10-Q 1 0001.txt BARNES GROUP INC. FORM 10-Q SEPTEMBER 30, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM l0-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For transition period from -------------------- to -------------------- Commission File Number 1-4801 BARNES GROUP INC. (a Delaware Corporation) I.R.S. Employer Identification No. 06-0247840 123 Main Street, Bristol, Connecticut 06010 Telephone Number (860) 583-7070 Number of common shares outstanding at November 10, 2000 - 18,633,046 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 --- --- -1- BARNES GROUP INC. FORM 10-Q INDEX For the Quarterly period ended September 30, 2000 DESCRIPTION PAGES ----------- ----- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Income for the three months and nine months ended September 30, 2000 and 1999 3 Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 4-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7-10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 14 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 15 Signatures 15 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements BARNES GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) Three months ended Nine months ended September 30, September 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net sales $190,570 $154,043 $552,041 $472,574 Cost of sales 123,550 103,665 362,715 320,485 Selling and admin- istrative expenses 50,058 37,043 140,471 110,820 -------- -------- -------- -------- 173,608 140,708 503,186 431,305 -------- -------- -------- -------- Operating income 16,962 13,335 48,855 41,269 Other income 973 1,364 3,350 4,400 Interest expense 4,008 1,617 10,250 3,530 Other expenses 1,151 379 2,742 855 -------- -------- -------- -------- Income before income Taxes 12,776 12,703 39,213 41,284 Income taxes 3,441 3,811 11,372 14,243 -------- -------- -------- -------- Net income $ 9,335 $ 8,892 $ 27,841 $ 27,041 ======== ======== ======== ======== Per common share: Net income Basic $ .50 $ .46 $ 1.50 $ 1.38 Diluted .49 .45 1.48 1.36 Dividends .20 .19 .59 .56 Average common shares outstanding Basic 18,601,009 19,347,665 18,551,378 19,560,942 Diluted 18,870,208 19,583,293 18,759,413 19,796,883 See accompanying notes. -3- BARNES GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS September 30, December 31, 2000 1999 ------------ ----------- (Unaudited) Current assets Cash and cash equivalents $ 44,808 $ 43,632 Accounts receivable, less allowances (2000-$3,945; 1999-$3,329) 122,033 91,701 Inventories Finished goods 57,874 39,573 Work-in-process 20,888 12,861 Raw materials and supplies 15,578 13,917 -------- -------- 94,340 66,351 Deferred income taxes and prepaid expenses 19,546 17,501 -------- -------- Total current assets 280,727 219,185 Deferred income taxes 22,713 23,797 Property, plant and equipment 403,735 368,191 Less accumulated depreciation 238,400 223,086 -------- -------- 165,335 145,105 Goodwill 147,578 88,562 Other assets 56,280 39,633 -------- -------- Total assets $672,633 $516,282 ======== ======== See accompanying notes. -4- BARNES GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2000 1999 ------------ ----------- (Unaudited) Current liabilities Notes payable $ 41,262 $ 12,136 Accounts payable 57,312 57,458 Accrued liabilities 64,513 46,426 -------- -------- Total current liabilities 163,087 116,020 Long-term debt 230,000 140,000 Accrued retirement benefits 67,944 66,973 Other liabilities 11,626 12,675 Stockholders' equity Common stock-par value $0.01 per share Authorized: 60,000,000 shares Issued: 22,037,769 shares stated at par value 220 220 Additional paid-in capital 51,305 49,786 Treasury stock at cost 2000-3,391,823 shares 1999-3,187,242 shares (67,914) (63,893) Retained earnings 235,174 218,388 Accumulated other comprehensive income (18,809) (23,887) -------- -------- Total stockholders' equity 199,976 180,614 -------- -------- Total liabilities and stockholders' equity $672,633 $516,282 ======== ======== See accompanying notes. -5- BARNES GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months ended September 30, 2000 and 1999 (Dollars in thousands) (Unaudited) 2000 1999 ------- ------- Operating activities: Net income $27,841 $27,041 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 26,196 22,821 Gain on sale of property, plant and equipment (2,255) (506) Changes in assets and liabilities: Accounts receivable (13,920) (9,851) Inventories (4,704) 4,286 Accounts payable (7,672) 5,265 Accrued liabilities 6,228 (11,419) Deferred income taxes 1,248 996 Other (10,540) (5,265) ------- ------- Net cash provided by operating activities 22,422 33,368 Investing activities: Proceeds from sale of property, plant and equipment 2,736 1,920 Capital expenditures (19,800) (19,832) Business acquisitions (104,655) (91,949) Redemption of short-term investment -- 2,566 Other (1,767) (1,480) ------- ------- Net cash used by investing activities (123,486) (108,775) Financing activities: Net increase in notes payable 29,165 15,407 Proceeds from the issuance of long-term debt 90,000 89,000 Proceeds from the issuance of common stock 3,645 1,238 Common stock repurchases (8,073) (18,756) Dividends paid (10,952) (10,953) ------- ------- Net cash provided by financing activities 103,785 75,936 Effect of exchange rate changes on cash flows (1,545) (1,678) ------- ------- Increase (decrease) in cash and cash equivalents 1,176 (1,149) Cash and cash equivalents at beginning of period 43,632 40,206 ------- ------- Cash and cash equivalents at end of period $44,808 $39,057 ======= ======= See accompanying notes. -6- Notes to Consolidated Financial Statements: 1. Summary of Significant Accounting Policies ------------------------------------------ The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. For additional information, please refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the nine-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 2. Comprehensive Income -------------------- Comprehensive income includes all changes in equity during a period except those resulting from the investment by and distributions to owners. For the Company, comprehensive income includes net income and foreign currency translation adjustments. Foreign currency translation adjustments result from the foreign operations' assets and liabilities being translated at the period-end exchange rates and revenues and expenses being translated at average rates of exchange. The resulting translation gains and losses are reflected in accumulated other comprehensive income within stockholders' equity. Statement of Comprehensive Income (Dollars in thousands) (Unaudited) Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 9,335 $ 8,892 $ 27,841 $ 27,041 Other comprehensive gain (loss) 3,540 (80) 5,078 (4,544) -------- -------- -------- -------- Comprehensive income $ 12,875 $ 8,812 $ 32,919 $ 22,497 ======== ======== ======== ======== -7- Notes to Consolidated Financial Statements Continued: 3. Stock Plans ----------- All U.S. salaried and non-union hourly employees are eligible to participate in the Company's Guaranteed Stock Plan (GSP). The GSP provides for the investment of employer and employee contributions in the Company's common stock. The Company guarantees a minimum rate of return on certain GSP assets. This guarantee will only become a liability for the Company if, and to the extent, the value of the related Company stock does not cover the guaranteed asset value on the day an employee withdraws from the plan. At December 31, 1999 the Company's guarantee was $2.3 million based on the Company's stock closing price of $16.31 per share. Based on the September 29, 2000 closing price of $18.38, the guarantee was $1.0 million. 4. Acquisitions ------------ On May 10, 2000, the Company purchased substantially all of the assets and liabilities of Curtis Industries, Inc. (Curtis), pursuant to an Asset Purchase and Sale Agreement dated April 27, 2000. The acquisition of Curtis, a distributor of maintenance, repair and operating supplies and high quality security products, was recorded using the purchase method of accounting and is included in the Barnes Distribution business segment. The $63.3 million acquisition cost has been allocated to tangible and intangible assets and liabilities of the Curtis business based upon estimates of their respective fair market values. The resulting goodwill of $52.7 million will be amortized over 40 years. On September 7, 2000, the Company purchased substantially all the manufacturing assets and liabilities of Kratz-Wilde Machine Company (Kratz-Wilde) and Apex Manufacturing Inc. (Apex) from Aviation Sales Company pursuant to an Asset Purchase and Sale Agreement dated August 3, 2000. Kratz- Wilde/Apex fabricates and machines intricate aerospace components for jet engines and auxiliary power units and is included in the Barnes Aerospace business segment. The acquisition was recorded using the purchase method of accounting. The $41.4 million acquisition cost has been allocated to tangible and intangible assets and liabilities of Kratz-Wilde/Apex based upon estimates of their respective fair market values. The resulting goodwill of $8.6 million will be amortized over 40 years. The funds used to purchase Curtis and Kratz-Wilde/Apex were borrowed under the Company's $150 million revolving credit facility. The Company is currently working on the issuance of $60.0 million of long-term notes to refinance a portion of the borrowings under the revolving credit facility. The new debt will result in higher interest expense. -8- Notes to Consolidated Financial Statements Continued: The following table reflects the operating results of the Company for the nine months ended September 30, 2000 and 1999 on a pro forma basis, which gives effect to the acquisition of Curtis and Kratz-Wilde/Apex as if they had occurred on January 1, 1999. The pro forma results are not necessarily indicative of the operating results that would have occurred if the acquisition had been effective January 1, 1999, nor are they intended to be indicative of results that may occur in the future. The underlying pro forma information includes the amortization expense associated with the assets acquired, the Company's financing arrangements and certain purchase accounting adjustments. Pro Forma Financial Data Curtis and Kratz-Wilde/Apex Acquisitions (Dollars in thousands, except per share data) (Unaudited) Nine Months ended September 30, 2000 1999 -------- -------- Net sales $610,661 $569,410 Income before income taxes 38,316 42,191 Net income 27,194 27,636 Per common share - basic $ 1.47 $ 1.41 - diluted 1.45 1.39 On a pro forma basis, the acquisitions would have been dilutive to earnings per share by $0.03, for the first nine months of 2000. The Company expects that, with anticipated synergies realized, the acquisitions will be accretive to earnings during their twelve-month post-acquisition periods. 5. Future Accounting Changes ------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001, as amended. The standard requires that the Company recognize derivatives on the balance sheet at fair value. Management believes that adoption of this standard will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. -9- Notes to Consolidated Financial Statements Continued: 6. Information on Business Segments -------------------------------- Segment assets were impacted by the May 2000 $63.3 million acquisition of Curtis (Barnes Distribution segment) and the September 2000 $41.4 million acquisition of Kratz-Wilde/Apex (Barnes Aerospace segment). See note 4 above. The following tables set forth information about the Company's operations by its three reportable business segments: Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- --------- -------- (Dollars in thousands) (Unaudited) Revenues: Associated Spring $ 79,891 $ 70,911 $252,356 $205,720 Barnes Distribution 79,162 57,744 215,615 176,738 Barnes Aerospace 34,719 28,523 94,396 99,211 Intersegment sales (3,202) (3,135) (10,326) (9,095) -------- -------- -------- -------- Total revenues $190,570 $154,043 $552,041 $472,574 ======== ======== ======== ======== Operating profit: Associated Spring $ 11,550 $ 8,397 $ 36,394 $ 24,378 Barnes Distribution 2,742 3,860 8,000 11,443 Barnes Aerospace 3,183 1,829 6,191 7,644 -------- -------- -------- -------- Total operating profit 17,475 14,086 50,585 43,465 Interest income 258 358 807 801 Interest expense 4,008 1,617 10,250 3,530 Other income(expense) (949) (124) (1,929) 548 -------- -------- -------- -------- Income before income taxes $ 12,776 $ 12,703 $ 39,213 $ 41,284 ======== ======== ======== ======== -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations --------------------- Net sales for the third quarter of 2000 were a record $190.6 million, up 24% from net sales of $154.0 in 1999. This is the third consecutive quarter of record sales, reflecting both internal sales growth and the Company's three recent acquisitions. The Company's sales for the first nine months were $552.0 million, up 17% from $472.6 million in 1999. Third quarter operating income was up 27% to $17.0 million compared to $13.3 million in the comparative 1999 period. Operating margins improved in the quarter to 8.9% from 8.7% in 1999. The third quarter 2000 results reflect strong sales performance by all three business segments and very strong earnings performance by the Associated Spring and Barnes Aerospace business segments, offset in part by lower earnings at Barnes Distribution. The year-to-date operating income was $48.9 million, up 18% from $41.3 million reported in 1999. Operating margins improved in the first nine months to 8.8% from 8.7% in 1999. Year-to-date 2000 performance reflects period-over-period sales and earnings improvements at Associated Spring, offset in part by an earnings decline at Barnes Distribution and sales and earnings declines at Barnes Aerospace. Lower pension expense in the third quarter and first nine months contributed $1.4 million and $3.7 million of incremental operating income over the comparable 1999 periods. Of the increase in selling and administrative expenses in 2000 over 1999, $11.5 million and $22.7 million in the third quarter and first nine months are attributable to newly acquired units. Included in both the current quarter and first nine months of 2000, is a gain of $2.2 million related to the sale of a corporate asset and $1.7 million of one-time consolidation costs related to the Curtis acquisition. Segment Review-Sales and Operating Profit ------------------------------------------ Associated Spring sales for the third quarter and year-to-date were $79.9 million and $252.4 million, up 13% and 23% over the comparable 1999 periods, reflecting strong foreign demand for the Company's products. The nitrogen gas springs product line, acquired in August 1999, contributed $6.0 million and $31.6 million in incremental sales for the quarter and first nine months of 2000. The segment's third quarter and year-to-date 2000 operating profits also increased substantially to $11.6 million and $36.4 million, improving 38% and 49% over the comparable 1999 periods. This operating profit increase was largely a result of the higher sales volume. -11- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: Barnes Distribution's third quarter and year-to-date sales were $79.2 million and $215.6 million, an increase of 37% and 22% over the comparative 1999 periods. The acquisition of Curtis, in May 2000, contributed $21.0 million in sales for the third quarter and $37.2 million year-to-date. However, segment operating profits in the third quarter declined largely as a result of one- time consolidation costs of $1.7 million related to the Curtis acquisition. On a year-to-date basis, operating profits declined, reflecting one-time consolidation costs and the higher costs associated with a new business management and information system implemented in 1999 in North America. Barnes Aerospace's third quarter sales were $34.7 million, up 22% as compared to 1999 and year-to-date 2000 sales were $94.4 million, down 5% as compared to $99.2 million in 1999. The acquisition of Kratz-Wilde/Apex added $3.0 million in sales to the current periods. The third quarter sales increase and the trend of increased orders for the third consecutive quarter indicate the beginning of a recovery in the commercial jet engine market. Excluding the impact of the acquisition of Kratz- Wilde/Apex, orders during the third quarter were $44.2 million and backlog rose by $12.0 million to $101.6 million at September 30, 2000. Segment operating profit for the third quarter improved significantly over last year's third quarter, primarily resulting from the increased sales volume. Year-to-date operating profit, however, was lower than last year due to the impact of year-to-date lower sales volume, which is directly related to the shortfall of sales in the first quarter. The acquisition of Kratz-Wilde/Apex had no material impact on operating profit in the current periods. Non-Operating Income/Expense ---------------------------- Other income for the first nine months of 2000 decreased from 1999 due to lower net foreign exchange transaction gains. The increase in other expenses in 2000 as compared to 1999 was attributable to higher goodwill amortization, a result of three acquisitions. Interest expense also increased substantially due to the debt service on acquisition-related debt. Income Taxes ------------ The Company's effective tax rate was 29.0% in 2000 compared to 34.5% in 1999. The lower rate in 2000 was due to lower state taxes, a higher percentage of foreign income with tax rates lower than the U.S. statutory tax rate, and foreign tax benefits related to the acquisition of the nitrogen gas springs business. -12- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: Net Income and Net Income Per Share ----------------------------------- Consolidated net income for the third quarter of 2000 and 1999 was $9.3 million and $8.9 million, respectively. Basic and diluted earnings per share for the 2000 third quarter were $.50 and $.49, compared to 1999's basic and diluted earnings per share of $.46 and $.45. Consolidated net income year-to-date 2000 and 1999 was $27.8 million and $27.0 million. Basic and diluted earnings per share for the first nine months of 2000 were $1.50 and $1.48 compared to 1999's basic and diluted earnings per share of $1.38 and $1.36. For the purpose of computing diluted earnings per share, the weighted average number of shares outstanding was increased for the potential dilutive effects of stock-based incentive plans. There were no adjustments to net income for the purpose of computing income available to common stockholders for 2000 or 1999. Financial Condition ------------------- Cash Flows ---------- Net cash generated by operating activities in the first nine months of 2000 was $22.4 million, compared to $33.4 million in 1999. The year-to-date 2000 operating cash flow was negatively impacted by higher investments in operating assets and liabilities, which were used to support a higher level of business activity. During the first three-quarters of 1999, operating cash flow was negatively impacted by cash payments of $7.4 million related to the early retirement package for the Company's former president, which was expensed and accrued in 1998. These cash payments are reflected in 1999's accrued liabilities. Net cash used for investing activities during the first nine months of 2000 was $123.5 million compared to $108.8 million in the first three-quarters of 1999. The significant cash usage in both periods reflects the acquisitions of Curtis and Kratz- Wilde/Apex in 2000 and the nitrogen gas springs business in 1999. Net cash provided by financing activities was $103.8 million in the first nine months of 2000 compared to $75.9 million in 1999. Both periods include the increase in long-term debt to fund acquisitions. The 2000 increase in notes payable was used to finance the incremental investment in operating assets and liabilities. -13- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: Liquidity and Capital Resources ------------------------------- The Company maintains substantial bank borrowing facilities to supplement internal cash generation. At September 30, 2000, the Company had $150.0 million of borrowing capacity under its long- term revolving credit facility of which all was borrowed. The funds used to purchase Curtis and Kratz-Wilde/Apex were borrowed under this agreement. The Company is currently working on the issuance of $60.0 million of long-term notes to refinance a portion of the borrowing under the revolving credit facility. The new debt will result in higher interest expense. At September 30, 2000, the Company had $8.0 million in borrowings under uncommitted short-term bank credit lines at an interest rate of 7.41%. The Company believes its credit facilities coupled with cash generated from operations are adequate to finance its anticipated future requirements. Forward-Looking Statements -------------------------- The Company cautions readers that certain factors may affect the Company's results for future fiscal periods. These factors involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made on behalf of the Company. For this purpose, any statement other than one of historical fact may be considered a forward-looking statement, as defined in the Public Securities Litigation and Reform Act of 1995. Some factors that could cause actual results to vary materially from those anticipated in forward- looking statements include changes in worldwide economic and political conditions, currency and interest rate fluctuations, regulatory and technological changes, changes in market demand for the types of products, services produced and sold by the Company and projected synergies of acquisitions. Item 3. Quantitative and Qualitative Disclosures About Market Risk At September 30, 2000, the result of a hypothetical 1% increase in the average cost of the Company's variable-rate debt would reduce pretax profit of the Company by $1.7 million on an annual basis. For additional information, please refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. -14- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit 27 Financial Data Schedule, September 30, 2000 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Barnes Group Inc. (Registrant) Date November 14, 2000 By /s/ William C. Denninger ----------------- ------------------------------------- William C. Denninger Senior Vice President, Finance and Chief Financial Officer (the principal financial officer) Date November 14, 2000 By /s/ Francis C. Boyle, Jr. ----------------- ------------------------------------- Francis C. Boyle, Jr. Vice President, Controller (the principal accounting officer) -15-