ALTRA INDUSTRIAL MOTION CORP. 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, gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, expected leverage levels, 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," "forecast," and similar expressions or variations. These forward-looking statements are based upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company's actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company's actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include:
• the effects of intense competition in the markets in which we operate;
• the cyclical nature of the markets in which we operate; • the loss of independent distributors on which we rely;
• changes in market conditions in which we operate that would influence the
value of the Company's stock;
• the Company's ability to achieve its business plans, including with
respect to an uncertain economic environment;
• the risks associated with international operations, including currency risks;
• the risks associated with and potential impacts of new trade policies,
legislation, treaties, and tariffs both in and outside of the United
States;
• 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;
• political and economic conditions globally, nationally, regionally, and in
the markets in which we operate;
• natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes,
earthquakes, hurricanes, pandemics or other matters beyond the Company's
control;
• the Company's risk of loss not covered by insurance;
• the accuracy of estimated forecasts of OEM customers and the impact of the
current global and European economic environment on our customers;
• the risks associated with certain minimum purchase agreements we have with
suppliers;
• disruption of our supply chain;
• fluctuations in the costs of raw materials used in our products;
• the outcome of litigation to which the Company is a party from time to
time, including product liability claims;
• work stoppages and other labor issues;
• changes in employment, environmental, tax and other laws, including
enactment of the 2017 Tax Act, and changes in the enforcement of laws;
• the Company's ability to attract and retain key executives and otherpersonnel;
• the Company's ability to successfully pursue the Company's development
activities and successfully integrate new operations and systems,
including the realization of revenues, economies of scale, cost savings,
and productivity gains associated with such operations;
• the Company's ability to obtain or protect intellectual property rights
and avoid infringing on the intellectual property rights of others;
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• the risks associated with the portion of the Company's total assets
comprised of goodwill and indefinite lived intangibles;
• changes in market conditions that would result in the impairment of
goodwill or other assets of the Company;
• changes in accounting rules and standards, audits, compliance with the
Sarbanes-Oxley Act, and regulatory investigations;
• the effects of 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;
• failure of the Company's operating equipment or information technology
infrastructure, including cyber-attacks or other security breaches, and
failure to comply with data privacy laws or regulations;
• the Company's ability to implement and maintain its Enterprise Resource
Planning (ERP) system;
• the Company's access to capital, credit ratings, indebtedness, and ability
to raise additional capital and operate under the terms of the Company's
debt obligations;
• the risks associated with our debt;
• the risks associated with the Company's exposure to variable interest
rates and foreign currency exchange rates;
• the risks associated with interest rate swap contracts;
• the risks associated with transitioning from LIBOR to a replacement
alternative reference rate;
• the risks associated with the Company's being subject to tax laws and
regulations in various jurisdictions;
• the risks associated with the Company's exposure to renewable energy markets;
• the risks related to regulations regarding conflict minerals;
• the risks associated with the volatility and disruption in the global
financial markets;
• the Company's ability to successfully execute, manage and integrate key
acquisitions and mergers, including the Stromag Acquisition and the
Fortive Transaction;
• other risks associated with the Fortive Transaction, including;
o lost sales and customers as a result of customers of Altra or the A&S
Business deciding not to do business with us;
o risks associated with managing a larger and more complex business;
o integrating personnel of Altra and the A&S Business while maintaining
focus on providing consistent, high-quality products andservice to
customers;
o the loss of key employees;
o unanticipated issues in integrating manufacturing, logistics,
information, communications and other systems;
o possible inconsistencies in standards, controls, procedures, policies
and compensation structures;
o the impact on our internal controls and compliance with the regulatory
requirements under the Sarbanes-Oxley Act of 2002; and
o potential unknown liabilities and unforeseen expenses associated with
the Fortive Transaction;
• the Company's ability to achieve the efficiencies, savings and other
benefits anticipated from our cost reduction, margin improvement,
restructuring, plant consolidation and other business optimization
initiatives;
• the risk associated with the
• 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.
• the impact of the coronavirus on manufacturing and supply capabilities in
China and throughout the world. 34
-------------------------------------------------------------------------------- ALL FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN OTHER REPORTS FILED WITH THE SEC BY THE COMPANY. The following discussion of the financial condition and results of operations ofAltra Industrial Motion Corp. and its subsidiaries should be read together with the Selected Historical Financial Data, and the consolidated financial statements ofAltra Industrial Motion Corp. and its subsidiaries and related notes included elsewhere in the Company's Annual Report on 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," "Altra Industrial Motion Corp. ," "the Company," "we," "us" and "our" refer toAltra Industrial Motion Corp. and its subsidiaries. The following generally discusses 2019 and 2018 items and year-to-year comparison between 2019 and 2018. Discussion of historical items and year-to-year comparisons between 2018 and 2017 that are not included in this discussion can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , filed with theSEC onMarch 1, 2019 (as amended). General We are a leading global designer, producer and marketer of a wide range of electromechanical power transmission motion control ("PTMC") products. Our technologies are used in various motion related applications and across a wide variety of high-volume manufacturing and non-manufacturing processes in which reliability and precision are critical to avoid costly down time and enhance the overall efficiency of operations. We market our products under well recognized and established brands, which have been in existence for an average of over 85 years. We serve a diversified group of customers comprised of over 1,000 direct original equipment manufacturers ("OEMs") includingGE , Honeywell and Siemens, and also benefit from established, long-term relationships with leading industrial distributors, including Applied Industrial Technologies, Grainger, Kaman Corporation andMotion Industries . Many of our customers operate globally across a large number of industries, ranging from transportation, turf and agriculture, energy and mining to factory automation, medical and robotics. Our relationships with these customers often span multiple decades, which we believe reflects the high level of performance, quality and service we deliver, supplemented by the breadth of our offering, vast geographic footprint and our ability to rapidly develop custom solutions for complex customer requirements. OnOctober 1, 2018 , Altra consummated the Fortive Transaction and acquired the A&S Business for an aggregate purchase price of approximately$2,855.7 million , subject to certain post-closing adjustments, which consisted of$1,400.0 million of cash and debt instruments transferred to Fortive and shares of Altra common stock received by Fortive shareholders valued at approximately$1,455.7 million . As ofDecember 31, 2019 , the initial accounting for the Fortive Transaction (including the allocation of the purchase price to acquired assets and liabilities) is complete. Business Outlook Our future financial performance depends, in large part, on conditions in the markets that we serve and on conditions in theU.S. , European, and global economies in general. In the year endedDecember 30, 2019 , against the backdrop of a challenging market environment and topline revenue headwinds, we were pleased with our operating performance highlighted by strong cash management and disciplined debt pay down. Nevertheless, we expect this challenging market environment to continue in the foreseeable future. As a result, we remain focused on cost containment, while working to ensure that we protect the long-term growth opportunities for the business.
In 2019, we also completed the tactical integration of the A&S Business operations into Altra's structure and began to integrate our business system across the entire organization by developing and utilizing best practices from both the A&S Business and legacy Altra businesses.
Looking ahead to 2020, we remain focused on capturing synergies from the A&S
Transaction in support of our synergy target through an ongoing focus on supply
chain optimization, value engineering, facility consolidations, and further
development of our business system. In addition, we are also starting to
shift more of our attention to capturing sales synergies. We also will continue
to prioritize cash generation and debt paydown to expediently de-lever to our
target leverage ratio and to strengthen our balance sheet. Furthermore, we plan
to focus on deploying our resources to ensure we are well positioned to
capitalize on high-growth opportunities for Altra.
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In December 2019 , a novel strain of coronavirus began to impact the population
of China , where several of our manufacturing and distribution facilities are
located. In late January and early February 2020 , in an effort to contain the
spread of the virus and maintain the wellbeing of our employees and in
accordance with governmental requirements, we closed several production
facilities in China . We rely upon these facilities to support our business in
China , as well as to export components for use in products in other parts of the
world. While the closures and limitations on movement in China are expected to
be temporary, the duration of the production and supply chain disruption, and
related financial impact, cannot be estimated at this time. Should the
production and distribution closures continue for an extended period of time or
should the effects of the coronavirus spread beyond China , the impact on our
supply chain in China and globally could have a material adverse effect on our
results of operations and cash flows.
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. Inventory. Inventories are generally stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. The cost of inventory includes direct materials, direct labor, and production overhead. We state inventories acquired through acquisitions at their fair value at the date of acquisition 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. 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 value 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 assetsGoodwill , Intangibles and other long-lived assets. In connection with our acquisitions, goodwill and intangible assets were identified and recorded at fair value. We recorded intangible assets for customer relationships, trade names and trademarks, product technology, patents, in-process research and development ("IPR&D") and goodwill. In valuing the customer relationships, trade names and trademarks and product technology, 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 1%- 12% 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 3 to 29 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. 36
--------------------------------------------------------------------------------Goodwill , trade names and trademarks and IPR&D are considered indefinite lived assets. Our trade names and trademarks 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. The Company has determined that its Power Transmission Technologies ("PTT") reporting segment is comprised of three reporting units. The Company has also determined that its A&S Business reporting segment is comprised of four reporting units. 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. The Company's measurement date isOctober 31st . The Company determines the fair value of its reporting units using the discounted cash flow model and, where appropriate, the Company also uses the market approach. 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. An impairment loss would be recognized to the extent that a reporting unit's carrying amount exceeded its deemed fair value. During 2019, the JVS reporting unit experienced lower than anticipated financial results primarily due to accelerating revenue pressures as a result of cyclicality in the heavy-duty truck market. As ofDecember 31, 2019 , the JVS reporting unit had a goodwill balance of$193.4 million , out of a total goodwill balance of$1.7 billion . The JVS reporting unit's fair value exceeds its carrying value by less than 10% as of the annual goodwill impairment date. All other reporting units have fair values that exceed their carrying value by 10% or more. The Company did not identify any impairment of goodwill during the periods presented for any reporting unit. Management believes the preparation of revenue and profitability growth rates for use in the long-range plan and the discount rate requires significant use of judgment. If any of our reporting units do not meet our 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. For our indefinite lived intangible assets, mainly trademarks, we estimate the fair value by first estimating the total revenue attributable to the trademarks. Second, we estimate 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. We compared the estimated fair value of the trademarks with the carrying value of the trademarks and did not identify any impairment as of the annual impairment date or for any of the periods presented. 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.
Recent Accounting Standards
See the discussion of significant accounting policies in Note 1 of the
consolidated financial statements for the year ended
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Results of Operations.
Amounts in millions, except percentage data
Years Ended December 31,
2019 2018 2017
Net sales $ 1,834.1 $ 1,175.3 $ 876.7
Cost of sales 1,177.8 799.2 601.0
Gross profit 656.3 376.1 275.7
Gross profit percentage 35.8 % 32.0 % 31.4 %
Selling, general and administrative expenses 359.0 251.9 164.5
Research and development expenses 59.1 33.1 24.4 Restructuring costs 14.1 4.4 4.1 Income from operations 224.1 86.7 82.7 Loss on partial settlement of pension plan - 5.1
1.7
Interest expense, net 73.8 28.6
7.7
Loss on extinguishment of debt - 1.2
1.8
Other non-operating (income) expense, net 2.1 0.1 0.4 Income before income taxes 148.2 51.7 71.1 Provision for income taxes 21.0 16.4 19.7 Net income$ 127.2 $ 35.3 $ 51.4 Segment Performance.
Amounts in thousands, except percentage data
Years Ended December 31,
2019 2018 2017
Net Sales :
Power Transmission Technologies $ 907.7 $ 935.0 $ 876.7
Automation & Specialty 931.0 241.7 -
Intra-segment eliminations (4.6 ) (1.4 ) -
Net sales $ 1,834.1 $ 1,175.3 $ 876.7
Income from operations:
Segment earnings:
Power Transmission Technologies $ 113.5 $ 118.2 $ 97.2
Automation & Specialty 132.3 27.9 -
Corporate (7.6 ) (55.0 ) (10.4 )
Restructuring and consolidation costs (14.1 ) (4.4 ) (4.1 ) Income from operations
$ 224.1 $ 86.7 $ 82.7
Year Ended
Amounts in millions, except percentage data Years Ended December 31,
2019 2018 Change %
Net sales $ 1,834.1 $ 1,175.3 $ 658.8 56.1 %
Net Sales . The increase in net sales during the year ended December 31, 2019 is
primarily due to increased sales resulting from the addition of the A&S Business
in the amount of $931.0 million . Excluding the impact of A&S sales, net sales
decreased $48.4 million compared to the prior year. This was mainly due to
cyclicality of the heavy-duty truck market. Changes in foreign exchange had an
unfavorable impact on net sales of $24.4 million compared to the prior year,
primarily driven by the Euro. This decrease was offset by price, which had a
favorable impact during the year of $21.2 million .
Amounts in millions, except percentage data Years Ended December 31,
2019 2018 Change %
Gross profit $ 656.3 $ 376.1 $ 280.2 74.5 %
Gross profit as a percent of net sales 35.8 % 32.0 %
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Gross profit. Gross profit as a percentage of net sales increased during the
year ended December 31, 2019 primarily due to the addition of the higher margin
A&S Business. The increase is also partially driven by the 2018 impact of
amortization of acquired inventory related to the A&S acquisition in the amount
of $14.2 million recorded at fair value rather than cost. Additionally, a
portion of the increase resulted from improvements realized from facility
consolidation, material cost savings, and price increases.
Amounts in millions, except percentage
data Years Ended
2019 2018 Change %
Selling, general and administrative
expense ("SG&A") $ 359.0 $ 251.9 $ 107.1 42.5 %
SG&A as a percent of net sales 19.6 % 21.4 %
Selling, general and administrative expenses. For the year ended December 31,
2019 , SG&A as a percentage of net sales increased primarily due to costs
associated with the addition of the A&S Business. The increase was partially
driven by the inclusion of $202.7 million of SG&A related to the A&S Business,
including $61.2 million of amortization expense. The decrease in SG&A as a
percent of net sales is primarily due to the inclusion of acquisition related
expenses of $36.2 million in 2018.
Amounts in millions, except percentage data Years Ended December 31,
2019 2018 Change %
Research and development expenses ("R&D")
78.5 %
Research and development expenses. Research and development expenses increased
due to the inclusion of R&D expenses for the A&S Business for the full year
ended December 31, 2019 in the amount of approximately $36.7 million . We expect
research and development costs to approximate 2.5% - 3.5% of sales in future
periods.
Amounts in millions, except percentage data Years Ended December 31,
2019 2018 Change %
Restructuring costs $ 14.1 $ 4.4 $ 9.7 220.5 %
Restructuring costs. During 2015 we adopted a restructuring plan ("2015 Altra
Plan") in response to weak demand in Europe and to make certain adjustments to
improve business effectiveness, reduce the number of facilities and streamline
our cost structure. The actions taken pursuant to the 2015 Altra Plan included
reducing headcount, facility consolidations and related asset impairments and
limiting discretionary spending to improve profitability. We do not expect to
incur any additional material costs as a result of the 2015 Altra Plan.
During the quarter ended September 30, 2017 , we commenced a restructuring plan
("2017 Altra Plan") as a result of Altra's purchase of Stromag (the "Stromag
Acquisition") and to rationalize our global renewable energy business. The
actions taken pursuant to the 2017 Altra Plan included reducing headcount,
facility consolidations and the elimination of certain costs. We incurred
approximately $5.7 million in expense through 2019, related to the 2017 Altra
Plan. The total 2017 Altra Plan savings are in line with our expectations. We do
not expect to incur any additional material costs as a result of the 2017 Altra
Plan.
During 2019, we commenced a restructuring plan ("2019 Plan") to drive
efficiencies, reduce the number of facilities and optimize our operating margin.
We expect to incur expenses related to workforce reductions, lease termination
costs and other facility rationalization costs. We expect to incur an additional
$15 - $20 million in restructuring expenses under the 2019 Altra Plan over the
next 4 years, primarily related to plant consolidation and headcount reductions.
The cost savings for the year ended December 31, 2019 were recognized as
improvements in SG&A and cost of sales of approximately $2.2 million and $2.7
million , respectfully.
Amounts in millions, except percentage data Years Ended December 31,
2019 2018 Change %
Interest expense, net $ 73.8 $ 28.6 $ 45.2 158.0 %
Interest expense. Interest expense increased for the year ended December 31,
2019 primarily due to the new debt instruments that the Company used to finance
the acquisition of the A&S Business including interest paid on the Altra Term
Loan Facility of approximately $55.1 million . This was partially offset by
interest income of $12.3 million generated by our Interest Rate Swaps and Cross
Currency Interest Rate Swaps for the year to date period ended December 31,
2019 . We expect our interest expense in 2020 to decrease as a result of
additional principal payments on our debt and lower current interest rates. We
made debt principal paydowns of $130 million during 2019.
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Amounts in millions, except percentage
data Years Ended
2019 2018 Change %
Provision for income taxes $ 21.0 $ 16.4 $ 4.6 28.0 %
Provision for income taxes as a percent
of income before
income taxes 14.2 % 31.7 %
Provision for income taxes. The provision for income tax as a percentage of
income before income taxes during the year ended December 31, 2019 was lower
than that of 2018 due to the impact in 2018 of non-deductible acquisition
related costs coupled with the Global Intangible Low-Taxed Income ("GILTI") tax
as a result of the 2017 Tax Act in the United States . In addition, the Company
recorded a $10.6 million deferred tax revaluation benefit in 2019 due to a rate
change in India . Going forward the Company expects its consolidated tax rate to
be approximately 20% to 25%.
Segment Performance
Power
Net sales in the Power Transmission Technologies segment were$907.7 million in the year endedDecember 31, 2019 , a decrease of approximately$27.3 million or 2.9%, from the year endedDecember 31, 2018 . The decrease was due to the softening of certain end markets and the unfavorable impact of foreign exchange rates, primarily related to the Euro, of approximately$22.3 million , partially offset by price. Segment operating income decreased by approximately$4.7 million compared to the prior year.
Automation & Specialty
Net sales in the Automation & Specialty business segment were$931.0 million in the year endedDecember 31, 2019 . Net sales were affected by the unfavorable impact of foreign exchange rates and the decline in certain of our more profitable end markets.
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 the Altra Revolving Credit Facility. AtDecember 31, 2019 , we have the ability under the Altra Revolving Credit Facility to borrow an additional$295.6 million subject to satisfying customary conditions. We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, acquisitions, pensions, dividends and share repurchases. OnOctober 1, 2018 , we consummated the Fortive Transaction. The aggregate purchase price for the A&S Business was approximately$2,855.7 million , subject to certain post-closing adjustments, and consisted of (i)$1,400.0 million of cash transferred to Fortive and (ii) shares of Altra common stock received by Fortive shareholders valued at approximately$1,455.7 million . The value of the common stock was based on the closing stock price on the A&S Closing Date of$41.59 . We financed the cash portion of the Fortive Transaction with the Altra Credit Facilities (as defined herein). We believe, based on current and projected levels of cash flows from operating activities, together with our ability to borrow under the Altra Revolving Credit Facility (as defined herein), we have sufficient liquidity to meet our short-term and long-term needs to make required payments of interest on our debt, make amortization payments under the Altra Credit Facilities (as defined herein), fund our operating needs, fund working capital and capital expenditure requirements and comply with the financial ratios in our debt agreements. In the event additional funds are needed for operations, we could attempt to obtain new debt and/or refinance existing debt, or attempt to raise capital in the equity markets. There can be no assurance however that additional debt or equity financing will be available on commercially acceptable terms, if at all. Notes OnSeptember 26, 2018 ,Stevens Holding Company, Inc. , a wholly owned subsidiary of the Company ("Stevens Holding "), announced the pricing of$400 million aggregate principal amount ofStevens Holding's 6.125% senior notes due 2026 (the "Notes") in a private debt offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933 (the "Private Placement"). OnOctober 1, 2018 , the Private Placement closed, andStevens Holding sold$150 million aggregate principal amount of the Notes (the "Primary Notes") and an unaffiliated selling securityholder sold$250 million aggregate principal amount of the Notes (the "Selling Securityholder Notes"). The Notes will mature onOctober 1, 2026 . Interest on the Notes accrues fromOctober 1, 2018 , and the first interest payment date on the Notes wasApril 1, 2019 . The Notes may be redeemed at the option ofStevens Holding on or after 40 --------------------------------------------------------------------------------October 1, 2023 , in the manner and at the redemption prices specified in the indenture governing the Notes, plus accrued and unpaid interest thereon, if any, to, but excluding, the date of redemption. The Notes are guaranteed on a senior unsecured basis by Altra and certain of its domestic subsidiaries. The unaffiliated selling securityholder received the Selling Securityholder Notes from Fortive prior to the closing of the Private Placement in exchange for certain outstanding Fortive debt held or acquired by the unaffiliated selling securityholder.Stevens Holding used the net proceeds of the Primary Notes to fund a dividend payment to Fortive prior to the consummation of the Merger, andStevens Holding did not receive any proceeds from the sale of the Selling Securityholder Notes. Altra Credit Agreement On the A&S Closing Date, Altra entered into a new Credit Agreement (the "Altra Credit Agreement") with certain subsidiaries of Altra,JPMorgan Chase Bank, N.A ., as administrative agent and collateral agent, and a syndicate of lenders. The Altra Credit Agreement provides for a seven-year senior secured term loan to Altra in an aggregate principal amount of$1,340.0 million (the "Altra Term Loan Facility") and a five-year senior secured revolving credit facility provided to Altra and certain of its subsidiaries 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 the Direct Sales, (ii) repay in full and extinguish all outstanding indebtedness for borrowed money under the 2015 Credit Agreement and (iii) pay certain fees, costs, and expenses in connection with the consummation of the Fortive Transaction. Any proceeds of the Altra Term Loan Facility not so used may be used for general corporate purposes. 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 Altra and by each direct or indirect wholly owned domestic subsidiary of Altra, 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 Altra's senior secured net leverage ratio. In addition, Altra 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 Altra's senior secured net leverage ratio. The interest rate on the Term Loan Facility and the Revolving Credit Facility was 3.70% atDecember 31, 2019 .
Revolving borrowings and issuances of letters of credit under the Altra Revolving Credit Facility are subject to the satisfaction of customary conditions, including the accuracy of representations and warranties and the absence of defaults.
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 judgements, ERISA events, actual or asserted invalidity of security documents or guarantees and change in control.
2015 Credit Agreement
OnOctober 22, 2015 , the Company entered into a Second Amended and Restated Credit Agreement by and among the Company,Altra Industrial Motion Netherlands, B.V ., one of the Company's foreign subsidiaries (collectively with the Company, the "Borrowers"), the lenders party to the Second Amended and Restated Credit Agreement from time to time (collectively, the "Lenders"),J.P, Morgan Securities LLC ,Wells Fargo Securities, LLC , andKeyBanc Capital Markets, Inc. , as joint lead arrangers and joint bookrunners, andJPMorgan Chase Bank, N.A ., as administrative agent (the "Administrative Agent"), to be guaranteed and secured by certain domestic subsidiaries of the Company, and which may be amended from time to time (the "2015 Credit Agreement"). Under the 2015 Credit Agreement, the amount of the Company's revolving credit facility was$350 million (the "2015 Revolving Credit Facility"). Prior toOctober 2018 , the amounts available under the 2015 Revolving Credit Facility were used for general corporate purposes, including acquisitions, and to repay existing indebtedness. 41
-------------------------------------------------------------------------------- Prior toOctober 2018 , the amounts available under the 2015 Revolving Credit Facility could be drawn upon in accordance with the terms of the 2015 Credit Agreement. All amounts outstanding under the 2015 Revolving Credit Facility were due on the stated maturity or such earlier time, if any, required under the 2015 Credit Agreement. The amounts owed under the 2015 Revolving Credit Facility could be prepaid at any time, subject to usual notification and breakage payment provisions. Interest on the amounts outstanding under the 2015 Revolving Credit Facility was calculated using either an ABR Rate or Eurodollar Rate, plus the applicable margin. A portion of the 2015 Revolving Credit Facility could also be used for the issuance of letters of credit, and a portion of the amount of the 2015 Revolving Credit Facility was available for borrowings in certain agreed upon foreign currencies. The 2015 Credit Agreement contained various affirmative and negative covenants and restrictions, which among other things, required the Borrowers to provide certain financial reports to the Lenders, required the Company to maintain certain financial covenants relating to consolidated leverage and interest coverage, limited maximum annual capital expenditures, and limited 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 2015 Credit Agreement also contained customary events of default. OnOctober 21, 2016 , the Company entered into an agreement to amend the 2015 Credit Agreement (the "October 2016 Amendment"). TheOctober 2016 Amendment, which became effective upon theDecember 30, 2016 closing of the Stromag Acquisition increased the 2015 Revolving Credit Facility by$75 million to$425 million . The Company borrowed additional funds under the increased 2015 Revolving Credit Facility to finance the Stromag Acquisition. TheOctober 2016 Amendment also reset the possible expansion of up to$150 million of additional future loan commitments. In addition, theOctober 2016 Amendment increased the multicurrency sublimit to$250 million and adjusted certain financial covenants. OnOctober 1, 2018 , in connection with the Fortive Transaction and the entering into the Altra Credit Agreement, the 2015 Credit Agreement was terminated and all outstanding indebtedness for borrowed money thereunder was repaid in full.
Working Capital Line of Credit
During the year to date period endedDecember 31, 2019 , one of the Company's subsidiaries inChina opened a new line of credit for approximately$7.5 million with a term life of one year. As ofDecember 31, 2019 the Company had approximately$1.6 million outstanding on the line of credit.
Borrowings
Below is a summary of borrowings as ofDecember 31, 2019 and 2018, respectively: Amounts in millions Years Ended December 31, 2019 2018 Debt: Term loan$ 1,190.0 $ 1,320.0 Notes 400.0 400.0 Mortgages and other 13.5 13.5 Capital leases 0.5 0.5 Total debt$ 1,604.0 $ 1,734.0
Below is a reconciliation of net debt for the year ended
Amounts in millions
Years Ended December 31,
2019 2018
Debt $ 1,604.0 $ 1,734.0
Cash (167.3 ) (169.0 )
Net debt $ 1,436.7 $ 1,565.0
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Cash and Cash Equivalents
The following is a summary of our cash balances and cash flows (in millions) as
of and for the years ended
2019 2018 Change
Cash and cash equivalents at the beginning of the year$ 169.0 $ 52.0 $ 117.0 Cash flows provided by (used in) operating activities 255.9 116.3
139.6
Cash flows provided by (used in) in investing activities (80.9 ) (989.4 )
908.5
Cash flows provided by (used in) financing activities (177.9 ) 986.2 (1,164.1 ) Effect of exchange rate changes on cash and cash equivalents 1.2 3.9 (2.7 ) Cash and cash equivalents at the end of the year$ 167.3 $ 169.0 $ (1.7 ) Cash Flows for 2019 Funds provided by operating activities totaled approximately$255.9 million for fiscal 2019, a significant portion of which resulted from cash provided by net income of$127.2 million . In addition, the net impact of the add-back of certain non-cash items including depreciation, amortization, amortization of deferred financing costs, stock-based compensation, accretion of debt discount, loss on disposals, impairments and other and (benefit) provision for deferred taxes was approximately$114.1 million . Also, a net decrease in current assets and liabilities provided cash of approximately$14.6 million . Net cash used in investing activities for the year endedDecember 31, 2019 decreased approximately$908.5 million due to the acquisition of the A&S Business onOctober 1, 2018 for$949.2 million , net of cash received, offset by a purchase price adjustment related to the Fortive Transaction in the amount of$29.5 million recorded in 2019. Net cash used in financing activities in the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 decreased by$1,164.1 million . In 2018, cash provided by financing activities was driven by the borrowing of$1,340.0 million under the Altra Term Loan Facility, offset by payments of$281.6 million for the termination of the 2015 Credit Facility. In 2019, we used our cash to pay down approximately$130.0 million of debt. We intend to use our remaining cash and cash equivalents and cash flow from operations to provide for our working capital needs, to fund potential future acquisitions, to service our debt, including principal payments, for capital expenditures, for pension funding, and to pay dividends to our stockholders. As ofDecember 31, 2019 , we have approximately$116.2 million of cash and cash equivalents held by foreign subsidiaries. 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 Altra Credit Facilities provide additional potential sources of liquidity should they be required.
Capital Expenditures
We made capital expenditures of approximately$51.7 million and$37.5 million in the years endedDecember 31, 2019 and 2018, respectively. The increase in capital expenditures during 2019 was due to the addition of the A&S Business. These capital expenditures will support on-going business needs. In 2020, we forecast capital expenditures to be in the range of$45.0 million to$50.0 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.
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Contractual Obligations
The following table is a summary of our contractual cash obligations as of
Payments Due by Period
2020 2021 2022 2023 2024 Thereafter Total
Operating leases $ 14.5 $ 9.2 $ 7.2 $ 5.0 $ 2.2 $ 3.3 $ 41.4
Finance leases 0.2 0.2 0.1 - - - 0.5
Heidelberg Germany
mortgage(1) 0.2 0.2 0.2 0.2 - - 0.8
Esslingen Germany
mortgage(2) - - - - - 6.7 6.7
Zlate Moravce,
Slovakia(3) 0.9 - - - - - 0.9
Angers France
mortgage(4) 0.2 0.2 0.2 0.2 0.2 0.4 1.4
Term Loan(5) 13.4 13.4 13.4 13.4 13.4 1,123.0 1,190.0
Altra Revolving
Credit Facility(5) - - - - - - -
Notes(6) - - - - - 400.0 400.0
Working Capital Line
of Credit(7) 3.9 - - - - - 3.9
Total contractual
cash obligations $ 33.3 $ 23.2 $ 21.1 $ 18.8 $ 15.8 $ 1,533.4 $ 1,645.6 (1) A foreign subsidiary of the Company entered into a mortgage with a bank for
€1.5 million, or
to replace its previously existing mortgage during the quarter ended
September 30, 2015 . The mortgage has an interest rate of 1.79% which is
payable in monthly installments through August 2023 . The mortgage has a
remaining principal balance of €0.7, or $0.8 , at December 31, 2019 .
(2) A foreign subsidiary of the Company entered into a mortgage with a bank to
borrow €6.0 million, or
Esslingen, Germany during
2.5% per year which is payable in annual interest payments of €0.1 million or
table above. The mortgage has a remaining principal balance of €6.0, or
at
lump-sum payment in
(3) During 2016, a foreign subsidiary of the Company entered into a loan with a
bank to equip its facility in Zlate Moravce,
2019, the total principal outstanding was €0.8 million, or
is guaranteed by land security at its parent company facility in Esslingen,
Germany. The loan is due in installments through 2020, with an interest rate
of 1.95%.
(4) A foreign subsidiary of the Company entered into a mortgage with a bank
for €2.0 million, or
Angers,
payable in monthly installments from
has a balance of €1.2 million, or
(5) We have up to
2025, under the Altra Revolving Credit Facility of which
currently available. As of
million and
Revolving Credit Facility and the 2015 Revolving Credit Facility. We have
variable monthly and/or quarterly cash interest requirements due on the Altra
Revolving Credit Facility through
above table. Refer to Footnote 11 for interest terms on the Term Loan.
(6) We assumed
2026, upon the closing of the Fortive Transaction. The Notes will mature on
Company and certain of its domestic subsidiaries. Refer to Footnote 11 for
interest terms on the Notes.
(7) Two foreign subsidiaries of the Company have lines of credit used for
operating purposes. As of
Turkish Lira, or
outstanding on each line of credit respectively.
From time to time, we may have cash funding requirements associated with our pension plans. As ofDecember 31, 2019 , there were no funding requirements for 2020 to 2024. 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. 44
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Stock-based Compensation
The 2014 Omnibus Incentive Plan (the "2014 Plan") was approved by the Company's
stockholders at its 2014 annual meeting. 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 total number of
shares of common stock available for delivery pursuant to the grant of awards
("Awards") was originally 750,000. Shares of our common stock subject to Awards
or grants awarded under our prior 2004 Equity Incentive Plan and outstanding as
of the effective date of the 2014 Plan (except for substitute awards) that
terminate without being exercised, expire, are forfeited or canceled, are
exchanged for Awards that did not involve shares of common stock, are not issued
on the stock settlement of a stock appreciation right, are withheld by the
Company or tendered by a participant (either actually or by attestation) to pay
an option exercise price or to pay the withholding tax on any Award, or are
settled in cash in lieu of shares will again be available for Awards under the
2014 Plan. An amendment to the 2014 Plan to, among other things, make an
additional 2,200,000 shares of common stock available for grant under the 2014
Plan was approved by the Company's stockholders at the special meeting of
stockholders on September 4, 2018 .
As of December 31, 2019 , there were 786.3 thousand shares of unvested restricted
stock outstanding under the 2014 Plan. The remaining compensation cost to be
recognized through 2022 is $19.9 million . Based on the stock price at
December 31, 2019 , of $36.2 per share, the intrinsic value of these awards as of
December 31, 2019 , was $28.5 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. OnDecember 22, 2017 , the 2017 Tax Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, aU.S. federal corporate tax rate decrease from 35% to 21% effective for tax years beginning afterDecember 31, 2017 , the transition ofU.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as ofDecember 31, 2017 . We have calculated the impact of the 2017 Tax Act in our year end income tax provision in accordance with guidance available as of the date of this filing. The one-time transition tax on the mandatory deemed repatriation of foreign earnings was$7.4 million . In addition, we recognized a benefit totaling$7.8 million upon the remeasurement of our net deferred tax liabilities from 35% to 21%. Seasonality General economic conditions impact our business and financial results, and certain of our businesses experience seasonal and other trends related to the industries and end markets that they serve. For example, sales to OEMs are often stronger immediately preceding and following the launch of new products. In addition, we experience seasonality in our turf and garden business. 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. However, as a whole, we are not subject to material seasonality.
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 although there can be no assurance that inflation will not increase in future periods. The competitive environment in which we operate inevitably creates pressure on us to provide our customers with cost-effective products and services.
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