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, 2015
has been derived from the
2015
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, 2015
. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair statement of the results, have been included. Operating results for the
nine-month period
ended
September 30, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
. Certain reclassifications have been made to prior year amounts.
2. Acquisition
On August 31, 2016, the Company, through three of its subsidiaries (collectively, the “Purchaser”), completed substantially all of its acquisition of the molds business of Adval Tech Holding AG and Adval Tech Holdings (Asia) Pte. Ltd. ("FOBOHA") (collectively, the “Sellers”). FOBOHA is headquartered in Haslach, Germany and operates out of three manufacturing facilities located in Germany, Switzerland and China. The Company completed it's purchase of the Germany and Switzerland businesses on August 31, 2016. The purchase of the China business required government approval which was granted on September 30, 2016. On October 7, 2016, shares of the China operations were subsequently transferred to the Company upon payment, per the terms of the Sale and Purchase Agreement for these respective operations ("China SPA"). The Company, pursuant to the terms and conditions within the Sale and Purchase Agreement ("FOBOHA SPA"), assumed economic control of the China business effective August 31, 2016. Having both economic control and the benefits and risks of ownership during the period from August 31, 2016 through September 30, 2016, the Company included the results of the China business within the consolidated results of operations of the Company during this period.
FOBOHA specializes in the development and manufacture of complex plastic injection molds for packaging, medical, consumer and automotive applications. The Company acquired FOBOHA for an aggregate cash purchase price of CHF
140,762
(
$143,094
), which is subject to post closing adjustments under the terms of the FOBOHA SPA. The Company paid CHF
128,528
(
$130,658
) in cash, using cash on hand and borrowings under the Company's revolving credit facility and recorded a payable to the Sellers of CHF
9,334
(
$9,489
) for the China operations and a liability of CHF
2,900
(
$2,947
) related to the estimated post closing adjustments, both of which are included within accrued liabilities on the consolidated balance sheet as of September 30, 2016. The purchase price includes preliminary adjustments under the terms of the FOBOHA SPA, including approximately CHF
11,342
(
$11,530
) related to cash acquired. In connection with the acquisition, the Company recorded
$37,600
of intangible assets and
$73,753
of goodwill. See Note 5 to the Consolidated Financial Statements. Pro forma operating results for the FOBOHA acquisition are not presented as the results would not be significantly different than historical results.
During the nine months ended September 30, 2016, the Company incurred
$2,118
of acquisition-related costs related to the FOBOHA acquisition. These costs include due diligence costs and transaction costs to complete the acquisition and have been recognized in the Consolidated Statements of Income as selling and administrative expenses.
The operating results of FOBOHA have been included in the Consolidated Statements of Income since the date of acquisition. The Company reported
$4,032
in net sales for the period from the acquisition date through September 30, 2016. FOBOHA results have been included within the Industrial segment's operating profit.
3. Net Income Per Common Share
For the purpose of computing diluted 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. For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding was increased by
366,251
and
388,777
for the three-month periods ended
September 30, 2016
and
2015
, respectively, and by
436,941
and
507,197
for the
nine-month periods ended
September 30, 2016
and
2015
, respectively, to account for the potential dilutive effect of stock-based incentive plans. There were no adjustments to net income for the purposes of computing income available to common stockholders for the 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, 2016
and
2015
, the Company excluded
209,907
and
209,102
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, 2016
and
2015
, the Company excluded
315,440
and
203,001
stock options, respectively, from the calculation of weighted-average diluted shares outstanding as the stock options would have been anti-dilutive. The Company also excluded
31,028
performance share awards from the calculation of weighted-average diluted shares outstanding during the nine- month period ended September 30, 2016 as such awards also would have been anti-dilutive. There were
no
performance share awards excluded from the calculation of weighted-average diluted shares outstanding during the three- month period ended September 30, 2016 as no awards would have been anti-dilutive.
The Company granted
142,000
stock options,
119,814
restricted stock unit awards and
108,400
performance share awards ("PSAs") in February 2016 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 weighted-average common shares outstanding as they contain nonforfeitable rights to dividend payments. The performance share awards are part of the long-term Performance Share Award Program (the "Awards Program") and are based on performance goals that are driven by a combination of independently measured metrics (depending on the grant year) with each metric being weighted equally. The metrics for awards granted in 2015 include the Company’s total shareholder return (“TSR”), return on invested capital (“ROIC”) and operating income before depreciation and amortization growth. The metrics for the awards granted in 2016 include TSR and ROIC. The TSR and operating income before depreciation and amortization growth metrics are designed to assess the long-term Company performance relative to the performance of companies included in the Russell 2000 Index over a
three
-year performance period. The ROIC metric is measured based on pre-established Company targets over the same period. 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 PSA was determined using a Monte Carlo valuation method as the award contains a market condition.
4. Inventories
The components of inventories consisted of:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Finished goods
|
$
|
70,221
|
|
|
$
|
76,836
|
|
Work-in-process
|
105,495
|
|
|
77,061
|
|
Raw material and supplies
|
57,693
|
|
|
54,714
|
|
|
$
|
233,409
|
|
|
$
|
208,611
|
|
5. 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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
Aerospace
|
|
Total Company
|
January 1, 2016
|
$
|
557,206
|
|
|
$
|
30,786
|
|
|
$
|
587,992
|
|
Goodwill acquired
|
73,753
|
|
|
—
|
|
|
73,753
|
|
Foreign currency translation
|
4,295
|
|
|
—
|
|
|
4,295
|
|
September 30, 2016
|
$
|
635,254
|
|
|
$
|
30,786
|
|
|
$
|
666,040
|
|
The changes recorded at Industrial include
$73,753
of goodwill resulting from the acquisition of FOBOHA in August 2016. The amount allocated to goodwill reflects the benefits that the Company expects to realize from synergies created by combining the operations of FOBOHA, future enhancements to technology, geographical expansion and FOBOHA's assembled workforce. None of the recognized goodwill is expected to be deductible for income tax purposes. The final purchase price is
subject to post-closing adjustments and purchase price allocations are subject to the finalized valuation of certain assets and liabilities, therefore goodwill acquired may require adjustment accordingly.
In the second quarter of 2016, management performed its annual impairment testing of goodwill. Based on this assessment, there was
no
goodwill impairment recognized.
Other
Intangible Assets:
Other intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Range of
Life -Years
|
|
Gross Amount
|
|
Accumulated Amortization
|
|
Gross Amount
|
|
Accumulated Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Revenue sharing programs (RSPs)
|
Up to 30
|
|
$
|
293,700
|
|
|
$
|
(93,142
|
)
|
|
$
|
293,700
|
|
|
$
|
(84,629
|
)
|
Component repair programs (CRPs)
|
Up to 30
|
|
111,839
|
|
|
(9,243
|
)
|
|
111,839
|
|
|
(6,054
|
)
|
Customer lists/relationships
|
10-16
|
|
213,066
|
|
|
(50,283
|
)
|
|
194,566
|
|
|
(41,786
|
)
|
Patents and technology
|
6-14
|
|
84,052
|
|
|
(35,519
|
)
|
|
69,352
|
|
|
(29,551
|
)
|
Trademarks/trade names
|
10-30
|
|
11,950
|
|
|
(9,871
|
)
|
|
11,950
|
|
|
(9,412
|
)
|
Other
|
Up to 15
|
|
20,551
|
|
|
(16,115
|
)
|
|
20,551
|
|
|
(15,413
|
)
|
|
|
|
735,158
|
|
|
(214,173
|
)
|
|
701,958
|
|
|
(186,845
|
)
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
42,770
|
|
|
—
|
|
|
38,370
|
|
|
—
|
|
Foreign currency translation
|
|
|
(21,672
|
)
|
|
—
|
|
|
(25,161
|
)
|
|
—
|
|
Total other intangible assets
|
|
|
$
|
756,256
|
|
|
$
|
(214,173
|
)
|
|
$
|
715,167
|
|
|
$
|
(186,845
|
)
|
Estimated amortization of intangible assets for future periods is as follows: 2016 -
$37,000
; 2017 -
$41,000
; 2018 -
$42,000
; 2019 -
$40,000
and 2020 -
$38,000
.
In connection with the acquisition of FOBOHA in August 2016, the Company recorded intangible assets of
$37,600
, which includes
$18,500
of customer relationships,
$14,700
of patents and technology and
$4,400
of an indefinite life trade name. The weighted-average useful lives of the acquired amortizable assets were
16
years and
7
years, respectively.
In the second quarter of 2016 management performed its annual impairment testing of its trade names, indefinite-lived intangible assets. Based on this assessment, there was
no
impairment recognized.
The Company entered into Component Repair Programs ("CRPs") with General Electric ("GE") during the fourth quarter of 2013 ("CRP 1"), the second quarter of 2014 ("CRP 2") and the fourth quarter of 2015 ("CRP 3"). The CRPs provide for, among other items, the right to sell certain aftermarket component repair services for CFM56, CF6, CF34 and LM engines directly to other customers as one of a few GE licensed suppliers. In addition, the CRPs extend certain existing contracts under which the Company currently provides these services directly to GE.
The Company agreed to pay
$26,639
as consideration for the rights related to CRP 1. Of this balance, the Company paid
$16,639
in the fourth quarter of 2013,
$9,100
in the fourth quarter of 2014, and
$900
in the first quarter of 2016. The Company agreed to pay
$80,000
as consideration for the rights related to CRP 2. The Company paid
$41,000
in the second quarter of 2014,
$20,000
in the fourth quarter of 2014 and
$19,000
in the second quarter of 2015. The Company agreed to pay
$5,200
as consideration for the rights related to CRP 3. Of this balance, the Company paid
$2,000
in the fourth quarter of 2015 and the remaining payment of
$3,200
is due by December 31, 2016 and has been included within accrued liabilities. The Company recorded the CRP payments as an intangible asset which is recognized as a reduction of sales over the remaining useful life of these engine programs.
6. 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, 2016
, 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, 2016
and
December 31, 2015
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Revolving credit agreement
|
|
$
|
406,410
|
|
|
$
|
407,881
|
|
|
$
|
379,700
|
|
|
$
|
375,188
|
|
3.97% Senior Notes
|
|
100,000
|
|
|
108,447
|
|
|
100,000
|
|
|
102,484
|
|
Borrowings under lines of credit and overdrafts
|
|
13,200
|
|
|
13,200
|
|
|
22,680
|
|
|
22,680
|
|
Capital leases
|
|
6,175
|
|
|
6,398
|
|
|
7,105
|
|
|
7,503
|
|
Other foreign bank borrowings
|
|
1,686
|
|
|
1,653
|
|
|
421
|
|
|
410
|
|
|
|
527,471
|
|
|
537,579
|
|
|
509,906
|
|
|
508,265
|
|
Less current maturities
|
|
(15,411
|
)
|
|
|
|
(24,195
|
)
|
|
|
Long-term debt
|
|
$
|
512,060
|
|
|
|
|
$
|
485,711
|
|
|
|
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 the administrative agent for the lenders. The
$750,000
Amended Credit Agreement matures in
September 2018
. The Amended Credit Agreement added a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, and included an accordion feature to increase the borrowing availability of the Company 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
. Borrowings under the Amended Credit Agreement 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.
Borrowings and availability under the Amended Credit Agreement were $
406,410
and $
343,590
, respectively, at
September 30, 2016
and
$379,700
and
$370,300
, respectively, at December 31, 2015. The average interest rate on these borrowings was
1.62%
and
1.50%
on
September 30, 2016
and December 31, 2015, respectively. During the third quarter, the Company borrowed
$100,000
under the Amended Credit Facility through an international subsidiary. The proceeds were distributed to the Parent Company and subsequently used to pay down U.S. borrowings under the Amended Credit Agreement. The fair value of the borrowings is based on observable Level
2
inputs. The borrowings were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
In October 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, as purchasers, for the issuance of
$100,000
aggregate principal amount of
3.97%
Senior Notes due
October 17, 2024
(the “
3.97%
Senior Notes”). The Company completed funding of the transaction and issued the
3.97%
Senior Notes on
October 17, 2014
.
The
3.97%
Senior Notes are senior unsecured obligations of the Company and the Company pays interest semi-annually on April 17 and October 17 of each year at an annual rate of
3.97%
. The
3.97%
Senior 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%
Senior Notes in an amount equal to
100%
of the principal amount of the
3.97%
Senior 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 fair value of the
3.97%
Senior Notes was determined using the US Treasury yield and a long-term credit spread for similar types of borrowings, that represent Level
2
observable inputs.
The Company's borrowing capacity may be limited by various debt covenants in the Amended Credit Agreement and the Note Purchase Agreement (the "Agreements"). The Agreements contain customary affirmative and negative covenants, including, among others, limitations on indebtedness, liens, investments, restricted payments, dispositions and business activities. The Agreements require 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 Agreements require 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.
In addition, the Company has available approximately
$56,000
in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. Under the Credit Lines,
$13,200
was borrowed at
September 30, 2016
at an average interest rate of
1.38%
and
$22,500
was borrowed at December 31, 2015 at an average interest rate of
1.56%
. The Company had also borrowed
$0
and
$180
under the overdraft facilities at
September 30, 2016
and
December 31, 2015
, respectively. Repayments under the Credit Lines are due within one month 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 has capital leases at the Thermoplay and Männer businesses. The fair value of the capital leases is 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 also has other foreign bank borrowings, including borrowings at FOBOHA. The fair value of the other foreign bank borrowings is 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.
7. Derivatives
The Company has manufacturing and sales 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 Euro, British pound sterling, U.S. dollar, Canadian dollar, Japanese yen, Singapore dollar, Korean won, Swedish kroner, Chinese renminbi, Mexican peso 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 Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the first nine months of 2016, as presented on the consolidated
statements of cash flows, include
$3,822
of net cash inflows from the settlement of foreign currency hedges related to intercompany financing.
The following table sets forth the fair value amounts of derivative instruments held by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
(238
|
)
|
|
$
|
—
|
|
|
$
|
(357
|
)
|
Foreign exchange contracts
|
—
|
|
|
(355
|
)
|
|
484
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
74
|
|
|
(333
|
)
|
|
215
|
|
|
(101
|
)
|
Total derivatives
|
$
|
74
|
|
|
$
|
(926
|
)
|
|
$
|
699
|
|
|
$
|
(458
|
)
|
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 (loss) gain, net of tax, recorded in accumulated other comprehensive income (loss), net of tax, for the three- and nine- month periods ended
September 30, 2016
and
2015
for derivatives held by the Company and designated as hedging instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
137
|
|
|
$
|
(151
|
)
|
|
$
|
74
|
|
|
$
|
(320
|
)
|
Foreign exchange contracts
|
(287
|
)
|
|
(23
|
)
|
|
(654
|
)
|
|
447
|
|
|
$
|
(150
|
)
|
|
$
|
(174
|
)
|
|
$
|
(580
|
)
|
|
$
|
127
|
|
Amounts related to the interest rate swaps included within accumulated other comprehensive income (loss) that were reclassified to expense during the first nine months of
2016
and
2015
resulted in a fixed rate of interest of
1.03%
plus the borrowing spread for the first
$100,000
of one-month LIBOR borrowings. Additionally, there were
no
amounts recognized in income for hedge ineffectiveness during the three- and nine-month periods ended
September 30, 2016
and
2015
.
The following table sets forth the net (loss) gain recorded in other expense (income), net in the consolidated statements of income for the three- and nine-month periods ended
September 30, 2016
and
2015
for non-designated derivatives held by the Company. Such amounts were substantially offset by the net (gain) loss recorded on the underlying hedged asset or liability, also recorded in other expense (income), net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
$
|
(3,755
|
)
|
|
$
|
(2,431
|
)
|
|
$
|
(7,506
|
)
|
|
$
|
4,514
|
|
8. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
—
|
|
Liability derivatives
|
|
(926
|
)
|
|
—
|
|
|
(926
|
)
|
|
—
|
|
Bank acceptances
|
|
9,946
|
|
|
—
|
|
|
9,946
|
|
|
—
|
|
Rabbi trust assets
|
|
2,187
|
|
|
2,187
|
|
|
—
|
|
|
—
|
|
|
|
$
|
11,281
|
|
|
$
|
2,187
|
|
|
$
|
9,094
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Asset derivatives
|
|
$
|
699
|
|
|
$
|
—
|
|
|
$
|
699
|
|
|
$
|
—
|
|
Liability derivatives
|
|
(458
|
)
|
|
—
|
|
|
(458
|
)
|
|
—
|
|
Bank acceptances
|
|
10,823
|
|
|
—
|
|
|
10,823
|
|
|
—
|
|
Rabbi trust assets
|
|
2,159
|
|
|
2,159
|
|
|
—
|
|
|
—
|
|
|
|
$
|
13,223
|
|
|
$
|
2,159
|
|
|
$
|
11,064
|
|
|
$
|
—
|
|
The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based 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.
9. Pension and Other Postretirement Benefits
Pension and other postretirement benefits expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Pensions
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
1,354
|
|
|
$
|
1,374
|
|
|
$
|
4,056
|
|
|
$
|
4,126
|
|
Interest cost
|
4,869
|
|
|
4,976
|
|
|
14,650
|
|
|
14,968
|
|
Expected return on plan assets
|
(7,564
|
)
|
|
(8,048
|
)
|
|
(22,774
|
)
|
|
(24,207
|
)
|
Amortization of prior service cost
|
52
|
|
|
76
|
|
|
157
|
|
|
231
|
|
Amortization of actuarial losses
|
2,697
|
|
|
3,730
|
|
|
8,109
|
|
|
11,215
|
|
Net periodic benefit cost
|
$
|
1,408
|
|
|
$
|
2,108
|
|
|
$
|
4,198
|
|
|
$
|
6,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Other Postretirement Benefits
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
92
|
|
|
$
|
109
|
|
Interest cost
|
440
|
|
|
459
|
|
|
1,324
|
|
|
1,377
|
|
Amortization of prior service credit
|
(93
|
)
|
|
(141
|
)
|
|
(280
|
)
|
|
(423
|
)
|
Amortization of actuarial losses
|
134
|
|
|
253
|
|
|
401
|
|
|
758
|
|
Net periodic benefit cost
|
$
|
512
|
|
|
$
|
607
|
|
|
$
|
1,537
|
|
|
$
|
1,821
|
|
As planned, the Company made a
$15,000
discretionary contribution to the U.S. qualified pension plans in March 2016.
10. Income Taxes
The Company's effective tax rate for the
first nine months of 2016
was
25.1%
compared with
25.7%
in the
first nine months of 2015
and
23.2%
for the full year 2015. The increase in the
first nine months of 2016
effective tax rate from the full year 2015 rate is primarily due to the expiration of certain tax holidays, the absence of the 2015 refund of withholding taxes and the projected change in the mix of earnings attributable to higher-taxing jurisdictions, partially offset by lower planned repatriation of a portion of current year foreign earnings to the U.S and the excess tax benefit on stock awards, reflecting the amended guidance related to share-based payments made to employees. See Note 14 of the Consolidated Financial Statements.
The Aerospace and Industrial segments were previously awarded international tax holidays. All significant tax holidays for which the Company currently receives benefit are expected to expire in 2016 and 2017.
11. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following table sets forth the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine month periods ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Cash Flow Hedges
|
|
Pension and Other Postretirement Benefit Items
|
|
Foreign Currency Items
|
|
Total
|
January 1, 2016
|
$
|
115
|
|
|
$
|
(105,703
|
)
|
|
$
|
(37,664
|
)
|
|
$
|
(143,252
|
)
|
Other comprehensive (loss) income before reclassifications to consolidated statements of income
|
(823
|
)
|
|
283
|
|
|
2,100
|
|
|
1,560
|
|
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income
|
243
|
|
|
5,457
|
|
|
—
|
|
|
5,700
|
|
Net current-period other comprehensive (loss) income
|
(580
|
)
|
|
5,740
|
|
|
2,100
|
|
|
7,260
|
|
September 30, 2016
|
$
|
(465
|
)
|
|
$
|
(99,963
|
)
|
|
$
|
(35,564
|
)
|
|
$
|
(135,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses on Cash Flow Hedges
|
|
Pension and Other Postretirement Benefit Items
|
|
Foreign Currency Items
|
|
Total
|
January 1, 2015
|
$
|
(732
|
)
|
|
$
|
(115,289
|
)
|
|
$
|
16,568
|
|
|
$
|
(99,453
|
)
|
Other comprehensive (loss) income before reclassifications to consolidated statements of income
|
(665
|
)
|
|
1,412
|
|
|
(38,847
|
)
|
|
(38,100
|
)
|
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income
|
792
|
|
|
7,631
|
|
|
—
|
|
|
8,423
|
|
Net current-period other comprehensive income (loss)
|
127
|
|
|
9,043
|
|
|
(38,847
|
)
|
|
(29,677
|
)
|
September 30, 2015
|
$
|
(605
|
)
|
|
$
|
(106,246
|
)
|
|
$
|
(22,279
|
)
|
|
$
|
(129,130
|
)
|
The following table sets forth the reclassifications out of accumulated other comprehensive income (loss) by component for the three- and nine- month periods ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income (Loss) Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
|
Affected Line Item in the Consolidated Statements of Income
|
|
|
Three months ended September 30, 2016
|
|
Three months ended September 30, 2015
|
|
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(137
|
)
|
|
$
|
(214
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
|
(20
|
)
|
|
(137
|
)
|
|
Net sales
|
|
|
(157
|
)
|
|
(351
|
)
|
|
Total before tax
|
|
|
55
|
|
|
110
|
|
|
Tax benefit
|
|
|
(102
|
)
|
|
(241
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Pension and other postretirement benefit items
|
|
|
|
|
|
|
Amortization of prior-service credits, net
|
|
$
|
41
|
|
|
$
|
65
|
|
|
(A)
|
Amortization of actuarial losses
|
|
(2,831
|
)
|
|
(3,983
|
)
|
|
(A)
|
|
|
(2,790
|
)
|
|
(3,918
|
)
|
|
Total before tax
|
|
|
977
|
|
|
1,383
|
|
|
Tax benefit
|
|
|
(1,813
|
)
|
|
(2,535
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications in the period
|
|
$
|
(1,915
|
)
|
|
$
|
(2,776
|
)
|
|
|
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pension cost. See Note 9.
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income (Loss) Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
|
Affected Line Item in the Consolidated Statements of Income
|
|
|
Nine months ended September 30, 2016
|
|
Nine months ended September 30, 2015
|
|
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(437
|
)
|
|
$
|
(642
|
)
|
|
Interest expense
|
Foreign exchange contracts
|
|
40
|
|
|
(499
|
)
|
|
Net sales
|
|
|
(397
|
)
|
|
(1,141
|
)
|
|
Total before tax
|
|
|
154
|
|
|
349
|
|
|
Tax benefit
|
|
|
(243
|
)
|
|
(792
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Pension and other postretirement benefit items
|
|
|
|
|
|
|
Amortization of prior-service credits, net
|
|
$
|
123
|
|
|
$
|
192
|
|
|
(A)
|
Amortization of actuarial losses
|
|
(8,510
|
)
|
|
(11,973
|
)
|
|
(A)
|
|
|
(8,387
|
)
|
|
(11,781
|
)
|
|
Total before tax
|
|
|
2,930
|
|
|
4,150
|
|
|
Tax benefit
|
|
|
(5,457
|
)
|
|
(7,631
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications in the period
|
|
$
|
(5,700
|
)
|
|
$
|
(8,423
|
)
|
|
|
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pension cost. See Note 9.
12. Information on Business Segments
The Company is organized based upon the nature of its products and services and reports under
two
global business segments: Industrial and Aerospace. 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 these
two
reportable segments.
The Industrial segment is a global manufacturer of highly-engineered, high-quality precision components, 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 customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products. Products are sold primarily through its direct sales force and global distribution channels. Industrial consists of
three
strategic business units that include Molding Solutions, Nitrogen Gas Products and Engineered Components. Industrial's Molding Solutions businesses design and manufacture customized hot runner systems, advanced mold cavity sensors and process control systems, and precision high cavitation mold assemblies - collectively, the enabling technologies for many complex injection molding applications. Industrial's Nitrogen Gas Products business manufactures nitrogen gas springs for the tool and die industry and manifold systems used to precisely control stamping presses. It also specializes in gas hydraulic suspension systems for heavy duty off road vehicles. Industrial's Engineered Components businesses manufacture and supply precision mechanical products used in transportation and industrial applications, including mechanical springs, high-precision punched and fine-blanked components, and retention rings.
The Aerospace segment is a global provider of fabricated and precision-machined components and assemblies for original equipment manufacturer ("OEM") turbine engine, airframe and industrial gas turbine builders, and the military. The Aerospace Aftermarket provides jet engine component maintenance overhaul and repair ("MRO") services, including our Component Repair Programs ("CRP's"), for many of the world's major turbine engine manufacturers, commercial airlines and the military. The Aerospace Aftermarket activities also include the manufacture and delivery of aerospace aftermarket spare parts, including the 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.
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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
|
Industrial
|
$
|
208,748
|
|
|
$
|
189,106
|
|
|
$
|
608,534
|
|
|
$
|
592,044
|
|
Aerospace
|
102,816
|
|
|
102,329
|
|
|
298,055
|
|
|
314,910
|
|
Intersegment sales
|
(3
|
)
|
|
(1
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Total net sales
|
$
|
311,561
|
|
|
$
|
291,434
|
|
|
$
|
906,586
|
|
|
$
|
906,949
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
Industrial
|
$
|
34,958
|
|
|
$
|
27,304
|
|
|
$
|
99,445
|
|
|
$
|
88,262
|
|
Aerospace
|
16,859
|
|
|
16,443
|
|
|
41,359
|
|
|
50,029
|
|
Total operating profit
|
51,817
|
|
|
43,747
|
|
|
140,804
|
|
|
138,291
|
|
Interest expense
|
3,020
|
|
|
2,637
|
|
|
8,826
|
|
|
7,944
|
|
Other expense (income), net
|
621
|
|
|
(545
|
)
|
|
24
|
|
|
(228
|
)
|
Income before income taxes
|
$
|
48,176
|
|
|
$
|
41,655
|
|
|
$
|
131,954
|
|
|
$
|
130,575
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Assets
|
|
|
|
Industrial
(A)
|
$
|
1,441,695
|
|
|
$
|
1,241,206
|
|
Aerospace
|
637,232
|
|
|
654,147
|
|
Other
(B)
|
142,956
|
|
|
166,513
|
|
Total assets
|
$
|
2,221,883
|
|
|
$
|
2,061,866
|
|
(A
) The change in assets within the Industrial segment primarily reflects an increase in assets resulting from the acquisition of FOBOHA.
(B) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.
13. 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, 2016
or December 31,
2015
.
Contract Matters
During the third quarter of 2015 the Company recorded a
$2,788
charge related to a contract termination dispute following the decision of a customer, Triumph Actuation Systems - Yakima, LLC ("Triumph"), to in-source work. The Company has approximately
$8,000
of net assets, in connection with this dispute, recorded on the Consolidated Balance Sheet as of September 30, 2016. The Company has assessed recoverability of costs and damages provided by the relevant contracts and, during the fourth quarter of 2015, filed an arbitration demand before the American Arbitration Association for recovery of these costs and damages for approximately
$15,000
. Also during the fourth quarter, Triumph responded with a counterclaim of a similar amount, alleging various breaches and seeking damages, which the Company views as unsubstantiated. During 2016, Triumph adjusted the amount of its counterclaim to approximately
$23,000
, and the Company adjusted its claim to seek approximately
$12,000
.
As scheduled in May 2016, the parties arbitrated the matter and the Company continues to view the Triumph counterclaim as unsubstantiated. The Company and Triumph submitted post-hearing filings during the third quarter and are now awaiting the arbiter's decision, which is expected in the fourth quarter of 2016. While it is currently not possible to determine the ultimate outcome of this matter, the Company believes that the ultimate resolution will not have a material adverse effect on the Company’s consolidated financial position or liquidity, but could be material to the consolidated results of operations of any one period.
14. Accounting Changes
In March 2016, the FASB amended its guidance related to the accounting for certain aspects of share-based payments to employees. The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or expiration) through the income statement, rather than through equity. Cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The amended guidance also allows for an employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the Consolidated Statements of Cash Flows. The guidance also allows for a policy election to account for forfeitures as they occur, rather than accounting for them on an estimated basis. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
The Company elected to early adopt this guidance in the third quarter of 2016. This adoption requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The most significant impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than through equity for all periods in fiscal year 2016, which resulted in the recognition of excess tax benefits in our provision for income taxes of
$1,530
for the three and nine-month periods ended September 30, 2016. In connection with the additional amendments within the amended guidance, the Company recognized state tax loss carryforwards in the amount of
$195
, which impacted retained earnings as of January 1, 2016. The cumulative effect of this change is required to be recorded in retained earnings. The Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
The presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares were applied retrospectively to all periods presented. This resulted in an increase in both net cash provided by operating activities and net cash used by financing activities of
$1,402
,
$2,320
and
$7,519
for the three, six and nine month periods ended March 31, June 30 and September 30, 2015, respectively, and
$413
and
$524
for the three and six month periods ended March 31 and June 30, 2016, respectively.
In November 2015, the FASB amended its guidance related to the balance sheet classification of deferred income taxes. The amended guidance removes the requirement to separate and classify deferred income tax liabilities and assets into current
and non-current amounts and requires an entity to now classify all deferred tax liabilities and assets as non-current. The
amended guidance can be adopted either on a prospective or retrospective basis and is effective for interim and annual periods
beginning after December 15, 2016. Early adoption is permitted. The provisions of the amended guidance were adopted on a prospective basis during the first quarter of 2016. The provisions resulted in the classification of
$26,072
and
$1,173
of current deferred income tax assets and liabilities, respectively, into non-current deferred income tax assets and liabilities, respectively, on the Consolidated Balance Sheet as of September 30, 2016.
In April 2015, the FASB amended its guidance related to the presentation of debt issuance costs. The amended guidance specifies that debt issuance costs related to notes shall be reported in the balance sheet as a direct deduction from the face amount of that note and that amortization of debt issuance costs shall be reported as interest expense. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and should be applied retrospectively. The Company adopted the guidance during the first quarter of 2016 and it did not have a material impact on its Consolidated Financial Statements.
__________________________________________________________________________________________
With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three- and nine- month periods ended
September 30, 2016
and
2015
, 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 28, 2016
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.