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B > SEC Filings for B > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for BARNES GROUP INC


29-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Please refer to the Overview in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website:
www.bginc.com.

In the first quarter of 2013, the Company entered into a definitive agreement to sell its Barnes Distribution North America Business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC") for $550.0 million, subject to certain working capital and post closing adjustments. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations. The Company completed the sale of BDNA on April 22, 2013.

Additionally, in the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable business segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by one of the Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment.

Aerospace

Aerospace produces precision-machined and fabricated components and assemblies for original equipment manufacturers ("OEM") of commercial jet engines, airframes, and industrial gas turbines throughout the world, and for the military. Aerospace also provides jet engine component overhaul and repair ("MRO") services for many of the world's major jet engine manufacturers, commercial airlines and the military. MRO activities include the manufacture and delivery of aerospace aftermarket spare parts, participation in revenue sharing programs ("RSPs") under which the Company receives an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program, and component repairs.

Aerospace's OEM business competes with both the leading jet engine OEMs and a large number of machining and fabrication companies. Competition is based mainly on quality, engineering and technical capability, product breadth, timeliness, service and price. Aerospace's machining and fabrication operations, with facilities in Arizona, Connecticut, Michigan, Ohio, Utah and Singapore, produce critical engine and airframe components through technically advanced processes.

Aerospace's MRO business competes with aerospace OEMs, service centers of major commercial airlines, and other independent service companies for the repair and overhaul of turbine engine components. The manufacturing and supply of aerospace aftermarket spare parts, including those related to the RSPs, are dependent upon the reliable and timely delivery of high-quality components. Aerospace's aftermarket facilities, located in Connecticut, Ohio and Singapore, specialize in the repair and refurbishment of highly engineered components and assemblies such as cases, rotating air seals, shrouds and honeycomb air seals.

Industrial

Industrial is a global manufacturer of highly-engineered, high-quality, precision parts, products and systems for critical applications serving a diverse customer base in end-markets such as transportation, energy, electronics, medical devices, and consumer products. Focused on custom solutions, Industrial participates in the design phase of components and assemblies whereby the customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products.

Industrial designs and manufactures customized hot runner systems and components
- the enabling technology for many complex injection molding applications. It is a leading manufacturer and supplier of precision mechanical products, including precision mechanical springs, compressor reed valves and nitrogen gas products. Industrial also manufactures high-precision punched and fine-blanked components used in transportation and industrial applications, nitrogen gas springs and manifold systems used to precisely control stamping presses, and retention rings that position parts on a shaft or other axis. Industrial is equipped to produce virtually every type of precision spring, from fine hairsprings for electronics and instruments to large heavy-duty springs for machinery.

Industrial competes with a broad base of large and small companies engaged in the manufacture and sale of custom metal components and assemblies and competes on the basis of quality, service, reliability of supply, engineering and technical


capability, geographic reach, product breadth, innovation, design, and price. Products are sold primarily through its direct sales force and a network of global distribution channels.

Industrial has manufacturing, sales, assembly, and distribution operations in the United States, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Japan, Mexico, Netherlands, Portugal, Singapore, Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey and the United Kingdom.

First Quarter 2013 Highlights

In February 2013, the Company entered into a definitive agreement to sell BDNA to MSC for $550.0 million, subject to certain working capital and post closing adjustments. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations. The Company completed the sale of BDNA on April 22, 2013.

In the first quarter of 2013, sales increased by $40.8 million, or 18.3% from the first quarter of 2012, to $263.5 million. This increase was driven primarily by a $40.3 million sales contribution from the Synventive business. Organic sales increased by $1.9 million, or 0.9%, with growth at both the Aerospace and Industrial segments. Foreign currency translation decreased sales by approximately $1.4 million as the U.S. dollar strengthened against foreign currencies.

Operating income in the first quarter of 2013 increased 1.4% to $25.0 million from the first quarter of 2012 and operating income margin decreased from 11.0% to 9.5%. Operating income benefited primarily from the profit contribution of the Synventive business, productivity improvements and favorable pricing, partially offset by non-recurring stock compensation expenses of $10.5 million related to the modification of outstanding equity awards granted to the former Chief Executive Officer ("CEO transition costs").

RESULTS OF OPERATIONS

Net Sales
                          Three months ended March 31,
(in millions)          2013          2012          Change
Aerospace          $    98.0       $  97.3    $  0.8     0.8 %
Industrial             165.5         125.5      40.0    31.8 %
Intersegment sales         -             -         -       - %
Total              $   263.5       $ 222.8    $ 40.8    18.3 %

The Company reported net sales of $263.5 million in the first quarter of 2013, an increase of $40.8 million or 18.3%, from the first quarter of 2012. The acquisition of Synventive in 2012 provided $40.3 million of net sales during the first quarter of 2013. Organic sales increased by $1.9 million, which included an increase of $0.8 million at Aerospace and an increase of $1.1 million at Industrial. The strengthening of the U.S. dollar against foreign currencies decreased net sales by approximately $1.4 million.

Expenses and Operating Income
                                          Three months ended March 31,
(in millions)                          2013        2012           Change
Cost of sales                       $  177.7     $ 160.4     $ 17.3    10.8 %
  % sales                               67.4 %      72.0 %
Gross profit (1)                    $   85.8     $  62.4     $ 23.5    37.6 %
  % sales                               32.6 %      28.0 %
Selling and administrative expenses $   60.9     $  37.8     $ 23.1    61.2 %
  % sales                               23.1 %      16.9 %
Operating income                    $   25.0     $  24.6     $  0.3     1.4 %
  % sales                                9.5 %      11.0 %
(1)  - Sales less cost of sales.


Cost of sales in the first quarter of 2013 increased 10.8% from the 2012 period, while gross profit margin increased from 28.0% in the 2012 period to 32.6% in the 2013 period. Gross margins declined at Aerospace and improved at Industrial. The acquisition of Synventive resulted in a higher percentage of sales, as well as higher gross profit as a percentage of sales, being driven by Industrial. Selling and administrative expenses in the first quarter of 2013 increased 61.2% from the 2012 period due primarily to the incremental operations of Synventive and CEO transition costs of $10.5 million. As a percentage of sales, selling and administrative costs increased from 16.9% in the first quarter of 2012 to 23.1% in the 2013 period. Operating income in the first quarter of 2013 increased 1.4% to $25.0 million from the first quarter of 2012 and operating income margin decreased from 11.0% to 9.5%.

Interest expense
Interest expense increased by $2.0 million in the first quarter of 2013 compared to the prior year amount, primarily a result of higher borrowings under the variable rate credit facility (the "Credit Facility") used to fund the acquisition of Synventive.

Other expense (income), net
Other expense (income), net in the first quarter of 2013 was $1.0 million compared to $0.9 million in the first quarter of 2012.

Income Taxes
The Company's effective tax rate from continuing operations for the first quarter of 2013 was 21.4% compared with 17.8% in the first quarter of 2012 and 13.5% for the full year 2012. The increase in the first quarter 2013 effective tax rate from the full year 2012 rate of 13.5% is due to the absence of the 2012 reversal of certain foreign valuation allowances and tax rate decreases in certain foreign jurisdictions, the increase in the Company's Swedish effective tax rate and the projected change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2013.

The Company was previously awarded a number of multi-year Pioneer tax status certificates (the "certificates") by the Ministry of Trade and Industry in Singapore. No certificates are scheduled to expire in 2013.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue ("April 2013 Tax Court Decision"). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.5 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001. The proposed IRS cash tax assessment (after utilization of a portion of the Company's existing net operating losses) is estimated to be approximately $13.0 million including penalties and interest.

The case arose out of an Internal Revenue Service ("IRS") audit for the tax years 2000 through 2002. The adjustment relates to the federal taxation of foreign income of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments. In the third quarter of 2009, the Company was informed that its protest was denied and a tax assessment was received from the Appeals Office of the IRS. Subsequently, in November 2009, the Company filed a petition against the IRS in the United States Tax Court, contesting the tax assessment. A trial was held and all briefs were filed in 2012. In April 2013 the Tax Court Decision was then issued rendering an unfavorable decision against the Company and imposing penalties.

The Company expects the Tax Court to enter an order reflecting the tax assessment, interest and penalties due ("Court Approved Assessment") in the second quarter 2013. Following entry of that order, both parties have 90 days to decide whether or not to appeal the April 2013 Tax Court Decision. At the end of the 90 day period, or earlier if an appeal is filed by the Company, the Court Approved Assessment becomes due.

The Company continues to believe that its tax position is correct and the Company is evaluating its options including an appeal of the decision. The April Tax Court Decision is not expected to have a material effect on the Company's consolidated financial position, but could be material to both the consolidated results of operations and cash flows in any one period. The Company now expects the cash flows to be negatively impacted by approximately $13.0 million in the third quarter of 2013 in connection with the Court Approved Assessment. In addition, in the second quarter of 2013, following the Company's evaluation, the Company could record an income tax charge of up to approximately $20.0 million and a reduction in its deferred tax assets to reflect the utilization of a portion of the Company's net operating loss carryforwards.

Discontinued Operations
On February 22, 2013, the Company and MSC entered into an Asset Purchase Agreement ("APA") pursuant to which MSC will acquire BDNA. The APA provided that MSC would pay the Company $550.0 million as consideration for the acquisition of BDNA, subject to certain working capital and post closing adjustments. In the first quarter of 2013, upon approval of the sale of BDNA by the Company's Board of Directors, the Company classified the business as "held for sale". The results of BDNA have been segregated and presented as discontinued operations. The Company completed the sale of BDNA on April 22, 2013. In the first


quarter of 2013, the Company recorded a $2.0 million loss from discontinued operations. The loss relates to the income generated by the operations of BDNA, more than offset by transaction expenses associated with the BDNA sale, charges related to the pension plans held by BDNA and a final adjustment related to a retained liability at BDE. See Note 2 and Note 16 of the Consolidated Financial Statements.

Income and Income per Share
                                                            Three months ended March 31,
(in millions, except per share)                        2013       2012            Change
Income from continuing operations                    $ 15.4     $ 17.6     $  (2.2 )   (12.3 )%
(Loss) income from discontinued operations, net of
income taxes                                           (2.0 )      4.6        (6.6 )      NM
Net income                                           $ 13.5     $ 22.2     $  (8.7 )   (39.3 )%
Per common share:
 Basic:
  Income from continuing operations                  $ 0.29     $ 0.33     $ (0.04 )   (12.1 )%
  (Loss) income from discontinued operations, net of
income taxes                                          (0.04 )     0.08       (0.12 )      NM
  Net income                                         $ 0.25     $ 0.41     $ (0.16 )   (39.0 )%
 Diluted:
  Income from continuing operations                  $ 0.28     $ 0.32     $ (0.04 )   (12.5 )%
  (Loss) income from discontinued operations, net of
income taxes                                          (0.04 )     0.08       (0.12 )      NM
  Net income                                         $ 0.24     $ 0.40     $ (0.16 )   (40.0 )%
Weighted average common shares outstanding:
  Basic                                                54.7       54.8        (0.1 )    (0.1 )%
  Diluted                                              55.5       55.5         0.1       0.1  %

NM - Not meaningful

In the first quarter of 2013, basic and diluted income from continuing operations per common share decreased 12.1% and 12.5%, respectively, from the first quarter of 2012. The decreases were directly attributable to the decrease in income from continuing operations for the period. Basic and diluted weighted average common shares outstanding remained flat period over period.

Financial Performance by Business Segment

Aerospace
Three months ended March 31, (in millions) 2013 2012 Change Sales $ 98.0 $ 97.3 $ 0.8 0.8 % Operating profit 10.3 12.7 (2.3 ) (18.2 )% Operating margin 10.6 % 13.0 %

The Aerospace segment reported sales of $98.0 million in the first quarter of 2013, a 0.8% increase from the first quarter of 2012. The OEM manufacturing business reflected increased sales activity, partially offset by declines in sales within the aftermarket repair and overhaul and spare parts businesses.

Operating profit at Aerospace in the first quarter of 2013 decreased 18.2% from the first quarter of 2012 to $10.3 million. The decrease was driven by CEO transition costs of $3.9 million allocated to the segment. The profit benefit of higher sales in the OEM business was partially offset by the profit detriment of lower sales in the aftermarket repair and overhaul and spare parts businesses. Operating margin declined from 13.0% in the 2012 period to 10.6% in the 2013 period.

Outlook: Sales in the Aerospace OEM business are impacted by the general state of the aerospace market driven by the worldwide economy and are driven by its order backlog through its participation in certain strategic commercial and military engine and airframe programs. Backlog in this business was $536.6 million at March 31, 2013, of which approximately 57% is


expected to be shipped in the next 12 months. The Aerospace OEM business may be impacted by adjustments of customer inventory levels, commodity availability and pricing, changes in the content levels on certain platforms including insourcing, changes in production schedules of specific engine and airframe programs, as well as the pursuit of new programs. Sales levels in the aerospace aftermarket repair and overhaul business are expected to reflect long-term trends towards improving maintenance, repair and overhaul activity, but may be negatively impacted by short-term fluctuations in demand. Incremental management fees within the aftermarket RSP spare parts business are dependent on future sales volumes and are treated as a reduction to sales. Management fees increase once during the life of each individual program, generally in the fourth or later years of each program. Management continues to believe its aerospace aftermarket business is competitively positioned based on strong customer relationships, including long-term RSP agreements and long-term maintenance and repair contracts in the repair and overhaul business, expanded capabilities and current capacity levels.

Management is focused on growing operating profit at Aerospace primarily through organic sales growth, productivity initiatives, new product introductions and continued cost management. Operating profit is expected to continue to be affected by the profit impact of changes in sales volume, mix and pricing, particularly as it relates to the highly profitable aftermarket RSP spare parts business, and investments made in each of its businesses. Management actively manages commodity price increases through pricing actions and other productivity initiatives. Costs associated with increases in new product introductions may also negatively impact operating profit.

Industrial
                       Three months ended March 31,
(in millions)       2013        2012           Change
Sales            $  165.5     $ 125.5     $ 40.0    31.8 %
Operating profit     14.6        12.0        2.6    22.1 %
Operating margin      8.8 %       9.5 %

Sales at Industrial were $165.5 million in the first quarter of 2013, a $40.0 million increase from the first quarter of 2012. The acquisition of Synventive provided $40.3 million of sales. Organic sales, which benefited from favorable pricing and mix, increased by $1.1 million during the 2013 period. These increases were partially offset by the negative impact of foreign currency translation which decreased sales by approximately $1.4 million as the U.S. dollar strengthened against foreign currencies.

Operating profit in the first quarter of 2013 at Industrial was $14.6 million, an increase of $2.6 million from the first quarter of 2012. Operating profit benefited primarily from the profit contribution of the Synventive business, productivity improvements and favorable pricing. These benefits were partially offset by CEO transition costs of $6.6 million that were allocated to the segment.

Outlook: In the Industrial manufacturing businesses, management is focused on generating organic sales growth by leveraging the benefits of the diversified products and industrial end-markets in which its businesses have a global presence and introducing new products. The Company also remains focused on sales growth through acquisition. The Synventive acquisition, for example, adds innovative products and services and is expected to expand the Company's global marketplace presence into geographic regions and end-markets where it had limited access. Our ability to generate sales growth in the global markets served by these businesses is subject to economic conditions. Order activity in certain end-markets, including transportation, may provide extended sales growth. Strategic investments are expected to provide incremental benefits in the long term.

Operating profit is largely dependent on the sales volumes and mix within all businesses of the segment. Management continues to focus on improving profitability through leveraging organic sales growth, acquisitions, pricing initiatives, productivity and process improvements. Costs associated with increases in new product introductions and the integration of and within the Synventive business may negatively impact operating profit.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses the Company's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Of particular importance in the management of liquidity are cash flows generated from operating activities, capital expenditure levels, dividends, capital stock transactions, effective utilization of surplus cash positions overseas and adequate lines of credit.


The Company's ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths. Management continues to focus on cash flow and working capital management, and anticipates that operating activities in 2013 will generate adequate cash. The Company closely monitors its cash generation, usage and preservation including the management of working capital to generate cash.

On April 22, 2013, the Company completed the sale of BDNA to MSC. The total cash consideration paid for BDNA was $550.0 million, subject to certain working capital and post closing adjustments. The after-tax proceeds from the transaction are estimated to be approximately $400.0 million. Taxes will be payable during 2013. The Credit Facility does not require that the Company use the proceeds from the sale of BDNA to reduce its outstanding borrowings. The Company will utilize a portion of the proceeds to reduce debt, repurchase common shares, invest in profitable growth initiatives including acquisitions, and for general corporate purposes. In April 2013, the Company initially utilized approximately $480.0 million to reduce borrowings under its Credit Facility (the "April 2013 Credit Facility payment").

The Company's 3.375% Convertible Notes are subject to redemption at their par value at any time, at the option of the Company, on or after March 20, 2014. The note holders may also require the Company to redeem some or all of the 3.375% Convertible Notes on March 15th of 2014, 2017 and 2022. Accordingly, the 3.375% Convertible Notes, classified as long-term debt as of December 31, 2012, have been classified within the current portion of long-term debt as of March 31, 2013. Payment on the 3.375% Convertible Notes, if required by note holders, is expected to be financed through internal cash, borrowings under its Credit Facility and the sale of debt securities, or a combination thereof.

Operating cash flow may be supplemented with external borrowings to meet near-term business expansion needs and the Company's current financial commitments. The Company has assessed its credit facilities and currently expects that its bank syndicate, comprised of 17 banks, will continue to support its Credit Facility which matures in September 2016. In July 2012, the bank syndicate made available an additional $250.0 million under the existing Credit Facility, bringing the amended Credit Facility to $750.0 million. At March 31, 2013, the Company has $145.9 million unused and available for borrowings under its amended $750.0 million Credit Facility, subject to covenants in the Company's debt agreements. At March 31, 2013, additional borrowings of $117.0 million of Total Debt and $24.5 million of Senior Debt would have been allowed under the covenants. The unused and available borrowings were increased subsequently by the amount of the April 2013 Credit Facility payment. Additional funds may be used, as needed, to support the Company's ongoing growth initiatives. The Company believes its credit facilities and access to capital markets, coupled with cash generated from operations, are adequate for its anticipated future requirements.

The Company closely monitors compliance with its various debt covenants. The Company's most restrictive financial covenant is the Senior Debt Ratio which requires the Company to maintain a ratio of Consolidated Senior Debt, as defined in the Amended and Restated Credit Agreement ("Credit Agreement"), to Consolidated EBITDA, as defined, of not more than 3.25 times at March 31, 2013. The actual ratio at March 31, 2013 was 3.13 times. The Company's debt agreements also contain other financial covenants that require the maintenance of a certain other debt ratio (Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times) and a certain interest coverage ratio (Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of at least 4.25 times) at March 31, 2013. The Company is in compliance with its debt covenants as of March 31, 2013.

In April 2012, the Company entered into five-year interest rate swap agreements transacted with three banks which together convert the interest on the first $100.0 million of borrowings under the Company's Credit Agreement from a variable rate plus the borrowing spread to a fixed rate of 1.03% plus the borrowing spread for the purpose of mitigating its exposure to variable interest rates.

Any future acquisitions are expected to be financed through internal cash, borrowings and equity, or a combination thereof. Additionally, we may from time to time seek to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.


Cash Flow
                          Three Months Ended March 31,
(in millions)            2013           2012        Change
Operating activities $    17.7       $     6.3     $ 11.3
. . .
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