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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

For the transition period from              to             

Commission file number 1-4801

BARNES GROUP INC.

(Exact name of registrant as specified in its charter)

(860) 583-7070

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of the close of business on June 30, 2003 was approximately $461,473,698, based on the closing price of the Common Stock on the New York Stock Exchange on that date. The registrant does not have any non-voting common equity.

The registrant had outstanding 22,973,540 shares of common stock as of February 17, 2004.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 14, 2004 are incorporated by reference into Part III.

Barnes Group Inc.

Index to Form 10-K

Year Ended December 31, 2003

PART I

Item 1. Business

THE COMPANY⁽¹⁾

The Company is a diversified international manufacturer of precision components and assemblies and distributor of industrial supplies, serving a wide range of markets and customers. Founded in 1857 and headquartered in Bristol, Connecticut, the Company was organized as a Delaware corporation in 1925. As of December 31, 2003, the Company had 6,026 employees at over 50 locations worldwide. The Company consists of three businesses:

Barnes Distribution, an international distributor of industrial maintenance, repair, operating and production supplies;

Associated Spring, one of the world’s largest manufacturers of precision mechanical and nitrogen gas springs and a global supplier of retaining rings, and plastic injection-molded components; and

Barnes Aerospace, a manufacturer and repairer of highly engineered components and assemblies for aircraft engines, airframes, and land-based industrial gas turbines.

BARNES DISTRIBUTION

Barnes Distribution is an industry leader in the distribution of maintenance, repair, operating and production (“MROP”) supplies. Since 1927, it has grown into one of the largest value-added MROP distributors in North America. Barnes Distribution also distributes products in 31 countries supported by distribution/sales centers in the United Kingdom, France, Ireland, Spain, Mexico, Singapore, Brazil and China. Barnes Distribution also provides related inventory management and logistics services to its customers.

Barnes Distribution distributes over 50,000 stocked replacement parts and other products under the brand names of Bowman, Curtis, Kar Products, Mechanics Choice, Autoliaisons and Motalink. These parts and products include fasteners, electrical supplies, hydraulics, chemicals and security products. Die springs and nitrogen gas springs, mechanical struts and standard parts, such as coil and flat springs, are distributed under the brand names of Raymond and SPEC. Most of the products sold under the Raymond and SPEC brand names are manufactured by Associated Spring. With the exception of the products from Associated Spring, the products sold by Barnes Distribution are obtained from outside suppliers.

Barnes Distribution faces active competition. The products sold by Barnes Distribution are not unique, and its competitors carry substantially similar products. Barnes Distribution competes based on service alternatives, timeliness and reliability of supply, price and product breadth and quality.

Barnes Distribution offers an array of service options built around a vendor managed inventory business model, which are designed to improve the productivity of its customers while substantially reducing procurement and transaction costs. Barnes Distribution has a well-diversified customer base ranging from small repair shops to the largest railroads, utilities, food processors, chemical producers, and vehicle fleet operators. Barnes Distribution’s products are sold through its sales force of approximately 1,500 employees and through distributors.

ASSOCIATED SPRING

Associated Spring is the largest manufacturer of precision mechanical and nitrogen gas springs in North America, and one of the largest precision spring manufacturers in the world. Associated Spring is equipped to

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produce virtually every type of precision spring, from fine hairsprings for electronics and instruments to large heavy-duty springs for machinery. Associated Spring also manufactures nitrogen gas manifold systems used to precisely control stamping presses; retaining rings that position parts on a shaft or other axis; and injection-molded plastic-on-metal and metal-in-plastic components and assemblies used in electronics, medical devices and consumer products.

Associated Spring provides complete engineering solutions from concept to manufacturing. These include product design and development, product and material testing, rapid prototyping and reduction of manufacturing cycle times. Associated Spring’s products are sold globally to manufacturers in many industries, chiefly for use as components in their own products. Products are sold primarily through Associated Spring’s direct sales force and through the Raymond division of Barnes Distribution.

Nearly all of Associated Spring’s products are highly engineered custom solutions. These products are purchased primarily by durable goods manufacturers in industries such as transportation, consumer products, farm equipment, telecommunications, medical devices, home appliances, and electronics.

Associated Spring has a global and diverse customer base. The customers are primarily durable goods manufacturers in industries such as transportation, consumer products, farm equipment, telecommunications, medical devices, home appliances and electronics. In the transportation industry, the customers include both original equipment manufacturers (“OEMs”) and their suppliers. Sales by Associated Spring to its three largest customers accounted for approximately 29% of its business in 2003.

Associated Spring has manufacturing operations in the United States, Brazil, Canada, China, Germany, Mexico, Singapore and Sweden, and has retained a minority interest of 15% in its former subsidiary in Argentina.

Associated Spring competes with many large and small companies engaged in the manufacture and sale of custom metal components and assemblies. Associated Spring competes on the basis of quality, service, reliability of supply, technology, innovation, design and price.

Associated Spring owns a 45% interest in a joint venture corporation in the United States with NHK Spring Co., Ltd. of Japan. The joint venture corporation, NHK-Associated Spring Suspension Components Inc. (“NASCO”), manufactures suspension springs at its facility in Bowling Green, Kentucky.

BARNES AEROSPACE

Barnes Aerospace produces precision machined and fabricated components and assemblies for OEM turbine engine, airframe and industrial gas turbine builders throughout the world and the United States military. Barnes Aerospace also provides jet engine component overhaul and repair services for many of the world’s major commercial airlines and the United States military. Barnes Aerospace products and services are sold primarily through its sales force. Sales by Barnes Aerospace to General Electric Co. and four other manufacturers in the aerospace industry accounted for approximately 64% of its business.

Barnes Aerospace’s machining and fabrication operations, with facilities in Arizona, Connecticut, Michigan, Ohio and Utah, produce critical engine and airframe parts through processes such as laser drilling, multi-axis milling and turning, and electrical discharge machining, and specialize in hot and cold forming of complex parts made from titanium and other aerospace alloys. Additional capabilities include superplastic forming and diffusion bonding, and machining of aluminum and other sheet metal products. Customers include airframe and gas turbine engine manufacturers for commercial and military jets, business jets, and land-based industrial gas turbines.

Barnes Aerospace’s OEM business competes primarily with both the leading jet engine OEMs and a large number of machining and fabrication companies. Competition is based mainly on quality, engineering and technical capability, product breadth, service and price.

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Barnes Aerospace’s overhaul and repair facilities, located in Connecticut, Ohio and Singapore, specialize in the refurbishment of jet engine components such as cases, rotating air seals, honeycomb air seals and housings. Processes performed at these facilities include electron beam welding, plasma coating, vacuum brazing, and water jet cleaning. Customers include airlines and engine overhaul businesses throughout the world and the United States military.

Competition for the repair and overhaul of turbine engine components comes from three principal sources: OEMs, major commercial airlines and other independent service companies. Some major commercial airlines own and operate their own service centers and sell repair and overhaul services to other aircraft operators. OEMs also maintain service centers that provide repair and overhaul services for the components that they manufacture. Other independent service organizations also compete for the repair and overhaul business of other users of aircraft components. Turnaround time, technical capability, price, quality and overall customer service are important competitive factors.

FINANCIAL INFORMATION

The backlog of the Company’s orders believed to be firm at the end of 2003 equaled $210 million as compared with $206 million at the end of 2002. Of the 2003 year-end backlog, $148 million was attributable to Barnes Aerospace and all of the balance was attributable to Associated Spring. $34 million of Barnes Aerospace’s backlog is not expected to be shipped in 2004. Substantially all of the remainder of the Company’s backlog is expected to be shipped during 2004.

One customer, General Electric Co., accounted for 10.1% of the Company’s total sales in 2003. For an analysis of the Company’s revenue from sales to external customers, operating profit and assets by business segment as well as revenues from sales to external customers and long-lived assets by geographic area, see Note 16 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K (“Annual Report”).

ACQUISITIONS

On February 6, 2003, the Company completed the acquisition of Kar Products, LLC and certain assets of a related company, A. & H. Bolt & Nut Company Ltd. (“Kar”), a leading full service distributor of maintenance, repair, and operating (“MRO”) supplies to industrial, construction, transportation and other markets. For more information regarding the acquisition, see Note 2 of the Notes to the Consolidated Financial Statements of this Annual Report.

RAW MATERIALS

The principal raw materials used by Associated Spring to manufacture its products are high-grade spring wire steel and flat rolled steel. As a result of, among other things, increasing global demand and reduction in the availability of raw materials used in steel making, prices for steel have been rising. If this combination of events continues, the availability of steel products may be negatively impacted. Associated Spring employs several sourcing programs which are expected to mitigate the overall impact of price increases.

The principal raw materials used by Barnes Aerospace to manufacture its products are titanium and inconel; however, Barnes Aerospace also requires special materials such as cobalt and other complex aerospace alloys. Barnes Aerospace has entered into long-term agreements to purchase its principal raw materials which are expected to limit its exposure to any increase in the price of raw materials.

RESEARCH AND DEVELOPMENT

Although most of the products manufactured by the Company are custom parts made to customers’ specifications, the Company is engaged in continuing efforts aimed at discovering and implementing new knowledge that is useful in developing new products or services or significantly improving existing products or

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services. In particular Associated Spring’s Product Development Center is focused on design, development, and prototype work and testing of new products and material. The Company spent approximately $5 million on research and development activities in 2003, as compared to expenditures of approximately $4 million in 2002 and $4 million in 2001.

PATENTS AND TRADEMARKS

Patents, trademarks, licenses, franchises and concessions are not significant to any of the Company’s businesses.

EXECUTIVE OFFICERS OF THE COMPANY

For information regarding the Executive Officers of the Company, see Part III, Item 10 of this Annual Report.

ENVIRONMENTAL

Compliance with federal, state, and local laws which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has not had a material effect, and is not expected to have a material effect, upon the capital expenditures, earnings, or competitive position of the Company.

AVAILABLE INFORMATION

The Company’s Internet address for its website is www.barnesgroupinc.com. The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available without charge on its website as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission. In addition, by April 14, 2004, the date of the Company’s Annual Meeting of Stockholders, the Company will have posted on its website, and will make available in print to any stockholder who requests, its corporate governance guidelines, its code of business conduct and ethics and the charters of its Audit Committee, Compensation and Management Development Committee and Corporate Governance Committee (the responsibilities of which include serving as the nominating committee).

FORWARD-LOOKING STATEMENTS

This Annual Report may contain certain forward-looking statements as defined in the Public Securities Litigation and Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. Investors are encouraged to consider these risks and uncertainties as described within the Company’s periodic filings with the Securities and Exchange Commission, including the following: the ability of the Company to integrate newly acquired businesses and to realize acquisition synergies on schedule; changes in market demand for the types of products and services produced and sold by the Company; the Company’s success in identifying, and attracting customers in, new markets; the Company’s timely ability to develop new and enhanced products to meet customers’ needs; the effectiveness of the Company’s marketing and sales programs; product liability in excess of insurance coverages; increased competitive activities that could adversely affect customer demand for the Company’s products; changes in economic, political and public health conditions worldwide and in the locations where the Company does business; interest and foreign exchange rate fluctuations; and regulatory changes.

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Item 2. Properties

As shown on the following table, at December 31, 2003, the Company had 55 manufacturing, sales, and distribution facilities worldwide. All but three of the manufacturing facilities are owned. None of the owned properties is subject to any encumbrances. The majority of the distribution centers are leased.

The above table does not include the Corporate Office of the Company, which is owned, or the headquarters for each of the businesses, one of which is owned and the other two of which are leased.

Item 3. Legal Proceedings

The Company is subject to litigation from time to time in the ordinary course of business. There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party, or of which any of their property is the subject. In the event the Company is named as a defendant in lawsuits involving product defects, breach of warranty or other actions relating to products that we manufacture or products that we distribute that are manufactured by others, we believe that the Company’s potential exposure is adequately covered by our liability insurance.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters

Market Information

The Company’s common stock is traded on the New York Stock Exchange under the symbol “B”. The following table sets forth, for the periods indicated, the low and high closing prices per share, as reported by the New York Stock Exchange.

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Stockholders

As of February 17, 2004, the Company’s common stock was held by 6,632 stockholders of record and, there were 11,832 beneficial owners.

Dividends

Payment of future dividends will depend upon the Company’s financial condition, results of operations and other factors deemed relevant by the Company’s Board of Directors, as well as any limitations imposed by lenders under the Company’s credit facilities. See table above for dividend information for 2003 and 2002.

Item 6. Selected Financial Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

2003 Highlights

In 2003, Barnes Group (the “Company”) achieved record sales of $890.8 million and 21.6% growth in net income, to $33.0 million. An important part of this financial success came from the February acquisition of Kar, a leading provider of MRO supplies in the U.S. and Canada.

To help fund the Kar acquisition and strengthen the balance sheet, the Company accessed the public capital markets for the first time in several decades, raising $42.2 million through an equity offering. The equity offering also greatly improved the trading liquidity of Barnes Group stock, enhancing its appeal to investors.

The Company has invested approximately $34.5 million in two Revenue Sharing Programs (“RSPs”) with a major aerospace company, securing long-term relationships for aftermarket production of parts with attractive financial returns. This represented a new strategic direction for the way the Company approaches its aerospace customer relationships, which management will continue to develop going forward.

Management Objectives

Management has embraced a corporate culture within Barnes Group that has as its common goals the generation of sustainable, profitable growth and building lasting value for its stockholders. The Company’s strategies for generating growth include organic growth from new products and services, markets and customers; and growth from strategic acquisitions, of which eight have been completed since 1999.

Our Business

Barnes Group consists of three operating groups: Barnes Distribution, an international distributor of industrial MROP supplies; Associated Spring, one of the world’s largest manufacturers of precision mechanical and nitrogen gas springs, and a global supplier of retaining rings and plastic injection-molded components; and Barnes Aerospace, a manufacturer and repairer of highly engineered assemblies and products for aircraft engines, airframes, and land-based industrial gas turbines.

In each of these businesses, Barnes Group is among the leaders in the market niches it serves, and has highly recognized brands for many of the products it sells or manufactures.

Key Performance Indicators

Management evaluates the performance of its reportable segments based on the operating profit of the respective businesses, which includes net sales, cost of sales, selling and administrative expenses and certain components of other income and other expenses, as well as the allocation of corporate overhead expenses. Management also uses an internal measurement tool called PPAT, or Performance Profit After Tax. PPAT is an economic value added (“EVA^®”) -like metric that calculates operating profit after tax, less a charge for the capital employed by the business. Management utilizes PPAT in economic decision making, such as capital expenditures, investments in growth initiatives, customer pricing decisions, and evaluation of acquisitions. The goal of utilizing PPAT is to create a mindset among all employees to use capital in the most efficient way possible and to link decisions to stockholder value creation.

In addition to PPAT, which is a measurement tool common among each of the operating groups, each business has its own key performance indicators (“KPIs”), a number of which are focused on customer satisfaction.

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In Barnes Distribution, KPIs include daily sales average, or DSA; average order size; fill rate, which is the percentage of order lines filled on the first pass from the distribution center assigned to that customer; and order turnaround, which tracks the time between order receipt and shipment to the customer.

At Associated Spring, KPIs include sales and orders per day, which together provide visibility on sales in the next 60 days. Management tracks inventory turns and sales per employee to gauge efficiency, and measures on-time delivery and the number of defective parts per million as means of evaluating customer service levels.

At Barnes Aerospace, important KPIs are customer orders and backlog, which are utilized to forecast how sales will develop over the next 12 months. In the OEM operations, management closely tracks quality measurements, on-time delivery to its customers and in the overhaul and repair operations, management measures turnaround time of overhauled or repaired parts returned to the customers.

Key Industry Data

In each business, management also tracks a variety of economic and industry data as indicators of the health of a particular sector.

At Barnes Distribution, this data includes the Institute for Supply Management’s PMI Composite Index (the “PMI”) and the Federal Reserve’s Industrial Production Index (the “IPI”), which are monthly indicators of the health of U.S. manufacturing activity. Management tracks similar indices in our operations in Canada, France and the U.K. and also utilizes the Business Conditions Report of the Precision Metalforming Association, which correlates well with demand for Barnes Distribution’s Raymond products.

For Associated Spring, key data include the production of light vehicles, both in the U.S. and globally; new vehicle platform, engine and transmission programs; durable goods orders; handset purchases for cell phones; and capital investments in the telecommunications and electronics industries.

At Barnes Aerospace, for its OEM operations, management regularly tracks orders and deliveries for each of the major aircraft manufacturers, as well as engine purchases made for new aircraft. In the overhaul and repair operations, management monitors the number of aircraft in the active fleet, the number of planes temporarily or permanently taken out of service, and aircraft utilization rates for the major airlines. Management also monitors annual appropriations for the U.S. military related to new aircraft purchases and maintenance.

Acquisitions

Acquisitions have been a key growth driver for the Company in each of its three business segments. The Company acquired a number of businesses during the past three years, the most recent of which is Kar, described more fully below. The Company continues to look for acquisitions that will broaden product line offerings and expand geographic reach, and acquisitions that provide synergistic opportunities.

In February 2003, the Company acquired Kar, which is a leading full-service distributor of MRO supplies to industrial, construction, transportation and other markets. The consideration for the acquisition was $76.1 million. This acquisition expands both the geographic scope and product line reach of the Barnes Distribution segment. Kar has a diversified customer base that operates in all 50 states of the U.S., Puerto Rico, and Canada, further enhancing Barnes Distribution’s leadership position within the MROP market and international presence.

In connection with the acquisition, management has approved and committed to certain activities aimed at achieving a number of post-acquisition cost savings and other synergies through headquarters and infrastructure consolidation. This plan includes combining the headquarters functions and consolidating warehousing and distribution networks. As a result, in 2003 the Company recorded total costs of $10.4 million related primarily to lease consolidation costs, facility closure costs, reductions in personnel and other costs. Of this amount, $7.6 million

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associated with the acquired business is reflected as assumed liabilities in the allocation of the purchase price to net assets acquired. The remaining costs of $2.8 million are reflected as expenses during 2003. Management anticipates additional costs of approximately $1.5 million to be incurred and reported as expense in 2004. These expenses include outside services, temporary labor and overtime related to the reconfiguration of distribution centers and inventory moves.

In 2002, the Company completed two acquisitions for a total purchase price of $34.0 million. In February 2002, the Company acquired substantially all of the manufacturing assets of Seeger-Orbis GmbH & Co. OHG of Germany (“Seeger-Orbis”) from TransTechnology Corporation. Seeger-Orbis is a leading manufacturer of retaining rings used in a number of transportation and industrial applications. The Seeger-Orbis acquisition expanded Associated Spring’s product line and geographic reach, particularly into the automotive and industrial manufacturing markets of Western Europe. In April 2002, the Company acquired Spectrum Plastics Molding Resources, Inc. of Ansonia, Connecticut (“Spectrum”). Spectrum is a manufacturer of plastic injection-molded components and assemblies that are used primarily in the telecommunications, electronics, medical and consumer goods industries. Spectrum, which is included in the Associated Spring segment, provides Associated Spring with the capability of providing more complete product solutions with discrete or continuous metal-in-plastic and plastic-on-metal injection-molded components.

For a more detailed description of acquisitions made over the past three years, refer to Notes 2 and 7 of the Notes to the Consolidated Financial Statements of this Annual Report.

RESULTS OF OPERATIONS

Sales

Barnes Group reported record net sales of $890.8 million in 2003, an increase of $106.8 million, or 13.6%, over 2002 net sales of $784.0 million. The sales increase reflected the Company’s recent acquisitions, which contributed $108.3 million to Barnes Distribution’s sales and $14.5 million to Associated Spring’s sales, plus approximately $11.7 million of positive impact on sales from the strengthening of foreign currencies against the U.S. dollar, primarily in Europe and Canada. The incremental acquisition sales include $5.8 million of sales attributable to a strengthening of the Euro relative to the U.S. dollar resulting in a total foreign currency translation impact of $17.5 million. Also contributing to the sales increase was continued growth of Associated Spring’s nitrogen gas business. This growth was partially offset by a decrease in Associated Spring’s North American and Asian sales and a 9.4% decline in sales at Barnes Aerospace, which coincided with the continuing decline in the commercial aerospace markets. From a geographic perspective, the Company’s international sales increased 23.0% year-over-year and domestic sales increased 11.6%. Excluding the positive impact on sales of foreign currency translation, the Company’s international sales increased 14.3% in 2003 over 2002.

In 2002, Barnes Group’s net sales were up $15.2 million, or 2.0%, over 2001 net sales of $768.8 million. The sales increase reflected the Company’s recent acquisitions, which contributed $40 million, all to Associated Spring’s sales, as well as organic growth in Associated Spring. This growth was partially offset by an 8.7% decline in sales at Barnes Aerospace, the result of the sharp decline in the commercial aerospace markets, and a 3.9% sales decline at Barnes Distribution. The decline at Barnes Distribution reflects the impact of adverse conditions in the manufacturing, industrial and transport services market sectors.

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Expenses and Operating Income

Operating income was $52.0 million in 2003, an increase of 16.0% compared with $44.8 million in 2002. These results reflect the higher operating profit at Barnes Distribution, more fully discussed in the Financial Performance by Business Segment section below. Overall operating income margin increased to 5.8% in 2003 compared with 5.7% in 2002. Cost of sales, as a percentage of sales, decreased to 64.8% reflecting improvements in gross profit margins at Barnes Distribution combined with the shift in overall sales mix to the higher margin distribution business, the result of the Kar acquisition. Total selling and administrative expenses increased to 29.4% as a percentage of sales, from 26.7% in 2002. This increase was also driven by the higher proportion of sales in the distribution business, which has a higher selling expense component. Impacting both cost of sales and selling and administrative expenses were higher postretirement benefit expenses at Associated Spring and lower pension income Company-wide. Pension income decreased by $4.8 million due primarily to reduced investment performance of plan assets in 2001 and 2002 and a lower discount rate. The cost of postretirement benefits, other than pensions, increased $1.1 million due in part to a higher medical cost trend, lower discount rate and the full year impact of increased benefit levels provided to certain U.S. employees.

Operating income was $44.8 million in 2002, an increase of 11.2% compared with $40.3 million in 2001. These results reflect higher operating profit at Associated Spring and Barnes Distribution. The year-over-year increase in operating profit was impacted positively by a $4.8 million pretax business consolidation charge, relating primarily to the Associated Spring segment, taken in the fourth quarter of 2001, which did not recur in 2002. In addition, operating income in 2002 benefited from efficiencies gained from the actions taken in this business consolidation. These improvements were partially offset by lower profits at Barnes Aerospace due to lower sales volume and additional severance expense, higher postretirement benefit expense at Associated Spring and lower pension income Company-wide. Pension income decreased by $1.2 million due primarily to reduced investment performance of plan assets and a lower discount rate. The cost of postretirement benefits, other than pensions, increased $1.4 million due to a lower discount rate and increased benefit levels provided to certain U.S. employees.

Other Income/Expense

Other income totaled $3.3 million in 2003, compared with $3.7 million in 2002 and $3.9 million in 2001. Included in other income in 2002 are foreign exchange gains of approximately $1.2 million. This compares to foreign exchange losses of approximately $0.7 million in 2003, which have been included in other expenses. These foreign exchange transaction losses related primarily to exposures on U.S. dollar-denominated financial instruments, primarily in the Company’s operation in Brazil. The Company’s policy is to hedge foreign currency transaction exposure except in locations where the local currency has historically weakened against the U.S. dollar, which includes both Mexico and Brazil. This decrease in foreign exchange transaction income was partially offset by higher interest income due to higher interest rates in Brazil and increased short-term investments in Canada.

The decrease in other income in 2002, compared with 2001, was due to foreign exchange transaction gains of $1.2 million in 2002 compared with gains of $1.9 million in 2001, offset by higher equity income from the Company’s NASCO joint venture.

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Interest expense increased in 2003 as a result of higher borrowings related primarily to the Kar acquisition, and a reduction in the amount of debt subject to variable interest rate swaps. Lower interest expense in 2002, compared with 2001, was a result of lower market interest rates and a fixed-to-variable interest rate swap agreement that collectively more than offset the impact of an increase in average borrowings.

Other expense declined in 2002 due to an accounting change that eliminated goodwill amortization of $4.2 million in 2001.

Income Taxes

The Company’s effective tax rate was 14.0% in 2003, compared with 18.0% in 2002 and 18.5% in 2001. The decline in the tax rate in 2003 was due to the reversal of tax reserves associated with a Brazilian tax matter which was resolved in 2003 and minimum asset tax carryforwards in Mexico which management now believes will be utilized in the near future. These benefits were partially offset by the absence in 2003 of an additional deduction which was taken during 2002 for the Company’s Retirement Savings Plan dividends. The 2002 dividend deduction resulted from a retroactive election in 2002 for the 2001 dividend distribution, pursuant to an amendment to the Plan. Excluding the two discrete tax benefit items recognized in 2003, the effective tax rate would have been 19.4% in 2003.

Net Income and Net Income Per Share

An increase in both basic and diluted average outstanding shares adversely impacted the increase in earnings per share when compared to the increase in net income. The increase in shares results from the issuance of 2.4 million shares of Company common stock in a May 21, 2003 follow-on public offering and issuance of 0.8 million Company shares in the acquisition of Kar. While the average shares outstanding were 21.5 million for 2003, total outstanding shares at December 31, 2003 were 22.9 million. Therefore, absent any significant repurchases of the Company’s common stock, basic average outstanding shares for 2004 will exceed 22.9 million shares.

Financial Performance by Business Segment

Barnes Distribution

Barnes Distribution achieved record level sales of over $400 million for 2003, a 39.7% increase over 2002. Kar, which the Company purchased on February 6, 2003, contributed $108.3 million of sales in 2003. Excluding Kar, sales at Barnes Distribution were up 1.9%, reflecting the positive impact on sales from the strengthening of foreign currencies against the U.S. dollar. Growth initiatives, including national and regional customer development efforts, e-commerce platforms and Tier 2 relationships together contributed approximately $20 million in sales. These gains were offset by a decrease in other customer segments. Barnes Distribution’s Raymond business reported higher year-over-year sales, the result of product line expansion and higher sales in markets outside the U.S.

Barnes Distribution’s operating profit increased significantly over 2002. The improvement in operating results was driven primarily by incremental operating profit contributed by Kar. Operating results also include an

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incremental gain of $0.9 million from the sales of distribution centers, which was partially offset by $0.6 million of incremental severance expense. In addition, Barnes Distribution’s operating profit included other one-time costs of approximately $2.8 million associated with the integration of Kar into the base business. These one-time costs were more than offset by the realization of estimated cost savings of $5.7 million. Management expects to complete the remaining integration activities, in the first half of 2004.

Outlook: The outlook for markets served by Barnes Distribution is improving, but remains uncertain. However, management anticipates that operating profit will continue to be positively impacted in 2004 by the contribution to profit from additional Kar sales, reflecting the full year of ownership, as well as from further realization of the synergistic cost savings resulting from integrating Kar into Barnes Distribution.

Sales fell in 2002 due to weak economic conditions within the manufacturing and industrial sectors in the United States and many international markets, which have persisted since late 2000. This was partially offset by new sales initiatives, including an increased focus on national and regional account development, which generated more than $3.0 million in sales during 2002.

Despite the year-over-year decline in sales, 2002 operating profit at Barnes Distribution increased to $7.5 million from $5.5 million in 2001. The increase largely reflects higher operating efficiency as synergies from the Curtis acquisition were successfully realized. Operating profit also benefited from an improvement in gross profit margin stemming from selective price increases and lower product procurement costs.

Associated Spring

Associated Spring achieved record sales of $333.1 million in 2003. This 3.5% increase over 2002 reflected incremental sales from the 2002 acquisitions combined with the positive impact on sales, primarily in Europe, from the strengthening of foreign currency against the U.S. dollar and higher sales of nitrogen gas springs. Incremental sales in 2003 from the acquisitions of Seeger-Orbis in February 2002 and Spectrum in April 2002 were $14.5 million. Offsetting these increases were declines in sales in the North American light vehicle market, a drop in sales related to a planned withdrawal from the heavy truck brake spring market, and lower sales in the Asian telecommunications/electronics market. In 2003, Associated Spring outperformed the 3.3% decline in North American light vehicle production.

Associated Spring’s operating profit decreased in 2003 and reflected an 8.0% operating margin, compared to 8.7% in 2002. Profits in 2003 were positively impacted by increased sales in Europe, the closure of the Texas plant in 2002 and the absence of $1.1 million of one-time costs related to purchase accounting adjustments recorded in 2002. However, overall margins were dampened by a decrease in sales in the higher margin telecommunications/electronics market, approximately $5.5 million of higher personnel costs, including pension, postretirement and medical costs, and a $0.5 million reduction in the carrying value of the Texas facility, held for sale at year end.

Outlook: The outlook for the markets served by Associated Spring is somewhat upbeat as an improving U.S. economy is expected to positively impact both its transportation and industrial customers. Management is less optimistic about a recovery in the telecommunications/electronics markets. On the cost side, Associated Spring is facing pressure from raw material prices, most notably steel, and will be negotiating two labor union agreements which expire in the first half of 2004. Any resulting cost increases or labor actions could negatively impact 2004 profit margins. Personnel costs related to pension, post retirement and medical costs are expected to increase in 2004, but at a rate significantly lower than 2003.

Sales in 2002 increased over 2001 due to higher light vehicle production in the domestic transportation markets as well as from incremental sales from the acquisitions of Forward Industries, Seeger-Orbis and

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Spectrum, which in the aggregate totaled $40 million. Offsetting these increases was a sharp drop in organic sales of telecommunications and electronics products, as sales to those end markets fell by over 40% in 2002. Domestic sales at Associated Spring grew by approximately 5% in 2002, while international sales increased by approximately 38% to $120 million. Sales grew sharply in Europe in 2002, reflecting the Seeger-Orbis acquisition and organic growth in nitrogen gas spring sales from Sweden, but were lower in Asia, reflecting the weakness in the telecommunications and electronics markets.

The increase in operating profit in 2002 reflects the higher sales volume; higher profits resulting from actions taken since late 2000 to reduce the business’s cost structure; operational improvements, particularly in Mexico; and the absence of a $4.6 million charge taken in 2001 to reduce the business unit’s infrastructure. This increase was partially offset by a decline in sales of more profitable telecommunications and electronics products, and one-time costs related to the purchase accounting step-up of inventory to fair value at Seeger-Orbis. In 2002, the closure of the Texas spring plant was completed, with retained business from the Texas plant being relocated to other Associated Spring facilities, improving their capacity utilization.

Barnes Aerospace

The decline in Barnes Aerospace sales for 2003 reflects the decline in commercial aircraft deliveries compared to 2002. The events of 9/11 triggered the fall off in the commercial airline market but not before Barnes Aerospace reported a record $200.4 million in sales in 2001. Since 2001, Barnes Aerospace has worked aggressively to expand into other markets including military and land-based turbines. Approximately $46.1 million, or 28%, of 2003 sales were to the military or land-based turbine markets.

Total orders for 2003 were $161.9 million, compared with $177.9 million in 2002 and $215.7 million in 2001. Stronger orders in the second half of 2003 were driven by a large commercial engine program that will enter service in early 2004 and an increase in direct military orders. The Company entered into two revenue sharing program agreements that are expected to generate over $5.0 million in orders and sales in 2004. Order backlog declined marginally to $147.7 million at December 31, 2003, from $151.8 million at December 31, 2002. Both orders and order backlog were affected by the same factors that negatively impacted sales.

Outlook: Based upon published data, recovery in the sales of commercial aircraft is anticipated in 2006. This should impact aerospace component suppliers beginning in 2005. Sales in 2004 are expected to improve over 2003 on the strength of sales from a large commercial engine program, higher military sales, the RSPs and higher overhaul and repair sales. More significant improvements are anticipated for 2005 if the aerospace industry enters a more robust recovery.

In 2003, Barnes Aerospace margins increased and total operating profit dollars equaled 2002, despite the significant drop in sales volume. The improvement in margin is a result of headcount reductions and other productivity actions taken at Barnes Aerospace throughout 2002 aimed at positioning the business for a period of lower commercial aerospace volume. In 2002 management addressed what it believed to be a protracted recovery in the aerospace industry by reducing employment by approximately 20%, resulting in severance expenses of $1.3 million. This significant reduction in costs effectively positioned Barnes Aerospace to report operating profits in 2003 in line with 2002, while sales declined nearly 10%.

Sales in 2002 were down from a record $200.4 million in 2001. That sales decline reflected the sharp decrease in new commercial aircraft deliveries and continued aircraft order cancellations or deferrals by the major airlines in the wake of the events of 9/11. Operating profit fell in 2002 primarily as a result of the sales volume, combined with severance expense.

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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 bank 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 and anticipates that operating activities in 2004 will provide sufficient cash to take advantage of opportunities for organic business expansion and to meet the Company’s current financial commitments. Future acquisitions are expected to be financed through a mix of internal cash, borrowing and equity.

Cash Flow

NM – not meaningful

Operating activities are the principal source of cash flow for the Company, generating nearly $180 million in cash over the last three years. The improvement in operating cash flow in 2003 resulted from improved operating results compared with 2002. While management consistently stresses the need for effective working capital management, in 2003 an additional investment of $4.2 million was required in working capital to support the operating needs of the businesses. In 2002, significant progress was made in reducing inventory levels, primarily at Barnes Distribution and Barnes Aerospace. Accounts payable decreased in part due to reduced inventory purchases, combined with the impact, in 2002, of aggressive working capital management at the end of 2001.

The significant increase in cash used by investing activities in 2003 compared with 2002 was due to the acquisition of Kar in February 2003. Investing activities in 2002 included the acquisitions of Seeger-Orbis and Spectrum. Investing activities in 2003 also included a $17.5 million participation fee payment related to the RSPs which are more fully discussed in Note 5 of the Notes to the Consolidated Financial Statements of this Annual Report. This payment was funded with cash held outside the United States. The Company has a remaining liability for $17.0 million of which $15.0 million will be paid in April 2004 also using cash held outside the United States. The Company’s capital spending program focuses on business growth and improvements in productivity and quality. In the past three years, capital spending was reduced in response to the economic downturn. The Company expects to increase capital spending in 2004 to an amount in the range of approximately $26-$28 million.

Cash from financing activities in 2003 included proceeds from additional borrowings of $56.0 million under the revolving credit agreement that were used to fund the Kar acquisition and certain operating cash flow requirements in the United States. The Company’s public offering of its common stock provided proceeds of approximately $42.2 million (net of expenses incurred) that were used to reduce borrowings under its revolving credit facility. In addition, the Company realized $10.4 million in proceeds from the purchase of Company stock through employee stock plans. In 2002, excess cash was used to reduce borrowings by $15.9 million. Cash from financing activities in 2002 included $4.7 million of cash proceeds from the termination of an interest rate swap. Cash dividends remained at $0.80 per share for the third year. Total cash used to pay dividends increased in 2003 by $2.5 million to $17.6 million due to the increase in shares outstanding. Other financing activities in 2003 include the first of two $1.0 million installment payments made in connection with the Spectrum acquisition. In

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2001 proceeds from the sale of a cross-currency debt swap, combined with strong cash flow from operating activities, were used in part to fund investing activities, pay dividends, repurchase the Company’s stock and reduce debt.

In 2003, the Company’s positive cash flows increased cash and cash equivalents by $21.4 million. This cash in large part is generated by the Company’s non-U.S. subsidiaries. As of December 31, 2003, nearly all of the Company’s cash and cash equivalents are held by the Company’s non-U.S. subsidiaries. Since the repatriation of this cash to the U.S. could have adverse tax consequences, the balances remain outside the U.S. to fund future international growth investments, including acquisitions.

The Company maintains borrowing facilities with banks to supplement internal cash generation. At December 31, 2003, the Company had a $150.0 million borrowing facility under a three-year revolving credit agreement that matures on June 14, 2005, of which $54.0 million was borrowed at an interest rate of 2.63%. Additionally, the Company had $10.0 million in borrowings under uncommitted short-term bank credit lines, at an interest rate of 3.00%.

Borrowing capacity is limited by various debt covenants. The most restrictive covenant requires the Company to maintain a ratio of Total Debt to EBITDA, as defined in the revolving credit agreement, of not more than 3.00 times at December 31, 2003. The ratio requirement will decrease to 2.75 times at June 30, 2004. The actual ratio at December 31, 2003 was 2.63 times and would have allowed additional borrowings of $33.4 million.

The Company believes its credit facilities, coupled with cash generated from operations, are adequate for its anticipated future requirements.

The funded status of the Company’s pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. In 2003, the value of pension plan securities traded in equity markets increased significantly, which had a positive impact on the funded status of the plans. Partially offsetting these gains was the impact of declines in long-term interest rates. In accordance with Statement of Financial Accounting Standards (“SFAS”) 87, “Employers’ Accounting for Pensions,” the Company initially recorded a minimum pension liability adjustment for under-funded plans as of December 31, 2002, through a non-cash after-tax charge of $16.8 million to accumulated other non-owner changes to equity. As of December 31, 2003, the under-funded status of the plans improved, resulting in a reduction of $5.7 million of this non-cash after-tax charge to equity. From a cash perspective, approximately $6.1 million in cash contributions were made by the Company to its various pension plans in 2003. No Company contribution was required and no cash contribution was made to any of the U.S. qualified pension plans. The Company expects to contribute approximately $3.0 million to its various plans in 2004.

Contractual Cash Obligations and Commitments

At December 31, 2003, the Company had the following contractual cash obligations and commercial commitments:

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OTHER MATTERS

Inflation

Management believes that during the 2001–2003 period, inflation did not have a material impact on the Company’s financial statements.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Notes to the Consolidated Financial Statements of this Annual Report. The most significant areas involving management judgments and estimates are described below. Actual results could differ from such estimates.

Inventory Valuation: Inventories are valued at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to value the majority of domestic inventories. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable value. Loss provisions, if any, on contracts are established when estimable. Loss provisions are based on the excess inventoriable costs over the net revenues of the products or group of related products under contract. The process for evaluating the value of excess and obsolete inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may necessitate future adjustments to these provisions.

Business Acquisitions: Assets and liabilities acquired in a business combination are recorded at their estimated fair values at the acquisition date. At December 31, 2003, the Company had $220.1 million of goodwill, representing the cost of acquisitions in excess of fair values assigned to the underlying net assets of acquired companies. In accordance with SFAS 142, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment testing. The assessment of goodwill involves the estimation of the fair value of “reporting units,” as defined by SFAS 142. Management completed this annual assessment during the second quarter of 2003 based on the best information available as of the date of the assessment, which incorporated management assumptions about expected future cash flows. Based on this assessment, there was no goodwill impairment in 2003. Future cash flows can be affected by changes in the global economy and local economies, industries and markets in which the Company sells products or services, and the execution of management’s plans, particularly with respect to integrating acquired companies. There can be no assurance that future events will not result in impairment of goodwill or other intangible assets.

Revenue Sharing Programs: The Company participates in RSPs under which the Company receives an exclusive right to supply designated aftermarket parts over the life of the aircraft engine program. As consideration, the Company pays participation fees, which are recorded as long-lived intangible assets, and are recognized as a reduction to sales over the life of the program. The value of the intangible asset is subject to significant estimates about future revenues related to the program’s aftermarket parts. In accordance with SFAS 142, the Company evaluates the remaining useful life of this asset to determine whether events and circumstances warrant a revision to the remaining period of amortization. See Note 5 of the Notes to the Consolidated Financial Statements of this Annual Report.

Reorganization of Businesses: For non-acquisition related reorganizations as of and subsequent to January 1, 2003, the Company records the cost of reorganization initiatives at the time the liability is incurred. For reorganization initiatives in connection with acquisitions, and for all other reorganization initiatives prior to January 1, 2003, the Company records liabilities at the time that management has approved and committed to a reorganization plan. Such a plan identifies all significant actions to be taken and specifies an expected completion date that is within a reasonable period of time. The liability includes those costs that can be reasonably estimated. These estimates are subject to adjustments based upon actual costs incurred.

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Pension and Other Postretirement Benefits: Accounting policies and significant assumptions related to pension and other postretirement benefits are disclosed in Note 9 of the Notes to the Consolidated Financial Statements of this Annual Report.

In 2002, the portfolio managers authorized to invest pension trust funds were changed and the mix of assets in which managers invest was revised. The following table provides a breakout of the current targeted mix of investments, by asset classification, along with the historical rates of return for each asset class and the long-term projected rates of return.

The historical rates of return were calculated based upon compounded average rates of return of published indices. The 25% target for fixed income and cash investments is lower than the fixed income and cash component of a typical pension trust. The fixed income investments include a higher-than-average component of yield-aggressive investments, including high-yield corporate bonds. Based on the overall historical and projected rates of return, management is projecting the long-term rate of return on pension assets to be 9.5%.

A one-quarter percentage point change in the assumed long-term rate of return would impact the Company’s pretax income by approximately $0.8 million annually. A one-quarter percentage point change in the discount rate would impact the Company’s pretax income by approximately $0.4 million annually. The Company reviews these and other assumptions at least annually.

During 2003, the fair value of the Company’s pension plan assets increased by $65.0 million compared to an increase in projected benefit obligations of $40.0 million. The Company’s pension expense for 2003 was $0.2 million. We expect pension expense for 2004 to increase by $0.8 million over 2003 expense, primarily due to the reduction in the assumed discount rate from 6.75% to 6.25% and the methodology for recognizing return on plan assets.

Income Taxes: As of December 31, 2003, the Company had recognized $45.1 million of deferred tax assets, net of valuation reserves. The realization of these benefits is dependent in part on future taxable income. For those jurisdictions where the expiration date of tax loss carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided. Management believes that sufficient income will be earned in the future to realize deferred income tax assets, net of valuation allowances recorded. The recognized net deferred tax asset is based on the Company’s estimates of future taxable income. The realization of these deferred tax assets can be impacted by changes to tax codes, statutory tax rates and future taxable income levels.

Recent Accounting Changes

In June 2002, SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activities,” was issued. This statement provides guidance on the recognition and measurement of liabilities associated with exit or

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disposal activities and requires that such liabilities be recognized when incurred. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company applied SFAS 146 prospectively to exit activities initiated after December 31, 2002.

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others.” FIN 45 expands disclosure requirements and requires that a guarantor recognize, at fair value, a liability for its obligation under a guarantee. The recognition and measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. Adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows. The Company has complied with the expanded disclosure requirements.

In January 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for certain requirements and was amended in December 2003 to defer implementation of other requirements until March 2004. The Company has adopted all provisions of FIN 46. Adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows. The Company has complied with the expanded disclosure requirements.

In April 2003, the FASB issued SFAS 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies SFAS No. 133 including the expansion and clarification of scope exceptions, clarifications to the character-based definitions of a derivative instrument, an embedded derivative, and net-settlement contracts, and requires additional disclosure in the statement of cash flows associated with a derivative having a significant financing element. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. Adoption of this standard did not have a material impact on the Company’s financial position, results of operation or cash flows.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for measuring and classifying certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of SFAS 150 must be classified as a liability. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective on August 1, 2003. Adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

In December 2003, the FASB revised SFAS 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FASB statements No. 87, 88 and 106 (“SFAS 132R”). SFAS 132R requires expanded disclosures about defined benefit pension plans and other postretirement benefit plan assets, obligations, cash flows, and net cost and retains disclosures required by SFAS 132. The expanded benefit payments and information about international plans disclosure provisions of the SFAS 132R are effective for fiscal years ending after June 15, 2004. The balance of the expanded disclosure provided by SFAS 132R is effective for fiscal years ending on or after December 15, 2003, and for the first interim period following adoption of the standard. The Company has complied with all expanded disclosures required for fiscal years ending on or after December 15, 2003 as well as the information about international plans.

In December 2003, the FASB staff issued FASB staff position 106-1, (“FSP 106-1”) “Accounting and Disclosure Requirements Related to the Medical Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement

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and Modernization Act of 2003 (the “Act”). The Company has elected deferral of the accounting effects of the Act.

In December 2003, the Securities and Exchanges Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. SAB 104 revises or rescinds certain SAB guidance in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations relating to revenue recognition. This bulletin is effective immediately. The Company’s current revenue recognition policies comply with SAB 104.

EBITDA

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2003 were $88.8 million compared to $81.6 million in 2002. EBITDA is a measurement not in accordance with generally accepted accounting principles (“GAAP”). The Company defines EBITDA as net income plus income taxes, interest expense and depreciation and amortization. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP, and the reader should not consider it as an alternative to net income, net cash provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company’s operating performance. The Company’s definition of EBITDA may not be comparable with EBITDA as defined by other companies. The Company believes EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors.

Following is a reconciliation of EBITDA to the Company’s net income (in millions):

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. The Company’s financial results could be impacted by changes in interest rates, foreign currency exchange rates and commodity price changes. The Company uses financial instruments to hedge its exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivatives for speculative or trading purposes.

The Company’s long-term debt portfolio consists of fixed-rate and variable-rate instruments and is managed to reduce the overall cost of borrowing while also minimizing the effect of changes in interest rates on near-term earnings. In August 2002, the Company entered into an interest rate swap agreement that effectively converts its 7.13% fixed-rate Senior Notes to variable-rate debt. The underlying debt will be repaid in equal installments over two years with a corresponding reduction in the interest rate swap. This interest swap agreement had a positive impact on 2003 earnings, reducing interest expense by $0.3 million.

The Company’s primary interest rate risk is derived from its outstanding variable-rate debt obligations. At December 31, 2003, the result of a hypothetical 1% increase in the average cost of the Company’s variable-rate debt, including debt subject to the interest rate swap agreement, would have reduced annual pretax profit by $0.8 million.

At December 31, 2003, the fair value of the Company’s fixed-rate debt was $176.7 million, compared with its carrying amount of $153.8 million. The Company estimates that a 1% decrease in market interest rates at December 31, 2003 would have increased the fair value of the Company’s fixed-rate debt to $183.5 million.

The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. The currencies of the locations where the Company’s business operations are conducted are the U.S. dollar, Singapore dollar, Euro, British pound, Mexican peso, Brazilian real, Canadian dollar, Swedish krona and Chinese yuan. The Company is exposed primarily to U.S. dollar-denominated financial instruments at its international locations. A 10% adverse change in all currencies at December 31, 2003 would have resulted in a $0.3 million loss in the fair value of those financial instruments.

Foreign currency commitments and transaction exposures are managed at the operating units as an integral part of their businesses in accordance with a corporate policy that addresses acceptable levels of foreign currency exposures. The Company does not hedge its foreign currency net investment exposure. To reduce foreign currency exposure, management has converted U.S. dollar-denominated cash and short-term investments to local currency and is using forward currency contracts for other U.S. dollar-denominated assets in an effort to reduce the effect of the volatility of changes in foreign exchange rates on the income statement. In weaker currency countries, such as Brazil and Mexico, management assesses the strength of these currencies relative to the U.S. dollar and may elect during periods of local currency weakness to invest excess cash in U.S. dollar-denominated instruments.

The Company’s exposure to commodity price changes relates primarily to certain manufacturing operations that utilize high-grade steel spring wire and titanium. The Company manages its exposure to changes in those prices through its procurement and sales practices.

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Item 8. Financial Statements and Supplementary Data

BARNES GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

See accompanying notes.

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BARNES GROUP INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

See accompanying notes.

22

BARNES GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)