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B > SEC Filings for B > Form 10-Q on 28-Jul-2014All Recent SEC Filings

Show all filings for BARNES GROUP INC

Form 10-Q for BARNES GROUP INC


28-Jul-2014

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

Second Quarter 2014 Highlights

In the second quarter of 2014, sales increased by $54.7 million, or 20.4% from the second quarter of 2013, to $322.1 million. This increase was driven primarily by a $35.7 million sales contribution from the Männer Business. Organic sales increased by $16.3 million, or 6.1%, with growth in both the Industrial and Aerospace segments.

Operating income in the second quarter of 2014 increased 25.5% to $45.4 million from the second quarter of 2013 and operating margin increased from 13.5% to 14.1%. Operating income benefited from the profit contribution of both the Männer Business and increased organic sales, partially offset by $1.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $2.3 million of pre-tax restructuring charges related to the closure of production operations at the facility in Saline, Michigan.

In March 2014, the Company authorized the closure of production operations ("Saline operations") at its Associated Spring facility located in Saline, Michigan ("the Closure"). The Saline operations primarily manufactured certain automotive engine valve springs. The Closure occurred during the second quarter of 2014, however certain other facility Closure costs, including the transfer of machinery and equipment, will continue through the remainder of 2014.

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

RESULTS OF OPERATIONS

Net Sales
                         Three months ended June 30,                 Six months ended June 30,
(in millions)         2014        2013          Change          2014       2013          Change
Industrial             212.8      170.6      42.2    24.7 %     416.7      336.1       80.6    24.0 %
Aerospace          $   109.3    $  96.8    $ 12.5    12.9 %   $ 217.5    $ 194.9    $  22.6    11.6 %
Intersegment sales         -          -         -       - %         -          -          -       - %
Total              $   322.1    $ 267.4    $ 54.7    20.4 %   $ 634.2    $ 530.9    $ 103.2    19.4 %

The Company reported net sales of $322.1 million in the second quarter of 2014, an increase of $54.7 million or 20.4%, from the second quarter of 2013. The acquisition of the Männer Business in 2013 provided $35.7 million of net sales during the second quarter of 2014. Organic sales increased by $16.3 million, which included an increase of $3.8 million at Industrial and an increase of $12.5 million at Aerospace. The weakening of the U.S. dollar against foreign currencies increased net sales by approximately $2.7 million.

The Company reported net sales of $634.2 million in the first half of 2014, an increase of $103.2 million or 19.4%, from the first half of 2013. The acquisition of the Männer Business in 2013 provided $73.7 million of net sales during the first half of 2014. Organic sales increased by $26.0 million, which included an increase of $3.4 million at Industrial and an increase of $22.6 million at Aerospace. The weakening of the U.S. dollar against foreign currencies increased net sales by approximately $3.5 million.


Expenses and Operating Income
                          Three months ended June 30,                     Six months ended June 30,
(in millions)       2014         2013            Change            2014        2013             Change
Cost of sales     $ 211.7     $  177.4     $ 34.3       19.3 %   $ 426.3     $ 355.1     $  71.1       20.0 %
  % sales            65.7 %       66.3 %                            67.2 %      66.9 %
Gross profit (1)  $ 110.4     $   90.0     $ 20.4       22.7 %   $ 207.9     $ 175.8     $  32.1       18.3 %
  % sales            34.3 %       33.7 %                            32.8 %      33.1 %
Selling and
administrative
expenses          $  65.0     $   53.8     $ 11.2       20.7 %   $ 127.4     $ 114.7     $  12.7       11.1 %
  % sales            20.2 %       20.1 %                            20.1 %      21.6 %
Operating income  $  45.4     $   36.1     $  9.2       25.5 %   $  80.5     $  61.1     $  19.4       31.8 %
  % sales            14.1 %       13.5 %                            12.7 %      11.5 %
(1) Sales less
cost of sales.

Cost of sales in the second quarter of 2014 increased 19.3% from the 2013 period, while gross profit margin increased from 33.7% in the 2013 period to 34.3% in the 2014 period. Gross margins improved at Industrial and declined at Aerospace. The acquisition of the Männer Business resulted in a higher percentage of sales being driven by Industrial during the 2014 period. Gross profit benefits from the Männer Business were partially offset by the $0.6 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and charges of $2.2 million related to the Closure of the Saline operations. Selling and administrative expenses in the second quarter of 2014 increased 20.7% from the 2013 period due primarily to the incremental operations of the Männer Business, $1.3 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $0.1 million of charges related to the Closure of the Saline operations. As a percentage of sales, selling and administrative costs increased slightly from 20.1% in the second quarter of 2013 to 20.2% in the 2014 period. Operating income in the second quarter of 2014 increased 25.5% to $45.4 million from the second quarter of 2013 and operating income margin increased from 13.5% to 14.1%.

Cost of sales in the first half of 2014 increased 20.0% from the 2013 period, while gross profit margin decreased slightly from 33.1% in the 2013 period to 32.8% in the 2014 period. Gross margins declined at both Industrial and Aerospace during the first half of 2014. The acquisition of the Männer Business resulted in a higher percentage of sales being driven by Industrial during the 2014 period. Gross profit benefits from the Männer Business were partially offset by the $3.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and charges of $4.4 million related to the Closure of the Saline operations. Selling and administrative expenses in the first half of 2014 increased 11.1% from the 2013 period due primarily to the incremental operations of the Männer Business, $2.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $0.6 million of charges related to the Closure of the Saline operations. Operating income during the first half of 2013 also included $10.5 million of non-recurring stock compensation expenses related to the modification of outstanding equity awards granted to the former Chief Executive Officer ("CEO Transition Costs"). As a percentage of sales, selling and administrative costs decreased from 21.6% in the first half of 2013 to 20.1% in the 2014 period. Operating income in the first half of 2014 increased 31.8% to $80.5 million from the first half of 2013 and operating income margin increased from 11.5% to 12.7%.

Interest expense
Interest expense decreased by $0.4 million and $1.5 million in the second quarter and the first half of 2014, respectively, compared to prior year amounts. The decrease during the first half of 2014 was primarily the result of lower average interest rates, partially offset by higher average borrowings.

Other expense (income), net
Other expense (income), net in the second quarter of 2014 was $0.8 million compared to $0.5 million in the second quarter of 2013. In the first half of 2014, other expense (income), net was $1.0 million compared to $1.5 million in the first half of 2013.

Income Taxes
The Company's effective tax rate from continuing operations for the first half of 2014 was 27.8% compared with 52.7% in the first half of 2013 and 32.8% for the full year 2013 which includes the impact of $16.4 million of tax expense related to the April 16, 2013 U.S. Court Decision (see Note 15 of the Consolidated Financial Statements). Excluding the impact of the U.S.


Tax Court Decision, the Company's effective tax rate from continuing operations for full year 2013 was 17.5%. The increase in the first half 2014 effective tax rate from the full year 2013 rate, as adjusted for the U.S. Tax Court Decision, is primarily due to a change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2014, the expiration of certain tax holidays and the increase in the planned repatriation of a portion of current year foreign earnings to the U.S.

The Industrial and Aerospace segments were previously awarded international tax holidays. All of the tax holidays for which the Company currently receives benefit are expected to expire in 2014 through 2016.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue ("Tax Court Decision"). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.4 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.

The case arose out of an Internal Revenue Service ("IRS") audit for the tax years 2000 through 2002. The adjustment relates to the federal taxation of foreign income of certain foreign subsidiaries. The Company filed an administrative protest of these adjustments. In the third quarter of 2009, the Company was informed that its protest was denied and a tax assessment was received from the Appeals Office of the IRS. Subsequently, in November 2009, the Company filed a petition against the IRS in the United States Tax Court, contesting the tax assessment. A trial was held and all briefs were filed in 2012. In April 2013 the Tax Court Decision was then issued rendering an unfavorable decision against the Company and imposing penalties. As a result of the unfavorable Tax Court Decision, the Company recorded an additional tax charge during 2013 for $16.4 million.

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

Discontinued Operations
In April 2013, the Company completed the sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC"). The results of BDNA were segregated and presented as discontinued operations during the first quarter of 2013. In the first half of 2013, the Company recorded a $198.2 million gain from discontinued operations. The gain relates to the net after-tax proceeds less the book value of the assets sold or otherwise disposed of and the income generated by the operations of BDNA, partially offset by charges related to the pension plans related to BDNA and a final adjustment related to a retained liability at the Barnes Distribution Europe business. See Note 2 of the Consolidated Financial Statements.


Income and Income per Share
                                 Three months ended June 30,                     Six months ended June 30,
(in millions, except per
share)                     2014       2013             Change             2014       2013             Change
Income from continuing
operations               $ 30.2     $   9.2     $   21.0        NM      $ 53.0     $  24.6     $   28.4        NM
Income from discontinued
operations, net of
income taxes                  -       200.1       (200.1 )      NM           -       198.2     $ (198.2 )      NM
Net income               $ 30.2     $ 209.3     $ (179.1 )   (85.6 )%   $ 53.0     $ 222.8     $ (169.8 )   (76.2 )%
Per common share:
 Basic:
  Income from continuing
operations               $ 0.55     $  0.18     $   0.37        NM      $ 0.97     $  0.46     $   0.51        NM
  Income from
discontinued operations,
net of income taxes           -        3.72        (3.72 )      NM           -        3.65        (3.65 )      NM
  Net income             $ 0.55     $  3.90     $  (3.35 )   (85.9 )%   $ 0.97     $  4.11     $  (3.14 )   (76.4 )%
 Diluted:
  Income from continuing
operations               $ 0.54     $  0.17     $   0.37        NM      $ 0.95     $  0.45     $    0.5        NM
  Income from
discontinued operations,
net of income taxes           -        3.65        (3.65 )      NM           -        3.59        (3.59 )      NM
  Net income             $ 0.54     $  3.82     $  (3.28 )   (85.9 )%   $ 0.95     $  4.04     $  (3.09 )   (76.5 )%
Weighted average common
shares outstanding:
  Basic                    54.7        53.7          1.0       1.9  %     54.7        54.2          0.5       0.9  %
  Diluted                  55.9        54.8          1.1       2.0  %     56.0        55.1          0.9       1.5  %

NM - Not meaningful

Basic and diluted income from continuing operations per common share increased for the three- and six- month periods as compared to 2013. The increases were directly attributable to the increases in income from continuing operations for the periods. Basic weighted average common shares outstanding increased due to the issuance of additional shares for employee stock plans and the issuance of 1,032,493 shares in connection with the acquisition of the Manner Business. The impact of these issuances was partially offset by the repurchase of 220,794 and 225,202 shares during the first half of 2014 and the second half of 2013, respectively, as part of the repurchase program. Diluted weighted average common shares outstanding increased primarily as a result of the increase in basic weighted average common shares outstanding and was also impacted by an increase in the dilutive effect of potentially issuable shares given an increase in the Company's stock price.

Financial Performance by Business Segment

Industrial
                       Three months ended June 30,                 Six months ended June 30,
(in millions)      2014        2013           Change          2014        2013           Change
Sales            $ 212.8     $ 170.6     $ 42.2    24.7 %   $ 416.7     $ 336.1     $ 80.6    24.0 %
Operating profit    28.8        20.9        7.8    37.5 %      48.1        35.5       12.6    35.5 %
Operating margin    13.5 %      12.3 %                         11.6 %      10.6 %

Sales at Industrial were $212.8 million in the second quarter of 2014, a $42.2 million increase from the second quarter of 2013. The acquisition of the Männer Business in 2013 provided $35.7 million of sales. Organic sales increased by $3.8 million, or 2.2%, during the 2014 period, primarily due to favorable light vehicle and tool and die end-markets. Sales benefited from foreign currency translation which increased sales by approximately $2.7 million as the U.S. dollar weakened against foreign currencies. In the first half of 2014, this segment reported sales of $416.7 million, a 24.0% increase from the first half of 2013. The Männer Business contributed $73.7 million of sales. Organic sales increased by $3.4 million, or 1.0%, during the 2014 period. The impact of foreign currency translation increased sales by approximately $3.5 million.


Operating profit in the second quarter of 2014 at Industrial was $28.8 million, an increase of $7.8 million from the second quarter of 2013. Operating profit benefited primarily from the profit contributions of the Männer Business and increased organic sales, partially offset by unfavorable pricing, $1.9 million of short-term purchase accounting adjustments related to the acquisition and $2.3 million of pre-tax restructuring charges related to the Closure of the Saline operations. Operating profit in the first half of 2014 was $48.1 million, an increase of $12.6 million from the first half of 2013. The increase was also driven by the profit contribution of the Männer Business and increased organic sales, partially offset by $6.8 million of short-term purchase accounting adjustments related to the acquisition and $5.1 million of pre-tax restructuring charges related to the Closure of the Saline operations. Operating income during the first quarter of 2013 included CEO transition costs of $6.6 million that were allocated to the Industrial segment.

Outlook: In the Industrial manufacturing businesses, management is focused on generating organic sales growth through the introduction of new products and by leveraging the benefits of the diversified products and industrial end-markets in which its businesses have a global presence. The Company also remains focused on sales growth through acquisition and expanding geographic reach. Synventive, acquired in 2012, adds innovative products and services and has expanded the Company's global marketplace presence. The Männer Business, acquired in 2013, further provides additional differentiated products and services through the manufacture of high precision molds, valve gate hot runner systems, and system solutions for the medical/pharmaceutical, packaging, and personal care/health care industries. Our ability to generate sales growth is subject to economic conditions in the global markets served by all of our businesses. Order activity in certain end-markets may provide extended sales growth. Strategic investments in new technologies, manufacturing processes and product development 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, and productivity and process improvements. Costs associated with increases in new product and process introductions, strategic investments and the integration of acquisitions may negatively impact operating profit.

Aerospace
                       Three months ended June 30,                 Six months ended June 30,
(in millions)       2014        2013          Change          2014        2013           Change
Sales            $  109.3     $ 96.8     $ 12.5    12.9 %   $ 217.5     $ 194.9     $ 22.6    11.6 %
Operating profit     16.6       15.2        1.4     9.1 %      32.4        25.6        6.8    26.6 %
Operating margin     15.2 %     15.7 %                         14.9 %      13.1 %

The Aerospace segment reported sales of $109.3 million in the second quarter of 2014, a 12.9% increase from the second quarter of 2013. Sales increases within the original equipment manufacturing ("OEM") business were partially offset by a decrease within the aftermarket business. Within aftermarket, a sales increase within the repair and overhaul business ("MRO") was more then offset by lower sales in the spare parts business. Increased sales within the OEM business reflected continued strength in demand for new engines, driven by increased commercial aircraft production. In the first half of 2014, this segment reported sales of $217.5 million, a 11.6% increase from the first half of 2013, primarily as a result of increased sales in the OEM manufacturing and the aftermarket repair and overhaul businesses, partially offset by lower sales within the spare parts business.

Operating profit at Aerospace in the second quarter of 2014 increased 9.1% from the second quarter of 2013 to $16.6 million, driven primarily by the profit contributions of increased sales in the OEM business, partially offset by lower profits in the spare parts business and increased employee related costs, primarily due to incentive compensation as a result of the level of the Company's pre-established annual performance targets. Operating margin decreased from 15.7% in the 2013 period to 15.2% in the 2014 period. Operating profit in the first half of 2014 increased 26.6% from the first half of 2013 to $32.4 million, driven primarily by the profit contributions of increased sales in the OEM business, partially offset by lower profits in the spare parts business and increased employee related costs, primarily due to incentive compensation. Operating income during the first quarter of 2013 included CEO transition costs of $3.9 million that were allocated to the Aerospace segment.

Outlook: Sales in the Aerospace OEM business are based on the general state of the aerospace market driven by the worldwide economy and are supported by its order backlog through participation in certain strategic commercial and military engine and airframe programs. Backlog in this business was $521.2 million at June 30, 2014, of which approximately 64% 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 business are expected to be impacted by fluctuations in end-market demand, adjustments of customer inventory levels and changes in customer sourcing, such as deferred or limited maintenance activity during engine shop visits and the use of used material during the engine repair and overhaul process. Management continues to believe its Aerospace aftermarket business is competitively positioned based on well-established long-term customer relationships, including maintenance and repair contracts in the repair and overhaul business and long-term RSPs and CRPs, expanded capabilities and current capacity levels.

Management is focused on growing operating profit at Aerospace primarily through leveraging organic sales growth, productivity initiatives, new product and process introductions and continued cost management. Operating profit is expected to be affected by the impact of changes in sales volume, mix and pricing, particularly as they relate 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 and process introductions and the physical transfer of work to lower cost manufacturing regions 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 2014 will generate adequate cash. The Company closely monitors its cash generation, usage and preservation including the management of working capital to generate cash.

As of March 20, 2014, the 3.375% Convertible Notes ("Notes") were subject to redemption at their par value at any time, at the option of the Company. The Notes are also eligible for conversion upon meeting certain conditions as provided in the indenture agreement including the closing stock price for 20 of the last 30 trading days in the preceding quarter being greater than or equal to 130% of the conversion price (the "conversion price eligibility requirement"). The eligibility for conversion is determined quarterly. During the first quarter of 2014, the Notes were not eligible for conversion. During the second quarter of 2014, the Notes were eligible for conversion due to meeting this conversion price eligibility requirement. On June 16, 2014, $0.2 million of the Notes (par value) were surrendered for conversion. On June 24, 2014, the Company exercised its right to redeem the remaining $55.4 million principal amount of the Notes, effective July 31, 2014. As such, the balance of these Notes and the related deferred tax balances are classified as current in the accompanying balance sheet as of June 30, 2014. The Company has elected to pay cash to holders of the Notes surrendered for conversion, including the value of any residual value shares of common stock that might be payable to the holders electing to convert their Notes into an equivalent share value. Under the terms of the indenture, the conversion value will be measured based upon a 20-day valuation period of the Company's stock price. An average stock price in excess of $28.31 during the valuation period would require a cash payment in excess of $55.6 million. For each $0.50 that the average stock price during the valuation period exceeds $28.31, the cash payment in excess of par would be approximately $1.0 million. As of July 16, holders of $32.9 million (par value) of Notes have surrendered their Notes for conversion. The Company intends to use borrowings under its Amended Credit facility to finance the redemption or conversion of the Notes.

In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement") and retained Bank of America, N.A. as Administrative Agent for the lenders. The Amended Credit Agreement extends the maturity date of the debt facility by two years from September 2016 to September 2018 and includes an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement added a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, maintained the borrowing availability of the Company at $750.0 million and added an accordion feature to increase this amount to $1,000.0 million. The borrowing availability of $750.0 million, pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalent to $500.0 million. Euro-denominated borrowings are subject to foreign currency translation adjustments that are included within accumulated other non-owner changes to equity. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not . . .

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