In December 2020 the Companyand May 2022, Altra invested $5.0 million and $4.6 million, respectively, for a minority equity interest in a privately held manufacturing software company, MTEK Industry AB (“MTEK”), over which the Company does not exert significant influence. The equity investment does not have a readily determinable fair valueDuring the year ended 2022, Altra subsidiaries purchased software licenses, services and does not qualify for the practical expedient to estimate fair value using the net asset value per share. Therefore, in accordance with ASU 2016-01, the Company elected to measure the investment at its cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or a similar investment of the same issuer. This investment is considered a Level 3 asset based on the lack of observable inputs and is classified within other non-current assets in the consolidated balance sheets. The Company will monitor its equity investment inhardware from MTEK for indicators of impairments or upward adjustments on an ongoing basis. If the Company determines that such an indicator is present, an adjustment will be recorded, which will be measured as the difference between the carrying value and estimated fair value.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. Dollar are translated into U.S. Dollars using exchange rates at the end of the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period.
Foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Net foreign currency transaction gains and losses are included in the results of operations in the period incurred and included in other non-operating expense (income), net in the accompanying consolidated statements of operations. Net foreign currency transaction gains and losses for the years ended December 31, 2020, 2019 and 2018 were inconsequential.
Trade Receivables
All trade account receivables are reported net of allowances for credit losses. The allowance for credit losses represents the Company’s best estimate of the credit losses expected from our trade account receivables over the life of the underlying assets. Assets with similar risk characteristics are pooled together for determination of their current expected credit losses. The Company regularly performs detailed reviews of its pooled assets to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.
Inventories
Inventories are generally stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.
The carrying value of inventories acquired by the Company in its acquisitions reflects fair value at the date of acquisition as determined by the Company based on the replacement cost of raw materials, the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts, and for work-in-process the sales price of the finished goods less an appropriate amount representing the expected profitability from selling efforts and costs to complete.
The Company periodically reviews its quantities of inventories on hand and compares these amounts to the expected usage of each particular product or product line. The Company records a charge to cost of sales for any amounts required to reduce the carrying value of inventories to its estimated net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation.
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Depreciation of property, plant and equipment, including capital leases is provided using the straight-line method over the estimated useful life of the asset, as follows:
Buildings and improvements
| | 7 to 45 years
|
Machinery and equipment
| | 2 to 15 years
|
Finance lease
| | Life of lease
|
Leasehold improvements are depreciated on a straight-line basis over the estimated life of the asset or the life of the lease, if shorter.
Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.
Lease Accounting Policy
Arrangements that are determined to be leases at inception are recognized in operating lease right of use (ROU) assets, current lease liabilities, and long-term lease liabilities in the consolidated balance sheet. Operating lease liabilities are recognized based on the present value of the future fixed lease payments over the lease term at lease commencement date. As the Company’s leases typically do not provide an implicit rate, the Company applies its incremental borrowing rate based on the economic environment at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease prepayments made and initial direct costs incurred and is reduced by lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases are recognized on a straight-line basis over the lease term.
Intangible Assets
Intangible assets represent product technology, patents, tradenames, trademarks, customer relationships, and in-process research and development (“IPR&D”). Product technology, patents and customer relationships are amortized on a straight-line basis over 3 to 29 years, which approximates the period of economic benefit. The tradenames, trademarks, and IPR&D are considered indefinite-lived assets and are not being amortized. Amortization of the IPR&D asset will commence when the asset is placed into service. Intangibles are stated at fair value on the date of acquisition. Intangibles are stated net of accumulated amortization.
Goodwill
Goodwill represents the excess of the purchase price paid by the Company over the fair value of the net assets acquired in each of the Company’s acquisitions.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
The Company conducts an annual impairment review of goodwill and indefinite-lived intangible assets in October of each year, unless events occur which trigger the need for an interim impairment review.
totaling approximately $468,683.
In connection withSeptember 2021, Alex Christenson (“Mr. A. Christenson”), the Company’s annual impairment review, goodwill is assessed for impairment by comparing the fair valueson of the reporting unit to the carrying value. The Company’s measurement date is October 31st. The Company determines the fair value of its reporting units using the discounted cash flow model and, where appropriate, the Company also uses the market approach. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenues, profit margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to earnings before interest, taxes, depreciation, amortization (EBITDA) multiples and revenue multiples. The Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate. An impairment loss would be recognized to the extent that a reporting unit’s carrying amount exceeded its deemed fair value. Refer to Note 7 for additional discussion of the Company’s annual impairment review.
ForCarl Christenson, our indefinite-lived intangible assets, mainly trademarks, we estimated the fair value first by estimating the total revenue attributable to the trademarks. Second, we estimated an appropriate royalty rate using the return on assets method by estimating the required financial return on our assets, excluding trademarks, less the overall return generated by our total asset base. The return as a percentage of revenue provides an indication of our royalty rate (between 1.0% and 2.0%). We compared the estimated fair value of our trademarks with the carrying value of the trademarks. Refer to Note 7 for additional discussion of the Company’s annual impairment review.
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Preparation of forecasts of revenue and profitability growth for use in the long-range plan and the discount rate require significant use of judgment. Changes to the discount rate and the forecasted cash flows could affect the estimated fair value of one or more of the Company’s reporting units and intangible assets and could result in an impairment charge in a future period.
Impairment of Long-Lived Assets Other Than Goodwill and Indefinite-Lived Intangible Assets
Long-lived assets, including definite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recovered. Long-lived assets are considered to be impaired if the carrying amount of the asset exceeds the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time.
Revenue Recognition
The Company recognizes revenue under the core principle of depicting the transfer of control to the Company’s customers in an amount reflecting the consideration to which the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
Our sales revenue for product sales is recognized based on a point in time model, when control transfers to our customers, which is generally when products are shipped from our manufacturing facilities or when delivered to the customer’s named location. Certain large distribution customers receive annual volume discounts, which are estimated at the time the sale is recorded based on the estimated annual sales.Product return reserves are accrued at the time of sale based on the historical relationship between shipments and returns and are recorded as a reduction of net sales. When the Company performs shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities and, accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from customersCEO, began performing consulting services relating to product salesdevelopment, implementation and remittedcommercialization for MTEK (the “Engagement”). Mr. A. Christenson has received and continues to governmental authorities are excludedreceive compensation from revenues. See Note 2 (MTEK for consulting services at an annualized rate of approximately $142,800 per year, commensurate with market practice and comparable to that of consultants providing similar services.
In accordance with Altra policy, Mr. Christenson disclosed the Engagement which was reviewed and approved by the Audit Committee. The Company anticipates that in the future it may continue to purchase software licenses, services and hardware from MTEK as well as potentially make additional equity investments in MTEK.
Revenue RecognitionDirector Independence)
The Nominating and Corporate Governance Committee annually reviews the independence of all directors and reports its findings to the consolidatedfull Board. The Governance Committee has determined that the following directors are independent within the meaning of the NASDAQ Rules and relevant federal securities laws and regulations: Lyle G. Ganske, J. Scott Hall, Nicole Parent Haughey, Margot L. Hoffman, Ph.D., Thomas W. Swidarski, La Vonda Williams and James H. Woodward, Jr.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. We believe that these agreements are necessary to attract and retain qualified persons as directors and executive officers. These agreements require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.
| ITEM 14. | Principal Accounting Fees and Services. |
Audit Fees
The aggregate professional fees billed or to be billed by our independent public accounting firm, Deloitte & Touche LLP (“D&T”), for the audit of our annual financial statements for further disclosures regarding revenue.
Shippingfiscal 2022 and Handling Costs
Shipping2021 and handling costs associated with sales are classified as a component of cost of sales. Amounts collected from our customers for shipping and handling are recognized as revenue.
Warranty Costs
Estimated expenses related to product warranties are accrued at the time products are sold to customers. Estimates are established using historical information as to the nature, frequency, and average costs of warranty claims.
Self-Insurance
Certain exposures are self-insured up to pre-determined amounts, above which third-party insurance applies, including exposures for medical claims, workers’ compensation, vehicle insurance, product liability costs and general liability exposure. The accompanying balance sheets include reserves for the estimated costs associated with these self-insured risks, based on historic experience factors and management’s estimates for known and anticipated claims. A portion of medical insurance costs are offset by charging employees a premium equivalent to group insurance rates. The costs of retained loss for the self-insurance programs, at each balance sheet date, have not been material in any period.
Research and Development
Research and development costs are expensed as incurred.
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Advertising
Advertising costs are charged to selling, general and administrative expenses as incurred and amounted to approximately $5.0 million, $6.6 million and $4.3 million, for the years ended December 31, 2020, 2019 and 2018, respectively.
Income Taxes
The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company evaluates the realizability of its net deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. The future benefit to be derived from its deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income to realize the assets. The Company records a valuation allowance to reduce its net deferred tax assets to the amount that may be more likely than not to be realized.
To the extent the Company establishes a valuation allowance on net deferred tax assets generated from operations, an expense will be recorded within the provision for income taxes. In periods subsequent to establishing a valuation allowance on net deferred assets from operations, if the Company were to determine that it would be able to realize its net deferred tax assets in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded as a reduction to income tax expense in the period such determination was made.
We assess our income tax positions and record tax benefits for all years subject to examination, based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record the amount that has a greater than 50% likelihood of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense in the consolidated statement of operations and included in accruals and other long-term liabilities in the Company’s consolidated balance sheet, when applicable. If we do not believe that it is more likely than not that a tax benefit will be sustained, no tax benefit is recognized.
Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following is a reconciliation of changes in Accumulated Other Comprehensive Income (Loss) 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, 2018 | | $ | (0.4 | ) | | $ | (3.7 | ) | | $ | (45.8 | ) | | $ | (49.9 | ) |
Change in fair value of interest rate swap, net of tax | | | (6.2 | ) | | | — | | | | — | | | | (6.2 | ) |
Pension adjustments, net of tax | | | — | | | | (0.8 | ) | | | — | | | | (0.8 | ) |
Reclassification of pension adjustments, net of tax | | | — | | | | 4.3 | | | | — | | | | 4.3 | |
Foreign currency translation adjustments | | | — | | | | — | | | | (12.7 | ) | | | (12.7 | ) |
Change in fair value of net investment hedge, net of tax | | | — | | | | — | | | | (6.3 | ) | | | (6.3 | ) |
Net current-period other comprehensive income/(loss) | | | (6.2 | ) | | | 3.5 | | | | (19.0 | ) | | | (21.7 | ) |
Accumulated other comprehensive income/(loss) by component, December 31, 2018 | | $ | (6.6 | ) | | $ | (0.2 | ) | | $ | (64.8 | ) | | $ | (71.6 | ) |
Change in fair value of interest rate swap, net of tax | | | (9.9 | ) | | | — | | | | — | | | | (9.9 | ) |
Pension adjustments, net of tax | | | — | | | | (1.4 | ) | | | — | | | | (1.4 | ) |
Reclassification of pension adjustments, net of tax | | | — | | | | 0.1 | | | | — | | | | 0.1 | |
Foreign currency translation adjustments | | | — | | | | — | | | | (26.9 | ) | | | (26.9 | ) |
Change in fair value of net investment hedge, net of tax | | | — | | | | — | | | | 19.8 | | | | 19.8 | |
Net current-period other comprehensive income/(loss) | | | (9.9 | ) | | | (1.3 | ) | | | (7.1 | ) | | | (18.3 | ) |
Accumulated other comprehensive income/(loss) by component, December 31, 2019 | | $ | (16.5 | ) | | $ | (1.5 | ) | | $ | (71.9 | ) | | $ | (89.9 | ) |
Change in fair value of interest rate swap, net of tax | | | (11.9 | ) | | | — | | | | — | | | | (11.9 | ) |
Reclassification of interest rate swap to income, net of tax | | | 6.9 | | | | — | | | | — | | | | 6.9 | |
Pension adjustments, net of tax | | | — | | | | (2.6 | ) | | | — | | | | (2.6 | ) |
Reclassification of pension adjustments, net of tax | | | — | | | | 0.4 | | | | — | | | | 0.4 | |
Foreign currency translation adjustments | | | — | | | | — | | | | 87.0 | | | | 87.0 | |
Change in fair value of net investment hedge, net of tax | | | — | | | | — | | | | 31.2 | | | | 31.2 | |
Net current-period other comprehensive income/(loss) | | | (5.0 | ) | | | (2.2 | ) | | | 118.2 | | | | 111.0 | |
Accumulated other comprehensive income/(loss) by component, December 31, 2020 | | $ | (21.5 | ) | | $ | (3.7 | ) | | $ | 46.3 | | | $ | 21.1 | |
Management identified a misstatement related to the classification of foreign currency translation adjustments associated with the net investment hedge for the years ended December 31, 2019 and 2018. As a result, the Company reclassified $19.8 million and $6.3 million, respectively, from Change in fair value of interest rate swap, net of tax in Gains and (losses) on cash flow hedges to Change in fair value of net investment hedge, net of tax in Cumulative foreign currency translation adjustment to reflect the correct presentation in the table above. This adjustment had no effect on the Company’s previously reported consolidated financial statements as of and for the years ended December 31, 2019 and 2018. Additionally, certain amounts related to the derivative financial instruments were reclassified in the Consolidated Statements of Comprehensive Income to conform with this presentation.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the use of the current expected credit loss impairment model to estimate credit losses on certain types of financial instruments, including trade receivables. The model requires an estimate of expected credit losses, measured over the contractual life of an asset, that considers information about past events, current conditions and a forecast of future economic conditions. The Company adopted the standard on January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial statements.
As a result of the adoption of ASU 2016-13, the Company has updated its significant accounting policy related to trade account receivables and allowances for credit losses as of March 31, 2020 from what was previously disclosed in our audited financial statements for the year ended December 31, 2019 as follows:
All trade account receivables are reported net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from our trade account receivables over the life of the underlying assets. Assets with similar risk characteristics are pooled together for determination of their current expected credit losses. We regularly perform detailed reviews of our pooled assets to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (“ASU-2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements. The Company adopted the standard on January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This ASU provides relief from certain accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The relief provided by this ASU is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The optional amendments are effective as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this standard on the Company.
2. Revenue Recognition
We sell our products through 3 primary commercial channels: original equipment manufacturers (OEMs), industrial distributors and direct to end users. Each of our segments sells similar products, which are balanced across end-user industries including, without limitation, energy, food processing, general industrial, material handling, mining, transportation, industrial automation, robotics, medical devices, and turf & garden.
As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient under Accounting Standards Codification (“ASC”) 606-10-32-18 to not assess whether a contract has a significant financing component. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment from the Company’s manufacturing site or delivery to the customer’s named location. In determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer. In certain circumstances, the Company manufactures customized product without alternative use for its customers, which would generally result in the transfer of control over time. The Company has evaluated the amount of revenue subject to recognition over time and concluded that it is immaterial.
The following table disaggregates our revenue for each reportable segment. The Company believes that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Net Sales: | | | | | | | | | | | | |
Power Transmission Technologies | | $ | 818.6 | | | $ | 907.7 | | | $ | 935.0 | |
Automation & Specialty | | | 911.8 | | | | 931.0 | | | | 241.7 | |
Inter-segment eliminations | | | (4.4 | ) | | | (4.6 | ) | | | (1.4 | ) |
Net sales | | $ | 1,726.0 | | | $ | 1,834.1 | | | $ | 1,175.3 | |
Net sales by geographic region based on point of shipment origin are as follows:
| | Net Sales | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
North America (primarily U.S.) | | $ | 914.9 | | | $ | 1,036.5 | | | $ | 629.0 | |
Europe excluding Germany | | | 289.3 | | | | 307.7 | | | | 208.8 | |
Germany | | | 185.8 | | | | 222.7 | | | | 204.0 | |
China | | | 222.5 | | | | 159.6 | | | | 79.2 | |
Asia and other (excluding China) | | | 113.5 | | | | 107.6 | | | | 54.3 | |
Total | | $ | 1,726.0 | | | $ | 1,834.1 | | | $ | 1,175.3 | |
The payment terms and conditions in our customer contracts vary. In some cases, customers will partially prepay for their goods; in other cases, after appropriate credit evaluations, payment will be due in arrears. In addition, there are constraints that cause variability in the ultimate consideration to be recognized. These constraints typically include early payment discounts, volume rebates, rights of return, surcharges, and other customer consolidation.
Payments received from customers are recorded as accounts receivable when an unconditional right to the consideration exists. A contract asset is recognized when the Company satisfies a performance obligation by transferring a promised good to the customer before consideration is due. A contract liability is recognized when consideration is received from a customer prior to the Company satisfying the related performance obligation. Contract assets and contract liabilities are recognized in other current assets and other current liabilities, respectively, in the Company’s consolidated balance sheets.
The Company had inconsequential contract assets for the year to date periods ended December 31, 2020 and December 31, 2019, respectively. The opening and closing balances of the Company’s current contract liabilities as of the year to date periods ended December 31, 2020 and December 31, 2019 are as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Beginning balance | | $ | 8.4 | | | $ | 7.4 | |
Closing balance | | | 10.3 | | | | 8.4 | |
Increase | | $ | 1.9 | | | $ | 1.0 | |
In the twelve-month period ended December 31, 2020 and December 31, 2019, respectively, all outstanding revenue has been recognized related to our contract liabilities at the beginning of the related period.
3. Acquisitions
On October 1, 2018, the Company and Fortive Corporation (“Fortive”) consummated the combination (the “Fortive Transaction”) of Altra with 4 operating companies from Fortive’s Automation & Specialty platform (the “A&S Business”), and as a result, the consolidated financial statements reflect the A&S Business’s results of operations from October 1, 2018 onward.
The A&S Business, consisting of four key brands, Kollmorgen, Portescap, Thomson and Jacobs Vehicle Systems, designs, manufactures, markets and sells electromechanical and electronic motion control products, including standard and custom motors, drives and controls; linear motion systems, ball screws, linear bearings, clutches/brakes, linear actuators and mechanical components; and through Jacobs Vehicle Systems, supplemental braking systems for commercial vehicles.
As of December 31, 2019, the allocation of the purchase price of the A&S Business was complete. The Company recorded $29.5 million of purchase price adjustments and certain measurement period adjustments for the year to date period ended December 31, 2019 resulting in an increase to goodwill in the amount of $47.5 million. The purchase price allocation below includes such adjustments.
| | At Acquisition Date | | | Measurement Period Adjustments | | | At Acquisition Date (As Adjusted) | |
Consideration transferred: | | | | | | | | | | | | |
Total cash consideration | | $ | 1,003.4 | | | $ | — | | | $ | 1,003.4 | |
Total equity consideration | | | 1,458.7 | | | | — | | | | 1,458.7 | |
A&S acquisition purchase price adjustment | | | — | | | | 29.5 | | | | 29.5 | |
Fair value of consideration transferred | | $ | 2,462.1 | | | $ | 29.5 | | | $ | 2,491.6 | |
| | | | | | | | | | | | |
Recognized identifiable assets acquired and liabilities assumed: | | | | | | | | | | | | |
Cash: less cash on A&S balance sheet at 10/1/2018 | | | 54.1 | | | | (0.6 | ) | | | 53.5 | |
Receivables | | | 129.7 | | | | (0.8 | ) | | | 128.9 | |
Inventory | | | 89.1 | | | | (3.8 | ) | | | 85.3 | |
Prepaids and other current assets | | | 6.9 | | | | (0.2 | ) | | | 6.7 | |
Property, plant and equipment | | | 178.3 | | | | (1.3 | ) | | | 177.0 | |
Intangibles | | | 1,454.0 | | | | — | | | | 1,454.0 | |
Other non-current assets | | | 7.9 | | | | (0.4 | ) | | | 7.5 | |
Accounts payable | | | (98.9 | ) | | | 0.8 | | | | (98.1 | ) |
Accrued payroll | | | (15.2 | ) | | | 0.5 | | | | (14.7 | ) |
Accrued expenses and other current liabilities | | | (33.7 | ) | | | (0.4 | ) | | | (34.1 | ) |
Pension liability and other post employment benefits | | | (12.0 | ) | | | (0.3 | ) | | | (12.3 | ) |
Deferred tax liability | | | (355.7 | ) | | | (11.2 | ) | | | (366.9 | ) |
Other long term liability | | | (2.6 | ) | | | (0.3 | ) | | | (2.9 | ) |
Senior unsecured notes assumed | | | (400.0 | ) | | | — | | | | (400.0 | ) |
Total identifiable net assets assumed | | | 1,001.9 | | | | (18.0 | ) | | | 983.9 | |
Goodwill | | $ | 1,460.2 | | | $ | 47.5 | | | $ | 1,507.7 | |
The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill, which is not deductible for income tax purposes in the United States. The goodwill in this acquisition is attributable to the Company’s expectation to achieve synergies, such as facility consolidations, global procurement efficiencies, the ability to cross-sell product, and the ability to penetrate certain geographic areas.
Intangible assets acquired consist of: | | | | | | | | |
Customer relationships | | | | | | $ | 1,025.0 | |
Trade names and trademarks | | | | | | | 209.0 | |
Technology | | | | | | | 204.0 | |
In-process research and development ("IPR&D") | | | | | | | 16.0 | |
Total intangible assets | | | | | | $ | 1,454.0 | |
Customer relationships and technology are subject to amortization, and will be recognized on a straight-line basis over the estimated useful lives of 22 – 29 years and 7-10 years, respectively, which represents the anticipated period over which the Company estimates it will benefit from the acquired assets. The tradenames and trademarks are considered to have an indefinite life and will not be amortized.
The major acquired technology IPR&D relates to the next generation of valvetrain technologies, which focus on improving engine brake performance, improving fuel efficiency and meeting future worldwide emissions regulations. The IPR&D projects are not currently amortized and will be reviewed for impairment at least annually and amortization will commence when the assets are placed into service. There was no evidence of impairment to IPR&D as of December 31, 2020.
4. Lease Accounting
All leases are presented under ASU 2016-02. We lease property and equipment under finance and operating leases. At December 31, 2020, the Company’s right-of-use (“ROU”) assets and lease liabilities for operating and finance leases totaled approximately $41.3 and $43.4 million, respectively. At December 31, 2019, the Company’s ROU assets and lease liabilities for operating and finance leases totaled approximately $36.6 and $38.7 million, respectively. Finance lease ROU assets are included in non-current other assets and finance lease liabilities are included in current and non-current other liabilities on the Company’s consolidated balance sheets.
Quantitative information regarding the Company’s leases is as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Lease cost(1): | | | | | | | | |
Operating lease cost | | | 14.2 | | | | 14.3 | |
Short-term lease cost | | | 0.3 | | | | 0.1 | |
Total lease cost | | $ | 14.5 | | | $ | 14.4 | |
(1)
| Finance lease costs and variable lease costs are immaterial to the Company. The Company does 0t have lease or sub-lease income.
|
Maturities of Lease Liabilities | | Operating Leases | | | Finance Leases | |
2021 | | $ | 14.6 | | | $ | 0.2 | |
2022 | | | 12.0 | | | | 0.1 | |
2023 | | | 8.6 | | | | — | |
2024 | | | 5.2 | | | | — | |
2025 | | | 3.2 | | | | — | |
After 2025 | | | 2.8 | | | | — | |
Total lease payments | | | 46.4 | | | | 0.3 | |
Less interest | | | (3.3 | ) | | | — | |
Present value of lease liabilities | | $ | 43.1 | | | $ | 0.3 | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Other Information: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from finance leases | | $ | — | | | $ | — | |
Operating cash flows from operating leases | | $ | 14.6 | | | $ | 14.5 | |
Financing cash flows from finance leases | | $ | — | | | $ | — | |
Weighted average remaining lease term - finance leases (in years) | | | 1.83 | | | | 2.83 | |
Weighted average remaining lease term - operating leases (in years) | | | 3.53 | | | | 4.23 | |
Average discount rate - finance leases | | | 5.50 | % | | | 5.50 | % |
Average discount rate - operating leases | | | 3.56 | % | | | 3.51 | % |
5. Inventories
Inventories consisted of the following:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Raw materials | | $ | 95.2 | | | $ | 104.2 | |
Work in process | | | 22.1 | | | | 22.4 | |
Finished goods | | | 93.1 | | | | 95.9 | |
| | $ | 210.4 | | | $ | 222.5 | |
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6. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Land | | $ | 44.6 | | | $ | 42.7 | |
Buildings and improvements | | | 149.7 | | | | 141.3 | |
Machinery and equipment | | | 466.8 | | | | 433.2 | |
| | | 661.1 | | | | 617.2 | |
Less-Accumulated depreciation | | | (316.9 | ) | | | (262.8 | ) |
| | $ | 344.2 | | | $ | 354.4 | |
The Company recorded $57.8 million, $58.0 million and $34.8 million of depreciation expense in the years ended December 31, 2020, 2019, and 2018, respectively.
In 2018, the Power Transmission Technologies segment closed a facility in Milan, Italy. The building was sold in the first quarter of 2019 at a loss of $0.3 million.
7. Goodwill and Intangible Assets
Annual impairment assessment
In connection with the Company’s annual impairment review, goodwill is assessed for impairment by comparing the fair value of the reporting unit to the carrying value. The Company’s measurement date is October 31st. During 2020, the Thomson reporting unit experienced lower than anticipated financial results primarily due to the impacts of the COVID-19 pandemic. As of December 31, 2020, the Thomson reporting unit had a goodwill balance of $441.9 million, out of a total goodwill balance of $1.6 billion. The Thomson reporting unit’s fair value exceeds its carrying value by less than 10% as of the annual goodwill impairment date. All other reporting units have fair values that exceed their carrying value by 10% or more.
Interim impairment assessment
During the first quarter of 2020, the Company considered the economic impact of the COVID-19 pandemic to be a triggering event for the JVS reporting unit and, as a result, the Company performed an interim impairment review. As a result of both the COVID-19 related economic downturn and its impact on JVS’s anticipated financial results, the Company concluded that it was more likely than not that the JVS reporting unit’s carrying value exceeded its fair value and performed an interim impairment review for both JVS’s goodwill and tradename intangible asset. As a result of the interim impairment testing performed, the Company recorded non-cash impairment charges of $8.4 million and $139.1 million for indefinite-lived intangible assets and goodwill, respectively, at March 31, 2020.
The Company estimated the fair value of the JVS reporting unit using both the discounted cash flow model and the market approach. The Company estimated the value of JVS’s indefinite-lived tradename intangible asset using a discounted cash flow model. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future revenues, profit margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples. The Company estimates future cash flows based upon historical results and current market projections, discounted at a market comparable rate.
Key assumptions developed by management and used in the interim quantitative analysis included the following:
• Near-term revenue declines in 2020;
• Adjusted profit margins over the projection period, due to revenue adjustments and maintained investment in the business;
• Market-based discount rates; and
• Reduced EBITDA multiple, due to current market conditions.
59
The changes in the carrying value of goodwill by segment for the years ended December 31, 2020 and 2019 are as follows:
| | Power Transmission Technologies | | | Automation & Specialty | | | Total | |
Goodwill | | $ | 441.9 | | | $ | 1,252.2 | | | $ | 1,694.1 | |
Accumulated impairment loss (1) | | | (31.8 | ) | | | — | | | | (31.8 | ) |
Balance January 1, 2019 | | $ | 410.1 | | | $ | 1,252.2 | | | $ | 1,662.3 | |
Impact of changes in foreign currency and other | | | (2.1 | ) | | | (12.8 | ) | | | (14.9 | ) |
Measurement period adjustment related to acquisition of the A&S Business | | | 2.1 | | | | 45.4 | | | | 47.5 | |
Balance December 31, 2019 | | | 410.1 | | | | 1,284.8 | | | | 1,694.9 | |
Impact of changes in foreign currency and other | | | 10.5 | | | | 29.7 | | | | 40.2 | |
Goodwill impairment charge | | | — | | | | (139.1 | ) | | | (139.1 | ) |
Balance December 31, 2020 | | $ | 420.6 | | | $ | 1,175.4 | | | $ | 1,596.0 | |
| | | | | | | | | | | | |
(1) As a result of the annual goodwill impairment review in 2008, the Company determined that goodwill was impaired and recorded a pre-tax charge of $31.8 million. | |
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
| | December 31, 2020 | | | December 31, 2019 | |
| | Cost | | | Accumulated Amortization | | | Net | | | Cost | | | Accumulated Amortization | | | Net | |
Other intangible assets | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible assets not subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Tradenames and trademarks (1) | | $ | 259.7 | | | $ | — | | | $ | 259.7 | | | $ | 260.0 | | | $ | — | | | $ | 260.0 | |
In-process research and development | | | 16.0 | | | | — | | | | 16.0 | | | | 16.0 | | | | — | | | | 16.0 | |
Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | | 1,220.2 | | | | 195.0 | | | | 1,025.2 | | | | 1,187.7 | | | | 137.8 | | | | 1,049.9 | |
Product technology and patents | | | 211.2 | | | | 52.5 | | | | 158.7 | | | | 210.0 | | | | 33.5 | | | | 176.5 | |
Total intangible assets | | $ | 1,707.1 | | | $ | 247.5 | | | $ | 1,459.6 | | | $ | 1,673.7 | | | $ | 171.3 | | | $ | 1,502.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) The change in Cost of Tradenames and trademarks is a result of the $8.4 million impairment charge in the quarter ended March 31, 2020 related to the JVS reporting unit, offset by the impact of foreign currency. | |
The Company recorded $69.8 million, $70.4 million, and $25.2 million of amortization for the years ended December 31, 2020, 2019 and 2018, respectively.
Customer relationships, product technology and patents are amortized over their useful lives ranging from 3 to 29 years. The weighted average estimated useful life of intangible assets subject to amortization is approximately 21 years.
The estimated amortization expense for intangible assets is approximately $69.7 million in 2021, $70.7 million in 2022, $70.7 million in 2023, $70.7 million in 2024, $70.7 million in 2025, and $831.4 million thereafter.
60
8. Warranty Costs
The contractual warranty period of the Company’s products generally ranges from three months to two years with certain warranties extending for longer periods. Estimated expenses related to product warranties are accrued at the time products are sold to customers and are recorded in accruals and other current liabilities on the consolidated balance sheet. Estimates are established using historical information as to the nature, frequency and average costs of warranty claims. Changes in the carrying amount of accrued product warranty costs for each of the years ended December 31, 2020, 2019 and 2018 are as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Balance at beginning of year | | $ | 10.0 | | | $ | 9.4 | | | $ | 7.5 | |
Accrued current period warranty expense | | | 3.5 | | | | 4.0 | | | | 2.4 | |
Acquired warranty reserve | | | — | | | | — | | | | 6.6 | |
Payments and adjustments | | | (3.9 | ) | | | (3.4 | ) | | | (7.1 | ) |
Balance at end of year | | $ | 9.6 | | | $ | 10.0 | | | $ | 9.4 | |
9. Income Taxes
Income before income taxes by domestic and foreign locations consists of the following:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Domestic | | $ | (38.1 | ) | | $ | 39.6 | | | $ | (7.5 | ) |
Foreign | | | 42.1 | | | | 108.6 | | | | 59.2 | |
Total | | $ | 4.0 | | | $ | 148.2 | | | $ | 51.7 | |
The components of the provision for income taxes consist of the following:
| | 2020 | | | 2019 | | | 2018 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 14.5 | | | $ | 16.6 | | | $ | 7.6 | |
State | | | 2.2 | | | | 4.6 | | | | 1.4 | |
Non-U.S. | | | 41.1 | | | | 32.9 | | | | 17.5 | |
| | | 57.8 | | | | 54.1 | | | | 26.5 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (15.3 | ) | | | (6.7 | ) | | | (5.7 | ) |
State | | | (2.1 | ) | | | (5.2 | ) | | | (0.7 | ) |
Non-U.S. | | | (10.9 | ) | | | (21.2 | ) | | | (3.7 | ) |
| | | (28.3 | ) | | | (33.1 | ) | | | (10.1 | ) |
Provision for income taxes | | $ | 29.5 | | | $ | 21.0 | | | $ | 16.4 | |
A reconciliation from tax at the U.S. federal statutory rate to the Company’s provision for income taxes is as follows:
| | 2020 | | | 2019 | | | 2018 | |
Tax at U.S. federal income tax rate | | $ | 0.9 | | | $ | 31.1 | | | $ | 10.9 | |
State taxes, net of federal income tax effect | | | 0.3 | | | | 1.8 | | | | 0.4 | |
Other changes in tax rate | | | (0.2 | ) | | | (10.6 | ) | | | (0.3 | ) |
Nondeductible transaction costs | | | — | | | | — | | | | 3.1 | |
Foreign taxes | | | 3.9 | | | | 0.7 | | | | 1.5 | |
Global intangible low-taxed income | | | (2.1 | ) | | | 1.3 | | | | 1.1 | |
Valuation allowance | | | 0.5 | | | | 0.1 | | | | 0.4 | |
Tax credits and incentives | | | (2.5 | ) | | | (2.6 | ) | | | (1.2 | ) |
Impairment of goodwill | | | 29.0 | | | | — | | | | — | |
Other | | | (0.3 | ) | | | (0.8 | ) | | | 0.5 | |
Provision for income taxes | | $ | 29.5 | | | $ | 21.0 | | | $ | 16.4 | |
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 states. The Company and its subsidiaries also file consolidated and separate income tax returns in various non U.S. 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 2017. Additionally, the Company has indemnification agreements with the sellers of the A&S Business, Guardian, Svendborg, Lamiflex, Bauer, and Stromag entities that may provide for reimbursement to the Company for payments made in satisfaction of income tax liabilities relating to pre-acquisition periods.
The Company does 0t have any unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense, if applicable.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Deferred tax assets: | | | | | | | | |
Post-retirement obligations | | $ | 6.2 | | | $ | 5.1 | |
Tax credits | | | 1.8 | | | | 1.2 | |
Expenses not currently deductible | | | 28.5 | | | | 21.0 | |
Net operating loss carryover | | | 5.9 | | | | 5.7 | |
Debt and derivative instruments | | | 2.2 | | | | 8.3 | |
Operating lease liabilities | | | 9.2 | | | | 8.8 | |
Other | | | 3.2 | | | | 2.8 | |
Total deferred tax assets | | | 57.0 | | | | 52.9 | |
Valuation allowance for deferred tax assets | | | (4.8 | ) | | | (4.2 | ) |
Net deferred tax assets | | | 52.2 | | | | 48.7 | |
Deferred tax liabilities: | | | | | | | | |
Property, plant and equipment | | | 38.1 | | | | 39.5 | |
Intangible assets | | | 343.4 | | | | 352.4 | |
Goodwill | | | 9.5 | | | | 9.3 | |
Operating lease right of use asset | | | 8.8 | | | | 8.4 | |
Other | | | 7.1 | | | | 5.2 | |
Total deferred liabilities | | | 406.9 | | | | 414.8 | |
Net deferred tax liabilities | | $ | 354.7 | | | $ | 366.1 | |
On December 31, 2020 the Company had state net operating loss (NOL) carry forwards of $19.6 million, which expire between 2025 and 2038, and non U.S. NOL and capital loss carryforwards of $20.5 million, of which substantially all have an unlimited carryforward period. The NOL carryforwards available are subject to limitations on their annual usage. The Company also has federal and state tax credits of $1.4 million available to reduce future income taxes that expire between 2020 and 2034.
Valuation allowances are established for deferred tax assets when management believes it is more likely than not that the associated benefit may not be realized. The Company periodically reviews the adequacy of its valuation allowances and recognizes tax benefits only as reassessments indicate that it is more likely than not the benefits will be realized. Valuation allowances have been established due to the uncertainty of realizing the benefits of certain net operating losses, capital loss carryforwards, tax credits, and other tax attributes. The valuation allowances are primarily related to certain non-U.S. NOL carryforwards, capital loss carryforwards, and U.S. federal foreign tax credits.
As of December 31, 2020, the Company has approximately $295.8 million of undistributed earnings in its foreign subsidiaries. During the fourth quarter of 2020, the Company determined that approximately $197.1 million of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the US is immaterial. The Company has not provided deferred taxes on approximately $98.7 million of undistributed earnings from non-U.S. subsidiaries as of December 31, 2020 which are indefinitely reinvested in operations. As a result of the multiple avenues to repatriate earnings to minimize the tax cost, and further given that a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
In March 2020, in response to the impact of the COVID-19 pandemic in the U.S. and across the globe, the United States Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. In December 2020, Congress passed a second relief package, the Consolidated Appropriations Act, 2021. The enactment period impacts to the Company were immaterial to income tax expense.
10.
| Pension and Other Employee Benefits
|
Defined Benefit (Pension)
The Company sponsors various defined benefit (pension) plans for certain active employees.
The following tables represent the reconciliation of the benefit obligation, fair value of plan assets and funded status of the respective defined benefit (pension) plans as of December 31, 2020, 2019 and 2018:
| Year Ended December 31, | |
| 2020 | | | 2019 | | | 2018 | |
Change in benefit obligation: | | | | | | | | | | | |
Obligation at beginning of year | $ | 42.2 | | | $ | 63.2 | | | $ | 43.1 | |
Acquired benefit obligation | | — | | | | — | | | | 40.1 | |
Service cost | | 0.7 | | | | 0.5 | | | | 0.3 | |
Interest cost | | 0.3 | | | | 0.6 | | | | 0.5 | |
Contributions | | 0.2 | | | | 0.2 | | | | 0.0 | |
Settlement transfer to third party (1) | | — | | | | (19.4 | ) | | | (18.1 | ) |
Actuarial (gains) losses | | 2.4 | | | | (0.4 | ) | | | 1.0 | |
Amendments | | 0.9 | | | | (0.7 | ) | | | — | |
Foreign exchange effect | | 4.0 | | | | (0.2 | ) | | | (1.3 | ) |
Benefits paid | | (2.4 | ) | | | (1.6 | ) | | | (2.4 | ) |
Obligation at end of year | $ | 48.3 | | | $ | 42.2 | | | $ | 63.2 | |
Change in plan assets: | | | | | | | | | | | |
Fair value of plan assets, beginning of year | $ | 11.4 | | | $ | 31.2 | | | $ | 18.0 | |
Acquired plan assets | | — | | | | — | | | | 31.3 | |
Settlement transfer to third party (2) | | — | | | | (19.4 | ) | | | (17.9 | ) |
Actual return on plan assets | | 0.6 | | | | (0.7 | ) | | | 0.1 | |
Contributions | | 0.6 | | | | 0.5 | | | | 0.2 | |
Foreign exchange effect | | 1.1 | | | | 0.2 | | | | 0.3 | |
Benefits paid | | (0.8 | ) | | | (0.4 | ) | | | (0.8 | ) |
Fair value of plan assets, end of year | $ | 12.9 | | | $ | 11.4 | | | $ | 31.2 | |
Unfunded status | | 35.4 | | | | 30.8 | | | | 32.0 | |
Amounts recognized in the balance sheet consist of: | | | | | | | | | | | |
Total non-current liabilities | $ | 35.4 | | | $ | 30.8 | | | $ | 32.0 | |
| | | | | | | | | | | |
(1) For the year ended December 31, 2019, represents settlement transfer to a third party for $19.4 million related to the Company’s Swiss Plan. For the year ended December 31, 2018, represents settlement transfer to a third party for $18.1 million related to the Company's US Plan. | |
(2) For the year ended December 31, 2019, represents settlement transfer to a third party for $19.4 million related to the Company’s Swiss Plan. For the year ended December 31, 2018, represents settlement transfer to a third party for $17.9 million related to the Company's US Plan. | |
For the pension plan presented above, the accumulated and projected benefit obligations exceed the fair value of plan assets.
Certain, primarily unionized, employees are entitled to limited grandfathered postretirement benefits (medical, dental, and life insurance coverage). The accumulated benefit obligation for the post-retirement benefit plans, which are not funded, at December 31, 2020, 2019 and 2018 are $6.0 million, $5.9 million and $6.0 million respectively. The balances are included within other long-term liabilities on the consolidated balance sheet. The Company recorded an inconsequential amount of income for of the years ended December 31, 2020, 2019 and 2018.
63
The key economic assumptions used in the computation of the respective benefit obligations at December 31, 2020, 2019 and 2018, presented below are as follows:
| | Non-US Pension Benefits | |
| | 2020 | | | 2019 | | | 2018 | |
Discount rate | | | 0.61 | % | | | 1.10 | % | | | 1.20 | % |
Rate of compensation increase | | | 2.10 | % | | | 2.01 | % | | | 2.01 | % |
The following table represents the components of the net periodic benefit cost associated with the respective plans:
| | Pension Benefits | |
| | Non-US Plans | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Service cost | | $ | 0.7 | | | $ | 0.5 | | | $ | 0.3 | |
Interest cost | | | 0.3 | | | | 0.6 | | | | 0.5 | |
Expected return on plan assets | | | (0.5 | ) | | | (1.1 | ) | | | (0.3 | ) |
Amortization of actuarial losses and prior year service costs | | | 0.4 | | | | 0.1 | | | | 0.1 | |
Net periodic benefit cost | | $ | 0.9 | | | $ | 0.1 | | | $ | 0.6 | |
The key economic assumptions used in the computation of the respective net periodic benefit cost for the periods presented above are as follows:
| | Pension Benefits | |
| | Non-US Plan | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Discount rate | | | 1.86 | % | | | 0.91 | % | | | 2.50 | % |
Rate of compensation increase | | | 2.63 | % | | | 1.75 | % | | | 1.97 | % |
Expected return on plan assets | | | 3.70 | % | | | 3.75 | % | | | 2.50 | % |
The expected long-term rate of return represents the average rate of earnings expected on the funds investedfees billed or to be invested to providebilled for the benefits included in the benefit obligation. The assumption reflects expectations regarding future rates of returnaudit related services, tax services and all other services rendered by D&T for the investment portfolio, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class.these periods are as follows (in thousands):
| | | | | | | | |
| | | Deloitte & Touche LLP | |
| | | 2022 | | | 2021 | |
Audit Fees(1) | | $ | 3,742 | | | $ | 3,222 | |
Audit Related Fees(2) | | | 100 | | | | — | |
Tax Fees(3) | | | 447 | | | | 335 | |
All Other Fees(4) | | | 2 | | | | 2 | |
| | | | | | | | |
Total | | $ | 4,291 | | | $ | 3,559 | |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive income (loss) as of December 31, 2020, 2019
| (1) | Audit Fees for the fiscal years ended December 31, 2022 and 2021 were for professional services provided for the audit of the Company’s consolidated financial statements, statutory audits, audit of internal controls, consents and assistance with review of documents filed with the SEC. |
| (2) | Audit Related fees for the fiscal year ended December 31, 2022 and 2021 were for professional attestation services provided at one of our foreign subsidiaries. |
| (3) | Tax Fees for the fiscal years ended December 31, 2022 and 2021 were for services related to tax compliance, including the preparation of tax returns; tax planning and tax advice. |
| (4) | Other Fees for the fiscal years ended December 31, 2022 and 2021 were for the Deloitte Accounting Research Tool (“DART”) software subscription. |
Pre-Approval Policy
Altra’s Audit Committee is responsible for appointing Altra’s independent auditor and 2018 consist of the following:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Unrecognized actuarial (loss) gain | | $ | (4.2 | ) | | $ | (2.1 | ) | | $ | (0.2 | ) |
Unrecognized prior service credit | | | 0.5 | | | | 0.6 | | | | — | |
Accumulated other comprehensive (loss) income (net of $1.0 million, $0.6 million and $0.0 million of tax benefit, respectively) | | $ | (3.7 | ) | | $ | (1.5 | ) | | $ | (0.2 | ) |
| | | | | | | | | | | | |
The unrecognized prior service cost included in accumulated other compressive income (loss) and expected to be recognized in net periodic pension cost during the year ending December 31, 2021 is $0.1 million (net of $0.0 million tax). The actuarial losses included in accumulated other comprehensive income (loss) and expected to be recognized in net periodic pension cost during the year ending December 31, 2021 is $0.5 million (net of $0.2 million of tax).
Other changes recognized in other comprehensive income (loss) in the years ended December 31, 2020, 2019 and 2018 were as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Incurred net actuarial (loss) gain | | $ | (2.6 | ) | | $ | (1.4 | ) | | $ | (0.8 | ) |
Amortization of prior service credit | | | (0.1 | ) | | | (0.1 | ) | | | — | |
Amortization of net actuarial (loss) gain | | | 0.5 | | | | 0.2 | | | | — | |
Settlement recognition of net actuarial (loss) | | | — | | | | — | | | | 4.3 | |
Total recognized in accumulated other comprehensive (loss) income (net of $0.5 million, $0.8 million and ($0.1 million) of tax (provision)/benefit, respectively) | | $ | (2.2 | ) | | $ | (1.3 | ) | | $ | 3.5 | | |
Fair Value of Plan Assets
The fair value of the Company’s pension plan assets at December 31, 2020, 2019 and 2018 by asset category is as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Asset Category: | | | | | | | | | | | | |
Cash and cash equivalents (Level 1) | | $ | 0.8 | | | $ | 0.8 | | | $ | 1.8 | |
Fixed income (Level 1) | | | 3.8 | | | | 3.5 | | | | 8.3 | |
Investment grade (Level 2) | | | 4.4 | | | | 3.9 | | | | 9.8 | |
Other private investments (Level 3) | | | 3.9 | | | | 3.2 | | | | 11.3 | |
Total assets at fair value | | $ | 12.9 | | | $ | 11.4 | | | $ | 31.2 | |
The investment strategy is to achieve a rate of return on the plan’s assets that meets the performance of liabilities as calculated using a bank’s liability index with appropriate adjustments for benefit payments, service cost and actuarial assumption changes. A determinant of the plan’s return is the asset allocation policy. The plan’s asset mix will be reviewed by the Company periodically, but at least quarterly, to rebalance within the target guidelines. The Company will also periodically review investment managers to determine if the respective manager has performed satisfactorily when compared to the defined objectives, similar invested portfolios and specific market indices.
Expected cash flows
The following table provides the amounts of expected benefit payments, which are made from the plans’ assets and includes the participants’ share of the costs, which is funded by participant contributions. The amounts in the table are actuarially determined and reflect the Company’s best estimate given its current knowledge; actual amounts could be materially different.
| | Pension Benefits | |
Expected benefit payments (from plan assets) | | | | |
2021 | | $ | 2.3 | |
2022 | | | 2.3 | |
2023 | | | 2.1 | |
2024 | | | 2.1 | |
2025 | | | 2.2 | |
Thereafter | | | 10.7 | |
The Company has 0 minimum cash funding requirements associated with its pension plans for years 2021 through 2025.
Defined Contribution Plans
Underapproving the terms of the Company’s defined contribution plans, eligible employees may contribute upindependent auditor’s services. The Audit Committee has established a policy for the pre-approval of all audit and permissible non-audit services to 75% percent of their eligible compensation to the plan on a pre-tax basis, subject to annual IRS limitations. The Company makes matching contributions equal to half of the first 6 percent of eligible compensation contributed by each employee and made a unilateral contribution (including for non-contributing employees). The Company’s expense associated with the defined contribution plans was $11.4 million, $10.0 million and $5.2 million during the years ended December 31, 2020, 2019 and 2018, respectively.
11. Long-Term Debt
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Debt: | | | | | | | | |
Term loan | | $ | 1,030.0 | | | $ | 1,190.0 | |
Notes | | | 400.0 | | | | 400.0 | |
Mortgages and other | | | 12.9 | | | | 13.5 | |
Capital leases | | | 0.3 | | | | 0.5 | |
Total gross debt | | | 1,443.2 | | | | 1,604.0 | |
Less: debt discount and deferred financing costs | | | (18.5 | ) | | | (22.2 | ) |
Total debt, net of deferred financing costs | | | 1,424.7 | | | | 1,581.8 | |
Less current portion of long-term debt | | | (16.6 | ) | | | (18.0 | ) |
Total long-term debt | | $ | 1,408.1 | | | $ | 1,563.8 | |
2018 Credit Agreement and Notes
On October 1, 2018 (the “A&S Closing Date”), upon the closing of the Fortive Transaction the Company assumed $400 million aggregate principal amount of 6.125% senior notes due 2026 (the “Notes”). The Notes will mature on October 1, 2026. Interest on the Notes accrues from October 1, 2018 and is payable semi-annually commencing on April 1, 2019. The Notes may be redeemed at the option of the issuer on or after October 1, 2023. The Notes are guaranteed on a senior unsecured basisprovided by the Companyindependent auditor, as described below and certain of its domestic subsidiaries.
On the A&S Closing Date, the Company entered into a new Credit Agreement (the “Altra Credit Agreement”). The Altra Credit Agreement provides for amust seven-yearpre-approve senior secured term loan in an aggregate principal amount of $1,340.0 million (the “Altra Term Loan Facility”) and a five-year senior secured revolving credit facility in an aggregate committed principal amount of $300.0 million (the “Altra Revolving Credit Facility” and together with the Altra Term Loan Facility, the “Altra Credit Facilities”). The proceeds of the Altra Term Loan Facility were used to (i) consummate Fortive’s transfer of certain non-U.S. assets, liabilities and entities constituting the remaining portion of the A&S Business to certain subsidiaries of Altra, and the Altra subsidiaries’ assumption of substantially all of the liabilities associated with the transferred assets, (ii) repay in full and extinguish all outstanding indebtedness for borrowed money under the 2015 Credit Agreement and (iii) pay certain fees, costs, and expenses in connection with the consummation of the Fortive Transaction. The proceeds of the Altra Revolving Credit Facility will be used for working capital and general corporate purposes. Any proceeds of the Altra Term Loan Facility not used may be used for general corporate purposes.
The Altra Credit Facilities are guaranteed on a senior secured basis by the Company and certain of its domestic subsidiaries, subject to certain customary exceptions.
Borrowings under the Altra Term Loan Facility will bear interest at a per annum rate equal to a “Eurocurrency Rate” plus 2.00%, in the case of Eurocurrency Rate borrowings, or equal to a “Base Rate” plus 1.00%, in the case of Base Rate borrowings. Borrowings under the Altra Revolving Credit Facility will bear interest at a per annum rate equal to a Eurocurrency Rate plus 2.00%, in the case of Eurocurrency Rate borrowings, or equal to a Base Rate plus 1.00%, in the case of Base Rate borrowings, and thereafter will bear interest at a per annum rate equal to a Eurocurrency Rate or Base Rate, as applicable, plus an interest rate spread determined by reference to a pricing grid based on the Company’s senior secured net leverage ratio. In addition, the Company will be required to pay fees that will fluctuate between 0.250% per annum to 0.375% per annum on the unused amount of the Altra Revolving Credit Facility, based upon the Company’s senior secured net leverage ratio. The interest rate on the Term Loan Facility and the Revolving Credit Facility was 2.146% at December 31, 2020.
The Altra Credit Agreement contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants,any internal control related service, including limitations on liens, investments, restricted payments, additional indebtedness and asset sales and mergers. In addition, the Altra Credit Agreement requires that Altra maintain a specified maximum senior secured leverage ratio and a specified minimum interest coverage ratio. The obligations of the borrowers of the Altra Credit Facilities under the Altra Credit Agreement may be accelerated upon customary events of default, including non-payment of principal, interest, fees and other amounts, inaccuracy of representation and warranties, violation of covenants, cross default and cross acceleration, voluntary and involuntary bankruptcy or insolvency proceedings, inability to pay debts as they become due, material judgments, ERISA events, actual or asserted invalidity of security documents or guarantees and change in control.
The Company incurred $29.9 million in issuance costs, which is being amortized over the term of the debt as an adjustment to the effective interest rate on the outstanding borrowings.
The Company provided notice to the administrative agent of the Altra Credit Agreement on March 9, 2020 and March 16, 2020 to draw down $50 million and $50 million, respectively, under the Altra Revolving Credit Facility. At that time, the Company had increased its borrowings under the Altra Revolving Credit Facility as a precautionary action in order to increase its cash position and enhance its financial flexibility during this period of uncertainty in the global markets resulting from COVID-19. On April 14, 2020, the Company provided notice to the administrative agent of the Altra Credit Agreement to repay $50 million outstanding under the Altra Revolving Credit Facility. On April 27, 2020 and May 27, 2020 the Company provided notice to the administrative agent to repay $15 million and $35 million, respectively, which were outstanding under the Altra Revolving Credit Facility. As of the period ended December 31, 2020, all outstanding borrowings under the Altra Revolving Credit Facility have been repaid.
As of December 31, 2020, the Company had $1,030.0 million outstanding on the Altra Credit Agreement. As of December 31, 2020 and 2019, the Company had $4.5 million and $4.4 million in letters of credit outstanding, respectively. The Company had $295.5 million available to borrow under the Altra Credit Facilities at December 31, 2020, subject to customary conditions including the accuracy of representation and warranties and the absence of defaults.
Second Amended and Restated Credit Agreement
Prior to the Altra Credit Facilities, the Company maintained a credit facility in the amount of $425 million under that certain Second Amended and Restated Credit Agreement (the “2015 Credit Agreement”) by and among the Company, Altra Industrial Motion Netherlands, B.V., one of the Company’s foreign subsidiaries, the lenders party thereto from time to time, J.P, Morgan Securities LLC, Wells Fargo Securities, LLC, and KeyBanc Capital Markets, Inc., as joint lead arrangers and joint bookrunners, and JPMorgan Chase Bank, N.A., as administrative agent.
On October 1, 2018, in connection with the Fortive Transaction and entering into the Altra Credit Agreement, the 2015 Credit Agreement, was terminated and all outstanding indebtedness for borrowed money thereunder was repaid in full.
Mortgages and Other Agreements
The Company’s subsidiaries in Europe have entered into certain long-term fixed rate term loans that are generally secured by the local property, plant and equipment. The debt has interest rates that range from 1.00% to 2.5%, with various quarterly and monthly installments through 2028.
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 $0.3 million and $0.5 million at December 31, 2020 and 2019, respectively. 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 0 borrowings as of December 31, 2020 or 2019 under any of the overdraft agreements.
Working Capital Line of Credit
NaN foreign subsidiaries of the Company have lines of credit used for operating purposes. As of December 31, 2020, the Company had 13.5 million Turkish Lira, or $1.8 million, and 3.2 million Chinese RMB, or $0.5 million, outstanding on each line of credit respectively.
Maturities on Long-Term Borrowings
Maturities on long-term borrowings are as follows: | | Amount | |
2021 | | $ | 16.4 | |
2022 | | | 14.7 | |
2023 | | | 14.0 | |
2024 | | | 13.7 | |
2025 | | | 13.7 | |
Thereafter | | | 1,370.4 | |
12. Stockholders’ Equity
Common Stock (shares not in thousands)
Effective October 1, 2018, the Company amended its Articles of Incorporation to increase the number of authorized shares of Altra common stock from 90.0 million shares to 120.0 million shares. As of December 31, 2020 and 2019, there were 64,676,567 and 64,222,603 shares of common stock issued and outstanding, respectively.
Preferred Stock
On December 20, 2006, the Company amended and restated its certificate of incorporation authorizing 10,000,000 shares of undesignated Preferred Stock (“Preferred Stock”). The Preferred Stock may be issued from time to time in one or more classes or series, the shares of each class or series to have such designations and powers, preferences, rights, qualifications, limitations and restrictions as determined by the Company’s Board of Directors. There was 0 Preferred Stock issued or outstanding at December 31, 2020, 2019, or 2018.
Restricted Common Stock
The 2014 Omnibus Incentive Plan (the “2014 Plan”) provides for various forms of stock based compensation to our directors, executive personnel and other key employees and consultants. Under the 2014 Plan, the total number of shares of common stock available for delivery pursuant to the grant of awards (“Awards”) was 4,357,624 as of December 31, 2020.
The restricted stock and restricted stock units issued pursuant to the 2014 Plan generally vest ratably over a period ranging from immediately to five years from the date of grant, provided that the vesting of the restricted stock or restricted stock units may accelerate upon the occurrence of certain events. Restricted stock and restricted stock units awarded under the 2014 Plan are generally subject to restrictions on transfer, repurchase rights, and other limitations and rights as set forth in the applicable award agreements.
The 2014 Plan permits the Company to grant, among other things, restricted stock, restricted stock units, stock options and performance share awards to key employees. Certain awards include vesting based upon achievement of specified market conditions. Compensation expense recorded (in selling, general and administrative expense) during the years ended December 31, 2020, 2019 and 2018 was $13.2 million, $13.6 million, and $8.1 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. Total remaining unrecognized compensation cost is approximately $19.3 million as of December 31, 2020, and will be recognized over a weighted average remaining period of three years.
Automation & Specialty Awards
In October 2018, the Company issued 536,030 restricted stock units to certain Automation & Specialty employees as a result of the acquisition and in accordance with the terms of the Employee Matters Agreement. The aggregate fair value of these awards totaled $21 million. Based upon the vesting provisions of these awards, $3.1 million of the fair value attributed to preacquisition services of the A&S employees and was recognized as purchase price consideration. The remaining compensation will be recognized over the remaining service period.
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Stock Options
The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes valuation model that uses the following weighted-average assumptions:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Expected term (in years) | | | 6.00 | | | | 6.00 | |
Expected volatility factor | | | 30.37 | % | | 28.55% | |
Risk free interest rate | | | 1.42 | % | | 2.52% | |
Expected dividend yield | | | 1.95 | % | | 2.22% | |
The expected life of the options was calculated using the simplified method. The Company uses the simplified method to determine the expected term, as management does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The Company’s expected volatility assumption for options granted is based on the historical volatility of the Company's common stock price over the expected life of the options. The weighted average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. The dividend yield uses the most recent quarterly dividend and the stock price as of the grant date, annualized and continuously compounded.
The following table summarizes the stock option activity under the Company’s plan for the year ended December 31, 2020:
| | Weighted Average Remaining Contractual Life in Years | | | Options (In thousands) | | | Weighted-average grant date fair value | | | Aggregate Intrinsic Value (In millions) | |
Outstanding at January 1, 2020 | | | | | | | 271.7 | | | $ | 30.65 | | | | | |
Granted | | | | | | | 214.5 | | | | 34.78 | | | | | |
Exercised | | | | | | | (9.1 | ) | | | 31.57 | | | | | |
Canceled/Forfeited | | | | | | | (16.4 | ) | | | 32.81 | | | | | |
Outstanding at December 31, 2020 | | | 8.6 | | | | 460.7 | | | $ | 32.48 | | | $ | 10.6 | |
Exercisable at December 31, 2020 | | | 8.4 | | | | 161.6 | | | $ | 31.79 | | | $ | 3.8 | |
Vested and expected to vest at December 31, 2020 | | | 8.6 | | | | 278.0 | | | $ | 32.83 | | | $ | 6.3 | |
The intrinsic value of options exercised during the year ended December 31, 2020 was $0.1 million. Cash proceeds from the exercise of stock options for the year ended December 31, 2020 was $0.3 million.
Restricted Stock Units
The following table summarizes the Restricted Stock Unit (“RSU”) activity under the Company’s plan for the year ended December 31, 2020:
| | Shares (In thousands) | | | Weighted-average grant date fair value | | | Aggregate Intrinsic Value (In millions) | |
Unvested at January 1, 2020 | | | 586.5 | | | $ | 35.80 | | | | | |
Granted | | | 227.0 | | | | 35.40 | | | | | |
Vested | | | (246.2 | ) | | | 36.85 | | | | | |
Canceled/Forfeited | | | (51.5 | ) | | | 35.98 | | | | | |
Unvested at December 31, 2020 | | | 515.8 | | | $ | 35.11 | | | $ | 28.6 | |
The total fair value and total intrinsic value of RSUs vested during the year ended December 31, 2020 was $9.1 million and $9.4 million, respectively.
Performance Share Awards
During fiscal 2020 and 2019, the Company granted Performance Share Awards (“PSAs”) to certain of its officers and employees. The performance objective of the PSAs measures the Total Shareholder Return (“TSR”) against the TSR for a peer group of companies over a measurement period of three years from the time of grant. Award payouts for the PSAs are based on the percentile rank of the Company’s TSR compared to the TSR of peer group companies over the performance period. PSAs awarded
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prior to October 1, 2018 were fixed and converted to unvested shares of restricted stock upon the consummation of the Fortive Transaction, which constituted a change in control under the Company’s Performance Share Award agreements. Although these PSAs converted to unvested shares of restricted stock, the activity is disclosed in the following table which summarizes the PSA activity under the Company’s plan for the year ended December 31, 2020:
| | Shares (In thousands) | | | Weighted-average grant date fair value | | | Aggregate Intrinsic Value (In millions) | |
Unvested at January 1, 2020 | | | 199.8 | | | $ | 35.35 | | | | | |
Granted | | | 110.9 | | | | 34.35 | | | | | |
Vested | | | (33.3 | ) | | | 40.27 | | | | | |
Canceled/Forfeited | | | (9.4 | ) | | | 33.10 | | | | | |
Unvested at December 31, 2020 | | | 268.0 | | | $ | 34.38 | | | $ | 14.9 | |
The total fair value and total intrinsic value of PSAs vested during the year ended December 31, 2020 was $1.3 million and $1.2 million, respectively.
The fair value of PSAs is determined utilizing the Monte Carlo simulation model. The following weighted-average assumptions were used in the Monte Carlo simulation model, which were based on historical data and standard industry valuation practices and methodology:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
PSA fair value per share | | $ | 34.35 | | | $ | 32.02 | |
Expected volatility factor | | | 34.23 | % | | | 28.72 | % |
Risk free interest rate | | | 1.35 | % | | | 2.47 | % |
Expected dividend yield | | | 0.00 | % | | | 0.00 | % |
Share Repurchase Program
On October 19, 2016, our board of directors approved a share repurchase program authorizing the buyback of up to $30.0 million of the Company's common stock through December 31, 2019. This program expired effective December 31, 2019.
13. Concentrations
Financial instruments, which are potentially subject to counterparty 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. NaN customer represented greater than 10% of total sales for the years ended December 31, 2020, 2019 and 2018.
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 and derivative transactions. Cash and investments are held by well-established financial institutions and invested in AAA rated mutual funds or United States Government securities. The Company is exposed to swap counterparty credit risk with financial institutions. The Company’s counterparties are well-established financial institutions.
14. Restructuring, Asset Impairment, and Transition Expenses
From time to time, the Company will initiate various restructuring programs and incur severance and other restructuring costs.
During 2017, the Company commenced a restructuring plan (“2017 Altra Plan”) as a result of the Company’s purchase of Stromag and to rationalize its global renewable energy business. The actions taken pursuant to the 2017 Altra Plan included reducing headcount, facility consolidations and the elimination of certain costs. In 2020, the Company recognized $0.5 million in restructuring expense related to headcount reduction. The amounts for 2019 were comprised of $1.8 million related to headcount reduction, $1.5 million in facility consolidation costs, $1.5 million in relocation costs, and $0.9 million in other restructuring expenses. The amounts for 2018 were comprised of $2.5 million related to headcount reduction, $0.6 million in facility consolidation costs, $0.3 million in relocation costs, and $0.8 million in other restructuring expenses.
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During 2019, the Company commenced a restructuring plan (“2019 Altra Plan”) to drive efficiencies, reduce the number of facilities and optimize its operating margin. The Company expects to incur an additional $5 - $7 million in restructuring expenses related to workforce reductions, lease termination costs and other facility rationalization costs under the 2019 Altra Plan over the next three years. For the year to date period ended December 31, 2020, the Company recorded approximately $5.0 million in expenses related to workforce reductions, $0.6 million in expenses related to facilities consolidation and relocation costs, and $1.3 million in other restructuring expense related charges. For the year to date period ended December 31, 2019, the Company recorded approximately $5.9 million in expenses related to workforce reductions, $1.5 million in expenses related to facilities consolidation and relocation costs, and $1.0 million in other restructuring expense related charges.
The following table is a reconciliation of the accrued restructuring costs between January 1, 2018 and December 31, 2020.
| | 2017 Altra Plan | | | 2019 Altra Plan | | | Total All Plans | |
Balance at January 1, 2018 | | $ | 1.0 | | | $ | — | | | $ | 1.0 | |
Restructuring expense incurred | | | 4.4 | | | | — | | | | 4.4 | |
Cash payments | | | (3.5 | ) | | | — | | | | (3.5 | ) |
Balance at December 31, 2018 | | | 1.9 | | | | — | | | | 1.9 | |
Restructuring expense incurred | | | 5.7 | | | | 8.4 | | | | 14.1 | |
Cash payments | | | (6.1 | ) | | | (5.8 | ) | | | (11.9 | ) |
Balance at December 31, 2019 | | | 1.5 | | | | 2.6 | | | | 4.1 | |
Restructuring expense incurred | | | 0.5 | | | | 6.9 | | | | 7.4 | |
Cash payments | | | (1.5 | ) | | | (7.7 | ) | | | (9.2 | ) |
Balance at December 31, 2020 | | $ | 0.5 | | | $ | 1.8 | | | $ | 2.3 | |
The total accrued restructuring reserve as of December 31, 2020 relates to severance to be paid to former employees and facility consolidation and relocation costs under the 2017 Altra Plan and 2019 Altra Plan and is recorded in accruals and other current liabilities on the accompanying consolidated balance sheet.
The following table is a reconciliation of restructuring expense by segment for the year ending December 31, 2020.
| | 2017 Altra Plan | | | 2019 Altra Plan | | | Total All Plans | |
Power Transmission Technologies | | $ | 0.5 | | | $ | 4.2 | | | $ | 4.7 | |
Automation & Specialty | | | — | | | | 2.7 | | | | 2.7 | |
Expense for the year ending December 31, 2020 | | $ | 0.5 | | | $ | 6.9 | | | $ | 7.4 | |
The following table is a reconciliation of restructuring expense by segment for the year ending December 31, 2019.
| | 2017 Altra Plan | | | 2019 Altra Plan | | | Total All Plans | |
Power Transmission Technologies | | $ | 5.7 | | | $ | 0.8 | | | $ | 6.5 | |
Automation & Specialty | | | — | | | | 7.6 | | | | 7.6 | |
Expense for the year ending December 31, 2019 | | $ | 5.7 | | | $ | 8.4 | | | $ | 14.1 | |
The Company incurred $4.4 million of restructuring expense under the 2017 Altra Plan for the year ending December 31, 2018, related to the Power Transmission Technologies segment.
15. Derivative Financial Instruments
The Company may manage changes in market conditions related to interest on debt obligations and foreign currency exposures by entering into derivative instruments, including interest rate and foreign currency swap agreements. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each period.The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of Altra or the financial counterparty to
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perform. For cross-currency interest rate swaps, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. For interest rate swaps, the significant inputs to these models are interest rate curves for discounting future cash flows that are adjusted for credit risk. Both cross-currency interest rate swaps and interest rate swaps are Level 2 investments. Refer to Note 1 for a description of the fair value levels. For designated hedging relationships, the Company formally documents the hedging relationship consistent with the requirements of ASC 815, Derivatives.
Cross-Currency Interest Rate Swaps
In December 2018, the Company entered into cross-currency swap agreements to hedge its net investment in Euro-denominated assets against future volatility in the exchange rate between the U.S. dollar and the Euro. By doing so, the Company synthetically converted a portion of its U.S. dollar-based long-term debt into Euro-denominated long-term debt. At inception, the cross-currency swaps were designated as net investment hedges.
For net investment hedges, changes in the fair valuenature, scope or extent of such services.
Audit Services
Under the effective portionpolicy, the Audit Committee is to approve the engagement of the derivatives’ gains or losses are reported as foreign currency translation gains or losses in accumulated other comprehensive income (loss) (“AOCIL”). The gains or losses on derivative instruments reported in AOCIL are reclassifiedAltra’s independent auditor each fiscal year and pre-approve each audit and audit-related service to earnings in the period in which earnings are affectedbe performed by the underlying item, such as a disposal or substantial liquidations of the entities being hedged. During the first quarter of 2020, the global economy declined substantially dueindependent auditor, including, but not limited to, the impactaudit of COVID-19. This decline resulted in a significant increase in the value of the U.S. dollar. The appreciation of the U.S. dollar resulted in the Company’s cross-currency interest rate swaps being substantially in-the-money. Given the increased cash value of the hedgesAltra’s financial statements and the Company’s overall desire to strengthen its cash position, the Company terminated the cross-currency interest rate swaps during the first quarter of 2020. The Company received the cash value of the cross-currency interest rate swaps of approximately $56.2 million upon termination. In addition, the Company paid the interest owed and received the interest due, resulting in the recognition of approximately $3.3 million in net interest income, and paid termination fees of approximately $0.9 million. Through the date of the termination of the cross-currency interest rate swaps, the Company recorded a gain in AOCIL of approximately $31.2 million, net of $9.9 million of tax. For the year ended December 31, 2019, the Company recorded a gain in AOCIL of approximately $19.8 million, net of $3.6 million of tax. For the year ended December 31, 2018, the Company recorded a loss in AOCIL of approximately $6.3 million, net of $2.1 million tax benefit.
During 2016 and through 2018, the Company utilized cross-currency interest rate swaps to mitigate foreign currency and interest rate cash flow exposure related to its non-functional currency long-term debt held at the Company’s wholly owned Dutch subsidiary. The currency adjustments related to this loan were recorded in Other non-operating (income) expense, net. The offsetting gains and losses on the related derivative contracts were recorded in other non-operating (income) expense, net. In December of 2016 the Company entered into a cross-currency interest rate swap that converted $100.0 million of U.S. dollar denominated floating interest payments to functional currency (euro) fixed interest payments during the life of the hedging instrument. The Company designated the $100.0 million swap as a cash flow hedge, with the effective portion of the gain or loss on the derivative reported as a component of AOCIL and reclassified into earnings in the same period or periods during which the hedged transaction impacts earnings. In addition, the Company entered into a cross-currency interest rate swap that converted an additional $40.0 million of the U.S. dollar denominated floating interest payments to functional currency (euro) floating interest payments during the life of the hedging instruments. On October 2, 2018, the Company terminated both the $100 million and the $40 million cross-currency interest rate swap agreements and paid approximately $14.0 million to settle the swap agreements.
Interest Rate Swaps
In January 2017, the Company entered into an interest rate swap agreement designed to fix the variable interest rate payable on a portion of its outstanding borrowings. This interest rate swap matured on January 31, 2020. Additionally, in December 2018, the Company entered into an interest rate swap agreement designed to manage the cash flow risk caused by interest rate changes on the forecasted interest payments expected to occur related to a portion of its outstanding borrowings under the Altra Credit Agreement.
The interest rate swap agreement was designed to manage exposure to interest rates on the Company’s variable rate indebtedness and was recognized on the balance sheet at fair value. The Company designated this interest rate swap agreement as a cash flow hedge and changes in the fair value of the swap were recognized in other comprehensive income until the hedged items were recognized in earnings.
During the second quarter of 2020, the Company terminated the interest rate swap agreement. The Company paid the cash value of the interest rate swaps of approximately $34.7 million upon termination. In addition, the Company paid the interest owed and received the interest due, resulting in the recognition of approximately $0.1 million in net interest expense, and paid termination fees of approximately $0.1 million. Through the date of the termination of the interest rate swap, the Company recorded a loss in AOCIL of approximately $11.9 million, net of $3.8 million of tax benefit. For the years ended December 31, 2019 and 2018 the Company
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recorded a loss in AOCIL of approximately $9.9 million, net of $1.7 million of tax benefit and $6.2 million, net of $1.2 million of tax benefit, respectively. The loss on the interest rate swap reported in AOCIL will be reclassified to earnings in future periods when the hedged transaction affects earnings or if it is determined that it is probable that the hedged transaction will not occur. The Company recorded $11.5 million, $3.3 million and $0.2 million of net interest expense for the year to date periods ended December 31, 2020, 2019 and 2018, respectively. Approximately $9.0 million ($6.9 million net of tax) of the net interest expense is non-cash amortization, due to the termination of the interest rate swap, reclassified from AOCIL for the year to date period ended December 31, 2020.
The following table summarizes the location and fair value of the Company's cash flow hedges in the consolidated balance sheet (in millions).
| | | | | | | | | | |
| | | | | | | | | | |
| | | | Years Ended December 31, | |
| | Balance Sheet Location | | 2020 | | | 2019 | |
| | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | | |
Cross-currency swap agreements | | Other long-term (asset)/liabilities | | $ | — | | | $ | (15.0 | ) |
Interest rate swap agreement | | Other long-term liabilities | | | — | | | | 19.0 | |
The following table summarizes the balance of the Company's derivative instruments designated as cash flow hedges (in millions).
| | Amount of Gain/(Loss) in AOCIL | |
| | 2020 | | | 2019 | |
Cash flow hedge: | | | | | | | | |
Interest rate swap agreement | | $ | (25.7 | ) | | $ | (19.0 | ) |
16.
| Commitments and Contingencies
|
General Litigation
The Company is involved in various pending legal proceedings arising out of the ordinary course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims, and workers’ compensation claims. With respect to these proceedings, management believes that the Company will prevail, has adequate insurance coverage or has established appropriate reserves to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined adversely to the Company, there could be a material adverse effect on the results of operations, cash flows, or financial condition of the Company. We have established loss provisions for matters in which losses are probable and can be reasonably estimated. For matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, we believe that such losses, individually and in the aggregate, will not have a material effect on our consolidated financial statements.
Our estimates regarding potential losses and materiality are based on our judgment and assessment of the claims utilizing currently available information. Although we will continue to reassess our reserves and estimates based on future developments, our objective assessment of the legal merits of such claims may not always be predictive of the outcome and actual results may vary from our current estimates. We will continue to consider the applicable guidance in ASC 450-20, based on the facts known at the time of our future filings, as it relates to legal contingencies, and will adjust our disclosures as may be required under the guidance.
There were 0 material amounts accrued in the accompanying consolidated balance sheets for potential litigation as of December 31, 2020 or 2019.
The Company also risks exposure to product liability claims in connection with products it has sold and those sold by businesses that the Company acquired. Although in some cases third parties have retained responsibility for product liability claims relating to products manufactured or sold prior to the acquisition of the relevant business and in other cases the persons from whom the Company has acquired a business may be required to indemnify the Company for certain product liability claims subject to certain caps or limitations on indemnification, the Company cannot assure that those third parties will in fact satisfy their obligations with respect to liabilities retained by them or their indemnification obligations. If those third parties become unable to or otherwise do not comply with their respective obligations including indemnity obligations, or if certain product liability claims for which the Company is obligated were not retained by third parties or are not subject to these indemnities, the Company could become subject to significant liabilities or other adverse consequences. Moreover, even in cases where third parties retain responsibility for product liability claims or are required to indemnify the Company, significant claims arising from products that have been acquired could have a material
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adverse effect on the Company’s ability to realize the benefits from an acquisition, could result in the reduction of the value of goodwill that the Company recorded in connection with an acquisition, or could otherwise have a material adverse effect on the Company’s business, financial condition, or operations.
Environmental
There is contamination at some of the Company’s current facilities, primarily related to historical operations at those sites, for which the Company could be liable for the investigation and remediation under certain environmental laws. The potential for contamination also exists at other of the Company’s current or former sites, based on historical uses of those sites. The Company currently is not undertaking any remediation or investigations and the costs or liability in connection with potential contamination conditions at these facilities cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the environmental conditions or likely remedial requirements. Currently, other parties with contractual liability are addressing or have plans or obligations to address those contamination conditions that may pose a material risk to human health, safety or the environment. In addition, while the Company attempts to evaluate the risk of liability associated with these facilities at the time the Company acquired them, there may be environmental conditions currently unknown to the Company relating to prior, existing or future sites or operations or those of predecessor companies whose liabilities the Company may have assumed or acquired which could have a material adverse effect on the Company’s business.
The Company is being indemnified, or expects to be indemnified, by third parties subject to certain caps or limitations on the indemnification, for certain environmental costs and liabilities associated with certain owned or operated sites. Accordingly, based on the indemnification and the experience with similar sites of the environmental consultants who the Company has hired, the Company does not expect such costs and liabilities to have a material adverse effect on its business, operations or earnings. There can be no assurance, however, that those third parties will in fact satisfy their indemnification obligations. If those third parties become unable to, or otherwise do not, comply with their respective indemnity obligations, or if certain contamination or other liability for which the Company is obligated is not subject to these indemnities, the Company could become subject to significant liabilities.
From time to time, the Company is notified that it is a potentially responsible party and may have liability in connection with off-site disposal facilities. To date, the Company has generally resolved matters involving off-site disposal facilities for a nominal sum but there can be no assurance that the Company will be able to resolve pending or future matters in a similar fashion.
17.
| Segment and Geographic Information
|
The internal reporting structure used by our Chief Operating Decision Maker (“CODM”) to assess performance and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer, and he evaluates operations and allocates resources based on a measure of income from operations. Our operations are organized in 2 reporting segments that are aligned with key product types and end markets served, Power Transmission Technologies and Automation & Specialty:
| •
| Power Transmission Technologies. This segment includes the following key product offerings:
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| o
| Couplings, Clutches & Brakes.Couplings are the interface between two shafts, which enable power to be transmitted from one shaft to the other. Clutches in this segment are devices that use mechanical, hydraulic, pneumatic, or friction type connections to facilitate engaging or disengaging two rotating members. Brakes are combinations of interacting parts that work to slow or stop machinery. Products in this segment are generally used in heavy industrial applications and energy markets.
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| o
| Electromagnetic Clutches & Brakes. Products in this segment include brakes and clutches that are used to electronically slow, stop, engage or disengage equipment utilizing electromagnetic friction type connections. Products in this segment are used in industrial and commercial markets including agricultural machinery, material handling, motion control, and turf & garden.
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| o
| Gearing. Gears are utilized to reduce the speed and increase the torque of an electric motor or engine to the level required to drive a particular piece of equipment. Gears produced by the Company are primarily utilized in industrial applications.
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| •
| Automation & Specialty. Our Automation & Specialty segment consists of four key brands:
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| o
| Kollmorgen: Provides rotary precision motion solutions, including servo motors, stepper motors, high performance electronic drives and motion controllers and related software, and precision linear actuators. These products are used in advanced material handling, aerospace and defense, factory automation, medical, packaging, printing, semiconductor, robotic and other applications.
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| o
| Portescap: Provides high-efficiency miniature motors and motion control products, including brush and brushless DC motors, can stack motors and disc magnet motors. These products are used in medical, industrial power tool and general industrial equipment applications.
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| o
| Thomson: Provides systems that enable and support the transition of rotary motion to linear motion. Products include linear bearings, guides, glides, lead and ball screws, industrial linear actuators, clutch brakes, precision gears, resolvers and inductors. These products are used in factory automation, medical, mobile off-highway, material handling, food processing and other niche applications.
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| o
| Jacobs Vehicle Systems (JVS): Provides renowned “Jake Brake” diesel engine braking systems and valve actuation mechanisms for the commercial vehicle market, including compression release, bleeder and exhaust brakes. These products are primarily used in heavy duty Class 8 truck engine applications.
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The segment information presented below for the prior periods has been reclassified to conform to the new presentation.
Segment financial information and a reconciliation of segment results to consolidated results follows:
| Year Ended December 31, | |
| 2020 | | | 2019 | | | 2018 | |
Net Sales: | | | | | | | | | | | |
Power Transmission Technologies | $ | 818.6 | | | $ | 907.7 | | | $ | 935.0 | |
Automation & Specialty | | 911.8 | | | | 931.0 | | | | 241.7 | |
Inter-segment eliminations | | (4.4 | ) | | | (4.6 | ) | | | (1.4 | ) |
Net sales | $ | 1,726.0 | | | $ | 1,834.1 | | | $ | 1,175.3 | |
Income from operations: | | | | | | | | | | | |
Segment earnings: | | | | | | | | | | | |
Power Transmission Technologies | $ | 97.5 | | | $ | 113.5 | | | $ | 118.2 | |
Automation & Specialty | | (10.4 | ) | | | 132.3 | | | | 27.9 | |
Corporate | | (2.2 | ) | | | (7.6 | ) | | | (55.0 | ) |
Restructuring and consolidation costs | | (7.4 | ) | | | (14.1 | ) | | | (4.4 | ) |
Income from operations | | 77.5 | | | | 224.1 | | | | 86.7 | |
Other non-operating (income) expense: | | | | | | | | | | | |
Loss on partial settlement of pension plan | | — | | | | — | | | | 5.1 | |
Net interest expense | | 72.1 | | | | 73.8 | | | | 28.6 | |
Loss on extinguishment of convertible debt | | — | | | | — | | | | 1.2 | |
Other non-operating expense (income), net | | 1.4 | | | | 2.1 | | | | 0.1 | |
| | 73.5 | | | | 75.9 | | | | 35.0 | |
Income before income taxes | | 4.0 | | | | 148.2 | | | | 51.7 | |
Provision for income taxes | | 29.5 | | | | 21.0 | | | | 16.4 | |
Net income/(loss) | $ | (25.5 | ) | | $ | 127.2 | | | $ | 35.3 | |
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| Certain expenses are maintained at the corporate level and not allocated to the segments. These include various administrative expenses related to the corporate headquarters, depreciation on capitalized software costs, non-capitalizable software implementation costs, acquisition related expenses and impairment of intangibles.
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Selected information by segment (continued)
| Years Ended December 31, | |
| 2020 | | | 2019 | | | 2018 | |
Depreciation and amortization: | | | | | | | | | | | |
Power Transmission Technologies | $ | 32.9 | | | $ | 33.6 | | | $ | 33.8 | |
Automation & Specialty | | 91.5 | | | | 92.0 | | | | 22.9 | |
Corporate | | 3.2 | | | | 2.8 | | | | 3.3 | |
Total depreciation and amortization | $ | 127.6 | | | $ | 128.4 | | | $ | 60.0 | |
| | | | | | | | | | | |
| Years Ended December 31, | | | | | |
| 2020 | | | 2019 | | | | | |
Total assets: | | | | | | | | | | | |
Power Transmission Technologies | $ | 1,063.3 | | | $ | 1,063.1 | | | | | |
Automation & Specialty | | 2,997.3 | | | | 3,128.4 | | | | | |
Corporate | | 147.5 | | | | 92.2 | | | | | |
Total assets | $ | 4,208.1 | | | $ | 4,283.7 | | | | | |
(2)
| Corporate assets are primarily cash and cash equivalents, tax related asset accounts, certain capitalized software costs, property, plant and equipment and deferred financing costs.
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| | Net Sales | | | Property, Plant and Equipment | |
| | Years Ended December 31, | | | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | |
North America (primarily U.S.) | | $ | 914.9 | | | $ | 1,036.5 | | | $ | 629.0 | | | $ | 191.1 | | | $ | 203.4 | |
Europe excluding Germany | | | 289.3 | | | | 307.7 | | | | 208.8 | | | | 52.6 | | | | 50.6 | |
Germany | | | 185.8 | | | | 222.7 | | | | 204.0 | | | | 63.9 | | | | 63.1 | |
China | | | 222.5 | | | | 159.6 | | | | 79.2 | | | | 23.3 | | | | 22.2 | |
Asia and other (excluding China) | | | 113.5 | | | | 107.6 | | | | 54.3 | | | | 13.3 | | | | 15.1 | |
Total | | $ | 1,726.0 | | | $ | 1,834.1 | | | $ | 1,175.3 | | | $ | 344.2 | | | $ | 354.4 | |
Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates. Amounts attributed to the geographic regions for property, plant and equipment are based on the location of the entity, which holds such assets.
18. Subsequent Events
On February 10, 2021, the Company declared a dividend of $0.06 per share for the quarter ended March 31, 2021, payable on April 2, 2021 to stockholders of record as of March 18, 2021.
Item 9.
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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None.
Item 9A.
| Controls and Procedures
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1. Disclosure Controls and Procedures
As of December 31, 2020, or the Evaluation Date, our management, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act, such as this Form 10-K, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective at a reasonable assurance level.
2. Internal Control Over Financial Reporting
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequateAltra’s internal control over financial reporting, as such term is definedreporting. As noted above, the Audit Committee must specifically approve, in Rules 13a-15(f) and 15d-15(f) underadvance, any proposed change in the Exchange Act. Internal control over financial reporting is a process designed by,nature, scope or under the supervisionextent of our chief executive officer and chief financial officer, and implemented by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
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| pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;
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| •
| provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
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| •
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
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Because of inherent limitations,any internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.
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(b) Report of the Independent Registered Public Accounting Firmrelated service.
To the Stockholders and the Board of Directors of Altra Industrial Motion Corp.23
