Item 1. Financial Statements
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
1. Organization and Nature of Operations
Headquartered in Braintree, Massachusetts, Altra Industrial Motion Corp. (the “Company,” “Altra,” “we,” or “our”) is a leading global designer, producer and marketer of a wide range of electro-mechanical power transmission and motion control products. The Company brings together strong brands with production facilities in seventeen countries. Altra’s leading brands include Ameridrives Couplings, Bauer Gear Motor, Bibby Turboflex, Boston Gear, Delroyd Worm Gear, Formsprag Clutch, Guardian Couplings, Huco, Industrial Clutch, Inertia Dynamics, Jacobs Vehicle Systems, Kilian Manufacturing, Kollmorgen, Lamiflex Couplings, Marland Clutch, Matrix, Nuttall Gear, Portescap, Stieber Clutch, Stromag, Svendborg Brakes, TB Wood’s, Thomson, Twiflex, Warner Electric, Warner Linear, and Wichita Clutch.
2. Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States, or GAAP. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 2020 (the “2019 Annual Report on Form 10-K”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position and cash flows for the interim periods presented. The results are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
3. Recent Accounting Standards
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the use of the current expected credit loss impairment model to estimate credit losses on certain types of financial instruments, including trade receivables. The model requires an estimate of expected credit losses, measured over the contractual life of an asset, that considers information about past events, current conditions and a forecast of future economic conditions. The Company adopted the standard on January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial statements.
As a result of the adoption of ASU 2016-13, the Company has updated its significant accounting policy related to trade account receivables and allowances for credit losses as of March 31, 2020 from what was previously disclosed in our audited financial statements for the year ended December 31, 2019 as follows:
All trade account receivables are reported net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from our trade account receivables over the life of the underlying assets. Assets with similar risk characteristics are pooled together for determination of their current expected credit losses. We regularly perform detailed reviews of our pooled assets to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements. The Company adopted the standard on January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial statements.
6
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This ASU provides relief from certain accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The relief provided by this ASU is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this standard to the Company.
4. Revenue Recognition
We sell our products through three primary commercial channels: original equipment manufacturers (OEMs), industrial distributors and direct to end users. Each of our segments sells similar products, which are balanced across end-user industries including, without limitation, energy, food processing, general industrial, material handling, mining, transportation, industrial automation, robotics, medical devices, and turf & garden.
As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or delivery to the customer’s named location. In determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers, which would generally result in the transfer of control over time. The Company has evaluated the amount of revenue subject to recognition over time and concluded that it is immaterial.
The following table disaggregates our revenue for each reportable segment. The Company believes that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
|
|
Quarter Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
Power Transmission Technologies
|
|
$
|
216.7
|
|
|
$
|
234.9
|
|
Automation & Specialty
|
|
|
218.6
|
|
|
|
249.1
|
|
Inter-segment eliminations
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
Net sales
|
|
$
|
434.2
|
|
|
$
|
482.8
|
|
Net sales by geographic region based on point of shipment origin are as follows:
|
|
Net Sales
|
|
|
|
Quarter Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
North America (primarily U.S.)
|
|
$
|
245.3
|
|
|
$
|
273.0
|
|
Europe excluding Germany
|
|
|
74.8
|
|
|
|
81.7
|
|
Germany
|
|
|
52.5
|
|
|
|
62.2
|
|
Asia and other
|
|
|
61.6
|
|
|
|
65.9
|
|
Total
|
|
$
|
434.2
|
|
|
$
|
482.8
|
|
The payment terms and conditions in our customer contracts vary. In some cases, customers will partially prepay for their goods; in other cases, after appropriate credit evaluations, payment will be due in arrears. In addition, there are constraints that cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, surcharges, and other customer considerations.
7
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
A contract asset is created when the Company satisfies a performance obligation by transferring a promised good to the customer. Contract assets may represent conditional or unconditional rights to consideration. A right is conditional, and recorded as a contract asset, if for example the Company must first satisfy another performance obligation in the contract before it is entitled to payment from the customer. Contract assets are transferred to accounts receivable once the right becomes unconditional. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due. If the Company receives a customer payment prior to satisfying a performance obligation or in excess of estimates of what the Company expects to be entitled to, the payment is recorded as a contract liability. Contracts with payment in arrears are recognized as receivables.
The opening and closing balances of the Company’s contract liability and accounts receivable as of the year to date period ended March 31, 2020 are as follows:
|
|
Deferred
Revenue
(Current)
|
|
|
Accounts
Receivable
|
|
Beginning - January 1, 2020
|
|
$
|
8.4
|
|
|
$
|
243.2
|
|
Closing - March 31, 2020
|
|
|
11.1
|
|
|
|
242.9
|
|
Increase/(Decrease)
|
|
$
|
2.7
|
|
|
$
|
(0.3
|
)
|
|
|
Deferred
Revenue
(Current)
|
|
|
Accounts
Receivable
|
|
Beginning - January 1, 2019
|
|
$
|
7.4
|
|
|
$
|
259.8
|
|
Closing - March 31, 2019
|
|
|
7.8
|
|
|
|
281.8
|
|
Increase/(Decrease)
|
|
$
|
0.4
|
|
|
$
|
22.0
|
|
The revenue recognized during the three-month periods ended March 31, 2020 and 2019 that was included in contract liabilities at the beginning of the period amounted to $2.2 million, and $2.1 million, respectively.
5. Fair Value of Financial Instruments
Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
|
•
|
Level 1- Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived.
|
|
•
|
Level 3- Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
|
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents and are classified as Level 1.
The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of the Company or the financial counterparty to perform. For interest rate and cross currency swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. For forward foreign currency contracts, the significant inputs are interest rate curves for discounting future cash flows and exchange rate curves of the foreign currency for translating future cash flows. See additional discussion of the Company’s use of financial instruments including cross-currency swaps and interest rate swaps included in Note 15.
8
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, and other accrued liabilities are carried at cost, which approximates fair value. Debt under the Altra Credit Agreement (as defined herein) is comprised of the Altra Term Loan Facility and the Altra Revolving Credit Facility (both as defined herein). The carrying amount of the Altra Term Loan Facility was $1,184.0 million and the estimated fair value of the Altra Term Loan Facility was $1,002.0 million at March 31, 2020. Debt under the Altra Credit Facility of $100.0 million approximates the fair value due to the variable interest rate. Further, the Altra Credit Agreement was negotiated in October 2018 and there have not been any significant changes in our credit rating. The carrying amount of the Notes (as defined herein) was $400 million and the estimated fair value of the Notes was $394.5 million at March 31, 2020.
6. Changes in Accumulated Other Comprehensive Income/(Loss) by Component
The following is a reconciliation of changes in accumulated other comprehensive income/(loss) by component for the periods presented:
|
|
Gains and
(Losses) on
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Cumulative
Foreign
Currency
Translation
Adjustment
|
|
|
Total
|
|
Accumulated Other Comprehensive (Loss) by
Component, January 1, 2020
|
|
$
|
(3.0
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
(85.4
|
)
|
|
$
|
(89.9
|
)
|
Net current-period Other Comprehensive Income (Loss)
|
|
|
19.6
|
|
|
|
(0.1
|
)
|
|
|
(58.4
|
)
|
|
|
(38.9
|
)
|
Accumulated Other Comprehensive Income (Loss)
by component, March 31, 2020
|
|
$
|
16.6
|
|
|
$
|
(1.6
|
)
|
|
$
|
(143.8
|
)
|
|
$
|
(128.8
|
)
|
|
|
Gains and
(Losses) on
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension
Plans
|
|
|
Cumulative
Foreign
Currency
Translation
Adjustment
|
|
|
Total
|
|
Accumulated Other Comprehensive (Loss) by
Component, January 1, 2019
|
|
$
|
(12.9
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(58.5
|
)
|
|
$
|
(71.6
|
)
|
Net current-period Other Comprehensive Income (Loss)
|
|
|
11.5
|
|
|
|
(0.3
|
)
|
|
|
(12.5
|
)
|
|
|
(1.3
|
)
|
Accumulated Other Comprehensive (Loss)
by Component, March 31, 2019
|
|
$
|
(1.4
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(71.0
|
)
|
|
$
|
(72.9
|
)
|
9
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
7. Net Income per Share
Basic earnings per share is based on the weighted average number of shares of common stock outstanding, and diluted earnings per share is based on the weighted average number of shares of common stock outstanding and all potentially dilutive common stock equivalents outstanding. Common stock equivalents are included in the per share calculations when the effect of their inclusion is dilutive.
The following is a reconciliation of basic to diluted net income per share:
|
|
Quarter Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Net income
|
|
$
|
(116.6
|
)
|
|
$
|
35.2
|
|
Shares used in net income per common share - basic
|
|
|
64.5
|
|
|
|
64.2
|
|
Incremental shares of unvested restricted common stock
|
|
|
—
|
|
|
|
0.2
|
|
Shares used in net income per common share - diluted
|
|
|
64.5
|
|
|
|
64.4
|
|
Shares excluded as their inclusion would be anti-dilutive
|
|
0.1
|
|
|
|
—
|
|
(Loss)/Earnings per share:
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
(1.81
|
)
|
|
$
|
0.55
|
|
Diluted net income
|
|
$
|
(1.81
|
)
|
|
$
|
0.55
|
|
8. Inventories
Inventories at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Raw materials
|
|
$
|
109.3
|
|
|
$
|
104.2
|
|
Work in process
|
|
|
23.6
|
|
|
|
22.4
|
|
Finished goods
|
|
|
96.5
|
|
|
|
95.9
|
|
|
|
$
|
229.4
|
|
|
$
|
222.5
|
|
9. Goodwill and Intangible Assets
The Company conducts an annual impairment review of goodwill and indefinite-lived intangible assets in October of each year, unless events occur which trigger the need for an interim impairment review. The 2019 annual goodwill impairment review indicated that the JVS reporting unit’s fair value exceeded its carrying value by less than 10%. All other reporting units had fair values that exceeded their carrying value by 10% or more.
The Company considered the recent economic impact of the COVID-19 pandemic to be a triggering event for the JVS business unit and, as a result, the Company performed an interim impairment review. As a result of both the COVID-19 related economic downturn and its impact on JVS’s anticipated financial results, the Company concluded that it is more likely than not that the JVS reporting unit’s carrying value exceeds its fair value and performed an interim impairment review for both JVS’s goodwill and tradename intangible asset. As a result of the interim impairment testing performed, the Company recorded non-cash impairment charges of $8.4 million and $139.1 million for indefinite-lived intangible assets and goodwill, respectively.
The Company estimated the fair value of the JVS reporting unit using both the discounted cash flow model and the market approach. The Company estimated the value of JVS’s indefinite-lived tradename intangible asset using a discounted cash flow model. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenues, profit margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples. The Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate.
Key assumptions developed by management and used in the interim quantitative analysis included the following:
|
•
|
Near-term revenue declines in 2020;
|
10
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
|
•
|
Adjusted profit margins over the projection period, due to revenue adjustments and maintained investment in the business; and
|
|
•
|
Market-based discount rates.
|
|
•
|
Reduced EBITDA multiple, due to current market conditions.
|
Depending on its duration and the severity of its economic impact, the COVID-19 pandemic may trigger additional interim impairment reviews in future periods.
Changes in goodwill from January 1, 2020 through March 31, 2020 were as follows:
|
|
Power
Transmission
Technologies
|
|
|
Automation
& Specialty
|
|
|
Total
|
|
Net goodwill balance January 1, 2020
|
|
$
|
410.1
|
|
|
$
|
1,284.8
|
|
|
$
|
1,694.9
|
|
Goodwill impairment charge
|
|
|
—
|
|
|
|
(139.1
|
)
|
|
|
(139.1
|
)
|
Impact of changes in foreign currency
|
|
|
(3.4
|
)
|
|
|
(24.1
|
)
|
|
|
(27.5
|
)
|
Net goodwill balance March 31, 2020
|
|
$
|
406.7
|
|
|
$
|
1,121.6
|
|
|
$
|
1,528.3
|
|
Other intangible assets as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames and trademarks
(1)
|
|
$
|
247.7
|
|
|
$
|
—
|
|
|
$
|
247.7
|
|
|
$
|
260.0
|
|
|
$
|
—
|
|
|
$
|
260.0
|
|
In-process research and
development
|
|
|
16.0
|
|
|
|
—
|
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
—
|
|
|
|
16.0
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
1,171.0
|
|
|
|
147.9
|
|
|
|
1,023.1
|
|
|
|
1,187.7
|
|
|
|
137.8
|
|
|
|
1,049.9
|
|
Product technology and
patents
|
|
|
209.6
|
|
|
|
38.7
|
|
|
|
170.9
|
|
|
|
210.0
|
|
|
|
33.5
|
|
|
|
176.5
|
|
Total intangible assets
|
|
$
|
1,644.3
|
|
|
$
|
186.6
|
|
|
$
|
1,457.7
|
|
|
$
|
1,673.7
|
|
|
$
|
171.3
|
|
|
$
|
1,502.4
|
|
(1)
|
The change in Cost of Trademarks and tradenames is a result of the $8.4 million impairment charge in the quarter-ended March 31, 2020 related to the JVS reporting unit.
|
The Company recorded $17.5 million and $17.8 million of amortization expense in the quarters ended March 31, 2020 and 2019, respectively.
The estimated amortization expense for intangible assets is approximately $52.6 million for the remainder of 2020, $70.7 million in each of the next four years and then $858.6 million thereafter.
11
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
10. Warranty Costs
The contractual warranty period of the Company's products generally ranges from three months to two years with certain warranties extending for longer periods. 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 unaudited condensed consolidated balance sheets. 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 quarters ended March 31, 2020 and 2019 are as follows:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Balance at beginning of period
|
|
$
|
10.0
|
|
|
$
|
9.4
|
|
Accrued current period warranty expense
|
|
|
1.0
|
|
|
|
1.0
|
|
Payments and adjustments
|
|
|
(1.4
|
)
|
|
|
(1.7
|
)
|
Balance at end of period
|
|
$
|
9.6
|
|
|
$
|
8.7
|
|
11. Debt
Outstanding debt obligations at March 31, 2020 and December 31, 2019 were as follows.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Debt:
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
1,184.0
|
|
|
$
|
1,190.0
|
|
Revolving Credit Facility
|
|
|
100.0
|
|
|
|
—
|
|
Notes
|
|
|
400.0
|
|
|
|
400.0
|
|
Mortgages and other
|
|
|
12.6
|
|
|
|
13.5
|
|
Finance leases
|
|
|
0.4
|
|
|
|
0.5
|
|
Total gross debt
|
|
|
1,697.0
|
|
|
|
1,604.0
|
|
Less: debt discount and deferred financing
costs
|
|
|
(21.3
|
)
|
|
|
(22.2
|
)
|
Total debt, net of debt discount and
deferred financing costs
|
|
|
1,675.7
|
|
|
|
1,581.8
|
|
Less: current portion of long-term debt
|
|
|
(17.2
|
)
|
|
|
(18.0
|
)
|
Total long-term debt, net of unaccreted
discount
|
|
$
|
1,658.5
|
|
|
$
|
1,563.8
|
|
2018 Credit Agreement and Notes
On October 1, 2018 (the “A&S Closing Date”), upon the closing of the combination (the “Fortive Transaction”) of Altra with four operating companies from Fortive Corporation’s (“Fortive”) Automation & Specialty platform (the “A&S Business”), the Company assumed $400 million aggregate principal amount of 6.125% senior notes due 2026 (the “Notes”). The Notes will mature on October 1, 2026. Interest on the Notes accrues from October 1, 2018, and the first interest payment date on the Notes was on April 1, 2019. The Notes may be redeemed at the option of the issuer on or after October 1, 2023. The Notes are guaranteed on a senior unsecured basis by the Company and certain of its domestic subsidiaries.
12
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
On the A&S Closing Date, the Company entered into a new Credit Agreement (the “Altra Credit Agreement”). The Altra Credit Agreement provides for a seven-year senior secured term loan in an aggregate principal amount of $1,340.0 million (the “Altra Term Loan Facility”) and a five-year senior secured revolving credit facility in an aggregate committed principal amount of $300.0 million (the “Altra Revolving Credit Facility” and together with the Altra Term Loan Facility, the “Altra Credit Facilities”). The proceeds of the Altra Term Loan Facility were used to (i) consummate Fortive’s transfer of certain non-U.S assets, liabilities and entities constituting a portion of the A&S Business to certain subsidiaries of Altra, and the Altra subsidiaries’ assumption of substantially all of the liabilities associated with the transferred assets (the “Direct Sales”), (ii) repay in full and extinguish all outstanding indebtedness for borrowed money under the 2015 Credit Agreement (as defined herein) and (iii) pay certain fees, costs, and expenses in connection with the consummation of the Fortive Transaction. The proceeds of the Altra Revolving Credit Facility will be used for working capital and general corporate purposes.
The Altra Credit Facilities are guaranteed on a senior secured basis by the Company and certain of its domestic subsidiaries, subject to certain customary exceptions.
Borrowings under the Altra Term Loan Facility will bear interest at a per annum rate equal to a “Eurocurrency Rate” plus 2.00%, in the case of Eurocurrency Rate borrowings, or equal to a “Base Rate” plus 1.00%, in the case of Base Rate borrowings. Borrowings under the Altra Revolving Credit Facility will initially bear interest at a per annum rate equal to a Eurocurrency Rate plus 2.00%, in the case of Eurocurrency Rate borrowings, or equal to a Base Rate plus 1.00%, in the case of Base Rate borrowings, and thereafter will bear interest at a per annum rate equal to a Eurocurrency Rate or Base Rate, as applicable, plus an interest rate spread determined by reference to a pricing grid based on the Company’s senior secured net leverage ratio. In addition, the Company will be required to pay fees that will fluctuate between 0.250% per annum to 0.375% per annum on the unused amount of the Altra Revolving Credit Facility, based upon the Company’s senior secured net leverage ratio. The interest rate on the Term Loan Facility was 3.603% at March 31, 2020.
The Altra Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including limitations on liens, investments, restricted payments, additional indebtedness and asset sales and mergers. In addition, the Altra Credit Agreement requires that Altra maintain a specified maximum senior secured leverage ratio and a specified minimum interest coverage ratio. The obligations of the borrowers of the Altra Credit Facilities under the Altra Credit Agreement may be accelerated upon customary events of default, including non-payment of principal, interest, fees and other amounts, inaccuracy of representation and warranties, violation of covenants, cross default and cross acceleration, voluntary and involuntary bankruptcy or insolvency proceedings, inability to pay debts as they become due, material judgments, ERISA events, actual or asserted invalidity of security documents or guarantees and change in control.
The Company incurred $29.9 million in issuance costs, which are amortized over the term of the debt as an adjustment to the effective interest rate on the outstanding borrowings.
The Company provided notice to the administrative agent of the Altra Credit Agreement on March 9, 2020 and March 16, 2020 to draw down $50 million, and $50 million, respectively, with interest rates of 2.811% and 2.750%, respectively, under the Altra Revolving Credit Facility. As of quarter end March 31, 2020, a total of $100 million was outstanding under the Altra Revolving Credit Facility. Borrowings under the Altra Revolving Credit Facility are scheduled to mature on September 30, 2023, and the Company may repay amounts borrowed any time without penalty. The Company increased its borrowings under the Altra Revolving Credit Facility as a precautionary action in order to increase its cash position and enhance its financial flexibility during this period of uncertainty in the global markets resulting from COVID-19. The draw-down proceeds from the Altra Revolving Credit Facility are currently being held on the Company’s balance sheet in cash and cash equivalents and may be used for general corporate purposes.
As of March 31, 2020, the Company had $1,284.0 million outstanding on the Altra Credit Agreement. As of March 31, 2020 and December 31, 2019, the Company had $4.7 million and $4.4 million in letters of credit outstanding, respectively. The Company had $195.3 million available to borrow under the Altra Credit Facilities at March 31, 2020.
Mortgages and Other Agreements
The Company’s subsidiaries in Europe have entered into certain long-term fixed rate term loans that are generally secured by local property, plant and equipment. The debt has interest rates that range from 1.79% to 2.5%, with various quarterly and monthly installments through 2028.
13
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
Financing Leases
The Company leases certain equipment under finance lease arrangements, whose obligations are included in both short-term and long-term debt. Finance lease obligations amounted to approximately $0.4 million and $0.5 million at March 31, 2020 and December 31, 2019, respectively. Finance lease right of use assets are included in property, plant and equipment with the related amortization recorded as depreciation expense.
12. Stockholders’ Equity
Common Stock
Effective October 1, 2018, the Company amended its Articles of Incorporation to increase the number of authorized shares of Altra common stock from 90.0 million shares to 120.0 million shares. As of March 31, 2020 and December 31, 2019, there were 64,564,526 and 64,222,603 shares of common stock issued and outstanding, respectively.
Preferred Stock
On December 20, 2006, the Company amended and restated its certificate of incorporation authorizing 10.0 million shares of undesignated Preferred Stock (“Preferred Stock”). The Preferred Stock may be issued from time to time in one or more classes or series, the shares of each class or series to have such designations and powers, preferences, rights, qualifications, limitations and restrictions as determined by the Company’s Board of Directors. There was no Preferred Stock issued or outstanding at March 31, 2020 or December 31, 2019.
Restricted Common Stock
The 2014 Omnibus Incentive Plan (the “2014 Plan”) was approved by the Company’s stockholders at the Company’s 2014 Annual Meeting of Stockholders. The 2014 Plan provides for various forms of stock-based compensation to our directors, executive personnel and other key employees and consultants. Under the 2014 Plan, the remaining total number of shares of common stock available for delivery pursuant to the grant of awards (“Awards”) was 1.5 million as of March 31, 2020.
The restricted shares and restricted stock units issued pursuant to the 2014 Plan generally vest ratably over a period ranging from immediately to five years from the date of grant, provided, that the vesting of the restricted shares or restricted stock units may accelerate upon the occurrence of certain events. Common stock awarded under the 2014 Plan is generally subject to restrictions on transfer, repurchase rights, and other limitations and rights as set forth in the applicable award agreements. The fair value of the shares repurchased are measured based on the share price on the date of grant.
The 2014 Plan permits the Company to grant, among other things, restricted stock, restricted stock units, and performance share awards to key employees. Certain awards include vesting based upon achievement of specified performance criteria. Compensation expense recorded (in selling, general and administrative expense) during the quarters ended March 31, 2020 and 2019 was $3.3 million and $3.5 million, respectively. The Company recognizes stock-based compensation expense on a straight-line basis for the shares vesting ratably under the plan and uses the graded-vesting method of recognizing stock-based compensation expense for the performance share awards based on the probability of the specific performance metrics being achieved over the requisite service period.
The following tables set forth the activity of the Company’s restricted stock grants and stock options to date:
|
|
Shares
|
|
|
Weighted-
average
fair value
|
|
Shares unvested January 1, 2020
|
|
|
786.3
|
|
|
$
|
35.69
|
|
Shares granted
|
|
|
322.0
|
|
|
|
34.58
|
|
Shares for which restrictions lapsed
|
|
|
(148.0
|
)
|
|
|
37.96
|
|
Shares unvested March 31, 2020
|
|
|
960.3
|
|
|
$
|
34.96
|
|
14
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
|
|
Shares
|
|
|
Weighted-
average
fair value
|
|
Options unvested January 1, 2020
|
|
|
271.7
|
|
|
$
|
30.65
|
|
Options granted
|
|
|
214.5
|
|
|
|
34.78
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
Options outstanding March 31, 2020
|
|
|
486.2
|
|
|
$
|
32.47
|
|
Quantity ending exercisable balance
|
|
|
66.4
|
|
|
$
|
30.65
|
|
Total remaining unrecognized compensation cost is approximately $29.7 million as of March 31, 2020, and will be recognized over a weighted average remaining period of three years. The intrinsic value of these awards, as of March 31, 2020, was $16.8 million. Grant date fair value is based on the quoted price of the stock on the date of grant.
13. Restructuring, Asset Impairment, and Transition Expenses
From time to time, the Company has initiated various restructuring programs and incurred severance and other restructuring costs.
During 2017, the Company commenced a restructuring plan (“2017 Altra Plan”) as a result of the Company’s purchase of Stromag and to rationalize its global renewable energy business. The actions taken pursuant to the 2017 Altra Plan included reducing headcount, facility consolidations and the elimination of certain costs. The expenses for the quarter ended March 31, 2020 were comprised of approximately $0.2 million in severance, consolidation and other restructuring costs. The Company does not expect to incur any additional material costs as a result of the 2017 Altra Plan.
During 2019, the Company commenced a restructuring plan (“2019 Altra Plan”) to drive efficiencies, reduce the number of facilities and optimize its operating margin. The Company expects expenses related to workforce reductions, lease termination costs and other facility rationalization costs. The Company expects to incur approximately $15 - $20 million in restructuring expenses under the 2019 Altra Plan over the next three years, primarily related to plant consolidation and headcount reductions. For the quarter ended March 31, 2020, the Company recorded $1.1million, and $0.3 million in severance and consolidation costs, respectively.
The following is a reconciliation of the accrued restructuring costs between January 1, 2020 and March 31, 2020.
|
|
2017 Altra
Plan
|
|
|
2019 Altra
Plan
|
|
|
Total All
Plans
|
|
Balance at January 1, 2020
|
|
$
|
1.5
|
|
|
$
|
2.6
|
|
|
$
|
4.1
|
|
Restructuring expense incurred
|
|
|
0.2
|
|
|
|
1.4
|
|
|
|
1.6
|
|
Cash payments
|
|
|
(0.4
|
)
|
|
|
(1.4
|
)
|
|
|
(1.8
|
)
|
Balance at March 31, 2020
|
|
|
1.3
|
|
|
|
2.6
|
|
|
|
3.9
|
|
The following is a reconcilation of the accrued restructuring costs between January 1, 2019 and March 31, 2019.
|
|
2017 Altra
Plan
|
|
|
2019 Altra
Plan
|
|
|
Total All
Plans
|
|
Balance at January 1, 2019
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
2.0
|
|
Restructuring expense incurred
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
2.3
|
|
Cash payments
|
|
|
(1.5
|
)
|
|
|
(0.5
|
)
|
|
|
(2.0
|
)
|
Balance at March 31, 2019
|
|
|
1.5
|
|
|
|
0.8
|
|
|
|
2.3
|
|
15
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
The following is a reconciliation of restructuring expense by segment for the year to date period ended March 31, 2020.
|
|
2017 Altra
Plan
|
|
|
2019 Altra
Plan
|
|
|
Total All
Plans
|
|
Power Transmission Technologies
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.6
|
|
Automation & Specialty
|
|
|
—
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Balance at March 31, 2020
|
|
$
|
0.2
|
|
|
$
|
1.4
|
|
|
$
|
1.6
|
|
The total accrued restructuring reserve as of March 31, 2020 relates primarily to consolidation and severance costs under the 2017 Altra Plan and 2019 Altra Plan and is recorded in accruals and other liabilities on the accompanying unaudited condensed consolidated balance sheet.
14. Segments, Concentrations and Geographic Information
Segments
The internal reporting structure used by our Chief Operating Decision Maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of income from operations. Our operations are organized in two reporting segments that are aligned with key product types and end markets served, Power Transmission Technologies (“PTT”) and Automation & Specialty (“A&S”):
|
•
|
Power Transmission Technologies - PTT. This segment includes the following key product offerings:
|
|
o
|
Couplings, Clutches & Brakes. Couplings are the interface between two shafts, which enable power to be transmitted from one shaft to the other. Clutches in this segment are devices that use mechanical, 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. Products in this segment are generally used in heavy industrial applications and energy markets.
|
|
o
|
Electromagnetic Clutches & Brakes. Products in this segment include brakes and clutches that are used to electronically slow, stop, engage or disengage equipment utilizing electromagnetic friction type connections. Products in this segment are used in industrial and commercial markets including agricultural machinery, material handling, motion control, and turf & garden.
|
|
o
|
Gearing. Gears are utilized to reduce the speed and increase the torque of an electric motor or engine to the level required to drive a particular piece of equipment. Gears produced by the Company are primarily utilized in industrial applications.
|
|
•
|
Automation & Specialty – A&S. This segment includes the following key brands:
|
|
o
|
Kollmorgen: Provides rotary precision motion solutions, including servo motors, stepper motors, high performance electronic drives and motion controllers and related software, and precision linear actuators. These products are used in advanced material handling, aerospace and defense, factory automation, medical, packaging, printing, semiconductor, robotic and other applications.
|
|
o
|
Portescap: Provides high-efficiency miniature motors and motion control products, including brush and brushless DC motors, can stack motors and disc magnet motors. These products are used in medical, industrial power tool and general industrial equipment applications.
|
|
o
|
Thomson: Provides systems that enable and support the transition of rotary motion to linear motion. Products include linear bearings, guides, glides, lead and ball screws, industrial linear actuators, clutch brakes, precision gears, resolvers and inductors. These products are used in factory automation, medical, mobile off-highway, material handling, food processing and other niche applications.
|
|
o
|
Jacobs Vehicle Systems (JVS): Provides heavy-duty diesel engine brake systems and valve actuation mechanisms for the commercial vehicle market, including compression release, bleeder and exhaust brakes, including the “Jake Brake” engine braking system. These products are primarily used in heavy duty Class 8 truck applications.
|
16
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
Segment financial information and a reconciliation of segment results to unaudited condensed consolidated results are as follows:
|
|
Quarters Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
Power Transmission Technologies
|
|
$
|
216.7
|
|
|
$
|
234.9
|
|
Automation & Specialty
|
|
|
218.6
|
|
|
|
249.1
|
|
Inter-segment eliminations
|
|
|
(1.1
|
)
|
|
|
(1.2
|
)
|
Net sales
|
|
$
|
434.2
|
|
|
$
|
482.8
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
Segment earnings:
|
|
|
|
|
|
|
|
|
Power Transmission Technologies
|
|
$
|
25.7
|
|
|
$
|
28.9
|
|
Automation & Specialty
|
|
|
(118.7
|
)
|
|
|
40.6
|
|
Corporate expenses (1)
|
|
|
(3.4
|
)
|
|
|
(0.8
|
)
|
Restructuring costs
|
|
|
(1.6
|
)
|
|
|
(2.3
|
)
|
Income from operations
|
|
$
|
(98.0
|
)
|
|
$
|
66.4
|
|
Other non-operating (income) expense:
|
|
|
|
|
|
|
|
|
Net interest expense
|
|
|
17.4
|
|
|
|
19.8
|
|
Other non-operating (income), net
|
|
|
(1.5
|
)
|
|
|
1.1
|
|
Total non-operating (income) expense
|
|
$
|
15.9
|
|
|
$
|
20.9
|
|
Income before income taxes
|
|
|
(113.9
|
)
|
|
|
45.5
|
|
Provision for income taxes
|
|
|
2.7
|
|
|
|
10.3
|
|
Net (loss)/income
|
|
$
|
(116.6
|
)
|
|
$
|
35.2
|
|
(1)
|
Certain expenses are maintained at the corporate level and not allocated to the segments. These include various administrative expenses related to the Company’s corporate headquarters, depreciation on capitalized software costs, non-capitalizable software implementation costs and acquisition related expenses.
|
Selected information by segment (continued)
|
|
Quarter Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Power Transmission Technologies
|
|
$
|
8.2
|
|
|
$
|
8.4
|
|
Automation & Specialty
|
|
|
23.3
|
|
|
|
23.0
|
|
Corporate
|
|
|
0.6
|
|
|
|
0.7
|
|
Total depreciation and amortization
|
|
$
|
32.1
|
|
|
$
|
32.1
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Power Transmission Technologies
|
|
$
|
1,047.4
|
|
|
$
|
1,091.4
|
|
Automation & Specialty
|
|
|
2,928.2
|
|
|
|
3,191.2
|
|
Corporate (2)
|
|
|
240.6
|
|
|
|
97.7
|
|
Total assets
|
|
$
|
4,216.2
|
|
|
$
|
4,380.3
|
|
(2)
|
Corporate assets are primarily cash and cash equivalents, tax related asset accounts, certain capitalized software costs, and property, plant and equipment.
|
17
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
Net sales to third parties by geographic region are as follows:
|
|
Net Sales
|
|
|
|
Quarter Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
North America (primarily U.S.)
|
|
$
|
245.3
|
|
|
$
|
273.0
|
|
Europe excluding Germany
|
|
|
74.8
|
|
|
|
81.7
|
|
Germany
|
|
|
52.5
|
|
|
|
62.2
|
|
Asia and other
|
|
|
61.6
|
|
|
|
65.9
|
|
Total
|
|
$
|
434.2
|
|
|
$
|
482.8
|
|
Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates. Amounts attributed to the geographic regions for property, plant and equipment are based on the location of the entity, which holds such assets.
15. Derivative Financial Instruments
The Company manages changes in market conditions related to interest on debt obligations and foreign currency exposures by entering into derivative instruments, including interest rate and foreign currency swap agreements. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each period. The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of Altra or the financial counterparty to perform. For interest rate swaps, the significant inputs to these models are interest rate curves for discounting future cash flows that are adjusted for credit risk. For forward foreign currency contracts, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. For designated hedging relationships, the Company formally documents the hedging relationship consistent with the requirements of ASC 815, Derivatives
The following table summarizes outstanding swaps that the Company has recorded at March 31, 2020.
|
|
|
|
Initial US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Derivative
|
|
Notional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entered
|
|
Financial
|
|
Amount
|
|
|
Fixed Rate
|
|
Floating Leg
|
|
Fixed Rate
|
|
Floating Leg
|
|
Settlement
|
|
Effective
|
into
|
|
Instrument
|
|
(millions)
|
|
|
(swap counterparty)
|
|
(swap counterparty)
|
|
(Company)
|
|
(Company)
|
|
Dates
|
|
Period of Swap
|
12/4/2018
|
|
Interest rate
swap
|
|
$
|
600.0
|
|
|
4.8255%
|
|
Variable rate 1-
month USD
LIBOR plus 2%
|
|
N/A
|
|
1 Month
USD-
LIBOR-
BBA
plus 2%
|
|
Monthly on the last
business day of each
month commencing
with December 31,
2018 in accordance
with Modified
Following Business
Day Convention
|
|
12/4/2018 - 9/29/2023
|
Cross Currency Interest Rate Swaps
In December 2018, the Company entered into cross-currency swap agreements to hedge its net investment in Euro-denominated assets against future volatility in the exchange rate between the U.S. dollar and the Euro. By doing so, the Company synthetically converted a portion of its U.S. dollar-based long-term debt into Euro-denominated long-term debt. The agreements originally had a five-year maturity at notional amounts declining from $600.0 million to $360.0 million over the contract period. The terms of the swap agreements provided for the Company to receive net interest payments at a fixed rate of 4.8255% and pay Euros at rates ranging from 2.19% to 2.315%. At inception, the cross-currency swaps were designated as net investment hedges.
18
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
For net investment hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported as foreign currency translation gains or losses in accumulated other comprehensive income (loss) (“AOCIL”). The gains or losses on derivative instruments reported in AOCIL are reclassified to earnings in the period in which earnings are affected by the underlying item, such as a disposal or substantial liquidations of the entities being hedged.
During the first quarter of 2020, the global economy declined substantially due to the impact of COVID-19. This decline resulted in a significant increase in the value of the U.S. dollar. The appreciation of the U.S. dollar resulted in the Company’s cross currency interest rate swaps being substantially in-the-money. Given the increased cash value of the hedges and the Company’s overall desire to strengthen its cash position, the Company terminated the cross-currency interest rate swaps during the first quarter of 2020. The Company received the cash value of the cross-currency interest rate swaps of approximately $56.2 million upon termination. In addition, the Company paid the interest owed and received the interest due, resulting in the recognition of approximately $3.3 million in net interest income and paid termination fees of approximately $0.9 million. As a result of the termination of the cross-currency interest rate swap, the Company recorded a gain in AOCIL of approximately $31.3 million, net of $9.9 million of tax, compared to $19.8 million, net of $3.6 million of tax, during the quarter ended March 31, 2020, and year to date period ended December 31, 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Description (in millions)
|
|
Gain/(Loss) Recognized in AOCI
|
|
Cross currency swap agreements, net of tax
|
|
$
|
31.3
|
|
|
$
|
19.8
|
|
Interest Rate Swaps
In January 2017, the Company entered into an interest rate swap agreement to fix the variable interest rate payable on a portion of its outstanding borrowings. This interest rate swap matured on January 31, 2020.
In December 2018, the Company entered into an interest rate swap agreement to manage the cash flow risk caused by interest rate changes on the forecasted interest payments expected to occur related to a portion of its outstanding borrowings under the Altra Credit Agreement for a notional value of $600 million at 4.8255%.
The interest rate swap agreement is designed to manage exposure to interest rates on the Company’s variable rate indebtedness and is recognized on the balance sheet at fair value. The Company has designated this interest rate swap agreement as a cash flow hedge. Changes in the fair value of the swap will be recognized in other comprehensive income until the hedged items are recognized in earnings. The Company recorded a loss in AOCIL of approximately $11.7 million, net of a $3.7 million tax benefit, and $9.8 million, net of a $1.7 million tax benefit, during the quarter ended March 31, 2020, and year to date period ended December 31, 2019, respectively.
The following table summarizes the location and fair value, using Level 2 inputs (see Note 6 for a description of the fair value levels), of the Company's derivatives designated and not designated as hedging instruments in the unaudited condensed consolidated balance sheets (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Cross currency swap agreements
|
|
Other long-term (assets)/liabilities
|
|
$
|
—
|
|
|
$
|
(15.0
|
)
|
Interest rate swap agreement
|
|
Other long-term (assets)
|
|
|
—
|
|
|
|
(0.0
|
)
|
Interest rate swap agreement
|
|
Other long-term liabilities
|
|
|
34.4
|
|
|
|
19.0
|
|
|
|
|
|
$
|
34.4
|
|
|
$
|
4.0
|
|
19
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
16. Commitments and Contingencies
General Litigation
The Company is involved in various pending legal proceedings arising out of the ordinary course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims, and workers’ compensation claims. With respect to these proceedings, management believes that the Company will prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to the Company, there could be a material adverse effect on the results of operations, cash flows, or financial condition of the Company. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. For matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses, individually and in the aggregate, will not have a material effect on our unaudited condensed consolidated financial statements.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates. We will continue to consider the applicable guidance in ASC 450-20, based on the facts known at the time of our future filings, as it relates to legal contingencies, and will adjust our disclosures as may be required under the guidance.
There were no material amounts accrued in the accompanying unaudited condensed consolidated balance sheets for potential litigation as of March 31, 2020 or December 31, 2019.
The Company also risks exposure to product liability claims in connection with products it has sold and those sold by businesses that the Company acquired. Although in some cases third parties have retained responsibility for product liability claims relating to products manufactured or sold prior to the acquisition of the relevant business and in other cases the persons from whom the Company has acquired a business may be required to indemnify the Company for certain product liability claims subject to certain caps or limitations on indemnification, the Company cannot assure that those third parties will in fact satisfy their obligations with respect to liabilities retained by them or their indemnification obligations. If those third parties become unable to or otherwise do not comply with their respective obligations including indemnity obligations, or if certain product liability claims for which the Company is obligated were not retained by third parties or are not subject to these indemnities, the Company could become subject to significant liabilities or other adverse consequences. Moreover, even in cases where third parties retain responsibility for product liability claims or are required to indemnify the Company, significant claims arising from products that have been acquired could have a material adverse effect on the Company’s ability to realize the benefits from an acquisition, could result in the reduction of the value of goodwill that the Company recorded in connection with an acquisition, or could otherwise have a material adverse effect on the Company’s business, financial condition, or operations.
Environmental
There is contamination at some of the Company’s current facilities, primarily related to historical operations at those sites, for which the Company could be liable for the investigation and remediation under certain environmental laws. The potential for contamination also exists at other of the Company’s current or former sites, based on historical uses of those sites. The Company currently is not undertaking any material remediation or investigations and the costs or liability in connection with potential contamination conditions at these facilities cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the 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 the Company attempts to evaluate the risk of liability associated with these facilities at the time the Company acquired them, there may be environmental conditions currently unknown to the Company relating to prior, existing or future sites or operations or those of predecessor companies whose liabilities the Company may have assumed or acquired which could have a material adverse effect on the Company’s business.
20
ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in millions, unless otherwise noted
The Company is being indemnified, or expects 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 the Company has hired, the Company does not expect such costs and liabilities to have a material adverse effect on its business, operations or earnings. The Company 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 the Company is obligated is not subject to these indemnities, the Company could become subject to significant liabilities.
From time to time, the Company is notified that it is a potentially responsible party and may have liability in connection with off-site disposal facilities. To date, the Company has generally resolved matters involving off-site disposal facilities for a nominal sum but there can be no assurance that the Company will be able to resolve pending or future matters in a similar fashion.
17. Subsequent Events
On April 14, 2020, the Company provided notice to the administrative agent of the Altra Credit Agreement to repay $50 million outstanding under the Altra Revolving Credit Facility. The Company previously disclosed in its 8-K filed with the SEC on March 19, 2020 that it had provided notice to the administrative agent of the Altra Credit Agreement on March 9, 2020 and March 16, 2020 to draw down $50 million and $50 million, respectively, under the Altra Revolving Credit Facility. At that time, the Company had increased its borrowings under the Altra Revolving Credit Facility as a precautionary action in order to increase its cash position and enhance its financial flexibility during this period of uncertainty in the global markets resulting from COVID-19. As of April 16, 2020, $50 million remains outstanding under the Altra Revolving Credit Facility and is currently being held on the Company’s balance sheet and may be used for general corporate purposes. The Company could make further borrowings and had $245.6 million available to borrow under the Altra Revolving Credit Facility as of April 16, 2020.
On April 29, 2020 the Company declared a dividend of $0.04 per share for the quarter ended June 30, 2020, payable on July 6, 2020 to stockholders of record as of June 18, 2020.
On May 4, 2020 the Company terminated its interest rate swap agreement by paying $34.9 million which represented the estimated fair value of the swap and a termination fee of approximately $0.1 million. The Company had entered into this interest rate swap agreement in December 2018 in order to manage the cash flow risk caused by interest rate changes on the forecasted interest payments expected to occur related to a portion of its outstanding borrowings under the Altra Credit Agreement for an initial notional value of $600 million at 4.8255%. The swap agreement was designated as a cash flow hedge and was recognized at fair value in other long-term liabilities in the unaudited condensed consolidated balance sheets.
21