Altra Industrial Motion Corp. reported better-than-expected results for third-quarter 2019. Its earnings surpassed estimates by 2.99% while sales topped the same by 0.94%. The healthy bottom-line performance came in after the company recorded negative earnings surprise of 10.13% in the second quarter of 2019.

We believe that lowered projections for 2019 and a disappointing preliminary view for 2020 weakened investor’s sentiments. The company’s share price decreased 0.1% yesterday, closing the trading session at $29.35.

The machinery company’s non-GAAP earnings in the reported quarter were 69 cents per share, surpassing the Zacks Consensus Estimate of 67 cents. However, the bottom line declined 2.8% from the year-ago quarter figure of 71 cents due to weakness in organic sales, and rise in costs and expenses.

Organic Sales Fall Y/Y

In the reported quarter, Altra Industrial’s net sales surged 93.8% year over year to $442.9 million, driven by collaboration with four companies of the Automation and Specialty business of Fortive Corporation (FTV Quick QuoteFTV - Free Report) . The collaboration was completed in the fourth quarter of 2018. The integration of Fortive’s businesses was completed in the first quarter of 2019.

Forex woes had an adverse impact of 1.75% on the quarter’s sales. Also, organic sales declined 3.6% year over year due to lower demand in China and Germany as well as weakness in several end markets — including transportation, metals, factory automation & specialty machinery, distribution, turf & garden, and agriculture. Notably, business in medical, energy (including oil & gas, and renewable), mining, and aerospace & defense improved in the quarter.

The company’s revenues surpassed the Zacks Consensus Estimate of $438.8 million.

Effective from the fourth quarter of 2018, Altra Industrial started reporting revenues under the following segments — Automation & Specialty, and Power Transmission Technologies. A brief snapshot of the segmental sales is provided below:

Revenues generated from Power Transmission Technologies amounted to $218.7 million, declining 4.3% year over year and 6.9% sequentially.

Automation & Specialty’s sales were roughly $224.8 million in the third quarter, down 3.6% from the last reported quarter.

Margins Improve Y/Y

In the reported quarter, Altra Industrial’s cost of sales surged 82.7% year over year to $285.9 million. Notably, cost of sales represented 64.6% of net sales versus 68.5% in the year-ago quarter. Non-GAAP gross profit was $157 million, up 118.1% year over year. Also, gross margin improved 390 basis points (bps) to 35.4%. The company noted that adverse impacts of high input costs and tariffs were offset by effective pricing actions and supply-chain management.

Non-GAAP selling, general and administrative expenses rose 83.9% year over year to $69.7 million and represented 15.7% of net sales. Research and development expenses were $14.4 million versus $5.7 million in the year-ago quarter.

Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $89 million, the margin being 20.1%. Conversely, non-GAAP operating income in the reported quarter grew 156.7% year over year to $72.9 million, with non-GAAP operating margin increasing 410 bps to 16.5%.

Net interest expenses totaled $18.2 million in the reported quarter versus $2 million recorded in the year-ago comparable quarter.

Balance Sheet & Cash Flow

Exiting the third quarter, Altra Industrial’s cash and cash equivalents were approximately $168 million, up 9.4% from $153.6 million recorded in the last reported quarter. Long-term debt was roughly $1,602.8 million, reflecting a 2.4% decline from $1,642.5 million in the last reported quarter. During the first nine months of 2019, the company repaid long-term debt of $90 million.

In the first nine months of 2019, it generated net cash of $180.4 million from operating activities, significantly above $59 million recorded in the year-ago period. Capital invested for purchasing property, plant and equipment totaled $36.9 million, up 74.9% year over year. Free cash flow was $71.5 million versus $23.7 million in the year-ago period.

During the first three quarters of 2019, the company paid out dividends amounting to $33.1 million, above $15 million distributed in the year-ago comparable period. No shares were repurchased during the period.

A couple of days before releasing the results, the company’s board of directors approved a quarterly cash dividend payout of 17 cents per share to shareholders of record as of Dec 18, 2019. The disbursement of dividends will be made on Jan 3, 2020.

Outlook

For 2019, Altra Industrial anticipates benefiting from efforts to optimize supply chain and program related to sales collaboration, and measures to lower debt profile. Also, the collaboration with Fortive’s Automation and Specialty business will be beneficial, with synergies of $15 million (higher than $10-$12 million mentioned earlier) anticipated in 2019 and $52 million by the fourth year.

However, the company believes that difficult end-market conditions will affect its performance in the near term. Also, it remains wary about the softness in the global industrial economy. To lower the adverse impacts of these headwinds, the company is working on cost reduction and margin-improvement actions. For 2020, the company expects these uncertainties to remain. Sales in the year are predicted to decline 2-4% year over year.

The company revised its projection for 2019 on prevailing headwinds. Its sales are now predicted to be $1,827-$1,837 million, down from previously mentioned $1,850-$1,880 million.

Non-GAAP earnings are expected to be $2.77-$2.83 per share, lower than $2.81-$2.97 stated earlier and non-GAAP adjusted EBITDA is anticipated to be $375-$381 million (down from $385-$400 million mentioned previously).

The tax rate is anticipated to be around 23.5-25%. Capital spending is expected to be approximately $50-$55.

Altra Industrial Motion Corp. Price, Consensus and EPS Surprise