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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, 2003
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 8, 2003 22,531,360
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the exchange Act). Yes X No
--- ---
-1-
BARNES GROUP INC.
FORM 10-Q INDEX
For the Quarterly period ended June 30, 2003
DESCRIPTION PAGES
- ----------- -----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income
for the three months and six months ended
June 30, 2003 and 2002 3
Consolidated Balance Sheets as
of June 30, 2003 and December 31, 2002 4-5
Consolidated Statements of Cash Flows
for the six months ended June 30,
2003 and 2002 6-7
Notes to Consolidated Financial
Statements 8-17
Report of Independent Accountants 18
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19-25
ITEM 3. Quantitative and Qualitative Disclosure
About Market Risk 26
ITEM 4. Controls and Procedures 26
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of
Security Holders 26
ITEM 5 Other Information 26-27
ITEM 6. Exhibits and Reports on Form 8-K 27-28
Signatures 29
Exhibit Index 30
-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,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $229,587 $209,385 $448,321 $403,621
Cost of sales 146,312 142,206 288,542 272,504
Selling and admin-
istrative expenses 67,290 53,417 130,584 105,798
-------- -------- -------- --------
213,602 195,623 419,126 378,302
-------- -------- -------- --------
Operating income 15,985 13,762 29,195 25,319
Other income 1,067 774 1,680 1,201
Interest expense 4,135 3,628 8,245 7,018
Other expenses 699 74 977 211
-------- -------- -------- --------
Income before income
taxes 12,218 10,834 21,653 19,291
Income taxes 2,471 2,167 4,547 3,858
-------- -------- -------- --------
Net income $ 9,747 $ 8,667 $ 17,106 $ 15,433
======== ======== ======== ========
Per common share:
Net income
Basic $ .46 $ .46 $ .84 $ .83
Diluted .46 .45 .83 .81
Dividends .20 .20 .40 .40
Average common shares
outstanding
Basic 20,989,236 18,751,084 20,264,504 18,624,929
Diluted 21,410,402 19,290,127 20,656,383 19,158,789
See accompanying notes.
-3-
BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS June 30, December 31,
2003 2002
--------- ------------
Current assets
Cash and cash equivalents $ 51,071 $ 28,355
Accounts receivable, less allowances
(2003-$3,734; 2002-$2,891) 128,569 97,533
Inventories
Finished goods 73,041 58,244
Work-in-process 19,570 16,993
Raw materials and supplies 11,796 13,572
-------- --------
104,407 88,809
Deferred income taxes 17,834 16,024
Prepaid expenses 9,876 7,916
-------- --------
Total current assets 311,757 238,637
Deferred income taxes 20,014 22,610
Property, plant and equipment 443,479 429,312
Less accumulated depreciation 286,902 269,872
-------- --------
156,577 159,440
Goodwill 222,795 164,594
Other assets 84,836 67,249
-------- --------
Total assets $795,979 $652,530
======== ========
See accompanying notes.
-4-
BARNES GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2003 2002
--------- ------------
Current liabilities
Accounts payable $ 72,921 $ 63,389
Accrued liabilities 75,069 61,853
Long-term debt - current 6,762 6,837
-------- --------
Total current liabilities 154,752 132,079
Long-term debt 245,513 214,125
Accrued retirement benefits 89,677 87,162
Other liabilities 10,933 10,944
Contingencies (Note 11)
Stockholders' equity
Common stock-par value $0.01 per share
Authorized: 60,000,000 shares
Issued 2003: 24,419,694 shares
Issued 2002: 22,037,769 shares 244 220
Additional paid-in capital 97,095 53,511
Treasury stock at cost,
2003-1,877,447 shares
2002-3,081,718 shares (38,254) (61,847)
Retained earnings 263,487 255,147
Accumulated other non-owner changes
to equity (27,468) (38,811)
-------- --------
Total stockholders' equity 295,104 208,220
-------- --------
Total liabilities and stockholders'
equity $795,979 $652,530
======== ========
See accompanying notes.
-5-
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
(Dollars in thousands)
(Unaudited)
2003 2002
------- -------
Operating activities:
Net income $17,106 $15,433
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 17,217 16,377
Gain on disposition of property,
plant and equipment (198) (66)
Changes in assets and liabilities:
Accounts receivable (14,152) (17,294)
Inventories 1,309 8,083
Prepaid expenses (942) (1,355)
Accounts payable 521 (7,632)
Accrued liabilities (1,376) 6,259
Deferred income taxes 1,164 2,125
Long-term pension asset (2,446) (3,806)
Other 1,076 (216)
------- -------
Net cash provided by operating activities 19,279 17,908
Investing activities:
Proceeds from disposition of property, plant
and equipment 776 469
Capital expenditures (7,980) (8,477)
Business acquisitions, net of cash acquired (61,404) (31,780)
Other (515) (438)
------- -------
Net cash used by investing activities (69,123) (40,226)
Financing activities:
Net increase (decrease) in notes payable 771 (1,658)
Payments on long-term debt (44,553) --
Proceeds from long-term debt 76,500 17,678
Proceeds from the issuance of common stock 46,565 2,903
Common stock repurchases (154) (96)
Dividends paid (8,482) (7,465)
Other (1,917) (740)
------- -------
Net cash provided by financing activities 68,730 10,622
Effect of exchange rate changes on cash flows 3,830 853
------- -------
Increase (decrease) in cash and cash equivalents 22,716 (10,843)
Cash and cash equivalents at beginning of period 28,355 48,868
------- -------
Cash and cash equivalents at end of period $51,071 $38,025
======= =======
See accompanying notes.
-6-
BARNES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
(Dollars in thousands)
(Unaudited)
Supplemental Disclosure of Cash Flow Information:
Non-cash financing and investing activities include the 2003 issuance of $18.5
million of treasury stock in connection with the Kar acquisition, and in 2002,
the issuance of $3.0 million of treasury stock and the recognition of a $2.0
million obligation in connection with the Spectrum acquisition.
See accompanying notes.
-7-
Notes to Consolidated Financial Statements (Unaudited):
1. Summary of Significant Accounting Policies
------------------------------------------
The accompanying unaudited 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 consolidated financial statements do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. The balance sheet as of
December 31, 2002 has been derived from the Company's 2002 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, 2002. 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, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003. Certain reclassifications have been made to
prior year amounts to conform to the current year presentation.
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation under the
recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
-8-
(Dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $9,747 $8,667 $17,106 $15,433
Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects 419 463 891 763
Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (1,137) (1,564) (2,812) (2,833)
------ ------ ------ -------
Pro forma net income $9,029 $7,566 $15,185 $13,363
====== ====== ======= =======
Earnings per share:
Basic - as reported $ .46 $ .46 $ .84 $ .83
Basic - pro forma .43 .40 .75 .72
Diluted - as reported .46 .45 .83 .81
Diluted - pro forma .42 .39 .73 .70
The fair value of each stock option grant on the date of grant has been
estimated using the Black-Scholes option-pricing model. Weighted average
assumptions used for the 2003 grants were as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate 1.58% 3.31% 2.19% 4.09%
Expected life (years) 2.5 2.0 3.5 4.5
Expected volatility 30% 35% 34% 35%
Expected dividend yield 3.83% 3.51% 3.58% 3.51%
The weighted average grant date fair values of options granted were $3.42
and $4.42 for the three months ended June 30, 2003 and 2002, respectively,
and $3.99 and $5.80 for the six months ended June 30, 2003 and 2002,
respectively.
-9-
2. Net Income Per Common Share
---------------------------
For the purpose of computing diluted earnings per share, the weighted
average number of shares outstanding was increased by 421,166 and
539,043 for the three-month periods ended June 30, 2003 and 2002,
respectively, and 391,879 and 533,860 for the six-month periods ended
June 30, 2003 and 2002, respectively, for the potential dilutive effects
of stock-based incentive plans. As of June 30, 2003 there were 4,024,565
options for shares of common stock outstanding of which 2,225,332 were
considered dilutive. There were no adjustments to net income for the
purposes of computing income available to common stockholders for those
periods.
3. Acquisitions
------------
On February 6, 2003, the Company acquired Kar Products, LLC and certain
assets of a related company, A.& H. Bolt & Nut Company Ltd., (Kar) which
is a leading full-service distributor of maintenance, repair and
operating (MRO) supplies to industrial, construction, transportation and
other markets. The acquisition expands both the geographic scope and
product line reach of the Barnes Distribution segment. Kar has a
diversified customer base that operates in all 50 states of the U.S.,
Puerto Rico, and Canada, further enhancing Barnes Distribution's
leadership position within the MRO market and international presence.
The results of operations of Kar have been included in the consolidated
financial statements since the purchase date. The purchase price of
$78.5 million, excluding transaction costs, was financed through a
combination of $4.0 million cash, $56.0 million of debt and $18.5
million (923,506 shares based upon an average market value proceeding
the acquisition date) of Barnes Group common stock. In July 2003, the
purchase price of Kar was reduced by $2.4 million, the result of final
closing balance sheet adjustments. The purchase price adjustment was
comprised of reimbursement to the Company of $0.4 million cash and $2.0
million (100,000 shares) of Barnes Group common stock. This purchase
price adjustment will be recorded in the third quarter, 2003
consolidated balance sheet as a reduction in the amount of goodwill
attributed to the acquisition.
-10-
The Company is in the process of obtaining third-party valuations of certain
assets acquired with Kar. Thus, the allocation of the purchase price is subject
to refinement. Any amounts attributable to such assets are expected to be
finalized during 2003. The aggregate purchase price, prior to the purchase
price adjustment of $2.4 million and including transaction costs of $1.4
million, was $79.9 million. The following table summarizes the estimate of fair
values of the assets acquired and liabilities assumed at the date of
acquisition (in thousands):
Current assets $ 28,393
Property, plant, and equipment 3,195
Other assets 12,495
Goodwill 58,123
--------
Total assets acquired 102,206
--------
Current liabilities (19,286)
Other liabilities (3,021)
--------
Total liabilities assumed (22,307)
--------
Net assets acquired $ 79,899
========
The following table reflects the pro forma operating results of the
Company for the three months and six months ended June 30, 2002, which
give effect to the acquisition of Kar as if it had occurred on January
1, 2002. The pro forma results are based on assumptions that the Company
believes are reasonable under the circumstances. The pro forma results
are not necessarily indicative of the operating results that would have
occurred if the acquisition had been effective January 1, 2002, nor are
they intended to be indicative of results that may occur in the future.
The pro forma information does not include the effect of synergies and
cost reduction initiatives related to the acquisition. The underlying
pro forma information includes the historical financial results of the
Company and Kar adjusted for the amortization expense associated with
the assets acquired, the Company's financing arrangements and certain
purchase accounting adjustments. Proforma results have not been
presented for 2003, because the results would not be significantly
different than historical results.
-11-
(Dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2002
---- ----
Net sales $240,618 $466,377
Income before income taxes 12,266 22,264
Net income 9,527 17,217
Per common share:
Basic $ .48 $ .88
Diluted .47 .86
4. Goodwill and Other Intangible assets
------------------------------------
Goodwill:
The following table sets forth the change in the carrying amount of
goodwill for each reportable segment for the six-month period ended June
30, 2003:
(Dollars in thousands)
Associated Barnes Barnes Total
Spring Aerospace Distribution BGI
---------- --------- ------------ --------
January 1, 2003 $ 76,377 $ 30,900 $ 57,317 $164,594
Goodwill acquired 78 -- 58,123 58,201
-------- -------- -------- -------
June 30, 2003 $ 76,455 $ 30,900 $115,440 $222,795
======== ======== ======== ========
Goodwill acquired of $58.1 million relates to the acquisition of Kar in
February 2003. The Company is in the process of obtaining third-party
valuations of certain intangible assets acquired with Kar. The purchase
price allocation is expected to be finalized during 2003.
Acquired Intangible Assets:
Intangible assets, other than goodwill, consist of patents and
registered trademarks and customer lists/relationships. These assets are
being amortized over their estimated useful lives ranging up to 30
years. In connection with the acquisition of Kar, the Company recorded
intangible assets primarily related to customer lists/relationships in
2003 of $12.3 million which is being amortized over their estimated
useful lives and will result in approximately $1.2 million of
amortization expense in 2003. The Company is in the process of obtaining
third-party valuations of these and other intangibles and thus the
amount is subject to refinement.
-12-
5. Business Reorganization Accruals
--------------------------------
In connection with the acquisition of the assets of Curtis Industries,
Inc. in May 2000, the Company recorded certain integration costs. The
Company recorded total costs of $6.4 million related primarily to lease
consolidation costs, facility closure costs and reductions in personnel.
As of June 30, 2003, an accrual of approximately $1.3 million remained,
related to future lease payments.
During the fourth quarter of 2001, the Company recorded pretax charges
of $4.8 million, primarily for Associated Spring, related to actions
aimed at reducing the Company's infrastructure including the closure of
an Associated Spring plant in Texas. As of June 30, 2003, the remaining
balance of $0.3 million related to post-closure holding costs for the
Texas plant, which is now closed and being held for sale.
In connection with the Kar acquisition in February 2003, the Company has
recorded certain integration costs. The integration plan includes
combining the headquarters functions and consolidating warehousing and
distribution networks. As a result, the Company recorded total costs of
$5.5 million that related primarily to lease consolidation costs,
facility closure costs and reductions primarily in administrative and
warehouse personnel. During the second quarter, $1.2 million of the
accrual was utilized primarily for lease and employee severance
payments. As of June 30, 2003, the remaining balance of $4.3 million
related primarily to future lease and employee severance payments. The
costs associated with the acquired business are reflected as assumed
liabilities in the allocation of the purchase price to net assets
acquired. The Company anticipates recording additional integration costs
in 2003 when additional distribution consolidation plans are finalized
in late 2003.
6. Debt
----
In February 2003, the Company borrowed $56.0 million under its revolving
credit facility in connection with financing the acquisition of Kar. The
June 30, 2003 weighted-average interest rate on these borrowings was
3.21%. Also, in conjunction with the acquisition, the Company amended
its revolving credit agreement, pursuant to which the maximum ratio of
Total Debt to EBITDA, as defined in the revolving credit agreement, was
increased to 3.25 times for the first three quarters of 2003 and will
decline to 3.00 times at December 31, 2003. The actual ratio at June 30,
2003 was 2.63.
At June 30, 2003, the Company classified $5.5 million of borrowings
under lines of credit due within one year as long-term debt. The Company
has both the intent and ability, through its revolving credit facility,
to refinance this amount on a long-term basis.
The Company's debt agreements contain financial covenants that require
the maintenance of interest coverage and leverage ratios, and minimum
levels
-13-
of net worth. The agreements also place certain restrictions on
indebtedness, capital expenditures and investments by the Company and
its subsidiaries. Such covenants and restrictions determine the amount
of borrowings, dividends or treasury stock purchases the Company can
make under such agreements.
Under the most restrictive borrowing capacity covenant in any agreement,
$59.1 million of additional capacity was available at June 30, 2003.
Under the most restrictive net worth covenant in any agreement, $84.8
million was available at June 30, 2003 for payment of dividends or to
fund acquisitions of shares of the Company's common stock.
7. Common Stock Issuance
---------------------
On May 21, 2003, the Company issued 2,381,925 primary shares of its
common stock as a result of a public offering at $19.00 per share. Net
proceeds to Barnes Group of approximately $42.3 million were used to pay
down a portion of the indebtedness incurred in connection with the Kar
acquisition. The offering also included 823,506 secondary shares sold by
an existing shareholder, GC-Sun Holdings II, L.P. Barnes Group did not
receive any of the proceeds from the sale of the shares owned by GC-Sun
Holdings.
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,
and other non-owner changes to equity, which are comprised of foreign
currency translation adjustments and deferred gains and losses related
to certain derivative instruments.
Statement of Comprehensive Income
(Dollars in thousands)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 9,747 $ 8,667 $17,106 $15,433
Unrealized losses on hedging
activities, net of income taxes (179) (709) (350) (1,327)
Foreign currency
translation adjustments 7,426 5,976 11,693 4,406
------- ------- ------- -------
Comprehensive income $16,994 $13,934 $28,449 $18,512
======= ======= ======= =======
-14-
9. Income Taxes
------------
A reconciliation of the U.S. federal statutory income tax rate to the
consolidated effective income tax rate follows:
Six months ended Twelve months ended
June 30, December 31,
2003 2002
---------------- -------------------
U.S. federal statutory
income tax rate 35.0% 35.0%
State taxes (net of federal benefit) 0.4 0.9
Foreign losses without tax benefit 1.6 3.6
Tax on foreign operations (11.9) (16.0)
NASCO equity income (1.0) (0.4)
Export sales benefit (1.0) (1.3)
ESOP dividend (2.3) (5.8)
Other 0.2 2.0
---- ----
Consolidated effective income tax rate 21.0% 18.0%
==== ====
10. Information on Business Segments
--------------------------------
The following tables set forth information about the Company's
operations by its three reportable business segments:
(Dollars in thousands)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Sales
Associated Spring $ 86,563 $ 88,041 $171,628 $163,606
Barnes Aerospace 40,616 49,387 82,945 96,797
Barnes Distribution 104,654 74,268 198,501 147,133
Intersegment sales (2,246) (2,311) (4,753) (3,915)
-------- -------- -------- --------
Total sales $229,587 $209,385 $448,321 $403,621
======== ======== ======== ========
Operating profit
Associated Spring $ 9,142 $ 7,745 $ 16,766 $ 14,778
Barnes Aerospace 2,627 3,007 5,333 5,887
Barnes Distribution 4,921 3,476 8,118 5,378
-------- -------- -------- --------
Total operating profit 16,690 14,228 30,217 26,043
Interest income 362 129 657 253
Interest expense (4,135) (3,628) (8,245) (7,018)
Other income (expense) (699) 105 (976) 13
-------- -------- -------- --------
Income before income taxes $ 12,218 $ 10,834 $ 21,653 $ 19,291
======== ======== ======== ========
-15-
The Kar acquisition added approximately $102.2 million of assets to the
Barnes Distribution segment assets.
11. Contingencies
-------------
Retirement Savings Plan:
The Company guarantees 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 if, and to the extent
that, the value of the related Company stock does not cover the
guaranteed asset value when an employee who had invested in the Barnes
Group stock investment election or vested in the Company match, which is
paid in Barnes Group stock, 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
----------- ---------
$25.00 $ 34
20.00 400
15.00 4,400
10.00 13,400
5.00 22,600
0.00 32,900
The closing price of the Company's stock on June 30, 2003 was $21.76,
resulting in an estimated guarantee on Plan assets of $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 in
April 2002. For the one-year period following the required holding
period under the Federal securities laws, which holding period ended
April 29, 2003, the sole shareholder 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 he sells any of the
shares during this period with the consent of the Company or during the
one month following this period, the Company is obligated to pay to him
an amount equal to the difference between $25.20 per share and the
lesser price at which he sells such shares.
Product Warranties:
The Company provides product warranties in connection with the sale of
products. Known product warranty liabilities were not significant as of
June 30, 2003.
-16-
------------------------
With respect to the unaudited consolidated financial information of
Barnes Group Inc. for the three-month and six-month periods ended June
30, 2003 and 2002, PricewaterhouseCoopers LLP reported that they have
applied limited procedures in accordance with professional standards for
a review of such information. However, their separate report dated July
16, 2003 appearing herein, states that they did not audit and they do
not express an opinion on that unaudited consolidated financial
information. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the
review procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities Act of 1933
(the Act) for their report on the unaudited consolidated financial
information because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers
LLP within the meaning of Sections 7 and 11 of the Act.
-17-
Report of Independent Accountants
To the Board of Directors and Stockholders of
Barnes Group Inc.:
We have reviewed the accompanying consolidated balance sheet of Barnes
Group Inc. and its subsidiaries as of June 30, 2003, and the related
consolidated statement of income for each of the three-month and six-
month periods ended June 30, 2003 and 2002 and the consolidated
statement of cash flows for the six-month periods ended June 30, 2003
and 2002. This interim financial information is the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in
the United States of America, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial
information for it to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet
as of December 31, 2002, and the related consolidated statements of
income, of stockholders' equity and of cash flows for the year then
ended (not presented herein), and in our report dated January 31, 2003
(except for Note 3, which is as of February 6, 2003) we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2002, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has
been derived.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, CT
July 16, 2003
-18-
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, 2002. The
most significant areas involving management judgments and estimates are
described in Management's Discussion and Analysis in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, to which there have
been no material changes. Actual results could differ from those estimates.
Acquisitions
------------
On February 6, 2003, the Company acquired Kar Products, LLC and certain assets
of a related company, A.& H. Bolt & Nut Company Ltd., (Kar) a leading full-
service distributor of maintenance repair and operating (MRO) supplies to
industrial, construction, transportation and other markets. The acquisition
expands both the geographic scope and product line of the Barnes Distribution
segment. Kar has a diversified customer base that operates in all 50 states of
the U.S., Puerto Rico, and Canada, further enhancing Barnes Distribution's
leadership position within the MRO market and international presence. The
results of operations of Kar have been included in the consolidated financial
statements since the purchase date. The consideration for the acquisition of
$78.5 million was financed through a combination of $4.0 million cash, $56.0
million of debt and $18.5 million (923,506 shares) of Barnes Group common
stock. In July 2003, the purchase price of Kar was reduced by $2.4 million,
the result of final closing balance sheet adjustments. The purchase price
adjustment included reimbursement to the Company of $0.4 million cash and $2.0
million (100,000 shares) of Barnes Group common stock. The purchase price
adjustment will be recorded in the third quarter consolidated balance sheet as
a reduction in the amount of goodwill attributed to the acquisition.
Management has approved and committed to certain integration activities aimed
at achieving a number of post-acquisition cost savings and other synergies
through headquarters and infrastructure consolidation. This integration plan
includes combining the headquarters functions and consolidating warehousing
and distribution networks. As a result, the Company recorded total costs of
$5.5 million related primarily to lease consolidation costs, facility closure
costs and reductions in personnel. These costs associated with the acquired
business are reflected as assumed liabilities in the allocation of the
purchase price to net assets acquired.
-19-
Results of Operations
---------------------
The following table sets forth, as a percentage of sales, the Company's
consolidated statement of income data for the three months and six months
ended June 30, 2003 and 2002:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.7 67.9 64.4 67.5
----- ----- ----- -----
Gross profit 36.3 32.1 35.6 32.5
Selling and
administrative expenses 29.3 25.5 29.1 26.2
----- ----- ----- -----
Operating income 7.0 6.6 6.5 6.3
Other income 0.4 0.3 0.3 0.3
Interest expense 1.8 1.7 1.8 1.7
Other expense 0.3 0.1 0.2 0.1
Income taxes 1.1 1.0 1.0 1.0
----- ----- ----- -----
Net income 4.2% 4.1% 3.8% 3.8%
===== ===== ===== =====
Net sales for the second quarter 2003 were a record $229.6 million, up 9.6%
from $209.4 million in the second quarter last year. The sales increase
reflected the Company's acquisition of Kar, which contributed $31.0 million to
Barnes Distribution. This growth was partially offset by a 17.8% decline in
sales at Barnes Aerospace. The Company's first half sales were $448.3 million,
up 11.1% from $403.6 million in 2002. This sales increase included $50.2
million in sales from the Kar acquisition.
Second quarter 2003 operating income was $16.0 million compared to $13.8
million in the second quarter of 2002. These results reflect higher profit at
Associated Spring and Barnes Distribution and lower profit in the Barnes
Aerospace segment. The Company-wide operating income margin was 7.0% compared
with 6.6% a year ago. This increase was driven, for the most part, by a higher
gross profit margin, which improved 4.2 percentage points. This increase in
gross profit margin reflects higher gross profit margins at all three
businesses, combined with a shift in the overall sales mix to the higher
margin distribution business. This shift was caused primarily by the
additional sales contributed by Kar. Selling and administrative expenses
increased as a percentage of sales compared to last year's second quarter.
This was also driven by the higher proportion of sales in the distribution
business, which has a higher selling expense component. Also impacting
operating expenses were higher personnel costs, including pension and other
postretirement benefit costs. These increases were offset by lower incentive
compensation expense. The 2003 year-to-date operating income was $29.2 million
compared to $25.3 million in 2002.
-20-
Segment Review - Sales and Operating Profit
-------------------------------------------
Associated Spring's sales for the 2003 second quarter and first half were
$86.6 million and $171.6 million, respectively, compared to $88.0 million and
$163.6 million a year ago. Sales during the quarter reflected a drop in sales
related to a planned withdrawal from the heavy truck brake spring market, as
well as a decline in sales to the light vehicle, telecommunications and
electronics markets. Partially offsetting this were higher sales of nitrogen
gas spring products, due in part to the strengthening of foreign currency
against the U.S. dollar. In the second quarter, sales of products destined for
light vehicles were down four percent, even as light vehicle production in
North America fell by nearly nine percent. This differential is attributable
to Associated Spring's sales mix, which includes a high penetration of sales
to the transplant automotive manufacturers, which reported stronger light
vehicle production in the period, combined with Associated Spring's higher
per-vehicle content on faster-selling light vehicles such as pickups and SUVs.
The second quarter and first half operating profit for the segment was $9.1
million and $16.8 million, respectively, compared with $7.7 million and $14.8
million for the same period a year ago. This increase reflected the benefits
of last year's closure of Associated Spring's Texas facility and the absence
of $0.8 million of purchase price accounting adjustments related to Seeger-
Orbis that were incurred in 2002. Light vehicle production in the second half
of 2003 is expected to be slightly lower than 2002, however, the impact on
Associated Spring will ultimately depend upon both the actual production rate
and the production mix. While the end markets for telecommunications and
electronics products have improved somewhat from the first quarter of 2003,
they are expected to remain weak in the near term.
Barnes Aerospace's second quarter and first half 2003 sales were $40.6 million
and $82.9 million; respectively, down 17.8% and 14.3% compared with $49.4
million and $96.8 million in the comparable periods in 2002, reflecting the
continued challenging commercial aerospace marketplace. The second quarter and
first half operating profit was $2.6 million and $5.3 million, respectively,
down from $3.0 million and $5.9 million in 2002, reflecting the lower sales
volume. Operating profit margin for the second quarter and first half was 6.5%
and 6.4%, respectively, up from 6.1% in both the second quarter and first half
of last year due to headcount reductions and other productivity actions taken
throughout Barnes Aerospace in 2002 aimed at positioning the business for a
period of lower commercial aerospace volume. Orders recorded during the second
quarter of 2003 were $29.0 million, resulting in order backlog at June 30,
2003 of $136.2 million, compared with $151.8 million at year-end 2002.
Impacting second quarter 2003 orders and backlog were commercial OEM delivery
deferrals and lower repair and overhaul volume stemming from the outbreak of
severe acute respiratory syndrome (SARS) and the Iraq conflict; a military
order deferral triggered by a delay in program funding; and a reduction in
orders due to the decision by Barnes Aerospace not to continue to manufacture
certain lower margin components. Direct and indirect orders for the military
were approximately 30% of the orders booked during the second quarter of 2003.
Recent events such as the Iraq conflict and SARS and the ongoing fear of
terrorism have continued to have a negative impact on air travel. As a result,
deliveries for new commercial aircraft are expected to remain soft until at
least 2005.
-21-
Barnes Distribution's sales in the second quarter and first half of 2003 were
$104.7 million and $198.5 million, respectively, up 40.9% and 34.9% from $74.3
million and $147.1 million in the comparable periods in 2002. Kar, which the
Company purchased on February 6, 2003, contributed $31.0 million of sales in
the second quarter and $50.2 million in the first half of 2003. Excluding Kar,
sales at Barnes Distribution were essentially flat reflecting the impact of
the continued weakness in the industrial economy. Operating profit for the
second quarter and first half of 2003 was $4.9 million and $8.1 million,
respectively, up 41.6% and 50.9% from $3.5 million and $5.4 million for the
comparable periods in 2002. The improvement in operating results was driven
primarily by incremental operating profit contributed by Kar. The outlook for
markets served by Barnes Distribution remains uncertain for the second half of
2003 because of the continued uncertainty in the industrial economy; however,
management anticipates that operating profit will continue to be positively
impacted by the contribution to profit from Kar sales as well as from the
synergistic cost savings resulting from integrating Kar into Barnes
Distribution.
Other Income/Expense
--------------------
The increase in other income for the first half of 2003 compared to 2002 was a
result of higher interest income due to higher interest rates in Brazil, and
increased short-term investments in Canada. In addition, profits related to
investments from the Company's NASCO joint venture increased by approximately
$0.2 million. Included in other income in 2002 are foreign exchange gains of
approximately $0.2 million. This compares to foreign exchange losses of
approximately $0.8 million in 2003, primarily in Brazil, which have been
included in other expense. These transaction losses related primarily to
exposures on U.S. dollar-denominated financial instruments at the Company's
international locations.
Interest expense increased in 2003 as a result of higher borrowings related
primarily to the Kar acquisition, and a reduction in the amount of debt
subject to interest rate swaps.
Income Taxes
------------
The Company's effective tax rate for the first six months of 2003 was 21.0%,
compared with 20.0% in the comparable year-to-date period in 2002 and 18.0%
for the full year 2002. The higher rate is primarily due to the absence in
2003 of an additional deduction which was taken during 2002 for the Company's
Retirement Savings Plan dividends, and an anticipated shift in 2003 earnings
to countries with higher tax rates, primarily the United States. The
additional 2002 dividend deduction resulted from a retroactive election in
2002 for the 2001 dividend distribution, resulting from an amendment to the
Plan.
-22-
Net Income and Net Income Per Share
-----------------------------------
Consolidated net income for the second quarter of 2003 and 2002 was $9.7
million and $8.7 million, respectively. Basic and diluted earnings per share
for the second quarter of 2003 were each $.46 compared with basic and diluted
earnings per share of $.46 and $.45, respectively, for the second quarter of
2002.
Consolidated net income for the first half of 2003 and 2002 was $17.1 million
and $15.4 million, respectively. Basic and diluted earnings per share for the
first six months of 2003 were $.84 and $.83, respectively, compared with basic
and diluted earnings per share of $.83 and $.81 respectively, for the first
six months of 2002.
Despite the growth in the net income, basic and diluted earnings per share for
the six months ended June 30, 2003 were relatively flat compared to the same
period in 2002, due to the 8.8% increase in average shares outstanding. This
increase was primarily a result of the issuance of 2.4 million shares related
to the equity offering in May 2003 and the issuance of 0.9 million shares in
conjunction with the acquisition of Kar in February 2003.
Liquidity and Capital Resources
-------------------------------
Management assesses the Company's liquidity in terms of its overall ability to
generate cash to fund its operating and investing activities. Of particular
importance in the management of liquidity are cash flows generated from
operating activities, capital expenditure levels, dividends, capital stock
transactions, effective utilization of surplus cash positions overseas and
adequate bank lines of credit.
The Company's ability to generate cash from operations in excess of its
internal operating needs is one of its financial strengths. Management
continues to focus on cash flow optimization and anticipates that operating
activities in 2003 will provide sufficient cash to take advantage of
opportunities for organic business expansion and to meet the Company's current
financial commitments.
Net cash provided by operating activities in the first six months of 2003 was
$19.3 million, compared to $17.9 million in the first half of 2002. The
improvement in operating cash flow in the first six months of 2003 resulted
primarily from improved operating results.
Net cash used by investing activities in the first half of 2003 was $69.1
million compared with $40.2 million in the comparable 2002 period. The
significant increase in this year's investing activities was due to the
acquisition of Kar in February, 2003. Investing activity in 2002 included the
acquisitions of Seeger-Orbis and Spectrum Plastics. In 2003, capital
expenditures were down compared to the 2002 level, as reduced asset
utilization at Barnes Aerospace resulted in lower capital spending.
-23-
Net cash provided by financing activities was $68.7 million in the first half
of 2003 compared to $10.6 million in the comparable 2002 period. The proceeds
from additional borrowings in 2003 were used to fund the Kar acquisition and
certain operating cash flow requirements in the United States. Cash generation
outside the U.S. resulted in an increase in cash and cash equivalents. The
Company's public offering of its common stock provided proceeds of
approximately $42.3 million that were used to reduce borrowings under its
revolving credit facility. Management anticipates that acquisitions will
continue to be financed through a mix of internal cash, borrowing and equity.
The Company maintains bank-borrowing facilities to supplement internal cash
generation. At June 30, 2003, the Company had a $150.0 million borrowing
facility under a revolving credit agreement that matures on June 14, 2005, of
which $65.0 million was borrowed at an interest rate of 3.23%. Additionally,
the Company had $15.0 million in uncommitted short-term bank credit lines, of
which $5.5 million was in use at June 30, 2003.
Borrowing capacity is limited by various debt covenants. The most restrictive
covenant requires the Company to maintain a ratio of Total Debt to EBITDA, as
defined in the revolving credit agreement, of not more than 3.25 times at June
30, 2003. The covenant will decline to 3.00 times at December 31, 2003. The
actual ratio at June 30, 2003 was 2.63 times and would have allowed additional
borrowings of $59.1 million. The Company believes its credit facilities,
coupled with cash generated from operations, are adequate for its anticipated
future requirements.
First half 2003 earnings before interest, taxes, depreciation and amortization
(EBITDA) were $47.1 million compared to $42.7 million in the first half of
2002. EBITDA is a measurement not calculated in accordance with generally
accepted accounting principles (GAAP). The Company defines EBITDA as net
income plus income taxes, interest expense and depreciation and amortization.
The Company does not intend EBITDA to represent cash flows from operations as
defined by GAAP, and the reader should not consider it as an alternative to
net income, net cash provided by operating activities or any other items
calculated in accordance with GAAP, or as an indicator of the Company's
operating performance. The Company's definition of EBITDA may not be
comparable with EBITDA as defined by other companies. The Company believes
EBITDA is commonly used by financial analysts and others in the industries in
which the Company operates and, thus, provides useful information to
investors. Management uses EBITDA as one measure of leverage capacity and debt
servicing ability.
-24-
Following is a reconciliation of EBITDA to the Company's net income:
(Dollars in thousands)
Six months ended June 30, 2003 2002
------- -------
Net income $17,106 $15,433
Add back:
Income taxes 4,547 3,858
Depreciation & amortization 17,217 16,377
Interest expense 8,245 7,018
------- -------
EBITDA $47,115 $42,686
======= =======
Recent Accounting Pronouncements
--------------------------------
During 2003, Statement of Financial Accounting Standards (SFAS) No. 143
"Accounting for Asset Retirement Obligations", SFAS No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", SFAS No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" and Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities," became effective for the Company. The adoption of
these statements did not have a material effect 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 Private 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 effectiveness of the Company's marketing and
sales programs; increased competitive activities including pricing,
advertising and promotions that could adversely affect customer demand for the
Company's products; changes in economic, political and public health
conditions, worldwide and in the locations where the Company does business;
interest and foreign exchange rate fluctuations; and changes in laws and
regulations.
-25-
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There has been no significant change in the Company's exposure to market
risk during the first six months of 2003. For discussion of the Company's
exposure to market risk, refer to the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management, including the
Company's President and Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon, and as of the date of, that evaluation, the President and
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective, in all material respects,
to ensure that information required to be disclosed in the reports the Company
files and submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required.
Part II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Company's stockholders was held on April 16,
2003. Proxies for the meeting were solicited pursuant to Regulation 14
A.
(c) (1) The following directors were elected:
Votes in Votes For Terms
Director Favor Withheld Expiring
-------- -------- -------- ---------
Thomas O. Barnes 16,578,228 316,143 2006
Gary G. Benanav 15,617,275 1,277,096 2006
Donald W. Griffin 15,621,741 1,272,630 2006
Mylle H. Mangum 15,670,465 1,223,906 2006
Item 5. Other Information
The information in this Item 5 is being provided under Item 11 of Form 8-K,
Temporary Suspension of Trading Under Registrant's Employee Benefit Plans,
pursuant to the interim guidance set forth in Release 33-8216. The notice
below was provided to the Directors and Officers of the Company on May 15,
2003. The Blackout Period referenced in the notice ended on July 15, 2003.
-26-
Notice of Blackout Trading Restriction
--------------------------------------
The Barnes Group Inc. Retirement Savings Plan, the Company's 401(k) plan,
is transitioning to a new provider of recordkeeping, trustee services and
investment options, Fidelity Investments. In order to accomplish the
transition, purchasing, selling and otherwise acquiring or transferring
Barnes Group stock must be suspended for a period of time. Such period is a
"blackout period."
This notice is given pursuant to the requirements in Section 306(a) of the
Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the regulations promulgated
thereunder. Section 306(a)(1) of Sarbanes-Oxley prohibits a Director or
Executive Officer of the Company from, directly or indirectly, purchasing,
selling or otherwise acquiring or transferring the Company's common stock
during a blackout period, unless such Director or Executive Officer can
affirmatively establish that such stock was not acquired in connection with
service or employment as a Director or Executive Officer, as applicable.
a. Duration of the Blackout Period. The Blackout Period will commence on
May 30, 2003 and is expected to end on July 15, 2003.
b. The class of stock subjected to the Blackout Period. Barnes Group Common
Stock.
c. Plan transactions to be suspended during the blackout period. Requests
for loans, in-service withdrawals, hardship withdrawals, and
distributions. Transfers/exchanges between investment options and access
to account balances.
d. Contact regarding the Blackout Period.
Signe S. Gates
Senior Vice President, General Counsel and Secretary
Barnes Group Inc.
123 Main Street
Bristol, CT 06010
Tel: 860-973-2153
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 10.1 Amendment 1 to Employment Agreement between Barnes
Group Inc. and Edmund M. Carpenter.
Exhibit 10.2 Non-Employee Director Deferred Stock Plan as further
amended.
-27-
Exhibit 15 Letter regarding unaudited interim financial
information.
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 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
A report on Form 8-K/A regarding the financial information required
under Item 7 related to the Company's acquisition of Kar Products, was
filed with the Commission on April 14, 2003.
A report on Form 8-K regarding financial results for the quarter ended
March 31, 2003, was filed with the Commission on April 17, 2003.
A report on Form 8-K regarding the filing of a prospectus supplement,
which included certain information regarding the Company's results of
operations for the quarter ended March 31, 2003, was filed with the
Commission on May 7, 2003.
A report on Form 8-K regarding the filing of a prospectus, relating to
the offer and sale of the Company's common stock, was filed with the
Commission on May 22, 2003.
A report on Form 8-K regarding the closing of the public offering of
shares of the Company's common stock, was filed with the Commission on
May 29, 2003.
-28-
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 12, 2003 By /s/ William C. Denninger
--------------- -------------------------------
William C. Denninger
Senior Vice President, Finance
and Chief Financial Officer
(the principal financial officer)
Date August 12, 2003 By /s/ Francis C. Boyle, Jr.
--------------- -------------------------------
Francis C. Boyle, Jr.
Vice President, Controller
(the principal accounting officer)
-29-
EXHIBIT INDEX
BARNES GROUP INC.
Quarterly Report on Form 10-Q
For Quarter ended June 30, 2003
------------------------------------
Exhibit No. Description Reference
- ---------- ----------- ---------
10.1 Amendment 1 to Employment Filed with this report.
Agreement between Barnes Group
Inc. and Edmund M. Carpenter.
10.2 Non-Employee Director Deferred Filed with this report.
Stock Plan as further amended.
15 Letter regarding unaudited interim Filed with this report.
financial information.
31.1 Certification Pursuant to Filed with this report.
Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Filed with this report.
Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification Pursuant to 18 U.S.C. Furnished with this
Section 1350 as Adopted Pursuant to report.
Section 906 of the Sarbanes-Oxley Act
of 2002.
-30-
EXHIBIT 10.1
AMENDMENT 1 TO THE EMPLOYMENT AGREEMENT BETWEEN
BARNES GROUP INC. AND EDMUND M. CARPENTER
AMENDMENT 1 is made as of July 2, 2003, by and between Barnes Group
Inc., a Delaware corporation (the "Company"), and Edmund M. Carpenter (the
"Executive").
WHEREAS, the Company and the Executive are parties to the certain
Employment Agreement made as of December 8, 1998 (the "Employment Agreement");
and
WHEREAS, the Executive may notify the Company not later than October 2,
2003 that he does not wish to extend the Employment Term, as defined in the
Employment Agreement, whereupon the Employment Agreement would terminate as of
December 31, 2003; and
WHEREAS, the Company wishes to encourage the Executive not to so
terminate the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree that the Executive and his spouse shall be
eligible to receive, at the Company's expense, those retiree medical coverage
benefits provided from time to time by the Company to other similarly situated
eligible retirees of the Company, as if the Executive had been employed by the
Company as of December 31, 1992. Notwithstanding the immediately foregoing
sentence, the Company reserves the right to terminate or change in any way
medical coverage provided to retirees, at any time including after retirement
has occurred.
Subject to the express terms of this Amendment 1, the Employment
Agreement remains in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by authority of its Board of Directors, and the Executive has hereunto set his
hand, the day and year first above written.
BARNES GROUP INC. (the "Company")
By: /s/ Thomas O. Barnes By: /s/ EM Carpenter
---------------------------- ---------------------------
Thomas O. Barnes, Chairman Edmund M. Carpenter
Board of Directors (the "Executive")
EXHIBIT 10.2
BARNES GROUP INC.
NON-EMPLOYEE DIRECTOR DEFERRED STOCK PLAN
as Further Amended
Section 1: Establishment of Plan
- ---------------------------------
The purpose of this Plan is to provide a means through which Directors
of the Company may share in its long-term growth by acquiring a common stock
ownership in the Company.
Section 2: Definitions
- -----------------------
When used in this Plan, the following terms shall have the definitions
set forth in this section:
2.1 "AAA" shall have the meaning set forth in Section 6 hereof.
2.2 "Board of Directors" shall mean the Board of Directors of Barnes Group
Inc.
2.3 "Change-in-Control" shall have the meaning set forth in the Barnes Group
Inc. Employee Stock And Ownership Program, as amended and in effect from time
to time.
2.4 "Committee" shall have the meaning set forth in Section 3.4 hereof.
2.5 "Company" shall mean Barnes Group Inc.
2.6 "Delivery Date" shall have the meaning set forth in Section 4.1 hereof.
2.7 "Director" shall mean a member of the Board of Directors who is not an
executive officer of the Company.
2.8 "Disability" shall have the meaning set forth in the Company's long-term
disability plan.
2.9 "Grant Date" shall have the meaning set forth in Section 3.1 hereof.
2.10 "Shares" shall have the meaning set forth in Section 3.1 hereof.
1
Section 3: Deferred Stock Grant
- --------------------------------
3.1 Each Director shall be granted as of the date of election to the Board
of Directors (the "Grant Date") the right to receive, without payment to the
Company and at the applicable time or times provided by Section 4 hereof,
6,000 shares of the common stock of the Company (the "Shares"). A Director
shall have no rights as a stockholder of the Company with respect to any of
the Shares until the Shares are delivered to the Director pursuant to Section
4 hereof.
3.2 If the number of outstanding shares of common stock of the Company is
changed as a result of a stock dividend, stock split, reverse stock split or
the like without additional consideration to the Company, the number of Shares
shall be adjusted to correspond to the change in the outstanding shares of
common stock; and in the case of any reorganization or recapitalization of the
Company (by reclassification of its outstanding common stock or otherwise), or
its consolidation or merger with or into another corporation, or the sale,
conveyance, lease or other transfer by the Company of all or substantially all
of its property, pursuant to any of which events the then outstanding shares
of common stock are combined, or are changed into or become exchangeable for
other shares of stock or property, the Director shall be entitled to receive,
in lieu of the Shares that s/he would otherwise be entitled to receive and
without any payment, the shares of stock or property which the Director would
have received upon such reorganization, recapitalization, consolidation,
merger, sale or other transfer, if immediately prior thereto s/he had owned
the Shares that s/he would otherwise be entitled to receive pursuant to this
Plan and had exchanged such Shares in accordance with the terms of such
reorganization, recapitalization, consolidation, merger, sale or other
transfer.
3.3 In no event (a) may the Director sell, exchange, transfer, assign,
pledge, hypothecate, mortgage or dispose of the right to receive the Shares or
any interest therein, nor (b) shall the right to receive the Shares or any
interest therein be subject to anticipation, attachment, garnishment, levy,
encumbrance or charge of any nature, voluntary or involuntary, by operation of
law or otherwise. Any attempt, whether voluntary or involuntary, to sell,
exchange, transfer, assign, pledge, hypothecate, mortgage, dispose,
anticipate, attach, garnish, levy upon, encumber or charge the right to
receive the Shares or any interest therein shall be null and void and the
other party to the transaction shall not obtain any rights to or interest in
the Shares. The foregoing sentences in this Section 3.3 shall not prevent the
assignment or transfer of the right to receive the Shares and any interest
therein by will or applicable laws of descent and distribution, or prevent the
Director from designating one or more beneficiaries to receive the Shares in
the event of his or her death; provided, that such designation shall have been
received in writing by the Company before such death and the last such
designation shall be controlling.
2
3.4 Notwithstanding Section 3.1, if the Director's service as a director of
the Company continues until the date on which a Change-in-Control occurs, the
Director shall have the right immediately to receive the Shares. However, if
such Change-in-Control occurs less than six months after the Grant Date and
the Compensation and Management Development Committee of the Board of
Directors (the "Committee") (other than the Director, if s/he is a member
thereof) requests in writing before the date of such Change-in-Control that
the Director agree in writing to remain a director of the Company through the
date which is six months after the Grant Date with substantially the same
title, duties, authority, compensation and indemnification as on the day
immediately preceding the Change-in-Control, then in that event the Director
shall have the right to receive the Shares pursuant to this Section 3.4 only
if the Director executes such written agreement and delivers it to the Company
not later than one week after the date of such Change-in-Control, in which
case the Director shall have the right to receive the Shares when the Director
delivers such written agreement or, if later, on the date on which such
Change-in-Control occurs.
3.5 If the Director, at any time before the Shares are delivered: (i)
directly or indirectly, whether as an owner, partner, shareholder, consultant,
agent, employee, investor or in any other capacity, accepts employment with,
renders services to or otherwise assists any other business which competes
with the business conducted by the Company or any of its subsidiaries, during
the Director's last two years with the Company or any of its subsidiaries;
(ii) directly or indirectly, hires or solicits or arranges for the hiring or
solicitation of any employee of the Company or any of its subsidiaries on
behalf of any business or enterprise other than the Company or a subsidiary,
or encourages any such employee to leave such employment; (iii) uses,
discloses, misappropriates or transfers confidential or proprietary
information concerning the Company or any of its subsidiaries (except as
required by the Director's work responsibilities with the Company or any of
its subsidiaries); (iv) is convicted of a crime against the Company or any of
its subsidiaries; or (v) engages in any activity in violation of the policies
of the Company or any of its subsidiaries, including without limitation the
Company's Code of Business Ethics and Conduct, or, at any time, engages in
conduct adverse to the best interests of the Company or any of its
subsidiaries; then should any of the foregoing events occur, the right to
receive the Shares and any interest therein and any future dividend
equivalents shall be forfeited unless the Committee (other than the Director,
if s/he is a member thereof), in its sole discretion, elects otherwise. The
provisions of this Section 3.5 are in addition to any other agreements related
to non-competition, non-solicitation and preservation of Company confidential
and proprietary information entered into between the Director and the Company,
and nothing herein is intended to waive, modify, alter or amend the terms of
any such other agreement.
Section 4: Delivery of the Shares
- ----------------------------------
4.1 The Shares shall be delivered to each Director by, at the Director's
election, issuance of a stock certificate for the Shares or entry of a credit
for the Shares in a book
3
entry account in the Director's name either on the first business day of the
month immediately following his/her termination as a Director (the "Delivery
Date") or, at the election of the Director, on the fifth anniversary of the
Delivery Date (or if such date is not a business day, on the first business
day thereafter) or in five annual installments (as equal as practical, rounded
to the nearest whole share, and not more in the aggregate than the total
number of Shares that the Director is entitled to receive) commencing on the
Delivery Date. The aforesaid election shall be made by a newly elected
Director within thirty days after election to the Board of Directors.
4.2 A Director who is first elected after July 16, 2003 shall meet a minimum
service requirement of three continuous years as a member of the Board of
Directors, beginning on the Grant Date and ending on the third anniversary
thereof, in order to receive 6,000 Shares. If such Director's service is
terminated due to a reason other than death or Disability, before the
expiration of such minimum service period, then a prorata portion of the
Shares, based on the Director's period of service and rounded to the nearest
number of whole shares, shall be delivered in accordance with this Section 4.
Such prorata portion shall be the number of Shares equal to 6,000 multiplied
by a fraction which shall not exceed the number one (1), the numerator of
which shall be the number of months elapsed from the Grant Date until the date
of such termination of service and the denominator of which fraction shall be
the number 36.
4.3 In the event of the death of a Director prior to earning 6,000 Shares,
6,000 Shares shall be delivered to the beneficiary designated by the Director
or, in the absence of such designation, to the Director's estate. In the
event of the Disability of a Director prior to earning 6,000 Shares, 6,000
Shares shall be delivered to such Director.
4.4 Regardless of any election by a Director to defer delivery of the
Shares, the Committee may in its sole discretion deliver to the Director all
of the Shares that the Director is entitled to receive at any time on or after
the Delivery Date.
4.5 The Shares shall be Treasury shares.
Section 5: Dividend Equivalents
- --------------------------------
5.1 The grant of the right to receive the Shares shall also entitle the
Director to receive Dividend Equivalents. On each date on which a dividend
(other than a common stock dividend) is paid to the holders of common stock
the record date of which falls during the period commencing on the Grant Date
and ending on the date when the Shares are delivered pursuant to Section 4
hereof, the Company shall pay the Director an amount of money determined by
multiplying (a) the number of the Shares that the Director is entitled to
receive, times (b) the dividend per share paid on such dividend payment date.
However, if the dividend is paid in property other than cash or common stock,
the amount of money to be paid to the Director in respect of such dividend
shall
4
be determined by multiplying (i) the number of the Shares that the Director is
entitled to receive, times (ii) the fair market value on such dividend payment
date of the property that was paid per share of common stock as a dividend on
such dividend payment date. Notwithstanding anything to the contrary herein,
the Director shall not be required to reimburse the Company for any dividend
equivalents previously paid to the Director with respect to Shares that are
not delivered to the Director pursuant to Section 4.2 hereof.
5.2 At the election of a Director, which election may be changed from time
to time, the Dividend Equivalents may be paid in cash or invested in the
Company's common stock through an arrangement similar to the Company's plan
for dividend investment.
5.3 A Director who subsequently becomes an employee of the Company before
the Delivery Date shall be entitled to continue to receive Dividend
Equivalents.
Section 6: Interpretation
- --------------------------
The Committee (other than the Director, if s/he is a member thereof)
shall interpret and construe this Plan and make all determinations thereunder,
and any such interpretation, construction or determination by the Committee
shall be binding and conclusive on the Company and the Director and on any
person or entity claiming under or through either of them.
Any claim, demand or controversy arising from such interpretation,
construction or determination by the Committee shall be submitted first to a
mediator in accordance with the rules of the American Arbitration Association
("AAA") by submitting a mediation request to the Corporate Secretary of the
Company within thirty (30) days of the date of the Committee's interpretation
or construction. The mediation process shall conclude upon the earlier of:
(a) the resolution of the dispute; (b) a determination by either the mediator
or one or more of the parties that all settlement possibilities have been
exhausted and there is no possibility of resolution; or (c) thirty (30) days
have passed since the filing of a request to mediate with the AAA. A party
who has previously submitted a dispute to mediation, and which dispute has not
been resolved, may submit such dispute to binding arbitration pursuant to the
rules of the AAA. Any arbitration proceeding for such dispute must be
initiated within fourteen (14) days from the date that the mediation process
has concluded. The prevailing party shall recover its costs and reasonable
attorney's fees incurred in such arbitration proceeding. The Director and the
Company specifically understand and agree that the failure of a party to
timely initiate a proceeding hereunder shall bar the party from any relief or
other proceeding and any such dispute shall be deemed to have been finally and
completely resolved. All mediation and arbitration proceedings shall be
conducted in Bristol, Connecticut or such other location as the Company may
determine and the Director agrees that no objection shall be made to such
jurisdiction or venue, as a forum non conveniens or otherwise. The
arbitrator's authority shall be limited to resolution of the
5
legal disputes between the parties and the arbitrator shall not have authority
to modify or amend this Plan or the Committee's interpretation or construction
thereof, or abridge or enlarge rights available under applicable law. Any
court with jurisdiction over the parties may enforce any award made hereunder.
Section 7: Amendment and Termination; Term
- -------------------------------------------
7.1 The Committee may at any time terminate this Plan and it may, at any
time, or from time to time, amend or suspend and, if suspended, reinstate,
this Plan in whole or in part; provided, that any such amendment of this Plan
shall be contingent on obtaining the approval of the stockholders of the
Company if the Committee determines that such approval is necessary to comply
with any requirement of law, including the rules of any stock exchange, stock
market or automated quotation system on which the Company's equity securities
are traded or quoted.
7.2 The expiration of this Plan, after which no rights to Shares may be
granted hereunder, shall be July 16, 2013; provided, that the administration
of this Plan shall continue in effect until all matters have been settled
relating to the delivery of Shares for which rights have been previously
granted.
Section 8: General
- -------------------
8.1 The Company will make reasonable efforts to comply with all applicable
federal and state securities laws. However, the Company will not issue any
Shares pursuant to this Plan if their issuance would result in a violation of
any such law. If at any time the Committee (other than the Director, if s/he
is a member thereof) shall determine, in its discretion, that the listing,
registration or qualification of any Shares subject to this Plan upon any
securities exchange or under any state or Federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of rights under this Plan or
the issue of the Shares, no rights under the Plan may be exercised and the
Shares may not be delivered, in whole or in part, unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee and any delay
caused thereby shall in no way affect the minimum service requirement
described in Section 4.2.
8.2 By accepting the right to receive the Shares and Dividend Equivalents,
the Director recognizes and agrees that the Company, its stockholders and its
subsidiaries, and each of their officers, directors, agents and employees,
including but not limited to the Board and the Committee, in their oversight
or conduct of the business and affairs of the Company and its subsidiaries,
or, in the exercise by the Company's stockholders of their voting rights, may
in good faith act or omit to act, or cause the Company and/or a subsidiary to
act or omit to act, in a manner that will, directly or indirectly, prevent all
or part of the Shares or Dividend Equivalents from becoming deliverable. No
provision
6
of this Plan shall be interpreted or construed to impose any liability upon
the Company, any stockholder of the Company, any subsidiary, or any officer,
director, agent or employee of the Company or any subsidiary, or the Board or
the Committee, for any forfeiture of the Shares or Dividend Equivalents or any
interest therein that may result, directly or indirectly, from any such action
or omission, or shall be interpreted or construed to impose any obligation on
the part of any such entity or person to refrain from any such action or
omission.
8.3 This Plan shall be governed by and construed in accordance with the
internal laws of the State of Delaware, without regard to the principles of
conflicts of laws thereof.
Adopted by the Board of Directors
on May 19, 1989
and Amended on February 18, 1994
Amended: July 16, 2003
7
Exhibit 15
August 11, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated July 16, 2003 on our review of interim
financial information of Barnes Group Inc. (the "Company") as of and for the
period ended June 30, 2003 and included in the Company's quarterly report on
Form 10-Q for the quarter then ended is incorporated by reference in its
Registration Statements on Form S-3 (No. 333-104242), and Form S-8 (Nos. 2-
56437, 2-91285, 33-20932, 33-30229, 33-91758, 33-27339, 333-41398, 333-88518
and 333-57658).
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
Exhibit 31.1
CERTIFICATION
I, Edmund M. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
June 30, 2003 of Barnes Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c)Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5.The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a)All significant deficiencies in the design and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 12, 2003
/s/ Edmund M. Carpenter
-----------------------
Edmund M. Carpenter
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, William C. Denninger, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
June 30, 2003 of Barnes Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c)Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies in the design and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: August 12, 2003
/s/ William C. Denninger
------------------------
William C. Denninger
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Barnes Group Inc. (the "Company")
on Form 10-Q for the period ending June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), each of the
undersigned certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 that:
1) the Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Edmund M. Carpenter /s/ William C. Denninger
- ----------------------- ------------------------
Edmund M. Carpenter William C. Denninger
President and Chief Chief Financial
Executive Officer Officer
August 12, 2003 August 12, 2003
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Barnes Group Inc. and
will be retained by Barnes Group Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.