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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-4801
coverpagelogoa06a04a01a01a17.jpg
BARNES GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
06-0247840
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
123 Main Street
 
 
 
Bristol
 
 
 
Connecticut
 
06010
 
(Address of Principal Executive Offices)
 
(Zip Code)
 
(860) 583-7070
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
B
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x   No  ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No

The registrant had outstanding 50,442,459 shares of common stock as of April 22, 2020.

1



Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended March 31, 2020
 
 
 
Page
Part I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 


This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “FORWARD-LOOKING STATEMENTS” under Part I - Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.


2



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Net sales
$
330,671

 
$
376,692

 
 
 
 
Cost of sales
208,248

 
244,643

Selling and administrative expenses
73,110

 
81,400

 
281,358

 
326,043

Operating income
49,313

 
50,649

 
 
 
 
Interest expense
4,324

 
5,113

Other expense (income), net
1,594

 
1,806

Income before income taxes
43,395

 
43,730

Income taxes
13,662

 
9,738

Net income
$
29,733

 
$
33,992

 
 
 
 
Per common share:
 
 
 
Basic
$
0.58

 
$
0.66

Diluted
0.58

 
0.65

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
51,061,132

 
51,660,804

Diluted
51,501,857

 
52,189,465


See accompanying notes.


3



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
 
2020
 
2019
 
Net income
$
29,733

 
$
33,992

 
Other comprehensive (loss) income, net of tax
 
 
 
 
Unrealized loss on hedging activities, net of tax (1)
(2,337
)
 
(568
)
 
Foreign currency translation adjustments, net of tax (2)
(36,333
)
 
(9,225
)
 
Defined benefit pension and other postretirement benefits, net of tax (3)
4,481

 
1,615

 
Total other comprehensive loss, net of tax
(34,189
)
 
(8,178
)
 
Total comprehensive (loss) income
$
(4,456
)
 
$
25,814

 

(1) Net of tax of $(823) and $(175) for the three months ended March 31, 2020 and 2019, respectively.

(2) Net of tax of $(66) and $(100) for the three months ended March 31, 2020 and 2019, respectively.

(3) Net of tax of $810 and $540 for the three months ended March 31, 2020 and 2019, respectively.

See accompanying notes.
 

4



BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
112,827

 
$
93,805

Accounts receivable, less allowances (2020 - $5,899; 2019 - $5,197)
335,409

 
348,974

Inventories
240,951

 
232,706

Prepaid expenses and other current assets
67,404

 
67,532

Assets held for sale

 
21,373

Total current assets
756,591

 
764,390

 
 
 
 
Deferred income taxes
18,474

 
21,235

 
 
 
 
Property, plant and equipment
834,313

 
840,640

Less accumulated depreciation
(485,390
)
 
(484,037
)
 
348,923

 
356,603

 
 
 
 
Goodwill
920,202

 
933,022

Other intangible assets, net
563,692

 
581,116

Other assets
59,723

 
53,924

Assets held for sale

 
28,045

Total assets
$
2,667,605

 
$
2,738,335

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Notes and overdrafts payable
$
28,314

 
$
7,724

Accounts payable
116,065

 
118,509

Accrued liabilities
205,264

 
209,992

Long-term debt - current
1,926

 
2,034

Liabilities held for sale

 
4,616

Total current liabilities
351,569

 
342,875

 
 
 
 
Long-term debt
783,424

 
825,017

Accrued retirement benefits
90,689

 
93,358

Deferred income taxes
85,313

 
88,408

Long-term tax liability
66,012

 
66,012

Other liabilities
45,638

 
45,148

Liabilities held for sale

 
6,989

 
 
 
 
Commitments and contingencies (Note 16)

 

Stockholders' equity
 
 
 
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2020 - 63,889,861 shares; 2019 - 63,872,756 shares)
639

 
639

Additional paid-in capital
492,025

 
489,282

Treasury stock, at cost (2020 - 13,448,609 shares; 2019 - 13,051,256 shares)
(513,708
)
 
(498,074
)
Retained earnings
1,510,688

 
1,489,176

Accumulated other non-owner changes to equity
(244,684
)
 
(210,495
)
Total stockholders' equity
1,244,960

 
1,270,528

Total liabilities and stockholders' equity
$
2,667,605

 
$
2,738,335


See accompanying notes.

5



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Operating activities:
 
 
 
Net income
$
29,733

 
$
33,992

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,617

 
25,100

(Gain) loss on disposition of property, plant and equipment
(123
)
 
91

Stock compensation expense
2,552

 
3,021

Seeger divestiture charges
6,620

 

Changes in assets and liabilities, net of the effects of divestitures:
 
 
 
Accounts receivable
9,592

 
4,345

Inventories
(12,788
)
 
7,300

Prepaid expenses and other current assets
(3,227
)
 
(2,670
)
Accounts payable
1,328

 
(9,179
)
Accrued liabilities
(7,885
)
 
(4,708
)
Deferred income taxes
462

 
(872
)
Long-term retirement benefits
(3,518
)
 
(3,428
)
Other
821

 
68

Net cash provided by operating activities
47,184

 
53,060

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposition of property, plant and equipment
185

 
322

Proceeds from the sale of businesses, net of cash sold
36,879

 

Investment in restricted cash
(6,621
)
 

Capital expenditures
(11,912
)
 
(13,738
)
Net cash provided (used) in investing activities
18,531

 
(13,416
)
 
 
 
 
Financing activities:
 
 
 
Net change in other borrowings
20,775

 
20,903

Payments on long-term debt
(83,521
)
 
(152,195
)
Proceeds from the issuance of long-term debt
50,000

 
102,990

Proceeds from the issuance of common stock
183

 
986

Common stock repurchases
(15,550
)
 

Dividends paid
(8,133
)
 
(8,217
)
Withholding taxes paid on stock issuances
(84
)
 
(80
)
Other
(7,252
)
 
(1,340
)
Net cash used in financing activities
(43,582
)
 
(36,953
)
 
 
 
 
Effect of exchange rate changes on cash flows
(3,111
)
 
97

Increase in cash and cash equivalents
19,022

 
2,788

Cash and cash equivalents at beginning of period
93,805

 
100,719

Cash and cash equivalents at end of period
$
112,827

 
$
103,507



See accompanying notes.

6



BARNES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data)
(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated balance sheet and the related unaudited consolidated statements of income, comprehensive income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The balance sheet as of December 31, 2019 has been derived from the 2019 financial statements of Barnes Group Inc. (the “Company”). For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair statement of the results, have been included. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

2. Divestiture

On December 20, 2019, the Company entered into a Share Purchase and Transfer Agreement ("SPA") with the Kajo Neukirchen Group ("KNG") to sell the Seeger business, consisting of partnership interests and shares, respectively, of Seeger-Orbis GmbH & Co. OHG and Seeger-Orbis Mechanical Components (Tianjin) Co., Ltd. (“Seeger”) for 42,500 Euros, subject to certain adjustments. The Company classified the assets and liabilities of Seeger, which operated within the Industrial segment, as "held for sale" on the Consolidated Balance Sheet as of December 31, 2019. Pursuant to the required accounting guidance, the Company allocated $15,000 of goodwill from the Engineered Components reporting unit to Seeger based on the estimated relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. The Company subsequently recorded an impairment charge of $5,600 related to the goodwill that was allocated to Seeger. The impairment charge was recorded within Selling and Administrative expenses on the Consolidated Statements of Income in the period ended December 31, 2019.

The Seeger assets and liabilities held for sale were comprised of the following as of December 31, 2019:
Assets
 
Accounts receivable, less allowance of $152
$
6,844

Inventories
13,727

Prepaid expenses and other current assets
802

  Current assets held for sale
21,373

 
 
Property, plant and equipment, net
17,701

Other intangible assets, net
590

Goodwill
9,400

Other assets
354

  Non-current assets held for sale
28,045

 
 
Liabilities
 
Accounts payable
$
2,961

Accrued liabilities
1,655

  Current liabilities held for sale
4,616

 
 
Accrued retirement benefits
5,788

Other liabilities
1,201

  Non-current liabilities held for sale
6,989



The Company completed the sale of the Seeger business to KNG effective February 1, 2020. Gross proceeds received were 39,634 Euros ($43,732). The Company yielded net cash proceeds of $36,879 after consideration of cash sold and transaction

7



costs. The final amount of proceeds from the sale is subject to post-closing adjustments. Resulting tax charges of $4,211 were recognized in the first quarter of 2020 following the completion of the sale. Divestiture charges of $2,409 resulted from the completion of the sale and were recorded within Selling and Administrative expenses on the Consolidated Statements of Income in the quarter ended March 31, 2020.

The Company utilized the proceeds from the sale to reduce debt under the Amended Credit Facility. Pursuant to the SPA, 6,000 Euros ($6,626) of the proceeds were placed in escrow and will be released pro-ratably through 2024, pending any potential settlement of claims. Cash related to a pending claim would remain in escrow until a final determination of the claim has been made. The Company has recorded the $6,626 of restricted cash in other assets as of March 31, 2020.

3. Recent Accounting Standards

The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under U.S. GAAP through the use of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification. The Company evaluates the applicability and potential impacts of recent ASUs on its Consolidated Financial Statements and related disclosures.

Recently Adopted Accounting Standards

In February 2016, the FASB amended its guidance related to lease accounting. The amended guidance required lessees to recognize a majority of their leases on the balance sheet as a right-of-use ("ROU") asset and a lease liability. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption was permitted. The Company adopted the new standard using the modified retrospective approach on January 1, 2019. The most significant impact of the guidance was the recognition of ROU assets and related lease liabilities for operating leases on the Consolidated Balance Sheet. The Company recognized ROU assets and related lease liabilities of $31,724 and $32,579 respectively, related to operating lease commitments, as of January 1, 2019. The amended guidance did not have a material impact on the Company's cash flows or results of operations.

In June 2016, the FASB amended its guidance related to credit losses on financial instruments. The amended guidance requires the use of a methodology of estimation that reflects expected credit losses on certain types of financial instruments, including trade receivables, as a replacement to the current methodology, which estimates losses based on incurred credit losses. This expected credit loss methodology requires that the Company consider a broader range of information when estimating credit losses on receivables. The amended guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this amended guidance and applicable FASB updates related to the guidance during the first quarter of 2020 and it did not have a material impact on the Company's Consolidated Financial Statements.

In January 2017, the FASB amended its guidance related to goodwill impairment testing. The amended guidance simplified the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test. Under the amended guidance, companies should perform their annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Companies would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, assuming the loss recognized does not exceed the total amount of goodwill for the reporting unit. The amended guidance was effective for fiscal years beginning after December 15, 2019. Early adoption was permitted. The Company elected to early adopt this amended guidance during the second quarter of 2018 in connection with its annual goodwill impairment testing and it did not have an impact on the Company's Consolidated Financial Statements.

In August 2017, the FASB amended its guidance related to hedge accounting. The amended guidance made 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 aligned hedge accounting with management strategies, simplifies application and increases the transparency of hedging. The amended guidance was effective January 1, 2019, with early adoption permitted in any interim period. The Company adopted the amended guidance on January 1, 2019 and it did not have a material impact on the Consolidated Financial Statements, however it did result in amendments to certain disclosures required pursuant to the earlier guidance. See Note 10 of the Consolidated Financial Statements.

In August 2018, the FASB issued new guidance related to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (for example, a service contract). Pursuant to the new guidance, customers apply the same criteria for capitalizing implementation costs in a hosting arrangement as they would for an arrangement that has a software license. The new guidance was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption was permitted, including adoption in any interim period for which financial statements have not been issued. The FASB provided the option of applying the guidance retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company elected to early

8



adopt this guidance, prospectively, during the third quarter of 2018, and it did not have a material impact on the Consolidated Financial Statements.

Recently Issued Accounting Standards

In August 2018, the FASB amended its guidance related to disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amended requirements serve to remove, add and otherwise clarify certain existing disclosures. The amended guidance is effective for fiscal years ending after December 15, 2020. The guidance requires application on a retrospective basis to all periods presented. The adoption of this amended guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

In December 2019, the FASB amended its guidance related to income taxes. The amended guidance simplifies the accounting for income taxes, eliminating certain exceptions to the general income tax principles, in an effort to reduce the cost and complexity of application. The amended guidance is effective for annual periods beginning after December 15, 2020, and interim periods within those reporting periods. Early adoption is permitted in any interim or annual period. The guidance requires application on either a prospective, retrospective or modified retrospective basis, contingent on the income tax exception being applied. The adoption of this amended guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.

4. Revenue

The Company is a global provider of highly engineered products, differentiated industrial technologies, and innovative solutions, serving a wide range of end markets and customers. Its specialized products and services are used in far-reaching applications including aerospace, transportation, manufacturing, automation, healthcare, and packaging.

Revenue is recognized by the Company when control of the product or solution is transferred to the customer. Control is generally transferred when products are shipped or delivered to customers, title is transferred, and the significant risks and rewards of ownership have transferred, and the Company has rights to payment and rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue is generally transferred at a point in time, a certain portion of businesses with customized products or contracts in which the Company performs work on customer-owned assets requires the use of an over time recognition model as certain contracts meet one or more of the established criteria pursuant to the accounting guidance. Also, service revenue is recognized as control transfers, which is concurrent with the services being performed.

The following table presents the Company's revenue disaggregated by products and services, and geographic regions, by segment:

9



 
Three Months Ended
March 31, 2020
 
Industrial
 
Aerospace
 
Total Company
Product and Services
 
 
 
 
 
Engineered Components Products
$
47,707

 
$

 
$
47,707

Molding Solutions Products
97,406

 

 
97,406

Force & Motion Control Products
39,791

 

 
39,791

Automation Products
14,196

 

 
14,196

Aerospace Original Equipment Manufacturer Products

 
81,706

 
81,706

Aerospace Aftermarket Product and Services

 
49,865

 
49,865

 
$
199,100

 
$
131,571

 
$
330,671

 
 
 
 
 
 
Geographic Regions (A)
 
 
 
 
 
Americas
$
80,644

 
$
92,578

 
$
173,222

Europe
81,864

 
25,163

 
107,027

Asia
35,493

 
11,696

 
47,189

Rest of World
1,099

 
2,134

 
3,233

 
$
199,100

 
$
131,571

 
$
330,671


 
Three Months Ended
March 31, 2019
 
Industrial
 
Aerospace
 
Total Company
Product and Services
 
 
 
 
 
Engineered Components Products
$
69,684

 
$

 
$
69,684

Molding Solutions Products
106,793

 

 
106,793

Force & Motion Control Products
51,617

 

 
51,617

Automation Products
14,408

 

 
14,408

Aerospace Original Equipment Manufacturer Products

 
87,939

 
87,939

Aerospace Aftermarket Product and Services

 
46,251

 
46,251

 
$
242,502

 
$
134,190

 
$
376,692

 
 
 
 
 
 
Geographic Regions (A)
 
 
 
 
 
Americas
$
98,288

 
$
96,144

 
$
194,432

Europe
94,430

 
24,324

 
118,754

Asia
48,942

 
12,404

 
61,346

Rest of World
842

 
1,318

 
2,160

 
$
242,502

 
$
134,190

 
$
376,692


(A) Sales by geographic region are based on the location to which the product is shipped.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 85 percent and approximately 90 percent of revenue for the three month period ended March 31, 2020 and 2019, respectively. A majority of revenue within the Industrial segment and Aerospace OEM business, along with a portion of revenue within the Aerospace Aftermarket business, is recognized at a point in time, primarily when the product or solution is shipped to the customer.

Revenue from products and services transferred to customers over time accounted for approximately 15 percent and approximately 10 percent of revenue for the three month period ended March 31, 2020 and 2019, respectively. The Company recognizes revenue over time in instances where a contract supports a continual transfer of control to the customer.

10



Substantially all of our revenue in the Aerospace maintenance repair and overhaul business and a portion of the Engineered Components Products, Molding Solutions Products and Aerospace Original Equipment Manufacturer Products is recognized over time. Within the Molding Solutions and Aerospace Aftermarket businesses, this continual transfer of control to the customer results from repair and refurbishment work performed on customer controlled assets. With other contracts, this continual transfer of control to the customer is supported by clauses in the contract where we deliver products that do not have an alternative use and requires an enforceable right to payment of costs incurred (plus a reasonable profit) or the Company has a contractual right to complete any work in process and receive full contract price.

The majority of our revenues are from contracts that are less than one year, however certain Aerospace OEM and Industrial Molding Solutions business contracts extend beyond one year. In the Industrial segment, customers are typically OEMs or suppliers to OEMs and, in some businesses, distributors. In the Aerospace segment, customers include commercial airlines, OEMs and other aircraft and military parts and service providers.

A performance obligation represents a promise within a contract to provide a distinct good or service to the customer. Revenue is recognized in an over time model based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company utilizes the cost-to-cost measure of progress for over time contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts.

Adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. Revenue recognized from performance obligations satisfied in previous periods was not material in both the three months ended March 31, 2020 and 2019.

Contract Balances. The timing of revenue recognition, invoicing and cash collections affect accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets.

Unbilled Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when 1) the cost-to-cost method is applied and 2) such revenue exceeds the amount invoiced to the customer. Unbilled receivables are included within prepaid expenses and other current assets on the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019.

Customer Advances and Deposits (Contract Liabilities) - The Company may receive a customer advance or deposit, or have an unconditional right to receive a customer advance, prior to revenue being recognized. Certain contracts within the Molding Solutions business, for example, may require such advances. Since the performance obligations related to such advances may not have been satisfied, a contract liability is established. An offsetting asset of equal amount is recorded as an account receivable until the advance is collected. Advances and deposits are included within accrued liabilities on the Consolidated Balance Sheets until the respective revenue is recognized. Advance payments are not considered a significant financing component as they are generally received less than one year before the customer solution is completed. These assets and liabilities are reported on the Consolidated Balance Sheets on an individual contract basis at the end of each reporting period.

Net contract liabilities consisted of the following:
 
March 31, 2020
 
December 31, 2019
 
$ Change
 
% Change
Unbilled receivables (contract assets)
$
26,301

 
$
22,444

 
$
3,857

 
17
 %
Contract liabilities
(51,086
)
 
(55,076
)
 
3,990

 
(7
)%
Net contract liabilities
$
(24,785
)
 
$
(32,632
)
 
$
7,847

 
(24
)%

Contract liabilities balances at March 31, 2020 and December 31, 2019 include $14,064 and $16,971, respectively, of customer advances for which the Company has an unconditional right to collect payment. Accounts receivable, as presented on the Consolidated Balance Sheet, includes corresponding balances at March 31, 2020 and December 31, 2019, respectively.

Changes in the net contract liabilities balance during the three-month period ended March 31, 2020 were impacted by a $3,990 decrease in contract liabilities, driven primarily by revenue recognized in the current period, partially offset by new customer advances and deposits. Adding to this net contract liability decrease was a $3,857 increase in contract assets, driven primarily by contract progress (i.e. unbilled receivable), partially offset by earlier contract progress being invoiced to the customer.


11



The Company recognized approximately 40% of the revenue related to the contract liability balance as of December 31, 2019 during the three months ended March 31, 2020, primarily representing revenue from the sale of molds and hot runners within the Molding Solutions business.

Remaining Performance Obligations. The Company has elected to disclose remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations represent the transaction price of firm orders for which work has not been performed and, for Aerospace, excludes projections of components and assemblies that Aerospace OEM customers anticipate purchasing in the future under existing programs, which represent orders that are beyond lead time and do not represent performance obligations pursuant to accounting guidance. As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $207,343. The Company expects to recognize revenue on approximately 75% of the remaining performance obligations over the next 12 months, with the remainder being recognized within 24 months.

5. Stockholders' Equity

A schedule of consolidated changes in equity for the three months ended March 31, 2020 is as follows (shares in thousands):
 
 
Common
Stock
(Number of
Shares)
 
Common
Stock
(Amount)
 
Additional
Paid-In
Capital
 
Treasury
Stock
(Number of
Shares)
 
Treasury
Stock (Amount)
 
Retained
Earnings
 
Accumulated
Other
Non-Owner
Changes to
Equity
 
Total
Stockholders’
Equity
December 31, 2019
 
63,873

 
$
639

 
$
489,282

 
13,051

 
$
(498,074
)
 
$
1,489,176

 
$
(210,495
)
 
$
1,270,528

Comprehensive income
 

 

 

 

 

 
29,733

 
(34,189
)
 
(4,456
)
Dividends declared ($0.16 per share)
 

 

 

 

 

 
(8,133
)
 

 
(8,133
)
Common stock repurchases
 

 

 

 
396

 
(15,550
)
 

 

 
(15,550
)
Employee stock plans
 
17

 

 
2,743

 
2

 
(84
)
 
(88
)
 

 
2,571

March 31, 2020
 
63,890

 
$
639

 
$
492,025

 
13,449

 
$
(513,708
)
 
$
1,510,688

 
$
(244,684
)
 
$
1,244,960


A schedule of consolidated changes in equity for the three months ended March 31, 2019 is as follows (shares in thousands):
 
 
Common
Stock
(Number of
Shares)
 
Common
Stock
(Amount)
 
Additional
Paid-In
Capital
 
Treasury
Stock
(Number of
Shares)
 
Treasury
Stock (Amount)
 
Retained
Earnings
 
Accumulated
Other
Non-Owner
Changes to
Equity
 
Total
Stockholders’
Equity
December 31, 2018
 
63,367

 
$
634

 
$
470,818

 
12,034

 
$
(441,668
)
 
$
1,363,772

 
$
(190,500
)
 
$
1,203,056

Comprehensive income
 

 

 

 

 

 
33,992

 
(8,178
)
 
25,814

Dividends declared ($0.16 per share)
 

 

 

 

 

 
(8,217
)
 

 
(8,217
)
Employee stock plans
 
51

 

 
4,039

 
1

 
(80
)
 
(109
)
 

 
3,850

March 31, 2019
 
63,418

 
$
634

 
$
474,857

 
12,035

 
$
(441,748
)
 
$
1,389,438

 
$
(198,678
)
 
$
1,224,503



6. Net Income Per Common Share

For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans. For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding was increased by 440,725 and 528,661 for the three month periods ended March 31, 2020 and 2019, respectively, to account for the potential dilutive effect of stock-based incentive plans. There were no adjustments to net income for the purposes of computing income available to common stockholders for the periods.

The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three month periods ended March 31, 2020 and 2019, the Company excluded 325,670 and 221,201 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive.

The Company granted 102,500 stock options, 79,994 restricted stock unit awards and 81,283 performance share awards ("PSAs") in February 2020 as part of its annual grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic weighted-average common

12



shares outstanding as they contain nonforfeitable rights to dividend payments. The PSAs are part of the long-term Performance Share Award Program and are based on performance goals that are driven by a combination of independently measured metrics (depending on the grant year) with each metric being weighted equally. The metrics for awards granted in 2020 include the Company’s total shareholder return (“TSR”), return on invested capital (“ROIC”) and operating income before depreciation and amortization growth ("EBITDA growth"). 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 performance period. ROIC is designed to assess the Company's performance compared to pre-established Company targets 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. The fair value of the TSR was determined using a Monte Carlo valuation method as the award contains a market condition.

7. Inventories

The components of inventories consisted of:
 
March 31, 2020
 
December 31, 2019
Finished goods
$
71,244


$
69,594

Work-in-process
92,624

 
88,196

Raw material and supplies
77,083

 
74,916

 
$
240,951


$
232,706



8. Goodwill and Other Intangible Assets

Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended March 31, 2020:
 
Industrial
 
Aerospace
 
Total Company
January 1, 2020
$
902,236

 
$
30,786

 
$
933,022

Foreign currency translation
(12,820
)
 

 
(12,820
)
March 31, 2020
$
889,416

 
$
30,786

 
$
920,202



Other Intangible Assets:
Other intangible assets consisted of:
 
 
 
March 31, 2020
 
December 31, 2019
 
Range of
Life -Years
 
Gross Amount
 
Accumulated Amortization
 
Gross Amount
 
Accumulated Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Revenue Sharing Programs (RSPs)
Up to 30
 
$
299,500

 
$
(138,889
)
 
$
299,500

 
$
(135,466
)
Component Repair Programs (CRPs)
Up to 30
 
111,839

 
(28,585
)
 
111,839

 
(27,270
)
Customer relationships
10-16
 
338,366

 
(103,779
)
 
338,366

 
(98,953
)
Patents and technology
4-11
 
123,433

 
(70,419
)
 
123,433

 
(68,188
)
Trademarks/trade names
10-30
 
10,949

 
(10,216
)
 
10,949

 
(10,145
)
Other
Up to 15
 
10,746

 
(4,191
)
 
10,746

 
(4,014
)
 
 
 
894,833

 
(356,079
)
 
894,833

 
(344,036
)
Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
Trade names
 
 
55,670

 

 
55,670

 

Foreign currency translation
 
 
(30,732
)
 

 
(25,351
)
 

Other intangible assets
 
 
$
919,771

 
$
(356,079
)
 
$
925,152

 
$
(344,036
)



13



Estimated amortization of intangible assets for future periods is as follows: 2020 - $46,000; 2021 - $50,000; 2022- $49,000; 2023 - $48,000 and 2024 - $46,000.

9. Debt

Long-term debt and notes and overdrafts payable at March 31, 2020 and December 31, 2019 consisted of:
 
March 31, 2020
 
December 31, 2019
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Revolving credit agreement
$
679,079

 
$
673,294

 
$
720,379

 
$
737,816

3.97% Senior Notes
100,000

 
110,993

 
100,000

 
104,151

Borrowings under lines of credit and overdrafts
28,314

 
28,314

 
7,724

 
7,724

Finance leases
5,915

 
6,028

 
6,266

 
6,515

Other foreign bank borrowings
356

 
358

 
406

 
410

 
813,664

 
818,987

 
834,775

 
856,616

Less current maturities
(30,240
)
 
 
 
(9,758
)
 
 
Long-term debt
$
783,424

 
 
 
$
825,017

 
 

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 increased 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 previous
accordion feature from $250,000, allowing the Company to now request additional borrowings of up to $350,000. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is not continuing. The borrowing availability of $850,000, pursuant to the terms of the Amended Credit Agreement, allows for multi-currency borrowing which includes Euro, British pound sterling or Swiss franc borrowing, up to $600,000.
In September 2018, the Company and one of its wholly owned subsidiaries entered into a Sale and Purchase Agreement to acquire Gimatic. In conjunction with the Acquisition, the Company requested additional borrowings of $150,000 that was provided for under the existing accordion feature. The Administrative Agent for the lenders approved the Company's access to the accordion feature and on October 19, 2018 the lenders formally committed the capital to fund such feature, resulting in the execution of the fifth amendment to the Amended Credit Agreement (the "Fifth Amendment"). The Fifth Amendment, effective October 19, 2018, thereby increased the borrowing availability of the existing facility to $1,000,000. The Company may also request access to the residual $200,000 of the accordion feature. Depending on the Company’s consolidated leverage ratio, and at the election of the Company, borrowings under the Amended Credit Agreement will bear interest at either LIBOR plus a margin of between 1.10% and 1.70% or the base rate, as defined in the Amended Credit Agreement, plus a margin of 0.10% to 0.70%. Multi-currency borrowings, pursuant to the Amended Credit Agreement, bear interest at their respective interbank offered rate (i.e. Euribor) or 0.00% (higher of the two rates) plus a margin of between 1.10% and 1.70%.

Borrowings and availability under the Amended Credit Agreement were $679,079 and $320,921, respectively, at March 31, 2020 and $720,379 and $279,621, respectively, at December 31, 2019, subject to covenants in the Company's revolving debt agreements. The borrowing capacity under the Amended Credit Agreement was limited by the Senior Debt Ratio (defined below) to $294,190 as of March 31, 2020. The average interest rate on these borrowings was 1.44% and 1.76% on March 31, 2020 and December 31, 2019, respectively. Borrowings included Euro-denominated borrowings of 456,490 Euros ($504,079) at March 31, 2020 and 504,690 Euros ($565,379) at December 31, 2019. 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 2019, the Company borrowed 44,100 Euros ($49,506) under the Amended Credit Facility through an international subsidiary. The proceeds were distributed to the Parent Company and subsequently used to pay down U.S. borrowings under the Amended Credit Agreement.

In October 2014, the Company entered into a Note Purchase Agreement (“Note Purchase Agreement”), among the Company and New York Life Insurance Company, New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account, as purchasers, for the issuance of $100,000 aggregate principal amount of 3.97% Senior Notes due October 17, 2024 (the “3.97% Senior Notes”).

The 3.97% Senior Notes are senior unsecured obligations of the Company and pay interest semi-annually on April 17 and October 17 of each year at an annual rate of 3.97%. The 3.97% Senior Notes will mature on October 17, 2024 unless earlier prepaid in accordance with their terms. Subject to certain conditions, the Company may, at its option, prepay all or any part of

14



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 U.S. 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 ("Total Debt Ratio") and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25, in each case at the end of each fiscal quarter; provided that the debt to EBITDA ratios are permitted to increase for a period of four fiscal quarters after the closing of certain permitted acquisitions. A permitted acquisition is defined as an acquisition exceeding $150,000, for which the acquisition of Gimatic on October 31, 2018 qualified. With the completion of a permitted acquisition, the Senior Debt Ratio cannot exceed 3.50 times and the Total Debt Ratio cannot exceed 4.25 times. The increased ratios were allowed for a period of four fiscal quarters subsequent to the close of the permitted acquisition and therefore expired in the fourth quarter of 2019. At March 31, 2020, 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 available approximately $81,000 in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. The Credit Lines are accessed locally and are available primarily within the U.S., Europe and Asia. The Credit Lines are subject to the applicable borrowing rates within each respective country and vary between jurisdictions (i.e. LIBOR, Euribor, etc.). Under the Credit Lines, $27,900 was borrowed at March 31, 2020 at an average interest rate of 1.05% and $7,700 was borrowed at December 31, 2019 at an average interest rate of 2.38%. The Company had also borrowed $414 and $24 under the overdraft facilities at March 31, 2020 and December 31, 2019, 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 also has several finance leases under which $5,915 and $6,266 was outstanding at March 31, 2020 and December 31, 2019, respectively. The fair value of the finance leases are 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.

At March 31, 2020 and December 31, 2019, the Company also had other foreign bank borrowings of $356 and $406, respectively. The fair value of the other 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.

10. Derivatives

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

Financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. The Company entered into an interest rate swap agreement (the "Swap") on April 28, 2017, with one bank, which 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 and is accounted for as a cash flow hedge.

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

The Company does not use derivatives for speculative or trading purposes or to manage commodity exposures. Changes in the fair market value of derivatives that qualify as cash flow hedges are recorded to accumulated other non-owner changes to equity. Amounts recorded to accumulated other non-owner changes to equity are reclassified to earnings in a manner that

15



matches the earnings impact of the hedged transaction. Amounts related to contracts that are not designated as hedges are recorded directly to earnings.

The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the first three months of 2020 and 2019, as presented on the Consolidated Statements of Cash Flows, include $7,212 and $1,299, respectively, of net cash payments 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:
 
Derivative Assets
 
Derivative Liabilities
 
 
Fair Value
 
 
Fair Value
 
Balance Sheet Location
March 31, 2020
December 31, 2019
 
Balance Sheet Location
March 31, 2020
December 31, 2019
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
Other assets
$

$

 
Other liabilities
$
(3,042
)
$
(820
)
Foreign exchange contracts
Prepaid expenses and other current assets

700

 
Accrued liabilities
(635
)

Total derivatives designated as hedging instruments
 

700

 
 
(3,677
)
(820
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
6

1,375

 
Accrued liabilities
(846
)
(1
)
Total derivatives not designated as hedging instruments
 
6

1,375

 
 
(846
)
(1
)
 
 
 
 
 
 
 
 
Total derivatives
 
$
6

$
2,075

 
 
$
(4,523
)
$
(821
)


The following table sets forth the effect of hedge accounting on accumulated other comprehensive (loss) income for the three month periods ended March 31, 2020 and 2019:

 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
Derivatives in Hedging Relationships
2020
 
2019
 
2020
 
2019
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
 
Interest rate contracts
$
(1,694
)
 
$
(487
)
 
Interest expense
$
(61
)
 
$
142

Foreign exchange contracts
(643
)
 
(81
)
 
Net sales
(523
)
 
(337
)
Total
$
(2,337
)
 
$
(568
)
 
 
$
(584
)
 
$
(195
)



16



The following table sets forth the effect of hedge accounting on the consolidated statements of income for the three-month periods ended March 31, 2020 and 2019:

 
Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships
 
Three Months Ended
March 31,
 
2020
 
2019
 
Net sales
 
Interest expense
 
Net sales
 
Interest expense
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of hedges are recorded
$
330,671

 
$
4,324

 
$
376,692

 
$
5,113

The effects of hedging:
 
 
 
 
 
 
 
  Gain (Loss) on cash flow hedging relationships
 
 
 
 
 
 
 
     Interest rate contracts
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
 
 
(61
)
 
 
 
142

     Foreign exchange contracts
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income
(523
)
 
 
 
(337
)
 




The following table sets forth the effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three-month periods ended March 31, 2020 and 2019:
 
Location of Gain (Loss) Recognized in Income on Derivative
Amount of Gain (Loss) Recognized in Income on Derivative(A)
 
Three Months Ended
March 31,
Derivatives Not Designated as Hedging Instruments
2020
 
2019
Foreign exchange contracts
Other expense (income), net
$
(12,195
)
 
$
(3,819
)


(A) Such amounts were substantially offset by the net (gain) loss recorded on the underlying hedged asset or liability, also recorded in other expense (income), net.

11. Fair Value Measurements

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

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

The following table provides the assets and liabilities reported at fair value and measured on a recurring basis:


17



 
 
 
 
Fair Value Measurements Using
Description
 
Total
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
March 31, 2020
 
 
 
 
 
 
 
 
Asset derivatives
 
$
6

 
$

 
$
6

 
$

Liability derivatives
 
(4,523
)
 

 
(4,523
)
 

Bank acceptances
 
12,911

 

 
12,911

 

Rabbi trust assets
 
2,507

 
2,507

 

 

Total
 
$
10,901

 
$
2,507

 
$
8,394

 
$

 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
Asset derivatives
 
$
2,075

 
$