamiflex production facilities in Brazil are represented by a works council. Additionally, approximately 58 employees in the TB Wood’s production facilities in Mexico are unionized under collective bargaining agreements that are subject to annual renewals.

We are a party to four U.S. collective bargaining agreements. The agreements will expire in July 2013, October 2013, June 2014, and, October 2014, respectively. With respect to the collective bargaining agreement scheduled to expire in July 2013, we have entered into a plant closing agreement with labor union employees at our South Beloit Manufacturing facility. The facility is substantially closed with the exception of one remaining product line.

We are also party to a collective bargaining agreement with union employees at our Toronto, Canada manufacturing facility. That agreement will expire in July 2015.

One of the four U.S. collective bargaining agreements contains provisions for additional, potentially significant, lump-sum severance payments to all employees covered by that agreement who are terminated as the result of a plant closing and one of our collective bargaining agreements contains provisions restricting our ability to terminate or relocate operations.

Our facilities in Europe and Brazil have employees who are generally represented by local or national social works councils. Social works councils meet with employer industry associations periodically to discuss employee wages and working conditions. Our facilities in France, Germany, and Slovakia often participate in such discussions and adhere to any agreements reached.

If our unionized workers or those represented by a works council were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our ability to deliver products on a timely basis and could have other negative effects, including decreased productivity and increased labor costs. In addition, if a greater percentage of our work force becomes unionized, our business and financial results could be materially adversely affected. Many of our direct and indirect customers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or their suppliers could result in slowdowns or closures of assembly plants where our products are used and could cause cancellation of purchase orders with us or otherwise result in reduced revenues from these customers.

Changes in employment laws could increase our costs and may adversely affect our business.

Various federal, state and international labor laws govern our relationship with employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers’ compensation rates paid, leaves of absence, mandated health and other benefits, and citizenship requirements. Significant additional government-imposed increases or new requirements in these areas could materially affect our business, financial condition, operating results or cash flow.

In the event our employee-related costs rise significantly, we may have to curtail the number of our employees or shut down certain manufacturing facilities. Any such actions would not only be costly but could also materially adversely affect our business.

We depend on the services of key executives, the loss of whom could materially harm our business.

Our senior executives are important to our success because they are instrumental in setting our strategic direction, operating our business, maintaining and expanding relationships with distributors, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until a suitable replacement could be found. We believe that our senior executives could not easily be replaced with executives of equal experience and capabilities. Although we have entered into employment agreements with certain of our key domestic executives, we cannot prevent our key executives from terminating their employment with us. We do not maintain key person life insurance policies on any of our executives.

 

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If we lose certain of our key sales, marketing or engineering personnel, our business may be adversely affected.

Our success depends on our ability to recruit, retain and motivate highly skilled sales, marketing and engineering personnel. Competition for these persons in our industry is intense and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. If certain of these key personnel were to terminate their employment with us, we may experience difficulty replacing them, and our business could be harmed.

We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses.

We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and cleanup contaminated sites that are or were owned, leased, operated or used by us or our predecessors. Some of these laws and regulations require us to obtain permits, which contain terms and conditions that impose limitations on our ability to emit and discharge hazardous materials into the environment and periodically may be subject to modification, renewal and revocation by issuing authorities. Fines and penalties may be imposed for non-compliance with applicable environmental laws and regulations and the failure to have or to comply with the terms and conditions of required permits. From time to time, our operations may not be in full compliance with the terms and conditions of our permits. We periodically review our procedures and policies for compliance with environmental laws and requirements. We believe that our operations generally are in material compliance with applicable environmental laws, requirements and permits and that any lapses in compliance would not be expected to result in us incurring material liability or cost to achieve compliance. Historically, the costs of achieving and maintaining compliance with environmental laws, and requirements and permits have not been material; however, the operation of manufacturing plants entails risks in these areas, and a failure by us to comply with applicable environmental laws, regulations, or permits could result in civil or criminal fines, penalties, enforcement actions, third party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup, or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions. Moreover, if applicable environmental laws and regulations, or the interpretation or enforcement thereof, become more stringent in the future, we could incur capital or operating costs beyond those currently anticipated.

Certain environmental laws in the United States, such as the federal Superfund law and similar state laws, impose liability for the cost of investigation or remediation of contaminated sites upon the current or, in some cases, the former site owners or operators and upon parties who arranged for the disposal of wastes or transported or sent those wastes to an off-site facility for treatment or disposal, regardless of when the release of hazardous substances occurred or the lawfulness of the activities giving rise to the release. Such liability can be imposed without regard to fault and, under certain circumstances, can be joint and several, resulting in one party being held responsible for the entire obligation. As a practical matter, however, the costs of investigation and remediation generally are allocated among the viable responsible parties on some form of equitable basis. Liability also may include damages to natural resources. We have not been notified that we are a potentially responsible party in connection with any sites we currently or formerly owned or operated. From time to time, we are notified that we are a potentially responsible party and may have liability in connection with off-site disposal facilities. To date, we have generally resolved matters involving off-site disposal facilities for a nominal sum although there can be no assurance that we will be able to resolve pending and future matters in a similar fashion.

However, there is contamination at some of our current facilities, primarily related to historical operations at those sites, for which we could be liable for the investigation and remediation under certain environmental laws. The potential for contamination also exists at other of our current or former sites, based on historical uses of those sites. We currently are not undertaking any remediation or investigations and our costs or liability in connection with potential contamination conditions at our facilities cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the

 

19


environmental conditions or likely remedial requirements. Currently, other parties with contractual liability are addressing or have plans or obligations to address those contamination conditions that may pose a material risk to human health, safety or the environment. In addition, while we attempt to evaluate the risk of liability associated with our facilities at the time we acquire them, there may be environmental conditions currently unknown to us relating to our prior, existing or future sites or operations or those of predecessor companies whose liabilities we may have assumed or acquired which could have a material adverse effect on our business.

We are being indemnified, or expect to be indemnified by third parties subject to certain caps or limitations on the indemnification, for certain environmental costs and liabilities associated with certain owned or operated sites. Accordingly, based on the indemnification and the experience with similar sites of the environmental consultants who we have hired, we do not expect such costs and liabilities to have a material adverse effect on our business, operations or earnings. We cannot assure you, however, that those third parties will in fact satisfy their indemnification obligations. If those third parties become unable to, or otherwise do not, comply with their respective indemnity obligations, or if certain contamination or other liability for which we are obligated is not subject to these indemnities, we could become subject to significant liabilities.

We may face additional costs associated with our post-retirement and post-employment obligations to employees which could have an adverse effect on our financial condition.

As part of the acquisition of our original core business through the acquisition of PTH from Colfax Corporation, the PTH Acquisition, we agreed to assume pension plan liabilities for active U.S. employees under the Retirement Plan for Power Transmission Employees of Colfax and the Ameridrives International Pension Fund for Hourly Employees Represented by United Steelworkers of America, Local 3199-10, collectively referred to as the Prior Plans. We have established a defined benefit plan, the Altra Industrial Motion, Inc. Retirement Plan or New Plan, mirroring the benefits provided under the Prior Plans. The New Plan accepted a spin-off of assets and liabilities from the Prior Plans, in accordance with Section 414(l) of the Internal Revenue Code, or the Code, with such assets and liabilities relating to active U.S. employees as of the closing of the PTH Acquisition. Given the funded status of the Prior Plans and the asset allocation requirements of Code Section 414(l), liabilities under the New Plan greatly exceed the assets that were transferred from the Prior Plans. The accumulated benefit obligation (not including accumulated benefit obligations of non-U.S. pension plans in the amount of $7.5 million) was approximately $27.1 million as of December 31, 2012 while the fair value of plan assets associated with these U.S. plans was approximately $19.8 million as of December 31, 2012. As the New Plan has a considerable funding deficit, the cash funding requirements are expected to be substantial over the next several years, and could have a material adverse effect on our financial condition. As of December 31, 2012, minimum funding requirements are estimated to be $1.0 million annually for each year from 2013 through 2017. These amounts are based on actuarial assumptions and actual amounts could be materially different.

Additionally, as part of the PTH Acquisition and Bauer Acquisition, we agreed to assume certain pension plan liabilities related to non-U.S. employees. The accumulated benefit obligations of non-U.S. pension plans were approximately $7.5 million as of December 31, 2012. There are no assets associated with these plans.

Finally, as part of the PTH Acquisition, we also agreed to assume all post-employment and post-retirement welfare benefit obligations with respect to active U.S. employees. The benefit obligation for post-retirement benefits, which are not funded, was approximately $0.2 million as of December 31, 2012.

For a description of the post-retirement and post-employment costs, see Note 8 to our audited financial statements included elsewhere in this Form 10-K.

Our future success depends on our ability to integrate acquired companies and manage our growth effectively.

Our growth through acquisitions has placed, and will continue to place, significant demands on our management, operational and financial resources. Realization of the benefits of acquisitions often requires integration of some or all of the acquired companies’ sales and marketing, distribution, manufacturing, engineering, finance and administrative organizations. Integration of companies demands substantial attention from senior management and the management of the acquired companies. In addition, we will continue to pursue

 

20


new acquisitions, some of which could be material to our business if completed. We may not be able to integrate successfully our recent acquisitions, or any future acquisitions, operate these acquired companies profitably, or realize the potential benefits from these acquisitions.

The market price of our common stock may decline as a result of acquisitions, including the Bauer Acquisition, if, among other things, we are unable to achieve the expected growth in earnings, or if the operational cost savings estimates in connection with the integration of the acquired businesses are not realized, or if the transaction costs related to the acquisitions are greater than expected. The market price of our common stock also may decline if we do not achieve the perceived benefits of the acquisitions as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the acquisitions on our financial results is not consistent with the expectations of financial or industry analysts.

We may not be able to protect our intellectual property rights, brands or technology effectively, which could allow competitors to duplicate or replicate our technology and could adversely affect our ability to compete.

We rely on a combination of patent, trademark, copyright, and trade secret laws in the United States and other jurisdictions, as well as on license, non-disclosure, employee and consultant assignment and other agreements and domain names registrations in order to protect our proprietary technology and rights. Applications for protection of our intellectual property rights may not be allowed, and the rights, if granted, may not be maintained. In addition, third parties may infringe or challenge our intellectual property rights. In some cases, we rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. In addition, in the ordinary course of our operations, we pursue potential claims from time to time relating to the protection of certain products and intellectual property rights, including with respect to some of our more profitable products. Such claims could be time consuming, expensive and divert resources. If we are unable to maintain the proprietary nature of our technologies or proprietary protection of our brands, our ability to market or be competitive with respect to some or all of our products may be affected, which could reduce our sales and profitability.

Goodwill and indefinite-lived intangibles comprises a significant portion of our total assets, and if we determine that goodwill or indefinite-lived intangibles become impaired in the future, net income in such years may be materially and adversely affected.

Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Due to the acquisitions we have completed historically, goodwill comprises a significant portion of our total assets. We review goodwill and indefinite-lived intangibles annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. Our review of goodwill and indefinite-lived intangibles in December 2012 resulted in no reduction to the value of such assets in our financial statements. Future reviews of goodwill and indefinite-lived intangibles could result in reductions. Any reduction in net income resulting from the write down or impairment of goodwill and indefinite-lived intangibles could adversely affect our financial results. If economic conditions deteriorate we may be required to impair goodwill and indefinite-lived intangibles in future periods.

Unplanned repairs or equipment outages could interrupt production and reduce income or cash flow.

Unplanned repairs or equipment outages, including those due to natural disasters, could result in the disruption of our manufacturing processes. Any interruption in our manufacturing processes would interrupt our production of products, reduce our income and cash flow and could result in a material adverse effect on our business and financial condition.

Our operations are highly dependent on information technology infrastructure and failures could significantly affect our business.

We depend heavily on our information technology, or IT, infrastructure in order to achieve our business objectives. If we experience a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of our IT systems by a third party, the resulting

 

21


disruptions could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems and address related security concerns.

Computer viruses, malware, and other “hacking” programs and devices may cause significant damage, delays or interruptions to our systems and operations or to certain of the products that we sell resulting in damage to our reputation and brand names.

Computer viruses, malware, and other “hacking” programs and devices may attack our infrastructure, industrial machinery, software or hardware causing significant damage, delays or other service interruptions to our systems and operations. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions, loss or corruption of data, software, hardware or other computer equipment. In addition, increasingly sophisticated malware may target real-world infrastructure or product components, including certain of the products that we currently or may in the future sell by attacking, disrupting, reconfiguring and/or reprogramming industrial control software. Hacking, computer viruses, and other malware could result in significant damage to our infrastructure, industrial machinery, systems, or databases. We may incur significant costs to protect our systems and equipment against the threat of, and to repair any damage caused by, computer viruses and hacking. Moreover, if a computer virus or hacking affects our systems or products, our reputation and brand names could be materially damaged and use of our products may decrease.

If we are unable to successfully implement our new ERP system across the Company or such implementation is delayed, our operations may be disrupted or become less efficient.

We have begun the worldwide implementation of a new Enterprise Resource Planning system entitled “SAP,” with the aim of enabling management to achieve better control over the Company through: improved quality, reliability and timeliness of information; improved integration and visibility of information stemming from different management functions and countries; and optimization and global management of corporate processes. The adoption of the new SAP system, which will replace the existing accounting and management systems, poses several challenges relating to, among other things, training of personnel, communication of new rules and procedures, changes in corporate culture, migration of data, and the potential instability of the new system. In order to mitigate the impact of such critical issues, the Company decided to implement the new SAP system on a step-by-step basis, both geographically and in terms of processes. As a result, we expect the system implementation process to continue for approximately the next 18 months. However, there can be no assurance that the new SAP system will be successfully implemented and failure to do so could have a material adverse effect on our operations. Further, if implementation of the SAP system is delayed, we would continue to use our current system which may not be sufficient to support our planned operations and significant upgrades to the current system may be warranted or required to meet our business needs pending SAP implementation. However, there can be no assurance that the new SAP system will be successfully implemented and failure to do so could have a material adverse effect on the Company’s operations.

Our leverage could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions.

We have incurred indebtedness that is substantial relative to our stockholders’ investment. As of December 31, 2012, we had approximately $266.9 million of gross indebtedness outstanding and $113.1 million available under our Revolving Credit Facility (as defined herein). Under the Credit Agreement, we have a $100,000,000 Term Loan Facility and a $200,000,000 Revolving Credit Facility. Our indebtedness has important consequences; for example, it could:

 

   

make it more challenging for us to obtain additional financing to fund our business strategy and acquisitions, debt service requirements, capital expenditures and working capital;

 

   

increase our vulnerability to interest rate changes and general adverse economic and industry conditions;

 

22


   

require us to dedicate a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the availability of our cash flow to finance acquisitions and to fund working capital, capital expenditures, research and development efforts and other general corporate activities;

 

   

make it difficult for us to fulfill our obligations under our credit and other debt agreements;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and our markets; and

 

   

place us at a competitive disadvantage relative to our competitors that have less debt.

Substantially all of the domestic personal property of Altra Holdings and its domestic subsidiaries and certain shares of certain non-domestic subsidiaries have been pledged as collateral against any outstanding borrowings under the credit agreement (the “Credit Agreement”) governing our Revolving Credit Facility and Term Loan Credit Facility. In addition, the Credit Agreement requires us to maintain specified financial ratios and satisfy certain financial condition tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives.

In the future, the then current economic and credit market conditions may limit our access to additional capital, to the extent that the Credit Agreement would otherwise permit additional financing, or may preclude our ability to refinance our existing indebtedness. There can be no assurance that there will not be a deterioration in the credit markets, a deterioration in the financial condition of our lenders or their ability to fund their commitments or, if necessary, that we will be able to find replacement financing, if need be, on similar or acceptable terms. An inability to access sufficient financing or capital could have an adverse impact on our operations and thus on our operating results and financial position.

Our Credit Agreement imposes significant operating and financial restrictions, which may prevent us from pursuing our business strategies or favorable business opportunities.

Subject to a number of important exceptions, the Credit Agreement may limit our ability to:

 

   

incur more debt;

 

   

pay dividends or make other distributions;

 

   

redeem stock;

 

   

issue stock of subsidiaries;

 

   

make certain investments;

 

   

create liens;

 

   

reorganize our corporate structure;

 

   

enter into transactions with affiliates;

 

   

merge or consolidate; and

 

   

transfer or sell assets.

The restrictions contained in the Credit Agreement may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. A breach of any of these covenants or the inability to comply with the required financial ratios could result in a default under the Credit Agreement. If any such default occurs, the lenders under the Credit Agreement may elect to declare all of the outstanding debt, under the Credit Agreement together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in those circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders under the Credit Agreement will have the right to proceed against the collateral described above that secures the debt. If the debt under the Credit

 

23


Agreement were to be accelerated, we may not have the ability to refinance that debt, and if we can, the terms of such refinancing may be less favorable than the current financing terms under the Credit Agreement. In the event that the indebtedness is accelerated, our assets may not be sufficient to repay in full all of our debt.

We are subject to tax laws and regulations in many jurisdictions and the inability to successfully defend claims from taxing authorities related to our current or acquired businesses could adversely affect our operating results and financial position.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.

Continued extreme volatility and disruption in global financial markets could significantly impact our customers, suppliers, weaken the markets we serve and harm our operations and financial performance.

Our financial performance depends, in large part, on conditions in the markets that we serve and on the U.S. and global economies in general. As widely reported, U.S. and global financial markets have been experiencing extreme disruption in recent years, including, among other things, concerns regarding the stability and viability of major financial institutions, the weak state of the housing markets, a severe tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets. Further, economic conditions in the European Union have deteriorated and with the Bauer Acquisition our exposure to European markets has increased. Given the significance and widespread nature of these nearly unprecedented circumstances, the U.S., European, and global economies could remain significantly challenged in a recessionary state for an indeterminate period of time. While currently these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. In addition, the tight credit market may adversely affect the ability of our customers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services as well as impact the ability of our customers to make payments. Similarly, this tight credit market may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. These conditions would harm our business by adversely affecting our sales, results of operations, profitability, cash flows, financial condition and long-term anticipated growth rate, which could result in potential impairment of certain long-term assets including goodwill.

We may not realize the expected benefits of the Bauer Acquisition and the Lamiflex Acquisition because of integration difficulties and other challenges.

The success of the Bauer Acquisition and the Lamiflex Acquisition will depend, in part, on our ability to realize the anticipated benefits from integrating the Bauer and the Lamiflex businesses with our existing businesses. The integration process may be complex, costly and time-consuming. The difficulties of integrating the operations of the Bauer and Lamiflex businesses include, among others:

 

   

failure to implement our business plan for the combined business;

 

   

unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;

 

   

possible inconsistencies in standards, controls, procedures and policies, and compensation structures;

 

   

unanticipated changes in applicable laws and regulations;

 

   

failure to retain key employees;

 

   

failure to retain key customers;

 

24


   

operating risks inherent in the Bauer business, the Lamiflex business and our business;

 

   

the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002; and

 

   

unanticipated issues, expenses and liabilities.

We may not be able to maintain the levels of revenue, earnings or operating efficiency that each of Altra and Bauer had achieved or might achieve separately. In addition, we may not accomplish the integration of Bauer’s business smoothly, successfully or within the anticipated costs or timeframe.

We face risks associated with the Purchase Agreement in connection with the Bauer Acquisition.

In connection with the Bauer Acquisition, we are subject to substantially all the liabilities of Bauer related to the gear motor business we acquired that were not satisfied on or prior to the closing date. There may be liabilities that we underestimated or did not discover in the course of performing our due diligence investigation of Bauer. Under the Purchase Agreement, the seller agreed to provide us with a limited set of representations and warranties, including with respect to outstanding and potential liabilities. However, our remedy from the seller for any breach of certain of those representations and warranties is an action for indemnification, not to exceed €14.1 million. This cap on damages does not apply to breaches of representations and warranties relating to incorporation, power and authority, insolvency, title to assets, taxes, environmental matters and certain pension claims. Damages resulting from a breach of a representation or warranty could have a material and adverse effect on our financial condition and results of operations, and there is no guarantee that we would actually be able to recover all or any portion of the sums payable to us in connection with such breach.

We may not realize the expected growth and production savings from Construction of our new China facility.

We have recently completed the construction of a plant in Changzhou, China. There are numerous risks and uncertainties that may prevent us from achieving the revenues we currently anticipate from this facility. Some of these risks and uncertainties relate to our ability to: offer new and innovative products to attract and retain a larger customer base; attract additional customers; undertake more contracted projects; maintain effective control of our costs and expenses; respond to evolving social, economic and political changes in China; respond to competitive market conditions; manage risks associated with intellectual property rights; and attract, retain and motivate qualified personnel. If we are unsuccessful in addressing any of these risks and uncertainties and such growth or production savings do not materialize, or should the timeline for full production at the facility be delayed, we may be unable to achieve our expected investment return, which could adversely affect our results of operations and financial condition.

 

Item 1B. Unresolved Staff Comments.

None.

 

25


Item 2. Properties.

In addition to our leased headquarters in Braintree, Massachusetts, we maintain 29 production facilities, thirteen of which are located in the United States, one in Canada, ten in Europe, two in each of Brazil and China and one in Mexico. The following table lists all of our facilities, other than sales offices and distribution centers, as of December 31, 2012, indicating the location, principal use and whether the facilities are owned or leased.

 

Location

   Brand    Major Products    Sq. Ft.      Type of
Possession
     Expiration

United States

              

Chambersburg,

              

Pennsylvania

   TB Wood’s    Belted Drives, Couplings,
Castings
     440,000         Owned       N/A

South Beloit, Illinois(1)

   Warner Electric    Electromagnetic Clutches &
Brakes
     104,288         Owned       N/A

Syracuse, New York

   Kilian    Engineered Bearing
Assemblies
     97,000         Owned       N/A

Wichita Falls, Texas

   Wichita Clutch    Heavy Duty Clutches and
Brakes
     90,400         Owned       N/A

Warren, Michigan

   Formsprag, Marland    Overrunning Clutches      79,000         Owned       N/A

Erie, Pennsylvania

   Ameridrives    Engineered Couplings      76,200         Owned       N/A

Scotland, Pennsylvania

   TB Wood’s    Portion of the space is leased to
a third party
     42,385         Owned       N/A

San Marcos, Texas

   TB Wood’s    Engineered Couplings      51,000         Owned       N/A

Mt. Pleasant, Michigan

   TB Wood’s    Portion of the space is leased to
a third party
     30,000         Owned       N/A

Columbia City, Indiana

   Warner Electric    Electromagnetic Clutches &
Brakes & Coils
     51,699         Leased       April 30, 2014

Charlotte, North Carolina

   Boston Gear    Gearing & Power Transmission
Components
     193,000         Leased       February 28, 2017

Niagara Falls, New York

   Nuttall Gear    Gearing      155,509         Leased       March 31, 2018

New Hartford, Connecticut

   Inertia Dynamics,
Warner Electric
   Electromagnetic Clutches &
Brakes
     81,491         Leased       July 30, 2024

Braintree, Massachusetts(2)

   Altra         13,804         Leased       November 30, 2016

Belvidere, Illinois

   Warner Linear    Linear Actuators      21,000         Leased       June 30, 2015

Green Bay, Wisconsin

   Ameridrives    Engineered Couplings      85,250         Leased       March 31, 2016

International

              

Heidelberg, Germany

   Stieber    Overrunning Clutches      57,609         Owned       N/A

Saint Barthelemy, France

   Warner Electric    Electromagnetic Clutches &
Brakes
     50,129         Owned       N/A

Bedford, England

   Wichita Clutch, Twiflex    Heavy Duty Clutches and
Brakes
     49,000         Owned       N/A

Allones, France

   Warner Electric    Electromagnetic Clutches &
Brakes
     38,751         Owned       N/A

Toronto, Canada

   Kilian    Engineered Bearing
Assemblies
     29,000         Owned       N/A

Dewsbury, England

   Bibby Transmissions    Engineered Couplings Power
Transmission Components
     26,100         Owned       N/A

Shenzhen, China

   Warner Electric    Electromagnetic Clutches &
Brakes Precision Components
     72,000         Leased       April 30, 2014

San Luis Potosi, Mexico

   TB Wood’s    Couplings and Belted Drives      71,800         Leased       June 8, 2014

Brechin, Scotland

   Matrix    Clutch Brakes, Couplings      27,889         Leased       February 24, 2022

Garching, Germany

   Stieber    Overrunning Clutches      32,292         Leased       (3)

Hertford, England

   Huco Dynatork    Couplings, Power Transmission
Components
     13,565         Leased       December 19, 2017

Esslingen, Germany

   Bauer Gear Motor    Gear motors      61,762         Leased       Various

Zlate Moravce, Slovakia

   Bauer Gear Motor    Gear motors      41,499         Leased       (4)

Changzhou, China

   Ameridrives    Engineered Couplings      107,348         Owned       N/A

Sao Paulo, Brazil

   Lamiflex    Engineered Couplings      10,764         Leased       N/A (5)

Cotia, Brazil

   Lamiflex    Engineered Couplings      26,910         Owned       N/A (6)

 

 

(1) Shared services center and & selective engineering functions as well as a production facility

 

(2) Corporate headquarters and selective customer service functions.

 

(3) Must give the lessor twelve months notice for termination.

 

(4) Indefinite lease; lease cancelable with 2 year notice given.

 

(5) Month to month lease. Must give lessor 30 days notice for termination.

 

(6) The company expects to occupy and begin manufacturing upon receipt of required governmental permits.

 

26


Item 3. Legal Proceedings.

We are, from time to time, party to various legal proceedings arising out of our business. These proceedings primarily involve commercial claims, product liability claims, intellectual property claims, environmental claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings should not have a material adverse effect on our business, financial condition and results of operations.

 

Item 4. Mine Safety Disclosures.

Not applicable

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock trades on the NASDAQ Global Market under the symbol “AIMC”. As of February 19, 2013, the number of holders of record of our common stock was approximately 59.

The following table sets forth, for the periods indicated, the high and low sales price for our common stock as reported on The NASDAQ Global Market. Our common stock commenced trading on the NASDAQ Global Market on December 15, 2006.

 

     U.S. Dollars  
     High      Low  

Fiscal year ended December 31, 2012

     

Fourth Quarter

   $ 22.18       $ 15.78   

Third Quarter

   $ 20.34       $ 14.55   

Second Quarter

   $ 19.65       $ 14.71   

First Quarter

   $ 22.18       $ 17.03   

Fiscal year ended December 31, 2011

     

Fourth Quarter

   $ 19.08       $ 10.60   

Third Quarter

   $ 25.60       $ 10.98   

Second Quarter

   $ 26.73       $ 22.28   

First Quarter

   $ 24.17       $ 19.14   

Dividends

The Company declared and paid dividends of $0.05 per share for the quarters ended June 30, 2012 and September 29, 2012. The Company declared and paid a dividend of $0.06 per share for the quarter ended December 31, 2012. There were no dividends declared or paid during the quarter ended March 31, 2012 or during the year ended December 31, 2011. The Company has declared a dividend of $0.08 per share for the quarter ended March 30, 2013, payable on April 3, 2013 to shareholders of record as of March 18, 2013. See Notes 10 and 15 to the consolidated financial statements.

 

27


Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information concerning our equity compensation plans:

 

Plan category

   Number of Securities to
be Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(a)
     Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(b)
     Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))(c)

Equity compensation plans approved by security holders(1)

           $       910,281

Equity compensation plans not approved by security holders

     n/a         n/a       n/a

Total

           $       910,281

 

 

 

(1) The equity compensation plans were approved by the Company’s shareholders prior to the initial public offering. Additional shares under the plan were approved by the Company’s shareholders at its most recent annual meeting.

Issuer Repurchases of Equity Securities

 

Approximate Period

  Total Number
of Shares
Purchased (1)
    Average
Price Paid per
Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
    Dollar Value of
Shares That May Yet be
Purchased Under The
Plans or Programs
 

September 30, 2012 to October 27, 2012

    122      $ 17.43             $   

October 28, 2012 to November 24, 2012

         $             $   

November 25, 2012 to December 31, 2012

    2,072      $ 20.46             $   

 

(1) We repurchased these shares of common stock in connection with the vesting of certain stock awards to cover minimum statutory withholding taxes.

 

28


Performance Graph

The following graph compares the cumulative total stockholder return on our common stock for the 5 year period from December 31, 2007, through December 31, 2012, with the cumulative total return on shares of companies comprising the S&P Small Cap 600 index and a special Peer Group Index, in each case assuming an initial investment of $100, assuming dividend reinvestment.

 

LOGO

 

      12/31/2007        3/31/2008        6/30/2008        9/30/2008        12/31/2008        3/31/2009        6/30/2009        9/30/2009        12/31/2009        3/31/2010        6/30/2010        9/30/2010   

Altra Holdings, Inc.

    23.19%        -0.59%        23.04%        12.37%        -41.41%        -71.26%        -44.52%        -17.11%        -8.52%        1.70%        -3.56%        9.11%   

S&P Small Cap 600

    -1.97%        -10.20%        -8.58%        -7.33%        -33.33%        -44.81%        -33.66%        -22.21%        -17.48%        -10.61%        -18.63%        -11.04%   

Peer Group

    3.57%        -14.65%        -4.58%        -1.28%        -29.29%        -43.97%        -30.25%        -23.53%        -16.55%        -7.27%        -13.74%        -6.22%   
      12/31/2010        3/31/2011        6/30/2011        9/30/2011        12/31/2011        3/31/2012        6/30/2012        9/30/2012        12/31/2012         

Altra Holdings, Inc.

    47.11%        74.96%        77.70%        -14.30%        39.48%        42.22%        16.59%        34.81%        63.33%         

S&P Small Cap 600

    3.14%        10.81%        10.33%        -11.83%        2.98%        14.98%        10.51%        16.11%        18.24%         

Peer Group

    8.32%        15.53%        9.70%        -17.43%        -5.31%        6.38%        3.14%        14.47%        17.12%         

The Peer Group Index consists of the following publicly traded companies: Franklin Electric Co. Inc., RBC Bearings, Inc., Regal Beloit Corp., and Kaydon Bearings Corp.

 

29


Item 6.    Selected Financial Data.

The following table contains our selected historical financial data for the years ended December 31, 2012, 2011, 2010, 2009, and 2008. The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes included elsewhere in this Form 10-K.

 

     Altra Holdings, Inc.
Amounts in thousands, except per share data
 
     Year Ended December 31,  
     2012     2011     2010     2009     2008  

Net sales

   $ 731,990      $ 674,812      $ 520,162      $ 452,846      $ 635,336   

Cost of sales

     513,442        478,394        366,151        329,825        449,244   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     218,548        196,418        154,011        123,021        186,092   

Operating expenses:

          

Selling, general and administrative expenses

     127,044        113,375        89,478        81,117        99,185   

Research and development expenses

     11,457        10,609        6,731        6,261        6,589   

Goodwill impairment

                                 31,810   

Restructuring costs

     3,196               2,726        7,286        2,310   

Gain on curtailment of post-employment benefit plans

                          (1,467     (925

Loss on disposal of assets

                          545        1,584   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     141,697        123,984        98,935        93,742        140,553   

Income from operations

     76,851        72,434        55,076        29,279        45,539   

Other non-operating income and expense:

          

Interest expense, net

     40,790        24,035        19,638        32,976        28,339   

Other non-operating (income) expense, net

     1,702        (32     909        981        (6,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     42,492        24,003        20,547        33,957        22,090   

Income (loss) from continuing operations before income taxes

     34,359        48,431        34,529        (4,678     23,449   

Provision (benefit) for income taxes

     10,154        10,756        10,004        (2,364     16,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     24,205        37,675        24,525        (2,314     6,718   

Loss from discontinued operations, net of income taxes of $43 in 2008

                                 (224

Net income (loss)

     24,205        37,675        24,525        (2,314     6,494   

Net loss attributable to non-controlling interest

     88                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Altra Holdings, Inc.

   $ 24,293      $ 37,675      $ 24,525      $ (2,314   $ 6,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

          

Depreciation and amortization

   $ 27,376      $ 24,683      $ 20,036      $ 22,072      $ 21,068   

Purchases of fixed assets

     31,346        22,242        17,295        9,194        19,289   

Cash flow provided by (used in):

          

Operating activities

     59,918        46,901        42,764        59,388        45,114   

Investing activities

     (38,770     (89,887     (17,827     (9,194     (3,687

Financing activities

     (29,880     64,765        (3,359     (54,016     (31,760

Weighted average shares, basic

     26,656        26,526        26,399        25,945        25,496   

Weighted average shares, diluted

     26,756        26,689        26,535        25,945        26,095   

Earnings per share:

          

Net income (loss) from continuing operations attributable to Altra Holdings, Inc.

   $ 0.91      $ 1.42      $ 0.93      $ (0.09   $ 0.26   

Net loss from discontinued operations

                                 (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Altra Holdings, Inc

   $ 0.91      $ 1.42      $ 0.93      $ (0.09   $ 0.25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

          

Net income (loss) from continuing operations attributable to Altra Holdings, Inc.

   $ 0.91      $ 1.41      $ 0.92      $ (0.09   $ 0.26   

Net loss from discontinued operations

                                 (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Altra Holdings, Inc.

   $ 0.91      $ 1.41      $ 0.92      $ (0.09   $ 0.25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend declared

   $ 0.16      $      $      $      $   

 

30


     December 31,  
     2012      2011      2010      2009      2008  

Balance Sheet Data:

              

Cash and cash equivalents

   $ 85,154       $ 92,515       $ 72,723       $ 51,497       $ 52,073   

Total assets

     633,039         629,985         508,102         465,199         513,584   

Total long-term debt, net of unaccredited discount

     247,595         264,049         216,502         217,549         261,523   

Long-term liabilities, excluding long-term debt

     55,428         56,122         43,349         41,907         46,870   

Comparability of the information included in the selected financial data has been impacted by the acquisitions of Bauer in 2011 and Lamiflex in 2012.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

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

 

   

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

 

   

the risks associated with our debt;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the Company’s ability to control costs;

 

   

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

 

31


   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

work stoppages and other labor issues;

 

   

changes in the Company’s pension and retirement liabilities;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the effects of changes to critical accounting estimates; changes in volatility of the Company’s stock price and the risk of litigation following a decline in the price of the Company’s stock;

 

   

the cyclical nature of the markets in which we operate;

 

   

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

 

   

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

 

   

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

 

   

the risks associated with international operations, including currency risks;

 

   

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

 

   

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

 

   

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

ALL FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE COMPANY’S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THIS FORM 10-K AND IN OTHER REPORTS FILED WITH THE SEC BY THE COMPANY.

 

32


The following discussion of the financial condition and results of operations of Altra Holdings, Inc. and its subsidiaries should be read together with the Selected Historical Financial Data, and the consolidated financial statements of Altra Holdings, Inc. and its subsidiaries and related notes included elsewhere in this Form 10-K. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the results referred to in the forward-looking statements, see “Forward-Looking Statements” and “Risk Factors”. Unless the context requires otherwise, the terms “Altra Holdings,” “the Company,” “we,” “us” and “our” refer to Altra Holdings, Inc. and its subsidiaries.

General

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

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

Business Outlook

Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S., European, and global economies in general. Currently, the demand environment remains flat across most of our early and late cycle end markets and, assuming this trend continues, we do not expect substantial end market growth in 2013.

We expect new products and programs that we have been developing to contribute to our top line performance in 2013. We also plan to enhance our bottom line performance as a result of the lower interest costs achieved through our 2012 refinancing and due to a number of strategic actions we completed in 2012, including cost savings and productivity improvement initiatives. We also continue to maintain a strong balance sheet and ample liquidity to pursue strategic acquisitions should appropriate opportunities arise during 2013.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an on-going basis. Our estimates are based upon historical experience and assumptions that we believe are reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what our management anticipates and different assumptions or estimates about the future could change our reported results.

We believe the following accounting policies are the most critical in that they are important to the financial statements and they require the most difficult, subjective or complex judgments in the preparation of the financial statements.

 

33


Inventory.    Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method for all of our subsidiaries except TB Wood’s. TB Wood’s inventory is stated at the lower of current cost or market, principally using the last-in, first-out (LIFO) method. Inventory stated using the LIFO method approximates 10% of total inventory. We state inventories acquired by us through acquisitions at their fair values at the date of acquisition as determined by us based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.

We periodically review our quantities of inventories on hand and compare these amounts to the historical and expected usage of each particular product or product line. We record as a charge to cost of sales any amounts required to reduce the carrying value of inventories to net realizable value.

Business Combinations.    Business combinations are accounted for at fair value. Acquisition costs are generally expensed as incurred and recorded in selling, general and administrative expenses; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets and liabilities acquired. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets

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. 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.

Accounting standards require that an annual goodwill impairment assessment be conducted at the reporting unit level using either a quantitative or qualitative approach. As part of the annual goodwill impairment assessment we performed a quantitative assessment and estimated the fair value of each of our five reporting units using an income approach. We forecasted future cash flows by reporting unit for each of the next five years

 

34


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 goodwill fair value analysis

We review the difference between the estimated fair value and net book value of each reporting unit. If the excess is less than $1.0 million, the reporting unit could be required to perform a step two goodwill impairment analysis in a future period, if the estimated profitability decreased by 10% when compared to our forecasts to determine what amount of goodwill is potentially impaired. As of December 31, 2012, each of our reporting units had estimated fair values that were at least $1.0 million greater than the net book value.

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 operating segments do not meet our forecasted revenue and/or profitability estimates, we could be required to perform an interim goodwill impairment analysis in future periods. In addition, if our discount rate increases, we could be required to perform an interim goodwill impairment analysis. We performed a sensitivity analysis on the estimated fair value of our reporting units by decreasing profitability by 5% and 10% in each of the following 5 years leaving all other assumptions constant and increasing the discount rate by 5% and 10% leaving all other assumptions constant. We did not identify any reporting unit that would be required to perform a step 2 goodwill impairment analysis as the fair value of our reporting units are substantially in excess of their carrying value.

The Company’s most recent significant acquisition was the Bauer Acquisition. The Company recorded approximately $8.1 million in Goodwill in connection with the Bauer Acquisition. Bauer’s sales are predominantly in the European market and therefore are impacted by prevailing economic conditions in Europe. If Bauer’s future financial performance were to deteriorate, as a result of further weakening of the European economy or otherwise, an interim goodwill impairment analysis may be required.

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 (between 1.0% and 1.5%). We compared the estimated fair value of our trademarks with the carrying value of the trademarks and did not identify any impairment.

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. No impairment indicators were noted in 2010, 2011 or 2012.

In 2010, 2011, and 2012 the Company did not identify any impairments related to goodwill, definite lived intangible assets or indefinite lived intangible assets as the fair value of our reporting units and definite lived intangible assets were substantially in excess of their carrying value.

Income Taxes.    We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. We evaluate the potential realization of our net deferred tax assets and assess the need for a valuation allowance on a quarterly basis. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income to realize the assets. We record a valuation allowance to reduce our net deferred tax assets to the amount that may be more likely than not to be realized. To the extent we establish a valuation allowance, an expense will be recorded within the provision for income taxes line on the statement of operations. In periods subsequent to establishing a valuation allowance, if we were to determine that we would be able to realize our net deferred tax assets in excess of our net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.

 

35


Results of Operations.

Amounts in thousands

 

     Year ended
December 31,
2012
    Year ended
December 31,
2011
    Year ended
December 31
2010
 

Net sales

   $ 731,990      $ 674,812      $ 520,162   

Cost of sales

     513,442        478,394        366,151   
  

 

 

   

 

 

   

 

 

 

Gross profit

     218,548        196,418        154,011   

Gross profit percentage

     29.86     29.11     29.61

Selling, general and administrative expenses

     127,044        113,375        89,478   

Research and development expenses

     11,457        10,609        6,731   

Restructuring costs

     3,196               2,726   
  

 

 

   

 

 

   

 

 

 

Income from operations

     76,851        72,434        55,076   

Interest expense, net

     40,790        24,035        19,638   

Other non-operating (income) expense, net

     1,702        (32     909   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     34,359        48,431        34,529   

Provision for income taxes

     10,154        10,756        10,004   
  

 

 

   

 

 

   

 

 

 

Net income

     24,205        37,675        24,525   

Net loss attributable to non-controlling interest

     88                 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Altra Holdings, Inc.

   $ 24,293      $ 37,675      $ 24,525   
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
     December 31,
2011
     Change      %  

Net sales

   $ 731,990       $ 674,812       $ 57,178         8.5

Net Sales.    Sales increased in 2012 primarily due to the full year effect of the acquisition of Bauer as well as the acquisition of Lamiflex in July of 2012. Of the increase in sales, approximately $40.6 million are additional sales related to the acquisition of Bauer and $2.7 million are additional sales related to the acquisition of Lamiflex, with the majority of the remaining increase attributable to modest increases in sales in North America and the rest of the world, partially offset by the impact related to the economic downturn in Europe and $11.0 million related to the negative impact of foreign exchange rate changes primarily attributed to the Euro and British Pound Sterling rates compared to 2011. We forecast that sales will increase modestly in 2013 primarily due to the introduction of new products, price increases, and the full year effect of the acquisition of Lamiflex.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
    December 31,
2011
    Change      %  

Gross Profit

   $ 218,548      $ 196,418      $ 22,130         11.3

Gross Profit as a percent of sales

     29.9     29.1     

Gross profit.    Of the increase in gross profit, approximately $12.8 million is related to the acquisitions of Bauer and Lamiflex. In addition, price increases implemented during the past twelve months, profit and productivity improvements and low cost country sourcing have resulted in improved gross profit margins compared to prior year. These factors are offset by the negative impact of foreign exchange rate changes

 

36


primarily related to the Euro and British Pound Sterling compared to 2011 of $3.2 million. We forecast that 2013 gross profit as a percentage of sales will increase modestly when compared to 2012 due to price increases and as we continue to focus on improving operational efficiency within Europe and, in particular, as part of restructuring activities implemented during late 2012.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
    December 31,
2011
    Change      %  

Selling, general and administrative expense (“SG&A”)

   $ 127,044      $ 113,375      $ 13,669         12.1

SG&A as a percent of sales

     17.4     16.8     

Selling, general and administrative expenses.    The vast majority of the increase in SG&A, approximately $13.9 million, was due to the acquisitions of Bauer and Lamiflex. Increased costs associated with wage increases of $4.1 million were offset by the favorable effect of foreign exchange of $2.1 million and a decrease in acquisition related expense of $2.5 million. SG&A as a percentage of sales increased as a result of the acquisition of Bauer. We have begun to take actions in Europe to improve profitability. These actions include reducing headcount and limiting discretionary spending. We forecast increases to our SG&A costs as a result of a full year of Lamiflex and general wage and benefit cost increases and plan to leverage them on increased sales as we invest in resources to enable us to grow faster in emerging markets and strategic industries in 2013.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
     December 31,
2011
     Change      %  

Research and development expenses (“R&D”)

   $ 11,457       $ 10,609       $ 848         8.0

Research and development expenses.    R&D expenses increased on an absolute dollar basis but maintained a level of approximately 1.5% of sales in both periods. $0.9 million of the increase in R&D expense in 2012 is related to the full year effect of the acquisition of Bauer, which occurred in May 2011. Increased R&D activities as well as headcount additions also contributed to the increase in R&D expense. We do not forecast significant variances in 2013 as a percentage of sales.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
     December 31,
2011
     Change      %  

Interest Expense, net

   $ 40,790       $ 24,035       $ 16,755         69.7

Interest expense.    Net interest expense increased due to the additional premium paid related to the redemption of Senior Secured Notes in July 2012 and additional premium paid related to the subsequent refinancing of the remaining outstanding Senior Secured notes in late 2012 and due to the expensing of unamortized costs associated with the issuance of the Senior Secured Notes and premium paid, for a total of $14.6 million. In conjunction with the refinancing, we wrote off the deferred financing costs associated with the old revolving credit agreement, which appears as interest expense in our Consolidated Statements of Comprehensive Income.

We expect interest expense to decrease substantially in 2013 by approximately $10.0 to $11.0 million due to the full year 2013 impact of the recent refinancing of our borrowings at more favorable interest rates.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
     December 31,
2011
    Change      %  

Other non-operating (income) expense, net

   $ 1,702       $ (32   $ 1,734         5419

 

37


Other non-operating (income) expense.    Other non-operating (income) expense in 2012 related primarily to the settlement of a tax matter with the State of New York for which we were fully indemnified by a third party. The settlement was for less than the indemnification receivable we had recorded, resulting in a an expense of $0.9 million. We recorded an offsetting benefit in the 2012 tax provision as a result of the settlement. The remainder of expense in 2012, and income in 2011, relates to changes in foreign currency, primarily the British Pound Sterling and Euro.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
     December 31,
2011
     Change      %  

Restructuring Expense

   $ 3,196       $ —         $ 3,196         (100 )% 

Restructuring expense.    In the quarter ended December 31, 2012, we adopted a restructuring plan (the “2012 Altra Plan”) to improve profitability in Europe. These actions include reducing headcount, moving and relocating equipment and limiting discretionary spending. The Company expects to incur additional expenses of between approximately $0.7 and $1.0 million during 2013 associated with the 2012 Altra Plan. Following payment of these additional expenses in 2013, we expect to see annualized savings from restructuring efforts of between $3.5 and $4.0 million.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2012
    December 31,
2011
    Change     %  

Provision for income taxes

   $ 10,154      $ 10,756      $ (602     5.6

Provision for income taxes as a % of income before taxes

     29.6     22.2    

Provision for income taxes.    The 2012 provision for income taxes, as a percentage of income before taxes, was higher than that of 2011 primarily due to 2011 favorable discrete items including a tax benefit for the reduction of the Company’s reserve for uncertain tax positions due to a favorable New Jersey Supreme Court ruling in a case that did not involve the Company. The reserve amount released as a result of the ruling consisted of approximately $2.3 million of tax, $1.8 million accrued interest and $0.5 million of penalties. In addition, in 2011, the Company reversed $1.4 million of deferred tax assets related to the federal benefit of the accrued state reserve. The net benefit to the Company was approximately $3.2 million. Finally, during 2011 the Company released $0.7 million of a valuation allowance against state income tax attributes.

Discrete tax items that occurred in 2012 partially offset the 2011 discrete tax items. During 2012, the Company settled a tax matter with the State of New York for which the Company was fully indemnified. Upon completion of the settlement, the Company released its reserve for $3.1 million of tax, interest and penalties combined, related to the unrecognized tax benefit. In addition, the Company recognized a benefit of $0.4 million related to the completion of the 2010 limited scope audit, and the completion of the 2007 audit by the Internal Revenue Service, and recorded a related change in tax rates in certain jurisdictions of $0.4 million. This was offset by the impact of the 2011 tax return filings in certain foreign jurisdictions which resulted in additional tax expense.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Taxpayer Relief Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. As a result of the retroactive extension, we expect to recognize a benefit of approximately $0.4 million for qualifying amounts incurred in 2012. This benefit will be recognized as a discrete item in the period of enactment, the first quarter of 2013.

We forecast that tax expense will increase in 2013 due to lower interest expense as a result of our 2012 refinancing of our borrowings at more favorable interest rates.

 

38


Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
     December 31,
2010
     Change      %  

Net sales

   $ 674,812       $ 520,162       $ 154,650         29.7 %

Net sales.    The increase in sales in 2011 was due to improvement in the end markets we serve compared to 2010 and the acquisition of Bauer. As a result, net sales increased at all of our operating segments. Of the increase in sales, approximately $65.9 million relates to the additional sales related to the acquisition of Bauer, $8.9 million relates to the impact of foreign exchange rate changes attributed primarily to the Euro and British Pound Sterling rates compared to 2010, and approximately $7.9 million relates to the impact of price increases.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
    December 31,
2010
    Change      %  

Gross Profit

   $ 196,418      $ 154,011      $ 42,407         27.5 %

Gross Profit as a percent of sales

     29.1 %     29.6 %     

Gross profit.    The decrease in gross profit as a percentage of sales was primarily due to increased material costs, specifically related to the price of copper and steel. The inclusion of Bauer negatively effected gross profit as a percentage of sales by approximately 400 basis points. Gross profit was favorably impacted by the effect of foreign exchange of $3.1 million, primarily related to the Euro and British Pound Sterling, and price increases of $7.9 million when compared to 2010, off-set by the incorporation of seven months of results for Bauer, which includes an inventory fair value charge of $0.6 million and lower gross profit margins.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
    December 31,
2010
    Change      %  

Selling, general and administrative expense (“SG&A”)

   $ 113,375      $ 89,478      $ 23,897         26.7 %

SG&A as a percent of sales

     16.8 %     17.2 %     

Selling, general and administrative expenses.    SG&A increased $14.4 million due to the acquisition of Bauer, $3.1 million of acquisition related expenses, as well as the effect of foreign exchange of $1.2 million. However, due to our cost reduction and containment efforts over the past two years that were focused on headcount reductions and the elimination of non-critical expenses, SG&A as a percentage of sales decreased in 2011 when compared to 2010.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
     December 31,
2010
     Change      %  

Research and development expenses (“R&D”)

   $ 10,609       $ 6,731       $ 3,878         57.6 %

Research and development expenses.    R&D expenses represented approximately 1% of sales in both periods. $1.3 million of the increase in R&D expense in 2011 is related to the newly acquired Bauer business. Increased R&D activities as well as headcount additions also attributed to the increase in R&D expense.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
     December 31,
2010
     Change      %  

Interest Expense, net

   $ 24,035       $ 19,638       $ 4,397         22.4 %

 

39


Interest expense.    Net interest expense increased due to the issuance of $85.0 million of Convertible Notes in March 2011, as well as the repurchase of $12.0 million of Senior Secured Notes in 2011 at a premium of $0.3 million, which was recorded as part of interest expense. Due to the repurchase of the Senior Secured Notes, the Company also wrote-off a proportional amount of the deferred financing fees and original issue discount associated with the Senior Secured Notes totaling $0.4 million which was also recorded as part of interest expense in 2011.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
    December 31,
2010
     Change     %  

Other non-operating (income) expense, net

   $ (32 )   $ 909       $ (941 )     -104 %

Other non-operating (income) expense.    Other non-operating (income) expense in both the years ended December 31, 2011 and 2010 primarily relates to changes in foreign currency, primarily the British Pound Sterling and Euro.

 

Amounts in thousands, except percentage data    Year Ended  
      December 31,
2011
     December 31,
2010
     Change     %  

Restructuring Expense

   $      $ 2,726       $ (2,726 )     (100 )%

In March 2009, we adopted a restructuring plan (the “2009 Altra Plan”) to continue to improve the utilization of our manufacturing infrastructure and to realign our business with economic conditions by consolidating certain facilities. We substantially concluded our restructuring efforts as of the quarter ended December 31, 2010 and there were no additional expense associated with the 2009 Altra Plan going forward.

 

Amounts in thousands, except percentage data    Year Ended  
     December 31,
2011
    December 31,
2010
    Change      %  

Provision for income taxes, continuing operations

   $ 10,756      $ 10,004      $ 752         7.5 %

Provision for income taxes as a % of income before taxes

     22.2 %     29.0 %     

Provision for income taxes.    Income tax expense was $10.8 million for the year ended December 31, 2011, compared to expense of $10.0 million for the year ended December 31, 2010. Our effective tax rate was 22.2% and 29.0% for the years ended December 31, 2011 and December 31, 2010, respectively. The decrease in the tax rate was primarily driven by a reduction of the Company’s reserve for uncertain tax positions due to a favorable New Jersey court ruling in a case that did not involve the Company. Additionally, the Company released a valuation allowance on state net operating losses related to projected profitability at various of our domestic entities.

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 revolving credit facility (“Revolving Credit Facility”). We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, acquisitions and pension plan funding. In the event additional funds are needed for operations, we could borrow additional funds available under our existing Revolving Credit Facility, request an expansion by $150,000,000 of the amount available to be borrowed under the Credit Agreement, attempt to secure new debt, attempt to refinance our loans under the Credit Agreement, or attempt to raise capital in the equity markets. Presently, we have the ability under our Revolving Credit Facility to borrow an additional $113.1 million, based on current availability calculations. 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.

 

40


During 2012, Altra redeemed the remaining principal balance of the 8 1/8% Senior Secured Notes (the “Senior Secured Notes”), of $198.0 million. In connection with the redemption, Altra incurred $11.4 million of pre-payment premiums and wrote-off the entire remaining balance of $4.4 million of deferred financing fees, which is recorded as interest expense in the Consolidated Statement of Comprehensive Income for 2012. The funding for retiring our Senior Secured Notes and the prior Revolving Credit Agreement were provided from the proceeds of the Term Loan Facility and a portion of the proceeds of the Revolving Credit Facility, along with cash on hand. As of December 31, 2012, we had $79.3 million outstanding on our Revolving Credit Facility, $100.0 million outstanding under our Term Loan Facility and $7.6 million in letters of credit outstanding.

Credit Agreement

In November 2012, the Company entered into a Credit Agreement with certain financial institutions (collectively, the “Lenders”), to be guaranteed by certain domestic subsidiaries of the Company (each a “Guarantor” and collectively the “Guarantors”). Pursuant to the Credit Agreement, the Lenders made available to the Company an initial term loan facility of $100,000,000 (the “Term Loan Facility”) and an amount of $200,000,000 under the Revolving Credit Facility.

Interest on the amounts outstanding under the credit facilities is calculated using either an ABR Rate or Eurodollar rate, plus the applicable margin. The applicable margins for Eurodollar Loans are between 1.375% to 1.875%, and for ABR Loans are between 0.375% and 0.875%. The Credit Agreement provides for a possible expansion of the facilities by an aggregate additional $150,000,000, which can be allocated as additional term loans and/or additional revolving credit loans. The amounts available under the Term Loan Facility and Revolving Credit Facility are to be available for general corporate purposes and to repay existing indebtedness. The stated maturity of both of these credit facilities is November 20, 2017, and there are scheduled quarterly principal payments due on the outstanding amount of the Term Loan Facility. A portion of the Revolving Credit Facility may be used for the issuance of letters of credit, and a portion of the amount of the Revolving Credit Facility is available for borrowings in certain agreed upon foreign currencies.

The Credit Agreement contains various affirmative and negative covenants and restrictions, which among other things, will require the Company and certain Subsidiaries to provide certain financial reports to the Lenders, require the Company to maintain certain financial covenants relating to consolidated leverage and interest coverage, limit maximum annual capital expenditures, and limit the ability of the Company and its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other equity distributions, purchase or redeem capital stock or debt, make certain investments, sell assets, engage in certain transactions, and effect a consolidation or merger. The Credit Agreement also contains customary events of default. The Company was in compliance in all material respects with all covenants of the Credit Agreement at December 31, 2012.

Pledge and Security Agreement; Trademark Security Agreement; Patent Security Agreement.

Pursuant to the Credit Agreement, on November 20, 2012, the Loan Parties and the Administrative Agent entered into a Pledge and Security Agreement (the “Pledge and Security Agreement”), pursuant to which each Loan Party pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all personal property, whether now owned by or owing to, or after acquired by or arising in favor of such Loan Party (including under any trade name or derivations), and whether owned or consigned by or to, or leased from or to, such Loan Party, and regardless of where located, except for specific excluded personal property identified in the Pledge and Security Agreement (collectively, the “Collateral”). Notwithstanding the foregoing, the Collateral does not include, among other items, more than 65% of the capital stock of the first tier foreign subsidiaries of the Company. The Pledge and Security Agreement contains other customary representations, warranties and covenants of the parties. The Credit Agreement provides that the obligation to grant the security interest can cease upon the obtaining of certain corporate family ratings for the Company, but the obligation to grant a security interest is subject to subsequent reinstatement if the ratings are not maintained as provided in the Credit Agreement.

In connection with the Pledge and Security Agreement, certain of the Loan Parties delivered a Patent Security Agreement and a Trademark Security Agreement in favor of the Administrative Agent pursuant to which each of the Loan Parties signatory thereto pledges, assigns and grants to the Administrative Agent, on

 

41


behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all registered patents, patent applications, registered trademarks and trademark applications owned by such Loan Parties.

Convertible Senior Notes

In March 2011, the Company issued Convertible Senior Notes (the “Convertible Notes”) due March 1, 2031. The Convertible Notes are guaranteed by the Company’s U.S. domestic subsidiaries. Interest on the Convertible Notes is payable semi-annually in arrears, on March 1 and September 1 of each year, commencing on September 1, 2011 at an annual rate of 2.75%. Proceeds from the offering were $81.3 million, net of fees and expenses that were capitalized. The proceeds from the offering were used to fund the Bauer Acquisition, as well as bolster the Company’s cash position.

We were in compliance in all material respects with all covenants of the indenture governing the Convertible Notes at December 31, 2012.

Borrowings

 

     Amounts in millions  
     December
31, 2012
     December
31, 2011
 

Debt:

     

Revolving Credit Facility

   $ 79.3       $   

Convertible Notes

     85.0         85.0   

Term Loan

     100.0           

Equipment Loan

     1.1           

Senior Secured Notes

             198.0   

Variable rate demand revenue bonds

             3.0   

Mortgages

     1.0         1.8   

Capital leases

     0.1         0.4   

Other

     0.4           
  

 

 

    

 

 

 

Total Debt

   $ 266.9       $ 288.2   
  

 

 

    

 

 

 

Cash and Cash Equivalents

 

Amounts in thousands, except percentage data       
     2012     2011     Change  

Cash and cash equivalents at the beginning of the period

   $ 92,515      $ 72,723      $ 19,792   

Cash flows from operating activities

     59,918        46,901        13,017   

Cash flows from investing activities

     (38,770     (89,887     51,117   

Cash flows from financing activities

     (29,880     64,765        (94,645

Effect of exchange rate changes on cash and cash equivalents

     1,371        (1,987     3,358   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 85,154      $ 92,515      $ (7,361
  

 

 

   

 

 

   

 

 

 

Cash Flows for 2012

The primary sources of funds provided from operating activities of approximately $59.9 million for fiscal 2012 resulted from cash provided from net income of $24.2 million. The net impact of the add-back of certain items including non-cash depreciation, amortization, stock-based compensation, accretion of debt discount, deferred financing costs, and non-cash loss on foreign currency was approximately $40.8 million. This amount was offset by a net increase in current assets and liabilities of approximately $4.6 million.

 

42


The change in cash flows from operating activities in 2012 as compared to 2011 related to a decrease in accounts receivable and inventory. Due to the focus on the integration of Bauer, and the inclusion of an additional $15.5 million of accounts receivables in 2011, the cash collection of those receivables in 2011 was not as timely as it was during 2012. Inventory balances have decreased due to planned inventory management efforts that have positively impacted our inventory levels. While a variety of factors can influence our ability to project future cash flow, we expect to see positive cash flows from operating activities during 2013 due to income from operations, lower interest expense and a decrease in working capital.

The change in net cash used in investing activities was primarily due to the acquisition of Bauer in May 2011 for $69.5 million. This was offset in 2012 by capital expenditures to fund our plant construction in ChangZhou, China of $6.7 million and the acquisition of Lamiflex for $7.4 million.

The change in net cash from financing activities was primarily due to the issuance of $85.0 million of Convertible Notes in March 2011. The cash used in financing activities in 2012 was primarily used to retire $198.0 million of 8 1/8% Senior Secured Notes, to redeem $3.0 million in variable rate demand revenue bonds related to our San Marcos facility and to make $4.3 million of dividend payments. This was partially offset by the funds provided under the new Credit Facility of $179.3 million.

We intend to use our remaining existing cash and cash equivalents and cash flow from operations to provide for our working capital needs, to fund potential future acquisitions, debt service, including principal payments, and capital expenditures, for pension funding, and to pay dividends to our stockholders. We have approximately $53.3 million of cash and cash equivalents held by foreign subsidiaries that are generally subject to U.S. income taxation on repatriation to the U.S. We believe our future operating cash flows will be sufficient to meet our future operating and investing cash needs. Furthermore, the existing cash balances and the availability of additional borrowings under our Revolving Credit Facility provide additional potential sources of liquidity should they be required.

As a result of continued sluggish demand in Europe and general global economic conditions, we adopted a restructuring plan (the “2012 Altra Plan”) in the quarter ended December 31, 2012 to improve profitability in Europe. The actions included in the 2012 Altra Plan include reducing headcount and limiting discretionary spending. We expect to experience improved liquidity as a result of these measures in 2013.

Cash Flows for 2011

Amount in thousands, except percentage data

 

      2011     2010     Change  

Cash and cash equivalents at the beginning of the period

   $ 72,723      $ 51,497      $ 21,226   

Cash flows from operating activities

     46,901        42,764        4,137   

Cash flows from investing activities

     (89,887     (17,827     (72,060

Cash flows from financing activities

     64,765        (3,359     68,124   

Effect of exchange rate changes on cash and cash equivalents

     (1,987     (352     (1,635
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 92,515      $ 72,723      $ 19,792   
  

 

 

   

 

 

   

 

 

 

The primary source of funds for our fiscal year 2011 was cash provided by operating activities of $46.9 million. Net cash used in investing activities of $89.9 million for the acquisition of Bauer, purchases of property, plant and equipment primarily for investment in manufacturing equipment and our new ERP system, off-set by funds received from the sale of both our Stratford and Chattanooga facilities. Net cash from financing activities of $64.8 million for 2011 consisted primarily of proceeds from the issuance of our Convertible Notes and partially off-set by payments for debt issuance costs, the repurchase of $12.0 million of Senior Secured Notes, redemption of variable rate demand revenue bonds related to the Chattanooga facility, and shares repurchased in lieu of taxes in connection with the vesting of restricted stock awards.

 

43


The change in cash flows from operating activities in 2011 as compared to 2010 related to increased net income of approximately $13.1 million, offset by the inclusion of additional accounts payable increase of $12.8 million, increases of pensions of approximately $2.1 million along with other increases in other current assets related primarily to the acquisition of Bauer.

The change in cash flows used in investing activities was primarily due to the acquisition of Bauer in May 2011 for $69.5 million.

The change in cash flows from financing activities was primarily due to the issuance of $85.0 million of Convertible Notes in March 2011. This was offset by cash in financing activities to retire approximately $11.9 million of 8 1/8% Senior Secured Notes, and to redeem approximately $2.3 million in variable rate demand revenue bonds related to our Chattanooga facility.

Capital Expenditures

We made capital expenditures of approximately $31.3 million and $22.2 million in the years ended December 31, 2012 and December 31, 2011, respectively. These capital expenditures will support on-going business needs. In 2013, we forecast capital expenditures to be in the range of $22.0 million to $25.0 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that provide liquidity, capital resources, market or credit risk support that expose us to any liability that is not reflected in our consolidated financial statements.

Contractual Obligations

The following table is a summary of our contractual cash obligations as of December 31, 2012 (in thousands):

 

    Payments Due by Period  
    2013     2014     2015     2016     2017     There after     Total  

Term Loan Facility(1)

  $ 7,500      $ 10,000      $ 10,000      $ 12,500      $ 60,000      $      $ 100,000   

Convertible Notes(2 )

                                       85,000        85,000   

Operating leases

    6,798        6,228        3,948        3,372        2,063        3,797        26,206   

Capital leases

    26        26        27        14        6               99   

Mortgage(3 )

    376        376        286                             1,038   

Revolving Credit

             

Facility(4 )

                                79,304               79,304   

Equipment loan(5)

    1,100                                           1,100   

Other

    178        292                                    470   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual cash obligations

  $ 15,978      $ 16,922      $ 14,261      $ 15,886      $ 141,373      $ 88,797      $ 293,217   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We have monthly and/or quarterly cash interest requirements due on the Term Loan Facility payable at variable rates which are not included in the above table.

 

(2) We have semi-annual cash interest requirements due on the Convertible Notes with $2.3 million payable in 2013 through 2017, and $0.4 million due thereafter which are not included in the above table.

 

(3) In June, 2006, our German subsidiary entered into a mortgage on its building in Heidelberg, Germany, with a local bank. The mortgage has a principal of €0.7 million ($1.0 million) as of December 31, 2012, an interest rate of 2.9% and is payable in monthly installments over the next 3 years.

 

(4)

We have up to $200 million of borrowing capacity, through November 2017, under our Revolving Credit Facility. As of December 31, 2012, there were $7.6 million of outstanding letters of credit under our

 

44


  Revolving Credit Facility. We have variable monthly and/or quarterly cash interest requirements due on the Revolving Credit Facility through 2017.

 

(5) The Company has up to a 24.6 RMB ($3.9 Million) Equipment Loan with a Chinese bank to furnish its new facility in Changzhou, China with equipment. The loan had a principal of 12.4 million RMB ($1.1 million) at December 31, 2012. Interest is payable monthly at 6.4%. The principal amount of the equipment loan is due in August 2013 when the note expires.

We have cash funding requirements associated with our pension plan. As of December 31, 2012, these requirements were estimated to be $1.0 million annually from 2013 to 2017, which are not included in the above table. These amounts are based on actuarial assumptions and actual amounts could be materially different.

We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $0.7 million as of December 31, 2012, have been excluded from the contractual obligations table above. For further information on unrecognized tax benefits, see Note 7 to the consolidated financial statements.

Stock-based Compensation

In January 2005, we established the 2004 Equity Incentive Plan that provides for various forms of stock based compensation to our officers and senior level employees.

As of December 31, 2012, there were 162,586 shares of unvested restricted stock outstanding under the plan. The remaining compensation cost to be recognized through 2015 is $2.6 million. Based on the stock price at December 31, 2012, of $22.05 per share, the intrinsic value of these awards as of December 31, 2012, was $3.6 million.

Income Taxes

We are subject to taxation in multiple jurisdictions throughout the world. Our effective tax rate and tax liability will be affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and repatriate income, and changes in law. Generally, the tax liability for each legal entity is determined either (a) on a non-consolidated and non-combined basis or (b) on a consolidated and combined basis only with other eligible entities subject to tax in the same jurisdiction, in either case without regard to the taxable losses of non-consolidated and non-combined affiliated entities. As a result, we may pay income taxes to some jurisdictions even though on an overall basis we incur a net loss for the period.

Seasonality

We experience seasonality in our turf and garden business, which in recent years has represented approximately 7% of our net sales. As our large OEM customers prepare for the spring season, our shipments generally start increasing in December, peak in February and March, and begin to decline in April and May. This allows our customers to have inventory in place for the peak consumer purchasing periods for turf and garden products. The June-through-November period is typically the low season for us and our customers in the turf and garden market. Seasonality is also affected by weather and the level of housing starts.

Inflation

Inflation can affect the costs of goods and services we use. The majority of the countries that are of significance to us, from either a manufacturing or sales viewpoint, have in recent years enjoyed relatively low inflation. The competitive environment in which we operate inevitably creates pressure on us to provide our customers with cost-effective products and services.

 

45


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risk factors such as fluctuating interest rates, changes in foreign currency rates and changes in commodity prices. At present, we do not utilize derivative instruments to manage these risks.

Currency translation.    The results of operations of our foreign subsidiaries are translated into U.S. Dollars at the average exchange rates for each period concerned. The balance sheets of foreign subsidiaries are translated into U.S. Dollars at the exchange rates in effect at the end of each period. Any adjustments resulting from the translation are recorded as other comprehensive income. As of December 31, 2012 and 2011, the aggregate total assets (based on book value) of foreign subsidiaries were $262.1 million and $236.5 million, respectively, representing approximately 41.4% and 37.6%, respectively, of our total assets (based on book value). Our foreign currency exchange rate exposure is primarily with respect to the Euro and British Pound Sterling. The approximate exchange rates in effect at December 31, 2012 and 2011, were $1.32 and $1.29, respectively to the Euro. The approximate exchange rates in effect at December 31, 2012 and 2011 were $1.62 and $1.54, respectively to the British Pound Sterling.

Currency transaction exposure.    Currency transaction exposure arises where actual sales, purchases and financing transactions are made by a business or company in a currency other than its own functional currency. Any transactional differences at an international location are recorded in net income on a monthly basis.

Interest rate risk.    We are subject to market exposure to changes in interest rates on some of our financing activities. This exposure relates to borrowings under our Term Loan Facility and our Revolving Credit Facility. Interest on the amounts outstanding under the credit facilities is calculated using either an ABR Rate or Eurodollar rate, plus the applicable margin. The applicable margins for Eurodollar Loans are between 1.375% to 1.875%, and for ABR Loans are between 0.375% and 0.875%. As of December 31, 2012, we had $79.3 million in borrowings under our Revolving Credit Facility and $7.6 million of outstanding letters of credit under our Revolving Credit Facility. A hypothetical change in interest rates of 1% on our outstanding variable rate debt would increase our annual interest expense by approximately $1.9 million. We intend to swap a portion of our variable interest payments to fixed payments during 2013.

Commodity Price Exposure.    We have exposure to changes in commodity prices principally related to metals including steel, copper and aluminum. From the first quarter of 2004 to the fourth quarter of 2012, the average price of copper and steel has increased approximately 168% and 78%, respectively. We primarily mange our 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.

 

46


Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Altra Holdings, Inc.

Braintree, Massachusetts

We have audited the accompanying consolidated balance sheets of Altra Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Altra Holdings, Inc. and subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/    Deloitte & Touche LLP

Boston, Massachusetts

February 25, 2013

 

47


ALTRA HOLDINGS, INC.

Consolidated Balance Sheets

Amounts in thousands, except share amounts

 

     Year Ended December 31,  
     2012     2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 85,154      $ 92,515   

Trade receivables, less allowance for doubtful accounts of $2,560 and $1,092 at December 31, 2012 and 2011, respectively

     92,933        91,859   

Inventories

     123,776        125,970   

Deferred income taxes

     8,918        5,856   

Income tax receivable

     6,397        7,299   

Prepaid expenses and other current assets

     6,578        7,141   
  

 

 

   

 

 

 

Total current assets

     323,756        330,640   

Property, plant and equipment, net

     138,094        123,464   

Intangible assets, net

     76,098        77,108   

Goodwill

     88,225        83,799   

Deferred income taxes

     1,150        1,614   

Other non-current assets, net

     5,716        13,360   
  

 

 

   

 

 

 

Total assets

   $ 633,039      $ 629,985   
  

 

 

   

 

 

 
LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 43,042      $ 52,768   

Accrued payroll

     19,893        19,734   

Accruals and other current liabilities

     33,796        28,798   

Deferred income taxes

     34        118   

Current portion of long-term debt

     9,135        688   
  

 

 

   

 

 

 

Total current liabilities

     105,900        102,106   

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

     238,460        263,361   

Deferred income taxes

     38,821        35,798   

Pension liabilities

     14,529        12,896   

Other post retirement benefits

     230        296   

Long-term taxes payable

     1,118        6,227   

Other long-term liabilities

     730        905   

Redeemable non-controlling interest

     1,239          

Commitments and Contingencies                                             Note 13

    

Stockholders’ equity:

    

Preferred stock ($0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at December 31, 2012 and 2011, respectively)

              

Common stock ($0.001 par value, 90,000,000 shares authorized, 26,724,349 and 26,600,056 issued and outstanding at December 31, 2012 and 2011, respectively)

     27        27   

Additional paid-in capital

     152,188        150,234   

Retained earnings

     103,200        83,211   

Accumulated other comprehensive income

     (23,403     (25,076
  

 

 

   

 

 

 

Total stockholders’ equity

     232,012        208,396   

Total liabilities, non-controlling interest and stockholders’ equity

   $ 633,039      $ 629,985   
  

 

 

   

 

 

 

 

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

 

48


ALTRA HOLDINGS, INC.

Consolidated Statements of Comprehensive Income

Amounts in thousands, except per share data

 

     December 31,  
     2012     2011     2010  

Net sales

   $ 731,990      $ 674,812      $ 520,162   

Cost of sales

     513,442        478,394        366,151   
  

 

 

   

 

 

   

 

 

 

Gross profit

     218,548        196,418        154,011   

Operating expenses:

      

Selling, general and administrative expenses

     127,044        113,375        89,478   

Research and development expenses

     11,457        10,609        6,731   

Restructuring costs

     3,196               2,726   
  

 

 

   

 

 

   

 

 

 
     141,697        123,984        98,935   

Income from operations

     76,851        72,434        55,076   

Other non-operating income and expense:

      

Interest expense, net

     40,790        24,035        19,638   

Other non-operating (income) expense, net

     1,702        (32     909   
  

 

 

   

 

 

   

 

 

 
     42,492        24,003        20,547   

Income before income taxes

     34,359        48,431        34,529   

Provision for income taxes

     10,154        10,756        10,004   
  

 

 

   

 

 

   

 

 

 

Net income

     24,205        37,675        24,525   

Net loss attributable to non-controlling interest

     88                 
  

 

 

   

 

 

   

 

 

 

Net income attributable to Altra Holdings, Inc.

   $ 24,293      $ 37,675      $ 24,525   
  

 

 

   

 

 

   

 

 

 

Consolidated Statement of Comprehensive Income

      

Pension liability adjustment, net of tax

     (2,122     (1,603     (1,950

Foreign currency translation adjustment, net of tax

     3,795        (8,802     1,925   
  

 

 

   

 

 

   

 

 

 

Total Comprehensive income

     25,966        27,270        24,500   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to non-controlling interest

                     
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Altra Holdings, Inc.

   $ 25,966      $ 27,270      $ 24,500   
  

 

 

   

 

 

   

 

 

 

Weighted average shares, basic

     26,656        26,526        26,399   

Weighted average shares, diluted

     26,756        26,689        26,535   

Earnings per share:

      

Basic net income attributable to Altra Holdings, Inc.

   $ 0.91      $ 1.42      $ 0.93   

Diluted net income attributable to Altra Holdings, Inc.

   $ 0.91      $ 1.41      $ 0.92   

Cash dividend declared

   $ 0.16      $      $   

 

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

 

49


ALTRA HOLDINGS, INC.

Consolidated Statements of Stockholders’ Equity

Amounts in thousands

 

    Common
Stock
    Shares     Additional
Paid in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total         Redeemable
Non-
Controlling
Interest
 

Balance at January 1, 2010

  $   26        26,058      $ 132,552      $ 21,011      $ (14,646   $ 138,943          $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Stock based compensation and vesting of restricted stock

           408        1,309                      1,309              

Net income

                         24,525               24,525              

Cumulative foreign currency translation adjustment, net of $108 of tax expense

                                1,925        1,925              

Minimum Pension adjustment, net of $1,098 tax expense

                                (1,950     (1,950           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Balance at December 31, 2010

  $ 26        26,466      $ 133,861      $ 45,536      $ (14,671   $ 164,752          $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Stock based compensation and vesting of restricted stock

    1        134        1,819                      1,820              

Net income

                         37,675               37,675              

Convertible Notes

                  24,510                      24,510              

Deferred taxes on Convertible Notes

                  (8,966                   (8,966           

Deferred financing costs on Convertible Notes

                  (990                   (990           

Cumulative foreign currency translation adjustment, net of $731 of tax expense

                                (8,802     (8,802           

Minimum Pension adjustment, net of $868 tax expense

                                (1,603     (1,603           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Balance at December 31, 2011

  $ 27        26,600      $ 150,234      $ 83,211      $ (25,076   $ 208,396          $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Stock based compensation and vesting of restricted stock

           124        1,954                      1,954              

Net income attributable to Altra Holdings, Inc.

                         24,293               24,293              

Net loss attributable to non- controlling interest

                                                  (88

Fair value of non-controlling interest at acquisition

                                                  1,327   

Dividends declared

                         (4,304            (4,304           

Minimum Pension adjustment, net of $1,388 tax expense

                                (2,122     (2,122           

Cumulative foreign currency translation adjustment, net of $994 tax expense

                                3,795        3,795              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Balance at December 31, 2012

  $ 27        26,724      $ 152,188      $ 103,200      $ (23,403   $ 232,012          $ 1,239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

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

 

50


ALTRA HOLDINGS, INC.

Consolidated Statements of Cash Flows

Amounts in thousands

 

     Year ended December 31,  
     2012     2011     2010  

Cash flows from operating activities

      

Net income

   $ 24,205      $ 37,675      $ 24,525   

Adjustments to reconcile net income to net cash flows provided by operating activities:

      

Depreciation

     20,537        18,403        15,010   

Amortization of intangible assets

     6,839        6,280        5,026   

Amortization and write-offs of deferred loan costs

     6,006        1,833        1,144   

(Gain) loss on foreign currency, net

     (125     843        313   

Accretion and write-off of debt discount and premium

     4,869        2,696        303   

Loss on disposal/impairment of fixed assets

     251        287        360   

Gain on settlement/curtailment of other post retirement benefit and pension plans

                   189   

Amortization of inventory fair value adjustment

     122        581          

Stock based compensation

     2,696        2,471        2,136   

(Benefit) provision for deferred taxes

     (625     4,879        6,657   

Changes in assets and liabilities:

      

Trade receivables

     836        (9,379     (13,540

Inventories

     4,084        (19,948     (16,819

Accounts payable and accrued liabilities

     (6,640     8,839        21,618   

Other current assets and liabilities

     726        (1,344     (795

Other operating assets and liabilities

     (3,863     (7,215     (3,363
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     59,918        46,901        42,764   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Purchase of property, plant and equipment

     (31,346     (22,242     (17,295

Proceeds from sale of Stratford Facility

            331          

Proceeds from sale of Chattanooga Facility

            1,484          

Acquisition of Lamiflex, net of $68 cash received

     (7,424              

Acquisition of Bauer, net of $41 cash received

            (69,460       

Payments for prior year acquisitions

                   (532
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (38,770     (89,887     (17,827
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Payment of debt issuance costs

     (2,454     (3,674     (489

Redemption of variable rate demand revenue bonds related to the Chattanooga facility

            (2,290       

Redemption of variable rate demand revenue bonds related to the San Marcos Facility

     (3,000    

Purchase of 8 1/8% Senior Secured Notes

     (198,045     (11,955       

Payment on mortgages and other

     (1,199     (547     (642

Payment for prior year acquisitions

                   (645

Proceeds from issuance of Convertible Notes

            85,000          

Proceeds from Term Loan Facility and Revolving Credit Facility

     179,304                 

Proceeds from Equipment Loan

     1,100                 

Shares surrendered for tax withholding

     (949     (944     (919

Dividend payments

     (4,304              

Net payments on capital leases

     (333     (825     (664
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     (29,880     64,765        (3,359
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,371        (1,987     (352
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (7,361     19,792        21,226   

Cash and cash equivalents at beginning of year

     92,515        72,723        51,497   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 85,154      $ 92,515      $ 72,723   
  

 

 

   

 

 

   

 

 

 

Cash paid during the period for:

      

Interest

   $ 30,891      $ 18,724      $ 18,393   

Income taxes

   $ 12,397      $ 11,8 60      $ 4,357   

Non-cash Financing and Investing:

      

Acquisition of capital equipment under capital lease

   $      $      $ 212   

Acquisition of property, plant and equipment included in accounts payable

   $ 574      $ 577      $ 586   

Mortgage receivable on sale of Stratford facility

   $      $ 623      $   

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

 

51


ALTRA HOLDINGS, INC.

Notes to Consolidated Financial Statements

Amounts in thousands (unless otherwise noted)

1.    Description of Business and Summary of Significant Accounting Policies

Basis of Preparation and Description of Business

Headquartered in Braintree, Massachusetts, Altra Holdings, Inc. (the “Company”), through its wholly-owned subsidiary Altra Industrial Motion, Inc. (“Altra Industrial”), is a leading multi-national designer, producer and marketer of a wide range of electro-mechanical power transmission and motion control products. The Company brings together strong brands covering over 50 product lines with production facilities in nine countries and sales coverage in over 70 countries. The Company’s leading brands include Boston Gear, Warner Electric, TB Wood’s, Formsprag Clutch, Ameridrives Couplings, Industrial Clutch, Kilian Manufacturing, Marland Clutch, Nuttall Gear, Stieber Clutch, Wichita Clutch, Twiflex Limited, Bibby Transmissions, Matrix International, Inertia Dynamics, Huco Dynatork, Warner Linear, Bauer Gear Motor, and PowerFlex.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Net Income Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common equivalent shares outstanding. Common equivalent shares are included in the per share calculations when the effect of their inclusion would be dilutive.

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

 

     Year Ended December, 31  
     2012      2011      2010  

Net income attributable to Altra Holdings, Inc

   $ 24,293       $ 37,675       $ 24,525   

Shares used in net income per common share — basic

     26,656         26,526         26,399   

Incremental shares of unvested restricted common stock

     100         163         136   
  

 

 

    

 

 

    

 

 

 

Shares used in net income per common share — diluted

     26,756         26,689         26,535   

Earnings per share:

        

Basic net income attributable to Altra Holdings, Inc.

   $ 0.91       $ 1.42       $ 0.93   

Diluted net income attributable to Altra Holdings, Inc.

   $ 0.91       $ 1.41       $ 0.92   

The Company excluded 3,094,706 shares in 2012 and 784,980 shares in 2011 (amounts not in thousands) related to the Convertible Notes (See Note 9) from the above earnings per share calculation as these shares were anti-dilutive. There were no anti-dilutive items excluded in 2010.

Fair Value of Financial Instruments

The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, other accrued liabilities, and debt under the Company’s Credit Agreement with certain financial institutions including an initial term loan facility of $100,000,000 (the “Term Loan Facility”) and an initial revolving credit facility of $200,000,000 (the “Revolving Credit Facility”) approximate their fair values due to their variable rate nature at current market rates. The carrying amount of the 8 1/8% Senior Secured Notes (the “Senior Secured Notes”) was $198.0 million at December 31, 2011. The estimated fair value of the Senior Secured Notes at December 31, 2011 was $210.4 million based on inputs other than quoted prices that are observable for the Senior Secured Notes (level 2).

 

52


The carrying amount of the 2.75% Convertible Notes (the “Convertible Notes”) was $85.0 million at December 31, 2012 and 2011. The estimated fair value of the Convertible Notes at December 31, 2012 and 2011, was $94.3 million and $79.1 million, respectively, based on inputs other than quoted prices that are observable for the Senior Secured Notes (level 2).

Included in cash and cash equivalents as of December 31, 2012 and December 31, 2011 are money market fund investments of $30.3 million and $48.9 million, respectively, which are reported at fair value based on quoted market prices for such investments (level 1).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.

Non-controlling Interest

On July 11, 2012, the Company acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda. (“Lamiflex”).

The Company recorded the redeemable non-controlling interest from its acquisition of an 85% ownership interest of Lamiflex at fair value at the date of acquisition. In connection with this acquisition, the Company entered into put and call option agreements with the minority shareholders for the potential purchase of the non-controlling interest at a future date at a value based on a contractually determined formula. As a result of the option agreements, the non-controlling interest is considered redeemable and is classified as temporary equity on the Company’s condensed consolidated balance sheet. The non-controlling interest is reviewed at each subsequent reporting period and adjusted, as needed, to reflect its then redemption value.

Foreign Currency Translation

Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. Dollar are translated into U.S. Dollars using exchange rates at the end of the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period.

Foreign currency translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders’ equity. Net foreign currency transaction gains and losses are included in the results of operations in the period incurred and included in other non-operating expense (income), net in the accompanying statements of comprehensive income.

Trade Receivables

An allowance for doubtful accounts is recorded for estimated collection losses that will be incurred in the collection of receivables. Estimated losses are based on historical collection experience, as well as a review by management of the status of all receivables. Collection losses have been within the Company’s expectations.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method for all entities excluding one of the Company’s subsidiaries, TB Wood’s. TB Wood’s inventory is stated at the lower of cost or market, principally using the last-in, first-out (“LIFO”) method. Inventory stated using the LIFO method approximates 10% and 11% of total inventory at December 31, 2012 and 2011, respectively.

The cost of inventories acquired by the Company in its acquisitions reflect their fair values at the date of acquisition as determined by the Company based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.

 

53


The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product or product line. The Company records a charge to cost of sales for any amounts required to reduce the carrying value of inventories to its estimated net realizable value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation.

Depreciation of property, plant and equipment, including capital leases is provided using the straight-line method over the estimated useful life of the asset, as follows:

 

Buildings and improvements

     15 to 45 years   

Machinery and equipment

     2 to 15 years   

Capital lease

     Life of lease   

Leasehold improvements are depreciated on a straight-line basis over the estimated life of the asset or the life of the lease, if shorter.

Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.

Intangible Assets

Intangibles represent product technology, patents, tradenames, trademarks and customer relationships. Product technology, patents and customer relationships are amortized on a straight-line basis over 8 to 16 years, which approximates the period of economic benefit. The tradenames and trademarks are considered indefinite-lived assets and are not being amortized. Intangibles are stated at fair value on the date of acquisition. At December 31, 2012 and 2011, intangibles are stated net of accumulated amortization incurred since the date of acquisition and any impairment charges.

Goodwill

Goodwill represents the excess of the purchase price paid by the Company for Power Transmission Holding, Inc. (“PTH”), The Kilian Company (“Kilian”), Hay Hall Holdings Ltd. (“Hay Hall”), Bear Linear Inc. (“Warner Linear”), TB Wood’s Corporation (“TB Wood’s”), All Power Transmission Manufacturing, Inc. (“All Power”), Bauer and Lamiflex over the fair value of the net assets acquired in each of the acquisitions.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

The Company conducts an annual impairment review of goodwill and indefinite lived intangible assets in December of each year, unless events occur which trigger the need for an interim impairment review.

In connection with the Company’s annual impairment review, goodwill is assessed for impairment by comparing the fair value of the reporting unit to the carrying value using a two-step approach. In the first step, the Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate. If the carrying amount of the reporting unit exceeds the estimated fair value, impairment may be present, the Company would then be required to perform a second step in its impairment analysis. In the second step, the Company would evaluate impairment losses based upon the fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimate the implied fair value of the goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded value of the goodwill asset exceeded its calculated fair value. In addition, to the extent the implied fair value of any indefinite-lived intangible asset is less than the asset’s carrying value, an impairment loss is recognized on those assets. The Company did not identify any impairment of goodwill in 2012, 2011 or 2010.

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

 

54


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 (between 1.0% and 1.5%). We compared the estimated fair value of our trademarks with the carrying value of the trademarks and did not identify any impairment.

Preparation of forecasts of revenue and profitability growth for use in the long-range plan and the discount rate require significant use of judgment. Changes to the discount rate and the forecasted profitability could affect the estimated fair value of one or more of the Company’s reporting units and could result in a goodwill impairment charge in a future period.

Impairment of Long-Lived Assets Other Than Goodwill and Indefinite-Lived Intangible Assets

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.

The Company did not identify any impairment of long-lived assets in 2012. In 2010 and 2011, in relation to the sale of the Chattanooga facility in 2010 and the Stratford facility in 2011, the Company identified and recorded an impairment with respect to each facility in the amount of $0.1 million based on their fair market value (Note 4).

Determining fair values based on discounted cash flows requires management to make significant estimates and assumptions, including forecasting of revenue and profitability growth for use in the long-range plan and estimating appropriate discount rates. Changes to the discount rate and the forecasted profitability could affect the estimated fair value of one or more of the Company’s indefinite-lived intangible assets and could result in an impairment charge in a future period.

Debt Issuance Costs

Costs directly related to the issuance of debt are capitalized, included in other non-current assets and amortized using the effective interest method over the term of the related debt obligation. The net carrying value of debt issuance costs was approximately $4.3 million and $7.6 million at December 31, 2012 and 2011, respectively.

Revenue Recognition

Product revenues are recognized, net of sales tax collected, at the time title and risk of loss pass to the customer, which generally occurs upon shipment to the customer. Product return reserves are accrued at the time of sale based on the historical relationship between shipments and returns, and are recorded as a reduction of net sales.

Certain large distribution customers receive annual volume discounts, which are estimated at the time the sale is recorded based on the estimated annual sales.

Shipping and Handling Costs

Shipping and handling costs associated with sales are classified as a component of cost of sales.

Warranty Costs

Estimated expenses related to product warranties are accrued at the time products are sold to customers. Estimates are established using historical information as to the nature, frequency, and average costs of warranty claims. See Note 6 to the consolidated financial statements.

Self-Insurance

Certain exposures are self-insured up to pre-determined amounts, above which third-party insurance applies, for medical claims, workers’ compensation, vehicle insurance, product liability costs and general liability exposure. The accompanying balance sheets include reserves for the estimated costs associated with

 

55


these self-insured risks, based on historic experience factors and management’s estimates for known and anticipated claims. A portion of medical insurance costs are offset by charging employees a premium equivalent to group insurance rates.

Research and Development

Research and development costs are expensed as incurred.

Advertising

Advertising costs are charged to selling, general and administrative expenses as incurred and amounted to approximately $2.1 million, $1.5 million and $1.1 million, for the years ended December 31, 2012, 2011, and 2010, respectively.

Stock-Based Compensation

The Company established the 2004 Equity Incentive Plan, as amended, that provides for various forms of stock-based compensation to officers, directors, key employees and others who make significant contributions to the success of the Company. Expense associated with equity awards is recognized on a straight-line basis over the requisite service period which typically coincides with the vesting period of the grant.

Income Taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company evaluates the realizability of its net deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. The future benefit to be derived from its deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income to realize the assets. The Company records a valuation allowance to reduce its net deferred tax assets to the amount that may be more likely than not to be realized.

To the extent the Company establishes a valuation allowance on net deferred tax assets generated from operations, an expense will be recorded within the provision for income taxes. In periods subsequent to establishing a valuation allowance on net deferred assets from operations, if the Company were to determine that it would be able to realize its net deferred tax assets in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.

We assess our income tax positions and record tax benefits for all years subject to examination, based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the amount that has a greater than 50% likelihood of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where applicable. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized.

Accumulated Other Comprehensive Income (Loss)

The Company’s total accumulated other comprehensive income (loss) is comprised of the following:

 

     Minimum
Pension
Asset/
(liability)
    Cumulative
Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance at December 31, 2010

   $ (882   $ (13,789 )   $ (14,671 )

Balance at December 31, 2011

   $ (2,485 )   $ (22,591 )   $ (25,076 )

Balance at December 31, 2012

   $ (4,607 )   $ (18,796 )   $ (23,403 )

 

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2.    Acquisitions

In May 2011, the Company consummated an agreement to acquire substantially all of the assets and liabilities of Danfoss Bauer GmbH relating to its gear motor business (“Bauer”) for cash consideration of €43.1 million ($62.3 million). This transaction is referred to as the Bauer Acquisition. Following closing, the Company made additional payments in the amount of €4.8 million ($7.0 million) to reflect an adjustment for working capital and €0.1 million ($0.2 million) to reflect an adjustment for pension liability. Through the Bauer Acquisition, the Company acquired a European manufacturer of high-quality gear motors, offering engineered solutions to a variety of industries, including material handling, metals, food processing and energy. With the Bauer Acquisition, in addition to a presence in Germany, the Company acquired Bauer’s well-established sales network in 15 additional countries in Western and Eastern Europe, China, and the United States as well as manufacturing facilities in Slovakia.

In connection with the Bauer Acquisition, the Company is subject to substantially all the liabilities of Bauer related to the gear motor business acquired that were not satisfied on or prior to the closing date. There may be liabilities that the Company underestimated or did not discover in the course of performing the Company’s due diligence investigation of Bauer. Under the Purchase Agreement, the seller agreed to provide the Company with a limited set of representations and warranties, including with respect to outstanding and potential liabilities. However, the remedy from the seller for any breach of certain of those representations and warranties is an action for indemnification, not to exceed €14.1 million. This cap on damages does not apply to breaches of representations and warranties relating to incorporation, power and authority, insolvency, title to assets, taxes, environmental matters and certain pension claims. Damages resulting from a breach of a representation or warranty could have a material and adverse effect on the Company’s financial condition and results of operations, and there is no guarantee that the Company would actually be able to recover all or any portion of the sums payable in connection with such breach.

The closing date of the Bauer Acquisition was May 29, 2011, and as a result, the Company’s consolidated financial statements reflect Bauer’s results of operations from the beginning of business on May 30, 2011 forward.

The Company has completed its final purchase price allocation for Bauer. The purchase price allocation as of the acquisition date is as follows:

 

Total purchase price, excluding acquisition costs of approximately $3.1 million

   $ 69,501   

Cash and cash equivalents

     41   

Trade receivables

     18,394   

Inventories

     21,397   

Prepaid expenses and other

     2,331   

Property, plant and equipment

     17,974   

Intangible assets

     15,669   
  

 

 

 

Total assets acquired

   $ 75,806   

Accounts payable

     3,946   

Accrued expenses and other current liabilities

     7,589   

Other liabilities

     2,910   
  

 

 

 

Total liabilities assumed

   $ 14,445   

Net assets acquired

     61,361   

Excess purchase price over fair value of net assets acquired

   $ 8,140   
  

 

 

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is deductible for income tax purposes. The Company expects to develop synergies, such as lower cost country sourcing, global procurement, the ability to cross-sell product, and the ability to penetrate certain geographic areas, as a result of the acquisition of Bauer.

 

57


The amounts recorded as intangible assets consist of the following:

 

Customer relationships, subject to amortization

   $ 12,274   

Trade names and trademarks, not subject to amortization

     3,395   
  

 

 

 

Total intangible assets

   $ 15,669   
  

 

 

 

In July 2012, the Company consummated an agreement to acquire 85% of privately held Lamiflex do Brasil Equipamentos Industrias Ltda. now known as Lamiflex Do Brasil Equipamentos Industriais S.A. This transaction is known as the Lamiflex Acquisition. The Company acquired 85% of the stock of Lamiflex for 17.4 million Reais ($8.6 million), which was subject to a reduction of 2.1 million Reais ($1.1 million) for estimated net debt at closing. The net debt assumed at closing is subject to a final net debt calculation adjustment.

The closing date of the Lamiflex Acquisition was July 11, 2012, and as a result, the Company’s consolidated financial statements reflect Lamiflex’s results of operations from the beginning of business on July 11, 2012 forward.

The Company is in the process of completing its final purchase price allocation. The Company has completed the valuation of customer relationships, trademarks, deferred tax assets and liabilities and fixed assets. The purchase price is subject to change based on the finalization of certain purchase price adjustments.

The value of the acquired assets, assumed liabilities and identified intangibles from the acquisition of Lamiflex, as presented below, are based upon the Company’s estimate of the fair value as of the date of the acquisition. Since the quarter ended September 29, 2012, the Company has updated the purchase price allocation for the final valuation of identifiable intangible assets and calculation of deferred tax liability. The purchase price allocation was calculated as if the Company had acquired 100% of Lamiflex. The preliminary purchase price allocation as of the acquisition date is as follows:

 

Total Assumed purchase price, excluding acquisition costs of approximately $0.4 million

   $ 8,820   

Less: Redeemable noncontrolling interest

     1,327   
  

 

 

 

Total purchase price paid at closing

     7,493   

Cash and cash equivalents

     68   

Trade receivables, net of amounts pledged

     606   

Inventories

     726   

Prepaid and other

     48   

Property, plant and equipment

     3,027   

Other assets

     108   

Intangible assets

     4,912   
  

 

 

 

Total assets acquired

   $ 9,495   

Accounts payable

     550   

Accrued expenses and other current liabilities

     867   

Deferred tax liability

     1,934   

Other liabilities, including long-term debt

     976   
  

 

 

 

Total liabilities assumed

   $ 4,327   

Net assets acquired

     5,168   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

     3,652   
  

 

 

 

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is deductible for income tax purposes. The Company expects to develop synergies, such as the ability to cross-sell product and to penetrate into certain geographic areas, as a result of the acquisition of Lamiflex.

The Company recorded a redeemable non-controlling interest from its acquisition of an 85% ownership interest of Lamiflex at fair value at the date of acquisition. In connection with the Lamiflex Acquisition, the Company entered into put and call option agreements with the minority shareholders for the potential purchase of the non-controlling interest at a future date at a value based on a contractually determined formula. As a result of the option agreements, the non-controlling interest is considered redeemable and is classified as temporary equity on the Company’s Consolidated Balance Sheet.

 

58


The estimated amounts recorded as intangible assets in connection with the Lamiflex Acquisition consist of the following:

 

Customer relationships, subject to amortization

   $ 4,552   

Trade names and trademarks, not subject to amortization

     360   
  

 

 

 

Total intangible assets

   $ 4,912   
  

 

 

 

Customer relationships are subject to amortization which will be straight-lined over their estimated useful lives of 13 years, which represents the anticipated period over which the Company estimates it will benefit from the acquired assets.

The following table sets forth the unaudited pro forma results of operations of the Company for the year to date periods ended December 31, 2012 and 2011 as if the Company had acquired Bauer at January 1, 2010 and Lamiflex at January 1, 2011. The pro forma information contains the actual operating results of the Company, including Bauer and Lamiflex, adjusted to include the pro forma impact of (i) additional depreciation expense as a result of estimated depreciation based on the fair value of fixed assets; (ii) additional expense as a result of the estimated amortization of identifiable intangible assets (iii) additional interest expense associated with the Convertible Notes issued on March 7, 2011 in connection with the Bauer Acquisition; (iv) elimination of certain acquisition related costs; and (v) the elimination of additional expense as a result of fair value adjustment to inventory recorded in connection with the Bauer and Lamiflex Acquisitions. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred at the beginning of the period or that may be obtained in the future.

 

     Year ended December 31,  
     2012      2011      2010  

Total revenues

   $ 734,701       $ 732,837       $ 614,629   

Net income attributable to Altra Holdings, Inc.

   $ 24,610       $ 41,718       $ 18,342   

Basic earnings per share:

        

Net income attributable to Altra Holdings, Inc.

   $ 0.92       $ 1.57       $ 0.69   

Diluted earnings per share:

        

Net income attributable to Altra Holdings, Inc.

   $ 0.92       $ 1.56       $ 0.69   

3.    Inventories

Inventories located at certain subsidiaries acquired in connection with the TB Wood’s acquisition are stated at the lower of current cost or market, principally using the last-in, first-out (LIFO) method. All of the Company’s remaining subsidiaries are stated at the lower of cost or market, using the first-in, first-out (FIFO) method. The cost of inventory includes direct materials, direct labor and production overhead. Market is defined as net realizable value. Inventories at December 31, 2012 and 2011 consisted of the following:

 

     December 31,
2012
     December 31,
2011
 

Raw materials

   $ 39,902       $ 45,664   

Work in process

     21,199         23,838   

Finished goods

     62,675         56,468   
  

 

 

    

 

 

 

Inventories, net

   $ 123,776       $ 125,970   
  

 

 

    

 

 

 

Approximately 10% of total inventories at December 31, 2012, were valued using the LIFO method. The Company recorded as a component of cost of sales, a $0.4 million and a $0.7 million provision in the years ended December 31, 2012 and 2011, respectively. If the LIFO inventory was accounted for using the FIFO method, the inventory balance at December 31, 2012 and 2011, would be $0.9 million higher and $0.5 million higher, respectively.

 

59


4.    Property, Plant and Equipment

Property, plant and equipment at December 31, 2012 and 2011, consisted of the following:

 

     2012     2011  

Land

   $ 13,565      $ 13,025   

Buildings and improvements

     38,942        36,877   

Machinery and equipment

     190,809        161,995   
  

 

 

   

 

 

 
     243,316        211,897   

Less -Accumulated depreciation

     (105,222     (88,433
  

 

 

   

 

 

 
   $ 138,094      $ 123,464   
  

 

 

   

 

 

 

In October 2010, the Company entered into a purchase and sale agreement for its facility located in Chattanooga, Tennessee. The Company recorded a $0.1 million impairment of the Chattanooga facility in 2010. The sale of the Chattanooga facility closed on April 14, 2011 for a purchase price of $1.5 million and, prior to closing, the associated debt was repaid.

In 2011, the Company sold its Stratford, Ontario, Canada facility for approximately $0.9 million. Cash was received for $0.3 million and a note receivable was established for $0.6 million, which has a term of 10 years and accrues interest at 6% annually.

The Company recorded $20.5 million, $18.4 million and $15.0 million of depreciation expense in the years ended December 31, 2012, 2011, and 2010, respectively.

5.    Goodwill and Intangible Assets

Changes in goodwill during the year ended December 31, 2012 and 2011 were as follows:

 

     2012     2 0 11  

Gross goodwill balance as of January 1

   $ 115,609      $ 108,707   

Adjustments related to the acquisition of Lamiflex in 2012 and Bauer in 2011

     3,652        8,140   

Impact of changes in foreign currency and other

     774        (1,238
  

 

 

   

 

 

 

Gross goodwill balance as of December 31

     120,035        115,609   
  

 

 

   

 

 

 

Accumulated impairment, January 1

     (31,810     (31,810

Impairment charge during period

              

Accumulated impairment, December 31

     (31,810     (31,810
  

 

 

   

 

 

 

Net goodwill balance December 31

   $ 88,225      $ 83,799   
  

 

 

   

 

 

 

Intangibles and related accumulated amortization consisted of the following:

 

    December 31, 2012     December 31, 2011  
    Cost     Accumulated
Amortization
    Cost     Accumulated
Amortization
 

Intangible Assets

       

Intangible assets not subject to amortization:

       

Tradenames and trademarks

  $ 34,485      $      $ 34,125      $   

Intangible assets subject to amortization:

       

Customer relationships

    78,864        36,202        74,312        29,704   

Product technology and patents

    5,719        5,657        5,576        5,316   

Impact of changes in foreign currency

    (1,111            (1,885       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

  $ 117,957      $ 41,859      $ 112,128      $ 35,020   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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The Company recorded $6.8 million, $6.3 million, and $5.0 million of amortization for the years ended December 31, 2012, 2011 and 2010, respectively.

Customer relationships, product technology and patents are amortized over their useful lives ranging from 8 to 16 years. The weighted average estimated useful life of intangible assets subject to amortization is approximately 11 years.

The estimated amortization expense for intangible assets is approximately $6.5 million in 2013, $6.5 million in each of the next four years and then $43.6 million thereafter.

6.    Warranty Costs

The wholly-owned subsidiaries of Altra Industrial manufacture various products. The contractual warranty period generally ranges from three months to two years with a few extending up to thirty-six months based on the product and application of the product. Estimated expenses related to product warranties are accrued at the time products are sold to customers and are recorded in accruals and other current liabilities on the consolidated balance sheet. Estimates are established using historical information as to the nature, frequency and average costs of warranty claims. Changes in the carrying amount of accrued product warranty costs for each of the years ended December 31, 2012, 2011, and 2010 are as follows:

 

     December 31,
2012
    December 31,
2011
    December 31,
2010
 

Balance at beginning of period

   $ 4,898      $ 3,583      $ 4,047   

Accrued current period warranty costs

     2,386        2,374        1,626   

Acquired warranty reserves

            1,720          

Payments and adjustments

     (1,659     (2,779     (2,090
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 5,625      $ 4,898      $ 3,583   
  

 

 

   

 

 

   

 

 

 

7.    Income Taxes

Income before income taxes by domestic and foreign locations consists of the following: