A month has gone by since the last earnings report for Altra Industrial Motion (AIMC). Shares have lost about 14.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Altra due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Altra Industrial Q2 Earnings & Sales Miss, View Down
Altra Industrial reported weaker-than-expected results for second-quarter 2019. Its earnings and sales missed respective estimates by 10.1% and 5.2%.
This machinery company's non-GAAP earnings in the reported quarter were 71 cents per share, lagging the Zacks Consensus Estimate of 79 cents. Also, the bottom line decreased 9% from the year-ago figure of 78 cents.
Organic Sales Down Y/Y
In the reported quarter, Altra Industrial's net sales surged 96.6% year over year to $466.5 million, driven by collaboration with four companies of Automation and Specialty business of Fortive Corporation. This collaboration was completed in the fourth quarter of 2018. Integration of Fortive's businesses was completed in the first quarter of 2019.
Organic sales in the quarter decreased 2.7% due to industrial headwinds in Europe and China as well as in some end markets in North America.
However, the company's revenues lagged the Zacks Consensus Estimate of approximately $492 million.
Effective from the fourth quarter of 2018, Altra Industrial started reporting revenues under the following heads/segments — Automation & Specialty, and Power Transmission Technologies. A brief snapshot of the segmental sales is provided below:
Automation & Specialty's sales were roughly $233.3 million, down 6.3% from $249.1 million generated in the previous quarter.
Revenues generated from Power Transmission Technologies amounted to $234.9 million, decreasing 1% year over year and flat sequentially.
Margin Profile Improves
In the reported quarter, Altra Industrial's cost of sales surged 88.2% year over year to $299.5 million. Notably, cost of sales represented 64.2% of net sales versus 67.1% in the year-ago quarter. Non-GAAP gross profit was $167 million, up 119.2% year over year. Also, gross margin improved 370 basis points (bps) to 35.8%.
Non-GAAP selling, general and administrative expenses increased 87.2% year over year to $73.4 million, and represented 15.7% of net sales. Research and development expenses were $14.7 million versus $6.2 million in the year-ago quarter.
Non-GAAP adjusted earnings before interest, taxes, depreciation and amortization were $95.5 million, with margin being 20.5%. Conversely, non-GAAP operating income in the reported quarter grew 156.2% year over year to $78.9 million, with non-GAAP operating margin increasing 390 bps to 16.9%.
Net interest expenses totaled $18.6 million in the reported quarter versus $2.1 million recorded in the year-ago comparable quarter.
Balance Sheet & Cash Flow
Exiting the second quarter, Altra Industrial's cash and cash equivalents were approximately $153.6 million, up 0.8% from $152.4 million recorded in the last reported quarter. Long-term debt was roughly $1,642.5 million, reflecting a 2% decline from $1,676.6 million in the last reported quarter. During the first half of 2019, the company repaid long-term debt of $50 million.
In the first half of 2019, it generated net cash of $96.1 million from operating activities, significantly above $29.1 million recorded in the year-ago period. Capital invested for purchasing of property, plant and equipment totaled $24.1 million, up 61.7% year over year. Free cash flow was $72 million versus $14.2 million in the year-ago period.
During the first half, the company paid dividends amounting to $22 million, above $10 million distributed in the year-ago comparable period. No shares were repurchased during the period.
For 2019, Altra Industrial anticipates benefiting from efforts to optimize supply chain and program related to sales collaboration, and gaining from efforts to lower debt profile. Also, the collaboration with Fortive's Automation and Specialty business will be beneficial, with synergies above $10-$12 million anticipated in 2019 and $52 million by the fourth year.
However, the company believes that mixed end-market conditions that it witnessed in the second quarter will likely be a concern for the remainder of the year. Also, it remains wary about weakness in industrial activities in China and Europe as well as softness in global industrial economy due to tariffs and trade-related woes. To lower the adverse impacts of these headwinds, the company is working on cost reduction and margin improvement actions.
The company revised its projection for 2019 due mainly to end-market and global economy-related concerns. Its sales are now predicted to be $1,850-$1,880 million, down from the previous expectation of $1,920-$1,950 million. Organic sales growth will vary between breakeven level and a 1.8% decline.
Non-GAAP earnings are expected to be $2.81-$2.97 per share, lower than $3.02-$3.18 anticipated earlier and non-GAAP adjusted EBITDA is anticipated to be $385-$400 million (down from $415-$430 million mentioned earlier).
The tax rate is anticipated to be around 23.5-25%, down from previously stated 24-25.8%. Capital spending is expected to be approximately $50-$55 million versus $60-$65 million stated earlier.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months. The consensus estimate has shifted -11.04% due to these changes.
Currently, Altra has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Altra has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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