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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
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☐ | 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)
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Delaware | | 06-0247840 | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
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123 Main Street | | | |
Bristol | | | |
Connecticut | | 06010 | |
(Address of Principal Executive Offices) | | (Zip Code) | |
(860) 583-7070
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | | B | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☒ |
The registrant had outstanding 50,674,896 shares of common stock as of November 1, 2023.
Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended September 30, 2023
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Part I. | FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II. | OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | Risk Factors | |
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Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net sales | $ | 360,988 | | | $ | 314,744 | | | $ | 1,035,329 | | | $ | 948,395 | |
| | | | | | | |
Cost of sales | 253,490 | | | 208,649 | | | 704,358 | | | 628,593 | |
Selling and administrative expenses | 97,508 | | | 76,059 | | | 271,688 | | | 218,646 | |
Goodwill impairment charge | — | | | — | | | — | | | 68,194 | |
| 350,998 | | | 284,708 | | | 976,046 | | | 915,433 | |
Operating income | 9,990 | | | 30,036 | | | 59,283 | | | 32,962 | |
| | | | | | | |
Interest expense | 22,792 | | | 3,357 | | | 34,612 | | | 10,249 | |
Other expense (income), net | (874) | | | 2,423 | | | (2,427) | | | 3,650 | |
(Loss) income before income taxes | (11,928) | | | 24,256 | | | 27,098 | | | 19,063 | |
Income taxes | 9,802 | | | 7,277 | | | 18,318 | | | 21,152 | |
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Net (loss) income | $ | (21,730) | | | $ | 16,979 | | | $ | 8,780 | | | $ | (2,089) | |
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Per common share: | | | | | | | |
Basic | $ | (0.43) | | | $ | 0.33 | | | $ | 0.17 | | | $ | (0.04) | |
Diluted | (0.43) | | | 0.33 | | | 0.17 | | | (0.04) | |
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Weighted average common shares outstanding: | | | | | | | |
Basic | 51,057,979 | | | 50,919,955 | | | 51,033,181 | | | 50,981,874 | |
Diluted | 51,057,979 | | | 51,059,906 | | | 51,223,978 | | | 50,981,874 | |
See accompanying notes.
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net (loss) income | $ | (21,730) | | | $ | 16,979 | | | $ | 8,780 | | | $ | (2,089) | |
Other comprehensive (loss) income, net of tax | | | | | | | |
Unrealized gain (loss) on hedging activities, net of tax (1) | 814 | | | 2,391 | | | 663 | | | 5,793 | |
Foreign currency translation adjustments, net of tax (2) | (14,282) | | | (63,433) | | | (10,146) | | | (145,238) | |
Defined benefit pension and other postretirement benefits, net of tax (3) | 539 | | | (3,737) | | | 10,810 | | | 2,114 | |
Total other comprehensive (loss) income, net of tax | (12,929) | | | (64,779) | | | 1,327 | | | (137,331) | |
Total comprehensive (loss) income | $ | (34,659) | | | $ | (47,800) | | | $ | 10,107 | | | $ | (139,420) | |
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(1) Net of tax of $255 and $751 for the three months ended September 30, 2023 and 2022, respectively, and $218 and $1,827 for the nine months ended September 30, 2023 and 2022, respectively.
(2) Net of tax of $0 for the three and nine months ended September 30, 2023 and 2022.
(3) Net of tax of $113 and $(1,383) for the three months ended September 30, 2023 and 2022, respectively, and $3,741 and $233 for the nine months ended September 30, 2023 and 2022, respectively.
See accompanying notes.
BARNES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 90,040 | | | $ | 76,858 | |
Accounts receivable, less allowances (2023 - $5,827; 2022 - $5,222) | 348,456 | | | 291,883 | |
Inventories | 370,669 | | | 283,402 | |
Prepaid expenses and other current assets | 94,248 | | | 80,161 | |
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Total current assets | 903,413 | | | 732,304 | |
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Deferred income taxes | 13,548 | | | 18,028 | |
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Property, plant and equipment | 1,009,351 | | | 906,980 | |
Less accumulated depreciation | (614,337) | | | (586,841) | |
| 395,014 | | | 320,139 | |
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Goodwill | 1,152,074 | | | 835,472 | |
Other intangible assets, net | 721,610 | | | 442,492 | |
Other assets | 91,675 | | | 65,295 | |
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Total assets | $ | 3,277,334 | | | $ | 2,413,730 | |
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Liabilities and Stockholders' Equity | | | |
Current liabilities | | | |
Notes and overdrafts payable | $ | 29 | | | $ | 8 | |
Accounts payable | 156,060 | | | 145,060 | |
Accrued liabilities | 220,088 | | | 158,568 | |
Long-term debt - current | 4,412 | | | 1,437 | |
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Total current liabilities | 380,589 | | | 305,073 | |
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Long-term debt | 1,307,853 | | | 569,639 | |
Accrued retirement benefits | 43,427 | | | 54,352 | |
Deferred income taxes | 142,027 | | | 62,562 | |
Long-term tax liability | 21,714 | | | 39,086 | |
Other liabilities | 44,673 | | | 36,691 | |
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Commitments and contingencies (Note 16) | | | |
Stockholders' equity | | | |
Common stock - par value $0.01 per share Authorized: 150,000,000 shares Issued: at par value (2023 - 64,585,444 shares; 2022 - 64,481,493 shares) | 646 | | | 645 | |
Additional paid-in capital | 535,777 | | | 529,791 | |
Treasury stock, at cost (2023 - 13,912,139 shares; 2022 - 13,890,802 shares) | (532,364) | | | (531,507) | |
Retained earnings | 1,552,165 | | | 1,567,898 | |
Accumulated other non-owner changes to equity | (219,173) | | | (220,500) | |
Total stockholders' equity | 1,337,051 | | | 1,346,327 | |
Total liabilities and stockholders' equity | $ | 3,277,334 | | | $ | 2,413,730 | |
See accompanying notes.
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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| Nine Months Ended September 30, |
| 2023 | | 2022 |
Operating activities: | | | |
Net income (loss) | $ | 8,780 | | | $ | (2,089) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 79,196 | | | 69,022 | |
Amortization of debt discount | 58 | | | — | |
(Gain) loss on disposition of property, plant and equipment | (202) | | | 14 | |
Stock compensation expense | 8,121 | | | 9,547 | |
Non-cash goodwill impairment charge | — | | | 68,194 | |
Changes in assets and liabilities, net of the effects of acquisition: | | | |
Accounts receivable | (5,273) | | | (17,923) | |
Inventories | (8,699) | | | (40,428) | |
Prepaid expenses and other current assets | 5,367 | | | (13,310) | |
Accounts payable | (11,629) | | | 10,509 | |
Accrued liabilities | 22,437 | | | (28,637) | |
Deferred income taxes | (3,541) | | | (4,350) | |
Long-term retirement benefits | (13,096) | | | (660) | |
Long-term tax liability | (13,029) | | | (6,948) | |
Other | 2,483 | | | 521 | |
Net cash provided by operating activities | 70,973 | | | 43,462 | |
| | | |
Investing activities: | | | |
Proceeds from disposition of property, plant and equipment | 6,990 | | | 104 | |
| | | |
| | | |
Capital expenditures | (37,405) | | | (21,655) | |
Business acquisitions, net of cash acquired | (718,782) | | | — | |
| | | |
Other | (921) | | | (2,168) | |
Net cash used by investing activities | (750,118) | | | (23,719) | |
| | | |
Financing activities: | | | |
Net change in other borrowings | (167) | | | (941) | |
Payments on long-term debt | (268,580) | | | (80,777) | |
Proceeds from the issuance of long-term debt | 1,006,333 | | | 85,082 | |
Payments of debt issuance costs | (11,341) | | | — | |
| | | |
Proceeds from the issuance of common stock | 277 | | | 338 | |
Common stock repurchases | — | | | (6,721) | |
Dividends paid | (24,302) | | | (24,282) | |
Withholding taxes paid on stock issuances | (857) | | | (818) | |
Other | (8,971) | | | (18,548) | |
Net cash provided (used) by financing activities | 692,392 | | | (46,667) | |
| | | |
Effect of exchange rate changes on cash flows | (2,190) | | | (9,467) | |
Increase (decrease) in cash, cash equivalents and restricted cash | 11,057 | | | (36,391) | |
Cash, cash equivalents and restricted cash at beginning of period | 81,128 | | | 111,909 | |
Cash, cash equivalents and restricted cash at end of period | 92,185 | | | 75,518 | |
Less: Restricted cash, included in Prepaid expenses and other current assets | (2,145) | | | (1,976) | |
Less: Restricted cash, included in Other assets | — | | | (1,957) | |
Cash and cash equivalents at end of period | $ | 90,040 | | | $ | 71,585 | |
See accompanying notes.
BARNES GROUP INC.
NOTES TO CONDENSED 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
Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet and the related Condensed Consolidated Statements of (Loss) Income, Comprehensive (Loss) 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 Condensed 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, 2022 has been derived from the 2022 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, 2022. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair statement of the results, have been included. Operating results for the three- and nine-month periods ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. Certain reclassifications have been made to prior year amounts to conform to current year presentation (see Note 4).
Business Combinations
In accordance with the Business Combinations guidance, acquisitions are recorded using the acquisition method of accounting. The Company includes the operating results of acquired entities from their respective dates of acquisition. The Company allocates the purchase consideration to the assets acquired and liabilities assumed in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the increase in global market access and the acquired assembled workforce, neither of which qualify for recognition as an intangible asset. Costs incurred as a result of a business combination other than costs related to the issuance of debt or equity securities are recorded in the period the costs are incurred. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to assets acquired and liabilities assumed with the corresponding offset to goodwill.
2. Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under U.S. generally accepted accounting principles ("US GAAP") through the use of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification. The Company evaluates the applicability and potential impacts of recent ASUs on its Condensed Consolidated Financial Statements and related disclosures.
Recently Adopted Accounting Standards
In October 2021, the FASB amended its guidance related to business combinations. The amended guidance requires entities to recognize and measure contract assets and contract liabilities acquired in business combinations on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. The new guidance is effective on a prospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance, on a prospective basis, on January 1, 2023 and applied the guidance as it relates to the acquisition of MB Aerospace Holdings, Inc. (Note 3).
In September 2022, the FASB amended its guidance related to supplier finance programs. The amended guidance requires additional disclosures surrounding the use of supplier finance programs to purchase goods or services including disclosing the key terms of the programs, the amount of obligations outstanding at the end of the reporting period, and a roll-forward of those obligations. The new guidance, except the amendment on roll-forward information, is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendment on roll-forward information is effective for fiscal years beginning after December 15, 2023. The Company adopted this guidance within the Condensed Consolidated Financial Statements filed as of March 31, 2023 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements, however it did result in additional disclosures pursuant to the new guidance. See Note 16.
Recently Issued Accounting Standards
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced its intent to phase out the use of LIBOR by December 31, 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred benchmark alternative to U.S. dollar LIBOR. Published by the Federal Reserve Bank of New York, SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. In March 2020, in response to this transition, the FASB issued guidance related to this rate reform, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. In January 2021, the FASB issued further clarifying guidance regarding derivatives, as it relates to this transition. In December 2022, the FASB extended the expiration of the guidance through December 31, 2024. The Company’s Unsecured Credit Agreement (Note 9) and corresponding USD interest rate Swaps (Note 10) each mature in February 2026. In March 2021, the Intercontinental Exchange Benchmark Association announced that it will extend the publication of overnight, 1, 3, 6 and 12 month LIBOR rates until June 30, 2023, while ceasing publication of all other LIBOR rates including 1 week and 2 month rates. The Company's Unsecured Credit Agreement was further amended in October 2021 and in April 2022 to address the replacement of LIBOR via the LIBOR Transition Agreement and Amendment No. 1, respectively (see Note 9), with SOFR. The Company's corresponding interest rate Swaps were amended in May 2022 to address the replacement of LIBOR. As a result of the Company's contract amendments to address the replacement of LIBOR, the Company does not anticipate a material impact on our business, financial condition, results of operations or cash flow as a result of this change.
3. Acquisition
On August 31, 2023 (“Acquisition Date”), the Company completed its acquisition of MB Aerospace Holdings Inc., a Delaware corporation ("MB Aerospace"), along with such entity's subsidiaries (the "Transaction") by acquiring all of the issued and outstanding shares of capital stock of MB Aerospace. MB Aerospace is a leading provider of precision aero-engine component manufacture and repair services serving major aerospace and defense engine original equipment manufacturers (“OEMs”), tier 1 suppliers and maintenance, repair and overhaul ("MRO") providers. This business, which is being integrated into our Aerospace segment, provides significant growth opportunities and enhances the Company’s ability to deliver value-add solutions across the aero-engine value chain. Further, the acquisition of MB Aerospace increases customer diversification within both commercial aerospace and defense platforms and provides the Company with a well-balanced portfolio across aerospace and industrial end markets.
The Company acquired MB Aerospace for an aggregate purchase price of $728,607, which includes preliminary adjustments under the terms of the Stock Purchase Agreement ("the Agreement") and is subject to post-closing adjustments under the terms of the Agreement. The Company paid $718,782, net of $9,825 of cash acquired, in cash, using cash on hand and borrowings under the Company’s $1,000,000 Revolving Credit Facility and its $650,000 Term Loan Facility (see Note 9).
During the three months ended September 30, 2023, the Company incurred $17,423 of acquisition-related costs related to the acquisition of MB Aerospace. These transaction costs have been recognized in the Company's Condensed Consolidated Statements of (Loss) Income, of which $7,817 was recognized as selling and administrative expenses and of which $9,606 primarily relating to the bridge loan facility financing was recognized as Interest expense (see Note 9).
During the nine months ended September 30, 2023, the Company incurred $22,711 of acquisition-related costs related to the acquisition of MB Aerospace. These costs include $1,729 of due diligence costs and $20,982 of transaction costs to complete the acquisition. These transaction costs have been recognized in the Company's Condensed Consolidated Statements of (Loss) Income, of which $13,105 was recognized as selling and administrative expenses and of which $9,606 primarily relating to the bridge loan facility financing was recognized as Interest expense (see Note 9).
The operating results of MB Aerospace have been included in the Consolidated Statements of Income since the Acquisition Date. The Company reported $26,476 in net sales and an operating loss of $7,386 from MB Aerospace, included within the Aerospace segment's operating profit, inclusive of $8,019 of short-term purchase accounting adjustments related to inventory step-up and backlog intangible amortization and $2,208 of amortization of other intangible assets acquired, for the period from the Acquisition Date through September 30, 2023.
Preliminary Estimated Fair Value of Assets Acquired and Liabilities Assumed
The Company accounted for the MB Aerospace acquisition as a business combination. The identifiable assets acquired and liabilities assumed are recorded at their preliminary fair values as of the Acquisition Date and are consolidated into the Company’s condensed consolidated financial statements. The assignment of fair market value requires significant judgments regarding the estimates and assumptions used to value the acquired assets and liabilities assumed. In determining the fair values of the assets acquired and liabilities assumed, the Company utilized the cost, income and market approaches from the perspective of a market participant. The Company used third party valuation professionals to aid in the determination of the estimated fair value of certain assets acquired and liabilities assumed.
The following table summarizes the preliminary estimated fair values for each major class of assets acquired, net of cash acquired, and liabilities assumed at the Acquisition Date:
| | | | | |
Accounts receivable | $ | 50,817 | |
Inventories | 78,464 | |
Prepaid expenses and other current assets | 18,836 | |
| |
Property, plant and equipment | 80,480 | |
Goodwill | 318,307 | |
Other intangible assets | 321,000 | |
Other Assets | 10,627 | |
Total Assets Acquired | 878,531 | |
| |
Accounts payable | (21,826) | |
Accrued liabilities | (34,955) | |
Deferred income taxes | (83,886) | |
Other liabilities | (9,659) | |
Debt assumed | (9,423) | |
Total Liabilities Assumed | (159,749) | |
Net Assets Acquired | $ | 718,782 | |
The Company recorded the fair values of the assets acquired and liabilities assumed of MB Aerospace as of August 31, 2023. The final purchase price allocation is subject to post-closing adjustments pursuant to the terms of the Agreement and finalization of fair value estimates. Estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The areas of the valuations that are not yet finalized relate to the amounts for property, plant and equipment, long term intangible assets and the final amount of residual goodwill. The Company may obtain additional information to assist in determining fair values of net assets acquired at the Acquisition Date during the measurement period.
Goodwill represents the excess of the purchase consideration over the fair value of the underlying acquired net tangible and intangible assets. Goodwill has been allocated to the Company’s Aerospace segment. None of the recognized goodwill from the acquisition of MB Aerospace is expected to be deductible for income tax purposes (see Note 8).
The Other intangible assets in the table above consist of backlog, developed technology, and customer relationships, which are amortized over their respective estimated useful lives (see Note 8).
Supplemental Pro Forma Information
The following table reflects the unaudited pro forma operating results of the Company for the three and nine months ended September 30, 2023 and 2022, which give effect to the acquisition of MB Aerospace as if it had occurred on January 1, 2022. 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, 2022, 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 MB Aerospace 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 unaudited pro forma combined condensed financial information has been prepared using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”).
The pro forma information does not include the effects of any synergies or cost reduction initiatives related to the acquisition.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net sales | $ | 416,088 | | | $ | 380,644 | | | $ | 1,249,129 | | | $ | 1,153,395 | |
Net (loss) income | (5,712) | | | 1,781 | | | 6,122 | | | (82,303) | |
The unaudited pro forma combined condensed financial information during the three and nine month periods ended September 30, 2023 were adjusted to include:
a.Depreciation and Amortization - Adjustment of $(4,032) and $884 for the three and nine months ended September 30, 2023, respectively, to reflect the adjustment to property, plant, and equipment depreciation and amortization expense from the acquired backlog, developed technology and customer relationships.
b.Transaction Costs - Adjustments of $(7,817) and $(13,105) for the three and nine months ended September 30, 2023, respectively, to reflect the elimination of non-recurring transaction costs.
c.Interest Expense - Adjustment of $(9,858) and $3,209 for the three and nine months ended September 30, 2023, respectively, to reflect the adjustment to interest expense resulting from interest on the new debt to finance the acquisition of MB Aerospace and the extinguishment of MB Aerospace’s existing debt and the amortization of related debt issuance costs.
d.Inventory Step-Up - Adjustment of $(3,019) and $(3,019) for the three and nine months ended September 30, 2023, respectively, to eliminate the inventory fair value adjustment that was recognized in cost of sales during the three and nine months ended September 30, 2023.
e.Income Taxes - The estimated tax impacts of the pro forma adjustments have been reflected within the unaudited pro forma condensed combined statement of operations by using a blended foreign, federal and state statutory income tax rate.
The unaudited pro forma combined condensed financial information during the three and nine month periods ended September 30, 2022 were adjusted to include:
a.Depreciation and Amortization - Adjustment of $3,331 and $20,645 for the three and nine months ended September 30, 2022, respectively, to reflect the adjustment to property, plant, and equipment depreciation and the amortization expense from the acquired backlog, developed technology and customer relationships.
b.Transaction Costs - Adjustments of $0 and $13,105 for the three and nine months ended September 30, 2022, respectively, to reflect non-recurring transaction costs.
c.Interest Expense - Adjustments of $7,993 and $17,506 for the three and nine months ended September 30, 2022, respectively, to reflect the adjustment to interest expense resulting from interest on the new debt to finance the acquisition of MB Aerospace and the extinguishment of MB Aerospace’s existing debt and the amortization of related debt issuance costs.
d.Inventory Step-Up - Adjustment of $0 and $12,337 for the three and nine months ended September 30, 2022, respectively, to reflect the increase in cost of sales for the impact of the $12,337 fair value adjustment to inventory for the acquired inventory.
e.Income Taxes - The estimated tax impacts of the pro forma adjustments have been reflected within the unaudited pro forma condensed combined statement of operations by using a blended foreign, federal and state statutory income tax rate.
4. Revenue
The Company is a global provider of highly engineered products, differentiated industrial technologies, and innovative solutions, serving a wide range of end markets and customers. Its specialized products and services are used in far-reaching applications in aerospace, healthcare, automation, packaging, mobility, and manufacturing.
Revenue is recognized by the Company when control of the product or solution is transferred to the customer. Control is generally transferred when products are shipped or delivered to customers, title is transferred, the significant risks and rewards of ownership have transferred, and the Company has rights to payment and the rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue is generally recognized at a point in time, a certain portion of the Company's businesses with customized products or contracts in which the Company performs work on customer-owned assets requires the use of an over-time recognition model as certain contracts meet one or more of the established criteria pursuant to the accounting guidance. Also, service revenue is recognized as control transfers, which is concurrent with the services being performed.
The following table presents the Company's revenue disaggregated by products and services, and geographic regions, by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Three Months Ended September 30, 2022 |
| Aerospace | | Industrial | | Total Company | | Aerospace | | Industrial | | Total Company |
Products and Services(A) | | | | | | | | | | | |
Aerospace Original Equipment Manufacturing Products | $ | 97,994 | | | $ | — | | | $ | 97,994 | | | $ | 65,229 | | | $ | — | | | 65,229 | |
Aerospace Aftermarket Products and Services | 58,096 | | | — | | | 58,096 | | | 45,558 | | | — | | | 45,558 | |
Motion Control Solutions Products (B) | — | | | 91,442 | | | 91,442 | | | — | | | 93,527 | | | 93,527 | |
Molding Solutions Products | — | | | 99,428 | | | 99,428 | | | — | | | 97,243 | | | 97,243 | |
Automation Products | — | | | 14,028 | | | 14,028 | | | — | | | 13,187 | | | 13,187 | |
| $ | 156,090 | | | $ | 204,898 | | | $ | 360,988 | | | $ | 110,787 | | | $ | 203,957 | | | $ | 314,744 | |
| | | | | | | | | | | |
Geographic Regions (C) | | | | | | | | | | | |
Americas | $ | 106,608 | | | $ | 89,574 | | | $ | 196,182 | | | $ | 78,535 | | | $ | 96,201 | | | $ | 174,736 | |
Europe | 29,708 | | | 74,777 | | | 104,485 | | | 19,859 | | | 65,637 | | | 85,496 | |
Asia | 17,213 | | | 38,738 | | | 55,951 | | | 10,888 | | | 40,995 | | | 51,883 | |
Rest of World | 2,561 | | | 1,809 | | | 4,370 | | | 1,505 | | | 1,124 | | | 2,629 | |
| $ | 156,090 | | | $ | 204,898 | | | $ | 360,988 | | | $ | 110,787 | | | $ | 203,957 | | | $ | 314,744 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | | Nine Months Ended September 30, 2022 |
| Aerospace | | Industrial | | Total Company | | Aerospace | | Industrial | | Total Company |
Products and Services(A) | | | | | | | | | | | |
Aerospace Original Equipment Manufacturing Products | $ | 246,094 | | | $ | — | | | $ | 246,094 | | | $ | 200,360 | | | $ | — | | | 200,360 | |
Aerospace Aftermarket Products and Services | 149,268 | | | — | | | 149,268 | | | 120,290 | | | — | | | 120,290 | |
Motion Control Solutions Products (B) | — | | | 290,356 | | | 290,356 | | | — | | | 282,120 | | | 144,537 | |
Molding Solutions Products | — | | | 303,082 | | | 303,082 | | | — | | | 301,488 | | | 301,488 | |
Automation Products | — | | | 46,529 | | | 46,529 | | | — | | | 44,136 | | | 44,136 | |
| $ | 395,362 | | | $ | 639,967 | | | $ | 1,035,329 | | | $ | 320,650 | | | $ | 627,745 | | | $ | 948,395 | |
| | | | | | | | | | | |
Geographic Regions (C) | | | | | | | | | | | |
Americas | $ | 279,029 | | | $ | 278,768 | | | $ | 557,797 | | | $ | 231,798 | | | $ | 271,176 | | | $ | 502,974 | |
Europe | 70,776 | | | 235,406 | | | 306,182 | | | 58,343 | | | 222,776 | | | 281,119 | |
Asia | 38,876 | | | 119,670 | | | 158,546 | | | 26,553 | | | 129,484 | | | 156,037 | |
Rest of World | 6,681 | | | 6,123 | | | 12,804 | | | 3,956 | | | 4,309 | | | 8,265 | |
| $ | 395,362 | | | $ | 639,967 | | | $ | 1,035,329 | | | $ | 320,650 | | | $ | 627,745 | | | $ | 948,395 | |
| | | | | | | | | | | |
(A) The results of MB Aerospace, from the acquisition on August 31, 2023, have been included within the Company's revenue disaggregated by products and services, and geographic regions within the Aerospace Segment for the three and nine month periods ended September 30, 2023.
(B) Effective January 1, 2023, the Company combined Industrial's Force & Motion Control and Engineered Components businesses to form a single strategic business unit named Motion Control Solutions. As a result of the combination, Motion Control Solutions Products reflects product revenues that were previously disclosed as Force & Motion Control Products and Engineered Components Products. Prior period amounts have been reclassified to conform to the current year presentation.
(C) Sales by geographic region are based on the location to which the product is shipped and services are delivered.
Revenue from products and services transferred to customers at a point in time accounted for approximately 75 percent and 80 percent of total revenue for the three month periods ended September 30, 2023 and September 30, 2022, respectively. Revenue from products and services transferred to customers at a point in time accounted for approximately 80 percent of total revenue for each of the nine month periods ended September 30, 2023 and September 30, 2022. A majority of revenue within the Industrial segment and Aerospace Original Equipment Manufacturing Products business ("OEM"), along with a portion of revenue within the Aerospace Aftermarket Products and Services business ("Aftermarket"), is recognized at a point in time, primarily when the product or solution is shipped to the customer.
Revenue from products and services transferred to customers over-time accounted for approximately 25 percent of total revenue and 20 percent of total revenue for the three month periods ended September 30, 2023 and September 30, 2022, respectively. Revenue from products and services transferred to customers over-time accounted for approximately 20 percent of total revenue for each of the nine month periods ended September 30, 2023 and September 30, 2022. The Company recognizes revenue over-time in instances where a contract supports a continual transfer of control to the customer. Substantially all of our revenue in the Aerospace Aftermarket maintenance repair and overhaul business (within Aftermarket Products and Services) and a portion of the revenue for Motion Control Solutions products, Molding Solutions products and Aerospace OEM products is recognized over-time. Within the Molding Solutions and Aerospace Aftermarket businesses, this continual transfer of control to the customer partially results from repair and refurbishment work performed on customer-controlled assets. With other contracts, this continual transfer of control to the customer is supported by clauses in the contract, or governing commercial law of the relevant jurisdiction, where we deliver products that do not have an alternative use and require an enforceable right to payment of costs incurred (plus a reasonable profit) or the Company has a contractual right to complete any work in process and receive full contract price.
The majority of our revenue is from contracts that are for less than one year, however certain Aerospace OEM and Molding Solutions business contracts extend beyond one year. In the Industrial segment, customers are typically OEMs or suppliers to OEMs and, in some businesses, distributors. In the Aerospace segment, customers include commercial airlines, OEMs, defense-related manufacturers, and industry parts and service providers.
A performance obligation represents a promise within a contract to provide a distinct good or service to the customer. Revenue is recognized in an over-time model based on the extent of progress towards completion of the performance obligation. The
selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company utilizes the cost-to-cost measure of progress for over-time contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts.
Adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. Revenue recognized from performance obligations satisfied in previous periods was not material in both the three and nine month periods ended September 30, 2023 and 2022.
Contract Balances. The timing of revenue recognition, invoicing and cash collections affects accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.
Unbilled Receivables (Contract Assets) - Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when 1) the cost-to-cost method is applied and 2) such revenue exceeds the amount invoiced to the customer. Unbilled receivables are included within Prepaid Expenses and Other Current Assets on the Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.
Customer Advances and Deposits (Contract Liabilities) - The Company may receive a customer advance or deposit, or have an unconditional right to receive a customer advance, prior to revenue being recognized. Certain contracts within the Molding Solutions business, for example, may require such advances. Since the performance obligations related to such advances have not been satisfied, a contract liability is established. An offsetting asset of equal amount is recorded as an account receivable until the advance is collected. Advances and deposits are included within Accrued Liabilities on the Condensed Consolidated Balance Sheets until the respective revenue is recognized. Advance payments are not considered a significant financing component as they are generally received less than one year before the customer solution is completed. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on an individual contract basis at the end of each reporting period.
Net contract assets (liabilities) consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | $ Change | | % Change |
Unbilled receivables (contract assets) | $ | 54,565 | | | $ | 42,423 | | | $ | 12,142 | | | 29 | % |
Contract liabilities | (43,259) | | | (27,857) | | | (15,402) | | | 55 | % |
Net contract assets | $ | 11,306 | | | $ | 14,566 | | | $ | (3,260) | | | (22) | % |
Contract liabilities balances at September 30, 2023 and December 31, 2022 include $10,731 and $9,593, respectively, of customer advances for which the Company has not yet collected payment, but has an unconditional right to collect payment. Accounts receivable, as presented on the Condensed Consolidated Balance Sheet, includes corresponding balances at September 30, 2023 and December 31, 2022, respectively.
Changes in the net contract assets during the nine month period ended September 30, 2023 included a $15,402 increase in contract liabilities, driven primarily by new customer advances and deposits, partially offset by revenue recognized in the current period. Offsetting this net contract assets decrease was a $12,142 increase in contract assets, driven primarily by contract progress (i.e., unbilled receivable), partially offset by earlier contract progress being invoiced to the customer. Of this net contract asset increase, $11,506 was attributable to MB Aerospace at September 30, 2023.
The Company recognized approximately 15% and 85% of the revenue related to the contract liabilities balance as of December 31, 2022 during the three and nine month periods ended September 30, 2023, respectively, and approximately 10% and 85% of the revenue related to the contract liabilities balance as of December 31, 2021 during the three and nine month periods ended September 30, 2022, respectively, primarily representing revenue from the sale of molds and hot runners within the Molding Solutions business.
Remaining Performance Obligations. The Company has elected to disclose remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed and, for Aerospace, excludes projections of components and assemblies that Aerospace OEM customers anticipate purchasing in the future under existing programs, which represent orders that are beyond lead time and do not represent performance obligations pursuant to accounting guidance. As of September 30,
2023, the aggregate amount of the transaction price allocated to remaining performance obligations, including the balance within MB Aerospace, was $538,898. The Company expects to recognize revenue on approximately 75% of the remaining performance obligations over the next 12 months, with the remainder to be recognized within 24 months.
5. Stockholders' Equity
A schedule of consolidated changes in equity for the nine months ended September 30, 2023 is as follows (number of shares in thousands):
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| | Common Stock (Number of Shares) | | Common Stock (Amount) | | Additional Paid-In Capital | | Treasury Stock (Number of Shares) | | Treasury Stock (Amount) | | Retained Earnings | | Accumulated Other Non-Owner Changes to Equity | | Total Stockholders’ Equity |
December 31, 2022 | | 64,481 | | | $ | 645 | | | $ | 529,791 | | | 13,891 | | | $ | (531,507) | | | $ | 1,567,898 | | | $ | (220,500) | | | $ | 1,346,327 | |
Comprehensive income | | — | | | — | | | — | | | — | | | — | | | 13,159 | | | 29,209 | | | 42,368 | |
Dividends declared ($0.16 per share)
| | — | | | — | | | — | | | — | | | — | | | (8,096) | | | — | | | (8,096) | |
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Residual interest in subsidiary | | — | | | — | | | (2,381) | | | — | | | — | | | — | | | — | | | (2,381) | |
Employee stock plans | | 23 | | | — | | | 2,665 | | | 6 | | | (252) | | | (83) | | | — | | | 2,330 | |
March 31, 2023 | | 64,504 | | | $ | 645 | | | $ | 530,075 | | | 13,897 | | | $ | (531,759) | | | $ | 1,572,878 | | | $ | (191,291) | | | $ | 1,380,548 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 17,352 | | | (14,953) | | | 2,399 | |
Dividends declared ($0.16 per share)
| | — | | | — | | | — | | | — | | | — | | | (8,099) | | | — | | | (8,099) | |
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Employee stock plans | | 22 | | | — | | | 2,339 | | | 3 | | | (124) | | | (76) | | | — | | | 2,139 | |
June 30, 2023 | | 64,526 | | | $ | 645 | | | $ | 532,414 | | | 13,900 | | | $ | (531,883) | | | $ | 1,582,055 | | | $ | (206,244) | | | $ | 1,376,987 | |
Comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (21,730) | | | (12,929) | | | (34,659) | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,107) | | | — | | | (8,107) | |
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Employee stock plans | | 59 | | | 1 | | | 3,363 | | | 12 | | | (481) | | | (53) | | | — | | | 2,830 | |
September 30, 2023 | | 64,585 | | | $ | 646 | | | $ | 535,777 | | | 13,912 | | | $ | (532,364) | | | $ | 1,552,165 | | | $ | (219,173) | | | $ | 1,337,051 | |
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A schedule of consolidated changes in equity for the nine months ended September 30, 2022 is as follows (number of shares in thousands):
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| | Common Stock (Number of Shares) | | Common Stock (Amount) | | Additional Paid-In Capital | | Treasury Stock (Number of Shares) | | Treasury Stock (Amount) | | Retained Earnings | | Accumulated Other Non-Owner Changes to Equity | | Total Stockholders’ Equity |
December 31, 2021 | | 64,344 | | | $ | 643 | | | $ | 516,562 | | | 13,658 | | | $ | (523,642) | | | $ | 1,587,041 | | | $ | (151,838) | | | $ | 1,428,766 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 20,484 | | | (2,590) | | | 17,894 | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,111) | | | — | | | (8,111) | |
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Employee stock plans | | 12 | | | 1 | | | 2,665 | | | 2 | | | (49) | | | (136) | | | — | | | 2,481 | |
March 31, 2022 | | 64,356 | | | $ | 644 | | | $ | 519,227 | | | 13,660 | | | $ | (523,691) | | | $ | 1,599,278 | | | $ | (154,428) | | | $ | 1,441,030 | |
Comprehensive loss | | — | | | — | | | — | | | — | | | — | | | (39,552) | | | (69,962) | | | (109,514) | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,081) | | | — | | | (8,081) | |
Common stock repurchases | | — | | | — | | | — | | | 200 | | | (6,721) | | | — | | | — | | | (6,721) | |
Employee stock plans | | 23 | | | — | | | 3,548 | | | 3 | | | (106) | | | (62) | | | — | | | 3,380 | |
June 30, 2022 | | 64,379 | | | $ | 644 | | | $ | 522,775 | | | 13,863 | | | $ | (530,518) | | | $ | 1,551,583 | | | $ | (224,390) | | | $ | 1,320,094 | |
Comprehensive income (loss) | | — | | | — | | | — | | | — | | | — | | | 16,979 | | | (64,779) | | | (47,800) | |
Dividends declared ($0.16 per share) | | — | | | — | | | — | | | — | | | — | | | (8,090) | | | — | | | (8,090) | |
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Employee stock plans | | 70 | | | — | | | 3,592 | | | 19 | | | (663) | | | (77) | | | — | | | 2,852 | |
September 30, 2022 | | 64,449 | | | $ | 644 | | | $ | 526,367 | | | 13,882 | | | $ | (531,181) | | | $ | 1,560,395 | | | $ | (289,169) | | | $ | 1,267,056 | |
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6. Net (Loss) Income Per Common Share
For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans. No potentially dilutive shares have
been included in the diluted earnings per share calculations for the three-month period ended September 30, 2023 due to the Company’s reported net loss for the period. For the purpose of computing diluted net income per common share for the nine-month period ended September 30, 2023, the weighted-average number of common shares outstanding was increased by 190,797. For the purpose of computing diluted net income per common share for the three-month period ended September 30, 2022, the weighted-average number of common shares outstanding was increased by 139,951. No potentially dilutive shares have been included in the diluted earnings per share calculations for the nine-month period ended September 30, 2022 due to the Company’s reported net loss for the period.
The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three month periods ended September 30, 2023 and 2022, the Company excluded 683,374 and 875,706 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive. During the nine month periods ended September 30, 2023 and 2022, the Company excluded 757,813 and 823,365 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive.
The Company granted 120,195 stock options, 152,476 restricted stock unit awards and 131,025 performance share awards ("PSAs") in February 2023 as part of its annual long-term incentive equity grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic weighted-average common shares outstanding as they contain nonforfeitable rights to dividend payments. The PSAs are part of the long-term Performance Share Award Program and are based on performance goals that are driven by a combination of independently measured metrics (depending on the grant year) with each metric being weighted equally. The metrics for awards granted in 2023 include the Company’s total shareholder return ("TSR"), return on invested capital ("ROIC") and operating income before depreciation and amortization growth ("EBITDA growth"). The TSR and EBITDA growth metrics are designed to assess the long-term Company performance relative to the performance of companies included in the Russell 2000 Index over a three-year performance period. ROIC is designed to assess the Company's performance compared to pre-established Company targets over a three-year performance period. The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR is determined using a Monte Carlo valuation method as the award contains a market condition.
7. Inventories
The components of inventories consisted of:
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| September 30, 2023 | | December 31, 2022 |
Finished goods | $ | 104,046 | |
| $ | 105,965 | |
Work-in-process | 116,561 | | | 68,664 | |
Raw material and supplies | 150,062 | | | 108,773 | |
| $ | 370,669 | | | $ | 283,402 | |
8. Goodwill and Other Intangible Assets
Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended September 30, 2023:
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| Industrial | | Aerospace | | | | Total Company |
December 31, 2022 (A) | $ | 804,686 | | | $ | 30,786 | | | | | $ | 835,472 | |
Acquisition related | — | | | $ | 318,307 | | | | | $ | 318,307 | |
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Foreign currency translation | (1,438) | | | (267) | | | | | (1,705) | |
September 30, 2023 | $ | 803,248 | | | $ | 348,826 | | | | | $ | 1,152,074 | |
(A) Industrial amounts are net of accumulated goodwill impairment losses of $68,194.
The changes recorded at Aerospace include $318,307 of goodwill in 2023 resulting from the acquisition of MB Aerospace in August 2023. See Note 3. The amounts allocated to goodwill reflect the benefits that the Company expects to realize from an increase in global market access and MB Aerospace's assembled workforce. None of the recognized goodwill from the
acquisition of MB Aerospace is expected to be deductible for income tax purposes. The purchase price for the MB Aerospace acquisition is subject to post-closing adjustments and finalization of purchase price allocation, therefore goodwill may require adjustment accordingly.
In the second quarter of 2023, management performed its annual impairment testing of goodwill and determined that there was no goodwill impairment.
Other Intangible Assets:
Other intangible assets consisted of:
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| | | September 30, 2023 | | December 31, 2022 |
| Range of Life -Years | | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized intangible assets: | | | | | | | | | |
Revenue Sharing Programs (RSPs) | Up to 30 | | $ | 299,500 | | | $ | (173,404) | | | $ | 299,500 | | | $ | (164,162) | |
Component Repair Programs (CRPs) | Up to 30 | | 111,839 | | | (47,664) | | | 111,839 | | | (41,880) | |
Customer relationships | 10-16 | | 587,189 | | | (172,627) | | | 337,189 | | | (156,442) | |
Patents and technology | 4-18 | | 178,433 | | | (98,538) | | | 123,433 | | | (92,875) | |
Trademarks/trade names | 10-30 | | 10,949 | | | (10,875) | | | 10,949 | | | (10,772) | |
Other | Up to 10 | | 26,334 | | | (8,074) | | | 9,413 | | | (2,966) | |
| | | 1,214,244 | | | (511,182) | | | 892,323 | | | (469,097) | |
Unamortized intangible assets: | | | | | | | | | |
Trade names | | | 55,670 | | | — | | | 55,670 | | | — | |
Foreign currency translation | | | (37,122) | | | — | | | (36,404) | | | — | |
Other intangible assets | | | $ | 1,232,792 | | | $ | (511,182) | | | $ | 911,589 | | | $ | (469,097) | |
In connection with the acquisition of MB Aerospace in August 2023, the Company recorded intangible assets of $321,000 which includes $250,000 of customer relationships, $55,000 of developed technology, and $16,000 of customer backlog included within Other above. The estimated weighted-average useful lives of the acquired assets were 15 years, 18 years and 1 year, respectively.
Amortization of intangible assets for the three and nine month periods ended September 30, 2023 was $18,860 and $42,084, respectively. Amortization of intangible assets for the three and nine month periods ended September 30, 2022 was $11,747 and $33,918, respectively. Estimated amortization of intangible assets for future periods is as follows: 2023 (remainder) - $25,000; 2024 - $71,000; 2025 - $70,000; 2026 - $67,000; 2027 - $66,000 and 2028 - $62,000.
In the second quarter of 2023, management performed its annual impairment testing of its trade names, which are indefinite-lived intangible assets. Based on this assessment, there were no impairments.
9. Debt
Long-term debt and notes and overdrafts payable at September 30, 2023 and December 31, 2022 consisted of:
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| September 30, 2023 | | December 31, 2022 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Revolving Credit Facility | $ | 662,937 | | | $ | 664,674 | | | $ | 466,672 | | | $ | 464,373 | |
Term Loan Facility | 650,000 | | | 651,625 | | | — | | | — | |
Unamortized deferred financing costs and original issue discount - Term Loan Facility | (12,915) | | | — | | | — | | | — | |
3.97% Senior Notes | — | | | — | | | 100,000 | | | 96,894 | |
Borrowings under lines of credit and overdrafts | 29 | | | 29 | | | 8 | | | 8 | |
Finance leases | 12,243 | | | 11,947 | | | 4,404 | | | 4,085 | |
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| 1,312,294 | | | 1,328,275 | | | 571,084 | | | 565,360 | |
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Less current maturities | (4,441) | | | | | (1,445) | | | |
Long-term debt | $ | 1,307,853 | | | | | $ | 569,639 | | | |
On February 10, 2021, the Company and certain of its subsidiaries entered into the sixth amended and restated senior unsecured revolving credit agreement (the "Unsecured Credit Agreement") and retained Bank of America, N.A. as the Administrative Agent for the lenders. The $1,000,000 Unsecured Credit Agreement was to mature in February 2026. Borrowings under the Unsecured Credit Agreement bore interest at either the Eurocurrency rate, as defined in the Unsecured Credit Agreement, plus a margin of 1.175% to 1.775% or the base rate, as defined in the Unsecured Credit Agreement, plus a margin of 0.175% to 0.775%, depending on the Company's leverage ratio at the time of the borrowing. Multi-currency borrowings, pursuant to the Unsecured Credit Agreement, bore interest at their respective interbank offered rate (i.e. Euribor) or 0.00% (higher of the two rates) plus a margin of between 1.175% and 1.775%. The Unsecured Credit Agreement required the Company to maintain a Senior Debt Ratio of not more than 3.25 times. In addition, the Unsecured Credit Agreement required the Company to maintain a Total Debt Ratio of not more than 3.75 times for each fiscal quarter. A ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times, was also required at the end of each fiscal quarter. The Unsecured Credit Agreement also contemplated the potential replacement of LIBOR (as defined below) with a successor financing rate, pursuant to the intent of the United Kingdom's Financial Conduct Authority to phase out use of LIBOR (see discussion below). The Company paid fees and expenses of $4,306 in conjunction with executing the Unsecured Credit Agreement. Such fees have been deferred within Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense on the Condensed Consolidated Statements of (Loss) Income through its maturity. Cash used to pay these fees was recorded through other financing activities on the Condensed Consolidated Statements of Cash Flows. The Company subsequently amended the Unsecured Credit Agreement on October 11, 2021 (the "LIBOR Transition Amendment"), defining certain applicable multi-currency borrowing rates that could be used as replacement rates for LIBOR, which was expected to be discontinued by reference rate reform. See Note 2 of the Condensed Consolidated Financial Statements, as well as the discussion below.
On April 6, 2022, the Company entered into Amendment No. 1 to the Unsecured Credit Agreement (“Amendment No. 1”), which (i) replaced the LIBOR interest rate for U.S. dollar loans to a term Secured Overnight Financing Rate including a Secured Overnight Financing Rate adjustment (or "SOFR", as defined in the Unsecured Credit Agreement), (ii) added a daily SOFR option for U.S. dollar loans and a term SOFR option for U.S. dollar loans, and (iii) added the ability to borrow foreign swing line loans based on the Euro Short Term Rate ("€STR") (as defined) with the same interest spread as the interest spread for SOFR Loans (as defined) and Alternative Currency Loans (defined as loans denominated in Euro, Sterling, Swiss Francs or Yen). In addition, Amendment No. 1 lowered the interest rate spread on (i) SOFR Loans and Alternative Currency Loans to a range from 0.975% to 1.70%, depending on the leverage ratio (the “Leverage Ratio”) of Consolidated Total Debt (as defined) to Consolidated EBITDA (as defined) as of the end of each fiscal quarter, and (ii) loans based on the Base Rate (as defined), to a range from 0.00% to 0.70%, depending on the Company’s Leverage Ratio as of the end of each fiscal quarter. Amendment No. 1 also lowered the facility fee, which was required to be paid by the Company under the Unsecured Credit Agreement and was calculated on the full amount of the revolving facility, to a range from 0.15% to 0.30%, depending on the Company’s Leverage Ratio at the end of each fiscal quarter. In April 2022, the Company paid fees and expenses of $1,037 in conjunction with executing Amendment No. 1. Such fees have been deferred within Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense on the Condensed Consolidated Statements of (Loss) Income through its maturity. Cash used to pay these fees was recorded through other financing activities on the Condensed Consolidated Statements of Cash Flows.
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate (“LIBOR”), announced its intent to phase out the use of LIBOR by December 31, 2021. The U.S. Federal Reserve, in conjunction with the
Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified SOFR as its preferred benchmark alternative to U.S. dollar LIBOR. Published by the Federal Reserve Bank of New York, SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. The Company’s Unsecured Credit Agreement and corresponding interest rate swap were tied to LIBOR, with each maturing in February 2026. In March 2021, the ICE Benchmark Association announced that it would extend the publication of overnight, 1, 3, 6 and 12 month LIBOR rates until June 30, 2023, while ceasing publication of all other LIBOR rates including 1 week and 2 month rates. The Company's Unsecured Credit Agreement was further amended in October 2021 and in April 2022 to address the replacement of LIBOR, which, as a result of the Company's contract amendments as discussed above, did not have a material impact on our business, financial condition, results of operations or cash flow.
On June 5, 2023, the Company entered into the Agreement with MB Aerospace Group Holdings Limited, a Cayman Islands limited company. See Note 3. In connection with entry into the Agreement, on June 5, 2023, the Company entered into the Second Amendment (the “Second Amendment”) to Note Purchase Agreement and Amendment No. 2 ("Amendment No. 2") to Unsecured Credit Agreement to facilitate the Transaction, as well as a commitment letter with Bank of America, N.A. and BofA Securities, Inc. (collectively, the “Commitment Parties”), pursuant to which the Commitment Parties agreed to provide, subject to the satisfaction of customary closing conditions contained therein, a $1,000,000 backstop senior secured revolving credit facility and a $700,000 senior secured 364-day bridge loan facility ("Bridge Loan Facility"). The Bridge Loan Facility was only intended to be drawn to the extent that the Company did not obtain alternative financing prior to the closing of the Transaction. The Company recorded fees of $9,500 in conjunction with the Bridge Loan Facility and $1,000,000 backstop senior secured revolving credit facility into interest expense on the Condensed Consolidated Statements of (Loss) Income in the three months ended September 30, 2023. On the Acquisition Date, pursuant to the terms of the Agreement, the Company completed the Transaction for an aggregate purchase price of $728,607, subject to customary and specified closing adjustments, as set forth in the Agreement. Concurrently, the Company entered into a new Credit Agreement (the “Credit Agreement”) among the Company and certain of its subsidiaries, the issuing banks, lenders and other parties party thereto, and Bank of America, N.A., as administrative agent, as collateral agent and as swingline lender, which provides for senior secured financing of $1,650,000, consisting of a term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $650,000, at an original issue discount of $4,875, and a revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Facilities”) in an aggregate principal amount of up to $1,000,000, including a letter of credit sub-facility of up to $50,000. Proceeds of the loans borrowed under the Senior Facilities on the Acquisition Date, net of a 0.75% original issue discount on the Term Loan Facility, were used to fund, in part, the transactions contemplated by the Agreement, including the consummation of the Transaction, the repayment in full of the 3.97% Senior Notes, and to pay related fees and expenses. As of the Acquisition Date, the Revolving Credit Facility had outstanding borrowings in an aggregate principal amount of approximately $698,000. Proceeds of any loans under the Revolving Credit Facility borrowed after the Acquisition Date will be used for general corporate purposes. The Company paid fees and expenses of $3,058 in conjunction with executing the Revolving Credit Facility. Such fees have been deferred within Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense on the Condensed Consolidated Statements of (Loss) Income through the maturity of the Credit Agreement with the previously recorded debt issuance costs. The Company incurred $8,283 of debt issuance costs in conjunction with executing the Term Loan Facility. Such fees have been recorded as a direct deduction from the carrying amount of the Term Loan Facility and will be amortized into interest expense on the Condensed Consolidated Statements of (Loss) Income through the maturity of the Term Loan Facility. Cash used to pay these fees was recorded through financing activities on the Condensed Consolidated Statements of Cash Flows. On August 31, 2023, in connection with the Credit Agreement and the closing of the Transaction, the Bridge Loan Facility was terminated.
The Senior Facilities are guaranteed by each of the Company’s wholly owned domestic subsidiaries and are secured by substantially all assets of the Company and of each subsidiary guarantor, in each case subject to certain exceptions.
Borrowings under the Senior Facilities bear interest at a rate per annum equal to, at the Company’s option, either Term SOFR (subject to a 0.00% floor) or an alternate base rate ("ABR"), in each case plus an applicable margin of (i) in the case of borrowings under the Term Loan Facility, 3.00% for Term SOFR loans and 2.00% for ABR loans and (ii) in the case of borrowings under the Revolving Credit Facility, initially, 2.375% for Term SOFR loans and 1.375% for ABR loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company’s total net leverage ratio. The Company is also required to pay a commitment fee initially equal to 0.35% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee under the Revolving Credit Facility varies depending on the Company’s total net leverage ratio.
The Term Loan Facility matures on the seven-year anniversary of the Acquisition Date and amortizes in equal quarterly installments, starting with the first full fiscal quarter after the Acquisition Date, of 0.25% of the initial principal amount. The Revolving Credit Facility matures on the five-year anniversary of the Acquisition Date. In addition, the Company is required to
prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with up to 50% of the Company’s annual excess cash flow (as defined under the Credit Agreement) in excess of the greater of $50,000 and 15.0% of Last Twelve Months ("LTM") Adjusted Consolidated EBITDA (as defined in the Credit Agreement) as of the applicable time, and with up to 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales (which percentages vary depending on the Company’s first lien secured net leverage ratio).
The Company may generally prepay outstanding loans under the Senior Facilities at any time, without prepayment premium or penalty, subject to customary “breakage” costs with respect to Term SOFR loans. Prepayments of the Term Loan Facility in connection with certain “repricing events” resulting in a lower yield occurring at any time during the first six months after the Acquisition Date must be accompanied by a 1.00% prepayment premium.
The Revolving Credit Facility requires that the Company maintain a maximum Total Net Leverage Ratio, as defined in the Credit Agreement, initially of 5.50 to 1.00 as of the last day of each fiscal quarter for which financials have been (or were required to be) delivered, commencing with the first full fiscal quarter after the Acquisition Date, stepping down to 4.00 to 1.00 over time. For material acquisitions in certain circumstances, such ratio may be increased by up to 0.50 to 1.00. The actual ratio, as defined, was 3.77 at September 30, 2023. The Revolving Credit Facility also requires that the Company not permit the Interest Coverage Ratio as of the last day of any test period to be less than 3.00 to 1.00. The actual ratio, as defined, was 3.36 as of September 30, 2023. At September 30, 2023, the Company was in compliance with all applicable covenants.
The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. The Senior Facilities also contain certain events of default, including relating to a change of control. If an event of default occurs, the lenders under the Senior Facilities will be entitled to take various actions, including the acceleration of amounts due under the Senior Facilities.
Borrowings and availability under the Revolving Credit Facility were $662,937 and $337,063, respectively, at September 30, 2023. Borrowings and availability under the Unsecured Credit Facility were $466,672 and $533,328, respectively, at December 31, 2022, subject to covenants discussed above. The average interest rate on these borrowings was 7.04% and 3.67% on September 30, 2023 and December 31, 2022, respectively. The average interest rate excludes the impact of the Company’s interest swap agreements. See Note 10. Borrowings included Euro-denominated borrowings of 296,500 Euros ($317,937) at September 30, 2023 and 310,700 Euros ($331,672) at December 31, 2022. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
Borrowings under the Term Loan Facility were $650,000 at September 30, 2023. The average interest rate on these borrowings was 8.42% on September 30, 2023. The average interest rate excludes the impact of the Company’s interest swap agreements. See Note 10. The fair value of the borrowings is based on the quoted market price of the borrowings on September 30, 2023, which represents Level 1 observable inputs.
In addition, the Company has approximately $83,000 in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. The Credit Lines are accessed locally and are available primarily within the U.S., Europe and Asia. The Credit Lines are subject to the applicable borrowing rates within each respective country and vary between jurisdictions (i.e. LIBOR, Euribor, etc.). The Company had no borrowings under the Credit Lines at September 30, 2023 or December 31, 2022. The Company had borrowed $29 and $8 under the overdraft facilities at September 30, 2023 and December 31, 2022, respectively. Repayments under the Credit Lines are due within one month after being borrowed. Repayments of the overdrafts are generally due within two days after being borrowed. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.
In October 2014, the Company entered into a Note Purchase Agreement (“Note Purchase Agreement”), among the Company and New York Life Insurance Company, New York Life Insurance and Annuity Corporation and New York Life Insurance and Annuity Corporation Institutionally Owned Life Insurance Separate Account, as purchasers, for the issuance of $100,000 aggregate principal amount of the 3.97% Senior Notes due October 17, 2024 (the “Notes”). The Notes were senior unsecured obligations of the Company and paid interest semi-annually on April 17 and October 17 of each year at an annual rate of 3.97%. Subject to certain conditions, the Company could, at its option, prepay all or any part of the Notes in an amount equal to 100% of the principal amount so prepaid, plus any accrued and unpaid interest to the date of prepayment, plus the Make-Whole Amount, as defined in the Note Purchase Agreement, with respect to such principal amount being prepaid. The Notes, together with accrued and unpaid interest thereon, were repaid on August 31, 2023 in connection with the Transaction. There was no
Make-Whole Amount. The fair value of the Notes at December 31, 2022 was determined using the U.S. Treasury yield and a long-term credit spread for similar types of borrowings, which represented Level 2 observable inputs.
The Company also has several finance leases under which $12,243 and $4,404 was outstanding at September 30, 2023 and December 31, 2022, respectively. The fair value of the finance leases is based on observable Level 2 inputs. These instruments were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
10. Derivatives
The Company has manufacturing, service and sales facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. The Company is also exposed to fluctuations in interest rates and commodity price changes. These financial exposures are monitored and managed by the Company as an integral part of its risk management program.
Derivative financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. On April 28, 2017, the Company entered into an interest rate swap agreement (the "2017 Swap") with one bank which converted the interest on $100,000 of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.92% plus the borrowing spread. The 2017 Swap expired on January 31, 2022. On March 24, 2021, the Company entered into a new interest rate swap agreement (the "2021 Swap") with this same bank that commenced on January 31, 2022 and that converted the interest on $100,000 of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.17% plus the borrowing spread. Effective, April 30, 2022, the Company amended the 2021 Swap (the "Amended 2021 Swap"), such that the one-month SOFR-based borrowing rate replaced the one-month LIBOR-based borrowing rate. The Amended 2021 Swap, which will expire on January 30, 2026, converts the interest on $100,000 of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.075% plus the borrowing spread. The execution of the Amended 2021 Swap did not have a material impact on our business, financial condition, results of operations or cash flow. On July 19, 2023, the Company entered into an interest rate swap agreement (the "Euribor Swap") with one bank that commenced on July 31, 2023, which converts the interest on €150,000 of the Company's Euribor-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 3.257% plus the borrowing spread. Under the Euribor Swap, €50,000 will expire on July 31, 2026, with the remaining balance of €100,000 expiring on July 31, 2028. On September 12, 2023, the Company entered into six additional interest rate swap agreement (the "2023 Swaps") with six different banks that commenced on September 29, 2023, which convert the interest on $600,000 of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a blended fixed rate of 4.321% plus the borrowing spread. Under the 2023 Swaps, $50,000 will expire on August 31, 2026, $100,000 will expire on August 31, 2027, $200,000 will expire on August 31, 2028, $50,000 will expire on August 31, 2029 and the remaining balance of $200,000 will expire on August 31, 2030. The execution of the interest rate swap agreements in 2023 did not have a material impact on our business, financial condition, results of operations or cash flow. These interest rate swap agreements (the "Swaps") are accounted for as cash flow hedges.
The Company also uses derivative financial instruments to hedge its exposures to fluctuations in foreign currency exchange rates. The Company has various contracts outstanding which primarily hedge recognized assets or liabilities and anticipated transactions in various currencies including the Euro, British pound sterling, U.S. dollar, Canadian dollar, Japanese yen, Singapore dollar, Korean won, Swedish kroner, Chinese renminbi, Mexican peso, Hong Kong dollar and Swiss franc. Certain foreign currency derivative instruments are treated as cash flow hedges of forecasted transactions. All foreign exchange contracts are due within two years.
The Company does not use derivatives for speculative or trading purposes or to manage commodity exposures.
The Company records the derivatives at fair value on the Condensed Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets, Other Assets, Accrued Liabilities or Other Liabilities depending on their fair value and remaining contractual period. Changes in the fair market value of derivatives accounted for as cash flow hedges are recorded to accumulated other comprehensive income (loss) and reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Reclassifications to earnings for the Swaps are recorded through interest expense and reclassifications to earnings for foreign exchange contracts are recorded through net sales. Changes in the fair market value of the foreign exchange contracts that are not designated hedging instruments are recorded directly to earnings through Other expense (income), net.
The fair values of the Amended 2021 Swap were $8,282 and $8,535 as of September 30, 2023 and December 31, 2022, respectively, the fair values of the Euribor Swap were $183 and $0 as of September 30, 2023 and December 31, 2022, respectively, and the fair values of the 2023 Swaps were $1,159 and $0 as of September 30, 2023 and December 31, 2022, respectively, and were recorded in Other Assets in the Condensed Consolidated Balance Sheets for the periods. The fair values
of the Company's other derivatives were not material to the Company's Condensed Consolidated Balance Sheets as of September 30, 2023 or December 31, 2022. See Note 11. The activity related to the derivatives that have been designated hedging instruments was not material to the Company's Condensed Consolidated Financial Statements for the periods ended September 30, 2023 or 2022. The Company recognized losses of $2,517 and $8,094 related to the foreign exchange contracts that are not accounted for as hedging instruments within other expense (income), net, in the Condensed Consolidated Statements of (Loss) Income for the three-month periods ended September 30, 2023 and 2022, respectively. The Company recognized losses of $5,466 and $18,671 related to the foreign exchange contracts that are not accounted for as hedging instruments within Other Expense (income), net, in the Consolidated Statements of (Loss) Income for the nine month periods ended September 30, 2023 and 2022, respectively. Such losses were substantially offset by net gains recorded on the underlying hedged asset or liability (the "underlying"). Offsetting net gains on the underlying are also recorded within Other expense (income), net.
The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the nine month periods ended September 30, 2023 and 2022, as presented on the Condensed Consolidated Statements of Cash Flows, include $6,346 and $17,271, respectively, of net cash payments related to the settlement of foreign currency hedges related to intercompany financing.
11. Fair Value Measurements
The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 Unobservable inputs for the asset or liability.
The following table provides the assets and liabilities reported at fair value and measured on a recurring basis as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
Description | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 30, 2023 | | | | | | | | |
Asset derivatives | | $ | 10,712 | | | $ | — | | | $ | 10,712 | | | $ | — | |
Liability derivatives | | (1,052) | | | — | | | (1,052) | | | — | |
Bank acceptances | | 10,615 | | | — | | | 10,615 | | | — | |
Rabbi trust assets | | 1,791 | | | 1,791 | | | — | | | — | |
Total | | $ | 22,066 | | | |