B 10Q 09.30.2014


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 September 30, 2014

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)
 
(860) 583-7070
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 54,446,853 shares of common stock as of October 22, 2014.

1


Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 2014
 
 
 
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
317,659

 
$
269,491

 
$
951,832

 
$
800,430

 
 
 
 
 
 
 
 
Cost of sales
206,410

 
189,488

 
632,671

 
544,615

Selling and administrative expenses
60,364

 
51,972

 
187,770

 
166,679

 
266,774

 
241,460

 
820,441

 
711,294

Operating income
50,885

 
28,031

 
131,391

 
89,136

 
 
 
 
 
 
 
 
Interest expense
2,435

 
2,401

 
8,558

 
10,000

Other expense (income), net
741

 
241

 
1,768

 
1,702

Income from continuing operations before income taxes
47,709

 
25,389

 
121,065

 
77,434

Income taxes
13,407

 
4,008

 
33,782

 
31,426

Income from continuing operations
34,302

 
21,381

 
87,283

 
46,008

(Loss) income from discontinued operations, net of income taxes (Note 2)
(425
)
 
(476
)
 
(425
)
 
197,696

Net income
$
33,877

 
$
20,905

 
$
86,858

 
$
243,704

 
 
 
 
 
 
 
 
Per common share:
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.63

 
$
0.40

 
$
1.60

 
$
0.86

    (Loss) income from discontinued operations, net of income taxes
(0.01
)
 
(0.01
)
 
(0.01
)
 
3.67

   Net income
$
0.62

 
$
0.39

 
$
1.59

 
$
4.53

  Diluted:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.62

 
$
0.39

 
$
1.57

 
$
0.84

    (Loss) income from discontinued operations, net of income taxes
(0.01
)
 
(0.01
)
 
(0.01
)
 
3.60

   Net income
$
0.61

 
$
0.38

 
$
1.56

 
$
4.44

Dividends
$
0.11

 
$
0.11

 
$
0.33

 
$
0.31

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
    Basic
54,879,329

 
53,009,720

 
54,756,794

 
53,818,950

    Diluted
55,509,658

 
54,304,990

 
55,803,370

 
54,854,456


See accompanying notes.


3



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
33,877

 
$
20,905

 
$
86,858

 
$
243,704

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
      Unrealized gain (loss) on hedging activities, net of tax (1)
564

 
(144
)
 
33

 
202

      Foreign currency translation adjustments, net of tax (2)
(41,279
)
 
21,876

 
(51,837
)
 
10,344

      Defined benefit pension and other postretirement benefits, net of tax (3)
2,863

 
1,874

 
(1,518
)
 
19,814

Total other comprehensive (loss) income, net of tax
(37,852
)
 
23,606

 
(53,322
)
 
30,360

Total comprehensive (loss) income
$
(3,975
)
 
$
44,511

 
$
33,536

 
$
274,064


(1) Net of tax of $256 and $(106) for the three months ended September 30, 2014 and 2013, respectively, and $62 and $331 for the nine months ended September 30, 2014 and 2013, respectively.

(2) Net of tax of $(1,376) and $843 for the three months ended September 30, 2014 and 2013, respectively, and $(2,143) and $332 for the nine months ended September 30, 2014 and 2013, respectively.

(3) Net of tax of $869 and $1,500 for the three months ended September 30, 2014 and 2013, respectively, and $(2,121) and $12,871 for the nine months ended September 30, 2014 and 2013, respectively.

See accompanying notes.


4


BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Current assets
 
 
 
  Cash and cash equivalents
$
63,007

 
$
70,856

  Accounts receivable, less allowances (2014 - $4,091; 2013 - $3,438)
282,858

 
258,664

  Inventories
214,291

 
211,246

  Deferred income taxes
31,794

 
18,226

  Prepaid expenses and other current assets
19,093

 
18,204

    Total current assets
611,043

 
577,196

 
 
 
 
Deferred income taxes
783

 
2,314

 
 
 
 
Property, plant and equipment
687,829

 
686,537

    Less accumulated depreciation
(384,947
)
 
(383,979
)
 
302,882

 
302,558

 
 
 
 
Goodwill
613,298

 
649,697

Other intangible assets, net
570,368

 
534,293

Other assets
57,587

 
57,615

Total assets
$
2,155,961

 
$
2,123,673

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
  Notes and overdrafts payable
$
25,695

 
$
1,074

  Accounts payable
95,122

 
88,721

  Accrued liabilities
175,507

 
154,514

  Long-term debt - current
885

 
56,009

    Total current liabilities
297,209

 
300,318

 
 
 
 
Long-term debt
513,215

 
490,341

Accrued retirement benefits
86,768

 
80,884

Deferred income taxes
88,350

 
94,506

Other liabilities
14,748

 
16,210

 
 
 
 
Commitments and contingencies (Note 15)

 

Stockholders' equity
 
 
 
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2014 - 61,170,339 shares; 2013 - 60,306,128 shares)
612

 
603

  Additional paid-in capital
402,211

 
390,347

  Treasury stock, at cost (2014 - 6,729,154 shares; 2013 - 6,389,267 shares)
(169,395
)
 
(156,649
)
  Retained earnings
949,621

 
881,169

  Accumulated other non-owner changes to equity
(27,378
)
 
25,944

Total stockholders' equity
1,155,671

 
1,141,414

Total liabilities and stockholders' equity
$
2,155,961

 
$
2,123,673


See accompanying notes.

5


BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)(Unaudited)
 
Nine months ended September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
86,858

 
$
243,704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
62,556

 
44,957

  Amortization of convertible debt discount
731

 
1,776

  Loss (gain) on disposition of property, plant and equipment
103

 
(632
)
  Stock compensation expense
5,453

 
16,092

  Withholding taxes paid on stock issuances
(4,357
)
 
(2,045
)
  Loss (gain) on the sale of businesses
1,586

 
(313,471
)
  Changes in assets and liabilities, net of the effects of divestitures:
 
 
 
    Accounts receivable
(26,648
)
 
(11,694
)
    Inventories
(8,481
)
 
(405
)
    Prepaid expenses and other current assets
(3,074
)
 
(815
)
    Accounts payable
8,237

 
8,988

    Accrued liabilities
8,630

 
27,784

    Deferred income taxes
(6,942
)
 
(6,603
)
    Long-term retirement benefits
(6,400
)
 
238

  Other
3,519

 
4,700

Net cash provided by operating activities
121,771

 
12,574

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposition of property, plant and equipment
627

 
895

(Payments for) proceeds from the sale of businesses
(1,181
)
 
539,116

Change in restricted cash
4,886

 
—

Capital expenditures
(43,594
)
 
(33,799
)
Component Repair Program payments
(41,000
)
 
—

Other
(1,030
)
 
(1,901
)
Net cash (used) provided by investing activities
(81,292
)
 
504,311

 
 
 
 
Financing activities:
 
 
 
Net change in other borrowings
24,663

 
3,887

Payments on long-term debt
(183,673
)
 
(482,158
)
Proceeds from the issuance of long-term debt
158,883

 
178,000

Payment of assumed liability to Otto Männer Holding AG
(19,796
)
 
—

Premium paid on convertible debt redemption
(14,868
)
 
—

Proceeds from the issuance of common stock
10,323

 
10,873

Common stock repurchases
(8,389
)
 
(68,608
)
Dividends paid
(17,925
)
 
(16,495
)
Excess tax benefit on stock awards
4,625

 
3,312

Other
(185
)
 
(1,320
)
Net cash used by financing activities
(46,342
)
 
(372,509
)
 
 
 
 
Effect of exchange rate changes on cash flows
(1,986
)
 
(447
)
(Decrease) increase in cash and cash equivalents
(7,849
)
 
143,929

Cash and cash equivalents at beginning of period
70,856

 
86,356

Cash and cash equivalents at end of period
$
63,007

 
$
230,285

Supplemental Disclosure of Cash Flow Information:
Non-cash investing activities in 2014 include the acquisition of $39,000 of intangible assets, and the recognition of corresponding liabilities, in connection with the Component Repair Program. See Note 6.

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, 2013 has been derived from the 2013 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, 2013. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

In the fourth quarter of 2013, the Company and two of its subsidiaries (collectively with the Company, the "Purchaser") completed the acquisition of the Männer Business (defined below) pursuant to the terms of the Share Purchase and Assignment Agreement dated September 30, 2013 ("Share Purchase Agreement") among the Purchaser, Otto Männer Holding AG, a German company based in Bahlingen, Germany (the "Seller"), and the three shareholders of the Seller ("the Männer Business"). The acquisition has been integrated into the Industrial segment. See Note 3.

In the second quarter of 2013, the Company completed the sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC"). The results of these operations are segregated and presented as discontinued operations in the Consolidated Financial Statements. See Note 2.

2. Discontinued Operations
 
Barnes Distribution North America

In April 2013, the Company completed the sale of BDNA to MSC pursuant to the terms of an Asset Purchase Agreement between the Company and MSC. The total cash consideration received for BDNA through September 30, 2014 was $537,761, net of transaction costs and closing adjustments paid. The net after-tax proceeds were $420,466 after consideration of certain post closing adjustments, transaction costs and income taxes. The Company made estimated income tax payments of $130,004 related to the gain on sale during 2013 and recorded an income tax receivable of $12,608 in the Consolidated Balance Sheet as of December 31, 2013. The Company has since elected to apply the income tax receivable to future tax filings. The losses from discontinued operations for the three- and nine-months ended September 30, 2014 include a tax benefit for deductions related to the sale of BDNA.

Barnes Distribution Europe

In December 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 dated November 17, 2011. The Company received gross proceeds of $33,358, which represents 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 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 plus interest remained in escrow. The Company settled the pending claim on September 24, 2014 and entered into an

7


agreement to pay the Purchaser €1,250 of the proceeds that were held in escrow. The losses from discontinued operations for the three- and nine-months ended September 30, 2014 include this €1,250 ($1,586) reduction in proceeds from the sale of the business. The remaining funds of €3,850 ($4,886 at September 30, 2014) were no longer restricted within escrow effective September 24, 2014, therefore the balance of the escrow account was recorded as cash at September 30, 2014. The cash was restricted and recorded in other assets at December 31, 2013.

The below amounts related to the BDE business 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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
—

 
$
—

 
$
—

 
$
93,173

Income before income taxes
—

 
10

 
—

 
4,967

Income tax expense
—

 
463

 
—

 
1,688

(Loss) income from operations of discontinued businesses, net of income taxes
—

 
(453
)
 
—

 
3,279

(Loss) gain on transaction
(1,586
)
 
(7
)
 
(1,586
)
 
313,471

Income tax benefit (expense) on sale
1,161

 
(16
)
 
1,161

 
(119,054
)
(Loss) gain on the sale of businesses
(425
)
 
(23
)
 
(425
)
 
194,417

(Loss) income from discontinued operations, net of income taxes
$
(425
)
 
$
(476
)
 
$
(425
)
 
$
197,696


3. Acquisitions

During 2013, the Company completed the acquisition of the Männer Business, a German company based in Bahlingen, Germany. The following table reflects the unaudited pro forma operating results of the Company for the three- and nine- months ended September 30, 2013, which gives effect to the acquisition of the Männer Business as if it had occurred on January 1, 2012. 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, 2012, 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 the Männer Business 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. The pro forma information does not include the effects of any synergies or cost reduction initiatives related to the acquisition.
 
(Unaudited Pro Forma) Three months ended September 30, 2013
 
(Unaudited Pro Forma) Nine months ended September 30, 2013
Net sales
$
295,286

 
$
886,620

Income from continuing operations
24,188

 
56,385

Net income
23,712

 
254,081

 
 
 
 
Per common share:
 
 
 
Basic:
 
 
 
     Income from continuing operations
$
0.45

 
$
1.03

     Net income
$
0.44

 
$
4.63

Diluted:
 
 
 
     Income from continuing operations
$
0.44

 
$
1.01

     Net income
$
0.43

 
$
4.55

  

8


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 630,329 and 1,295,270 for the three-month periods ended September 30, 2014 and 2013, respectively, and 1,046,576 and 1,035,506 for the nine-month periods ended September 30, 2014 and 2013, 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 September 30, 2014 and 2013, the Company excluded 92,049 and 27,300 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive. During the nine-month periods ended September 30, 2014 and 2013, the Company excluded 92,049 and 177,550 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive.
  
The Company granted 86,300 stock options, 93,989 restricted stock unit awards and 84,654 performance share awards in February 2014 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, 2016. 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 provided 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 were 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 unit 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 performance share awards. The Company recorded $10,492 of stock compensation expense in the first quarter of 2013 as a result of the modifications.

On June 16, 2014, $224 (par value) of the 3.375% Convertible Senior Subordinated Notes due in March 2027 (the "3.375% Convertible Notes") were surrendered for conversion. On June 24, 2014, the Company exercised its right to redeem the remaining $55,412 principal amount of the Notes, effective July 31, 2014, and elected to pay cash to holders of the Notes surrendered for conversion, including the value of any residual shares of common stock that were payable to the holders electing to convert their notes into an equivalent share value. Accordingly, the potential shares issuable for the 3.375% Convertible Notes were included in diluted average common shares outstanding for the period prior to the June 24, 2014 notification date. Under the net share settlement method, there were 0 and 326,973 potential shares issuable under the Notes that were considered dilutive for the three- and nine- month periods ended September 30, 2014, respectively, and 286,205 and 128,594 potential shares issuable under the Notes that were considered dilutive for the three- and nine- month periods ended September 30, 2013, respectively.








9


5. Inventories

The components of inventories consisted of:
 
September 30, 2014
 
December 31, 2013
Finished goods
$
86,471


$
85,033

Work-in-process
76,005

 
71,982

Raw material and supplies
51,815

 
54,231

 
$
214,291


$
211,246


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 September 30, 2014:
 
Industrial
 
Aerospace
 
Total Company
January 1, 2014
$
618,911

 
$
30,786

 
$
649,697

Foreign currency translation
(36,399
)
 
—

 
(36,399
)
September 30, 2014
$
582,512

 
$
30,786

 
$
613,298


In the second quarter of 2014, management performed its annual goodwill impairment testing. Based on this assessment, there was no goodwill impairment recognized.

Other Intangible Assets:
Other intangible assets consisted of:
 
 
 
September 30, 2014
 
December 31, 2013
 
Range of
Life -Years
 
Gross Amount
 
Accumulated Amortization
 
Gross Amount
 
Accumulated Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Revenue sharing programs (RSPs)
Up to 30
 
$
293,700

 
$
(70,974
)
 
$
293,700

 
$
(64,220
)
Component repair programs (CRPs)
Up to 18
 
106,639

 
(1,210
)
 
26,639

 
—

Customer lists/relationships
10-18
 
183,406

 
(27,417
)
 
183,406

 
(18,293
)
Patents and technology
7-14
 
62,972

 
(20,222
)
 
62,972

 
(14,210
)
Trademarks/trade names
5-30
 
11,950

 
(8,342
)
 
11,950

 
(7,628
)
Other
Up to 15
 
19,292

 
(14,785
)
 
19,292

 
(9,868
)
 
 
 
677,959

 
(142,950
)
 
597,959

 
(114,219
)
Unamortized intangible asset:
 
 
 
 
 
 
 
 
 
Trade names
 
 
36,900

 


 
36,900

 


Foreign currency translation
 
 
(1,541
)
 
—

 
13,653

 
—

Other intangible assets
 
 
$
713,318

 
$
(142,950
)
 
$
648,512

 
$
(114,219
)

Estimated amortization of intangible assets for future periods is as follows: 2014 - $39,000; 2015 - $36,000; 2016 - $35,000; 2017 - $36,000 and 2018 - $37,000.

On June 12, 2014, the Company entered into a Component Repair Program ("CRP") with its customer, General Electric ("GE"). This CRP provides for, among other items, the right to sell certain aftermarket component repair services for CFM56 engines directly to other customers as one of a few GE licensed suppliers. In addition, this CRP extends existing contracts under which the Company currently provides these services directly to GE. As consideration for these rights, the Company agreed to pay $80,000. The Company paid $41,000 in the second quarter of 2014 and the remaining payments of $20,000 and $19,000 will be paid in the fourth quarter of 2014 and the second quarter of 2015, respectively, and are included within accrued liabilities in the

10


Consolidated Financial Statements. The length of the program rights are for the remaining life of all CFM56 engine lines and the amortization of the intangible will be recognized as a reduction to sales over this life.

In the third quarter of 2014, management performed its annual impairment testing of its indefinite-lived trade names. Based on this assessment, there was no trade name impairment recognized.

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 financial covenants as of September 30, 2014, and continues to monitor its future compliance based on current and anticipated future economic conditions.

Long-term debt and notes and overdrafts payable at September 30, 2014 and December 31, 2013 consisted of:
 
 
September 30, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
3.375% Convertible Notes
 
$
—

 
$
—

 
$
55,636

 
$
76,569

Unamortized debt discount – 3.375% Convertible Notes
 
—

 
—

 
(731
)
 
—

Revolving credit agreement
 
510,557

 
520,029

 
487,920

 
482,431

Borrowings under lines of credit and overdrafts
 
25,695

 
25,695

 
1,074

 
1,074

Other foreign bank borrowings
 
—

 
—

 
405

 
410

Capital leases
 
3,543

 
3,879

 
3,120

 
3,402

 
 
539,795

 
549,603

 
547,424

 
563,886

Less current maturities
 
(26,580
)
 
 
 
(57,083
)
 
 
Long-term debt
 
$
513,215

 
 
 
$
490,341

 
 
 
Previously, the 3.375% Convertible Notes ("Notes") were eligible for conversion upon meeting certain conditions as provided in the indenture agreement including the closing stock price for 20 of the last 30 trading days in the preceding quarter being greater than or equal to 130% of the conversion price (the "conversion price eligibility requirement"). The eligibility for conversion was determined quarterly. During the second quarter of 2014, the Notes were eligible for conversion due to meeting the conversion price eligibility requirement and on March 20, the Company formally notified the note holders that they were entitled to convert the Notes. On June 16, 2014, $224 (par value) of the Notes were surrendered for conversion. On June 24, 2014, the Company exercised its right to redeem the remaining $55,412 principal amount of the Notes, effective July 31, 2014. Of the total $55,412 principal amount, $7 of these notes were redeemed with accrued interest through the redemption date. The remaining $55,405 of these notes were surrendered for conversion. The Company elected to pay cash to holders of the Notes surrendered for conversion, including the value of any residual shares of common stock that were payable to the holders electing to convert their notes into an equivalent share value, resulting in a total cash payment of $70,497 including a premium on conversion of $14,868 (reducing the equity component by $9,326, net of tax of $5,542). As a result of this transaction, the Company recaptured $23,565 of previously deducted contingent convertible debt interest which resulted in an $8,784 reduction in short-term deferred tax liabilities and a corresponding increase in current taxes payable included within accrued liabilities. The Company used borrowings under its Amended Credit Facility to finance the conversion of the Notes. The fair value of the Notes was previously determined using quoted market prices that represent Level 2 observable inputs.
   
In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement") and retained Bank of America, N.A. as Administrative Agent for the lenders. The Amended Credit Agreement extended the maturity date of the debt facility by two years from September 2016 to September 2018 and includes an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement added a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, maintained the borrowing availability of the Company at $750,000 and added an accordion feature to increase this amount to $1,000,000. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is continuing. The borrowing availability of $750,000, pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalent to $500,000. Euro-denominated borrowings are subject to foreign currency translation adjustments that are included within accumulated other non-owner changes to equity. Borrowings under the Amended Credit Agreement continue to bear interest at LIBOR plus a spread ranging from 1.10% to 1.70% depending on the Company's leverage ratio at prior quarter end. The Company paid fees and expenses of $1,261 in conjunction

11


with executing the Amended Credit Agreement in 2013; such fees will be deferred and amortized into interest expense on the accompanying Consolidated Statements of Income through its maturity.

Borrowings and availability under the Amended Credit Agreement were $510,557 and $239,443, respectively, at September 30, 2014 and $487,920 and $262,080, respectively, at December 31, 2013. Borrowings included Euro-denominated borrowings of €64,820 ($82,257) at September 30, 2014 and €114,000 ($157,320) at December 31, 2013. The interest rate on these borrowings was 1.45% and 1.36% on September 30, 2014 and December 31, 2013, respectively. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

The Company's borrowing capacity remains limited by various debt covenants in the Amended Credit Agreement, certain of which were amended in September 2013. The Amended Credit Agreement requires the Company to maintain a ratio of Consolidated Senior Debt, as defined in the Amended Credit Agreement, to Consolidated EBITDA, as defined, of not more than 3.25 times at the end of each fiscal quarter ("Senior Debt Ratio"), a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times at the end of each fiscal quarter, and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of each fiscal quarter. The Amended Credit Agreement also provides that in connection with certain permitted acquisitions with aggregate consideration in excess of $150,000, the Senior Debt Ratio and the Consolidated Total Debt to EBITDA ratio are permitted to increase to 3.50 times and 4.25 times, respectively, for a period of the four fiscal quarters ending after the closing of the acquisition. In October 2013, the Company completed the acquisition of the Männer Business, a permitted transaction pursuant to the terms of the Amended Credit Agreement. At September 30, 2014, the Company was in compliance with all financial covenants under the Amended Credit Agreement.

In addition, the Company has available approximately $40,000 in uncommitted short-term bank credit lines ("Credit Lines"), of which $25,500 was borrowed at September 30, 2014 at an interest rate of 1.16% and $1,000 was borrowed at December 31, 2013 at an interest rate of 2.13%. The Company had also borrowed $195 and $74 under overdraft facilities at September 30, 2014 and December 31, 2013, respectively. Repayments under the Credit Lines are due within one month. Repayments of the overdrafts are generally due within two days. 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 other 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.

The Company holds certain foreign capital leases. The fair value of the capital leases 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.

8. Business Reorganization

On March 14, 2014, the Company authorized the closure of production operations ("Saline operations") at its Associated Spring facility located in Saline, Michigan (the "Closure").  Saline operations, which included approximately 50 employees, primarily manufactured certain automotive engine valve springs, a highly commoditized product.  Based on changing market dynamics and increased customer demands for commodity pricing, several customers advised the Company of their intent to transition these specific springs to other suppliers, which led to the decision of the Closure.  The Closure occurred during the second quarter of 2014, however certain other facility Closure costs, including the transfer of machinery and equipment, will continue during the remainder of 2014. The Company recorded restructure and related costs of $5,552 during the first nine-months of 2014. This balance included $2,167 of employee termination costs, primarily employee severance expense and defined benefit pension and other postretirement plan (the "Plans") costs related to the accelerated recognition of actuarial losses and special termination benefits, and $3,385 of other facility costs, primarily related to asset write-downs and depreciation on assets that had been utilized through the Closure. The remaining severance liability of $315 was included within accrued liabilities as of September 30, 2014. See Note 11 for costs associated with the Plans that were impacted by the Closure. The Company also expects to incur additional costs of approximately $1,000 in 2014 related to the Closure. Closure costs are recorded primarily within Cost of Sales in the accompanying Consolidated Statements of Income and are reflected in the results of the Industrial segment.
The following table sets forth the change in the liability for the 2014 employee severance actions:

12


 
 
January 1, 2014
$
—

Employee severance costs
1,230

Payments
(915
)
September 30, 2014
$
315

The balance is expected to be paid in 2014.

9. 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 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.
 
September 30, 2014
 
December 31, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
(100
)
 
$
—

 
$
(370
)
Foreign exchange contracts
—

 
(492
)
 
—

 
(318
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
130

 
(669
)
 
543

 
(67
)
Total derivatives
$
130

 
$
(1,261
)
 
$
543

 
$
(755
)

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 nine- month periods ended September 30, 2014 and 2013 for derivatives held by the Company and designated as hedging instruments.

13


 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
312

 
$
(242
)
 
$
169

 
$
825

Foreign exchange contracts
252

 
98

 
(136
)
 
(623
)
 
$
564

 
$
(144
)
 
$
33

 
$
202


Amounts related to the interest rate swaps included within accumulated other non-owner changes to equity that were reclassified to expense during the first nine months of 2014 and 2013 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 nine- month periods ended September 30, 2014 and 2013.

The following table sets forth the (losses) gains recorded in other expense (income), net in the consolidated statements of income for the three- and nine- month periods ended September 30, 2014 and 2013 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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Foreign exchange contracts
$
141

 
$
1,361

 
$
(847
)
 
$
(2,121
)

10. 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

The following table provides the financial assets and financial liabilities reported at fair value and measured on a recurring basis:

14


 
 
 
 
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)
September 30, 2014
 
 
 
 
 
 
 
 
Asset derivatives
 
$
130

 
$
—

 
$
130

 
$
—

Liability derivatives
 
(1,261
)
 
—

 
(1,261
)
 
—

Bank acceptances
 
6,518

 
—

 
6,518

 
—

Rabbi trust assets
 
2,027

 
2,027

 
—

 
—

 
 
$
7,414

 
$
2,027

 
$
5,387

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Asset derivatives
 
$
543

 
$
—

 
$
543

 
$
—

Liability derivatives
 
(755
)
 
—

 
(755
)
 
—

Bank acceptances
 
6,461

 
—

 
6,461

 
—

Rabbi trust assets
 
1,975

 
1,975

 
—

 
—

 
 
$
8,224


$
1,975

 
$
6,249

 
$
—


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.

11. Pension and Other Postretirement Benefits

Pension and other postretirement benefits expenses consisted of the following:

15


 
Three months ended September 30,
 
Nine months ended September 30,
Pensions
2014
 
2013
 
2014
 
2013
Service cost
$
1,132

 
$
1,393

 
$
3,439

 
$
4,839

Interest cost
5,455

 
5,018

 
16,432

 
15,043

Expected return on plan assets
(8,476
)
 
(8,273
)
 
(25,529
)
 
(24,867
)
Amortization of prior service cost
152

 
185

 
486

 
567

Amortization of actuarial losses
2,141

 
4,038

 
6,374

 
12,331

Curtailment loss
—

 
—

 
219

 
199

Settlement loss
281

 
—

 
863

 
637

Special termination benefits
—

 
—

 
715

 
1,016

Net periodic benefit cost
$
685

 
$
2,361

 
$
2,999

 
$
9,765

 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
Other Postretirement Benefits
2014
 
2013
 
2014
 
2013
Service cost
$
29

 
$
58

 
$
110

 
$
176

Interest cost
540

 
513

 
1,638

 
1,548

Amortization of prior service credit
(218
)
 
(223
)
 
(653
)
 
(783
)
Amortization of actuarial losses
268

 
241

 
751

 
762

Curtailment loss (gain)
—

 
—

 
4

 
(3,081
)
Net periodic benefit cost
$
619

 
$
589

 
$
1,850

 
$
(1,378
)

Curtailment losses and special termination benefits during the first nine months of 2014 relate to certain defined benefit pension and other postretirement benefit plans that were impacted by the closure of production operations at the Associated Spring facility located in Saline, Michigan. The settlement loss during the first nine months of 2014 reflects payments that were made to participants within certain of the Company's defined benefit pension plans. The curtailment loss (gain), settlement loss and special termination benefits during the first nine months of 2013 relate to certain defined benefit pension and other postretirement benefit plans that were impacted by the completed sale of the Barnes Distribution North America business("BDNA"). Amounts related to BDNA have been segregated from continuing operations and reported as discontinued operations within the Consolidated Financial Statements during the first nine months of 2013.

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 of the Edison, New Jersey facility 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 estimated its assessment of a withdrawal liability, on a pre-tax discounted basis, and recorded a liability of $2,788 during the first quarter of 2013. The expense was recorded within discontinued operations. The Company completed the sale of BDNA and ceased making contributions into the multi-employer plan during the second quarter of 2013. The Company settled the withdrawal liability in the fourth quarter of 2013, with the agreed-upon settlement payment being made during the first quarter of 2014.

12. Income Taxes

The Company's effective tax rate from continuing operations for the first nine months of 2014 was 27.9% compared with 40.6% in the first nine months of 2013 and 32.8% for the full year 2013 which includes the impact of $16,428 of tax expense related to the April 16, 2013 U.S. Court Decision (see Note 15). Excluding the impact of the U.S. Tax Court Decision, the Company's effective tax rate from continuing operations for full year 2013 was 17.5%. The increase in the first nine months 2014 effective tax rate from the full year 2013 rate, as adjusted for the U.S. Tax Court Decision, is primarily due to a change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2014, the expiration of certain tax holidays and the increase in the planned repatriation of a portion of current year foreign earnings to the U.S.

The Aerospace and Industrial segments were previously awarded international tax holidays. All of the tax holidays for which the Company currently receives benefit are expected to expire in 2015 and 2016.

16



13. Changes in Accumulated Other Comprehensive Income by Component

The following table sets forth the changes in accumulated other comprehensive income, net of tax, by component for the nine- month period ended September 30, 2014 and 2013:
 
Gains and Losses on Cash Flow Hedges
 
Pension and Other Postretirement Benefit Items
 
Foreign Currency Items
 
Total
January 1, 2014
$
(519
)
 
$
(73,273
)
 
$
99,736

 
$
25,944

Other comprehensive loss before reclassifications to consolidated statements of income
(585
)
 
(7,081
)
 
(51,837
)
 
(59,503
)
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income
618

 
5,563

 
—

 
6,181

Net current-period other comprehensive income (loss)
33

 
(1,518
)
 
(51,837
)
 
(53,322
)
September 30, 2014
$
(486
)
 
$
(74,791
)
 
$
47,899

 
$
(27,378
)

 
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 before reclassifications to consolidated statements of income
321

 
12,671

 
6,201

 
19,193

Amounts reclassified from accumulated other comprehensive (loss) income to the consolidated statements of income
(119
)
 
7,143

 
4,143

 
11,167

Net current-period other comprehensive income
202

 
19,814

 
10,344

 
30,360

September 30, 2013
$
(230
)
 
$
(126,627
)
 
$
90,465

 
$
(36,392
)

The following table sets forth the reclassifications out of accumulated other comprehensive income by component for the three- and nine- month periods ended September 30, 2014 and 2013:

17


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 September 30, 2014
 
Three months ended September 30, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
 

     Interest rate contracts
 
$
(224
)
 
$
(220
)
 
Interest expense
     Foreign exchange contracts
 
(239
)
 
132

 
Net sales
 
 
(463
)
 
(88
)
 
Total before tax
 
 
136

 
53

 
Tax benefit
 
 
(327
)
 
(35
)
 
Net of tax
 
 
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
 
 
     Amortization of prior-service credits, net
 
66

 
$
38

 
(A)
Amortization of actuarial losses
 
(2,409
)
 
(4,279
)
 
(A)
Curtailment gain
 
—

 
—

 
(A)
Settlement loss
 
(281
)
 
—

 
(A)
 
 
(2,624
)
 
(4,241
)
 
Total before tax
 
 
814

 
1,500

 
Tax benefit
 
 
(1,810
)
 
(2,741
)
 
Net of tax
 
 
 
 
 
 
 
Foreign currency items
 
 
 
 
 
 
Charge to cumulative translation adjustment (sale of BDNA)
 
$
—

 
$
—

 
Income from discontinued operations
 
 
—

 
—

 
Tax benefit
 
 
—

 
—

 
Net of tax
Total reclassifications in the period
 
$
(2,137
)
 
$
(2,776
)
 
 
(A) These accumulated other comprehensive income components are included within the computation of net periodic pension cost. See Note 11.



18


Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
Affected Line Item in the Consolidated Statements of Income
 
 
Nine months ended September 30, 2014
 
Nine months ended September 30, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
 
 
     Interest rate contracts
 
$
(663
)
 
$
(631
)
 
Interest expense
     Foreign exchange contracts
 
(259
)
 
659

 
Net sales
 
 
(922
)
 
28

 
Total before tax
 
 
304

 
91

 
Tax benefit
 
 
(618
)
 
119

 
Net of tax
 
 
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
 
 
     Amortization of prior service credits, net
 
$
167

 
$
216

 
(A)
Amortization of actuarial losses
 
(7,125
)
 
(13,093
)
 
(A)
Curtailment (loss) gain, net
 
(223
)
 
2,882

 
(A)
Settlement loss
 
(863
)
 
(637
)
 
(A)
 
 
(8,044
)
 
(10,632
)
 
Total before tax
 
 
2,481

 
3,489

 
Tax benefit
 
 
(5,563
)
 
(7,143
)
 
Net of tax
 
 
 
 
 
 
 
Foreign currency items
 
 
 
 
 
 
Charge to cumulative translation adjustment (sale of BDNA)
 
$
—

 
$
(4,143
)
 
Income from discontinued operations
 
 
—

 
—

 
Tax benefit
 
 
—

 
(4,143
)
 
Net of tax
Total reclassifications in the period
 
$
(6,181
)
 
$
(11,167
)
 
 
(A) These accumulated other comprehensive income components are included within the computation of net periodic pension cost. See Note 11.

14. 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.

The Industrial segment 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, packaging, electronics, medical devices, and energy. Focused on innovative 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 precision mold assemblies - the enabling technologies for many complex injection molding applications. It is a leading manufacturer and supplier of precision mechanical products, including precision mechanical springs and nitrogen gas products. Industrial also manufactures high-precision 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.

The Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturer ("OEM") turbine engine, airframe and industrial gas turbine builders throughout the world, and the military. Aerospace Aftermarket also provides jet engine component overhaul and repair ("MRO") services, including the CRP's, for many of the world's major turbine engine manufacturers, commercial airlines and the military. Aerospace Aftermarket activities

19


also include the manufacture and delivery of spare parts, including the 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.

The following tables set forth information about the Company's operations by its two reportable segments:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
   Industrial
$
207,230

 
$
167,747

 
$
623,886

 
$
503,809

   Aerospace
110,429

 
101,744

 
327,951

 
296,622

   Intersegment sales
—

 
—

 
(5
)
 
(1
)
Total net sales
$
317,659

 
$
269,491

 
$
951,832

 
$
800,430

 
 
 
 
 
 
 
 
Operating profit
 
 
 
 
 
 
 
   Industrial
$
33,205

 
$
20,874

 
$
81,344

 
$
56,406

   Aerospace
17,680

 
7,157

 
50,047

 
32,730

Total operating profit
50,885

 
28,031

 
131,391

 
89,136

   Interest expense
2,435

 
2,401

 
8,558

 
10,000

   Other expense (income), net
741

 
241

 
1,768

 
1,702

Income from continuing operations before income taxes
$
47,709

 
$
25,389

 
$
121,065

 
$
77,434


 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
   Industrial
$
1,359,174

 
$
1,410,400

   Aerospace
658,192

 
567,080

   Other (A)
138,595

 
146,193

Total assets
$
2,155,961

 
$
2,123,673


(A) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.

15. 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 September 30, 2014 and December 31, 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. As a result of the unfavorable Tax Court Decision, the Company recorded an additional tax charge during 2013 for $16,428.


20


In November 2013, the Company made a cash payment of approximately $12,700 related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its opening brief with the United States Court of Appeals for the Second Circuit on February 13, 2014 and presented its oral arguments on October 1, 2014. The Company does not expect a decision until early 2015.

16. Accounting Changes

In July 2013, the Financial Accounting Standards Board (FASB) issued guidance related to the financial statement presentation of an unrecognized tax benefit when certain tax losses or tax credit carryforwards exist. This guidance requires that companies present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The provisions of the amended guidance were effective for the Company, and adopted, in the first quarter of 2014. The provisions did not have a material impact on the presentation of the Company's consolidated financial statements.

17. Subsequent Event

On October 15, 2014, the Company entered into a Note Purchase Agreement (“Note Purchase Agreement”), among the Company and New York Life Insurance Company, New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account (BOLI 30C), as purchasers, for the issuance of $100,000 aggregate principal amount of 3.97% Senior Notes due October 17, 2024 (the “3.97% Notes”). The Company completed funding of the transaction and issued the 3.97% Notes on October 17, 2014.

The 3.97% Notes are senior unsecured obligations of the Company and will pay interest semi-annually on April 17 and October 17 of each year at an annual rate of 3.97%. The 3.97% Notes will mature on October 17, 2024 unless earlier prepaid in accordance with their terms. Subject to certain conditions, the Company may, at its option, prepay all or any part of the 3.97% Notes in an amount equal to 100% of the principal amount of the 3.97% Notes so prepaid, plus any accrued and unpaid interest to the date of prepayment, plus the Make-Whole Amount, as defined in the Note Purchase Agreement, with respect to such principal amount being prepaid.
The Note Purchase Agreement contains customary affirmative and negative covenants, including, among others, limitations on indebtedness, liens, investments, restricted payments, dispositions and business activities. The Note Purchase Agreement also requires the Company to maintain a ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, of not more than 3.25 times at the end of each fiscal quarter, provided that such ratio may increase to 3.50 times following the consummation of certain acquisitions. In addition, the Note Purchase Agreement requires the Company to maintain (i) a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times at the end of each fiscal quarter, provided that such ratio may increase to 4.25 times following the consummation of certain acquisitions, and (ii) a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of any fiscal quarter.
__________________________________________________________________________________________

With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month and nine-month periods ended September 30, 2014 and 2013, 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 October 27, 2014 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.


21


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 September 30, 2014 and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2014 and September 30, 2013 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2014 and September 30, 2013. 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, 2013, 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, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2013, 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
 
October 27, 2014
 



22


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, 2013. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website: www.bginc.com.

Third Quarter 2014 Highlights

In the third quarter of 2014, sales increased by $48.2 million, or 17.9% from the third quarter of 2013, to $317.7 million. This increase was driven primarily by a $29.6 million sales contribution from the Männer Business. Organic sales increased by $20.4 million, or 7.6%, with growth in both the Industrial and Aerospace segments.

Operating income in the third quarter of 2014 increased 81.5% to $50.9 million from the third quarter of 2013 and operating margin increased from 10.4% to 16.0%. Operating income benefited from the profit contribution of both the Männer Business and increased organic sales, partially offset by increased employee related costs, $0.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $0.5 million of pre-tax restructuring charges related to the closure of production operations at the facility in Saline, Michigan. The third quarter of 2013 also included an $8.6 million pre-tax inventory valuation charge related to a specific family of spare parts within the repair and overhaul business.

RESULTS OF OPERATIONS

Net Sales
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Industrial
$
207.2

 
$
167.7

 
$
39.5

 
23.5
%
 
$
623.9

 
$
503.8

 
$
120.1

 
23.8
%
Aerospace
110.4

 
101.7

 
8.7

 
8.5
%
 
328.0

 
296.6

 
31.3

 
10.6
%
Intersegment sales
—

 
—

 
—

 
—
%
 
—

 
—

 
—

 
—
%
Total
$
317.7

 
$
269.5

 
$
48.2

 
17.9
%
 
$
951.8

 
$
800.4

 
$
151.4

 
18.9
%

The Company reported net sales of $317.7 million in the third quarter of 2014, an increase of $48.2 million or 17.9%, from the third quarter of 2013. The acquisition of the Männer Business in 2013 provided $29.6 million of net sales during the third quarter of 2014. Organic sales increased by $20.4 million, which included an increase of $11.7 million at Industrial and an increase of $8.7 million at Aerospace. The strengthening of the U.S. dollar against foreign currencies decreased net sales by approximately $1.8 million.

The Company reported net sales of $951.8 million in the first nine months of 2014, an increase of $151.4 million or 18.9%, from the first nine months of 2013. The acquisition of the Männer Business in 2013 provided $103.3 million of net sales during the first nine months of 2014. Organic sales increased by $46.4 million, which included an increase of $15.1 million at Industrial and an increase of $31.3 million at Aerospace. The weakening of the U.S. dollar against foreign currencies increased net sales by approximately $1.7 million.















23



Expenses and Operating Income
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Cost of sales
$
206.4

 
$
189.5

 
$
16.9

 
8.9
%
 
$
632.7

 
$
544.6

 
$
88.1

 
16.2
%
    % sales
65.0
%
 
70.3
%
 

 

 
66.5
%
 
68.0
%
 
 
 
 
Gross profit (1)
$
111.2

 
$
80.0

 
$
31.2

 
39.1
%
 
$
319.2

 
$
255.8

 
$
63.3

 
24.8
%
    % sales
35.0
%
 
29.7
%
 

 

 
33.5
%
 
32.0
%
 
 
 
 
Selling and administrative expenses
$
60.4

 
$
52.0

 
$
8.4

 
16.1
%
 
$
187.8

 
$
166.7

 
$
21.1

 
12.7
%
    % sales
19.0
%
 
19.3
%
 
 
 
 
 
19.7
%
 
20.8
%
 
 
 
 
Operating income
$
50.9

 
$
28.0

 
$
22.9

 
81.5
%
 
$
131.4

 
$
89.1

 
$
42.3

 
47.4
%
    % sales
16.0
%
 
10.4
%
 
 
 
 
 
13.8
%
 
11.1
%
 
 
 
 
(1) Sales less cost of sales. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cost of sales in the third quarter of 2014 increased 8.9% from the 2013 period, while gross profit margin increased from 29.7% in the 2013 period to 35.0% in the 2014 period. Gross margins improved at both Industrial and Aerospace. Third quarter 2013 cost of sales included an $8.6 million pre-tax inventory valuation charge related to a specific family of spare parts within the repair and overhaul business at Aerospace. Gross margins at Aerospace would have remained flat relative to the prior year period in the absence of this item. The acquisition of the Männer Business resulted in a higher percentage of sales being driven by Industrial during the 2014 period. Gross profit benefits from the Männer Business were partially offset by the $0.2 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and charges of $0.5 million related to the Closure of the Saline operations. Selling and administrative expenses in the third quarter of 2014 increased 16.1% from the 2013 period due primarily to the incremental operations of the Männer Business and $0.7 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business. The third quarter of 2013 also included transaction costs related to the acquisition of the Männer Business. As a percentage of sales, selling and administrative costs decreased slightly from 19.3% in the third quarter of 2013 to 19.0% in the 2014 period. Operating income in the third quarter of 2014 increased 81.5% to $50.9 million from the third quarter of 2013 and operating income margin increased from 10.4% to 16.0%.

Cost of sales in the first nine months of 2014 increased 16.2% from the 2013 period, while gross profit margin increased from 32.0% in the 2013 period to 33.5% in the 2014 period. Gross margins improved at both Industrial and Aerospace during the first nine months of 2014. Cost of sales in 2013 included an $8.6 million pre-tax inventory valuation charge related to a specific family of spare parts within the repair and overhaul business at Aerospace. Gross margins at Aerospace would have been down slightly relative to the prior year period in the absence of this item. The acquisition of the Männer Business resulted in a higher percentage of sales being driven by Industrial during the 2014 period. Gross profit benefits from the Männer Business were partially offset by $4.0 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and charges of $4.9 million related to the Closure of the Saline operations. Selling and administrative expenses in the first nine months of 2014 increased 12.7% from the 2013 period due primarily to the incremental operations of the Männer Business, $3.7 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $0.6 million of charges related to the Closure of the Saline operations. Operating income during the first nine months of 2013 also included $10.5 million of non-recurring stock compensation expenses related to the modification of outstanding equity awards granted to the former Chief Executive Officer ("CEO Transition Costs") as well as transaction costs related to the acquisition of the Männer Business. As a percentage of sales, selling and administrative costs decreased from 20.8% in the first nine months of 2013 to 19.7% in the 2014 period. Operating income in the first nine months of 2014 increased 47.4% to $131.4 million from the first nine months of 2013 and operating income margin increased from 11.1% to 13.8%.

Interest expense
Interest expense remained flat in the third quarter of 2014 as compared with the prior year amount. Interest expense decreased by $1.4 million in first nine months of 2014 compared to the prior year amount. The decrease during the first nine months of 2014 was primarily the result of lower average interest rates, partially offset by higher average borrowings.





24



Other expense (income), net
Other expense (income), net in the third quarter of 2014 was $0.7 million compared to $0.2 million in the third quarter of 2013. In the first nine months of 2014, other expense (income), net was $1.8 million compared to $1.7 million in the first nine months of 2013.

Income Taxes
The Company's effective tax rate from continuing operations for the first nine months of 2014 was 27.9% compared with 40.6% in the first nine months of 2013 and 32.8% for the full year 2013 which includes the impact of $16.4 million of tax expense related to the April 16, 2013 U.S. Court Decision (see Note 15 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 full year 2013 was 17.5%. The increase in the first nine months of 2014 effective tax rate from the full year 2013 rate, as adjusted for the U.S. Tax Court Decision, is primarily due to a change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2014, the expiration of certain tax holidays and the increase in the planned repatriation of a portion of current year foreign earnings to the U.S.

The Industrial and Aerospace segments were previously awarded international tax holidays. All of the tax holidays for which the Company currently receives benefit are expected to expire in 2015 and 2016.

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 $16.4 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. As a result of the unfavorable Tax Court Decision, the Company recorded an additional tax charge during 2013 for $16.4 million.

In November 2013, the Company made a cash payment of approximately $12.7 million related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its opening brief with the United States Court of Appeals for the Second Circuit on February 13, 2014 and presented its oral arguments on October 1, 2014. The Company does not expect a decision until early 2015.

Discontinued Operations
In April 2013, the Company completed the sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC"). The results of BDNA were segregated and presented as discontinued operations during the first quarter of 2013. In the first nine months of 2013, the Company recorded a $197.7 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.














25



Income and Income per Share
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Income from continuing operations
$
34.3

 
$
21.4

 
$
12.9

 
60.4
%
 
$
87.3

 
$
46.0

 
$
41.3

 
89.7
 %
(Loss) income from discontinued operations, net of income taxes
(0.4
)
 
(0.5
)
 
0.1

 
10.7
%
 
(0.4
)
 
197.7

 
$
(198.1
)
 
NM

Net income
$
33.9

 
$
20.9

 
$
13.0

 
62.1
%
 
$
86.9

 
$
243.7

 
$
(156.8
)
 
(64.4
)%
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Income from continuing operations
$
0.63

 
$
0.40

 
$
0.23

 
57.5
%
 
$
1.60

 
$
0.86

 
$
0.74

 
86.0
 %
    (Loss) income from discontinued operations, net of income taxes
(0.01
)
 
(0.01
)
 
—

 
—
%
 
(0.01
)
 
3.67

 
(3.68
)
 
NM

    Net income
$
0.62

 
$
0.39

 
$
0.23

 
59.0
%
 
$
1.59

 
$
4.53

 
$
(2.94
)
 
(64.9
)%
  Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Income from continuing operations
$
0.62

 
$
0.39

 
$
0.23

 
59.0
%
 
$
1.57

 
$
0.84

 
$
0.73

 
86.9
 %
    (Loss) income from discontinued operations, net of income taxes
(0.01
)
 
(0.01
)
 
—

 
—
%
 
(0.01
)
 
3.60

 
(3.61
)
 
NM

    Net income
$
0.61

 
$
0.38

 
$
0.23