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, 2002
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 9, 2002 - 18,826,625
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, 2002
DESCRIPTION PAGES
- ----------- -----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income
for the three months and six months
ended June 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets as
of June 30, 2002 and December 31, 2001 4-5
Consolidated Statements of Cash Flows
for the six months ended June 30,
2002 and 2001 6
Notes to Condensed Consolidated Financial
Statements 7-12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-17
ITEM 3. Quantitative and Qualitative Disclosure
About Market Risk 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17-18
Signatures 19
Exhibit Index 19
-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,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- --------- --------
Net sales $209,385 $199,464 $403,621 $398,714
Cost of sales 142,206 133,890 272,504 266,452
Selling and admin-
istrative expenses 53,417 52,134 105,798 105,069
-------- -------- -------- --------
195,623 186,024 378,302 371,521
-------- -------- -------- --------
Operating income 13,762 13,440 25,319 27,193
Other income 774 1,336 1,201 2,741
Interest expense 3,628 4,486 7,018 8,719
Other expenses 74 1,129 211 2,302
-------- -------- -------- --------
Income before income
taxes 10,834 9,161 19,291 18,913
Income taxes 2,167 2,290 3,858 4,728
-------- -------- -------- --------
Net income $ 8,667 $ 6,871 $ 15,433 $ 14,185
======== ======== ======== ========
Per common share:
Net income
Basic $ .46 $ .37 $ .83 $ .76
Diluted .45 .36 .81 .75
Dividends .20 .20 .40 .40
Average common shares
outstanding
Basic 18,751,084 18,508,148 18,624,929 18,564,143
Diluted 19,290,127 18,913,360 19,158,789 18,925,590
See accompanying notes.
-3-
BARNES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS June 30, December 31,
2002 2001
--------- ------------
(Unaudited)
Current assets
Cash and cash equivalents $ 38,025 $ 48,868
Accounts receivable, less allowances
(2002-$3,078; 2001-$3,114) 119,939 94,124
Inventories
Finished goods 56,180 51,840
Work-in-process 17,938 15,506
Raw materials and supplies 14,322 18,375
-------- --------
88,440 85,721
Deferred income taxes and prepaid
expenses 30,822 27,822
-------- --------
Total current assets 277,226 256,535
Deferred income taxes 3,607 5,783
Property, plant and equipment 429,602 406,639
Less accumulated depreciation 264,861 253,696
-------- --------
164,741 152,943
Goodwill 168,969 159,836
Other assets 74,814 61,408
-------- --------
Total assets $689,357 $636,505
======== ========
See accompanying notes.
-4-
BARNES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2002 2001
--------- ------------
(Unaudited)
Current liabilities
Notes payable $ -- $ 5,500
Accounts payable 69,693 71,410
Accrued liabilities 69,495 59,118
Long-term debt - current 8,279 47,576
-------- --------
Total current liabilities 147,467 183,604
Long-term debt 242,011 178,365
Accrued retirement benefits 67,760 63,610
Other liabilities 13,232 12,089
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 54,473 54,874
Treasury stock at cost,
2002-3,203,418 shares
2001-3,576,322 shares (67,835) (76,903)
Retained earnings 251,673 243,369
Accumulated other comprehensive income (19,644) (22,723)
-------- --------
Total stockholders' equity 218,887 198,837
-------- --------
Total liabilities and stockholders'
equity $689,357 $636,505
======== ========
See accompanying notes.
-5-
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
(Dollars in thousands)
(Unaudited)
2002 2001
------- -------
Operating activities:
Net income $15,433 $14,185
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 16,377 19,061
Gain on disposition of property,
plant and equipment (66) (2)
Changes in assets and liabilities:
Accounts receivable (17,294) (9,569)
Inventories 8,083 6,487
Accounts payable (7,632) 7,658
Accrued liabilities 6,259 (9,165)
Deferred income taxes 2,125 4,175
Other (5,377) (6,200)
------- -------
Net cash provided by operating activities 17,908 26,630
Investing activities:
Proceeds from disposition of property, plant
and equipment 469 132
Capital expenditures (7,935) (11,026)
Business acquisitions, net of cash acquired (31,780) (39)
Other (1,720) (2,362)
------- -------
Net cash used by investing activities (40,966) (13,295)
Financing activities:
Net decrease in notes and overdrafts payable (1,658) (2,904)
Proceeds from the issuance of long-term debt 17,678 --
Proceeds from the issuance of common stock 2,903 1,113
Common stock repurchases (96) (4,870)
Dividends paid (7,465) (7,425)
Proceeds from sale of debt swap -- 13,766
------- -------
Net cash provided (used) by financing activities 11,362 (320)
Effect of exchange rate changes on cash flows 853 (1,211)
------- -------
(Decrease) increase in cash and cash equivalents (10,843) 11,804
Cash and cash equivalents at beginning of period 48,868 23,303
------- -------
Cash and cash equivalents at end of period $38,025 $35,107
======= =======
See accompanying notes.
-6-
Notes to Condensed 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, 2001 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, 2001. 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, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
2. Net Income Per Common Share
---------------------------
For the purposes of computing diluted earnings per share, the weighted
average number of shares outstanding was increased by 533,860 and
361,447 for the six month periods ended June 30, 2002 and 2001,
respectively, and 539,043 and 405,212 for the three month periods ended
June 30, 2002 and 2001, respectively, 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
those periods.
3. New Accounting Standards
------------------------
The Company adopted Statement of Financial Accounting Standard (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.
Goodwill and other intangible assets with indefinite lives are no longer
amortized and instead are evaluated at least annually for impairment by
comparing the carrying value to the fair value at the reporting unit
level. Intangible assets with finite lives will be amortized over their
useful lives. SFAS 142 is effective for acquisitions completed after
June 30, 2001 and effective for all other acquisitions on January 1,
2002.
SFAS 142 states that an entity has six months from the date it initially
applies SFAS 142 to complete the transitional goodwill impairment test.
Management has completed the fair value assessment and has determined
that no impairments exist. The Company assesses the carrying value of
goodwill annually. There can be no assurances that an impairment will
not occur in the future.
-7-
Notes to Condensed Consolidated Financial Statements, Continued:
In accordance with SFAS 142, the Company no longer amortizes goodwill.
The following table presents income adjusted to exclude goodwill
amortization expense recognized in the prior period:
(Dollars in thousands, except for per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------ ------ ------- -------
Net income, as reported $8,667 $6,871 $15,433 $14,185
Add back: goodwill amortization,
net of income taxes -- 855 -- 1,696
------ ------ ------- -------
Adjusted net income $8,667 $7,726 $15,433 $15,881
====== ====== ======= =======
Basic earnings per share,
as reported $ .46 $ .37 $ .83 $ .76
Add back: goodwill amortization,
net of income taxes -- .05 -- .10
------ ------ ------- -------
Adjusted basic earnings per share $ .46 $ .42 $ .83 $ .86
====== ====== ======= =======
Diluted earnings per share,
as reported $ .45 $ .36 $ .81 $ .75
Add back: goodwill amortization,
net of income taxes -- .05 -- .09
------ ------ ------- ------
Adjusted diluted earnings
per share $ .45 $ .41 $ .81 $ .84
====== ====== ======= =======
4. Acquisitions
------------
On February 21, 2002, the Company purchased substantially all of the
manufacturing assets of Seeger-Orbis GmbH & Co. OHG of Germany (Seeger-
Orbis) from TransTechnology Corporation. The results of operations of
Seeger-Orbis have been included in the consolidated financial statements
since the purchase date. The acquired business expands both the product
offerings and geographic scope of the Associated Spring segment.
On April 29, 2002, the Company acquired Spectrum Plastics Molding
Resources, Inc. (Spectrum Plastics), a fully integrated, precision
injection molder of plastic products. The results of operations of
Spectrum Plastics have been included in the consolidated financial
statements since the purchase date and are included in the Associated
Spring segment. The acquisition adds a complementary product line that
will expand the current metal product offerings of this segment,
enabling it to become a single-source solution for customers needing
plastic and metal components and
-8-
Notes to Condensed Consolidated Financial Statements, Continued:
assemblies. The acquisition added plastic molding capabilities that will
use metal inserts and continuous stamped lead frame to supply metal-in-
plastic and plastic-on-metal assemblies for the electronics,
telecommunications, medical, and other rapidly growing, technologically
advanced markets.
The aggregate cost of these two acquisitions was approximately $37.3
million. Consideration for the acquisitions included cash of
approximately $31.6 million, of which $2.0 million was deferred,
issuance of 119,048 shares of Barnes Group common stock (at a market
value at the time of the acquisition of approximately $3.0 million), and
the assumption of $2.7 million of capital lease debt. The cost of the
acquisitions may change based on final purchase price adjustments and
finalization of integration plans.
5. Acquired Intangible Assets
--------------------------
Intangible assets consist of registered trademarks purchased in the
acquisition of the nitrogen gas spring business in 1999. These
trademarks are being amortized over their estimated useful lives of 30
years. At June 30, 2002, the gross carrying amount of trademarks was
$4.3 million and accumulated amortization was $0.4 million. Amortization
expense for the six-month period was immaterial. The estimated aggregate
amortization expense is approximately $0.1 million in each of the years
2002 through 2006.
The Company is in the process of obtaining third-party valuations of
certain intangible assets for its acquisitions of Seeger-Orbis and
Spectrum Plastics. The purchase price allocations are expected to be
finalized in the second half of 2002. Any amounts related to the
intangible assets that were acquired with the Seeger-Orbis and Spectrum
Plastics acquisitions are not included in the $4.3 million discussed
above.
6. Goodwill
--------
The following table sets forth the change in the carrying amount of
goodwill for each reportable segment for the period ended June 30, 2002:
(Dollars in thousands)
(Unaudited)
Associated Barnes Barnes Total
Spring Aerospace Distribution BGI
---------- --------- ------------ --------
Balance as of
January 1, 2002 $ 68,505 $ 31,415 $ 59,916 $159,836
Goodwill acquired 9,133 -- -- 9,133
-------- -------- -------- --------
Balance as of
June 30, 2002 $ 77,638 $ 31,415 $ 59,916 $168,969
======== ======== ======== ========
An adjustment of $0.3 million to acquired goodwill relates to the
acquisition of the assets of Forward Industries in November 2001 based
on
-9-
Notes to Condensed Consolidated Financial Statements, Continued:
the determination of the final purchase price and the purchase price
allocation. Goodwill of $8.8 million relates to the April 2002
acquisition of Spectrum Plastics. This amount may be adjusted upon
finalization of the purchase price allocation as discussed in Note 5.
There was no goodwill recognized in connection with the acquisition of
Seeger-Orbis.
7. Debt
----
On June 14, 2002, the Company replaced its revolving credit and term
loan agreement with a new $150.0 million Senior Unsecured Revolving
Credit Agreement due June 14, 2005 with 11 commercial banks. The Company
had $50.0 million borrowed under this agreement at June 30, 2002 at an
interest rate of 3.36%.
A commitment fee is payable quarterly on the unused portion of the
facility. This fee is calculated as a rate per annum on the average
daily-unused commitment during each calendar quarter. The rate will
change based upon the Company's leverage ratio. On June 30, 2002, the
applicable annual rate was 0.375%.
The new revolving credit agreement contains requirements as to the
maintenance of interest coverage and leverage ratios, and minimum levels
of net worth. The agreement also places certain restrictions on
indebtedness, capital expenditures and investments by the Company and
its subsidiaries.
As of June 30, 2002, the Company is required to maintain a ratio of debt
to EBITDA, as defined in the agreement, of not more than 3.5 times. At
December 31, 2002, the ratio is required to be not more that 3.0. The
Company met this requirement as of June 30, 2002 and expects to meet the
new requirement at year-end.
At June 30, 2002, the Company classified as long-term debt $8.5 million
of its uncommitted short-term bank credit lines. 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 assumed $2.7 million of debt related to capital leases with
the acquisition of Spectrum Plastics in April 2002. The weighted average
interest rate on these borrowings at June 30, 2002 was 7.7%. This debt
has an interest rate equalization prepayment penalty.
8. Comprehensive Income
--------------------
Comprehensive income includes all changes in equity during a period
except those resulting from the investment by, and distributions to,
stockholders. For the Company, comprehensive income includes net income,
foreign currency translation adjustments and deferred gains and losses
related to certain derivative instruments.
-10-
Notes to Condensed Consolidated Financial Statements, Continued:
Statement of Comprehensive Income
(Dollars in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
------ ------- ------- -------
Net income $ 8,667 $ 6,871 $15,433 $14,185
Unrealized (losses) gains on hedging
activities, net of income taxes (709) 260 (1,327) 436
Foreign currency
translation adjustments 5,976 (307) 4,406 (806)
------- ------- ------- -------
Comprehensive income $13,934 $ 6,824 $18,512 $13,815
======= ======= ======= =======
9. Information on Business Segments
--------------------------------
The following tables set forth information about the Company's
operations by its three reportable business segments:
(Dollars in thousands)
(Unaudited)
Three months ended Six months ended,
June 30, June 30,
2002 2001 2002 2001
-------- -------- --------- --------
Revenues
Associated Spring $ 88,041 $ 74,759 $163,606 $150,752
Barnes Aerospace 49,387 50,174 96,797 97,064
Barnes Distribution 74,268 77,001 147,133 156,408
Intersegment sales (2,311) (2,470) (3,915) (5,510)
-------- -------- -------- --------
Total revenues $209,385 $199,464 $403,621 $398,714
======== ======== ======== ========
Operating profit
Associated Spring $ 7,845 $ 8,171 $ 14,922 $ 15,339
Barnes Aerospace 2,872 3,939 5,614 7,866
Barnes Distribution 3,511 1,868 5,507 4,819
-------- -------- -------- --------
Total operating profit 14,228 13,978 26,043 28,024
Interest income 129 283 253 443
Interest expense (3,628) (4,486) (7,018) (8,719)
Other income(expense) 105 (614) 13 (835)
-------- -------- -------- --------
Income before income taxes $ 10,834 $ 9,161 $ 19,291 $ 18,913
======== ======== ======== ========
-11-
Notes to Condensed Consolidated Financial Statements, Continued:
10. Contingencies
-------------
Retirement Savings Plan:
The Company continues to guarantee a minimum rate of return on certain
pre-April, 2001, assets of its 401(k) Retirement Savings Plan (the
Plan). This guarantee will become a liability for the Company only if,
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.
The following table provides a number of hypothetical market values of
the Company's stock compared to the estimated guarantee amounts based on
those market values:
(Dollars in thousands, except for per share data)
Stock price Plan
per share Guarantee
----------- ---------
$28.00 $ 40
24.00 50
20.00 400
16.00 3,000
12.00 10,800
At June 30, 2002, the value of the Company's guarantee on these assets
was approximately $0.1 million.
Restrictions on Stock Consideration for Spectrum Plastics:
The sole shareholder of Spectrum Plastics received 119,048 shares of the
Company's common stock as partial consideration for Spectrum Plastics.
For the one year period following the required holding period under the
Federal securities laws, the sole shareholder has agreed not to sell the
Company shares received in the acquisition at a price below $25.20 per
share without the consent of the Company. In the event the seller sells
any of the shares during that period with the consent of the Company or
during the one month following that period, the Company guarantees the
value at $25.20 per share.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. The
most significant areas involving management judgments and estimates are
described below. Actual results could differ from such estimates.
-12-
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued:
Business Acquisitions:
Assets and liabilities acquired in business combinations are recorded at their
estimated fair values at the acquisition date. At June 2002, the Company has
$169.0 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 the Standard. Management completed this
assessment during the second quarter of 2002 based on the best information
available as of the date of the assessment, which incorporated management
assumptions about expected future cash flows. Future cash flows can be
affected by changes in the global economy, industries and markets in which the
Company sells products and the execution of management's plans, particularly
to integrate acquired companies. There can be no assurance that future events
will not result in impairments of goodwill or other assets.
Income Taxes:
At June 30, 2002, the Company has recognized $20.8 million of deferred tax
assets, net of valuation reserves. The realization of a portion of these
benefits is dependent on future income. Management believes that sufficient
income will be earned in the future to realize deferred income tax assets, net
of valuation allowances recorded. For those jurisdictions where the expiration
date of tax carry-forwards or the projected operating results indicate that
realization is not likely, a valuation allowance is provided.
The recognized net deferred tax asset is based on the Company's estimates of
future taxable income and its tax planning strategies. The realization of
these deferred tax assets can be impacted by changes to tax codes, statutory
tax rates and future taxable income levels.
Results of Operations
---------------------
Net sales for the second quarter 2002 were a record $209.4 million, up 5.0%
from $199.5 million last year. Sales growth in the second quarter was
primarily due to the Company's recent acquisitions, which contributed $12.0
million to Associated Spring's segment sales. This was partially offset by a
decline in the electronics and telecommunications-related sales at Associated
Spring and the impact on Barnes Distribution of adverse market conditions in
the manufacturing and heavy industrial sectors. The Company's first half sales
were $403.6 million, up 1.2% from $398.7 million in 2001.
Second quarter operating income was $13.8 million compared to $13.4 million in
the corresponding 2001 period. These results largely reflect higher operating
profit at Barnes Distribution driven by improved gross profit margin and lower
warehouse and administrative expenses. Lower sales and earnings in the Barnes
Aerospace segment and the dilutive impact of the Associated Spring
acquisitions partially offset these positive results. The acquisition dilution
is directly related to the impact of a purchase accounting adjustment of $0.8
million for the increase in fair value of acquired inventory. This adjustment
will not significantly impact subsequent periods. The 2002 year-to-date
operating income was $25.3 million compared to $27.2 million in 2001.
-13-
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued:
Operating income margin for the second quarter was 6.6% compared to 6.7% a
year ago. Gross margin declined slightly to 32.1% from 32.9% a year ago. This
reflects the improvements realized at Barnes Distribution, offset by lower
margins on sales by the acquisitions. As expected, the sales of the acquired
inventories reflected higher costs of sales as noted above. Selling and
administrative expenses, as a percentage of sales, improved to 25.5% from
26.1% compared to a year ago. This was primarily due to improvements at Barnes
Distribution.
Segment Review - Sales and Operating Profit
-------------------------------------------
Associated Spring sales for the 2002 second quarter and first half were $88.0
million and $163.6 million, up 17.8% and 8.5% from a year ago. Strong sales of
nitrogen gas springs and products for the global transportation market, as
well as $12.0 million of incremental sales from recent acquisitions, favorably
impacted sales growth in the most recent period. The second quarter and first
half operating profit for the segment decreased to $7.8 million and $14.9
million, a 4.0% and 2.7% decrease from the comparable 2001 periods. The
historical business produced slight gains in both sales and profits. The
overall decrease in operating profits includes the additional $0.8 million
cost of sales expense related to the acquired inventory as noted above.
Barnes Aerospace second quarter and year-to-date 2002 segment sales were $49.4
million and $96.8 million, down slightly from the comparable 2001 periods. The
second quarter and first half operating profit for the segment decreased to
$2.9 million and $5.6 million, reflecting higher engineering costs associated
with productivity, processing and quality improvements as well as severance
expense. Management has reduced the workforce since the beginning of the year
to position the business for the current aircraft production forecast. Orders
were $45.0 million for the quarter and order backlog was $150.0 million, down
about 6% from $159 million at December 31, 2001.
Barnes Distribution second quarter and year-to-date 2002 segment sales were
$74.3 million and $147.1 million, decreases of 3.5% and 5.9% from the
comparable 2001 periods. The sales decline reflects the continued weak
economic conditions in the North American and European industrial markets.
Despite the sales decline, the operating profit improved significantly in the
second quarter and first half to $3.5 million and $5.5 million. This
improvement was a result of warehouse consolidation, and reduced selling and
administrative expenses, as well as improved gross margin levels related to
substantial purchasing savings and selective pricing actions.
Other Income/Expense
--------------------
Significantly lower other income for the first half of 2002 compared to 2001
resulted from foreign exchange transaction gains of $0.2 million compared to
gains of $1.4 million a year ago. These transaction gains related primarily to
exposures on U.S dollar-denominated financial instruments at the Company's
international locations. The lower gains in 2002 reflect a weakening in the
U.S. dollar. As a result, in accordance with a corporate policy that
addresses
-14-
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued:
acceptable levels of foreign currency exposures, the Company has increased its
hedging activities using forward currency contracts in an effort to reduce the
volatility of changes in foreign exchange rates on the income statement.
Lower interest expense in 2002 was a result of lower interest rates driven in
large part by the fixed-to-variable interest rate swap agreement.
Other expenses declined because of the absence of $2.1 million in goodwill
amortization, due to an accounting change. Please refer to Note 3, "New
Accounting Standards" for further explanation.
Income Taxes
------------
The Company's effective tax rate for first half of 2002 was 20.0% compared to
25.0% in 2001. The lower rate in 2002 is due to a higher percentage of foreign
income in jurisdictions with tax rates lower than the U.S. effective tax rate.
Net Income and Net Income Per Share
-----------------------------------
Consolidated net income for the second quarter of 2002 and 2001 was $8.7
million and $6.9 million, respectively. Basic and diluted earnings per share
for the second quarter of 2002 were $.46 and $.45, respectively, compared to
basic and diluted earnings per share of $.37 and $.36, respectively, for the
second quarter of 2001.
Consolidated net income for the first half of 2002 and 2001 was $15.4 million
and $14.2 million. Basic and diluted earnings per share for the first six
months of 2002 were $.83 and $.81, compared to 2001's basic and diluted
earnings per share of $.76 and $.75, respectively.
Financial Condition
-------------------
Cash Flows
----------
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 anticipates operating activities in 2002,
combined with aggressive asset management, will provide sufficient cash to
take advantage of opportunities for organic business expansion and to meet the
Company's current financial commitments.
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.
Net cash provided by operating activities in the first half of 2002 was $17.9
million, down from the $26.6 million provided in the first six months of 2001.
In the first half of 2002 operating cash flow was negatively impacted
primarily by a higher use of working capital compared to the same 2001 period.
-15-
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued:
The increase in accounts receivable reflects the increase in business activity
during the second quarter of 2002. Accounts payable decreased in part due to
reduced inventory purchases. The reduction in depreciation and amortization
expense was due to the absence of $2.1 million of goodwill amortization in
2002, as previously discussed. In addition, depreciation declined $1.0 million
due to lower capital spending over the past three years and the retirement of
older assets.
Net cash used by investing activities in the first six months of 2002 was
$41.0 million compared with $13.3 million in 2001. The significant increase in
this year's investing activities was due to the acquisitions of Seeger-Orbis
and Spectrum Plastics. The acquisitions were funded in large part from cash
held by the Company outside the United States. Due to the economic
environment, capital spending was kept below the 2001 level.
Net cash provided by financing activities was $11.4 million in the first six
months of 2002, compared to $0.3 million used in the comparable period of
2001. In 2002, cash flow provided by operating activities, combined with the
proceeds from additional borrowings under the revolving credit agreement and
short-term credit lines, were used to fund the acquisitions and capital
expenditures, and to pay dividends. In 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 capital expenditures, pay dividends,
repurchase the Company's stock and reduce debt.
Liquidity and Capital Resources
-------------------------------
The Company maintains substantial bank borrowing facilities to supplement
internal cash generation. At June 30, 2002, the Company had $150.0 million of
borrowing capacity under a new three-year revolving credit agreement of which
$50.0 million was borrowed at an interest rate of 3.36%. The Company also has
available approximately $15.0 million in uncommitted short-term bank credit
lines of which $8.5 million was in use at June 30, 2002. The interest rate on
this borrowing was 2.75%.
The Company assumed $2.7 million of debt related to capital leases with the
acquisition of Spectrum Plastics in April 2002. The weighted average interest
rate on this borrowing at June 30, 2002 was 7.7%. This debt has an interest
rate equalization prepayment penalty.
The Company believes its credit facilities coupled with cash generated from
operations are adequate to finance its anticipated future requirements.
Future Accounting Changes
-------------------------
During the second quarter of 2002, the Financial Accounting Standards Board
issued two new Statements of Financial Accounting Standards (SFAS). The first,
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, amendment of
FASB Statement No. 13, and Technical Corrections," eliminates an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback
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Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued:
transactions. This statement is effective immediately. The second, SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," is
effective for exit or disposal activities that are initiated after December
31, 2002. Management believes that the adoption of these standards will not
have a material impact on the Company's financial position, results of
operations or cash flows.
Forward-Looking Statements
--------------------------
This quarterly 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. These risks and uncertainties include, but are not
limited to, 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 ability to develop new and enhanced products to
meet customers' needs on time; the Company's ability to finance growth plans,
share repurchases and general operating activities; the Company's ability to
achieve earnings forecasts; changes in economic and political conditions
worldwide and in the locations where the Company does business; interest and
foreign exchange rate fluctuations; and changes in laws and regulations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
At June 30, 2002, 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 $1.3 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, 2001.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On April 29, 2002, the Company issued 119,048 shares of its common stock
valued at approximately $3,000,000 to the sole stockholder of Spectrum
Plastics in accordance with Regulation D Rule 506 under the Securities Act of
1933, in partial consideration for the Company's acquisition of Spectrum
Plastics.
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
(a) The Annual Meeting of the Company's stockholders was held on April 10,
2002. Proxies for the meeting were solicited pursuant to Regulation 14 A.
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PART II. OTHER INFORMATION, CONTINUED:
(c) (1) The following directors were elected:
Votes in Vote For Terms
Director Favor Withheld Expiring
-------- ---------- -------- --------
William S. Bristow, Jr. 14,869,154 805,733 2005
Edmund M. Carpenter 14,858,829 816,058 2005
G. Jackson Ratcliffe, Jr. 14,848,398 826,489 2005
Donald W. Griffin 14,860,780 814,107 2003
(2) The stockholders approved the Barnes Group Inc. Employee Stock And
Ownership Program, as amended effective February 1, 2002. The proposal was
adopted as 9,961,948 shares voted for, 3,831,402 shares voted against, 272,650
shares abstained and 1,608,887 shares were unvoted.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 10.1 $150,000,000 Senior Unsecured Revolving Credit
Agreement dated as of June 14, 2002 among the Company
and several commercial banks.
Exhibit 10.2 The Company's Key Executive Stock Plan effective
December 8, 1998.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2002.
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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 13, 2002 By /S/ William C. Denninger
--------------- -------------------------------------
William C. Denninger
Senior Vice President, Finance
and Chief Financial Officer
(the principal financial officer)
Date August 13, 2002 By /s/ Francis C. Boyle, Jr.
--------------- -------------------------------------
Francis C. Boyle, Jr.
Vice President, Controller
(the principal accounting officer)
EXHIBIT INDEX
BARNES GROUP INC.
Quarterly Report on Form 10-Q
For Quarter ended June 30, 2002
--------------------------------
Exhibit No. Description Reference
---------- ----------- ---------
10.1 $150,000,000 Senior Unsecured Filed with this report.
Revolving Credit Agreement dated
as of June 14, 2002 among the Company
and several commercial banks.
10.2 The Company's Key Executive Stock Plan Incorporated by
effective December 8, 1998. reference To Exhibit
4.4 to the Company's
Form S-8 filed on
March 27, 2001.
99.1 Certification Pursuant to 18 U.S.C. Filed with this report.
Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification Pursuant to 18 U.S.C. Filed with this report.
Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
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