AIMC-9.30.2014-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33209
 
 
 
ALTRA INDUSTRIAL MOTION CORP.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
61-1478870
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
300 Granite Street, Suite 201, Braintree, MA
 
02184
(Address of principal executive offices)
 
(Zip Code)
(781) 917-0600
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company.)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 23, 2014, 26,635,336 shares of Common Stock, $0.001 par value per share, were outstanding.


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Table of Contents

TABLE OF CONTENTS
 
Page #
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
EX-31.1 Section 302 Certification of Chief Executive Officer
 
EX-31.2 Section 302 Certification of Chief Financial Officer
 
EX-32.1 Section 906 Certification of Chief Executive Officer
 
EX-32.2 Section 906 Certification of Chief Financial Officer
 
EX-101 Certain materials formatted in XBRL
 


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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

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Table of Contents

ALTRA INDUSTRIAL MOTION CORP.
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
42,994

 
$
63,604

Trade receivables, less allowance for doubtful accounts of $2,802 and $2,245 at September 30, 2014 and December 31, 2013, respectively
117,872

 
109,084

Inventories
135,383

 
143,665

Deferred income taxes
9,821

 
9,754

Asset held for sale
573

 

Income tax receivable
1,918

 
5,032

Prepaid expenses and other current assets
8,195

 
18,066

Total current assets
316,756

 
349,205

Property, plant and equipment, net
152,776

 
157,535

Intangible assets, net
115,530

 
118,768

Goodwill
104,653

 
104,339

Deferred income taxes
894

 
934

Other non-current assets, net
4,188

 
4,895

Total assets
$
694,797

 
$
735,676

LIABILITIES, NON-CONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
43,914

 
$
51,180

Accrued payroll
24,194

 
23,983

Accruals and other current liabilities
38,649

 
34,979

Deferred income taxes
44

 
44

Income tax payable
4,088

 
12,963

Current portion of long-term debt
14,532

 
16,924

Total current liabilities
125,421

 
140,073

Long-term debt - less current portion and net of unaccreted discount
237,062

 
261,348

Deferred income taxes
53,822

 
53,813

Pension liabilities
7,565

 
8,025

Long-term taxes payable
762

 
1,038

Other long-term liabilities
844

 
1,055

Redeemable non-controlling interest
979

 
991

Commitment and Contingencies (See Note 17)

 

Stockholders’ equity:
 
 
 
Common stock ($0.001 par value, 90,000,000 shares authorized, 26,515,072 and 26,819,795 issued and outstanding at September 30, 2014 and December 31, 2013, respectively)
27

 
27

Additional paid-in capital
142,841

 
154,471

Retained earnings
155,198

 
133,231

Accumulated other comprehensive loss
(29,724
)
 
(18,396
)
Total stockholders’ equity
268,342

 
269,333

Total liabilities, redeemable non-controlling interest and stockholders’ equity
$
694,797

 
$
735,676

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

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ALTRA INDUSTRIAL MOTION CORP.
Condensed Consolidated Statements of Operations
Amounts in thousands, except per share data
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Net sales
$
202,520

 
$
175,443

 
$
627,856

 
$
541,688

Cost of sales
140,187

 
121,785

 
437,257

 
378,112

Gross profit
62,333

 
53,658

 
190,599

 
163,576

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
39,067

 
31,672

 
117,828

 
96,742

Research and development expenses
3,818

 
3,002

 
11,719

 
9,150

Restructuring costs
1,643

 
97

 
1,643

 
655

 
44,528

 
34,771

 
131,190

 
106,547

Income from operations
17,805

 
18,887

 
59,409

 
57,029

Other non-operating income and expense:
 
 
 
 
 
 
 
Interest expense, net
3,000

 
2,567

 
8,991

 
7,830

Other non-operating expense (income), net
(313
)
 
686

 
446

 
783

 
2,687

 
3,253

 
9,437

 
8,613

Income before income taxes
15,118

 
15,634

 
49,972

 
48,416

Provision for income taxes
8,170

 
5,176

 
18,843

 
15,423

Net income
6,948

 
10,458

 
31,129

 
32,993

Net (income) loss attributable to non-controlling interest
(2
)
 
43

 
(21
)
 
77

Net income attributable to Altra Industrial Motion Corp.
$
6,946

 
$
10,501

 
$
31,108

 
$
33,070

Weighted average shares, basic
26,648

 
26,780

 
26,785

 
26,750

Weighted average shares, diluted
27,334

 
26,836

 
27,557

 
26,852

Net income per share:
 
 
 
 
 
 
 
Basic net income attributable to Altra Industrial Motion Corp.
$
0.26

 
$
0.39

 
$
1.16

 
$
1.24

Diluted net income attributable to Altra Industrial Motion Corp.
$
0.25

 
$
0.39

 
$
1.13

 
$
1.23

Cash dividend declared
$
0.12

 
$
0.10

 
$
0.34

 
$
0.28

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

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ALTRA INDUSTRIAL MOTION CORP.
Condensed Consolidated Statement of Comprehensive Income
Amounts in thousands
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Net Income
$
6,948

 
$
10,458

 
$
31,129

 
$
32,993

Other Comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(12,341
)
 
(6,727
)
 
(11,437
)
 
(46
)
Change in fair value of interest rate swap, net of tax
229

 
(346
)
 
109

 
191

Other comprehensive income (loss)
(12,112
)
 
(7,073
)
 
(11,328
)
 
145

Comprehensive (loss) income
(5,164
)
 
3,385

 
19,801

 
33,138

Comprehensive (income) loss attributable to noncontrolling interest
105

 
43

 
12

 
77

Comprehensive income (loss) attributable to Altra Industrial Motion Corp.
$
(5,059
)
 
$
3,428

 
$
19,813

 
$
33,215

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

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ALTRA INDUSTRIAL MOTION CORP.
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
 
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
(Unaudited)
 
(Unaudited)
Cash flows from operating activities
 
 
 
Net income
$
31,129

 
$
32,993

Adjustments to reconcile net income to net cash flows:
 
 
 
Depreciation
17,238

 
16,047

Amortization of intangible assets
6,884

 
4,882

Amortization of deferred financing costs
699

 
646

Loss on foreign currency, net
461

 
593

Amortization of inventory fair value adjustment
2,264

 

Accretion of debt discount, net
2,527

 
2,331

Loss on disposal of fixed assets
195

 

Provision for deferred taxes
1,350

 

Stock based compensation
2,633

 
2,397

Changes in assets and liabilities:
 
 
 
Trade receivables
(11,452
)
 
(8,756
)
Inventories
5,276

 
3,451

Accounts payable and accrued liabilities
(6,682
)
 
9,197

Other current assets and liabilities
9,704

 
254

Other operating assets and liabilities
(188
)
 
(1,866
)
Net cash from operating activities
62,038

 
62,169

Cash flows from investing activities
 
 
 
Purchase of property, plant and equipment
(16,464
)
 
(14,361
)
Proceeds from sale of land
274

 

Acquisition of Guardian, net of $2.0 million cash acquired
(15,092
)
 

Net cash from investing activities
(31,282
)
 
(14,361
)
Cash flows from financing activities
 
 
 
Payments on term loan facility
(21,478
)
 
(3,750
)
Payments on revolving credit facility
(9,190
)
 
(54,304
)
Dividend payments
(8,644
)
 
(4,852
)
Proceeds from equipment loan
2,245

 
3,550

Payment of equipment and working capital notes
(1,028
)
 
(1,100
)
Borrowing under revolving credit facility
5,000

 

Shares surrendered for tax withholding
(1,447
)
 
(1,166
)
Payments on mortgages and other
(435
)
 
(540
)
Purchases of common stock under share repurchase program
(12,816
)
 

Net cash from financing activities
(47,793
)
 
(62,162
)
Effect of exchange rate changes on cash and cash equivalents
(3,573
)
 
(528
)
Net change in cash and cash equivalents
(20,610
)
 
(14,882
)
Cash and cash equivalents at beginning of year
63,604

 
85,154

Cash and cash equivalents at end of period
$
42,994

 
$
70,272

Cash paid during the period for:
 
 
 
Interest
$
6,504

 
$
5,561

Income taxes
$
23,333

 
$
15,156

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

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Table of Contents

ALTRA INDUSTRIAL MOTION CORP.
Consolidated Statement of Stockholders’ Equity
Amounts in thousands
(Unaudited)
 
Common
Stock
 
Shares
 
Additional
Paid
in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Redeemable
Non-Controlling
Interest
Balance at January 1, 2013
$
27

 
26,724

 
$
152,188

 
$
103,200

 
$
(23,403
)
 
$
232,012

 
$
1,239

Stock-based compensation and vesting of restricted stock

 
94

 
1,231

 

 

 
1,231

 

Net income attributable to Altra Industrial Motion Corp.

 

 

 
33,070

 

 
33,070

 

Net loss attributable to non-controlling interest

 

 

 
(77
)
 

 
(77
)
 
(77
)
Dividends declared

 

 

 
(7,471
)
 
 
 
(7,471
)
 

Change in fair value of interest rate swap

 

 

 

 
191

 
191

 

Cumulative foreign currency translation adjustment

 

 

 

 
(46
)
 
(46
)
 
(121
)
Balance at September 28, 2013
$
27

 
26,818

 
$
153,419

 
$
128,722

 
$
(23,258
)
 
$
258,910

 
$
1,041

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
27

 
26,820

 
$
154,471

 
$
133,231

 
$
(18,396
)
 
$
269,333

 
$
991

Stock-based compensation and vesting of restricted stock

 
78

 
1,186

 

 

 
1,186

 

Net income loss attributable to Altra Industrial Motion Corp.

 

 

 
31,108

 

 
31,108

 

Net income attributable to non-controlling interest

 

 

 

 

 

 
21

Dividends declared

 

 

 
(9,141
)
 

 
(9,141
)
 

Change in fair value of interest rate swap

 

 

 

 
109

 
109

 

Cumulative foreign currency translation adjustment

 

 

 

 
(11,437
)
 
(11,437
)
 
(33
)
Repurchases of common stock - 382,626 shares

 
(383
)
 
(12,816
)
 

 

 
(12,816
)
 

Balance at September 30, 2014
$
27

 
26,515

 
$
142,841

 
$
155,198

 
$
(29,724
)
 
$
268,342

 
$
979

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

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Table of Contents

ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted



1. Organization and Nature of Operations
Headquartered in Braintree, Massachusetts, Altra Industrial Motion Corp. (the “Company” or "Altra"), through its wholly-owned subsidiary Altra Power Transmissions, Inc. (“APT”), is a leading multi-national designer, producer and marketer of a wide range of electro-mechanical power transmission products. The Company brings together strong brands covering over 42 product lines with production facilities in eleven 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, Kilian Manufacturing, Lamiflex Couplings, Marland Clutch, Matrix, Nuttall Gear, Stieber Clutch, Svendborg Brakes, TB Wood’s, Twiflex, Warner Electric, Warner Linear, and Wichita Clutch.
In November 2013, Altra Holdings, Inc. changed its name to Altra Industrial Motion Corp., and Altra Industrial Motion, Inc., the Company’s wholly owned subsidiary, changed its name to Altra Power Transmission, Inc.
2. Basis of Presentation
The Company was formed on November 30, 2004 following acquisitions of The Kilian Company (“Kilian”) and certain subsidiaries of Colfax Corporation (“Colfax”). During 2006, the Company acquired Hay Hall Holdings Limited (“Hay Hall”) and Bear Linear. On April 5, 2007, the Company acquired TB Wood’s Corporation (“TB Wood’s”), and on October 5, 2007, the Company acquired substantially all of the assets of All Power Transmission Manufacturing, Inc. On May 29, 2011, the Company acquired substantially all of the assets of Danfoss Bauer GmbH relating to its gear motor business (“Bauer”). On July 11, 2012, the Company acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda. (“Lamiflex”). On December 17, 2013, the Company completed the acquisition of Svendborg Brakes A/S, now known as Svendborg Brakes ApS, and S.B. Patent Holding ApS (together “Svendborg”). The Company acquired all the issued and outstanding shares of Svendborg from Friction Holding A/S. On July 1, 2014, the Company acquired all of the issued and outstanding shares of Guardian Ind., Inc. (“Guardian Couplings”).
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 accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2014 and December 31, 2013, results of operations for the quarters and year to date periods ended September 30, 2014 and September 28, 2013, and cash flows for the year to date periods ended September 30, 2014 and September 28, 2013.
The Company modified its quarterly reporting calendar effective at the beginning of fiscal year 2014 to report on a calendar month-end basis with all quarters ending on the last day of the final month of each quarter. Historically, the Company’s reporting calendar for all quarters presented has consisted of thirteen weeks of operations per quarter. The Company’s fiscal year end will remain December 31. The effects of the change in the reporting periods did not have a significant impact on the consolidated financial statements.
3. Fair Value of Financial Instruments
The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, and other accrued liabilities approximate fair value. Debt under the Company’s Credit Agreement including a Term Loan Facility and a Revolving Credit Facility approximate the fair values due to the variable rate nature at current market rates.
The carrying amount of the 2.75% Convertible Notes (the “Convertible Notes”) was $85 million at each of September 30, 2014 and December 31, 2013. The estimated fair value of the Convertible Notes at September 30, 2014 and December 31, 2013 was $102.8 million and $116.5 million, respectively, based on inputs other than quoted prices that are observable for the Convertible Notes (level 2).
Included in cash and cash equivalents as of September 30, 2014 and December 31, 2013 are money market fund investments of $0.3 million and $16.6 million, respectively, which are reported at fair value based on quoted market prices for such investments (level 1).

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted



4. 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 Income (Loss) by Component, January 1, 2013
$

 
$
(4,607
)
 
$
(18,796
)
 
$
(23,403
)
Net current-period Other Comprehensive Income (Loss)
191

 

 
(46
)
 
145

Accumulated Other Comprehensive Income (Loss) by Component, Balance at September 28, 2013
$
191

 
$
(4,607
)
 
$
(18,842
)
 
$
(23,258
)
 
 
Gains and
Losses on
Cash Flow
Hedges
 
Defined
Benefit
Pension
Plans
 
Cumulative
Foreign
Currency
Translation
Adjustment
 
Total
Accumulated Other Comprehensive Income (Loss) by Component, January 1, 2014
$
135

 
$
(3,133
)
 
$
(15,398
)
 
$
(18,396
)
Net current-period Other Comprehensive Income (Loss)
109

 

 
(11,437
)
 
(11,328
)
Accumulated Other Comprehensive Income (Loss) by Component, Balance at September 30, 2014
$
244

 
$
(3,133
)
 
$
(26,835
)
 
$
(29,724
)
5. 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
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
Net income attributable to Altra Industrial Motion Corp.
$
6,946

 
$
10,501

 
$
31,108

 
$
33,070

Shares used in net income per common share - basic
26,648

 
26,780

 
26,785

 
26,750

Dilutive effect of the equity premium on Convertible Notes at the average price of common stock
626

 

 
687

 

Incremental shares of unvested restricted common stock
60

 
56

 
85

 
102

Shares used in net income per common share - diluted
27,334

 
26,836

 
27,557

 
26,852

Earnings per share:
 
 
 
 
 
 
 
Basic net income attributable to Altra Industrial Motion Corp.
$
0.26

 
$
0.39

 
$
1.16

 
$
1.24

Diluted net income attributable to Altra Industrial Motion Corp.
$
0.25

 
$
0.39

 
$
1.13

 
$
1.23

During the quarter and year to date periods ended September 30, 2014, the average price of the Company’s common stock exceeded the current conversion price of the Company’s Convertible Notes resulting in additional

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


shares being included in the shares used in net income per common share in the diluted earnings per share calculation above (See Note 12).
6. Acquisitions

Guardian Couplings
On July 1, 2014, the Company acquired all of the issued and outstanding shares of Guardian Ind., Inc. (“Guardian Couplings”) for cash consideration of $17.1 million. This transaction is referred to as the Guardian Acquisition. Guardian Couplings is a manufacturer and supplier of flywheel, motion control and general industrial couplings. The Guardian Acquisition provides the Company with increased product coverage in several core markets, including energy, farm and agriculture, and specialty machinery and is expected to provide synergies with the Company's existing product offerings.
The sellers agreed to provide the Company with a limited set of representations and warranties, including those with respect to outstanding and potential liabilities. Claims for a breach of a representation or warranty are secured by a limited escrow. There is no guarantee that the Company would actually be able to recover all or any portion of the sums payable in connection with such breach. The transaction is subject to a working capital adjustment to be agreed upon between the Company and the seller, which is expected to occur by the end of 2014.

As of September 30, 2014, the allocation of the purchase price for the Guardian Acquisition is provisional, pending finalization of the Company’s acquisition accounting. The Company believes that such preliminary allocations provide a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The purchase price of $17.1 million, excluding acquisition costs of $0.4 million, is in excess of the fair value of net assets acquired by approximately $2.1 million. Current assets acquired, excluding approximately $2.0 million in cash, totaled approximately $4.0 million, non-current assets totaled approximately $9.2 million and current liabilities totaled approximately $0.2 million.
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is deductible for income tax purposes over a period of 15 years. The Company expects to develop synergies, such as lower cost country sourcing and global procurement.
The non-current assets acquired included the following intangible assets:
Customer relationships, subject to amortization
$
7,450

Trade names and trademarks, not subject to amortization
650

Total intangible assets
$
8,100

Customer relationships are subject to amortization which will be amortized on a straight-line basis over their estimated useful lives of 14 years, which represents the anticipated period over which the Company estimates it will benefit from the acquired assets.
Svendborg Brakes
In December 2013, the Company consummated an agreement (the “Purchase Agreement”) to acquire all of the issued and outstanding shares of Svendborg for cash consideration of €80.1 million ($110.2 million), less the cash remaining on the balance sheet at close of €5.4 million ($7.5 million). This transaction is referred to as the Svendborg Acquisition. Through the Svendborg Acquisition, the Company acquired the leading global manufacturer of premium quality caliper brakes. With the Svendborg Acquisition, in addition to a presence in Denmark, the Company acquired Svendborg’s well-established sales network in 7 additional countries in Western Europe, China, South America, Australia and the United States as well as a manufacturing facility in China.
Under the Purchase Agreement, the seller agreed to provide the Company with a limited set of representations and warranties, including with respect to outstanding and potential liabilities. Claims for a breach of a representation or warranty are secured by a limited escrow and warranty and indemnity insurance. Damages resulting from a breach of a representation or

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


warranty could have a material and adverse effect on the Company’s financial condition and results of operations, and there is no guarantee that the Company would actually be able to recover all or any portion of the sums payable in connection with such breach.
Under the Purchase Agreement, the seller agreed to provide the Company with an indemnification for certain tax liabilities related to transfer pricing (the “Transfer Pricing Claims”) identified as part of an ongoing tax audit in Denmark. As part of the Purchase Agreement, an escrow in the amount of approximately €8.5 million ($11.6 million) was established for the Transfer Pricing Claims. The Company estimated this liability to be $8.1 million and as a result initially recorded a liability included in taxes payable and an escrow receivable in other current assets. The purchase price in the reconciliation below represents cash consideration less the estimated escrow receivable for which the Company expects to be indemnified.
During the year to date period ended September 30, 2014, the Company paid approximately €5.9 million ($8.1 million ) to settle a portion of the Transfer Pricing Claims and received a corresponding amount from the escrow established for the Transfer Pricing Claims.
Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the acquisition date. The Company is in the process of finalizing the valuation of certain intangibles, related tax impact and the valuation of certain tax information to finalize fair value. The Company updated the acquisition accounting for the measurement period adjustments noted in the table below during the year to date period ended September 30, 2014.
 
 
At Acquisition
Date
 
Measurement
Period
Adjustments
 
At Acquisition
Date (As
Adjusted)
Purchase price, excluding acquisition costs of approximately $2.5 million
$
102,096

 
$

 
$
102,096

Cash and cash equivalents
7,483

 

 
7,483

Trade receivables
21,575

 
(809
)
 
20,766

Inventories
25,452

 
(224
)
 
25,228

Prepaid and other
5,511

 
(76
)
 
5,435

Property, plant and equipment
12,216

 

 
12,216

Other assets
1,133

 

 
1,133

Intangible assets
48,893

 

 
48,893

Total assets acquired
122,263

 
(1,109
)
 
121,154

Accounts payable
4,833

 

 
4,833

Accrued expenses and other current liabilities
9,620

 
168

 
9,788

Taxes payable
10,254

 

 
10,254

Deferred tax liability
11,483

 

 
11,483

Total liabilities assumed
36,190

 
168

 
36,358

Net assets acquired
86,073

 
(1,277
)
 
84,796

Excess of purchase price over fair value of net assets acquired
$
16,023

 
$
1,277

 
$
17,300

The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. This goodwill is not deductible for income tax purposes. The Company expects to develop synergies, such as lower cost country sourcing, global procurement, the ability to cross-sell product, and the ability to penetrate certain geographic areas, as a result of the acquisition of Svendborg.
 
Customer relationships, subject to amortization
$
40,050

Trade names and trademarks, not subject to amortization
8,500

Patents
343

Total intangible assets
$
48,893


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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


Customer relationships are subject to amortization which will be amortized on a straight-line basis over their estimated useful lives of 17 years, which represents the anticipated period over which the Company estimates benefits from the acquired assets will be realized.

Pro forma Results of Operations
The closing date of the Svendborg Acquisition was December 17, 2013, and the closing date of the Guardian Acquisition was July 1, 2014. The Company's consolidated financial statements reflect the results of the operations of the acquired entities for the periods commencing after the acquisition dates.    

The following table sets forth the unaudited pro forma results of operations of the Company for the quarter and year to date periods ended September 28, 2013 and the year to date period ended September 30, 2014, as if the Company had acquired Svendborg and Guardian on January 1, 2013. The pro forma information contains the actual operating results of the Company, including Svendborg and Guardian, adjusted to include the pro forma impact of (i) additional depreciation expense as a result of estimated depreciation based on the fair value of fixed assets and; (ii) additional expense as a result of the estimated amortization of identifiable intangible assets; (iii) additional interest expense for borrowings under the Credit Agreement associated with the Svendborg and Guardian Acquisitions. These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred at the beginning of the period or that may be obtained in the future.
 
 
Pro Forma
(unaudited)
 
Pro Forma
(unaudited)
 
Quarter Ended
 
Year to Date Period Ended
 
 
September 28, 2013
 
September 30, 2014
September 28, 2013
Total revenues
 
$
201,405

 
$
633,762

$
615,885

Net income attributable to Altra Industrial Motion Corp.
 
$
12,777

 
$
31,852

$
39,799

Basic earnings per share:
 
 
 
 
 
Net income attributable to Altra Industrial Motion Corp.
 
$
0.48

 
$
1.19

$
1.49

Diluted earnings per share:
 
 
 
 
 
Net income attributable to Altra Industrial Motion Corp.
 
$
0.48

 
$
1.16

$
1.48

7. Inventories
Inventories are generally stated at the lower of cost or market, using the first-in, first-out (“FIFO”) method. Market is defined as net realizable value. Inventories located at certain subsidiaries are stated at the lower of cost or market, principally using the last-in, first-out (“LIFO”) method. Inventories at September 30, 2014 and December 31, 2013 consisted of the following:

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September 30, 2014
 
December 31, 2013
Raw materials
$
40,545

 
$
56,824

Work in process
16,352

 
18,432

Finished goods
78,486

 
68,409

 
$
135,383

 
$
143,665

Approximately 6.7% and 7.5% of total inventories were valued using the LIFO method as of September 30, 2014 and December 31, 2013, respectively. The Company recorded a $0.3 million adjustment as a component of cost of sales to value the inventory on a LIFO basis for the year to date period ended September 30, 2014. There was no provision recorded as a component of cost of sales to value the inventory on a LIFO basis for the quarter and year to date periods ended September 28, 2013.

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


8. Goodwill and Intangible Assets
Changes to goodwill from January 1, through September 30, 2014 were as follows:
 
2014
Gross goodwill balance as of January 1
$
136,149

Impact of changes in foreign currency
(3,048
)
Adjustment related to the impact of Guardian (See Note 6)
2,085

Measurement period adjustments related to acquisition of Svendborg (See Note 6)
1,277

Gross goodwill balance as of September 30,
136,463

Accumulated impairment as of January 1
(31,810
)
Impairment charge during the period

Accumulated impairment as of September 30,
(31,810
)
Net goodwill balance September 30,
$
104,653

Other intangible assets as of September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30, 2014
 
December 31, 2013
 
Cost
 
Accumulated
Amortization
 
Cost
 
Accumulated
Amortization
Other intangible assets
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
Tradenames and trademarks
$
43,635

 
$

 
$
42,985

 
$

Intangible assets subject to amortization:
 
 
 
 
 
 
 
Customer relationships
126,364

 
49,400

 
118,914

 
42,645

Product technology and patents
6,062

 
5,848

 
6,062

 
5,719

Impact of changes in foreign currency
(5,283
)
 

 
(829
)
 

Total intangible assets
$
170,778

 
$
55,248

 
$
167,132

 
$
48,364

The Company recorded $2.3 million and $1.7 million of amortization expense in the quarters ended September 30, 2014 and September 28, 2013, respectively, and recorded $6.9 million and $4.9 million of amortization in the year to date periods ended September 30, 2014 and September 28, 2013, respectively.
The estimated amortization expense for intangible assets is approximately $2.4 million for the remainder of 2014, $9.3 million in each of the next four years and then $32.3 million thereafter.
9. Warranty Costs
The contractual warranty period generally ranges from 3 months to 2 years with certain warranties extending for longer periods based on the product and application of the product and are recorded in accruals and other current liabilities on the Company's balance sheet. Changes in the carrying amount of accrued product warranty costs for each of the year to date periods ended September 30, 2014 and September 28, 2013 are as follows:
 
September 30, 2014
 
September 28, 2013
Balance at beginning of period
$
8,739

 
$
5,625

Accrued current period warranty expense
1,314

 
1,758

Payments
(1,900
)
 
(1,743
)
Balance at end of period
$
8,153

 
$
5,640

10. Income Taxes

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


The estimated effective income tax rates recorded for the year to date periods ended September 30, 2014 and September 28, 2013, were based upon management’s best estimate of the effective tax rate for the entire year.
The Company and its subsidiaries file a consolidated federal income tax return in the United States as well as consolidated and separate income tax returns in various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in all of these jurisdictions. With the exception of certain foreign jurisdictions, the Company is no longer subject to income tax examinations for the tax years prior to 2010.
Additionally, the Company has indemnification agreements with the sellers of the Guardian, Svendborg, Bauer and Lamiflex entities that generally provide for reimbursement to the Company for payments made in satisfaction of tax liabilities relating to pre-acquisition periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense in the condensed consolidated statements of operations. At September 30, 2014 and December 31, 2013, the Company had $0.2 million and $0.4 million of accrued interest and penalties, respectively.
11. Pension and Other Employee Benefits
Defined Benefit (Pension)
The Company sponsors various defined benefit (pension) plans for certain, primarily unionized, active employees (those in the employment of the Company at, and certain employees hired since, November 30, 2004).
The following tables represent the reconciliation of the net periodic benefit cost of the defined benefit (pension) plans as of September 30, 2014 and September 28, 2013:
 
 
Quarter Ended
 
Pension Benefits
 
September 30, 2014
 
September 28, 2013
Service cost
$
38

 
$
37

Interest cost
273

 
246

Expected return on plan assets
(269
)
 
(267
)
Amortization of net gain
27

 
41

Net periodic benefit cost (income)
$
69

 
$
57


 
Year to Date Ended
 
Pension Benefits
 
September 30, 2014
 
September 28, 2013
Service cost
$
114

 
$
113

Interest cost
819

 
738

Expected return on plan assets
(807
)
 
(801
)
Amortization of net gain
81

 
125

Net periodic benefit cost (income)
$
207

 
$
175


The Company made $0.2 million in contributions during the year to date period ended September 30, 2014. The Company does not have any future required contributions during the remainder of the year ended December 31, 2014.
Partial Pension Settlement

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During October 2014, the Company initiated a plan to offer lump-sum settlements to vested terminated participants of its domestic pension plan.  Participants were notified of the settlement offers during October 2014.  The acceptance of these offers will trigger partial settlement accounting with a maximum charge to earnings of approximately $0.8 million.  The funds to provide for these settlements will be paid from plan assets.



12. Debt
Outstanding debt obligations at September 30, 2014 and December 31, 2013 were as follows:
 
 
September 30, 2014
 
December 31, 2013
Debt:
 
 
 
Revolving Credit Facility
$
37,000

 
$
41,198

Convertible Notes
85,000

 
85,000

Term Loan Facility
137,528

 
163,245

Equipment Loan
5,334

 
4,155

Mortgages
340

 
659

Capital leases

 
178

Other
28

 

Total debt
265,230

 
294,435

Less: debt discount, net of accretion
(13,636
)
 
(16,163
)
Total debt, net of unaccreted discount
$
251,594

 
$
278,272

Less current portion of long-term debt
14,532

 
16,924

Total long-term debt, net of unaccreted discount
$
237,062

 
$
261,348

Credit Agreement
In December 2013, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement amends and restates the Company’s former credit agreement, dated November 20, 2012 (the “Former Credit Agreement”). Pursuant to the Former Credit Agreement, the former lenders made available to the Company an initial term loan facility of $100,000,000 and an initial revolving credit facility of $200,000,000.
Pursuant to the Credit Agreement, the lenders made an additional term loan of €50,000,000 (the “Additional Term Loan”) to Altra Industrial Motion Netherlands B.V. The Credit Agreement kept in effect the balance (approximately $94,375,000,000) of the existing term loan facility (the “Initial Term Loan”) made to the domestic borrowers under the Former Credit Agreement (collectively, the two term loans are referred to as the “Term Loan Facility”), as well as the revolving credit facility of $200,000,000 made under the Former Credit Agreement (the “Revolving Credit Facility”). The Credit Agreement continues, even after the making of the Additional Term Loan, to provide for a possible expansion of the credit facilities by an additional $150,000,000, which can be allocated as additional term loans and/or additional revolving credit loans. The amounts available under the Term Loan Facility were used, and amounts available under the Revolving Credit Facility can be used, for general corporate purposes, including acquisitions, and to repay existing indebtedness. The stated maturity of these credit facilities is December 6, 2018, and there are scheduled quarterly principal payments due on the outstanding amount of the Term Loan Facility. With respect to the Initial Term Loan, the scheduled quarterly principal payments due on the outstanding amount have been reset to amortize in accordance with the new December 6, 2018 maturity date. The previous maturity of the Revolving Credit Facility and the Initial Term Loan was November 20, 2017.


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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


The amounts available under the Revolving Credit Facility may be drawn upon in accordance with the terms of the Credit Agreement. All amounts outstanding under the credit facilities are due on the stated maturity or such earlier time, if any, required under the Credit Agreement. The amounts owed under either of the credit facilities may be prepaid at any time, subject to usual notification and breakage payment provisions. Interest on the amounts outstanding under the credit facilities is calculated using either an ABR Rate or Eurodollar Rate, plus the applicable margin. The applicable margins for Eurodollar Loans are between 1.375% to 1.875%, and for ABR Loans are between 0.375% and 0.875%. The amounts of the margins are calculated based on either a consolidated total net leverage ratio (as defined in the Credit Agreement), or the then applicable credit rating(s) of the Company’s debt if and then to the extent as provided in the Credit Agreement. A portion of the Revolving Credit Facility may also be used for the issuance of letters of credit, and a portion of the amount of the Revolving Credit Facility is available for borrowings in certain agreed upon foreign currencies.
As of September 30, 2014 and December 31, 2013, we had $37.0 million and $41.2 million outstanding on our Revolving Credit Facility, respectively. As of September 30, 2014 and December 31, 2013, we had $10.1 million and $9.8 million in letters of credit outstanding, respectively. We had $152.9 million and $149.0 million available under the Revolving Credit Facility at September 30, 2014 and December 31, 2013, respectively.
The Credit Agreement contains various affirmative and negative covenants and restrictions, which among other things, will require the Company and certain of its subsidiaries to provide certain financial reports to the Lenders, require the Company to maintain certain financial covenants relating to consolidated leverage and interest coverage, limit maximum annual capital expenditures, and limit the ability of the Company and its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other equity distributions, purchase or redeem capital stock or debt stock or debt, make certain investments, sell assets, engage in certain transactions, and effect a consolidation or merger. The Credit Agreement also contains customary events of default.
 
Pledge and Security Agreement; Trademark Security Agreement; Patent Security Agreement.
Pursuant to an Omnibus Reaffirmation and Ratification of Collateral Documents entered into on December 6, 2013 in connection with the Credit Agreement by and among the Company, the Loan Parties and the Administrative Agent (the “Ratification Agreement”), the Loan Parties (exclusive of the foreign subsidiary Borrower) have reaffirmed their obligations to the Lenders under the Pledge and Security Agreement. The Credit Agreement provides that the obligation to grant the security interest can cease upon the obtaining of certain corporate family credit ratings for the Company, but the obligation to grant a security interest is subject to subsequent reinstatement if the ratings are not maintained as provided in the Credit Agreement.
Pursuant to the Ratification Agreement, the Loan Parties (other than the foregoing subsidiary Borrower) have also reaffirmed their obligations under each of the Patent Security Agreement and a Trademark Security Agreement.
The Loan Parties and the Administrative Agent entered into a Pledge and Security Agreement (the “Pledge and Security Agreement”), pursuant to which each Loan Party pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all personal property, whether now owned by or owing to, or after acquired by or arising in favor of such Loan Party (including under any trade name or derivations), and whether owned or consigned by or to, or leased from or to, such Loan Party, and regardless of where located, except for specific excluded personal property identified in the Pledge and Security Agreement (collectively, the “Collateral”). Notwithstanding the foregoing, the Collateral does not include, among other items, more than 65% of the capital stock of the first tier foreign subsidiaries of the Company. The Pledge and Security Agreement contains other customary representations, warranties and covenants of the parties. The Credit Agreement provides that the obligation to grant the security interest can cease upon the obtaining of certain corporate family ratings for the Company, but the obligation to grant a security interest is subject to subsequent reinstatement if the ratings are not maintained as provided in the Credit Agreement.
In connection with the Pledge and Security Agreement, certain of the Loan Parties delivered a Patent Security Agreement and a Trademark Security Agreement in favor of the Administrative Agent pursuant to which each of the Loan Parties signatory thereto pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all registered patents, patent applications, registered trademarks and trademark applications owned by such Loan Parties.

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


Convertible Senior Notes
In March 2011, the Company issued Convertible Senior Notes (the “Convertible Notes”) due March 1, 2031. The Convertible Notes are guaranteed by the Company’s U.S. domestic subsidiaries. Interest on the Convertible Notes is payable semi-annually in arrears, on March 1 and September 1 of each year, commencing on September 1, 2011 at an annual rate of 2.75%. Proceeds from the offering were $81.3 million, net of fees and expenses that were capitalized. The proceeds from the offering were used to fund the Bauer Acquisition, as well as bolster the Company’s cash position.
The Convertible Notes will mature on March 1, 2031, unless earlier redeemed, repurchased by the Company or converted, and are convertible into cash or shares, or a combination thereof, at the Company’s election. The Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate, subject to adjustment, of 36.0985 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $27.70 per share of our common stock), in certain circumstances. The conversion price at September 30, 2014 is $26.82 per share. Prior to March 1, 2030, the Convertible Notes are convertible only in the following circumstances: (1) during any fiscal quarter commencing after June 30, 2011 if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the 5 business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day in the measurement period was less than 97% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; (3) if the Convertible Notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions.
On or after March 1, 2030, and ending at the close of business on the second business day immediately preceding the maturity date, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of common stock, or a combination thereof, at the Company’s election. The Company intends to settle the principal amount in cash and any additional amounts in shares of stock.
If a fundamental change occurs, the Convertible Notes are redeemable at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but excluding, the repurchase date. The Convertible Notes are also redeemable on each of March 1, 2018March 1, 2021, and March 1, 2026 for cash at a price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest (including contingent interest and additional interest, if any) to, but excluding, the option repurchase date.
On or after March 1, 2015, the Company may call all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a “make-whole premium” payment in cash, shares of the Company’s common stock, or combination thereof, at the Company’s option, equal to the sum of the present values of the remaining scheduled payments of interest on the Convertible Notes to be redeemed through March 1, 2018 to, but excluding, the redemption date, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day prior to the date the Company provides notice of redemption exceeds 130% of the conversion price in effect on each such trading day. On or after March 1, 2018, the Company may redeem for cash all or a portion of the notes at a redemption price of 100% of the principle amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest (including contingent and additional interest, if any) to, but not including, the redemption date.
The Company separately accounted for the debt and equity components of the Convertible Notes to reflect the issuer’s non-convertible debt borrowing rate, which interest costs are to be recognized in subsequent periods. The note payable principal balance at the date of issuance of $85.0 million was bifurcated into a debt component of $60.5 million and an equity component of $24.5 million. The difference between the note payable principal balance and the value of the debt component is being accreted to interest expense over the term of the notes. The debt component was recognized at the present value of associated cash flows discounted using a 8.25% discount rate, the borrowing rate at the date of issuance for a similar debt instrument without a conversion feature. The Company paid approximately $3.7 million of issuance costs associated with the Convertible Notes. The Company recorded $1.0 million of debt issuance costs as an offset to additional paid-in capital. The balance of $2.7 million of debt issuance costs is classified as other non-current assets and will be amortized over the term of the notes using the effective interest method.

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


The Company reviews the last recorded sale price of the Company's stock price each quarter to determine whether the sales price exceeded 130% of the conversion price, for at least 20 of the last 30 consecutive trading days. During the quarter ended June 30, 2014, the last reported sales price exceeded 130% of the conversion price, for at least 20 of the last 30 consecutive trading days of the quarter and the Convertible Notes became convertible at the election of the holders of the Convertible Notes at any time during the fiscal quarter ending September 30, 2014.
Because the last reported sale price of the Company's common stock did not exceeded 130% of the current conversion price, which was $26.82 for at least 20 of the last 30 consecutive trading days in the fiscal quarter ended September 30, 2014, the Convertible Notes are not convertible at the election of the holders of the Convertible Notes at any time during the fiscal quarter ending December 31, 2014. The future convertibility will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company's common stock during the prescribed measurement periods.
The carrying amount of the principal amount of the liability component, the unamortized discount, and the net carrying amount are as follows as of September 30, 2014:
 
Principal amount of debt
$
85,000

Unamortized discount
13,636

Carrying value of debt
$
71,364

Interest expense associated with the Convertible Notes consists of the following:
 
 
Quarter to Date Ended

September 30, 2014
September 28, 2013
Contractual coupon rate of interest
$
584

$
584

Accretion of Convertible Notes discount and amortization of deferred financing costs
681

879

Interest expense for the convertible notes
$
1,265

$
1,463


 
Year to Date Ended

September 30, 2014
September 28, 2013
Contractual coupon rate of interest
$
1,753

$
1,753

Accretion of Convertible Notes discount and amortization of deferred financing costs
2,527

2,594

Interest expense for the convertible notes
$
4,280

$
4,347

The effective interest yield of the Convertible Notes due in 2031 is 8.5% at September 30, 2014 and the cash coupon interest rate is 2.75%.
 
Equipment and Working Capital Notes
The Company entered into a loan with a bank to equip its new facility in Changzhou, China during 2013. The Company is allowed to borrow up to 90% of the amount of certain outstanding letters of credit issued by the Company’s U.S. bank in favor of the lending bank in China. As of September 30, 2014, the total available to borrow was 38.7 million RMB ($6.3 million). The note is due in installments from 2014 through 2016, with interest varying between 5.04% and 8.02%. The Company has a 32.8 million RMB ($5.3 million) line of credit outstanding at September 30, 2014. The note is callable by the bank at its discretion and as such, has been included in the current portion of long-term debt in the balance sheet at September 30, 2014.


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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


Mortgages
The Company has a mortgage with a bank on its facility in Heidelberg, Germany with an interest rate of 2.9% which is payable in monthly installments until September 2015. As of September 30, 2014 and December 31, 2013, the mortgage had a remaining principal balance of €0.2 million or $0.3 million, and €0.5 million or $0.7 million, respectively.
The Company entered an agreement with a bank for €6.0 million or $7.9 million for the construction of its new facility in Esslingen, Germany during August 2014 with an interest rate of 2.5% per year which is payable in annual interest payments of €0.2 million or $0.3 million to be paid in monthly installments. The Company expects to receive the proceeds of this loan during the quarter ended December 31, 2014. The principal portion of the mortgage will be due in a lump-sum payment in May 2019.
Capital Leases
The Company leases certain equipment under capital lease arrangements, whose obligations are included in both short-term and long-term debt. Capital lease obligations amounted to approximately $0.2 million at December 31, 2013. There were no capital lease obligations outstanding at September 30, 2014. Assets subject to capital leases are included in property, plant and equipment with the related amortization recorded as depreciation expense.
Overdraft Agreements
Certain of our foreign subsidiaries maintain overdraft agreements with financial institutions. There were no borrowings as of September 30, 2014 or December 31, 2013 under any of the overdraft agreements.

13. Stockholders’ Equity

On July 23, 2014, the Company declared a dividend of $0.12 per share of common stock related to the quarter ended September 30, 2014. This dividend of $3.2 million was paid on October 2, 2014 to shareholders of record as of the close of business on September 18, 2014 and was accrued for in the balance sheet at September 30, 2014.
Future declarations of quarterly cash dividends are subject to approval by the Board of Directors and to the Board’s continuing determination that the declaration of dividends are in the best interest of the Company’s stockholders and are in compliance with all laws and agreements of the Company applicable to the declaration and payment of cash dividends.

In May 2014, our board of directors approved a new share repurchase program authorizing the buyback of up to $50.0 million of the Company's common stock. The Company expects to purchase shares on the open market, through block trades, in privately negotiated transactions, in compliance with SEC Rule 10b-18 (including through Rule 10b5-1 plans), or in any other appropriate manner. The timing of the shares repurchased will be at the discretion of management and will depend on a number of factors, including price, market conditions and regulatory requirements. Shares acquired through the repurchase program will be retired. The Company retains the right to limit, terminate or extend the share repurchase program at any time without prior notice.

For the three month period ended September 30, 2014, the Company repurchased 300,984 shares of common stock at an average purchase price of $32.91 per share.    As of September 30, 2014, up to $37.2 million was available for repurchase under the repurchase program, which expires on December 31, 2016. The Company expects to fund any further repurchases of its common stock through a combination of cash on hand, cash generated by operations.
 
Stock-Based Compensation
The Company’s Board of Directors established the 2004 Equity Incentive Plan (as amended, the “Plan”) that provides for various forms of stock-based compensation to independent directors, officers and senior-level employees of the Company. The restricted shares issued pursuant to the Plan generally vest ratably over a period ranging from immediately to 5 years from the date of grant, provided, that the vesting of the restricted shares may accelerate upon the occurrence of certain liquidity events, if approved by the Board of Directors in connection with the transactions. Common stock awarded under the

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


Plan is generally subject to restrictions on transfer, repurchase rights, and other limitations and rights as set forth in the applicable award agreements. The shares are valued based on the share price on the date of grant.
The Plan permits the Company to grant, among other things, restricted stock, restricted stock units, and performance share awards to key employees and other persons who make significant contributions to the success of the Company. The restrictions and vesting schedule for restricted stock granted under the Plan are determined by the Personnel and Compensation Committee of the Board of Directors.
Stock-based compensation expense recorded (in selling, general and administrative expense) in the year to date periods ended September 30, 2014 and September 28, 2013, was $2.6 million and $2.4 million, respectively. Stock-based compensation expense recorded during the quarters ended September 30, 2014 and September 28, 2013, was $0.8 million and $0.9 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 table sets forth the activity of the Company’s restricted stock and performance share grants in the year to date period ended September 30, 2014:
 
Shares
 
Weighted-average
grant date fair value
Shares unvested January 1, 2014
149,635

 
$
23.02

Shares granted
132,441

 
33.56

Shares for which restrictions lapsed
(122,898
)
 
29.50

Shares unvested September 30, 2014
159,178

 
$
28.53

Total remaining unrecognized compensation cost was $4.2 million as of September 30, 2014, which will be recognized over a weighted average remaining period of 3 years. The fair market value of the shares for which the restrictions have lapsed during the quarter ended September 30, 2014 was $0.6 million. Restricted shares granted are valued based on the fair market value of the stock on the date of grant.
14. Derivative Financial Instruments
Interest Rate Swap
In April 2013, the Company entered into an interest rate swap agreement designed to fix the variable interest rate payable on a portion of its outstanding borrowings, currently $85.0 million, under the Credit Agreement, at 0.626% exclusive of the margin under the Former Credit Agreement. The interest rate swap agreement and its terms are also applicable to the variable interest rate borrowings under the current Credit Agreement.
The interest rate swap agreement was designed to manage exposure to interest rates on the Company’s variable rate indebtedness. The Company recognizes all derivatives on its balance sheet at fair value. The Company has designated its interest rate swap agreement, which is forward-dated, as a cash flow hedge. Changes in the fair value of the swap are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swap will be reported by the Company in interest expense. There was no ineffectiveness associated with the swap during the quarter ended September 30, 2014, nor was any amount excluded from ineffectiveness testing for the period.
The estimated fair value of the Company’s interest rate swap agreement with certain financial institutions (“Interest Rate Swap”) was based on inputs other than quoted prices that are observable for the Interest Rate Swap (level 2). Inputs include present value of fixed and projected floating rate cash flows over the term of the swap contract.
The fair value of the swap recognized in other non-current assets, net and in other comprehensive income (loss) is as follows:

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


 
 
 
 
 
 
 
Fair Value
 
Notional
 
 
 
 
 
September 30, 2014
 
December 31, 2013
Effective Date
Amount
 
Fixed Rate
 
Maturity
 
 
April 30, 2013
$
85,000

 
0.626
%
 
November 30, 2016
 
$
243

 
$
213

15. Concentrations of Credit, Segment Data and Workforce
Financial instruments, which are potentially subject to counter party performance and concentrations of credit risk, consist primarily of trade accounts receivable. The Company manages these risks by conducting credit evaluations of customers prior to delivery or commencement of services. When the Company enters into a sales contract, collateral is normally not required from the customer. Payments are typically due within 30 days of billing. An allowance for potential credit losses is maintained, and losses have historically been within management’s expectations. No customer represented greater than 10% of total sales for each of the year to date periods ended September 30, 2014 and September 28, 2013.
The Company is also subject to counter party performance risk of loss in the event of non-performance by counterparties to financial instruments, such as cash and investments. Cash and cash equivalents are held by well-established financial institutions and invested in AAA rated mutual funds. The Company is exposed to swap counterparty credit risk with financial institutions. The Company’s counterparty is a well-established financial institution.

The Company has three operating segments that are regularly reviewed by our chief operating decision maker. Each of these operating segments represents a unit that produces mechanical power transmission products. The Company aggregates all of the operating segments into one reportable segment. The three operating segments are expected to have similar long-term average gross profit margins. All of our products are sold by one global sales force and we have one global marketing function with the exception of the newly acquired Svendborg business for which the Company is in the process of integrating sales and marketing activities. Strategic markets and industries are determined for the entire company and then targeted by the brands. All of our operating segments have common manufacturing and production processes. Each operating segment includes a machine shop which uses similar equipment and manufacturing techniques. Each of our operating segments uses common raw materials, such as aluminum, steel and copper. The materials are purchased and procurement contracts are negotiated by one global purchasing function.
The Company serves the general industrial market by selling to original equipment manufacturers (“OEM”) and distributors. Our OEM and distributor customers serve the general industrial market. Resource allocation decisions such as capital expenditure requirements and headcount requirements are made at a consolidated level and allocated to the individual operating segments.
Discrete financial information is not available by product line at the level necessary for management to assess performance or make resource allocation decisions.
Net sales to third parties by geographic region are as follows:
 
Net Sales
 
Net Sales
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
North America (primarily U.S.)
$
117,796

 
$
109,810

 
$
370,944

 
$
343,844

Europe
64,116

 
52,315

 
199,196

 
160,895

Asia and other
20,608

 
13,318

 
57,716

 
36,949

Total
$
202,520

 
$
175,443

 
$
627,856

 
$
541,688

Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates.

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


The net assets of the Company’s foreign subsidiaries at September 30, 2014 and December 31, 2013 were $143.2 million and $138.7 million, respectively.
16. Restructuring
In the quarter ended December 31, 2012, the Company adopted a restructuring plan (“2012 Altra Plan”) as a result of continued sluggish demand in Europe and general global economic conditions. The actions taken pursuant to the 2012 Altra Plan included reducing headcount and limiting discretionary spending to improve profitability in Europe. The Company did not record any restructuring charges associated with the 2012 Altra Plan in the year to date period ended September 30, 2014.
In the quarter ended September 30, 2014, the Company adopted a restructuring plan (“2014 Altra Plan”) as a result of weak demand in Europe and to make certain adjustments to its existing sales force to reflect the Company's expanding global footprint. The actions taken pursuant to the 2014 Altra Plan included reducing headcount and limiting discretionary spending to improve profitability.
The Company’s total restructuring expense, by major component for the quarter and year to date periods ended September 30, 2014 and September 28, 2013 was as follows:
 
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
 
2014
Altra Plan
 
2012
Altra Plan
 
2014
Altra Plan
 
2012
Altra Plan
Severance
$
1,161

 
$
137

 
$
1,161

 
$
653

Other
482

 
(40
)
 
482

 
2

Total cash expenses
$
1,643

 
$
97

 
$
1,643

 
$
655

The following is a reconciliation of the accrued restructuring cost:
 
All Plans
Balance at January 1, 2014
$
429

Restructuring expense incurred
1,643

Cash payments
(933
)
Balance at September 30, 2014
$
1,139

The total restructuring reserve as of September 30, 2014 relates to severance costs to be paid to employees and is recorded in accruals and other current liabilities on the accompanying condensed consolidated balance sheet.
17. 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. None of these legal proceedings are expected to have a material adverse effect on the results of operations, cash flows, or financial condition of the Company. With respect to these proceedings, management believes that the Company will prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to the Company, there could be a material adverse effect on the results of operations, cash flows, or financial condition of the Company. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. There were no material amounts accrued in the accompanying condensed consolidated balance sheets for potential litigation as of September 30, 2014 or December 31, 2013. For matters where a reserve has not been established and for which we believe a

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ALTRA INDUSTRIAL MOTION CORP.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
Amounts in thousands, unless otherwise noted


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 consolidated financial statements.
 
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.
18. Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
On October 22, 2014, the Company declared a cash dividend of $0.12 per share for the quarter ended December 31, 2014, payable on January 2, 2015 to shareholders of record as of December 18, 2014.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company’s current estimates, expectations and projections about the Company’s future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning the Company’s possible future results of operations including revenue, costs of goods sold, gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, the Company’s competitive position and the effects of competition, the projected growth of the industries in which we operate, and the Company’s ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “may,” “should,” “will,” “would,” “project,” and similar expressions. These forward-looking statements are based upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company’s actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include:
 
the effects of intense competition in the markets in which we operate;
the cyclical nature of the markets in which we operate;
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;

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the Company’s ability to retain existing customers and our ability to attract new customers for growth of our business;
the effects of the loss or bankruptcy of or default by any significant customer, suppliers, or other entity relevant to the Company’s operations;
the Company’s ability to complete cost reduction actions and risks associated with such actions;
the Company’s ability to control costs;
political and economic conditions nationally, regionally, and in the markets in which we operate;
natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, or other matters beyond the Company’s control;
the 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 association with certain minimum purchase agreements we have with suppliers;
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 and changes in the enforcement of laws;
the Company’s ability to attract and retain key executives and other personnel;
changes in the Company’s pension and retirement liabilities;
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;
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 unanticipated deficiencies, if any, in the disclosure controls and internal controls of Svendborg;
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;
the Company’s ability to implement our new 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;

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the risks associated with the potential dilution of our common stock as a result of our convertible bonds;
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 global recession and European economic downturn and volatility and disruption in the global financial markets;
the Company’s ability to successfully execute, manage and integrate key acquisitions and mergers, including the Lamiflex Acquisition, Svendborg Acquisition and the Guardian Acquisition;
the risks associated with the Company’s investment in a new manufacturing facility in China; and
other factors, risks, and uncertainties referenced in the Company’s filings with the Securities and Exchange Commission, including the “Risk Factors” set forth in this document

ALL FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE COMPANY’S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013, AND IN OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY.
The following discussion of the financial condition and results of operations of Altra Industrial Motion Corp. and its subsidiaries should be read together with the audited financial statements of Altra Industrial Motion Corp. and its subsidiaries and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Unless the context requires otherwise, the terms “Altra Industrial Motion Corp.,” “the Company,” “we,” “us,” and “our” refer to Altra Industrial Motion Corp. and its subsidiaries.

General
Altra Industrial Motion Corp. (“Altra” or the “Company”) (formerly Altra Holdings, Inc.) is the parent company of Altra Power Transmission, Inc. (“APT”) (formerly Altra Industrial Motion, Inc.) and owns 100% of APT’s outstanding capital stock. APT, directly or indirectly, owns 100% of the capital stock of 67 of its subsidiaries and 85% of the

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capital stock of one of its subsidiaries located in Brazil. The following chart illustrates a summary of our corporate structure:
Although we were incorporated in Delaware in 2004, much of our current business has its roots with the prior acquisition by Colfax Corporation, or Colfax, of the MPT (mechanical power transmission) group of Zurn Technologies, Inc. in December 1996. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax’s acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber, and Wichita Clutch brands. Colfax formed Power Transmission Holding, LLC or “PTH” in June 2004 to serve as a holding company for all of these power transmission businesses. On November 30, 2004, we acquired our original core business through the acquisition of PTH from Colfax. We refer to this transaction as the PTH Acquisition.
On October 22, 2004, The Kilian Company, or Kilian, a company formed at the direction of Genstar Capital, then the largest stockholder of Altra, acquired Kilian Manufacturing Corporation from Timken U.S. Corporation. At the completion of the PTH Acquisition, (i) all of the outstanding shares of Kilian capital stock were exchanged for shares of our capital stock and (ii) Kilian and its subsidiaries were transferred to APT.
On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings Limited, or Hay Hall. Hay Hall was a UK-based holding company established in 1996 that was focused primarily on the manufacture of couplings and clutch brakes. Hay Hall consisted of five main businesses that were niche focused and had strong brand names and established reputations within their primary markets. Through Hay Hall, we acquired 15 strong brands in complementary product lines, improved customer leverage and expanded geographic presence in over 11 countries.
On May 18, 2006, we acquired substantially all of the assets of Bear Linear Inc., now known as Warner Linear. Warner Linear manufactures high value-added linear actuators which are electromechanical power transmission devices designed to move and position loads linearly for mobile off-highway and industrial applications.

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On April 5, 2007, we acquired all of the outstanding shares of TB Wood’s Corporation, or TB Wood’s. TB Wood’s is an established designer, manufacturer and marketer of mechanical industrial power transmission products. In December 2007, the Company divested the TB Wood’s electronics division.
On October 5, 2007, we acquired substantially all of the assets of All Power Transmission Manufacturing, Inc., or All Power, a manufacturer of universal joints.
On May 29, 2011, we acquired substantially all of the assets and liabilities of Danfoss Bauer GmbH relating to its gear motor business, or Bauer. We refer to this transaction as the Bauer Acquisition. Bauer is a European manufacturer of high-quality gear motors, offering engineered solutions to a variety of industries, including material handling, metals, food processing, and energy.
On July 11, 2012, we acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda., now known as Lamiflex Do Brasil Equipamentos Industriais S.A., or Lamiflex. Lamiflex is one of the premier Brazilian manufacturers of high-speed disc couplings, providing engineered solutions to a variety of industries, including oil and gas, power generation, metals and mining.
On November 22, 2013, we changed our legal corporate name from Altra Holdings, Inc. to Altra Industrial Motion Corp.
On December 17, 2013, we completed the acquisition of Svendborg . We acquired all the issued and outstanding shares of Svendborg from Friction Holding A/S. Svendborg is the leading global manufacturer of premium quality caliper brakes.
On July 1, 2014, we acquired all of the issued and outstanding shares of Guardian Ind., Inc. (“Guardian Couplings”). Through the Guardian Acquisition, the Company acquired a manufacturer and supplier of flywheel, motion control and general industrial couplings. The Guardian Acquisition will provide the Company with increased coverage in several core markets, including energy, farm and agriculture, and specialty machinery.
We are a leading global designer, producer and marketer of a wide range of electromechanical power transmission products with a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct OEM customers and over 3,000 distributor outlets. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, couplings, engineered bearing assemblies, linear components, gear motors, and other related products. Our products serve a wide variety of end markets including energy, general industrial, material handling, mining, transportation and turf and garden. We primarily sell our products to a wide range of OEMs and through long-standing relationships with industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger.
While the power transmission industry has undergone some consolidation, we estimate that in 2013 the top five broad-based electromechanical power transmission companies represented approximately 20% of the U.S. power transmission market. The remainder of the power transmission industry remains fragmented with many small and family-owned companies that cater to a specific market niche often due to their narrow product offerings. We believe that consolidation in our industry will continue because of the increasing demand for global distribution channels, broader product mixes and better brand recognition to compete in this industry.

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

 
 
 
 
 
 
 
Products
  
Principal Brands
  
Principal Markets
  
Sample Applications
Clutches and Brakes
  
Warner Electric, Wichita Clutch, Formsprag Clutch, Stieber Clutch, Svendborg Brakes, Matrix, Inertia Dynamics, Twiflex, Industrial Clutch, Marland Clutch
  
Aerospace, energy,
material handling,
metals, turf and garden,
mining
  
Elevators,
forklifts, lawn
mowers, oil well
draw works,
punch presses,
conveyors
 
 
 
 
 
 
 
Gearing
  
Boston Gear, Nuttall Gear, Delroyd, Bauer Gear Motor
  
Food processing,
material handling,
metals, transportation
  
Conveyors,
ethanol mixers,
packaging
machinery, metal
processing
equipment
 
 
 
 
 
 
 
Engineered Couplings
  
Ameridrives, Bibby Transmissions, TB Wood’s, PowerFlex, Guardian Couplings
  
Energy, metals,
plastics, chemical
  
Extruders,
turbines, steel
strip mills,
pumps
 
 
 
 
 
 
 
Engineered Bearing Assemblies
  
Kilian
  
Aerospace, material
handling, transportation
  
Cargo rollers,
seat storage
systems,
conveyors
 
 
 
 
 
 
 
Power Transmission Components
  
Warner Electric, Boston Gear, Huco Dynatork, Warner Linear, Matrix, TB Wood’s
  
Material handling,
metals, turf and garden
  
Conveyors, lawn
mowers,
machine tools
 
 
 
 
 
 
 
Engineered Belted Drives
  
TB Wood’s
  
Aggregate, HVAC,
material handling
  
Pumps, sand and
gravel
conveyors,
industrial fans

Our Internet address is www.altramotion.com. By following the link “Investor Relations” and then “SEC filings” on our Internet website, we make available, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Form 10-Q.
Business Outlook
Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S., European, and global economies in general.
Our various profit improvement initiatives remain on track. Given the deteriorating economic environment in Europe and prolonged higher medical claims costs, we expect operating results for the remainder of the year to be flat when compared to the comparable prior year period adjusted for the impact of the Svendborg and Guardian acquisitions.

Critical Accounting Policies

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The preparation of our condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect our reported amounts of assets, revenues and expenses, as well as related disclosures of contingent assets and liabilities. We base our estimates on past experiences and other assumptions we believe to be appropriate, and we evaluate these estimates on an on-going basis. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes in the identification or application of the Company’s critical accounting policies during the quarter and year to date periods ended September 30, 2014.

Results of Operations
(Amounts in thousands, unless otherwise noted)
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2014
 
September 28, 2013
 
September 30, 2014
 
September 28, 2013
Net sales
$
202,520

 
$
175,443

 
$
627,856

 
$
541,688

Cost of sales
140,187

 
121,785

 
437,257

 
378,112

Gross profit
62,333

 
53,658

 
190,599

 
163,576

Gross profit percentage
30.8
%
 
30.6
%
 
30.4
%
 
30.2
%
Selling, general and administrative expenses
39,067

 
31,672

 
117,828

 
96,742

Research and development expenses
3,818

 
3,002

 
11,719

 
9,150

Restructuring costs
1,643

 
97

 
1,643

 
655

Income from operations
17,805

 
18,887

 
59,409

 
57,029

Interest expense, net
3,000

 
2,567

 
8,991

 
7,830

Other non-operating expense, net
(313
)
 
686

 
446

 
783

Income before income taxes
15,118

 
15,634

 
49,972

 
48,416

Provision for income taxes
8,170

 
5,176

 
18,843

 
15,423

Net income
6,948

 
10,458

 
31,129

 
32,993

Net (income) loss attributable to non-controlling interest
(2
)
 
43

 
(21
)
 
77

Net income attributable to Altra Industrial Motion Corp.
$
6,946

 
$
10,501

 
$
31,108

 
$
33,070

Quarter Ended September 30, 2014 compared with Quarter Ended September 28, 2013
(Amounts in thousands, unless otherwise noted)
Amounts in thousands, except percentage data
Quarter-Ended
 
September 30, 2014
 
September 28, 2013
 
 
 
 
 
Change
 
%
Net sales
$
202,520

 
$
175,433

 
$
27,087

 
15.4
%
The increase in sales during the quarter ended September 30, 2014 was due to the acquisition of Svendborg and Guardian, positive foreign exchange rates, and slightly higher sales levels than in the quarter ended September 28, 2013. Of the increase in sales, approximately $21.3 million and $2.7 million relates to the inclusion of additional sales related to the acquisitions of Svendborg and Guardian, respectively, and $1.1 million relates to the impact of foreign exchange rate increases primarily attributed to the exchange rates for the British Pound compared to the prior year. The remainder of the increase was attributable to sales growth in the North American oil and gas markets. Based on current conditions in our end markets, we expect our order rates to remain stable throughout the remainder of 2014.
 
 

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Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Gross Profit
$
62,333

 
$
53,658

 
$
8,675

 
16.2
%
Gross Profit as a percent of sales
30.8
%
 
30.6
%
 
 
 
 

Gross profit as a percentage of sales increased during the quarter due to the inclusion of Svendborg and Guardian for the quarter ended September 30, 2014 as both operations improved the Company's overall gross profit.
 
Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Selling, general and administrative expense (“SG&A”)
$
39,067

 
$
31,672

 
$
7,395

 
23.3
%
SG&A as a percent of sales
19.3
%
 
18.0
%
 
 
 
 
$5.8 million and $0.7 million of the increase in SG&A is due to the inclusion of SG&A related to the acquisitions of Svendborg and Guardian, respectively. The remainder of the difference relates to $1.4 million in increased costs related to the Company's employer sponsored health care plan in the United States, offset by approximately $0.5 in general cost savings.
 

Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Research and development expenses (“R&D”)
$
3,818

 
$
3,002

 
$
816

 
27.2
%
Of the increase in R&D, approximately $0.4 million relates to the inclusion of R&D related to the acquisition of Svendborg.
R&D expenses as a percentage of sales excluding the impact of Svendborg remained consistent with prior year at approximately 1.7% of sales. We expect R&D expenses approximate 1.8% - 2.0% in future periods.
 
 
Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Restructuring
$
1,643

 
$
97

 
$
1,546

 
1,593.8
%
During the quarter ended September 30, 2014, the Company adopted a restructuring plan (“2014 Altra Plan”) as a result of weak demand in Europe and to make certain adjustments to its existing sales force to reflect the Company's expanding global footprint. The actions taken pursuant to the 2014 Altra Plan included reducing headcount and limiting discretionary spending to improve profitability. The Company expects to incur approximately $0.4 million in additional expenses associated with the 2014 Altra Plan during the remainder of 2014.

Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Interest Expense, net
$
3,000

 
$
2,567

 
$
433

 
16.9
%
Net interest expense increased during the quarter ended September 30, 2014 over the comparable 2013 period, primarily due to the borrowing of approximately €54.5 million for the acquisition of Svendborg during the quarter ended December 31, 2013.

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Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Other non-operating expense, net
$
(313
)
 
$
686

 
$
(999
)
 
(145.6
)%
Other non-operating expense in each period in the chart above relates primarily to changes in foreign currency, primarily the Euro.
Amounts in thousands, except percentage data
Quarter Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Provision for income taxes
$
8,170

 
$
5,176

 
$
2,994

 
57.8
%
Provision for income taxes as a % of income before income taxes
54.0
%
 
33.1
%
 
 
 
 
The increase in the provision for income taxes, as a percentage of income before taxes for the quarter ended September 30, 2014 compared to the quarter ended September 28, 2013 is primarily due to the discrete tax impact of $3.8 million recorded in the quarter ended September 30, 2014. The one time charge is a result of the restructuring of certain of our foreign subsidiaries resulting in additional taxable income in the United States during the quarter ended September 30, 2014. We expect that this restructuring will result in a lower tax rate in future years. This increase was partially offset by the favorable impact of statutory tax rate reductions in the United Kingdom along with the lower statutory tax rates in jurisdictions in which the Svendborg business operates.

Year to Date Period Ended September 30, 2014 compared with Year to Date Period Ended September 28, 2013
(Amounts in thousands, unless otherwise noted)

Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
 
 
 
 
Change
 
%
Net sales
$
627,856

 
$
541,688

 
$
86,168

 
15.9
%
The increase in sales during the period ended September 30, 2014 was due to the acquisition of Svendborg and Guardian, positive foreign exchange rates, and slightly higher sales levels than in the quarter ended September 28, 2013. Of the increase in sales, approximately $63.7 million and $2.7 million relates to the inclusion of additional sales related to the acquisition of Svendborg and Guardian, respectively, for the year to date period ended September 30, 2014 and $5.1 million relates to the impact of foreign exchange rate increases primarily attributed to the exchange rate for the British Pound compared to the prior year. The remainder of the increase was attributable to sales growth in the North American turf & garden and oil and gas markets. We expect our order rates to remain stable throughout the remainder of 2014.
Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Gross Profit
$
190,599

 
$
164,686

 
$
25,913

 
15.7
%
Gross Profit as a percent of sales
30.4
%
 
30.2
%
 
 
 
 

Gross profit as a percentage of sales increased during the year to date period ended September 30, 2014 due to the inclusion of Svenborg and Guardian as Svendborg's and Guardian’s operations have gross profit percentages of sales greater than the average of the overall Company.



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Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Selling, general and administrative expense (“SG&A”)
$
117,828

 
$
96,742

 
$
21,086

 
21.8
%
SG&A as a percent of sales
18.8
%
 
17.9
%
 
 
 
 
$19.1 million of the increase in SG&A is due to the inclusion of SG&A related to the acquisition of Svendborg and Guardian. The remainder of the difference relates to $2.5 million in increased costs related to the Company's employer sponsored health care plan in the United States, offset by approximately $0.5 in general cost savings.

Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Research and development expenses (“R&D”)
$
11,719

 
$
9,150

 
$
2,569

 
28.1
%
Of the increase in R&D, approximately $1.4 million relates to the inclusion of R&D related to the acquisition of Svendborg for the year.

Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Restructuring
$
1,643

 
$
655

 
$
988

 
150.8
%
During the quarter ended September 30, 2014, the Company adopted a restructuring plan (“the 2014 Altra Plan”) as a result of weak demand in Europe and to make certain adjustments to its existing salesforce to reflect the Company's expanding global footprint. The actions taken pursuant to the 2014 Altra Plan included reducing headcount and limiting discretionary spending to improve profitability. The Company expects to incur approximately $0.4 million in additional expenses associated with the 2014 Altra Plan during the remainder of 2014.
 
Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Interest Expense, net
$
8,991

 
$
7,830

 
$
1,161

 
14.8
%
Net interest expense increased during the year to date period ended September 30, 2014 over the comparable 2013 period, primarily due to the borrowing of approximately €54.5 million for the acquisition of Svendborg during the quarter ended December 31, 2013.

Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Other non-operating expense (income), net
$
446

 
$
783

 
$
(337
)
 
(43.0
)%
Other non-operating expense (income) in each period in the chart above relates primarily to changes in foreign currency, primarily the Euro.

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Amounts in thousands, except percentage data
Year to Date Period Ended
 
September 30, 2014
 
September 28, 2013
 
Change
 
%
Provision for income taxes
$
18,843

 
$
15,423

 
$
3,420

 
22.2
%
Provision for income taxes as a % of income before income taxes
37.7
%
 
31.9
%
 
 
 
 
The increase in the provision for income taxes as a percentage of income before taxes for the year to date period ended September 30, 2014 compared to the year to date period ended September 28, 2013 was primarily due to the discrete tax impact of $3.8 million recorded in the quarter ended September 30, 2014. The one time charge is a result of the restructuring of certain of our foreign subsidiaries resulting in additional taxable income in the United States during the quarter ended September 30, 2014. We expect that this restructuring will result in a lower tax rate in future years. This increase was partially offset by the favorable impact of statutory tax rate reductions in the United Kingdom along with the lower statutory tax rates in jurisdictions in which the Svendborg business operates.


(Amounts in thousands, unless otherwise noted)


Liquidity and Capital Resources

Liquidity and Capital Resources
Overview
We finance our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our Revolving Credit Facility. We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, acquisitions, pensions and dividends. In the event additional funds are needed for operations, we could borrow additional funds available under our existing Revolving Credit Facility, request an expansion by up to $150,000,000 of the amount available to be borrowed under the Credit Agreement, attempt to secure new debt, attempt to refinance our loans under the Credit Agreement, or attempt to raise capital in the equity markets. Presently, we have the ability under our Revolving Credit Facility to borrow an additional $152.9 million, based on current availability calculations. There can be no assurance however that additional debt financing will be available on commercially acceptable terms, if at all. Similarly, there can be no assurance that equity financing will be available on commercially acceptable terms, if at all.

Borrowings
 
Amounts in millions
 
September 30, 2014
 
December 31, 2013
Debt:
 
 
 
Revolving Credit Facility
$
37.0

 
$
41.2

Convertible Notes
85.0

 
$
85.0

Term Loan Facility
137.5

 
$
163.2

Equipment Loan
5.3

 
$
4.1

Mortgages
0.4

 
$
0.7

Capital leases

 
$
0.2

Total debt
$
265.2

 
$
294.4

Credit Agreement
In December 2013, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement amends and restates the Company’s former credit agreement, dated November 20, 2012

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(the “Former Credit Agreement”). Pursuant to the Former Credit Agreement, the former lenders made available to the Company an initial term loan facility of $100,000,000 and an initial revolving credit facility of $200,000,000.
Pursuant to the Credit Agreement, the lenders made an additional term loan of €50,000,000 (the “Additional Term Loan”) to Altra Industrial Motion Netherlands B.V. The Credit Agreement kept in effect the balance (approximately $94,375,000) of the existing term loan facility (the “Initial Term Loan”) made to the domestic borrowers under the Former Credit Agreement (collectively, the two term loans are referred to as the “Term Loan Facility”), as well as the revolving credit facility of $200,000,000 made under the Former Credit Agreement (the “Revolving Credit Facility”). The Credit Agreement continues, even after the making of the Additional Term Loan, to provide for a possible expansion of the credit facilities by an additional $150,000,000, which can be allocated as additional term loans and/or additional revolving credit loans. The amounts available under the Term Loan Facility were used, and amounts available under the Revolving Credit Facility can be used, for general corporate purposes, including acquisitions, and to repay existing indebtedness. The stated maturity of these credit facilities is December 6, 2018, and there are scheduled quarterly principal payments due on the outstanding amount of the Term Loan Facility. With respect to the Initial Term Loan, the scheduled quarterly principal payments due on the outstanding amount have been reset to amortize in accordance with the new December 6, 2018 maturity date. The previous maturity of the Revolving Credit Facility and the Initial Term Loan was November 20, 2017.

The amounts available under the Revolving Credit Facility may be drawn upon in accordance with the terms of the Credit Agreement. All amounts outstanding under the credit facilities are due on the stated maturity or such earlier time, if any, required under the Credit Agreement. The amounts owed under either of the credit facilities may be prepaid at any time, subject to usual notification and breakage payment provisions. Interest on the amounts outstanding under the credit facilities is calculated using either an ABR Rate or Eurodollar Rate, plus the applicable margin. The applicable margins for Eurodollar Loans are between 1.375% to 1.875%, and for ABR Loans are between 0.375% and 0.875%. The amounts of the margins are calculated based on either a consolidated total net leverage ratio (as defined in the Credit Agreement), or the then applicable rating(s) of the Company’s debt if and then to the extent as provided in the Credit Agreement. A portion of the Revolving Credit Facility may also be used for the issuance of letters of credit, and a portion of the amount of the Revolving Credit Facility is available for borrowings in certain agreed upon foreign currencies.
As of September 30, 2014 and December 31, 2013, we had $37.0 million and $41.2 million outstanding on our Revolving Credit Facility, respectively. As of September 30, 2014 and December 31, 2013, we had $10.1 million and $9.8 million in letters of credit outstanding, respectively. We had $152.9 million and $149.0 million available under the Revolving Credit Facility at September 30, 2014 and December 31, 2013, respectively.
The Credit Agreement contains various affirmative and negative covenants and restrictions, which among other things, will require the Company and certain Subsidiaries to provide certain financial reports to the Lenders, require the Company to maintain certain financial covenants relating to consolidated leverage and interest coverage, limit maximum annual capital expenditures, and limit the ability of the Company and its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other equity distributions, purchase or redeem capital stock or debt stock or debt, make certain investments, sell assets, engage in certain transactions, and effect a consolidation or merger. The Credit Agreement also contains customary events of default.
Hedging Activities
The Company utilizes a derivative instrument, namely an interest rate swap, to manage exposure to interest rates on the Company’s variable rate indebtedness. Our derivative instrument is with a major financial institution and is not for speculative or trading purposes. The Company has designated its interest rate swap agreement which is forward-dated, as a cash flow hedge, and changes in the fair value of the swap are recognized in other comprehensi