1
In the last 24 hours, you have certainly
experienced one of the many applications of
our innovative solutions.
2
Barnes Group Inc. (NYSE: B) is a global provider of highly engineered products, differentiated industrial
Barnes Group Inc. (NYSE: B) 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
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,
products and services are used in far-reaching applications including aerospace, transportation,
manufacturing, healthcare, and packaging. Barnes Group’s skilled and dedicated employees around the globe
manufacturing, healthcare, and packaging. Barnes Group’s skilled and dedicated employees around the globe
are committed to the highest performance standards and achieving consistent, sustainable profitable growth.
are committed to the highest performance standards and achieving consistent, sustainable profitable growth.
B U S I N E S S E S AT A G L A N C E
B U S I N E S S E S AT A G L A N C E
Molding Solutions
Molding Solutions
Molding Solutions’ comprehensive portfolio of advanced technologies and value-added services delivers
Molding Solutions’ comprehensive portfolio of advanced technologies and value-added services delivers
premium tool-based solutions where demanding specifications are required by global customers in the
premium tool-based solutions where demanding specifications are required by global customers in the
plastic injection molding industry across a broad spectrum of applications, including quality hot runners,
plastic injection molding industry across a broad spectrum of applications, including quality hot runners,
complex molds, sensor technologies, and control systems.
complex molds, sensor technologies, and control systems.
Nitrogen Gas Products
Nitrogen Gas Products
A global provider of force and motion control, Nitrogen Gas Products is a leader in highly specialized
A global provider of force and motion control, Nitrogen Gas Products is a leader in highly specialized
solutions which enable customers to overcome challenges in the metal forming, heavy duty suspension,
solutions which enable customers to overcome challenges in the metal forming, heavy duty suspension,
and industrial markets.
and industrial markets.
The Safer Choice
The Safer Choice
Engineered Components
Engineered Components
Engineered Components provides a comprehensive range of manufacturing capabilities including
precision micro-stamped/fine-blanked solutions, high performance precision components, retaining
and snap rings, engineered struts, and assemblies for industrial applications in end markets such as
aerospace, transportation, and medical.
Engineered Components provides a comprehensive range of manufacturing capabilities including
precision micro-stamped/fine-blanked solutions, high performance precision components, retaining
and snap rings, engineered struts, and assemblies for industrial applications in end markets such as
aerospace, transportation, and medical.
Aerospace
Aerospace
Barnes Aerospace provides superior manufacturing solutions and comprehensive component overhaul
Barnes Aerospace provides superior manufacturing solutions and comprehensive component overhaul
and repair services to the world’s major turbine manufacturers, commercial airlines, and the military.
and repair services to the world’s major turbine manufacturers, commercial airlines, and the military.
3
3
P E R C E N TA G E O F S A L E S
Industrial Segment
Aerospace Segment
Molding Solutions
Engineered Components
Nitrogen Gas Products
34%
24%
10%
Original Equipment
Manufacturing (OEM)
Aftermarket: Maintenance,
Repair and Overhaul (MRO)
and Spare Parts
22%
10%
2 0 1 7 F I N A N C I A L H I G H L I G H T S
Net Sales
(Continuing Operations, $ in Millions)
Adjusted EPS (1)
(Continuing Operations)
$1,436
$1,262
$1,231
$1,194
$1,092
$2.88
$2.53
$2.38
$2.34
$1.83
‘13
‘14
‘15
‘16
‘17
‘13
‘14
‘15
‘16
‘17
Adjusted Operating Margins (1)
(Continuing Operations)
Adjusted Free Cash Flow (1)
($ in Millions)
16.0%
15.8%
15.4%
14.8%
12.9%
$171
$170
$145
$126
$89
‘13
‘14
‘15
‘16
‘17
‘13
‘14
‘15
‘16
‘17
Cash Conversion:
118%
107%
134% 125%
93%
4
(1) References to adjusted results are non-GAAP measures. For a reconciliation
to the appropriate GAAP measure, see the GAAP reconciliation on page 9.
R E V E N U E B R E A K D O W N
Total Revenue
Industrial
$973.9M
68%
32%
Aerospace
$462.6M
Industrial
Aerospace
Molding
Solutions
Nitrogen Gas
Products
14%
Engineered
Components
50%
36%
OEM
OEM
70%
30%
Aftermarket
End Markets
Aerospace OEM
Aerospace Aftermarket
23%
10%
Medical, Personal
Care & Packaging
13%
14%
Auto Production
Tool & Die
9%
15%
16%
General Industrial
Auto Molding Solutions
Geographic Region
Americas
51%
31%
Europe
18%
Asia
5
Letter to Our Shareholders
Strategy Evolution Drives Financial Results
During 2017, Barnes Group delivered strong revenue and adjusted earnings growth and made noteworthy progress on
our transformational journey. We executed well on our strategy and delivered impressive financial results as we pursue
our vision to be a global provider of engineered products and innovative solutions, generating superior value for our
customers and our stakeholders, through our passionate and energized employees.
As we build on our Company’s strengths, which include market leadership with
high-quality brands; an experienced management team; a culture built on values,
teamwork, and community spirit; and a 160-year legacy of manufacturing
expertise and innovation, we are differentiating the Company from our
competition. Around the world, our 5,400 skilled and dedicated employees
are committed to achieving consistent and sustainable, profitable growth by
fulfilling the four key pillars of our strategy:
• Build a World-class Company Focused on High Margin, High Growth Businesses
• Leverage the Barnes Enterprise System (“BES”) as a Significant Competitive Advantage
• Expand and Protect Our Core Intellectual Property to Deliver Differentiated Solutions
• Effectively Allocate Capital to Drive Top Quartile Total Shareholder Return
A R N
B
C
E
L
E
B
E S GROU
P
I
N
C
S
R
A
0 Y E
R
ATING 1 6
We firmly believe that delivering on these core elements of our strategy will allow us to achieve our present goals and
ensure our future success. Our solid execution of this strategy has provided for a 2017 total shareholder return of nearly
35% to our shareholders, surpassing that of the S&P 600 and Russell 2000 indices.
Solid Financial Performance & Investment in our Future
For 2017, strong financial performance was led by organic sales growth of 11%
and an adjusted earnings per share(1) increase of 14%. With both our Industrial
and Aerospace segments well positioned in favorable end markets, robust
order intake propelled year-end backlog to over $1 billion, up 17% over the
prior year-end.
We continued to generate good cash flow and conversion. Free cash flow,
our operating cash flow less capital expenditures, was $145 million and our
“free cash flow to net income” conversion ratio, as adjusted, was a solid 93%,
even in light of higher working capital to support global growth and increased
investment. During the year, we spent $59 million in capital expenditures, 23%
higher than the prior year, about half of which targeted growth programs supporting
our products and services with differentiated industrial technologies and capabilities.
At the same time, acquisitions remain a critical component of our growth strategy. In April, we acquired Gammaflux, a
leading global supplier of high quality hot runner temperature and sequential valve gate control systems to the plastics
industry. Gammaflux technology, when combined with our leading hot runner, complex mold, and sensor technologies,
creates an unsurpassed offering to our customers in the plastic injection molding industry.
In addition, we returned over $70 million of capital to our shareholders through dividends and share repurchases. Early
in 2017, we increased our quarterly cash dividend by 8%, reflective of our improving financial performance and good
cash generation, and we are proud to have paid a cash dividend to our stockholders on a continuous basis since 1934.
6
Leveraging BES to Power Excellence
Our ability to deliver improved performance is integrally linked to
the Barnes Enterprise System, or BES, and our strategic enablers
of Innovation and Talent Management. Each component
is instrumental in supporting the Company’s continued
transformation.
The Barnes Enterprise System has evolved from important
tool-based processes and techniques to being our fully
integrated, operating system. Building on the significant progress
made in terms of culture, alignment, and continuous improvement,
we are taking BES to the next level with an even stronger emphasis
on excellence in everything we do. BES is about powering excellence
through clearly defined and fully integrated business processes. Achieving
Commercial, Operational, and Financial Excellence allows us to build on
the principles of BES to achieve measurable results – both quantitative and qualitative – which are critical to
successfully executing our strategy.
Commercial Excellence ensures that we get the proposal, the deal, and the product right the first time.
Understanding our value, pricing, manufacturing processes and capacity, supply chain, and potential risks will
allow us to maximize a given opportunity and limit our downside exposure while allowing us to achieve the best
outcome for our customers and Barnes Group.
Operational Excellence allows us to continuously improve our systems to drive productivity and efficiencies in
our business. Key elements of Operational Excellence focus on driving safety as a priority, all while delivering
quality products and services on time to our customers, every day. Applying technologies such as automation,
additive manufacturing, and smart-connected products will enable us to meet fast-changing market demands and
customer needs as well as provide us with a competitive advantage today and in the future.
Financial Excellence is directly related to Operational and Commercial Excellence. All three elements are
intrinsically connected to achieve the desired results. Ultimately, Financial Excellence is an outcome of every
aspect of how we conduct business in our operations. By creating, implementing, and continuously improving
robust business processes and systems, we will accomplish profitable growth across all of Barnes Group.
In the area of Innovation, we launched the new Global Innovation Forum (GIF), formally the Global Engineering
and Technology Forum, to now include new customer-facing cross-functional representation. The mission of the
GIF is to promote organic profitable growth by identifying and capitalizing on disruptive trends such as additive
manufacturing and digitalization, expanding and protecting our global intellectual property infrastructure, and
optimizing worldwide resources, both internal and external, to position the next generation of products and
services for commercial success.
With Talent Management, substantial progress was made on systems and processes to attract, develop, and
retain top talent with the skills necessary to accelerate Barnes Group’s performance to the next level. Such actions
included enhancing the Company’s leadership development program, launching a mentoring pilot program,
hosting numerous events to promote careers in manufacturing, expanding our apprenticeship program, and
increasing community outreach and involvement across the enterprise.
7
A Positive 2018 Outlook with 2020 Vision
As we exit 2017, we feel very positive about the upcoming
year and look forward to delivering solid returns to our
shareholders. We remain committed to making the necessary
investments to strengthen our global competitive position
and deliver exceptional value to our customers through
our intellectual property-based capabilities and innovative
solutions. We are enthusiastic about the opportunities we
see for future growth, and our businesses are well-positioned
to further benefit from a strong economy.
During our Company’s inaugural investor day in September,
we introduced our 2020 financial targets: organic sales
growth CAGR of 4% to 6%, operating margins between
18% to 19%, EPS CAGR in the double digits, and return on
invested capital of approximately 10%. Our management
team is collectively energized about driving our vision
and strategy; and while we’ve made tremendous progress
to date, we believe we’re only in the early stages of this
journey. We thank all of our employees for their hard work,
support, and dedication to Barnes Group. Not only have we
achieved our current success through their contributions,
but we look to them to attain our 2020 goals. Our long-term
excellence will depend on our ability to work as One Team,
One Company, embracing the change required to shape
Barnes Group for the future.
On behalf of our Board of Directors and employees, we
extend our sincere appreciation to our customers, suppliers,
shareholders, and the communities in which we operate for
their continued confidence and trust in Barnes Group.
Patrick J. Dempsey
President and
Chief Executive Officer
Thomas O. Barnes
Chairman of the Board
8
(1) References to adjusted results are non-GAAP measures. For a reconciliation
to the appropriate GAAP measure, see the GAAP reconciliation on page 9.
Barnes Group Inc.
Non-GAAP Financial Measure Reconciliation
(cid:11)(cid:39)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:82)(cid:88)(cid:86)(cid:68)(cid:81)(cid:71)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:83)(cid:87)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:12)
(Unaudited)
CONSOLIDATED RESULTS
Operating Income (GAAP)
Männer short-term purchase accounting adjustments
Thermoplay short-term purchase accounting adjustments
FOBOHA short-term purchase accounting adjustments
Acquisition transaction costs
Restructuring/reduction in force
Contract termination dispute charges
Contract termination arbitration award
Pension lump-sum settlement charge
CEO transition costs
Operating Income as adjusted (Non-GAAP)1
Operating Margin (GAAP)
Operating Margin as adjusted (Non-GAAP)1
Diluted Income from Continuing Operations per Share (GAAP)
Männer short-term purchase accounting adjustments
Thermoplay short-term purchase accounting adjustments
FOBOHA short-term purchase accounting adjustments
Acquisition transaction costs
Restructuring/reduction in force
Contract termination dispute charges
Contract termination arbitration award
Pension lump-sum settlement charge
Tax benefit recognized for refund of withholding taxes
CEO transition costs
April 2013 tax court decision
Effects of U.S. tax reform
Diluted Income from Continuing Operations per Share as adjusted (Non-GAAP)1
2017
$ 210,278
-
-
2,294
-
13
-
-
-
-
$ 212,585
14.6%
14.8%
$ 1.09
-
-
0.03
-
(0.01)
-
-
-
-
-
-
1.77
$ 2.88
Twelve Months Ended December 31,
2015
2014
2016
$ 192,178
-
-
2,316
1,164
-
3,005
(1,371)
-
-
$ 197,292
15.6%
16.0%
$ 2.48
-
-
0.03
0.02
-
0.03
(0.03)
-
-
-
-
-
$ 2.53
$ 168,396
1,481
1,167
-
970
4,222
2,788
-
9,856
-
$ 188,880
14.1%
15.8%
$ 2.19
0.02
0.01
-
0.02
0.05
0.03
-
0.11
(0.05)
-
-
-
$ 2.38
$ 179,974
8,504
-
-
-
6,020
-
-
-
-
$ 194,498
14.3%
15.4%
$ 2.16
0.11
-
-
-
0.07
-
-
-
-
-
-
-
$ 2.34
2013
$ 123,201
5,456
-
-
1,823
-
-
-
-
10,492
$ 140,972
11.3%
12.9%
$ 1.31
0.07
-
-
0.03
-
-
-
-
-
0.12
0.30
-
$ 1.83
NOTES:
1(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:179)(cid:68)(cid:86)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:180)(cid:3)(cid:191)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:29)
2017: 1) Short-term purchase accounting adjustments related to its FOBOHA acquisition 2) the net loss (gain) from restructuring actions related to the closure and consolidation of two manufacturing facilities within the
Industrial segment and 3) the effects of U.S. tax reform commonly referred to as the Tax Cuts and Jobs Act ($96,700).
2016: 1) Transaction costs related to its FOBOHA acquisition, 2) short-term purchase accounting adjustments related to its FOBOHA acquisition, 3) charges related to the contract termination dispute and 4) operating
income related to the contract termination arbitration award and the non-operating interest income awarded.
2015: 1) Short-term purchase accounting adjustments related to its Männer and Thermoplay acquisitions, 2) transaction costs related to its Thermoplay and Priamus acquisitions, 3) restructuring and workforce
reduction charges, 4) certain charges recorded in the Aerospace segment in the third quarter of 2015 related to a contract termination dispute following a customer sourcing decision, 5) the pension lump-sum
(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:25)(cid:12)(cid:3)(cid:68)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:79)(cid:92)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)
2014: 1) Short-term purchase accounting adjustments related to its Männer acquisition and 2) restructuring charges related to the closure of production operations at its Associated Spring facility located in Saline,
Michigan.
2013:(cid:3)(cid:20)(cid:12)(cid:3)(cid:54)(cid:75)(cid:82)(cid:85)(cid:87)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:48)(cid:108)(cid:81)(cid:81)(cid:72)(cid:85)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:21)(cid:12)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:48)(cid:108)(cid:81)(cid:81)(cid:72)(cid:85)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:22)(cid:12)(cid:3)(cid:38)(cid:40)(cid:50)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:82)(cid:71)(cid:76)(cid:191)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)
equity awards and 4) the tax charge associated with the April 2013 tax court decision.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:55)(cid:68)(cid:91)(cid:3)(cid:53)(cid:72)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:15)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:77)(cid:88)(cid:85)(cid:76)(cid:86)(cid:71)(cid:76)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:17)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:86)(cid:3)
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:81)(cid:74)(cid:82)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:17)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:82)(cid:72)(cid:86)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:191)(cid:81)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:71)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:3)(cid:76)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:79)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:82)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:88)(cid:86)(cid:72)(cid:17)(cid:3)
FREE CASH FLOW (FCF):
Net cash provided by operating activities1
Capital expenditures
Free cash flow2
Free cash flow to net income cash conversion ratio (as adjusted):
Free cash flow (from above)
Income tax payments related to the gain on the sale of BDNA
Income tax reduction related to the gain on the sale of BDNA
Free cash flow (as adjusted)3
Net income
Gain on the sale of BDNA, net of tax
Pension lump-sum settlement charge, net of tax
Effects of U.S. tax reform
Net income (as adjusted)3
Free cash flow to net income cash conversion ratio (as adjusted)3
Twelve Months Ended December 31,
2017
2016
2015
2014
2013
$ 203,920
$ 217,646
$ 217,475
$ 196,153
$ 16,079
(58,712)
(47,577)
(45,982)
(57,365)
(57,304)
$ 145,208
$ 170,069
$ 171,493
$ 138,788
$ (41,225)
$ 145,208
$ 170,069
$ 171,493
$ 138,788
$ (41,225)
-
-
145,208
59,415
-
-
96,700
-
-
170,069
135,601
-
-
-
-
-
171,493
121,380
-
6,182
-
-
130,004
(12,608)
126,180
118,370
-
-
-
-
88,779
270,527
(195,317)
-
-
$ 156,115
$ 135,601
$ 127,562
$ 118,370
$ 75,210
93%
125%
134%
107%
118%
NOTES:
1(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:191)(cid:72)(cid:71)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:81)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:22)(cid:3)(cid:87)(cid:82)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:192)(cid:72)(cid:70)(cid:87)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:16)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:17)
2(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:71)(cid:72)(cid:191)(cid:81)(cid:72)(cid:86)(cid:3)(cid:73)(cid:85)(cid:72)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:192)(cid:82)(cid:90)(cid:3)(cid:68)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:85)(cid:72)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:192)(cid:82)(cid:90)(cid:3)(cid:80)(cid:72)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:76)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:73)(cid:88)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)
(cid:82)(cid:73)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:69)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)(cid:15)(cid:3)(cid:83)(cid:68)(cid:92)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:15)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:80)(cid:72)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)
(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:192)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:192)(cid:82)(cid:90)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:17)
3(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:29)
2017: The effects of U.S. tax reform, commonly referred to as the Tax Cuts and Jobs Act, from net income.
2015: The pension lump-sum settlement charge, net of tax, from net income.
2014:(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:16)(cid:72)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:22)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:11)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:37)(cid:39)(cid:49)(cid:36)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:41)(cid:38)(cid:41)(cid:17)
2013:(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:37)(cid:39)(cid:49)(cid:36)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:22)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:41)(cid:38)(cid:41)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:37)(cid:39)(cid:49)(cid:36)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)
9
9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
(State of incorporation)
123 Main Street, Bristol, Connecticut
(Address of Principal Executive Office)
06-0247840
(I.R.S. Employer Identification No.)
06010
(Zip Code)
(860) 583-7070
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 Par Value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
No
Act. Yes
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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):
Large accelerated filer
Non-accelerated filer
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
The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of the close of business on
June 30, 2017 was approximately $2,914,055,542 based on the closing price of the Common Stock on the New York Stock Exchange on that
date. The registrant does not have any non-voting common equity.
No
The registrant had outstanding 53,234,401 shares of common stock as of February 14, 2018.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held May 4, 2018 are incorporated by reference into Part III.
Barnes Group Inc.
Index to Form 10-K
Year Ended December 31, 2017
Part I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Items
11-14.
Incorporated by Reference to Definitive Proxy Statement
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
FORWARD-LOOKING STATEMENTS
Page
1
4
12
13
14
14
15
17
18
35
36
74
74
75
76
77
77
78
This Annual Report may 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 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; the impact of new or revised tax laws and
regulations; 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; 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; and other risks and uncertainties
described in this Annual Report. The Company assumes no obligation to update its forward-looking statements.
Item 1. Business
BARNES GROUP INC. (1)
PART I
Barnes Group Inc. (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, healthcare and packaging. The Company’s skilled
and dedicated employees around the globe are committed to the highest performance standards and achieving consistent,
sustainable profitable growth.
Our Strategy
The Company’s strategy outlines the actions that we are executing to achieve our vision. Our strategy is comprised of four
pillars:
1. Build a World-class Company Focused on High Margin, High Growth Businesses - We pro-actively manage our
business portfolio with a focus on multiple platforms and market channels, in end-markets where projected long-term
growth and favorable macro-economic trends are present. By doing so, we expect to create superior value for our
key stakeholders - our shareholders, customers, employees and the communities in which we operate.
2. Leverage the Barnes Enterprise System (“BES”) as a Significant Competitive Advantage - BES is our integrated
operating system that promotes a culture of employee engagement and empowerment and drives alignment across the
organization around a common vision. BES standardizes our business processes to allow us to achieve commercial,
operational and financial excellence in everything we do.
3. Expand and Protect Our Core Intellectual Property to Deliver Differentiated Solutions - Driven by a passion for
innovation, we embrace intellectual property as a core differentiator to create proprietary products, processes and
systems. Through our Global Innovation Forum, we foster an environment that generates great ideas and shares best
practices across the enterprise to maximize our collective strengths and create economies of scale in the development
and commercialization of new and innovative products and services.
4. Effectively Allocate Capital to Drive Top Quartile Total Shareholder Return - We strive to be good custodians of
our shareholders’ capital and to drive maximum shareholder value. We do so by investing in our core businesses to
fund profitable, organic growth and by employing a disciplined capital allocation process in the strategic acquisitions
we undertake.
Structure
The Company operates under two global business segments: Industrial and Aerospace. The Industrial Segment includes the
Molding Solutions, Nitrogen Gas Products and Engineered Components business units. The Aerospace segment includes the
original equipment manufacturer (“OEM”) business and the aftermarket business, which includes maintenance repair and
overhaul (“MRO”) services and the manufacture and delivery of aerospace aftermarket spare parts.
In the second quarter of 2017, the Company completed its acquisition of the assets of the privately held Gammaflux L.P.
business ("Gammaflux"), a leading supplier of hot runner temperature and sequential valve gate control systems to the plastics
industry. Gammaflux, which is headquartered in Sterling, Virginia and has offices in Illinois and Germany, provides
temperature control solutions for injection molding, extrusion, blow molding, thermoforming, and other applications. Its end
markets include packaging, electronics, automotive, household products, medical, and tool building. Gammaflux is being
integrated into the Industrial Segment, within our Molding Solutions business unit. See Note 2 of the Consolidated Financial
Statements.
__________
(1) As used in this annual report, “Company,” “Barnes Group,” “we” and “ours” refer to the registrant and its consolidated subsidiaries except where the
context requires otherwise, and “Industrial” and “Aerospace” refer to the registrant’s segments, not to separate corporate entities.
1
In the third quarter of 2016, the Company, through three of its subsidiaries, completed its acquisition of the molds
business of Adval Tech Holding AG and Adval Tech Holdings (Asia) Pte. Ltd. ("FOBOHA"). FOBOHA is headquartered in
Haslach, Germany and operates out of manufacturing facilities located in Germany and China. FOBOHA specializes in the
development and manufacture of complex plastic injection molds for packaging, medical, consumer and automotive
applications. FOBOHA has been integrated into the Industrial Segment, within our Molding Solutions business unit. See Note 2
of the Consolidated Financial Statements.
In the fourth quarter of 2015, the Company completed the acquisition of privately held Priamus System Technologies AG
and two of its subsidiaries (collectively, "Priamus") from Growth Finance AG. Priamus, which 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 has been integrated into the Industrial Segment, within our Molding Solutions business unit. See Note 2 of the
Consolidated Financial Statements.
In the third quarter of 2015, the Company 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 specializes in the design,
development, and manufacturing of hot runner systems for plastic injection molding, primarily in the packaging, automotive,
and medical end markets. Thermoplay has been integrated into the Industrial Segment, within our Molding Solutions business
unit. See Note 2 of the Consolidated Financial Statements.
INDUSTRIAL
The Industrial segment is a global provider of highly-engineered, high-quality precision components, products and
systems for critical applications serving a diverse customer base in end-markets such as 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 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 design
and manufacture 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 Products business provides innovative cost effective force and motion solutions for sheet metal
forming, heavy duty suspension and other selective niche markets for customers worldwide. Industrial's Engineered
Components businesses manufacture and supply precision mechanical products used in transportation and industrial
applications, including mechanical springs, high-precision punched and fine-blanked components and retention rings.
Industrial competes with a broad base of large and small companies engaged in the manufacture and sale of engineered
products, precision molds, hot runner systems and precision components. Industrial competes on the basis of quality, service,
reliability of supply, engineering and technical capability, geographic reach, product breadth, innovation, design, and price.
Industrial has manufacturing, distribution and assembly operations in the United States, Brazil, China, Germany, Italy, Mexico,
Singapore, Sweden, Switzerland and the United Kingdom. Industrial also has sales and service operations in the United States,
Brazil, Canada, Czech Republic, China/Hong Kong, France, Germany, India, Italy, Japan, Mexico, the Netherlands, Portugal,
Singapore, Slovakia, South Africa, South Korea, Spain, Switzerland, Thailand and the United Kingdom. Sales by Industrial to
its three largest customers accounted for approximately 9% of its sales in 2017.
AEROSPACE
Aerospace is a global manufacturer of complex fabricated and precision machined components and assemblies for OEM
turbine engine, airframe and industrial gas turbine builders, and the military. The Aerospace aftermarket business provides
aircraft engine component MRO services, including services performed under our Component Repair Programs (“CRPs”), for
many of the world’s major turbine engine manufacturers, commercial airlines and the military. The Aerospace aftermarket
activities also include the manufacture and delivery of aerospace aftermarket spare parts, including revenue sharing programs
(“RSPs”) under which the Company receives an exclusive right to supply designated aftermarket parts over the life of specific
aircraft engine programs.
Aerospace’s OEM business supplements the leading aircraft engine OEM capabilities and competes with a large number
of fabrication and machining companies. Competition is based mainly on quality, engineering and technical capability, product
2
breadth, new product introduction, timeliness, service and price. Aerospace’s fabrication and machining operations, with
facilities in Arizona, Connecticut, Mexico, Michigan, Ohio, Utah and Singapore, produce critical engine and airframe
components through technologically advanced manufacturing processes.
The Aerospace aftermarket business supplements jet engine OEMs’ maintenance, repair and overhaul capabilities, and
competes with the service centers of major commercial airlines and other independent service companies for the repair and
overhaul of turbine engine components. The manufacture and supply of aerospace aftermarket spare parts, including those
related to the RSPs, are dependent upon the reliable and timely delivery of high-quality components. Aerospace’s aftermarket
facilities, located in Connecticut, Ohio and Singapore, specialize in the repair and refurbishment of highly engineered
components and assemblies such as cases, rotating life limited parts, rotating air seals, turbine shrouds, vanes and honeycomb
air seals. Sales by Aerospace to its three largest customers, General Electric, Rolls-Royce and United Technologies Corporation,
accounted for approximately 55%, 15% and 10% of its sales in 2017, respectively. Sales to its next three largest customers in
2017 collectively accounted for approximately 6% of its total sales.
FINANCIAL INFORMATION
The backlog of the Company’s orders believed to be firm at the end of 2017 was $1,039 million as compared with $886
million at the end of 2016. Of the 2017 year-end backlog, $723 million was attributable to Aerospace and $316 million was
attributable to Industrial. Approximately 62% of the Company's consolidated year-end backlog is scheduled to be shipped
during 2018. The remainder of the Company’s backlog is scheduled to be shipped after 2018.
We have a global manufacturing footprint and a technical service network to service our worldwide customer base. The
global economies have a significant impact on the financial results of the business as we have significant operations outside of
the United States. For a summary of net sales, operating profit and long-lived assets by reportable business segment, as well as
net sales by product and services and geographic area, see Note 19 of the Consolidated Financial Statements. For a discussion
of risks attendant to the global nature of our operations and assets, see Item 1A. Risk Factors.
RAW MATERIALS
The principal raw materials used to manufacture our products are various grades and forms of steel, from rolled steel bars,
plates and sheets, to high-grade valve steel wires and sheets, various grades and forms (bars, sheets, forgings, castings and
powders) of stainless steels, aluminum alloys, titanium alloys, copper alloys, graphite, and iron-based, nickel-based (Inconels)
and cobalt-based (Hastelloys) superalloys for complex aerospace applications. Prices for steel, titanium, Inconel, Hastelloys, as
well as other specialty materials, have periodically increased due to higher demand and, in some cases, reduction of the
availability of materials. If this occurs, the availability of certain raw materials used by us or in products sold by us may be
negatively impacted.
RESEARCH AND DEVELOPMENT
We conduct research and development activities in our effort to provide a continuous flow of innovative new products,
processes and services to our customers. We also focus on continuing efforts aimed at discovering and implementing new
knowledge that significantly improves existing products and services, and developing new applications for existing products
and services. Our product development strategy is driven by product design teams and collaboration with our customers,
particularly within Industrial’s Molding Solutions businesses, as well as within our Aerospace and our other Industrial
businesses. Many of the products manufactured by us are custom parts made to customers’ specifications. Investments in
research and development are important to our long-term growth, enabling us to stay ahead of changing customer and
marketplace needs. We spent approximately $15 million, $13 million and $13 million in 2017, 2016 and 2015, respectively, on
research and development activities.
PATENTS AND TRADEMARKS
Patents and other proprietary rights, including trade secrets and unpatented know-how, are critical to certain of our
business units. We are party to certain licenses of intellectual property and hold numerous patents, trademarks, and trade names
that enhance our competitive position. The Company does not believe, however, that any of these licenses, patents, trademarks
or trade names is individually significant to the Company or either of our segments. We maintain procedures to protect our
intellectual property (including trade secrets, patents and trademarks). Risk factors associated with our intellectual property are
discussed in Item 1A. Risk Factors.
3
EXECUTIVE OFFICERS OF THE COMPANY
For information regarding the Executive Officers of the Company, see Part III, Item 10 of this Annual Report.
ENVIRONMENTAL
Compliance with federal, state, and local laws, as well as those of other countries, which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had
a material effect, and is not expected to have a material effect, upon our capital expenditures, earnings, or competitive position.
Our past and present business operations and past and present ownership and operations of real property and the use, sale,
storage and handling of chemicals and hazardous products subject us to extensive and changing U.S. federal, state and local
environmental laws and regulations, as well as those of other countries, pertaining to the discharge of materials into the
environment, enforcement, disposition of wastes (including hazardous wastes), the use, shipping, labeling, and storage of
chemicals and hazardous materials, building requirements, or otherwise relating to protection of the environment. We have
experienced, and expect to continue to experience, costs to comply with environmental laws and regulations. In addition, new
laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination
or the imposition of new clean-up requirements could require us to incur costs or become subject to new or increased liabilities
that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We use and generate hazardous substances and wastes in our operations. In addition, many of our current and former
properties are or have been used for industrial purposes. Accordingly, we monitor hazardous waste management and applicable
environmental permitting and reporting for compliance with applicable laws at our locations in the ordinary course of our
business. We may be subject to potential material liabilities relating to any investigation and clean-up of our locations or
properties where we delivered hazardous waste for handling or disposal that may be contaminated or which may have been
contaminated prior to our purchase, and to claims alleging personal injury.
AVAILABLE INFORMATION
Our Internet address is www.BGInc.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports are available without charge on our website as soon as reasonably
practicable after they are filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC"). In addition, we
have posted on our website, and will make available in print to any stockholder who makes a request, our Corporate
Governance Guidelines, our Code of Business Ethics and Conduct, and the charters of the Audit Committee, Compensation and
Management Development Committee and Corporate Governance Committee (the responsibilities of which include serving as
the nominating committee) of the Company’s Board of Directors. References to our website addressed in this Annual Report are
provided as a convenience and do not constitute, and should not be viewed as, an incorporation by reference of the information
contained on, or available through, the website. Therefore, such information should not be considered part of this Annual
Report.
Item 1A. Risk Factors
Our business, financial condition or results of operations could be materially adversely affected by any of the following
risks. Please note that additional risks not presently known to us may also materially impact our business and operations.
RISKS RELATED TO OUR BUSINESS
We depend on revenues and earnings from a small number of significant customers. Any bankruptcy of or loss of
or, cancellation, reduction or delay in purchases by these customers could harm our business. In 2017, our net sales to
General Electric and its subsidiaries accounted for 18% of our total sales and approximately 55% of Aerospace's net sales.
Aerospace's second and third largest customers, Rolls-Royce and United Technologies Corporation and their subsidiaries,
accounted for 15% and 10%, respectively, of Aerospace's net sales in 2017. Approximately 6% of Aerospace's net sales in 2017
were to its next three largest customers. Approximately 9% of Industrial's sales in 2017 were to its three largest customers.
Some of our success will depend on the business strength and viability of those customers. We cannot assure you that we will
be able to retain our largest customers. Some of our customers may in the future reduce their purchases due to economic
conditions or shift their purchases from us to our competitors, in-house or to other sources. Some of our long-term sales
agreements provide that until a firm order is placed by a customer for a particular product, the customer may unilaterally reduce
or discontinue its projected purchases without penalty, or terminate for convenience. The loss of one or more of our largest
4
customers, any reduction, cancellation or delay in sales to these customers (including a reduction in aftermarket volume in our
RSPs), our inability to successfully develop relationships with new customers, or future price concessions we make to retain
customers could significantly reduce our sales and profitability.
The global nature of our business exposes us to foreign currency fluctuations that may affect our future revenues,
debt levels and profitability. We have manufacturing facilities and technical service, sales and distribution centers around the
world, and the majority of our foreign operations use the local currency as their functional currency. These include, among
others, the Brazilian real, British pound sterling, Canadian dollar, Chinese renminbi, Euro, Japanese yen, Korean won,
Malaysian ringgit, Mexican peso, Singapore dollar, Swedish krona, Swiss franc and Thai baht. Since our financial statements
are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies expose us to
translation risk when the local currency financial statements are translated to U.S. dollars. Changes in currency exchange rates
may also expose us to transaction risk. We may buy hedges in certain currencies to reduce or offset our exposure to currency
exchange fluctuations; however, these transactions may not be adequate or effective to protect us from the exposure for which
they are purchased. We have not engaged in any speculative hedging activities. Currency fluctuations may adversely impact our
revenues and profitability in the future.
Our operations depend on our manufacturing, sales, and service facilities and information systems in various
parts of the world which are subject to physical, financial, regulatory, environmental, operational and other risks that
could disrupt our operations. We have a significant number of manufacturing facilities, technical service, and sales centers
both within and outside the U.S. The global scope of our business subjects us to increased risks and uncertainties such as threats
of war, terrorism and instability of governments; and economic, regulatory and legal systems in countries in which we or our
customers conduct business.
Customer, supplier and our facilities are located in areas that may be affected by natural disasters, including earthquakes,
windstorms and floods, which could cause significant damage and disruption to the operations of those facilities and, in turn,
could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally,
some of our manufacturing equipment and tooling is custom-made and is not readily replaceable. Loss of such equipment or
tooling could have a negative impact on our manufacturing business, financial condition, results of operations and cash flows.
Although we have obtained property damage and business interruption insurance, a major catastrophe such as an
earthquake, windstorm, flood or other natural disaster at any of our sites, or significant labor strikes, work stoppages, political
unrest, or any of the events described above, in any of the areas where we conduct operations could result in a prolonged
interruption of our business. Any disruption resulting from these events could cause significant delays in the manufacture or
shipment of products or the provision of repair and other services that may result in our loss of sales and customers. Our
insurance will not cover all potential risks, and we cannot assure you that we will have adequate insurance to compensate us for
all losses that result from any insured risks. Any material loss not covered by insurance could have a material adverse effect on
our financial condition, results of operations and cash flows. We cannot assure you that insurance will be available in the future
at a cost acceptable to us or at a cost that will not have a material adverse effect on our profitability, net income and cash flows.
The global nature of our operations and assets subject us to additional financial and regulatory risks. We have
operations and assets in various parts of the world. In addition, we sell or may in the future sell our products and services to the
U.S. and foreign governments and in foreign countries. As a global business, we are subject to complex laws and regulations in
the U.S. and other countries in which we operate, and associated risks, including: U.S. imposed embargoes of sales to specific
countries; foreign import controls (which may be arbitrarily imposed or enforced); import regulations and duties; export
regulations (which require us to comply with stringent licensing regimes); reporting requirements regarding the use of
"conflict" minerals mined from certain countries; anti-dumping regulations; price and currency controls; exchange rate
fluctuations; dividend remittance restrictions; expropriation of assets; war, civil uprisings and riots; government instability;
government contracting requirements including cost accounting standards, including various procurement, security, and audit
requirements, as well as requirements to certify to the government compliance with these requirements; the necessity of
obtaining governmental approval for new and continuing products and operations; and legal systems or decrees, laws, taxes,
regulations, interpretations and court decisions that are not always fully developed and that may be retroactively or arbitrarily
applied. We have experienced inadvertent violations of some of these regulations, including export regulations, safety and
environmental regulations, regulations prohibiting sales of certain products and product labeling regulations, in the past, none
of which has had or, we believe, will have a material adverse effect on our business. However, any significant violations of
these or other regulations in the future could result in civil or criminal sanctions, and the loss of export or other licenses which
could have a material adverse effect on our business. We are subject to state unclaimed property laws in the ordinary course of
business, and are currently undergoing a multi-state unclaimed property audit, the timing and outcome of which cannot be
predicted, and we may incur significant professional fees in conjunction with the audit. We may also be subject to unanticipated
income taxes, excise duties, import taxes, export taxes, value added taxes, or other governmental assessments, and taxes may be
5
impacted by changes in legislation in the tax jurisdictions in which we operate. In addition, our organizational and capital
structure may limit our ability to transfer funds between countries without incurring adverse tax consequences. Any of these
events could result in a loss of business or other unexpected costs that could reduce sales or profits and have a material adverse
effect on our financial condition, results of operations and cash flows.
Any disruption or failure in the operation of our information systems, including from conversions or integrations
of information technology or reporting systems, could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Our information technology ("IT") systems are an integral part of our
business. We depend upon our IT systems to help communicate internally and externally, process orders, manage inventory,
make payments and collect accounts receivable. Our IT systems also allow us to purchase, sell and ship products efficiently and
on a timely basis, to maintain cost-effective operations, and to help provide superior service to our customers. We are currently
in the process of implementing enterprise resource planning ("ERP") platforms across certain of our businesses, and we expect
that we will need to continue to improve and further integrate our IT systems, on an ongoing basis in order to effectively run
our business. If we fail to successfully manage and integrate our IT systems, including these ERP platforms, it could adversely
affect our business or operating results.
Further, in the ordinary course of our business, we store sensitive data, including intellectual property, our proprietary business
information and that of our customers, suppliers and business partners, and personally identifiable information of our employees,
in our data centers and on our networks. The secure maintenance and transmission of this information is critical to our business
operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers
or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the
information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information
could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory
penalties, disrupt our operations, and damage our reputation, which could adversely affect our business, revenues and competitive
position.
We have significant indebtedness that could affect our operations and financial condition, and our failure to meet
certain financial covenants required by our debt agreements may materially and adversely affect our assets, financial
position and cash flows. At December 31, 2017, we had consolidated debt obligations of $532.6 million, representing
approximately 30% of our total capital (indebtedness plus stockholders’ equity) as of that date. Our level of indebtedness,
proportion of variable rate debt obligations and the significant debt servicing costs associated with that indebtedness may
adversely affect our operations and financial condition. For example, our indebtedness could require us to dedicate a substantial
portion of our cash flows from operations to payments on our debt, thereby reducing the amount of our cash flows available for
working capital, capital expenditures, investments in technology and research and development, acquisitions, dividends and
other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in the industries in which we
compete; place us at a competitive disadvantage compared to our competitors, some of whom have lower debt service
obligations and greater financial resources than we do; limit our ability to borrow additional funds; or increase our vulnerability
to general adverse economic and industry conditions. In addition, a majority of our debt arrangements require us to maintain
certain debt and interest coverage ratios and limit our ability to incur debt, make investments or undertake certain other
business activities. These requirements could limit our ability to obtain future financing and may prevent us from taking
advantage of attractive business opportunities. Our ability to meet the financial covenants or requirements in our debt
arrangements may be affected by events beyond our control, and we cannot assure you that we will satisfy such covenants and
requirements. A breach of these covenants or our inability to comply with the restrictions could result in an event of default
under our debt arrangements which, in turn, could result in an event of default under the terms of our other indebtedness. Upon
the occurrence of an event of default under our debt arrangements, after the expiration of any grace periods, our lenders could
elect to declare all amounts outstanding under our debt arrangements, together with accrued interest, to be immediately due and
payable. If this were to happen, we cannot assure you that our assets would be sufficient to repay in full the payments due under
those arrangements or our other indebtedness or that we could find alternative financing to replace that indebtedness.
Conditions in the worldwide credit markets may limit our ability to expand our credit lines beyond current bank
commitments. In addition, our profitability may be adversely affected as a result of increases in interest rates. At December 31,
2017, we and our subsidiaries had $532.6 million aggregate principal amount of consolidated debt obligations outstanding, of
which approximately 61% had interest rates that float with the market (not hedged against interest rate fluctuations). A 100
basis point increase in the interest rate on the floating rate debt in effect at December 31, 2017 would result in an approximate
$3.2 million annualized increase in interest expense.
Changes in the availability or price of materials, products and energy resources could adversely affect our costs
and profitability. We may be adversely affected by the availability or price of raw materials, products and energy resources,
particularly related to certain manufacturing operations that utilize steel, stainless steel, titanium, Inconel, Hastelloys and other
6
specialty materials. The availability and price of raw materials and energy resources may be subject to curtailment or change
due to, among other things, new laws or regulations, global economic or political events including strikes, terrorist attacks and
war, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and
prevailing price levels. In some instances there are limited sources for raw materials and a limited number of primary suppliers
for some of our products for resale. Although we are not dependent upon any single source for any of our principal raw
materials or products for resale, and such materials and products have, historically, been readily available, we cannot assure you
that such raw materials and products will continue to be readily available. Disruption in the supply of raw materials, products or
energy resources or our inability to come to favorable agreements with our suppliers could impair our ability to manufacture,
sell and deliver our products and require us to pay higher prices. Any increase in prices for such raw materials, products or
energy resources could materially adversely affect our costs and our profitability.
We maintain pension and other postretirement benefit plans in the U.S. and certain international locations. Our
costs of providing defined benefit plans are dependent upon a number of factors, such as the rates of return on the plans’ assets,
exchange rate fluctuations, future governmental regulation, global fixed income and equity prices, and our required and/or
voluntary contributions to the plans. Declines in the stock market, prevailing interest rates, declines in discount rates,
improvements in mortality rates and rising medical costs may cause an increase in our pension and other postretirement benefit
expenses in the future and result in reductions in our pension fund asset values and increases in our pension and other
postretirement benefit obligations. These changes have caused and may continue to cause a significant reduction in our net
worth and without sustained growth in the pension investments over time to increase the value of the plans’ assets, and
depending upon the other factors listed above, we could be required to increase funding for some or all of these pension and
postretirement plans.
We carry significant inventories and a loss in net realizable value could cause a decline in our net worth. At
December 31, 2017, our inventories totaled $242.0 million. Inventories are valued at the lower of cost or net realizable value
based on management's judgments and estimates concerning future sales levels, quantities and prices at which such inventories
will be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential
may necessitate future reduction to inventory values. See “Part II - Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies”.
We have significant goodwill and an impairment of our goodwill could cause a decline in our net worth. Our total
assets include substantial goodwill. At December 31, 2017, our goodwill totaled $690.2 million. The goodwill results from our
prior acquisitions, representing the excess of the purchase price we paid over the net assets of the companies acquired. We
assess whether there has been an impairment in the value of our goodwill during each calendar year or sooner if triggering
events warrant. If future operating performance at one or more of our reporting units does not meet expectations or fair values
fall due to significant stock market declines, we may be required to reflect a non-cash charge to operating results for goodwill
impairment. The recognition of an impairment of a significant portion of goodwill would negatively affect our results of
operations and total capitalization, the effect of which could be material. See “Part II - Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”.
We may not realize all of the sales expected from our existing backlog or anticipated orders. At December 31, 2017,
we had $1,039.0 million of order backlog, the majority of which related to aerospace OEM customers. There can be no
assurances that the revenues projected in our backlog will be realized or, if realized, will result in profits. We consider backlog
to be firm customer orders for future delivery. OEM customers may provide projections of components and assemblies that
they anticipate purchasing in the future under existing programs. These projections may represent orders that are beyond lead
time and are included in backlog when supported by a long term agreement. Our customers may have the right under certain
circumstances or with certain penalties or consequences to terminate, reduce or defer firm orders that we have in backlog. If our
customers terminate, reduce or defer firm orders, we may be protected from certain costs and losses, but our sales will
nevertheless be adversely affected. Although we strive to maintain ongoing relationships with our customers, there is an
ongoing risk that orders may be canceled or rescheduled due to fluctuations in our customers’ business needs or purchasing
budgets.
Also, our realization of sales from new and existing programs is inherently subject to a number of important risks and
uncertainties, including whether our customers execute the launch of product programs on time, or at all, the number of units
that our customers actually produce, the timing of production and manufacturing insourcing decisions made by our customers.
In addition, until firm orders are placed, our customers may have the right to discontinue a program or replace us with another
supplier at any time without penalty. Our failure to realize sales from new and existing programs could have a material adverse
effect on our net sales, results of operations and cash flows.
7
We may not recover all of our up-front costs related to new or existing programs. New programs may require
significant up-front investments for capital equipment, engineering, inventory, design and tooling. As OEMs in the
transportation and aerospace industries have looked to suppliers to bear increasing responsibility for the design, engineering
and manufacture of systems and components, they have increasingly shifted the financial risk associated with those
responsibilities to the suppliers as well. This trend may continue and is most evident in the area of engineering cost
reimbursement. We cannot assure you that we will have adequate funds to make such up-front investments or to recover such
costs from our customers as part of our product pricing. In the event that we are unable to make such investments, or to recover
them through sales or direct reimbursement from our customers, our profitability, liquidity and cash flows may be adversely
affected. In addition, we incur costs and make capital expenditures for new program awards based upon certain estimates of
production volumes and production complexity. While we attempt to recover such costs and capital expenditures by
appropriately pricing our products, the prices of our products are based in part upon planned production volumes. If the actual
production is significantly less than planned or significantly more complex than anticipated, we may be unable to recover such
costs. In addition, because a significant portion of our overall costs is fixed, declines in our customers’ production levels can
adversely affect the level of our reported profits even if our up-front investments are recovered.
We may not realize all of the intangible assets related to the Aerospace aftermarket businesses. We participate in
aftermarket Revenue Sharing Programs ("RSPs") under which we receive an exclusive right to supply designated aftermarket
parts over the life of the related aircraft engine program to our customer, General Electric ("GE"). As consideration, we pay
participation fees, which are recorded as intangible assets and are recognized as a reduction of sales over the estimated life of
the related engine programs. Our total investments in participation fees under our RSPs as of December 31, 2017 equaled
$293.7 million, all of which have been paid. At December 31, 2017, the remaining unamortized balance of these participation
fees was $185.6 million.
We entered into Component Repair Programs ("CRPs"), also with GE, during 2015, 2014 and 2013. The CRPs provide
for, among other items, the right to sell certain aftermarket component repair services for CFM56, CF6, CF34 and LM engines
directly to other customers over the life of the aircraft engine program as one of a few GE licensed suppliers. In addition, the
CRPs extended certain contracts under which the Company currently provides these services directly to GE. Our total
investments in CRPs as of December 31, 2017 equaled $111.8 million, all of which have been paid. At December 31, 2017, the
remaining unamortized balance the CRPs was $95.3 million. We recorded the CRP payments as an intangible asset which is
recognized as a reduction of sales over the remaining useful life of these engine programs.
The realizability of each asset is dependent upon future revenues related to the programs' aftermarket parts and services
and is subject to impairment testing if circumstances indicate that its carrying amount may not be recoverable. The potential
exists that actual revenues will not meet expectations due to a change in market conditions, including, for example, the
replacement of older engines with new, more fuel-efficient engines or our ability to maintain market share within the
aftermarket business. A shortfall in future revenues may result in the failure to realize the net amount of the investments, which
could adversely affect our financial condition and results of operations. In addition, profitability could be impacted by the
amortization of the participation fees and licenses, and the expiration of the international tax incentives on these programs. See
“Part II - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies”.
We face risks of cost overruns and losses on fixed-price contracts. We sell certain of our products under firm, fixed-
price contracts providing for a fixed price for the products regardless of the production or purchase costs incurred by us. The
cost of producing products may be adversely affected by increases in the cost of labor, materials, fuel, outside processing,
overhead and other factors, including manufacturing inefficiencies. Increased production costs may result in cost overruns and
losses on contracts.
The departure of existing management and key personnel, a shortage of skilled employees or a lack of qualified
sales professionals could materially affect our business, operations and prospects. Our executive officers are important to
the management and direction of our business. Our future success depends, in large part, on our ability to retain or replace these
officers and other key management personnel. Although we believe we will be able to attract and retain talented personnel and
replace key personnel should the need arise, our inability to do so could have a material adverse effect on our business,
financial condition, results of operations or cash flows. Because of the complex nature of many of our products and services,
we are generally dependent on an educated and highly skilled workforce, including, for example, our engineering talent. In
addition, there are significant costs associated with the hiring and training of sales professionals. We could be adversely
affected by a shortage of available skilled employees or the loss of a significant number of our sales professionals.
If we are unable to protect our intellectual property rights effectively, our financial condition and results of
operations could be adversely affected. We own or are licensed under various intellectual property rights, including patents,
8
trademarks and trade secrets. Our intellectual property rights may not be sufficiently broad or otherwise may not provide us a
significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed
to us. In addition, the steps that we have taken to maintain and protect our intellectual property may not prevent it from being
improperly disclosed, challenged, invalidated, circumvented or designed-around, particularly in countries where intellectual
property rights are not highly developed or protected. In some circumstances, enforcement may not be available to us because
an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory
licensing of our intellectual property. We also rely on nondisclosure and noncompetition agreements with employees,
consultants and other parties to protect, in part, confidential information, trade secrets and other proprietary rights. There can be
no assurance that these agreements will adequately protect these intangible assets and will not be breached, that we will have
adequate remedies for any breach, or that others will not independently develop substantially equivalent proprietary
information. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect
our intellectual property or detect or prevent circumvention or unauthorized use of such property and the cost of enforcing our
intellectual property rights could adversely impact our competitive position, financial condition and results of operations.
Any product liability, warranty, contractual or other claims in excess of insurance may adversely affect our
financial condition. Our operations expose us to potential product liability risks that are inherent in the design, manufacture
and sale of our products and the products we buy from third parties and sell to our customers, or to potential warranty,
contractual or other claims. For example, we may be exposed to potential liability for personal injury, property damage or death
as a result of the failure of an aircraft component designed, manufactured or sold by us, or the failure of an aircraft component
that has been serviced by us or of the components themselves. While we have liability insurance for certain risks, our insurance
may not cover all liabilities, including potential reputational impacts. Additionally, insurance coverage may not be available in
the future at a cost acceptable to us. Any material liability not covered by insurance or for which third-party indemnification is
not available for the full amount of the loss could have a material adverse effect on our financial condition, results of operations
and cash flows.
From time to time, we receive product warranty claims, under which we may be required to bear costs of inspection,
repair or replacement of certain of our products. Warranty claims may range from individual customer claims to full recalls of
all products in the field. We vigorously defend ourselves in connection with these matters. We cannot, however, assure you that
the costs, charges and liabilities associated with these matters will not be material, or that those costs, charges and liabilities
will not exceed any amounts reserved for them in our consolidated financial statements.
Our business, financial condition, results of operations and cash flows could be adversely impacted by strikes or
work stoppages. Approximately 17% of our U.S. employees are covered by collective bargaining agreements and more than
39% of our non-U.S. employees are covered by collective bargaining agreements or statutory trade union agreements. The
Company has a national collective bargaining agreement (“CBA”) with certain unionized employees at the Bristol, Connecticut
and Corry, Pennsylvania facilities of the Associated Spring business unit, covering approximately 300 employees. The current
CBA will expire in August 2020, at which time we expect to negotiate a successor agreement. The local CBA for the Corry,
Pennsylvania facility of the Associated Spring business unit will expire on June 14, 2018, and the local CBA for the Bristol,
Connecticut facility of the Associated Spring business unit will expire on October 15, 2018, at which time we expect to
negotiate successor agreements. We also have annual negotiations in Brazil and Mexico and, collectively, these negotiations
cover approximately 300 employees in those two countries. In addition, we expect to negotiate a successor agreement to the
local CBA covering approximately 250 employees in Singapore which will expire at the end of 2018. We also completed
negotiations resulting in wage adjustments at four locations in our Industrial Segment, collectively, covering a total of
approximately 750 employees.
Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in
negotiating new CBAs or that such negotiations will not result in significant increases in the cost of labor, including healthcare,
pensions or other benefits. Any potential strikes or work stoppages, and the resulting adverse impact on our relationships with
customers, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Similarly, a protracted strike or work stoppage at any of our major customers, suppliers or other vendors could materially
adversely affect our business.
Changes in taxation requirements could affect our financial results. Our products are subject to import and excise
duties and/or sales or value-added taxes in many jurisdictions in which we operate. Increases in indirect taxes could affect our
products’ affordability and therefore reduce our sales. We are also subject to income tax in numerous jurisdictions in which we
generate revenues. Changes in tax laws, tax rates or tax rulings may have a significant adverse impact on our effective tax rate.
Among other things, our tax liabilities are affected by the mix of pretax income or loss among the tax jurisdictions in which we
operate and the potential repatriation of foreign earnings to the U.S. Further, during the ordinary course of business, we are
subject to examination by the various tax authorities of the jurisdictions in which we operate which could result in an
9
unanticipated increase in taxes. On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. Tax Code that affect
2017 and that include, but are not limited to, requiring a one-time Transition Tax on certain unrepatriated earnings of foreign
subsidiaries of the Company (payable over eight years) and exempting foreign dividends paid to the U.S. during the year from
taxation, if such earnings are included with the Transition Tax. The Act also establishes new law that will affect 2018 and
beyond, including, but not limited to a reduction of the U.S. Corporate income tax rate from 35% to 21% and a general
elimination of U.S. federal income taxes on dividends from foreign subsidiaries. The Company has recorded a provisional tax
expense in the Consolidated Financial Statements as of December 31, 2017. The Company has not finalized its' accounting for
the income tax effects related to certain sections of the Act; however we are permitted to make changes over a measurement
period that should not extend beyond one year from the enactment date of the Act. Such changes may adversely affect our
financial condition, results of operations and cash flows. See “Part II - Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - U.S. Tax Reform”.
Changes in accounting guidance could affect our financial results. New accounting guidance that may become
applicable to us from time to time, or changes in the interpretations of existing guidance, could have a significant effect on our
reported results for the affected periods. Adoption of new accounting guidance could have a material impact on our financial
statements and may retroactively affect the accounting treatment of transactions completed before adoption. See Note 1 of the
Consolidated Financial Statements.
RISKS RELATED TO THE INDUSTRIES IN WHICH WE OPERATE
We operate in highly competitive markets. We may not be able to compete effectively with our competitors, and
competitive pressures could adversely affect our business, financial condition and results of operations. Our two global
business segments compete with a number of larger and smaller companies in the markets we serve. Some of our competitors
have greater financial, production, research and development, or other resources than we do. Within Aerospace, certain of our
OEM customers compete with our repair and overhaul business. Some of our OEM customers in the aerospace industry also
compete with us where they have the ability to manufacture the components and assemblies that we supply to them but have
chosen, for capacity limitations, cost considerations or other reasons, to outsource the manufacturing to us. Our customers
award business based on, among other things, price, quality, reliability of supply, service, technology and design. Our
competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Our competitors
may also develop products or services, or methods of delivering those products or services that are superior to our products,
services or methods. Our competitors may adapt more quickly than us to new technologies or evolving customer requirements.
We cannot assure you that we will be able to compete successfully with our existing or future competitors. Our ability to
compete successfully will depend, in part, on our ability to continue make investments to innovate and manufacture the types of
products demanded by our customers, and to reduce costs by such means as reducing excess capacity, leveraging global
purchasing, improving productivity, eliminating redundancies and increasing production in low-cost countries. We have
invested, and expect to continue to invest, in increasing our manufacturing footprint in low-cost countries. We cannot assure
you that we will have sufficient resources to continue to make such investments or that we will be successful in maintaining our
competitive position. If we are unable to differentiate our products or maintain a low-cost footprint, we may lose market share
or be forced to reduce prices, thereby lowering our margins. Any such occurrences could adversely affect our financial
condition, results of operations and cash flows.
The industries in which we operate have been experiencing consolidation, both in our suppliers and the customers we
serve. Supplier consolidation is in part attributable to OEMs more frequently awarding long-term sole source or preferred
supplier contracts to the most capable suppliers in an effort to reduce the total number of suppliers from whom components and
systems are purchased. If consolidation of our existing competitors occurs, we would expect the competitive pressures we face
to increase, and we cannot assure you that our business, financial condition, results of operations or cash flows will not be
adversely impacted as a result of consolidation by our competitors or customers.
Original equipment manufacturers in the aerospace and transportation industries have significant pricing
leverage over suppliers and may be able to achieve price reductions over time. Additionally, we may not be successful in
our efforts to raise prices on our customers. There is substantial and continuing pressure from OEMs in the transportation
industries, including automotive and aerospace, to reduce the prices they pay to suppliers. We attempt to manage such
downward pricing pressure, while trying to preserve our business relationships with our customers, by seeking to reduce our
production costs through various measures, including purchasing raw materials and components at lower prices and
implementing cost-effective process improvements. Our suppliers have periodically resisted, and in the future may resist,
pressure to lower their prices and may seek to impose price increases. If we are unable to offset OEM price reductions, our
profitability and cash flows could be adversely affected. In addition, OEMs have substantial leverage in setting purchasing and
payment terms, including the terms of accelerated payment programs under which payments are made prior to the account due
10
date in return for an early payment discount. OEMs can unexpectedly change their purchasing policies or payment practices,
which could have a negative impact on our short-term working capital.
Demand for our defense-related products depends on government spending. A portion of Aerospace's sales is derived
from the military market, including single-sourced and dual-sourced sales. The military market is largely dependent upon
government budgets and is subject to governmental appropriations. Although multi-year contracts may be authorized in
connection with major procurements, funds are generally appropriated on a fiscal year basis even though a program may be
expected to continue for several years. Consequently, programs are often only partially funded and additional funds are
committed only as further appropriations are made. We cannot assure you that maintenance of or increases in defense spending
will be allocated to programs that would benefit our business. Moreover, we cannot assure you that new military aircraft
programs in which we participate will enter full-scale production as expected. A decrease in levels of defense spending or the
government’s termination of, or failure to fully fund, one or more of the contracts for the programs in which we participate
could have a material adverse effect on our financial position and results of operations.
The aerospace industry is highly regulated. Complications related to aerospace regulations may adversely affect
the Company. A substantial portion of our income is derived from our aerospace businesses. The aerospace industry is highly
regulated in the U.S. by the Federal Aviation Administration, or FAA, and in other countries by similar regulatory agencies. We
must be certified by these agencies and, in some cases, by individual OEMs in order to engineer and service systems and
components used in specific aircraft models. If material authorizations or approvals were delayed, revoked or suspended, our
business could be adversely affected. New or more stringent governmental regulations may be adopted, or industry oversight
heightened, in the future, and we may incur significant expenses to comply with any new regulations or any heightened
industry oversight.
Fluctuations in jet fuel and other energy prices may impact our operating results. Fuel costs constitute a significant
portion of operating expenses for companies in the aerospace industry. Fluctuations in fuel costs 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. Widespread disruption to oil
production, refinery operations and pipeline capacity in certain areas of the U.S. can impact the price of jet fuel significantly.
Conflicts in the Middle East, an important source of oil for the U.S. and other countries where we do business, cause prices for
fuel to be volatile. Because we and many of our customers are in the aerospace industry, these fluctuations could have a
material adverse effect on our financial condition or results of operations.
Our products and services may be rendered obsolete by new products, technologies and processes. Our
manufacturing operations focus on highly engineered components which require extensive engineering and research and
development time. Our competitive advantage may be adversely impacted if we cannot continue to introduce new products
ahead of our competition, or if our products are rendered obsolete by other products or by new, different technologies and
processes. The success of our new products will depend on a number of factors, including innovation, customer acceptance, the
efficiency of our suppliers in providing materials and component parts, and the performance and quality of our products relative
to those of our competitors. We cannot predict the level of market acceptance or the amount of market share our new products
will achieve. Additionally, we may face increased or unexpected costs associated with new product introduction, including the
use of additional resources such as personnel and capital. We cannot assure that we will not experience new product
introduction delays in the future.
RISKS RELATED TO RESTRUCTURING, ACQUISITIONS, JOINT VENTURES AND DIVESTITURES
Our restructuring actions could have long-term adverse effects on our business. From time to time, we have
implemented restructuring activities across our businesses to adjust our cost structure, and we may engage in similar
restructuring activities in the future. We may not achieve expected cost savings from workforce reductions or restructuring
activities and actual charges, costs and adjustments due to these actions may vary materially from our estimates. Our ability to
realize anticipated cost savings, synergies and revenue enhancements may be affected by a number of factors, including the
following: our ability to effectively eliminate duplicative back office overhead and overlapping sales personnel, rationalize
manufacturing capacity, synchronize information technology systems, consolidate warehousing and other facilities and shift
production to more economical facilities; significant cash and non-cash integration and implementation costs or charges in
order to achieve those cost savings, which could offset any such savings and other synergies resulting from our acquisitions or
divestitures; and our ability to avoid labor disruption in connection with these activities. In addition, delays in implementing
planned restructuring activities or other productivity improvements may diminish the expected operational or financial benefits.
See Note 8 of the Consolidated Financial Statements.
11
Our acquisition and other strategic initiatives may not be successful. We have made a number of acquisitions in the
past, including most recently the acquisitions of the Gammaflux and FOBOHA businesses, and we anticipate that we may, from
time to time, acquire additional businesses, assets or securities of companies, and enter into joint ventures and other strategic
relationships that we believe would provide a strategic fit with our businesses. These activities expose the Company to a
number of risks and uncertainties, the occurrence of any of which could materially adversely affect our business, cash flows,
financial condition and results of operations. A portion of the industries that we serve are mature industries. As a result, our
future growth may depend in part on the successful acquisition and integration of acquired businesses into our existing
operations. We may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future
acquisitions on satisfactory terms, obtain regulatory approvals or otherwise complete acquisitions in the future.
We could have difficulties integrating acquired businesses with our existing operations. Difficulties of integration can
include coordinating and consolidating separate systems, integrating the management of the acquired business, retaining market
acceptance of acquired products and services, maintaining employee morale and retaining key employees, and implementing
our enterprise resource planning systems and operational procedures and disciplines. Any such difficulties may make it more
difficult to maintain relationships with employees, customers, business partners and suppliers. In addition, even if integration is
successful, the financial performance of acquired business may not be as expected and there can be no assurance we will realize
anticipated benefits from our acquisitions. We cannot assure you that we will effectively assimilate the business or product
offerings of acquired companies into our business or product offerings or realize anticipated operational synergies. In
connection with the integration of acquired operations or the conduct of our overall business strategies, we may periodically
restructure our businesses and/or sell assets or portions of our business. Integrating the operations and personnel of acquired
companies into our existing operations may result in difficulties, significant expense and accounting charges, disrupt our
business or divert management’s time and attention.
Acquisitions involve numerous other risks, including potential exposure to unknown liabilities of acquired companies and
the possible loss of key employees and customers of the acquired business. Certain of the acquisition agreements by which we
have acquired businesses require the former owners to indemnify us against certain liabilities related to the business operations
before we acquired it. However, the liability of the former owners is limited and certain former owners may be unable to meet
their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all,
and as a result we may face unexpected liabilities that adversely affect our financial condition. In connection with acquisitions
or joint venture investments outside the U.S., we may enter into derivative contracts to purchase foreign currency in order to
hedge against the risk of foreign currency fluctuations in connection with such acquisitions or joint venture investments, which
subjects us to the risk of foreign currency fluctuations associated with such derivative contracts. Additionally, our final
determinations and appraisals of the fair value of assets acquired and liabilities assumed in our acquisitions may vary materially
from earlier estimates. We cannot assure you that the fair value of acquired businesses will remain constant.
We continually assess the strategic fit of our existing businesses and may divest or otherwise dispose of businesses
that are deemed not to fit with our strategic plan or are not achieving the desired return on investment, and we cannot
be certain that our business, operating results and financial condition will not be materially and adversely affected. A
successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and
employees to any purchaser, identify and separate the intellectual property to be divested from the intellectual property that we
wish to retain, reduce fixed costs previously associated with the divested assets or business, and collect the proceeds from any
divestitures. In addition, if customers of the divested business do not receive the same level of service from the new owners,
this may adversely affect our other businesses to the extent that these customers also purchase other products offered by us. All
of these efforts require varying levels of management resources, which may divert our attention from other business operations.
If we do not realize the expected benefits or synergies of any divestiture transaction, our consolidated financial position, results
of operations and cash flows could be negatively impacted. In addition, divestitures of businesses involve a number of risks,
including significant costs and expenses, the loss of customer relationships, and a decrease in revenues and earnings associated
with the divested business. Furthermore, divestitures potentially involve significant post-closing separation activities, which
could involve the expenditure of material financial resources and significant employee resources. Any divestiture may result in
a dilutive impact to our future earnings if we are unable to offset the dilutive impact from the loss of revenue associated with
the divestiture, as well as significant write-offs, including those related to goodwill and other intangible assets, which could
have a material adverse effect on our results of operations and financial condition.
Item 1B. Unresolved Staff Comments
None.
12
Item 2. Properties
Location
Manufacturing:
North America
Europe
Asia
Central and Latin America
Non-Manufacturing:
North America
Europe
* The Company's Corporate office
Location
Manufacturing:
North America
Europe
Asia
Non-Manufacturing:
North America
Europe
Asia
Central and Latin America
Number of Facilities - Owned
Industrial
Aerospace
Other
Total
6
9
1
2
18
0
2
2
5
0
0
0
5
0
0
0
0
0
0
0
0
1*
0
1
Number of Facilities - Leased
Industrial
Aerospace
Other
Total
3
2
5
10
8
13
20
3
44
2
0
5
7
2
1
0
0
3
0
0
0
0
1**
0
0
0
1
11
9
1
2
23
1
2
3
5
2
10
17
11
14
20
3
48
** Industrial Segment headquarters and certain Shared Services groups.
13
Item 3. 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 such proceedings,
individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
In November 2016, the Company’s previously disclosed arbitration with Triumph Actuation Systems - Yakima, LLC
("Triumph") was concluded. The Company was awarded $9.2 million, plus interest on the judgment of $1.4 million, which
amounts were received on January 3, 2017. The outcome did not have a material impact on the Company's consolidated
financial position, liquidity or consolidated results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
14
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
(a) Market Information
The Company’s common stock is traded on the New York Stock Exchange under the symbol “B”. The following table
sets forth, for the periods indicated, the low and high sales intra-day trading price per share, as reported by the New York Stock
Exchange, and dividends declared and paid.
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
Quarter ended March 31
Quarter ended June 30
Quarter ended September 30
Quarter ended December 31
Stockholders
$
$
Low
45.47
49.31
57.70
61.06
Low
30.07
31.13
32.55
37.88
$
$
2017
High
51.97
60.74
70.84
72.87
2016
High
35.81
37.75
41.86
49.90
Dividends
0.13
$
0.14
0.14
0.14
Dividends
0.12
$
0.13
0.13
0.13
As of February 13, 2018, there were approximately 3,088 holders of record of the Company’s common stock. A
significant number of the outstanding shares of common stock which are beneficially owned by individuals or entities are
registered in the name of a nominee of The Depository Trust Company, a securities depository for banks and brokerage firms.
The Company believes that there are approximately 29,596 beneficial owners of its common stock.
Dividends
Payment of future dividends will depend upon the Company’s financial condition, results of operations and other factors
deemed relevant by the Company’s Board of Directors, as well as any limitations resulting from financial covenants under the
Company’s credit facilities or debt indentures. See the table above for dividend information for 2017 and 2016.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding Securities Authorized for Issuance Under Equity Compensation Plans, see Part III, Item 12 of
this Annual Report.
15
Performance Graph
A stock performance graph based on cumulative total returns (price change plus reinvested dividends) for $100 invested
the Company on December 31, 2012 is set forth below.
BGI
S&P 600
Russell 2000
2012
$100.00
$100.00
$100.00
2013
$172.90
$141.29
$138.81
2014
$169.10
$149.40
$145.59
2015
$163.68
$146.40
$139.18
2016
$222.26
$185.09
$168.75
2017
$299.35
$209.41
$193.42
The performance graph includes the S&P 600 Small Cap Index and the Russell 2000 Index, both of which include the
Company.
(c) Issuer Purchases of Equity Securities
Period
October 1-31, 2017
November 1-30, 2017
December 1-31, 2017
Total
Total Number
of Shares (or Units)
Purchased
Average Price
Paid Per Share
(or Unit)
304
106,471
171,646
278,421 (1)
$
$
$
$
70.75
64.88
64.61
64.72
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
—
106,100
164,000
270,100
Maximum Number of
Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
(2)
4,042,006
3,935,906
3,771,906
(1) Other than 270,100 shares purchased in the fourth quarter of 2017, which were purchased as part of the Company's 2011 Program (defined below),
all acquisitions of equity securities during the fourth quarter of 2017 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 December 31, 2015, 1.1 million shares of common stock had not been purchased under the 2011 Program. On February 10, 2016, the
Board of Directors of the Company increased the number of shares authorized for repurchase under the 2011 Program by 3.9 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.
16
Item 6. Selected Financial Data
Per common share (1)
Income from continuing operations
Basic
Diluted
Net income
Basic
Diluted
Dividends declared and paid
Stockholders’ equity (at year-end)
Stock price (at year-end)
For the year (in thousands)
Net sales
Operating income
As a percent of net sales
Income from continuing operations
As a percent of net sales
Net income
2017 (5)(6)
2016 (7)
2015 (8)
2014
2013 (9)(10)
$
$
1.10
1.09
$
2.50
2.48
$
2.21
2.19
$
2.20
2.16
1.34
1.31
1.10
1.09
0.55
23.61
63.27
2.50
2.48
0.51
21.72
47.42
2.21
2.19
0.48
20.94
35.39
2.16
2.12
0.45
20.40
37.01
5.02
4.92
0.42
21.17
38.31
$1,436,499
210,278
$ 1,230,754
$ 1,193,975
$ 1,262,006
$ 1,091,566
192,178
168,396
179,974
123,201
14.6%
15.6%
14.1%
14.3%
11.3%
$ 59,415
$ 135,601
$ 121,380
$ 120,541
$ 72,321
4.1%
11.0%
10.2%
9.6%
6.6%
$ 59,415
$ 135,601
$ 121,380
$ 118,370
$ 270,527
As a percent of net sales
As a percent of average stockholders’ equity (2)
4.1%
4.7%
11.0%
11.6%
10.2%
10.7%
9.4%
10.3%
24.8%
28.3%
Depreciation and amortization
Capital expenditures
Weighted average common shares outstanding – basic
Weighted average common shares outstanding – diluted
Year-end financial position (in thousands)
Working capital
Goodwill
Other intangible assets, net
Property, plant and equipment, net
Total assets
Long-term debt and notes payable
Stockholders’ equity
Debt as a percent of total capitalization (3)
Statistics
Employees at year-end (4)
$ 90,150
$ 80,154
$ 78,242
$ 81,395
$ 65,052
58,712
54,073
54,605
47,577
54,191
54,631
45,982
55,028
55,513
57,365
54,791
55,723
57,304
53,860
54,973
$ 452,960
$ 306,609
$ 359,038
$ 323,306
$ 276,878
690,223
507,042
359,298
2,365,716
532,596
633,436
522,258
334,489
587,992
528,322
308,856
594,949
554,694
299,435
649,697
534,293
302,558
2,137,539
2,061,866
2,073,885
2,123,673
500,954
509,906
504,734
547,424
1,260,321
1,168,358
1,127,753
1,111,793
1,141,414
29.7%
30.0%
31.1%
31.2%
32.4%
5,375
5,036
4,735
4,515
4,331
(1)
Income from continuing operations and net income per common share are based on the weighted average common shares outstanding during each year.
Stockholders’ equity per common share is calculated based on actual common shares outstanding at the end of each year.
(2) Average stockholders' equity is calculated based on the month-end stockholders equity balances between December 31, 2016 and December 31, 2017 (13-month
average).
(3) Debt includes all interest-bearing debt and total capitalization includes interest-bearing debt and stockholders’ equity.
(4) The number of employees at each year-end includes employees of continuing operations and excludes prior employees of discontinued operations.
(5) During 2017, the Company completed the acquisition of the assets of the Gammaflux business. The results of Gammaflux, from the acquisition on April 3, 2017,
have been included within the Company's Consolidated Financial Statements for the period ended December 31, 2017.
(6) During 2017, the Company recorded the effects of the U.S. Tax Reform, resulting in tax expense of $96.7 million, or $1.79 per basic share ($1.77 per diluted
share). See Note 13 of the Consolidated Financial Statements.
(7) During 2016, the Company completed the acquisition of FOBOHA. The results of FOBOHA, from the acquisition on August 31, 2016, have been included within
the Company's Consolidated Financial Statements for the period ended December 31, 2016.
(8) During 2015, the Company completed the acquisitions of Thermoplay and Priamus. The results of Thermoplay and Priamus, from their acquisitions on August 7,
2015 and October 1, 2015, respectively, have been included within the Company's Consolidated Financial Statements for the period ended December 31, 2015.
(9) During 2013, the Company completed the acquisition of the Männer Business. The results of the Männer Business, from the acquisition on October 31, 2013,
have been included within the Company's Consolidated Financial Statements for the period ended December 31, 2013.
(10) During 2013, the Company sold the BDNA business within the segment formerly referred to as Distribution. The results of the BDNA business, including any
(loss) gain on the sale of business, have been reported through discontinued operations during the respective periods.
17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our consolidated financial statements and related notes in
this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements
that involve risks, uncertainties, and assumptions that could cause actual results to differ materially from our
expectations. Factors that could cause such differences include those described in the section titled “Risk Factors” and
elsewhere in this report. We undertake no obligation to update any of the forward-looking statements.
OVERVIEW
2017 Highlights
Barnes Group Inc. (the "Company") achieved sales of $1,436.5 million in 2017, an increase of $205.7 million, or 16.7%,
from 2016. Within Industrial, the acquisitions of FOBOHA in August 2016 and Gammaflux in April 2017 provided incremental
sales of $47.2 million and $9.1 million, respectively, during the 2017 period. Organic sales (net sales excluding both foreign
currency and acquisition impacts) increased by $137.1 million, or 11.1%, with increases of 9.8% and 13.8% within the
Industrial and Aerospace segments, respectively. Sales in the Industrial segment were impacted by changes in foreign currency
which increased sales by approximately $12.4 million as the U.S. dollar weakened against foreign currencies.
Operating income increased 9.4% from $192.2 million in 2016 to $210.3 million in 2017 and operating margin decreased
from 15.6% in 2016 to 14.6% in 2017. Operating income was impacted by increased leverage of organic sales growth in both
segments, partially offset by lower productivity, resulting primarily from increased costs incurred on certain programs at
Industrial.
The Company focused on profitable sales growth both organically and through acquisition, in addition to productivity
improvements, as key strategic objectives in 2017. Management continued its focus on cash flow and working capital
management in 2017 and generated $203.9 million in cash flow from operations.
Business Transformation
Acquisitions and strategic relationships with our customers have been a key growth driver for the Company, and we
continue to seek alliances which foster long-term business relationships. These acquisitions have allowed us to extend into new
or adjacent markets, expand our geographic reach, and commercialize new products, processes and services. The Company
continually evaluates its business portfolio to optimize product offerings and maximize value. We have significantly
transformed our business following our entrance into the plastic injection molding market.
The Company has completed a number of acquisitions in the past few years. In the second quarter of 2017, the Company
completed its acquisition of the assets of the privately held Gammaflux L.P. business ("Gammaflux"), a leading supplier of hot
runner temperature and sequential valve gate control systems to the plastics industry. Gammaflux, which is headquartered in
Sterling, Virginia and has offices in Illinois and Germany, provides temperature control solutions for injection molding,
extrusion, blow molding, thermoforming, and other applications. Its end markets include packaging, electronics, automotive,
household products, medical, and tool building. The Company acquired the assets of Gammaflux for an aggregate purchase
price of $8.9 million, which was financed using cash on hand and borrowings under the Company's revolving credit facility.
The purchase price includes adjustments under the terms of the Asset Purchase Agreement. In connection with the acquisition,
the Company recorded $1.5 million of goodwill and $3.7 million of intangible assets. See Notes 2 and 5 to the Consolidated
Financial Statements.
In the third quarter of 2016, the Company, through three of its subsidiaries (collectively, the “Purchaser”), completed its
acquisition of the molds business of Adval Tech Holding AG and Adval Tech Holdings (Asia) Pte. Ltd. ("FOBOHA").
FOBOHA is headquartered in Haslach, Germany and currently operates out of two manufacturing facilities located in Germany
and China. At the time of acquisition, FOBOHA also operated out of a manufacturing facility located in Switzerland; however,
this location was consolidated and closed during 2017. See Note 8 to the Consolidated Financial Statements. FOBOHA
specializes in the development and manufacture of complex plastic injection molds for packaging, medical, consumer and
automotive applications. The Company acquired FOBOHA for an aggregate cash purchase price of CHF 137.9 million ($140.2
million) which was financed using cash on hand and borrowings under the Company's revolving credit facility. The purchase
price includes adjustments under the terms of the FOBOHA Share Purchase Agreement, including approximately CHF 11.3
million ($11.5 million) related to cash acquired. In connection with the acquisition, the Company recorded $39.8 million of
intangible assets and $75.6 million of goodwill. See Notes 2 and 5 to the Consolidated Financial Statements.
18
In the fourth quarter of 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.
Priamus 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 has been integrated into our Industrial segment. The Company acquired Priamus
for an aggregate cash purchase price of CHF 9.9 million ($10.1 million) which was financed using cash on hand and
borrowings under the Company's revolving credit facility. The purchase price includes adjustments under the terms of the Share
Purchase Agreement, including CHF 1.6 million ($1.6 million) related to cash acquired. See Note 2 of the Consolidated
Financial Statements.
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
has been 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 €58.1 million ($63.7 million), pursuant to the terms of the Sale
and Purchase Agreement ("SPA"), which was financed using cash on hand and borrowings under the Company's revolving
credit facility. The purchase price includes adjustments under the terms of the SPA, including €17.1 million ($18.7 million)
related to cash acquired. See Note 2 of the Consolidated Financial Statements.
Management Objectives
Management is focused on continuing the Company's transformation by executing on its profitable growth strategy comprised
of the following elements:
•
•
•
•
Build a world-class Company focused on high margin, high growth businesses
Leverage the Barnes Enterprise System ("BES") as a significant competitive advantage
Expand and protect our core intellectual property to deliver differentiated solutions
Effectively allocate capital to drive top quartile total shareholder returns.
The successful execution of this strategy requires making value enhancing investments in organic growth (new products,
processes, systems, services, markets and customers) and strategic acquisitions. Management remains focused on a deeper
deployment of BES across the Company to advance Commercial Excellence, Operational Excellence and Financial Excellence.
In addition, we remain focused on optimizing two key strategic enablers that will strengthen our competitive position:
•
•
Cultivate a culture of innovation and build upon intellectual property to drive growth
Enhance our talent management system to recruit, develop and retain an engaged and empowered workforce.
The combined benefits from growth investment and execution of the strategic enablers is expected to generate long-term value
for the Company's shareholders, customers and employees.
Our Business
The Company consists of two operating segments: Industrial and Aerospace.
Key Performance Indicators
Management evaluates the performance of its reportable segments based on the sales, operating profit, operating margins
and cash generation of the respective businesses, which includes net sales, cost of sales, selling and administrative expenses and
certain components of other income and other expenses, as well as the allocation of corporate overhead expenses. Each segment
has standard key performance indicators (“KPIs”), a number of which are focused on customer metrics (on-time-delivery and
quality), internal effectiveness and productivity/efficiency metrics (sales effectiveness, global sourcing, operational excellence,
functional excellence, cost of quality, and days working capital), employee safety-related metrics (total recordable incident rate
and lost time incident rate), and specific KPIs on profitable growth.
19
Key Industry Data
In both segments, management tracks a variety of economic and industry data as indicators of the health of a particular
sector.
At Industrial, key data for the manufacturing operations include the Institute for Supply Management’s manufacturing
PMI Composite Index (and similar indices for European and Asian-based businesses); the Federal Reserve’s Industrial
Production Index ("the IPI"); IHS-Markit worldwide forecasts for light vehicle production, as well as new model introductions
and existing model refreshes; North American medium and heavy duty vehicle production; IC Interconnection Consulting
Hotrunners Worldwide Report for Auto, Medical, Personal Care and Packaging industries; and global GDP growth forecasts.
At Aerospace, management of the aftermarket business monitors the number of aircraft in the active fleet, the number of
planes temporarily or permanently taken out of service, aircraft utilization rates for the major airlines, engine shop visits, airline
profitability, aircraft fuel costs and traffic growth. The Aerospace OEM business regularly tracks orders and deliveries for each
of the major aircraft manufacturers, as well as engine purchases made for new aircraft. Management also monitors annual
appropriations for the U.S. military related to purchases of new or used aircraft and engine components.
RESULTS OF OPERATIONS
Sales
($ in millions)
Industrial
Aerospace
Total
2017 vs. 2016:
2017
2016
$ Change
% Change
2015
$
$
973.9
462.6
1,436.5
$
$
824.2
406.5
1,230.8
$
$
149.7
56.1
205.7
18.2% $
13.8%
782.3
411.7
16.7% $
1,194.0
The Company reported net sales of $1,436.5 million in 2017, an increase of $205.7 million, or 16.7%, from 2016.
Acquired businesses contributed incremental sales of $56.3 million during the 2017 period. Organic sales within Industrial
increased by $81.0 million, or 9.8% during 2017, driven primarily by continued strength in our Nitrogen Gas Products and
Molding Solutions business units. Aerospace recorded sales of $462.6 million in 2017, a $56.1 million, or 13.8% increase from
2016 as newer, more technologically advanced engine platforms increased volumes at the original equipment manufacturing
business within Aerospace. Sales within the aftermarket businesses also improved throughout 2017. The impact of foreign
currency translation increased sales within Industrial by approximately $12.4 million as the U.S. dollar weakened against
foreign currencies. Sales within Aerospace were not impacted by changes in foreign currency as these are largely denominated
in U.S. dollars. The Company’s international sales increased 19.8% year-over-year, while domestic sales increased 13.0%,
largely a result of Aerospace sales being primarily U.S. based. Excluding the impact of foreign currency translation on sales,
however, the Company's international sales in 2017 increased 18.0%, inclusive of sales through acquisition, from 2016.
2016 vs. 2015:
The Company reported net sales of $1,230.8 million in 2016, an increase of $36.8 million, or 3.1%, from 2015. Acquired
businesses contributed incremental sales of $47.4 million during the 2016 period. Organic sales within Industrial increased by
$4.1 million, or 0.5%, during 2016, primarily due to strength in our Molding Solutions businesses, slightly offset by continued
softness in North American general industrial end-markets. Aerospace recorded sales of $406.5 million in 2016, a $5.2 million,
or 1.3% decrease from 2015. Lower sales within the OEM and spare parts businesses were partially offset by increased sales
within the MRO business. The impact of foreign currency translation decreased sales within Industrial by approximately $9.6
million as the U.S. dollar strengthened against foreign currencies. Sales within Aerospace were not impacted by changes in
foreign currency as these are largely denominated in U.S. dollars. The Company’s international sales increased 10.4% year-
over-year, while domestic sales decreased 4.7%, largely a result of Aerospace sales being primarily U.S.-based. Excluding the
impact of foreign currency translation on sales, however, the Company's international sales in 2016 increased 12.0%, inclusive
of sales through acquisition, from 2015.
20
Expenses and Operating Income
($ in millions)
Cost of sales
% sales
Gross profit (1)
% sales
Selling and administrative expenses
% sales
Operating income
% sales
(1) Sales less cost of sales
2017 vs. 2016:
2017
2016
$ Change
% Change
2015
$
$
$
$
$
$
$
$
939.3
65.4%
497.2
34.6%
286.9
20.0%
210.3
14.6%
$
$
$
$
790.3
64.2%
440.5
35.8%
248.3
20.2%
192.2
15.6%
149.0
18.9% $
56.8
38.7
18.1
12.9% $
15.6% $
9.4% $
782.8
65.6%
411.2
34.4%
242.8
20.3%
168.4
14.1%
Cost of sales in 2017 increased 18.9% from 2016, while gross profit margin decreased from 35.8% in 2016 to 34.6% in
2017. 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 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. Gross profit at Industrial
increased, however, driven by the profit impact of organic growth within our Molding Solutions and Nitrogen Gas Products
business units, and a pre-tax net benefit of $0.3 million resulting from the second quarter 2017 restructuring actions taken
within Industrial, partially offset by the additional costs at Engineered Components discussed above. Gross profits during both
the 2017 and 2016 periods were negatively impacted by $2.3 million of short-term purchase accounting adjustments related to
the acquisition of FOBOHA. Within Aerospace, improvement in gross profit relates primarily to organic growth within each of
the businesses, combined with favorable productivity, partially offset by scheduled price deflation and the absence of the $1.4
million gain related to the contract termination arbitration award in 2016. Increased volumes in the maintenance repair and
overhaul and spare parts businesses, in particular, contributed to the gross margin improvement during 2017. Selling and
administrative expenses in 2017 increased 15.6% from the 2016 period, due primarily to corresponding increases in sales
volumes, incentive compensation, the amortization of intangible assets related to the acquisition of FOBOHA and a pre-tax
charge of $0.3 million resulting from the second quarter 2017 restructuring actions taken within Industrial, partially offset by
the absence of $3.0 million of costs related to a customer termination dispute and a $1.2 million reduction in transaction costs
related to the acquisition of FOBOHA in 2016. As a percentage of sales, selling and administrative costs slightly decreased
from 20.2% in the 2016 period to 20.0% in the 2017 period. Operating income in 2017 increased 9.4% to $210.3 million from
the 2016 period and operating income margin decreased from 15.6% to 14.6%.
2016 vs. 2015:
Cost of sales in 2016 increased 1.0% from 2015, while gross profit margin increased from 34.4% in 2015 to 35.8% in
2016. Gross margins improved at Industrial and decreased at Aerospace. Gross margin during the comparable 2015 period
included a charge of $6.4 million related to a lump-sum pension settlement charge (see Note 11 of the Consolidated Financial
Statements). At Industrial, gross profit increased during 2016 primarily as a result of favorable productivity and strength within
the Molding Solutions businesses. Gross profit during 2016 was negatively impacted by $2.3 million of short-term purchase
accounting adjustments related to the acquisition of FOBOHA, whereas the 2015 period included $0.9 million of short-term
purchase accounting adjustments related to the acquisition of the Männer business and $0.9 million of short-term purchase
accounting adjustments related to the acquisition of Thermoplay. Within Aerospace, a decline in gross profit relates primarily to
lower sales volumes and unfavorable productivity. Selling and administrative expenses in 2016 increased 2.3% from the 2015
period, due in part to $3.0 million of costs related to the contract termination dispute within the Aerospace segment and the
incremental operations of the acquired businesses, partially offset by an $0.8 million reduction in short-term purchase
accounting adjustments related to acquisitions. During the 2015 period, selling and administrative expenses included $4.2
million of charges related to workforce reductions and severance, and $3.5 million of lump-sum pension settlement charges.
Short-term purchase accounting adjustments that impact selling and administrative expenses during 2015 included $0.6 million
and $0.3 million related to the acquisitions of Männer and Thermoplay, respectively. As a percentage of sales, selling and
administrative costs decreased slightly from 20.3% in the 2015 period to 20.2% in the 2016 period. Operating income in the
2016 period increased 14.1% to $192.2 million from 2015 and operating income margin increased from 14.1% to 15.6%.
21
Interest expense
2017 vs. 2016:
Interest expense in 2017 increased $2.7 million to $14.6 million from 2016, primarily as a result of higher average interest
rates.
2016 vs. 2015:
Interest expense in 2016 increased $1.2 million to $11.9 million from 2015, primarily as a result of higher average interest
rates.
Other expense (income), net
2017 vs. 2016:
Other expense (income), net in 2017 was $0.0 million compared to $(2.3) million in 2016. Foreign currency gains of
$0.8 million in the 2017 period compared with gains of $1.9 million in the 2016 period. Interest income of $0.8 million in 2017
compared with interest income of $2.3 million during 2016, with the decrease being primarily attributed to the $1.4 million of
interest income that resulted from the Triumph arbitration in 2016. See "Part I - Legal Proceedings".
2016 vs. 2015:
Other expense (income), net in 2016 was $(2.3) million compared to $(0.2) million in 2015. Foreign currency gains of
$1.9 million in the 2016 period compared with gains of $0.5 million in the 2015 period. Interest income of $2.3 million in 2016
compared with interest income of $1.0 million during 2015, with the increase being primarily attributed to the $1.4 million of
interest income resulting from the Triumph arbitration award. See "Part I - Legal Proceedings".
Income Taxes
U.S. Tax Reform
On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. Tax Code that affect 2017 and include,
but are not limited to, requiring a one-time Transition Tax on certain unrepatriated earnings of foreign subsidiaries of the
Company, which is payable over eight years, and exempting foreign dividends paid to the U.S. during the year from taxation if
such earnings are included within the Transition Tax.
The Act also establishes new law that will affect 2018 and beyond and includes, but is not limited to, (1) a reduction of
the U.S. Corporate income tax rate from 35% to 21%; (2) general elimination of U.S. federal income taxes on dividends from
foreign subsidiaries; (3) a new limitation on the deduction of interest expense; (4) repeal of the domestic production activity
deduction; (5) additional limitations on deduction of compensation for certain executives; (6) a new provision designed to tax
global intangible low-taxed income (“GILTI”) which allows for the possibility of utilizing foreign tax credits (“FTCs”) and a
deduction up to 50% to offset the income tax liability (subject to certain limitations); (7) the introduction of the base erosion
anti-abuse tax which represents a new minimum tax; (8) limitations on utilization of FTCs to reduce U.S. income tax liability;
and (9) limitations on net operating losses (“NOLS”) generated after December 31, 2017 to 80% of taxable income.
The SEC issued Staff Accounting Bulletin 118 ("SAB 118") in January 2018, which provides guidance on accounting for
the tax effects of the Act. SAB 118 provides a measurement period in which to finalize the accounting under Accounting
Standards Codification 740, Income Taxes ("ASC 740"). This measurement period should not extend beyond one year from the
Act enactment date. In accordance with SAB 118, we are required to reflect the income tax effects of those aspects of the Act
for which the accounting under ASC 740 is complete. To the extent that our accounting for certain income tax effects of the Act
is incomplete but we are capable of reasonably estimating the effects, we must record a provisional amount in the Consolidated
Financial Statements based on this estimate. To the extent we could not reasonably estimate the provisional impacts of the Act,
we are required to apply ASC 740 on the basis of tax law in place immediately prior to the enactment of the Act.
22
As part of our analysis of the impact of the Act, we have recorded discrete tax expense of $99.2 million in the three-
month period ended December 31, 2017. This amount primarily consists of net expense related to the deemed repatriation
Transition Tax of $86.7 million, combined with the impacts of reduced corporate income tax rates on our deferred tax assets of
$4.2 million, state taxation on the earnings reported under the Transition Tax of $1.4 million and foreign income and
withholding taxes of $6.9 million related to the repatriation of certain foreign earnings. For reasons discussed further below, we
have not completed our accounting for the income tax effects for certain sections of the Act. The amounts recorded are
therefore provisional as we were capable of reasonably estimating the effects of certain sections of the Act. The provisional
adjustments are as follows:
•
•
•
•
•
Deemed Repatriation Transition Tax: The Act taxes certain unrepatriated earnings and profits (“E&P”) of our foreign
subsidiaries. In order to calculate the Transition Tax we must determine, along with other information, the amount of
our accumulated post 1986 E&P for our foreign subsidiaries, as well as the non-U.S. income tax paid by those
subsidiaries on such E&P. We are capable of reasonably estimating the Transition Tax and recorded a provisional
Transition Tax liability of $86.7 million. However, we continue to gather additional information which may adjust the
computed Transition Tax. Further, certain provisions of the Act are ambiguous as to the details of the computation of
the Transition tax requiring us to await further guidance from the U.S. Treasury Department and the Internal Revenue
Service.
Reduction of U.S. Federal Corporate tax rate: The Act reduced the U.S. Corporate income tax rate from 35% to 21%,
effective January 1, 2018. Our U.S. companies remain in a net deferred tax asset position, and, as a result of the
Corporate rate reduction, we have reduced our deferred tax assets by $4.2 million, with a corresponding adjustment to
net deferred tax expense for the year ended December 31, 2017. While we were able to make a reasonable estimate on
the impact of the reduction in the Corporate income tax rate, it may be affected by other analysis related to the Act,
such as the calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made
to federal temporary difference.
State Taxation of unrepatriated earnings and profits: As a result of the Transition Tax, the Company will record
income as if the earnings had been repatriated. This income may be subject to additional taxation at the state level. We
were able to reasonably estimate the state taxation of these earnings and recorded a provisional expense of $1.4
million. While we were able to reasonably estimate the impact of state taxation on the deemed repatriation of deferred
foreign income, it may be affected by changes of the computation resulting from the gathering of additional
information as well as future guidance provided by the state tax authorities.
Indefinite Reinvestment Assertion: Under accounting standards (ASC 740) a deferred tax liability is not recorded for
the excess of the tax basis over the financial reporting (book) basis of an investment in a foreign subsidiary if the
indefinite reinvestment criteria is met. On December 31, 2017, the Company’s unremitted foreign earnings were
$1,228.2 million. Pursuant to SAB 118, if an entity has completed all or portions of its assessment and has made a
decision to repatriate and has the ability to reasonably estimate the effects of that assessment, that entity should record
a provisional expense and disclose the status of its efforts. The Company is continuing to evaluate its indefinite
reinvestment assertion, but expects to repatriate certain earnings that would be subject to withholding and foreign
income tax. For amounts currently expected to be repatriated, the Company recorded a provisional expense of $6.9
million. These amounts are provisional in nature given the uncertainty related to the taxation of the distributions under
the Act and the finalization of the Company’s analysis on its indefinite reinvestment assertion.
Valuation Allowances: The Company must assess whether its valuation allowance analysis is affected by various
components of the Act, including the deemed mandatory repatriation of foreign income for the Transition Tax, future
GILTI inclusions and changes to the NOL and FTC rules. Since, as discussed within this section, the Company has
recorded provisional amounts related to certain portions of the Act, any corresponding determination of the need for or
change in a valuation allowance would also be provisional.
The Act created a new requirement, effective for 2018, that certain income (i.e. GILTI) earned by Controlled Foreign
Corporations (“CFCs”) must be included currently in the gross income of the Company. GILTI represents the excess of the
shareholders “net CFC tested income” over the net deemed tangible income return which is defined in the Act as the excess of
(1) 10 percent of the aggregate of the U.S. shareholders' pro rata share of the qualified business assets of each CFC over (2) the
amount of certain interest expense taken into account in the determination of the net CFC tested income.
Given the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Act and the
application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due
on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost
23
method”) or (2) factoring such amounts into our measurement of its deferred taxes (the “deferred method’). Our selection of an
accounting method with respect to the new GILTI provisions will depend on our analysis of our global income to determine
whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact of those
inclusions will be. The determination of potential future U.S. inclusions in taxable income related to GILTI depends on our
current structure and estimated future results of our foreign subsidiaries, as well as our intent and ability to modify our
structure. Due to this uncertainty, we are unable to currently estimate the effect of the GILTI provisions within the Act and its
impact on our future financial statements. Therefore, we have not made any adjustments related to potential GILTI tax in our
financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.
2017 vs. 2016:
The Company’s effective tax rate was 69.6% in 2017 compared with 25.7% in 2016. The increase in the 2017 effective
tax rate is primarily due to taxes recorded as a result of U.S. Tax Reform. Excluding the impact of $99.2 million of discrete tax
expense related to the Act, partially offset by a benefit of $2.5 million on the current year repatriation, the effective tax rate
would have been 20.2% in 2017. The comparable decrease in the effective tax rate, excluding the impacts of the Act, are
primarily due to the adjustment of the Swiss valuation reserves, the settlement of tax audits and closure of tax years for various
tax jurisdictions and the change in the mix of earnings attributable to higher-taxing jurisdictions, partially offset by the
expiration of certain tax holidays. During 2017, the Company repatriated a dividend from a portion of the current year foreign
earnings to the U.S. in the amount of $7.3 million, compared to $8.3 million in 2016. Pursuant to the Act, this current year
dividend is not taxable in the U.S.
In 2018, the Company expects the effective tax rate to be between 25% and 26%, an increase from the 20.2% in 2017,
primarily due to the absence of the current year excess tax benefit on stock awards, the settlements of tax audits and the
adjustment of the Swiss valuation reserves, combined with the expiration of certain foreign tax holidays, partially offset by the
reduction of the U.S. tax rate. As discussed above, we are currently evaluating the potential impact of the GILTI provisions,
therefore adjustments have not been made in estimating our effective tax rate in 2018. We have made provisional entries related
to certain provisions within the Act, including the Transition Tax, the state impact on the earnings reported as required by the
Transition Tax, and the change in tax rates impact on the U.S deferred tax asset balance. Changes resulting from our ongoing
evaluation may further impact our expected tax rate in 2018.
2016 vs. 2015:
The Company’s effective tax rate from continuing operations was 25.7% in 2016 compared with 23.2% in 2015. The
increase in the 2016 effective tax rate from continuing operations is primarily due to the expiration of certain tax holidays, the
absence of the 2015 refund of withholding taxes and the change in the mix of earnings attributable to higher-taxing
jurisdictions, partially offset by lower repatriation of a portion of current year foreign earnings to the U.S and the excess tax
benefit on stock awards, reflecting the amended guidance related to share-based payments made to employees. See Note 12 of
the Consolidated Financial Statements. During 2016, the Company repatriated a dividend from a portion of the current year
foreign earnings to the U.S. in the amount of $8.3 million compared to $19.5 million in 2015. The decrease in the dividend
decreased tax expense by $3.9 million and decreased the annual effective tax rate by 2.2 percentage points compared to 2015.
See Note 13 of the Consolidated Financial Statements for a reconciliation of the U.S. federal statutory income tax rate to
the consolidated effective income tax rate.
Income and Income Per Share
(in millions, except per share)
Net income
Net income per common share:
Basic
Diluted
Weighted average common shares
outstanding:
Basic
Diluted
2017
2016
Change
% Change
2015
$
$
$
135.6
2.50
2.48
54.2
54.6
(76.2)
(56.2)% $
121.4
(1.40)
(1.39)
(56.0)% $
(56.0)% $
(0.1)
—
(0.2)%
— %
2.21
2.19
55.0
55.5
$
$
$
$
$
$
59.4
1.10
1.09
54.1
54.6
24
Basic and diluted net income per common share decreased for 2017 as compared to 2016, consistent with the change in
net income year over year. Basic weighted average common shares outstanding decreased slightly while diluted weighted
average common shares outstanding were flat. Share repurchases of 550,994 and 677,100 shares during 2016 and 2017,
respectively, as part of the Company's repurchase program were largely offset by the issuance of shares for employee stock
plans.
Financial Performance by Business Segment
Industrial
($ in millions)
Sales
Operating profit
Operating margin
2017 vs. 2016:
2017
2016
$ Change
% Change
2015
$
$
973.9
127.1
13.0%
$
824.2
129.7
15.7%
149.7
(2.6)
18.2 % $
(2.0)%
782.3
103.0
13.2%
Sales at Industrial were $973.9 million in 2017, an increase of $149.7 million, or 18.2%, from 2016. Acquired businesses
contributed incremental sales of $56.3 million during the 2017 period. Organic sales increased by $81.0 million, or 9.8%,
during 2017, 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, transportation and other industrial end-markets have largely
contributed to the organic growth within these business units. The impact of foreign currency translation increased sales by
approximately $12.4 million as the U.S. dollar weakened against foreign currencies.
Operating profit in 2017 at Industrial was $127.1 million, a decrease of 2.0% from 2016. The decrease was driven by
lower productivity, primarily driven by the increased costs incurred on certain programs within Engineered Components.
Incremental costs include expedited freight, increased scrap and costs related to the transfer of work to other facilities.
Employee related costs also increased during the 2017 period, primarily due to incentive compensation at certain Industrial
businesses. Industrial's ability to leverage increased sales volumes partially offset this decrease in operating profit. The 2016
period included $3.5 million of short-term purchase accounting adjustments and transaction costs related to business
acquisitions, whereas the 2017 period included $2.3 million of short-term purchase accounting adjustments. Operating margins
decreased from 15.7% in the 2016 period to 13.0% in the 2017 period primarily as a result of these items. Lower margins at
FOBOHA also impacted the 2017 period.
Outlook:
In Industrial, management is focused on generating organic sales growth through the introduction of new products and
services 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. For general industrial end-markets, manufacturing Purchasing Managers Indices ("PMIs") above 50 in China,
North America and Europe are positive signs. Growth in PMI's continued throughout the fourth quarter of 2017. Within China,
we have seen a strengthening in orders that began during the middle of 2016 and that has continued through the fourth quarter
of 2017, indicating strength within the transportation markets. Global forecasted production for light vehicles is expected to
grow nominally in 2018, with production expected to improve modestly within the North American market. Within our
Molding Solutions businesses, global markets remain healthy. The Molding Solutions businesses exited 2017 with improved
growth, and we anticipate favorable demand trends to continue within the automotive, medical, personal care and packaging hot
runner and mold markets in 2018. As noted above, our sales were positively impacted by $12.4 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, 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 sales volumes, mix of the businesses in the segment and the Company's ability to
effectively perform. 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.
25
Management does not anticipate increased costs incurred on certain programs within Engineered Components to be as
impactful in 2018, with these business challenges being primarily resolved in the first half of 2018. We continue to evaluate
market conditions and remain proactive in managing costs. Costs associated with new product and process introductions,
restructuring initiatives, strategic investments and the integration of acquisitions may negatively impact operating profit.
2016 vs. 2015:
Sales at Industrial were $824.2 million in 2016, an increase of $41.9 million, or 5.4%, from 2015. Acquired businesses
contributed incremental sales of $47.4 million during the 2016 period. Organic sales increased by $4.1 million, or $0.5%,
during 2016, driven primarily by strength in our Molding Solutions businesses, slightly offset by continued softness in North
American general industrial end-markets. The impact of foreign currency translation decreased sales by approximately $9.6
million as the U.S. dollar strengthened against foreign currencies.
Operating profit in 2016 at Industrial was $129.7 million, an increase of 26.0% from 2015. The increase was driven by
favorable productivity, as the Company continued its focus on manufacturing efficiencies and improved supply chain
management across multiple units, and the profit contributions of acquired businesses, partially offset by lower pricing. The
2015 period included $3.6 million of short-term purchase accounting adjustments and transaction costs related to business
acquisitions, whereas the acquisition of FOBOHA during the 2016 period resulted in $3.5 million of such costs. The 2015
period also included lump-sum pension settlement charges of $7.5 million that were allocated to the segment and $3.4 million
of charges related to certain workforce reductions and restructuring.
Aerospace
($ in millions)
Sales
Operating profit
Operating margin
2017 vs. 2016:
2017
2016
$ Change
% Change
2015
$
$
462.6
83.2
18.0%
$
406.5
62.5
15.4%
56.1
20.7
13.8% $
33.2%
411.7
65.4
15.9%
Aerospace recorded sales of $462.6 million in 2017, a 13.8% increase from 2016. Sales increased within all of the
Aerospace businesses. The original equipment manufacturing ("OEM") business continued to transition from the manufacture
of components on legacy engine platforms to newer, more technologically advanced platforms. Increased volume generated by
ramping programs was partially offset by lower volumes and scheduled price deflation on more mature engine platforms. Sales
within the aftermarket maintenance repair and overhaul ("MRO") business also increased during the 2017 period as the
Company continued to obtain additional sales volume from new and existing customers, a trend that began during the second
half of 2016. Volumes within the spare parts business also increased during the 2017 period. Sales were not impacted by
changes in foreign currency as sales within the segment are largely denominated in U.S. dollars.
Operating profit at Aerospace increased 33.2% from 2016 to $83.2 million. The operating profit increase resulted from the
increased volumes discussed above, coupled with favorable productivity, resulting from our ability to leverage production
volumes, partially offset by scheduled price deflation and an increase in incentive compensation. Operating profit during the
2016 period included a $3.0 million charge related to the contract termination dispute and a $1.4 million benefit from the
contract termination arbitration award.
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, driven by
a forecasted increase in commercial aircraft production levels. The Company anticipates further shifts in the production mix
from legacy engine programs to the continual ramping of several new engine programs. Backlog at OEM was $713.8 million at
December 31, 2017, an increase of 14.0% since December 31, 2016, at which time backlog was $626.3 million. The increase in
2017 orders primarily reflects an expanded time horizon on orders for certain engine programs and increased volumes.
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, the use of alternate materials, changes in production schedules
26
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. 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, the physical transfer of work to other global regions, additional productivity initiatives and restructuring activities
may also negatively impact operating profit.
2016 vs. 2015:
Aerospace recorded sales of $406.5 million in 2016, a 1.3% decrease from 2015. Lower sales within OEM and spare
parts businesses were partially offset by increased sales within the MRO business. During the 2016 period, the segment
continued to transition from the manufacture of components on legacy engine platforms to newer, more technologically
advanced platforms. Lower volumes on the GE90 engine platform, as well as on other mature engine platforms, were partially
offset by increased volume generated by newer programs within the OEM business. A decline in aftermarket spare parts was
partially offset by a volume increase in the MRO business. Customer inventory management resulted in lower volumes within
the spare parts business. Sales within the MRO business, although soft during the first half of the year, improved during the
second half of 2016 as we obtained additional sales volume from existing customers. This business, however, continues to be
impacted by airlines continuing to closely manage their aftermarket costs and as engine performance and quality has improved.
Sales were not impacted by changes in foreign currency as sales within the segment are largely denominated in U.S. dollars.
Operating profit at Aerospace decreased 4.5% from 2015 to $62.5 million. The operating profit decrease was primarily
due to pricing deflation, the profit impact of lower volumes within the highly profitable spare parts business and unfavorable
productivity, primarily a result of the transition from legacy engine platforms to newer, more advanced programs. Operating
profit included a $1.4 million benefit from a contract termination arbitration award. Charges related to the contract termination
dispute approximated $3.0 million and $2.8 million during the 2016 and 2015 periods, respectively. Operating profit in 2015
also included a lump-sum pension settlement charge of $2.4 million that was allocated to the segment and $0.8 million in
workforce reduction and restructuring charges.
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 it's ability to generate cash from operations in excess of its internal operating needs is one of
its financial strengths. Management continues to focus on cash flow and working capital management, and anticipates that
operating activities in 2018 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 increases 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
27
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. 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%.
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, 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 pays 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 December 31, 2017, the
Company was in compliance with all covenants under the Note Purchase Agreement.
The Company's borrowing capacity remains 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 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. At December 31, 2017, the Company was in compliance with all covenants under the Agreements. The Company's
most restrictive financial covenant is the Senior Debt Ratio which requires the Company to maintain a ratio of Consolidated
Senior Debt to Consolidated EBITDA of not more than 3.25 times at December 31, 2017. The actual ratio at December 31,
2017 was 1.70 times.
In 2017, 2016 and 2015, the Company acquired 0.7 million shares, 0.6 million shares and 1.4 million shares of the
Company's common stock, respectively, at a cost of $40.8 million, $20.5 million and $52.1 million, respectively.
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 December 31, 2017, the Company had $428.5 million unused and
available for borrowings under its $850.0 million Amended Credit Facility, subject to covenants. At December 31, 2017,
additional borrowings of $642.8 million of Total Debt and $486.1 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 $5.3 million in borrowings under short-term bank credit lines at December 31, 2017.
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 new interest rate swap
agreement (the "Swap") that commenced on April 28, 2017, with one bank, and 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 December 31, 2017, the Company's total borrowings
were comprised of approximately 39% fixed rate debt and 61% variable rate debt. At December 31, 2016, the Company's total
borrowings were comprised of approximately 41% fixed rate debt and 59% variable rate debt.
28
The funded status of the Company's pension plans is dependent upon many factors, including actual rates of return that
impact the fair value of pension assets and changes in discount rates that impact projected benefit obligations. The unfunded
status of the pension plans decreased from $77.0 million at December 31, 2016 to $43.7 million at December 31, 2017 as the
increase in the fair value of the pension plan assets exceeded increase in the projected benefit obligations ("PBOs"), following
an update of certain actuarial assumptions. The Company recorded a $10.7 million non-cash after-tax increase in stockholders
equity (through other non-owner changes to equity) to record the current year adjustments for changes in the funded status of
its pension and postretirement benefit plans as required under accounting for defined benefit and other postretirement plans.
This increase in stockholders equity resulted primarily from favorable variances between expected and actual returns on
pension plan assets and the amortization of actuarial losses recorded earlier, partially offset by changes in actuarial
assumptions, primarily the decrease in the discount rate. In 2017, the Company made $10.0 million in discretionary
contributions to the U.S. qualified pension plans. The Company expects to contribute approximately $4.6 million to its various
defined benefit pension plans in 2018. No discretionary contributions to the U.S. Qualified pension plans are currently planned
in 2018. See Note 11 of the Consolidated Financial Statements.
As noted above, the U.S. government enacted the Act on December 22, 2017, resulting in a provisional net expense of
$86.7 million related to the Transition Tax. The Company intends to elect to pay the Transition Tax over the allowed eight year
period. The installment payments for the Transition Tax are not expected to have a material impact on the liquidity or capital
resources of the Company. The Company expects to make the payments through the use of available cash or borrowings under
the Amended Credit Facility.
At December 31, 2017, the Company held $145.3 million in cash and cash equivalents, the majority of which was held by
foreign subsidiaries. These amounts have no material regulatory or contractual restrictions. The Act has changed the impact of
U.S. taxation on foreign distributions. The Company is continuing its evaluation regarding the potential repatriation of overseas
cash. Currently the Company expects to repatriate certain foreign earnings and has recorded a provisional tax expense of $6.9
million to account for the estimated withholding and income taxes on the potential repatriation, however no final decision has
been made in regards to future potential distributions. The evaluation is dependent upon several variables, including foreign
taxation of dividends and the impact of withholding tax. The Company repatriated $7.3 million of current year foreign earnings
to the U.S. during 2017.
Any future acquisitions are expected to be financed through internal cash, borrowings and equity, or a combination
thereof. Additionally, we may from time to time seek to retire or repurchase our outstanding debt through cash purchases and/
or exchanges for equity securities, in open market purchases, under a Rule 10b5-1 trading plan, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors.
Cash Flow
($ in millions)
Operating activities
Investing activities
Financing activities
Exchange rate effect
Increase (decrease) in cash
________________________
NM – Not meaningful
2017
2016
$ Change
% Change
2015
$
$
203.9
(68.0)
(63.8)
6.7
78.8
$
$
$
217.6
(179.5)
(53.3)
(2.3)
(17.5) $
(13.7)
111.5
(10.4)
9.0
96.3
(6.3)% $
62.1 %
(19.6)%
NM
NM $
217.5
(115.5)
(59.2)
(4.9)
37.9
Operating activities provided $203.9 million in 2017 compared to $217.6 million in 2016. Operating cash flows in the
2017 period were positively impacted by improved operating results partially offset by an increase in cash used for working
capital driven by an increase in accounts receivable, reflecting growth in revenue. Net income during the period was impacted
by $96.7 million of tax expense related to the enactment of the Act, having no impact to cash outflows during the 2017 period.
See Note 13 of the Consolidated Financial Statements. Cash flows in the 2017 and 2016 periods were impacted by outflows of
$10.0 million and $15.0 million, respectively, related to discretionary contributions to the U.S. Qualified pension plans.
Investing activities used $68.0 million in 2017 and $179.5 million in 2016. In 2017, investing activities included capital
expenditures of $58.7 million compared to $47.6 million in 2016. The Company expects capital spending in 2018 to
approximate $60 million. Capital expenditures relate to both maintenance needs and support of growth initiatives, which
include the purchase of equipment to support new products and services, and are expected to be funded primarily through cash
29
flows from operations. Investing activities in 2017 also included outflows of $8.9 million used to fund the Gammaflux
acquisition and $3.0 million related to an Aerospace agreement (which was included in Other Investing activities). In 2016,
investing activities also included outflows of $127.1 million used to fund the FOBOHA acquisition, $1.5 million related to the
post-acquisition closing adjustment of Thermoplay and $4.1 million related to the Component Repair Programs ("CRPs"). See
Note 5 of the Consolidated Financial Statements.
Cash used by financing activities in 2017 included a net increase in borrowings of $30.7 million compared to a net
decrease of $9.9 million in 2016. In 2016, the Company borrowed $100.0 million 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. Proceeds from the issuance of common stock were $2.4 million and $4.6
million in 2017 and 2016, respectively. In 2017, the Company repurchased 0.7 million shares of the Company's stock at a cost
of $40.8 million, compared with the purchase of 0.6 million shares at a cost of $20.5 million in 2016. Total cash used to pay
dividends increased slightly to $29.6 million in 2017 compared to $27.4 million in 2016, reflecting an increase in dividends
paid per share. Withholding taxes paid on stock issuances in the 2017 and 2016 periods were $5.4 million and $4.9 million,
respectively. Other financing cash flows during 2017 include $18.2 million of net cash payments related to the settlement of
foreign currency hedges related to intercompany financings, compared to $5.2 million and $10.3 million of net cash proceeds in
2016 and 2015, respectively, and $2.5 million of payments made in connection with executing the Amended Credit Agreement.
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):
Net income
Add back:
Interest expense
Income taxes
Depreciation and amortization
Adjustment for non-cash stock based compensation
Other adjustments
Consolidated EBITDA, as defined
Consolidated Senior Debt, as defined, as of December 31, 2017
Ratio of Consolidated Senior Debt to Consolidated EBITDA
Maximum
Consolidated Total Debt, as defined, as of December 31, 2017
Ratio of Consolidated Total Debt to Consolidated EBITDA
Maximum
Consolidated Cash Interest Expense, as defined, as of December 31, 2017
Ratio of Consolidated EBITDA to Consolidated Cash Interest Expense
Minimum
2017
$
59.4
14.6
136.3
90.2
11.7
1.3
313.4
532.6
1.70
3.25
532.6
1.70
3.75
14.6
21.51
4.25
$
$
$
$
The Amended Credit Agreement allows for certain adjustments within the calculation of the financial covenants. Other
adjustments consist of net gains on the sale of assets, due diligence and transaction expenses as permitted under the Amended
Credit Agreement and the amortization of the FOBOHA acquisition inventory step-up. The Company's financial covenants are
measured as of the end of each fiscal quarter. At December 31, 2017, additional borrowings of $642.8 million of Total Debt and
$486.1 million of Senior Debt would have been allowed under the covenants. 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 December 31, 2017 were $428.5 million. As noted above, the Company is continuing to
analyze the impacts of the Act, however we currently do not believe that any changes proposed by the Act will impact
compliance with our debt covenants.
30
Contractual Obligations and Commitments
At December 31, 2017, the Company had the following contractual obligations and commitments:
($ in millions)
Long-term debt obligations (1)
Estimated interest payments under long-term
obligations (2)
Operating lease obligations
Purchase obligations (3)
Expected pension contributions (4)
Expected benefit payments – other
postretirement benefit plans (5)
Long-term U.S. Tax Reform obligations(6)
Total
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
$
526.9
$
1.3
$
1.5
$
422.6
$
101.6
78.6
39.8
182.5
4.6
27.9
79.8
15.4
11.9
167.1
4.6
3.7
—
$
940.1
$
204.0
$
30.7
13.4
11.5
—
6.7
13.9
77.6
21.2
7.2
3.8
—
5.9
13.9
$
474.5
$
11.1
7.4
0.1
—
11.7
52.0
184.0
(1) Long-term debt obligations represent the required principal payments under such agreements.
(2)
Interest payments under long-term debt obligations have been estimated based on the borrowings outstanding and market interest rates as of
December 31, 2017.
(3) The amounts do not include purchase obligations reflected as current liabilities on the consolidated balance sheet. The purchase obligation amount
includes all outstanding purchase orders as of the balance sheet date as well as the minimum contractual obligation or termination penalty under
other contracts.
(4) The amount included in “Less Than 1 Year” reflects anticipated contributions to the Company’s various pension plans. Anticipated contributions
beyond one year are not determinable.
(5) Amounts reflect anticipated benefit payments under the Company’s various other postretirement benefit plans based on current actuarial
assumptions. Expected benefit payments do not extend beyond 2027. See Note 11 of the Consolidated Financial Statements.
(6) Amounts reflect anticipated long-term payments related to the Tax Cuts and Jobs Act that was enacted on December 22, 2017. Payments are allowed
over an eight-year period. See Note 13 of the Consolidated Financial Statements. The amount payable in 2018 is included within accrued liabilities
on the Consolidated Balance Sheets.
The above table does not reflect unrecognized tax benefits as the timing of the potential payments of these amounts cannot be determined. See Note 13 of
the Consolidated Financial Statements.
OTHER MATTERS
Inflation
Inflation generally affects the Company through its costs of labor, equipment and raw materials. Increases in the costs of
these items have historically been offset by price increases, commodity price escalator provisions, operating improvements, and
other cost-saving initiatives.
Critical Accounting Estimates
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.
The most significant areas involving management judgments and estimates are described below. Actual results could differ
from such estimates.
Inventory Valuation: Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable
value. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable value. Loss provisions, if
any, on aerospace contracts are established when estimable. Loss provisions are based on the projected excess of manufacturing
costs over the net revenues of the products or group of related products representing orders that are supported under a long term
agreement. The process for evaluating the value of excess and obsolete inventory often requires the Company to make
subjective judgments and estimates concerning future sales levels, access to applicable markets, quantities and prices at which
such inventory will be sold in the normal course of business and estimated costs. Accelerating the disposal process or incorrect
estimates of future sales potential or estimated costs may necessitate future adjustments to these provisions.
Business Acquisitions, Indefinite-Lived Intangible Assets and Goodwill: Assets and liabilities acquired in a business
combination are recorded at their estimated fair values at the acquisition date. At December 31, 2017, the Company had $690.2
31
million and $42.8 million of goodwill and indefinite-lived intangible assets, respectively. Goodwill represents the cost of
acquisitions in excess of fair values assigned to the underlying net assets of acquired companies. Goodwill and intangible assets
deemed to have indefinite lives are not amortized but are subject to impairment testing annually or earlier if an event or change
in circumstances indicates that the fair value of a reporting unit may have been reduced below its carrying value. Management
completes its annual impairment assessments for goodwill and indefinite-lived intangible assets during the second quarter of
each year. The Company uses the option to first assess qualitative factors to determine whether it is necessary to perform the
two-step quantitative impairment tests in accordance with applicable accounting standards.
Under the qualitative goodwill 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 two-step 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.
Based on the second quarter 2017 assessment, the estimated fair value of all reporting units significantly exceeded their
carrying values and there was no goodwill impairment at any of the 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 during the second quarter of
2017 included 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 assess the likelihood of whether the fair
value would be less than the carrying value. Management also performed its annual impairment testing of its trade names,
indefinite-lived intangible assets, during the second quarter of 2017. Based on this assessment, there was no trade name
impairment recognized.
Aerospace Aftermarket Programs: The Company participates in aftermarket RSPs under which the Company receives
an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program to our customer,
General Electric ("GE"). As consideration, the Company has paid participation fees, which are recorded as intangible assets.
The carrying value of these intangible assets was $185.6 million at December 31, 2017. The Company records amortization of
the related asset as sales dollars are being earned based on a proportional sales dollar method. Specifically, this method
amortizes each asset as a reduction to revenue based on the proportion of sales under a program in a given period to the
estimated aggregate sales dollars over the life of that program which reflects the pattern in which economic benefits are
realized.
The Company entered into Component Repair Programs ("CRPs") with GE during 2015, 2014 and 2013. The CRPs
provide for, among other items, the right to sell certain aftermarket component repair services for CFM56, CF6, CF34 and LM
engines directly to other customers over the life of the aircraft engine program as one of a few GE licensed suppliers. In
addition, the CRPs extended certain existing contracts under which the Company provides these services directly to GE. Our
total investments in CRPs as of December 31, 2017 equaled $111.8 million, all of which have been paid. At December 31,
2017, the carrying value of the CRPs was $95.3 million. The Company recorded the CRP payments as an intangible asset which
is recognized as a reduction of sales over the remaining life of these engine programs based on the estimated sales over the life
of such programs. This method reflects the pattern in which the economic benefits of the CRPs are realized.
The recoverability of each asset is subject to significant estimates about future revenues related to the programs'
aftermarket parts and services. The Company evaluates these intangible assets for recoverability and updates amortization rates
on an agreement by agreement basis for the RSPs and on an individual asset basis for the CRPs. The assets are reviewed for
recoverability periodically including whenever events or changes in circumstances indicate that their carrying amount may not
be recoverable. Annually, the Company evaluates the remaining life of these assets to determine whether events and
circumstances warrant a revision to the remaining periods of amortization. Management updates revenue projections, which
includes comparing actual experience against projected revenue and industry projections. The potential exists that actual
revenues will not meet expectations due to a change in market conditions, including, for example, the replacement of older
engines with new, more fuel-efficient engines or the Company's ability to capture additional market share within the
aftermarket business. A shortfall in future revenues may indicate a triggering event requiring a write down or further evaluation
of the recoverability of the assets or require the Company to accelerate amortization expense prospectively dependent on the
level of the shortfall. The Company has not identified any impairment of these assets. See Note 5 of the Consolidated Financial
Statements.
Pension and Other Postretirement Benefits: Accounting policies and significant assumptions related to pension and
other postretirement benefits are disclosed in Note 11 of the Consolidated Financial Statements. As discussed further below, the
32
significant assumptions that impact pension and other postretirement benefits include discount rates, mortality rates and
expected long-term rates of return on invested pension assets.
The Company selected the expected long-term rate of return of its U.S. defined benefit plans based on consideration of
historical and projected rates of return on the weighted target asset mix of our pension investments. The target mix reflects a
65% equity investment target and a 35% target for fixed income and cash investments (in aggregate). The equity investment of
65% is more heavily weighted on global equity investment targets, rather than U.S. targets. The historical rates of return for the
Company's defined benefit plans were calculated based upon compounded average rates of return of published indices.
Management selected a long-term expected rate of return on its U.S. pension assets of 7.75%. The long-term rates of return for
non-U.S. plans were selected based on actual historical rates of return of published indices that reflect the plans’ target asset
allocations.
The discount rate used for the Company’s U.S. pension plans reflects the rate at which the pension benefits could be
effectively settled. At December 31, 2017, the Company selected a discount rate of 3.90% based on a bond matching model for
its U.S. pension plans. Market interest rates have decreased in 2017 as compared with 2016 and, as a result, the discount rate
used to measure pension liabilities decreased from 4.50% at December 31, 2016. The discount rates for non-U.S. plans were
selected based on highly rated long-term bond indices and yield curves that match the duration of the plan’s benefit obligations.
A one-quarter percentage point change in the assumed long-term rate of return on the Company’s U.S. pension plans as of
December 31, 2017 would impact the Company’s 2018 pre-tax income by approximately $0.9 million. A one-quarter
percentage point decrease in the discount rate on the Company's U.S. pension plans as of December 31, 2017 would decrease
the Company’s 2018 pre-tax income by approximately $0.9 million. The Company reviews these and other assumptions at least
annually.
The Company recorded a $10.7 million non-cash after-tax increase in stockholders equity (through other non-owner
changes to equity) to record the current year adjustments for changes in the funded status of its pension and postretirement
benefit plans as required under accounting for defined benefit and other postretirement plans. This increase in stockholders
equity resulted primarily from favorable variances between expected and actual returns on pension plan assets, and the
amortization of actuarial losses recorded earlier, partially offset by changes in actuarial assumptions, primarily the decrease in
the discount rate. During 2017, the fair value of the Company’s pension plan assets increased by $37.5 million and the
projected benefit obligation increased by $4.2 million. The increase in the projected benefit obligation included a $24.0 million
(pre-tax) increase due to actuarial losses resulting primarily from a change in the discount rates used to measure pension
liabilities, annual service and interest costs of $6.1 million and $18.8 million, respectively, $7.2 million of foreign exchange
impacts and $2.7 million of transfers in, resulting from employees that were hired during the period. These increases were
partially offset by a $7.0 million curtailment gain related to the Closure of the FOBOHA facility in Muri, Switzerland (the
"Closure", see Note 8 of the Consolidated Financial Statements), settlements of $21.1 million (primarily related to the Closure)
and $29.1 million in benefits paid. Changes to other actuarial assumptions in 2017 did not have a material impact on our
stockholders equity or projected benefit obligation. Actual pre-tax gains on total pension plan assets were $62.3 million
compared with an expected pre-tax return on pension assets of $28.1 million. Also impacting total pension plan assets during
the 2017 period were $29.1 million in benefits paid and settlements of $20.9 million, related primarily to the Closure. Pension
expense for 2018 is expected to decrease from $7.8 million in 2017, excluding curtailments and settlement gains of $7.2 million
and $0.1 million, respectively, to $5.8 million.
Income Taxes: Recognition of the impacts of the U.S. Tax Reform required significant estimates and judgments. As
noted within “Results of Operations - U.S. Tax Reform”, the SEC issued SAB 118 in January 2018. Pursuant to SAB 118, the
Company was capable of reasonably estimating the effects of the Act and therefore has recorded a provisional income tax
expense within the Consolidated Financial Statements. See further discussion therein.
As of December 31, 2017, the Company had recognized $12.2 million of deferred tax assets, net of valuation reserves.
The realization of these benefits is dependent, in part, on the amount and timing of future taxable income in jurisdictions where
the deferred tax assets reside. For those jurisdictions where the expirations date of tax loss carryforwards or the proposed
operating results indicate that realization is unlikely, a valuation allowance is provided. Management currently believes that
sufficient taxable income should be earned in the future to realize the deferred tax assets, net of valuation allowances recorded,
however there can be no assurance that such expectations will be met.
Additionally, the Company is exposed to certain tax contingencies in the ordinary course of business and records those tax
liabilities in accordance with the guidance for accounting for uncertain tax positions. For tax positions where the Company
believes it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax
benefit with a greater than 50% likelihood of being realized. For those income tax positions where it is more likely than not that
33
a tax benefit will not be sustained, no tax benefit is recognized in the financial statements. See Note 13 of the Consolidated
Financial Statements.
A significant portion of revenue is generated by foreign locations. Current guidance requires the recognition of a tax
liability under the assumption that foreign earnings will be repatriated in the future, unless the Company can assert that the
earnings are indefinitely reinvested. Management’s annual assessment in determining whether the earnings are indefinitely
reinvested is based on an analysis of U.S. cash requirements and working capital requirements of the foreign operations,
including capital expenditures, combined with any limitations, such as dividend restrictions or local law limits, which would
limit possible repatriation.
Stock-Based Compensation: The Company accounts for its stock-based employee compensation plans at fair value on
the grant date and recognizes the related cost in its consolidated statement of income in accordance with accounting standards
related to share-based payments. The fair values of stock options are estimated using the Black-Scholes option-pricing model
based on certain assumptions. The fair values of service and performance based share awards are estimated based on the fair
market value of the Company’s stock price on the grant date. The fair values of market based performance share awards are
estimated using the Monte Carlo valuation method. See Note 12 of the Consolidated Financial Statements.
EBITDA
Earnings before interest expense, income taxes, and depreciation and amortization (“EBITDA”) for 2017 was $300.4
million compared to $274.7 million in 2016. EBITDA is a measurement not in accordance with generally accepted accounting
principles (“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. 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. Accordingly, the calculation has limitations depending
on its use.
Following is a reconciliation of EBITDA to the Company’s net income (in millions):
Net income
Add back:
Interest expense
Income taxes
Depreciation and amortization
EBITDA
2017
2016
$
59.4
$
135.6
14.6
136.3
90.2
11.9
47.0
80.2
$
300.4
$
274.7
34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments.
The Company’s financial results could be impacted by changes in interest rates and foreign currency exchange rates, and
commodity price changes. The Company uses financial instruments to hedge its exposure to fluctuations in interest rates and
foreign currency exchange rates. The Company does not use derivatives for speculative or trading purposes.
The Company’s long-term debt portfolio consists of fixed-rate and variable-rate instruments and is managed to reduce the
overall cost of borrowing while also minimizing the effect of changes in interest rates on near-term earnings. The Company’s
primary interest rate risk is derived from its outstanding variable-rate debt obligations. Financial instruments have been used by
the Company to hedge its exposures to fluctuations in interest rates.
In April 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 borrowings under the Company’s Amended Credit
Agreement from a variable rate plus the borrowing spread to a fixed rate of 1.03% plus the borrowing spread for the purpose of
mitigating its exposure to variable interest rates. The Swaps expired on April 28, 2017. The Company entered into a new
interest rate swap agreement (the "Swap") that commenced on April 28, 2017, with one bank, and converts the interest on the
first $100.0 million of 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. The result of a hypothetical 100 basis point increase in the interest rate on the
average bank borrowings of the Company’s variable-rate debt during 2017 would have reduced annual pretax profit by $3.0
million.
At December 31, 2017, the fair value of the Company’s fixed-rate debt was $107.2 million, compared with its carrying
amount of $105.4 million. The Company estimates that a 100 basis point decrease in market interest rates at December 31, 2017
would have increased the fair value of the Company's fixed rate debt to $113.5 million.
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 exposed primarily to financial instruments
denominated in currencies other than the functional currency at its international locations. A 10% adverse change in foreign
currencies relative to the U.S dollar at December 31, 2017 would have resulted in a $3.8 million loss in the fair value of those
financial instruments. At December 31, 2017, the Company held $145.3 million of cash and cash equivalents, the majority of
which is held by foreign subsidiaries.
Foreign currency commitments and transaction exposures are managed at the operating units as an integral part of their
businesses in accordance with a corporate policy that addresses acceptable levels of foreign currency exposures.
Additionally, to reduce foreign currency exposure, management generally maintains the majority of foreign cash and
short-term investments in functional currency and uses forward currency contracts for non-functional currency denominated
monetary assets and liabilities and anticipated transactions in an effort to reduce the effect of the volatility of changes in foreign
exchange rates on the income statement. Management assesses the strength of currencies in certain countries such as Brazil and
Mexico, relative to the U.S. dollar, and may elect during periods of local currency weakness to invest excess cash in U.S.
dollar-denominated instruments.
The Company’s exposure to commodity price changes relates to certain manufacturing operations that utilize high-grade
steel spring wire, stainless steel, titanium, Inconel, Hastelloys and other specialty metals. The Company attempts to manage its
exposure to price increases through its procurement and sales practices.
35
Item 8. Financial Statements and Supplementary Data
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Net sales
Cost of sales
Selling and administrative expenses
Operating income
Interest expense
Other expense (income), net
Income before income taxes
Income taxes
Net income
Per common share:
Basic
Diluted
Dividends
Weighted average common shares outstanding:
Basic
Diluted
Years Ended December 31,
2017
1,436,499
$
2016
1,230,754
$
$
939,288
286,933
790,299
248,277
2015
1,193,975
782,817
242,762
1,226,221
1,038,576
1,025,579
210,278
14,571
8
195,699
136,284
59,415
1.10
1.09
0.55
$
$
$
$
192,178
11,883
(2,326)
182,621
47,020
135,601
2.50
2.48
0.51
$
$
$
$
168,396
10,698
(248)
157,946
36,566
121,380
2.21
2.19
0.48
$
$
$
$
54,073,407
54,605,298
54,191,013
54,631,313
55,028,063
55,513,219
See accompanying notes.
36
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income
Other comprehensive income (loss), net of tax
Unrealized gain (loss) hedging activities, net of tax (1)
Foreign currency translation adjustments, net of tax (2)
Defined benefit pension and other postretirement benefits, net
of tax (3)
Total other comprehensive income (loss), net of tax
Total comprehensive income
Years Ended December 31,
2017
$ 59,415
2016
$ 135,601
2015
$ 121,380
299
83,404
10,726
94,429
$ 153,844
(342)
(48,367)
847
(54,232)
(8,867)
(57,576)
$ 78,025
9,586
(43,799)
$ 77,581
(1) Net of tax of $232, $(42) and $227 for the years ended December 31, 2017, 2016 and 2015, respectively.
(2) Net of tax of $610, $(833) and $(1,777) for the years ended December 31, 2017, 2016 and 2015, respectively.
(3) Net of tax of $4,469, $(4,687) and $3,916 for the years ended December 31, 2017, 2016 and 2015, respectively.
See accompanying notes.
37
BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, less allowances (2017 – $5,143; 2016 – $3,992)
Inventories
Prepaid expenses and other current assets
Total current assets
Deferred income taxes
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Notes and overdrafts payable
Accounts payable
Accrued liabilities
Long-term debt – current
Total current liabilities
Long-term debt
Accrued retirement benefits
Deferred income taxes
Long-term tax liability
Other liabilities
Commitments and contingencies (Note 20)
Stockholders’ equity
Common stock – par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2017 – 63,034,240 shares; 2016 – 62,692,403 shares)
Additional paid-in capital
Treasury stock, at cost (2017 – 9,656,369 shares; 2016 – 8,889,947 shares)
Retained earnings
Accumulated other non-owner changes to equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
38
December 31,
2017
2016
$
$
$
145,290
348,943
241,962
32,526
768,721
12,161
359,298
690,223
507,042
28,271
2,365,716
5,669
127,521
181,241
1,330
315,761
525,597
89,000
73,505
79,770
21,762
66,447
287,123
227,759
27,163
608,492
25,433
334,489
633,436
522,258
13,431
2,137,539
30,825
112,024
156,967
2,067
301,883
468,062
109,350
66,446
—
23,440
630
457,365
(297,998)
1,206,723
(106,399)
1,260,321
2,365,716
$
627
443,235
(251,827)
1,177,151
(200,828)
1,168,358
2,137,539
$
$
$
$
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Gain on disposition of property, plant and equipment
Stock compensation expense
Pension lump-sum settlement charge
Effect of U.S. Tax Reform on deferred tax assets
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Deferred income taxes
Long-term retirement benefits
Long-term tax liability
Other
Net cash provided by operating activities
Investing activities:
Proceeds from disposition of property, plant and equipment
Capital expenditures
Business acquisitions, net of cash acquired
Component Repair Program payments
Other
Net cash used in investing activities
Financing activities:
Net change in other borrowings
Payments on long-term debt
Proceeds from the issuance of long-term debt
Proceeds from the issuance of common stock
Common stock repurchases
Dividends paid
Withholding taxes paid on stock issuances
Other
Net cash used by financing activities
Effect of exchange rate changes on cash flows
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Years Ended December 31,
2017
2016
2015
$
59,415
$
135,601
$
121,380
90,150
(246)
12,279
—
4,152
(50,082)
(173)
(4,241)
12,018
14,439
3,589
(16,349)
79,770
(801)
203,920
2,594
(58,712)
(8,922)
—
(3,000)
(68,040)
(25,304)
(73,161)
129,118
2,408
(40,791)
(29,551)
(5,380)
(21,090)
(63,751)
6,714
78,843
66,447
145,290
$
80,154
(349)
11,493
—
—
(23,057)
1,989
569
11,778
15,825
(2,210)
(15,492)
—
1,345
217,646
780
(47,577)
(128,613)
(4,100)
—
(179,510)
8,375
(321,506)
303,277
4,611
(20,520)
(27,435)
(4,885)
4,771
(53,312)
(2,303)
(17,479)
83,926
66,447
$
78,242
(1,128)
9,258
9,856
—
14,027
(1,190)
(2,645)
(2,936)
(14,166)
3,121
1,081
—
2,575
217,475
3,442
(45,982)
(51,954)
(21,000)
—
(115,494)
14,680
(171,198)
159,264
11,425
(52,103)
(26,176)
(4,913)
9,850
(59,171)
(4,923)
37,887
46,039
83,926
$
Non-cash investing activities in 2015 included the acquisition of $3,200 of intangible assets, and the recognition of the
corresponding liabilities, in connection with the Component Repair Programs.
See accompanying notes.
39
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
Common
Stock
(Number of
Shares)
Common
Stock
(Amount)
Additional
Paid-In
Capital
Treasury
Stock
(Number of
Shares)
Treasury
Stock
Retained
Earnings
Accumulated
Other
Non-Owner
Changes to
Equity
Total
Stockholders’
Equity
61,230
$
612
$
405,525
6,729
$ (169,405) $
974,514
$
(99,453) $
1,111,793
841
62,071
9
621
22,033
427,558
121,380
(26,176)
(471)
(52,103)
(4,913)
(226,421)
1,069,247
1,353
125
8,207
551
(20,520)
621
62,692
6
627
15,677
443,235
132
8,890
(4,886)
(251,827)
342
3
14,130
677
89
(40,791)
(5,380)
135,601
(27,435)
198
(460)
1,177,151
59,415
(29,551)
(292)
(43,799)
(143,252)
(57,576)
(200,828)
94,429
77,581
(26,176)
(52,103)
16,658
1,127,753
78,025
(27,435)
(20,520)
198
10,337
1,168,358
153,844
(29,551)
(40,791)
8,461
63,034
$
630
$
457,365
9,656
$ (297,998) $ 1,206,723
$
(106,399) $
1,260,321
January 1, 2015
Comprehensive income
Dividends paid
Common stock repurchases
Employee stock plans
December 31, 2015
Comprehensive income
Dividends paid
Common stock repurchases
Cumulative effect of change in
accounting guidance (Note 12)
Employee stock plans
December 31, 2016
Comprehensive income
Dividends paid
Common stock repurchases
Employee stock plans
December 31, 2017
See accompanying notes.
40
BARNES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data
and the tables in Note 19)
1. Summary of Significant Accounting Policies
General: The preparation of consolidated 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. Actual results could differ from those estimates.
Consolidation: The accompanying consolidated financial statements include the accounts of the Company and all of its
subsidiaries. Intercompany transactions and account balances have been eliminated.
Revenue recognition: Sales and related cost of sales are recognized when products are shipped or delivered to customers,
title has transferred, and the risks and rewards of ownership pass to the customer, provided the earnings process is complete and
revenue is measurable. Service revenue is recognized when the related services are performed. In the aerospace manufacturing
businesses, the Company recognizes revenue based on the units-of-delivery method in accordance with accounting standards
related to accounting for performance of construction-type and certain production-type contracts. Management fees related to
the aerospace aftermarket Revenue Sharing Programs ("RSPs") are satisfied through an agreed upon reduction from the sales
price of each of the related spare parts. These fees recognize our customer's necessary performance of engine program support
activities, such as spare parts administration, warehousing and inventory management, and customer support, and are not
separable from our sale of products, and accordingly, they are reflected as a reduction to sales, rather than as costs incurred,
when revenues are recognized.
Cash and cash equivalents: Cash in excess of operating requirements is invested in short-term, highly liquid, income-
producing investments. All highly liquid investments purchased with an original maturity of three months or less are considered
cash equivalents. Cash equivalents are carried at cost which approximates fair value.
Inventories: Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.
Loss provisions, if any, on aerospace contracts are established when estimable. Loss provisions are based on the projected
excess of manufacturing costs over the net revenues of the products or group of related products representing firm orders that
are supported under a long term agreement.
Property, plant and equipment: Property, plant and equipment is stated at cost. Depreciation is recorded over estimated
useful lives, generally ranging from 20 to 50 years for buildings and four to 12 years for machinery and equipment. The
straight-line method of depreciation was adopted for all property, plant and equipment placed in service after March 31, 1999.
For property, plant and equipment placed into service prior to April 1, 1999, depreciation is calculated using accelerated
methods. The Company assesses the impairment of property, plant and equipment subject to depreciation whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Goodwill: Goodwill represents the excess purchase cost over the fair value of net assets of companies acquired in
business combinations. Goodwill is considered an indefinite-lived asset. Goodwill is subject to impairment testing in
accordance with accounting standards governing such on an annual basis, in the second quarter, or more frequently if an event
or change in circumstances indicates that the fair value of a reporting unit has been reduced below its carrying value. Based on
the assessments performed during 2017, there was no goodwill impairment.
Aerospace Aftermarket Programs: The Company participates in aftermarket RSPs under which the Company receives
an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program. As consideration,
the Company has paid participation fees, which are recorded as long-lived intangible assets. The Company records amortization
of the related intangible asset as sales dollars are being earned based on a proportional sales dollar method. Specifically, this
method amortizes each asset as a reduction to revenue based on the proportion of sales under a program in a given period to the
estimated aggregate sales dollars over the life of that program. This method reflects the pattern in which the economic benefits
of the RSPs are realized.
The Company also entered into Component Repair Programs ("CRPs") that provide for, among other items, the right to
sell certain aftermarket component repair services for CFM56, CF6, CF34 and LM engines directly to other customers as one
of a few GE licensed suppliers. In addition, the CRPs extended certain existing contracts under which the Company currently
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
provides these services directly to GE. The Company recorded the consideration for these rights as an intangible asset that is
amortized as a reduction to sales over the remaining life of these engine programs based on the estimated sales over the life of
such programs. This method reflects the pattern in which the economic benefits of the CRPs are realized.
The recoverability of each asset is subject to significant estimates about future revenues related to the program’s
aftermarket parts and services. The Company evaluates these intangible assets for recoverability and updates amortization rates
on an agreement by agreement basis for the RSPs and on an individual asset program basis for the CRPs. The assets are
reviewed for recoverability periodically including whenever events or changes in circumstances indicate that their carrying
amount may not be recoverable. Annually, the Company evaluates the remaining useful life of these assets to determine
whether events and circumstances warrant a revision to the remaining periods of amortization. Management updates revenue
projections, which includes comparing actual experience against projected revenue and industry projections. The potential
exists that actual revenues will not meet expectations due to a change in market conditions including, for example, the
replacement of older engines with new, more fuel-efficient engines or the Company's ability to maintain market share within
the Aftermarket business. A shortfall in future revenues may indicate a triggering event requiring a write down or further
evaluation of the recoverability of the assets or require the Company to accelerate amortization expense prospectively
dependent on the level of the shortfall. The Company has not identified any impairment of these assets.
Other Intangible Assets: Other intangible assets consist primarily of the Aerospace Aftermarket Programs, as discussed
above, customer relationships, tradenames, patents and proprietary technology. These intangible assets, with the exception of
certain tradenames, have finite lives and are amortized over the periods in which they provide benefit. The Company assesses
the impairment of long-lived assets, including identifiable intangible assets subject to amortization, whenever significant events
or significant changes in circumstances indicate the carrying value may not be recoverable. Tradenames with indefinite lives
are subject to impairment testing in accordance with accounting standards governing such on an annual basis, in the second
quarter, or more frequently if an event or change in circumstances indicates that the fair value of the asset has been reduced
below its carrying value. Based on the assessment performed during 2017, there were no impairments of other intangible assets.
See Note 5 of the Consolidated Financial Statements.
Derivatives: Accounting standards related to the accounting for derivative instruments and hedging activities require that
all derivative instruments be recorded on the balance sheet at fair value. Foreign currency contracts may qualify as fair value
hedges of unrecognized firm commitments, cash flow hedges of recognized assets and liabilities or anticipated transactions, or
a hedge of a net investment. 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 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.
Foreign currency: Assets and liabilities of international operations are translated at year-end rates of exchange; revenues
and expenses are translated at average rates of exchange. The resulting translation gains or losses are reflected in accumulated
other non-owner changes to equity within stockholders’ equity. Net foreign currency transaction gains of $756, $1,873 and
$505 in 2017, 2016 and 2015, respectively, were included in other expense (income), net in the Consolidated Statements of
Income.
Research and Development: Costs are incurred in connection with efforts aimed at discovering and implementing new
knowledge that is critical to developing new products, processes or services, significantly improving existing products or
services, and developing new applications for existing products and services. Research and development expenses for the
creation of new and improved products and services were $14,765, $12,913 and $12,688, for the years 2017, 2016 and 2015,
respectively, and are included in selling and administrative expense.
Pension and Other Postretirement Benefits: The Company accounts for its defined benefit pension plans and other
postretirement plans by recognizing the overfunded or underfunded status of the plans, calculated as the difference between
plan assets and the projected benefit obligation related to each plan, as an asset or liability on the Consolidated Balance Sheets.
Benefit costs associated with the plans primarily include current service costs, interest costs and the amortization of actuarial
losses, partially offset by expected returns on plan assets, which are determined based upon actuarial valuations. Settlement and
curtailment losses (gains) may also impact benefit costs. The Company regularly reviews actuarial assumptions, including
discount rates and the expected return on plan assets, which are updated at the measurement date, December 31st. The impact
of differences between actual results and the assumptions are generally accumulated within Other Comprehensive Income and
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
amortized over future periods, which will affect benefit costs recognized in such periods. See Note 11 to the Consolidated
Financial Statements.
Stock-Based Compensation: Stock-based employee compensation plans are accounted for based on their fair value on
the grant date and the related cost is recognized in the Consolidated Statements of Income in accordance with accounting
standards related to share-based payments. The fair values of stock options are estimated using the Black-Scholes option-
pricing model based on certain assumptions. The fair values of service and performance based share awards are estimated
based on the fair market value of the Company’s stock price on the grant date. The fair values of market based performance
share awards are estimated using the Monte Carlo valuation method. See Note 12 of the Consolidated Financial Statements.
Income Taxes: Deferred tax assets and liabilities are recognized for future tax effects attributable to temporary
differences, operating loss carryforwards and tax credits. The measurement of deferred tax assets and liabilities is determined
using tax rates from enacted tax law of the period in which the temporary differences, operating loss carryforwards and tax
credits are expected to be realized. The effect of the change in income tax rates is recognized in the period of the enactment
date. The guidance related to accounting for income taxes requires that deferred tax assets be reduced by a valuation allowance
if, based on all available evidence, it is more likely than not that the deferred tax asset will not be realized. The Company is
exposed to certain tax contingencies in the ordinary course of business and records those tax liabilities in accordance with the
guidance for accounting for uncertain tax positions. See Note 13 of the Consolidated Financial Statements.
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.
Recently Adopted Accounting Standards
In April 2015, the FASB amended its guidance related to the presentation of debt issuance costs. The amended guidance
specifies that debt issuance costs related to notes shall be reported in the balance sheet as a direct deduction from the face
amount of that note and that amortization of debt issuance costs shall be reported as interest expense. The amended guidance is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and should be
applied retrospectively. The Company adopted the guidance during the first quarter of 2016 and it did not have a material
impact on its Consolidated Financial Statements.
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 prior 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 did not have a material impact on its Consolidated Financial Statements.
In November 2015, the FASB amended its guidance related to the balance sheet classification of deferred income taxes.
The amended guidance removes the requirement to separate and classify deferred income tax liabilities and assets into current
and non-current amounts and requires an entity to now classify all deferred tax liabilities and assets as non-current. The
amended guidance can be adopted either on a prospective or retrospective basis and is effective for interim and annual periods
beginning after December 15, 2016. Early adoption is permitted. The provisions of the amended guidance were adopted on a
prospective basis during the first quarter of 2016. The provisions resulted in the classification of $26,639 and $1,290 of current
deferred income tax assets and liabilities, respectively, into non-current deferred income tax assets and liabilities on the
Consolidated Balance Sheet as of December 31, 2016.
In March 2016, the FASB amended its guidance related to the accounting for certain aspects of share-based payments to
employees. The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or
expiration) through the income statement, rather than through equity. Cash flows related to excess tax benefits will no longer be
separately classified as a financing activity apart from other income tax cash flows. The amended guidance also allows for an
employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and
clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a
financing activity on the Consolidated Statements of Cash Flows. The guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2016. Early adoption was permitted, and the Company elected to early
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
adopt in the third quarter of 2016. See Note 12 of the Consolidated Financial Statements for additional details related to the
Company's adoption of this amended guidance.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") amended its guidance related to revenue recognition.
The amended guidance establishes a single comprehensive model for companies to use 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 clarifies 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 will adopt the amended guidance using the modified retrospective approach on January 1, 2018 at which
time it becomes effective for the Company. In 2015, management developed a project plan and established a cross-functional
team to implement the amended guidance. We have completed the review of our customer contracts and have evaluated the
impact of the amended guidance on each of our primary revenue streams. While we are finalizing our overall assessment under
the amended guidance, we believe that the most significant impact relates to the timing of revenue recognition, presentation
and disclosures. We expect that the majority 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 customer 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 meet
certain of the criteria established in the amended guidance. We will utilize the cost-to-cost input method to measure progress
towards completion for contracts on an over time revenue recognition model.
On January 1, 2018, the Company will recognize the cumulative effect of initially applying the amended guidance as an
increase of approximately $4,000 to the opening balance of retained earnings, attributed primarily to the over time recognition
of approximately $15,000 of net sales. We do not expect that the ongoing impact to net sales and net income will be material to
the Consolidated Statements of Income, however the future impact of the amended guidance is dependent on the mix and
nature of specific customer contracts. Under the existing guidance, the Company recognizes customer advances when payment
is received. Adoption of the amended guidance will result in the recognition of additional 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 will recognize these customer advances as trade receivables, with a corresponding contract liability of
equal amount. 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 continuing to implement design changes to such
business processes, controls and systems to ensure that such changes are effective.
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
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
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 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 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The adoption of this amended
guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.
In March 2017, the FASB amended its guidance related to 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. The Company is currently evaluating the amended guidance to determine the impact it will have on its Consolidated
Financial Statements. The Company does not expect that the adoption 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
have an impact on certain classifications in the 2017 Consolidated Statements of Income, primarily due to the pre-tax pension
curtailment gain of $7,217 that was recorded in operating income during 2017. See Note 11 of 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 is currently evaluating the impact that the guidance may
have on its Consolidated Financial Statements.
In February 2018, the FASB issued guidance related to the impacts of the 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 Other
Comprehensive Income to Retained Earnings (stranded tax effects). The guidance also requires certain new disclosures. The
guidance is effective for annual periods beginning after December 15, 2018, and interim periods within that reporting period.
Early adoption is permitted. Entities may adopt the guidance using one of two transition methods; retrospective to each period
(or periods) in which the income tax effects of the Act related to the items remaining in Other Comprehensive Income are
recognized or at the beginning of the period of adoption. The Company is currently evaluating the impact that the guidance
may have on its Consolidated Financial Statements.
2. Acquisitions
The Company has acquired a number of businesses during the past three years. The results of operations of these acquired
businesses have been included in the consolidated results from the respective acquisition dates. The purchase prices for these
acquisitions have been allocated to tangible and intangible assets and liabilities of the businesses based upon estimates of their
respective fair values. Pro forma operating results for the acquisitions are not presented as the results would not be significantly
different than historical results.
In the second quarter of 2017, the Company completed its acquisition of the assets of the privately held Gammaflux L.P.
business ("Gammaflux"), a leading supplier of hot runner temperature and sequential valve gate control systems to the plastics
industry. Gammaflux, which is headquartered in Sterling, Virginia and has offices in Illinois and Germany, provides
temperature control solutions for injection molding, extrusion, blow molding, thermoforming, and other applications. Its end
markets include packaging, electronics, automotive, household products, medical, and tool building. The Company acquired the
assets of Gammaflux for an aggregate purchase price of $8,866, which was financed using cash on hand and borrowings under
the Company's revolving credit facility. The purchase price includes adjustments under the terms of the Asset Purchase
Agreement, including $2 related to cash acquired. In connection with the acquisition, the Company recorded $1,535 of goodwill
and $3,700 of intangible assets. See Note 5 to the Consolidated Financial Statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The Company incurred $210 of acquisition-related costs during the year ended December 31, 2017 related to the
Gammaflux 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 Gammaflux have been included in the Consolidated Statements of Income for the period ended
December 31, 2017 since the date of acquisition. The Company reported $9,081 in net sales for Gammaflux for the year ended
December 31, 2017. Gammaflux results have been included within the Industrial segment's operating profit.
In the third quarter of 2016, the Company, through three of its subsidiaries (collectively, the “Purchaser”), completed its
acquisition of the molds business of Adval Tech Holding AG and Adval Tech Holdings (Asia) Pte. Ltd. ("FOBOHA").
FOBOHA is headquartered in Haslach, Germany and currently operates out of manufacturing facilities located in Germany and
China. When acquired, FOBOHA also operated out of a third manufacturing facility located in Switzerland; however, this
operation was consolidated and closed during 2017. See Note 8 to the Consolidated Financial Statements. The Company
completed its purchase of the Germany and Switzerland businesses on August 31, 2016. The purchase of the China business
required government approval which was granted on September 30, 2016. On October 7, 2016, shares of the China operations
were subsequently transferred to the Company upon payment, per the terms of the Share Purchase Agreement for these
respective operations ("China SPA"). The Company, pursuant to the terms and conditions within the Share Purchase Agreement
("FOBOHA SPA"), assumed economic control of the China business effective August 31, 2016. Having both economic control
and the benefits and risks of ownership during the period from August 31, 2016 through September 30, 2016, the Company
included the results of the China business within the consolidated results of operations of the Company during this period.
FOBOHA specializes in the development and manufacture of complex plastic injection molds for packaging, medical,
consumer and automotive applications. The Company acquired FOBOHA for an aggregate cash purchase price of CHF 137,918
($140,203) which was financed using cash on hand and borrowings under the Company's revolving credit facility. The purchase
price includes adjustments under the terms of the FOBOHA SPA, including approximately CHF 11,342 ($11,530) related to
cash acquired. In connection with the acquisition, the Company recorded $39,800 of intangible assets and $75,574 of goodwill.
See Note 5 to the Consolidated Financial Statements.
The Company incurred $2,193 of acquisition-related costs during the year ended December 31, 2016 related to the
FOBOHA acquisition. These costs include due diligence costs and transaction costs to complete the acquisition and have been
recognized in the Company's Consolidated Statements of Income as selling and administrative expenses.
The operating results of FOBOHA have been included in the Consolidated Statements of Income for the period ended
December 31, 2016 since the date of acquisition. The Company reported $18,348 in net sales for FOBOHA for the year ended
December 31, 2016. FOBOHA results have been included within the Industrial segment's operating profit.
In the fourth quarter of 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.
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. The Company acquired Priamus for an
aggregate cash purchase price of CHF 9,879 ($10,111) which was financed using cash on hand and borrowings under the
Company's revolving credit facility. The purchase price includes adjustments under the terms of the Share Purchase Agreement,
including CHF 1,556 ($1,592) related to cash acquired.
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
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
€58,066 ($63,690), pursuant to the terms of the Sale and Purchase Agreement ("SPA"), which was financed using cash on hand
and borrowings under the Company's revolving credit facility. The purchase price includes adjustments under the terms of the
SPA, including €17,054 ($18,706) related to cash acquired.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The Company incurred $2,195 and $574 of acquisition-related costs during the year ended December 31, 2015 related to
the Thermoplay and Priamus acquisitions, respectively. These costs include due diligence costs and transaction costs to
complete the acquisitions, and have been recognized in the Company's Consolidated Statements of Income as selling and
administrative expenses.
The operating results of Thermoplay and Priamus have been included in the Consolidated Statements of Income for the
period ended December 31, 2015, since the dates of acquisition. The Company reported $13,593 and $2,028 in net sales for
Thermoplay and Priamus, respectively, for the year ended December 31, 2015. Thermoplay and Priamus results have been
included within the Industrial segment's operating profit.
3. Inventories
Inventories at December 31 consisted of:
Finished goods
Work-in-process
Raw materials and supplies
4. Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of:
Land
Buildings
Machinery and equipment
Less accumulated depreciation
2017
2016
79,649
97,276
65,037
241,962
$
$
71,100
98,246
58,413
227,759
2017
2016
21,723
182,226
631,392
835,341
(476,043)
359,298
$
$
19,952
169,695
572,540
762,187
(427,698)
334,489
$
$
$
$
Depreciation expense was $48,693, $43,165 and $39,654 during 2017, 2016 and 2015, respectively.
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
the Company:
January 1, 2016
Acquisition-related
Foreign currency translation
December 31, 2016
Acquisition-related
Foreign currency translation
December 31, 2017
$
Industrial
$ 557,206
73,688
(28,244)
602,650
3,330
53,457
$ 659,437
$
Aerospace
Total
Company
30,786
—
—
30,786
—
—
30,786
$
$
587,992
73,688
(28,244)
633,436
3,330
53,457
690,223
Of the $690,223 of goodwill at December 31, 2017, $43,860 represents the original tax deductible basis.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The increase in goodwill in 2016 was due to the acquisition of FOBOHA on August 31, 2016, which is included in the
Industrial segment. The amount allocated to goodwill reflects the benefits that the Company expects to realize from synergies
created by combining the operations of FOBOHA, future enhancements to technology, geographical expansion and FOBOHA's
assembled workforce. None of the recognized goodwill is expected to be deductible for income tax purposes.
Other Intangible Assets: Other intangible assets at December 31 consisted of:
Amortized intangible assets:
Revenue Sharing Programs
Component Repair Programs
Customer lists/relationships
Patents and technology
Trademarks/trade names
Other
Unamortized intangible asset:
Trade names
Foreign currency translation
Other intangible assets
Range of
Life-Years
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
2017
2016
Up to 30
Up to 30
10-16
4-14
10-30
Up to 15
$
293,700
$
(108,075) $
293,700
$
(95,701)
111,839
215,966
87,052
11,950
20,551
741,058
42,770
(11,972)
771,856
$
(16,508)
(65,385)
(48,083)
(10,349)
(16,414)
(264,814)
—
—
$
(264,814) $
111,839
215,266
84,052
11,950
20,551
737,358
(10,497)
(53,198)
(37,897)
(9,967)
(16,338)
(223,598)
42,770
—
(34,272)
745,856
$
—
(223,598)
The Company entered into Component Repair Programs ("CRPs") with General Electric ("GE") during 2015, 2014 and
2013. The CRPs provide for, among other items, the right to sell certain aftermarket component repair services for CFM56,
CF6, CF34 and LM engines directly to other customers over the life of the aircraft engine program as one of a few GE licensed
suppliers. In addition, the CRPs extended certain contracts under which the Company provides these services directly to GE.
Total investments in CRPs as of December 31, 2017 equaled $111,839, all of which have been paid. The Company recorded the
CRP consideration as an intangible asset which is recognized as a reduction of sales over the remaining useful life of these
engine programs based on the estimated sales over the life of such programs.
In connection with the acquisition of FOBOHA in August 2016, the Company recorded intangible assets of $39,800,
which includes $20,700 of customer relationships, $14,700 of patents and technology and $4,400 of an indefinite life trade
name. The weighted-average useful lives of the acquired assets were 16 years and 7 years, respectively.
Amortization of intangible assets for the years ended December 31, 2017, 2016 and 2015 was $41,216, $36,753 and
$38,502, respectively. Estimated amortization of intangible assets for future periods is as follows: 2018 - $41,000; 2019 -
$41,000; 2020 - $37,000; 2021 - $37,000 and 2022 - $36,000.
The Company has entered into a number of aftermarket RSP agreements each of which is with GE. See Note 1 of the
Consolidated Financial Statements for a further discussion of these Revenue Sharing Programs. As of December 31, 2017, the
Company has made all required participation fee payments under the aftermarket RSP agreements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
6. Accrued Liabilities
Accrued liabilities at December 31 consisted of:
Payroll and other compensation
Deferred revenue and customer advances
Pension and other postretirement benefits
Accrued income taxes
Other
7. Debt and Commitments
2017
2016
$
$
53,857
40,472
8,294
26,340
52,278
181,241
$
$
37,560
34,812
8,261
26,477
49,857
156,967
Long-term debt and notes and overdrafts payable at December 31 consisted of:
Revolving credit agreement
3.97% Senior Notes
Borrowings under lines of credit and overdrafts
Capital leases
Other foreign bank borrowings
Less current maturities
Long-term debt
2017
2016
Carrying
Amount
$
421,500
100,000
5,669
4,541
886
532,596
(6,999)
525,597
$
$
Fair
Value
424,818
101,348
5,669
4,964
897
537,696
Carrying
Amount
$
363,300
100,000
30,825
5,413
1,416
500,954
(32,892)
468,062
$
$
Fair
Value
364,775
101,598
30,825
5,902
1,428
504,528
The Company’s long-term debt portfolio consists of fixed-rate and variable-rate instruments and is managed to reduce
the overall cost of borrowing and to mitigate fluctuations in interest rates. Among other things, interest rate fluctuations impact
the market value of the Company’s fixed-rate debt.
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 increases 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, sterling or Swiss franc borrowing, up to $600,000. 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%. The Company paid fees and expenses of $2,542 in conjunction with
executing the Amended Credit Agreement; 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 has been recorded through other financing activities on the
Consolidated Statements of Cash Flows.
Borrowings and availability under the Amended Credit Agreement were $421,500 and $428,500, respectively, at
December 31, 2017 and $363,300 and $386,700, respectively, at December 31, 2016. The average interest rate on these
borrowings was 2.65% and 1.86% on December 31, 2017 and 2016, respectively. 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 2016, the Company borrowed $100,000 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.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
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, which represent Level 2 observable
inputs.
The Company's borrowing capacity remains 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 and a ratio of Consolidated EBITDA
to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of each fiscal quarter; provided that
these debt to EBITDA ratios are permitted to increase for a period of four fiscal quarters after the closing of certain permitted
acquisitions. At December 31, 2017, the Company was in compliance with all covenants under the Agreements and continues to
monitor its future compliance based on current and future economic conditions.
In addition, the Company has approximately $59,000 in uncommitted short-term bank credit lines ("Credit Lines") and
overdraft facilities. Under the Credit Lines, $5,300 was borrowed at December 31, 2017 at an average interest rate of 2.33%
and $30,700 was borrowed at December 31, 2016 at an average interest rate of 1.96%. The Company had also borrowed $369
and $125 under the overdraft facilities at December 31, 2017 and 2016, 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 capital leases at the Thermoplay and Männer businesses. The fair value of the capital leases are 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.
At December 31, 2017 and 2016, the Company also had other foreign bank borrowings of $886 and $1,416, respectively.
The fair value of the foreign bank borrowings was based on observable Level 2 inputs. These instruments were valued using
discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
Long-term debt and notes payable as of December 31, 2017 are payable as follows: $6,999 in 2018, $955 in 2019, $508
in 2020, $601 in 2021, $421,989 in 2022 and $101,544 thereafter. The 3.97% Senior Notes are due in 2024 according to their
maturity date.
In addition, the Company had outstanding letters of credit totaling $9,339 at December 31, 2017.
Interest paid was $13,962, $11,471 and $10,550 in 2017, 2016 and 2015, respectively. Interest capitalized was $415,
$324 and $422 in 2017, 2016 and 2015, respectively, and is being depreciated over the lives of the related fixed assets.
8. Business Reorganizations
In the second quarter of 2017, 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.
The Company recorded a net pre-tax loss of $13 in 2017 related to the Closures. This balance includes employee severance
charges of $3,796 and other Closure costs of $3,664, primarily related to asset write-downs and costs to transfer work to other
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
existing facilities, almost fully offset by pension curtailment and settlement gains of $7,217 and $230, respectively. The Muri
Closure was completed as of December 31, 2017, whereas the Closure at the Associated Spring facility is expected to be
completed in the first half of 2018. The remaining severance liability, which is expected to be paid in 2018, was included within
accrued liabilities as of December 31, 2017. 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 severance costs
Payments
Foreign currency translation
December 31, 2017
9. Derivatives
$
$
—
3,796
(3,099)
(48)
649
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 exposures 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 new interest rate swap agreement (the "Swap") that commenced on April 28, 2017, with one bank, and 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 were accounted for as cash flow hedges. The Swap remained in place at December 31, 2017.
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 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 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 years ended December 31, 2017 and 2016, as presented on the
consolidated statements of cash flows, include $18,256 of net cash payments and $5,221 of net cash proceeds, respectively,
related 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 as of December 31.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Derivatives designated as hedging
instruments:
Interest rate contracts
Foreign exchange contracts
Derivatives not designated as
hedging instruments:
Foreign exchange contracts
Total derivatives
2017
2016
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
$
$
654
—
654
$
— $
(379)
(379)
— $
—
—
(78)
(177)
(255)
58
712
$
(29)
(408) $
397
397
$
(1,499)
(1,754)
Asset derivatives related to interest rate contracts and foreign exchange contracts are recorded in other assets and prepaid
expenses and other current assets, respectively, 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 recorded in accumulated other comprehensive income (loss), net of tax, for
the years ended December 31, 2017 and 2016 for derivatives held by the Company and designated as hedging instruments.
Cash flow hedges:
Interest rate contracts
Foreign exchange contracts
2017
2016
$
$
460
(161)
299
$
$
174
(516)
(342)
Amounts related to the interest rate swaps included within accumulated other comprehensive income (loss) that were
reclassified to expense during the years ended December 31, 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 years ended December 31, 2017 and 2016.
The following table sets forth the net (loss) gains recorded in other expense (income), net in the consolidated statements
of income for the years ended December 31, 2017 and 2016 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
expense (income), net.
Foreign exchange contracts
10. Fair Value Measurements
2017
(16,813) $
$
2016
2,297
The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard
classifies the inputs used to measure fair value into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices
for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or liability.
Level 3
Unobservable inputs for the asset or liability.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The following table provides the assets and liabilities reported at fair value and measured on a recurring basis as of
December 31, 2017 and 2016:
December 31, 2017
Asset derivatives
Liability derivatives
Bank acceptances
Rabbi trust assets
December 31, 2016
Asset derivatives
Liability derivatives
Bank acceptances
Rabbi trust assets
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
712
(408)
16,092
2,554
18,950
397
(1,754)
9,690
2,216
10,549
$
$
$
$
— $
—
—
2,554
2,554
$
— $
—
—
2,216
2,216
$
712
(408)
16,092
—
16,396
397
(1,754)
9,690
—
8,333
$
$
$
$
—
—
—
—
—
—
—
—
—
—
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 3 to 6 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. For disclosures of the fair values of the Company’s pension
plan assets, see Note 11 of the Consolidated Financial Statements.
11. Pension and Other Postretirement Benefits
The accounting standards related to employers’ accounting for defined benefit pension and other postretirement plans
requires the Company to recognize the funded status of its defined benefit postretirement plans as assets or liabilities in the
accompanying consolidated balance sheets and to recognize changes in the funded status of the plans in comprehensive
income.
The Company has various defined contribution plans, the largest of which is its Retirement Savings Plan. Most U.S.
salaried and non-union hourly employees are eligible to participate in this plan. See Note 16 for further discussion of the
Retirement Savings Plan. The Company also maintains various other defined contribution plans which cover certain other
employees. Company contributions under these plans are based primarily on the performance of the business units and
employee compensation. Contribution expense under these other defined contribution plans was $6,644, $5,907 and $5,347 in
2017, 2016 and 2015, respectively.
Defined benefit pension plans in the U.S. cover a majority of the Company’s U.S. employees at the Associated Spring
and Nitrogen Gas Products businesses of Industrial, the Company’s Corporate Office and certain former U.S. employees,
including retirees. Plan benefits for salaried and non-union hourly employees are based on years of service and average salary.
Plans covering union hourly employees provide benefits based on years of service. In 2012, the Company closed the U.S.
salaried defined benefit pension plan (the "U.S. Salaried Plan") to employees hired on or after January 1, 2013, with no impact
to the benefits of existing participants. Effective January 1, 2013, the Retirement Savings Plan was amended to provide certain
salaried employees hired on or after January 1, 2013 with an additional annual retirement contribution of 4% of eligible
earnings, in place of pensionable benefits under the closed U.S. Salaried Plan. The Company funds U.S. pension costs in
accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Non-U.S. defined benefit
pension plans cover certain employees of certain international locations in Europe and Canada.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The Company provides other medical, dental and life insurance postretirement benefits for certain of its retired
employees in the U.S. and Canada. It is the Company’s practice to fund these benefits as incurred.
The accompanying balance sheets reflect the funded status of the Company’s defined benefit pension plans at
December 31, 2017 and 2016, respectively. Reconciliations of the obligations and funded status of the plans follow:
Benefit obligation, January 1
$
389,613
$
104,339
$
493,952
$
385,629
$
75,406
$
461,035
2017
2016
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
Service cost
Interest cost
Amendments
Actuarial loss (gain)
Benefits paid
Transfers in
Plan curtailments
Plan settlements
Participant contributions
Foreign exchange rate changes
Benefit obligation, December 31
Fair value of plan assets, January 1
Actual return on plan assets
Company contributions
Participant contributions
Benefits paid
Plan settlements
Transfers in
Foreign exchange rate changes
Fair value of plan assets, December 31
Underfunded status, December 31
3,931
17,151
1,233
28,350
(24,909)
—
—
—
—
—
415,369
331,260
56,131
12,896
—
(24,909)
—
—
—
375,378
2,124
1,668
27
(4,397)
(4,240)
2,743
(7,030)
(21,074)
1,355
7,226
82,741
85,652
6,150
2,027
1,355
(4,240)
(20,857)
2,743
6,230
79,060
$
(39,991) $
(3,681) $
6,055
18,819
1,260
23,953
(29,149)
2,743
(7,030)
(21,074)
1,355
7,226
498,110
416,912
62,281
14,923
1,355
(29,149)
(20,857)
2,743
6,230
454,438
(43,672) $
3,892
17,523
2,405
6,661
(26,497)
—
—
—
—
—
389,613
326,829
13,051
17,877
—
1,503
1,971
(174)
10,814
(4,691)
25,968
—
—
1,444
(7,902)
104,339
68,553
7,276
2,224
1,444
5,395
19,494
2,231
17,475
(31,188)
25,968
—
—
1,444
(7,902)
493,952
395,382
20,327
20,101
1,444
(26,497)
(4,691)
(31,188)
—
—
—
331,260
—
18,320
(7,474)
85,652
—
18,320
(7,474)
416,912
(58,353) $
(18,687) $
(77,040)
In 2017, the Company authorized the closure of it's FOBOHA facility located in Muri, Switzerland, resulting in the
pension curtailments and settlements noted above. See Note 8 of the Consolidated Financial Statements for additional
information related to this Closure.
Projected benefit obligations related to pension plans with benefit obligations in excess of plan assets follow:
Projected benefit obligation
Fair value of plan assets
U.S.
$ 311,320
267,087
2017
Non-U.S.
$
40,931
26,205
Total
$ 352,251
293,292
U.S.
$ 389,613
331,260
2016
Non-U.S.
$
61,060
39,356
Total
$ 450,673
370,616
Information related to pension plans with accumulated benefit obligations in excess of plan assets follows:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
U.S.
40,572
40,090
4,797
2017
Non-U.S.
$
$
40,931
40,877
26,205
Total
81,503
80,967
31,002
U.S.
$ 389,613
378,431
331,260
2016
Non-U.S.
$
61,014
59,568
39,356
Total
$ 450,627
437,999
370,616
The accumulated benefit obligation for all defined benefit pension plans was $485,777 and $481,241 at December 31,
2017 and 2016, respectively.
Amounts related to pensions recognized in the accompanying balance sheets consist of:
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Other assets
Accrued liabilities
$
U.S.
4,242
2,823
2017
Non-U.S.
$ 11,045
407
Accrued retirement benefits
41,410
14,319
2016
Total
$ 15,287
3,230
55,729
U.S.
Non-U.S.
Total
$
— $
3,017
$
2,813
55,540
367
21,337
3,017
3,180
76,877
Accumulated other non-owner changes
to equity, net
(84,990)
(13,016)
(98,006)
(91,530)
(19,458)
(110,988)
Amounts related to pensions recognized in accumulated other non-owner changes to equity, net of tax, at December 31,
2017 and 2016, respectively, consist of:
2017
2016
U.S.
Non-U.S.
Total
U.S.
Non-U.S.
Total
Net actuarial loss
Prior service costs
$ (82,736) $ (13,237) $ (95,973) $ (89,772) $ (19,822) $ (109,594)
(1,394)
$ (84,990) $ (13,016) $ (98,006) $ (91,530) $ (19,458) $ (110,988)
(2,033)
(1,758)
(2,254)
221
364
The accompanying balance sheets reflect the underfunded status of the Company’s other postretirement benefit plans at
December 31, 2017 and 2016. Reconciliations of the obligations and underfunded status of the plans follow:
2017
2016
Benefit obligation, January 1
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Participant contributions
Foreign exchange rate changes
Benefit obligation, December 31
Fair value of plan assets, January 1
Company contributions
Participant contributions
Benefits paid
Fair value of plan assets, December 31
Underfunded status, December 31
$
$
36,853
83
1,561
3,806
(7,251)
2,209
309
37,570
—
5,042
2,209
(7,251)
—
37,570
Amounts related to other postretirement benefits recognized in the accompanying balance sheets consist of:
Accrued liabilities
Accrued retirement benefits
Accumulated other non-owner changes to equity, net
$
2017
5,064
32,506
(5,838)
$
$
$
41,706
122
1,766
(3,495)
(5,621)
2,281
94
36,853
—
3,340
2,281
(5,621)
—
36,853
2016
5,081
31,772
(3,582)
Amounts related to other postretirement benefits recognized in accumulated other non-owner changes to equity, net of
tax, at December 31, 2017 and 2016 consist of:
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Net actuarial loss
Prior service loss
2017
2016
$
$
(5,746) $
(92)
(5,838) $
(3,532)
(50)
(3,582)
The sources of changes in accumulated other non-owner changes to equity, net, during 2017 were:
Prior service cost
Net (loss) gain
Amortization of prior service (credits) costs
Amortization of actuarial loss
Foreign exchange rate changes
Pension
Other
Postretirement
Benefits
$
$
(800) $
7,787
117
7,140
(1,262)
12,982
$
—
(2,392)
(43)
170
9
(2,256)
Weighted-average assumptions used to determine benefit obligations as of December 31, are:
U.S. plans:
Discount rate
Increase in compensation
Non-U.S. plans:
Discount rate
Increase in compensation
2017
2016
3.90%
2.56%
1.90%
2.17%
4.50%
2.56%
1.60%
2.29%
The investment strategy of the plans is to generate a consistent total investment return sufficient to pay present and future
plan benefits to retirees, while minimizing the long-term cost to the Company. Target allocations for asset categories are used to
earn a reasonable rate of return, provide required liquidity and minimize the risk of large losses. Targets may be adjusted, as
necessary, to reflect trends and developments within the overall investment environment. The weighted-average target
investment allocations by asset category were as follows during 2017: 65% in equity securities and 35% in fixed income
securities, including cash.
The fair values of the Company’s pension plan assets at December 31, 2017 and 2016, by asset category are as follows:
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Asset Category
December 31, 2017
Cash and short-term investments
Equity securities:
U.S. large-cap
U.S. mid-cap
U.S. small-cap
International equities
Global equity
Fixed income securities:
U.S. bond funds
International bonds
Other
December 31, 2016
Cash and short-term investments
Equity securities:
U.S. large-cap
U.S. mid-cap
U.S. small-cap
International equities
Global equity
Fixed income securities:
U.S. bond funds
International bonds
Other
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
10,731
$
10,731
$
— $
46,786
15,576
16,157
159,803
51,945
109,033
41,742
2,665
454,438
3,207
39,162
12,724
19,551
135,514
47,445
103,399
53,783
2,127
416,912
$
$
$
$
—
15,576
16,157
—
51,945
—
—
—
94,409
3,207
—
12,724
19,551
—
47,445
—
—
—
82,927
$
$
46,786
—
—
159,803
—
109,033
41,742
—
357,364
—
39,162
—
—
135,514
—
103,399
53,783
—
331,858
$
$
—
—
—
—
—
—
—
—
2,665
2,665
—
—
—
—
—
—
—
—
2,127
2,127
The fair values of the Level 1 assets are based on quoted market prices from various financial exchanges. The fair values
of the Level 2 assets are based primarily on quoted prices in active markets for similar assets or liabilities. The Level 2 assets
are comprised primarily of commingled funds and fixed income securities. Commingled equity funds are valued at their net
asset values based on quoted market prices of the underlying assets. Fixed income securities are valued using a market
approach which considers observable market data for the underlying asset or securities. The Level 3 assets relate to the defined
benefit pension plan at the Synventive business. These pension assets are fully insured and have been estimated based on
accrued pension rights and actuarial rates. These pension assets are limited to fulfilling the Company's pension obligations.
The Company expects to contribute approximately $4,600 to the pension plans in 2018. No contributions to the U.S.
Qualified pension plans, specifically, are required, and the Company does not currently plan to make any discretionary
contributions to such plans in 2018.
The following are the estimated future net benefit payments, which include future service, over the next 10 years:
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
2018
2019
2020
2021
2022
Years 2023-2027
Total
Pensions
Other
Postretirement
Benefits
$
$
29,261
29,243
29,086
29,205
29,378
144,074
290,247
$
$
3,653
3,485
3,204
3,014
2,848
11,722
27,926
Pension and other postretirement benefit costs consist of the following:
2017
Pensions
2016
Other
Postretirement Benefits
2015
2017
2016
2015
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service
cost (credit)
Recognized losses
Curtailment gain
Settlement (gain) loss
Net periodic benefit cost
$
6,055
$
5,395
$
5,508
$
83
$
122
$
18,819
(28,082)
446
10,557
(7,217)
(119)
19,494
(30,302)
20,019
(32,404)
210
10,791
—
—
305
15,004
—
9,939
1,561
—
(68)
276
—
—
1,766
—
(373)
535
—
—
145
1,836
—
(564)
1,011
—
—
$
459
$
5,588
$
18,371
$
1,852
$
2,050
$
2,428
In 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 that, if accepted,
would settle the Company's pension obligation to them. The Program provided 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 resultant
pre-tax settlement charge of $9,856 represents accelerated amortization of actuarial losses and is included the settlement loss
above. This settlement charge was reflected within costs of sales and selling and administrative expenses within the
Consolidated Statements of Income.
The Closure of the Company's FOBOHA facility located in Muri, Switzerland, as discussed above, resulted in a pre-tax
curtailment gain of $7,217 during the 2017 period. See Note 8 of the Consolidated Financial Statements.
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from
accumulated other non-owner changes to equity into net periodic benefit cost in 2018 are $11,222 and $562, respectively. The
estimated net actuarial loss and prior service credit for other defined benefit postretirement plans that will be amortized from
accumulated other non-owner changes to equity into net periodic benefit cost in 2018 are $641 and $20, respectively.
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, are:
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
U.S. plans:
Discount rate
Long-term rate of return
Increase in compensation
Non-U.S. plans:
Discount rate
Long-term rate of return
Increase in compensation
2017
2016
2015
4.50%
7.75%
2.56%
1.60%
3.59%
2.29%
4.65%
8.25%
3.71%
2.80%
4.73%
2.71%
4.25%
8.25%
3.71%
2.74%
5.00%
2.72%
The expected long-term rate of return is based on consideration of projected rates of return and the historical rates of
return of published indices that reflect the plans’ target asset allocation.
The Company’s accumulated postretirement benefit obligations, exclusive of pensions, take into account certain cost-
sharing provisions. The annual rate of increase in the cost of covered benefits (i.e., health care cost trend rate) is assumed to be
6.86% and 6.44% at December 31, 2017 and 2016, respectively, decreasing gradually to a rate of 4.50% by December 31, 2038.
A one percentage point change in the assumed health care cost trend rate would have the following effects:
Effect on postretirement benefit obligation
Effect on postretirement benefit cost
One Percentage
Point Increase
261
$
11
One Percentage
Point Decrease
(242)
$
(10)
The Company actively contributes to a Swedish pension plan that supplements the Swedish social insurance system. The
pension plan guarantees employees a pension based on a percentage of their salary and represents a multi-employer pension
plan, however the pension plan was not significant in any year presented. This pension plan is not underfunded.
Contributions related to the individually insignificant multi-employer plans, as disclosure is required pursuant to the
applicable accounting standards, are as follows:
Pension Fund:
Swedish Pension Plan
Total Contributions
12. Stock-Based Compensation
Contributions by the Company
2017
739
$
$ 739
2016
$ 673
$ 673
2015
$
$
343
343
The Company accounts for the cost of all share-based payments, including stock options, by measuring the payments at
fair value on the grant date and recognizing the cost in the results of operations. The fair values of stock options are estimated
using the Black-Scholes option-pricing model based on certain assumptions. The fair values of service and performance based
stock awards are estimated based on the fair market value of the Company’s stock price on the grant date. The fair value of
market based performance share awards are estimated using the Monte Carlo valuation method. Estimated forfeiture rates are
applied to outstanding awards.
Refer to Note 16 for a description of the Company’s stock-based compensation plans and their general terms. As of
December 31, 2017, incentives have been awarded in the form of performance share awards and restricted stock unit awards
(collectively, “Rights”) and stock options. The Company has elected to use the straight-line method to recognize compensation
costs. Stock options and awards typically vest over a period ranging from six months to five years. The maximum term of stock
option awards is 10 years. Upon exercise of a stock option or upon vesting of Rights, shares may be issued from treasury shares
held by the Company or from authorized shares.
In March 2016, the FASB amended its guidance related to the accounting for certain aspects of share-based payments to
employees. The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
expiration) through the income statement, rather than through equity. Cash flows related to excess tax benefits will no longer be
separately classified as a financing activity apart from other income tax cash flows. The amended guidance also allows for an
employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and
clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a
financing activity on the Consolidated Statements of Cash Flows. The guidance also allows for a policy election to account for
forfeitures as they occur, rather than accounting for them on an estimated basis. The guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.
The Company elected to early adopt this guidance in the third quarter of 2016. This adoption requires the Company to
reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption.
The most significant impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than
through equity for all periods in fiscal year 2016. This resulted in the recognition of excess tax benefits in the provision for
income taxes of $2,229 for the year ended December 31, 2016. In 2015, the Company recorded $2,667 of excess tax benefits
for current year tax deductions in additional paid-in capital, as was required pursuant to the earlier accounting guidance. In
connection with the additional amendments within the amended guidance, the Company recognized state tax loss carryforwards
in the amount of $198, which impacted retained earnings as of January 1, 2016. The cumulative effect of this change is required
to be recorded in retained earnings. The Company elected to continue to estimate forfeitures expected to occur to determine the
amount of compensation cost to be recognized in each period.
The presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares
were applied retrospectively to all periods presented. This resulted in an increase in both net cash provided by operating
activities and net cash used by financing activities of $1,402, $2,320, $7,519 and $7,580 for the three, six, nine and twelve
month periods ended March 31, June 30, September 30 and December 31, 2015, respectively, and $413 and $524 for the three
and six month periods ended March 31 and June 30, 2016, respectively.
During 2017, 2016 and 2015, the Company recognized $12,285, $11,493, and $9,258 respectively, of stock-based
compensation cost and $4,579, $4,284, and $3,451 respectively, of related tax benefits in the accompanying consolidated
statements of income. Additionally, the Company recognized excess tax benefits in the tax provision of $2,463 and $2,229 in
2017 and 2016, respectively. The Company has realized all available tax benefits related to deductions from excess stock
awards exercised or restricted stock unit awards and performance share awards vested. At December 31, 2017, the Company
had $12,940 of unrecognized compensation costs related to unvested awards which are expected to be recognized over a
weighted average period of 2.85 years.
The following table summarizes information about the Company’s stock option awards during 2017:
Outstanding, January 1, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Number of
Shares
Weighted-Average
Exercise
Price
$
589,160
131,416
(84,393)
(17,403)
618,780
28.67
47.80
23.28
39.82
33.15
The following table summarizes information about stock options outstanding at December 31, 2017:
Range of
Exercise
Prices
$11.45 to $15.83
$20.69 to $26.32
$26.38 to $30.71
$34.92 to $37.13
$38.93 to $63.38
Number
of Shares
67,130
77,955
146,828
195,005
131,862
Options Outstanding
Average
Remaining
Life (Years)
Average
Exercise
Price
Options Exercisable
Number
of Shares
Average
Exercise
Price
$
1.5
4.2
7.5
6.9
9.0
60
13.43
23.56
30.26
36.40
47.28
$
67,130
77,955
58,173
142,844
5,750
13.43
23.56
29.58
36.59
38.96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The Company received cash proceeds from the exercise of stock options of $1,964, $4,184 and $11,022 in 2017, 2016
and 2015, respectively. The total intrinsic value (the amount by which the stock price exceeds the exercise price of the option
on the date of exercise) of the stock options exercised during 2017, 2016 and 2015 was $2,887, $4,464 and $8,331,
respectively.
The weighted-average grant date fair value of stock options granted in 2017, 2016 and 2015 was $10.31, $7.01 and $8.86,
respectively. The fair value of each stock option grant on the date of grant was estimated using the Black-Scholes option-
pricing model based on the following weighted average assumptions:
Risk-free interest rate
Expected life (years)
Expected volatility
Expected dividend yield
2017
2016
2015
1.90%
5.3
26.1%
1.82%
1.20%
5.3
29.1%
1.94%
1.58%
5.3
31.1%
2.06%
The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life
represents an estimate of the period of time that options are expected to remain outstanding. Assumptions of expected volatility
of the Company’s common stock and expected dividend yield are estimates of future volatility and dividend yields based on
historical trends.
The following table summarizes information about stock options outstanding that are expected to vest and stock options
outstanding that are exercisable at December 31, 2017:
Options Outstanding, Expected to Vest
Options Outstanding, Exercisable
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Weighted-
Average
Remaining
Term (Years)
Shares
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Weighted-
Average
Remaining
Term (Years)
$
33.15
$
18,041
6.58
351,852
$
28.16
$
12,352
5.16
Shares
598,986
The following table summarizes information about the Company’s Rights during 2017:
Service Based Rights
Service and Performance
Based Rights
Service and Market Based
Rights
Number of
Units
Weighted-
Average
Grant Date
Fair Value
Number of
Units
Weighted-
Average
Grant Date
Fair Value
Number of
Units
Weighted-
Average
Grant Date
Fair Value
Outstanding, January 1, 2017
347,304
$
Granted
Forfeited
Additional Earned
Issued
Outstanding, December 31, 2017
122,696
(14,573)
—
(144,903)
310,524
31.86
50.30
37.77
—
57.80
172,042
$
43,506
(4,660)
18,370
(73,364)
155,894
34.74
47.69
57.83
37.00
37.00
116,746
$
43,506
(4,363)
3,946
(31,443)
128,392
52.24
74.20
43.39
50.45
50.45
The Company granted 122,696 restricted stock unit awards and 87,012 performance share awards in 2017. All of the
restricted stock unit awards vest upon meeting certain service conditions. "Additional Earned" reflects performance share
awards earned above target that have been issued. The performance share awards are part of the long-term Performance Share
Award Program (the "Awards Program"), which is designed to assess the long-term Company performance relative to the
performance of companies included in the Russell 2000 Index or to pre-established goals. The performance goals are
independent of each other and based on equally weighted metrics. For awards granted in 2015, the metrics included the
Company's total shareholder return ("TSR"), operating income before depreciation and amortization growth ("EBITDA
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
growth") and return on invested capital ("ROIC"). For awards granted in 2016 and 2017, the metrics included TSR and ROIC.
The TSR and EBITDA growth metrics are designed to assess the long-term Company performance relative to the performance
of companies included in the Russell 2000 Index over a three year period. ROIC is designed to assess the Company’s
performance compared to pre-established goals over a three year performance period. The participants can earn from zero to
250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the
aggregate target award numbers. Compensation expense for the awards is recognized over the three year service period based
upon the value determined under the intrinsic value method for the Earnings per share growth, EBITDA growth and ROIC
portions of the award and the Monte Carlo simulation valuation model for the TSR portion of the award since it contains a
market condition. The assumptions used to determine the weighted-average fair values of the market based portion of the 2017
awards include a 1.40% risk-free interest rate and a 24.76% expected volatility rate.
Compensation expense for the TSR portion of the awards is fixed at the date of grant and will not be adjusted in future
periods based upon the achievement of the TSR performance goal. Compensation expense for the Earnings per share growth,
EBITDA growth and the ROIC portions of the awards is recorded each period based upon a probability assessment of achieving
the goals with a final adjustment at the end of the service period based upon the actual achievement of those performance goals.
13. Income Taxes
The components of Income from continuing operations before income taxes and Income taxes follow:
Income from continuing operations before income taxes:
U.S.
International
Income from continuing operations before income taxes
Income tax provision:
Current:
U.S. – federal
U.S. – state
International
Deferred:
U.S. – federal
U.S. – state
International
Income taxes
2017
2016
2015
$
$
$
$
$
3,082
192,617
195,699
77,799
1,762
48,032
127,593
9,596
819
(1,724)
8,691
136,284
$
$
$
$
$
34,129
148,492
182,621
7,215
755
41,516
49,486
6,091
1,060
(9,617)
(2,466)
47,020
$
$
$
$
$
11,525
146,421
157,946
(210)
2,019
32,217
34,026
7,670
(1,137)
(3,993)
2,540
36,566
On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the “Act”). The Act reduced the U.S. Corporate income tax rate from 35% to 21%, effective January 1,
2018. As required, the Company re-measured its U.S. deferred tax assets and liabilities as of December 31, 2017, applying the
reduced U.S. Corporate income tax rate. As a result, the Company recorded a provisional adjustment of $4,152 to net expense,
with a corresponding reduction to the U.S. net deferred asset. The Company was capable of reasonably estimating the impact of
the reduction to the U.S. Corporate tax rate on the deferred tax balances, however the estimate may be affected by other aspects
of the Act, such as the calculation of deferred foreign income and the state effect of adjustments made to federal temporary
differences.
The Act taxes certain unrepatriated earnings and profits (“E&P”) of our foreign subsidiaries. In order to determine the
Transition Tax we must determine, along with other information, the amount of our accumulated post 1986 E&P for our foreign
subsidiaries, as well as the non U.S. income tax paid by those subsidiaries on such E&P. We were capable of reasonably
estimating the Transition Tax and recorded a provisional Transition Tax expense of $86,707. However, we continue to gather
information which may adjust the computed Transition Tax. Furthermore, certain provisions of the Act are ambiguous as to the
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
details of the computation of the Transition tax, thereby requiring us to await further guidance from the U.S. Treasury
Department and the Internal Revenue Service.
As a result of the Transition Tax the Company will be recording income as if the earnings had been repatriated. This
income may be subject to additional taxation at the state level. We were able to make a reasonable estimate of the state taxation
of these earnings and recorded a provisional expense of $1,423. While we were able to make a reasonable estimate of the
impact of state taxation on the deemed repatriation of deferred foreign income, it may be affected by changes in the
computation resulting from the gathering of additional information as well as future guidance provided by the state tax
authorities.
U.S. Tax Reform required the mandatory deemed repatriation of certain undistributed earnings of the Company’s
international subsidiaries as of December 31, 2017. If the earnings were distributed in the form of cash dividends, the Company
would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. Under
accounting standards (ASC 740) a deferred tax liability is not recorded for the excess of the tax basis over the financial
reporting (book) basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria is met. On December 31,
2017, the Company's unremitted foreign earnings were $1,228,170. Pursuant to SAB 118, if an entity has completed all or
portions of its assessment and has made a decision to repatriate and has the ability to reasonably estimate the effects of that
assessment, that entity should record a provisional expense and disclose the status of its efforts. The Company is continuing to
evaluate its indefinite assertions related to its foreign earnings, but expects to repatriate certain earnings which would be subject
to withholding and foreign income tax. For amounts currently expected to be repatriated, the Company recorded a provisional
expense of $6,932. These amounts are provisional in nature given the uncertainty related to the taxation of the distributions
under the Act and the finalization of the Company’s analysis on its indefinite reinvestment assertion. During 2017, the
Company repatriated a dividend from a portion of current year foreign earnings to the U.S. in the amount of $7,250. The
dividend was not taxable in the U.S. as the amount was included within the Transition Tax.
Deferred income tax assets and liabilities at December 31 consist of the tax effects of temporary differences related to the
following:
Deferred tax assets:
Pension
Tax loss carryforwards
Inventory valuation
Other postretirement/postemployment costs
Accrued Compensation
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Goodwill
Other
Total deferred tax liabilities
Net deferred tax liabilities
2017
2016
$
13,255
16,078
10,568
9,440
5,743
4,018
(10,223)
48,879
27,410
16,686
15,518
14,071
10,121
6,489
(14,957)
75,338
(82,422)
(9,440)
(18,361)
(110,223)
(61,344) $
(89,198)
(14,871)
(12,282)
(116,351)
(41,013)
$
$
In the first quarter of 2016, the Company prospectively adopted the amended guidance related to the balance sheet
classification of deferred income taxes. The amended guidance removed the requirement to separate and classify deferred
income tax liabilities and assets into current and non-current amounts and required an entity to now classify all deferred tax
liabilities and assets as non-current. The provisions of the amended guidance were adopted on a prospective basis during the
first quarter of 2016. Amounts related to deferred taxes in the balance sheets as of December 31, 2017 and 2016 are presented
as follows:
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Non-current deferred tax assets
Non-current deferred tax liabilities
Net deferred tax liabilities
2017
2016
$
$
$
12,161
(73,505)
(61,344) $
25,433
(66,446)
(41,013)
The standards related to accounting for income taxes require that deferred tax assets be reduced by a valuation allowance
if, based on all available evidence, it is more likely than not that the deferred tax asset will not be realized. Available evidence
includes the reversal of existing taxable temporary differences, future taxable income exclusive of temporary differences,
taxable income in carryback years and tax planning strategies.
Management believes that sufficient taxable income should be earned in the future to realize the net deferred tax assets
principally in the United States. The realization of these assets is dependent in part on the amount and timing of future taxable
income in the jurisdictions where deferred tax assets reside. The Company has tax loss carryforwards of $62,285; $3,224 which
relates to U.S tax loss carryforwards which have carryforward periods up to 20 years for federal purposes and ranging from one
to 20 years for state purposes; $46,255 of which relates to international tax loss carryforwards with carryforward periods
ranging from one to 20 years; and $12,806 of which relates to international tax loss carryforwards with unlimited carryforward
periods. In addition, the Company has tax credit carryforwards of $144 with remaining carryforward periods ranging from one
year to 5 years. As the ultimate realization of the remaining net deferred tax assets is dependent upon future taxable income, if
such future taxable income is not earned and it becomes necessary to recognize a valuation allowance, it could result in a
material increase in the Company’s tax expense which could have a material adverse effect on the Company’s financial
condition and results of operations.
Management is required to assess whether its valuation allowance analysis is affected by various components of the Act
including the deemed mandatory repatriation of foreign income for the Transition Tax, future GILTI inclusions and changes to
the NOL and FTC rules. Since the Company has recorded provisional amounts related to certain portions of the Act, any
corresponding determination of the need for or change in a valuation allowance would be provisional.
A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate from
continuing operations follows:
U.S. federal statutory income tax rate
State taxes (net of federal benefit)
Transition Tax
U.S. Corporate Tax Rate change
Indefinite Reinvestment Assertion
Foreign operations taxed at different rates
Foreign losses without tax benefit
Repatriation from current year foreign earnings
Tax withholding refund
Tax Holidays
Stock awards excess tax benefit
Swiss Legal Entity Reduction
Audit Settlements
Other
Consolidated effective income tax rate
2017
2016
2015
35.0%
0.1
45.0
2.1
3.5
(11.5)
1.5
—
—
(0.8)
(1.2)
(3.4)
(2.7)
2.0
69.6%
35.0%
0.4
—
—
—
(10.9)
0.7
1.6
—
(1.2)
(1.2)
—
—
1.3
25.7%
35.0%
0.2
—
—
—
(12.9)
1.1
4.3
(1.9)
(3.2)
—
—
—
0.6
23.2%
Payment of the Transition Tax assessed is required over an eight-year period. The short-term portion of the Transition
Tax payable, $6,937, has been included within Accrued Liabilities on the Consolidated Balance Sheet as of December 31, 2017.
The long-term portion of the assessment, $79,770, is included as a Long-term tax liability on the Consolidated Balance Sheet
and is payable as follows: $6,937 annually in 2019 through 2022; $13,005 in 2023; $17,341 in 2024 and $21,676 in 2025.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The Aerospace and Industrial Segments were previously awarded a number of multi-year tax holidays in both
Singapore and China. Tax benefits of $1,540 ($0.03 per diluted share), $2,245 ($0.04 per diluted share) and $5,000 ($0.09
per diluted share) were realized in 2017, 2016 and 2015, respectively. These holidays are subject to the Company meeting
certain commitments in the respective jurisdictions. Most tax holidays expired in 2017.
Income taxes paid globally, net of refunds, were $51,548, $40,842 and $31,895 in 2017, 2016 and 2015, respectively.
As of December 31, 2017, 2016 and 2015, the total amount of unrecognized tax benefits recorded in the consolidated
balance sheet was $9,209, $13,320 and $10,634, respectively, which, if recognized, would have reduced the effective tax rate in
prior years, with the exception of amounts related to acquisitions. A reconciliation of the unrecognized tax benefits for 2017,
2016 and 2015 follows:
Balance at January 1
Increase (decrease) in unrecognized tax benefits due to:
Tax positions taken during prior periods
Tax positions taken during the current period
Acquisition
Settlements
Lapse of the applicable statute of limitations
Balance at December 31
2017
2016
2015
$
13,320
$
10,634
$
8,560
1,141
778
—
(4,162)
(1,868)
9,209
$
—
117
2,569
—
—
13,320
$
1,691
—
598
—
(215)
10,634
$
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The
Company recognized interest and penalties as a component of income taxes of $(257), $(337), and $616 in the years 2017,
2016 and 2015 respectively. The liability for unrecognized tax benefits includes gross accrued interest and penalties of $1,576,
$1,838 and $1,923 at December 31, 2017, 2016 and 2015, respectively.
The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign
jurisdictions. In the normal course of business, the Company is subject to examination by various taxing authorities, including
the IRS in the U.S. and the taxing authorities in other major jurisdictions including China, Germany, Singapore, Sweden and
Switzerland. With a few exceptions, tax years remaining open to examination in significant foreign jurisdictions include tax
years 2010 and forward and for the U.S. include tax years 2014 and forward. The Company has received the audit report but
not the final assessment in Germany for tax years 2010 to 2014 and is also under audit in several states for the period 2013 to
2014.
14. Common Stock
There were no shares of common stock issued from treasury in 2017, 2016 or 2015.
In 2017, 2016 and 2015, the Company acquired 677,100 shares, 550,994 shares and 1,352,596 shares, respectively, of the
Company’s common stock at a cost of $40,791, $20,520 and $52,103, respectively. These amounts exclude shares reacquired to
pay for the related income tax upon issuance of shares in accordance with the terms of the Company’s stockholder-approved
equity compensation plans and the equity rights granted under those plans ("Reacquired Shares"). These Reacquired Shares
were placed in treasury.
In 2017, 2016 and 2015, 341,837 shares, 621,259 shares and 841,164 shares of common stock, respectively, were issued
from authorized shares for the exercise of stock options, various other incentive awards and purchases by the Company's
Employee Stock Purchase Plan.
15. Preferred Stock
At December 31, 2017 and 2016, the Company had 3,000,000 shares of preferred stock authorized, none of which were
outstanding.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
16. Stock Plans
Most U.S. salaried and non-union hourly employees are eligible to participate in the Company’s 401(k) plan (the
"Retirement Savings Plan"). The Retirement Savings Plan provides for the investment of employer and employee contributions
in various investment alternatives including the Company’s common stock, at the employee’s direction. The Company
contributes an amount equal to 50% of employee contributions up to 6% of eligible compensation. The Company expenses all
contributions made to the Retirement Savings Plan. Effective January 1, 2013, the Retirement Savings Plan was amended to
provide certain salaried employees hired on or after January 1, 2013 with an additional annual retirement contribution of 4% of
eligible earnings. The Company recognized expense of $4,088, $3,660 and $3,666 in 2017, 2016 and 2015, respectively. As of
December 31, 2017, the Retirement Savings Plan held 1,124,360 shares of the Company’s common stock.
The Company has an Employee Stock Purchase Plan (“ESPP”) under which eligible employees may elect to have up to
the lesser of $25 or 10% of base compensation deducted from their payroll checks for the purchase of the Company’s common
stock at 95% of the average market value on the date of purchase. The maximum number of shares which may be purchased
under the ESPP is 4,550,000. The number of shares purchased under the ESPP was 7,734, 11,804 and 11,246 in 2017, 2016 and
2015, respectively. The Company received cash proceeds from the purchase of these shares of $444, $427 and $403 in 2017,
2016 and 2015, respectively. As of December 31, 2017, 277,671 additional shares may be purchased.
The 1991 Barnes Group Stock Incentive Plan (the “1991 Plan”) authorized the granting of incentives to executive
officers, directors and key employees in the form of stock options, stock appreciation rights, incentive stock rights and
performance unit awards. On May 9, 2014, the 1991 Plan was merged into the 2014 Plan (defined below).
The Barnes Group Inc. Employee Stock and Ownership Program (the “2000 Plan”) was approved on April 12, 2000, and
subsequently amended on April 10, 2002 by the Company’s stockholders. The 2000 Plan permitted the granting of incentive
stock options, nonqualified stock options, restricted stock awards, performance share or cash unit awards and stock
appreciation rights, or any combination of the foregoing, to eligible employees to purchase up to 6,900,000 shares of the
Company’s common stock. Such shares were authorized and reserved. On May 9, 2014, the 2000 Plan was merged into the
2014 Plan (defined below).
The Barnes Group Stock and Incentive Award Plan (the “2004 Plan”) was approved on April 14, 2004, and subsequently
amended on April 20, 2006 and May 7, 2010 by the Company’s stockholders. The 2004 Plan permits the issuance of incentive
awards, stock option grants and stock appreciation rights to eligible participants to purchase up to 5,700,000 shares of common
stock. On May 9, 2014, the 2004 Plan was merged into the 2014 Plan (defined below), and the remaining shares available for
future grants under the 2004 Plan, as of the merger date, were made available under the 2014 Plan.
The 2014 Barnes Group Stock and Incentive Award Plan (the “2014 Plan”) was approved on May 9, 2014 by the
Company's stockholders. The 2014 Plan permits the issuance of incentive awards, stock option grants and stock appreciation
rights to eligible participants to purchase up to 6,913,978 shares of common stock. The amount includes shares available for
purchase under the 1991, 2000, and 2004 Plans which were merged into the 2014 Plan. The 2014 Plan allows for stock options
and stock appreciation rights to be issued at a ratio of 1:1 and other types of incentive awards at a ratio of 2.84:1 from the
shares available for future grants. As of December 31, 2017, there were 5,628,950 shares available for future grants under the
2014 Plan, inclusive of Shares Reacquired and shares made available through 2017 forfeitures. As of December 31, 2017, there
were 1,224,275 shares of common stock outstanding to be issued upon the exercise of stock options and the vesting of Rights.
Rights under the 2014 Plan entitle the holder to receive, without payment, one share of the Company’s common stock
after the expiration of the vesting period. Certain of these Rights are also subject to the satisfaction of established performance
goals. Additionally, holders of certain Rights are credited with dividend equivalents, which are converted into additional
Rights, and holders of certain restricted stock units are paid dividend equivalents in cash when dividends are paid to other
stockholders. All Rights have a vesting period of up to five years.
Under the Non-Employee Director Deferred Stock Plan, as amended, each non-employee director who joined the Board
of Directors prior to December 15, 2005 was granted the right to receive 12,000 shares of the Company’s common stock upon
retirement. In 2017, 2016 and 2014, $20, $21 and $26, respectively, of dividend equivalents were paid in cash related to these
shares. Compensation cost related to this plan was $9, $28 and $16 in 2017, 2016 and 2015, respectively. There are 36,000
shares reserved for issuance under this plan. Each non-employee director who joined the Board of Directors subsequent to
December 15, 2005 received restricted stock units under the respective 2004 or 2014 Plans that have a grant date value of $50
that vest three years after the date of grant.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Total maximum shares reserved for issuance under all stock plans aggregated 7,166,895 at December 31, 2017.
17. Weighted Average Shares Outstanding
Net income per common share is computed in accordance with accounting standards related to earnings per share. Basic
earnings per share is calculated using the weighted-average number of common shares outstanding during the year. Share-based
payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating
securities and, as such, should be included in the calculation of basic earnings per share. The Company’s restricted stock unit
awards which contain nonforfeitable rights to dividends are considered participating securities. Diluted earnings per share
reflects the assumed exercise and conversion of all dilutive securities. Shares held by the Retirement Savings Plan are
considered outstanding for both basic and diluted earnings per share. There are no significant adjustments to net income for
purposes of computing income available to common stockholders for the years ended December 31, 2017, 2016 and 2015. A
reconciliation of the weighted-average number of common shares outstanding used in the calculation of basic and diluted
earnings per share follows:
Basic
Dilutive effect of:
Stock options
Performance share awards
Diluted
Weighted-Average Common Shares Outstanding
2017
54,073,407
2016
54,191,013
2015
55,028,063
258,052
273,839
54,605,298
166,986
273,314
54,631,313
206,778
278,378
55,513,219
The calculation of weighted-average diluted shares outstanding excludes all anti-dilutive shares. During 2017, 2016 and
2015, the Company excluded 46,450, 262,336 and 214,032 stock awards, respectively, from the calculation of diluted
weighted-average shares outstanding as the stock awards were considered anti-dilutive.
18. Changes in Accumulated Other Comprehensive Income by Component
The following tables set forth the changes in accumulated other comprehensive income by component for the years ended
December 31, 2017 and December 31, 2016:
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Gains and Losses
on Cash Flow
Hedges
Pension and Other
Postretirement
Benefit Items
Foreign
Currency Items
$
(227) $
(114,570) $
(86,031) $
Total
(200,828)
(231)
3,342
83,404
86,515
January 1, 2017
Other comprehensive (loss) income before
reclassifications to consolidated statements of income
Amounts reclassified from accumulated other
comprehensive income to the consolidated statements
of income
Net current-period other comprehensive income
December 31, 2017
$
72
$
530
299
7,384
10,726
(103,844) $
—
83,404
(2,627) $
7,914
94,429
(106,399)
Gains and Losses
on Cash Flow
Hedges
Pension and Other
Postretirement
Benefit Items
Foreign
Currency Items
Total
January 1, 2016
Other comprehensive loss before reclassifications to
consolidated statements of income
Amounts reclassified from accumulated other
comprehensive income to the consolidated statements
of income
Net current-period other comprehensive loss
December 31, 2016
$
$
115
$
(105,703) $
(37,664) $
(143,252)
(739)
(16,137)
(48,367)
(65,243)
397
(342)
(227) $
7,270
—
7,667
(8,867)
(114,570) $
(48,367)
(86,031) $
(57,576)
(200,828)
The following table sets forth the reclassifications out of accumulated other comprehensive income by component for the years
ended December 31, 2017 and December 31, 2016:
Details about Accumulated Other Comprehensive Income
Components
Amount Reclassified from Accumulated Other
Comprehensive Income
Affected Line Item in the
Consolidated Statements
of Income
2017
2016
Gains and losses on cash flow hedges
Interest rate contracts
Foreign exchange contracts
$
Pension and other postretirement benefit items
Amortization of prior-service (cost) credits, net
$
Amortization of actuarial losses
Curtailment gain
Settlement loss
$
$
(545)
(242)
(787)
257
(530)
(378)
(10,833)
187
(142)
(11,166)
3,782
(7,384)
Interest expense
(557)
(61) Net sales
(618) Total before tax
221 Tax benefit
(397) Net of tax
163
(11,326)
(A)
(A)
— (A)
— (A)
(11,163) Total before tax
3,893 Tax benefit
(7,270) Net of tax
Total reclassifications in the period
$
(7,914)
$
(7,667)
(A) These accumulated other comprehensive income components are included within the computation of net periodic Pension and Other Postretirement
Benefits cost. See Note 11.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
19. Information on Business Segments
The Company is organized based upon the nature of its products and services and reports under two global business
segments: Industrial and Aerospace. Segment information is consistent with how management reviews the businesses, makes
investing and resource allocation decisions and assesses operating performance. The Company has not aggregated operating
segments for purposes of identifying these two reportable segments.
Industrial is a global manufacturer 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, packaging, electronics, medical devices, and energy. 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 design and
manufacture 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 Products business provides innovative cost effective force and motion solutions for sheet metal
forming, heavy duty suspension and other selective niche markets for customers worldwide. Industrial's Engineered
Components businesses manufacture and supply precision mechanical products used in transportation and industrial
applications, including mechanical springs, high-precision punched and fine-blanked components and retention rings.
Industrial has a diverse customer base with products purchased by durable goods manufacturers located around the world
in industries including transportation, consumer products, packaging, farm and mining equipment, telecommunications,
medical devices, home appliances and electronics.
Industrial competes with a broad base of large and small companies engaged in the manufacture and sale of custom metal
components, products and assemblies, precision molds, and hot runner systems. Industrial competes on the basis of value to
customer, quality, service, reliability of supply, engineering and technical capability, geographic reach, product breadth,
innovation, design, and price. Industrial has manufacturing, distribution and assembly operations in the United States, Brazil,
China, Germany, Italy, Mexico, Singapore, Sweden, Switzerland and the United Kingdom. Industrial also has sales and service
operations in the United States, Brazil, Canada, Czech Republic, China/Hong Kong, France, Germany, India, Italy, Japan,
Mexico, the Netherlands, Portugal, Singapore, Slovakia, South Africa, South Korea, Spain, Switzerland, Thailand and the
United Kingdom.
Aerospace is a global provider of fabricated and precision-machined components and assemblies for original equipment
manufacturer ("OEM") turbine engine, airframe and industrial gas turbine builders, and the military. Aerospace Aftermarket
includes the jet engine component maintenance overhaul and repair business ("MRO") and the spare parts business. MRO
includes our Component Repair Programs ("CRPs") and services many of the world's major turbine engine manufacturers,
commercial airlines and the military. The spare parts business includes our revenue sharing programs ("RSPs") under which the
Company receives an exclusive right to supply designated aftermarket parts over the life of the related aircraft engine program.
Aerospace’s OEM business supplements the leading jet engine OEM capabilities and competes with a large number of
fabrication and machining companies. Competition is based on quality, engineering and technical capability, product breadth,
new product introduction, timeliness, service and price. Aerospace’s fabrication and machining operations, with facilities in
Arizona, Connecticut, Mexico, Michigan, Ohio, Utah and Singapore, produce critical engine and airframe components through
technically advanced manufacturing processes.
The Aerospace aftermarket business supplements jet engine OEMs’ maintenance, repair and overhaul capabilities, and
competes with the service centers of major commercial airlines and other independent service companies for the repair and
overhaul of turbine engine components. The manufacture and supply of aerospace aftermarket spare parts, including those
related to the RSPs, are dependent upon the reliable and timely delivery of high-quality components. Aerospace’s aftermarket
facilities, located in Connecticut, Ohio and Singapore, specialize in the repair and refurbishment of highly engineered
components and assemblies such as cases, rotating life limited parts, rotating air seals, turbine shrouds, vanes and honeycomb
air seals.
The Company evaluates the performance of its reportable segments based on the operating profit of the respective
businesses, which includes net sales, cost of sales, selling and administrative expenses and certain components of other expense
(income), net, as well as the allocation of corporate overhead expenses.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
Sales between the business segments and between the geographic areas in which the businesses operate are accounted for
on the same basis as sales to unaffiliated customers. Additionally, revenues are attributed to countries based on the location of
facilities.
The following table (in millions) sets forth summarized financial information by reportable business segment:
Sales
Operating profit
Assets
Depreciation and amortization
Capital expenditures
Industrial
Aerospace
Other
Total Company
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
$
$
973.9
824.2
782.3
127.1
129.7
103.0
$ 1,505.4
1,356.1
1,241.2
$
$
54.8
49.5
46.0
31.0
25.9
28.7
$
$
$
$
$
$
$
$
$
$
462.6
406.5
411.7
83.2
62.5
65.4
667.1
647.8
654.1
33.6
30.0
30.8
27.5
21.1
17.2
— $
—
—
— $
—
—
$
$
$
193.3
133.7
166.5
1.7
0.7
1.3
0.2
0.5
0.1
1,436.5
1,230.8
1,194.0
210.3
192.2
168.4
2,365.7
2,137.5
2,061.9
90.2
80.2
78.2
58.7
47.6
46.0
_________________________
Notes:
One customer, General Electric, accounted for 18%, 17% and 18% of the Company’s total revenues in 2017, 2016 and 2015, respectively.
“Other” assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.
A reconciliation of the total reportable segments’ operating profit to income before income taxes follows (in millions):
Operating profit
Interest expense
Other expense (income), net
Income before income taxes
2017
2016
2015
$
$
210.3
14.6
—
195.7
$
$
192.2
11.9
(2.3)
182.6
$
$
The following table (in millions) summarizes total net sales of the Company by products and services:
Engineered Components Products
Molding Solutions Products
Nitrogen Gas Products
Aerospace Original Equipment Manufacturer Products
Aerospace Aftermarket Products and Services
Total net sales
2017
2016
2015
$
347.9
$
332.6
$
487.3
138.7
323.4
139.2
376.6
115.0
288.4
118.2
$
1,436.5
$
1,230.8
$
1,194.0
70
168.4
10.7
(0.2)
157.9
342.2
324.6
115.5
295.7
116.0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
BARNES GROUP INC.
The following table (in millions) summarizes total net sales and long-lived assets of the Company by geographic area:
Sales
Long-lived assets
Domestic
International
Other
Total
Company
$
$
2017
2016
2015
2017
2016
2015
$
$
638.6
562.6
589.6
366.7
368.2
379.2
$
$
868.3
727.4
661.7
1,218.1
1,135.5
1,069.9
(70.4) $
(59.2)
(57.3)
— $
—
—
1,436.5
1,230.8
1,194.0
1,584.8
1,503.6
1,449.1
_________________________
Notes:
Germany, with sales of $301.7 million, $238.3 million and $210.5 million in 2017, 2016 and 2015, respectively, represents the only international country with
revenues in excess of 10% of the Company's total revenues.
“Other” revenues represent the elimination of intercompany sales between geographic locations, of which approximately 78%, 82% and 82% were sales from
international locations to domestic locations in 2017, 2016 and 2015, respectively.
Germany, with long-lived assets of $514.0 million, $449.9 million and $362.7 million as of December 31, 2017, 2016 and 2015, respectively, Singapore, with
long-lived assets of $237.6 million, $238.3 million and $246.4 million as of December 31, 2017, 2016 and 2015, respectively and Switzerland, with long-lived
assets of $160.0 million, $169.3 million and $167.0 million as of December 31, 2017, 2016 and 2015, respectively, represent the only international countries
with long-lived assets that exceeded 10% of the Company's total long-lived assets in those years.
20. Commitments and Contingencies
Leases
The Company has various noncancellable operating leases for buildings, office space and equipment. Rent expense was
$15,325, $12,939 and $11,166 for 2017, 2016 and 2015, respectively. Minimum rental commitments under noncancellable
leases in years 2018 through 2022 are $11,926, $7,760, $5,613, $4,890 and $2,265, respectively, and $7,372 thereafter. The
rental expense and minimum rental commitments of leases with step rent provisions are recognized on a straight-line basis over
the lease term.
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. Liabilities related to product warranties and
extended warranties were not material as of December 31, 2017 or 2016.
71
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Barnes Group Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Barnes Group Inc. and its subsidiaries as of December
31, 2017 and 2016, and the related consolidated statements of income, of comprehensive income, of changes in stockholders’
equity and of cash flows for each of the three years in the period ended December 31, 2017, including the related notes and
schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing
under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principle
As discussed in Note 12 to the consolidated financial statements, the Company changed the manner in which it accounts
for share based compensation in 2016.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
72
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 20, 2018
We have served as the Company’s auditor since 1994.
73
QUARTERLY DATA (UNAUDITED)
(Dollars in millions, except per share data)
2017
Net sales
Gross profit (1)
Operating income
Net income
Per common share:
Basic
Diluted
Dividends
Market prices (high - low)
2016
Net sales
Gross profit (1)
Operating income
Net income
Per common share:
Basic
Diluted
Dividends
Market prices (high - low)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter(2)
Full
Year(2)
$
$
341.8
122.0
55.7
38.3
$
364.5
128.0
57.1
45.0
$
357.2
121.1
47.8
35.3
$
373.0
126.1
49.6
(59.2)
1,436.5
497.2
210.3
59.4
0.71
0.70
0.13
$51.97-45.47
0.83
0.82
0.14
$60.74-49.31
0.65
0.65
0.14
$70.84-57.70
(1.10)
(1.10)
0.14
$72.87-61.06
1.10
1.09
0.55
$72.87-45.47
$
$
288.3
102.1
41.5
28.8
$
306.7
109.5
47.5
33.2
$
311.6
113.0
51.8
36.8
$
324.2
115.9
51.4
36.7
1,230.8
440.5
192.2
135.6
0.53
0.53
0.12
$35.81-30.07
0.61
0.61
0.13
$37.75-31.13
0.68
0.67
0.13
$41.86-32.55
0.68
0.67
0.13
$49.90-37.88
2.50
2.48
0.51
$49.90-30.07
________________________
(1) Sales less cost of sales.
(2) During the fourth quarter of 2017, the Company recorded the effects of the U.S. Tax Reform, resulting in tax expense of $96.7 million, or $1.79 per
basic share ($1.79 per diluted share). During the full-year 2017 period, the effects of the U.S. Tax Reform were $1.79 and $1.77 per basic and per
diluted share, respectively. See Note 13 of the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Management, including the Company's President and Chief Executive Officer 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
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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the
principal executive officer and principal financial officer, the Company conducted an assessment of the effectiveness of its
internal control over financial reporting based on the framework in the “Internal Control - Integrated Framework 2013” issued
74
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment under this framework,
management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements
included in this Annual Report, has issued an attestation report on the Company’s internal control over financial reporting as of
December 31, 2017, which appears on page 72 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There has been no change to our internal control over financial reporting during the Company’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
75
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information with respect to our directors and corporate governance may be found in the “Governance” and "Stock
Ownership" sections of our definitive proxy statement to be delivered to stockholders in connection with the Annual
Meeting of Stockholders to be held on May 4, 2018 (the “Proxy Statement”). Such information is incorporated herein by
reference.
EXECUTIVE OFFICERS
The Company’s executive officers as of the date of this Annual Report are as follows:
Executive Officer
Position
Patrick J. Dempsey
President and Chief Executive Officer
Michael A. Beck
Senior Vice President, Barnes Group Inc., and President, Barnes
Aerospace
Peter A. Gutermann
Senior Vice President, General Counsel and Secretary
Dawn N. Edwards
Senior Vice President, Human Resources
Scott A. Mayo
Senior Vice President, Barnes Group Inc., and President, Barnes
Industrial
Christopher J. Stephens, Jr.
Senior Vice President, Finance and Chief Financial Officer
Age as of
December 31, 2017
53
57
58
49
50
53
Each officer holds office until his or her successor is appointed and qualified or otherwise as provided in the
Company’s Amended and Restated By-Laws. No family relationships exist among the executive officers of the
Company. Except for Messrs. Beck, Gutermann and Mayo, each of the Company’s executive officers has been employed
by the Company or its subsidiaries in an executive or managerial capacity for at least the past five years.
Mr. Dempsey was appointed President and Chief Executive Officer effective March 1, 2013. From February 2012
until such appointment, he served as Senior Vice President and Chief Operating Officer. From October 2008 until
February 2012, he served as Vice President, Barnes Group Inc. and President, Logistics and Manufacturing Services.
Prior to that, he held a series of roles of increasing responsibility since joining the Company in October 2000. In October
2007, he was appointed Vice President, Barnes Group Inc. and President, Barnes Distribution. In November 2004, he
was promoted to Vice President, Barnes Group Inc. and President, Barnes Aerospace. Mr. Dempsey is currently a
director of Nucor Corporation, having been appointed as of December 1, 2016.
Mr. Beck was appointed Senior Vice President, Barnes Group Inc. and President, Barnes Aerospace effective
March 1, 2016. Mr. Beck came to Barnes Group with over 27 years of global aerospace experience. Prior to joining
Barnes Group, Mr. Beck was the Senior Vice President & General Manager, Fuel and Motion Control, a $1B division of
Eaton’s Aerospace Group. Prior to this, he was the Chief Executive Officer of GKN’s Aerospace Engine Systems
business, where he led the due diligence, business synergies and integration of a significant acquisition. Prior to that, he
was the President and Chief Executive Officer of GKN’s global Propulsion Systems and Special Products business.
Earlier in his career, Mr. Beck was the Chief Operating Officer and Site Executive for GKN’s St. Louis, Missouri
business.
Ms. Edwards was appointed Senior Vice President, Human Resources effective August 2009. From December
2008 until August 2009, she served as Vice President of Human Resources - Global Operations. From September 1998
until December 2008, Ms. Edwards served as Group Director, Human Resources for Barnes Aerospace, Associated
Spring and Barnes Industrial. Ms. Edwards joined the Company in September 1998.
Mr. Gutermann was appointed Senior Vice President, General Counsel and Secretary, effective December 11, 2017.
Before joining the Company, Mr. Gutermann served as Corporate Vice President, Chief Ethics & Compliance Officer for
United Technologies Corporation. Prior to that, Mr. Gutermann held a variety of positions with increasing responsibility
76
within United Technologies Corporation including Vice President & General Counsel, UTC Propulsion/Aerospace
Systems; Vice President & General Counsel, Pratt & Whitney; Associate General Counsel, UTC Corporate; Deputy
General Counsel, Otis Elevator Company; and Executive Assistant to the UTC Chairman and Chief Executive Officer.
Mr. Gutermann began his career as a Litigation Associate with the law firm of Robinson & Cole.
Mr. Mayo was appointed Senior Vice President, Barnes Group Inc. and President, Barnes Industrial effective
March 17, 2014. Before joining the Company, from 2012 to 2014, Mr. Mayo served as Vice President and General
Manager, Power Sector, Flow Control, a division of Flowserve Corporation. From 2010 to 2012, he served as Vice
President and General Manager, General Industries Sector, Flow Control Division. From 2009 to 2010, he served as Vice
President, Marketing for the Flow Control Division. Prior to that, from 2002 to 2008, Mr. Mayo held a series of roles
including General Manager, Flow Control Division China based in Shanghai, China; Director, Marketing, Flow Control
Division, based in Raleigh, NC; Director and General Manager, Aftermarket, Raleigh, NC; and Director, Strategic
Planning and Business Development, also based in Raleigh, NC.
Mr. Stephens was appointed Senior Vice President, Finance and Chief Financial Officer, Barnes Group Inc.
effective January 2009. Prior to joining the Company, Mr. Stephens held key leadership roles at Honeywell
International, serving as President of the Consumer Products Group from 2007 to 2008, and Vice President and Chief
Financial Officer of Honeywell Transportation Systems from 2003 to 2007. Prior to Honeywell, he held roles with
increasing responsibility at The Boeing Company, serving as Vice President and General Manager, Boeing Electron
Dynamic Devices; Vice President, Business Operations, Boeing Space and Communications; and Vice President and
Chief Financial Officer, Boeing Satellite Systems.
Items 11-14.
The information called for by Items 11-14 is incorporated by reference to the "Governance," "Stock Ownership,"
"Executive Compensation," "Director Compensation in 2017," "Securities Authorized for Issuance Under Equity Compensation
Plans," "Related Person Transactions," and "Principal Accountant Fees and Services" sections in our Proxy Statement.
Item 15. Exhibits, Financial Statement Schedule
PART IV
(a)(1)
The following Financial Statements and Supplementary Data of the Company are set forth herein under
Item 8 of this Annual Report:
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016
and 2015
(a)(2)
(a)(3)
(b)
(c)
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
See Financial Statement Schedule under Item 15(c).
See Item 15(b) below.
The Exhibits required by Item 601 of Regulation S-K are filed as Exhibits to this Annual Report and indexed
at pages 84 through 88 of this Annual Report, which index is incorporated herein by reference.
Financial Statement Schedule.
77
Item 16. Form 10-K Summary
None.
78
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2017, 2016 and 2015
(In thousands)
Allowances for Doubtful Accounts:
Balance January 1, 2015
Provision charged to income
Doubtful accounts written off
Other adjustments(1)
Balance December 31, 2015
Provision charged to income
Doubtful accounts written off
Other adjustments(1)
Balance December 31, 2016
Provision charged to income
Doubtful accounts written off
Other adjustments(1)
Balance December 31, 2017
________________
(1) These amounts are comprised primarily of foreign currency translation and other reclassifications.
$
$
3,873
1,248
(404)
(632)
4,085
863
(910)
(46)
3,992
1,512
(297)
(64)
5,143
79
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2017, 2016 and 2015
(In thousands)
Valuation Allowance on Deferred Tax Assets:
Balance January 1, 2015
Additions charged to income tax expense
Reductions charged to other comprehensive income
Reductions credited to income tax expense
Changes due to foreign currency translation
Acquisitions(1)
Balance December 31, 2015
Additions charged to income tax expense
Reductions charged to other comprehensive income
Reductions credited to income tax expense(2)
Changes due to foreign currency translation
Acquisition(3)
Balance December 31, 2016
Additions charged to income tax expense
Reductions charged to other comprehensive income
Reductions credited to income tax expense(4)
Changes due to foreign currency translation
Balance December 31, 2017
________________
$
$
15,856
1,043
(59)
(1,216)
(2,204)
981
14,401
759
(17)
(5,638)
(133)
5,585
14,957
1,161
(123)
(6,773)
1,001
10,223
(1) The increase in 2015 reflects the valuation allowances recorded at the Thermoplay and Priamus businesses which were acquired in the third and
fourth quarters of 2015, respectively.
(2) The reductions in 2016 relate primarily to net operating losses that were fully valued. These net operating losses have subsequently expired during
2016 (lapse of applicable carry forward periods) and the corresponding valuation allowance was reduced accordingly.
(3) The increase in 2016 reflects the valuation allowance recorded at the FOBOHA business, which was acquired in the third quarter of 2016.
(4) The reductions in 2017 relate to the release of valuation allowances associated with net operating losses as a result of the Swiss legal entity
reduction.
80
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date:
February 20, 2018
BARNES GROUP INC.
By
/S/ PATRICK J. DEMPSEY
Patrick J. Dempsey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of the above
date by the following persons on behalf of the Company in the capacities indicated.
81
/S/ PATRICK J. DEMPSEY
Patrick J. Dempsey
President and Chief Executive Officer
(Principal Executive Officer), and Director
/S/ CHRISTOPHER J. STEPHENS, JR.
Christopher J. Stephens, Jr.
Senior Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)
/S/ MARIAN ACKER
Marian Acker
Vice President, Controller
(Principal Accounting Officer)
/S/ THOMAS O. BARNES
Thomas O. Barnes
Director
/S/ ELIJAH K. BARNES
Elijah K. Barnes
Director
/S/ GARY G. BENANAV
Gary G. Benanav
Director
/S/ THOMAS J. HOOK
Thomas J. Hook
Director
/S/ MYLLE H. MANGUM
Mylle H. Mangum
Director
/S/ HANS-PETER MÄNNER
Hans-Peter Männer
Director
82
/S/ HASSELL H. MCCLELLAN
Hassell H. McClellan
Director
/S/ WILLIAM J. MORGAN
William J. Morgan
Director
/S/ ANTHONY V. NICOLOSI
Anthony V. Nicolosi
Director
/S/ JOANNA L. SOHOVICH
JoAnna L. Sohovich
Director
/S/ RICHARD J. HIPPLE
Richard J. Hipple
Director
83
EXHIBIT INDEX
Barnes Group Inc.
Annual Report on Form 10-K
for the Year ended December 31, 2017
Exhibit No.
Description
Reference
2.1*
2.2*
3.1
Asset Purchase Agreement dated February 22, 2013
between the Company and MSC Industrial Direct Co.,
Inc.
Incorporated by reference to Exhibit 2.1 to the
Company’s report on Form 10-Q for the quarter ended
March 31, 2013.
Share Purchase and Assignment Agreement dated
September 30, 2013 among the Company, two of its
subsidiaries, Otto Männer Holding AG (the "Seller"), and
the three shareholders of Seller.
Restated Certificate of Incorporation; Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock; Certificate of Change of
Location of registered office and of registered agent,
dated December 13, 2002; Certificate of Merger of
domestic limited liability company into a domestic
company, dated May 19, 2004; Certificate of Amendment
of Restated Certificate of Incorporation, dated April 20,
2006; and Certificate of Amendment of Restated
Certificate of Incorporation, dated as of May 3, 2013.
Incorporated by reference to Exhibit 2.1 to Form 8-K
filed by the Company on October 4, 2013.
Incorporated by reference to Exhibit 3.1 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2013.
3.2
Amended and Restated By-Laws.
10.1
(i) Fifth Amended and Restated Senior Unsecured
Revolving Credit Agreement, dated September 27, 2011.
(ii) Amendment No. 2 and Joinder to Credit Agreement
dated as of September 27, 2013 (amending Fifth
Amended and Restated Senior Unsecured Revolving
Credit Agreement, dated as of September 27, 2011).
(iii) Amendment No. 3 to Credit Agreement dated as of
October 15, 2014.
(iv) Amendment No. 4 to Credit Agreement dated as of
February 2, 2017.
10.2
Note Purchase Agreement, dated as of October 15, 2014,
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).
10.3**
(i) Barnes Group Inc. Management Incentive
Compensation Plan, amended October 22, 2008.
Incorporated by reference to Exhibit 3.1 to Form 8-K
filed by the Company on February 11, 2016.
Incorporated by reference to Exhibit 4.1 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2013.
Incorporated by reference to Exhibit 4.1 to the
Company’s report on Form 10-Q for the quarter ended
September 30, 2013.
Incorporated by reference to Exhibit 10.1(iii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
Incorporated by reference to Exhibit 10.1 to the
Company’s Report on Form 10-Q for the quarter
ended March 31, 2017.
Incorporated by reference to Exhibit 10.1 to Form 8-K
filed by the Company on October 17, 2014.
Incorporated by reference to Exhibit 10.3 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
10.4**
10.5**
(ii) Barnes Group Inc. Management Incentive
Compensation Plan, amended December 27, 2017.
Filed with this report.
Barnes Group Inc. Performance-Linked Bonus Plan for
Selected Executive Officers, as amended February 8,
2011.
Incorporated by reference to Exhibit 10.4 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(i) Offer Letter between the Company and Patrick
Dempsey, dated February 22, 2013.
Incorporated by reference to Exhibit 10.3 to the
Company's report on Form 10-Q for the quarter ended
March 31, 2013.
84
Exhibit No.
Description
Reference
(ii) Amendment to Offer Letter to Patrick Dempsey, dated
January 6, 2015.
(iii) Employee Non-Disclosure, Non-Competition, Non-
Solicitation and Non-Disparagement Agreement between
the Company and Patrick J. Dempsey, dated February 27,
2013.
10.6**
(i) Amendment to Offer Letter to Christopher J. Stephens,
Jr., dated June 7, 2013.
(ii) Amendment to Amended Offer Letter to Christopher J.
Stephens, Jr., dated February 12, 2014.
Offer Letter to Scott A. Mayo, dated January 28, 2014.
Offer Letter to James P. Berklas, Jr., dated June 5, 2015.
Incorporated by reference to Exhibit 10.6(ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
Incorporated by reference to Exhibit 10.4 to the
Company's report on Form 10-Q for the quarter ended
March 31, 2013.
Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended
June 30, 2013.
Incorporated by reference to Exhibit 10.6(ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2013.
Incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended
March 31, 2014.
Incorporated by reference to Exhibit 10.1 to the
Company’s report on Form 10-Q for the quarter ended
September 30, 2015.
10.7**
10.8**
10.9**
(i) Barnes Group Inc. Retirement Benefit Equalization
Plan, as amended and restated effective January 1, 2013.
Filed with this report.
(ii) First Amendment to the Barnes Group Inc. Retirement
Benefit Equalization Plan dated December 12, 2014.
Incorporated by reference to Exhibit 10.9(ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
10.10**
(i) Barnes Group Inc. Supplemental Senior Officer
Retirement Plan, as amended and restated effective
January 1, 2009.
Incorporated by reference to Exhibit 10.10 (i) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(ii) Amendment to the Barnes Group Inc. Supplemental
Senior Officer Retirement Plan dated December 30, 2009.
Incorporated by reference to Exhibit 10.10 (ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(iii) Second Amendment to the Barnes Group Inc.
Supplemental Senior Officer Retirement Plan dated
December 12, 2014.
Incorporated by reference to Exhibit 10.10(iii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
10.11**
(i) Amended and Restated Supplemental Executive
Retirement Plan effective April 1, 2012.
Incorporated by reference to Exhibit 10.11 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(ii) Amendment 2013-1 to the Barnes Group Inc.
Supplemental Executive Retirement Plan dated July 23,
2013.
Incorporated by reference to Exhibit 10.3 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2013.
(iii) Amendment 2014-1 to the Barnes Group Inc.
Supplemental Executive Retirement Plan dated December
12, 2014.
Incorporated by reference to Exhibit 10.11(iii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
Barnes Group Inc. Senior Executive Enhanced Life
Insurance Program, as amended and restated effective
April 1, 2011.
Incorporated by reference to Exhibit 10.12 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Barnes Group Inc. Enhanced Life Insurance Program, as
amended and restated effective April 1, 2011.
Barnes Group Inc. Executive Group Term Life Insurance
Program effective April 1, 2011.
Incorporated by reference to Exhibit 10.13 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.14 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
10.12**
10.13**
10.14**
85
Exhibit No.
10.15**
10.16**
10.17**
10.18**
10.19**
10.20**
10.21**
Description
Reference
Form of Barnes Group Inc. Executive Officer Severance
Agreement, as amended March 31, 2010.
Form of Barnes Group Inc. Executive Officer Severance
Agreement, effective February 19, 2014.
Barnes Group Inc. Executive Separation Pay Plan, as
amended and restated effective January 1, 2012.
Incorporated by reference to Exhibit 10.15 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended
March 31, 2014.
Incorporated by reference to Exhibit 10.17 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(i) Trust Agreement between the Company and Fidelity
Management Trust Company (Barnes Group 2009
Deferred Compensation Plan) dated September 1, 2009.
Incorporated by reference to Exhibit 10.18 (i) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(ii) Amended and Restated Barnes Group 2009 Deferred
Compensation Plan effective as of April 1, 2012.
(iii) First Amendment to the Barnes Group 2009 Deferred
Compensation Plan dated December 12, 2014.
Barnes Group Inc. Non-Employee Director Deferred
Stock Plan, as amended and restated December 31, 2008.
Barnes Group Inc. Directors’ Deferred Compensation
Plan, as amended and restated December 31, 2008.
Form of Amended and Restated Contingent Dividend
Equivalent Rights Agreement for Officers.
10.22**
Barnes Group Inc. Trust Agreement for Specified Plans.
10.23**
10.24**
10.25**
Form of Incentive Compensation Reimbursement
Agreement between the Company and certain Officers.
Form of Indemnification Agreement between the
Company and its Officers and Directors.
(i) Barnes Group Inc. Stock and Incentive Award Plan, as
amended December 31, 2008.
Incorporated by reference to Exhibit 10.18 (ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.18(iii) to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
Incorporated by reference to Exhibit 10.19 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.20 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.21 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.22 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.23 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.24 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.25 (i) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(ii) Barnes Group Inc. Stock and Incentive Award Plan, as
amended March 15, 2010.
Incorporated by reference to Exhibit 10.25 (ii) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(iii) Exercise of Authority Relating to the Stock and
Incentive Award Plan, dated March 3, 2009.
Incorporated by reference to Exhibit 10.25 (iii) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
(iv) Amendment 2010-1 approved on December 9, 2010
to the Barnes Group Inc. Stock and Incentive Award Plan
as amended March 15, 2010.
Incorporated by reference to Exhibit 10.25 (iv) to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
10.26**
2014 Barnes Group Inc. Stock and Incentive Award Plan.
Incorporated by reference to Annex A to the
Company's definitive proxy statement filed with the
Securities and Exchange Commission on March 25,
2014.
86
Exhibit No.
10.27**
10.28**
10.29**
10.30**
10.31**
10.32**
10.33**
10.34**
10.35**
10.36**
10.37**
10.38**
10.39**
Description
Reference
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant and
Restricted Stock Unit Agreement for Directors dated
February 8, 2012 (for non-management directors).
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant and
Restricted Stock Unit Agreement for Directors dated May
9, 2014 (for non-management directors).
Incorporated by reference to Exhibit 10.27 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.2 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2014.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant and
Restricted Stock Unit Agreement for Directors dated
February 9, 2016 (for non-management directors).
Form of Non-Qualified Stock Option Agreement for
employees grade 21 and up.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Stock Option Summary of Grant and Stock Option
Agreement for employees in grade 21 and up dated as of
February 8, 2011.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Stock Option Summary of Grant and Stock Option
Agreement for Employees in Grade 21 and up dated May
9, 2014.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Stock Option Summary of Grant and Stock Option
Agreement for Employees in Grade 21 and up dated
February 9, 2016.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant and
Restricted Stock Unit Agreement for employees grade 21
and up dated as of February 8, 2011.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant for
Employees and Restricted Stock Unit Agreement dated
February 8, 2012.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant for
Employees and Restricted Stock Unit Agreement dated
May 9, 2014.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Restricted Stock Unit Summary of Grant for
Employees and Restricted Stock Unit Agreement dated
February 9, 2016.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Performance Share Award Summary of Grant and
Performance Share Award Agreement for Officers and
Other Individuals as Designated by the Compensation and
Management Development Committee dated as of
February 11, 2014.
Form of Barnes Group Inc. Stock and Incentive Award
Plan Performance Share Award Summary of Grant and
Performance Share Award Agreement for Officers and
Other Individuals as Designated by the Compensation and
Management Development Committee dated July 21,
2014.
87
Incorporated by reference to Exhibit 10.29 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.30 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.31 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.4 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2014.
Incorporated by reference to Exhibit 10.33 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.34 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.35 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.3 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2014.
Incorporated by reference to Exhibit 10.37 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.36 to the
Company’s report on Form 10-K for the year ended
December 31, 2013.
Incorporated by reference to Exhibit 10.5 to the
Company’s report on Form 10-Q for the quarter ended
June 30, 2014.
Exhibit No.
10.40**
10.41**
Description
Reference
Form of Barnes Group Inc. Stock and Incentive Award
Plan Performance Share Award Summary of Grant and
Performance Share Award Agreement for Officers and
Other Individuals as Designated by the Compensation and
Management Development Committee dated as of
February 11, 2015.
(i) Form of Barnes Group Inc. Stock and Incentive Award
Plan Performance Share Award Summary of Grant and
Performance Share Award Agreement for Officers and
Other Individuals as Designated by the Compensation and
Management Development Committee dated as of
February 9, 2016.
(ii) Form of Barnes Group Inc. Stock and Incentive Award
Plan Performance Share Award Summary of Grant and
Performance Share Award Agreement for Officers and
Other individuals as Designated by the Compensation and
Management Development Committee dated as of
February 8, 2018.
Incorporated by reference to Exhibit 10.40 to the
Company’s report on Form 10-K for the year ended
December 31, 2014.
Incorporated by reference to Exhibit 10.42 to the
Company’s report on Form 10-K for the year ended
December 31, 2015.
Filed with this report.
10.42**
Performance-Linked Bonus Plan for Selected Executive
Officers dated as of May 6, 2016.
10.43
Offer Letter to Michael A. Beck, dated January 28, 2016.
Incorporated by reference to Exhibit 10.42 to the
Company’s report on Form 10-K for the year ended
December 31, 2016.
Incorporated by reference to Exhibit 10.1 to the
Company’s report on Form 10-Q for the quarter ended
March 31, 2016
10.44
Offer Letter to Peter Gutermann, dated November 29,
2017.
Filed with this report.
21
23
31.1
31.2
32
List of Subsidiaries.
Consent of Independent Registered Public Accounting
Firm.
Filed with this report.
Filed with this report.
Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Filed with this report.
Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Filed with this report.
Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Furnished with this report.
101.INS XBRL Instance Document.
Filed with this report.
101.SCH XBRL Taxonomy Extension Schema Document.
Filed with this report.
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Document.
Filed with this report.
101.DEF XBRL Taxonomy Extension Definition Linkbase
Filed with this report.
Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
Filed with this report.
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Filed with this report.
Document.
_________________________
* The Company hereby agrees to provide the Commission upon request copies of any omitted exhibits or schedules to this exhibit required by Item 601(b)(2) of
Regulation S-K.
** Management contract or compensatory plan or arrangement.
The Company agrees to furnish to the Commission, upon request, a copy of each instrument with respect to which there
are outstanding issues of unregistered long-term debt of the Company and its subsidiaries, the authorized principal amount of
which does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.
88
(THIS PAGE INTENTIONALLY LEFT BLANK)
BARNES GROUP INC.
CONSOLIDATED SUBSIDIARIES
as of December 31, 2017
EXHIBIT 21
Name
AS Monterrey, S.de R.L. de C.V.
Associated Spring (Tianjin) Company, Ltd.
Associated Spring (UK) Ltd.
Associated Spring Asia Pte. Ltd.
Associated Spring Corporation
Associated Spring do Brasil Ltda.
Associated Spring Mexico, S. de R.L. de C.V.
Associated Spring Raymond (Shanghai) Co., Ltd.
Associated Spring Raymond GmbH
Barnes Airmotive Malaysia SND BHD
Barnes Financing Delaware LLC
Barnes Group (Bermuda) Limited
Barnes Group (Delaware) LLC
Barnes Group (Germany) GmbH
Barnes Group (Scotland) Limited
Barnes Group (Thailand) Ltd.
Barnes Group (U.K.) 2 Limited
Barnes Group (U.K.) Limited
Barnes Group Acquisition GmbH
Barnes Group Canada Corp
Barnes Group Finance Company (Bermuda) Limited
Barnes Group Finance Company (Delaware)
Barnes Group Holding LLC
Barnes Group Inc.
Barnes Group Luxembourg (No. 1) S.à r.l.
Barnes Group Luxembourg (No. 2) S.á r.l.
Barnes Group Spain, S.R.L.
Barnes Group Suisse Industries GmbH
Barnes Group Switzerland GmbH
Barnes Industrial Group India Private Limited
Barnes Korea Ltd.
Barnes Molding Solutions (Jiangsu) Co., Ltd
Blitz F16-34 GmbH
Curtiss Industries (U.K.) Limited
FOBOHA (Germany) GmbH
FOBOHA (Switzerland) GmbH
Jurisdiction of Operation
Mexico
China
United Kingdom
Republic of Singapore
United States - Connecticut
Brazil
Mexico
China
Germany
Malaysia
United States - Delaware
Bermuda
United States - Delaware
Germany
Scotland
Thailand
United Kingdom
United Kingdom
Germany
Canada
Bermuda
United States - Delaware
United States - Delaware
United States - Delaware
Luxembourg
Luxembourg
Spain
Switzerland
Switzerland
India
Korea
China
Germany
United Kingdom
Germany
Switzerland
Name
Foboha Holding GmbH
FOBOHA US, Inc.
Gammaflux Control, Inc.
GF Controls GmbH
Heinz Hänggi GmbH, Stanztechnik
HPE S.p.A.
Manner Hong Kong Limited
männer Japan Co. Ltd.
Manner USA, Inc.
Otto Männer GmbH
Otto Männer Immobilien GmbH
Otto Männer Innovation GmbH
Otto Männer Präzisionsformenbau GmbH
Priamus System Technologies GmbH
Priamus System Technologies GmbH
Priamus System Technologies LLC
Raymond Distribution-Mexico, S.A. de C.V.
RESORTES ARGENTINA S.A.
Ressorts SPEC SAS
Seeger-Orbis GmbH & Co. OHG
Strömsholmen AB
Synventive Acquisition BV
Synventive Acquisition GmbH
Synventive Acquisition Inc.
Synventive Acquisition UK Ltd.
Synventive Acquisition Unlimited
Synventive BV
Synventive Fertigungstechnik GmbH
Synventive Holding BV
Synventive Holding Limited
Synventive Holding SAS
Synventive Molding Solutions (Suzhou) Co., Ltd.
Synventive Molding Solutions BV
Synventive Molding Solutions Canada, Inc.
Synventive Molding Solutions Co., Ltd.
Synventive Molding Solutions GmbH
Synventive Molding Solutions JBJ Private Limited
Synventive Molding Solutions K.K.
Synventive Molding Solutions LDA
Synventive Molding Solutions Limited
Synventive Molding Solutions LLC
Jurisdiction of Operation
Germany
United States - Delaware
United States - Connecticut
Germany
Switzerland
Italy
Hong Kong
Japan
United States - Georgia
Germany
Germany
Germany
Germany
Germany
Switzerland
United States - Ohio
Mexico
Argentina
France
Germany
Sweden
Netherlands
Germany
United States - Delaware
United Kingdom
United Kingdom
Netherlands
Germany
Netherlands
United kingdom
France
China
Netherlands
Canada
Hong Kong
Germany
India
Japan
Portugal
United Kingdom
United States – Delaware
Name
Synventive Molding Solutions Ltda
Synventive Molding Solutions Pte Ltd.
Synventive Molding Solutions S.R.L.
Synventive Molding Solutions s.r.o.
Synventive Molding Solutions SAS
Synventive Molding Solutions SL
Synventive Molding Solutions, Inc.
Synventive Parent Inc.
The Wallace Barnes Company
Thermoplay Brasil Sistemas de Injecao Ltda
Thermoplay Deutschland GmbH
Thermoplay France S.a.r.l.
Thermoplay Hot Runner Systems (Beijing) Co. Ltd
Thermoplay India Private Limited
Thermoplay Portugal Unipessoal Lda
Thermoplay S.p.A.
Thermoplay U.K. Ltd.
Windsor Airmotive Asia Pte. Ltd.
Jurisdiction of Operation
Brazil
Singapore
Italy
Czech Republic
France
Spain
United States - Delaware
United States - Delaware
United States - Connecticut
Brazil
Germany
France
China
India
Portugal
Italy
United Kingdom
Republic of Singapore
The foregoing does not constitute a complete list of all subsidiaries of the registrant. The subsidiaries that have been omitted do not, if considered in
the aggregate as a single subsidiary, constitute a “Significant Subsidiary” as defined by the Securities and Exchange Commission.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-205952, 333-
196013, 333-150741, and 333-133597) of Barnes Group Inc. of our report dated February 20, 2018 relating to the financial
statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this
Form 10-K.
EXHIBIT 23
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 20, 2018
B O A R D O F D I R E C T O R S
Thomas O. Barnes
Chairman of the Board,
Barnes Group Inc.
Elijah K. Barnes
Principal, Avison Young
Gary G. Benanav
Former Chief Executive Officer, New York Life
International, LLC and
Former Vice Chairman and Director,
New York Life Insurance Company, LLC
Patrick J. Dempsey
President and Chief Executive Officer,
Barnes Group Inc.
Richard J. Hipple
Former Executive Chairman,
Materion Corporation
Thomas J. Hook
Chief Executive Officer,
Q Holding Company
Mylle H. Mangum
Chief Executive Officer,
IBT Enterprises, LLC
Hans-Peter Männer
Managing Director,
Proventus Verwaltungs-GmbH
Hassell H. McClellan
Former Associate Professor of
Finance and Policy,
Boston College’s Wallace E. Carroll
School of Management
William J. Morgan
Former Partner,
KPMG LLP
Anthony V. Nicolosi
Former Regional Risk Management
Partner for the Americas,
KPMG LLP
JoAnna L. Sohovich
Chief Executive Officer,
The Chamberlain Group, Inc.
O F F I C E R S
Patrick J. Dempsey
President and Chief Executive Officer
Marian Acker
Vice President,
Controller
Michael A. Beck
Senior Vice President,
Barnes Group Inc. and
President, Barnes Aerospace
Dawn N. Edwards
Senior Vice President,
Human Resources
Peter A. Gutermann
Senior Vice President,
General Counsel and Secretary
Lukas Hovorka
Vice President,
Corporate Development
Michael V. Kennedy
Vice President,
Tax and Treasury
Scott A. Mayo
Senior Vice President,
Barnes Group Inc. and
President, Barnes Industrial
Christopher J. Stephens, Jr.
Senior Vice President, Finance
and Chief Financial Officer
C O R P O R AT E I N F O R M AT I O N
Transfer Agent and Registrar
Computershare
P.O. Box 30170,
College Station, TX 77842-3170
Phone: 1-800-801-9519 (Continental U.S. only)
Phone: 1-201-680-6578 (Outside U.S.)
For the hearing impaired:
1-800-231-5469 (Continental U.S. only)
1-201-680-6610 (Outside U.S.)
www.computershare.com/investor
Use the above address, phone numbers and Internet
address for information about the following services:
Direct Deposit of Dividends, Stockholders Inquiries,
Change of Name or Address, Consolidations, Lost
Certificates, Replacement.
A N N U A L M E E T I N G
Direct Stock Purchase Plan/
Dividend Reinvestment
Initial purchases of Barnes Group common stock can be
made through the Direct Stock Purchase Plan. Dividends
on Barnes Group common stock may be automatically
invested in additional shares.
Barnes Group Inc.
123 Main Street
Bristol, CT 06010-6376 USA
Phone: 1-860-583-7070
Stock Exchange
New York Stock Exchange
Stock Trading Symbol: B
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
185 Asylum Street, Hartford, CT 06103
Communications
For press releases and other information about
the Company, go to our Internet address at
www.BGInc.com or contact:
Investor Relations
William E. Pitts
Director, Investor Relations
IR@BGInc.com
The Barnes Group Inc. Annual Meeting of Stockholders will be held at 11:00 a.m., Friday, May 4, 2018, at the DoubleTree by Hilton Hotel, Bristol, Connecticut.
10
Corporate Office
123 Main Street
Bristol, CT 06010-6376
USA
BGInc.com
11