UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4801
BARNES GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware | 06-0247840 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
123 Main Street, Bristol, Connecticut | 06010 | |||
(Address of Principal Executive Offices) | (Zip Code) | |||
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The registrant had outstanding 52,429,865 shares of common stock as of July 24, 2013.
1
Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended June 30, 2013
Page | ||
Part I. | FINANCIAL INFORMATION | |
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II. | OTHER INFORMATION | |
Item 1. | ||
Item 2. | ||
Item 6. | ||
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “FORWARD-LOOKING STATEMENTS” under Part I - Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 267,394 | $ | 215,310 | $ | 530,940 | $ | 438,104 | |||||||
Cost of sales | 177,411 | 152,367 | 355,127 | 312,788 | |||||||||||
Selling and administrative expenses | 53,834 | 37,183 | 114,708 | 74,938 | |||||||||||
231,245 | 189,550 | 469,835 | 387,726 | ||||||||||||
Operating income | 36,149 | 25,760 | 61,105 | 50,378 | |||||||||||
Interest expense | 3,241 | 2,435 | 7,598 | 4,803 | |||||||||||
Other expense (income), net | 495 | 55 | 1,462 | 914 | |||||||||||
Income from continuing operations before income taxes | 32,413 | 23,270 | 52,045 | 44,661 | |||||||||||
Income taxes | 23,218 | 3,783 | 27,417 | 7,584 | |||||||||||
Income from continuing operations | 9,195 | 19,487 | 24,628 | 37,077 | |||||||||||
Income from discontinued operations, net of income taxes (Note 2) | 200,132 | 5,344 | 198,171 | 9,961 | |||||||||||
Net income | $ | 209,327 | $ | 24,831 | $ | 222,799 | $ | 47,038 | |||||||
Per common share: | |||||||||||||||
Basic: | |||||||||||||||
Income from continuing operations | $ | 0.18 | $ | 0.36 | $ | 0.46 | $ | 0.68 | |||||||
Income from discontinued operations, net of income taxes | 3.72 | 0.10 | 3.65 | 0.18 | |||||||||||
Net income | $ | 3.90 | $ | 0.46 | $ | 4.11 | $ | 0.86 | |||||||
Diluted: | |||||||||||||||
Income from continuing operations | $ | 0.17 | $ | 0.35 | $ | 0.45 | $ | 0.67 | |||||||
Income from discontinued operations, net of income taxes | 3.65 | 0.10 | 3.59 | 0.18 | |||||||||||
Net income | $ | 3.82 | $ | 0.45 | $ | 4.04 | $ | 0.85 | |||||||
Dividends | $ | 0.10 | $ | 0.10 | $ | 0.20 | $ | 0.20 | |||||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 53,738,051 | 54,543,098 | 54,230,272 | 54,674,366 | |||||||||||
Diluted | 54,809,896 | 55,150,806 | 55,135,892 | 55,303,192 | |||||||||||
See accompanying notes.
3
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net income | $ | 209,327 | $ | 24,831 | $ | 222,799 | $ | 47,038 | |||||||
Other comprehensive income (loss), net of tax | |||||||||||||||
Unrealized (loss) gain on hedging activities, net of tax (1) | (81 | ) | (633 | ) | 346 | (397 | ) | ||||||||
Foreign currency translation adjustments, net of tax (2) | 2,976 | (25,164 | ) | (11,529 | ) | (10,455 | ) | ||||||||
Defined benefit pension and other postretirement benefits, net of tax (3) | 15,529 | 2,706 | 17,939 | 3,911 | |||||||||||
Total other comprehensive income (loss), net of tax | 18,424 | (23,091 | ) | 6,756 | (6,941 | ) | |||||||||
Total comprehensive income | $ | 227,751 | $ | 1,740 | $ | 229,555 | $ | 40,097 | |||||||
(1) Net of tax of $249 and $(403) for the three months ended June 30, 2013 and 2012, respectively, and $437 and $(319) for the six months ended June 30, 2013 and 2012, respectively.
(2) Net of tax of $(410) and $(1,209) for the three months ended June 30, 2013 and 2012, respectively, and $(511) and $(492) for the six months ended June 30, 2013 and 2012, respectively.
(3) Net of tax of $8,534 and $1,144 for the three months ended June 30, 2013 and 2012, respectively, and $11,372 and $2,161 for the six months ended June 30, 2013 and 2012, respectively.
See accompanying notes.
4
BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
June 30, 2013 | December 31, 2012 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 197,398 | $ | 86,356 | |||
Accounts receivable, less allowances (2013 - $2,528; 2012 - $2,858) | 229,934 | 253,202 | |||||
Inventories | 186,224 | 226,220 | |||||
Deferred income taxes | 23,331 | 33,906 | |||||
Prepaid expenses and other current assets | 15,756 | 18,856 | |||||
Total current assets | 652,643 | 618,540 | |||||
Deferred income taxes | 37,318 | 29,961 | |||||
Property, plant and equipment | 583,303 | 634,464 | |||||
Less accumulated depreciation | (368,568 | ) | (401,367 | ) | |||
214,735 | 233,097 | ||||||
Goodwill | 439,447 | 579,905 | |||||
Other intangible assets, net | 370,645 | 383,972 | |||||
Other assets | 20,182 | 23,121 | |||||
Total assets | $ | 1,734,970 | $ | 1,868,596 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities | |||||||
Notes and overdrafts payable | $ | 12,899 | $ | 3,795 | |||
Accounts payable | 92,469 | 99,037 | |||||
Accrued liabilities | 227,191 | 96,364 | |||||
Long-term debt - current | 54,241 | 699 | |||||
Total current liabilities | 386,800 | 199,895 | |||||
Long-term debt | 177,242 | 642,119 | |||||
Accrued retirement benefits | 133,562 | 159,103 | |||||
Deferred income taxes | 47,222 | 48,707 | |||||
Other liabilities | 15,154 | 18,654 | |||||
Commitments and contingencies (Note 14) | |||||||
Stockholders' equity | |||||||
Common stock - par value $0.01 per share Authorized: 150,000,000 shares Issued: at par value (2013 - 59,558,153 shares; 2012 - 59,202,029 shares) | 596 | 592 | |||||
Additional paid-in capital | 350,998 | 332,588 | |||||
Treasury stock, at cost (2013 - 7,155,763 shares; 2012 - 4,999,556 shares) | (161,941 | ) | (99,756 | ) | |||
Retained earnings | 845,333 | 633,446 | |||||
Accumulated other non-owner changes to equity | (59,996 | ) | (66,752 | ) | |||
Total stockholders' equity | 974,990 | 800,118 | |||||
Total liabilities and stockholders' equity | $ | 1,734,970 | $ | 1,868,596 | |||
See accompanying notes.
5
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six months ended June 30, | |||||||
2013 | 2012 | ||||||
Operating activities: | |||||||
Net income | $ | 222,799 | $ | 47,038 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 31,110 | 25,912 | |||||
Amortization of convertible debt discount | 1,173 | 1,083 | |||||
Loss (gain) on disposition of property, plant and equipment | 56 | (62 | ) | ||||
Stock compensation expense | 14,348 | 4,286 | |||||
Withholding taxes paid on stock issuances | (753 | ) | (727 | ) | |||
(Gain) loss on the sale of businesses | (194,438 | ) | 734 | ||||
Changes in assets and liabilities, net of the effects of divestitures: | |||||||
Accounts receivable | (17,951 | ) | (8,893 | ) | |||
Inventories | (8,026 | ) | (852 | ) | |||
Prepaid expenses and other current assets | 250 | (1,290 | ) | ||||
Accounts payable | 7,620 | (621 | ) | ||||
Accrued liabilities | 14,066 | (15,830 | ) | ||||
Deferred income taxes | (10,066 | ) | 789 | ||||
Long-term retirement benefits | (166 | ) | (18,770 | ) | |||
Other | 6,061 | 837 | |||||
Net cash provided by operating activities | 66,083 | 33,634 | |||||
Investing activities: | |||||||
Proceeds from disposition of property, plant and equipment | 160 | 222 | |||||
Proceeds from (payments for) the sale of businesses, net | 540,435 | (318 | ) | ||||
Capital expenditures | (20,419 | ) | (15,658 | ) | |||
Other | (1,748 | ) | (2,476 | ) | |||
Net cash provided (used) by investing activities | 518,428 | (18,230 | ) | ||||
Financing activities: | |||||||
Net change in other borrowings | 9,092 | (10,535 | ) | ||||
Payments on long-term debt | (478,005 | ) | (17,770 | ) | |||
Proceeds from the issuance of long-term debt | 65,500 | 67,000 | |||||
Proceeds from the issuance of common stock | 3,763 | 4,080 | |||||
Common stock repurchases | (61,432 | ) | (19,037 | ) | |||
Dividends paid | (10,720 | ) | (10,842 | ) | |||
Excess tax benefit on stock awards | 632 | 1,331 | |||||
Other | (111 | ) | (120 | ) | |||
Net cash (used) provided by financing activities | (471,281 | ) | 14,107 | ||||
Effect of exchange rate changes on cash flows | (2,188 | ) | (1,038 | ) | |||
Increase in cash and cash equivalents | 111,042 | 28,473 | |||||
Cash and cash equivalents at beginning of period | 86,356 | 62,505 | |||||
Cash and cash equivalents at end of period | $ | 197,398 | $ | 90,978 | |||
See accompanying notes.
6
BARNES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data.)
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited consolidated balance sheet and the related unaudited consolidated statements of income, comprehensive income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The balance sheet as of December 31, 2012 has been derived from the 2012 financial statements of Barnes Group Inc. (the “Company”). For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the three- and six-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
In the second quarter of 2013, the Company completed the previously announced sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC") pursuant to the terms of the Asset Purchase Agreement dated February 22, 2013 (the "APA") between the Company and MSC. The Company received proceeds of $540,435 through June 30, 2013, net of transaction costs and closing adjustments paid. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations in the consolidated statements of income. See Note 2.
In the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable business segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by certain Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment. See Note 13.
In the third quarter of 2012, the Company completed its acquisition of Synventive Molding Solutions. The acquisition has been integrated into the Industrial segment. See Note 3.
2. Discontinued Operations
Barnes Distribution Europe
On December 30, 2011, the Company sold substantially all of the assets of its Barnes Distribution Europe ("BDE") business to Berner SE (the "Purchaser") in a cash transaction pursuant to the terms of a Share and Asset Purchase Agreement ("SPA") among the Company, the Purchaser, and their respective relevant subsidiaries. The Company received gross proceeds of $33,358, which represented the initial stated purchase price, and yielded net cash proceeds of $22,492 after consideration of cash sold, transaction costs paid and closing adjustments. The final amount of proceeds from the sale of the BDE business was subject to post closing adjustments that were reflected in discontinued operations in periods subsequent to the disposition. The income from operations of discontinued businesses for the six-month period ended June 30, 2013 includes a final settlement of a retained liability related to BDE.
As required by the terms of the SPA, the Company was required to place €9,000 of the proceeds in escrow to be used for any settlement of general representation and warranty claims. Absent a breach of warranty claim, the funds would be released from escrow on August 31, 2012 unless there were any then pending claims. Cash related to a pending claim would remain in escrow until a final determination of the claim had been made. On August 17, 2012, the Purchaser provided a notice of breach of various warranties to the Company. The Company rejected the Purchaser's notice and demanded release of the full escrow effective August 31, 2012. The Purchaser refused to release the full escrow, and only €3,900 plus interest was released whereas €5,100 ($6,651 at June 30, 2013) plus interest remains in escrow. The Company objected to the retention of the escrow and expects to prevail in this matter. The Company has recorded the restricted cash in other assets at June 30, 2013 and December 31, 2012.
7
Barnes Distribution North America
On April 22, 2013, the Company completed the previously announced sale of BDNA to MSC pursuant to the terms of the APA between the Company and MSC. The total cash consideration received for BDNA through June 30, 2013 was $540,435, net of transaction costs and closing adjustments paid. The net after-tax proceeds are expected to be $406,585 after consideration of certain post closing adjustments, transaction costs and income taxes, which are expected to be paid during 2013. Income taxes payable related to the cash proceeds have been recorded in accrued liabilities in the consolidated balance sheets. The Company recorded a net after-tax gain of $194,438 on the transaction in the three- and six-month periods ended June 30, 2013, net of transaction-related costs of $9,949.
The following amounts related to BDE and BDNA were derived from historical financial information. The amounts have been segregated from continuing operations and reported as discontinued operations within the consolidated financial statements:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | $ | 17,352 | $ | 78,112 | $ | 93,173 | $ | 158,413 | |||||||
Income before income taxes | 6,735 | 8,326 | 4,957 | 16,727 | |||||||||||
Income tax expense | 1,041 | 3,015 | 1,224 | 6,032 | |||||||||||
Income from operations of discontinued businesses, net of income taxes | 5,694 | 5,311 | 3,733 | 10,695 | |||||||||||
Gain (loss) on transaction | 313,477 | 14 | 313,477 | (767 | ) | ||||||||||
Income tax (expense) benefit on sale | (119,039 | ) | 19 | (119,039 | ) | 33 | |||||||||
Gain (loss) on the sale of businesses | 194,438 | 33 | 194,438 | (734 | ) | ||||||||||
Income from discontinued operations, net of income taxes | $ | 200,132 | $ | 5,344 | $ | 198,171 | $ | 9,961 | |||||||
3. Acquisition
During 2012, the Company completed the acquisition of Synventive Molding Solutions (“Synventive”) by acquiring all of the issued and outstanding shares of capital stock of Synventive Acquisition Inc., a Delaware corporation. The following table reflects the unaudited pro forma operating results of the Company for the three- and six-month periods ended June 30, 2012, which gives effect to the acquisition of Synventive as if it had occurred on January 1, 2011. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2011, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and Synventive adjusted for certain items including depreciation and amortization expense associated with the assets acquired and the Company’s expense related to financing arrangements, with the related tax effects.
8
(Unaudited Pro Forma) Three months ended June 30, 2012 | (Unaudited Pro Forma) Six months ended June 30, 2012 | ||||||
Net sales | $ | 254,684 | $ | 516,804 | |||
Income from continuing operations | 21,404 | 40,301 | |||||
Net income | 26,748 | 50,262 | |||||
Per common share: | |||||||
Basic: | |||||||
Income from continuing operations | $ | 0.39 | $ | 0.74 | |||
Net income | $ | 0.49 | $ | 0.92 | |||
Diluted: | |||||||
Income from continuing operations | $ | 0.38 | $ | 0.73 | |||
Net income | $ | 0.48 | $ | 0.91 | |||
4. Net Income Per Common Share
For the purpose of computing diluted income from continuing operations and net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans and convertible senior subordinated notes. For the purpose of computing diluted income from continuing operations and net income per common share, the weighted-average number of common shares outstanding was increased by 1,071,845 and 607,708 for the three-month periods ended June 30, 2013 and 2012, respectively, and 905,620 and 628,826 for the six-month periods ended June 30, 2013 and 2012, respectively, to account for the potential dilutive effect of stock-based incentive plans and convertible senior subordinated notes. There were no adjustments to income from continuing operations or net income for the purposes of computing income available to common stockholders for those periods.
The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three-month periods ended June 30, 2013 and 2012, the Company excluded 139,000 and 320,313 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive. During the six-month periods ended June 30, 2013 and 2012, the Company excluded 252,675 and 313,713 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive.
The Company granted 130,600 stock options, 161,295 restricted stock unit awards and 135,055 performance share awards in February 2013 as part of its annual grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic average common shares outstanding as they contain nonforfeitable rights to dividend payments. The performance share awards are part of a long-term Relative Measure program, which is designed to assess the Company's performance relative to the performance of companies included in the Russell 2000 Index over the three-year term of the program ending December 31, 2015. The performance goals are independent of each other and based on three metrics: the Company's total shareholder return ("TSR"), basic earnings per share growth and operating income before depreciation and amortization growth (weighted equally). The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR portion of the performance share awards was determined using a Monte Carlo valuation method as the award contains a market condition.
In the first quarter of 2013, the Board of Directors of the Company approved a Transition and Resignation Agreement (the "Agreement") for its former Chief Executive Officer (“Former CEO”) in connection with his resignation of the CEO role and his assumption of a Vice Chairman role. The Agreement provides that, in exchange for the Former CEO's delivery of an effective release of claims, his adherence to certain restrictive covenants, and the successful provision of transition services, including with regard to certain equity grants, the successful sale of the BDNA business, the Former CEO's outstanding equity awards are modified to increase the post-termination exercise period for stock options until the earlier of ten years from the date of grant or five years from the retirement date and made non-forfeitable all outstanding stock options, restricted stock units awards and performance share awards that remained unvested on the day of his agreed to resignation date from the Company. The original vesting dates of the equity awards serve as the delivery dates and the performance metrics continue to apply to the
9
performance share awards. The Company recorded $10,492 of stock compensation expense in the first quarter of 2013 as a result of the modifications.
The 3.375% convertible senior subordinated notes due in March 2027 (the “Notes”) are convertible, under certain circumstances, into a combination of cash and common stock of the Company. The conversion price as of June 30, 2013 was approximately $28.31 per share of common stock. The dilutive effect of the Notes is determined based on the average closing price of the Company's stock for the last 30 trading days of the quarter as compared to the conversion price of the Notes. Under the net share settlement method, there were 99,577 and 49,788 potential shares issuable under the Notes that were considered dilutive for the three- and six- month periods ended June 30, 2013, respectively. There were no potential shares issuable under the Notes for the three- and six- month periods ended June 30, 2012 as the Notes would have been anti-dilutive.
5. Inventories
The components of inventories consisted of:
June 30, 2013 | December 31, 2012 | ||||||
Finished goods | $ | 76,029 | $ | 126,139 | |||
Work-in-process | 64,182 | 56,186 | |||||
Raw material and supplies | 46,013 | 43,895 | |||||
$ | 186,224 | $ | 226,220 | ||||
6. Goodwill and Other Intangible Assets
Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended June 30, 2013:
Aerospace | Industrial | Other | Total Company | ||||||||||||
January 1, 2013 | $ | 30,786 | $ | 414,244 | $ | 134,875 | $ | 579,905 | |||||||
Divestiture | — | — | (134,704 | ) | (134,704 | ) | |||||||||
Purchase accounting adjustment | — | (185 | ) | — | (185 | ) | |||||||||
Foreign currency translation | — | (5,398 | ) | (171 | ) | (5,569 | ) | ||||||||
June 30, 2013 | $ | 30,786 | $ | 408,661 | $ | — | $ | 439,447 | |||||||
In the first quarter of 2013, the Company realigned its reportable business segments by transferring the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. The goodwill related to BDNA ("BDNA goodwill"), also a business within the former Distribution segment, was $134,875 at December 31, 2012. BDNA was sold on April 22, 2013. See Note 2. In the second quarter of 2013, certain purchase price adjustments were made in connection with the acquisition of Synventive.
In the second quarter of 2013, management performed its annual impairment testing. Based on this assessment, there was no goodwill impairment through June 30, 2013.
10
Other Intangible Assets:
Other intangible assets consisted of:
June 30, 2013 | December 31, 2012 | ||||||||||||||||
Range of Life -Years | Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||||||||||
Amortized intangible assets: | |||||||||||||||||
Revenue sharing programs (RSPs) | Up to 30 | $ | 293,700 | $ | (59,730 | ) | $ | 293,700 | $ | (54,638 | ) | ||||||
Customer lists/relationships | 10-15 | 91,306 | (13,819 | ) | 102,806 | (21,727 | ) | ||||||||||
Patents and technology | 7-14 | 41,972 | (10,756 | ) | 41,972 | (7,758 | ) | ||||||||||
Trademarks/trade names | 5-30 | 11,950 | (7,159 | ) | 12,750 | (7,497 | ) | ||||||||||
Other | Up to 15 | 12,692 | (7,436 | ) | 12,692 | (6,927 | ) | ||||||||||
451,620 | (98,900 | ) | 463,920 | (98,547 | ) | ||||||||||||
Unamortized intangible asset: | |||||||||||||||||
Trade name | 10,000 | 10,000 | |||||||||||||||
Foreign currency translation | 7,925 | — | 8,599 | — | |||||||||||||
Other intangible assets | $ | 469,545 | $ | (98,900 | ) | $ | 482,519 | $ | (98,547 | ) | |||||||
Gross amounts of $11,500 and $800 (accumulated amortization of $11,387 and $800) that were included within customer lists and trademarks, respectively, at December 31, 2012, were related to BDNA.
Estimated amortization of intangible assets for future periods is as follows: 2013 - $23,000; 2014 - $24,000; 2015 - $24,000; 2016 - $23,000 and 2017 - $24,000.
7. Debt
The Company's debt agreements contain financial covenants that require the maintenance of interest coverage and leverage ratios. The Company is in compliance with its debt covenants as of June 30, 2013, and closely monitors its future compliance based on current and anticipated future economic conditions.
Long-term debt and notes and overdrafts payable at June 30, 2013 and December 31, 2012 consisted of:
June 30, 2013 | December 31, 2012 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
3.375% Convertible Notes | $ | 55,636 | $ | 63,197 | $ | 55,636 | $ | 57,977 | ||||||||
Unamortized debt discount – 3.375% Convertible Notes | (1,949 | ) | — | (3,122 | ) | — | ||||||||||
Revolving credit agreement | 177,100 | 180,437 | 589,200 | 599,172 | ||||||||||||
Borrowings under lines of credit and overdrafts | 12,451 | 12,451 | 3,380 | 3,380 | ||||||||||||
Foreign bank borrowings | 675 | 676 | 945 | 947 | ||||||||||||
Other | 469 | 469 | 574 | 574 | ||||||||||||
244,382 | 257,230 | 646,613 | 662,050 | |||||||||||||
Less current maturities | (67,140 | ) | (4,494 | ) | ||||||||||||
Long-term debt | $ | 177,242 | $ | 642,119 | ||||||||||||
The 3.375% Convertible Notes are subject to redemption at their par value at any time, at the option of the Company, on or after March 20, 2014. The note holders may also require the Company to redeem some or all of the notes at their par value on March 15th of 2014, 2017 and 2022. As such, the balance of these Notes of $53,687 ($55,636 par value) and the related deferred tax balances are classified as current in the accompanying balance sheet as of June 30, 2013. The 3.375% Convertible Notes are also eligible for conversion upon meeting certain conditions as provided in the indenture agreement. The eligibility for conversion is determined quarterly. During the second quarter of 2013, the 3.375% Convertible Notes were not eligible for
11
conversion. During the third quarter of 2013, the 3.375% Convertible Notes will not be eligible for conversion. The fair value of the Notes was determined using quoted market prices that represent Level 2 observable inputs.
The Company maintains an amended and restated revolving credit agreement (the "Credit Agreement") with Bank of America, N.A. as the administrative agent. The $750,000 Credit Agreement matures in September 2016. Borrowings under the Credit Agreement bear interest at LIBOR plus a spread ranging from 1.10% to 1.70%. On April 22, 2013, the Company completed the sale of BDNA to MSC. The total cash consideration received for BDNA through June 30, 2013 was $540,435, net of transaction costs and closing adjustments paid. The Company initially utilized approximately $480,000 of the proceeds to reduce borrowings under the Credit Facility. During the second quarter of 2013, the Company utilized $48,575 under the Credit Facility to repurchase 1,657,495 shares of the Company's common stock under its publicly announced repurchase program. The fair value of the borrowings is based on observable Level 2 inputs using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
In addition, the Company has available approximately $15,000 in uncommitted short-term bank credit lines ("Credit Lines"), of which $11,700 was borrowed at June 30, 2013 at an interest rate of 2.16% and $2,800 was borrowed at December 31, 2012 at an interest rate of 2.16%. The Company had also borrowed $751 and $580 under overdraft facilities at June 30, 2013 and December 31, 2012, respectively. Repayments under the Credit Lines are due within seven days after being borrowed. Repayments of the overdrafts are generally due within two days after being borrowed. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.
The Company also has foreign bank borrowings. The fair value of the foreign bank borrowings are based on observable Level 2 inputs. These instruments are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
Other debt consists primarily of bank acceptances which are used to pay certain vendors. Bank acceptances represent financial instruments accepted by certain Chinese vendors in lieu of cash paid on payables, generally range from three to six months in maturity and are guaranteed by banks. The fair value of the bank acceptances are based on observable Level 2 inputs and their carrying amounts approximate fair value due to their short maturities.
8. Derivatives
The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. The Company is also exposed to fluctuations in interest rates and commodity price changes. These financial exposures are monitored and managed by the Company as an integral part of its risk management program.
Financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. In April 2012, the Company entered into five-year interest rate swap agreements transacted with three banks which together convert the interest on the first $100,000 of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.03% plus the borrowing spread. These interest rate swap agreements were accounted for as cash flow hedges.
The Company also uses financial instruments to hedge its exposures to fluctuations in foreign currency exchange rates. The Company has various contracts outstanding which primarily hedge recognized assets or liabilities, and anticipated transactions in various currencies including the British pound sterling, U.S. dollar, Euro, Singapore dollar, Swedish kroner and Swiss franc. Certain foreign currency derivative instruments are treated as cash flow hedges of forecasted transactions. All foreign exchange contracts are due within two years.
The Company does not use derivatives for speculative or trading purposes or to manage commodity exposures.
Changes in the fair market value of derivatives that qualify as fair value hedges or cash flow hedges are recorded directly to earnings or accumulated other non-owner changes to equity, depending on the designation. Amounts recorded to accumulated other non-owner changes to equity are reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings.
The following table sets forth the fair value amounts of derivative instruments held by the Company.
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June 30, 2013 | December 31, 2012 | ||||||||||||||
Asset Derivatives | Liability Derivatives | Asset Derivatives | Liability Derivatives | ||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||||
Interest rate contracts | $ | — | $ | (101 | ) | $ | — | $ | (1,818 | ) | |||||
Foreign exchange contracts | 20 | — | 945 | — | |||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||
Foreign exchange contracts | — | (1,062 | ) | 2,370 | (152 | ) | |||||||||
Total derivatives | $ | 20 | $ | (1,163 | ) | $ | 3,315 | $ | (1,970 | ) | |||||
Asset derivatives are recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Liability derivatives related to interest rate contracts and foreign exchange contracts are recorded in other liabilities and accrued liabilities, respectively, in the accompanying consolidated balance sheets.
The following table sets forth the gain (loss), net of tax, recorded in accumulated other non-owner changes to equity for the three- and six- month periods ended June 30, 2013 and 2012 for derivatives held by the Company and designated as hedging instruments.
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate contracts | $ | 911 | $ | (699 | ) | $ | 1,067 | $ | (699 | ) | |||||
Foreign exchange contracts | (992 | ) | 66 | (721 | ) | 302 | |||||||||
$ | (81 | ) | $ | (633 | ) | $ | 346 | $ | (397 | ) | |||||
Amounts included within accumulated other non-owner changes to equity that were reclassified to expense during the first six months of 2013 and 2012 related to the interest rate swaps resulted in a fixed rate of interest of 1.03% plus the borrowing spread for the first $100,000 of one-month LIBOR borrowings. The amounts reclassified for the foreign exchange contracts were not material in any period presented. Additionally, there were no amounts recognized in income for hedge ineffectiveness during the three- and six- month periods ended June 30, 2013 and 2012.
The following table sets forth the (losses) gains recorded in other expense (income), net in the consolidated statements of income for the three- and six- month periods ended June 30, 2013 and 2012 for non-designated derivatives held by the Company. Such amounts were substantially offset by gains (losses) recorded on the underlying hedged asset or liability.
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Foreign exchange contracts | $ | 425 | $ | (82 | ) | $ | (3,481 | ) | $ | (911 | ) | ||||
9. Fair Value Measurements
The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
Level 3 | Unobservable inputs for the asset or liability |
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The following table provides the financial assets and financial liabilities reported at fair value and measured on a recurring basis:
Fair Value Measurements Using | |||||||||||||||
Description | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
June 30, 2013 | |||||||||||||||
Asset derivatives | $ | 20 | $ | — | $ | 20 | $ | — | |||||||
Liability derivatives | (1,163 | ) | — | (1,163 | ) | — | |||||||||
Bank acceptances | 3,348 | — | 3,348 | — | |||||||||||
Rabbi trust assets | 1,845 | 1,845 | — | — | |||||||||||
$ | 4,050 | $ | 1,845 | $ | 2,205 | $ | — | ||||||||
December 31, 2012 | |||||||||||||||
Asset derivatives | $ | 3,315 | $ | — | $ | 3,315 | $ | — | |||||||
Liability derivatives | (1,970 | ) | — | (1,970 | ) | — | |||||||||
Bank acceptances | 3,441 | — | 3,441 | — | |||||||||||
Rabbi trust assets | 1,831 | 1,831 | — | — | |||||||||||
$ | 6,617 | $ | 1,831 | $ | 4,786 | $ | — | ||||||||
The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based and U.S. treasury interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain Chinese customers in lieu of cash paid on receivables, generally range from three to six months in maturity and are guaranteed by banks. The carrying amounts of the bank acceptances, which are included within prepaid expenses and other current assets, approximate fair value due to their short maturities. The fair values of rabbi trust assets are based on quoted market prices from various financial exchanges.
14
10. Pension and Other Postretirement Benefits
Pension and other postretirement benefits expenses consisted of the following:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
Pensions | 2013 | 2012 | 2013 | 2012 | |||||||||||
Service cost | $ | 1,462 | $ | 1,645 | $ | 3,446 | $ | 3,258 | |||||||
Interest cost | 5,038 | 5,415 | 10,025 | 10,737 | |||||||||||
Expected return on plan assets | (8,318 | ) | (8,257 | ) | (16,594 | ) | (16,290 | ) | |||||||
Amortization of prior service cost | 179 | 209 | 382 | 420 | |||||||||||
Recognized losses | 4,218 | 3,100 | 8,293 | 5,859 | |||||||||||
Curtailment loss | — | — | 199 | — | |||||||||||
Settlement loss | 637 | — | 637 | — | |||||||||||
Special termination benefits | 1,016 | — | 1,016 | — | |||||||||||
Net periodic benefit cost | $ | 4,232 | $ | 2,112 | $ | 7,404 | $ | 3,984 | |||||||
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
Other Postretirement Benefits | 2013 | 2012 | 2013 | 2012 | |||||||||||
Service cost | $ | 41 | $ | 59 | $ | 118 | $ | 136 | |||||||
Interest cost | 492 | 579 | 1,035 | 1,259 | |||||||||||
Amortization of prior service credit | (165 | ) | (397 | ) | (560 | ) | (793 | ) | |||||||
Recognized losses | 231 | 256 | 521 | 542 | |||||||||||
Curtailment gain | (3,081 | ) | — | (3,081 | ) | — | |||||||||
Net periodic benefit cost | $ | (2,482 | ) | $ | 497 | $ | (1,967 | ) | $ | 1,144 | |||||
The curtailment loss (gain), settlement loss and special termination benefits during the first half of 2013 relate to certain defined benefit pension and other postretirement benefit plans that were impacted by the completed sale of BDNA in April 2013. These amounts have been segregated from continuing operations and reported as discontinued operations within the Consolidated Financial Statements.
The Company contributed to a multi-employer defined benefit pension plan under the terms of a collective bargaining agreement. This multi-employer plan provides pension benefits to certain former union-represented employees at BDNA. The Company determined that a withdrawal from this multi-employer plan, following its entry into a definitive agreement to sell BDNA in February 2013, was probable. The Company has estimated that its assessment of a withdrawal liability, on a pre-tax discounted basis, is $2,788. The expense was recorded within discontinued operations during the first quarter of 2013. The Company completed the sale of BDNA during the second quarter of 2013.
11. Income Taxes
The Company's effective tax rate from continuing operations for the first half of 2013 was 52.7% compared with 17.0% in the first half of 2012 and 13.5% for the full year 2012 and includes the impact of $16,569 of tax expense related to the April 16, 2013 U.S. Court Decision (Note 14 of the Consolidated Financial Statements). Excluding the impact of the U.S. Tax Court Decision, the Company's effective tax rate from continuing operations for the first half of 2013 was 20.8%. The remaining increase in the first half 2013 effective tax rate from the full year 2012 rate is due to the absence of the 2012 reversal of certain foreign valuation allowances and tax rate decreases in certain foreign jurisdictions, the increase in the Company's Swedish effective tax rate and the projected change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2013.
The Aerospace segment was previously awarded international tax incentives, none of which are scheduled to expire in 2013.
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12. Changes in Accumulated Other Comprehensive Income by Component
The following table sets forth the changes in accumulated other comprehensive income by component for the six-month period ended June 30, 2013:
Gains and Losses on Cash Flow Hedges | Pension and Other Postretirement Benefit Items | Foreign Currency Items | Total | ||||||||||||
January 1, 2013 | $ | (432 | ) | $ | (146,441 | ) | $ | 80,121 | $ | (66,752 | ) | ||||
Other comprehensive income (loss) before reclassifications to consolidated statements of income | 500 | 13,537 | (15,672 | ) | (1,635 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive (loss) income to the consolidated statements of income | (154 | ) | 4,402 | 4,143 | 8,391 | ||||||||||
Net current-period other comprehensive income (loss) | 346 | 17,939 | (11,529 | ) | 6,756 | ||||||||||
June 30, 2013 | $ | (86 | ) | $ | (128,502 | ) | $ | 68,592 | $ | (59,996 | ) | ||||
The following table sets forth the reclassifications out of accumulated other comprehensive income by component for the three- and six-month periods ended June 30, 2013:
Details about Accumulated Other Comprehensive Income Components | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Consolidated Statements of Income | ||||||||
Three months ended June 30, 2013 | Six months ended June 30, 2013 | |||||||||
Gains and losses on cash flow hedges | ||||||||||
Interest rate contracts | $ | (212 | ) | $ | (411 | ) | Interest expense | |||
Foreign exchange contracts | 243 | 527 | Net sales | |||||||
31 | 116 | Total before tax | ||||||||
26 | 38 | Tax benefit | ||||||||
57 | 154 | Net of tax | ||||||||
Pension and other postretirement benefit items | ||||||||||
Amortization of prior-service credits | $ | (14 | ) | $ | 178 | (A) | ||||
Amortization of actuarial losses | (4,449 | ) | (8,814 | ) | (A) | |||||
Curtailment gain (net) | 3,081 | 2,882 | (A) | |||||||
Settlement loss | (637 | ) | (637 | ) | (A) | |||||
(2,019 | ) | (6,391 | ) | Total before tax | ||||||
415 | 1,989 | Tax benefit | ||||||||
(1,604 | ) | (4,402 | ) | Net of tax | ||||||
Foreign currency items | ||||||||||
Charge to cumulative translation adjustment (sale of BDNA) | $ | (4,143 | ) | $ | (4,143 | ) | Income from discontinued operations | |||
— | — | Tax benefit | ||||||||
(4,143 | ) | (4,143 | ) | Net of tax | ||||||
Total reclassifications in the period | $ | (5,690 | ) | $ | (8,391 | ) | ||||
(A) These accumulated other comprehensive income components are included within the computation of net periodic pension cost. See Note 10.
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13. Information on Business Segments
The Company is organized based upon the nature of its products and services. Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company has not aggregated operating segments for purposes of identifying reportable segments.
In the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by certain Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment.
The Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturers (“OEM”) of commercial jet engines, airframes and industrial gas turbines throughout the world, and for the military. Aerospace also provides jet engine component overhaul and repair services for many of the world's major jet engine manufacturers, commercial airlines and the military. In addition, Aerospace manufactures and provides aerospace aftermarket spare parts. The Industrial segment is a global supplier of high quality manufactured precision components for critical applications, and a leading designer and manufacturer of highly engineered and customized hot runner systems and components, serving diverse industrial end-markets such as transportation, energy, electronics, medical devices and consumer products. The Industrial segment also participates in the design, assembly and distribution of engineered supplies for the global industrial base.
The following tables, adjusted on a retrospective basis to reflect the segment alignment, set forth information about the Company's operations by its two reportable segments:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Net sales | |||||||||||||||
Aerospace | $ | 96,834 | $ | 93,770 | $ | 194,878 | $ | 191,020 | |||||||
Industrial | 170,560 | 121,540 | 336,062 | 247,085 | |||||||||||
Intersegment sales | — | — | — | (1 | ) | ||||||||||
Total net sales | $ | 267,394 | $ | 215,310 | $ | 530,940 | $ | 438,104 | |||||||
Operating profit | |||||||||||||||
Aerospace | $ | 15,226 | $ | 13,023 | $ | 25,573 | $ | 25,677 | |||||||
Industrial | 20,923 | 12,737 | 35,532 | 24,701 | |||||||||||
Total operating profit | 36,149 | 25,760 | 61,105 | 50,378 | |||||||||||
Interest expense | 3,241 | 2,435 | 7,598 | 4,803 | |||||||||||
Other expense (income), net | 495 | 55 | 1,462 | 914 | |||||||||||
Income from continuing operations before income taxes | $ | 32,413 | $ | 23,270 | $ | 52,045 | $ | 44,661 | |||||||
June 30, 2013 | December 31, 2012 | ||||||
Assets | |||||||
Aerospace | $ | 534,167 | $ | 533,465 | |||
Industrial | 906,112 | 907,124 | |||||
Other (A) | 294,691 | 428,007 | |||||
Total assets | $ | 1,734,970 | $ | 1,868,596 | |||
(A) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets. Other assets as of December 31, 2012 also include the assets of BDNA, which was sold on April 22, 2013. See Note 2.
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14. Commitments and Contingencies
Product Warranties
The Company provides product warranties in connection with the sale of certain products. From time to time, the Company is subject to customer claims with respect to product warranties. Product warranty liabilities were not material as of June 30, 2013 and December 31, 2012.
The Company was named in a lawsuit arising out of an alleged breach of contract and implied warranty by a customer of Toolcom Suppliers Limited (“Toolcom”), a business previously included within the former Logistics and Manufacturing Services segment, related to the sale of certain products prior to the Company’s 2005 acquisition of Toolcom. In 2006, the plaintiff filed the lawsuit in civil court in Scotland and asserted that certain products sold were not fit for a particular use. The Company settled the lawsuit during the first quarter of 2013 with an outcome that did not have a material effect on the consolidated financial statements. The final settlement expense is included within the income from operations of discontinued businesses in the consolidated statements of income for the six-month period ended June 30, 2013.
Income Taxes
On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16,500, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.
The case arose out of an Internal Revenue Service (“IRS”) audit for the tax years 2000 through 2002. The adjustment relates to the federal taxation of foreign income of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments. In the third quarter of 2009, the Company was informed that its protest was denied and a tax assessment was received from the Appeals Office of the IRS. Subsequently, in November 2009, the Company filed a petition against the IRS in the United States Tax Court, contesting the tax assessment. A trial was held and all briefs were filed in 2012. In April 2013 the Tax Court Decision was then issued rendering an unfavorable decision against the Company and imposing penalties.
The Company expects the Tax Court to enter an order reflecting the tax assessment, interest and penalties due (“Court Approved Assessment”) in the third quarter 2013. Following entry of that order, both parties have 90 days to decide whether or not to appeal the Tax Court Decision. At the end of the 90 day period, or earlier if an appeal is filed by the Company, the Court Approved Assessment becomes due. The Company plans to appeal the Tax Court Decision to the United States Court of Appeals for the Second Circuit. As a result of the unfavorable Tax Court Decision the Company has recorded an additional tax charge in the second quarter of 2013 for $16,569. The Company's reserve balance now includes the estimated Court Approved Assessment and the presumed utilization of net operating losses related to this matter.
On or before the expiration of the 90 day period following the entry of the Court Approved Assessment, the Company expects to make a cash payment of approximately $13,000 related to tax, interest and penalties as a result of the Tax Court Decision.
__________________________________________________________________________________________
With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month and six-month periods ended June 30, 2013 and 2012, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated July 29, 2013 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended, for their report on the unaudited consolidated financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933, as amended.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Barnes Group Inc.
We have reviewed the accompanying consolidated balance sheet of Barnes Group Inc. and its subsidiaries as of June 30, 2013 and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2013 and June 30, 2012 and the consolidated statements of cash flows for the six-month periods ended June 30, 2013 and June 30, 2012. This interim financial information is the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of income and comprehensive income, of changes in stockholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated February 25, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP | |
PricewaterhouseCoopers LLP Hartford, Connecticut | |
July 29, 2013 | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Please refer to the Overview in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website: www.bginc.com.
In the second quarter of 2013, the Company completed the previously announced sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC") pursuant to the terms of the Asset Purchase Agreement dated February 22, 2013 (the "APA") between the Company and MSC. The total cash consideration received for BDNA through June 30, 2013 was $540.4 million, net of transaction costs and closing adjustments paid. The net after-tax proceeds and net gain on sale from the transaction are expected to be $406.6 million and $194.4 million, respectively. Taxes are expected to be paid in 2013. The Credit Facility does not require that the Company use the proceeds from the sale of BDNA to reduce its outstanding borrowings. In April 2013, the Company initially utilized approximately $480.0 million of the proceeds to reduce borrowings under the Credit Facility. During the second quarter of 2013, the Company utilized $48.6 million under the Credit Facility to repurchase 1.7 million shares of the Company's common stock under its publicly announced repurchase program. The Company also plans to utilize a portion of the proceeds to invest in profitable growth initiatives including potential acquisitions, for general corporate purposes, to fund pension plans, and to repurchase additional common shares. See Note 2 of the Consolidated Financial Statements.
Additionally, in the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable business segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by certain Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment.
Aerospace
Aerospace produces precision-machined and fabricated components and assemblies for original equipment manufacturers ("OEM") of commercial jet engines, airframes, and industrial gas turbines throughout the world, and for the military. Aerospace also provides jet engine component overhaul and repair ("MRO") services for many of the world's major jet engine manufacturers, commercial airlines and the military. MRO activities include the manufacture and delivery of aerospace aftermarket spare parts, participation in revenue sharing programs (“RSPs”) under which the Company receives an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program, and component repairs.
Aerospace's OEM business competes with both the leading jet engine OEMs and a large number of machining and fabrication companies. Competition is based mainly on quality, engineering and technical capability, product breadth, timeliness, service and price. Aerospace's machining and fabrication operations, with facilities in Arizona, Connecticut, Michigan, Ohio, Utah and Singapore, produce critical engine and airframe components through technically advanced processes.
Aerospace's MRO business competes with aerospace OEMs, service centers of major commercial airlines, and other independent service companies for the repair and overhaul of turbine engine components. The manufacturing and supply of aerospace aftermarket spare parts, including those related to the RSPs, are dependent upon the reliable and timely delivery of high-quality components. Aerospace's aftermarket facilities, located in Connecticut, Ohio and Singapore, specialize in the repair and refurbishment of highly engineered components and assemblies such as cases, rotating air seals, shrouds and honeycomb air seals.
Industrial
Industrial is a global manufacturer of highly-engineered, high-quality, precision parts, products and systems for critical applications serving a diverse customer base in end-markets such as transportation, industrial equipment, consumer products, electronics, medical devices, and energy. Focused on custom solutions, Industrial participates in the design phase of components and assemblies whereby the customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products.
Industrial designs and manufactures customized hot runner systems and components - the enabling technology for many complex injection molding applications. It is a leading manufacturer and supplier of precision mechanical products, including precision mechanical springs, compressor reed valves and nitrogen gas products. Industrial also manufactures high-precision
20
punched and fine-blanked components used in transportation and industrial applications, nitrogen gas springs and manifold systems used to precisely control stamping presses, and retention rings that position parts on a shaft or other axis. Industrial is equipped to produce virtually every type of precision spring, from fine hairsprings for electronics and instruments to large heavy-duty springs for machinery.
Industrial competes with a broad base of large and small companies engaged in the manufacture and sale of custom metal components and assemblies and competes on the basis of quality, service, reliability of supply, engineering and technical capability, geographic reach, product breadth, innovation, design, and price. Products are sold primarily through its direct sales force and a network of global distribution channels.
Industrial has manufacturing, sales, assembly, and distribution operations in the United States, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Japan, Mexico, Netherlands, Portugal, Singapore, Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey and the United Kingdom.
Second Quarter 2013 Highlights
In April 2013, the Company completed the previously announced sale of BDNA to MSC for the purchase price of $550.0 million and received cash of $540.4 million through June 30, 2013, net of transaction costs and closing adjustments paid. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations. See Note 2 of the Consolidated Financial Statements.
In the second quarter of 2013, sales increased by $52.1 million, or 24.2% from the second quarter of 2012, to $267.4 million. This increase was driven primarily by a $43.1 million sales contribution from the Synventive business that was acquired in August 2012. Organic sales increased by $9.5 million, or 4.4%, with growth in both the Aerospace and Industrial segments.
Operating income in the second quarter of 2013 increased 40.3% to $36.1 million from the second quarter of 2012 and operating income margin increased from 12.0% to 13.5%. Operating income benefited primarily from the profit contribution of the Synventive business and productivity improvements.
RESULTS OF OPERATIONS
Net Sales
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||||||
Aerospace | $ | 96.8 | $ | 93.8 | $ | 3.1 | 3.3 | % | $ | 194.9 | $ | 191.0 | $ | 3.9 | 2.0 | % | |||||||||||||
Industrial | 170.6 | 121.5 | 49.0 | 40.3 | % | 336.1 | 247.1 | 89.0 | 36.0 | % | |||||||||||||||||||
Intersegment sales | — | — | — | — | % | — | — | — | — | % | |||||||||||||||||||
Total | $ | 267.4 | $ | 215.3 | $ | 52.1 | 24.2 | % | $ | 530.9 | $ | 438.1 | $ | 92.8 | 21.2 | % | |||||||||||||
The Company reported net sales of $267.4 million in the second quarter of 2013, an increase of $52.1 million or 24.2%, from the second quarter of 2012. The acquisition of Synventive in 2012 provided $43.1 million of net sales during the second quarter of 2013. Organic sales increased by $9.5 million, which included an increase of $3.1 million at Aerospace and an increase of $6.4 million at Industrial. The strengthening of the U.S. dollar against foreign currencies decreased net sales by approximately $0.5 million.
The Company reported net sales of $530.9 million in the first half of 2013, an increase of $92.8 million or 21.2%, from the first half of 2012. The acquisition of Synventive in 2012 provided $83.5 million of net sales during the first half of 2013. Organic sales increased by $11.3 million, which included an increase of $3.9 million at Aerospace and an increase of $7.4 million at Industrial. The strengthening of the U.S. dollar against foreign currencies decreased net sales by approximately $1.9 million.
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Expenses and Operating Income
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||||||
Cost of sales | $ | 177.4 | $ | 152.4 | $ | 25.0 | 16.4 | % | $ | 355.1 | $ | 312.8 | $ | 42.3 | 13.5 | % | |||||||||||||
% sales | 66.3 | % | 70.8 | % | 66.9 | % | 71.4 | % | |||||||||||||||||||||
Gross profit (1) | $ | 90.0 | $ | 62.9 | $ | 27.0 | 43.0 | % | $ | 175.8 | $ | 125.3 | $ | 50.5 | 40.3 | % | |||||||||||||
% sales | 33.7 | % | 29.2 | % | 33.1 | % | 28.6 | % | |||||||||||||||||||||
Selling and administrative expenses | $ | 53.8 | $ | 37.2 | $ | 16.7 | 44.8 | % | $ | 114.7 | $ | 74.9 | $ | 39.8 | 53.1 | % | |||||||||||||
% sales | 20.1 | % | 17.3 | % | 21.6 | % | 17.1 | % | |||||||||||||||||||||
Operating income | $ | 36.1 | $ | 25.8 | $ | 10.4 | 40.3 | % | $ | 61.1 | $ | 50.4 | $ | 10.7 | 21.3 | % | |||||||||||||
% sales | 13.5 | % | 12.0 | % | 11.5 | % | 11.5 | % | |||||||||||||||||||||
(1) - Sales less cost of sales. | |||||||||||||||||||||||||||||
Cost of sales in the second quarter of 2013 increased 16.4% from the 2012 period, while gross profit margin increased from 29.2% in the 2012 period to 33.7% in the 2013 period. Gross margins improved at both Aerospace and Industrial. The acquisition of Synventive resulted in a higher percentage of sales being driven by Industrial. Selling and administrative expenses in the second quarter of 2013 increased 44.8% from the 2012 period due primarily to the incremental operations of Synventive. As a percentage of sales, selling and administrative costs increased from 17.3% in the second quarter of 2012 to 20.1% in the 2013 period. Operating income in the second quarter of 2013 increased 40.3% to $36.1 million from the second quarter of 2012 and operating income margin increased from 12.0% to 13.5%.
Cost of sales in the first half of 2013 increased 13.5% from the 2012 period, while gross profit margin increased from 28.6% in the 2012 period to 33.1% in the 2013 period. Gross margins declined at Aerospace and improved at Industrial. The acquisition of Synventive resulted in a higher percentage of sales being driven by Industrial. Selling and administrative expenses in the first half of 2013 increased 53.1% from the 2012 period due primarily to the incremental operations of Synventive and CEO transition costs of $10.5 million. As a percentage of sales, selling and administrative costs increased from 17.1% in the first half of 2012 to 21.6% in the 2013 period. Operating income in the first half of 2013 increased 21.3% to $61.1 million from the first half of 2012 and operating income margin remained stable at 11.5%.
Interest expense
Interest expense increased by $0.8 million and $2.8 million in the second quarter and the first half of 2013, respectively, compared to prior year amounts. The increase during the first half of 2013 was primarily a result of higher borrowings under the variable rate credit facility (the “Credit Facility”) combined with a higher average borrowing rate. During the second quarter, borrowings were substantially reduced as proceeds from the BDNA sale were used to reduce debt under the Credit Facility.
Other expense (income), net
Other expense (income), net in the second quarter of 2013 was $0.5 million compared to $0.1 million in the second quarter of 2012. In the first half of 2013, other expense (income), net was $1.5 million compared to $0.9 million in the first half of 2012.
Income Taxes
The Company's effective tax rate from continuing operations for the first half of 2013 was 52.7% compared with 17.0% in the first half of 2012 and 13.5% for the full year 2012 and includes the impact of $16.6 million of tax expense related to the April 16, 2013 U.S. Court Decision (Note 14 of the Consolidated Financial Statements and below). Excluding the impact of the U.S. Tax Court Decision, the Company's effective tax rate from continuing operations for the first half of 2013 was 20.8%. The remaining increase in the first half 2013 effective tax rate from the full year 2012 rate is due to the absence of the 2012 reversal of certain foreign valuation allowances and tax rate decreases in certain foreign jurisdictions, the increase in the Company's Swedish effective tax rate and the projected change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2013.
The Aerospace segment was previously awarded international tax incentives, none of which are scheduled to expire in 2013.
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On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.5 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.
The case arose out of an Internal Revenue Service (“IRS”) audit for the tax years 2000 through 2002. The adjustment relates to the federal taxation of foreign income of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments. In the third quarter of 2009, the Company was informed that its protest was denied and a tax assessment was received from the Appeals Office of the IRS. Subsequently, in November 2009, the Company filed a petition against the IRS in the United States Tax Court, contesting the tax assessment. A trial was held and all briefs were filed in 2012. In April 2013 the Tax Court Decision was then issued rendering an unfavorable decision against the Company and imposing penalties.
The Company expects the Tax Court to enter an order reflecting the tax assessment, interest and penalties due (“Court Approved Assessment”) in the third quarter 2013. Following entry of that order, both parties have 90 days to decide whether or not to appeal the Tax Court Decision. At the end of the 90 day period, or earlier if an appeal is filed by the Company, the Court Approved Assessment becomes due. The Company plans to appeal the Tax Court Decision to the United States Court of Appeals for the Second Circuit. As a result of the unfavorable Tax Court Decision the Company has recorded an additional tax charge in the second quarter of 2013 for $16.6 million. The Company's reserve balance now includes the estimated Court Approved Assessment and the presumed utilization of net operating losses related to this matter.
On or before the expiration of the 90 day period following the entry of the Court Approved Assessment, the Company expects to make a cash payment of approximately $13 million related to tax, interest and penalties as a result of the Tax Court Decision.
Discontinued Operations
On April 22, 2013, the Company completed the previously announced sale of BDNA to MSC pursuant to the terms of the APA between the Company and MSC. The Company initially received net cash proceeds of $540.4 million through June 30, 2013 after consideration of transaction costs and closing adjustments paid. The net after-tax proceeds are expected to be $406.6 million after consideration of certain post-closing adjustments, transaction costs and income taxes, which are expected to be paid during 2013. The Company recorded a net after-tax gain of $194.4 million on the transaction, net of transaction-related costs of $9.9 million. The results of BDNA have been segregated and presented as discontinued operations. In the six-month period ended June 30, 2013, the Company recorded a $198.2 million gain from discontinued operations. The gain relates to the net after-tax proceeds less the book value of the assets sold or otherwise disposed of and the income generated by the operations of BDNA, partially offset by charges related to the pension plans related to BDNA and a final adjustment related to a retained liability at the Barnes Distribution Europe business. See Note 2 of the Consolidated Financial Statements.
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Income and Income per Share
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
(in millions, except per share) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||||||
Income from continuing operations | $ | 9.2 | $ | 19.5 | $ | (10.3 | ) | (52.8 | )% | $ | 24.6 | $ | 37.1 | $ | (12.4 | ) | (33.6 | )% | |||||||||||
Income from discontinued operations, net of income taxes | 200.1 | 5.3 | 194.8 | NM | 198.2 | 10.0 | $ | 188.2 | NM | ||||||||||||||||||||
Net income | $ | 209.3 | $ | 24.8 | $ | 184.5 | NM | $ | 222.8 | $ | 47.0 | $ | 175.8 | NM | |||||||||||||||
Per common share: | |||||||||||||||||||||||||||||
Basic: | |||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.18 | $ | 0.36 | $ | (0.18 | ) | (50.0 | )% | $ | 0.46 | $ | 0.68 | $ | (0.22 | ) | (32.4 | )% | |||||||||||
Income from discontinued operations, net of income taxes | 3.72 | 0.10 | 3.62 | NM | 3.65 | 0.18 | 3.47 | NM | |||||||||||||||||||||
Net income | $ | 3.90 | $ | 0.46 | $ | 3.44 | NM | $ | 4.11 | $ | 0.86 | $ | 3.25 | NM | |||||||||||||||
Diluted: | |||||||||||||||||||||||||||||
Income from continuing operations | $ | 0.17 | $ | 0.35 | $ | (0.18 | ) | (51.4 | )% | $ | 0.45 | $ | 0.67 | $ | (0.22 | ) | (32.8 | )% | |||||||||||
Income from discontinued operations, net of income taxes | 3.65 | 0.10 | 3.55 | NM | 3.59 | 0.18 | 3.41 | NM | |||||||||||||||||||||
Net income | $ | 3.82 | $ | 0.45 | $ | 3.37 | NM | $ | 4.04 | $ | 0.85 | $ | 3.19 | NM | |||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||||||||
Basic | 53.7 | 54.5 | (0.8 | ) | (1.5 | )% | 54.2 | 54.7 | (0.4 | ) | (0.8 | )% | |||||||||||||||||
Diluted | 54.8 | 55.2 | (0.3 | ) | (0.6 | )% | 55.1 | 55.3 | (0.2 | ) | (0.3 | )% | |||||||||||||||||
NM - Not meaningful
In the second quarter of 2013, basic and diluted income from continuing operations per common share decreased 50.0% and 51.4%, respectively, from the second quarter of 2012 and for the first half of 2013 decreased 32.4% and 32.8%, respectively, from the first half of 2012. The decreases were directly attributable to the decreases in income from continuing operations for the periods. Basic and diluted weighted average common shares outstanding decreased due to the repurchase of 2,125,495 shares during the first half of 2013. The decrease in diluted shares was partially offset by an increase in the dilutive effect of potentially issuable shares given an increase in the Company's stock price and the modification of outstanding equity awards granted to the former Chief Executive Officer in the first quarter of 2013.
Financial Performance by Business Segment
Aerospace
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||||||
Sales | $ | 96.8 | $ | 93.8 | $ | 3.1 | 3.3 | % | $ | 194.9 | $ | 191.0 | $ | 3.9 | 2.0 | % | |||||||||||||
Operating profit | 15.2 | 13.0 | 2.2 | 16.9 | % | 25.6 | 25.7 | (0.1 | ) | (0.4 | )% | ||||||||||||||||||
Operating margin | 15.7 | % | 13.9 | % | 13.1 | % | 13.4 | % | |||||||||||||||||||||
The Aerospace segment reported sales of $96.8 million in the second quarter of 2013, a 3.3% increase from the second quarter of 2012. A sales increase in the original equipment manufacturing ("OEM") business was partially offset by lower sales in the aftermarket business. Within aftermarket, sales declined in the repair and overhaul business and were flat within the spare parts business. Increased sales within the OEM business reflected strengthened demand for new engines, driven by increased aircraft production whereas a decline in sales within the aftermarket repair and overhaul business was driven by a trend of deferred maintenance. In the first half of 2013, this segment reported sales of $194.9 million, a 2.0% increase from the first half of 2012 primarily as a result of increased sales in the OEM manufacturing business, offset partially by sales declines in the aftermarket repair and overhaul and spare parts businesses.
Operating profit at Aerospace in the second quarter of 2013 increased 16.9% from the second quarter of 2012 to $15.2 million. The operating profit benefit of increased sales in the OEM business and productivity improvements were partially offset by a lower profit contribution from the aftermarket business. Operating margin increased from 13.9% in the 2012 period to 15.7%
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in the 2013 period. Operating profit in the first half of 2013 decreased 0.4% from the first half of 2012 to $25.6 million. The decrease was driven by CEO transition costs of $3.9 million allocated to the segment during the first quarter of 2013 and the profit detriment of lower sales in the aftermarket businesses, offset partially by the profit benefit of higher sales in the OEM business.
Outlook: Sales in the Aerospace OEM business are based on the general state of the aerospace market driven by the worldwide economy and are driven by its order backlog through its participation in certain strategic commercial and military engine and airframe programs. Backlog in this business was $529.4 million at June 30, 2013, of which approximately 59% is expected to be shipped in the next 12 months. The Aerospace OEM business may be impacted by adjustments of customer inventory levels, commodity availability and pricing, changes in the content levels on certain platforms including insourcing, changes in production schedules of specific engine and airframe programs, as well as the pursuit of new programs. Sales levels in the Aerospace aftermarket repair and overhaul business are expected to reflect long-term trends towards improving maintenance, repair and overhaul activity, but may be negatively impacted by short-term fluctuations in demand. Incremental management fees within the aftermarket RSP spare parts business are dependent on future sales volumes and are treated as a reduction to sales. Management fees increase once during the life of each individual program, generally in the fourth or later years of each program. Management continues to believe its Aerospace aftermarket business is competitively positioned based on well-established long-term customer relationships, including maintenance and repair contracts in the repair and overhaul business and long-term RSP agreements, expanded capabilities and current capacity levels.
Management is focused on growing operating profit at Aerospace primarily through organic sales growth, productivity initiatives, new product introductions and continued cost management. Operating profit is expected to continue to be affected by the profit impact of changes in sales volume, mix and pricing, particularly as it relates to the highly profitable aftermarket RSP spare parts business, and investments made in each of its businesses. Management actively manages commodity price increases through pricing actions and other productivity initiatives. Costs associated with increases in new product introductions may also negatively impact operating profit.
Industrial
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||
(in millions) | 2013 | 2012 | Change | 2013 | 2012 | Change | |||||||||||||||||||||||
Sales | $ | 170.6 | $ | 121.5 | $ | 49.0 | 40.3 | % | $ | 336.1 | $ | 247.1 | $ | 89.0 | 36.0 | % | |||||||||||||
Operating profit | 20.9 | 12.7 | 8.2 | 64.3 | % | 35.5 | 24.7 | 10.8 | 43.8 | % | |||||||||||||||||||
Operating margin | 12.3 | % | 10.5 | ||||||||||||||||||||||||||