10-Q 1 e10q01q2.txt BARNES GROUP INC 10Q 2ND QTR 6/30/2001 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 June 30, 2001 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 August 6, 2001 - 18,471,340 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 June 30, 2001 DESCRIPTION PAGES ----------- ----- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Income for the three months ended and six months ended June 30, 2001 and 2000 3 Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 4-5 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7-11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 16 Signatures 17 -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 Six months ended June 30, June 30, -------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net sales $199,464 $188,465 $398,714 $361,472 Cost of sales 133,890 122,847 266,452 239,165 Selling and admin- istrative expenses 52,134 49,480 105,069 90,413 -------- -------- -------- -------- 186,024 172,327 371,521 329,578 -------- -------- -------- -------- Operating income 13,440 16,138 27,193 31,894 Other income 1,336 1,057 2,741 2,376 Interest expense 4,486 3,464 8,719 6,242 Other expenses 1,129 917 2,302 1,591 -------- -------- -------- -------- Income before income taxes 9,161 12,814 18,913 26,437 Income taxes 2,290 3,708 4,728 7,931 -------- -------- -------- -------- Net income $ 6,871 $ 9,106 $ 14,185 $ 18,506 ======== ======== ======== ======== Per common share: Net income Basic $ .37 $ .49 $ .76 $ 1.00 Diluted .36 .49 .75 .99 Dividends .20 .20 .40 .39 Average common shares outstanding Basic 18,508,148 18,454,001 18,564,143 18,526,290 Diluted 18,913,360 18,640,858 18,925,590 18,701,533 See accompanying notes. -3- BARNES GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS June 30, December 31, 2001 2000 --------- ------------ (Unaudited) Current assets Cash and cash equivalents $ 35,107 $ 23,303 Accounts receivable, less allowances (2001-$2,522; 2000-$2,720) 114,771 107,434 Inventories Finished goods 48,021 59,665 Work-in-process 15,710 13,605 Raw materials and supplies 16,269 15,244 -------- -------- 80,000 88,514 Deferred income taxes and prepaid expenses 20,942 22,097 -------- -------- Total current assets 250,820 241,348 Deferred income taxes 12,247 15,010 Property, plant and equipment 406,750 400,319 Less accumulated depreciation 246,504 236,553 -------- -------- 160,246 163,766 Goodwill 159,026 155,667 Other assets 56,150 61,150 -------- -------- Total assets $638,489 $636,941 ======== ======== See accompanying notes. -4- BARNES GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31, 2001 2000 --------- ------------ (Unaudited) Current liabilities Notes payable $ 4,181 $ 6,896 Accounts payable 66,929 59,767 Accrued liabilities 54,817 60,183 -------- -------- Total current liabilities 125,927 126,846 Long-term debt 230,000 230,000 Accrued retirement benefits 68,119 67,686 Other liabilities 10,035 11,076 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 53,051 51,845 Treasury stock at cost, 2001-3,552,870 shares 2000-3,430,411 shares (73,601) (69,181) Retained earnings 245,925 239,266 Accumulated other comprehensive income (21,187) (20,817) -------- -------- Total stockholders' equity 204,408 201,333 -------- -------- Total liabilities and stockholders' equity $638,489 $636,941 ======== ======== See accompanying notes. -5- BARNES GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) 2001 2000 ------- ------- Operating Activities: Net income $14,185 $18,506 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 19,061 17,231 (Loss) gain on sale of property, plant and equipment (2) 26 Changes in assets and liabilities: Accounts receivable (9,569) (13,746) Inventories 6,487 (7,135) Accounts payable 7,658 (3,737) Accrued liabilities (9,165) (1,101) Deferred income taxes 4,175 541 Other (6,200) (5,282) ------- ------- Net Cash Provided by Operating Activities 26,630 5,303 Investing Activities: Proceeds from sale of property, plant and equipment 132 297 Capital expenditures (11,026) (11,516) Business acquisitions . (39) (62,580) Other (2,362) (1,010) ------- ------- Net Cash Used by Investing Activities (13,295) (74,809) Financing Activities: Net (decrease) increase in notes payable (2,904) 23,338 Proceeds from the issuance of long-term debt -- 60,000 Proceeds from the issuance of common stock 1,113 901 Common stock repurchases (4,870) (7,136) Dividends paid (7,425) (7,223) Proceeds from sale of debt swap 13,766 -- ------- ------- Net Cash (Used) Provided by Financing Activities (320) 69,880 Effect of exchange rate changes on cash flows (1,211) (1,404) ------- ------- Increase (decrease)in cash and cash equivalents 11,804 (1,030) Cash and cash equivalents at beginning of period 23,303 43,632 ------- ------- Cash and cash equivalents at end of period $35,107 $42,602 ======= ======= See accompanying notes. -6- Notes to Consolidated Financial Statements: 1. Summary of Significant Accounting Policies ------------------------------------------ The accompanying unaudited condensed consolidated balance sheet and consolidated statements of income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The December 31, 2000 balance sheet was derived from audited financial statements. The financial statements 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, 2000. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the six-month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying instrument. 2. Accounting Change ----------------- The Company adopted Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities", as amended, on January 1, 2001. The standard requires that all derivative instruments be recorded on the balance sheet at fair value. The accounting for changes in the fair value depends on how the derivative is used and designated. In accordance with the transition provisions of FAS 133, the Company recorded a $0.4 million gain which was entirely offset by a loss recorded on the re-measurement of underlying balance sheet items. There was no transition adjustment to other comprehensive income. The Company is exposed to fluctuations in interest rates, foreign currency exchange rates and commodity price changes. These financial exposures are monitored and managed by the Company as an integral part of its risk management program. The Company uses financial instruments to mitigating fluctuations in its cost of debt and to hedge its exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not use derivatives to manage commodity exposures or for speculative or trading purposes. -7- Notes to Consolidated Financial Statements Continued: Interest Rate Exposures: The Company's long-term debt portfolio consists of fixed rate and variable rate instruments and is managed to mitigate fluctuations in interest rates. Interest rate fluctuations result in changes in the market value of the Company's fixed rate debt. As part of managing its debt portfolio, the Company maintains an interest rate exchange agreement to convert a portion of its 9.47% fixed rate Senior Notes to variable rate debt. This interest rate contract is a fair value hedge, which is effective in offsetting fluctuations in the fair value of the hedged portion of the debt instrument. The gains and losses on the interest rate contract are recorded to earnings and are offset by gains and losses recorded on the re-measurement of the underlying debt. In March 2001, the Company sold its $70 million cross- currency debt swap. The accumulated adjustment to the carrying value of the debt will be recognized in accordance with terms of the underlying debt. Foreign Currency Exposures: The Company has manufacturing, sales and distribution facilities around the world and thus makes investments and conducts business transactions denominated in various currencies. Foreign currency commitment and transaction exposures are managed at the operating units as an integral part of their businesses in accordance with corporate policy that addresses acceptable levels of foreign currency risk. The Company uses foreign currency forward exchange contracts to hedge certain of these risks. These contracts qualify as fair value hedges of unrecognized firm commitments or cash flow hedges of anticipated transactions. The Company does not hedge its foreign currency net investment exposure. At June 30, 2001, the fair value of derivatives held by the Company was a net asset of $0.3 million. During the six months ended June 30, 2001, gains or losses related to hedge ineffectiveness, which amounts were reclassified to stockholders' equity, were immaterial. -8- Notes to Consolidated Financial Statements Continued: 3. 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, foreign currency translation adjustments, and deferred gains and losses related to certain derivative instruments. The resulting gains and losses are reflected in accumulated other comprehensive income within stockholders' equity. Statement of Comprehensive Income (Dollars in thousands) (Unaudited) Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 6,871 $ 9,106 $ 14,185 $ 18,506 Unrealized gains on hedging activities 260 -- 436 -- Foreign currency translation adjustment (307) 2,590 (806) 1,538 -------- -------- -------- -------- Comprehensive income $ 6,824 $ 11,696 $ 13,815 $ 20,044 ======== ======== ======== ======== 4. Stock Plans ----------- Most U.S. salaried and non-union hourly employees are eligible to participate in the Company's 401(K) plan. Effective April 1, 2001, the 401(K) plan, previously called the Barnes Group Inc. Guaranteed Stock Plan (GSP), was amended and renamed the Retirement Savings Plan (RSP). The RSP continues to provide for the investment of employer and employee contributions in the Company's common stock and also provides for employee contributions in other investment alternatives. Employee contributions to the RSP for investment in the Company's common stock after March 31, 2001 are no longer guaranteed a minimum rate of return. However, the Company continues to guarantee a minimum rate of return on certain pre-April 1, 2001 assets of the plan. This guarantee will only become a liability for the Company if, -9- Notes to Consolidated Financial Statements Continued: and to the extent that, the value of the related Company stock does not cover the guaranteed asset value when an employee withdraws from the plan. At June 30, 2001, the value of the Company's guarantee on these assets was immaterial. 5. Information on Business Segments -------------------------------- The following tables set forth information about the Company's operations by its three reportable business segments: Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- --------- -------- (Dollars in thousands) (Unaudited) Revenues: Associated Spring $ 74,759 $ 86,152 $150,752 $172,465 Barnes Aerospace 50,174 30,387 97,064 59,677 Barnes Distribution 77,001 75,366 156,408 136,453 Intersegment sales (2,470) (3,440) (5,510) (7,123) -------- -------- -------- -------- Total revenues $199,464 $188,465 $398,714 $361,472 ======== ======== ======== ======== Operating profit: Associated Spring $ 8,171 $ 12,508 $ 15,339 $ 24,844 Barnes Aerospace 3,939 1,899 7,866 3,008 Barnes Distribution 1,868 2,344 4,819 5,258 -------- -------- -------- -------- Total operating profit 13,978 16,751 28,024 33,110 Interest income 283 273 443 549 Interest expense (4,486) (3,464) (8,719) (6,242) Other expense (614) (746) (835) (980) -------- -------- -------- -------- Income before income taxes $ 9,161 $ 12,814 $ 18,913 $ 26,437 ======== ======== ======== ======== -10- Notes to Consolidated Financial Statements Continued: 6. New Accounting Standards ------------------------ In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires companies to account for acquisitions entered into after June 30, 2001 using the purchase method and establishes criteria to be used in determining whether acquired intangible assets are to be recorded separately from goodwill. SFAS 142 sets forth the accounting for goodwill and other intangible assets related to business combinations. Goodwill and other intangible assets with indefinite lives will no longer be amortized and instead will be evaluated annually for impairment by comparing the fair value at the reporting unit level to its carrying value. Intangible assets with definitive lives will be amortized over their useful lives. SFAS 142 is effective January 1, 2002 for the Company. Management is in the process of analyzing and assessing the impact of the adoption of these statements. The Company does not expect the adoption of SFAS 141 to have a material effect on its financial position or results of operations. The Company expects that adoption of SFAS 142 will have a favorable impact on net income due to the elimination of goodwill amortization; however, the actual effect on the Company's consolidated results of operations and financial position is not determinable at this time. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations --------------------- Net sales for the second quarter 2001 were the highest quarterly sales ever in the Company's history at $199.5 million, up 5.8% from $188.5 million last year. Net sales growth in the second quarter reflected a sharp rise in sales at Barnes Aerospace and sales from the Company's recent acquisitions. This was partially offset by a decline in the transportation and telecommunications-related sales at Associated Spring and the adverse impact on Barnes Distribution of economic conditions in the manufacturing and heavy industrial sectors. -11- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: The Company's first half sales were $398.7 million, up 10.3% from $361.5 million in 2000. Second quarter operating income was $13.4 million compared to $16.1 million in the corresponding 2000 period. The 2001 year-to-date operating income was $27.2 million compared to $31.9 million in 2000. These results reflect period-over- period sales and earnings growth in the Barnes Aerospace segment, which were more than offset by lower earnings in the Barnes Distribution segment and sharply lower sales and earnings in the Associated Spring segment. Operating income margin for the second quarter was 6.7% compared to 8.6% a year ago. This decrease reflects a lower gross margin of 32.9% compared to 34.8% a year ago, primarily due to lower sales volume at Associated Spring. Selling and administrative expenses, while up 5.4% in total, decreased as a percentage of sales. The increase in selling and administrative expenses reflects a continued strategic investment in sales and marketing for the purpose of stimulating sales growth in new businesses and new customers as well as additional selling and administrative expenses related to the added sales from the acquired businesses. Segment Review - Sales and Operating Profit ------------------------------------------- Associated Spring sales for the 2001 second quarter and first half were $74.8 million and $150.8 million, down 13.2% and 12.6% from a year ago. Sales in 2001 were negatively impacted by the slowdown in the domestic transportation sector, as well as the global decline in sales of telecommunications products. The second quarter and first half operating profit for the segment also decreased substantially to $8.2 million and $15.3 million, a 34.7% and 38.3% decrease over the comparable 2000 periods. This decrease in operating profits reflects the sales volume decline partly offset by cost reductions. Barnes Aerospace second quarter and year-to-date 2001 segment sales were $50.2 million and $97.1 million, up 65.1% and 62.6%, respectively, over the comparable 2000 periods. Organic sales were $38.5 million in the second quarter, up 26.6%, reflecting penetration of new accounts and sales of new products. Sales from the Kratz-Wilde/Apex business, acquired in September 2000, totaled $11.7 million in the second quarter. Orders were $60.5 million for the quarter and order backlog increased to a record $166.9 million from $144.9 million at December 31, 2000. -12- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: Operating profit more than doubled from the comparable 2000 periods as a result of the higher sales volume and the Kratz-Wilde/Apex acquisition, partially offset by higher expenses related to a large number of new product introductions. Barnes Distribution second quarter and year-to-date 2001 segment sales were $77.0 million and $156.4 million, an increase of 2.2% and 14.6% over the comparable 2000 periods. Second quarter sales included $21.2 million from Curtis, which was acquired in May 2000, up from $14.8 million in sales in the year-ago period. This increase was offset in part by lower sales at the Raymond division, reflecting the general economic conditions in the manufacturing and heavy industrial sectors. Operating profit for the second quarter and year-to-date periods decreased to $1.9 million and $4.8 million, respectively. Operating profits declined on lower sales from Barnes Distribution's organic businesses, particularly at the Raymond division, partially offset by higher sales volume and cost synergies achieved through the Curtis acquisition. Non-Operating Income/Expense ---------------------------- Higher other income for the first half of 2001 compared to 2000 resulted from foreign exchange transaction gains of $1.4 million compared to $0.5 million. This increase was partially offset by lower income from the Company's NASCO joint venture. The increase in other expenses in the first half of 2001 compared to 2000 was largely attributable to higher goodwill amortization, a result of two acquisitions made in 2000. Interest expense also increased substantially due to the debt service on acquisition-related debt. Income Taxes ------------ The Company's effective tax rate for first half 2001 was 25.0% compared to 30.0% in 2000. The lower rate in 2001 is due to a higher percentage of foreign income in jurisdictions with tax rates lower than the U.S. statutory tax rate. -13- 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 second quarter of 2001 and 2000 was $6.9 million and $9.1 million, respectively. Basic and diluted earnings per share for the second quarter of 2001 were $.37 and $.36, respectively, compared to basic and diluted earnings per share of $.49 for the second quarter, 2000. For the purposes 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. Financial Condition ------------------- Cash Flows ---------- Net cash provided by operating activities in the first six months of 2001 was $26.6 million, compared to $5.3 million in 2000. In the first half of 2001, the significant increase in operating cash flow was due primarily to the continued improvements in working capital. Management continues its focus on aggressive asset management and was effective in actively reducing overall working capital levels during the first half of 2001. Net cash used by investing activities in the first half of 2001 was $13.3 million compared to $74.8 million in 2000. The cash used in 2000 includes $62.6 million for the acquisition of Curtis. In 2001, funds used for a small bolt- on acquisition were offset in large part by a purchase price adjustment received in 2001 on the Kratz-Wilde/Apex acquisition, which was completed in the second half of 2000. Net cash used by financing activities was $0.3 million in the first six months of 2001, compared to net cash provided by financing activities of $69.9 million in the comparable period of 2000. Cash generated from the sale of a cross- currency debt swap is included in 2001. The proceeds from this sale, combined with very strong operating cash flow, were used in part to fund capital expenditures, pay dividends, repurchase the Company's stock and reduce debt. In 2000, the increase in borrowings reflected the issuance of additional long-term debt to fund the acquisition of Curtis as well as cash needed to supplement cash generated by operating activities to finance capital expenditures, dividends and stock repurchases. -14- Management's Discussion and Analysis of Financial Condition and Results of Operations Continued: Liquidity and Capital Resources ------------------------------- At June 30, 2001, the Company classified as long-term debt $3.1 million of the current portion of its 9.47% long-term notes. The Company has both the intent and the ability, through its revolving credit agreement, to refinance this amount on a long-term basis. The Company maintains substantial bank borrowing facilities to supplement internal cash generation. At June 30, 2001, the Company had $150.0 million of borrowing capacity under its long-term revolving credit agreement of which $65.0 million was borrowed. The Company had $4.0 million in borrowings under uncommitted short-term bank credit lines at June 30, 2001. The interest rate on these borrowings averaged 4.76%. The Company believes its credit facilities coupled with cash generated from operations are adequate to finance its anticipated future requirements. On June 19, 2001, Associated Spring - Asia PTE.LTD a wholly- owned subsidiary of the Company, entered into an agreement with The Development Bank of Singapore Limited, to make available to Associated Spring - Asia PTE. LTD a term loan facility of up to Yen 3.3 billion. The amount was subsequently reduced to Yen 3.0 billion. The Company guarantees amounts due under the agreement. As of June 30, 2001, there were no borrowings under this agreement. 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 and services produced and sold by the Company and the inability to realize projected synergies of acquisitions. -15- Item 3. Quantitative and Qualitative Disclosure About Market Risk At June 30, 2001, 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 $0.8 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, 2000. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit 10.1 Term loan facility agreement between Associated Spring - Asia PTE. LTD and The Development Bank of Singapore Limited, dated June 19, 2001. Exhibit 10.2 Guarantee of term loan facility agreement, between Barnes Group Inc. and The Development Bank of Singapore Limited, dated June 19, 2001. Exhibit 10.3 Currency swap and interest rate hedging master agreement between Associated Spring - Asia PTE. LTD and The Development Bank of Singapore Limited, dated June 19, 2001. Exhibit 10.4 Guarantee of currency swap and interest rate hedging agreement between Barnes Group Inc. and The Development Bank of Singapore Limited, dated June 19, 2001. (b) No reports on Form 8-K were filed during the quarter ended June 30, 2001. -16- 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 August 14, 2001 By /S/ William C. Denninger --------------- ------------------------------------- William C. Denninger Senior Vice President, Finance and Chief Financial Officer (the principal financial officer) Date August 14, 2001 By /s/ Francis C. Boyle, Jr. --------------- ------------------------------------- Francis C. Boyle, Jr. Vice President, Controller (the principal accounting officer) -17-