UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172019
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-4801
BARNES GROUP INC.INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 06-0247840 | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
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123 Main Street | | | |
Bristol | | | |
Connecticut | | 06010 | |
(Address of Principal Executive Offices) | | (Zip Code) | |
(860) (860) 583-7070Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | | B | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerx | ☒ | Accelerated filer¨ | ☐ |
Non-accelerated filer¨ | ☐ | Smaller reporting company¨ | ☐ |
| | Emerging growth company¨ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | Yes | ☐ | No | ☒ |
The registrant had outstanding 53,610,57050,713,922 shares of common stock as of October 25, 2017.23, 2019.
Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 20172019
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Part I. | FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. | OTHER INFORMATION | |
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Item 1. | | |
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Item 2. | | |
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Item 6. | | |
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This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “FORWARD-LOOKING STATEMENTS” under Part I - Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 357,156 |
| | $ | 311,561 |
| | $ | 1,063,451 |
| | $ | 906,586 |
| $ | 372,587 |
| | $ | 369,797 |
| | $ | 1,120,947 |
| | $ | 1,111,772 |
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Cost of sales | 236,016 |
| | 198,600 |
| | 692,355 |
| | 582,028 |
| 234,421 |
| | 236,880 |
| | 717,370 |
| | 711,622 |
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Selling and administrative expenses | 73,354 |
| | 61,144 |
| | 210,423 |
| | 183,754 |
| 70,581 |
| | 73,854 |
| | 228,385 |
| | 220,575 |
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| 309,370 |
| | 259,744 |
| | 902,778 |
| | 765,782 |
| 305,002 |
| | 310,734 |
| | 945,755 |
| | 932,197 |
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Operating income | 47,786 |
| | 51,817 |
| | 160,673 |
| | 140,804 |
| 67,585 |
| | 59,063 |
| | 175,192 |
| | 179,575 |
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| | | | | | | | | | | | | | |
Interest expense | 3,748 |
| | 3,020 |
| | 10,638 |
| | 8,826 |
| 5,344 |
| | 4,054 |
| | 15,856 |
| | 12,078 |
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Other expense (income), net | 357 |
| | 621 |
| | 773 |
| | 24 |
| 2,524 |
| | 2,447 |
| | 6,043 |
| | 5,157 |
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Income before income taxes | 43,681 |
| | 48,176 |
| | 149,262 |
| | 131,954 |
| 59,717 |
| | 52,562 |
| | 153,293 |
| | 162,340 |
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Income taxes | 8,348 |
| | 11,348 |
| | 30,599 |
| | 33,066 |
| 13,948 |
| | 13,453 |
| | 35,916 |
| | 34,983 |
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Net income | $ | 35,333 |
| | $ | 36,828 |
| | $ | 118,663 |
| | $ | 98,888 |
| $ | 45,769 |
| | $ | 39,109 |
| | $ | 117,377 |
| | $ | 127,357 |
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Per common share: | | | | | | | | | | | | | | |
Basic | $ | 0.65 |
| | $ | 0.68 |
| | $ | 2.19 |
| | $ | 1.82 |
| $ | 0.90 |
| | $ | 0.76 |
| | $ | 2.29 |
| | $ | 2.42 |
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Diluted | 0.65 |
| | 0.67 |
| | 2.17 |
| | 1.81 |
| 0.89 |
| | 0.75 |
| | 2.27 |
| | 2.40 |
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Dividends | 0.14 |
| | 0.13 |
| | 0.41 |
| | 0.38 |
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Weighted average common shares outstanding: | | | | | | | | | | | | | | |
Basic | 54,066,509 |
| | 54,206,064 |
| | 54,140,551 |
| | 54,206,798 |
| 50,926,521 |
| | 51,569,764 |
| | 51,276,801 |
| | 52,555,130 |
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Diluted | 54,570,677 |
| | 54,572,315 |
| | 54,649,723 |
| | 54,643,739 |
| 51,230,845 |
| | 52,080,676 |
| | 51,718,574 |
| | 53,091,468 |
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See accompanying notes.
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 35,333 |
| | $ | 36,828 |
| | $ | 118,663 |
| | $ | 98,888 |
| $ | 45,769 |
| | $ | 39,109 |
| | $ | 117,377 |
| | $ | 127,357 |
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Other comprehensive income, net of tax | | | | | | | | |
Unrealized gains (losses) on hedging activities, net of tax (1) | 335 |
| | (150 | ) | | (124 | ) | | (580 | ) | |
Other comprehensive (loss) income, net of tax | | | | | | | | |
Unrealized (loss) gain on hedging activities, net of tax (1) | | (168 | ) | | 1,075 |
| | (1,960 | ) | | 1,886 |
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Foreign currency translation adjustments, net of tax (2) | 20,004 |
| | 990 |
| | 80,174 |
| | 2,100 |
| (39,289 | ) | | 1,737 |
| | (44,513 | ) | | (36,670 | ) |
Defined benefit pension and other postretirement benefits, net of tax (3) | 1,640 |
| | 2,042 |
| | 3,576 |
| | 5,740 |
| 2,112 |
| | 2,193 |
| | 5,648 |
| | 8,382 |
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Total other comprehensive income, net of tax | 21,979 |
| | 2,882 |
| | 83,626 |
| | 7,260 |
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Total other comprehensive (loss) income, net of tax | | (37,345 | ) | | 5,005 |
| | (40,825 | ) | | (26,402 | ) |
Total comprehensive income | $ | 57,312 |
| | $ | 39,710 |
| | $ | 202,289 |
| | $ | 106,148 |
| $ | 8,424 |
| | $ | 44,114 |
| | $ | 76,552 |
| | $ | 100,955 |
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(1) Net of tax of $125$(52) and $1$315 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $(87)$(607) and $(141)$593 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
(2) Net of tax of $146$(196) and $31$43 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $526$(230) and $105$(119) for the nine months ended September 30, 20172019 and 2016,2018, respectively.
(3) Net of tax of $946$554 and $977$750 for the three months ended September 30, 20172019 and 2016,2018, respectively, and $2,749$1,663 and $2,930$2,813 for the nine months ended September 30, 20172019 and 2016,2018, respectively.
See accompanying notes.
BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
| | | September 30, 2017 | | December 31, 2016 | September 30, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | $ | 134,471 |
| | $ | 66,447 |
| $ | 80,468 |
| | $ | 100,719 |
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Accounts receivable, less allowances (2017 - $4,495; 2016 - $3,992) | 325,189 |
| | 287,123 |
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Accounts receivable, less allowances (2019 - $4,510; 2018 - $5,010) | | 370,052 |
| | 382,253 |
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Inventories | 252,502 |
| | 227,759 |
| 254,478 |
| | 265,990 |
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Prepaid expenses and other current assets | 31,591 |
| | 27,163 |
| 67,408 |
| | 57,184 |
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Total current assets | 743,753 |
| | 608,492 |
| 772,406 |
| | 806,146 |
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Deferred income taxes | 31,942 |
| | 25,433 |
| 16,302 |
| | 20,474 |
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Property, plant and equipment | 825,705 |
| | 762,187 |
| 864,950 |
| | 853,497 |
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Less accumulated depreciation | (471,760 | ) | | (427,698 | ) | (501,365 | ) | | (482,966 | ) |
| 353,945 |
| | 334,489 |
| 363,585 |
| | 370,531 |
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Goodwill | 685,990 |
| | 633,436 |
| 922,608 |
| | 955,524 |
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Other intangible assets, net | 514,331 |
| | 522,258 |
| 583,328 |
| | 636,538 |
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Other assets | 16,570 |
| | 13,431 |
| 49,685 |
| | 19,757 |
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Total assets | $ | 2,346,531 |
| | $ | 2,137,539 |
| $ | 2,707,914 |
| | $ | 2,808,970 |
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Liabilities and Stockholders' Equity | | | | | | |
Current liabilities | | | | | | |
Notes and overdrafts payable | $ | 16,875 |
| | $ | 30,825 |
| $ | 18,520 |
| | $ | 2,137 |
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Accounts payable | 127,750 |
| | 112,024 |
| 122,066 |
| | 143,419 |
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Accrued liabilities | 191,889 |
| | 156,967 |
| 204,694 |
| | 206,782 |
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Long-term debt - current | 1,689 |
| | 2,067 |
| 1,724 |
| | 5,522 |
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Total current liabilities | 338,203 |
| | 301,883 |
| 347,004 |
| | 357,860 |
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Long-term debt | 497,429 |
| | 468,062 |
| 856,082 |
| | 936,357 |
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Accrued retirement benefits | 91,803 |
| | 109,350 |
| 81,897 |
| | 104,302 |
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Deferred income taxes | 64,700 |
| | 66,446 |
| 94,929 |
| | 106,559 |
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Long-term tax liability | | 66,012 |
| | 72,961 |
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Other liabilities | 24,795 |
| | 23,440 |
| 51,292 |
| | 27,875 |
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Commitments and contingencies (Note 13) |
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Commitments and contingencies (Note 17) | |
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Stockholders' equity | | | | | | |
Common stock - par value $0.01 per share Authorized: 150,000,000 shares Issued: at par value (2017 - 62,987,803 shares; 2016 - 62,692,403 shares) | 630 |
| | 627 |
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Common stock - par value $0.01 per share Authorized: 150,000,000 shares Issued: at par value (2019 - 63,756,811 shares; 2018 - 63,367,133 shares) | | 638 |
| | 634 |
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Additional paid-in capital | 452,677 |
| | 443,235 |
| 482,855 |
| | 470,818 |
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Treasury stock, at cost (2017 - 9,377,948 shares; 2016 - 8,889,947 shares) | (279,978 | ) | | (251,827 | ) | |
Treasury stock, at cost (2019 - 13,048,629 shares; 2018 - 12,033,580 shares) | | (497,928 | ) | | (441,668 | ) |
Retained earnings | 1,273,474 |
| | 1,177,151 |
| 1,456,458 |
| | 1,363,772 |
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Accumulated other non-owner changes to equity | (117,202 | ) | | (200,828 | ) | (231,325 | ) | | (190,500 | ) |
Total stockholders' equity | 1,329,601 |
| | 1,168,358 |
| 1,210,698 |
| | 1,203,056 |
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Total liabilities and stockholders' equity | $ | 2,346,531 |
| | $ | 2,137,539 |
| $ | 2,707,914 |
| | $ | 2,808,970 |
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See accompanying notes.
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| | | Nine months ended September 30, | Nine Months Ended September 30, |
| 2017 | | 2016 | 2019 | | 2018 |
Operating activities: | | | | | | |
Net income | $ | 118,663 |
| | $ | 98,888 |
| $ | 117,377 |
| | $ | 127,357 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 68,535 |
| | 58,949 |
| 75,692 |
| | 70,405 |
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Gain on disposition of property, plant and equipment | (96 | ) | | (475 | ) | |
Loss on disposition of property, plant and equipment | | 35 |
| | 124 |
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Stock compensation expense | 8,472 |
| | 8,620 |
| 9,740 |
| | 8,850 |
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Changes in assets and liabilities, net of the effects of acquisitions: | | | | | | |
Accounts receivable | (26,773 | ) | | (18,461 | ) | 9,741 |
| | (12,136 | ) |
Inventories | (11,454 | ) | | 4,626 |
| 6,145 |
| | (24,525 | ) |
Prepaid expenses and other current assets | (2,398 | ) | | (296 | ) | (12,494 | ) | | (7,186 | ) |
Accounts payable | 14,134 |
| | 9,799 |
| (19,541 | ) | | 4,824 |
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Accrued liabilities | 28,889 |
| | 13,028 |
| (216 | ) | | 9,765 |
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Deferred income taxes | (18,063 | ) | | 998 |
| (2,617 | ) | | (13,758 | ) |
Long-term retirement benefits | (11,469 | ) | | (16,026 | ) | (16,862 | ) | | 544 |
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Long-term tax liability | | (6,949 | ) | | (7,465 | ) |
Other | (677 | ) | | 461 |
| 1,298 |
| | 1,162 |
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Net cash provided by operating activities | 167,763 |
| | 160,111 |
| 161,349 |
| | 157,961 |
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Investing activities: | | | | | | |
Proceeds from disposition of property, plant and equipment | 401 |
| | 715 |
| 233 |
| | 491 |
|
Capital expenditures | (41,957 | ) | | (32,920 | ) | (37,722 | ) | | (40,168 | ) |
Business acquisitions, net of cash acquired | (8,922 | ) | | (120,675 | ) | (6,061 | ) | | (30,837 | ) |
Component Repair Program payments | — |
| | (900 | ) | |
Revenue Sharing Program payments | | — |
| | (5,800 | ) |
Other | (3,000 | ) | | — |
| — |
| | (1,000 | ) |
Net cash used by investing activities | (53,478 | ) | | (153,780 | ) | |
Net cash used in investing activities | | (43,550 | ) | | (77,314 | ) |
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Financing activities: | | | | | | |
Net change in other borrowings | (14,103 | ) | | (9,321 | ) | 16,415 |
| | (5,542 | ) |
Payments on long-term debt | (60,897 | ) | | (263,578 | ) | (290,593 | ) | | (381,887 | ) |
Proceeds from the issuance of long-term debt | 89,118 |
| | 288,982 |
| 230,625 |
| | 414,989 |
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Proceeds from the issuance of common stock | 1,731 |
| | 2,463 |
| 2,458 |
| | 721 |
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Common stock repurchases | (23,300 | ) | | (15,660 | ) | (50,347 | ) | | (138,275 | ) |
Dividends paid | (22,042 | ) | | (20,444 | ) | (24,414 | ) | | (23,996 | ) |
Withholding taxes paid on stock issuances | (4,851 | ) | | (4,881 | ) | (5,913 | ) | | (5,149 | ) |
Other | (17,773 | ) | | 3,406 |
| (13,034 | ) | | (3,598 | ) |
Net cash used by financing activities | (52,117 | ) | | (19,033 | ) | |
Net cash used in financing activities | | (134,803 | ) | | (142,737 | ) |
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Effect of exchange rate changes on cash flows | 5,856 |
| | 717 |
| (3,247 | ) | | (3,813 | ) |
Increase (decrease) in cash and cash equivalents | 68,024 |
| | (11,985 | ) | |
Decrease in cash and cash equivalents | | (20,251 | ) | | (65,903 | ) |
Cash and cash equivalents at beginning of period | 66,447 |
| | 83,926 |
| 100,719 |
| | 145,290 |
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Cash and cash equivalents at end of period | $ | 134,471 |
| | $ | 71,941 |
| $ | 80,468 |
| | $ | 79,387 |
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Supplemental Disclosure of Cash Flow Information:
Non-cash investing activities in 2016 included the recognition of $12,436 of liabilities in connection with the FOBOHA acquisition.
See accompanying notes.
BARNES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data)
(Unaudited)
1. SummaryBasis of Significant Accounting PoliciesPresentation
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, 20162018 has been derived from the 20162018 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, 2016.2018. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair statement of the results, have been included. Operating results for the nine-month period ended September 30, 20172019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
2. AcquisitionAcquisitions
In the third quarter of 2018, the Company acquired Industrial Gas Springs Group Holdings Limited (“IGS”) and in the fourth quarter of 2018, the Company acquired Gimatic S.r.l ("Gimatic"). The following table reflects the unaudited pro forma operating results (the "Pro Forma Results") of the Company for the three and nine months ended September 30, 2018, which give effect to the acquisitions of Gimatic and IGS as if they had occurred on January 1, 2017. The Pro Forma Results are based on assumptions that the Company believes are reasonable under the circumstances. The Pro Forma Results are not necessarily indicative of the operating results that would have occurred if the acquisitions had been effective January 1, 2017, nor are they intended to be indicative of results that may occur in the future. The underlying Pro Forma Results include the historical financial results of the Company and the acquired entities adjusted for certain items including amortization expense associated with the assets acquired and the Company’s expense related to financing arrangements, with the related tax effects. The Pro Forma Results do not include the effects of any synergies or cost reduction initiatives related to the acquisitions. |
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| (Unaudited Pro Forma) |
| Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 |
Net Sales | $ | 384,266 |
| $ | 1,166,087 |
|
Net Income | 40,517 |
| 127,731 |
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3. Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under U.S. 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 February 2016, the FASB amended its guidance related to lease accounting. The amended guidance required lessees to recognize a majority of their leases on the balance sheet as a right-of-use ("ROU") asset and a lease liability. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lease expense will be recorded in a manner similar to current accounting, with leases being classified as either finance or operating in nature. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted.
The Company adopted the new standard using the modified retrospective approach on January 1, 2019. The Company's adoption included lease codification improvements that were issued by the FASB through March 2019. The Company elected an available transition method that uses the effective date of the amended guidance as the date of initial application. The FASB made available several practical expedients in adopting the amended lease accounting guidance. The Company elected the
On April 3,
package of practical expedients permitted under the transition guidance within the amended guidance, which among other things, allowed registrants to carry forward historical lease classification. The Company elected the practical expedient that allows the combination of both lease and non-lease components as a single component and account for it as a lease for all classes of underlying assets. The Company elected not to apply the amended guidance to short term leases with an initial term of 12 months or less. The Company recognizes those lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term. The Company elected to use a single discount rate for a portfolio of leases with reasonably similar characteristics.
The most significant impact of the guidance was the recognition of ROU assets and related lease liabilities for operating leases on the Consolidated Balance Sheet. The Company recognized ROU assets and related lease liabilities of $31,724 and $32,579 respectively, related to operating lease commitments, as of January 1, 2019. The operating lease ROU asset represents the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The amended guidance did not have a material impact on the Company's cash flows or results of operations. See Note 14 of the Consolidated Financial Statements.
In May 2014, the FASB amended its guidance related to revenue recognition. The amended guidance established a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The amended guidance clarified that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity (1) identifies the contract(s) with a customer; (2) identifies the performance obligations in the contract; (3) determines the transaction price; (4) allocates the transaction price to the contract’s performance obligations; and (5) recognizes revenue when (or as) the entity satisfies a performance obligation. The amended guidance applied to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Companies had the option of using either a full retrospective or modified retrospective approach to the amended guidance.
The Company adopted the amended guidance, Accounting Standard Codification 606, Revenue from Contracts with Customers (“ASC 606”), and related amendments, using the modified retrospective approach on January 1, 2018, at which time it became effective for the Company. The Company recognized the cumulative effect of initially applying the new revenue standard to all contracts that were not completed on the date of adoption as an adjustment to the opening balance of retained earnings.
A majority of revenue continues to be recognized when products are shipped. Under the amended guidance, however, a certain portion of our businesses with customized products or contracts in which we perform work on customer-owned assets require the use of an "over time" recognition model as certain of these contracts meet one or more of the criteria established in the amended guidance. Revenue recognition on contracts requiring over time accounting recognition created unbilled receivables (contract assets) and reduced inventory on the Company’s Consolidated Balance Sheet. Adoption of the amended guidance also resulted in the recognition of customer advances for which the Company has received an unconditional right to payment. Since the related performance obligations have not been satisfied, however, the Company recognized these customer advances as trade receivables, with a corresponding contract liability of equal amount. Under the previous guidance, the Company recognized customer advances when payment was received. See Note 4 of the Consolidated Financial Statements.
In August 2016, the FASB amended its guidance related to the Statement of Cash Flows. The amended guidance clarifies how certain cash receipts and cash payments should be presented on the statement of cash flows. The guidance was effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company adopted the guidance during the first quarter of 2018 and the adoption did not have an impact on its Statement of Cash Flows.
In January 2017, the FASB amended its guidance related to goodwill impairment testing. The amended guidance simplifies the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under the amended guidance, companies should perform their annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Companies would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The amended guidance was effective for fiscal years beginning after December 15, 2019. Early adoption was permitted. The Company completedelected to early adopt this amended guidance during the second quarter of 2018 in connection with its acquisitionannual goodwill impairment testing and it did not have an impact on the Company's Consolidated Financial Statements.
In March 2017, the FASB amended its guidance related to the presentation of pension and other postretirement benefit costs. The amended guidance requires the bifurcation of net periodic benefit cost for pension and other postretirement plans. The service cost component of expense requires presentation with other employee compensation costs in operating income, consistent with the earlier guidance. The other components of expense, however, are reported separately outside of operating
income. The amended guidance also allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance was effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The Company adopted the amended guidance on a retrospective basis during the first quarter of 2018 and it did not have a material impact on its results of operations. See Note 12 of the assetsConsolidated Financial Statements for additional disclosure related to pension and postretirement benefit costs.
In February 2018, the FASB issued guidance related to the impacts of the privately held Gammaflux L.P. business ("Gammaflux"tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”),. The guidance permits the reclassification of certain income tax effects of the Act from Accumulated Other Comprehensive Income to Retained Earnings (stranded tax effects). The stranded tax effects resulted from the December 31, 2017 remeasurement of deferred income taxes that was recorded through the Consolidated Statements of Income, with no corresponding adjustment to Accumulated Other Comprehensive Income having been initially recognized. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within that reporting period. Early adoption was permitted. The Company elected to early adopt this amended guidance during the first quarter of 2018 using specific identification and as a leading supplier of hot runner temperature and sequential valve gate control systemsresult reclassified $19,331 from Accumulated Other Comprehensive Income to Retained Earnings on the Consolidated Balance Sheets. This reclassification relates only to the plastics industry. Gammaflux,change in the U.S. Corporate income tax rate.
In August 2018, the FASB issued new guidance related to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (for example, a service contract). Pursuant to the new guidance, customers apply the same criteria for capitalizing implementation costs in a hosting arrangement as they would for an arrangement that has a software license. The new guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption was permitted, including adoption in any interim period for which financial statements have not been issued. The FASB provided the option of applying the guidance retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company elected to early adopt this guidance, prospectively, during the third quarter of 2018, and it did not have a material impact on the Consolidated Financial Statements.
In August 2017, the FASB amended its guidance related to hedge accounting. The amended guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting, amends presentation and disclosure requirements and changes the assessment of effectiveness. The guidance also more closely aligns hedge accounting with management strategies, simplifies application and increases the transparency of hedging. The amended guidance is effective January 1, 2019, with early adoption permitted in any interim period. The Company adopted the amended guidance on January 1, 2019 and it did not have a material impact on the Consolidated Financial Statements, however it did result in amendments to certain disclosures required pursuant to the earlier guidance. See Note 10 of the Consolidated Financial Statements.
Recently Issued Accounting Standards
In August 2018, the FASB amended its guidance related to disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amended requirements serve to remove, add and otherwise clarify certain existing disclosures. The amended guidance is effective for fiscal years ending after December 15, 2020. The guidance requires application on a retrospective basis to all periods presented. The Company is currently evaluating the impact that the guidance may have on the disclosures within its Consolidated Financial Statements.
4. 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 including aerospace, transportation, manufacturing, automation, healthcare, and packaging. The Company accounts for revenue in accordance with ASC 606, which it adopted on January 1, 2018, using the modified retrospective approach. Note 3 of the Consolidated Financial Statements further discusses this adoption.
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 and the significant risks and rewards of ownership have transferred, and the Company has rights to payment and 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 transferred at a point in time, a certain portion of 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 ASC 606. Also, service revenue is recognized as control transfers, which is headquarteredconcurrent with the services being performed.
The following table presents the Company's revenue disaggregated by products and services, and geographic regions, by segment:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| Industrial | | Aerospace | | Total Company | | Industrial | | Aerospace | | Total Company |
Product and Services | | | | | | | | | | | |
Engineered Components Products | $ | 63,069 |
| | $ | — |
| | $ | 63,069 |
| | $ | 198,291 |
| | $ | — |
| | $ | 198,291 |
|
Molding Solutions Products | 110,546 |
| | — |
| | 110,546 |
| | 323,242 |
| | — |
| | 323,242 |
|
Force & Motion Control Products | 45,676 |
| | — |
| | 45,676 |
| | 144,746 |
| | — |
| | 144,746 |
|
Automation Products | 12,397 |
| | — |
| | 12,397 |
| | 41,315 |
| | — |
| | 41,315 |
|
Aerospace Original Equipment Manufacturer Products | — |
| | 92,885 |
| | 92,885 |
| | — |
| | 274,708 |
| | 274,708 |
|
Aerospace Aftermarket Product and Services | — |
| | 48,014 |
| | 48,014 |
| | — |
| | 138,645 |
| | 138,645 |
|
| $ | 231,688 |
| | $ | 140,899 |
| | $ | 372,587 |
| | $ | 707,594 |
|
| $ | 413,353 |
| | $ | 1,120,947 |
|
| | | | | | | | | | | |
Geographic Regions (A) | | | | | | | | | | | |
Americas | $ | 93,086 |
| | $ | 100,949 |
| | $ | 194,035 |
| | $ | 278,520 |
| | $ | 299,220 |
| | $ | 577,740 |
|
Europe | 77,308 |
| | 25,534 |
| | 102,842 |
| | 261,388 |
| | 73,248 |
| | 334,636 |
|
Asia | 60,433 |
| | 13,444 |
| | 73,877 |
| | 164,844 |
| | 38,051 |
| | 202,895 |
|
Other | 861 |
| | 972 |
| | 1,833 |
| | 2,842 |
| | 2,834 |
| | 5,676 |
|
| $ | 231,688 |
| | $ | 140,899 |
| | $ | 372,587 |
| | $ | 707,594 |
| | $ | 413,353 |
| | $ | 1,120,947 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| Industrial | | Aerospace | | Total Company | | Industrial | | Aerospace | | Total Company |
Product and Services | | | | | | | | | | | |
Engineered Components Products | $ | 69,994 |
| | $ | — |
| | $ | 69,994 |
| | $ | 220,448 |
| | $ | — |
| | $ | 220,448 |
|
Molding Solutions Products | 124,887 |
| | — |
| | 124,887 |
| | 369,923 |
| | — |
| | 369,923 |
|
Force & Motion Control Products | 49,251 |
| | — |
| | 49,251 |
| | 149,299 |
| | — |
| | 149,299 |
|
Automation Products | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Aerospace Original Equipment Manufacturer Products | — |
| | 84,741 |
| | 84,741 |
| | — |
| | 249,963 |
| | 249,963 |
|
Aerospace Aftermarket Product and Services | — |
| | 40,924 |
| | 40,924 |
| | — |
| | 122,139 |
| | 122,139 |
|
| $ | 244,132 |
| | $ | 125,665 |
| | $ | 369,797 |
| | $ | 739,670 |
| | $ | 372,102 |
| | $ | 1,111,772 |
|
| | | | | | | | | | | |
Geographic Regions (A) | | | | | | | | | | | |
Americas | $ | 98,948 |
| | $ | 88,260 |
| | $ | 187,208 |
| | $ | 288,265 |
| | $ | 266,698 |
| | $ | 554,963 |
|
Europe | 86,083 |
| | 25,591 |
| | 111,674 |
| | 273,214 |
| | 72,991 |
| | 346,205 |
|
Asia | 58,151 |
| | 10,911 |
| | 69,062 |
| | 175,533 |
| | 29,671 |
| | 205,204 |
|
Other | 950 |
| | 903 |
| | 1,853 |
| | 2,658 |
| | 2,742 |
| | 5,400 |
|
| $ | 244,132 |
| | $ | 125,665 |
| | $ | 369,797 |
| | $ | 739,670 |
| | $ | 372,102 |
| | $ | 1,111,772 |
|
(A) Sales by geographic region are based on the location to which the product is shipped.
Revenue from products and services transferred to customers at a point in Sterling, Virginiatime accounted for approximately 90 percent of revenue for both the three and nine month periods ended September 30, 2019. A majority of revenue within the Industrial segment and Aerospace OEM business is recognized at a point in time when the product or solution is shipped to the customer. A portion of revenue within the Aerospace Aftermarket business is also recognized when product is shipped.
Revenue from products and services transferred to customers over time accounted for approximately 10 percent of revenue for both the three and nine month periods ended September 30, 2019. 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 maintenance repair and overhaul business and a portion of the Engineered Components Products, Molding Solutions Products and Aerospace Original Equipment Manufacturer Products is recognized over time. Within the Molding Solutions and Aerospace Aftermarket businesses, this continual transfer of control to the customer 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 where we deliver products that do not have an alternative use and requires an enforceable right to payment of costs incurred (plus a reasonable profit) or the Company has officesa contractual right to complete any work in Illinoisprocess and Germany, provides temperature control solutionsreceive full contract price.
Performance Obligations. A performance obligation represents a promise within a contract to provide a distinct good or service to the customer. The Company accounts for injection molding, extrusion, blow molding, thermoforming,a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectibility of consideration is probable. Transaction price reflects the amount of consideration which the Company expects to be entitled in exchange for transferred goods or services. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized as the performance obligation is satisfied.
The majority of our revenues are from contracts that are less than one year, however certain Aerospace OEM and Industrial Molding Solutions business contracts extend beyond one year. In the Industrial segment, customers are typically with OEMs or suppliers to OEMs and in some businesses, with distributors. In the Aerospace segment, customers include commercial airlines, OEMs and other applications. Its end markets include packaging, electronics, automotive, household products, medical,aircraft and tool building. Themilitary parts and service providers.
To determine the proper revenue recognition method for contracts, the Company acquireduses judgment to evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the assets of Gammafluxcombined or single contract should be accounted for an aggregateas more than one performance obligation. Contracts within the Aerospace OEM and Engineered Components businesses typically have contracts that are combined as the customer may issue multiple purchase price of $8,866, which was financed using cash on hand and borrowings underorders at or near the Company's revolving credit facility. The purchase price includes adjustmentssame point in time under the terms of a long term agreement.
Revenue is recognized in an over time model based on the Asset Purchase Agreement ("APA"), including $2extent 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.
Contract Estimates. Due to the nature of the work performed in completing certain performance obligations, the estimation of both total revenue and cost at completion (the process described above) includes a number of variables and requires significant judgment.
Estimating total contract revenue may require judgment as certain contracts contain pricing discount structures, rebates, early payment discounts, or other provisions that can impact transaction price. The Company generally estimates variable consideration utilizing the expected value methodology as multiple inputs are considered and weighed, such as customer history, customer forecast communications, economic outlooks, and industry data. In certain circumstances where a particular outcome is probable, we utilize the most likely amount to which we expect to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Estimating the total expected costs related to contracts also requires significant judgment. The Aerospace OEM business has an Estimate at Completion (EAC) process in which management reviews the progress and execution of our performance obligations for significant contracts with revenue recognized under an over time model. As part of this process, management reviews information including, but not limited to, performance under the contract, progress towards completion, identified risks and opportunities, sourcing determinations and related changes in estimates of costs to be incurred. These considerations include management's judgment about the ability and cost to achieve technical requirements and other contract requirements. Management makes assumptions and estimates regarding labor efficiency, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and
prices for materials and related support cost allocations), execution by our subcontractors and overhead cost rates, among other variables.
The Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for certain other contracts which require over time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product. Each portfolio of contracts is grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual 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 the three and nine months ended September 30, 2019.
Contract Balances. The timing of revenue recognition, invoicing and cash acquired. In connectioncollections affect 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 Sheet as of September 30, 2019 and December 31, 2018.
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 may not have 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 Sheet on an individual contract basis at the end of each reporting period.
Net contract liabilities consisted of the following:
|
| | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 | | $ Change | | % Change |
Unbilled receivables (contract assets) | $ | 20,555 |
| | $ | 11,844 |
| | $ | 8,711 |
| | 74 | % |
Contract liabilities | (58,031 | ) | | (57,522 | ) | | (509 | ) | | 1 | % |
Net contract liabilities | $ | (37,476 | ) | | $ | (45,678 | ) | | $ | 8,202 |
| | (18 | )% |
Contract liabilities balances at September 30, 2019 and December 31, 2018 include $14,861 and $15,348, 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 September 30, 2019 and December 31, 2018, respectively.
Changes in the net contract liabilities balance during the nine-month period ended September 30, 2019 were impacted by a $509 increase in contract liabilities, driven primarily by new customer advances and deposits, partially offset by revenue recognized in the current period. Adding to this net contract liability decrease was a $8,711 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 15% and 70% of the revenue related to the contract liability balance as of December 31, 2018 during the three and nine months ended September 30, 2019, respectively, primarily representing revenue from the sale of molds and hot runners within the Molding Solutions business.
Contract Costs. The Company may incur costs to fulfill a contract. Costs are incurred to develop, design and manufacture tooling to produce a customer’s customized product in conjunction with certain of its contracts, primarily in the Aerospace OEM business. For certain contracts, control related to this tooling remains with the acquisition,Company. The tooling may be deemed recoverable over the life of the related customer contract (oftentimes a long-term agreement). The Company therefore capitalizes these tooling costs and amortizes them over the shorter of the tooling life or the duration of the long-term agreement. The Company may also incur costs related to the development of product designs (molds or hot runner systems)
within its Molding Solutions business. Control of the design may be retained by the Company recorded $1,535and deemed recoverable over the contract to build the systems or mold, therefore this design work cost is capitalized and amortized to cost of goodwillsales when the related revenue is recognized. Amortization related to these capitalized costs to fulfill a contract were $3,506 and $3,700$10,614 in the three and nine month periods ended September 30, 2019, respectively, and $3,606 and $11,548 in the three and nine month periods ended September 30, 2018, respectively.
Capitalized costs, net of intangible assets.amortization, to fulfill a contract balances were as follows:
During |
| | | | | | |
| September 30, 2019 | December 31, 2018 |
Tooling | $ | 6,231 |
| $ | 6,155 |
|
Design costs | 2,441 |
| 2,285 |
|
Other | — |
| 5 |
|
| $ | 8,672 |
| $ | 8,445 |
|
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 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 ASC 606. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $226,202. The Company expects to recognize revenue on approximately 75% of the remaining performance obligations over the next 12 months, with the remainder being recognized within 24 months.
5. Stockholders' Equity
A schedule of consolidated changes in equity for the nine months ended September 30, 2017, the Company incurred $184 of acquisition-related costs related to the Gammaflux acquisition. These costs include due diligence costs and transaction costs to complete the acquisition and have been recognized2019 is as follows (shares in the Consolidated Statements of Income as selling and administrative expenses.thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 | | 63,367 |
| | $ | 634 |
| | $ | 470,818 |
| | 12,034 |
| | $ | (441,668 | ) | | $ | 1,363,772 |
| | $ | (190,500 | ) | | $ | 1,203,056 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 33,992 |
| | (8,178 | ) | | 25,814 |
|
Dividends declared ($0.16 per share)
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,217 | ) | | — |
| | (8,217 | ) |
Employee stock plans | | 51 |
| | — |
| | 4,039 |
| | 1 |
| | (80 | ) | | (109 | ) | | — |
| | 3,850 |
|
March 31, 2019 | | 63,418 |
| | $ | 634 |
| | $ | 474,857 |
| | 12,035 |
| | $ | (441,748 | ) | | $ | 1,389,438 |
| | $ | (198,678 | ) | | $ | 1,224,503 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 37,616 |
| | 4,698 |
| | 42,314 |
|
Dividends declared ($0.16 per share)
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,086 | ) | | — |
| | (8,086 | ) |
Common stock repurchases | | — |
| | — |
| | — |
| | 900 |
| | (50,347 | ) | | — |
| | — |
| | (50,347 | ) |
Employee stock plans | | 18 |
| | — |
| | 3,285 |
| | 2 |
| | (106 | ) | | (178 | ) | | — |
| | 3,001 |
|
June 30, 2019 | | 63,436 |
| | $ | 634 |
| | $ | 478,142 |
| | 12,937 |
| | $ | (492,201 | ) | | $ | 1,418,790 |
| | $ | (193,980 | ) | | $ | 1,211,385 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 45,769 |
| | (37,345 | ) | | 8,424 |
|
Dividends declared ($0.16 per share)
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,111 | ) | | — |
| | (8,111 | ) |
Employee stock plans | | 321 |
| | 4 |
| | 4,713 |
| | 112 |
| | (5,727 | ) | | 10 |
| | — |
| | (1,000 | ) |
September 30, 2019 | | 63,757 |
| | $ | 638 |
| | $ | 482,855 |
| | 13,049 |
| | $ | (497,928 | ) | | $ | 1,456,458 |
| | $ | (231,325 | ) | | $ | 1,210,698 |
|
The operating results
A schedule of Gammaflux have been includedconsolidated changes in the Consolidated Statements of Income since the date of acquisition. The Company reported $6,483 in net salesequity for the period from the acquisition date throughnine months ended September 30, 2017. Gammaflux results have been included within the Industrial segment.2018 is as follows (shares in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2017 | | 63,034 |
| | $ | 630 |
| | $ | 457,365 |
| | 9,656 |
| | $ | (297,998 | ) | | $ | 1,206,723 |
| | $ | (106,399 | ) | | $ | 1,260,321 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 38,818 |
| | 30,513 |
| | 69,331 |
|
Dividends declared ($0.14 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (7,453 | ) | | — |
| | (7,453 | ) |
Common stock repurchases | | — |
| | — |
| | — |
| | 533 |
| | (33,541 | ) | | — |
| | — |
| | (33,541 | ) |
Reclassification pursuant to accounting guidance related to U.S. Tax Reform (Note 3)
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,331 |
| | (19,331 | ) | | — |
|
Cumulative effect of change in accounting guidance related to Revenue (Note 3) | | — |
| | — |
| | — |
| | — |
| | — |
| | 4,295 |
| | — |
| | 4,295 |
|
Employee stock plans | | 20 |
| | 1 |
| | 2,874 |
| | 1 |
| | (68 | ) | | (174 | ) | | — |
| | 2,633 |
|
March 31, 2018 | | 63,054 |
| | $ | 631 |
| | $ | 460,239 |
| | 10,190 |
| | $ | (331,607 | ) | | $ | 1,261,540 |
| | $ | (95,217 | ) | | $ | 1,295,586 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 49,429 |
| | (61,920 | ) | | (12,491 | ) |
Dividends declared ($0.16 per share) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,342 | ) | | — |
| | (8,342 | ) |
Common stock repurchases | | — |
| | — |
| | — |
| | 1,422 |
| | (84,574 | ) | | — |
| | — |
| | (84,574 | ) |
Employee stock plans | | 13 |
| | — |
| | 3,078 |
| | 2 |
| | (107 | ) | | 13 |
| | — |
| | 2,984 |
|
June 30, 2018 | | 63,067 |
| | $ | 631 |
| | $ | 463,317 |
| | 11,614 |
| | $ | (416,288 | ) | | $ | 1,302,640 |
| | $ | (157,137 | ) | | $ | 1,193,163 |
|
Comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 39,109 |
| | 5,005 |
| | 44,114 |
|
Dividends declared ($0.16 per share)
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,201 | ) | | — |
| | (8,201 | ) |
Common stock repurchases | | — |
| | — |
| | — |
| | 337 |
| | (20,160 | ) | | — |
| | — |
| | (20,160 | ) |
Employee stock plans | | 226 |
| | 2 |
| | 3,293 |
| | 79 |
| | (4,974 | ) | | (332 | ) | | — |
| | (2,011 | ) |
September 30, 2018 | | 63,293 |
| | $ | 633 |
| | $ | 466,610 |
| | 12,030 |
| | $ | (441,422 | ) | | $ | 1,333,216 |
| | $ | (152,132 | ) | | $ | 1,206,905 |
|
3.6. Net Income Per Common Share
For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans. For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding was increased by 504,168304,324 and 366,251510,912 for the three-monththree month periods ended September 30, 20172019 and 2016,2018, respectively, and by 509,172441,773 and 436,941536,338 for the nine-monthnine month periods ended September 30, 20172019 and 2016,2018, respectively, to account for the potential dilutive effect of stock-based incentive plans. There were no adjustments to net income for the purposes of computing income available to common stockholders for the periods.
The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three-monththree month periods ended September 30, 20172019 and 2016,2018, the Company excluded 0257,979 and 209,907108,516 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive. During the nine-monthnine month periods ended September 30, 20172019 and 2016,2018, the Company excluded 59,261295,043 and 346,468133,910 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive.
The Company granted 125,300120,585 stock options, 85,30793,992 restricted stock unit awards and 83,97088,402 performance share awards ("PSAs") in February 20172019 as part of its annual grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic weighted-average common shares outstanding as they contain nonforfeitable rights to dividend payments. The PSAs are part of the long-term Performance
Share Award Program (the "Awards Program") and are based on performance goals that are driven by a combination of independently measured metrics (depending on the grant year) with each metric being weighted equally. The metrics for awards granted in 2016 and 20172019 include the Company’s total shareholder return (“TSR”) and, return on invested capital (“ROIC”) and operating income before depreciation and amortization growth ("EBITDA growth"). The TSR metric isand 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-yearthree -year performance period. The ROIC metric is measured based ondesigned to assess the Company's performance compared to pre-established Company targets
over the samea three -year performance period. The participants can earn from zero0 to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR portion of the PSA was determined using a Monte Carlo valuation method as the award contains a market condition.
4.7. Inventories
The components of inventories consisted of:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Finished goods | $ | 78,089 |
|
| $ | 87,779 |
|
Work-in-process | 97,631 |
| | 98,426 |
|
Raw material and supplies | 78,758 |
| | 79,785 |
|
| $ | 254,478 |
|
| $ | 265,990 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Finished goods | $ | 78,116 |
|
| $ | 71,100 |
|
Work-in-process | 110,204 |
| | 98,246 |
|
Raw material and supplies | 64,182 |
| | 58,413 |
|
| $ | 252,502 |
|
| $ | 227,759 |
|
5.8. Goodwill and Other Intangible Assets
Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended September 30, 2017:2019:
|
| | | | | | | | | | | |
| Industrial | | Aerospace | | Total Company |
January 1, 2019 | $ | 924,738 |
| | $ | 30,786 |
| | $ | 955,524 |
|
Acquisition related | 681 |
| | — |
| | 681 |
|
Foreign currency translation | (33,597 | ) | | — |
| | (33,597 | ) |
September 30, 2019 | $ | 891,822 |
| | $ | 30,786 |
| | $ | 922,608 |
|
|
| | | | | | | | | | | |
| Industrial | | Aerospace | | Total Company |
January 1, 2017 | $ | 602,650 |
| | $ | 30,786 |
| | $ | 633,436 |
|
Acquisition related | 3,330 |
| | — |
| | 3,330 |
|
Foreign currency translation | 49,224 |
| | — |
| | 49,224 |
|
September 30, 2017 | $ | 655,204 |
| | $ | 30,786 |
| | $ | 685,990 |
|
In the second quarter of 2017,2019, management performed its annual impairment testing of goodwill. Based on this assessment,goodwill and determined that there was no0 goodwill impairment recognized as of June 30, 2017.impairment.
OtherIntangible Assets:
Other intangible assets consisted of:
|
| | | | | | | | | | | | | | | | | |
| | | September 30, 2019 | | December 31, 2018 |
| Range of Life -Years | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | |
Revenue Sharing Programs (RSPs) | Up to 30 | | $ | 299,500 |
| | $ | (132,410 | ) | | $ | 299,500 |
| | $ | (121,957 | ) |
Component Repair Programs (CRPs) | Up to 30 | | 111,839 |
| | (25,918 | ) | | 111,839 |
| | (21,895 | ) |
Customer relationships | 10-16 | | 338,366 |
| | (94,668 | ) | | 338,366 |
| | (79,439 | ) |
Patents and technology | 4-10 | | 125,852 |
| | (68,637 | ) | | 125,852 |
| | (59,205 | ) |
Trademarks/trade names | 10-30 | | 11,950 |
| | (11,021 | ) | | 11,950 |
| | (10,731 | ) |
Other | Up to 15 | | 7,296 |
| | (3,898 | ) | | 7,296 |
| | (3,551 | ) |
| | | 894,803 |
| | (336,552 | ) | | 894,803 |
| | (296,778 | ) |
Unamortized intangible assets: | | | | | | | | | |
Trade names | | | 55,670 |
| | — |
| | 55,670 |
| | — |
|
Foreign currency translation | | | (30,593 | ) | | — |
| | (17,157 | ) | | — |
|
Other intangible assets | | | $ | 919,880 |
| | $ | (336,552 | ) | | $ | 933,316 |
| | $ | (296,778 | ) |
|
| | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| Range of Life -Years | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | |
Revenue sharing programs (RSPs) | Up to 30 | | $ | 293,700 |
| | $ | (105,054 | ) | | $ | 293,700 |
| | $ | (95,701 | ) |
Component repair programs (CRPs) | Up to 30 | | 111,839 |
| | (15,112 | ) | | 111,839 |
| | (10,497 | ) |
Customer lists/relationships | 10-16 | | 215,966 |
| | (62,250 | ) | | 215,266 |
| | (53,198 | ) |
Patents and technology | 4-14 | | 87,052 |
| | (45,428 | ) | | 84,052 |
| | (37,897 | ) |
Trademarks/trade names | 10-30 | | 11,950 |
| | (10,258 | ) | | 11,950 |
| | (9,967 | ) |
Other | Up to 15 | | 20,551 |
| | (16,960 | ) | | 20,551 |
| | (16,338 | ) |
| | | 741,058 |
| | (255,062 | ) | | 737,358 |
| | (223,598 | ) |
Unamortized intangible assets: | | | | | | | | | |
Trade names | | | 42,770 |
| | — |
| | 42,770 |
| | — |
|
Foreign currency translation | | | (14,435 | ) | | — |
| | (34,272 | ) | | — |
|
Other intangible assets | | | $ | 769,393 |
| | $ | (255,062 | ) | | $ | 745,856 |
| | $ | (223,598 | ) |
Estimated amortization of intangible assets for future periods is as follows: 2017 - $41,000; 2018 - $41,000; 2019 - $40,000;$53,000; 2020 - $37,000 and$50,000; 2021 - $36,000.$49,000; 2022 - $49,000 and 2023 - $48,000.
In the second quarter of 20172019, management performed its annual impairment testing of its trade names, indefinite-lived intangible assets. Based on this assessment, there was no impairment recognized as of June 30, 2017.were 0 impairments.
6.9. Debt
The Company's debt agreements contain financial covenants that require the maintenance of interest coverage and leverage ratios. The Company is in compliance with its financial covenants as of September 30, 2017,2019, and continues to monitor its future compliance based on current and anticipated future economic conditions.
Long-term debt and notes and overdrafts payable at September 30, 20172019 and December 31, 20162018 consisted of:
|
| | | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Revolving credit agreement | $ | 752,035 |
| | $ | 771,523 |
| | $ | 831,016 |
| | $ | 828,800 |
|
3.97% Senior Notes | 100,000 |
| | 105,793 |
| | 100,000 |
| | 100,185 |
|
Borrowings under lines of credit and overdrafts | 18,520 |
| | 18,520 |
| | 2,137 |
| | 2,137 |
|
Finance leases | 5,323 |
| | 5,556 |
| | 10,216 |
| | 10,503 |
|
Other foreign bank borrowings | 448 |
| | 452 |
| | 647 |
| | 651 |
|
| 876,326 |
| | 901,844 |
| | 944,016 |
| | 942,276 |
|
Less current maturities | (20,244 | ) | | | | (7,659 | ) | | |
Long-term debt | $ | 856,082 |
| | | | $ | 936,357 |
| | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Revolving credit agreement | | $ | 393,000 |
| | $ | 397,805 |
| | $ | 363,300 |
| | $ | 364,775 |
|
3.97% Senior Notes | | 100,000 |
| | 103,319 |
| | 100,000 |
| | 101,598 |
|
Borrowings under lines of credit and overdrafts | | 16,875 |
| | 16,875 |
| | 30,825 |
| | 30,825 |
|
Capital leases | | 4,882 |
| | 5,314 |
| | 5,413 |
| | 5,902 |
|
Other foreign bank borrowings | | 1,236 |
| | 1,249 |
| | 1,416 |
| | 1,428 |
|
| | 515,993 |
| | 524,562 |
| | 500,954 |
| | 504,528 |
|
Less current maturities | | (18,564 | ) | | | | (32,892 | ) | | |
Long-term debt | | $ | 497,429 |
| | | | $ | 468,062 |
| | |
In February 2017, the Company and certain of its subsidiaries entered into the fourth amendment of its fifth amended and restated revolving credit agreement (the “Amended Credit Agreement”) and retained Bank of America, N.A as the Administrative Agent for the lenders. The Amended Credit Agreement increasesincreased the facility from $750,000 to $850,000 and extends the maturity date from September 2018 to February 2022. The Amended Credit Agreement also increases the existing
accordion feature from $250,000, allowing the Company to now request additional borrowings of up to $350,000. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is not continuing. The borrowing availability of $850,000, pursuant to the terms of the Amended Credit Agreement, allows for multi-currency borrowing which includes euro, British pound sterling or Swiss franc borrowing, up to $600,000.
In September 2018, the Company and one of its wholly owned subsidiaries entered into a Sale and Purchase Agreement to acquire Gimatic. See Note 2 of the Consolidated Financial Statements. In conjunction with the Acquisition, the Company requested additional borrowings of $150,000 that was provided for under the existing accordion feature. The Administrative Agent for the lenders approved the Company's access to the accordion feature and on October 19, 2018 the lenders formally committed the capital to fund such feature, resulting in the execution of the fifth amendment to the Amended Credit Agreement (the "Fifth Amendment"). The Fifth Amendment, effective October 19, 2018, thereby increased the borrowing availability of the existing facility to $1,000,000. The Company may also request access to the residual $200,000 of the accordion feature. Depending on the Company’s consolidated leverage ratio, and at the election of the Company, borrowings under the Amended Credit Agreement will bear interest at either LIBOR plus a margin of between 1.10% and 1.70% or the base rate, as defined in the Amended Credit Agreement, plus a margin of 0.10% to 0.70%. 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 1.10% and 1.70%. The Company paid fees and expenses of $2,542$529 in the fourth quarter of 2018 in conjunction with executing the Amended Credit Agreement;Fifth Amendment; such fees have been deferred within Other Assets on the accompanying Consolidated Balance Sheets and are being amortized into interest expense on the accompanying Consolidated Statements of Income through its maturity. Cash used to pay these fees have been recorded through other financing activities on the Consolidated Statements of Cash Flows.
Borrowings and availability under the Amended Credit Agreement were $393,000$752,035 and $457,000,$247,965, respectively, at September 30, 20172019 and $363,300$831,016 and $386,700,$168,984, respectively, at December 31, 2016.2018. The average interest rate on these borrowings was 2.34%1.92% and 1.86%1.99% on September 30, 20172019 and December 31, 2016,2018, respectively. Borrowings included Euro-denominated borrowings of 504,690 Euros ($552,535) at September 30, 2019 and 470,350 Euros ($538,316) at December 31, 2018. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings. In the first quarter of 2019, and the second quarter of 2018, the Company borrowed 44,100 Euros ($49,506) and 179,000 Euros ($208,589), respectively, under the Amended Credit Facility through an international subsidiary. The proceeds were distributed to the parent company and subsequently used to pay down U.S. borrowings under the Amended Credit Agreement.
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 US Treasury yield and a long-term credit spread for similar types of borrowings, thatwhich represent Level 2 observable inputs.
The Company's borrowing capacity remainsis limited by various debt covenants in the Amended Credit Agreement and the Note Purchase Agreement (the "Agreements"). The Agreements require the Company to maintain a ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, of not more than 3.25 times ("Senior Debt Ratio"), a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 3.75 times ("Total Debt Ratio") and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25, in each case at the end of each fiscal quarter; provided that the debt to EBITDA ratios are permitted to increase for a period of four fiscal quarters after the closing of certain permitted acquisitions. A permitted acquisition is defined as an acquisition exceeding $150,000, for which the acquisition of Gimatic qualifies. With the completion of a permitted acquisition, the Senior Debt Ratio cannot exceed 3.50 times and the Total Debt Ratio cannot exceed 4.25 times. The increased ratios are allowed for a period of four fiscal quarters subsequent to the close of the permitted acquisition.
In addition, the Company has available approximately $59,000$86,000 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.). Under the Credit Lines, $16,800$18,000 was borrowed at September 30, 20172019 at an interest rate of 2.05%2.74% and $30,700$2,041 was borrowed at December 31, 20162018 at an average interest rate of 1.96%0.17%. The Company had also borrowed $75$520 and $125$96 under the overdraft facilities at September 30, 20172019 and December 31, 2016,2018, respectively. Repayments under the Credit Lines are due within one month after being borrowed. Repayments of the overdrafts are generally due within two days after being borrowed. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.
The Company has capitalseveral finance leases under which $5,323 and $10,216 was outstanding at the ThermoplaySeptember 30, 2019 and Männer businesses.December 31, 2018, respectively. The fair value of the capitalfinance leases isare based on observable Level 2 inputs. These instruments arewere valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
TheAt September 30, 2019 and December 31, 2018, the Company also hashad other foreign bank borrowings.borrowings of $448 and $647, respectively. The fair value of the other foreign bank borrowings is based on observable Level 2 inputs. These instruments arewere valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
7.10. Derivatives
The Company has manufacturing and sales facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. The Company is also exposed to fluctuations in interest rates and commodity price changes. These financial exposures are monitored and managed by the Company as an integral part of its risk management program.
Financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. In 2012, the Company entered into five-year interest rate swap agreements (the "Swaps") transacted with three banks which together 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 1.03% plus the borrowing spread. The Swaps expired on April 28, 2017. The Company entered into a newan interest rate swap agreement (the "Swap") that commenced on April 28, 2017, with one1 bank, andwhich converts 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 Swap expires on January 31, 2022. These interest rate swap agreements are2022 and is accounted for as a cash flow hedges.hedge.
The Company also uses financial instruments to hedge its exposures to fluctuations in foreign currency exchange rates. The Company has various contracts outstanding which primarily hedge recognized assets or liabilities and anticipated transactions in various currencies including the Euro, British pound sterling, U.S. dollar, Canadian dollar, Japanese yen, Singapore dollar, Korean won, Swedish kroner, Chinese renminbi, Mexican peso, 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. Changes in the fair market value of derivatives that qualify as fair value hedges or cash flow hedges are recorded directly to earnings or accumulated other non-owner changes to equity, depending on the designation.equity. Amounts recorded to accumulated other non-owner changes to equity are reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Any ineffective portion, or amountsAmounts related to contracts that are not designated as hedges are recorded directly to earnings.
The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the first nine months of 20172019 and 2016,2018, as presented on the consolidated
statementsConsolidatedStatements of cash flows,Cash Flows, include $14,962$12,593 and $3,291, respectively, of net cash payments and $3,822 of net cash proceeds, respectively, fromrelated to the settlement of foreign currency hedges related to intercompany financing.
The following table sets forth the fair value amounts of derivative instruments held by the Company.Company:
|
| | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| | Fair Value | | | Fair Value |
| Balance Sheet Location | September 30, 2019 | December 31, 2018 | | Balance Sheet Location | September 30, 2019 | December 31, 2018 |
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate contracts | Other assets | $ | — |
| $ | 1,412 |
| | Other liabilities | $ | (1,011 | ) | $ | — |
|
Foreign exchange contracts | Prepaid expenses and other current assets | — |
| — |
| | Accrued liabilities | (402 | ) | (258 | ) |
Total derivatives designated as hedging instruments | | — |
| 1,412 |
| | | (1,413 | ) | (258 | ) |
| | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | 25 |
| 1,105 |
| | Accrued liabilities | (227 | ) | (90 | ) |
Total derivatives not designated as hedging instruments | | 25 |
| 1,105 |
| | | (227 | ) | (90 | ) |
| | | | | | | |
Total derivatives | | $ | 25 |
| $ | 2,517 |
| | | $ | (1,640 | ) | $ | (348 | ) |
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate contracts | $ | — |
| | $ | (345 | ) | | $ | — |
| | $ | (78 | ) |
Foreign exchange contracts | — |
| | (121 | ) | | — |
| | (177 | ) |
| | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts | 65 |
| | (377 | ) | | 397 |
| | (1,499 | ) |
Total derivatives | $ | 65 |
| | $ | (843 | ) | | $ | 397 |
| | $ | (1,754 | ) |
Asset derivatives are recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Liability derivatives related to interest rate contracts and foreign exchange contracts are recorded in other liabilities and accrued liabilities, respectively, in the accompanying Consolidated Balance Sheets.
The following table sets forth the gain (loss), neteffect of tax, recorded inhedge accounting on accumulated other comprehensive (loss) income (loss), net of tax, for the three-three and nine-monthnine month periods ended September 30, 20172019 and 2016 for derivatives held by the Company and designated as hedging instruments.2018:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Cash flow hedges: | | | | | | | |
Interest rate contracts | $ | 97 |
| | $ | 137 |
| | $ | (167 | ) | | $ | 74 |
|
Foreign exchange contracts | 238 |
| | (287 | ) | | 43 |
| | (654 | ) |
| $ | 335 |
| | $ | (150 | ) | | $ | (124 | ) | | $ | (580 | ) |
Amounts related to the interest rate swaps included within accumulated other comprehensive income (loss) that were reclassified to expense during the first nine months of 2017 and 2016 resulted in a fixed rate of interest plus the borrowing spread for the first $100,000 of one-month LIBOR borrowings. The fixed rate of interest was 1.92% for the period covered by the Swap, which matures in January 2022, and 1.03% for the Swaps, which matured in April 2017. Additionally, there were no amounts recognized in income for hedge ineffectiveness during the three- and nine-month periods ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income |
| Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
Derivatives in Hedging Relationships | 2019 | | 2018 | | 2019 | | 2018 | 2019 | | 2018 | | 2019 | | 2018 |
Derivatives in Cash Flow Hedging Relationships: | | | | | | | | | | | | | | | |
Interest rate contracts | $ | (178 | ) | | $ | 378 |
| | $ | (1,846 | ) | | $ | 2,064 |
| Interest expense | $ | 86 |
| | $ | 40 |
| | $ | 367 |
| | $ | (374 | ) |
Foreign exchange contracts | 10 |
| | 697 |
| | (114 | ) | | (178 | ) | Net sales | (199 | ) | | (326 | ) | | (788 | ) | | (859 | ) |
Total | $ | (168 | ) | | $ | 1,075 |
| | $ | (1,960 | ) | | $ | 1,886 |
| | $ | (113 | ) | | $ | (286 | ) | | $ | (421 | ) | | $ | (1,233 | ) |
The following table sets forth the net (loss) gain recorded in other expense (income), net ineffect of hedge accounting on the consolidated statements of income for the three-three-month periods ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships |
| Three Months Ended September 30, |
| 2019 | | 2018 |
| Net sales | | Interest expense | | Net sales | | Interest expense |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of hedges are recorded | $ | 372,587 |
| | $ | 5,344 |
| | $ | 369,797 |
| | $ | 4,054 |
|
The effects of hedging: | | | | | | | |
Gain (Loss) on cash flow hedging relationships | | | | | | | |
Interest rate contracts | | | | | | | |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | | | 86 |
| | | | 40 |
|
Foreign exchange contracts | | | | | | | |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | (199 | ) | | | | | | (326 | ) |
The following table sets forth the effect of hedge accounting on the consolidated statements of income for the nine-month periods ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships |
| Nine Months Ended September 30, |
| 2019 | | 2018 |
| Net sales | | Interest expense | | Net sales | | Interest expense |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of hedges are recorded | $ | 1,120,947 |
| | $ | 15,856 |
| | $ | 1,111,772 |
| | $ | 12,078 |
|
The effects of hedging: | | | | | | | |
Gain (Loss) on cash flow hedging relationships | | | | | | | |
Interest rate contracts | | | | | | | |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | | | 367 |
| | | | (374 | ) |
Foreign exchange contracts | | | | | | | |
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income | (788 | ) | | | | | | (859 | ) |
The following table sets forth the effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three and nine-month periods ended September 30, 20172019 and 2016 for non-designated derivatives held by the Company.2018:
|
| | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Income on Derivative | Amount of Gain (Loss) Recognized in Income on Derivative(A) |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Derivatives Not Designated as Hedging Instruments | 2019 | | 2018 | | 2019 | | 2018 |
Foreign exchange contracts | Other expense (income), net | $ | (11,662 | ) | | $ | 1,380 |
| | $ | (15,182 | ) | | $ | (6,218 | ) |
(A) Such amounts were substantially offset by the net (gain) loss recorded on the underlying hedged asset or liability, also recorded in other expense (income), net.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Foreign exchange contracts | $ | (2,545 | ) | | $ | (3,755 | ) | | $ | (12,949 | ) | | $ | (7,506 | ) |
8.11. 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 liabilitiesliabilities. |
| |
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 liabilityliability. |
| |
Level 3 | Unobservable inputs for the asset or liabilityliability. |
The following table provides the financial assets and financial liabilities reported at fair value and measured on a recurring basis:
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 30, 2017 | | | | | | | | |
Asset derivatives | | $ | 65 |
| | $ | — |
| | $ | 65 |
| | $ | — |
|
Liability derivatives | | (843 | ) | | — |
| | (843 | ) | | — |
|
Bank acceptances | | 13,009 |
| | — |
| | 13,009 |
| | — |
|
Rabbi trust assets | | 2,427 |
| | 2,427 |
| | — |
| | — |
|
| | $ | 14,658 |
| | $ | 2,427 |
| | $ | 12,231 |
| | $ | — |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Asset derivatives | | $ | 397 |
| | $ | — |
| | $ | 397 |
| | $ | — |
|
Liability derivatives | | (1,754 | ) | | — |
| | (1,754 | ) | | — |
|
Bank acceptances | | 9,690 |
| | — |
| | 9,690 |
| | — |
|
Rabbi trust assets | | 2,216 |
| | 2,216 |
| | — |
| | — |
|
| | $ | 10,549 |
|
| $ | 2,216 |
| | $ | 8,333 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 30, 2019 | | | | | | | | |
Asset derivatives | | $ | 25 |
| | $ | — |
| | $ | 25 |
| | $ | — |
|
Liability derivatives | | (1,640 | ) | | — |
| | (1,640 | ) | | — |
|
Bank acceptances | | 16,044 |
| | — |
| | 16,044 |
| | — |
|
Rabbi trust assets | | 2,725 |
| | 2,725 |
| | — |
| | — |
|
Total | | $ | 17,154 |
| | $ | 2,725 |
| | $ | 14,429 |
| | $ | — |
|
| | | | | | | | |
December 31, 2018 | | | | | | | | |
Asset derivatives | | $ | 2,517 |
| | $ | — |
| | $ | 2,517 |
| | $ | — |
|
Liability derivatives | | (348 | ) | | — |
| | (348 | ) | | — |
|
Bank acceptances | | 17,698 |
| | — |
| | 17,698 |
| | — |
|
Rabbi trust assets | | 2,457 |
| | 2,457 |
| | — |
| | — |
|
Total | | $ | 22,324 |
|
| $ | 2,457 |
| | $ | 19,867 |
| | $ | — |
|
The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain Chinese customers in lieu of cash paid on receivables, generally range from three to six months in maturity and are guaranteed by banks. The carrying amounts of the bank acceptances, which are included within prepaid expenses and other current assets, approximate fair value due to their short maturities. The fair values of rabbi trust assets are based on quoted market prices from various financial exchanges.
9.12. Pension and Other Postretirement Benefits
Pension and other postretirement benefits expenses consisted of the following:
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
Pensions | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 1,572 |
| | $ | 1,354 |
| | $ | 4,674 |
| | $ | 4,056 |
| $ | 1,356 |
| | $ | 1,491 |
| | $ | 4,064 |
| | $ | 4,479 |
|
Interest cost | 4,764 |
| | 4,869 |
| | 14,051 |
| | 14,650 |
| 4,539 |
| | 4,336 |
| | 13,647 |
| | 13,028 |
|
Expected return on plan assets | (7,206 | ) | | (7,564 | ) | | (20,882 | ) | | (22,774 | ) | (7,389 | ) | | (7,615 | ) | | (21,816 | ) | | (22,392 | ) |
Amortization of prior service cost | 110 |
| | 52 |
| | 330 |
| | 157 |
| 101 |
| | 141 |
| | 302 |
| | 422 |
|
Amortization of actuarial losses | 2,703 |
| | 2,697 |
| | 7,846 |
| | 8,109 |
| 2,215 |
| | 2,879 |
| | 6,658 |
| | 8,719 |
|
Curtailment gain | — |
| | — |
| | (7,217 | ) | | — |
| |
Settlement loss (gain) | 298 |
| | — |
| | (193 | ) | | — |
| |
Settlement loss | | 93 |
| | — |
| | 340 |
| | — |
|
Net periodic benefit cost | $ | 2,241 |
| | $ | 1,408 |
| | $ | (1,391 | ) | | $ | 4,198 |
| $ | 915 |
| | $ | 1,232 |
| | $ | 3,195 |
| | $ | 4,256 |
|
| | | | | | | | |
In June 2017,
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Postretirement Benefits | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 18 |
| | $ | 22 |
| | $ | 53 |
| | $ | 64 |
|
Interest cost | 335 |
| | 338 |
| | 1,008 |
| | 1,019 |
|
Amortization of prior service cost | 6 |
| | 5 |
| | 19 |
| | 15 |
|
Amortization of actuarial losses | 3 |
| | 135 |
| | 10 |
| | 421 |
|
Net periodic benefit cost | $ | 362 |
| | $ | 500 |
| | $ | 1,090 |
| | $ | 1,519 |
|
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 Company authorized the closure of its FOBOHA facility locatedservice cost component are included in Muri, Switzerland which resulted in pension curtailment and settlement gains of $7,217 and $230, respectively, during the second quarter of 2017. See Note 14 ofOther Income (Expense) on the Consolidated Financial Statements for additional information related to the Closure.
of Income.
In May 2017,July 2019, the Company contributed $5,000$15,000 of discretionary contributions to its U.S Qualified pension plans. The Company currently does not plan to make any additional discretionary contributions to its U.S. Qualified pension plans, however approximately $5,000 is expected to be made into its U.S. Non-qualified and international pension plans throughout 2017.2019.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
Other Postretirement Benefits | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 20 |
| | $ | 31 |
| | $ | 62 |
| | $ | 92 |
|
Interest cost | 389 |
| | 440 |
| | 1,170 |
| | 1,324 |
|
Amortization of prior service credit | (17 | ) | | (93 | ) | | (51 | ) | | (280 | ) |
Amortization of actuarial losses | 68 |
| | 134 |
| | 207 |
| | 401 |
|
Net periodic benefit cost | $ | 460 |
| | $ | 512 |
| | $ | 1,388 |
| | $ | 1,537 |
|
10.13. Income Taxes
The Company merged certain of its Swiss operating legal entities during the second quarter of 2017 (the "Merger"). Certain of these entities included businesses with deferred tax assets that were offset by valuation allowances. As a result of the Merger, the Company reevaluated the valuation allowances and deferred tax assets related to these businesses and determined such allowances were no longer required as the merged entities would more likely than not utilize previously unbenefited net operating losses that would have otherwise expired. In addition, certain deferred tax assets were adjusted as a result of higher income tax rates. The impacts of these adjustments were treated as discrete items in the second quarter of 2017 resulting in reductions in tax expense of $5,872 and $461, respectively.
The Company's effective tax rate for the first nine months of 20172019 was 20.5%23.4% compared with 25.1%21.5% in the first nine months of 20162018 and 25.7%19.9% for the full year 2016.2018. The decreaseincrease in the first nine months of 20172019 effective tax rate from the full year 20162018 rate is primarily due to the adjustmentabsence of adjustments to certain international valuation reserves and other benefitsfinal adjustments resulting from the mergerimpact of legal entities in Switzerland,the Tax Cuts and the settlement of tax audits and closure of tax years for various tax jurisdictions, partially offset by the expiration of certain tax holidays.Jobs Act (the “Act”).
The Aerospace and Industrial segments were previously awarded international tax holidays. All significantSegments have a number of multi-year tax holidays for whichin both Singapore and China. These holidays are subject to the Company currently receives benefit are expected to expiremeeting certain commitments in the fourth quarter of 2017.respective jurisdictions.
11.14. Leases
The Company maintains leases of certain manufacturing, distribution and assembly facilities, office space, land, machinery and equipment. Leases generally have remaining terms of one year to ten years. Leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company recognizes lease expense for minimum lease payments on a straight line basis over the term of the lease. Certain leases include options to renew or terminate. Renewal options are exercisable per the discretion of the Company and vary based on the nature of each lease, with renewal periods generally ranging from one year to five years. The term of the lease includes renewal periods only if the Company is reasonably certain that it will exercise the renewal option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the cost of moving to another location, the cost of disruption to operations, whether the purpose or location of the leased asset is unique and the contractual terms associated with extending the lease.
Certain leases provide the option to purchase the leased property and are therefore evaluated for finance lease consideration. Right-of-use ("ROU") assets and lease liabilities related to finance leases were not material as of September 30, 2019. The depreciable life of leased assets are limited by the expected term of the lease, unless there is a transfer of title or purchase option and the Company believes it is reasonably certain of exercise.
Lease agreements generally do not contain any material residual value guarantees or materially restrictive covenants and the Company does not sublease to any third parties. The Company does not have any material leases that have been signed but not commenced.
Contracts are evaluated at inception to determine whether they contain a lease, where the Company obtains the right to control an identified asset. The following table sets forth the classification of ROU assets and lease liabilities on the Consolidated Balance Sheets:
|
| | | | | | |
| | | | |
Operating Leases | | Classification | | September 30, 2019 |
Leased Assets | | | | |
ROU assets | | Other assets | | $ | 31,804 |
|
| | | | |
Lease Liabilities | | | | |
Current lease liability | | Accrued liabilities | | 10,525 |
|
Long term lease liability | | Other liabilities | | 22,037 |
|
| | | | $ | 32,562 |
|
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The operating lease ROU assets represent the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received. The Company's real estate leases, which are comprised primarily of manufacturing, distribution and assembly facilities, represent a majority of the lease liability. A significant portion of lease payments are fixed, although an immaterial portion of payments are variable in nature. Variable lease payments vary based on changes in facts and circumstances related to the use of the ROU and are recorded as incurred. The Company uses an incremental borrowing rate based on rates available at commencement in determining the present value of future payments.
The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component. The Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Operating lease costs during the three and nine months ended September 30, 2019 were $4,095 and $11,927, respectively, and were included within cost of sales and selling and administrative expenses. Operating lease costs include short-term and variable leases costs, which were immaterial during the period.
Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:
|
| | | | |
| | |
| | Operating Leases |
2019 | | $ | 3,238 |
|
2020 | | 10,926 |
|
2021 | | 8,389 |
|
2022 | | 4,155 |
|
2023 | | 2,771 |
|
After 2023 | | 7,894 |
|
Total lease payments | | $ | 37,373 |
|
Less: Interest | | 4,811 |
|
Present value of lease payments | | $ | 32,562 |
|
Minimum rental commitments under non-cancellable leases as of December 31, 2018 for years 2019 through 2023 were $11,931, $8,322, $5,888, $2,898 and $2,064, respectively, and $7,659 thereafter.
|
| | | |
| | |
Lease Term and Discount Rate | | September 30, 2019 |
Weighted-average remaining lease term (years) | | |
Operating leases | | 6.0 |
|
Weighted-average discount rate | | |
Operating leases | | 3.95 | % |
|
| | | | |
| | |
Other Information | | Nine months ended September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | |
Operating cash flows from operating leases | | $ | 9,967 |
|
Leased assets obtained in exchange for new operating lease liabilities | | $ | 9,692 |
|
15. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following table setstables set forth the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine-monthnine month periods ended September 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
January 1, 2019 | $ | 834 |
| | $ | (138,690 | ) | | $ | (52,644 | ) | | $ | (190,500 | ) |
Other comprehensive (loss) income before reclassifications | (2,300 | ) | | (18 | ) | | (44,513 | ) | | (46,831 | ) |
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 340 |
| | 5,666 |
| | — |
| | 6,006 |
|
Net current-period other comprehensive (loss) income | (1,960 | ) | | 5,648 |
| | (44,513 | ) | | (40,825 | ) |
September 30, 2019 | $ | (1,126 | ) | | $ | (133,042 | ) | | $ | (97,157 | ) | | $ | (231,325 | ) |
|
| | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
January 1, 2017 | $ | (227 | ) | | $ | (114,570 | ) | | $ | (86,031 | ) | | $ | (200,828 | ) |
Other comprehensive (loss) income before reclassifications to consolidated statements of income | (501 | ) | | (1,888 | ) | | 80,174 |
| | 77,785 |
|
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 377 |
| | 5,464 |
| | — |
| | 5,841 |
|
Net current-period other comprehensive (loss) income | (124 | ) | | 3,576 |
| | 80,174 |
| | 83,626 |
|
September 30, 2017 | $ | (351 | ) | | $ | (110,994 | ) | | $ | (5,857 | ) | | $ | (117,202 | ) |
|
| | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
January 1, 2018 | $ | 72 |
| | $ | (103,844 | ) | | $ | (2,627 | ) | | $ | (106,399 | ) |
Other comprehensive income (loss) before reclassifications | 930 |
| | 1,076 |
| | (36,670 | ) | | (34,664 | ) |
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 956 |
| | 7,306 |
| | — |
| | 8,262 |
|
Net current-period other comprehensive income (loss) | 1,886 |
| | 8,382 |
| | (36,670 | ) | | (26,402 | ) |
Amounts reclassified from accumulated other comprehensive income to retained earnings (A) | — |
| | (19,331 | ) | | — |
| | (19,331 | ) |
September 30, 2018 | $ | 1,958 |
| | $ | (114,793 | ) | | $ | (39,297 | ) | | $ | (152,132 | ) |
|
| | | | | | | | | | | | | | | |
| Gains and Losses on Cash Flow Hedges | | Pension and Other Postretirement Benefit Items | | Foreign Currency Items | | Total |
January 1, 2016 | $ | 115 |
| | $ | (105,703 | ) | | $ | (37,664 | ) | | $ | (143,252 | ) |
Other comprehensive (loss) income before reclassifications to consolidated statements of income | (823 | ) | | 283 |
| | 2,100 |
| | 1,560 |
|
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income | 243 |
| | 5,457 |
| | — |
| | 5,700 |
|
Net current-period other comprehensive (loss) income | (580 | ) | | 5,740 |
| | 2,100 |
| | 7,260 |
|
September 30, 2016 | $ | (465 | ) | | $ | (99,963 | ) | | $ | (35,564 | ) | | $ | (135,992 | ) |
(A) This amount represents the reclassification of stranded tax effects resulting from the Act, as permitted by amended guidance issued by the FASB in February 2018. See Note 3.
The following table setstables set forth the reclassifications out of accumulated other comprehensive income (loss) by component for the three-three and nine-monthnine month periods ended September 30, 20172019 and 2016:2018:
| | 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 | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income |
| | Three months ended September 30, 2017 | | Three months ended September 30, 2016 | | | Three months ended September 30, 2019 | | Three months ended September 30, 2018 | | |
Gains and losses on cash flow hedges | | | | | | | | | | |
Interest rate contracts | | $ | (174 | ) | | $ | (137 | ) | | Interest expense | | $ | 86 |
| | $ | 40 |
| | Interest expense |
Foreign exchange contracts | | (40 | ) | | (20 | ) | | Net sales | | (199 | ) | | (326 | ) | | Net sales |
| | (214 | ) | | (157 | ) | | Total before tax | | (113 | ) | | (286 | ) | | Total before tax |
| | 74 |
| | 55 |
| | Tax benefit | | 19 |
| | 62 |
| | Tax benefit |
| | (140 | ) | | (102 | ) | | Net of tax | | (94 | ) | | (224 | ) | | Net of tax |
| | | | | | | | | | |
Pension and other postretirement benefit items | | | | | | | | | | |
Amortization of prior-service (costs) credits, net | | $ | (93 | ) | | $ | 41 |
| | (A) | |
Amortization of prior-service costs | | | $ | (107 | ) | | $ | (146 | ) | | (A) |
Amortization of actuarial losses | | (2,771 | ) | | (2,831 | ) | | (A) | | (2,218 | ) | | (3,014 | ) | | (A) |
Settlement loss | | (298 | ) | | — |
| | (A) | | (93 | ) | | — |
| | (A) |
| | (3,162 | ) | | (2,790 | ) | | Total before tax | | (2,418 | ) | | (3,160 | ) | | Total before tax |
| | 946 |
| | 977 |
| | Tax benefit | | 554 |
| | 750 |
| | Tax benefit |
| | (2,216 | ) | | (1,813 | ) | | Net of tax | | (1,864 | ) | | (2,410 | ) | | Net of tax |
| | | | | | | | | | |
Total reclassifications in the period | | $ | (2,356 | ) | | $ | (1,915 | ) | | | $ | (1,958 | ) | | $ | (2,634 | ) | |
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pensionPension and Other Postretirement Benefits cost. See Note 9.
12.
| | 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 | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income |
| | Nine months ended September 30, 2017 | | Nine months ended September 30, 2016 | | | Nine months ended September 30, 2019 | | Nine months ended September 30, 2018 | | |
Gains and losses on cash flow hedges | | | | | | | | | | |
Interest rate contracts | | $ | (380 | ) | | $ | (437 | ) | | Interest expense | | $ | 367 |
| | $ | (374 | ) | | Interest expense |
Foreign exchange contracts | | (178 | ) | | 40 |
| | Net sales | | (788 | ) | | (859 | ) | | Net sales |
| | (558 | ) | | (397 | ) | | Total before tax | | (421 | ) | | (1,233 | ) | | Total before tax |
| | 181 |
| | 154 |
| | Tax benefit | | 81 |
| | 277 |
| | Tax benefit |
| | (377 | ) | | (243 | ) | | Net of tax | | (340 | ) | | (956 | ) | | Net of tax |
| | | | | | | | | | |
Pension and other postretirement benefit items | | | | | | | | | | |
Amortization of prior-service (costs) credits, net | | $ | (279 | ) | | $ | 123 |
| | (A) | |
Amortization of prior-service costs | | | $ | (321 | ) | | $ | (437 | ) | | (A) |
Amortization of actuarial losses | | (8,053 | ) | | (8,510 | ) | | (A) | | (6,668 | ) | | (9,140 | ) | | (A) |
Curtailment gain | | 187 |
| | — |
| | (A) | |
Settlement loss | | (68 | ) | | — |
| | (A) | | (340 | ) | | — |
| | (A) |
| | (8,213 | ) | | (8,387 | ) | | Total before tax | | (7,329 | ) | | (9,577 | ) | | Total before tax |
| | 2,749 |
| | 2,930 |
| | Tax benefit | | 1,663 |
| | 2,271 |
| | Tax benefit |
| | (5,464 | ) | | (5,457 | ) | | Net of tax | | (5,666 | ) | | (7,306 | ) | | Net of tax |
| | | | | | | | | | |
Total reclassifications in the period | | $ | (5,841 | ) | | $ | (5,700 | ) | | | $ | (6,006 | ) | | $ | (8,262 | ) | |
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pensionPension and Other Postretirement Benefits cost. See Note 9.12.
12.
16. Information on Business Segments
The Company is organized based upon the nature of its products and services and reports under two2 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 two2 reportable segments.
The Industrial segment is a global manufacturerprovider of highly-engineered, high-quality precision components, products and systems for critical applications serving a diverse customer base in end-markets such as transportation, industrial equipment, consumer products,automation, personal care, packaging, electronics, and medical devices, and energy.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 businesses designbusiness designs and manufacturemanufactures customized hot runner systems, advanced mold cavity sensors and process control systems, and precision high cavitation mold assemblies - collectively, the enabling technologies for many complex injection molding applications. Industrial's Nitrogen Gas ProductsThe Force & Motion Control business provides innovative cost effective force and motion control solutions for sheeta wide range of metal forming heavy duty suspension and other selective niche marketsindustrial markets. The Automation business designs and develops robotic grippers, advanced end-of-arm tooling systems, sensors and other automation components for customers worldwide.intelligent robotic handling solutions and industrial automation applications. Industrial's Engineered Components businesses manufacturebusiness manufactures and supplysupplies precision mechanical products used in transportation and industrial applications, including mechanical springs, high-precision punched and fine-blanked components and retention rings.
The Aerospace segment is a global providermanufacturer of complex fabricated and precision-machinedprecision machined components and assemblies for original equipment manufacturer ("OEM") turbine engine, airframeengines, nacelles and industrial gas turbine builders,structures for both commercial and the military.military aircraft. The Aerospace Aftermarket includes the jetaftermarket business provides aircraft engine component maintenance overhaul and repair business ("MRO") and the spare parts business. MRO includesservices, including services performed under our Component Repair Programs ("CRPs"(“CRPs”), which servicefor many of the world'sworld’s major turbine engine manufacturers, commercial airlines and the military. The Aerospace aftermarket activities also include the manufacture and delivery of aerospace aftermarket spare parts, business includes our revenue sharing programs ("RSPs"including Revenue Sharing Programs (“RSPs”) under which the Company receives an exclusive right to supply designated aftermarket parts over the life of the relatedspecific aircraft engine program.programs.
The following tables set forth information about the Company's operations by its two2 reportable segments: | | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | | | | | | | | | | | | | |
Industrial | $ | 240,390 |
| | $ | 208,748 |
| | $ | 719,556 |
| | $ | 608,534 |
| $ | 231,688 |
| | $ | 244,133 |
| | $ | 707,594 |
| | $ | 739,677 |
|
Aerospace | 116,767 |
| | 102,816 |
| | 343,899 |
| | 298,055 |
| 140,899 |
| | 125,665 |
| | 413,353 |
| | 372,102 |
|
Intersegment sales | (1 | ) | | (3 | ) | | (4 | ) | | (3 | ) | — |
| | (1 | ) | | — |
| | (7 | ) |
Total net sales | $ | 357,156 |
| | $ | 311,561 |
| | $ | 1,063,451 |
| | $ | 906,586 |
| $ | 372,587 |
| | $ | 369,797 |
| | $ | 1,120,947 |
| | $ | 1,111,772 |
|
| | | | | | | | | | | | | | |
Operating profit | | | | | | | | | | | | | | |
Industrial | $ | 29,308 |
| | $ | 34,958 |
| | $ | 100,154 |
| | $ | 99,445 |
| $ | 34,836 |
| | $ | 33,329 |
| | $ | 83,785 |
|
| $ | 104,004 |
|
Aerospace | 18,478 |
| | 16,859 |
| | 60,519 |
| | 41,359 |
| 32,749 |
| | 25,734 |
| | 91,407 |
| | 75,571 |
|
Total operating profit | 47,786 |
| | 51,817 |
| | 160,673 |
| | 140,804 |
| 67,585 |
| | 59,063 |
| | 175,192 |
| | 179,575 |
|
Interest expense | 3,748 |
| | 3,020 |
| | 10,638 |
| | 8,826 |
| 5,344 |
| | 4,054 |
| | 15,856 |
| | 12,078 |
|
Other expense (income), net | 357 |
| | 621 |
| | 773 |
| | 24 |
| 2,524 |
| | 2,447 |
| | 6,043 |
| | 5,157 |
|
Income before income taxes | $ | 43,681 |
| | $ | 48,176 |
| | $ | 149,262 |
| | $ | 131,954 |
| $ | 59,717 |
| | $ | 52,562 |
| | $ | 153,293 |
| | $ | 162,340 |
|
| | | September 30, 2017 | | December 31, 2016 | September 30, 2019 | | December 31, 2018 |
Assets | | | | | | |
Industrial | $ | 1,502,193 |
| | $ | 1,356,081 |
| $ | 1,863,432 |
| | $ | 1,962,362 |
|
Aerospace | 648,561 |
| | 647,766 |
| 714,189 |
| | 692,584 |
|
Other (A) | 195,777 |
| | 133,692 |
| 130,293 |
| | 154,024 |
|
Total assets | $ | 2,346,531 |
| | $ | 2,137,539 |
| $ | 2,707,914 |
| | $ | 2,808,970 |
|
(A) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.cash equivalents.
13.17. 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 September 30, 20172019 and December 31, 2016.2018.
14. Business Reorganization
In June 2017,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 authorized the closure and consolidation of two production facilities (the "Closures") including a FOBOHA facility located in Muri, Switzerland (60 employees) and an Associated Spring facility (30 employees) into other facilities included within the Industrial segment to leverage capacity, infrastructure and critical resources.its subsidiaries. The Company recordedrecords a net pre-tax gainloss 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 $1,392each 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 first nine months of 2017 related to the Closures. This balance includes pension curtailment and settlement gains of $7,217 and $230, respectively, partially offset by employee severance charges of $3,756 and other Closure costs of $2,299, primarily related to asset write-downs. The severance liability was included within Accrued Liabilities as of September 30, 2017. The Company also expects to incur additional costs of approximately $700 in 2017 related to the Closures, including costs related to the transfer of work to other existing facilities. Closure costs are recorded primarily within Cost of Sales in the accompanying Consolidated Statements of Income and are reflected in the results of the Industrial segment.
The following table sets forth the change in the liability for the 2017 employee termination actions:
|
| | | |
January 1, 2017 | $ | — |
|
Employee termination benefit costs | 3,756 |
|
Payments | (3,008 | ) |
Foreign currency translation | (45 | ) |
September 30, 2017 | $ | 703 |
|
The majority of this balance is expected to be paid in 2017.
15. Accounting Changes
In July 2015, the FASB amended its guidance related to the measurement of inventory. The amended guidance requires inventory to be measured at the lower of cost and net realizable value and thereby simplifies the current guidance of measuring inventory at the lower of cost or market. The amended guidance is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted the guidance during the first quarter of 2017 and it didaggregate, will not have a material impactadverse effect on its Consolidated Financial Statements.financial condition or results of operations.
With respect to the unaudited consolidated financial information of Barnes Group Inc. for the nine-monththree and nine month periods ended September 30, 20172019 and 2016,2018, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 27, 201725, 2019 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.
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of
Barnes Group Inc.:
Results of Review of Interim Financial Information
We have reviewed the accompanying consolidatedbalance sheetof Barnes Group Inc.and its subsidiaries(the “Company”) as of September 30, 2017,2019, and the related consolidated statements of income and of comprehensive income for the three-month and nine-monthperiods ended September 30, 20172019 and September 30, 2016 2018and the consolidated statement of cash flows for thenine-monthperiods ended September 30, 20172019 and September 30, 2016. This2018,including the related notes (collectively referred to as the “interim financialinformation”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information isforit to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company’s management.America.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)., the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, of comprehensive income, of changes in stockholders’ equity,and of cash flowsfor the year then ended (not presented herein), and in our report dated February 25, 2019, which included a paragraph describing a change in the manner of accounting for revenue in the 2018 financial statements, we expressed an unqualified opinion on those consolidated financial statements.In our opinion, the information set forth in the accompanying consolidated balance sheet information as ofDecember 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information isthe responsibility of the Company’s management.We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, of comprehensive income, of changes in stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated February 21, 2017, which included a paragraph describing a change in the manner of accounting for stock-based compensation and a change in the manner of accounting for classification of deferred taxes in the 2016 financial statements, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
|
| |
/s/ PricewaterhouseCoopers LLP | |
PricewaterhouseCoopers LLP
Hartford, Connecticut | |
October 27, 2017 | |
Hartford, CT25, 2019 | |
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, 2016.2018. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website: www.bginc.com.
Third Quarter 2017 Highlights
In the third quarter of 2017, sales increased by $45.6 million, or 14.6% from the third quarter of 2016, to $357.2 million. Within Industrial, this sales increase was partly driven by an incremental $11.3 million sales contribution from FOBOHA during July and August 2017 (acquisition completed on August 31, 2016) and Gammaflux sales of $3.2 million during the quarter. Organic sales (net sales excluding both foreign currency and acquisition impacts) increased by $26.0 million, or 8.3%, with increases of 5.8% within Industrial and 13.6% within Aerospace. Sales in Industrial were impacted by changes in foreign currency which increased sales by approximately $5.1 million as the U.S. dollar weakened against foreign currencies.
Operating income in the third quarter of 2017 decreased 7.8% to $47.8 million from the third quarter of 2016 and operating margin decreased from 16.6% to 13.4%. Operating income was largely impacted by lower productivity, resulting primarily from increased costs incurred on certain programs at Industrial, partially offset by increased leverage of organic sales in both segments.
RESULTS OF OPERATIONS
Net Sales
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Industrial | $ | 240.4 |
| | $ | 208.7 |
| | $ | 31.6 |
| | 15.2 | % | | $ | 719.6 |
| | $ | 608.5 |
| | $ | 111.0 |
| | 18.2 | % | $ | 231.7 |
| | $ | 244.1 |
| | $ | (12.4 | ) | | (5.1 | )% | | $ | 707.6 |
| | $ | 739.7 |
| | $ | (32.1 | ) | | (4.3 | )% |
Aerospace | 116.8 |
| | 102.8 |
| | 14.0 |
| | 13.6 | % | | 343.9 |
| | 298.1 |
| | 45.8 |
| | 15.4 | % | 140.9 |
| | 125.7 |
| | 15.2 |
| | 12.1 | % | | 413.4 |
| | 372.1 |
| | 41.3 |
| | 11.1 | % |
Total | $ | 357.2 |
| | $ | 311.6 |
| | $ | 45.6 |
| | 14.6 | % | | $ | 1,063.5 |
| | $ | 906.6 |
| | $ | 156.9 |
| | 17.3 | % | $ | 372.6 |
| | $ | 369.8 |
| | $ | 2.8 |
| | 0.8 | % | | $ | 1,120.9 |
| | $ | 1,111.8 |
| | $ | 9.2 |
| | 0.8 | % |
The Company reported net sales of $357.2$372.6 million in the third quarter of 2017,2019, an increase of $45.6$2.8 million or 14.6%0.8%, from the third quarter of 2016.2018. Organic sales increaseddecreased by $26.0$3.8 million, which included increasesor 1.0%, including a decrease of $12.0 million and $14.0 million$19.0 at Industrial, and Aerospace, respectively.partially offset by an increase of $15.2 at Aerospace. The increasedecrease at Industrial was driven primarily by continued strength in our Nitrogen Gas Products and Molding Solutionsorganic sales declines within the each of the Industrial business units, whereas growth on newer, more technologically advanced engine platforms increased volumes atlargely due to lower global auto production rates and delays in automotive model change releases, reflecting uncertainty related to current and proposed tariffs announced by the original equipment manufacturing business within Aerospace. Sales withinUnited States and China governments and potential changes in regulatory requirements. Acquired businesses contributed incremental sales of $13.6 million in the Aerospace aftermarket businesses also improvedIndustrial segment during the third quarter of 2017. The overall sales increase was also driven by an incremental $11.3 million sales contribution from FOBOHA during July and August 2017 (acquisition completed on August 31, 2016) and Gammaflux sales of $3.2 million during the third quarter of 2017. The weakening of the U.S. dollar against foreign currencies increased net sales within the Industrial segment by approximately $5.1 million.
The Company reported net sales of $1,063.5 million in the first nine months of 2017, an increase of $156.9 million or 17.3%, from the first nine months of 2016. In Industrial, the acquisitions of FOBOHA in August 2016 and Gammaflux in April 2017 provided incremental sales of $47.2 million and $6.5 million, respectively, during the first nine months of 2017. Organic sales increased by $103.8 million, which included increases of $58.0 million and $45.8 million at Industrial and Aerospace, respectively. The increase at Industrial was driven primarily by continued strength in our Nitrogen Gas Products and Molding Solutions business units, whereas growth on newer, more technologically advanced engine platforms increased volumes at the original equipment manufacturing business within Aerospace. Sales within the Aerospace aftermarket businesses also improved during the first nine months of 2017.2019. The strengthening of the U.S. dollar against foreign currencies decreased net sales within the Industrial segment by approximately $0.7$7.0 million. The increase at Aerospace was driven primarily by sales growth within the aftermarket businesses, whereas continued growth on newer, more technologically advanced engine platforms contributed to increase sales within the original equipment manufacturing business.
The Company reported net sales of $1,120.9 million in the first nine months of 2019, an increase of $9.2 million, or 0.8%, from the first nine months of 2018. Organic sales decreased by $13.9 million as a decrease of $55.2 million at Industrial was partially offset by an increase of $41.3 million at Aerospace. The decrease at Industrial was driven by organic sales declines within each of the Industrial business units, again, due to lower global auto production rates and delays in automotive model change releases. Acquired businesses contributed incremental sales of $49.9 million in the Industrial segment during the first nine months of 2019. The strengthening of the U.S. dollar against foreign currencies decreased net sales within the Industrial segment by approximately $26.8 million. The increase at Aerospace was driven primarily by sales growth within the aftermarket businesses, whereas continued growth on newer, more technologically advanced engine platforms contributed to increased sales within the original equipment manufacturing business.
Expenses and Operating Income
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Cost of sales | $ | 236.0 |
| | $ | 198.6 |
| | $ | 37.4 |
| | 18.8 | % | | $ | 692.4 |
| | $ | 582.0 |
| | $ | 110.3 |
| | 19.0 | % | $ | 234.4 |
| | $ | 236.9 |
| | $ | (2.5 | ) | | (1.0 | )% | | $ | 717.4 |
| | $ | 711.6 |
| | $ | 5.7 |
| | 0.8 | % |
% sales | 66.1 | % | | 63.7 | % | |
| |
| | 65.1 | % | | 64.2 | % | | | | | 62.9 | % | | 64.1 | % | |
| |
| | 64.0 | % | | 64.0 | % | | | | |
Gross profit (1) | $ | 121.1 |
| | $ | 113.0 |
| | $ | 8.2 |
| | 7.2 | % | | $ | 371.1 |
| | $ | 324.6 |
| | $ | 46.5 |
| | 14.3 | % | $ | 138.2 |
| | $ | 132.9 |
| | $ | 5.2 |
| | 3.9 | % | | $ | 403.6 |
| | $ | 400.2 |
| | $ | 3.4 |
| | 0.9 | % |
% sales | 33.9 | % | | 36.3 | % | |
| |
| | 34.9 | % | | 35.8 | % | |
| | | 37.1 | % | | 35.9 | % | |
| |
| | 36.0 | % | | 36.0 | % | | | | |
Selling and administrative expenses | $ | 73.4 |
| | $ | 61.1 |
| | $ | 12.2 |
| | 20.0 | % | | $ | 210.4 |
| | $ | 183.8 |
| | $ | 26.7 |
| | 14.5 | % | $ | 70.6 |
| | $ | 73.9 |
| | $ | (3.3 | ) | | (4.4 | )% | | $ | 228.4 |
| | $ | 220.6 |
| | $ | 7.8 |
| | 3.5 | % |
% sales | 20.5 | % | | 19.6 | % | | | | | | 19.8 | % | | 20.3 | % | |
| | | 18.9 | % | | 20.0 | % | | | | | | 20.4 | % | | 19.8 | % | | | | |
Operating income | $ | 47.8 |
| | $ | 51.8 |
| | $ | (4.0 | ) | | (7.8 | )% | | $ | 160.7 |
| | $ | 140.8 |
| | $ | 19.9 |
|
| 14.1 | % | $ | 67.6 |
| | $ | 59.1 |
| | $ | 8.5 |
| | 14.4 | % | | $ | 175.2 |
| | $ | 179.6 |
| | $ | (4.4 | ) | | (2.4 | )% |
% sales | 13.4 | % | | 16.6 | % | | | | | | 15.1 | % | | 15.5 | % | | | | | 18.1 | % | | 16.0 | % | | | | | | 15.6 | % | | 16.2 | % | | | | |
(1) Sales less cost of sales. | | | | | | | | | | | | | | | | |
(1) Sales less cost of sales.
Cost of sales in the third quarter of 2017 increased 18.8%2019 decreased 1.0% from the 20162018 period, while gross profit margin decreasedincreased from 36.3%35.9% in the 20162018 period to 33.9%37.1% in the 20172019 period. Gross margins declinedimproved at both AerospaceIndustrial and Industrial. Gross profit improved within both segments, driven primarily by organic growth within each of the business units.Aerospace. At Industrial, gross margins decreasedmargin increased during the 20172019 period, due to lowerprimarily driven by favorable cost productivity primarily a result of additional costs incurred on certain programs at Engineered Components. Incremental costs include expedited freight, increased scrap and costs related to the transfer of work to other facilities. A lower margin contribution on acquisition sales and an increase in incentive compensation at certain businesses also had an impact on the overall lower gross margins at Industrial. Partially offsetting these items was the profit impact of organic growth within our Molding Solutions and Nitrogen Gas Products business units. The third quarter of 2017 and the third quarterabsence of 2016 both included $0.5$1.2 million of short-term purchase accounting adjustments related to the acquisition of FOBOHA.Industrial Gas Springs Group Holdings Limited ("IGS") during the prior year period, partially offset by the lower profit contribution of lower organic sales volumes within the Industrial businesses, primarily Molding Solutions. Within Aerospace, an improvement in gross profit relates primarily to organic growth within each of the businesses. Increased volumes in the maintenance overhaul and repair and spare parts businesses, in particular, contributed to the gross margin improvement during the third quarter of 2019. Selling and administrative expenses in the third quarter of 2019 decreased 4.4% from the 2018 period due to improving cost productivity and the absence of prior period costs, including due diligence costs related to the acquisition of Gimatic and IGS transaction acquisition costs, partially offset by increased amortization of acquired intangible assets. As a percentage of sales, selling and administrative costs decreased from 20.0% in the third quarter of 2018 to 18.9% in the 2019 period. Operating income in the third quarter of 2019 increased 14.4% to $67.6 million from the third quarter of 2018 and operating income margin increased from 16.0% to 18.1%, primarily driven by the items at Industrial noted above.
Cost of sales in the first nine months of 2019 increased 0.8% from the 2018 period, while gross profit margin remained at 36.0% in both the 2018 and 2019 periods. Gross margins improved at Aerospace and declined slightly at Industrial. At Industrial, the gross margin decrease during the first nine months of 2019 was primarily a result of a lower profit contribution of lower organic sales volumes within the Industrial businesses, primarily Molding Solutions, and $5.4 million of short-term purchase accounting adjustments related to the acquisition of Gimatic. Within Aerospace, improvement in gross profit relates primarily to organic growth within each of the businesses, combined with favorable productivity, partially offset by planned price deflation. Gross margins at Aerospace decreased primarily as a result of price deflation within the original equipment manufacturing business and an increase in incentive compensation, partially offset by the profit impact of increased sales volumes within our maintenance repair and overhaul and spare parts businesses during the third quarter of 2017. Selling and administrative expenses in the third quarter of 2017 increased 20.0% from the 2016 period, due primarily to corresponding increases in sales volumes and incentive compensation during the period, partially offset by the absence of $0.6 million of costs related to a customer termination dispute and $1.2 million of costs related to the acquisition of FOBOHA during the 2016 period. Additional costs of $0.3 million related to the second quarter 2017 restructuring actions also contributed to the increase in selling and administrative expenses during the third quarter of 2017. As a percentage of sales, selling and administrative costs increased slightly from 19.6% in the third quarter of 2016 to 20.5% in the 2017 period. Operating income in the third quarter of 2017 decreased 7.8% to $47.8 million from the third quarter of 2016 and operating income margin decreased from 16.6% to 13.4%, driven primarily by unfavorable productivity, as discussed above, at Industrial.
Cost of sales in the first nine months of 2017 increased 19.0% from the 2016 period, while gross profit margin decreased from 35.8% in the 2016 period to 34.9% in the 2017 period. Gross margins improved at Aerospace and declined at Industrial. Gross profit improved within both segments, driven primarily by organic growth within each of the business units. At Industrial, gross margins decreased during the first nine months of 2017 as a result of lower productivity, primarily a result of additional costs incurred on certain programs at Engineered Components. Incremental costs include expedited freight, increased scrap and costs related to the transfer of work to other facilities. A lower margin contribution on acquisition sales also had an impact on the overall lower gross margins at Industrial. Partially offsetting these items was the profit impact of organic growth within our Molding Solutions and Nitrogen Gas Products business units and a pre-tax net benefit of $1.3 million resulting from the second quarter 2017 restructuring actions taken within Industrial. Gross profit during the first nine months of 2017 was negatively impacted by $2.3 million of short-term purchase accounting adjustments related to the acquisition of FOBOHA, whereas the prior year period included $0.5 million of such adjustments. Within Aerospace, improvement in gross profit relates primarily to organic growth within each of the businesses, combined with favorable productivity, partially offset by price deflation.businesses. Increased volumes in the maintenance repairoverhaul and overhaulrepair and spare parts businesses, in particular, contributed to the gross margin improvement during the first nine months of 2017.2019. Selling and administrative expenses in the first nine months of 20172019 increased 14.5%3.5% from the 20162018 period, due primarily to corresponding increases in sales volumes, incentive compensation and the amortization of intangible assetscosts related to the acquisition of FOBOHA,Gimatic, primarily the amortization of acquired intangible assets, partially offset by the absence of $3.0 million ofGimatic due diligence costs related to a customer termination dispute and $1.2 million of transaction costs related to FOBOHA duringthat were incurred in the first nine months of 2016.prior year period. As a percentage of sales, selling and administrative costs slightly decreasedincreased from 20.3%19.8% in the first nine
months of 20162018 to 19.8%20.4% in the 20172019 period. Operating income in the first nine months of 2017 increased 14.1%2019 decreased 2.4% to $160.7$175.2 million from the first nine months of 20162018 and operating income margin decreased slightly from 15.5%16.2% to 15.1%.15.6%, driven primarily by the items noted above.
Interest expense
Interest expense increased by $0.7$1.3 million in the third quarter of 2017, as compared with the prior year period, primarily as a result of higher interest rates. Interest expense increased2019 and by $1.8$3.8 million in the first nine months of 2017,2019, as compared with the prior year period, alsoperiods. The increase in both periods was primarily a result of higherincreased average borrowings, partially offset by lower average interest rates.
Other expense (income), net
Other expense (income), net in the third quarter of 20172019 was $0.4$2.5 million compared to $0.6$2.4 million in the third quarter of 2016.2018. Foreign currency losses of $2.2 million remained flat in both the third quarter of 2019 and 2018, representing the significant driver in both periods. Other expense (income), net in the first nine months of 20172019 was $0.8$6.0 million compared to $0.0$5.2 million in the first nine months of 2016.2018. Foreign currency losses of $0.1$4.2 million in the first nine months of 20172019 compared with foreign currency gainslosses of $0.8$2.9 million in the first nine months of 2016.2018.
Income Taxes
The Company merged certain of its Swiss operating legal entities during the second quarter of 2017 (the "Merger"). Certain of these entities included businesses with deferred tax assets that were offset by valuation allowances. As a result of the Merger, the Company reevaluated the valuation allowances and deferred tax assets related to these businesses and determined such allowances were no longer required as the merged entities would more likely than not utilize previously unbenefited net operating losses that would have otherwise expired. In addition, certain deferred tax assets were adjusted as a result of higher income tax rates. The impacts of these adjustments were treated as discrete items in the second quarter of 2017 resulting in reductions in tax expense of $5.9 million and $0.5 million, respectively.
The Company's effective tax rate for the first nine months of 20172019 was 20.5%23.4% compared with 25.1%21.5% in the first nine months of 20162018 and 25.7%19.9% for the full year 2016.2018. The decreaseincrease in the first nine months of 20172019 effective tax rate from the full year 20162018 rate is primarily due to the adjustmentabsence of adjustments to certain international valuation reserves and other benefitsfinal adjustments resulting from the mergerimpact of legal entities in Switzerland,the Tax Cuts and the settlement of tax audits and closure of tax years for various jurisdictions, partially offset by the expiration of certain tax holidays.Jobs Act (the “Act”).
The Aerospace and Industrial segments were previously awarded international tax holidays. All significantSegments have a number of multi-year tax holidays for whichin both Singapore and China. These holidays are subject to the Company currently receives benefit are expected to expiremeeting certain commitments in the fourth quarter of 2017.respective jurisdictions.
Income and Income per Share
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net income | $ | 35.3 |
| | $ | 36.8 |
| | $ | (1.5 | ) | | (4.1 | )% | | $ | 118.7 |
| | $ | 98.9 |
| | $ | 19.8 |
| | 20.0 | % | $ | 45.8 |
| | $ | 39.1 |
| | $ | 6.7 |
| | 17.0 | % | | $ | 117.4 |
| | $ | 127.4 |
| | $ | (10.0 | ) | | (7.8 | )% |
Net income per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | $ | 0.65 |
| | $ | 0.68 |
| | $ | (0.03 | ) | | (4.4 | )% | | $ | 2.19 |
| | $ | 1.82 |
| | $ | 0.37 |
| | 20.3 | % | $ | 0.90 |
| | $ | 0.76 |
| | $ | 0.14 |
| | 18.4 | % | | $ | 2.29 |
| | $ | 2.42 |
| | $ | (0.13 | ) | | (5.4 | )% |
Diluted | 0.65 |
| | 0.67 |
| | (0.02 | ) | | (3.0 | )% | | 2.17 |
| | 1.81 |
| | 0.36 |
| | 19.9 | % | 0.89 |
| | 0.75 |
| | 0.14 |
| | 18.7 | % | | 2.27 |
| | 2.40 |
| | (0.13 | ) | | (5.4 | )% |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | 54.1 |
| | 54.2 |
| | (0.1 | ) | | (0.3 | )% | | 54.1 |
| | 54.2 |
| | (0.1 | ) | | (0.1 | )% | 50.9 |
| | 51.6 |
| | (0.6 | ) | | (1.2 | )% | | 51.3 |
| | 52.6 |
| | (1.3 | ) | | (2.4 | )% |
Diluted | 54.6 |
| | 54.6 |
| | — |
| | — | % | | 54.6 |
| | 54.6 |
| | — |
| | — | % | 51.2 |
| | 52.1 |
| | (0.8 | ) | | (1.6 | )% | | 51.7 |
| | 53.1 |
| | (1.4 | ) | | (2.6 | )% |
Basic and diluted net income per common share decreased for the three-month period, and increased for the nine-monththree month period as compared to 2018. The increase was due to the 2016 periods, consistent with the changesincrease in net income for the periods. Basic weighted average common shares outstanding decreased slightly whileperiod as well as the impact of reductions in both basic and diluted weighted average common shares outstanding were flat. Share repurchaseswhich decreased due to the repurchase of 550,9942,292,100 and 407,000900,000 shares during 20162018 and the first nine months of 2017,2019, respectively, as part of the Company's repurchase program were largelypublicly announced Repurchase Program. For the nine month period, basic and diluted net income per common share decreased as compared to 2018 due to the decrease in net income for the period which was partially offset by the grant andimpact of the repurchased shares. The impact of the repurchased shares was partially offset by the issuance of additional shares for employee stock plans.plans in both the three and nine month periods.
Financial Performance by Business Segment
Industrial
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Sales | $ | 240.4 |
| | $ | 208.7 |
| | $ | 31.6 |
| | 15.2 | % | | $ | 719.6 |
| | $ | 608.5 |
| | $ | 111.0 |
| | 18.2 | % | $ | 231.7 |
| | $ | 244.1 |
| | $ | (12.4 | ) | | (5.1 | )% | | $ | 707.6 |
| | $ | 739.7 |
| | $ | (32.1 | ) | | (4.3 | )% |
Operating profit | 29.3 |
| | 35.0 |
| | (5.7 | ) | | (16.2 | )% | | 100.2 |
| | 99.4 |
| | 0.7 |
| | 0.7 | % | 34.8 |
| | 33.3 |
| | 1.5 |
| | 4.5 | % | | 83.8 |
| | 104.0 |
| | (20.2 | ) | | (19.4 | )% |
Operating margin | 12.2 | % | | 16.7 | % | | | | | | 13.9 | % | | 16.3 | % | | | | | 15.0 | % | | 13.7 | % | | | | | | 11.8 | % | | 14.1 | % | | | | |
Sales at Industrial were $240.4$231.7 million in the third quarter of 2017,2019, a $31.6$12.4 million, increaseor 5.1% decrease from the third quarter of 2016. This2018. Organic sales increase was partlydecreased by $19.0 million, or 7.8%, during the 2019 period, driven by andeclines in sales within each of the businesses. Softness in automotive end markets continued to decrease sales volumes, largely due to lower global auto production rates and delays in automotive model change releases, reflecting uncertainty related to current and proposed tariffs announced by the United States and China governments and potential changes in regulatory requirements. Increased volumes within the medical end market, however, partially offset the automotive, personal care and packaging related declines within the Molding Solutions business. Proposed regulations affecting product and packaging composition and disposability have impacted sales within these end markets. Acquired businesses contributed incremental $11.3 million sales contribution from FOBOHA during July and August 2017 (acquisition completed on August 31, 2016) and Gammaflux sales of $3.2$13.6 million during the third quarter of 2017. Organic sales increased by $12.0 million, or 5.8%, during the 2017 period, driven primarily by continued strength in our Nitrogen Gas Products and Molding Solutions business units. A continuation of favorable demand trends in our tool and die and transportation end-markets have contributed to the organic growth within these business units. Foreign2019, whereas foreign currency increaseddecreased sales by approximately $5.1$7.0 million as the U.S. dollar weakenedstrengthened against foreign currencies. During the first nine months of 2017,2019, this segment reported sales of $719.6$707.6 million, an 18.2% increasea 4.3% decrease from the first nine months of 2016.2018. Organic sales increaseddecreased by $58.0$55.2 million, or 9.5%7.5%, during the 20172019 period, primarily a result of continued strengthdeclines in our Nitrogen Gas Products and Molding Solutions businesses. Acquisitions providedsales within each of the businesses, partially offset by a favorable $2.6 million commercial settlement of a patent-related matter. The sales decline in the nine month period was also driven largely by the softness in automotive end markets. Acquired businesses contributed incremental sales of $53.7 $49.9million during the first nine months of 2017. The impact of2019, whereas foreign currency decreased sales by approximately $0.7$26.8 million as the U.S. dollar strengthened against foreign currencies.
Operating profit in the third quarter of 20172019 at Industrial was $29.3$34.8 million, a decreasean increase of $5.7$1.5 million from the third quarter of 2016.2018. Operating profit was negatively impacted primarily by the lower profit contribution of lower organic sales volumes across each of the businesses. Favorable productivity, resulting primarily from increased costs incurred on certain programs within Engineered Components. Incremental costs include expedited freight, increased scrap andcombined with the absence of prior period costs related to the transferacquisitions of work to other facilities. Costs related to lower productivityIGS (transaction costs of $0.4 million and an increase in incentive compensation at certain Industrial businesses were partiallyshort-term purchase adjustments of $1.2 million) and Gimatic (due diligence costs), more than offset by the profit impact of lower volumes. Operating margin increased sales volumes, largelyfrom 13.7% in the 2018 period to 15.0% in the 2019 period, primarily a result of stronger toolthe net productivity benefits. Operating profit in the first nine months of 2019 at Industrial was $83.8 million, a decrease of $20.2 million from the first nine months of 2018, driven by the lower profit contribution of
lower organic sales and die and transportation end-markets. The third quarter of 2017 also included $0.3 million of costs related to restructuring actions that occurred during the second quarter of 2017. See Note 14 to the Consolidated Financial Statements for further discussion related to the restructuring actions. The third quarter of 2017 includes $0.5$5.4 million of short-term purchase accounting adjustments related to the acquisition of FOBOHA, whereas the third quarterGimatic. The first nine months of 20162018 included $1.7$1.2 million of short-term purchase accounting adjustments and acquisition costs. Lower margins at FOBOHA also impacted the third quarter of 2017. Operating margin decreased from 16.7% in the 2016 period to 12.2% in the 2017 period due to the above items. Operating profit in the first nine months of 2017 at Industrial was $100.2 million, an increase of $0.7 million from the first nine months of 2016. Operating profit benefited from increased sales volumes, largely offset by lower productivity, primarily driven by the increased costs incurred on certain programs within Engineered Components. The 2017 period also includes $2.3$0.4 million of short-term purchase accounting adjustmentsacquisition transaction costs, both related to the acquisition of FOBOHA, primarily offset by a pre-tax net benefitIGS, in addition to due diligence costs related to the acquisition of $1.4 million that resulted from the restructuring actions taken during the second quarter of 2017.Gimatic. Operating margin decreased from 16.3%14.1% in the 20162018 period to 13.9%11.8% in the 20172019 period primarily as a result of these items. Lower margins at FOBOHA also impacted the first nine months of 2017.
Outlook: In the Industrial, manufacturing businesses, management is focused on generating organic sales growth through the introduction of new products and services and by leveraging the benefits of theits diversified products and global industrial end-markets in which its businesses have a global presence.end-markets. Our ability to generate sales growth is subject to economic conditions in the global markets served by all of our businesses. For generaloverall industrial end-markets, the manufacturing Purchasing Managers IndicesManagers' Index ("PMIs"PMI") remains above 50 in China, North America, andwhereas PMI in China has fluctuated around 50 throughout 2019. PMI in Europe are positive signs. Within China, we have seenhas remained below 50 throughout the majority of 2019, including as of September 30, 2019, indicative of a strengthening in orders that began during the middle of 2016 and that is continuing into the fourth quarter of 2017, indicating strength within the transportation markets.slowing economy. Global forecasted production for light vehicles is expected to grow nominally in 2017, however production is beginninghas continued to decline modestly within the Europe, China and North American market.America markets throughout the first nine months of 2019. Within our Molding Solutions businesses,business, the global markets remain healthy. Formedical market remains healthy, while the Molding Solutions businesses in the remainder of 2017, we anticipate favorable demand trends to continue within the medical and personal careautomotive hot runner marketsmarket remains soft given the delay in model launches by automotive original equipment manufacturers. Proposed regulations affecting product and packaging composition and disposability may continue to impact sales within these end markets. Overall industrial end-markets may also be impacted by uncertainty related to current and proposed tariffs announced by the United States and the packaging and medical mold markets. Within our molds product line, orders continued to improve during the third quarter of 2017.China governments. As noted above, our third quarterfirst nine months of sales were positivelynegatively impacted by $5.1$26.8 million from fluctuations in foreign currencies. To the extent that the U.S. dollar fluctuates relative to other foreign currencies, our sales may continue to be impacted by foreign currency relative to the prior year periods. The relative impact on operating profit is not expected to be as significant as the impact on sales as most of our businesses have expenses primarily denominated in local currencies, where their revenues reside.reside, however operating margins may be impacted. The Company also remains
focused on sales growth through acquisition and expanding geographic reach. Strategic investments in new technologies, manufacturing processes and product development are expected to provide incremental benefits over the long term.
Operating profit is largely dependent on the sales volumes and mix of the businesses in the segment. Management continues to focus on improving profitability and expanding margins through leveraging organic sales growth, acquisitions, pricing initiatives, global sourcing, productivity and the evaluation of customer programs.programs, driven by the Barnes Enterprise System. Operating profit may also be impacted by enactment of or changes in tariffs, trade agreements and trade policies that may affect the cost and/or availability of goods, including aluminum and steel. In particular, current and proposed tariffs announced by the United States government could further increase prices of raw materials or other supplies which we will attempt to offset through mitigation actions. We continue to evaluate market conditions and remain proactive in managing costs. Costs associated with new product and process introductions, restructuring and other cost initiatives, strategic investments and the integration of acquisitions may negatively impact operating profit.
Aerospace
| | | Three months ended September 30, | | Nine months ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Sales | $ | 116.8 |
| | $ | 102.8 |
| | $ | 14.0 |
| | 13.6 | % | | $ | 343.9 |
| | $ | 298.1 |
| | $ | 45.8 |
| | 15.4 | % | $ | 140.9 |
| | $ | 125.7 |
| | $ | 15.2 |
| | 12.1 | % | | $ | 413.4 |
| | $ | 372.1 |
| | $ | 41.3 |
| | 11.1 | % |
Operating profit | 18.5 |
| | 16.9 |
| | 1.6 |
| | 9.6 | % | | 60.5 |
| | 41.4 |
| | 19.2 |
| | 46.3 | % | 32.7 |
| | 25.7 |
| | 7.0 |
| | 27.3 | % | | 91.4 |
| | 75.6 |
| | 15.8 |
| | 21.0 | % |
Operating margin | 15.8 | % | | 16.4 | % | | | | | | 17.6 | % | | 13.9 | % | | | | | 23.2 | % | | 20.5 | % | | | | | | 22.1 | % | | 20.3 | % | | | | |
The Aerospace segment reported sales of $116.8$140.9 million in the third quarter of 2017,2019, a 13.6%12.1% increase from the third quarter of 2016.2018. Sales increased within all of the Aerospace businesses. The original equipment manufacturing ("OEM") business continued to transitionbenefit from the manufactureramp of components on legacy engine platforms to newer, more technologically advanced platforms. Increasedengine programs. The sales increase reflects increased volume generated by newer programs was only partially offset by lower volumes and the impact of lower pricing on more mature enginethese platforms. Sales within the aftermarket repair and overhaul ("MRO") business alsoand spare parts businesses increased during the third quarter of 20172019 as the Company continued to obtainairline traffic and aircraft utilization remained strong, with additional sales volumevolumes being obtained largely from existing customers, a trend that began during the second half of 2016. Volumes within the spare parts business also increased during the 2017 period.customers. Sales within the segment are largely denominated in U.S. dollars and therefore were not significantly impacted by changes in foreign currency. During the first nine months of 2017, this2019, the Aerospace segment reported sales of $343.9$413.4 million, a 15.4%an 11.1% increase from the first nine months of 2016,2018, also driven by growth within each of the Aerospace businesses. Growth during the first nine months of 20172019 also resulted from sales in newer engine programs within OEM and additional volume from existing customers within aftermarket.the aftermarket businesses.
Operating profit at Aerospace in the third quarter of 20172019 increased 9.6%27.3% from the third quarter of 20162018 to $18.5$32.7 million. The operating profit increase resulted from the profit impact of the increased volumes at both the OEM and aftermarket businesses, as discussed above, coupledabove. Operating margin increased from 20.5% in the 2018 period to 23.2% in the 2019 period primarily as a result of these items, combined with favorable productivity, resultingmix from our ability to leverage production volumes, partially offset by price deflation, mix within the OEM businessMRO and increased employee related costs, primarily due to incentive compensation. The third quarter of 2016 included $0.6 million of costs related to a contract termination dispute that was resolved favorably by the end of 2016. Operating margin decreased slightly from 16.4% in the 2016 period to 15.8% in the 2017 period.spare parts businesses. Operating profit in the first nine months of 20172019 increased 46.3%21.0% from the first nine months of 20162018 to $60.5$91.4 million, also driven by higher sales volumes and favorable productivity. The first nine months of 2016 included $3.0 million of costs related toacross the contract termination dispute.businesses.
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. Over the next several years, the Company expects sustained strength in demand for new engines,more technologically advanced engine programs, driven by an expected increase in commercial aircraft production levels. The Company expects further shifts in the production mix from some of its legacy engine programs to the continual ramping of several new engine programs. Backlog at OEM was $708.9$809.7 million at September 30, 2017, an increase2019, a decrease of 13.2%4.2% since December 31, 2016,2018, at which time backlog was $626.3$845.1 million. Backlog decreased as Aerospace customers continued to adjust orders based on their requirements. The increase in the first nine monthsCompany believes that this activity represents normal order management and does not represent a loss of 2017 orders primarily reflects an expanded time horizon on orders for certain engine programs and increased volumes.our planned production. Approximately 50% of OEM backlog is expected to ship in the next 12 months. The Aerospace OEM business may be impacted by changes in the content levels on certain platforms, changes in customer sourcing decisions, adjustments to customer inventory levels, commodity availability and pricing, vendor sourcing capacity and the use of alternate materials. Additional impacts may include changes in production schedules of specific engine and airframe programs, redesign of parts, quantity of parts per engine, cost schedules agreed to under contract with the engine manufacturers, as well as the pursuit and duration of new programs. Sales in the Aerospace aftermarket business may be impacted by fluctuations in end-market demand, early aircraft retirements, inventory management and changes in customer sourcing, deferred or limited maintenance activity during engine shop visits and the use of surplus (used) material during the engine repair and overhaul process. End markets are expected to grow based on the long term underlying fundamentals of the aerospace industry. 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 MRO business and long-term Revenue Sharing Programs ("RSPs") and Component Repair Programs ("CRPs"), expanded capabilities and current capacity levels. The MRO business may be potentially impacted by airlines that closely manage their aftermarket costs as engine performance and quality improves. Fluctuations in fuel costs and their impact on airline profitability and behaviors
within the aerospace industry could also impact levels and frequency of aircraft maintenance and overhaul activities, and airlines' decisions on maintaining, deferring or canceling new aircraft purchases, in part based on the economics associated with new fuel efficient technologies.
Management is focused on growing operating profit at Aerospace primarily through leveraging organic sales growth, strategic investments, new product and process introductions, and productivity.productivity, driven by the Barnes Enterprise System. 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. Operating profits may also be impacted by potential changes in tariffs, trade agreements and trade policies that may affect the cost and/or availability of goods. Costs associated with new product and process introductions, the physical transfer of work to lower cost manufacturingother global regions, additional productivity initiatives and restructuring activities may also 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 believes that its 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 20172019 will generate sufficient cash to fund operations. The Company closely monitors its cash generation, usage and preservation including the management of working capital to generate cash.
In February 2017, the Company and certain of its subsidiaries entered into the fourth amendment of its fifth amended and restated revolving credit agreement (the “Amended Credit Agreement”) and retained Bank of America, N.A. as the Administrative Agent for the lenders. The Amended Credit Agreement increasesincreased the facility from $750.0 million to $850.0 million and extends the maturity date from September 2018 to February 2022. The Amended Credit Agreement also increases the existing accordion feature from $250.0 million, allowing the Company to now request additional borrowings of up to $350.0 million. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is not continuing. The borrowing availability of $850.0 million, pursuant to the terms of the Amended Credit Agreement, allows for multi-currency borrowing which includes euro, British pound sterling or Swiss franc
borrowing, up to $600.0 million. In September 2018, the Company and one of its wholly owned subsidiaries entered into a Sale and Purchase Agreement to acquire Gimatic S.r.l. See Note 2 of the Consolidated Financial Statements. In conjunction with the Acquisition, the Company requested additional borrowings of $150.0 million that was provided for under the existing accordion feature. The Administrative Agent for the lenders has approved the Company's access to the accordion feature and on October 19, 2018 the lenders formally committed the capital to fund such feature, resulting in the execution of the fifth amendment to the Amended Credit Agreement (the "Fifth Amendment"). The Fifth Amendment, effective October 19, 2018, thereby increased the borrowing availability of the existing facility to $1,000.0 million. The Company may also request access to the residual $200.0 million of the accordion feature. Depending on the Company’s consolidated leverage ratio, and at the election of the Company, borrowings under the Amended Credit Agreement will bear interest at either LIBOR plus a margin of between 1.10% and 1.70% or the base rate, as defined in the Amended Credit Agreement, plus a margin of 0.10% to 0.70%. 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 1.10% and 1.70%.
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 $100.0 million 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 will 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 Note Purchase Agreement contains customary affirmative and negative covenants that are similar to the covenants required under the Amended Credit Agreement, as discussed below. At September 30, 2017,2019, the Company was in compliance with all covenants under the Note Purchase Agreement.
The Company's borrowing capacity remainsis limited by various debt covenants in the Amended Credit Agreement and the Note Purchase Agreement (the "Agreements"). The Agreements require the Company to maintain a ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, of not more than 3.25 times ("Senior Debt Ratio"), a ratio of Consolidated Total Debt, as defined, to Consolidated EBIDAEBITDA of not more than 3.75 times ("Total Debt Ratio") and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25, in each case at the end of each fiscal quarter; provided that the debt to EBITDA ratios are permitted to increase for a period of four fiscal quarters after the closing of certain permitted acquisitions.
A permitted acquisition is defined as an acquisition exceeding $150.0 million, for which the acquisition of Gimatic qualifies. With the completion of a permitted acquisition, the Senior Debt Ratio cannot exceed 3.50 times and the Total Debt Ratio cannot exceed 4.25 times. The increased ratios are allowed for a period of four fiscal quarters subsequent to the close of the permitted acquisition and therefore they expire in the fourth quarter of 2019. At September 30, 2017,2019, the Company was in compliance with all covenants under the Agreements. The Company's most restrictive financial covenant is the Senior Debt Ratio, which, with a permitted acquisition, requires the Company to maintain a ratio of Consolidated Senior Debt to Consolidated EBITDA of not more than 3.253.50 times at September 30, 2017.2019. The actual ratio at September 30, 20172019 was 1.63 times.2.52 times, as defined.
During the first nine months of 2017,2019, the Company repurchased 0.40.9 million shares of the Company's stock under the publicly announced Repurchase Program, at a cost of $23.3$50.3 million. See "Part II - Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds".
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 in conjunction with the Amended Credit Facility and currently expects that its bank syndicate, comprised of 14 banks, will continue to support its Amended Credit Agreement which matures in February 2022. At September 30, 2017,2019, the Company had $457.0$248.0 million unused and available for borrowings under its $850.0$1,000.0 million Amended Credit Facility, subject to covenants.covenants in the Company's revolving debt agreements. At September 30, 2017,2019, additional borrowings of $671.7$599.4 million of Total Debt and $513.4including $338.9 million of Senior Debt would have been allowed under the financial covenants. The Company intends to use borrowings under its Amended Credit Facility 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 had $16.8$18.0 million in borrowings under short-term bank credit lines at September 30, 2017.2019.
In 2012, the Company entered into five-year interest rate swap agreements (the "swaps") transacted with three banks which together converted the interest on the first $100.0 million of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.03% plus the borrowing spread, for the purpose of mitigating its exposure to variable interest rates. The swaps expired on April 28, 2017. The Company entered into a newan interest rate swap agreement (the "swap""Swap") that commenced on April 28, 2017, with one bank, andwhich converts the interest on the first $100.0 million 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 swap expires on January 31, 2022. At September 30, 2017,2019, the Company's total borrowings were comprised of approximately 40%23% fixed rate debt and 60%77% variable rate debt. At December 31, 2016,2018, the Company's total borrowings were comprised of approximately 41%22% fixed rate debt and 59%78% variable rate debt.
At September 30, 2017,2019, the Company held $134.5$80.5 million in cash and cash equivalents, the majority of which was held by foreign subsidiaries. These amounts have no material regulatory or contractual restrictions and are expected to primarily fund international investments.
In May 2017,July 2019, the Company made a $5.0contributed $15.0 million of discretionary contributioncontributions to its U.S Qualified pension plans. The Company currently does not plan to make any additional discretionary contributions to its U.S. Qualified pension plans, however an incrementalapproximately $5.0 million of contributions areis expected to be made into its U.S. Non-qualified and international pension plans throughout 2017.2019.
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, under a Rule 10b5-1 trading plan, 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
| | | Nine months ended September 30, | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | Change | 2019 | | 2018 | | Change |
Operating activities | $ | 167.8 |
| | $ | 160.1 |
| | $ | 7.7 |
| $ | 161.3 |
| | $ | 158.0 |
| | $ | 3.4 |
|
Investing activities | (53.5 | ) | | (153.8 | ) | | 100.3 |
| (43.6 | ) | | (77.3 | ) | | 33.8 |
|
Financing activities | (52.1 | ) | | (19.0 | ) | | (33.1 | ) | (134.8 | ) | | (142.7 | ) | | 7.9 |
|
Exchange rate effect | 5.9 |
| | 0.7 |
| | 5.1 |
| (3.2 | ) | | (3.8 | ) | | 0.6 |
|
Increase (decrease) in cash | $ | 68.0 |
| | $ | (12.0 | ) | | $ | 80.0 |
| |
Decrease in cash | | $ | (20.3 | ) | | $ | (65.9 | ) | | $ | 45.7 |
|
Operating activities provided $167.8$161.3 million in the first nine months of 20172019 compared to $160.1$158.0 million in the first nine months of 2016.2018. Operating cash flows in the 20172019 period were positively impacted by improved operating results partially offset by an increasea reduction in cash used for working capital. Cash flowscapital from $31.8 million in the 2017 and 2016 periods were2018 period to $3.7 million in the 2019 period, but negatively impacted by outflows of $5.0 million anda $15.0 million respectively, related to discretionary contributionscontribution made to the U.S. Qualified pension plans.plans in the 2019 period.
Investing activities used $53.5$43.6 million and $153.8$77.3 million in the first nine months of 20172019 and 2016,2018, respectively. Investing activities in the 20172019 period includeincluded capital expenditures of $42.0$37.7 million compared to $32.9$40.2 million in the 20162018 period. The Company expects capital spending in 20172019 to approximate $55 to $60 million. Investing activities in the first nine months of 20172019 period also included outflows$6.1 million of $8.9payments related to the Gimatic acquisition under the terms of the Sale and Purchase Agreement. In the 2018 period, investing activities also included an outflow of $30.8 million to fund the acquisition of Gammaflux and $3.0IGS, a $5.8 million participation fee payment related to an Aerospace agreement (which was includedthe aftermarket Revenue Sharing Programs and a payment of $1.0 million, reflected in Other Investing activities). Investing activities, in the first nine months of 2016 also included outflows of $119.2 million to fund the acquisition of FOBOHA, $1.5 million related to the post-acquisition closing adjustment of Thermoplay and $0.9 million for payment that was required pursuant to the first Component Repair Program.a separate Aerospace agreement.
Financing activities in the first nine months of 20172019 included a net increasedecrease in borrowings of $14.1$43.6 million compared to $16.1an increase of $27.6 million in the comparable 20162018 period. During the third quarter of 2016,In 2019 and 2018, the Company borrowed $100.044.1 million Euros ($49.5 million) and 179.0 million Euros ($208.6 million), respectively, under the Amended Credit Facility through an international subsidiary. The proceeds were distributed to the Parent Company and subsequently used to pay down U.S. borrowings under the Amended Credit Facility. Proceeds from the issuance of common stock were $1.7 million and $2.5 million in the 2017 and 2016 periods, respectively.Agreement. During the first nine months of 2017,2019 and 2018, the Company repurchased 0.40.9 million shares and 2.3 million shares, respectively, of the Company's stock at a cost of $23.3$50.3 million compared with the purchase of 0.4and $138.3 million, shares at a cost of $15.7 million during the first nine months of 2016.respectively. Total cash used to pay dividends increased to $22.0$24.4 million in the 20172019 period from $20.4$24.0 million in the 2016 period, reflecting an increase in dividends paid per share.2018 period. Other financing cash flows during the first nine months of 20172019 and 2018 include $15.0$12.6 million and $3.3 million, respectively, of net cash payments resulting from the settlement of foreign currency hedges related to intercompany financing compared to $3.8 million of net cash proceeds in the first nine months of 2016. Cash used for financing activities in the 2017 period also includes $2.5 million of deferred financing fees paid in connection with the Amended Credit Agreement.financing.
The Company maintains borrowing facilities with banks to supplement internal cash generation. At September 30, 2017, $393.02019, $752.0 million was borrowed at an average interest rate of 2.34%1.92% under the Company's $850.0$1,000.0 million Amended Credit Facility which matures in February 2022. In addition, as of September 30, 2017,2019, the Company had $16.8$18.0 million in borrowings under short-term bank credit lines. At September 30, 2017,2019, the Company's total borrowings were comprised of 40%23% fixed rate debt and 60%77% variable rate debt. The interest payments on $100.0 million of the variable rate interest debt have been converted into payment of fixed interest plus the borrowing spread under the terms of the respective interest rate swap that was executed in April 2017.
Debt Covenants
As noted above, borrowing capacity is limited by various debt covenants in the Company's debt agreements. Following is a reconciliation of Consolidated EBITDA, a key metric in the debt covenants, to the Company's net income (in millions):
| | | Four fiscal quarters ended September 30, 2017 | Four fiscal quarters ended September 30, 2019 |
Net income | $ | 155.4 |
| $ | 156.2 |
|
Add back: | | |
Interest expense | 13.7 |
| 20.6 |
|
Income taxes | 44.6 |
| 42.2 |
|
Depreciation and amortization | 89.7 |
| 99.5 |
|
Adjustment for non-cash stock based compensation | 10.4 |
| 13.4 |
|
Amortization of FOBOHA acquisition inventory step-up | 2.4 |
| |
Adjustment for acquired businesses | | 1.5 |
|
Amortization of Gimatic and IGS acquisition inventory step-up | | 9.8 |
|
Due diligence and transaction expenses | | 4.1 |
|
Other adjustments | 0.6 |
| (0.2 | ) |
Consolidated EBITDA, as defined | $ | 316.7 |
| $ | 347.2 |
|
| | |
Consolidated Senior Debt, as defined, as of September 30, 2017 | $ | 516.0 |
| |
Consolidated Senior Debt, as defined, as of September 30, 2019 | | $ | 876.3 |
|
Ratio of Consolidated Senior Debt to Consolidated EBITDA | 1.63 |
| 2.52 |
|
Maximum | 3.25 |
| 3.50 |
|
Consolidated Total Debt, as defined, as of September 30, 2017 | $ | 516.0 |
| |
Consolidated Total Debt, as defined, as of September 30, 2019 | | $ | 876.3 |
|
Ratio of Consolidated Total Debt to Consolidated EBITDA | 1.63 |
| 2.52 |
|
Maximum | 3.75 |
| 4.25 |
|
Consolidated Cash Interest Expense, as defined, as of September 30, 2017 | $ | 13.7 |
| |
Consolidated Cash Interest Expense, as defined, as of September 30, 2019 | | $ | 22.0 |
|
Ratio of Consolidated EBITDA to Consolidated Cash Interest Expense | 23.13 |
| 15.75 |
|
Minimum | 4.25 |
| 4.25 |
|
The Amended Credit Agreement allows for certain adjustments within the calculation of the financial covenants. The adjustment for acquired businesses reflects the unaudited pre-acquisition operations of Gimatic for the period October 1, 2018 through October 31, 2018. Other adjustments consist ofinclude net lossesgains on the sale of assets, changes in accounting and due diligence and transaction expensesrestructuring charges as permitted under the Amended Credit Agreement. The Company's financial covenants are measured as of the end of each fiscal quarter. At September 30, 2017,2019, additional borrowings of $671.7$599.4 million of Total Debt and $513.4including $338.9 million of Senior Debt would have been allowed under the covenants. The increased debt covenant ratios that are allowed pursuant to the acquisition of Gimatic, as noted above, expire in the fourth quarter of 2019. Additional borrowings allowed under the covenants may therefore be impacted by changes in the debt covenant ratios. Senior Debt includes primarily the borrowings under the Amended Credit Facility, the 3.97% Senior Notes and the borrowings under the lines of credit. The Company's unused committed credit facilities at September 30, 20172019 were $457.0$248.0 million.
OTHER MATTERS
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2018. The most significant areas involving management judgments and estimates are described in 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, 2016.2018. Actual results could differ from those estimates. There have been no material changes to such judgments and estimates. Actual results could differ from those estimates.
RecentCritical Accounting ChangesPolicies
In May 2014, the Financial Accounting Standards Board ("FASB") amended its guidance relatedGoodwill and Indefinite-Lived Intangible Assets: Goodwill and indefinite-lived intangible assets are subject to revenue recognition. The amended guidance establishes a single comprehensive model for companies to useimpairment testing annually or between annual tests if an event or change in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The amended guidance clarifiescircumstances indicates that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The amended guidance applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The amended guidance was initially effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. On July 9, 2015, the FASB approved a deferral
of the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Entities have the option of using either a full retrospective or modified retrospective approach to the amended guidance. The Company plans to adopt the amended guidance using the modified retrospective approach on January 1, 2018 at which time it becomes effective for the Company.
In 2015, we developed a project plan and established a cross-functional team to implement the amended guidance. We are completing the review of our contracts and evaluating the impact of the amended guidance on each of our primary revenue streams. While we are continuing to assess all potential impacts of the amended guidance, we currently believe that the most significant impact relates to the timing of revenue recognition, presentation and disclosures. We expect that a substantial portion of our businesses will continue to recognize revenue on a "point-in-time basis". We also expect, however, that a portion of our businesses with customized products or contracts in which we perform work on a customer-owned asset will require the use of an "over time" recognition model as certain of our contracts may meet certain of the criteria established in the amended guidance. We anticipate utilizing the cost-to-cost input method to measure progress towards completion for contracts on an over time revenue recognition model. The Company is working to quantify the impact of the "over time" revenue recognition model in conjunction with our ongoing review of contracts, however the ultimate financial impact will be dependent upon the terms of the contracts with customers at the time of adoption and the Company's progress to completion on such contracts at that time. In addition, we continue to identify appropriate changes to our business processes, systems and controls to support recognition and disclosure requirements under the new standard. We are currently implementing design changes to such business processes, controls and systems to ensure that such changes are effective at the time of adoption.
In February 2016, the FASB amended its guidance related to lease accounting. The amended guidance requires lessees to recognize a majority of their leases on the balance sheet as a right-to-use asset. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lease expense will be recorded in a manner similar to current accounting. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the guidance to determine the impact it will have on its Consolidated Financial Statements. The Company anticipates the amended guidance will have a material impact on its assets and liabilities due to the addition of right-of-use assets and lease liabilities to the balance sheet; however, it does not expect the amended guidance to have a material impact on its cash flows or results of operations.
In August 2016, the FASB amended its guidance related to the Statement of Cash Flows. The amended guidance clarifies how certain cash receipts and cash payments should be presented on the statement of cash flows, with focus on eight specific areas in which cash flows have, in practice, been presented inconsistently. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the amended guidance to have a material impact on its cash flows.
In January 2017, the FASB amended its guidance related to goodwill impairment testing. The amended guidance simplifies the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under the amended guidance, companies should perform their annual goodwill impairment test by comparing the fair value of a reporting unit has been reduced below its carrying value. Management completes their annual impairment assessments during the second quarter of each year as of April 1. The Company adopted the amended guidance related to goodwill impairment testing during the second quarter of 2018, in conjunction with its annual assessment. See Note 3 of the Consolidated Financial Statements. 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 the 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 unit performance and events directly affecting a 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 the income approach, which reflects management’s cash flow projections, and also evaluates the fair value using the market approach. Inherent in management’s development of cash flow projections are assumptions and estimates, including those related to future earnings and growth and the weighted average cost of capital. The Company compares the fair value of the reporting unit with the carrying amount. Companiesvalue of the reporting unit. If the fair values were to fall below the carrying values, the Company would recognize ana non-cash impairment charge to income from operations for the amount by which the carrying amount of any reporting unit exceeds the reporting unit'sunit’s fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The amended guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The adoptionBased on our second quarter assessment, the estimated fair value of this amended guidance is not expectedthe Automation reporting unit, which represents the October 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. There was no goodwill impairment at any reporting units. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates can change in future periods as a result of both Company-specific and overall economic conditions. Management’s quantitative assessment includes a review of the potential impacts of current and projected market conditions from a market participant’s perspective on reporting units’ projected cash flows, growth rates and cost of capital to have a material impact onassess the Company's Consolidated Financial Statements.
In March 2017,likelihood of whether the FASB amended its guidance related tofair value would be less than the presentation of pension costs. The amended guidance requires the bifurcation of net periodic benefit cost for pension and other postretirement plans. The service cost component of expense will be presented with other employee compensation costs in operating income, consistent with the current guidance. The other components of expense, however, will be reported separately outside of operating income. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted.carrying value. The Company is currently evaluating the amended guidance to determine the impact it will have onalso completed its Consolidated Financial Statements. The Company does not expect that the adoptionannual impairment testing of this amended guidance will have a material impact on the Company's Consolidated Financial Statements on an ongoing basis. The Company's retrospective adoption, though, will likely have an impact on certain classificationsits trade names, indefinite-lived intangible assets, in the 2017 Consolidated Statementssecond quarter of Income, mainly due to the pension curtailment2019 and settlement gains (net)determined that there were recorded in operating income during the first nine months of 2017. See Note 9 of the Consolidated Financial Statements.no impairments.
In August 2017, the FASB amended its guidance related to hedge accounting. The amended guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting, amends presentation and disclosure requirements and changes the assessment of effectiveness. The guidance also more closely aligns hedge accounting with management strategies, simplifies application and increases the transparency of hedging. The amended guidance is effective January 1, 2019, with early adoption permitted in any interim period. The Company is currently evaluating the impact that the guidance will have on its Consolidated Financial Statements.
EBITDA
EBITDA for the first nine months of 2017both 2019 and 2018 was $228.4 million compared to $199.7 million in the first nine months of 2016.$244.8 million. EBITDA is a measurement not in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company defines EBITDA as net income plus interest expense, income taxes and depreciation and amortization which the Company incurs in the normal course of business. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP, and the reader should not consider it as an alternative to net income, net cash provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company's operating performance. The Company's definition of EBITDA may not be comparable with EBITDA as defined by other companies. Accordingly, the measurement has limitations depending on its use. The Company believes EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors.
Following is a reconciliation of EBITDA to the Company's net income (in millions):
| | | Nine months ended September 30, | Nine Months Ended September 30, |
| 2017 | | 2016 | 2019 | | 2018 |
Net income | $ | 118.7 |
| | $ | 98.9 |
| $ | 117.4 |
| | $ | 127.4 |
|
Add back: | | | | | | |
Interest expense | 10.6 |
| | 8.8 |
| 15.9 |
| | 12.1 |
|
Income taxes | 30.6 |
| | 33.1 |
| 35.9 |
| | 35.0 |
|
Depreciation and amortization | 68.5 |
| | 58.9 |
| 75.7 |
| | 70.4 |
|
EBITDA | $ | 228.4 |
| | $ | 199.7 |
| $ | 244.8 |
| | $ | 244.8 |
|
FORWARD-LOOKING STATEMENTS
Certain of the statements in this quarterly report contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future operating and financial performance and financial condition, and often contain words such as "anticipate," "believe," "expect," "plan," "estimate," "project," and similar terms. These forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. These include, among others: difficulty maintaining relationships with employees, including unionized employees, customers, distributors, suppliers, business partners or governmental entities; failure to successfully negotiate collective bargaining agreements or potential strikes, work stoppages or other similar events; difficulties leveraging market opportunities; changes in market demand for our products and services; rapid technological and market change; the ability to protect and avoid infringing upon intellectual property rights; introduction or development of new products or transfer of work; higher risks in global operations and markets; the impact of intense competition; acts of terrorism, cybersecurity attacks or intrusions that could adversely impact our businesses; uncertainties relating to conditions in financial markets; currency fluctuations and foreign currency exposure; future financial performance of the industries or customers that we serve; our dependence upon revenues and earnings from a small number of significant customers; a major loss of customers; inability to realize expected sales or profits from existing backlog due to a range of factors, including changes in customer sourcing decisions, material changes, production schedules and volumes of specific programs; the impact of government budget and funding decisions;decisions, including any potential adverse effects associated with a U.S. government shutdown; the impact of new or revised tax laws and regulations; the adoption of laws, directives or regulations that impact the materials processed by our products or their end markets; changes in raw material or product prices and availability; integration of acquired businesses; restructuring costs or savings; the continuing impact of prior acquisitions and divestitures;divestitures, including the ongoing impact of the acquisition of Gimatic, including integration efforts; and any other future strategic actions, including acquisitions, divestitures, restructurings, or strategic business realignments, and our ability to achieve the financial and operational targets set in connection with any such actions; the outcome of pending and future legal, governmental, or regulatory proceedings and contingencies and uninsured claims; product liabilities; future repurchases of common stock; future levels of indebtedness; and numerous other matters of a global, regional or national scale, including those of a political, economic, business, competitive, environmental, regulatory and public health nature; government tariffs, trade agreements and trade policies; and other risks and uncertainties described in documents filed with or furnished to the Securities and Exchange Commission ("SEC") by the Company, including, among others, those in the
Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of the Company's filings. The Company assumes no obligation to update its forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the Company’s exposure to market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Item 4. Controls and Procedures
Management, including the Company's President and Chief Executive Officer and Senior Vice President, Finance and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon, and as of the date of, our evaluation, the President and Chief Executive Officer and Senior Vice President, Finance and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects and designed to provide reasonable assurance that information
required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) is accumulated and communicated to the Company's management, including our President and Chief Executive Officer and Senior Vice President, Finance and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the Company's third fiscal quarter of 20172019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to litigation from time to time in the ordinary course of business and various other suits, proceedings and claims are pending against us and our subsidiaries. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
Period |
| (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid Per Share (or Unit) |
| (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| (d) Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(2) | |
| | | | | | | | | |
July 1-31, 2017 | | 45,771 |
| | $ | 61.05 |
| | — |
| | 4,342,006 |
| |
August 1-31, 2017 | | 329,146 |
| | $ | 59.66 |
| | 300,000 |
| | 4,042,006 |
| |
September 1-30, 2017 | | 1,502 |
| | $ | 63.67 |
| | — |
| | 4,042,006 |
| |
Total | | 376,419 |
| (1) | $ | 59.85 |
| | 300,000 |
| | | |
|
| | | | | | | | | | | | | |
Period |
| (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid Per Share (or Unit) |
| (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| (d) Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(2) |
July 1-31, 2019 | | 89,084 |
| | $ | 52.66 |
| | — |
| | 4,100,000 |
|
August 1-30, 2019 | | 21,031 |
| | $ | 45.79 |
| | — |
| | 4,100,000 |
|
September 1-30, 2019 | | 1,589 |
| | $ | 45.73 |
| | — |
| | 4,100,000 |
|
Total | | 111,704 |
| (1) | $ | 51.27 |
| | — |
| | |
| |
(1) | Other than 300,000 shares purchased in the third quarter of 2017, which were purchased as part of the Company's 2011 program (defined below), allAll acquisitions of equity securities during the third quarter of 20172019 were the result of the operation of the terms of the Company's stockholder-approved equity compensation plans and the terms of the equity rights granted pursuant to those plans to pay for the related income tax upon issuance of shares. The purchase price of a share of stock used for tax withholding is the market price on the date of issuance. |
| |
(2) | The program was publicly announced on October 20, 2011 (the "2011 Program") authorizing repurchase of up to 5.0 million shares of common stock. At DecemberMarch 31, 2015, 1.12019, 1.5 million shares of common stock had not been purchased under the 2011 Program.publicly announced Repurchase Program (the “Program”). On February 10, 2016,April 25, 2019, the Board of Directors of the Company increased the number of shares authorized for repurchase under the 2011 Program by 3.93.5 million shares of common stock (5.0 million authorized, in total). The 2011 Program permits open market purchases, purchases under a Rule 10b5-1 trading plan and privately negotiated transactions. |
Item 6. Exhibits
|
| |
Exhibit 15 | |
Exhibit 31.1 | |
Exhibit 31.2 | |
Exhibit 32 | |
Exhibit 101.INS | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document. |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | Barnes Group Inc. |
| | (Registrant) |
| | |
Date: | October 27, 201725, 2019 | /s/ CHRISTOPHER J. STEPHENS, JR. |
| | Christopher J. Stephens, Jr. Senior Vice President, Finance Chief Financial Officer (Principal Financial Officer) |
| | |
Date: | October 27, 201725, 2019 | /s/ MARIAN ACKER |
| | Marian Acker Vice President, Controller (Principal Accounting Officer) |
EXHIBIT INDEX
Barnes Group Inc.
Quarterly Report on Form 10-Q
For the Quarter ended September 30, 20172019
|
| | | | |
Exhibit No. | | Description | | Reference |
| | | | Filed with this report. |
| | | | Filed with this report. |
| | | | Filed with this report. |
| | | | Furnished with this report. |
Exhibit 101.INS | | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | Filed with this report. |
Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document. | | Filed with this report. |
Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | Filed with this report. |
Exhibit 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | Filed with this report. |
Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | Filed with this report. |
Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | Filed with this report. |