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, 2014

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

Commission file number 1-4801


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

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

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

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

The registrant had outstanding 54,205,461 shares of common stock as of April 24, 2014.

1


Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended March 31, 2014
 
 
 
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,
 
2014
 
2013
Net sales
$
312,099

 
$
263,545

 
 
 
 
Cost of sales
214,557

 
177,715

Selling and administrative expenses
62,418

 
60,875

 
276,975

 
238,590

Operating income
35,124

 
24,955

 
 
 
 
Interest expense
3,319

 
4,357

Other expense (income), net
234

 
966

Income from continuing operations before income taxes
31,571

 
19,632

Income taxes
8,819

 
4,199

Income from continuing operations
22,752

 
15,433

Loss from discontinued operations, net of income taxes (Note 2)
—

 
(1,961
)
Net income
$
22,752

 
$
13,472

 
 
 
 
Per common share:
 
 
 
  Basic:
 
 
 
    Income from continuing operations
$
0.42

 
$
0.29

    Loss from discontinued operations, net of income taxes
—

 
(0.04
)
   Net income
$
0.42

 
$
0.25

  Diluted:
 
 
 
    Income from continuing operations
$
0.41

 
$
0.28

    Loss from discontinued operations, net of income taxes
—

 
(0.04
)
   Net income
$
0.41

 
$
0.24

Dividends
$
0.11

 
$
0.10

 
 
 
 
Weighted average common shares outstanding:
 
 
 
    Basic
54,650,481

 
54,739,465

    Diluted
55,972,753

 
55,524,560


See accompanying notes.


3



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


 
Three months ended March 31,
 
2014
 
2013
Net income
$
22,752

 
$
13,472

Other comprehensive (loss) income, net of tax
 
 
 
      Unrealized (loss) income on hedging activities, net of tax (1)
(27
)
 
427

      Foreign currency translation adjustments, net of tax (2)
(5,948
)
 
(14,505
)
      Defined benefit pension and other postretirement benefits, net of tax (3)
(5,870
)
 
2,410

Total other comprehensive loss, net of tax
(11,845
)
 
(11,668
)
Total comprehensive income
$
10,907

 
$
1,804


(1) Net of tax of $14 and $188 for the three months ended March 31, 2014 and 2013 , respectively.

(2) Net of tax of $(198) and $(101) for the three months ended March 31, 2014 and 2013 , respectively.

(3) Net of tax of $(3,787) and $2,838 for the three months ended March 31, 2014 and 2013 , respectively.

See accompanying notes.


4


BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
Current assets
 
 
 
  Cash and cash equivalents
$
61,411

 
$
70,856

  Accounts receivable, less allowances (2014 - $2,729; 2013 - $3,438)
291,703

 
258,664

  Inventories
210,212

 
211,246

  Deferred income taxes
14,874

 
18,226

  Prepaid expenses and other current assets
19,958

 
18,204

    Total current assets
598,158

 
577,196

 
 
 
 
Deferred income taxes
869

 
2,314

 
 
 
 
Property, plant and equipment
699,195

 
686,537

    Less accumulated depreciation
(392,026
)
 
(383,979
)
 
307,169

 
302,558

 
 
 
 
Goodwill
645,604

 
649,697

Other intangible assets, net
523,002

 
534,293

Other assets
59,865

 
57,615

Total assets
$
2,134,667

 
$
2,123,673

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
  Notes and overdrafts payable
$
1,636

 
$
1,074

  Accounts payable
98,421

 
88,721

  Accrued liabilities
129,589

 
154,514

  Long-term debt - current
56,615

 
56,009

    Total current liabilities
286,261

 
300,318

 
 
 
 
Long-term debt
503,076

 
490,341

Accrued retirement benefits
90,319

 
80,884

Deferred income taxes
91,250

 
94,506

Other liabilities
15,058

 
16,210

 
 
 
 
Commitments and contingencies (Note 15)

 

Stockholders' equity
 
 
 
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2014 - 60,742,629 shares; 2013 - 60,306,128 shares)
607

 
603

  Additional paid-in capital
401,675

 
390,347

  Treasury stock, at cost (2014 - 6,622,624 shares; 2013 - 6,389,267 shares)
(165,501
)
 
(156,649
)
  Retained earnings
897,823

 
881,169

  Accumulated other non-owner changes to equity
14,099

 
25,944

Total stockholders' equity
1,148,703

 
1,141,414

Total liabilities and stockholders' equity
$
2,134,667

 
$
2,123,673


See accompanying notes.

5


BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Three months ended March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net income
$
22,752

 
$
13,472

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
20,782

 
16,499

  Amortization of convertible debt discount
731

 
582

  Loss (gain) on disposition of property, plant and equipment
78

 
(54
)
  Stock compensation expense
1,865

 
12,657

  Withholding taxes paid on stock issuances
(463
)
 
(720
)
  Changes in assets and liabilities:
 
 
 
    Accounts receivable
(32,802
)
 
(16,347
)
    Inventories
802

 
(968
)
    Prepaid expenses and other current assets
(2,763
)
 
(235
)
    Accounts payable
9,676

 
7,144

    Accrued liabilities
(3,131
)
 
(16,679
)
    Deferred income taxes
3,834

 
485

    Long-term retirement benefits
(4,964
)
 
801

  Other
580

 
1,020

Net cash provided by operating activities
16,977

 
17,657

 
 
 
 
Investing activities:
 
 
 
Proceeds from disposition of property, plant and equipment
382

 
44

Capital expenditures
(15,074
)
 
(10,050
)
Other
(467
)
 
(1,420
)
Net cash used by investing activities
(15,159
)
 
(11,426
)
 
 
 
 
Financing activities:
 
 
 
Net change in other borrowings
559

 
8,737

Payments on long-term debt
(26,151
)
 
(6,245
)
Proceeds from the issuance of long-term debt
39,283

 
21,000

Payment of assumed liability to Otto Männer Holding AG
(19,796
)
 
—

Proceeds from the issuance of common stock
7,262

 
2,677

Common stock repurchases
(8,389
)
 
(12,856
)
Dividends paid
(5,971
)
 
(5,443
)
Excess tax benefit on stock awards
2,246

 
506

Other
(76
)
 
(53
)
Net cash (used) provided by financing activities
(11,033
)
 
8,323

 
 
 
 
Effect of exchange rate changes on cash flows
(230
)
 
(1,038
)
(Decrease) increase in cash and cash equivalents
(9,445
)
 
13,516

Cash and cash equivalents at beginning of period
70,856

 
86,356

Cash and cash equivalents at end of period
$
61,411

 
$
99,872


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, 2013 has been derived from the 2013 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, 2013 . 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 .

In the fourth quarter of 2013, the Company and two of its subsidiaries (collectively with the Company, the "Purchaser") completed the acquisition of the Männer Business (defined below) pursuant to the terms of the Share Purchase and Assignment Agreement dated September 30, 2013 ("Share Purchase Agreement") among the Purchaser, Otto Männer Holding AG, a German company based in Bahlingen, Germany (the "Seller"), and the three shareholders of the Seller ("the Männer Business”). The acquisition has been integrated into the Industrial segment. See Note 3 of the Consolidated Financial Statements.

In the second quarter of 2013, the Company completed the sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC"). The results of these operations are segregated and presented as discontinued operations in the Consolidated Financial Statements. See Note 2.

2. Discontinued Operations
 
Barnes Distribution North America

In April 2013, the Company completed the sale of BDNA to MSC pursuant to the terms of an Asset Purchase Agreement between the Company and MSC. The total cash consideration received for BDNA through March 31, 2014 was $538,942 , net of transaction costs and closing adjustments paid. The net after-tax proceeds were $420,190 after consideration of certain post closing adjustments, transaction costs and income taxes. The Company made estimated income tax payments related to the gain on sale during 2013 and has recorded an income tax receivable of $12,608 in the Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013.

Barnes Distribution Europe

In December 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 dated November 17, 2011. The Company received gross proceeds of $33,358 , which represents 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 income from operations of discontinued businesses for 2013 includes a final settlement of 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 ( $7,014 at March 31, 2014) plus interest remains in escrow. The Company objected to the retention of the escrow and

7


expects to prevail in this matter. The Company has recorded the restricted cash in other assets at March 31, 2014 and December 31, 2013.
    
The below amounts related to the BDE business 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,
 
2014
 
2013
Net sales
$
—

 
$
75,821

Loss before income taxes
—

 
(1,778
)
Income tax expense
—

 
183

Loss from operations of discontinued businesses, net of income taxes
—

 
(1,961
)
(Loss) gain on transaction
—

 
—

Income tax (expense) benefit on sale
—

 
—

(Loss) gain on the sale of businesses, net of income taxes
—

 
—

Loss from discontinued operations, net of income taxes
$
—

 
$
(1,961
)

3. Acquisitions

During 2013, the Company completed the acquisition of the Männer Business, a German company based in Bahlingen, Germany. The following table reflects the unaudited pro forma operating results of the Company for the three months ended March 31, 2013, which gives effect to the acquisition of the Männer Business as if it had occurred on January 1, 2012. 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, 2012, 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 the Männer Business adjusted for certain items including depreciation and amortization expense associated with the 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, 2013
Net sales
$
286,834

Income from continuing operations
17,929

Net income
15,968

 
 
Per common share:
 
Basic:
 
     Income from continuing operations
$
0.32

     Net income
$
0.29

Diluted:
 
     Income from continuing operations
$
0.32

     Net income
$
0.28

  
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

8


income per common share, the weighted-average number of common shares outstanding was increased by 1,322,272 and 785,095 for the three-month periods ended March 31, 2014 and 2013 , respectively, to account for the potential dilutive effect of stock-based incentive plans and convertible senior subordinated notes. 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 periods ended March 31, 2014 and 2013 , the Company excluded 92,049 and 366,349 stock options, respectively, from the calculation of weighted average diluted shares outstanding as the stock options would have been anti-dilutive.

The Company granted 86,300 stock options, 93,989 restricted stock unit awards and 84,654 performance share awards in February 2014 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, 2016. 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 provided 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 BDNA business, the Former CEO's outstanding equity awards were 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 unit awards and performance share awards that remained unvested on the day of his agreed to 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, 2014 was $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 512,453 potential shares issuable under the Notes that were considered dilutive for the three-month period ended March 31, 2014 . There were no potential shares issuable under the Notes for the three-month period ended March 31, 2013 as the Notes would have been anti-dilutive.

5. Inventories

The components of inventories consisted of:
 
March 31, 2014
 
December 31, 2013
Finished goods
$
81,406


$
85,033

Work-in-process
76,152

 
71,982

Raw material and supplies
52,654

 
54,231

 
$
210,212


$
211,246








9


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, 2014 :
 
Industrial
 
Aerospace
 
Total Company
January 1, 2014
$
618,911

 
$
30,786

 
$
649,697

Foreign currency translation
(4,093
)
 
—

 
(4,093
)
March 31, 2014
$
614,818

 
$
30,786

 
$
645,604


Other Intangible Assets:
Other intangible assets consisted of:
 
 
 
March 31, 2014
 
December 31, 2013
 
Range of
Life -Years
 
Gross Amount
 
Accumulated Amortization
 
Gross Amount
 
Accumulated Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Revenue sharing programs (RSPs)
Up to 30
 
$
293,700

 
$
(66,393
)
 
$
293,700

 
$
(64,220
)
Component Repair Program
Up to 15
 
26,639

 
(247
)
 
26,639

 
—

Customer lists/relationships
10-15
 
183,406

 
(21,515
)
 
183,406

 
(18,293
)
Patents and technology
7-14
 
62,972

 
(16,296
)
 
62,972

 
(14,210
)
Trademarks/trade names
5-30
 
11,950

 
(7,868
)
 
11,950

 
(7,628
)
Other
Up to 15
 
19,292

 
(11,736
)
 
19,292

 
(9,868
)
 
 
 
597,959

 
(124,055
)
 
597,959

 
(114,219
)
Unamortized intangible asset:
 
 
 
 
 
 
 
 
 
Trade name
 
 
36,900

 


 
36,900

 


Foreign currency translation
 
 
12,198

 
—

 
13,653

 
—

Other intangible assets
 
 
$
647,057

 
$
(124,055
)
 
$
648,512

 
$
(114,219
)

Estimated amortization of intangible assets for future periods is as follows: 2014 - $39,000 ; 2015 - $33,000 ; 2016 - $32,000 ; 2017 - $32,000 and 2018 - $33,000 .
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 financial covenants as of March 31, 2014 , and continues to monitor its future compliance based on current and anticipated future economic conditions.

Long-term debt and notes and overdrafts payable at March 31, 2014 and December 31, 2013 consisted of:

10


 
 
March 31, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
3.375% Convertible Notes
 
$
55,636

 
$
76,114

 
$
55,636

 
$
76,569

Unamortized debt discount – 3.375% Convertible Notes
 
—

 
—

 
(731
)
 
—

Revolving credit agreement
 
500,845

 
503,798

 
487,920

 
482,431

Borrowings under lines of credit and overdrafts
 
1,636

 
1,636

 
1,074

 
1,074

Other foreign bank borrowings
 
270

 
273

 
405

 
410

Capital leases
 
2,940

 
3,264

 
3,120

 
3,402

 
 
561,327

 
585,085

 
547,424

 
563,886

Less current maturities
 
(58,251
)
 
 
 
(57,083
)
 
 
Long-term debt
 
$
503,076

 
 
 
$
490,341

 
 

As of March 20, 2014, the 3.375% Convertible Notes (Notes") are subject to redemption at their par value at any time, at the option of the Company. The note holders had the option to require the Company to redeem some or all of the Notes on April 11, 2014. As such, the balance of these Notes of $55,636 (par value) and the related deferred tax balances are classified as current in the accompanying balance sheet as of March 31, 2014. None of the Notes were redeemed by the note holders on April 11, 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 2017 and 2022. The 3.375% Convertible Notes are also eligible for conversion upon meeting certain conditions as provided in the indenture agreement including the closing stock price for 20 of the last 30 trading days in the preceding quarter being greater than or equal to 130% of the conversion price (the "conversion price eligibility requirement"). The eligibility for conversion is determined quarterly. During the first quarter of 2014 , the 3.375% Convertible Notes were not eligible for conversion. During the second quarter of 2014 , the 3.375% Convertible Notes will be eligible for conversion due to meeting the conversion price eligibility requirement and on March 20, the Company formally notified the note holders that they are entitled to convert the Notes. The first $1 of the conversion value of each note would be paid in cash and the additional conversion value, if any, would be paid in cash or common stock, at the option of the Company. The fair value of the Notes was determined using quoted market prices that represent Level 2 observable inputs.

In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement”) and retained Bank of America, N.A. as Administrative Agent for the lenders. The Amended Credit Agreement extended the maturity date of the debt facility by two years from September 2016 to September 2018 and includes an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement added a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, maintained the borrowing availability of the Company at $750,000 and adds an accordion feature to increase this amount to $1,000,000 . The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is continuing. The borrowing availability of $750,000 , pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalent to $500,000 . Euro-denominated borrowings are subject to foreign currency translation adjustments that are included within accumulated other non-owner changes to equity. Borrowings under the Amended Credit Agreement continue to bear interest at LIBOR plus a spread ranging from 1.10% to 1.70% depending on the Company's leverage ratio at prior quarter end. The Company paid fees and expenses of $ 1,261 in conjunction with executing the Amended Credit Agreement in 2013; such fees will be deferred and amortized into interest expense on the accompanying Consolidated Statements of Income through its maturity.

Borrowings and availability under the Amended Credit Agreement were $ 500,845 and $ 249,155 , respectively, at March 31, 2014 and $487,920 and $262,080 , respectively, at December 31, 2013. Borrowings included Euro-denominated borrowings of €109,100 ( $150,045 ) at March 31, 2014 and €114,000 ( $157,320 ) at December 31, 2013. The interest rate on these borrowings was 1.30% and 1.36% on March 31, 2014 and December 31, 2013, respectively. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings are valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.

The Company's borrowing capacity remains limited by various debt covenants in the Amended Credit Agreement, certain of which were amended in September 2013. The Amended Credit Agreement requires the Company to maintain a ratio of Consolidated Senior Debt, as defined in the Amended Credit Agreement, to Consolidated EBITDA, as defined, of not more than 3.25 times at the end of each fiscal quarter ("Senior Debt Ratio"), a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times at the end of each fiscal quarter, and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of each fiscal quarter. The Amended Credit Agreement also provides that in connection with certain permitted acquisitions with aggregate consideration in excess of

11


$150,000 , the Consolidated Senior Debt to EBITDA ratio and the Consolidated Total Debt to EBITDA ratio are permitted to increase to 3.50 times and 4.25 times, respectively, for a period of the four fiscal quarters ending after the closing of the acquisition. In October 2013, the Company completed the acquisition of the Männer Business, a permitted transaction pursuant to the terms of the Amended Credit Agreement. At March 31, 2014, the Company was in compliance with all financial covenants under the Amended Credit Agreement.

In addition, the Company has available approximately $15,000 in uncommitted short-term bank credit lines ("Credit Lines"), of which $1,000 was borrowed at March 31, 2014 at an interest rate of 2.12% and $1,000 was borrowed at December 31, 2013 at an interest rate of 2.13% . The Company had also borrowed $636 and $74 under overdraft facilities at March 31, 2014 and December 31, 2013 , respectively. Repayments under the Credit Lines are due within seven days. Repayments of the overdrafts are generally due within two days. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.

The Company also has other foreign bank borrowings. The fair value of the 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.

The Company holds capital leases within the Männer Business that was acquired in October 2013. The fair value of
the capital leases are based on observable Level 2 inputs. These instruments are valued using discounted cash flows based
upon the Company's estimated interest costs for similar types of borrowings.

8. Business Reorganization

On March 14, 2014, the Company authorized the closure of production operations ("Saline operations") at its Associated Spring facility located in Saline, Michigan ("the Closure").  Saline operations, which include approximately 50 employees, primarily manufacture certain automotive engine valve springs, a highly commoditized product.  Based on changing market dynamics and increased customer demands for commodity pricing, several customers advised the Company of their intent to transition these specific springs to other suppliers, which led to the decision of the Closure.  The Closure is expected to be completed mid-year 2014. The Company recorded restructure and related costs of $2,750 . This balance included $2,112 of employee termination costs, primarily severance expense of $1,174 and defined benefit pension and other postretirement plan ("the "Plans") costs related to the accelerated recognition of actuarial losses and special termination benefits, and $638 of other Closure costs, primarily related to asset write-downs. The severance liability of $1,174 was included within accrued liabilities as of March 31, 2014. See Note 11 of the Consolidated Financial Statements for costs associated with the Plans that were impacted by the Closure. The Company also expects to incur additional costs of approximately $5,000 in 2014 related to the Closure. Closure costs are recorded primarily within Cost of Sales in the accompanying Consolidated Statements of Income and are reflected in the results of the Industrial segment.
The following table sets forth the change in the liability for the 2014 employee termination actions:
 
 
 
January 1, 2014
$
—

Employee termination benefit costs
1,174

Payments
—

March 31, 2014
$
1,174

The balance is expected to be paid in 2014.

9. Derivatives

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

Financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. In 2012, the Company entered into five -year interest rate swap agreements transacted with three banks which together convert the interest

12


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.
 
March 31, 2014
 
December 31, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
(258
)
 
$
—

 
$
(370
)
Foreign exchange contracts
—

 
(443
)
 
—

 
(318
)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
37

 
(296
)
 
543

 
(67
)
Total derivatives
$
37

 
$
(997
)
 
$
543

 
$
(755
)

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

The following table sets forth the gain (loss), net of tax, recorded in accumulated other non-owner changes to equity for the three-month periods ended March 31, 2014 and 2013 for derivatives held by the Company and designated as hedging instruments.
 
Three months ended March 31,
 
2014
 
2013
Cash flow hedges:
 
 
 
Interest rate contracts
$
71

 
$
156

Foreign exchange contracts
(98
)
 
271

 
$
(27
)
 
$
427


Amounts included within accumulated other non-owner changes to equity that were reclassified to expense during the first three months of 2014 and 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- month periods ended March 31, 2014 and 2013.

The following table sets forth the (losses) recorded in other expense (income), net in the consolidated statements of income for the three- month periods ended March 31, 2014 and 2013 for non-designated derivatives held by the Company. Such amounts were substantially offset by gains (losses) recorded on the underlying hedged asset or liability.

13


 
Three months ended March 31,
 
2014
 
2013
Foreign exchange contracts
$
(747
)
 
$
(3,906
)

10. 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:
 
 
 
 
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, 2014
 
 
 
 
 
 
 
 
Asset derivatives
 
$
37

 
$
—

 
$
37

 
$
—

Liability derivatives
 
(997
)
 
—

 
(997
)
 
—

Bank acceptances
 
5,174

 
—

 
5,174

 
—

Rabbi trust assets
 
2,053

 
2,053

 
—

 
—

 
 
$
6,267

 
$
2,053

 
$
4,214

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Asset derivatives
 
$
543

 
$
—

 
$
543

 
$
—

Liability derivatives
 
(755
)
 
—

 
(755
)
 
—

Bank acceptances
 
6,461

 
—

 
6,461

 
—

Rabbi trust assets
 
1,975

 
1,975

 
—

 
—

 
 
$
8,224


$
1,975

 
$
6,249

 
$
—


The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing LIBOR-based and U.S. treasury interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain Chinese customers in lieu of cash paid on receivables, generally range from three to six months in maturity and are guaranteed by banks. The carrying amounts of the bank acceptances, which are included within prepaid expenses and other current assets, approximate fair value due to their short maturities. The fair values of rabbi trust assets are based on quoted market prices from various financial exchanges.









14


11. Pension and Other Postretirement Benefits

Pension and other postretirement benefits expenses consisted of the following:
 
Three months ended March 31,
Pensions
2014
 
2013
Service cost
$
1,255

 
$
1,984

Interest cost
5,438

 
4,987

Expected return on plan assets
(8,570
)
 
(8,276
)
Amortization of prior service cost
177

 
203

Amortization of actuarial losses
1,962

 
4,075

Curtailment loss
219

 
199

Special termination benefits
715

 
—

Net periodic benefit cost
$
1,196

 
$
3,172

 
 
 
 
 
Three months ended March 31,
Other Postretirement Benefits
2014
 
2013
Service cost
$
52

 
$
77

Interest cost
559

 
543

Amortization of prior service credit
(217
)
 
(395
)
Amortization of actuarial losses
216

 
290

Curtailment loss
4

 
—

Net periodic benefit cost
$
614

 
$
515


Curtailment losses and special termination benefits during the first three months of 2014 and 2013 relate to certain defined benefit pension and other postretirement benefit plans that were impacted by the closure of production operations at the Associated Spring facility located in Saline, Michigan and the completed sale of Barnes Distribution North America ("BDNA"), respectively. Amounts related to BDNA have been segregated from continuing operations and reported as discontinued operations within the Consolidated Financial Statements during the first three months of 2013.

The Company contributed 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 former union-represented employees of the Edison, New Jersey facility at BDNA. The Company determined that a withdrawal from this multi-employer plan, following its entry into a definitive agreement to sell BDNA in February 2013, was probable. The Company estimated its assessment of a withdrawal liability, on a pre-tax discounted basis, and recorded a liability of $2,788 during the first quarter of 2013. The expense was recorded within discontinued operations. The Company completed the sale of BDNA and ceased making contributions into the multi-employer plan during the second quarter of 2013. The Company settled the withdrawal liability in the fourth quarter of 2013, with the agreed-upon settlement payment being made during the first quarter of 2014.

12. Income Taxes

The Company's effective tax rate from continuing operations for the first quarter of 2014 was 27.9% compared with 21.4% in the first quarter of 2013 and 32.8% for the full year 2013 which includes the impact of $16,428 of tax expense related to the April 16, 2013 U.S. Court Decision (see Note 15 of the Consolidated Financial Statements). Excluding the impact of the U.S. Tax Court Decision, the Company's effective tax rate from continuing operations for full year 2013 was 17.5% . The increase in the first quarter 2014 effective tax rate from the full year 2013 rate, as adjusted for the U.S. Tax Court Decision, is primarily due to the a change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2014, the expiration of certain tax holidays and the increase in planned repatriation of a portion of current foreign earnings to the U.S.

The Aerospace and Industrial segments were previously awarded international tax holidays. All of the tax holidays for which the Company currently receives benefit are expected to expire in 2014 through 2016.


15


13. Changes in Accumulated Other Comprehensive Income by Component

The following table sets forth the changes in accumulated other comprehensive income, net of tax, by component for the three-month periods ended March 31, 2014 and March 31, 2013:
 
Gains and Losses on Cash Flow Hedges
 
Pension and Other Postretirement Benefit Items
 
Foreign Currency Items
 
Total
January 1, 2014
$
(519
)
 
$
(73,273
)
 
$
99,736

 
$
25,944

Other comprehensive income before reclassifications to consolidated statements of income
(146
)
 
(7,419
)
 
(5,948
)
 
(13,513
)
Amounts reclassified from accumulated other comprehensive (loss) income to the consolidated statements of income
119

 
1,549

 
—

 
1,668

Net current-period other comprehensive loss
(27
)
 
(5,870
)
 
(5,948
)
 
(11,845
)
March 31, 2014
$
(546
)
 
$
(79,143
)
 
$
93,788

 
$
14,099


 
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 (loss)
427

 
2,410

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

 
$
(78,420
)


The following table sets forth the reclassifications out of accumulated other comprehensive income by component for the three- periods ended March 31, 2014 and March 31, 2013:

16


Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
Affected Line Item in the Consolidated Statements of Income
 
 
Three months ended March 31, 2014
 
Three months ended March 31, 2013
 
 
Gains and losses on cash flow hedges
 
 
 
 
 

     Interest rate contracts
 
$
(217
)
 
$
(199
)
 
Interest expense
     Foreign exchange contracts
 
22

 
284

 
Net sales
 
 
(195
)
 
85

 
Total before tax
 
 
76

 
13

 
Tax benefit
 
 
(119
)
 
98

 
Net of tax
 
 
 
 
 
 
 
Pension and other postretirement benefit items
 
 
 
 
 
 
     Amortization of prior-service credits, net
 
$
40

 
$
192

 
(A)
Amortization of actuarial losses
 
(2,178
)
 
(4,365
)
 
(A)
Curtailment loss (net)
 
(223
)
 
(199
)
 
(A)
 
 
(2,361
)
 
(4,372
)
 
Total before tax
 
 
812

 
1,574

 
Tax benefit
 
 
(1,549
)
 
(2,798
)
 
Net of tax
Total reclassifications in the period
 
$
(1,668
)
 
$
(2,700
)
 
 
(A) These accumulated other comprehensive income components are included within the computation of net periodic pension cost. See Note 11.

14. 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.

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

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


17


The following tables set forth information about the Company's operations by its two reportable segments:
 
Three months ended March 31,
 
2014
 
2013
Net sales
 
 
 
   Industrial
$
203,888

 
$
165,502

   Aerospace
108,212

 
98,045

   Intersegment sales
(1
)
 
(2
)
Total net sales
$
312,099

 
$
263,545

 
 
 
 
Operating profit
 
 
 
   Industrial
$
19,374

 
$
14,609

   Aerospace
15,750

 
10,346

Total operating profit
35,124

 
24,955

   Interest expense
3,319

 
4,357

   Other expense (income), net
234

 
966

Income from continuing operations before income taxes
$
31,571

 
$
19,632


 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
   Industrial
$
1,421,029

 
$
1,410,400

   Aerospace
576,336

 
567,080

   Other (A)
137,302

 
146,193

Total assets
$
2,134,667

 
$
2,123,673


(A) "Other" assets include corporate-controlled assets, the majority of which are cash and deferred tax assets.

15. 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, 2014 and December 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 (“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 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. As a result of the unfavorable Tax Court Decision, the Company recorded an additional tax charge during 2013 for $16,428 .

In November 2013, the Company made a cash payment of approximately $12,700 related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its formal appeal with the United States Court of Appeals for the Second Circuit on February 13, 2014. The Company does not expect a decision until 2015.

18



16. Accounting Changes

In July 2013, the Financial Accounting Standards Board (FASB) issued guidance related to the financial statement presentation of an unrecognized tax benefit when certain tax losses or tax credit carryforwards exist. This guidance requires that companies present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The provisions of the amended guidance were effective for the Company, and adopted, in the first quarter of 2014. The provisions did not have a material impact on the presentation of the Company's consolidated financial statements.

__________________________________________________________________________________________

With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month periods ended March 31, 2014 and 2013 , 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 28, 2014 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.


19


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, 2014 and the related consolidated statements of income and comprehensive income for the three-month periods ended March 31, 2014 and March 31, 2013 and the consolidated statements of cash flows for the three-month periods ended March 31, 2014 and March 31, 2013 . 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, 2013 , 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, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2013 , 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 28, 2014
 



20


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, 2013. The Annual Report on Form 10-K and other documents related to the Company are located on the Company's website: www.bginc.com .

First Quarter 2014 Highlights

In the first quarter of 2014, sales increased by $48.6 million, or 18.4% from the first quarter of 2013, to $312.1 million. This increase was driven primarily by a $38.0 million sales contribution from the Männer Business. Organic sales, driven by the Aerospace segment, increased by $9.8 million, or 3.7% . Organic growth within the Industrial segment declined slightly.

Operating income in the first quarter of 2014 increased 40.7% to $35.1 million from the first quarter of 2013 and operating margin increased from 9.5% to 11.3% . Operating income benefited from the profit contribution of both the Männer Business and increased organic sales, partially offset by $4.9 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $2.8 million of pre-tax restructuring charges related to the closure of production operations at the facility in Saline, Michigan. Operating income during the first quarter of 2013 included $10.5 million of non-recurring stock compensation expenses related to the modification of outstanding equity awards granted to the former Chief Executive Officer ("CEO transition costs").

In March 2014, the Company authorized the closure of production operations ("Saline operations") at its Associated Spring facility located in Saline, Michigan ("the Closure"). The Saline operations primarily manufacture certain automotive engine valve springs. The Closure is expected to be completed mid-year 2014.

RESULTS OF OPERATIONS

Net Sales
 
Three months ended March 31,
(in millions)
2014
 
2013
 
Change
Industrial
203.9

 
165.5

 
38.4

 
23.2
%
Aerospace
$
108.2

 
$
98.0

 
$
10.2

 
10.4
%
Intersegment sales
—

 
—

 
—

 
—
%
Total
$
312.1

 
$
263.5

 
$
48.6

 
18.4
%

The Company reported net sales of $312.1 million in the first quarter of 2014 , an increase of $48.6 million or 18.4% , from the first quarter of 2013 . The acquisition of the Männer Business in 2013 provided $38.0 million of net sales during the first quarter of 2014. Organic sales increased by $9.8 million, as $10.2 million of organic growth at Aerospace was partially offset by a decline of $0.4 million at Industrial. The weakening of the U.S. dollar against foreign currencies increased net sales by approximately $0.8 million.
















21


Expenses and Operating Income
 
Three months ended March 31,
(in millions)
2014
 
2013
 
Change
Cost of sales
$
214.6

 
$
177.7

 
$
36.8

 
20.7
%
    % sales
68.8
%
 
67.4
%
 

 

Gross profit (1)
$
97.5

 
$
85.8

 
$
11.7

 
13.6
%
    % sales
31.2
%
 
32.6
%
 

 

Selling and administrative expenses
$
62.4

 
$
60.9

 
$
1.5

 
2.5
%
    % sales
20.0
%
 
23.1
%
 
 
 
 
Operating income
$
35.1

 
$
25.0

 
$
10.2

 
40.7
%
    % sales
11.3
%
 
9.5
%
 
 
 
 
(1) Sales less cost of sales.  
 
 
 
 
 
 
 

Cost of sales in the first quarter of 2014 increased 20.7% from the 2013 period, while gross profit margin decreased from 32.6% in the 2013 period to 31.2% in the 2014 period. Gross margins declined at both Industrial and Aerospace. The acquisition of the Männer Business resulted in a higher percentage of sales being driven by Industrial during the 2014 period. Gross profit benefits from the Männer Business were partially offset by the $3.3 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and charges of $2.3 million related to the Closure of the Saline operations. Selling and administrative expenses in the first quarter of 2014 increased 2.5% from the 2013 period due primarily to the incremental operations of the Männer Business, $1.6 million of short-term purchase accounting adjustments related to the acquisition of the Männer Business and $0.5 million of charges related to the Closure of the Saline operations. As a percentage of sales, selling and administrative costs decreased from 23.1% in the first quarter of 2013 to 20.0% in the 2014 period as the 2013 period included CEO transition costs of $10.5 million. Operating income in the first quarter of 2014 increased 40.7% to $35.1 million from the first quarter of 2013 and operating income margin increased from 9.5% to 11.3% .

Interest expense
Interest expense decreased by $1.0 million in the first quarter of 2014 compared to the prior year amount, primarily the result of lower average borrowings under the Amended Credit Agreement.

Other expense (income), net
Other expense (income), net in the first quarter of 2014 was $0.2 million compared to $1.0 million in the first quarter of 2013 . The decrease was primarily due to changes in foreign exchange net transaction losses during the period.

Income Taxes
The Company's effective tax rate from continuing operations for the first quarter of 2014 was 27.9% compared with 21.4% in the first quarter of 2013 and 32.8% for the full year 2013 which includes the impact of $ 16.4 million of tax expense related to the April 16, 2013 U.S. Tax Court Decision (see below). Excluding the impact of the U.S. Tax Court Decision, the Company's effective tax rate from continuing operations for full year 2013 was 17.5%. The increase in the first quarter 2014 effective tax rate from the full year 2013 rate, as adjusted for the U.S. Tax Court Decision, is primarily due to the a change in the mix of earnings attributable to higher-taxing jurisdictions or jurisdictions where losses cannot be benefited in 2014, the expiration of certain tax holidays and the increase in planned repatriation of a portion of current foreign earnings to the U.S.

The Aerospace and Industrial segments were previously awarded international tax holidays. All of the tax holidays for which the Company currently receives benefit are expected to expire in 2014 through 2016.

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.4 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.

The case arose out of an Internal Revenue Service (“IRS”) audit for the tax years 2000 through 2002. The 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

22


the United States Tax Court, contesting the tax assessment. A trial was held and all briefs were filed in 2012. In April 2013 the Tax Court Decision was then issued rendering an unfavorable decision against the Company and imposing penalties. As a result of the unfavorable Tax Court Decision, the Company recorded an additional tax charge during 2013 for $16.4 million.

In November 2013, the Company made a cash payment of approximately $12.7 million related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its formal appeal with the United States Court of Appeals for the Second Circuit on February 13, 2014. The Company does not expect a decision until 2015.

Discontinued Operations
In April 2013, the Company completed the sale of its Barnes Distribution North America business ("BDNA") to MSC Industrial Direct Co., Inc. ("MSC"). The results of BDNA were segregated and presented as discontinued operations during the first quarter of 2013. The Company recorded a $2.0 million loss from discontinued operations during the 2013 period. 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 the Barnes Distribution Europe businesses. See Note 2 of the Consolidated Financial Statements.

Income and Income per Share
 
Three months ended March 31,
(in millions, except per share)
2014
 
2013
 
Change
Income from continuing operations
$
22.8

 
$
15.4

 
$
7.3

 
47.4
 %
Loss from discontinued operations, net of income taxes
—

 
(2.0
)
 
2.0

 
NM

Net income
$
22.8

 
$
13.5

 
$
9.3

 
68.9
 %
Per common share:
 
 
 
 
 
 
 
  Basic:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.42

 
$
0.29

 
$
0.13

 
44.8
 %
    Loss from discontinued operations, net of income taxes
—

 
(0.04
)
 
0.04

 
NM

    Net income
$
0.42

 
$
0.25

 
$
0.17

 
68.0
 %
  Diluted:
 
 
 
 
 
 
 
    Income from continuing operations
$
0.41

 
$
0.28

 
$
0.13

 
46.4
 %
    Loss from discontinued operations, net of income taxes
—

 
(0.04
)
 
0.04

 
NM

    Net income
$
0.41

 
$
0.24

 
$
0.17

 
70.8
 %
Weighted average common shares outstanding:
 
 
 
 
 
 
 
   Basic
54.7

 
54.7

 
—

 
(0.2
)%
   Diluted
56.0

 
55.5

 
0.4

 
0.8
 %

NM - Not meaningful

In the first quarter of 2014 , basic and diluted income from continuing operations per common share increased 44.8% and 46.4% , respectively, from the first quarter of 2013 . The increases were directly attributable to the increase in income from continuing operations for the period. Basic weighted average common shares outstanding decreased slightly due to the repurchase of 220,794 and 2,350,697 shares during 2014 and 2013, respectively, as part of the repurchase program. Diluted weighted average common shares outstanding increased as a result of an increase in the dilutive effect of potentially issuable shares given an increase in the Company's stock price and the modification of outstanding equity awards granted to the former Chief Executive Officer in the first quarter of 2013.
 









23


Financial Performance by Business Segment

Industrial
 
Three months ended March 31,
(in millions)
2014
 
2013
 
Change
Sales
$
203.9

 
$
165.5

 
$
38.4

 
23.2
%
Operating profit
19.4

 
14.6

 
4.8

 
32.6
%
Operating margin
9.5
%
 
8.8
%
 
 
 
 

Sales at Industrial were $203.9 million in the first quarter of 2014 , a $38.4 million increase from the first quarter of 2013 . The acquisition of the Männer Business in 2013 provided $38.0 million of sales. Organic sales declined by $0.4 million during the 2014 period. Sales benefited from foreign currency translation which increased sales by approximately $0.8 million as the U.S. dollar weakened against foreign currencies.

Operating profit in the first quarter of 2014 at Industrial was $19.4 million, an increase of $4.8 million from the first quarter of 2013. Operating profit benefited primarily from the profit contribution of the Männer Business, partially offset by $4.9 million of short-term purchase accounting adjustments related to the acquisition and $2.8 million of pre-tax restructuring charges related to the Closure of the Saline operations. Operating income during the first quarter of 2013 included CEO transition costs of $6.6 million that were allocated to the Industrial segment.

Outlook: In the Industrial manufacturing businesses, management is focused on generating organic sales growth through the introduction of new products and by leveraging the benefits of the diversified products and industrial end-markets in which its businesses have a global presence. The Company also remains focused on sales growth through acquisition and expanding geographic reach. Synventive, acquired in 2012, added new innovative products and services and has expanded the Company's global marketplace presence. The Männer Business, acquired in 2013, is expected to further provide additional differentiated products and services through the manufacture of high precision molds, valve gate hot runner systems, and system solutions for the medical/pharmaceutical, packaging, and personal care/health care industries. Our ability to generate sales growth is subject to economic conditions in the global markets served by all of our businesses. Order activity in certain end-markets may provide extended sales growth. Strategic investments in new technologies, manufacturing processes and product development 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, and productivity and process improvements. Costs associated with increases in new product and process introductions, strategic investments and the integration of acquisitions may negatively impact operating profit.

Aerospace
 
Three months ended March 31,
(in millions)
2014
 
2013
 
Change
Sales
$
108.2

 
$
98.0

 
$
10.2

 
10.4
%
Operating profit
15.8

 
10.3

 
5.4

 
52.2
%
Operating margin
14.6
%
 
10.6
%
 
 
 
 

The Aerospace segment reported sales of $108.2 million in the first quarter of 2014 , a 10.4% increase from the first quarter of 2013 . Sales increased within the original equipment manufacturing ("OEM") business and the aftermarket business. Within aftermarket, a sales increase within the repair and overhaul business ("MRO") was partially offset by lower sales in the spare parts business. Increased sales within the OEM business reflected continued strength in demand for new engines, driven by increased commercial aircraft production. The aftermarket repair and overhaul sales growth was driven by increased levels of commercial engine maintenance.

Operating profit at Aerospace in the first quarter of 2014 increased 52.2% from the first quarter of 2013 to $15.8 million, driven primarily by the profit contributions of increased sales in the OEM and MRO businesses, partially offset by lower profits in the spare parts business. Operating income during the first quarter of 2013 included CEO transition costs of $3.9 million that were allocated to the segment. Operating margin increased from 10.6% in the 2013 period to 14.6% in the 2014 period.


24


Outlook: Sales in the Aerospace OEM business are based on the general state of the aerospace market driven by the worldwide economy and are supported by its order backlog through participation in certain strategic commercial and military engine and airframe programs. Backlog in this business was $544.9 million at March 31, 2014 , of which approximately 61% is 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 be impacted by fluctuations in end-market demand and changes in customer insourcing. Management continues to believe its Aerospace aftermarket business is competitively positioned based on well-established long-term customer relationships, including maintenance and repair contracts in the repair and overhaul business and long-term RSP and Component Repair Program ("CRP"), expanded capabilities and current capacity levels.

Management is focused on growing operating profit at Aerospace primarily through leveraging organic sales growth, productivity initiatives, new product and process introductions and continued cost management. Operating profit is expected to be affected by the impact of changes in sales volume, mix and pricing, particularly as 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 and process introductions and the physical transfer of work to lower cost manufacturing regions may negatively impact operating profit.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses the Company's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Of particular importance in the management of liquidity are cash flows generated from operating activities, capital expenditure levels, dividends, capital stock transactions, effective utilization of surplus cash positions overseas and adequate lines of credit.
 
The Company'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 2014 will generate adequate cash. The Company closely monitors its cash generation, usage and preservation including the management of working capital to generate cash.

As of March 20, 2014, the 3.375% Convertible Notes ("Notes") are subject to redemption at their par value at any time, at the option of the Company. The note holders had the option to require the Company to redeem some or all of the Notes on April 11, 2014. As such, the balance of these Notes of $55,636 (par value) and the related deferred tax balances are classified as current in the accompanying balance sheet as of March 31, 2014. None of the Notes were redeemed by the note holders on April 11, 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 2017 and 2022. The 3.375% Convertible Notes are also eligible for conversion upon meeting certain conditions as provided in the indenture agreement including the closing stock price for 20 of the last 30 trading days in the preceding quarter being greater than or equal to 130% of the conversion price (the "conversion price eligibility requirement"). The eligibility for conversion is determined quarterly. During the first quarter of 2014 , the 3.375% Convertible Notes were not eligible for conversion. During the second quarter of 2014 , the 3.375% Convertible Notes will be eligible for conversion due to meeting the conversion price eligibility requirement and on March 20, the Company formally notified the note holders that they are entitled to convert the Notes. The first $1 of the conversion value of each note would be paid in cash and the additional conversion value, if any, would be paid in cash or common stock, at the option of the Company. 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.

In September 2013, the Company entered into a second amendment to its fifth amended and restated revolving credit agreement (the "Amended Credit Agreement”) and retained Bank of America, N.A. as Administrative Agent for the lenders. The Amended Credit Agreement extends the maturity date of the debt facility by two years from September 2016 to September 2018 and includes an option to extend the maturity date for an additional year, subject to certain conditions. The Amended Credit Agreement added a new foreign subsidiary borrower in Germany, Barnes Group Acquisition GmbH, maintained the borrowing availability of the Company at $750.0 million and adds an accordion feature to increase this amount to $1,000.0 million. The borrowing availability of $750.0 million, pursuant to the terms of the Amended Credit Agreement, allows for Euro-denominated borrowings equivalent to $500.0 million. Euro-denominated borrowings are subject to foreign currency translation adjustments that are included within accumulated other non-owner changes to equity. The Company may exercise the accordion feature upon request to the Administrative Agent as long as an event of default has not occurred or is continuing. Borrowings under the Amended Credit Agreement continue to bear interest at LIBOR plus a spread ranging from 1.10% to

25


1.70% . The Company paid fees and expenses of $1.3 million in conjunction with executing the Amended Credit Agreement; such fees will be deferred and amortized into interest expense on the accompanying Consolidated Statements of Income through its maturity.
 
The Company's borrowing capacity remains limited by various debt covenants in the Amended Credit Agreement, certain of which were amended in September 2013. The Amended Credit Agreement requires the Company to maintain a ratio of Consolidated Senior Debt, as defined in the Amended Credit Agreement, to Consolidated EBITDA, as defined, of not more than 3.25 times at the end of each fiscal quarter ("Senior Debt Ratio"), a ratio of Consolidated Total Debt, as defined, to Consolidated EBITDA of not more than 4.00 times at the end of each fiscal quarter, and a ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times at the end of each fiscal quarter. The Amended Credit Agreement also provides that in connection with certain permitted acquisitions with aggregate consideration in excess of $150.0 million, the Consolidated Senior Debt to EBITDA ratio and the Consolidated Total Debt to EBITDA ratio are permitted to increase to 3.50 times and 4.25 times, respectively, for a period of the four fiscal quarters ending after the closing of the acquisition. In October 2013, the Company completed the acquisition of the Männer Business, a permitted transaction pursuant to the terms of the Amended Credit Agreement. At March 31, 2014, the Company was in compliance with all financial covenants under the Amended Credit Agreement. The Company's most restrictive financial covenant is the Senior Debt Ratio which requires the Company to maintain a ratio of Consolidated Senior Debt to Consolidated EBITDA of not more than 3.50 times at March 31, 2014 . The actual ratio at March 31, 2014 was 2.10 times.

Operating cash flow may be supplemented with external borrowings to meet near-term business expansion needs and the Company's current financial commitments. The Company has assessed its credit facilities in conjunction with the September 27, 2013 refinancing and currently expects that its bank syndicate, comprised of 17 banks, will continue to support its Amended Credit Agreement which matures in September 2018.  At March 31, 2014 , the Company had $249.2 million unused and available for borrowings under its $750.0 million Amended Credit Facility, subject to covenants in the Company's debt agreements. At March 31, 2014 , additional borrowings of $ 464.0 million of Total Debt and $ 338.7 million of Senior Debt would have been allowed under the financial covenants. 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.

In 2012, the Company entered into five-year interest rate swap agreements transacted with three banks which together convert the interest on the first $100.0 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, under a Rule 10b5-1 trading plan, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Cash Flow
 
Three months ended March 31,
(in millions)
2014
 
2013
 
Change
Operating activities
$
17.0

 
$
17.7

 
$
(0.7
)
Investing activities
(15.2
)
 
(11.4
)
 
(3.7
)
Financing activities
(11.0
)
 
8.3

 
(19.4
)
Exchange rate effect
(0.2
)
 
(1.0
)
 
0.8

(Decrease)/increase in cash
$
(9.4
)
 
$
13.5

 
$
(23.0
)

Operating activities provided $17.0 million in cash in the first three months of 2014 and $17.7 million in the first three months of 2013. Operating cash flows in the 2014 period reflect an increase in cash used for working capital generated by higher levels of sales growth relative to 2013. Higher levels of sales growth in 2014 resulted in an increase in receivables which generated a higher use of cash than in the comparable period. Operating cash flows in the 2013 period were negatively impacted by a higher use of cash for the settlement of accrued liabilities than in the comparable 2014 period.
  

26


Investing activities in the 2014 and 2013 periods primarily consisted of capital expenditures of $15.1 million and $10.1 million, respectively. The Company expects capital spending in 2014 to approximate $60 million.

Financing activities in the first three months of 2014 included a net increase in borrowings of $13.7 million compared to $23.5 million in the comparable 2013 period. In addition, financing activities in the 2014 period included the payment of an assumed liability to the seller in connection with the acquisition of the Männer Business. Proceeds from the issuance of common stock were $ 7.3 million and $ 2.7 million in the 2014 and 2013 periods, respectively. During the three months ended March 31, 2014 and March 31, 2013 , the Company repurchased 0.2 million and 0.5 million shares, respectively, of the Company's stock. The cost of the repurchases was $8.4 million in the 2014 period and $12.9 million in the 2013 period. Total cash used to pay dividends was $6.0 million in the 2014 period compared to $5.4 million in the 2013 period.

At March 31, 2014 , the Company held $ 61.4 million in cash and cash equivalents, the majority of which was held by foreign subsidiaries. These amounts have no material regulatory or contractual restrictions and are expected to primarily fund international investments. The Company has not repatriated any portion of current year foreign earnings to the U.S. during the first three months of 2014; however, repatriations of a portion of current year foreign earnings are planned during the remainder of 2014.

The Company maintains borrowing facilities with banks to supplement internal cash generation. At March 31, 2014 , $500.8 million was borrowed at an interest rate of 1.30% under the Company's amended $750.0 million Credit Facility which matures in September 2018. In addition, as of March 31, 2014 , the Company had $1.0 million in borrowings under short-term bank credit lines. At March 31, 2014 , the Company's total borrowings were comprised of approximately 28% fixed rate debt and approximately 72% 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, 2014 , the most restrictive financial covenant is included within the Amended Credit Agreement and 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 Amended Credit Agreement also contains 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, 2014 . The Amended Credit Agreement also provides that in connection with certain permitted acquisitions with aggregate consideration in excess of $150.0 million, the Consolidated Senior Debt to EBITDA ratio and the Consolidated Total Debt to EBITDA ratio are permitted to increase to 3.50 times and 4.25 times, respectively, for a period of the four fiscal quarters ending after the closing of the acquisition. On October 31, 2013, the Company completed the acquisition of the Männer Business, a permitted transaction pursuant to the terms of the Amended Credit Agreement. Following is a reconciliation of Consolidated EBITDA to the Company's net income (in millions):


27


 
Four fiscal quarters ended March 31, 2014
Net income
$
279.8

Add back:
 
   Interest expense
12.1

   Income taxes
39.9

   Depreciation and amortization
69.3

   Income from discontinued operations, net of income taxes
(200.2
)
   Adjustment for acquired businesses
23.8

   Adjustment for non-cash stock based compensation
6.8

   Amortization of Männer acquisition inventory step-up
6.9

   Restructuring charges
2.2

   Due diligence and transaction expenses
1.5

   Other adjustments
(0.9
)
Consolidated EBITDA, as defined
$
241.3

 
 
Consolidated Senior Debt, as defined, as of March 31, 2014
$
505.7

Ratio of Consolidated Senior Debt to Consolidated EBITDA
2.10

Maximum
3.50

Consolidated Total Debt, as defined, as of March 31, 2014
$
561.3

Ratio of Consolidated Total Debt to Consolidated EBITDA
2.33

Maximum
4.25

Consolidated Cash Interest Expense, as defined, as of March 31, 2014
$
11.3

Ratio of Consolidated EBITDA to Consolidated Cash Interest Expense
21.36

Minimum
4.25


The income from discontinued operations, net of income taxes, reflects income associated with BDNA (including gain on sale). The adjustment for acquired businesses reflects the unaudited pre-acquisition operations of the Männer business for the seven-month period ended October 31, 2013. The restructuring charges represent charges recorded in the first quarter of 2014 related to the closure of production operations at the Associated Spring facility located in Saline, Michigan. Other adjustments primarily consist of net gains on the sale of assets. The Company's financial covenants are measured as of the end of each fiscal quarter. At March 31, 2014 , additional borrowings of $ 464.0 million of Total Debt and $ 338.7 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, 2014 were $249.2 million.

OTHER MATTERS

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 . The most significant areas involving management judgments and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 . 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 2014 was $55.7 million compared to $38.8 million in the first three months of 2013. 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

28


provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company's operating performance. The Company's definition of EBITDA may not be comparable with EBITDA as defined by other companies. Accordingly, the measurement has limitations depending on its use. The Company believes EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors.

Following is a reconciliation of EBITDA to the Company's net income (in millions):
 
Three months ended March 31,
 
2014
 
2013
Net income
$
22.8

 
$
13.5

Add back:
 
 
 
   Interest expense
3.3

 
4.4

   Income taxes
8.8

 
4.4

   Depreciation and amortization
20.8

 
16.5

EBITDA
$
55.7

 
$
38.8


FORWARD-LOOKING STATEMENTS
Certain of the statements in this quarterly report contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future operating and financial performance and financial condition, and often contain words such as "anticipate," "believe," "expect," "plan," "strategy," "estimate," "project," and similar terms. These forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. These include, among others: difficulty maintaining relationships with employees, including unionized employees, customers, distributors, suppliers, business partners or governmental entities; potential strikes or work stoppages; difficulties leveraging market opportunities; changes in market demand for our products and services; rapid technological and market change; the ability to protect intellectual property rights; introduction or development of new products or transfer of work; higher risks in international operations and markets; the impact of intense competition; and other risks and uncertainties described in documents filed with or furnished to the Securities and Exchange Commission ("SEC") by the Company, including, among others, those in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of the Company's filings. The risks and uncertainties described in our periodic filings with the SEC include, among others, uncertainties relating to conditions in financial markets; currency fluctuations and foreign currency exposure; future financial performance of the industries or customers that we serve; our dependence upon revenues and earnings from a small number of significant customers; a major loss of customers; inability to realize expected sales or profits from existing backlog due to a range of factors, including insourcing decisions, material changes, production schedules and volumes of specific programs; the impact of government budget and funding decisions; changes in raw material or product prices and availability; integration of acquired businesses including the Männer business; restructuring costs or savings including those related to the planned closure of production operations at the Company’s facility in Saline, Michigan; the continuing impact of strategic actions, including acquisitions, divestitures, restructurings, or strategic business realignments, and our ability to achieve the financial and operational targets set in connection with any such actions; the outcome of pending and future legal, governmental, or regulatory proceedings and contingencies and uninsured claims; future repurchases of common stock; future levels of indebtedness; and numerous other matters of a global, regional or national scale, including those of a political, economic, business, competitive, environmental, regulatory and public health nature. 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, 2013.

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 covered by this report. Based upon, and as of the date of, our evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects and designed to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported as and when required and

29


(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 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


30



PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On April 16, 2013, the United States Tax Court rendered an unfavorable decision in the matter Barnes Group Inc. and Subsidiaries v. Commissioner of Internal Revenue (“Tax Court Decision”). The Tax Court rejected the Company's objections and imposed penalties. The case involved IRS proposed adjustments of approximately $16.4 million, plus a 20% penalty and interest for the tax years 1998, 2000 and 2001.

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

In November 2013, the Company made a cash payment of approximately $12.7 million related to tax, interest and penalties and utilized a portion of its net operating losses. The Company also submitted a notice of appeal of the Tax Court Decision to the United States Court of Appeals for the Second Circuit. The Company filed its formal appeal with the United States Court of Appeals for the Second Circuit on February 13, 2014. The Company does not expect a decision until 2015.

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, 2014
 
276

 
$
38.31

 
—

 
2,649,303

 
February 1-28, 2014
 
12,287

 
$
36.82

 
—

 
2,649,303

 
March 1-31, 2014
 
220,794

 
$
37.99

 
220,794

 
2,428,509

 
Total
 
233,357

(2)  
$
37.93

 
220,794

 
 
 

(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, purchases under a Rule 10b5-1 trading plan and privately negotiated transactions.
(2)
Other than 220,794 shares purchased in the first quarter of 2014, which were purchased as part of the Company's 2011 Program, all acquisitions of equity securities during the first quarter of 2014 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

31


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.



32


Item 6. Exhibits
(a) Exhibits
 
Exhibit 10.1
Form of Barnes Group Inc. Executive Officer Severance Agreement, effective February 19, 2014.
Exhibit 10.2
Offer Letter to Scott A. Mayo, dated January 28, 2014.
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.


33


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 28, 2014
/s/    CHRISTOPHER J. STEPHENS, JR.
 
 
Christopher J. Stephens, Jr.
Senior Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)
 
 
 
Date:
April 28, 2014
/s/    MARIAN ACKER
 
 
Marian Acker
Vice President, Controller
(Principal Accounting Officer)





34


EXHIBIT INDEX
Barnes Group Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2014
Exhibit No.
 
Description
 
Reference
10.1
 
Form of Barnes Group Inc. Executive Officer Severance Agreement, effective February 19, 2014.
 
Filed with this report.
10.2
 
Offer Letter to Scott A. Mayo, dated January 28, 2014.
 
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.




































35


EXHIBIT 10.1

SEVERANCE AGREEMENT


THIS AGREEMENT, is made by and between Barnes Group Inc., a Delaware corporation (the "Company"), and [_______________________] (the "Executive"), to be effective as of [______________] (the "Effective Date").

WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel; and

WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and

WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:

1. Defined Terms . The definitions of capitalized terms used in this Agreement are provided in the last Section hereof.

2. Term of Agreement . The Term of this Agreement shall commence on the Effective Date and shall continue in effect through December 31, [____] provided , however , that commencing on January 1, [____] and each January 1 thereafter, the Term shall automatically be extended for one (1) additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend the Term; and further provided , however , that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than twenty‑four (24) months beyond the month in which such Change in Control occurred.

3. Company's Covenants Summarized . In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless the Executive has a Separation from Service following a Change in Control and during the Term and such Separation from Service is described in the first sentence of Section 6.1. This Agreement shall not be construed as creating an express or implied contract of employment and,




except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

4. The Executive's Covenants . The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason.

5. Compensation Other Than Severance Payments .

5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full‑time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability; provided, however, that the amounts received under this Section 5.1 shall be reduced by any amounts received by the Executive with respect to the same period of time under any long term disability plan of the Company. For the avoidance of doubt, payments pursuant to this Section 5.1 are contingent on the Executive's continued full-time employment until such time as (a) a Change in Control occurs during the Term, and (b) the Executive fails to perform full-time duties as a result of incapacity due to physical or mental illness, and are payable only for so long as the Executive continues to fail to perform full-time duties as a result of incapacity due to physical or mental illness or, if sooner, until the earlier of (i) the end of the Term, or (ii) the Executive's employment is terminated by the Company for Disability.


5.2 For the Executive's services following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Change in Control or, if higher, the rate in effect from time to time after the Change in Control and prior to any reduction thereof, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Change in Control or, if more favorable to the Executive, as in effect from time to time after the Change in Control and prior to any reduction thereof.

5.3 If the Executive has a Separation from Service following a Change in Control and during the Term, and such Separation from Service is (A) an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability, or (B) a Separation from Service by the Executive for Good Reason, the Company shall pay to the Executive after the Separation from Service the




Executive's normal post‑termination compensation and benefits as such payments become due. Such post‑termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to any adverse change therein after the Change in Control; provided that nothing in this Section 5.3 shall alter the terms of any stock option or any equity-based award. Nothing herein shall reduce or otherwise adversely affect any compensation and benefits to which the Executive may be entitled after Separation from Service under any of the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect from time to time before or after a Change in Control.

5.4 In the event that a Change in Control occurs during the Term, (A) the Company shall, within five (5) days after such Change in Control, pay to the Executive a lump sum cash amount equal to the product of (i) the target annual bonus or incentive award applicable to the Executive under each of the Company's annual bonus or incentive compensation plans (such target award to be determined pursuant to the provisions of each such plan or, if no such provisions exist in the case of any such plan, as determined by the Compensation Committee of the Board, as constituted immediately prior to the Change in Control, in its sole discretion), in respect of the year in which such Change in Control occurs and (ii) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the year in which the Change in Control occurs to the date on which the Change in Control occurs, unless the Change in Control occurs during the year in which the Executive's first day of employment by the Company occurs, in which case the numerator shall be the number of months (including fractions thereof) from the first day of employment by the Company to the date on which the Change in Control occurs, and the denominator of which shall be twelve (12); and (B) all options held by the Executive to acquire Company stock shall immediately become vested and exercisable in full, and all other Company stock‑based awards held by the Executive shall vest and be paid at such time or times on or after the date on which such Change in Control occurs, and to such extent, as shall be set forth in the award agreement documenting such awards (it being understood and agreed that any stock-based award agreements will provide for vesting and payment of such awards in connection with a Change in Control at such time or times and on such terms and conditions as the Committee deems advisable to comply with or qualify for an exclusion from Section 409A of the Code). The lump sum cash amount payable pursuant to Section 5.4(A) above shall be credited against any annual bonus or incentive award to which the Executive may be entitled for the year in which the Change in Control occurs pursuant to the Performance-Linked Bonus Plan for Selected Executive Officers or any other annual bonus or incentive plan in which the Executive participates in such year, provided that such annual bonus or incentive award qualifies (or will qualify) for treatment as a short-term deferral under Treasury Regulation section 1.409A-1(b)(4) or is otherwise not subject to Section 409A of the Code, it being the intention hereof that, between Section 5.4(A) above and any annual bonus or incentive award plan pursuant to which the Executive is entitled to an annual bonus or incentive award for the year in which the Change in Control occurs, the Executive will receive any annual bonus or incentive award to which the Executive may be entitled for the year in which the Change in Control occurs but not less than the lump sum cash amount payable pursuant to Section 5.4(A) above.




6. Severance Payments .

6.1 Subject to Section 6.2 and Section 12(B) hereof, if the Executive has a Separation from Service following a Change in Control and during the Term, and such Separation from Service is an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability, or is a Separation from Service by the Executive for Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments"), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. Notwithstanding the foregoing, the Executive shall not be eligible to receive any payment or benefit provided for in this Section 6.1 unless the Executive shall have executed and delivered to the Company within 45 days after the Separation from Service a release (substantially in the form of Exhibit A hereto) in favor of the Company and others set forth on said Exhibit A, relating to all claims or liabilities of any kind relating to the Executive's employment and termination of employment with the Company, and the Executive shall not have revoked such release within 7 days after executing it. Subject to Section 12(B) hereof, any payments and benefits that, but for the preceding sentence, may be paid or provided pursuant to the provisions below of this Section 6.1 before the 56 th day following the Separation from Service shall be paid or provided on the 56 th day following the Separation from Service, unless such payment or benefit may be paid or provided pursuant to the provisions below of this Section 6.1 within a designated period following the Separation from Service that ends more than 56 days following the Separation from Service, in which case such payment or benefit shall be paid or provided within the portion of such designated period that begins on the 56 th day following the Separation from Service and ends on the last day of such designated period, provided in each case that the Executive executed the release and delivered it to the Company within the aforementioned 45-day period and did not revoke the release within 7 days after executing it.

(A) Cash Severance Payments .

(i) The Company shall pay to the Executive an amount, in cash, equal to the severance pay to which the Executive would be entitled under the Barnes Group Inc. Executive Separation Pay Plan as amended on December 31, 2008 (the "Executive Separation Pay Plan") if the Separation from Service were a Separation from Service for which severance benefits were payable under that Plan and the provisions of Sections 4.3, 4.4 and 4.5 thereof did not apply. For the avoidance of doubt, the severance pay to which the Executive would be entitled if the Separation from Service were a Separation from Service for which severance benefits were payable under the Executive Separation Pay Plan and the provisions of Sections 4.3, 4.4 and 4.5 thereof did not apply is twelve months of base salary as in effect immediately prior to the Separation from Service. Such amount shall be paid at the same times at which it would be paid under the Executive Separation Pay Plan if the provisions of Sections 4.3, 4.4 and 4.5 thereof did not apply, and in the same installments. However, if the Separation from Service for which the amount described in this Section 6.1(A)(i) is payable takes place during the two years following the occurrence of a "change in control event" with respect to the




Executive (within the meaning of Treasury Regulation section 1.409A-3(i)(5)(i) & (ii)), then in that event the Company shall pay the Executive the aforementioned amount in a lump sum within five (5) days of such Separation from Service; and

(ii) The Company shall pay to the Executive within five (5) days of such Separation from Service a lump sum amount, in cash, equal to the excess of (a) over (b) where (a) is 2 times the sum of (I) the Executive's annual base salary as in effect immediately prior to the Separation from Service or, if higher, in effect immediately prior to any reduction thereof, and (II) the highest of (A) the average annual bonus earned by the Executive in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Separation from Service, or, if the Executive was not employed by the Company throughout that three fiscal year period, the average annual bonus earned by the Executive in respect of the portion of such three fiscal year period during which the Executive was employed by the Company (annualizing any bonus earned for less than a full fiscal year of employment), (B) the average annual bonus earned by the Executive in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs the Change in Control, or, if the Executive was not employed by the Company throughout that three fiscal year period, the average annual bonus earned by the Executive in respect of the portion of such three fiscal year period during which the Executive was employed by the Company (annualizing any bonus earned for less than a full fiscal year of employment), or (C) the target bonus in respect of the fiscal year in which occurs the Separation from Service, and (b) is the amount payable pursuant to Section 6.1(A)(i) above.

(B) Pro-Rata Bonus for Year of Termination . Within five (5) days of such Separation from Service, the Company shall pay to the Executive a lump sum cash amount (the "Pro‑Rata Bonus") equal to the product of (i) the target annual bonus or incentive award applicable to the Executive under each of the Company's annual bonus or incentive compensation plans (such target award to be determined pursuant to the provisions of each such plan or, if no such provisions exist in the case of any such plan, as determined by the Board in its sole discretion), in respect of the year in which such Separation from Service occurs and (ii) a fraction, the numerator of which shall be the number of months (including fractions thereof) from the first day of the year during which such Separation from Service occurs to the date on which such Separation from Service occurs, unless the Separation from Service occurs during the year in which the Executive's first day of employment by the Company occurs, in which case the numerator shall be the number of months (including fractions thereof) from the first day of employment by the Company to the date on which the Separation from Service occurs, and the denominator of which shall be twelve (12); provided , however , that if such Separation from Service occurs during the same year in which the Change in Control occurs, the Pro Rata Bonus shall be offset by any payments received by the Executive pursuant to Section 5.4(A) hereof.

(C) Vesting of Unvested Non-Qualified Plan Accruals Prior to the Date of Termination . If the Executive was participating immediately prior to the Date of




Termination or the Change in Control in any of the Company's non-qualified defined contribution employee pension benefit plans (including without limitation the Company's Retirement Benefit Equalization Plan, but excluding any severance pay plan) and on the Date of Termination was not fully vested in benefits accrued through the Date of Termination under any such plan in which s/he was so participating, then the Executive shall be entitled to receive pursuant to this Section 6.1(C) benefits equal to the benefits accrued by the Executive under those plans prior to the Date of Termination that are not vested on that date that would vest under those plans if the Executive's age and service credit for vesting purposes were equal to the Executive's age and service credit as calculated under the provisions of such plans as of the Date of Termination plus 24 months. The intent of this provision is to give the Executive 24 months of age and service credit for vesting under such non-qualified defined contribution employee pension benefit plans, disregarding any investment gains or losses and any plan amendment or termination that may occur after the Date of Termination, in excess of the Executive's actual age and service credit as of the Date of Termination as determined under such plans, if and to the extent that such plans do not otherwise give the Executive age and service credit for vesting for the 24 month period following the Date of Termination. Any benefits resulting from the additional age and service credit for vesting provided hereby shall be payable at the time and in the form of payment applicable to the Executive's benefits under the non-qualified defined contribution employee pension benefit plan(s) in question, and to the person or persons to whom such benefits would be paid under such plan(s).

(D) Payments in Respect of Unvested Account Balances as of the Date of Termination under Qualified Defined Contribution Plans . If the Executive was participating immediately prior to the Date of Termination or the Change in Control in any of the Company's qualified defined contribution employee pension benefit plans (including without limitation a 401(k) plan or a qualified profit-sharing plan) and on the Date of Termination was not fully vested in any amount (including without limitation investment gains and losses) that had been credited to the Executive through the Date of Termination (the "Unvested Account Balance") under any such plan in which s/he was so participating, then, on March 1 of the calendar year following the calendar year in which the Date of Termination occurs, the Company shall pay the Executive, if s/he is then surviving, an amount equal to the portion of the Unvested Account Balance that would vest during the 24 month period following the Date of Termination (and that will not in fact vest under the qualified defined contribution plan in question), if such plan were to remain in effect during such 24 month period and the Executive were able to and did continue to earn age credit and service credit for vesting purposes under such plan until the last day of such 24 month period. However, the Company shall not pay an amount pursuant to the preceding sentence equal to any portion of the Executive's Unvested Account Balance under a 401(k) plan that is attributable to (i) the Executive's elective contributions (as defined in Treasury Regulation 1.401(k)-6) under that plan, or to (ii) employer contributions that were conditioned (directly or indirectly) upon the Executive's electing to make or not to make elective contributions under that plan, or to (iii) income, expenses, gains and losses on such elective contributions and employer contributions,




(such amount being hereafter referred to as a "Potentially Contingent Amount") unless the Executive made the maximum elective deferrals under Section 402(g) of the Code or the maximum elective contributions permitted under the terms of such 401(k) plan (a) in the year(s) in which the Executive made such elective contributions, or in the year(s) (if any) in which such employer contributions were conditioned upon the Executive's electing to make or not to make elective contributions under that plan, or (b) in such other or additional year(s) (or other period(s)) as may be necessary for the Potentially Contingent Amount to not be treated as contingent for purposes of Treasury Regulation 1.401(k)-1(e)(6) by reason of the application of the second sentence of Treasury Regulation 1.401(k)-1(e)(6)(iii). The intent of this provision is to pay the Executive an amount equal to the portion of the Unvested Account Balance that, disregarding any investment gains or losses and any plan amendment or termination that may occur after the Date of Termination, would vest if the Executive were able to and did continue to earn age credit and vesting service credit under the qualified defined contribution plan in question during the 24 month period following the Date of Termination, provided that the Executive survives to the March 1 payment date set forth above in this Section 6.1(D) and, in the case of any Unvested Account Balance in a 401(k) plan, provided that the exclusion from the contingent benefit rule set forth in Treasury Regulation section 1.401(k)-1(e)(6) for deferred compensation that is dependent on an employee's having made the maximum elective deferrals under Code section 402(g) or the maximum elective contributions permitted under the terms of the plan is satisfied. Nothing herein shall alter any qualified defined contribution employee pension benefit plan or any rights the Executive may have under any such plan.
 

(E)      Defined Contribution Plan Accruals for 24 Months After Date of Termination . If the Executive was participating immediately prior to the Date of Termination or the Change in Control in any of the Company's qualified or non-qualified defined contribution employee pension benefit plans (including without limitation a 401(k) plan or a qualified profit-sharing plan), then, on March 1 of the calendar year following the calendar year in which the Date of Termination occurs, the Company shall pay the Executive, if s/he is then surviving, an amount equal to the employer contributions (if any) that would have been credited to the Executive and would have vested during the 24 month period following the Date of Termination (but are not so credited or vested) under any qualified or non-qualified defined contribution employee pension benefit plan in which the Executive was participating immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control, if (i) the Executive were able to and did continue to earn age credit, service credit and compensation credit for benefit accrual and vesting purposes under such plan during that 24 month period, and (ii) the Executive's compensation during the 24 month period following the Date of Termination for purposes of that plan consisted of salary equal to 2 times the amount referred to in Section 6.1(A)(ii)(a)(I) hereof earned and paid ratably over that 24 month period and bonus (if and to the extent that bonuses are eligible for employer contributions under such plan) equal to 2 times the amount referred to in Section 6.1(A)(ii)(a)(II) hereof earned and paid ratably over that 24 month




period, and (iii) in the case of any contributory defined contribution employee pension benefit plan such as a 401(k) plan, the Executive were able to and did contribute the maximum matchable employee contributions to the plan during the 24 month period after the Date of Termination, and (iv) the same employer contributions were made to the plan during that 24 month period as a percentage of Compensation and, in the case of a contributory plan, as a percentage of employee contributions, as were made in respect of the last full plan year preceding the Date of Termination or, if more favorable to the Executive, preceding the Change in Control, and (v) the same qualified plan limits on compensation, contributions and benefits that applied in respect of such last full plan year continued to apply during the 24 months following the Date of Termination. No payment shall be made pursuant to the preceding sentence in respect of the employer contributions that would have been credited to the Executive and would have vested under a 401(k) plan unless the Executive made the maximum elective deferrals under Section 402(g) of the Code or the maximum elective contributions permitted under the terms of the 401(k) plan in which the Executive was participating immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control, in the year in which the Date of Termination occurs (or in such portion of such year as will result in the payment being not treated as contingent pursuant to the second sentence of Treasury Regulation 1.401(k)-1(e)(6)(iii)) or, if the 401(k) plan in which the Executive was participating immediately prior to the Change in Control was more favorable to the Executive than the 401(k) plan in which the Executive was participating immediately prior to the Date of Termination, in the year in which the Change in Control occurred. The preceding sentence is intended to apply only if and to the extent the preceding sentence is necessary to comply with the contingent benefit rule set forth in Treasury Regulation section 1.401(k)-1(e)(6), and it shall be administered, interpreted and construed accordingly.


(F) Health Care Benefits . For the twenty-four month period immediately following the Date of Termination or until the earlier death of the Executive (the "Benefits Period"), the Company shall continue to provide the Executive with the same medical and dental coverage which the Executive was receiving immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control (the "Health Care Benefits"). For the avoidance of doubt, the Company shall pay or reimburse the Executive for the same medical and dental expenses which were subject to payment or reimbursement under the medical and dental insurance coverage which the Executive was receiving immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control. The Health Care Benefits shall be provided in such a manner that such benefits will be excluded from the Executive's income for federal income tax purposes. The receipt of the Health Care Benefits shall be conditioned on the Executive continuing to pay the applicable premiums for such Health Care Benefits during the Benefits Period. The applicable monthly premium shall be the monthly COBRA premium as in effect at the Company from time to time with respect to the coverage provided under Section 4980B of the Code. Except as permitted by Treasury Regulation section 1.409A-3(i)(4)




(B), the amount of medical and dental expenses that are subject to Section 409A of the Code and not excluded therefrom as involuntary separation pay or otherwise and that are subject to reimbursement pursuant to this Section 6.1(F) during any taxable year of the Executive may not affect the expenses eligible for reimbursement in any other taxable year, and shall be reimbursed at the time required by the plan applicable to the Executive immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control but in no event later than the last day of the Executive's taxable year following the taxable year in which the expense was incurred.

(G) Additional Payments . During the Benefits Period, and subject to Section 12(B) below (relating to the six month delay applicable to Specified Employees), the Company shall pay to the Executive an amount equal to the monthly premium cost set forth in Section 6.1(F) above, minus an amount equal to the monthly employee contribution rate that is paid by Company employees for the applicable level of such coverage immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control, which payment shall be paid in advance on the first payroll day of each month, commencing with the first such payroll day that coincides with or next follows the Date of Termination. Each month, when the Company pays the amount required by the preceding sentence, the Company shall also pay the Executive a tax gross-up on the amount paid pursuant to the preceding sentence, i.e., an amount sufficient after taxes on the tax gross-up paid pursuant to this sentence to reimburse the Executive for any Federal, state, local or foreign taxes imposed upon the Executive as a result of the Company's payment of the amount required by the preceding sentence. For purposes of determining the amount of the tax gross-up to be paid pursuant to this Section 6.1(G) or pursuant to any other provision of this Agreement or any other plan or arrangement pursuant to which the Executive is entitled to receive a tax gross-up after a Change in Control and during the Term, the Executive shall notify the Company from time to time of the highest effective marginal rates at which the Executive's income is taxed under any applicable Federal, state, local and foreign laws and such rates shall be conclusive on the Company for purposes of determining the amount of the tax gross-up to be paid, and in no event shall the Executive be required to disclose his tax returns to the Company or otherwise for the purpose of determining the amount of the tax gross-up to be paid.

(H) EGTLIP Benefits . If the Executive was a participant in the Company's Executive Group Term Life Insurance Program (“EGTLIP”) immediately prior to the Date of Termination or the Change in Control, then during the Benefits Period the Company shall provide the Executive with the same benefits, if any, under the EGTLIP as in effect immediately prior to the Separation from Service or, if more favorable to the Executive, immediately prior to the Change in Control, at the same times, that the Company would have provided if the EGTLIP had remained in effect and the Executive's active employment and participation in the EGTLIP had continued (and no Separation from Service had occurred) until the end of the Benefits Period and the Executive's annual base salary during the Benefits Period for purposes of the EGTLIP had been equal to the amount referred to in Section 6.1(A)(ii)(a)(I) hereof. In no event




shall this Section 6.1(H) entitle the Executive to benefits that duplicate any EGTLIP benefits that the Executive is entitled to receive at the same time other than pursuant to this Section 6.1(H). If any premiums that would be payable by the Company pursuant to the preceding provisions of this Section 6.1(H) during the six month period following the Separation from Service are not paid during that six month period due to the six month delay imposed by Section 12(B) hereof, then (i) the Company shall timely provide the Executive with the opportunity to pay the EGTLIP premiums during that six month period and, if the Executive chooses to do so, the Company shall cooperate as needed to enable the Executive to do so, and (ii) at the time provided by Section 12(B) hereof (i.e., the first day of the seventh month following the Separation from Service) the Company shall pay such premiums in accordance with the EGTLIP. Premiums eligible for reimbursement pursuant to the preceding provisions of this Section 6.1(H) during the Executive's taxable year may not affect the premiums eligible for reimbursement in any other taxable year, and any in-kind benefits provided pursuant to this Section 6.1(H) or otherwise during a taxable year of the Executive may not affect the in-kind benefits to be provided pursuant to this Section 6.1(H) or otherwise in any other taxable year.

(I) Death and Disability Benefits . During the Benefits Period, the Company shall cause the Executive to continue to participate in all death benefit plans (other than the EGTLIP, which is already addressed above) and disability benefit plans in which the Executive was participating immediately prior to the Separation from Service or, if more favorable to the Executive, immediately prior to the Change in Control; provided that to the extent such participation in any such plan is barred or otherwise not feasible, the Company shall arrange to provide substantially similar benefits to the Executive (and, if applicable, the Executive's dependents) outside such plan.

(J) Tax-Free Benefits . If immediately prior to the Date of Termination or the Change in Control the Executive was participating in any welfare benefit plan or perquisite plan not addressed above (including without limitation the Executive Health Exams Policy), and during the Benefits Period benefits may be provided to the Executive under such plan as in effect immediately prior to the Separation from Service or, if more favorable to the Executive, immediately prior to the Change in Control, (or may be provided to the Executive outside of such plan), that would be excludable from income when and if received, then the Company shall continue to provide such benefits to the Executive during the Benefits Period.

(K) In-Kind Benefit and Reimbursement Plans and Tax Gross-Ups . If immediately prior to the Separation from Service or the Change in Control the Executive was receiving in-kind benefits within the meaning of Treasury Regulation section 1.409A-1(p) or reimbursements pursuant to any Company plan not addressed above in this Section 6.1, other than reimbursements of direct business expenses (such as automobile mileage and travel, entertainment and other business expenses), or was receiving tax gross-ups within the meaning of Treasury Regulation 1.409A-3(i)(1)(v) under any Company plan not addressed above in this Section 6.1, then in accordance with such plan (other than continued service requirements) as in effect immediately prior to




the Separation from Service or, if more favorable to the Executive, immediately prior to the Change in Control, the Executive shall continue to receive in-kind benefits, and reimbursements for expenses incurred, during the Benefits Period and to receive tax gross-ups for taxes incurred during the Benefits Period; provided that, with respect to any such in-kind benefits and reimbursements, other than reimbursements that pursuant to Treasury Regulation section 1.409A-1(b)(9)(v) or otherwise do not provide for a deferral of compensation that is subject to Section 409A of the Code, the amount of expenses eligible for reimbursement, or in-kind benefits provided, during the Executive's taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year (within the meaning of Treasury Regulation 1.409A-3(i)(1)(iv)), and the reimbursement of an eligible expense shall be made on or before (a) the last day of the Executive's taxable year following the taxable year in which the expense was incurred, or (b) such earlier date as the reimbursement plan may require, and any such tax gross-up shall be paid by the end of the Executive's taxable year next following the Executive's taxable year in which the Executive remits the related taxes or by such earlier date as the plan which provides for such tax gross-up may require. For the avoidance of doubt, for purposes of this agreement the term "plan" shall include the Company's perquisite policies (including, without limitation, the Financial Planning Assistance Policy) and any other "plan" as defined in Treasury Regulation section 1.409A-1(c)(1).

(L) Other Welfare Plans, Benefits and Perquisites . If immediately prior to the Date of Termination or the Change in Control the Executive participated in any welfare benefit plan not addressed above (other than a severance pay plan) or was receiving benefits or perquisites not addressed above, and the Executive is not otherwise entitled to participate in such welfare benefit plan or to receive such benefits or perquisites during the Benefits Period, then during the Benefits Period the Executive shall continue to participate in the welfare benefit plan in which s/he was participating or to receive the benefits or perquisites s/he was receiving immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the Change in Control, in accordance with the terms of such welfare benefit plan or plan providing such benefits or perquisites (other than continued service requirements); provided that if the Executive's continued participation in such welfare benefit plan or in the plan providing such benefits or perquisites is barred or otherwise not feasible, the Company shall provide such benefits outside the plan; and, provided further, that this sentence shall not apply if and to the extent that any payments to be made and benefits to be provided pursuant to this sentence would not qualify for an exclusion from Section 409A of the Code (including without limitation an exclusion provided by Treasury Regulation section 1.409A-1(b)(9)) or comply with Section 409A of the Code.

Neither the Company nor any Affiliate shall be required by any of the foregoing provisions of this Section 6.1 to grant stock options or other stock‑based awards to the Executive after the Date of Termination. Benefits receivable by the Executive pursuant to Sections 6.1(E) through (L) hereof shall be forfeited to the extent benefits of the same type are made available to the Executive during the twenty‑four (24) month period following the Date of Termination, other




than by the Company or an Affiliate, in connection with the Executive's performance of services for an enterprise (including without limitation a non-profit enterprise) not affiliated with the Company (and any such benefits made available to the Executive shall be reported to the Company by the Executive). In the event that payment is made pursuant to Section 6.1(E) hereof and benefits of the same type are thereafter made available to the Executive during the twenty‑four (24) month period following the Date of Termination, other than by the Company or an Affiliate, in connection with the Executive's performance of services for an enterprise not affiliated with the Company, the Executive shall repay to the Company the portion of the payment previously made in respect of benefits of the same type, that corresponds to the portion of the 24 month period during which benefits of the same type are so made available to the Executive.

6.2      (A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part), to the Excise Tax, then, the Total Payments shall be reduced in the following order: (i) cash payments that are not deferred compensation subject to Section 409A of the Code, (ii) non-cash payments and benefits, other than payments pursuant to Section 5.4(B) above, that are not deferred compensation subject to Section 409A of the Code, (iii) the payments pursuant to Section 5.4(B) above that are not deferred compensation subject to Section 409A of the Code, (iv) cash payments that are deferred compensation subject to Section 409A of the Code, (v) non-cash payments and benefits, other than payments pursuant to Section 5.4(B) above, that are deferred compensation subject to Section 409A of the Code, and (vi) the payments pursuant to Section 5.4(B) above that are deferred compensation subject to Section 409A of the Code, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) is greater than or equal to (B), where (A) equals the reduced amount of such Total Payments minus the aggregate amount of federal, state and local income taxes on such reduced Total Payments and (B) equals the unreduced amount of such Total Payments minus the sum of (1) the aggregate amount of federal, state and local income taxes on such Total Payments and (2) the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments; provided , however , that within each of the foregoing categories (i) through (vi) the first payment or benefit to be reduced shall be the payment or benefit the highest percentage of which is included in the aggregate present value of all payments in the nature of compensation to or for the benefit of the Executive that are contingent on the change in ownership or control within the meaning of Treasury Regulation 1.280G-1 (i.e., is included in such aggregate present value for purposes of determining whether such aggregate present value equals or exceeds 3 times the Executive's base amount), and the last payment or benefit to be reduced shall be the payment or benefit the lowest percentage of which is included in such aggregate present value, and, provided further , that the Executive may elect to change the order in which any of the payments or benefits in categories (i), (ii) and (iii) is reduced as long as both payments and benefits being changed (I) are short-term deferrals within the meaning of Treasury Regulation section 1.409A-1(b)(4) the "applicable




2½ month period" of which (within the meaning of that Treasury Regulation) end on the same date, or (II) are not short-term deferrals but are otherwise not deferred compensation subject to Section 409A of the Code (whether due to Treasury Regulation section 1.409A-1(b)(9) or otherwise), and as long as such change in order does not affect the time at which any payment that constitutes deferred compensation that is subject to Section 409A of the Code would be reduced or the amount by which any payment that constitutes deferred compensation that is subject to Section 409A of the Code would be reduced at any time.
 
(B) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non‑cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code.

(C) At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

6.3 The payments provided in subsections (A)(ii) and (B) of Section 6.1 hereof and, if applicable, the last sentence of subsection (A)(i) of Section 6.1 hereof, shall be made on the fifth (5 th ) day following the Separation from Service or, if such 5 th day is a weekend or a holiday, on the next business day; provided , however , that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Separation from Service. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after




demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code).

7. Termination Procedures and Compensation During Dispute .

7.1 Notice of Termination . After a Change in Control and during the Term, any termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three‑quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. In the event of an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability following a Change in Control and during the Term, the Company will provide the Executive with a Notice of Termination at least thirty (30) days in advance of the Date of Termination and, if it fails to do so, will pay the Executive's salary in lieu of notice on the Date of Termination or within ten (10) days thereafter, in addition to all other amounts payable to the Executive hereunder. In the event of a Separation from Service by the Executive following a Change in Control and during the Term, the Executive will provide the Company with a Notice of Termination at least fifteen (15) days and not more than sixty (60) days in advance of the Date of Termination.

7.2 Date of Termination . "Date of Termination" means the date on which the Executive has a Separation from Service.

7.3 Certain Disputes Concerning Termination .

If the Executive has a Separation from Service following a Change in Control and during the Term, and such Separation from Service is (a) an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability, or (b) a Separation from Service by the Executive for Good Reason, and, in the case of (a), the Company disputes by its Notice of Termination or otherwise (including without limitation by its conduct or inaction) that the Executive has had an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability, or, in the case of (b), the Company disputes by written notice or otherwise (including without limitation by its conduct or inaction) that the Executive has had a Separation from Service for Good Reason, and the Executive pursues the resolution of such dispute with reasonable diligence, then in that event during the period from the Date of Termination until the earlier of (i) the date on which the Term ends, or (ii) the date on




which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator (the "Continuation Period"), the Company shall continue to pay the Executive the salary at the rate in effect immediately prior to the Date of Termination, on the same payroll schedule that was in effect immediately prior to the Date of Termination, and shall pay the Executive on the first business day of each calendar month during the Continuation Period a bonus amount equal to one-twelfth of the amount described in Section 6.1(A)(ii)(a)(II) above, ), and shall make monthly payments on the first payroll day of each month, commencing with the first such payroll day that coincides with or next follows the Date of Termination, equal to the monthly payments the Company is obligated to provide pursuant to Section 6.1(G) above. In addition, for a period immediately following the Benefits Period equal to the length of the Continuation Period, (A) the Company shall continue to provide the Executive with the Health Care Benefits described in Section 6.1(F) above, (B) the Company shall provide the Executive with the same benefits, if any, under the EGTLIP, at the same times , that the Company would have provided if the EGTLIP had remained in effect and the Executive's active employment and participation in the EGTLIP had continued (and no Separation from Service had occurred) until the end of the period immediately following the Benefits Period equal to the length of the Continuation Period and the Executive's annual base salary during that period for purposes of the EGTLIP had been equal to the Executive's annual base salary as in effect immediately prior to the Separation from Service or, if higher, in effect immediately prior to any reduction thereof, and (C) the Company shall continue to provide the Executive with the death and disability coverage described in Section 6.1(I) above, the tax-free benefits described in Section 6.1(J) above, and the in-kind benefits and reimbursements and tax gross-ups described in Section 6.1(K) above, in each case on the same terms and conditions as apply during the Benefits Period. Amounts to be paid and benefits and perquisites to be provided under this Section 7.3 are in addition to all other amounts, benefits and perquisites due under this Agreement (including amounts, benefits and perquisites due under Section 6.1) and shall not be offset against or reduce any other amounts, benefits or perquisites due under this Agreement. For the avoidance of doubt, each payment to be made and benefit to be provided under the first sentence of this Section 7.3 is contingent on there having been, prior to the date on which the payment is to be made or the benefit is to be provided, (A) an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) of the Executive by the Company other than for Cause or Disability, or a Separation from Service by the Executive for Good Reason, (B) a dispute by the Company as described above, (C) the Executive's pursuit of the resolution of such dispute with reasonable diligence, and (D) no final resolution of such dispute, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator.

8. No Mitigation . The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.1 or 7.3 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Sections 6.1(E) through (L) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.





9. Successors; Binding Agreement .

9.1 In addition to any obligations imposed by law upon any successor to the Company, during the Term the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession during the Term shall be a material breach of this Agreement by the Company and, if such failure occurs before the Executive has a Separation from Service, shall entitle the Executive to compensation, benefits and perquisites from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive had an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability following a Change in Control and during the Term, provided that (A) the Executive notifies the Company that such failure has occurred within 90 days of the initial occurrence of such failure or, if later, within 90 days after the Executive first knows or should know of such failure (which notification may but need not be in the form of a Notice of Termination given in respect of such failure), (B) such failure is not corrected within 30 days after the Executive so notifies the Company, and (C) the Executive terminates employment (i.e., has a Separation from Service) after such 30 day period, within 2 years following the initial occurrence of such failure, and before the expiration of the Term.

9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate.

10. Notices . For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt:

To the Company:

Barnes Group Inc.
123 Main Street
Bristol, CT 06010





Attention: Dawn N. Edwards
Senior Vice President, Human Resources

11. Miscellaneous . No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. Notwithstanding the preceding sentence, the Company may unilaterally amend this Agreement in whole or in part before a Change in Control or Potential Change in Control occurs, in such respects as the Company may determine to be to be necessary, advisable or expedient to plan for, respond to, comply with or reflect Section 409A of the Code, and the Executive hereby consents to any amendments that the Company may make pursuant to this sentence. For the avoidance of doubt, the preceding sentence is not intended to authorize or constitute the Executive's consent to any amendment that would constitute a modification or extension of a stock option within the meaning of Treasury Regulation section 1.409A-1(b)(5)(v), and, if and to the extent that, notwithstanding the foregoing, anything therein would be interpreted or construed to authorize or constitute the Executive's consent to any such amendment, then to that extent the authorization or consent is hereby rescinded. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided , however , that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive has a Separation from Service following a Change in Control, and such Separation from Service is an involuntary Separation from Service (within the meaning of Treasury Regulation section 1.409A-1(n)(1)) by the Company other than for Cause or Disability, or is a Separation from Service by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration.

12. Code Section 409A .     

(A)      The Executive's right to any series of payments, including without limitation taxable benefits, that are to be paid or provided under this Agreement and that is eligible to be treated as a right to a series of separate payments under Treasury Regulation section 1.409A-2(b)(2)(iii), including in particular but not limited to the Executive's right to the series of benefits under Sections 6.1(F) through 6.1(L), shall be treated as a right to a series of separate payments for purposes of Section 409A of the Code, including without limitation for purposes of the short-term deferral rule set forth in Treasury Regulation section 1.409A-1(b)(4).





(B)      Any provision of this Agreement to the contrary notwithstanding, if the Executive is a Specified Employee on the date of a Separation from Service, any payment or benefit to be paid or provided pursuant to this Agreement that constitutes deferred compensation that is subject to Section 409A of the Code and that is payable due to a Separation from Service during the six month period following the Separation from Service shall not be paid before the date that is six months after the date of Separation from Service (or, if earlier, the date of death of the Executive) and shall instead be accumulated and paid on the first day of the seventh month following the date of the Separation from Service (or, if earlier, within 14 days after the death of the Executive), in accordance with Treasury Regulation section 1.409A-3(i)(2)(ii). The preceding sentence shall apply to any amount or benefit (and only to any amount or benefit) to be paid or provided pursuant to this Agreement to which Code Section 409A(a)(2)(B)(i) (relating to Specified Employees) applies, and shall not apply to any amount or benefit if and to the extent that such amount or benefit is not subject to Section 409A of the Code as a result of Treasury Regulation section 1.409A-1(a)(5) (relating to welfare benefit plans), Treasury Regulation Section 1.409A-1(b)(4) (relating to short-term deferrals), Treasury Regulation Section 1.409A-1(b)(9) (relating to separation pay plans), or otherwise.

(C)      If at any time during the 12-month period ending on any "specified employee identification date", which shall be December 31, the Executive is in Salary Grade 20 or above or meets the requirements of Code section 416(i)(1)(A)(ii) or (iii) (applied in accordance with the Treasury Regulations thereunder and disregarding Code section 416(i)(5)), then the Executive shall be treated as a Specified Employee for purposes of Section 12(B) above for the entire 12-month period beginning on the "specified employee effective date", which shall be the January 1 that immediately follows such specified employee identification date, unless the Board or the Committee at any time prescribes a different method of identifying service providers who will be subject to the six month delay required by Section 409A(a)(2)(B)(i) of the Code (the "Six Month Delay") in accordance with Treasury Regulation section 1.409A-1(i) or the transition rules and official guidance under Code Section 409A (a "Different Identification Method") or elects a different specified employee identification date or specified employee effective date or makes any other election that may be made in accordance with Treasury Regulation section 1.409A-1(i) or the transition rules and official guidance under Code Section 409A (a "Different Election"), in which case whether the Executive shall be treated as a Specified Employee for purposes of Section 12(B) above shall be determined in accordance with any such Different Identification Method so prescribed and any such Different Election so made by the Board or Committee. The Executive hereby irrevocably (i) consents to any such Different Identification Method that the Board or Committee may prescribe at any time and any such Different Election that the Board or Committee may make at any time for purposes of identifying the service providers who will be subject to the Six Month Delay with respect to payments under this Agreement, and (ii) agrees that the Executive's consent to any such Different Identification Method or Different Election shall be as effective as if such Different Identification Method or Different Election were fully set forth herein, and (iii) waives any right he or she may have to consent to the Different Identification Method or Different Election in question if for any reason the Executive's consent to such Different Identification Method or Different Election is not legally effective.




(D) Any payments that may be made and benefits that may be provided pursuant to this Agreement are intended to qualify for an exclusion from Section 409A of the Code (including without limitation the exclusion for certain welfare benefits under Treasury Regulation section 1.409A-1(a)(5), the exclusion for short-term deferrals under Treasury Regulation section 1.409A-1(b)(4), and the exclusions for separation pay plans under Treasury Regulation section 1.409A-1(b)(9)), and/or are intended to meet the requirements of Section 409A(a)(2), (3) and (4) of the Code, so that none of the payments that may be made and benefits that may be provided pursuant to this Agreement will be includible in the Executive's federal gross income pursuant to Section 409A(a)(1)(A) of the Code. This Agreement shall be administered, interpreted and construed to carry out such intentions, and any provision of this Agreement that cannot be so administered, interpreted and construed shall to that extent be disregarded. However, any provision of this Agreement to the contrary notwithstanding, the Company does not represent, warrant or guarantee that the payments and benefits that may be paid or provided pursuant to this Agreement will not be includible in the Executive's federal gross income pursuant to Section 409A(a)(1)(A) of the Code, nor does the Company make any other representation, warranty or guaranty to the Executive as to the tax consequences of this Agreement.

13. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

14. Counterparts . This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

15. Settlement of Disputes; Arbitration .

15.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied.

15.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Hartford, Connecticut in accordance with the rules of the American Arbitration Association then in effect; provided , however , that the evidentiary standards set forth in this Agreement shall apply. The arbitrator shall have the authority to require that the Company reimburse the Executive for the payment of all or any portion of the reasonable legal fees and expenses incurred by the Executive during the Term of this Agreement or at any time within ten years thereafter in connection with such dispute or controversy. The amount of legal fees and expenses eligible for reimbursement during a taxable year of the Executive may not affect the legal fees and expenses eligible for reimbursement in




any other taxable year. Unless the arbitrator provides otherwise, any legal fees and expenses incurred by the Executive that the arbitrator requires the Company to reimburse shall be reimbursed on or before the last day of the Executive's taxable year following the taxable year in which the expense was incurred. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid amounts and benefits due under this Agreement during the pendency of any dispute or controversy arising under or in connection with this Agreement.

16. Definitions . For purposes of this Agreement, the following terms shall have the meanings indicated below:

(A) "Affiliate" shall have the meaning set forth in Rule 12b‑2 promulgated under Section 12 of the Exchange Act.

(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.

(C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code.

(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d‑3 under the Exchange Act.
        
(E) "Benefits Period" shall have the meaning set forth in Section 6.1(F) hereof.

(F) "Board" shall mean the Board of Directors of the Company.

(G) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, (ii) the engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise or (iii) the Executive's conviction for the commission of (a) a felony or (b) any other crime involving moral turpitude. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company.

(H) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:





(I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or

(II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two‑thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

(III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or

(IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.





(I) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.

(J) "Committee" shall mean the Compensation and Management Development Committee of the Board or a successor committee of the Board.

(K) "Company" shall mean Barnes Group Inc. and, except in determining under Section 16(H) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(L) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof.

(M) "Disability" shall be deemed the reason for a Separation from Service, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full‑time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full‑time performance of the Executive's duties.

(N) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.

(O) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code.

(P) "Executive" shall mean the individual named in the first paragraph of this Agreement.

(Q) "Good Reason" for a Separation from Service by the Executive shall mean the occurrence (without the Executive's express written consent) after any Change in Control, of any one of the following acts by the Company, or failures by the Company to act, if the Executive notifies the Company that such act or failure to act has occurred within 90 days of the initial occurrence of such act or failure to act (which notification may but need not be in the form of a Notice of Termination given in respect of such act or failure to act), and if such act or failure to act is not corrected within 30 days after the Executive so notifies the Company:

(I) the assignment to the Executive of any duties materially inconsistent with the Executive's status as an executive officer of the Company, or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control;

(II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time, by five percent (5%) or more or by $20,000 or more;





(III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control, provided that such relocation increases the Executive's round trip commuting time by 25% or more, or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations;

(IV) any termination of the Executive's employment for Cause which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof.

The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.

(R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof.

(S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) any member of the Barnes family (by blood or marriage) or any entity for the benefit of, or controlled by, a member of the Barnes family (by blood or marriage), (ii) the Company or any of its subsidiaries, (iii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

(i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

(ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

(iii) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or





(iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

(U) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees.

(V) "Separation from Service" means a "separation from service with the employer" within the meaning of Treasury Regulation Section 1.409A-1(h), where the "employer" means Barnes Group Inc. and all corporations and trades or businesses with which Barnes Group Inc. would be considered a single employer under Section 414(b) or Section 414(c) of the Code (as determined in accordance with the first sentence of Treasury Regulation section 1.409A-1(h)(3)).

(W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof.

(X) "Specified Employee" shall mean a specified employee within the meaning of Treasury Regulation Section 1.409A-1(i), as determined in accordance with Section 12(C) above.

(Y) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof.

(Z) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein).

(AA) "Total Payments" shall mean those payments so described in Section 6.2 hereof.





IN WITNESS WHEREOF, the parties have executed this Agreement on [_____] __, [__], effective as of the date and year first above written.

BARNES GROUP INC.



By: __________________________________     
Name:
Title:



    
Name: _________________________________
EXECUTIVE

Address: (Home)
                        



Home Address according to the records     
of the Company on the day of notice     
(Please print carefully):

    




EXHIBIT A ‑ COMPLETE AND PERMANENT RELEASE


TO:          ________________ (the "Executive")

DATE:      _________________

The Executive is hereby offered severance payments and benefits in accordance with and subject to the terms of the Severance Agreement between the Executive and the Company (the "Agreement") dated as of [______] ___, [____], in consideration of the Executive's execution and return of this Complete and Permanent Release (the "Release").

The Executive's severance payments and benefits pursuant to the Agreement will be paid and provided only if the Executive executes this release and returns the signed release to the Company within 45 days after the Date of Termination as defined in the Agreement, and if the Executive does not revoke the release. The severance payments and benefits will commence on the 8 th day after the execution and return to the Company of this Release (or, if such 8 th day is on a weekend or a holiday, on the next business day), provided that the Executive has not revoked this Release as hereinafter described. The Executive has seven (7) calendar days from the date that the Executive signs this Release to revoke this Release by giving written notice of the Executive's intent to do so to the Company. This Release shall not become effective or enforceable until this seven (7) day period has expired. If the Executive revokes this Release, the Executive will not receive the severance payments and benefits described in the Agreement.

By signing below, the Executive agrees that execution of this Release operates to, and hereby does, release the Company, its subsidiaries and affiliates, its (and its subsidiaries' and affiliates') present or former employees, officers, directors, shareholders, representatives and agents (the "Released Parties") from all claims or demands (the "Claims") the Executive has had, presently has or may have, based on the Executive's employment with the Company or the termination of that employment, including any rights or claims the Executive may have based on any facts or events, whether known or unknown by the Executive, including, without limitation, a release of any rights or claims the Executive may have based on the Civil Rights Act of 1966, as amended; the Civil Rights Act of 1991, as amended; the Age Discrimination in Employment Act of 1967, as amended; Title VII of the Civil Rights Act of 1964, as amended; the Americans with Disabilities Act of 1990; the Equal Pay Act of 1963; any and all laws of any state concerning wages, employment and discharge; any state or local municipality fair employment statutes or laws; or any other law, rule, regulation or ordinance pertaining to employment, terms and conditions of employment, or termination of employment; provided , however , that execution of this Release shall not adversely affect (i) the Executive's rights to receive benefits under the employee benefit plans and arrangements of the Company, following termination of the Executive's employment or Separation from Service (as defined in the Agreement); (ii) the Executive's rights under the Agreement; or (iii) the Executive's rights to indemnification or advancement of expenses under applicable law, the Certificate of Incorporation or by‑laws of the Company, any agreement between the Executive and the Company, or the Company's officers' and directors' liability insurance policies. The Executive is advised to consult with an attorney before signing the Release.





The Executive has forty-five (45) calendar days from the date of Separation from Service (as defined in the Agreement) in which to sign and return this Release to the Company.


For the Company:


_______________________
_______________________
_______________________


ACCEPTED THIS ____ DAY OF ___________, _______


_______________________
Executive






EXHIBIT 10.2
 
 
 
 
 
 
 
Patrick Dempsey
President and Chief Executive Officer
 
123 MAIN STREET
BRISTOL, CT 06010-6307

 
T: 860.583.7070

January 28, 2014


Mr. Scott A. Mayo
8601 Canyon Crossing
Lantana, TX 76226

Dear Scott:

We are pleased to offer you the position of Senior Vice President, Barnes Group Inc. and President, Barnes Industrial at an annual salary of $425,000 (paid monthly in advance), effective March 17, 2014, or your date of employment. In this position you will report to me and be headquartered in Farmington, Connecticut.

You will participate in the Company’s Management Incentive Compensation Plan (2014) and the Performance-Linked Bonus Plan for Selected Executive Officers (2015 and beyond) effective on your date of employment. Your target incentive under these plans is 50% of salary, with a maximum payout of 150% of salary. Your incentive payout will be based on 60% Barnes Industrial Results (60% Operating Profit, 20% Operating Margin, 20% Revenue) and 40% Corporate Results (60% Diluted EPS, 20% Operating Margin, and 20% Revenue). Payouts to participants are subject to the provisions of the plan and are normally paid in late February of the year immediately following the plan year (i.e., payouts for the 2014 plan year are expected to be paid in late February, 2015). For 2014, your incentive payment will be prorated based on your date of employment.

Effective on your date of employment, you will be awarded the following:

▪
5,750 stock options with an exercise price equal to the fair market value of Barnes Group’s stock (as defined in the Barnes Group Inc. Stock and Incentive Award Plan, as amended) on your date of employment. These options will vest one-third each on the 18, 30, and 42 month anniversaries of grant. Stock options are a speculative financial vehicle driven solely by stock price appreciation. Fair market value stock options have no intrinsic value absent such appreciation.

▪
3,100 time-vested restricted stock units, with each unit having the equivalent value of one share of Barnes Group stock. The restrictions will lapse one-third each on the 18, 30, and 42 months from the date of grant. You will receive dividends on these restricted stock units as such dividends are declared by the Company.









January 28, 2014                              Page - 2 -
Scott A. Mayo



▪
5,150 performance-vested share unit awards, with each unit having the equivalent value of one share of Barnes Group stock. These shares will be based on a comparison of the Company’s performance relative to the Russell 2000 index with shares earned, if any, to be paid out during the second quarter of 2017. Dividends will accrue on this performance share award and be paid in the same ratio as the underlying shares.

In addition, you will receive special one-time equity grants, as follows:

▪
8,350 time-vested restricted stock units, with each unit having the equivalent value of one share of Barnes Group stock. The restrictions will lapse 50% in 12 months, and 50% in 24 months from the date of grant. You will receive dividends on these restricted stock units as such dividends are declared by the Company.

▪
8,350 performance-vested share unit awards, with each unit having the equivalent value of one share of Barnes Group stock. These shares will be based on a comparison of the Company’s performance relative to the Russell 2000 index with shares earned, if any, to be paid out during the second quarter of 2017. Dividends will accrue on this performance share award and be paid in the same ratio as the underlying shares.

You will be eligible for annual long-term awards in the 2015 grant cycle. Your current target value for annual long-term compensation is $400,000. We currently expect these awards to be in the form of stock options, restricted stock units, and performance-vested share unit awards. All awards are subject to the discretion of the Compensation and Management Development Committee.

You will be expected to sign an agreement that provides that in certain circumstances, you may be subject to a “claw back” of any cash or equity awards earned if the Company restates its financial results lower than those upon which awards were calculated (with the exception for restatements not caused by misconduct or error) to comply with generally accepted accounting principles.

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 position is three times your base salary. Ownership includes directly and beneficially owned shares, stock retained following the distribution of vested restricted stock units and earned performance share awards, and exercises of stock options, stock unit holdings under the Barnes Group Inc.









January 28, 2014                              Page - 3 -
Scott A. Mayo     



Retirement Savings Plan (RSP), and stock owned through the Barnes Group Inc. Employee Stock Purchase Plan (ESPP). In addition, two-thirds of the value of unvested restricted stock units will be credited toward ownership guidelines. While there is no specific time frame requirement for achieving the ownership requirement, participants are expected to make steady progress and maintain ownership of any shares realized through vesting of restricted stock units, performance share awards, or stock option exercises.

In addition to your annual and incentive compensation, Barnes Group Inc. offers a comprehensive employee benefits package, including:
•
Medical and Prescription Drug Insurance (contributory on a pre-tax cost-sharing basis).

•
Dental Insurance (contributory on a pre-tax cost-sharing basis).

•
Vision Insurance (contributory).

•
Employee Stock Purchase Plan featuring a 5% discount off fair market value of Barnes Group Inc. stock, subject to statutory limits.

•
Retirement Savings Plan [401(k)] with a Company matching contribution of 50% of the amount you contribute on a pre-tax basis, up to 6% of eligible earnings (i.e., Company match is capped at 3% of eligible earnings). The Plan offers a wide range of investment funds to choose from.

•
4% Retirement Contribution (Company funded based on eligible earnings) deposited annually into your Retirement Savings 401(k) Account.

•
4% Retirement Contribution to the Defined Contribution Retirement Benefit Equalization Plan (DC RBEP) for eligible compensation in excess of annual IRS limits ($255,000 for 2014), deposited annually into your Retirement Savings 401(k) Account.

•
Participation in the Company's Executive Group Term Life Insurance Plan (EGTLIP), effective the latter of March 17, 2014 or your date of employment. EGTLIP provides a death benefit equal to four times salary ($1,700,000). EGTLIP is an individual policy that you own and, as such, the policy is portable. Barnes Group Inc. pays the premium for as long as you remain with the Company.
•
Accidental Death and Dismemberment Insurance up to $100,000 (non-contributory).

•
Optional Employee Term Life Insurance of 1 to 6 times annual salary (contributory).






January 28, 2014                              Page - 4 -
Scott A. Mayo


•
Optional Dependent Term Life Insurance of up to $250,000 for a spouse and up to $10,000 for each dependent child, as applicable (contributory).

•
Short-term Disability coverage, with a benefit of up to 26 weeks’ salary continuation (non-contributory).

•
Long-term Disability coverage with a benefit of 50% of covered earnings (non-contributory).

•
Supplemental Long-term Disability coverage available in increments of 10% and 16 2/3% (contributory and subject to plan limits).

•
Business Travel Accident Insurance.

•
Education Assistance Program.

You will receive additional information regarding our benefit programs as part of our RedCarpet Onboarding system or by accessing the Benefits 360 website. Most coverage, subject to your enrollment, will become effective the first day of the month following your date of hire. Coverage under the Company’s Short-term and Long-term Disability plans begin on the first day of the calendar month following the completion of 90 days’ continuous service.

As an Officer of the Company, you are entitled to coverage for an annual executive physical and financial planning assistance. The executive physical benefit provides reimbursement for expenses associated with an annual physical examination with a provider of your choice. The financial planning benefit provides reimbursement for professional financial planning assistance, tax planning, and/or tax preparation services, to a maximum of $8,000 (for the first year) and a maximum of $4,000 per year thereafter. There is no tax gross up associated with these expenses.

The Company provides a competitive relocation assistance program, including an allowance for incidental moving expenses of $10,000.00, grossed up for applicable withholding taxes, payable on your employment date. This benefit will be available to you for one year after your hire date (March 17, 2015) and repayable to the Company should you voluntarily terminate your employment within one (1) year of actual relocation commencement.

You will be entitled to four weeks of vacation annually as well as eligible for a total of thirteen company-paid holidays (which includes 3 to 4 floating holidays annually).










January 28, 2014                                  Page - 5 -
Scott A. Mayo



All prospective Barnes Group employees are required to pass a urinalysis test for the presence of drugs and to undergo a standard physical examination to determine whether they are capable of performing (with or without reasonable accommodation) the essential functions of the job for which an offer is extended. This offer of employment is contingent upon the results of the drug test and physical examination. Additionally, this offer is contingent on you completing the Officer Questionnaire that Barnes Group requires to comply with federal securities laws.

This letter sets forth our offer of 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 may only be amended or modified in writing by me.

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

Scott, I would appreciate your calling Dawn Edwards at the above number by January 31, 2014 with your decision. Please also sign, date, and return the enclosed duplicate copy of this letter to Dawn Edwards within three (3) business days of receipt to indicate your acceptance of this offer.

I look forward to your joining the Barnes Group executive team and contributing to our growth and profitability.

Sincerely,

/S/ PATRICK J. DEMPSEY    

Patrick J. Dempsey
President and Chief Executive Officer

Agreed to and accepted:



/S/ SCOTT A. MAYO                          1/30/14    
Scott A. Mayo                          Date






EXHIBIT 15


April 28, 2014

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

Commissioners:

We are aware that our report dated April 28, 2014 on our review of interim financial information of Barnes Group Inc. for the three-month periods ended March 31, 2014 and March 31, 2013 and included in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014 is incorporated by reference in its Registration Statements on Form S-8 (Nos. 333-27339, 333-88518, 333-133597, 333-150741, 333-166975 and 333-179643).


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, 2014 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 28, 2014
 
/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, 2014 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 28, 2014
 
  /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, 2014 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 28, 2014
 
April 28, 2014
 
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.