10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015

OR
¨
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.
(Exact name of registrant as specified in its charter)
Delaware
 
06-0247840
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
123 Main Street, Bristol, Connecticut
 
06010
 
(Address of Principal Executive Offices)
 
(Zip Code)
 
(860) 583-7070
Registrant's telephone number, including area code

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.    Yes  x    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).     Yes  x   No  ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):    
Large accelerated filer x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company ¨    
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x

The registrant had outstanding 54,901,368 shares of common stock as of October 21, 2015.

1



Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 2015
 
 
 
Page
Part I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 


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.


2



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,
 
2015
 
2014
 
2015
 
2014
Net sales
$
291,434

 
$
317,659

 
$
906,949

 
$
951,832

 
 
 
 
 
 
 
 
Cost of sales
191,132

 
206,410

 
593,609

 
632,671

Selling and administrative expenses
56,555

 
60,364

 
175,049

 
187,770

 
247,687

 
266,774

 
768,658

 
820,441

Operating income
43,747

 
50,885

 
138,291

 
131,391

 
 
 
 
 
 
 
 
Interest expense
2,637

 
2,435

 
7,944

 
8,558

Other (income) expense, net
(545
)
 
741

 
(228
)
 
1,768

Income from continuing operations before income taxes
41,655

 
47,709

 
130,575

 
121,065

Income taxes
7,984

 
13,407

 
33,601

 
33,782

Income from continuing operations
33,671

 
34,302

 
96,974

 
87,283

Loss from discontinued operations, net of income taxes

 
(425
)
 

 
(425
)
Net income
$
33,671

 
$
33,877

 
$
96,974

 
$
86,858

 
 
 
 
 
 
 
 
Per common share:
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.61

 
$
0.63

 
$
1.76

 
$
1.60

    Loss from discontinued operations, net of income taxes

 
(0.01
)
 

 
(0.01
)
   Net income
$
0.61

 
$
0.62

 
$
1.76

 
$
1.59

  Diluted:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.61

 
$
0.62

 
$
1.74

 
$
1.57

    Loss from discontinued operations, net of income taxes

 
(0.01
)
 

 
(0.01
)
   Net income
$
0.61

 
$
0.61

 
$
1.74

 
$
1.56

Dividends
0.12

 
0.11

 
0.36

 
0.33

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
    Basic
55,199,315

 
54,879,329

 
55,140,774

 
54,756,794

    Diluted
55,588,092

 
55,509,658

 
55,647,971

 
55,803,370


See accompanying notes.


3



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
33,671

 
$
33,877

 
$
96,974

 
$
86,858

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
      Unrealized (loss) gain on hedging activities, net of tax (1)
(174
)
 
564

 
127

 
33

      Foreign currency translation adjustments, net of tax (2)
(22,722
)
 
(41,279
)
 
(38,847
)
 
(51,837
)
      Defined benefit pension and other postretirement benefits, net of tax (3)
3,592

 
2,863

 
9,043

 
(1,518
)
Total other comprehensive loss, net of tax
(19,304
)
 
(37,852
)
 
(29,677
)
 
(53,322
)
Total comprehensive income (loss)
$
14,367

 
$
(3,975
)
 
$
67,297

 
$
33,536


(1) Net of tax of $(96) and $256 for the three months ended September 30, 2015 and 2014, respectively, and $(64) and $62 for the nine months ended September 30, 2015 and 2014, respectively.

(2) Net of tax of $(188) and $(1,376) for the three months ended September 30, 2015 and 2014, respectively, and $(1,569) and $(2,143) for the nine months ended September 30, 2015 and 2014, respectively.

(3) Net of tax of $1,383 and $869 for the three months ended September 30, 2015 and 2014, respectively, and $4,150 and $(2,121) for the nine months ended September 30, 2015 and 2014, respectively.

See accompanying notes.


4



BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets
 
 
 
  Cash and cash equivalents
$
65,763

 
$
46,039

  Accounts receivable, less allowances (2015 - $3,487; 2014 - $3,873)
275,055

 
275,890

  Inventories
213,321

 
212,044

  Deferred income taxes
27,759

 
31,849

  Prepaid expenses and other current assets
28,969

 
22,574

    Total current assets
610,867

 
588,396

 
 
 
 
Deferred income taxes
2,750

 
10,061

 
 
 
 
Property, plant and equipment
697,902

 
672,225

    Less accumulated depreciation
(387,682
)
 
(372,790
)
 
310,220

 
299,435

 
 
 
 
Goodwill
595,131

 
594,949

Other intangible assets, net
528,051

 
554,694

Other assets
31,059

 
26,350

Total assets
$
2,078,078

 
$
2,073,885

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
  Notes and overdrafts payable
$
10,509

 
$
8,028

  Accounts payable
105,413

 
94,803

  Accrued liabilities
131,356

 
161,397

  Long-term debt - current
1,523

 
862

    Total current liabilities
248,801

 
265,090

 
 
 
 
Long-term debt
467,962

 
495,844

Accrued retirement benefits
107,564

 
115,057

Deferred income taxes
69,946

 
70,147

Other liabilities
22,254

 
15,954

 
 
 
 
Commitments and contingencies (Note 14)

 

Stockholders' equity
 
 
 
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2015 - 62,057,230 shares; 2014 - 61,229,980 shares)
620

 
612

  Additional paid-in capital
424,979

 
405,525

  Treasury stock, at cost (2015 - 7,156,256 shares; 2014 - 6,729,438 shares)
(186,386
)
 
(169,405
)
  Retained earnings
1,051,468

 
974,514

  Accumulated other non-owner changes to equity
(129,130
)
 
(99,453
)
Total stockholders' equity
1,161,551

 
1,111,793

Total liabilities and stockholders' equity
$
2,078,078

 
$
2,073,885


See accompanying notes.

5



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Nine months ended September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income
$
96,974

 
$
86,858

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
59,249

 
62,556

  Amortization of convertible debt discount

 
731

 (Gain) loss on disposition of property, plant and equipment
(1,269
)
 
103

  Stock compensation expense
6,934

 
5,453

  Withholding taxes paid on stock issuances
(4,898
)
 
(4,357
)
  Loss on the sale of businesses

 
1,586

  Changes in assets and liabilities, net of the effect of acquisitions:
 
 
 
    Accounts receivable
2,221

 
(26,648
)
    Inventories
(3,593
)
 
(8,481
)
    Prepaid expenses and other current assets
(7,617
)
 
(3,074
)
    Accounts payable
8,667

 
8,237

    Accrued liabilities
(10,647
)
 
8,630

    Deferred income taxes
4,741

 
(6,942
)
    Long-term retirement benefits
(166
)
 
(6,400
)
  Other
2,481

 
3,519

Net cash provided by operating activities
153,077

 
121,771

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposition of property, plant and equipment
3,311

 
627

Payments for the sale of businesses

 
(1,181
)
Change in restricted cash

 
4,886

Capital expenditures
(31,412
)
 
(43,594
)
Business acquisitions, net of cash acquired
(43,485
)
 

Component Repair Program payments
(19,000
)
 
(41,000
)
Other

 
(1,030
)
Net cash used by investing activities
(90,586
)
 
(81,292
)
 
 
 
 
Financing activities:
 
 
 
Net change in other borrowings
2,491

 
24,663

Payments on long-term debt
(137,699
)
 
(183,673
)
Proceeds from the issuance of long-term debt
107,766

 
158,883

Payment of assumed liability to Otto Männer Holding AG

 
(19,796
)
Premium paid on convertible debt redemption

 
(14,868
)
Proceeds from the issuance of common stock
11,183

 
10,323

Common stock repurchases
(12,082
)
 
(8,389
)
Dividends paid
(19,713
)
 
(17,925
)
Excess tax benefit on stock awards
2,621

 
4,625

Other
6,341

 
(185
)
Net cash used by financing activities
(39,092
)
 
(46,342
)
 
 
 
 
Effect of exchange rate changes on cash flows
(3,675
)
 
(1,986
)
Increase (decrease) in cash and cash equivalents
19,724

 
(7,849
)
Cash and cash equivalents at beginning of period
46,039

 
70,856

Cash and cash equivalents at end of period
$
65,763

 
$
63,007


Supplemental Disclosure of Cash Flow Information:
Non-cash investing activities in 2014 include the acquisition of $39,000 of intangible assets, and the recognition of corresponding liabilities, in connection with the Component Repair Program. See Note 5.

See accompanying notes.

6



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. Summary of Significant Accounting Policies

The accompanying unaudited consolidated balance sheet and the related unaudited consolidated statements of income, comprehensive income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The balance sheet as of December 31, 2014 has been derived from the 2014 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, 2014. 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

2. Acquisition

On August 7, 2015, the Company, through one of its subsidiaries, completed the acquisition of the Thermoplay business ("Thermoplay") by acquiring all of the capital stock of privately held HPE S.p.A., the parent company through which Thermoplay operates. Thermoplay’s headquarters and manufacturing facility are located in Pont-Saint-Martin in Aosta, Italy, with technical service capabilities in China, India, France, Germany, United Kingdom, Portugal, and Brazil. Thermoplay, which is being integrated into our Industrial segment, specializes in the design, development, and manufacturing of hot runner solutions for plastic injection molding, primarily in the packaging, automotive, and medical end markets. The Company acquired Thermoplay for an aggregate cash purchase price of €58,903 ($64,608), which is subject to post closing adjustments under the terms of the Sale and Purchase Agreement ("SPA"). The Company paid €56,700 ($62,191) in cash, using cash on hand and borrowings under the Company's revolving credit facility and recorded a liability of €2,203 ($2,416) related to the estimated post closing adjustments. The purchase price includes adjustments under the terms of the SPA, including approximately €17,054 ($18,706) related to cash acquired. In connection with the acquisition, the Company recorded $14,770 of intangible assets and $20,249 of goodwill. See Note 5 to the Consolidated Financial Statements. Pro forma operating results for the Thermoplay acquisition are not presented as the results would not be significantly different than historical results.
 
During the nine months ended September 30, 2015, the Company incurred $2,239 of acquisition-related costs related to the Thermoplay acquisition. These costs include due diligence costs and transaction costs to complete the acquisition and have been recognized in the Consolidated Statements of Income as selling and administrative expenses.
The operating results of Thermoplay have been included in the Consolidated Statements of Income since the date of acquisition. The Company reported $4,595 in net sales for the period from the acquisition date through September 30, 2015. Thermoplay results have been included within the Industrial segment's operating profit.

3. Net Income Per Common Share

For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans and convertible senior subordinated notes. For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding was increased by 388,777 and 630,329 for the three-month periods ended September 30, 2015 and 2014, respectively, and 507,197 and 1,046,576 for the nine-month periods ended September 30, 2015 and 2014, respectively, to account for the potential dilutive effect of stock-based incentive plans and for 2014 the effect of the Company's 3.375% Senior Subordinated Convertible Notes (the "3.375% Notes"). The decrease in potentially issuable shares in the nine-months ended September 30, 2015 was due primarily to the redemption of the 3.375% Notes, which occurred during 2014. There were no adjustments to net income for the purposes of computing income available to common stockholders for those periods.

The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three-month periods ended September 30, 2015 and 2014, the Company excluded 209,102 and 92,049 stock options, respectively, from the calculation of weighted-average diluted shares outstanding as the stock options would have been anti-dilutive. During the nine-month periods ended September 30, 2015 and 2014, the Company excluded 203,001 and 92,049 stock

7



options, respectively, from the calculation of weighted-average diluted shares outstanding as the stock options would have been anti-dilutive.
  
The Company granted 122,700 stock options, 106,685 restricted stock unit awards and 85,465 performance share awards in February 2015 as part of its annual grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic weighted-average common shares outstanding as they contain nonforfeitable rights to dividend payments. The performance share awards are part of a long-term incentive program and are based on performance goals that are driven by three independently measured metrics: the Company's total shareholder return ("TSR"), return on invested capital ("ROIC") and operating income before depreciation and amortization growth (each metric weighted equally). The TSR and operating income before depreciation and amortization growth metrics are designed to assess the Company's performance relative to the performance of companies included in the Russell 2000 Index over the three-year term of the program ending December 31, 2017. The ROIC metric is measured based on pre-established Company targets over the same period. The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR portion of the performance share awards was determined using a Monte Carlo valuation method as the award contains a market condition.

4. Inventories

The components of inventories consisted of:
 
September 30, 2015
 
December 31, 2014
Finished goods
$
78,712


$
83,905

Work-in-process
80,099

 
79,563

Raw material and supplies
54,510

 
48,576

 
$
213,321


$
212,044

5. Goodwill and Other Intangible Assets

Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended September 30, 2015:
 
Industrial
 
Aerospace
 
Total Company
January 1, 2015
$
564,163

 
$
30,786

 
$
594,949

Goodwill acquired
20,249

 

 
20,249

Foreign currency translation
(20,067
)
 

 
(20,067
)
September 30, 2015
$
564,345

 
$
30,786

 
$
595,131


The changes recorded at Industrial include $20,249 of goodwill resulting from the acquisition of Thermoplay in August 2015. The amount allocated to goodwill reflects the benefits that the Company expects to realize from geographical expansion, new end-market applications within the plastics market, future enhancements to technology and Thermoplay’s assembled workforce. None of the recognized goodwill is expected to be deductible for income tax purposes. The final purchase price allocation is subject to post-closing adjustments pursuant to the SPA.

In the second quarter of 2015, management performed its annual impairment testing of goodwill. Based on this assessment, there was no goodwill impairment recognized.










8



Other Intangible Assets:
Other intangible assets consisted of:
 
 
 
September 30, 2015
 
December 31, 2014
 
Range of
Life -Years
 
Gross Amount
 
Accumulated Amortization
 
Gross Amount
 
Accumulated Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Revenue sharing programs (RSPs)
Up to 30
 
$
293,700

 
$
(82,137
)
 
$
293,700

 
$
(72,958
)
Component repair programs (CRPs)
Up to 30
 
106,639

 
(4,996
)
 
106,639

 
(1,941
)
Customer lists/relationships
10-16
 
193,266

 
(38,978
)
 
183,406

 
(30,731
)
Patents and technology
6-14
 
66,152

 
(27,619
)
 
62,972

 
(22,356
)
Trademarks/trade names
10-30
 
11,950

 
(9,215
)
 
11,950

 
(8,552
)
Other
Up to 15
 
16,552

 
(15,101
)
 
19,292

 
(14,806
)
 
 
 
688,259

 
(178,046
)
 
677,959

 
(151,344
)
Unamortized intangible asset:
 
 
 
 
 
 
 
 
 
Trade names
 
 
38,370

 

 
36,900

 

Foreign currency translation
 
 
(20,532
)
 

 
(8,821
)
 

Other intangible assets
 
 
$
706,097

 
$
(178,046
)
 
$
706,038

 
$
(151,344
)

Estimated amortization of intangible assets for future periods is as follows: 2015 - $41,000; 2016 - $36,000; 2017 - $36,000; 2018 - $37,000 and 2019 - $35,000.

In connection with the acquisition of Thermoplay in August 2015, the Company recorded intangible assets of $14,770 which includes $9,860 of customer relationships, $3,180 of patents and technology, $1,470 of an indefinite life trade name and $260 of customer backlog. The weighted-average useful lives of the acquired assets were 13 years, 6 years and less than one year, respectively.

During the second quarter of 2015, the Company changed its annual impairment testing of its trade names, indefinite-lived intangible assets, from July 1 to April 1. The Company believes this timing is preferable as it better aligns with its annual testing of goodwill impairment. The Company completed its annual testing in the second quarter of 2015 and determined that there were no impairments recognized.

In June 2014, the Company entered into a second Component Repair Program ("CRP") with its customer, General Electric ("GE"). This CRP provides for, among other items, the right to sell certain aftermarket component repair services for CFM56 engines directly to other customers as one of a few GE licensed suppliers. In addition, this CRP extends existing contracts under which the Company currently provides these services directly to GE. As consideration for these rights, the Company agreed to pay $80,000. The Company paid $61,000 during 2014 and $19,000 during the second quarter of 2015. The length of the program rights are for the remaining life of all CFM56 engine lines and the amortization of the intangible will be recognized as a reduction to sales over this life.

6. Debt

The Company's debt agreements contain financial covenants that require the maintenance of interest coverage and leverage ratios. The Company is in compliance with its financial covenants as of September 30, 2015, and continues to monitor its future compliance based on current and anticipated future economic conditions.












9



Long-term debt and notes and overdrafts payable at September 30, 2015 and December 31, 2014 consisted of:
 
 
September 30, 2015
 
December 31, 2014
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Revolving credit agreement
 
$
361,312

 
$
357,962

 
$
393,518

 
$
394,917

3.97% Senior Notes
 
100,000

 
105,551

 
100,000

 
102,859

Borrowings under lines of credit and overdrafts
 
10,509

 
10,509

 
8,028

 
8,028

Other foreign bank borrowings
 
449

 
447

 

 

Capital leases
 
7,724

 
8,256

 
3,188

 
3,479

 
 
479,994

 
482,725

 
504,734

 
509,283

Less current maturities
 
(12,032
)
 
 
 
(8,890
)
 
 
Long-term debt
 
$
467,962

 
 
 
$
495,844

 
 
 
In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement") and retained Bank of America, N.A. as the administrative agent for the lenders. The $750,000 Amended Credit Agreement matures in September 2018 with an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement adds a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, and includes an accordion feature to increase the borrowing availability of the Company to $1,000,000. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is continuing. The borrowing availability of $750,000, pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalent to $500,000. Borrowings under the Amended Credit Agreement bear interest at LIBOR plus a spread ranging from 1.10% to 1.70% depending on the Company's leverage ratio at prior quarter end.

Borrowings and availability under the Amended Credit Agreement were $361,312 and $388,688, respectively, at September 30, 2015 and $393,518 and $356,482, respectively, at December 31, 2014. Borrowings included Euro-denominated borrowings of €900 ($1,012) at September 30, 2015 and €30,945 ($37,618) at December 31, 2014. The interest rate on these borrowings was 1.30% and 1.33% on September 30, 2015 and December 31, 2014, respectively. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

On October 15, 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 (BOLI 30C), as purchasers, for the issuance of $100,000 aggregate principal amount of 3.97% senior notes due October 17, 2024 (the “3.97% Senior Notes”). The Company completed funding of the transaction and issued the 3.97% Senior Notes on October 17, 2014.

The 3.97% Senior Notes are senior unsecured obligations of the Company and 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 fair value of the 3.97% Senior Notes was determined using the US Treasury yield and a long-term credit spread for similar types of borrowings, that represent Level 2 observable inputs.
The Company's borrowing capacity may be limited by various debt covenants in the Amended Credit Agreement and the Note Purchase Agreement (the "Agreements"). The Agreements contain customary affirmative and negative covenants, including, among others, limitations on indebtedness, liens, investments, restricted payments, dispositions and business activities. The Agreements require the Company to maintain a ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, of not more than 3.25 times at the end of each fiscal quarter, provided that such ratio may increase to 3.50 times following the consummation of certain acquisitions. In addition, the Agreements require the Company to maintain (i) a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times at the end of each fiscal quarter, provided that such ratio may increase to 4.25 times following the consummation of certain acquisitions, and (ii) a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of any fiscal quarter.

10




In addition, the Company has available approximately $56,000 in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. Under the Credit Lines, $10,500 was borrowed at September 30, 2015 at an average interest rate of 1.41% and $7,550 was borrowed at December 31, 2014 at an average interest rate of 1.23%. The Company had also borrowed $9 and $478 under the overdraft facilities at September 30, 2015 and December 31, 2014, respectively. Repayments under the Credit Lines are due within a month after being borrowed. Repayments of the overdrafts are generally due within two days after being borrowed. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.

The Company also has other foreign bank borrowings. The fair value of the other foreign bank borrowings is based on observable Level 2 inputs. These instruments are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

The Company has capital leases including capital leases at Thermoplay which was acquired on August 7, 2015. The fair value of the capital leases is based on observable Level 2 inputs. These instruments are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

7. Business Reorganization

The Company authorized the closure of production operations ("Saline operations") at its Associated Spring facility located in Saline, Michigan (the "Closure") during the first quarter of 2014.  The Saline operations, which included approximately 50 employees, primarily manufactured certain automotive engine valve springs, a highly commoditized product. Based on changing market dynamics and increased customer demands for commodity pricing, several customers advised the Company of their intent to transition these specific springs to other suppliers, which led to the decision of the Closure. The Closure occurred during the second quarter of 2014, however certain other facility Closure costs, including the transfer of machinery and equipment, continued during the remainder of 2014. The Company recorded restructure and related costs of $5,552 during the first nine months of 2014. This balance included $2,167 of employee termination costs, primarily employee severance expense and defined benefit pension and other postretirement plans (the "Plans") costs related to the accelerated recognition of actuarial losses and special termination benefits, and $3,385 of other facility costs, primarily related to asset write-downs and depreciation on assets that had been utilized through the Closure. See Note 10 for costs associated with the Plans that were impacted by the Closure during the first nine months of 2014. The Closure was completed as of December 31, 2014. Closure costs were recorded primarily within Cost of Sales in the accompanying Consolidated Statements of Income and are reflected in the results of the Industrial segment.

8. Derivatives

The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. The Company is also exposed to fluctuations in interest rates and commodity price changes. These financial exposures are monitored and managed by the Company as an integral part of its risk management program.

Financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. In 2012, the Company entered into five-year interest rate swap agreements transacted with three banks which together convert the interest on the first $100,000 of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.03% plus the borrowing spread. These interest rate swap agreements were accounted for as cash flow hedges.

The Company also uses financial instruments to hedge its exposures to fluctuations in foreign currency exchange rates. The Company has various contracts outstanding which primarily hedge recognized assets or liabilities, and anticipated transactions in various currencies including the Euro, British pound sterling, U.S. dollar, Japanese yen, Singapore dollar, Swedish kroner and Swiss franc. Certain foreign currency derivative instruments are treated as cash flow hedges of forecasted transactions. All foreign exchange contracts are due within two years.

The Company does not use derivatives for speculative or trading purposes or to manage commodity exposures.

Changes in the fair market value of derivatives that qualify as fair value hedges or cash flow hedges are recorded directly to earnings or accumulated other non-owner changes to equity, depending on the designation. Amounts recorded to accumulated other non-owner changes to equity are reclassified to earnings in a manner that matches the earnings impact of the hedged

11



transaction. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings.
The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the first nine months of 2015, as presented on the consolidated statements of cash flows, include $6,761 of net cash proceeds from the settlement of foreign currency hedges related to intercompany financing.

The following table sets forth the fair value amounts of derivative instruments held by the Company.
 
September 30, 2015
 
December 31, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
$

 
$
(805
)
 
$

 
$
(295
)
Foreign exchange contracts

 
(79
)
 

 
(652
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
148

 
(410
)
 
460

 
(699
)
Total derivatives
$
148

 
$
(1,294
)
 
$
460

 
$
(1,646
)

Asset derivatives are recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Liability derivatives related to interest rate contracts and foreign exchange contracts are recorded in other liabilities and accrued liabilities, respectively, in the accompanying consolidated balance sheets.

The following table sets forth the (loss) gain, net of tax, recorded in accumulated other non-owner changes to equity for the three- and nine- month periods ended September 30, 2015 and 2014 for derivatives held by the Company and designated as hedging instruments.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
(151
)
 
$
312

 
$
(320
)
 
$
169

Foreign exchange contracts
(23
)
 
252

 
447

 
(136
)
 
$
(174
)
 
$
564

 
$
127

 
$
33


Amounts related to the interest rate swaps included within accumulated other non-owner changes to equity that were reclassified to expense during the first nine months of 2015 and 2014 resulted in a fixed rate of interest of 1.03% plus the borrowing spread for the first $100,000 of one-month LIBOR borrowings. Additionally, there were no amounts recognized in income for hedge ineffectiveness during the three- and nine- month periods ended September 30, 2015 and 2014.

The following table sets forth the net (loss) gain recorded in other (income) expense, net in the consolidated statements of income for the three- and nine- month periods ended September 30, 2015 and 2014 for non-designated derivatives held by the Company. Such amounts were substantially offset by the net (gain) loss recorded on the underlying hedged asset or liability, also recorded in other (income) expense, net.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Foreign exchange contracts
$
(2,431
)
 
$
141

 
$
4,514

 
$
(847
)

9. Fair Value Measurements

The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:

Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities

12




Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

Level 3
Unobservable inputs for the asset or liability

The following table provides the financial assets and financial liabilities reported at fair value and measured on a recurring basis:
 
 
 
 
Fair Value Measurements Using
Description
 
Total
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
September 30, 2015
 
 
 
 
 
 
 
 
Asset derivatives
 
$
148

 
$

 
$
148

 
$

Liability derivatives
 
(1,294
)
 

 
(1,294
)
 

Bank acceptances
 
14,732

 

 
14,732

 

Rabbi trust assets
 
2,065

 
2,065

 

 

 
 
$
15,651

 
$
2,065

 
$
13,586

 
$

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Asset derivatives
 
$
460

 
$

 
$
460

 
$

Liability derivatives
 
(1,646
)
 

 
(1,646
)
 

Bank acceptances
 
10,785

 

 
10,785

 

Rabbi trust assets
 
2,092

 
2,092

 

 

 
 
$
11,691


$
2,092

 
$
9,599

 
$


The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based and U.S. treasury 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.

10. Pension and Other Postretirement Benefits

Pension and other postretirement benefits expenses consisted of the following:
 
Three months ended September 30,
 
Nine months ended September 30,
Pensions
2015
 
2014
 
2015
 
2014
Service cost
$
1,374

 
$
1,132

 
$
4,126

 
$
3,439

Interest cost
4,976

 
5,455

 
14,968

 
16,432

Expected return on plan assets
(8,048
)
 
(8,476
)
 
(24,207
)
 
(25,529
)
Amortization of prior service cost
76

 
152

 
231

 
486

Amortization of actuarial losses
3,730

 
2,141

 
11,215

 
6,374

Curtailment loss

 

 

 
219

Settlement loss

 
281

 

 
863

Special termination benefits

 

 

 
715

Net periodic benefit cost
$
2,108

 
$
685

 
$
6,333

 
$
2,999

 
 
 
 
 
 
 
 

13



 
Three months ended September 30,
 
Nine months ended September 30,
Other Postretirement Benefits
2015
 
2014
 
2015
 
2014
Service cost
$
36

 
$
29

 
$
109

 
$
110

Interest cost
459

 
540

 
1,377

 
1,638

Amortization of prior service credit
(141
)
 
(218
)
 
(423
)
 
(653
)
Amortization of actuarial losses
253

 
268

 
758

 
751

Curtailment loss

 

 

 
4

Net periodic benefit cost
$
607

 
$
619

 
$
1,821

 
$
1,850


Curtailment losses and special termination benefits during the first nine months of 2014 relate to certain defined benefit pension and other postretirement benefit plans that were impacted by the closure of production operations at an Associated Spring facility located in Saline, Michigan. The settlement loss during the first nine months of 2014 reflects payments that were made to certain participants within one of the Company's defined benefit pension plans.

In September 2015, the Company announced a limited-time program offering (the "Program") to certain eligible, vested, terminated participants ("eligible participants") for a voluntary lump-sum pension payout or reduced annuity option (the "payout") that, if accepted, would settle the Company's pension obligation to them. The Program provides the eligible participants with a limited time opportunity of electing to receive a lump-sum settlement of their remaining pension benefit, or reduced annuity. The eligible participants must notify the Company by November 20, 2015 if they elect a lump-sum payout or reduced annuity, scheduled for a December 2015 payout. Upon settlement during the fourth quarter of 2015, the Company will record a non-cash settlement charge resulting from the accelerated amortization of actuarial losses within Other Comprehensive Income.

11. Income Taxes

The Company's effective tax rate from continuing operations for the first nine months of 2015 was 25.7% compared with 27.9% in the first nine months of 2014 and 27.6% for the full year 2014. The decrease in the first nine months of 2015 effective tax rate from the full year 2014 rate is primarily due to the recognition of a tax benefit recorded in the third quarter related to a refund of withholding taxes that were previously paid and included in tax expense in prior years, partially offset by the expiration of certain tax holidays.

The Aerospace and Industrial segments were previously awarded international tax holidays. The tax holidays awarded to Industrial have expired. The remaining tax holidays for which the Company currently receives benefit relate to Aerospace, the majority of which are due to expire in the second half of 2016.

12. Changes in Accumulated Other Comprehensive Income (Loss) by Component

The following table sets forth the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine- month periods ended September 30, 2015 and 2014:
 
Gains and Losses on Cash Flow Hedges
 
Pension and Other Postretirement Benefit Items
 
Foreign Currency Items
 
Total
January 1, 2015
$
(732
)
 
$
(115,289
)
 
$
16,568

 
$
(99,453
)
Other comprehensive (loss) income before reclassifications to consolidated statements of income
(665
)
 
1,412

 
(38,847
)
 
(38,100
)
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income
792

 
7,631

 

 
8,423

Net current-period other comprehensive income (loss)
127

 
9,043

 
(38,847
)
 
(29,677
)
September 30, 2015
$
(605
)
 
$
(106,246
)
 
$
(22,279
)
 
$
(129,130
)


14



 
Gains and Losses on Cash Flow Hedges
 
Pension and Other Postretirement Benefit Items
 
Foreign Currency Items
 
Total
January 1, 2014
$
(519
)
 
$
(73,273
)
 
$
99,736

 
$
25,944

Other comprehensive loss before reclassifications to consolidated statements of income
(585
)
 
(7,081
)
 
(51,837
)
 
(59,503
)
Amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of income
618

 
5,563

 

 
6,181

Net current-period other comprehensive income (loss)
33

 
(1,518
)
 
(51,837
)
 
(53,322
)
September 30, 2014
$
(486
)
 
$
(74,791
)
 
$
47,899

 
$
(27,378
)

The following table sets forth the reclassifications out of accumulated other comprehensive income (loss) by component for the three-and nine- month periods ended September 30, 2015 and 2014:

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Affected Line Item in the Consolidated Statements of Income
 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
 
Gains and losses on cash flow hedges
 
 
 
 
 
 
     Interest rate contracts
 
$
(214
)
 
$
(224
)
 
Interest expense
     Foreign exchange contracts
 
(137
)
 
(239
)
 
Net sales
 
 
(351
)
 
(463
)
 
Total before tax
 
 
110

 
136

 
Tax benefit
 
 
(241
)
 
(327
)
 
Net of tax
 
 
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
 
 
     Amortization of prior-service credits, net
 
$
65

 
$
66

 
(A)
Amortization of actuarial losses
 
(3,983
)
 
(2,409
)
 
(A)
Settlement loss
 

 
(281
)
 
(A)
 
 
(3,918
)
 
(2,624
)
 
Total before tax
 
 
1,383

 
814

 
Tax benefit
 
 
(2,535
)
 
(1,810
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications in the period
 
$
(2,776
)
 
$
(2,137
)
 
 
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pension cost. See Note 10.


15



Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Affected Line Item in the Consolidated Statements of Income
 
 
Nine months ended September 30, 2015
 
Nine months ended September 30, 2014
 
 
Gains and losses on cash flow hedges
 
 
 
 
 

     Interest rate contracts
 
$
(642
)
 
$
(663
)
 
Interest expense
     Foreign exchange contracts
 
(499
)
 
(259
)
 
Net sales
 
 
(1,141
)
 
(922
)
 
Total before tax
 
 
349

 
304

 
Tax benefit
 
 
(792
)
 
(618
)
 
Net of tax
 
 
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
 
 
     Amortization of prior-service credits, net
 
$
192

 
$
167

 
(A)
Amortization of actuarial losses
 
(11,973
)
 
(7,125
)
 
(A)
Curtailment loss
 

 
(223
)
 
(A)
Settlement loss
 

 
(863
)
 
(A)
 
 
(11,781
)
 
(8,044
)
 
Total before tax
 
 
4,150

 
2,481

 
Tax benefit
 
 
(7,631
)
 
(5,563
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications in the period
 
$
(8,423
)
 
$
(6,181
)
 
 
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic pension cost. See Note 10.

13. Information on Business Segments

The Company is organized based upon the nature of its products and services and reports under two global business segments: Industrial and Aerospace. Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company has not aggregated operating segments for purposes of identifying these two reportable segments.

The Industrial segment is a global manufacturer of highly-engineered, high-quality precision parts, products and systems for critical applications serving a diverse customer base in end-markets such as transportation, industrial equipment, consumer products, packaging, electronics, medical devices, and energy. Focused on innovative custom solutions, Industrial participates in the design phase of components and assemblies whereby the customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products. Industrial designs and manufactures customized hot runner systems and precision mold assemblies - the enabling technologies for many complex injection molding applications. It is a leading manufacturer and supplier of precision mechanical products, including precision mechanical springs and nitrogen gas products. Industrial also manufactures high-precision punched and fine-blanked components used in transportation and industrial applications, nitrogen gas springs and manifold systems used to precisely control stamping presses, and retention rings that position parts on a shaft or other axis. Industrial is equipped to produce virtually every type of precision spring, from fine hairsprings for electronics and instruments to large heavy-duty springs for machinery.

The Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturer ("OEM") turbine engine, airframe and industrial gas turbine builders throughout the world, and the military. Aerospace Aftermarket provides jet engine component overhaul and repair ("MRO") services, including the CRP's, for many of the world's major turbine engine manufacturers, commercial airlines and militaries. Aerospace Aftermarket activities also include the manufacture and delivery of spare parts, including the RSPs under which the Company receives an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program, and component repairs.


16



The following tables set forth information about the Company's operations by its two reportable segments:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
 
 
 
 
 
 
 
   Industrial
$
189,106

 
$
207,230

 
$
592,044

 
$
623,886

   Aerospace
102,329

 
110,429

 
314,910

 
327,951

   Intersegment sales
(1
)
 

 
(5
)
 
(5
)
Total net sales
$
291,434

 
$
317,659

 
$
906,949

 
$
951,832

 
 
 
 
 
 
 
 
Operating profit
 
 
 
 
 
 
 
   Industrial
$
27,304

 
$
33,205

 
$
88,262

 
$
81,344

   Aerospace
16,443

 
17,680

 
50,029

 
50,047

Total operating profit
43,747

 
50,885

 
138,291

 
131,391

   Interest expense
2,637

 
2,435

 
7,944

 
8,558

   Other (income) expense, net
(545
)
 
741

 
(228
)
 
1,768

Income from continuing operations before income taxes
$
41,655

 
$
47,709

 
$
130,575

 
$
121,065


 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
   Industrial (A)
$
1,282,039

 
$
1,281,974

   Aerospace
645,555

 
655,042

   Other (B)
150,484

 
136,869

Total assets
$
2,078,078

 
$
2,073,885


(A) The change in assets within the Industrial segment primarily reflects an increase in assets resulting from the acquisition of Thermoplay partially offset by a reduction caused by a change in foreign exchange rates.
(B) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.

14. Commitments and Contingencies

The Company provides product warranties in connection with the sale of certain products. From time to time, the Company is subject to customer claims with respect to product warranties. Product warranty liabilities were not material as of September 30, 2015 and December 31, 2014.

During the third quarter of 2015 the Company recorded a $2,788 charge related to a contract termination dispute following a customer decision to re-source work. The Company has assessed recoverability of related working capital and long lived assets and has filed an arbitration demand for recovery under the provisions of the contract. The Company believes the ultimate resolution will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flow.

15. Subsequent Event

On October 1, 2015, the Company, itself and through two of its subsidiaries, completed the acquisition of privately held Priamus System Technologies AG and two of its subsidiaries (collectively, "Priamus") from Growth Finance AG for a purchase price of CHF 9,000 ($9,211), which is subject to certain adjustments. Priamus, which has approximately 40 employees, is headquartered in Schaffhausen, Switzerland and has direct sales and service offices in the U.S. and Germany. Priamus is a technology leader in the development of advanced process control systems for the plastic injection molding industry and services many of the world's highest quality plastic injection molders in the medical, automotive, consumer goods, electronics and packaging markets. Priamus is being integrated into our Industrial segment.




17




__________________________________________________________________________________________

With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three- and nine- month periods ended September 30, 2015 and 2014, 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, 2015 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.


18



Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Barnes Group Inc.

We have reviewed the accompanying consolidated balance sheet of Barnes Group Inc. and its subsidiaries as of September 30, 2015 and the related consolidated statements of income and comprehensive income for the three- and nine- month periods ended September 30, 2015 and September 30, 2014 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and September 30, 2014. This interim financial information is the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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), 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, 2014, and the related consolidated statements of income and 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 23, 2015, 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, 2014, 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, 2015
 



19



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, 2014. 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 2015 Highlights

In the third quarter of 2015, the Company, through one of its subsidiaries, completed the acquisition of the Thermoplay business ("Thermoplay") by acquiring all of the capital stock of privately held HPE S.p.A., the parent Company through which Thermoplay operates. Thermoplay’s headquarters and manufacturing facility are located in Pont-Saint-Martin in Aosta, Italy, with technical service capabilities in China, India, France, Germany, United Kingdom, Portugal, and Brazil. Thermoplay, which is being integrated into our Industrial segment, specializes in the design, development, and manufacturing of hot runner solutions for plastic injection molding, primarily in the packaging, automotive, and medical end markets. The Company acquired Thermoplay for an aggregate cash purchase price of €58.9 million ($64.6 million), which is subject to post closing adjustments under the terms of the Sale and Purchase Agreement ("SPA"). The Company paid €56.7 million ($62.2 million) in cash, using cash on hand and borrowings under the Company's revolving credit facility and recorded a liability of €2.2 million ($2.4 million) related to the estimated post closing adjustments. The purchase price includes adjustments under the terms of the SPA, including approximately €17.1 million ($18.7 million) related to cash acquired. See Note 2 to the Consolidated Financial Statements.

In the third quarter of 2015, sales decreased by $26.2 million, or 8.3% from the third quarter of 2014, to $291.4 million. The August 7, 2015 Thermoplay acquisition provided $4.6 million of net sales during the 2015 period. Organic sales decreased by $14.4 million, or 4.5%, with declines of 3.1% within the Industrial segment and 7.3% within the Aerospace segment. Sales in the Industrial segment were impacted by changes in foreign currency which decreased sales by approximately $16.4 million as the U.S. dollar strengthened against foreign currencies.

Operating income in the third quarter of 2015 decreased 14.0% to $43.7 million from the third quarter of 2014 and operating margin decreased from 16.0% to 15.0%. Operating income was impacted by decreased organic sales in both the Industrial and Aerospace segments, $1.9 million of short-term purchase accounting adjustments and transaction costs resulting from the acquisition of Thermoplay and a $2.8 million charge related to a contract termination dispute following a customer decision to re-source work. Operating profit benefited from lower employee related costs, primarily incentive compensation, partially offset by higher pension costs. The third quarter of 2014 included $0.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer business and $0.5 million of pre-tax restructuring charges related to the closure of production operations at a facility in Saline, Michigan.

RESULTS OF OPERATIONS

Net Sales
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Industrial
$
189.1

 
$
207.2

 
$
(18.1
)
 
(8.7
)%
 
$
592.0

 
$
623.9

 
$
(31.8
)
 
(5.1
)%
Aerospace
102.3

 
110.4

 
(8.1
)
 
(7.3
)%
 
314.9

 
328.0

 
(13.0
)
 
(4.0
)%
Total
$
291.4

 
$
317.7

 
$
(26.2
)
 
(8.3
)%
 
$
906.9

 
$
951.8

 
$
(44.9
)
 
(4.7
)%

The Company reported net sales of $291.4 million in the third quarter of 2015, a decrease of $26.2 million or 8.3%, from the third quarter of 2014. The August 7, 2015 acquisition of Thermoplay provided $4.6 million of net sales during the 2015 period. Organic sales decreased by $14.4 million, which included decreases of $6.3 million and $8.1 million at Industrial and Aerospace, respectively. The strengthening of the U.S. dollar against foreign currencies decreased net sales within the Industrial segment by approximately $16.4 million.

The Company reported net sales of $906.9 million in the first nine months of 2015, a decrease of $44.9 million or 4.7%, from the first nine months of 2014. The acquisition of Thermoplay provided $4.6 million of net sales during the 2015 period. Organic sales increased by $6.7 million, which included an increase of $19.7 million at Industrial and a decrease of $13.0

20



million at Aerospace. The strengthening of the U.S. dollar against foreign currencies decreased net sales within the Industrial segment by approximately $56.2 million.

Expenses and Operating Income
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Cost of sales
$
191.1

 
$
206.4

 
$
(15.3
)
 
(7.4
)%
 
$
593.6

 
$
632.7

 
$
(39.1
)
 
(6.2
)%
    % sales
65.6
%
 
65.0
%
 

 

 
65.5
%
 
66.5
%
 
 
 
 
Gross profit (1)
$
100.3

 
$
111.2

 
$
(10.9
)
 
(9.8
)%
 
$
313.3

 
$
319.2

 
$
(5.8
)
 
(1.8
)%
    % sales
34.4
%
 
35.0
%
 

 

 
34.5
%
 
33.5
%
 
 
 
 
Selling and administrative expenses
$
56.6

 
$
60.4

 
$
(3.8
)
 
(6.3
)%
 
$
175.0

 
$
187.8

 
$
(12.7
)
 
(6.8
)%
    % sales
19.4
%
 
19.0
%
 
 
 
 
 
19.3
%
 
19.7
%
 
 
 
 
Operating income
$
43.7

 
$
50.9

 
$
(7.1
)
 
(14.0
)%
 
$
138.3

 
$
131.4

 
$
6.9

 
5.3
 %
    % sales
15.0
%
 
16.0
%
 
 
 
 
 
15.2
%
 
13.8
%
 
 
 
 
(1) Sales less cost of sales. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cost of sales in the third quarter of 2015 decreased 7.4% from the 2014 period, while gross profit margin decreased from 35.0% in the 2014 period to 34.4% in the 2015 period. Gross margins remained flat at Aerospace and decreased slightly at Industrial. Within Aerospace, the profit margin benefit of increased sales within the spare parts business was partially offset by lower margins in the OEM business, including the impact of charges related to a contract termination dispute following a customer decision to re-source. At Industrial, gross margins decreased during the third quarter of 2015 primarily as a result of lower productivity. Gross profit during the third quarter of 2014 was negatively impacted by $0.2 million of short-term purchase accounting adjustments related to the acquisition of the Männer business and restructure charges of $0.5 million related to the Closure of the Saline facility. Gross profit during the third quarter of 2015 was offset by short-term purchase accounting adjustments of $0.9 million related to the acquisition of Thermoplay. Selling and administrative expenses in the third quarter of 2015 decreased 6.3% from the 2014 period due in part to foreign exchange translation as the European businesses have expenses primarily denominated in local currencies. Selling and administrative expenses also benefited from a reduction in short-term purchase accounting adjustments related to the acquisition of the Männer business, which were $0.7 million during the third quarter of 2014, partially offset by short-term purchase accounting adjustments of $0.2 million related to the acquisition of Thermoplay. Lower employee related expenses, primarily from incentive compensation, also reduced selling and administrative expenses during the 2015 period. As a percentage of sales, selling and administrative costs increased slightly from 19.0% in the third quarter of 2014 to 19.4% in the 2015 period. Operating income in the third quarter of 2015 decreased 14.0% to $43.7 million from the third quarter of 2014 and operating income margin decreased from 16.0% to 15.0%.

Cost of sales in the first nine months of 2015 decreased 6.2% from the 2014 period, while gross profit margin increased from 33.5% in the 2014 period to 34.5% in the 2015 period. Gross margins improved at Industrial and at Aerospace. At Industrial, gross profit during the first nine months of 2014 was partially offset by $4.0 million of short-term purchase accounting adjustments related to the acquisition of the Männer business and restructure charges of $4.9 million related to the Closure of the Saline facility. Gross profit during the first nine months of 2015 was offset by short-term purchase accounting adjustments of $0.9 million related to the acquisition of the Männer business and short-term purchase accounting adjustments of $0.9 million related to the acquisition of Thermoplay. Selling and administrative expenses in the first nine months of 2015 decreased 6.8% from the 2014 period due primarily to foreign exchange translation and a reduction in the short-term purchase accounting adjustments related to the acquisition of the Männer business. Lower employee related expenses, primarily from incentive compensation, also reduced selling and administrative expenses during the 2015 period. Short-term purchase accounting adjustments related to the Männer business were $0.6 million and $3.7 million during the first nine months of 2015 and 2014, respectively. Short-term purchase accounting adjustments of $0.2 million during the 2015 period related to the acquisition of Thermoplay. The first nine months of 2014 also included $0.6 million of charges related to the Closure of the Saline facility. As a percentage of sales, selling and administrative costs decreased slightly from 19.7% in the first nine months of 2014 to 19.3% in the 2015 period. Operating income in the first nine months of 2015 increased 5.3% to $138.3 million from the first nine months of 2014 and operating income margin increased from 13.8% to 15.2%.




21



Interest expense
Interest expense increased by $0.2 million in the third quarter of 2015, as compared with the prior year period, primarily as a result of higher interest rates, partially offset by lower average borrowings. Interest expense decreased by $0.6 million in the first nine months of 2015, as compared with the prior year period, as a result of lower average borrowings.

Other (income) expense, net
Other (income) expense, net in the third quarter of 2015 was $(0.5) million compared to $0.7 million in the third quarter of 2014. Foreign currency gains of $0.6 million in the third quarter of 2015 compared with foreign currency losses of $0.5 million in the third quarter of 2014. In the first nine months of 2015, other (income) expense, net was $(0.2) million compared to $1.8 million in the first nine months of 2014. Foreign currency gains of $0.4 million in the first nine months of 2015 compared with foreign currency losses of $1.3 million in the first nine months of 2014.

Income Taxes
The Company's effective tax rate from continuing operations for the first nine months of 2015 was 25.7% compared with 27.9% in the first nine months of 2014 and 27.6% for the full year 2014. The decrease in the first nine months of 2015 effective tax rate from the full year 2014 rate is primarily due to the recognition of a tax benefit in the third quarter related to a refund of withholding taxes that were previously paid and included in tax expense in prior years, partially offset by the expiration of certain tax holidays.

The Aerospace and Industrial segments were previously awarded international tax holidays. The tax holidays awarded to Industrial have expired. The remaining tax holidays for which the Company currently receives benefit relate to Aerospace, the majority of which are due to expire in the second half of 2016.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.5 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.

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

In November 2013, the Company made a cash payment of approximately $12.7 million related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its opening brief with the United States Court of Appeals for the Second Circuit on February 13, 2014 and presented its oral arguments on October 1, 2014.

On November 5, 2014, the Second Circuit Court of Appeals upheld the Tax Court Decision.  Following the decision by the Second Circuit Court of Appeals, the Company had 60 days in which to file with the U.S. Supreme Court a petition for review.  The Company has not filed a petition for review and therefore the judgment of the Second Circuit Court of Appeals is final.

In connection with the IRS Audit, the Company filed protective claims related to withholding taxes paid as a component of the transactions with certain subsidiaries. These filings allowed the Company to preserve the right to claim certain protection should the IRS prevail in its assessment. Upon the expiration of the period to file a petition for review to the U.S. Supreme Court, the Company acted on the protective claims and filed for the refund of the withholding taxes. In the third quarter of 2015, the Company received refunds of $3.0 million related to the withholding taxes and recorded a corresponding tax benefit.









22



Income and Income per Share
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Income from continuing operations
$
33.7

 
$
34.3

 
$
(0.6
)
 
(1.8
)%
 
$
97.0

 
$
87.3

 
$
9.7

 
11.1
 %
Loss from discontinued operations, net of income taxes

 
(0.4
)
 
0.4

 
NM

 

 
(0.4
)
 
0.4

 
NM

Net income
$
33.7

 
$
33.9

 
$
(0.2
)
 
(0.6
)%
 
$
97.0

 
$
86.9

 
$
10.1

 
11.6
 %
Per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Income from continuing operations
$
0.61

 
$
0.63

 
$
(0.02
)
 
(3.2
)%
 
$
1.76

 
$
1.60

 
$
0.16

 
10.0
 %
Loss from discontinued operations, net of income taxes

 
(0.01
)
 
0.01

 
NM

 

 
(0.01
)
 
0.01

 
NM

     Net income
$
0.61

 
$
0.62

 
$
(0.01
)
 
(1.6
)%
 
$
1.76

 
$
1.59

 
$
0.17

 
10.7
 %
  Diluted:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Income from continuing operations
$
0.61

 
$
0.62

 
$
(0.01
)
 
(1.6
)%
 
$
1.74

 
$
1.57

 
$
0.17

 
10.8
 %
Loss from discontinued operations, net of income taxes

 
(0.01
)
 
0.01

 
NM

 

 
(0.01
)
 
0.01

 
NM

     Net income
$
0.61

 
$
0.61

 
$

 

 
$
1.74

 
$
1.56

 
$
0.18

 
11.5
 %
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Basic
55.2

 
54.9

 
0.3

 
0.6
 %
 
55.1

 
54.8

 
0.4

 
0.7
 %
     Diluted
55.6

 
55.5

 
0.1

 
0.1
 %
 
55.6

 
55.8

 
(0.2
)
 
(0.3
)%

Basic and diluted income from continuing operations per common share decreased for the three-month period and increased for the nine-month period as compared to the 2014 periods consistent with the changes in income from continuing operations for the periods. Basic weighted-average common shares outstanding increased slightly due to the issuance of additional shares for employee stock plans. The impact of these issuances was partially offset by the repurchase of 302,556 shares during the first nine months of 2015 as part of the Company's repurchase program. Diluted weighted-average common shares outstanding increased as a result of the increases in basic weighted-average common shares outstanding which was more than offset in the year to date period by a decrease in potentially issuable shares, due primarily to the redemption of the 3.375% Convertible Notes during 2014.
 
Financial Performance by Business Segment

Industrial
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Sales
$
189.1

 
$
207.2

 
$
(18.1
)
 
(8.7
)%
 
$
592.0

 
$
623.9

 
$
(31.8
)
 
(5.1
)%
Operating profit
27.3

 
33.2

 
(5.9
)
 
(17.8
)%
 
88.3

 
81.3

 
6.9

 
8.5
 %
Operating margin
14.4
%
 
16.0
%
 
 
 
 
 
14.9
%
 
13.0
%
 
 
 
 

Sales at Industrial were $189.1 million in the third quarter of 2015, an $18.1 million decrease from the third quarter of 2014. The August 7, 2015 acquisition of Thermoplay provided $4.6 million of net sales during the 2015 period. Organic sales decreased by $6.3 million, or 3.1%, during the 2015 period, primarily due to softer transportation and general industrial end-markets. Sales were impacted by foreign currency which decreased sales by approximately $16.4 million as the U.S. dollar strengthened against foreign currencies, primarily the Euro. In the first nine months of 2015, this segment reported sales of $592.0 million, a 5.1% decrease from the first nine months of 2014. Organic sales increased by $19.7 million, or 3.2%, during the 2015 period, primarily due to favorable end-markets served by our tool and die and plastics businesses during the first half of 2015. The impact of foreign currency translation decreased sales by approximately $56.2 million.

Operating profit in the third quarter of 2015 at Industrial was $27.3 million, a decrease of $5.9 million from the third quarter of 2014. Operating profit was impacted by lower sales volumes, lower productivity, the unfavorable impact of foreign exchange

23



and $1.9 million of short-term purchase accounting adjustments and transaction costs resulting from the acquisition of Thermoplay. Operating profit also benefited from lower employee related costs, primarily incentive compensation, partially offset by higher pension costs. The third quarter of 2014 also included $0.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer business and $0.5 million of pre-tax restructuring charges related to the closure of production operations at a facility in Saline, Michigan. Operating margin decreased from 16.0% in the 2014 period to 14.4% in the 2015 period primarily as a result of these items. Operating profit in the first nine months of 2015 was $88.3 million, an increase of $6.9 million from the first nine months of 2014. Operating profit benefited primarily from the profit contribution of increased organic sales within our end markets during the first half of 2015, partially offset by lower productivity and foreign exchange during the full nine month period. Lower sales volumes during the three months ended September 30, 2015 also tapered the benefit of growth in organic sales during the first half of the year. The first nine months of 2014 included $7.7 million of short-term purchase accounting adjustments related to the acquisition of the Männer business, whereas the first nine months of 2015 included $1.5 million of such adjustments. The first nine months of 2014 also included $5.6 million of pre-tax restructuring charges related to the closure of production operations at the facility in Saline, Michigan.

Outlook: In the Industrial manufacturing businesses, management is focused on generating organic sales growth through the introduction of new products and by leveraging the benefits of the diversified products and industrial end-markets in which its businesses have a global presence. Our ability to generate sales growth is subject to economic conditions in the global markets served by all of our businesses. The Company is continuing to see softness in certain global industrial markets as indicated by declining Purchasing Managers Indexes (PMI's) in North America, Europe and China. In our light vehicle markets, production levels in North America and Europe are growing, while China's automotive build forecast, while growing, is decelerating. As noted above, our sales were negatively impacted by fluctuations in foreign currencies during the first nine months of 2015 of $56.2 million. A significant portion of businesses within the Industrial segment are domiciled in Europe. To the extent that the U.S. dollar remains strong as compared with the Euro and other foreign currencies, our sales may continue to be unfavorably 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 the European businesses have expenses primarily denominated in local currencies, where their revenues reside. 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. The Company is currently in the process of negotiating a collective bargaining agreement (“CBA”) with certain unionized employees at the Bristol, CT and Corry, PA facilities, which are located within the Associated Spring business unit. The current CBA expired on November 30, 2014, and we continue to negotiate to reach a successor agreement.

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, and productivity and process improvements. The Company continues to actively manage costs during these periods of market softening. Costs associated with new product and process introductions, strategic investments and the integration of acquisitions may negatively impact operating profit.

Aerospace
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Sales
$
102.3

 
$
110.4

 
$
(8.1
)
 
(7.3
)%
 
$
314.9

 
$
328.0

 
$
(13.0
)
 
(4.0
)%
Operating profit
16.4

 
17.7

 
(1.2
)
 
(7.0
)%
 
50.0

 
50.0

 

 
 %
Operating margin
16.1
%
 
16.0
%
 
 
 
 
 
15.9
%
 
15.3
%
 
 
 
 

The Aerospace segment reported sales of $102.3 million in the third quarter of 2015, a 7.3% decrease from the third quarter of 2014. Lower sales within the original equipment manufacturing ("OEM") business were partially offset by increased sales within the spare parts business and slightly higher sales in the aftermarket repair and overhaul ("MRO") business. Similar to the second quarter of 2015, the spare parts business benefited from increased demand as a result of higher airline hours and customer restocking of inventory, whereas the MRO business continued to be impacted by deferred maintenance on certain platforms. The timing of customer deliveries, execution and the impacts of a contract termination dispute directly impacted lower sales within the OEM business during the third quarter of 2015. Sales were not impacted by changes in foreign currency as sales within the segment are largely denominated in U.S. dollars. In the first nine months of 2015, this segment reported sales of $314.9 million, a 4.0% decrease from the first nine months of 2014, primarily as a result of increased sales within the spare parts business, more than offset by lower sales within the OEM and MRO businesses.


24



Operating profit at Aerospace in the third quarter of 2015 decreased (7.0)% from the third quarter of 2014 to $16.4 million. The operating profit decrease was primarily due to the profit impact of lower sales within the OEM business and a $2.8 million charge that resulted from a contract termination dispute following a customer decision to re-source work. Partially offsetting these items were the higher profit impact of increased sales within the spare parts business and the Component Repair Programs ("CRPs") and lower employee related costs, primarily incentive compensation. Operating margin increased slightly from 16.0% to 16.1% during the 2014 and 2015 periods, respectively, primarily as a result of these items. Operating profit in the first nine months of 2015 remained flat at $50.0 million from the first nine months of 2014, also driven by the increased contributions from the spare parts business and the CRPs, and offset by reduced profit contributions from the OEM business.

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 continued strength in demand for new engines, driven by increased commercial aircraft production. Backlog at OEM was $554.0 million at September 30, 2015, an increase of 6.8% since December 31, 2014, at which time backlog was $518.6 million. Approximately 64% of this backlog at September 30, 2015 is expected to be shipped over 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, changes in production schedules of specific engine and airframe programs, as well as the pursuit of new programs. Sales levels in the Aerospace aftermarket business may be impacted by fluctuations in end-market demand, 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 CRPs, expanded capabilities and current capacity levels. Fluctuations in fuel costs and their impact on airline profitability and behaviors within the aerospace industry could 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 value associated with new fuel efficient technologies. The Company does not expect that fluctuations in fuel costs will have a significant impact in the near term on the OEM business, however may impact the MRO business.

Management is focused on growing operating profit at Aerospace primarily through leveraging organic sales growth, strategic investments, productivity initiatives, new product and process introductions and continued cost management. Operating profit is expected to be affected by the impact of changes in sales volume, mix and pricing, particularly as they relate to the highly profitable aftermarket RSP spare parts business, and investments made in each of its businesses. Costs associated with new product and process introductions and the physical transfer of work to lower cost manufacturing regions may negatively impact operating profit.

LIQUIDITY AND CAPITAL RESOURCES

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

The Company 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 2015 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.

On October 15, 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 (BOLI 30C), 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 Company completed funding of the transaction and issued the 3.97% Senior Notes on October 17, 2014. The 3.97% Senior Notes are senior unsecured obligations of the Company and 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

25



affirmative and negative covenants that are similar to the covenants required under the Amended Credit Agreement, as discussed below. At September 30, 2015, the Company was in compliance with all covenants under the Note Purchase Agreement.

During the second quarter of 2014, the 3.375% Convertible Notes (the "3.375% Notes") were eligible for conversion due to meeting their conversion price eligibility requirement. On June 16, 2014, $0.2 million of the 3.375% Notes (par value) were surrendered for conversion. On June 24, 2014, the Company exercised its right to redeem the remaining $55.4 million principal amount of the 3.375% Notes, effective July 31, 2014. The Company elected to pay cash to holders of the 3.375% Notes surrendered for conversion, including the value of any residual shares of common stock that might be payable to the holders electing to convert their 3.375% Notes into an equivalent share value. Under the terms of the indenture, the conversion value was measured based upon a 20-day valuation period of the Company's stock price. The Company used borrowings under its Amended Credit Facility to finance the redemption and conversion of the 3.375% Notes. The remaining 3.375% Notes were rendered for conversion during the third quarter of 2014 and the Company paid $70.5 million in cash to the holders, which included a premium of $14.9 million.

In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement”) and retained Bank of America, N.A. as the administrative agent for the lenders. The $750.0 million Amended Credit Agreement matures in September 2018 with an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement adds a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, and includes an accordion feature to increase the borrowing availability of the Company to $1,000.0 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 continuing. The borrowing availability of $750.0 million, pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalen