NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data)
(Unaudited)
1. Basis of Presentation
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, 2021 has been derived from the 2021 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, 2021. 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 six-month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The COVID-19 pandemic ("COVID-19") has resulted in a disruption in business activities worldwide and has caused weakened economic conditions, both in the United States and abroad. COVID-19 has had, and may continue to have, a significant negative impact on the Company's ongoing operations and the end markets in which it serves. The Company has assessed the impacts on its accounting estimates, assumptions and disclosures.
2. Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under U.S. generally accepted accounting principles ("US GAAP") through the use of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification. The Company evaluates the applicability and potential impacts of recent ASUs on its Consolidated Financial Statements and related disclosures.
Recently Adopted Accounting Standards
In December 2019, the FASB amended its guidance related to income taxes. The amended guidance simplifies the accounting for income taxes, eliminating certain exceptions to the general income tax principles, in an effort to reduce the cost and complexity of application. The amended guidance is effective for annual periods beginning after December 15, 2020, and interim periods within those reporting periods. Early adoption was permitted in any interim or annual period. The guidance requires application on either a prospective, retrospective or modified retrospective basis, contingent on the income tax exception being applied. The Company adopted this guidance, on a prospective basis, on January 1, 2021 and it did not have a material impact on the Company's Consolidated Financial Statements.
Recently Issued Accounting Standards
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced its intent to phase out the use of LIBOR by December 31, 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred benchmark alternative to U.S. dollar LIBOR. Published by the Federal Reserve Bank of New York, SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. In March 2020, in response to this transition, the FASB issued guidance related to this rate reform, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. In January 2021, the FASB issued further clarifying guidance regarding derivatives, as it relates to this transition. The guidance is effective through December 31, 2022. The Company’s Amended Credit Agreement (Note 8) and corresponding interest rate Swaps (Note 9) each mature in February 2026. In March 2021, the ICE Benchmark Association announced that it will extend the publication of overnight, 1, 3, 6 and 12 month LIBOR rates until June 30, 2023, while ceasing publication of all other LIBOR rates including 1 week and 2 month rates. The Company's Amended Credit Agreement was further amended in October 2021 and in April 2022 to address the replacement of LIBOR via the LIBOR Transition Agreement and Amendment No. 1, respectively (see Note 8), with SOFR. The Company's corresponding interest rate Swaps were amended in May 2022 to address the replacement of LIBOR. The
Company does not anticipate a material impact on our business, financial condition, results of operations or cash flow as a result of this change.
In October 2021, the FASB amended its guidance related to business combinations. The amended guidance requires entities to recognize and measure contract assets and contract liabilities acquired in business combinations on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the amended guidance as the guidance will be applicable to future acquisitions.
3. Revenue
The Company is a global provider of highly engineered products, differentiated industrial technologies, and innovative solutions, serving a wide range of end markets and customers. Its specialized products and services are used in far-reaching applications in healthcare, automation, packaging, aerospace, mobility and manufacturing.
Revenue is recognized by the Company when control of the product or solution is transferred to the customer. Control is generally transferred when products are shipped or delivered to customers, title is transferred, the significant risks and rewards of ownership have transferred, and the Company has rights to payment and the rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue is generally recognized at a point in time, a certain portion of the Company's businesses with customized products or contracts in which the Company performs work on customer-owned assets requires the use of an over-time recognition model as certain contracts meet one or more of the established criteria pursuant to the accounting guidance. Also, service revenue is recognized as control transfers, which is concurrent with the services being performed.
The following table presents the Company's revenue disaggregated by products and services, and geographic regions, by segment:
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| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 | |
| Industrial | | Aerospace | | Total Company | | Industrial | | Aerospace | | Total Company | | | | | |
Products and Services | | | | | | | | | | | | | | | | |
Engineered Components Products | $ | 48,287 | | | $ | — | | | $ | 48,287 | | | $ | 45,429 | | | $ | — | | | $ | 45,429 | | | | | | |
Molding Solutions Products | 101,209 | | | — | | | 101,209 | | | 122,612 | | | — | | | 122,612 | | | | | | |
Force & Motion Control Products | 47,260 | | | — | | | 47,260 | | | 48,321 | | | — | | | 48,321 | | | | | | |
Automation Products | 15,359 | | | — | | | 15,359 | | | 18,311 | | | — | | | 18,311 | | | | | | |
Aerospace Original Equipment Manufacturing Products | — | | | 69,503 | | | 69,503 | | | — | | | 60,985 | | | 60,985 | | | | | | |
Aerospace Aftermarket Products and Services | — | | | 39,650 | | | 39,650 | | | — | | | 25,500 | | | 25,500 | | | | | | |
| $ | 212,115 | | | $ | 109,153 | | | $ | 321,268 | | | $ | 234,673 | | | $ | 86,485 | | | $ | 321,158 | | | | | | |
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Geographic Regions (A) | | | | | | | | | | | | | | | | |
Americas | $ | 88,970 | | | $ | 80,766 | | | $ | 169,736 | | | $ | 93,001 | | | $ | 65,638 | | | $ | 158,639 | | | | | | |
Europe | 74,770 | | | 18,663 | | | 93,433 | | | 90,094 | | | 13,263 | | | 103,357 | | | | | | |
Asia | 46,670 | | | 8,347 | | | 55,017 | | | 50,746 | | | 7,096 | | | 57,842 | | | | | | |
Rest of World | 1,705 | | | 1,377 | | | 3,082 | | | 832 | | | 488 | | | 1,320 | | | | | | |
| $ | 212,115 | | | $ | 109,153 | | | $ | 321,268 | | | $ | 234,673 | | | $ | 86,485 | | | $ | 321,158 | | | | | | |
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(A) Sales by geographic region are based on the location to which the product is shipped and services are delivered.
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| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 | |
| Industrial | | Aerospace | | Total Company | | Industrial | | Aerospace | | Total Company | | | | | |
Products and Services | | | | | | | | | | | | | | | | |
Engineered Components Products | $ | 95,251 | | | $ | — | | | $ | 95,251 | | | $ | 93,715 | | | $ | — | | | $ | 93,715 | | | | | | |
Molding Solutions Products | 204,245 | | | — | | | 204,245 | | | 231,159 | | | — | | | 231,159 | | | | | | |
Force & Motion Control Products | 93,343 | | | — | | | 93,343 | | | 93,978 | | | — | | | 93,978 | | | | | | |
Automation Products | 30,948 | | | — | | | 30,948 | | | 35,808 | | | — | | | 35,808 | | | | | | |
Aerospace Original Equipment Manufacturing Products | — | | | 135,132 | | | 135,132 | | | — | | | 116,513 | | | 116,513 | | | | | | |
Aerospace Aftermarket Products and Services | — | | | 74,732 | | | 74,732 | | | — | | | 51,614 | | | 51,614 | | | | | | |
| $ | 423,787 | | | $ | 209,864 | | | $ | 633,651 | | | $ | 454,660 | | | $ | 168,127 | | | $ | 622,787 | | | | | | |
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Geographic Regions (A) | | | | | | | | | | | | | | | | |
Americas | $ | 174,975 | | | $ | 153,263 | | | $ | 328,238 | | | $ | 175,896 | | | $ | 124,647 | | | $ | 300,543 | | | | | | |
Europe | 157,139 | | | 38,484 | | | 195,623 | | | 178,768 | | | 27,414 | | | 206,182 | | | | | | |
Asia | 88,489 | | | 15,665 | | | 104,154 | | | 97,506 | | | 14,743 | | | 112,249 | | | | | | |
Rest of World | 3,184 | | | 2,452 | | | 5,636 | | | 2,490 | | | 1,323 | | | 3,813 | | | | | | |
| $ | 423,787 | | | $ | 209,864 | | | $ | 633,651 | | | $ | 454,660 | | | $ | 168,127 | | | $ | 622,787 | | | | | | |
(A) Sales by geographic region are based on the location to which the product is shipped and services are delivered.
Revenue from products and services transferred to customers at a point in time accounted for approximately 80 percent of total revenue for the three and six month periods ended June 30, 2022 and June 30, 2021. A majority of revenue within the Industrial segment and Aerospace Original Equipment Manufacturing business ("OEM"), along with a portion of revenue within the Aerospace Aftermarket Products and Services business ("Aftermarket"), is recognized at a point in time, primarily when the product or solution is shipped to the customer.
Revenue from products and services transferred to customers over-time accounted for approximately 20 percent of total revenue for the three and six month periods ended June 30, 2022 and June 30, 2021. The Company recognizes revenue over-time in instances where a contract supports a continual transfer of control to the customer. Substantially all of our revenue in the Aerospace Aftermarket maintenance repair and overhaul business (within Aftermarket Products and Services) and a portion of the revenue for Engineered Components products, Molding Solutions products and Aerospace OEM products is recognized over-time. Within the Molding Solutions and Aerospace Aftermarket businesses, this continual transfer of control to the customer partially results from repair and refurbishment work performed on customer-controlled assets. With other contracts, this continual transfer of control to the customer is supported by clauses in the contract, or governing commercial law of the relevant jurisdiction, where we deliver products that do not have an alternative use and require an enforceable right to payment of costs incurred (plus a reasonable profit) or the Company has a contractual right to complete any work in process and receive full contract price.
The majority of our revenue is from contracts that are for less than one year, however certain Aerospace OEM and Molding Solutions business contracts extend beyond one year. In the Industrial segment, customers are typically OEMs or suppliers to OEMs and, in some businesses, distributors. In the Aerospace segment, customers include commercial airlines, OEMs, defense-related manufacturers, and industry parts and service providers.
A performance obligation represents a promise within a contract to provide a distinct good or service to the customer. Revenue is recognized in an over-time model based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company utilizes the cost-to-cost measure of progress for over-time contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts.
Adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. Revenue recognized from performance obligations satisfied in previous periods was not material in both the three and six month periods ended June 30, 2022 and 2021.
Contract Balances. The timing of revenue recognition, invoicing and cash collections affects accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets.
Unbilled Receivables (Contract Assets) - Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when 1) the cost-to-cost method is applied and 2) such revenue exceeds the amount invoiced to the customer. Unbilled receivables are included within Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021.
Customer Advances and Deposits (Contract Liabilities) - The Company may receive a customer advance or deposit, or have an unconditional right to receive a customer advance, prior to revenue being recognized. Certain contracts within the Molding Solutions business, for example, may require such advances. Since the performance obligations related to such advances have not been satisfied, a contract liability is established. An offsetting asset of equal amount is recorded as an account receivable until the advance is collected. Advances and deposits are included within Accrued Liabilities on the Consolidated Balance Sheets until the respective revenue is recognized. Advance payments are not considered a significant financing component as they are generally received less than one year before the customer solution is completed. These assets and liabilities are reported on the Consolidated Balance Sheets on an individual contract basis at the end of each reporting period.
Net contract assets (liabilities) consisted of the following:
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| June 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Unbilled receivables (contract assets) | $ | 36,401 | | | $ | 33,522 | | | $ | 2,879 | | | 9 | % |
Contract liabilities | (19,868) | | | (25,374) | | | 5,506 | | | (22) | % |
Net contract assets | $ | 16,533 | | | $ | 8,148 | | | $ | 8,385 | | | 103 | % |
Contract liabilities balances at June 30, 2022 and December 31, 2021 include $10,242 and $9,364, respectively, of customer advances for which the Company has an unconditional right to collect payment. Accounts receivable, as presented on the Consolidated Balance Sheet, includes corresponding balances at June 30, 2022 and December 31, 2021, respectively.
Changes in the net contract assets during the six month period ended June 30, 2022 included a $5,506 decrease in contract liabilities, driven primarily by revenue recognized in the current period, partially offset by new customer advances and deposits.
Adding to this net contract assets increase was a $2,879 increase in contract assets, driven primarily by contract progress (i.e., unbilled receivable), partially offset by earlier contract progress being invoiced to the customer.
The Company recognized approximately 40% and over 90% of the revenue related to the contract liabilities balance as of December 31, 2021 during the three and six months ended June 30, 2022, respectively, and approximately 15% and 55% of the revenue related to the contract liabilities balance as of December 31, 2020 during the three and six months ended June 30, 2021, respectively, primarily representing revenue from the sale of molds and hot runners within the Molding Solutions business.
Remaining Performance Obligations. The Company has elected to disclose remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed and, for Aerospace, excludes projections of components and assemblies that Aerospace OEM customers anticipate purchasing in the future under existing programs, which represent orders that are beyond lead time and do not represent performance obligations pursuant to accounting guidance. As of June 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $182,869. The Company expects to recognize revenue on approximately 70% of the remaining performance obligations over the next 12 months, with the remainder to be recognized within 24 months.
4. Stockholders' Equity
A schedule of consolidated changes in equity for the six months ended June 30, 2022 is as follows (number of shares in thousands):
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| | Common Stock (Number of Shares) | | Common Stock (Amount) | | Additional Paid-In Capital | | Treasury Stock (Number of Shares) | | Treasury Stock (Amount) | | Retained Earnings | | Accumulated Other Non-Owner Changes to Equity | | Total Stockholders’ Equity |
December 31, 2021 | | 64,344 | | | $ | 643 | | | $ | 516,562 | | | 13,658 | | | $ | (523,642) | | | $ | 1,587,041 | | | $ | (151,838) | | | $ | 1,428,766 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 20,484 | | | (2,590) | | | 17,894 | |
Dividends declared ($0.16 per share)
| | — | | | — | | | — | | | — | | | — | | | (8,111) | | | — | | | (8,111) | |
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Employee stock plans | | 12 | | | 1 | | | 2,665 | | | 2 | | | (49) | | | (136) | | | — | | | 2,481 | |
March 31, 2022 | | 64,356 | | | $ | 644 | | | $ | 519,227 | | | 13,660 | | | $ | (523,691) | | | $ | 1,599,278 | | | $ | (154,428) | | | $ | 1,441,030 | |
Comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (39,552) | | | (69,962) | | | (109,514) | |
Dividends declared ($0.16 per share)
| | — | | | — | | | — | | | — | | | — | | | (8,081) | | | — | | | (8,081) | |
Common stock repurchases | | — | | | — | | | — | | | 200 | | | (6,721) | | | — | | | — | | | (6,721) | |
Employee stock plans | | 23 | | | — | | | 3,548 | | | 3 | | | (106) | | | (62) | | | — | | | 3,380 | |
June 30, 2022 | | 64,379 | | | $ | 644 | | | $ | 522,775 | | | 13,863 | | | $ | (530,518) | | | $ | 1,551,583 | | | $ | (224,390) | | | $ | 1,320,094 | |
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A schedule of consolidated changes in equity for the six months ended June 30, 2021 is as follows (number of shares in thousands):
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| | Common Stock (Number of Shares) | | Common Stock (Amount) | | Additional Paid-In Capital | | Treasury Stock (Number of Shares) | | Treasury Stock (Amount) | | Retained Earnings | | Accumulated Other Non-Owner Changes to Equity | | Total Stockholders’ Equity |
December 31, 2020 | | 64,171 | | | $ | 642 | | | $ | 501,531 | | | 13,530 | | | $ | (516,992) | | | $ | 1,519,811 | | | $ | (122,315) | | | $ | 1,382,677 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 19,382 | | | (44,902) | | | (25,520) | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,104) | | | — | | | (8,104) | |
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Employee stock plans | | 12 | | | — | | | 2,406 | | | 1 | | | (68) | | | (24) | | | — | | | 2,314 | |
March 31, 2021 | | 64,183 | | | $ | 642 | | | $ | 503,937 | | | 13,531 | | | $ | (517,060) | | | $ | 1,531,065 | | | $ | (167,217) | | | $ | 1,351,367 | |
Comprehensive income | | — | | | — | | | — | | | — | | | — | | | 24,491 | | | 24,591 | | | 49,082 | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,090) | | | — | | | (8,090) | |
Common stock repurchases | | — | | | — | | | — | | | 100 | | | (5,229) | | | — | | | — | | | (5,229) | |
Employee stock plans | | 17 | | | — | | | 3,417 | | | 3 | | | (123) | | | (31) | | | — | | | 3,263 | |
June 30, 2021 | | 64,200 | | | $ | 642 | | | $ | 507,354 | | | 13,634 | | | $ | (522,412) | | | $ | 1,547,435 | | | $ | (142,626) | | | $ | 1,390,393 | |
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5. Net (Loss) 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. No potentially dilutive shares have been included in the diluted earnings per share calculations for the three- and six-month periods ended June 30, 2022 due to the Company’s reported net losses for the periods. For the purpose of computing diluted net income per common share for the three- and six-month periods ended June 30, 2021, the weighted-average number of common shares outstanding was increased by 169,081 and 161,825, respectively.
The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three-month periods ended June 30, 2022 and 2021, the Company excluded 875,544 and 503,078 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive. During the six month periods ended June 30, 2022 and 2021, the Company excluded 797,194 and 512,598 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive.
The Company granted 115,600 stock options, 144,524 restricted stock unit awards and 121,860 performance share awards ("PSAs") in February 2022 as part of its annual long-term incentive equity 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 PSAs are part of the long-term Performance Share Award 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 2022 include the Company’s total shareholder return (“TSR”), return on invested capital (“ROIC”) and operating income before depreciation and amortization growth ("EBITDA growth"). The TSR and EBITDA 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. ROIC is designed to assess the Company's performance compared to pre-established Company targets over a three-year performance 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 is determined using a Monte Carlo valuation method as the award contains a market condition.
On July 14, 2022, the Company granted Thomas J. Hook, newly appointed President and Chief Executive Officer, an award of performance stock options to purchase 1,183,406 shares of Barnes common stock at a purchase price of $30.32 in connection with his appointment based on a grant date fair value of $10,000. The stock options have a ten-year term and cliff-vest in five years, subject to continued service and the achievement of compound annual growth rates (“CAGRs”) in the price of the Company’s common shares above the option exercise price as of the fifth anniversary of the grant date, with 0% vesting at a CAGR of less than 5%, 33.3% vesting at a CAGR of 5%, 66.6% vesting at a CAGR of 7% and 100% vesting at a CAGR of 9% or greater, with linear interpolation between such CAGR levels. The fair value of the options is determined using a Monte Carlo valuation method as the award contains a market condition.
6. Inventories
The components of inventories consisted of:
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| June 30, 2022 | | December 31, 2021 |
Finished goods | $ | 93,349 | |
| $ | 88,954 | |
Work-in-process | 70,057 | | | 65,468 | |
Raw material and supplies | 97,227 | | | 85,233 | |
| $ | 260,633 | | | $ | 239,655 | |
7. Goodwill and Other Intangible Assets
Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended June 30, 2022:
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| Industrial | | Aerospace | | | | Total Company |
December 31, 2021 | $ | 924,584 | | | $ | 30,786 | | | | | $ | 955,370 | |
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Impairment charge | (68,194) | | | — | | | | | (68,194) | |
Foreign currency translation | (60,045) | | | — | | | | | (60,045) | |
June 30, 2022 | $ | 796,345 | | | $ | 30,786 | | | | | $ | 827,131 | |
As of April 1, 2022, management performed its annual impairment testing of goodwill. The Company utilizes the option to first assess qualitative factors to determine whether it is necessary to perform the Step 1 quantitative goodwill impairment test in accordance with applicable accounting standards. Under the qualitative assessment, management considers relevant events and circumstances including but not limited to macroeconomic conditions, industry and market considerations, overall reporting unit performance and events directly affecting a reporting unit. If the Company determines that the Step 1 quantitative impairment test is required, management estimates the fair value of the reporting unit primarily using an income approach, which reflects management’s cash flow projections, and also evaluates the fair value using a market approach. Inherent in management’s development of cash flow projections are assumptions and estimates, including those related to future earnings and growth rates and the weighted average cost of capital. The Company compares the fair value of the reporting unit with the carrying value of the reporting unit. If the fair values were to fall below the carrying values, the Company would recognize a
non-cash impairment charge to income from operations for the amount by which the carrying amount of any reporting unit exceeds the reporting unit’s fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit.
Based on our assessment as of April 1, the estimated fair value of the Automation reporting unit, which represents the 2018 acquisition of Gimatic, exceeded its carrying value, while the estimated fair value of each of the remaining reporting units significantly exceeded their carrying values. The Company evaluated deteriorating macro-economic conditions subsequent to the date of the assessment, including inflationary pressures, rising interest rates, worsening global supply chain constraints and demand outlook, which materialized during the second quarter of 2022, which impacted performance and outlook at Automation and resulted in a triggering event. Management revised its cash flow projections and weighted average cost of capital, resulting in a non-cash goodwill impairment charge of $68,194 related to the Automation reporting unit as the estimated fair value of the reporting unit declined below its carrying value. The goodwill impairment charge was recorded during the three-month period ended June 30, 2022.
Based on our second quarter assessments and as noted above, the estimated fair value for each of the remaining reporting units significantly exceeded their carrying values, and there was no impairment at any other reporting units in 2022.
Other Intangible Assets:
Other intangible assets consisted of:
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| | | June 30, 2022 | | December 31, 2021 |
| Range of Life -Years | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | |
Revenue Sharing Programs (RSPs) | Up to 30 | | $ | 299,500 | | | $ | (157,737) | | | $ | 299,500 | | | $ | (151,961) | |
Component Repair Programs (CRPs) | Up to 30 | | 111,839 | | | (38,410) | | | 111,839 | | | (35,632) | |
Customer relationships | 10-16 | | 337,189 | | | (147,418) | | | 337,189 | | | (137,856) | |
Patents and technology | 4-11 | | 123,433 | | | (89,564) | | | 123,433 | | | (86,002) | |
Trademarks/trade names | 10-30 | | 10,949 | | | (10,681) | | | 10,949 | | | (10,587) | |
Other | Up to 10 | | 8,328 | | | (2,471) | | | 7,450 | | | (2,072) | |
| | | 891,238 | | | (446,281) | | | 890,360 | | | (424,110) | |
Unamortized intangible assets: | | | | | | | | | |
Trade names | | | 55,670 | | | — | | | 55,670 | | | — | |
Foreign currency translation | | | (39,466) | | | — | | | (21,674) | | | — | |
Other intangible assets | | | $ | 907,442 | | | $ | (446,281) | | | $ | 924,356 | | | $ | (424,110) | |
Amortization of intangible assets for the three and six month periods ended June 30, 2022 was $11,593 and $22,171, respectively. Amortization of intangible assets for the three and six month periods ended June 30, 2021 was $10,549 and $20,899, respectively. Estimated amortization of intangible assets for future periods is as follows: 2022 (remainder) - $23,000; 2023 - $46,000; 2024 - $44,000; 2025 - $44,000; 2026 - $43,000 and 2027 - $42,000.
In the second quarter of 2022, management performed its annual impairment testing of its trade names, which are indefinite-lived intangible assets. Based on this assessment, there were no impairments.
8. Debt
Long-term debt and notes and overdrafts payable at June 30, 2022 and December 31, 2021 consisted of:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Amended Credit Agreement | $ | 478,919 | | | $ | 467,491 | | | $ | 495,262 | | | $ | 516,380 | |
3.97% Senior Notes | 100,000 | | | 100,215 | | | 100,000 | | | 105,541 | |
Borrowings under lines of credit and overdrafts | 4 | | | 4 | | | 224 | | | 224 | |
Finance leases | 5,120 | | | 5,555 | | | 6,505 | | | 6,827 | |
Other | — | | | — | | | 1,676 | | | 1,676 | |
| 584,043 | | | 573,265 | | | 603,667 | | | 630,648 | |
Less current maturities | (1,506) | | | | | (3,735) | | | |
Long-term debt | $ | 582,537 | | | | | $ | 599,932 | | | |
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 3.97% Senior Notes are senior unsecured obligations of the Company and pay 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 U.S. Treasury yield and a long-term credit spread for similar types of borrowings, which represent Level 2 observable inputs.
On October 8, 2020, the Company entered into the sixth amendment to its fifth amended and restated revolving credit agreement with Bank of America (the “Sixth Amendment”) and the first amendment to the Note Purchase Agreement with New York Life (the “First NPA Amendment” and, collectively with the Sixth Amendment, the "Amendments"). The Sixth Amendment maintained the borrowing availability of $1,000,000 along with access to request an additional $200,000 through an accordion feature. The Sixth Amendment and the First NPA Amendment provided for an increase in the Company’s maximum ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, from 3.25 times (or, if a certain permitted acquisition above $150,000 is consummated, 3.50 times) to 3.75 times in each case at the end of the four fiscal quarters, beginning with December 31, 2020, and regardless of whether a permitted acquisition, as defined, is consummated, providing additional financing flexibility and access to liquidity. Additionally, the Sixth Amendment requires the Company to maintain a maximum ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA, of not more than 3.75 times in each case, at the end of the four fiscal quarters, beginning with December 31, 2020 and regardless of whether a permitted acquisition is consummated. Furthermore, the First NPA Amendment provides for (i) adjustments to the ratio of Consolidated Total Debt to Consolidated EBITDA, as defined, to conform to a more restrictive total leverage ratio that may be required under the Sixth Amendment, (ii) an increase in the amount of allowable add-back for restructuring charges when calculating Consolidated EBITDA from $15,000 to $25,000 and (iii) a required fee payment equal to 0.50% per annum times the daily outstanding principal amount of the note during each of the four fiscal quarters, following the quarter ended December 31, 2020, if the Company’s Senior Leverage Ratio, as defined, exceeds 3.25 times. In October 2020, the Company paid fees and expenses of $1,384 in conjunction with executing the Amendments. Such fees have been deferred within Other Assets on the accompanying Consolidated Balance Sheets and are being amortized into interest expense on the Consolidated Statements of (Loss) Income.
On February 10, 2021, the Company and certain of its subsidiaries entered into the sixth amended and restated senior unsecured revolving credit agreement (the "Amended Credit Agreement") and retained Bank of America, N.A. as the Administrative Agent for the lenders. The Amended Credit Agreement maintains the $1,000,000 of availability under the facility, while increasing the available borrowings under the accordion feature from $200,000 to $250,000 (aggregate availability of $1,250,000) and extends the maturity date through February 2026. The Amended Credit Agreement also adjusts the interest rate to either the Eurocurrency rate, as defined in the Amended Credit Agreement, plus a margin of 1.175% to 1.775% or the base rate, as defined in the Amended Credit Agreement, plus a margin of 0.175% to 0.775%, depending on the Company's leverage ratio at the time of the borrowing. Multi-currency borrowings, pursuant to the Amended Credit Agreement, bear interest at their respective interbank offered rate (i.e. Euribor) or 0.00% (higher of the two rates) plus a margin of between 1.175% and 1.775%. As with the earlier facility, the Company's borrowing capacity is limited by various debt covenants in the Amended Credit Agreement, as described further below. The Amended Credit Agreement requires the Company to maintain a Senior Debt Ratio of not more than 3.25 times at the end of each fiscal quarter (or, if a permitted acquisition above $150,000 is consummated, 3.50 times at the end of each of the first four fiscal quarters ending after the consummation of any such acquisition). In addition, the Amended Credit Agreement requires the Company to maintain a Total Debt Ratio of not more than 3.75 for each fiscal quarter (or, if a permitted acquisition above $150,000 is consummated, 4.25 times at the end of each of the first four fiscal quarters ending after the consummation of any such acquisition). A ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25, is required at the end of each fiscal quarter. The Company paid fees and expenses of $4,306 in conjunction with executing the Amended Credit Agreement. Such fees have been deferred within Other Assets on the Consolidated Balance Sheets and are being amortized into interest expense on the Consolidated Statements of Income through their maturity. Cash used to pay these fees was recorded through other financing activities on the Consolidated Statements of Cash Flows. The Company further amended the Amended Credit Agreement on October 11, 2021, defining certain applicable multi-currency borrowing rates that may be used as replacement rates for LIBOR, which is expected to be discontinued by reference rate reform. See Note 2.
On April 6, 2022, the Company entered into Amendment No. 1 (“Amendment No. 1”) to the Amended Credit Agreement, which (i) replaced the LIBOR interest rate for U.S. dollar loans to a term Secured Overnight Financing Rate including a Secured Overnight Financing Rate adjustment (or "SOFR", as defined in the Amended Credit Agreement), (ii) added a daily SOFR option for U.S. dollar loans and a term SOFR option for U.S. dollar loans, and (iii) added the ability to borrow foreign swing line loans based on the Euro Short Term Rate (as defined) with the same interest spread as the interest spread for SOFR Loans (as defined) and Alternative Currency Loans (defined as loans denominated in Euro, Sterling, Swiss Francs or Yen). In addition, Amendment No. 1 lowered the interest rate spread on (i) SOFR Loans and Alternative Currency Loans to a range from 0.975% to 1.70%, depending on the leverage ratio (the “Leverage Ratio”) of Consolidated Total Debt (as defined) to Consolidated EBITDA (as defined) as of the end of each fiscal quarter, and (ii) loans based on the Base Rate (as defined), to a range from 0.00% to 0.70%, depending on the Company’s Leverage Ratio as of the end of each fiscal quarter. Amendment No. 1 also lowered the facility fee, which is required to be paid by the Company under the Amended Credit Agreement and is calculated on the full amount of the revolving facility, to a range from 0.15% to 0.30%, depending on the Company’s Leverage Ratio at the end of each fiscal quarter. In April 2022, the Company paid fees and expenses of $1,037 in conjunction with executing Amendment No. 1. Such fees have been deferred within Other Assets on the Consolidated Balance Sheets and will be amortized into interest expense on the Consolidated Statements of (Loss) Income through the maturity of Amended Credit Agreement. Cash used to pay these fees was recorded through other financing activities on the Consolidated Statements of Cash Flows.
Borrowings and availability under the Amended Credit Agreement were $478,919 and $521,081, respectively, at June 30, 2022 and $495,262 and $504,738, respectively, at December 31, 2021, subject to covenants in the Company's revolving debt agreements. At June 30, 2022, additional borrowings of $355,243 of Total Debt (including $230,005 of Senior Debt) would have been allowed under the financial covenants. The average interest rate on these borrowings was 1.57% and 1.48% on June 30, 2022 and December 31, 2021, respectively. Borrowings included Euro-denominated borrowings of 310,000 Euros ($323,919) at June 30, 2022 and 318,450 Euros ($360,262) at December 31, 2021. 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.
At June 30, 2022, the Company was in compliance with all applicable covenants. The Company anticipates continued compliance in each of the next four quarters while continuing to monitor its future compliance based on current and future economic conditions. The Company's most restrictive financial covenant is the Senior Debt Ratio, which required the Company to maintain a ratio of Consolidated Senior Debt to Consolidated EBITDA of not more than 3.25 times at June 30, 2022. The actual ratio, as defined, was 2.33 times at June 30, 2022.
In addition, the Company has approximately $70,000 in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. The Credit Lines are accessed locally and are available primarily within the U.S., Europe and Asia. The
Credit Lines are subject to the applicable borrowing rates within each respective country and vary between jurisdictions (i.e. LIBOR, Euribor, etc.). The Company had no borrowings under the Credit Lines at June 30, 2022 or December 31, 2021. The Company had borrowed $4 and $224 under the overdraft facilities at June 30, 2022 and December 31, 2021, 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 also has several finance leases under which $5,120 and $6,505 was outstanding at June 30, 2022 and December 31, 2021, respectively. The fair value of the finance leases is based on observable Level 2 inputs. These instruments were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
Other debt includes bank acceptances. Bank acceptances represent financial instruments accepted by certain China-based vendors in lieu of cash paid on payables, generally range from three to six months in maturity and are guaranteed by banks. The Company had no bank acceptances outstanding at June 30, 2022 and $1,676 of bank acceptances outstanding at December 31, 2021. The carrying amounts of the bank acceptances approximate fair value due to the short maturities of these financial instruments.
9. Derivatives
The Company has manufacturing, service 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.
Derivative financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. On April 28, 2017, the Company entered into an interest rate swap agreement (the "2017 Swap") with one bank which converted 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 1.92% plus the borrowing spread. The 2017 Swap expired on January 31, 2022. On March 24, 2021, the Company entered into a new interest rate swap agreement (the "2021 Swap") with this same bank that commenced on January 31, 2022 and that converted 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 1.17% plus the borrowing spread. On April 6, 2022, the Company entered into Amendment No. 1 to the Amended Credit Agreement, which replaced the LIBOR interest rate for U.S. dollar loans with the SOFR rate (see Note 8). As a result, in May 2022 the Company subsequently amended the 2021 Swap (the "Amended 2021 Swap"), effective April 30, 2022, such that the one-month SOFR-based borrowing rate replaced the one-month LIBOR-based borrowing rate. The Amended 2021 Swap, which will expire on January 30, 2026, converts the interest on the first $100,000 of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.075% plus the borrowing spread. The execution of the Amended 2021 Swap did not result in a material impact on our business, financial condition, results of operations or cash flow. These interest rate swap agreements (the "Swaps") are accounted for as cash flow hedges.
The Company also uses derivative 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, Hong Kong dollar 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.
The Company records the derivatives at fair value on the Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets, Other Assets, Accrued Liabilities or Other Liabilities depending on their fair value and remaining contractual period. Changes in the fair market value of derivatives accounted for as cash flow hedges are recorded to accumulated other comprehensive income (loss) and reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Reclassifications to earnings for the Swaps are recorded through interest expense and reclassifications to earnings for foreign exchange contracts are recorded through net sales. Changes in the fair market value of the foreign exchange contracts that are not designated hedging instruments are recorded directly to earnings through Other expense (income), net.
The fair values of derivatives were not material to the Company's Consolidated Balance Sheets as of June 30, 2022 or December 31, 2021. The activity related to the derivatives that have been designated hedging instruments was not material to
the Company's Consolidated Financial Statements for the periods ended June 30, 2022 or 2021. The Company recognized losses (gains) of $9,325 and $(2,889) related to the foreign exchange contracts that are not accounted for as hedging instruments within other expense (income), net, in the Consolidated Statements of (Loss) Income for the three-month periods ended June 30, 2022 and 2021, respectively. The Company recognized losses of $10,577 and $412 related to the foreign exchange contracts that are not accounted for as hedging instruments within other expense (income), net, in the Consolidated Statements of (Loss) Income for the six month periods ended June 30, 2022 and 2021, respectively. Such losses (gains) were substantially offset by net gains (losses) recorded on the underlying hedged asset or liability (the "underlying"). Offsetting net gains (losses) on the underlying are also recorded within Other expense (income), net.
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 six months ended June 30, 2022 and 2021, as presented on the Consolidated Statements of Cash Flows, include $8,690 of net cash payments and $808 of net cash proceeds, respectively, related to the settlement of foreign currency hedges related to intercompany financing.
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 assets and liabilities reported at fair value and measured on a recurring basis as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
June 30, 2022 | | | | | | | | |
Asset derivatives | | $ | 5,277 | | | $ | — | | | $ | 5,277 | | | $ | — | |
Liability derivatives | | (1,816) | | | — | | | (1,816) | | | — | |
Bank acceptances | | 13,685 | | | — | | | 13,685 | | | — | |
Rabbi trust assets | | 2,493 | | | 2,493 | | | — | | | — | |
Total | | $ | 19,639 | | | $ | 2,493 | | | $ | 17,146 | | | $ | — | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
Asset derivatives | | $ | 375 | | | $ | — | | | $ | 375 | | | $ | — | |
Liability derivatives | | (107) | | | — | | | (107) | | | — | |
Bank acceptances | | 13,240 | | | — | | | 13,240 | | | — | |
Rabbi trust assets | | 3,001 | | | 3,001 | | | — | | | — | |
Total | | $ | 16,509 | | | $ | 3,001 | | | $ | 13,508 | | | $ | — | |
The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing SOFR-based interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain China-based customers in lieu of cash paid on receivables, have maturities of one year or less 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Pensions | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $ | 1,328 | | | $ | 1,538 | | | $ | 2,883 | | | $ | 3,279 | |
Interest cost | 3,434 | | | 3,204 | | | 6,868 | | | 6,376 | |
Expected return on plan assets | (7,257) | | | (6,962) | | | (14,538) | | | (13,934) | |
Amortization of prior service cost | 99 | | | 80 | | | 207 | | | 165 | |
Amortization of actuarial losses | 3,518 | | | 4,080 | | | 6,657 | | | 8,006 | |
| | | | | | | |
| | | | | | | |
Special termination benefits | — | | | — | | | 136 | | | — | |
Net periodic benefit cost | $ | 1,122 | | | $ | 1,940 | | | $ | 2,213 | | | $ | 3,892 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, |
Other Postretirement Benefits | 2022 | | 2021 | | | 2022 | | 2021 |
Service cost | $ | 15 | | | $ | 25 | | | | $ | 39 | | | $ | 50 | |
Interest cost | 203 | | | 206 | | | | 409 | | | 412 | |
Amortization of prior service cost | 9 | | | 8 | | | | 18 | | | 15 | |
Amortization of actuarial losses | (1) | | | 70 | | | | (1) | | | 140 | |
| | | | | | | | |
Net periodic benefit cost | $ | 226 | | | $ | 309 | | | | $ | 465 | | | $ | 617 | |
The service cost component of net periodic benefit cost is included within cost of sales and selling and administrative expenses. The components of net periodic benefit cost other than the service cost component are included in Other income (expense) on the Consolidated Statements of (Loss) Income.
12. Income Taxes
The Company's effective tax rate for the first half of 2022 was (267.2)% compared with 26.6% in the first half of 2021 and 21.9% for the full year 2021. The decrease in the effective tax rate in the first half of 2022 as compared with the rate for the full year 2021 was driven by the goodwill impairment charge of $68,194, which is not tax deductible for book purposes. Excluding the goodwill impairment charge, the effective tax rate for the first half of 2022 was 22.0%. Additional drivers in the effective tax rate in the first half of 2022, as compared with the full year 2021 rate, include the absence of benefits related to the realignment of tax basis goodwill and intangibles, and the favorable Mutual Aid Process Approval, both recorded in 2021. The effective tax rate is also impacted by higher income in jurisdictions with tax holidays.
The Aerospace and Industrial segments have several multi-year tax holidays in Singapore, China and Malaysia. The Company was granted a tax holiday in China that was approved in December 2021. As a result of this tax holiday, the China tax rate was reduced from 25% to 15% and is effective for a three year period commencing January 1, 2021 (retroactively). Aerospace was granted an income tax holiday for operations established in Malaysia. This holiday commenced effective November 2020 (retroactively) and remains effective for a period of ten years. The Singapore tax holiday is scheduled to expire in December 2022. These holidays are subject to the Company meeting certain commitments in the respective jurisdictions.
13. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following tables set forth the changes in accumulated other comprehensive income (loss), net of tax, by component for the six-month periods ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
December 31, 2021 | $ | 160 | | | $ | (112,307) | | | $ | (39,691) | | | $ | (151,838) | |
Other comprehensive income (loss) before reclassifications | 3,206 | | | 586 | | | (81,805) | | | (78,013) | |
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 196 | | | 5,265 | | | — | | | 5,461 | |
Net current-period other comprehensive income (loss) | 3,402 | | | 5,851 | | | (81,805) | | | (72,552) | |
June 30, 2022 | $ | 3,562 | | | $ | (106,456) | | | $ | (121,496) | | | $ | (224,390) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
December 31, 2020 | $ | (757) | | | $ | (142,119) | | | $ | 20,561 | | | $ | (122,315) | |
Other comprehensive (loss) income before reclassifications | (1,003) | | | 145 | | | (26,286) | | | (27,144) | |
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 453 | | | 6,380 | | | — | | | 6,833 | |
Net current-period other comprehensive (loss) income | (550) | | | 6,525 | | | (26,286) | | | (20,311) | |
| | | | | | | |
June 30, 2021 | $ | (1,307) | | | $ | (135,594) | | | $ | (5,725) | | | $ | (142,626) | |
The following table sets forth the reclassifications out of accumulated other comprehensive income (loss) by component for the three-month periods ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
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 June 30, 2022 | | Three Months Ended June 30, 2021 | | |
Cash flow hedges | | | | | | |
Interest rate contracts | | $ | (94) | | | $ | (460) | | | Interest expense |
Foreign exchange contracts | | (27) | | | 171 | | | Net sales |
| | (121) | | | (289) | | | Total before tax |
| | 28 | | | 73 | | | Tax benefit |
| | (93) | | | (216) | | | Net of tax |
| | | | | | |
Pension and other postretirement benefit items | | | | | | |
Amortization of prior service costs | | $ | (108) | | | $ | (88) | | | (A) |
Amortization of actuarial losses | | (3,517) | | | (4,150) | | | (A) |
| | | | | | |
| | | | | | |
| | (3,625) | | | (4,238) | | | Total before tax |
| | 852 | | | 992 | | | Tax benefit |
| | (2,773) | | | (3,246) | | | Net of tax |
| | | | | | |
Total reclassifications in the period | | $ | (2,866) | | | $ | (3,462) | | | |
| | | | | | |
The following table sets forth the reclassifications out of accumulated other comprehensive income (loss) by component for the six-month periods ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
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 |
| | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 | | |
Cash flow hedges | | | | | | |
Interest rate contracts | | $ | (260) | | | (909) | | | Interest expense |
Foreign exchange contracts | | 3 | | | 298 | | | Net sales |
| | (257) | | | (611) | | | Total before tax |
| | 61 | | | 158 | | | Tax benefit |
| | (196) | | | (453) | | | Net of tax |
| | | | | | |
Pension and other postretirement benefit items | | | | | | |
Amortization of prior service costs | | $ | (225) | | | $ | (180) | | | (A) |
Amortization of actuarial losses | | (6,656) | | | (8,146) | | | (A) |
| | | | | | |
| | | | | | |
| | (6,881) | | | (8,326) | | | Total before tax |
| | 1,616 | | | 1,946 | | | Tax benefit |
| | (5,265) | | | (6,380) | | | Net of tax |
| | | | | | |
Total reclassifications in the period | | $ | (5,461) | | | $ | (6,833) | | | |
| | | | | | |
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic Pension and Other Postretirement Benefits cost. See Note 11.
14. 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.
Industrial is a global provider of highly-engineered, high-quality precision components, products and systems for critical applications serving a diverse customer base in end-markets such as mobility, industrial equipment, automation, personal care, packaging, electronics, and medical devices. 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's Molding Solutions business designs and manufactures 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. The Force & Motion Control business provides innovative cost effective force and motion control solutions for a wide range of metal forming and other industrial markets. The Automation business designs and develops robotic grippers, advanced end-of-arm tooling systems, sensors and other automation components for intelligent robotic handling solutions and industrial automation applications. Industrial's Engineered Components business manufactures and supplies precision mechanical products used in mobility and industrial applications, including mechanical springs, and high-precision punched and fine-blanked components.
Aerospace is a global manufacturer of complex fabricated and precision machined components and assemblies for turbine engines, nacelles and structures for both commercial and defense-related aircraft. The Aerospace Aftermarket business provides aircraft engine component maintenance, repair and overhaul ("MRO") services, including services performed under our Component Repair Programs (“CRPs”), for many of the world’s major turbine engine manufacturers, commercial airlines and the defense market. The Aerospace Aftermarket activities also include the manufacture and delivery of aerospace aftermarket spare parts, including through revenue sharing programs (“RSPs”) under which the Company receives an exclusive right to supply designated aftermarket parts over the life of specific aircraft engine programs.
The following tables set forth information about the Company's operations by its two reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net sales | | | | | | | |
Industrial | $ | 212,115 | | | $ | 234,679 | | | $ | 423,787 | | | $ | 454,671 | |
Aerospace | 109,153 | | | 86,485 | | | 209,864 | | | 168,127 | |
Intersegment sales | — | | | (6) | | | — | | | (11) | |
Total net sales | $ | 321,268 | | | $ | 321,158 | | | $ | 633,651 | | | $ | 622,787 | |
| | | | | | | |
Operating (loss) profit | | | | | | | |
Industrial(A) | $ | (48,743) | | | $ | 27,273 | | | $ | (33,990) | | | $ | 48,568 | |
Aerospace | 20,556 | | | 11,270 | | | 36,916 | | | 22,355 | |
Total operating (loss) profit | (28,187) | | | 38,543 | | | 2,926 | | | 70,923 | |
Interest expense | 3,325 | | | 4,475 | | | 6,893 | | | 8,416 | |
Other expense (income), net | (403) | | | 1,272 | | | 1,226 | | | 2,734 | |
(Loss) income before income taxes | $ | (31,109) | | | $ | 32,796 | | | $ | (5,193) | | | $ | 59,773 | |
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Assets | | | |
Industrial | $ | 1,679,108 | | | $ | 1,827,903 | |
Aerospace | 584,053 | | | 583,043 | |
Other (B) | 137,935 | | | 165,874 | |
Total assets | $ | 2,401,096 | | | $ | 2,576,820 | |
(A) Industrial operating losses in the three and six-month periods ended June 30, 2022 include a $68,194 goodwill impairment charge. See Note 7.
(B) "Other" assets include corporate-controlled assets, the majority of which are cash and cash equivalents 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. The Company accrues its estimated exposure for warranty claims at the time of sale based upon the length of the warranty period, historical experience and other related information known to the Company. Liabilities related to product warranties and extended warranties were not material as of June 30, 2022 and December 31, 2021.
In July 2021, a customer asserted breach of contract and contractual warranty claims regarding a part manufactured by the Company. While the Company disputes the asserted claims, the Company and the customer are in discussions seeking to resolve the matter. No litigation or other proceeding has been initiated. While it is currently not possible to determine the ultimate outcome of this matter, the Company intends to vigorously defend its position and 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.
Litigation
The Company is subject to litigation from time to time in the ordinary course of business and various other suits, proceedings and claims are pending involving the Company and its subsidiaries. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with the Company's beliefs, the Company expects that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on financial condition or results of operations.
16. Business Reorganizations
In June 2020, the Company announced restructuring and workforce reduction actions ("Actions") which were implemented across its businesses and functions in response to the macroeconomic disruption in global industrial and aerospace end markets arising from COVID-19. During 2020, a resulting pre-tax charge of $19,116 was recorded ($18,158 through operating profit), primarily related to employee severance and termination benefits (recorded largely during the second quarter of 2020). These actions were substantially complete as of December 31, 2020 and reduced the Company’s global workforce by approximately 8%. A corresponding liability of $664, per below, remained and was included within accrued liabilities as of June 30, 2022. The Company does not expect any additional costs related to the Actions to be significant.
The following table sets forth the change in the liability related to these actions:
| | | | | |
December 31, 2021 | $ | 1,222 | |
Payments | (558) | |
June 30, 2022 | $ | 664 | |
In 2021, the Company initiated additional restructuring actions ("Restructurings") at a number of locations. The Restructurings included a transfer of manufacturing capabilities to leverage existing capacity which is expected to reduce labor and infrastructure costs. The Restructurings resulted in pre-tax charges of $2,869, primarily related to employee severance and termination benefits, in 2021 (recorded primarily during the second and fourth quarters of 2021) and $719 in the first half of 2022. The Company does not expect any additional costs related to the Restructurings to be significant.
17. Subsequent Event
On July 26, 2022, the Company authorized restructure actions (“2022 Actions”) focused on the consolidation of two manufacturing sites and a number of branch offices, and changes in infrastructure to eliminate certain roles across a number of locations in the Industrial segment businesses.
The pretax charges associated with the 2022 Actions are expected to approximate $24,000, with approximately $17,000 of the charges being recorded in the second half of 2022, primarily through operating profit. Of the aggregate, approximately $10,000
relates to employee termination costs, primarily employee severance and other termination benefits, and are to be paid in cash, and approximately $14,000 relates to other associated costs, of which approximately $5,000 are to be paid in cash, with the balance being non-cash charges inclusive of accelerated depreciation of assets. The Actions are expected to be completed in 2023. The Company anticipates annualized cost savings of approximately $14,000 from the 2022 Actions.
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With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three- and six-month periods ended June 30, 2022 and 2021, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated July 29, 2022 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.