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ALTRA INDUSTRIAL MOTION CORP. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the Company's current estimates, expectations and projections about the Company's future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning the Company's possible future results of operations including revenue, costs of goods sold, gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, the Company's competitive position and the effects of competition, the projected growth of the industries in which we operate, and the Company's ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may," "should," "will," "would," "project," and similar expressions. These forward-looking statements are based upon information currently available to the Company and are subject to a number of risks, uncertainties, and other factors that could cause the Company's actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause the Company's actual results to differ materially from the results referred to in the forward-looking statements the Company makes in this report include: • the effects of intense competition in the markets in which we operate; • the cyclical nature of the markets in which we operate; • changes in market conditions in which we operate that would influence the value of the Company's stock; • the Company's ability to achieve its business plans,including with respect to an uncertain economic environment; • the risks associated with international operations, including currency risks; • the Company's ability to retain existing customers and our ability to attract new customers for growth of our business; • the effects of the loss or bankruptcy of or default by any significant customer, suppliers, or other entity relevant to the Company's operations; • the Company's ability to complete cost reduction actions and risks associated with such actions; • the Company's ability to control costs; • political and economic conditions nationally, regionally, and in the markets in which we operate; 23-------------------------------------------------------------------------------- Table of Contents • natural disasters, war, civil unrest, terrorism, fire, floods, tornadoes, earthquakes, hurricanes, or other matters beyond the Company's control; • the Company's risk of loss not covered by insurance; • the accuracy of estimated forecasts of OEM customers and the impact of the current global and European economic environment on our customers; • the risks association with certain minimum purchaseagreements we have with suppliers; • fluctuations in the costs of raw materials used in our products; • the outcome of litigation to which the Company is a party from time to time, including product liability claims; • work stoppages and other labor issues; • changes in employment, environmental, tax and other laws and changes in the enforcement of laws; • the Company's ability to attract and retain key executives and other personnel; • changes in the Company's pension and retirement liabilities; • the Company's ability to successfully pursue the Company's development activities and successfully integrate newoperations and systems, including the realization of revenues, economies of scale, cost savings, and productivity gains associated with such operations; • the Company's ability to obtain or protect intellectual property rights; • the risks associated with the portion of the Company's total assets comprised of goodwill and indefinite lived intangibles; • changes in market conditions that would result in theimpairment of goodwill or other assets of the Company; • changes in accounting rules and standards, audits, compliance with the Sarbanes-Oxley Act, and regulatory investigations; • the effects of unanticipated deficiencies, if any, in the disclosure controls and internal controls of Svendborg; • the effects of changes to critical accounting estimates; changes in volatility of the Company's stock price and the risk of litigation following a decline in the price of the Company's stock; • failure of the Company's operating equipment or information technology infrastructure; • the Company's ability to implement our new ERP system; • the Company's access to capital, credit ratings, indebtedness, and ability to raise additional capital and operate under the terms of the Company's debt obligations; • the risks associated with our debt; • the risks associated with the Company's exposure to variable interest rates and foreign currency exchange rates; • the risks associated with interest rate swap contracts; • the risks associated with the potential dilution of our common stock as a result of our convertible bonds; • the risks associated with the Company's exposure to renewable energy markets; • the risks related to regulations regarding conflict minerals; • the risks associated with the global recession and European economic downturn and volatility and disruption in the global financial markets; • the Company's ability to successfully execute, manage and integrate key acquisitions and mergers, including the LamiflexAcquisition, Svendborg Acquisition and the Guardian Acquisition; 24-------------------------------------------------------------------------------- Table of Contents • the risks associated with the Company's investment in a new manufacturing facility in China; and • other factors, risks, and uncertainties referenced in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" set forth in this document ALL FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT ANY EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR ANY PERSON ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION AND IN OUR RISK FACTORS SET FORTH IN PART I, ITEM 1A OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013, AND IN OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY. The following discussion of the financial condition and results of operations of Altra Industrial Motion Corp. and its subsidiaries should be read together with the audited financial statements of Altra Industrial Motion Corp. and its subsidiaries and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Unless the context requires otherwise, the terms "Altra Industrial Motion Corp.," "the Company," "we," "us," and "our" refer to Altra Industrial Motion Corp. and its subsidiaries. General Altra Industrial Motion Corp. ("Altra" or the "Company") (formerly Altra Holdings, Inc.) is the parent company of Altra Power Transmission, Inc. ("APT") (formerly Altra Industrial Motion, Inc.) and owns 100% of APT's outstanding capital stock. APT, directly or indirectly, owns 100% of the capital stock of 67 of its subsidiaries and 85% of the capital stock of one of its subsidiaries located in Brazil. The following chart illustrates a summary of our corporate structure: [[Image Removed]] Although we were incorporated in Delaware in 2004, much of our current business has its roots with the prior acquisition by Colfax Corporation, or Colfax, of the MPT (mechanical power transmission) group of Zurn Technologies, Inc. in December 1996. Colfax subsequently acquired Industrial Clutch Corp. in May 1997, Nuttall Gear Corp. in July 1997 and the Boston Gear and Delroyd Worm Gear brands in August 1997 as part of Colfax's acquisition of Imo Industries, Inc. In February 2000, Colfax acquired Warner Electric, Inc., which sold products under the Warner Electric, Formsprag Clutch, Stieber, and Wichita Clutch brands. Colfax formed Power Transmission Holding, LLC or "PTH" in June 2004 to serve as a 25-------------------------------------------------------------------------------- Table of Contents holding company for all of these power transmission businesses. On November 30, 2004, we acquired our original core business through the acquisition of PTH from Colfax. We refer to this transaction as the PTH Acquisition. On October 22, 2004, The Kilian Company, or Kilian, a company formed at the direction of Genstar Capital, then the largest stockholder of Altra, acquired Kilian Manufacturing Corporation from Timken U.S. Corporation. At the completion of the PTH Acquisition, (i) all of the outstanding shares of Kilian capital stock were exchanged for shares of our capital stock and (ii) Kilian and its subsidiaries were transferred to APT. On February 10, 2006, we purchased all of the outstanding share capital of Hay Hall Holdings Limited, or Hay Hall. Hay Hall was a UK-based holding company established in 1996 that was focused primarily on the manufacture of couplings and clutch brakes. Hay Hall consisted of five main businesses that were niche focused and had strong brand names and established reputations within their primary markets. Through Hay Hall, we acquired 15 strong brands in complementary product lines, improved customer leverage and expanded geographic presence in over 11 countries. On May 18, 2006, we acquired substantially all of the assets of Bear Linear Inc., now known as Warner Linear. Warner Linear manufactures high value-added linear actuators which are electromechanical power transmission devices designed to move and position loads linearly for mobile off-highway and industrial applications. On April 5, 2007, we acquired all of the outstanding shares of TB Wood's Corporation, or TB Wood's. TB Wood's is an established designer, manufacturer and marketer of mechanical industrial power transmission products. In December 2007, the Company divested the TB Wood's electronics division. On October 5, 2007, we acquired substantially all of the assets of All Power Transmission Manufacturing, Inc., or All Power, a manufacturer of universal joints. On May 29, 2011, we acquired substantially all of the assets and liabilities of Danfoss Bauer GmbH relating to its gear motor business, or Bauer. We refer to this transaction as the Bauer Acquisition. Bauer is a European manufacturer of high-quality gear motors, offering engineered solutions to a variety of industries, including material handling, metals, food processing, and energy. On July 11, 2012, we acquired 85% of privately held Lamiflex do Brasil Equipamentos Industriais Ltda., now known as Lamiflex Do Brasil Equipamentos Industriais S.A., or Lamiflex. Lamiflex is one of the premier Brazilian manufacturers of high-speed disc couplings, providing engineered solutions to a variety of industries, including oil and gas, power generation, metals and mining. On November 22, 2013, we changed our legal corporate name from Altra Holdings, Inc. to Altra Industrial Motion Corp. On December 17, 2013, we completed the acquisition of Svendborg Brakes A/S, now known as Svendborg Brakes ApS, and S.B. Patent Holding ApS (together "Svendborg"). We acquired all the issued and outstanding shares of Svendborg from Friction Holding A/S. Svendborg is the leading global manufacturer of premium quality caliper brakes. We are a leading global designer, producer and marketer of a wide range of electromechanical power transmission products with a presence in over 70 countries. Our global sales and marketing network includes over 1,000 direct OEM customers and over 3,000 distributor outlets. Our product portfolio includes industrial clutches and brakes, enclosed gear drives, open gearing, couplings, engineered bearing assemblies, linear components, gear motors, and other related products. Our products serve a wide variety of end markets including energy, general industrial, material handling, mining, transportation and turf and garden. We primarily sell our products to a wide range of OEMs and through long-standing relationships with industrial distributors such as Motion Industries, Applied Industrial Technologies, Kaman Industrial Technologies and W.W. Grainger. While the power transmission industry has undergone some consolidation, we estimate that in 2013 the top five broad-based electromechanical power transmission companies represented approximately 20% of the U.S. power transmission market. The remainder of the power transmission industry remains fragmented with many small and family-owned companies that cater to a specific market niche often due to their narrow product offerings. We believe that consolidation in our industry will continue because of the increasing demand for global distribution channels, broader product mixes and better brand recognition to compete in this industry. 26-------------------------------------------------------------------------------- Table of Contents Our products, principal brands and markets and sample applications are set forth below: Products Principal Brands Principal Markets Sample Applications Clutches and Brakes Warner Electric, Aerospace, energy, Elevators, Wichita Clutch, material handling, forklifts, lawn Formsprag Clutch, metals, turf andgarden, mowers, oil well Stieber Clutch, mining draw works, Svendborg Brakes, punch presses, Matrix, Inertia conveyors Dynamics, Twiflex, Industrial Clutch, Marland Clutch Gearing Boston Gear, Nuttall Food processing, Conveyors, Gear, Delroyd, Bauer material handling, ethanol mixers, Gear Motor metals, transportation packaging machinery, metal processing equipment Engineered Couplings Ameridrives, Bibby Energy, metals, Extruders, Transmissions, TB plastics, chemical turbines, steel Wood's, PowerFlex strip mills, pumps Engineered Bearing Kilian Aerospace, material Cargo rollers, Assemblies handling, transportation seat storage systems, conveyors Power Transmission Warner Electric, Material handling, Conveyors, lawn Components Boston Gear, Huco metals, turf and garden mowers, Dynatork, Warner machine tools Linear, Matrix, TB Wood's Engineered Belted TB Wood's Aggregate, HVAC, Pumps, sand and Drives material handling gravel conveyors, industrial fans Our Internet address is www.altramotion.com. By following the link "Investor Relations" and then "SEC filings" on our Internet website, we make available, free of charge, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after such forms are filed with or furnished to the Securities and Exchange Commission. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Form 10-Q. Business Outlook Our future financial performance depends, in large part, on conditions in the markets that we serve and on the U.S., European, and global economies in general. We have noted year over year improvement in a majority of our end markets, although mining continues to be weak. Our profit improvement initiatives remain on track and are contributing to margins as we expected. Critical Accounting Policies The preparation of our condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect our reported amounts of assets, revenues and expenses, as well as related disclosure of contingent assets and liabilities. We base our estimates on past experiences and other assumptions we believe to be appropriate, and we evaluate 27-------------------------------------------------------------------------------- Table of Contents these estimates on an on-going basis. See the discussion of critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes in the identification or application of the Company's critical accounting policies during the quarter and year to date periods ended June 30, 2014. Results of Operations (Amounts in thousands, unless otherwise noted) Quarter Ended Year to Date Ended June 30, 2014 June 29, 2013 June 30, 2014 June 29, 2013 Net sales $ 215,198 $ 181,095 $ 425,336 $ 366,245 Cost of sales 148,728 126,676 297,070 256,327 Gross profit 66,470 54,419 128,266 109,918 Gross profit percentage 30.9 % 30.0 % 30.2 % 30.0 % Selling, general and administrative expenses 40,499 32,628 78,761 65,070 Research and development expenses 4,012 3,214 7,901 6,148 Restructuring costs - 238 - 558 Income from operations 21,959 18,339 41,604 38,142 Interest expense, net 2,972 2,658 5,991 5,263 Other non-operating expense, net 225 144 759 97 Income before income taxes 18,762 15,537 34,854 32,782 Provision for income taxes 5,944 4,861 10,673 10,247 Net income 12,818 10,676 24,181 22,535 Net (income) loss attributable to non-controlling interest (21 ) 13 (19 ) 34 Net income attributable to Altra Industrial Motion Corp. $ 12,797 $ 10,689 $ 24,162 $ 22,569 Quarter Ended June 30, 2014 compared with Quarter Ended June 29, 2013 (Amounts in thousands, unless otherwise noted) Amounts in thousands, except percentage data Quarter-Ended June 30, 2014 June 29, 2013 Change % Net sales $ 215,198 $ 181,095 $ 34,103 18.8 % The increase in sales during the quarter ended June 30, 2014 was due to the acquisition of Svendborg, positive foreign exchange rates, and slightly higher sales levels than in the quarter ended June 29, 2013. Of the increase in sales, approximately $22.5 million relates to the inclusion of additional sales related to the acquisition of Svendborg for the quarter, $2.8 million relates to the impact of foreign exchange rate increases attributed to the increase in the British Pound rates compared to 2013, and $2.5 million relates to the impact of profit improvement initiatives. The remainder of the increase was attributable to sales growth in the North American turf & garden and energy markets. We expect our order rates to remain stable throughout the remainder of 2014. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Gross Profit $ 66,470 $ 54,419 $ 12,051 22.1 % Gross Profit as a percent of sales 30.9 % 30.0 % Gross profit as a percentage of sales increased during the quarter due to the inclusion of Svendborg for the quarter ended June 30, 2014 as Svendborg's operations improved the Company's overall gross profit. 28-------------------------------------------------------------------------------- Table of Contents Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Selling, general and administrative expense ("SG&A") $ 40,499 $ 32,628 $ 7,871 24.1 % SG&A as a percent of sales 18.9 % 18.0 % $5.6 million of the increase in SG&A is due to the inclusion of SG&A related to the acquisition of Svendborg. The remainder of the increase is due to increased costs of health care insurance. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Research and development expenses ("R&D") $ 4,012 $ 3,214 $ 798 24.8 % Of the increase in R&D, approximately $0.5 million relates to the inclusion of R&D related to the acquisition of Svendborg for the quarter. R&D expenses as a percentage of sales excluding the impact of Svendborg remained consistent with prior year at approximately 1.8% of sales. We do not forecast significant variances in future periods. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Restructuring $ - $ 238 $ (238 ) - % The Company did not incur any additional expenses under the 2012 Altra Plan in the quarter ended June 30, 2014 and does not expect to incur any additional expenses associated with the 2012 Altra Plan during the remainder of 2014. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Interest Expense, net $ 2,972 $ 2,658 $ 314 11.8 % Net interest expense increased during the quarter ended June 30, 2014 over the comparable 2013 period, primarily due to the borrowing of approximately additional 54.5 million Euros for the acquisition of Svendborg during the quarter ended December 31, 2013. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Other non-operating expense, net $ 225 $ 144 $ 81 56.3 % Other non-operating expense in each period in the chart above relates primarily to changes in foreign currency. Amounts in thousands, except percentage data Quarter Ended June 30, 2014 June 29, 2013 Change % Provision for income taxes $ 5,944 $ 4,861 $ 1,083 22.3 % Provision for income taxes as a % of income before income taxes 31.7 % 31.3 % 29-------------------------------------------------------------------------------- Table of Contents The provision for income taxes, as a percentage of income before taxes, during the quarter ended June 30, 2014 was slightly higher than that of the quarter ended June 29, 2013. This increase is primarily due to elimination of the R&D credit in the U.S. for the quarter ended June 30, 2014, offset somewhat by the favorable statutory tax rates in jurisdictions in which the newly acquired Svenborg operates Year to Date Period Ended June 30, 2014 compared with Year to Date Period Ended June 29, 2013 (Amounts in thousands, unless otherwise noted) Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Net sales $ 425,336 $ 366,245 $ 59,091 16.1 % The increase in sales during the period ended June 30, 2014 was due to the acquisition of Svendborg, positive foreign exchange rates, profit improvement initiatives and slightly higher sales levels than in the quarter ended June 29, 2013. Of the increase in sales, approximately $42.6 million relates to the inclusion of additional sales related to the acquisition of Svendborg for the year to date period ended June 30, 2014, $5.6 million relates to the impact of foreign exchange rate increases attributed to the increase in the British Pound rates compared to 2013, and $3.7 million relates to the impact of profit improvement initiatives. The remainder of the increase was attributable to sales growth in the North American turf & garden and energy markets. We expect our order rates to remain stable throughout the remainder of 2014. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Gross Profit $ 128,266 $ 109,918 $ 18,348 16.7 % Gross Profit as a percent of sales 31.7 % 31.3 % Gross profit as a percentage of sales increased during the quarter due to the inclusion of Svenborg for the year to date period ended June 30, 2014 as Svendborg's operations improved the Company's overall gross profit. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Selling, general and administrative expense ("SG&A") $ 78,761 $ 65,070 $ 13,691 21.0 % SG&A as a percent of sales 18.6 % 17.8 % $12.8 million of the increase in SG&A is due to the inclusion of SG&A related to the acquisition of Svendborg. The remainder of the increase is due to increased costs of health care insurance. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Research and development expenses ("R&D") $ 7,901 $ 6,148 $ 1,753 28.5 % 30-------------------------------------------------------------------------------- Table of Contents Of the increase in R&D, approximately $0.9 million relates to the inclusion of R&D related to the acquisition of Svendborg for the quarter. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Restructuring $ - $ 558 $ (558 ) 100 % The Company did not incur any additional expenses under the 2012 Altra Plan in the year to date period ended June 30, 2014 and does not expect to incur any additional expenses associated with the 2012 Altra Plan during the remainder of 2014. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Interest Expense, net $ 5,991 $ 5,263 $ 728 13.8 % Net interest expense increased during the year to date period ended June 30, 2014 over the comparable 2013 period, primarily due to the borrowing of approximately additional 54.5 million Euros for the acquisition of Svendborg during the quarter ended December 31, 2013. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Other non-operating expense (income), net $ 759 $ 97 $ 662 682.5 % Other non-operating expense (income) in each period in the chart above relates primarily to changes in foreign currency. Amounts in thousands, except percentage data Year to Date Period Ended June 30, 2014 June 29, 2013 Change % Provision for income taxes $ 10,673 $ 10,247 $ 426 4.2 % Provision for income taxes as a % of income before income taxes 30.6 % 31.3 % The provision for income taxes, as a percentage of income before taxes, during the year to date period ended June 30, 2014 was slightly lower than that for the year to date period ended June 29, 2013 primarily due to the favorable impact of the statutory tax rate reductions in the United Kingdom along with the statutory tax rates in jurisdictions in which the newly acquired Svenborg business operates. (Amounts in thousands, unless otherwise noted) Liquidity and Capital Resources 31-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Overview We finance our capital and working capital requirements through a combination of cash flows from operating activities and borrowings under our Revolving Credit Facility. We expect that our primary ongoing requirements for cash will be for working capital, debt service, capital expenditures, acquisitions, pensions and dividends. In the event additional funds are needed for operations, we could borrow additional funds available under our existing Revolving Credit Facility, request an expansion by up to $150,000,000 of the amount available to be borrowed under the Credit Agreement, attempt to secure new debt, attempt to refinance our loans under the Credit Agreement, or attempt to raise capital in the equity markets. Presently, we have the ability under our Revolving Credit Facility to borrow an additional $149.9 million, based on current availability calculations. There can be no assurance however that additional debt financing will be available on commercially acceptable terms, if at all. Similarly, there can be no assurance that equity financing will be available on commercially acceptable terms, if at all. Borrowings Amounts in millions June 30, 2014 December 31, 2013 Debt: Revolving Credit Facility $ 40.0 $ 41.2 Convertible Notes 85.0 $ 85.0 Term Loan Facility 150.1 $ 163.2 Equipment Loan 5.8 $ 4.2 Mortgages 0.4 $ 0.7 Capital leases - $ 0.2 Total debt $ 281.3 $ 294.4 Credit Agreement In December 2013, the Company entered into an Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement amends and restates the Company's former credit agreement, dated November 20, 2012 (the "Former Credit Agreement"). Pursuant to the Former Credit Agreement, the former lenders made available to the Company an initial term loan facility of $100,000,000 and an initial revolving credit facility of $200,000,000. Pursuant to the Credit Agreement, the lenders made an additional term loan of €50,000,000 (the "Additional Term Loan") to Altra Industrial Motion Netherlands B.V. The Credit Agreement kept in effect the balance (approximately $94,375,000) of the existing term loan facility (the "Initial Term Loan") made to the domestic borrowers under the Former Credit Agreement (collectively, the two term loans are referred to as the "Term Loan Facility"), as well as the revolving credit facility of $200,000,000 made under the Former Credit Agreement (the "Revolving Credit Facility"). The Credit Agreement continues, even after the making of the Additional Term Loan, to provide for a possible expansion of the credit facilities by an additional $150,000,000, which can be allocated as additional term loans and/or additional revolving credit loans. The amounts available under the Term Loan Facility were used, and amounts available under the Revolving Credit Facility can be used, for general corporate purposes, including acquisitions, and to repay existing indebtedness. The stated maturity of these credit facilities is December 6, 2018, and there are scheduled quarterly principal payments due on the outstanding amount of the Term Loan Facility. With respect to the Initial Term Loan, the scheduled quarterly principal payments due on the outstanding amount have been reamortized in accordance with the new December 6, 2018 maturity date. The previous maturity of the Revolving Credit Facility and the Initial Term Loan was November 20, 2017. The amounts available under the Revolving Credit Facility may be drawn upon in accordance with the terms of the Credit Agreement. All amounts outstanding under the credit facilities are due on the stated maturity or such earlier time, if any, required under the Credit Agreement. The amounts owed under either of the credit facilities may be prepaid at any time, subject to usual notification and breakage payment provisions. Interest on the amounts outstanding under the credit facilities is calculated using either an ABR Rate or Eurodollar Rate, plus the applicable margin. The applicable margins for Eurodollar Loans are between 1.375% to 1.875%, and for ABR Loans are between 0.375% and 0.875%. The amounts of the margins are calculated based on either a consolidated total net leverage ratio (as defined in the Credit Agreement), or the then applicable rating(s) of the Company's debt if and then to the extent as provided in the Credit Agreement. A portion of the 32-------------------------------------------------------------------------------- Table of Contents Revolving Credit Facility may also be used for the issuance of letters of credit, and a portion of the amount of the Revolving Credit Facility is available for borrowings in certain agreed upon foreign currencies. As of June 30, 2014 and December 31, 2013, we had $40.0 million and $41.2 million outstanding on our Revolving Credit Facility, respectively. As of June 30, 2014 and December 31, 2013, we had $10.1 and $9.8 million in letters of credit outstanding, respectively. We had $149.9 million and $149.0 million available under the Revolving Credit Facility at June 30, 2014 and December 31, 2013, respectively. The Credit Agreement contains various affirmative and negative covenants and restrictions, which among other things, will require the Company and certain Subsidiaries to provide certain financial reports to the Lenders, require the Company to maintain certain financial covenants relating to consolidated leverage and interest coverage, limit maximum annual capital expenditures, and limit the ability of the Company and its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other equity distributions, purchase or redeem capital stock or debt stock or debt, make certain investments, sell assets, engage in certain transactions, and effect a consolidation or merger. The Credit Agreement also contains customary events of default. Hedging Activities During the quarter period ended June 30, 2014, we utilized a derivative instrument, namely an interest rate swap, to manage exposure to interest rates on the Company's variable rate indebtedness. Our derivative instrument is with a major financial institution and is not for speculative or trading purposes. The Company has designated its interest rate swap agreement which is forward-dated, as a cash flow hedge, and changes in the fair value of the swap are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swap will be reported by the Company in interest expense. For more information on the interest rate swap (see Note 14). Pledge and Security Agreement; Trademark Security Agreement; Patent Security Agreement. Pursuant to an Omnibus Reaffirmation and Ratification of Collateral Documents entered into on December 6, 2013 in connection with the Credit Agreement by and among the Company, the Loan Parties and the Administrative Agent (the "Ratification Agreement"), the Loan Parties (exclusive of the foreign subsidiary Borrower) have reaffirmed their obligations to the Lenders under the Pledge and Security Agreement dated November 20, 2012 (the "Pledge and Security Agreement"), pursuant to which each Loan Party pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all personal property, whether now owned by or owing to, or after acquired by or arising in favor of such Loan Party (including under any trade name or derivations), and whether owned or consigned by or to, or leased from or to, such Loan Party, and regardless of where located, except for specific excluded personal property identified in the Pledge and Security Agreement (collectively, the "Collateral"). Notwithstanding the foregoing, the Collateral does not include, among other items, more than 65% of the capital stock of the first tier foreign subsidiaries of the Company. The Pledge and Security Agreement contains other customary representations, warranties and covenants of the parties. The Credit Agreement provides that the obligation to grant the security interest can cease upon the obtaining of certain corporate family credit ratings for the Company, but the obligation to grant a security interest is subject to subsequent reinstatement if the ratings are not maintained as provided in the Credit Agreement. Pursuant to the Ratification Agreement, the Loan Parties (other than the foregoing subsidiary Borrower) have also reaffirmed their obligations under each of the Patent Security Agreement and a Trademark Security Agreement in favor of the Administrative Agent dated November 20, 2012 pursuant to which each of the Loan Parties signatory thereto pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all registered patents, patent applications, registered trademarks and trademark applications owned by such Loan Parties. The Loan Parties and the Administrative Agent entered into a Pledge and Security Agreement (the "Pledge and Security Agreement"), pursuant to which each Loan Party pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all personal property, whether now owned by or owing to, or after acquired by or arising in favor of such Loan Party (including under any trade name or derivations), and whether owned or consigned by or to, or leased from or to, such Loan Party, and regardless of where located, except for specific excluded personal property identified in the Pledge and Security Agreement (collectively, the "Collateral"). Notwithstanding the foregoing, the Collateral does not include, among other items, more than 65% of the capital stock of the first tier foreign subsidiaries of the Company. The Pledge and Security Agreement contains other customary representations, warranties, and covenants of the parties. The Credit Agreement provides that the obligation to 33-------------------------------------------------------------------------------- Table of Contents grant the security interest can cease upon the obtaining of certain corporate family ratings for the Company, but the obligation to grant a security interest is subject to subsequent reinstatement if the ratings are not maintained as provided in the Credit Agreement. In connection with the Pledge and Security Agreement, certain of the Loan Parties delivered a Patent Security Agreement and a Trademark Security Agreement in favor of the Administrative Agent pursuant to which each of the Loan Parties signatory thereto pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders, a security interest in all of its right, title and interest in, to and under all registered patents, patent applications, registered trademarks and trademark applications owned by such Loan Parties. We were in compliance in all material respects with all covenants of the indenture governing the Credit Agreement on June 30, 2014. Convertible Senior Notes In March 2011, the Company issued Convertible Senior Notes (the "Convertible Notes") due March 1, 2031. The Convertible Notes are guaranteed by the Company's U.S. domestic subsidiaries. Interest on the Convertible Notes is payable semi-annually in arrears, on March 1 and September 1 of each year, commencing on September 1, 2011 at an annual rate of 2.75%. Proceeds from the offering were $81.3 million, net of fees and expenses that were capitalized. The proceeds from the offering were used to fund the Bauer Acquisition, as well as bolster the Company's cash position. Because the last reported sale price of the Company's common stock exceeded 130% of the current conversion price, which was $26.93 for at least 20 of the last 30 consecutive trading days in the fiscal quarter ended June 30, 2014, the Convertible Notes are convertible at the election of the holders of the Convertible Notes at any time during the fiscal quarter ending September 30, 2014. The Company has the ability and intent to fund any potential payments of the principal amount of the debt with additional borrowings under the Revolving Credit Agreement. Accordingly, the Convertible Notes, net of accretion continues to be included in long-term debt. The future convertibility will be monitored at each quarterly reporting date and will be analyzed dependent upon market prices of the Company's common stock during the prescribed measurement periods. |