UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission file number 1-4801


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

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

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

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

The registrant had outstanding 53,745,549 shares of common stock as of April 24, 2013.

1


Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended March 31, 2013
 
 
 
Page
Part I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 


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


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
 
Three months ended March 31,
 
2013
 
2012
Net sales
$
263,545

 
$
222,795

 
 
 
 
Cost of sales
177,715

 
160,421

Selling and administrative expenses
60,875

 
37,756

 
238,590

 
198,177

Operating income
24,955

 
24,618

 
 
 
 
Interest expense
4,357

 
2,368

Other expense (income), net
966

 
859

Income from continuing operations before income taxes
19,632

 
21,391

Income taxes
4,199

 
3,801

Income from continuing operations
15,433

 
17,590

(Loss) income from discontinued operations, net of income taxes of $183 and $3,004 respectively (Note 2)
(1,961
)
 
4,617

Net income
$
13,472

 
$
22,207

 
 
 
 
Per common share:
 
 
 
  Basic:
 
 
 
    Income from continuing operations
$
0.29

 
$
0.33

    (Loss) income from discontinued operations, net of income taxes
(0.04
)
 
0.08

   Net income
$
0.25

 
$
0.41

  Diluted:
 
 
 
    Income from continuing operations
$
0.28

 
$
0.32

    (Loss) income from discontinued operations, net of income taxes
(0.04
)
 
0.08

   Net income
$
0.24

 
$
0.40

Dividends
$
0.10

 
$
0.10

 
 
 
 
Weighted average common shares outstanding:
 
 
 
    Basic
54,739,465

 
54,805,636

    Diluted
55,524,560

 
55,455,579


See accompanying notes.


3



BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


 
Three months ended March 31,
 
2013
 
2012
Net income
$
13,472

 
$
22,207

Other comprehensive (loss) income, net of tax
 
 
 
      Unrealized gain on hedging activities, net of tax (1)
427

 
236

      Foreign currency translation adjustments, net of tax (2)
(14,505
)
 
14,709

      Defined benefit pension and other postretirement benefits, net of tax (3)
2,410

 
1,205

Total other comprehensive (loss) income, net of tax
(11,668
)
 
16,150

Total comprehensive income
$
1,804

 
$
38,357


(1) Net of tax of $188 and $84 for the three months ended March 31, 2013 and 2012 , respectively.

(2) Net of tax of $(101) and $717 for the three months ended March 31, 2013 and 2012 , respectively.

(3) Net of tax of $2,838 and $1,017 for the three months ended March 31, 2013 and 2012 , respectively.

See accompanying notes.


4


BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
Current assets
 
 
 
  Cash and cash equivalents
$
99,872

 
$
86,356

  Accounts receivable, less allowances (2013 - $2,050; 2012 - $2,858)
226,744

 
253,202

  Inventories
179,142

 
226,220

  Deferred income taxes
12,968

 
33,906

  Assets held for sale
241,311

 
—

  Prepaid expenses and other current assets
17,682

 
18,856

    Total current assets
777,719

 
618,540

 
 
 
 
Deferred income taxes
46,955

 
29,961

 
 
 
 
Property, plant and equipment
581,964

 
634,464

    Less accumulated depreciation
(368,124
)
 
(401,367
)
 
213,840

 
233,097

 
 
 
 
Goodwill
439,240

 
579,905

Other intangible assets, net
375,663

 
383,972

Other assets
22,191

 
23,121

Total assets
$
1,875,608

 
$
1,868,596

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
  Notes and overdrafts payable
$
12,539

 
$
3,795

  Accounts payable
85,227

 
99,037

  Accrued liabilities
72,786

 
96,364

  Liabilities held for sale
23,809

 
—

  Long-term debt - current
53,781

 
699

    Total current liabilities
248,142

 
199,895

 
 
 
 
Long-term debt
604,370

 
642,119

Accrued retirement benefits
158,455

 
159,103

Deferred income taxes
47,809

 
48,707

Other liabilities
18,437

 
18,654

 
 
 
 
Commitments and contingencies (Note 14)

 

Stockholders' equity
 
 
 
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2013 - 59,489,205 shares; 2012 - 59,202,029 shares)
595

 
592

  Additional paid-in capital
348,158

 
332,588

  Treasury stock, at cost (2013 - 5,497,079 shares; 2012 - 4,999,556 shares)
(113,333
)
 
(99,756
)
  Retained earnings
641,395

 
633,446

  Accumulated other non-owner changes to equity
(78,420
)
 
(66,752
)
Total stockholders' equity
798,395

 
800,118

Total liabilities and stockholders' equity
$
1,875,608

 
$
1,868,596


See accompanying notes.

5


BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2013
 
2012
Operating activities:
 
 
 
Net income
$
13,472

 
$
22,207

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
16,499

 
13,063

  Amortization of convertible debt discount
582

 
537

  Gain on disposition of property, plant and equipment
(54
)
 
(97
)
  Stock compensation expense
12,657

 
2,100

  Withholding taxes paid on stock issuances
(720
)
 
(683
)
  Loss on the sale of businesses
—

 
767

  Changes in assets and liabilities:
 
 
 
    Accounts receivable
(16,347
)
 
(1,512
)
    Inventories
(968
)
 
1,091

    Prepaid expenses and other current assets
(235
)
 
(2,272
)
    Accounts payable
7,144

 
(672
)
    Accrued liabilities
(16,679
)
 
(29,379
)
    Deferred income taxes
485

 
3,852

    Long-term retirement benefits
801

 
(2,708
)
  Other
1,020

 
25

Net cash provided by operating activities
17,657

 
6,319

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposition of property, plant and equipment
44

 
135

Payments related to the sale of businesses, net
—

 
(363
)
Capital expenditures
(10,050
)
 
(7,281
)
Other
(1,420
)
 
(1,418
)
Net cash used by investing activities
(11,426
)
 
(8,927
)
 
 
 
 
Financing activities:
 
 
 
Net change in other borrowings
8,737

 
(6,688
)
Payments on long-term debt
(6,245
)
 
(13,135
)
Proceeds from the issuance of long-term debt
21,000

 
49,000

Proceeds from the issuance of common stock
2,677

 
3,324

Common stock repurchases
(12,856
)
 
(11,141
)
Dividends paid
(5,443
)
 
(5,459
)
Excess tax benefit on stock awards
506

 
1,227

Other
(53
)
 
(65
)
Net cash provided by financing activities
8,323

 
17,063

 
 
 
 
Effect of exchange rate changes on cash flows
(1,038
)
 
529

Increase in cash and cash equivalents
13,516

 
14,984

Cash and cash equivalents at beginning of period
86,356

 
62,505

Cash and cash equivalents at end of period
$
99,872

 
$
77,489

 
See accompanying notes.

6


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

1. Summary of Significant Accounting Policies

The accompanying unaudited consolidated balance sheet and the related unaudited consolidated statements of income, comprehensive income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The balance sheet as of December 31, 2012 has been derived from the 2012 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, 2012 . In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the three-month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 . Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

In the first quarter of 2013, the Company entered into a definitive agreement to sell its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC") for $550,000 , subject to certain working capital and post closing adjustments. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations in the consolidated statements of income. The Company classified the business as "held for sale" on the consolidated balance sheets as of March 31, 2013. The Company completed the sale of BDNA on April 22, 2013. See Note 2 and Note 16.

Additionally, in the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable business segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by one of the Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment. See Note 13.

In the third quarter of 2012, the Company completed its acquisition of Synventive Molding Solutions. The acquisition has been integrated into the Industrial segment. See Note 3.

2. Discontinued Operations
 
Barnes Distribution Europe

On December 30, 2011, the Company sold substantially all of the assets of its Barnes Distribution Europe ("BDE") business to Berner SE (the "Purchaser") in a cash transaction pursuant to the terms of a Share and Asset Purchase Agreement ("SPA") among the Company, the Purchaser, and their respective relevant subsidiaries. The Company received gross proceeds of $33,358 , which represented the initial stated purchase price, and yielded net cash proceeds of $22,492 after consideration of cash sold, transaction costs paid and closing adjustments. The final amount of proceeds from the sale of the BDE business was subject to post-closing adjustments that were reflected in discontinued operations in periods subsequent to the disposition. The loss from operations of discontinued businesses for the quarter ended March 31, 2013 includes a final settlement to a retained liability related to BDE.

As required by the terms of the SPA, the Company was required to place €9,000 of the proceeds in escrow to be used for any settlement of general representation and warranty claims. Absent a breach of warranty claim, the funds would be released from escrow on August 31, 2012 unless there were any then pending claims. Cash related to a pending claim would remain in escrow until a final determination of the claim had been made. On August 17, 2012, the Purchaser provided a notice of breach of various warranties to the Company.  The Company rejected the Purchaser's notice and demanded release of the full escrow effective August 31, 2012.  The Purchaser refused to release the full escrow, and only €3,900 plus interest was released whereas €5,100 ( $6,537 at March 31, 2013) plus interest remains in escrow. The Company objected to the retention of the escrow and expects to prevail in this matter. The Company has recorded the restricted cash in other assets at March 31, 2013 and December 31, 2012.



7



Barnes Distribution North America

On February 22, 2013, the Company and MSC entered into an Asset Purchase Agreement ("APA") pursuant to which MSC would acquire BDNA. The APA provided that MSC would pay the Company $550,000 as consideration for the acquisition of BDNA, subject to certain working capital and post closing adjustments. In the first quarter of 2013, the Company classified the business as "held for sale". The results of BDNA have been segregated and presented as discontinued operations in the consolidated statements of income. The Company completed the sale of BDNA on April 22, 2013.

The following amounts related to BDE and BDNA were derived from historical financial information. The amounts have been segregated from continuing operations and reported as discontinued operations within the consolidated financial statements:

 
Three months ended March 31,
 
2013
 
2012
Net sales
$
75,821

 
$
80,301

(Loss) income before income taxes
(1,778
)
 
8,401

Income tax expense
183

 
3,017

(Loss) income from operations of discontinued businesses, net of income taxes
(1,961
)
 
5,384

Loss on transaction
—

 
(780
)
Income tax benefit on loss on sale
—

 
13

Loss on the sale of businesses
—

 
(767
)
(Loss) income from discontinued operations, net of income taxes
$
(1,961
)
 
$
4,617


The BDNA assets and liabilities held for sale will be sold or otherwise disposed of and are comprised of the following:
Assets
 
Accounts receivable, less allowance of $801
$
38,752

Inventories
47,408

Prepaid expenses and other current assets
2,179

Property, plant and equipment, net
17,861

Goodwill
134,715

Other assets
396

     Assets held for sale
$
241,311

 
 
Liabilities
 
Accounts payable
$
20,676

Accrued liabilities
2,964

Accrued retirement benefits
66

Other liabilities
103

     Liabilities held for sale
$
23,809


3. Acquisition

During 2012, the Company completed the acquisition of Synventive Molding Solutions (“Synventive”) by acquiring all of the issued and outstanding shares of capital stock of Synventive Acquisition Inc., a Delaware corporation. The following table reflects the unaudited pro forma operating results of the Company for the three months ended March 31, 2012, which gives effect to the acquisition of Synventive as if it had occurred on January 1, 2011. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective January 1, 2011, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the historical financial results of the Company and Synventive adjusted for certain items including depreciation and amortization expense associated with the

8


assets acquired and the Company’s expense related to financing arrangements, with the related tax effects. The pro forma information does not include the effects of any synergies or cost reduction initiatives related to the acquisition.
 
(Unaudited Pro Forma)
Three months ended March 31, 2012
Net sales
$
262,120

Income from continuing operations
18,897

Net income
23,514

 
 
Per common share:
 
Basic:
 
     Income from continuing operations
$
0.35

     Net income
$
0.43

Diluted:
 
     Income from continuing operations
$
0.34

     Net income
$
0.42


4. Net Income Per Common Share

For the purpose of computing diluted income from continuing operations and net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans and convertible senior subordinated notes. For the purpose of computing diluted income from continuing operations and net income per common share, the weighted-average number of common shares was increased by 785,095 and 649,943 for the three-month periods ended March 31, 2013 and 2012 , respectively, to account for the potential dilutive effect of stock-based incentive plans. There were no adjustments to income from continuing operations or net income for the purposes of computing income available to common stockholders for those periods.

The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three month period s ended March 31, 2013 and 2012 , the Company excluded 366,349 and 307,113 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive.

The Company granted 130,600 stock options, 161,295 restricted stock unit awards and 135,055 performance share awards in February 2013 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 average common shares outstanding as they contain nonforfeitable rights to dividend payments. The performance share awards are part of a long-term Relative Measure program, which is designed to assess the Company's performance relative to the performance of companies included in the Russell 2000 Index over the three -year term of the program ending December 31, 2015. The performance goals are independent of each other and based on three metrics: the Company's total shareholder return ("TSR"), basic earnings per share growth and operating income before depreciation and amortization growth (weighted equally). The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR portion of the performance share awards was determined using a Monte Carlo valuation method as the award contains a market condition.

In the first quarter of 2013, the Board of Directors of the Company approved a Transition and Resignation Agreement (the "Agreement") for its former Chief Executive Officer (“Former CEO”) in connection with his resignation of the CEO role and his assumption of a Vice Chairman role. The Agreement provides that, in exchange for the Former CEO's delivery of an effective release of claims, his adherence to certain restrictive covenants, and the successful provision of transition services, including with regard to certain equity grants, the successful sale of the Barnes Distribution North America business, the Former CEO's outstanding equity awards are modified to increase the post-termination exercise period for stock options until the earlier of ten years from the date of grant or five years from the retirement date and made non-forfeitable all outstanding stock options, restricted stock units awards and performance share awards that remained unvested on the day of his agreed to

9


resignation date from the company.  The original vesting dates of the equity awards serve as the delivery dates and the performance metrics continue to apply to the performance share awards. The Company recorded $10,492 of stock compensation expense in the first quarter of 2013 as a result of the modifications.

The 3.375% convertible senior subordinated notes due in March 2027 (the “Notes”) are convertible, under certain circumstances, into a combination of cash and common stock of the Company. The conversion price as of March 31, 2013 was approximately $28.31 per share of common stock. The dilutive effect of the Notes is determined based on the average closing price of the Company's stock for the last 30 trading days of the quarter as compared to the conversion price of the Notes. Under the net share settlement method, there were no potential shares issuable under the Notes as the Notes would have been anti-dilutive for the three-month periods ended March 31, 2013 and 2012 .

5. Inventories

The components of inventories consisted of:
 
March 31, 2013
 
December 31, 2012
Finished goods
$
73,974

 
$
126,139

Work-in-process
61,495

 
56,186

Raw material and supplies
43,673

 
43,895

 
$
179,142

 
$
226,220

As of March 31, 2013, BDNA held inventories of $47,408 which is included in assets held for sale in the accompanying consolidated balance sheet as of March 31, 2013. See Note 2.

6. 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, 2013 :
 
Aerospace
 
Industrial
 
Other
 
Total Company
January 1, 2013
$
30,786

 
$
414,244

 
$
134,875

 
$
579,905

Transfer to assets held for sale
—

 
—

 
(134,715
)
 
(134,715
)
Foreign currency translation
—

 
(5,790
)
 
(160
)
 
(5,950
)
March 31, 2013
$
30,786

 
$
408,454

 
$
—

 
$
439,240


In the first quarter of 2013, the Company realigned its reportable business segments by transferring the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. The goodwill related to BDNA ("BDNA goodwill"), also a business within the former Distribution segment, was $134,875 at December 31, 2012. At March 31, 2013, the BDNA goodwill was included within assets held for sale on the consolidated balance sheet. See Note 2. The BDNA and Raymond businesses represent individual reporting units as of December 31, 2012 and March 31, 2013.














10




Other Intangible Assets:
Other intangible assets consisted of:
 
 
 
March 31, 2013
 
December 31, 2012
 
Range of
Life -Years
 
Gross Amount
 
Accumulated Amortization
 
Gross Amount
 
Accumulated Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Revenue sharing programs (RSPs)
Up to 30
 
$
293,700

 
$
(57,313
)
 
$
293,700

 
$
(54,638
)
Customer lists/relationships
10-15
 
91,306

 
(12,088
)
 
102,806

 
(21,727
)
Patents and technology
7-14
 
41,972

 
(9,261
)
 
41,972

 
(7,758
)
Trademarks/trade names
5-30
 
11,950

 
(6,930
)
 
12,750

 
(7,497
)
Other
Up to 15
 
12,692

 
(7,202
)
 
12,692

 
(6,927
)
 
 
 
451,620

 
(92,794
)
 
463,920

 
(98,547
)
Unamortized intangible asset:
 
 
 
 
 
 
 
 
 
Trade name
 
 
10,000

 


 
10,000

 


 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
 
6,837

 
—

 
8,599

 
—

Other intangible assets
 
 
$
468,457

 
$
(92,794
)
 
$
482,519

 
$
(98,547
)
Gross amounts of $11,500 and $800 that were included within customer lists and trademarks, respectively, at December 31, 2012, were related to BDNA, and are therefore classified within assets held for sale as of March 31, 2013. The gross amounts were fully amortized at March 31, 2013.
Estimated amortization of intangible assets for future periods is as follows: 2013 - $24,000 ; 2014 - $24,000 ; 2015 - $24,000 ; 2016 - $23,000 and 2017 - $24,000 .
7. Debt

The Company's debt agreements contain financial covenants that require the maintenance of interest coverage and leverage ratios. The Company is in compliance with its debt covenants as of March 31, 2013 , and closely monitors its future compliance based on current and anticipated future economic conditions.

Long-term debt and notes and overdrafts payable at March 31, 2013 and December 31, 2012 consisted of:
 
 
March 31, 2013
 
December 31, 2012
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
3.375% Convertible Notes
 
$
55,636

 
$
61,240

 
$
55,636

 
$
57,977

Unamortized debt discount – 3.375% Convertible Notes
 
(2,540
)
 
—

 
(3,122
)
 
—

Revolving credit agreement
 
604,100

 
614,965

 
589,200

 
599,172

Borrowings under lines of credit and overdrafts
 
12,095

 
12,095

 
3,380

 
3,380

Foreign bank borrowings
 
810

 
812

 
945

 
947

Other
 
589

 
587

 
574

 
574

 
 
670,690

 
689,699

 
646,613

 
662,050

Less current maturities
 
(66,320
)
 
 
 
(4,494
)
 
 
Long-term debt
 
$
604,370

 
 
 
$
642,119

 
 

The 3.375% Convertible Notes are subject to redemption at their par value at any time, at the option of the Company, on or after March 20, 2014. The note holders may also require the Company to redeem some or all of the notes at their par value on March 15 th of 2014, 2017 and 2022. As such, the balance of these Notes of $53,096 ( $55,636 par value) and the related deferred tax balances are classified as current in the accompanying balance sheet as of March 31, 2013. The 3.375% Convertible Notes are also eligible for conversion upon meeting certain conditions as provided in the indenture agreement. The eligibility for conversion is determined quarterly. During the first quarter of 2013 , the 3.375% Convertible Notes were not

11


eligible for conversion. During the second quarter of 2013 , the 3.375% Convertible Notes will not be eligible for conversion. The fair value of the Notes was determined using quoted market prices that represent Level 2 observable inputs.

The Company maintains an amended and restated revolving credit agreement (the "Credit Agreement") with Bank of America, N.A. as the administrative agent. The $750,000 Credit Agreement matures in September 2016 . Borrowings under the Credit Agreement bear interest at LIBOR plus a spread ranging from 1.10% to 1.70% . The fair value of the borrowings is based on observable Level 2 inputs using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

In addition, the Company has available approximately $15,000 in uncommitted short-term bank credit lines ("Credit Lines"), of which $11,200 was borrowed at March 31, 2013 at an interest rate of 2.16% and $2,800 was borrowed at December 31, 2012 at an interest rate of 2.16% . The Company had also borrowed $895 and $580 under overdraft facilities at March 31, 2013 and December 31, 2012 , respectively. Repayments under the Credit Lines are due within 7 days after being borrowed. Repayments of the overdrafts are generally due within 2 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 foreign bank borrowings. The fair value of the foreign bank borrowings 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.

Other debt consists primarily of bank acceptances which are used to pay certain vendors. Bank acceptances represent financial instruments accepted by certain Chinese vendors in lieu of cash paid on receivables, generally range from 3 to 6 months in maturity and are guaranteed by banks. The fair value of the bank acceptances are based on observable Level 2 inputs and their carrying amounts approximate fair value due to their short maturities.

8. Derivatives

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

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

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

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

Changes in the fair market value of derivatives that qualify as fair value hedges or cash flow hedges are recorded directly to earnings or accumulated other non-owner changes to equity, depending on the designation. Amounts recorded to accumulated other non-owner changes to equity are reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Any ineffective portion, or amounts related to contracts that are not designated as hedges, are recorded directly to earnings.

The following table sets forth the fair value amounts of derivative instruments held by the Company.

12


 
March 31, 2013
 
December 31, 2012
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
(1,551
)
 
$
—

 
$
(1,818
)
Foreign exchange contracts
1,293

 
—

 
945

 
—

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
35

 
(1,609
)
 
2,370

 
(152
)
Total derivatives
$
1,328

 
$
(3,160
)
 
$
3,315

 
$
(1,970
)

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

The following table sets forth the gain, net of tax, recorded in accumulated other non-owner changes to equity for the three-month periods ended March 31, 2013 and 2012 for derivatives held by the Company and designated as hedging instruments.
 
Three months ended March 31,
 
2013
 
2012
Cash flow hedges:
 
 
 
Interest rate contracts
$
156

 
$
—

Foreign exchange contracts
271

 
236

 
$
427

 
$
236


Amounts included within accumulated other non-owner changes to equity that were reclassified to expense during the first three months of 2013 related to the interest rate swaps resulted in a fixed rate of interest of 1.03% plus the borrowing spread for the first $100,000 of one-month LIBOR borrowings. The amounts reclassified for the foreign exchange contracts were not material in any period presented. Additionally, there were no amounts recognized in income for hedge ineffectiveness during the three months ended March 31, 2013 and 2012 .

The following table sets forth the (losses) gains recorded in other expense (income), net in the consolidated statements of income for the three month periods ended March 31, 2013 and 2012 for non-designated derivatives held by the Company. Such amounts were substantially offset by gains (losses) recorded on the underlying hedged asset or liability.
 
Three months ended March 31,
 
2013
 
2012
Foreign exchange contracts
$
(3,906
)
 
$
1,057


9. Fair Value Measurements

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

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

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

Level 3
Unobservable inputs for the asset or liability

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

13


 
 
 
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, 2013
 
 
 
 
 
 
 
Asset derivatives
$
1,328

 
$
—

 
$
1,328

 
$
—

Liability derivatives
(3,160
)
 
—

 
(3,160
)
 
—

Bank acceptances
3,151

 
—

 
3,151

 
—

Rabbi trust assets
1,896

 
1,896

 
—

 
—

 
$
3,215

 
$
1,896

 
$
1,319

 
$
—

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Asset derivatives
$
3,315

 
$
—

 
$
3,315

 
$
—

Liability derivatives
(1,970
)
 
—

 
(1,970
)
 
—

Bank acceptances
3,441

 
—

 
3,441

 
—

Rabbi trust assets
1,831

 
1,831

 
—

 
—

 
$
6,617

 
$
1,831

 
$
4,786

 
$
—


The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based and U.S. treasury interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain Chinese customers in lieu of cash paid on receivables, generally range from 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.

10. Pension and Other Postretirement Benefits

Pension and other postretirement benefits expenses consisted of the following:
 
Three months ended March 31,
Pensions
2013
 
2012
Service cost
$
1,984

 
$
1,613

Interest cost
4,987

 
5,322

Expected return on plan assets
(8,276
)
 
(8,033
)
Amortization of prior service cost
203

 
211

Recognized losses
4,075

 
2,759

Curtailment loss
199

 
—

Net periodic benefit cost
$
3,172

 
$
1,872

 
 
 
 
 
Three months ended March 31,
Other Postretirement Benefits
2013
 
2012
Service cost
$
77

 
$
77

Interest cost
543

 
680

Amortization of prior service credit
(395
)
 
(396
)
Recognized losses
290

 
286

Net periodic benefit cost
$
515

 
$
647



14


The curtailment loss during the first quarter of 2013 relates to the defined benefit pension plans that were impacted by the planned sale of BDNA. The Company also expects that its defined benefit pension and other post retirement benefit plans may be impacted by curtailments and settlements related to the sale of BDNA during the second quarter of 2013. See Note 2.

The Company contributes to a multi-employer defined benefit pension plan under the terms of a collective bargaining agreement. This multi-employer plan provides pension benefits to certain union-represented employees at BDNA. The Company has determined that a withdrawal from this multi-employer plan, following its entry into a definitive agreement to sell BDNA, is probable. The Company has estimated that its assessment of a withdrawal liability, on a pre-tax discounted basis, is $2,788 . The expense has been recorded within discontinued operations.

11. Income Taxes

The Company's effective tax rate from continuing operations for the first quarter of 2013 was 21.4% compared with 17.8% in the first quarter of 2012 and 13.5% for the full year 2012. The increase in the first quarter 2013 effective tax rate from the full year 2012 rate of 13.5% is due to the absence of the 2012 reversal of certain foreign valuation allowances and tax rate decreases in certain foreign jurisdictions, the increase in the Company's Swedish effective tax rate and the projected change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2013.

The Company was previously awarded a number of multi-year Pioneer tax status certificates (the "certificates") by the Ministry of Trade and Industry in Singapore. No certificates are scheduled to expire in 2013.

12. Changes in Accumulated Other Comprehensive Income by Component

The following table sets forth the changes in accumulated other comprehensive income by component for the period ended March 31, 2013 :
 
Gains and Losses on Cash Flow Hedges
 
Pension and Other Postretirement Benefit Items
 
Foreign Currency Items
 
Total
January 1, 2013
$
(432
)
 
$
(146,441
)
 
$
80,121

 
$
(66,752
)
Other comprehensive income before reclassifications to consolidated statements of income
525

 
(388
)
 
(14,505
)
 
(14,368
)
Amounts reclassified from accumulated other comprehensive income to the consolidated statements of income
(98
)
 
2,798

 
—

 
2,700

Net current-period other comprehensive income
427

 
2,410

 
(14,505
)
 
(11,668
)
March 31, 2013
$
(5
)
 
$
(144,031
)
 
$
65,616

 
$
(78,420
)






















15



The following table sets forth the reclassifications out of accumulated other comprehensive income by component for the period ended March 31, 2013 :
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statements of Income
Gains and losses on cash flow hedges
 
 
 

     Interest rate contracts
 
$
(199
)
 
Interest expense
     Foreign exchange contracts
 
284

 
Net sales
 
 
85

 
Total before tax
 
 
13

 
Tax benefit
 
 
$
98

 
Net of tax
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
     Amortization of prior-service credits
 
$
192

 
(A)
Amortization of actuarial losses
 
(4,365
)
 
(A)
Curtailment
 
(199
)
 
(A)
 
 
(4,372
)
 
Total before tax
 
 
1,574

 
Tax benefit
 
 
(2,798
)
 
Net of tax
Total reclassifications in the period
 
$
(2,700
)
 
 

(A) These accumulated other comprehensive income components are included within the computation of net periodic pension cost. See Note 10.

13. Information on Business Segments

The Company is organized based upon the nature of its products and services. 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 reportable segments.

In the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by one of the Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment.

The Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturers (“OEM”) of commercial jet engines, airframes and industrial gas turbines throughout the world, and for the military. Aerospace also provides jet engine component overhaul and repair services for many of the world's major jet engine manufacturers, commercial airlines and the military. In addition, Aerospace manufactures and provides aerospace aftermarket spare parts. The Industrial segment is a global supplier of high quality manufactured precision components for critical applications, and a leading designer and manufacturer of highly engineered and customized hot runner systems and components, serving diverse industrial end-markets such as transportation, energy, electronics, medical devices and consumer products. The Industrial segment also participates in the design, assembly and distribution of engineered supplies for the global industrial base.


16


The following tables, adjusted on a retrospective basis to reflect the segment alignment, set forth information about the Company's operations by its two reportable segments:
 
Three months ended March 31,
 
2013
 
2012
Net sales
 
 
 
   Aerospace
$
98,045

 
$
97,250

   Industrial
165,502

 
125,545

   Intersegment sales
(2
)
 
—

Total net sales
$
263,545

 
$
222,795

 
 
 
 
Operating profit
 
 
 
   Aerospace
$
10,346

 
$
12,654

   Industrial
14,609

 
11,964

Total operating profit
24,955

 
24,618

   Interest expense
4,357

 
2,368

   Other expense (income), net
966

 
859

Income from continuing operations before income taxes
$
19,632

 
$
21,391


 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
   Aerospace
$
531,920

 
$
533,465

   Industrial
907,505

 
907,124

   Other (A)
436,183

 
428,007

Total assets
$
1,875,608

 
$
1,868,596


(A) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets, as well as the assets of BDNA which are classified as held for sale in the accompanying consolidated balance sheet as of March 31, 2013. See Note 2.

14. Commitments and Contingencies

Product Warranties

The Company provides product warranties in connection with the sale of certain products. From time to time, the Company is subject to customer claims with respect to product warranties. Product warranty liabilities were not material as of March 31, 2013 and December 31, 2012 .

The Company was named in a lawsuit arising out of an alleged breach of contract and implied warranty by a customer of Toolcom Suppliers Limited (“Toolcom”), a business previously included within the former Logistics and Manufacturing Services segment, related to the sale of certain products prior to the Company’s 2005 acquisition of Toolcom. In 2006, the plaintiff filed the lawsuit in civil court in Scotland and asserted that certain products sold were not fit for a particular use. The Company settled the lawsuit during the first quarter of 2013 with an outcome that did not have a material effect on the consolidated financial statements. The final settlement expense is included within the loss from operations of discontinued businesses in the consolidated statements of income for the quarter ended March 31, 2013.

Income Taxes

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“April 2013 Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $ 16,500 , plus a 20% penalty and interest for the tax years 1998, 2000 and 2001. The proposed IRS cash tax assessment (after utilization of a portion of the Company's existing net operating losses) is estimated to be approximately $13,000 including penalties and interest.


17


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

The Company expects the Tax Court to enter an order reflecting the tax assessment, interest and penalties due (“Court Approved Assessment”) in the second quarter 2013. Following entry of that order, both parties have 90 days to decide whether or not to appeal the April 2013 Tax Court Decision. At the end of the 90 day period, or earlier if an appeal is filed by the Company, the Court Approved Assessment becomes due. 

The Company continues to believe that its tax position is correct and the Company is evaluating its options including an appeal of the decision. The April Tax Court Decision is not expected to have a material effect on the Company's consolidated financial position, but could be material to both the consolidated results of operations and cash flows in any one period. The Company now expects the cash flows to be negatively impacted by approximately $13,000 in the third quarter of 2013 in connection with the Court Approved Assessment. In addition, in the second quarter of 2013, following the Company's evaluation, the Company could record an income tax charge of up to approximately $20,000 and a reduction in its deferred tax assets to reflect the utilization of a portion of the Company's net operating loss carryforwards. 


15. Accounting Changes
In February 2013, the Financial Accounting Standards Board amended its guidance related to the presentation of other comprehensive income. The amended guidance requires that companies present information related to reclassification adjustments from accumulated other comprehensive income in their consolidated financial statements within a single note or on the face of the financial statements. The Company has adopted the provisions of the amended accounting standard within Note 12.

16. Subsequent Event

On April 22, 2013, the Company completed the previously announced sale of BDNA to MSC pursuant to the terms of the Asset Purchase Agreement dated February 22, 2013 (the "APA") between the Company and MSC. Pursuant to the terms of the APA, the total cash consideration paid for BDNA was approximately $550,000 , subject to certain working capital and post closing adjustments set forth in the APA. The after-tax proceeds and net gain on sale from the transaction are expected to be approximately $400,000 and $200,000 , respectively. Taxes will be payable during 2013. The Credit Facility does not require that the Company use the proceeds from the sale of BDNA to reduce its outstanding borrowings. The Company will utilize a portion of the proceeds to reduce debt, repurchase common shares, invest in profitable growth initiatives including potential acquisitions, and for general corporate purposes. In April 2013, the Company initially utilized approximately $480,000 to reduce borrowings under the Credit Facility.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in a case against the Company. See Note 14.
__________________________________________________________________________________________

With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month periods ended March 31, 2013 and 2012 , PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated April 29, 2013 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended, for their report on the unaudited consolidated financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Securities Act of 1933, as amended.


18


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

We have reviewed the accompanying consolidated balance sheet of Barnes Group Inc. and its subsidiaries as of March 31, 2013 and the related consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2013 and March 31, 2012 and the consolidated statements of cash flows for the three-month periods ended March 31, 2013 and March 31, 2012 . This interim financial information is the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012 , and the related consolidated statements of income and comprehensive income, of changes in stockholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated February 25, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2012 , is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
Hartford, Connecticut
 
April 29, 2013
 



19


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Please refer to the Overview in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website: www.bginc.com .

In the first quarter of 2013, the Company entered into a definitive agreement to sell its Barnes Distribution North America Business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC") for $550.0 million, subject to certain working capital and post closing adjustments. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations. The Company completed the sale of BDNA on April 22, 2013.

Additionally, in the first quarter of 2013, the Company changed its organizational structure to align its strategic business units into two reportable business segments: Aerospace and Industrial. The Company has transferred the Associated Spring Raymond business ("Raymond"), its remaining business within the former Distribution segment, to the Industrial segment. Raymond sells, among other products, springs that are manufactured by one of the Industrial businesses. All previously reported financial information has been adjusted on a retrospective basis to reflect the segment realignment.

Aerospace

Aerospace produces precision-machined and fabricated components and assemblies for original equipment manufacturers ("OEM") of commercial jet engines, airframes, and industrial gas turbines throughout the world, and for the military. Aerospace also provides jet engine component overhaul and repair ("MRO") services for many of the world's major jet engine manufacturers, commercial airlines and the military. MRO activities include the manufacture and delivery of aerospace aftermarket spare parts, participation in 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, and component repairs.

Aerospace's OEM business competes with both the leading jet engine OEMs and a large number of machining and fabrication companies. Competition is based mainly on quality, engineering and technical capability, product breadth, timeliness, service and price. Aerospace's machining and fabrication operations, with facilities in Arizona, Connecticut, Michigan, Ohio, Utah and Singapore, produce critical engine and airframe components through technically advanced processes.

Aerospace's MRO business competes with aerospace OEMs, service centers of major commercial airlines, and other independent service companies for the repair and overhaul of turbine engine components. The manufacturing 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 air seals, shrouds and honeycomb air seals.

Industrial

Industrial is a global manufacturer of highly-engineered, high-quality, precision parts, products and systems for critical applications serving a diverse customer base in end-markets such as transportation, energy, electronics, medical devices, and consumer products. Focused on custom solutions, Industrial participates in the design phase of components and assemblies whereby the customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products.

Industrial designs and manufactures customized hot runner systems and components - the enabling technology for many complex injection molding applications. It is a leading manufacturer and supplier of precision mechanical products, including precision mechanical springs, compressor reed valves and nitrogen gas products. Industrial also manufactures high-precision punched and fine-blanked components used in transportation and industrial applications, nitrogen gas springs and manifold systems used to precisely control stamping presses, and retention rings that position parts on a shaft or other axis. Industrial is equipped to produce virtually every type of precision spring, from fine hairsprings for electronics and instruments to large heavy-duty springs for machinery.

Industrial competes with a broad base of large and small companies engaged in the manufacture and sale of custom metal components and assemblies and competes on the basis of quality, service, reliability of supply, engineering and technical

20


capability, geographic reach, product breadth, innovation, design, and price. Products are sold primarily through its direct sales force and a network of global distribution channels.

Industrial has manufacturing, sales, assembly, and distribution operations in the United States, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Japan, Mexico, Netherlands, Portugal, Singapore, Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey and the United Kingdom.

First Quarter 2013 Highlights

In February 2013, the Company entered into a definitive agreement to sell BDNA to MSC for $550.0 million, subject to certain working capital and post closing adjustments. All previously reported financial information has been adjusted on a retrospective basis to reflect BDNA results as discontinued operations. The Company completed the sale of BDNA on April 22, 2013.

In the first quarter of 2013, sales increased by $40.8 million, or 18.3% from the first quarter of 2012, to $263.5 million. This increase was driven primarily by a $40.3 million sales contribution from the Synventive business. Organic sales increased by $1.9 million, or 0.9% , with growth at both the Aerospace and Industrial segments. Foreign currency translation decreased sales by approximately $1.4 million as the U.S. dollar strengthened against foreign currencies.

Operating income in the first quarter of 2013 increased 1.4% to $25.0 million from the first quarter of 2012 and operating income margin decreased from 11.0% to 9.5% . Operating income benefited primarily from the profit contribution of the Synventive business, productivity improvements and favorable pricing, partially offset by non-recurring stock compensation expenses of $10.5 million related to the modification of outstanding equity awards granted to the former Chief Executive Officer ("CEO transition costs").

RESULTS OF OPERATIONS

Net Sales
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Aerospace
$
98.0

 
$
97.3

 
$
0.8

 
0.8
%
Industrial
165.5

 
125.5

 
40.0

 
31.8
%
Intersegment sales
—

 
—

 
—

 
—
%
Total
$
263.5

 
$
222.8

 
$
40.8

 
18.3
%

The Company reported net sales of $263.5 million in the first quarter of 2013 , an increase of $40.8 million or 18.3% , from the first quarter of 2012 . The acquisition of Synventive in 2012 provided $40.3 million of net sales during the first quarter of 2013. Organic sales increased by $1.9 million, which included an increase of $0.8 million at Aerospace and an increase of $1.1 million at Industrial. The strengthening of the U.S. dollar against foreign currencies decreased net sales by approximately $1.4 million.

Expenses and Operating Income
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Cost of sales
$
177.7

 
$
160.4

 
$
17.3

 
10.8
%
    % sales
67.4
%
 
72.0
%
 

 

Gross profit (1)
$
85.8

 
$
62.4

 
$
23.5

 
37.6
%
    % sales
32.6
%
 
28.0
%
 

 

Selling and administrative expenses
$
60.9

 
$
37.8

 
$
23.1

 
61.2
%
    % sales
23.1
%
 
16.9
%
 
 
 
 
Operating income
$
25.0

 
$
24.6

 
$
0.3

 
1.4
%
    % sales
9.5
%
 
11.0
%
 
 
 
 
(1)  - Sales less cost of sales.  
 
 
 
 
 
 
 

21



Cost of sales in the first quarter of 2013 increased 10.8% from the 2012 period, while gross profit margin increased from 28.0% in the 2012 period to 32.6% in the 2013 period. Gross margins declined at Aerospace and improved at Industrial. The acquisition of Synventive resulted in a higher percentage of sales, as well as higher gross profit as a percentage of sales, being driven by Industrial. Selling and administrative expenses in the first quarter of 2013 increased 61.2% from the 2012 period due primarily to the incremental operations of Synventive and CEO transition costs of $10.5 million. As a percentage of sales, selling and administrative costs increased from 16.9% in the first quarter of 2012 to 23.1% in the 2013 period. Operating income in the first quarter of 2013 increased 1.4% to $25.0 million from the first quarter of 2012 and operating income margin decreased from 11.0% to 9.5% .

Interest expense
Interest expense increased by $2.0 million in the first quarter of 2013 compared to the prior year amount, primarily a result of higher borrowings under the variable rate credit facility (the “Credit Facility”) used to fund the acquisition of Synventive.

Other expense (income), net
Other expense (income), net in the first quarter of 2013 was $1.0 million compared to $0.9 million in the first quarter of 2012 .

Income Taxes
The Company's effective tax rate from continuing operations for the first quarter of 2013 was 21.4% compared with 17.8% in the first quarter of 2012 and 13.5% for the full year 2012. The increase in the first quarter 2013 effective tax rate from the full year 2012 rate of 13.5% is due to the absence of the 2012 reversal of certain foreign valuation allowances and tax rate decreases in certain foreign jurisdictions, the increase in the Company's Swedish effective tax rate and the projected change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2013.

The Company was previously awarded a number of multi-year Pioneer tax status certificates (the "certificates") by the Ministry of Trade and Industry in Singapore. No certificates are scheduled to expire in 2013.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“April 2013 Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.5 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001. The proposed IRS cash tax assessment (after utilization of a portion of the Company's existing net operating losses) is estimated to be approximately $13.0 million including penalties and interest.

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

The Company expects the Tax Court to enter an order reflecting the tax assessment, interest and penalties due (“Court Approved Assessment”) in the second quarter 2013. Following entry of that order, both parties have 90 days to decide whether or not to appeal the April 2013 Tax Court Decision. At the end of the 90 day period, or earlier if an appeal is filed by the Company, the Court Approved Assessment becomes due. 

The Company continues to believe that its tax position is correct and the Company is evaluating its options including an appeal of the decision. The April Tax Court Decision is not expected to have a material effect on the Company's consolidated financial position, but could be material to both the consolidated results of operations and cash flows in any one period. The Company now expects the cash flows to be negatively impacted by approximately $13.0 million in the third quarter of 2013 in connection with the Court Approved Assessment. In addition, in the second quarter of 2013, following the Company's evaluation, the Company could record an income tax charge of up to approximately $20.0 million and a reduction in its deferred tax assets to reflect the utilization of a portion of the Company's net operating loss carryforwards. 

Discontinued Operations
On February 22, 2013, the Company and MSC entered into an Asset Purchase Agreement ("APA") pursuant to which MSC will acquire BDNA. The APA provided that MSC would pay the Company $550.0 million as consideration for the acquisition of BDNA, subject to certain working capital and post closing adjustments. In the first quarter of 2013, upon approval of the sale of BDNA by the Company's Board of Directors, the Company classified the business as "held for sale". The results of BDNA have been segregated and presented as discontinued operations. The Company completed the sale of BDNA on April 22, 2013. In the first

22


quarter of 2013, the Company recorded a $2.0 million loss from discontinued operations. The loss relates to the income generated by the operations of BDNA, more than offset by transaction expenses associated with the BDNA sale, charges related to the pension plans held by BDNA and a final adjustment related to a retained liability at BDE. See Note 2 and Note 16 of the Consolidated Financial Statements.

Income and Income per Share
 
Three months ended March 31,
(in millions, except per share)
2013
 
2012
 
Change
Income from continuing operations
$
15.4

 
$
17.6

 
$
(2.2
)
 
(12.3
)%
(Loss) income from discontinued operations, net of income taxes
(2.0
)
 
4.6

 
(6.6
)
 
NM

Net income
$
13.5

 
$
22.2

 
$
(8.7
)
 
(39.3
)%
Per common share:
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.29

 
$
0.33

 
$
(0.04
)
 
(12.1
)%
    (Loss) income from discontinued operations, net of income taxes
(0.04
)
 
0.08

 
(0.12
)
 
NM

    Net income
$
0.25

 
$
0.41

 
$
(0.16
)
 
(39.0
)%
  Diluted:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.28

 
$
0.32

 
$
(0.04
)
 
(12.5
)%
    (Loss) income from discontinued operations, net of income taxes
(0.04
)
 
0.08

 
(0.12
)
 
NM

    Net income
$
0.24

 
$
0.40

 
$
(0.16
)
 
(40.0
)%
Weighted average common shares outstanding:
 
 
 
 
 
 
 
   Basic
54.7

 
54.8

 
(0.1
)
 
(0.1
)%
   Diluted
55.5

 
55.5

 
0.1

 
0.1
 %

NM - Not meaningful

In the first quarter of 2013 , basic and diluted income from continuing operations per common share decreased 12.1% and 12.5%, respectively, from the first quarter of 2012 . The decreases were directly attributable to the decrease in income from continuing operations for the period. Basic and diluted weighted average common shares outstanding remained flat period over period.
 
Financial Performance by Business Segment

Aerospace
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Sales
$
98.0

 
$
97.3

 
$
0.8

 
0.8
 %
Operating profit
10.3

 
12.7

 
(2.3
)
 
(18.2
)%
Operating margin
10.6
%
 
13.0
%
 
 
 
 

The Aerospace segment reported sales of $98.0 million in the first quarter of 2013 , a 0.8% increase from the first quarter of 2012 . The OEM manufacturing business reflected increased sales activity, partially offset by declines in sales within the aftermarket repair and overhaul and spare parts businesses.

Operating profit at Aerospace in the first quarter of 2013 decreased 18.2% from the first quarter of 2012 to $10.3 million. The decrease was driven by CEO transition costs of $3.9 million allocated to the segment. The profit benefit of higher sales in the OEM business was partially offset by the profit detriment of lower sales in the aftermarket repair and overhaul and spare parts businesses. Operating margin declined from 13.0% in the 2012 period to 10.6% in the 2013 period.

Outlook: Sales in the Aerospace OEM business are impacted by the general state of the aerospace market driven by the worldwide economy and are driven by its order backlog through its participation in certain strategic commercial and military engine and airframe programs. Backlog in this business was $536.6 million at March 31, 2013 , of which approximately 57% is

23


expected to be shipped in the next 12 months. The Aerospace OEM business may be impacted by adjustments of customer inventory levels, commodity availability and pricing, changes in the content levels on certain platforms including insourcing, changes in production schedules of specific engine and airframe programs, as well as the pursuit of new programs. Sales levels in the aerospace aftermarket repair and overhaul business are expected to reflect long-term trends towards improving maintenance, repair and overhaul activity, but may be negatively impacted by short-term fluctuations in demand. Incremental management fees within the aftermarket RSP spare parts business are dependent on future sales volumes and are treated as a reduction to sales. Management fees increase once during the life of each individual program, generally in the fourth or later years of each program. Management continues to believe its aerospace aftermarket business is competitively positioned based on strong customer relationships, including long-term RSP agreements and long-term maintenance and repair contracts in the repair and overhaul business, expanded capabilities and current capacity levels.

Management is focused on growing operating profit at Aerospace primarily through organic sales growth, productivity initiatives, new product introductions and continued cost management. Operating profit is expected to continue to be affected by the profit impact of changes in sales volume, mix and pricing, particularly as it relates to the highly profitable aftermarket RSP spare parts business, and investments made in each of its businesses. Management actively manages commodity price increases through pricing actions and other productivity initiatives. Costs associated with increases in new product introductions may also negatively impact operating profit.

Industrial
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Sales
$
165.5

 
$
125.5

 
$
40.0

 
31.8
%
Operating profit
14.6

 
12.0

 
2.6

 
22.1
%
Operating margin
8.8
%
 
9.5
%
 
 
 
 

Sales at Industrial were $165.5 million in the first quarter of 2013 , a $40.0 million increase from the first quarter of 2012 . The acquisition of Synventive provided $40.3 million of sales. Organic sales, which benefited from favorable pricing and mix, increased by $1.1 million during the 2013 period. These increases were partially offset by the negative impact of foreign currency translation which decreased sales by approximately $1.4 million as the U.S. dollar strengthened against foreign currencies.

Operating profit in the first quarter of 2013 at Industrial was $14.6 million, an increase of $2.6 million from the first quarter of 2012. Operating profit benefited primarily from the profit contribution of the Synventive business, productivity improvements and favorable pricing. These benefits were partially offset by CEO transition costs of $6.6 million that were allocated to the segment.

Outlook: In the Industrial manufacturing businesses, management is focused on generating organic sales growth by leveraging the benefits of the diversified products and industrial end-markets in which its businesses have a global presence and introducing new products. The Company also remains focused on sales growth through acquisition. The Synventive acquisition, for example, adds innovative products and services and is expected to expand the Company's global marketplace presence into geographic regions and end-markets where it had limited access. Our ability to generate sales growth in the global markets served by these businesses is subject to economic conditions. Order activity in certain end-markets, including transportation, may provide extended sales growth. Strategic investments are expected to provide incremental benefits in the long term.

Operating profit is largely dependent on the sales volumes and mix within all businesses of the segment. Management continues to focus on improving profitability through leveraging organic sales growth, acquisitions, pricing initiatives, productivity and process improvements. Costs associated with increases in new product introductions and the integration of and within the Synventive business may negatively impact operating profit.

LIQUIDITY AND CAPITAL RESOURCES

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

24


The Company's ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths. Management continues to focus on cash flow and working capital management, and anticipates that operating activities in 2013 will generate adequate cash. The Company closely monitors its cash generation, usage and preservation including the management of working capital to generate cash.

On April 22, 2013, the Company completed the sale of BDNA to MSC. The total cash consideration paid for BDNA was $550.0 million, subject to certain working capital and post closing adjustments. The after-tax proceeds from the transaction are estimated to be approximately $400.0 million. Taxes will be payable during 2013. The Credit Facility does not require that the Company use the proceeds from the sale of BDNA to reduce its outstanding borrowings. The Company will utilize a portion of the proceeds to reduce debt, repurchase common shares, invest in profitable growth initiatives including acquisitions, and for general corporate purposes. In April 2013, the Company initially utilized approximately $480.0 million to reduce borrowings under its Credit Facility (the "April 2013 Credit Facility payment").
 
The Company's 3.375% Convertible Notes are subject to redemption at their par value at any time, at the option of the Company, on or after March 20, 2014.  The note holders may also require the Company to redeem some or all of the 3.375% Convertible Notes on March 15 th of 2014, 2017 and 2022. Accordingly, the 3.375% Convertible Notes, classified as long-term debt as of December 31, 2012, have been classified within the current portion of long-term debt as of March 31, 2013. Payment on the 3.375% Convertible Notes, if required by note holders, is expected to be financed through internal cash, borrowings under its Credit Facility and the sale of debt securities, or a combination thereof. 

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 and currently expects that its bank syndicate, comprised of 17 banks, will continue to support its Credit Facility which matures in September 2016. In July 2012, the bank syndicate made available an additional $250.0 million under the existing Credit Facility, bringing the amended Credit Facility to $750.0 million.  At March 31, 2013 , the Company has $145.9 million unused and available for borrowings under its amended $750.0 million Credit Facility, subject to covenants in the Company's debt agreements. At March 31, 2013 , additional borrowings of $117.0 million of Total Debt and $24.5 million of Senior Debt would have been allowed under the covenants. The unused and available borrowings were increased subsequently by the amount of the April 2013 Credit Facility payment. Additional funds may be used, as needed, 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 closely monitors compliance with its various debt covenants. The Company's most restrictive financial covenant is the Senior Debt Ratio which requires the Company to maintain a ratio of Consolidated Senior Debt, as defined in the Amended and Restated Credit Agreement ("Credit Agreement"), to Consolidated EBITDA, as defined, of not more than 3.25 times at March 31, 2013 . The actual ratio at March 31, 2013 was 3.13 times. The Company's debt agreements also contain other financial covenants that require the maintenance of a certain other debt ratio (Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times) and a certain interest coverage ratio (Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of at least 4.25 times) at March 31, 2013 . The Company is in compliance with its debt covenants as of March 31, 2013 .

In April 2012, the Company entered into five-year interest rate swap agreements transacted with three banks which together convert the interest on the first $100.0 million of borrowings under the Company’s 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.

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, 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.









25


Cash Flow
 
Three Months Ended March 31,
(in millions)
2013
 
2012
 
Change
Operating activities
$
17.7

 
$
6.3

 
$
11.3

Investing activities
(11.4
)
 
(8.9
)
 
(2.5
)
Financing activities
8.3

 
17.1

 
(8.7
)
Exchange rate effect
(1.0
)
 
0.5

 
(1.6
)
Increase in cash
$
13.5

 
$
15.0

 
$
(1.5
)

Operating activities provided $17.7 million in cash in the first three months of 2013 as compared to $6.3 million in the first three months of 2012. In the first three months of 2013, operating cash flows were positively impacted by improved operating performance, which was offset within net income by $10.5 million in non-cash CEO transition costs. Higher cash payments for accrued employee incentive compensation, which was earned in 2011 and paid in the first quarter of 2012, negatively impacted the 2012 period. However, the 2012 period was positively impacted by lower levels of cash used for working capital as a result of the focus in 2012 on reducing working capital levels. The cash generated from operations in the 2013 period, together with borrowings under the Company's credit agreements, was primarily used for capital expenditures, the repurchase of stock and the payment of dividends.

Investing activities in the 2013 period primarily consisted of capital expenditures of $10.1 million compared to $7.3 million in the 2012 period. The Company expects capital spending in 2013 to approximate $45 million.

Cash provided by financing activities in the first three months of 2013 included a net increase in borrowings of $23.5 million compared to $29.2 million in the comparable 2012 period. Proceeds from the issuance of common stock decreased $0.6 million in the 2013 period from the 2012 period primarily as a result of fewer stock option exercises in the 2013 period. During the three months ended March 31, 2013 and March 31, 2012, the Company repurchased 0.5 million and 0.4 million shares, respectively, of the Company's stock. The cost of the repurchases was $12.9 million in the 2013 period and $11.1 million in the 2012 period. Total cash used to pay dividends was $5.4 million in the 2013 period compared to $5.5 million in the 2012 period.

At March 31, 2013 , the Company held $ 99.9 million in cash and cash equivalents, substantially all of which was held by foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries are expected to continue to increase in the near term. These balances are available primarily to fund international investments. The Company has not repatriated any portion of current year foreign earnings to the U.S. during the first three months of 2013; however, repatriations of a portion of current year foreign earnings are planned during the remainder of 2013.

The Company maintains borrowing facilities with banks to supplement internal cash generation. At March 31, 2013 , $604.1 million was borrowed at an interest rate of 1.77% under the Company's amended $750.0 million Credit Facility which matures in September 2016. In addition, as of March 31, 2013 , the Company had $11.2 million in borrowings under short-term bank credit lines. At March 31, 2013 , the Company's total borrowings were comprised of approximately 23% fixed rate debt and approximately 77% variable rate debt. The interest payments on approximately $100.0 million of the variable rate interest debt have been converted into payment of fixed interest plus the borrowing spread under the terms of the respective interest rate swaps that were executed in April 2012.

Debt Covenants

Borrowing capacity is limited by various debt covenants in the Company's debt agreements. As of March 31, 2013 , the most restrictive borrowing capacity covenant in any agreement requires the Company to maintain a maximum ratio of Consolidated Senior Debt, as defined, to Consolidated EBITDA, as defined, of not more than 3.25 times for the four fiscal quarters then ending. The Company's debt agreements also contain other financial covenants that require the maintenance of a certain other debt ratio, Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times and a certain interest coverage ratio, Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of at least 4.25 times, at March 31, 2013 . Following is a reconciliation of Consolidated EBITDA to the Company's net income (in millions):


26


 
Four fiscal quarters ended March 31, 2013
Net income
$
86.5

Add back:
 
   Interest expense
14.2

   Income taxes
12.8

   Depreciation and amortization
60.8

   Loss from discontinued operations, net of income taxes
3.3

   Adjustment for acquired businesses
11.5

   Other adjustments
8.5

Consolidated EBITDA, as defined
$
197.6

 
 
Consolidated Senior Debt, as defined, as of March 31, 2013
$
617.6

Ratio of Consolidated Senior Debt to Consolidated EBITDA
3.13

Maximum
3.25

Consolidated Total Debt, as defined, as of March 31, 2013
$
673.2

Ratio of Consolidated Total Debt to Consolidated EBITDA
3.41

Maximum
4.00

Consolidated Cash Interest Expense, as defined, as of March 31, 2013
$
14.4

Ratio of Consolidated EBITDA to Consolidated Cash Interest Expense
13.70

Minimum
4.25


The loss from discontinued operations, net of income taxes, reflects losses associated with BDE. The loss on discontinued operations related to BDNA remains included in EBITDA, as defined, until the date the disposition is consummated. The adjustment for acquired businesses reflects the pre-acquisition operations of Synventive for the five-month period ended August 27, 2012. Other adjustments represent income taxes included within discontinued operations associated with BDNA, net gains on the sale of assets and due diligence and transaction expenses as permitted under the Credit Agreement. Consolidated Total Debt excludes the debt discount related to the 3.375% Convertible Notes. The Company's financial covenants are measured as of the end of each fiscal quarter. At March 31, 2013 , additional borrowings of $117.0 million of Total Debt and $24.5 million of Senior Debt would have been allowed under the covenants. Senior Debt includes primarily the borrowings under the Credit Facility and the borrowings under lines of credit. The Company's unused credit facilities at March 31, 2013 were $145.9 million.

OTHER MATTERS

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 . The most significant areas involving management judgments and estimates are described in Management's Discussion and Analysis of Financial Conditions and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 . There have been no material changes to such judgments and estimates. Actual results could differ from those estimates.

EBITDA

EBITDA for the first three months of 2013 was $38.8 million compared to $44.5 million in the first three months of 2012. EBITDA is a measurement not in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company defines EBITDA as net income plus interest expense, income taxes and depreciation and amortization which the Company incurs in the normal course of business. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP, and the reader should not consider it as an alternative to net income, net cash provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company's operating performance. The Company's definition of EBITDA may not be comparable with EBITDA as defined by other companies. Accordingly, the measurement has limitations depending on its use. The Company believes EBITDA is commonly

27


used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors.

Following is a reconciliation of EBITDA to the Company's net income (in millions):
 
Three Months Ended March 31,
 
2013
 
2012
Net income
$
13.5

 
$
22.2

Add back:
 
 
 
   Interest expense
4.4

 
2.4

   Income taxes
4.4

 
6.8

   Depreciation and amortization
16.5

 
13.1

EBITDA
$
38.8

 
$
44.5


FORWARD-LOOKING STATEMENTS

Certain of the statements in this quarterly report may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based upon management's good faith expectations and beliefs concerning future developments and their potential effect upon the Company and can be identified by the use of words such as "anticipated," "believe," "expect," "plans," "strategy," "estimate," "project," and other words of similar meaning in connection with a discussion of future operating or financial performance. 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, but are not limited to: difficulty maintaining relationships with employees, customers, distributors, suppliers, business partners or governmental entities; the success of integration strategy implementation; the ability to recruit and retain key personnel and execute effective executive transitions; difficulties leveraging market opportunities; difficulties providing solutions that meet the needs of customers; rapid technological and market change; the ability to protect intellectual property rights; higher risks in international operations and markets; the impact of increased competition; currency fluctuations; litigation; and other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission by the Company, including the Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of the Company's filings with the Securities and Exchange Commission. The risks and uncertainties described in our periodic filings with the Securities and Exchange Commission include, among others, uncertainties arising from the current or worsening conditions in financial markets; future financial performance of the industries or customers that we serve; changes in market demand for our products and services; inability to realize expected sales or profits from existing backlog; integration of acquired businesses; restructuring costs or savings; the impact of the divestiture of the Barnes Distribution North America business to MSC Industrial Direct Co., Inc.; the impact of the acquisition in 2012 of the Synventive Molding Solutions business; the impact of the divestiture in 2011 of our Barnes Distribution Europe businesses; and any other future strategic actions, including acquisitions, joint ventures, divestitures, restructurings, or strategic business realignments, and our ability to achieve the financial and operational targets set in connection with any such actions; introduction or development of new products or transfer of work; changes in raw material or product prices and availability; foreign currency exposure; our dependence upon revenues and earnings from a small number of significant customers; a major loss of customers; the impact of the U.S. Tax Court's unfavorable decision related to an IRS audit for the tax years 2000 through 2002 rendered on April 16, 2013; the outcome of pending and future claims or litigation or governmental, regulatory proceedings, investigations, inquiries, and audits; uninsured claims and litigation; outcome of contingencies; future repurchases of common stock; future levels of indebtedness; and numerous other matters of global, regional or national scale, including those of a political, economic, business, competitive, environmental, regulatory and public health nature. The Company assumes no obligation to update our forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the Company’s exposure to market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4. 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

28


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 the 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.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the Company's first fiscal quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


29



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company was named in a lawsuit arising out of an alleged breach of contract and implied warranty by a customer of Toolcom Suppliers Limited (“Toolcom”), a business previously included within the former Logistics and Manufacturing Services segment, related to the sale of certain products prior to the Company’s 2005 acquisition of Toolcom. In 2006, the plaintiff filed the lawsuit in civil court in Scotland and asserted that certain products sold were not fit for a particular use. The Company settled the lawsuit during the first quarter of 2013 with an outcome that did not have a material effect on the consolidated financial statements. The final settlement expense was included within the loss from operations of discontinued businesses in the consolidated statements of income for the quarter ended March 31, 2013.

In addition, we are subject to litigation from time to time in the ordinary course of business and various other suits, proceedings and claims are pending against us and our subsidiaries. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

Period








(a)
Total Number of Shares (or Units) Purchased
 
(b)
Average Price Paid Per Share (or Unit)








(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs








(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
 
 
 
 
 
January 1-31, 2013
 
1,701

 
$
23.39

 
—

 
3,800,000

 
February 1-28, 2013
 
26,686

 
$
24.36

 
—

 
5,000,000

(1)  
March 1-31, 2013
 
469,136

 
$
27.47

 
468,000

 
4,532,000

 
Total
 
497,523

(2)  
$
27.29

 
468,000

 
 
 

(1)
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, 2012, 3.8 million shares of common stock had not been purchased under the 2011 Program. On February 21, 2013, the Board of Directors of the Company increased the number of shares authorized for repurchase under the 2011 Program by 1.2 million shares of common stock. The 2011 Program permits open market purchases and privately negotiated transactions.
(2)
Other than 468,000 shares purchased in the first quarter of 2013, which were purchased as part of the Company's 2011 Program, all acquisitions of equity securities during the first quarter of 2013 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.


30


Item 6. Exhibits
(a) Exhibits
 
Exhibit 2.1
Asset Purchase Agreement, dated February 22, 2013, between the Company and MSC Industrial Direct Co., Inc.
Exhibit 10.1
Amendment No. 1 and Consent under the Fifth Amended and Restated Revolving Credit Agreement, dated as of February 21, 2013.
Exhibit 10.2
Transition and Resignation Agreement between the Company and Gregory F. Milzcik, dated February 22, 2013.
Exhibit 10.3
Offer Letter between the Company and Patrick Dempsey, dated February 22, 2013.
Exhibit 10.4
Employee Non-Disclosure, Non-Competition, Non-Solicitation and Non-Disparagement Agreement between the Company and Patrick J. Dempsey, dated February 27, 2013.
Exhibit 15
Letter regarding unaudited interim financial information.
Exhibit 31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS
XBRL Instance Document.
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.


31


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
Barnes Group Inc.
 
 
(Registrant)
 
 
 
Date:
April 29, 2013
/s/    CHRISTOPHER J. STEPHENS, JR.
 
 
Christopher J. Stephens, Jr.
Senior Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)
 
 
 
Date:
April 29, 2013
/s/    MARIAN ACKER
 
 
Marian Acker
Vice President, Controller
(Principal Accounting Officer)





32


EXHIBIT INDEX
Barnes Group Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2013
Exhibit No.
 
Description
 
Reference
2.1
 
Asset Purchase Agreement, dated February 22, 2013, between the Company and MSC Industrial Direct Co., Inc.

 
Incorporated by reference to Exhibit 2.1 to Form 8-K filed by the Company on February 27, 2013.
10.1
 
Amendment No. 1 and Consent under the Fifth Amended and Restated Revolving Credit Agreement, dated as of February 21, 2013.
 
Filed with this report.
10.2
 
Transition and Resignation Agreement between the Company and Gregory F. Milzcik, dated February 22, 2013.
 
Filed with this report.
10.3
 
Offer Letter between the Company and Patrick Dempsey, dated February 22, 2013.
 
Filed with this report.
10.4
 
Employee Non-Disclosure, Non-Competition, Non-Solicitation and Non-Disparagement Agreement between the Company and Patrick J. Dempsey, dated February 27, 2013.
 
Filed with this report.
15
 
Letter regarding unaudited interim financial information.
 
Filed with this report.
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed with this report.
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed with this report.
32
 
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.
Exhibit 101.INS
 
XBRL Instance Document.
 
Filed with this report.
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
Filed with this report.
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
Filed with this report.
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
Filed with this report.
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
Filed with this report.
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
Filed with this report.


























33


EXHIBIT 10.1

EXECUTION VERSION

AMENDMENT NO. 1 AND CONSENT

under that certain

FIFTH AMENDED AND RESTATED $750,000,000 SENIOR UNSECURED REVOLVING CREDIT AGREEMENT

This AMENDMENT NO. 1 AND CONSENT (this “Agreement”), dated as of February 21, 2013, is by and among Barnes Group Inc. (“ BGI ”), a Delaware corporation having its principal place of business at 123 Main Street, P.O. Box 489, Bristol, Connecticut 06011, Barnes Group Switzerland GmbH , a limited liability company organized under the laws of Switzerland and an indirect, wholly-owned Subsidiary of BGI, registered at Alte Haslenstrasse 29, 9053 Teufen, Switzerland, acting through its Nevis Branch having its registered office at Four Seasons Estates, Villa 1426, Palm Grove Villas, Nevis & Saint Kitts, West Indies (“ Barnes Switzerland ”), and Barnes Group Luxembourg (No. 1) S.à r.l. , a private limited liability company organized under the laws of Luxembourg and a wholly-owned Subsidiary of BGI, registered at 102, rue des Maraîchers, L-2124 Luxembourg, Grand-Duchy of Luxembourg (“ Barnes Luxembourg ” and, together with BGI and Barnes Switzerland, the “ Borrowers ”, and each individually, a “ Borrower ”), and Bank of America, N.A. (“ Bank of America ”), a national banking association, and the other lending institutions signatory hereto (the “ Lenders ”) and Bank of America, as administrative agent for itself and such other lending institutions (the “ Administrative Agent ”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and RBS Citizens, N.A., as Co-Lead Arrangers, J.P. Morgan Securities LLC and RBS Citizens, N.A., as Co-Syndication Agents, and Wells Fargo Bank, National Association, as Documentation Agent. Capitalized terms used herein without definition shall have the respective meanings provided therefor in the Credit Agreement referred to below.

WHEREAS , the Borrowers, the Lenders and the Administrative Agent are parties to that certain Fifth Amended and Restated $750,000,000 Senior Unsecured Revolving Credit Agreement, dated as of September 27, 2011 (as amended, restated, amended and restated, supplemented and otherwise in effect from time to time, the “Credit Agreement”), pursuant to which the Lenders, upon certain terms and conditions, have agreed to make loans and otherwise extend credit to the Borrowers;
    
WHEREAS , the Borrowers have advised the Lenders and the Administrative Agent of a proposed disposition of certain assets as more specifically described to the Lenders and the Administrative Agent on February 14, 2013 (the “ Disposition ”);

WHEREAS , absent a consent from the Lenders and the Administrative Agent, certain aspects of the Disposition would violate Section 9.5.2 of the Credit Agreement; and

WHEREAS , the Borrowers have asked that the Lenders and the Administrative Agent (i) consent to the Disposition and (ii) make certain other amendments and modifications to the Credit Agreement, and the Lenders and the Administrative Agent consent to such Disposition and are willing to make such other amendments and modifications requested by the Borrowers, subject to the terms and conditions of this Agreement;

NOW THEREFORE , in consideration of the mutual agreements contained in the Credit Agreement and herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:




§1.      Consent . As of the date hereof, upon satisfaction of the conditions precedent set forth in Section 5 hereof, and in reliance upon the representations and warranties of the Borrowers and Guarantors set forth in the Credit Agreement and in this Agreement, and notwithstanding anything to the contrary contained in the Credit Agreement or any other Loan Document, the Administrative Agent and the Lenders signatory hereto hereby consent to the Disposition. For the avoidance of doubt, the Disposition shall not be included when calculating the exclusion contained in the proviso of Section 9.5.2. The consent contained in this Section 1 is a limited consent and (i) shall only be relied upon and used for the specific purpose set forth herein, (ii) shall not constitute nor be deemed to constitute a waiver of any other term or condition of the Credit Agreement and the other Loan Documents, and (iii) shall not constitute a custom or course of dealing among the parties hereto.

§2.      Amendments to the Credit Agreement . Subject to the satisfaction of the conditions precedent set forth in Section 5 below:     

(a) Section 1.1 of the Credit Agreement is amended and modified by deleting the definition of “Consolidated EBITDA” contained therein and replacing it in its entirety with the following:

“ Consolidated EBITDA . For any period, Consolidated Net Income of the Borrowers, their Subsidiaries and, without duplication, the Acquired Businesses (excluding, without duplication, (a) extraordinary gains and losses in accordance with GAAP, (b) gains and losses in connection with asset dispositions whether or not constituting extraordinary gains and losses, and (c) gains or losses on discontinued operations; provided that for purposes of calculating the financial covenants under §10 of this Agreement, the Consolidated Net Income generated by any discontinued operations of BGI and its Subsidiaries related to a proposed disposition permitted by §9.5.2 or otherwise consented to by the Lenders and Administrative Agent in accordance with the terms of the Credit Agreement shall continue to be included in the calculation of Consolidated EBITDA until the date that the proposed disposition is actually consummated) for the four fiscal quarters ended on such date, plus (i) to the extent deducted in computing Consolidated Net Income of the Borrowers, their Subsidiaries and, without duplication, the Acquired Businesses, the amount of interest expense, accrued (including, for the avoidance of doubt, imputed interest on convertible notes) or paid, during such period, plus (ii) to the extent deducted in computing such Consolidated Net Income of the Borrowers, their Subsidiaries and, without duplication, the Acquired Businesses, the sum of income taxes, depreciation and amortization for such period, plus (iii) due diligence and transaction expenses in connection with acquisitions and Asset Sales permitted hereunder (whether or not consummated) in an amount not to exceed $500,000 in any four fiscal quarter period, plus (iv) broker fees and success fees in connection with acquisitions and Asset Sales permitted hereunder in an amount not to exceed $6,000,000 in the aggregate over the term of this Credit Agreement; provided that for purposes of calculating the financial covenants under §10 of this Agreement, the portion of any adjustments contained in clause (i), (ii), (iii) and (iv) hereof attributed to any discontinued operations of BGI and its Subsidiaries related to a proposed disposition permitted by §9.5.2 or otherwise consented to by the Lenders and Administrative Agent in accordance with the terms of the Credit Agreement shall continue to be included in the calculation of Consolidated EBITDA until the date that the proposed disposition is actually consummated. The financial results of any Acquired Businesses acquired at any time during the period tested shall be included as if such Acquired Business had been acquired as of the first day of the period tested.”
(b) Section 1.1 of the Credit Agreement is amended and modified by deleting the definition of “Consolidated Net Income” contained therein and replacing it in its entirety with the following:


2


“ Consolidated Net Income . The consolidated net income (or deficit) of BGI and its Subsidiaries, after deduction of all expenses, taxes, and other proper charges, determined in accordance with GAAP (excluding any losses attributable to the use of a fair value methodology for recognition and measurement of impairment of goodwill identified in accordance with FASB ASC 350); provided that for purposes of calculating the financial covenants under §10 of this Agreement, the consolidated net income (or deficit) generated by any discontinued operations of BGI and its Subsidiaries related to a proposed disposition permitted by §9.5.2 or otherwise consented to by the Lenders and Administrative Agent in accordance with the terms of the Credit Agreement shall continue to be included in the calculation of consolidated net income (or deficit) until the date that the proposed disposition is actually consummated, notwithstanding any contrary treatment with respect to such consolidated net income (or deficit) in accordance with GAAP.”

(c)    Section 9.5.1(g) of the Credit Agreement is amended and modified by deleting the reference to “$200,000,000” contained therein and inserting “$400,000,000” in replacement thereof.
§3.      Representations and Warranties . As of the Agreement Effective Date (as defined below), each of the Borrowers and the Guarantors, as the case may be, represents and warrants to the Lenders and the Administrative Agent as follows:

(a)     Representations and Warranties in Credit Agreement . The representations and warranties of the Borrowers contained in the Credit Agreement were true and correct in all material respects when made, and continue to be true and correct on the Agreement Effective Date, except for any such representations or warranties which by their terms refer to a specific date.

(b)     Authority , Etc . The execution and delivery by each of the Borrowers and the Guarantors of this Agreement and the performance by each of the Borrowers and the Guarantors of all of its respective agreements and obligations of this Agreement and the other documents delivered in connection therewith (collectively, the “Agreement Documents”), the Credit Agreement as modified hereby and the other Loan Documents (i) are within the corporate or company authority of such Borrower or such Guarantor, (ii) have been duly authorized by all necessary corporate or company proceedings by such Borrower and such Guarantor, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which such Borrower or such Guarantor is subject or any judgment, order, writ, injunction, license or permit applicable to such Borrower or such Guarantor, (iv) do not conflict with any provision of the Governing Documents of, or any agreement or other instrument binding upon, such Borrower or such Guarantor, and (v) do not require the approval or consent of, or filing with, any Person other than those already obtained.

(c)     Enforceability of Obligations . This Agreement, the Agreement Documents, the Credit Agreement as modified hereby, and the other Loan Documents constitute the legal, valid and binding obligations of such Borrower or such Guarantor, enforceable against such Borrower or such Guarantor in accordance with their respective terms.

(d)     No Default . Immediately after giving effect to this Agreement, no Default or Event of Default exists under the Credit Agreement or any other Loan Document.

§4.      Affirmation of Borrowers and Guarantors.

(a)    Each Borrower hereby affirms its absolute and unconditional promise to pay to each Lender and the Administrative Agent the Revolving Credit Loan, the Swing Line Loans, the Reimbursement Obligations and all other amounts due under the Notes, the Letters of Credit, the Credit

3


Agreement as modified hereby and the other Loan Documents, at the times and in the amounts provided for therein. Each Borrower confirms and agrees that all references to the term “Credit Agreement” in the other Loan Documents shall hereafter refer to the Credit Agreement as modified hereby.

(b)    Each of the undersigned Guarantors hereby acknowledges that it has read and is aware of the provisions of this Agreement. Each such Guarantor hereby reaffirms its absolute and unconditional guaranty of the applicable Borrower's payment and performance of its obligations to the Lenders and the Administrative Agent under the Credit Agreement as modified hereby. Each Guarantor hereby confirms and agrees that all references to the term “Credit Agreement” in the Guaranty to which it is a party shall hereafter refer to the Credit Agreement as modified hereby.

§5.      Conditions to Effectiveness . The consents provided for herein shall take effect upon the satisfaction of the following conditions precedent (such date, the “ Agreement Effective Date ”):

(a)    the Administrative Agent shall have received a counterpart signature page to this Agreement, duly executed and delivered by each of the Borrowers, the Guarantors and the Required Lenders; and

(b)    the Borrowers shall have paid to the Lenders or the Administrative Agent, as appropriate, any and all fees due on or prior to the date hereof, together with the reasonable fees, expenses and disbursements of the Administrative Agent's Special Counsel with respect to which the Borrowers have received invoices on or prior to the Agreement Effective Date.

§6.      Satisfaction of Conditions . Without limiting the generality of the foregoing Section 5, for purposes of determining compliance with the conditions specified in Section 5, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted, or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the date hereof specifying its objection thereto.

§7.      Miscellaneous Provisions . This Agreement shall constitute one of the Loan Documents referred to in the Credit Agreement. Except as otherwise expressly provided by this Agreement, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as modified hereby, shall continue in full force and effect, and that this Agreement and the Credit Agreement shall be read and construed as one instrument. Nothing contained in this Agreement shall be construed to imply a willingness on the part of the Lenders or the Administrative Agent to grant any similar or other future consents with respect to any of the terms and conditions of the Credit Agreement or the other Loan Documents or shall in any way prejudice, impair or effect any rights or remedies of the Lenders and the Administrative Agent under the Credit Agreement or the other Loan Documents. THIS AGREEMENT IS A CONTRACT UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL, PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW §5-1401, BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. EACH BORROWER CONSENTS AND AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON SUCH BORROWER IN ACCORDANCE WITH LAW AT THE ADDRESS SPECIFIED IN THE CREDIT AGREEMENT. EACH BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT

4


OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. This Agreement may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. Delivery of an executed signature page of this Agreement by facsimile or electronic transmission shall be effective as delivery of a manually executed counterpart thereof. In making proof of this Agreement it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. Headings or captions used in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. The Borrowers hereby agree to pay to the Administrative Agent on demand all reasonable out-of-pocket costs and expenses incurred or sustained by the Administrative Agent in connection with the preparation of this Agreement (including reasonable legal fees and disbursements of the Administrative Agent's Special Counsel).

[Remainder of this page intentionally left blank.]










5



IN WITNESS WHEREOF , the parties hereto have executed this Agreement as an agreement as of the date first written above.

BARNES GROUP INC.

By:
/s/ Kenneth R. Hopson
 
Name:
Kenneth R. Hopson
 
Title:
Vice President, Treasurer






BARNES GROUP LUXEMBOURG (NO. 1) S.À R.L.

By:
/s/ Christopher J. Stephens, Jr.
 
For and on Behalf of Barnes Group Luxembourg
 
(NO. 2) S.à r.l.
 
In turn represented by,
 
Mr. Christopher J. Stephens, Jr.
 
Its Class B Manager, duly authorized and empowered in
 
this respect by the Board of Managers of Barnes Group
 
Luxembourg (NO. 2) S.à r.l.





BARNES GROUP SWITZERLAND GmbH, Nevis Branch

By:
 /s/ Christopher J. Stephens, Jr.
 
Name:
 Christopher J. Stephens, Jr.
 
Title:
 Manager





BANK OF AMERICA, N.A. , individually, as a Lender, Issuing Bank and as Swing Line Lender

By:
  /s/ Christopher T. Phelan
 
Name:
 Christopher T. Phelan
 
Title:
 Senior Vice President

BANK OF AMERICA, N.A. , as Administrative Agent
By:
 /s/ Don B. Pinzon
 
Name:
 Don B. Pinzon
 
Title:
 Vice President





JPMORGAN CHASE BANK, N.A., as a Lender

By:
 /s/ Daglas Panchal
 
Name:
 Daglas Panchal
 
Title:
 Vice President





RBS CITIZENS, NATIONAL ASSOCIATION, as a Lender

By:
 /s/ Stephen F. O'Sullivan
 
Name:
 Stephen F. O'Sullivan
 
Title:
 Senior Vice President





WELLS FARGO BANK, N.A., as a Lender

By:
/s/ Tom Molitor
 
Name:
 Tom Molitor
 
Title:
 Managing Director





BRANCH BANKING & TRUST COMPANY, as a Lender

By:
 /s/ Troy Weaver
 
Name:
 Troy Weaver
 
Title:
 Senior Vice President






THE BANK OF NEW YORK MELLON, as a Lender

By:
 /s/ Donald G. Cassidy, Jr.
 
Name:
 Donald G. Cassidy, Jr.
 
Title:
 Managing Director






FIFTH THIRD BANK, as a Lender

By:
 /s/ Valerie Schanzer
 
Name:
 Valerie Schanzer
 
Title:
 Vice President





HSBC BANK USA, N.A., as a Lender

By:
 /s/ Robert H. Rogers
 
Name:
 Robert H. Rogers
 
Title:
 Senior Relationship Manager





U.S. BANK NATIONAL ASSOCIATION, as a Lender

By:
 /s/ Patrick Engel
 
Name:
 Patrick Engel
 
Title:
 Vice President





DBS BANK LTD., Los Angeles Agency, as a Lender

By:
 /s/ James McWalters
 
Name:
 James McWalters
 
Title:
 General Manager





THE GOVERNOR & COMPANY OF THE BANK OF IRELAND, as a Lender

By:
 /s/ Padraig Rushe
 
Name:
 Padraig Rushe
 
Title:
 Authorised Signatory



By:
 /s/ Wendy Hobson
 
Name:
Wendy Hobson
 
Title:
 Authorised Signatory





THE HUNTINGTON NATIONAL BANK, as a Lender

By:
 /s/ Jared Shaner
 
Name:
 Jared Shaner
 
Title:
 Assistant Vice President





THE NORTHERN TRUST COMPANY, as a Lender

By:
 /s/ Clifford Hoppe
 
Name:
 Clifford Hoppe
 
Title:
 Vice President





WEBSTER BANK, NATIONAL ASSOCIATION, as a Lender

By:
 /s/ Carol Carver
 
Name:
 Carol Carver
 
Title:
 Vice President





PNC BANK, NATIONAL ASSOCIATION, as a Lender

By:
 /s/ Robert M. Martin
 
Name:
 Robert M. Martin
 
Title:
 Senior Vice President







    



UNION BANK, N.A., as a Lender

By:
 /s/ Christine Davis
 
Name:
 Christine Davis
 
Title:
 Vice President







    




EXHIBIT 10.2

February 22, 2013

By Hand Delivery

Mr. Gregory F. Milzcik
4 Atwater Terrace
Farmington, Connecticut 06032

Re:      Transition and Resignation Agreement

Dear Mr. Milzcik:

This letter agreement (this “ Agreement ”) confirms the arrangements regarding your resignation from the positions of President and Chief Executive Officer, Barnes Group Inc. (the “ Company ”), effective as of March 1, 2013, and the terms of your continued employment as Executive Vice Chairman of the Company through the transition services period from March 1, 2013 through the May 3, 2013 (the “ Resignation Date ”).

1.
Transition and Resignation Date . In exchange for your continued employment during the period from March 1, 2013 through the Resignation Date (the “ Transition Period ”) and your performance of transition services, as requested by the Company's Board of Directors (the “ Board ”) in connection with your role as Executive Vice Chairman of the Company, the following terms govern your transition and separation from employment:

A.
You resign your position as President and Chief Executive Officer of the Company, effective as of 12:01 AM Eastern Daylight Time on March 1, 2013. Subject to your satisfaction of the terms and conditions set forth below, you will remain an employee of the Company, and a member of the Board, until the Resignation Date. Between March 1, 2013 and the Resignation Date, you agree to resign all other officer, director and/or committee member positions you hold with the Company or any of its subsidiaries or affiliates and on the Resignation Date you agree to resign from the Board, effective as of 5:00 PM Eastern Daylight Time on that day. You agree to execute all such documentation as may be required to effectuate such resignations.

B.
During the Transition Period, you will serve as Executive Vice Chairman of the Company and perform such transition services for the Company as are reasonably requested by the Board in order to facilitate an orderly transition of your duties, including, consultation and other assistance with respect to matters for which you have had responsibility while President and Chief Executive Officer of the Company, including the Successful Kelly Closing (as defined below). For purposes of this Agreement, “ Successful Kelly Closing ” is defined as the consummation of Project Kelly on or before the Resignation Date, at a purchase price and upon terms and conditions approved by the Board, in its sole discretion.




Mr. Greg Milzcik
February 22, 2013
Page 2


C.
Notwithstanding anything in this Agreement to the contrary, if you engage in conduct described as “Cause” in the Employment Agreement between you and the Company, dated October 19, 2006, as amended and restated December 31, 2008 (the “ Employment Agreement ”), or you do not remain employed by the Company through the Resignation Date by your own volition, your employment will terminate immediately, and no consideration will be provided pursuant to Section 2 below.

D.
During the Transition Period, you will continue to (i) receive your regular salary, subject to applicable deductions and (ii) be eligible to participate in the Company benefits plans in which you are currently participating. Notwithstanding the foregoing, in no event will you be eligible to earn a cash bonus or receive equity compensation during the Transition Period.

E.
In the event that a Change in Control (as defined in the Employment Agreement) occurs prior to the final vesting date of your outstanding equity awards, those equity awards will be treated in accordance with Section 6.4 of the Employment Agreement. In the event that a Change in Control occurs prior to the Resignation Date and your employment is terminated by the Company without Cause (as defined in the Employment Agreement) or by you for Good Reason (as defined in the Employment Agreement) on or after the Change in Control but prior to the Resignation Date, you will be eligible to receive the severance benefits set forth in Section 6.4 of the Employment Agreement, in the amounts and at the times set forth therein.

F.
As of the Resignation Date, you will be entitled to receive any earned but unpaid base salary and your participation will cease in all of the Company's employee benefit and retirement plans. COBRA medical and/or dental coverage may be continued upon payment by you of the full premium until the earlier of the expiration of the applicable COBRA period or the date on which you become covered for medical and/or dental benefits under another group health plan, whichever occurs first.

2.
Consideration . To ensure an orderly transition that encourages maximizing shareholder value, to reward you for the Successful Kelly Closing and, in exchange for your continued employment through the end of the Transition Period and your execution and nonrevocation of the release attached hereto as Exhibit A (“ Release ”) within the period beginning on and ending twenty-one days after the Resignation Date, the Company will provide you with the following consideration to which you would not otherwise be entitled:

A.
Equity Awards Granted prior to January 1, 2013.

i.
Stock Options. All outstanding stock options granted to you by the Company before January 1, 2013 will vest as of your Resignation Date, but will become exercisable in accordance with the vesting and exercisability schedules included in the applicable stock option agreements. Such stock options will remain exercisable until the earlier to occur of (x) ten years following the date of grant of the applicable stock option (the exact date is set forth in the stock option agreement) and (y) the fifth anniversary of the Resignation Date.




Mr. Greg Milzcik
February 22, 2013
Page 3

ii.
Time-Vested Restricted Stock Units. All outstanding time-vested restricted stock units granted to you by the Company before January 1, 2013 will vest as of the Resignation Date, but will be settled on the same schedule as set forth in the applicable restricted stock unit agreements.

iii.
Performance Share Awards. All outstanding performance share awards granted to you by the Company before January 1, 2013 will vest as of the Resignation Date, but will be settled, without proration, following the end of the applicable performance periods, based on actual performance, at the same time performance share awards are settled for other participating executives of the Company.

B.
Equity Awards Granted in February 2013.

i.
Stock Options. The stock options granted to you by the Company in February 2013 will vest upon the Successful Kelly Closing, but will become exercisable in accordance with the vesting and exercisability schedule included in the stock option agreement. Such stock option will remain exercisable until the fifth anniversary of the Resignation Date.

ii.
Time-Vested Restricted Stock Units. The time-vested restricted stock units granted to you by the Company in February 2013 will vest upon the Successful Closing but will be settled on the same schedule as set forth in the applicable restricted stock unit agreements.

iii. Performance Share Awards. The performance share award granted to you by the Company in February 2013 will vest upon the Successful Kelly Closing but will be settled, without proration, following the end of the applicable performance period, based on actual performance, at the same time performance share awards are settled for other participating executives of the Company.

C.
Except as otherwise modified pursuant to the terms of this Section 2, your outstanding equity awards are subject to the terms and conditions of the applicable equity plan and award agreements. If you have any questions regarding your equity awards, please contact Monique Marchetti, Manager, Manager Stockholder Relations and Corporate Governance, at (860) 973-2185.

3.
Retirement Benefits . You will receive benefits under the Company's retirement plans in accordance with the terms of those plans. If you have a Savings Plan account, you can access the Fidelity Website at www.401k.com or the Retirement Benefits Line at 1-800-835-5095 for the necessary information to receive a distribution or rollover of the vested portion of your account to an IRA or another qualified plan.

4.
Welfare Benefits, SEELIP and Perquisites . During the Transition Period, you will be entitled to health and welfare benefits, and perquisites, in accordance with the terms and conditions




Mr. Greg Milzcik
February 22, 2013
Page 4

of the applicable plans and programs. As a participant in the Company's Senior Executive Enhanced Life Insurance Program (“ SEELIP ”), you own the life insurance policy even though the Company has paid the premiums for the coverage while you were employed. The annual policy premium has already been paid through June 30, 2013. You have the option of continuing the policy beyond the Resignation Date at your own expense. Please note that you must notify Bret Maffett at the C. M. Smith Agency at (860) 633-3611 to cancel the policy. If you have any additional questions regarding this benefit, please contact Caroline Segar, Director, Benefits, at (860) 973-2136.

5.
Final Expenses . Your expense account, if any, and use of any Company credit and telephone cards, will cease as of the Resignation Date. You will promptly return any such cards or other similar Company property in your possession and, if applicable, submit your final expense account, including an accounting for any advances, as of the Resignation Date.

6. Return of Company Property . On or before the Resignation Date, you will return to the Company any and all information relating to the Company and Company property in your possession and you will not, directly or indirectly, copy, take, or remove from the Company's premises, use or disclose to third parties any such information or property. To enable the provision of the transition services, the Company will maintain email and voicemail accounts through the Resignation Date.

7.
Restrictive Covenants . The terms of Sections 4.10 and 8 of the Employment Agreement and all covenants, restrictions and provisions contained therein shall survive and continue in full force, and are hereby incorporated by reference into this Agreement. By executing this Agreement, you recognize and affirm that you shall continue to be bound by the terms of Sections 4.10 and 8 of the Employment Agreement and all covenants, restrictions and provisions contained therein, which shall survive the termination of the Employment Agreement and continue in full force and effect.

8.
Cooperation . You agree to fully cooperate with the Company by responding truthfully to any questions asked of you by the Company concerning its business, or operational or regulatory issues that may arise following the execution of this Agreement. You further agree to cooperate with any investigation conducted by the Company on its own initiative or pursuant to a request by any government agency or department, including, but not limited to, the provision of personal documents and testimony, in connection with any matter arising out of or related to your duties while employed by the Company. You also agree to execute and deliver such instruments, documents, certificates, and affidavits and supply such other information and take such further action as the Company may reasonably require in order to effectuate or document your resignation as an officer of the Company and from all positions with the Company, its subsidiaries and affiliates, and the termination of your employment with the Company.

9.
Electronic Media . You agree to leave intact all electronic Company documents, including those that you developed or helped to develop during your employment, and deliver to the Company concurrent with the execution of this Agreement or upon earlier request the computer media on which such documents are stored and all passwords and keys necessary to access such documents.




Mr. Greg Milzcik
February 22, 2013
Page 5


10. Arbitration; Governing Law . In the event that either party institutes legal proceedings to enforce the terms of this Agreement, it is specifically understood and agreed that such a claim shall be submitted to final and binding arbitration in Hartford County, Connecticut, pursuant to the rules of the American Arbitration Association, and that the prevailing party shall recover its costs and reasonable attorney's fees incurred in such arbitration proceeding; provided that, in order to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“ Section 409A ”), the following provisions apply if you are the prevailing party: costs and reasonable attorney's fees incurred in the arbitration proceeding may be recovered if they are incurred during the three-year period commencing on the Resignation Date; the amount of costs and reasonable attorney's fees eligible for reimbursement during your taxable year may not affect the amount of costs and reasonable attorney's fees eligible for reimbursement in any other taxable year; any reimbursement of costs or reasonable attorney's fees shall be made on or before the last day of your taxable year following the taxable year in which the costs or attorney's fees were incurred; and the right to reimbursement shall not be subject to liquidation or exchange for another benefit. The parties further agree that this Agreement is governed by the laws of the State of Connecticut.

11. Tax Considerations . The parties agree that this Agreement is to be interpreted and administered in accordance with the requirements of Section 409A, to the extent applicable. The Company is authorized to delay any payment due to you until the first business day following the six month anniversary of your termination of employment, if such delay is required in order to comply with the requirements of Section 409A (taking into account the severance exception and the short-term deferral rule under Section 409A). The date of your resignation from employment will be determined in accordance with the separation from service rules under Section 409A. The Company shall be entitled to withhold from any amounts payable under this Agreement all taxes as legally shall be required to be withheld (including, without limitation, any United States federal taxes and any other state, city, or local taxes).

12. Entire Agreement . Effective as of March 1, 2013, this Agreement constitutes the entire agreement between you and the Company with respect to the subjects addressed herein and, except as provided in this Agreement, any applicable equity award agreements or Sections 4.10, 6.4 or 8 of the Employment Agreement, supersedes all prior agreements, understandings and representations, written or oral, with respect to those subjects, including, but not limited to Employment Agreement. In the event of any conflict between this Agreement and the terms of any plans or award agreements, the terms of this Agreement shall control. Without limiting the generality of the foregoing, you acknowledge that, except to the extent specifically indicated in this Agreement, the Employment Agreement shall be terminated upon the effectiveness of this Agreement.

As a reminder, you are expected to abide by all obligations set forth in this Agreement, including, without limitation, confidentiality. Further, after your resignation, you continue to have obligations to the Company under various other sources, including the Barnes Group Inc. Code of Business Ethics and Conduct, statutes, and common law. Please be mindful of these restrictions and govern your activities accordingly. The attached Release is a legal release, the




Mr. Greg Milzcik
February 22, 2013
Page 6

terms of which are incorporated by reference in this Agreement. Please review it carefully and let me know if you have any questions.

Sincerely,

/s/ DAWN N. EDWARDS        
Dawn N. Edwards
Senior Vice President, Human Resources
Barnes Group Inc.


Agreed and accepted:

/s/ GREGORY F. MILZCIK
 
February 22, 2013
 
Gregory F. Milzcik
 
Date
 








Exhibit A

RELEASE

In exchange for the consideration to which I would not otherwise be entitled, set forth in Section 2 of the attached transition and resignation agreement dated as of February 22, 2013 (the “ Agreement ”), the terms of which are incorporated by reference in this release (this “ Release ”), I (and anyone acting on my behalf) agree to release every past and present right or claim of any kind, whether legal, equitable or otherwise, against Barnes Group Inc. (the “ Company ”), including, without limitation, any and all related entities, corporations, partnerships, subsidiaries, joint ventures and divisions of the Company. I give up such rights and claims against the Company, its employee benefit plans and anyone else related to the Company (such as, without limitation, the Company's present and former employees, officers, directors, stockholders, representatives, agents and insurers).

I agree that I executed this Release on my own behalf and also on behalf of any heirs, agents, representatives, successors and assigns that I have now or may have in the future. These rights and claims include, but are not limited to, those that I may have under the Age Discrimination in Employment Act, which prohibits age discrimination in employment; Title VII of the Civil Rights Act of 1964 and Executive Order 11246, which prohibit discrimination in employment based on race, color, national origin, religion or sex; the Americans With Disabilities Act of 1990, which prohibits discrimination in employment based on a handicap or disability; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; any claims under the Worker Adjustment and Retraining Notification Act of 1988 or any similar law, which requires, among other things, that advance notice be given of certain work force reductions; and all claims under the Employee Retirement Income Security Act of 1974, such as claims relating to pension, profit sharing, or health plan benefits, except as noted in the following paragraph; the Family and Medical Leave Act of 1993; all claims under any state Fair Employment Practices Act as well as any other federal, state or local laws or regulations; all claims for alleged physical or personal injury or emotional distress; and any other claims which could arise from employment or separation from employment, whether in express or implied contract (whether written or oral), or claims for breach of any covenant of good faith and fair dealing (express or implied), or in tort (including without limitation, defamation, assault, battery, false imprisonment, interference with contractual or advantageous business relationship, and invasion of privacy) or for wrongful or retaliatory discharge, whether based on common law or otherwise. The foregoing list is meant to be illustrative rather than inclusive. Nothing in this Release shall prohibit me from filing a claim with, cooperating with, or participating in any investigation or proceeding conducted by, the federal Equal Employment Opportunity Commission or a state Fair Employment Practices Agency (although I acknowledge and agree that I shall not be able to recover any monetary benefits in connection with such claim or proceeding).

I keep any right, however, that I may have to (1) elect health care coverage under the federal continuation of health coverage law known as “COBRA,” or under any applicable state law concerning continuation of health coverage, unless I am ineligible for such coverage under such law; (2) exercise exercisable stock options in accordance with the applicable stock option




agreements; (4) receive payouts in accordance with the applicable equity award agreements, and (5) indemnification or advancement of expenses under applicable law, the Certificate of Incorporation or by‑laws of the Company, any agreement between me and the Company, or the Company's officers' and directors' liability insurance policies.

This Release covers both claims that I know about and those I may not know about. I expressly give up and waive all rights afforded by any statute which limits the effect of a release with respect to claims that are presently unknown. I understand the significance of my release of unknown claims and my waiver of statutory protection against a release of unknown claims. This Release does not give up or waive any rights or claims, which arise after the date that this Release is signed by me.

I have been given a period of at least twenty-one (21) calendar days from the date of my receipt of this Release to review and consider this Release before signing it. I may take as much of this period of time to consider this Release as I wish prior to signing it. I understand that if I sign this Release, it is in exchange for receiving the additional payments and the other benefits described in the Agreement. I acknowledge that I have received twenty-one (21) calendar days to review this Release from the Resignation Date. I acknowledge and agree that any changes made to this Release before I sign it will not entitle me to an additional twenty-one (21) calendar days to review the new version of this Release. I also understand that under no circumstances will I receive the benefits pursuant to Section 2 of the Agreement unless I sign this Release and deliver it to the Company within twenty-one (21) calendar days after the Resignation Date and do not revoke the Release.

I am hereby advised by the Company to consult with an attorney before signing this Release . I understand that whether or not to do so is my decision.
    
I have not relied on any representations, promises, or agreements of any kind made to me in connection with my decision to sign this Release except for those set forth in the documents attached to or referred to by this Release. I may revoke or cancel this Release within seven (7) calendar days after I sign it . The last day on which this Release can be revoked is called the “ Last Revocation Day .” Revocation can only be made by delivering a written notice of revocation to Dawn N. Edwards, Senior Vice President, Human Resources at the Company's Corporate Office, 123 Main Street, Bristol, Connecticut 06010. For this revocation to be effective, a written notice of revocation must be sent on or before the Last Revocation Day for delivery to the foregoing address on the next business day. I acknowledge that this Release can be revoked only in its entirety and that once revoked, I will not receive the consideration set forth in Section 2 of the Agreement.

If I do not revoke this Release, it shall go into effect on the day after the Last Revocation Day and I will receive the consideration set forth in Section 2 of the Agreement and the other benefits described therein.

A finding that any term or provision of this Release is invalid, unlawful or unenforceable will not affect the remaining terms and provisions of this Release.





This Release, and the documents referenced in or attached to this Release, set forth the entire agreement between me and the Company and supersede and render null and void any and all prior or contemporaneous oral or written understandings, statements, representations or promises pertaining to the matters set forth herein except for those set forth in the documents attached to or referred to by this Release and except for any and all previously agreed to noncompetition or confidentiality obligations to the Company to which I specifically agree to remain bound after signing this Release, including without limitation my obligations under the Barnes Group Inc. Code of Business Ethics and Conduct.

If I violate any part of the Agreement, I will be responsible for all costs incurred by the Company that flow from that violation, including the Company's legal fees and other costs associated with any legal action that arises from that violation. If I violate any part of the Agreement, I will also be required to return all consideration, directly or indirectly received, in exchange for signing this Release, except for the sum of $500, which I agree constitutes ongoing valid consideration for this waiver and release.


Agreed and accepted:

____________________________            ______________________
Gregory F. Milzcik                         Date







EXHIBIT 10.3



February 22, 2013

By Hand Delivery

Mr. Patrick Dempsey
84 Northington Drive
Avon, Connecticut 06001

Re:      Offer Letter

Dear Patrick:

We are delighted to confirm our offer to promote you to President and Chief Executive Officer, Barnes Group Inc. (the “Company”), effective March 1, 2013, subject to approval by the Company's Board of Directors (the “Board”) of the current Chief Executive Officer's resignation on the same date (“Commencement Date”) which has occurred. In this position, you will report directly to the Board. It is expected that the Board will nominate you to become a member of the Board to fulfill the term of the outgoing Chief Executive Officer's seat on the Board, effective immediately following the Annual Meeting on May 3, 2013. Any successive terms on the Board will be subject to stockholder approval at subsequent Annual Meetings, commencing with the Annual Meeting in May 2014.

1.
Compensation .

A.
Salary . As compensation for your services as President and Chief Executive Officer of the Company, you will receive a base salary at the rate of $750,000 per annum, payable in accordance with the Company's regular payroll practices.

B.
Cash Incentive Compensation . You will continue to participate in the Performance Linked Bonus Plan for Selected Executive Officers (PLBP) with the Corporate Office designated objectives. In connection with your promotion, your target incentive will be increased to 75% of base salary with a maximum of 225% of base salary. Participation in the Company's short term incentive plan brings your total cash compensation (base salary plus annual incentive) to $1,312,500 at target and $2,437,500 at maximum on an annualized basis. For 2013, your participation in the PLBP with the new target incentive and maximum will be prorated from the Commencement Date with the target incentive and maximum set for your prior position applying prior to the Commencement Date.

C.
Equity Incentive Compensation . In addition to the time-vested restricted stock units (RSUs), stock options and performance share units (PSUs) granted to you on February 12, 2013, the Compensation Management and Development Committee








of the Board will award you an additional 13,600 RSUs, 25,300 stock options and 22,600 PSUs on the Commencement Date to bring your total equity incentive compensation value to $1,760,000. The additional awards will be subject to the same terms and conditions as the respective awards granted to you on February 12, 2013, except that the additional stock options will have an exercise price equal to the closing price of the Company's common stock on March 1, 2013, in accordance with the terms of the Barnes Group Inc. Stock and Incentive Award Plan.

As you are aware, stock ownership guidelines have been established for our leadership team to ensure that management's interests are aligned with our stockholders' interests. The guideline for your new position is five times (5x) base salary.

D.
Benefits . You will continue to receive the same retirement and health and welfare benefits, including participation in the Barnes Group Inc. Senior Executive Enhanced Life Insurance Program (SEELIP), except that your new base salary will be taken into account for purposes of the level of benefits provided to you pursuant to the respective benefits plans and programs, to the extent applicable. You remain eligible for an executive physical benefit and financial planning assistance. The financial planning benefit provides for reimbursement of professional financial planning assistance and tax planning and preparation services, to a maximum of $4,000 on a calendar basis. The value of the executive physical benefit and financial planning assistance is considered taxable income to you.

E.
Recoupment . You will continue to be subject to the Incentive Compensation Reimbursement Agreement between you and the Company, effective February 13, 2012, in accordance with the terms and conditions thereof, except as such agreement may be amended to comply with applicable law.

2.      Severance . You will continue to be covered by the Barnes Group Inc. Executive Separation Pay Plan, which will be amended to provide that in the event of your covered termination of employment, not in connection with a change in control of the Company, you will receive two times your base salary and a pro rata actual bonus, based on the number of days in which you were employed in the calendar year in which the covered termination occurs. Your Severance Agreement with the Company, as amended on December 31, 2008, will continue to remain in effect in accordance with the terms and conditions thereof.

3.      Executive Covenants . As a consequence of this promotion, and in exchange for the enhanced compensation and severance detailed in this letter, you will need to execute the attached agreement respecting the restrictive covenants to which you will be subject.

This letter agreement sets forth our offer of continued employment and is not intended to create an expressed or implied contract of any kind, nor shall it be construed to constitute a







promise or contract of lifetime or continuing employment. Your employment with Barnes Group Inc. is at will and may be terminated at any time, with or without cause, by either you or the Company. The terms of this offer supersede and take the place of any prior written or oral offers of employment. Barnes Group Inc. also has the right to change, interpret, withdraw, or add to any of the policies, benefits, terms or conditions of employment at any time. The terms and conditions of this letter agreement may only be amended or modified in writing if they are approved by the Board.

If you have any questions with regard to the above, please call Dawn N. Edwards, Senior Vice President, Human Resources, Barnes Group Inc., directly at (860) 973-2119.

Please sign, date, and return the enclosed duplicate copy of this letter agreement to me today, Friday, February 22, 2013 to indicate your acceptance of this offer.

Sincerely,

/s/ THOMAS O. BARNES        

Thomas O. Barnes
Chairman of the Board
Barnes Group Inc.


Agreed and accepted:
/s/ PATRICK DEMPSEY
 
February 26, 2013
 
Patrick Dempsey
 
Date
 






EXHIBIT 10.4


BARNES GROUP INC.

EMPLOYEE NON-DISCLOSURE, NON-COMPETITION, NON-SOLICITATION AND NON-DISPARAGEMENT AGREEMENT

In consideration of your promotion to President and Chief Executive Officer with Barnes Group Inc. (the “ Company ”), and the severance and other enhanced compensation and benefits set forth in the Offer Letter between you and the Company, dated February 22, 2013 (the “ Offer Letter ”), and for other good and valuable consideration, the receipt and sufficiency of which you hereby acknowledge, you agree to this Employee Non-Disclosure, Non-Competition, Non-Solicitation and Non-Disparagement Agreement (this “ Agreement ”).

1.     Unauthorized Disclosure . You agree and understand that in your position with the Company, you have been and will be exposed to and receive information relating to the business affairs of the Company, including but not limited to technical information, business and marketing plans, strategies, customer information, other information concerning the Company's products, promotions, development, financing, expansion plans, business policies and practices, and other forms of information considered by the Company to be confidential and in the nature of trade secrets. You agree that during your employment and thereafter, you shall keep such information confidential and not disclose such information, either directly or indirectly, to any third person or entity without the prior written consent of the Company (unless such information is otherwise in the public domain through no fault of yours); provided, however, that nothing in this Section 1 shall prevent you, with or without the Company's consent, from (i) providing truthful testimony or otherwise cooperating in good faith with any investigation related to the business activities and practices of the Company and its officers and agents being conducted by a duly authorized agency of the federal or any state or local government or any duly appointed agent of the Board or any committee thereof or (ii) disclosing documents or information (a) in the performance of your duties hereunder to persons having commercial relationships or dealings with the Company, so long as such disclosure is made by you (or at your direction) in the good faith belief that it is in the best interests of the Company and such disclosure is not contrary to any direction of the Board or any committee thereof or internal or external legal counsel to the Company and (b) in connection with any judicial or administrative investigation, inquiry or proceeding, provided that you are compelled to do so by court order or subpoena and notifies the Company as soon as practicable after the receipt of such court order or subpoena (it being understood and agreed that no such order or subpoena shall be required in connection with an inquiry or proceeding that is described in subclause (i) above). This confidentiality covenant has no temporal, geographical or territorial restriction. Upon termination of your employment, you shall promptly supply to the Company all property, keys, notes, memoranda, writings, lists, files, reports, customer lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines, technical data or any other tangible product or document in your actual or constructive possession at the end of your employment.

2.     Non-Competition . In consideration of your promotion to President and Chief Executive Officer of the Company and the severance and other enhanced compensation and other benefits set forth in the Offer Letter, and further in consideration of your exposure to the proprietary information of the Company, you agree that you shall not, during your employment and for a

1




period of two (2) years thereafter (the “ Restriction Period ”), directly or indirectly, own, manage, operate, join, control, be employed by, or participate in the ownership, management, operation or control of, or be connected in any manner, including but not limited to, holding the position of shareholder, director, officer, consultant, independent contractor, employee, partner, or investor, with any Competing Enterprise. For purposes of this Section 2, the term “ Competing Enterprise ” shall mean any person, corporation, partnership or other entity engaged in a business which is in direct competition with any business of the Company or any of its affiliates at the relevant time (or, during the Restriction Period, at the date of termination of employment); provided that, the direct or indirect parent of any entity that is in direct competition with the Company shall be considered to be in direct competition with the Company, but that nothing herein shall preclude you from providing services to an entity affiliated with, but not directly or indirectly controlling or controlled by an entity that is in direct competition with the Company so long as you do not, directly or indirectly, provide any services, advice or other assistance to such competing entity.

3.     Non-Solicitation of Customers . You agree that during the Restriction Period, you shall not intentionally or knowingly, directly or indirectly, (i) interfere with the Company's or any of its affiliates' relationship with, or endeavor to entice away from the Company or any of its affiliates, any individual, person, firm, corporation or other business entity who at any time during your employment was a customer of the Company or any of its affiliates or otherwise had a material business relationship with the Company or any of its affiliates, or (ii) discourage, or attempt to discourage, any individual, person, firm, corporation or business entity from doing business with the Company or any of its affiliates.

4.     Non-Solicitation of Employees . You agree that during your employment and for a period of three (3) years thereafter, you will not intentionally or knowingly, directly or indirectly, (i) interfere with the Company's or any of its affiliates' relationships with, or endeavor to entice away from the Company or any of its affiliates, (ii) solicit for employment, or (iii) hire any person who is an employee (or, within the immediately preceding 90 days, was an employee) of the Company or any of its affiliates and who was an employee of the Company or any of its affiliates at the date of your termination of employment (or during the 90-day period immediately prior thereto).

5.     Non-Disparagement . You agree that you shall not disparage the Company or its affiliates, or its or their current or former officers, directors, and key employees in any way; further, you shall not make or solicit any comments, statements, or the like to the media or to others that would be considered derogatory or detrimental to the good name or business reputation of any of the aforementioned entities or individuals; provided, that this Section 5 shall not prohibit statements which you are required to make under oath or which are otherwise required by law, provided that such statements are truthful and made in a professional manner. The Company agrees that it shall not, and that it will direct its directors and executive officers not to, disparage you in any way, and that the Company shall not, and it will direct its directors and executive officers not to, make or solicit any comments, statements, or the like to the media or to others that would be considered derogatory or detrimental to your good name or business reputation; provided, that this Section 5 does not prohibit statements which (i) the Company or any of its officers, directors, employees, affiliates or advisors are required to make under oath or are otherwise required by law, (ii) are required to comply with the rules of the New York Stock

2




Exchange or any other similar exchange or automated trading system on which any of the Company's securities are listed, or (iii) are, in the opinion of counsel for the Company, necessary to comply with the Company's disclosure obligations to its stockholders, provided that in any case such statements are truthful and made in a professional manner.

6.     Remedies . You agree that (i) any breach of the terms of Sections 1, 2, 3, 4 or 5 of this Agreement would result in irreparable injury and damage to the Company for which the Company would have no adequate remedy at law; (ii) in the event of said breach or any threat of breach, the Company shall be entitled to an immediate injunction and restraining order to prevent such breach and/or threatened breach and/or continued breach by you and/or any and all persons and/or entities acting for and/ or with you, without having to prove damages, and to all costs and expenses, including reasonable attorneys' fees and costs, in addition to any other remedies to which the Company may be entitled at law or in equity and (iii) notwithstanding any other terms in this Agreement or applicable stock plans, in the event of said breach, all (a) vested and unvested stock options, and (b) restricted shares, restricted stock units and performance share units which have not yet been earned, in each case were granted to you after the Commencement Date (as defined in the Offer Letter), shall immediately expire and shall no longer be exercisable after such breach. The terms of this Section 6 shall not prevent the Company from pursuing any other available remedies for any breach or threatened breach hereof, including but not limited to the recovery of damages from you. You and the Company further agree that the provisions of this Section 6 are reasonable and the Company would not have agreed to provide you with the severance and other enhanced compensation and other benefits set forth in the Offer Letter but for their inclusion herein.

7.     Survival; Breach Not a Defense . The provisions of this Agreement shall survive any termination of your employment, and the existence of any claim or cause of action by you against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of this Agreement.

8.     Severability . If any provision of this Agreement is adjudicated to be overbroad, invalid or unenforceable, the court may modify or sever such provision(s), such modification or deletion to apply only with respect to the operation of such provision(s) in the particular jurisdiction in which such adjudication is made. In addition, if any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear. The remaining provisions of this Agreement shall remain in full force and effect. You agree that the parties shall request that a court of competent jurisdiction not invalidate or ignore the terms of this Agreement, but instead honor this provision by reforming or modifying any overbroad or otherwise invalid terms to the extent necessary to render the terms valid and enforceable and then enforcing the Agreement as so reformed or modified.

9.     Waiver, Amendment, Assignment, Successors . The terms of this Agreement are to be read consistent with the terms of any other agreements that you have executed with the Company; provided, however, to the extent there is a conflict between such agreements, such agreements shall be construed as providing the broadest possible protections to the Company,

3




even if such construction would require provisions of more than one such agreement to be given effect. No waiver of this Agreement will be effective unless it is in writing and signed by the Company. This Agreement may not be superseded or amended by any other agreement between yourself and the Company unless such agreement specifically and expressly states that it is intended to supersede this Agreement and is signed by both the Company and you. You recognize and agree that your obligations under this Agreement are of a personal nature and are not assignable or delegable in whole or in part by you. The Company may assign this Agreement to any affiliate or to any successor-in-interest (whether by sale of assets, sale of stock, merger or other business combination). All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and permitted assigns of the Company and you.

10.     Effectiveness of Agreement . This Agreement becomes effective upon the Commencement Date. The obligations under this Agreement continue throughout the entire period of time you are employed by the Company, and these obligations will continue after, and survive, the termination of your employment with the Company.

11.     Arbitration . Any claim, demand or controversy under this Agreement shall be submitted first to a mediator in accordance with the rules of the American Arbitration Association (“AAA”) by submitting a mediation request to the other party within 30 days of the date of the breach. The mediation process shall conclude upon the earlier of: (a) the resolution of the dispute; (b) a determination by either the mediator or one or more of the parties that all settlement possibilities have been exhausted and there is no possibility of resolution; or (c) 30 days have passed since the filing of a request to mediate with the AAA. A party who has previously submitted a dispute to mediation, and which dispute has not been resolved, may submit such dispute to binding arbitration pursuant to the rules of the AAA. Any arbitration proceeding for such dispute must be initiated within 14 days from the date that the mediation process has concluded. The prevailing party shall recover its costs and reasonable attorney's fees incurred in such arbitration proceeding. You and the Company specifically understand and agree that the failure of a party to timely initiate a proceeding hereunder shall bar the party from any relief or other proceeding and any such dispute shall be deemed to have been finally and completely resolved. All mediation and arbitration proceedings shall be conducted in Bristol, Connecticut or such other location as the Company may determine and you agree that no objection shall be made to such jurisdiction or venue, as a forum non conveniens or otherwise. The arbitrator's authority shall be limited to resolution of the legal disputes between the parties and the arbitrator shall not have authority to modify or amend this Agreement, or abridge or enlarge rights available under applicable law. Any court with jurisdiction over the parties may enforce any award made hereunder.

11.     Governing Law; Jurisdiction . This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles of conflicts of law. You hereby consent to personal jurisdiction in the federal and state courts of the State of Connecticut for the resolution of all disputes arising under, or relating to, this Agreement.


4




[Signature follows]


Patrick J. Dempsey

/s/ PATRICK J. DEMPSEY
 
February 27, 2013
 
Signature
 
Date
 


Agreed and Acknowledged

Barnes Group Inc.



By: /s/ DAWN N. EDWARDS    
Name: Dawn N. Edwards
Title: Sr. Vice President, Human Resources


5


EXHIBIT 15


April 29, 2013

Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549

Commissioners:

We are aware that our report dated April 29, 2013 on our review of interim financial information of Barnes Group Inc. for the three-month periods ended March 31, 2013 and March 31, 2012 and included in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013 is incorporated by reference in its Registration Statements on Form S-8 (Nos. 333-27339, 333-88518, 333-133597, 333-140922, 333-150741, 333-166975 and 333-179643) and S-3 (No. 333-168438).



Very truly yours,


/s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
Hartford, Connecticut
 





EXHIBIT 31.1
CERTIFICATION

I, Patrick J. Dempsey, certify that:

1.
I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2013 of Barnes Group Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: April 29, 2013
 
/s/ PATRICK J. DEMPSEY
 
Patrick J. Dempsey
 
President and Chief Executive Officer






EXHIBIT 31.2
CERTIFICATION

I, Christopher J. Stephens, Jr., certify that:

1.
I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2013 of Barnes Group Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: April 29, 2013
 
  /s/  CHRISTOPHER J. STEPHENS, JR.
 
Christopher J. Stephens, Jr.
 
Chief Financial Officer






EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Barnes Group Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


  /s/    PATRICK J. DEMPSEY
  
 
  /s/    CHRISTOPHER J. STEPHENS, JR.
Patrick J. Dempsey
President and Chief Executive Officer
  
Christopher J. Stephens, Jr.
Chief Financial Officer
April 29, 2013
 
April 29, 2013
 
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging, or otherwise adopting the signature that appears in the typed form within the electronic version of this written statement required by Section 906, has been provided to Barnes Group Inc. and will be retained by Barnes Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request.