Our mission
Bairnco is an organization of people committed to providing value-added
industrial and commercial products and services to niche markets which meet
or exceed our customers' requirements leading to the creation of
stockholder and employee value.
Our strategy
Bairnco strives to develop true partnership relationships with its
customers in selected markets through close cooperation in developing value-
added solutions to their needs. Bairnco seeks to identify and participate
in those markets that will provide growth opportunities due to either
technical developments or the changing needs of customers.
Bairnco implements this mission and strategy through two business segments:
Engineered materials and components are designed, manufactured and sold
under the Arlon brand identity.
Replacement products and services are manufactured and distributed under
the Kasco brand identity.
Our objectives
Bairnco believes that concentrating its resources in selected market niches
can provide the basis to achieve both superior profitability and growth.
Management's long term objectives are to achieve:
15% compound rate of earnings growth
20% return on stockholders' investment
15% return on total capital employed.
CONTENTS
Financial Highlights 1
Letter to our Stockholders 2
Our Values and People 4
Engineered Materials & Components (Arlon) 6
Replacement Products & Services (Kasco) 11
Directors and Management 12
Financial History 13
Management's Discussion and Analysis 14
Quarterly Results of Operations 16
Report of Independent Certified Public Accountants 17
Consolidated Financial Statements 18
Notes to Consolidated Financial Statements 22
FINANCIAL HIGHLIGHTS
(In thousands except per share data)
Percent Change
1997 1996 1995 97/96 96/95
Net Sales $158,708 $150,234 $150,507 6% 0%
Operating Profit $ 15,592 $ 14,956 $ 14,633 4% 2%
Net Income $ 8,771 $ 8,335 $ 7,781 5% 7%
Diluted Earnings per Share $ 0.94 $ 0.85 $ 0.75 11% 13%
Cash Dividends per Share $ 0.20 $ 0.20 $ 0.20 0% 0%
Stockholders' Investment
per Average Diluted Common
Share Outstanding $ 5.61 $ 5.02 $ 4.60 12% 9%
Total Assets $109,286 $102,600 $ 98,196 7% 4%
Stockholders' Investment $ 52,469 $ 49,464 $ 48,024 6% 3%
Average Diluted Common
Shares Outstanding 9,350 9,851 10,440 (5%) (6%)
Graphic - Bar Chart depicting Sales (y-axis) for five years - 1993 to
1997 (x-axis):
Year Sales
(in thousands)
1993 $134,958
1994 $145,522
1995 $150,507
1996 $150,234
1997 $158,708
Graphic - Bar Chart depicting Income from Continuing Operations (y-axis)
for five years - 1993 to 1997 (x-axis):
Year Income from Continuing Operations
(in thousands)
1993 $ 817
1994 $7,255
1995 $7,781
1996 $8,335
1997 $8,771
Graphic - Bar Chart depicting Diluted Earnings per Share from Continuing
Operations ( y-axis) for five years - 1993 to 1997 (x-axis):
Year Diluted Earnings per Share from Continuing Operations
1993 $0.08
1994 $0.69
1995 $0.75
1996 $0.85
1997 $0.94
LETTER TO OUR STOCKHOLDERS
1997 was another year of good progress for Bairnco. Earnings and sales
increased. Our management teams improved. The stream of new products
continued to grow. We repurchased more of our common stock. Our financial
condition remained strong.
FINANCIAL RESULTS
1997 sales of $158,708,000 increased 5.6% from $150,234,000 in 1996.
Arlon's sales increased 8.3%. All markets served experienced growth
although there was substantial volatility within the electronics market.
Kasco's sales declined 0.2% as growth in the U.S. was offset by the planned
discontinuation of equipment sales in certain Canadian markets and the
negative impact of the strong dollar on the "translation" of foreign sales.
In 1997, gross profit increased 2.8% to $53,996,000 from $52,536,000 in the
prior year. Gross profit increased at both Arlon and Kasco with increased
sales. However, the strong dollar also negatively impacted the translation
of foreign gross profit. Gross profit margins declined to 34% from 35%
last year. Profit margins were lower primarily due to plant and labor
inefficiencies caused by swings in demand during the year, new equipment
start-ups at three plants, and the two week strike at the Bear Delaware
facility.
Selling and administrative expenses increased 2.2% to $38,404,000 from
$37,580,000 in 1996. As a percent of sales, these expenses decreased to
24.2% in 1997 from 25.0% in 1996. Research and development expenses
increased 17.2% as Bairnco continued to invest in the development of new
products and improved quality.
Net interest expense increased from $1,725,000 to $1,834,000. The increase
was due to increased average debt outstanding.
Income before income taxes increased 4% to $13,758,000 in 1997 as compared
to $13,231,000 in 1996. The effective tax rate was 36.2% as compared to
37.0% in 1996.
Net income increased 5.2% to $8,771,000 in 1997 as compared to $8,335,000
in 1996. Diluted earnings per share increased 10.6% to $.94 from $.85 last
year. As a result of the stock repurchase program, the average number of
diluted shares outstanding in 1997 was 9,350,000, a 5.1% decrease from the
9,851,000 average shares outstanding in 1996.
FINANCIAL MANAGEMENT
Return on capital employed decreased to 12.2% from 12.3% last year, as the
positive impact of many of the major capital expenditures will not be
realized until 1998 and beyond. Return on stockholders' investment in 1997
increased to 17.4% compared to 17.2% last year. Management continues to
make progress towards our long-term objectives of a 20% return on
stockholders' investment and a 15% return on total capital employed.
In 1997, Bairnco's Board of Directors authorized the repurchase of up to
$5,000,000 of its common stock. This authorization was in addition to the
$2,008,000 still unused from the prior year authorization. During the year
the company repurchased 424,800 shares for $3,255,000. The Board has
authorized management to continue its stock repurchase program in 1998
subject to market conditions and capital requirements of the business. At
year-end $3.75 million was available for additional stock repurchases. The
Board may consider additional authorizations if appropriate during the
year.
Working capital as a percent of sales increased from 20.2% to 22.5%. The
increase is primarily attributable to increased accounts receivable from
strong fourth quarter sales and growing export sales and increased
inventories.
Net cash flows provided by operating activities were $12,203,000. These
cash flows were more than sufficient to cover operating requirements, fund
Bairnco's capital expenditure program, pay dividends and generate some
excess cash. However the stock repurchasing program required $3,255,000 in
cash. Consequently 1997 total debt increased to $30,318,000 from
$28,179,000 at the end of 1996. Debt as a percent of equity increased to
57.8% from 57.0% in 1996. At year-end 1997 Bairnco had $15.7 million
available under its revolving credit agreement, and $5.6 million available
under short-term lines of credit.
1997 capital expenditures were $8,789,000 as compared to a plan of
$13,300,000. Depreciation and amortization was $6,516,000. Improvements
in operating efficiencies in 1997 and planned for 1998 permitted the
postponement of some planned capital expenditures. Approximately half the
capital expenditures were related to both increased capacity and cost
reduction programs.
The capital expenditure plan for 1998 is approximately $12.0 million.
Depreciation and amortization is estimated to be approximately $7.0
million. The planned capital expenditures include cost reduction projects,
replacements, quality improvements, new product developments, new
processing equipment and capacity additions. Approximately $3.0 million of
the planned capital expenditures are for additional capacity and are
contingent upon the growth being realized.
DIVIDEND
The quarterly $.05 per share cash dividend was maintained during the year.
MANAGEMENT
Effective August 11, 1997, James W. Lambert was appointed Corporate
Controller of Bairnco Corporation. Jim was formerly Manager of Group
Financial Planning and Analysis with Air Products and Chemicals Inc. of
Allentown, PA. Jim filled the vacancy left when Elmer Pruim was appointed
President of Arlon's Adhesive and Films Division at the end of 1996.
Effective December 15, 1997, Linda Metcalf resigned as Vice President
Administration and Secretary of Bairnco. A search is currently underway
to fill this position.
During 1997 the management development program, which is one of the keys
to our future success, continued to make progress in all operations. To
further push the responsibility and authority closer to the marketplace,
to increase product development focus, and as a result of their individual
growth, Eric Kleinschmidt was promoted to Business Unit Manager of ELCD
and Chuck Roye was promoted to Business Unit Manager of STD. The ongoing
improvement and development of all our employees remains a critical and
never-ending element for Bairnco's success.
SUMMARY AND OUTLOOK
1997 was another year of progress for Bairnco.
Arlon's results continued to manifest the benefits of investing in the
development of new products, new markets, and of expanded sales, marketing
and research efforts.
Kasco North America's program to become the preeminent supplier of cutting
products and routine in-store equipment services was continued during the
year. Kasco's seasoning program for in-store meal preparation continued
its strong growth. The North American operations had improved results
from increased revenues in the US and from reduced costs from product line
pruning in Canada. European meat markets continued to recover from the
"Mad Cow" panic of 1996. We expect to see both improved revenues and
improved efficiencies in 1998 and beyond.
The outlook for 1998 is for another year of improved sales and earnings.
The US economy is again expected to experience slow growth during 1998
with inflation remaining under control and the Federal Reserve Board
maintaining interest rates within recent historical bands. We expect the
combination of general economic growth, growth from new products, and
higher growth in certain niche markets will result in increased sales.
Improved earnings are expected both from the increased sales and from
continuing efficiency and yield improvement programs.
The continuing dedication and excellent performance of our teammates
remains the key to our past and future success. We are all dedicated to
making 1998 a year of continuing improvement.
Respectfully yours,
Luke E. Fichthorn III
Chairman and CEO
Our values:
At Bairnco, our values are the core of our corporate culture. They are the
basis for the decisions we make regarding the development and deployment of
our people, the improvement and investment in our processes, and the
manufacture and distribution of our products.
We value:
Personal and corporate integrity;
The inevitability and opportunity of change;
Continuous improvement and development;
Total customer satisfaction;
Decentralized organization and empowered employees;
Superior rewards for superior performance;
Have fun - enjoy your work and your life.
PHOTO - Kasco employees review recipe instructions in the new seasoning
test kitchen. Employees will use the test kitchen for product
development and training.
Our people:
People are our most valuable asset. We continuously invest in education,
communication, and reward programs to develop this vital resource.
Whether it's a marketing specialist who is completing her MBA, a lab
technician attending a seminar on infrared spectroscopy analysis, or a
machine operator receiving instruction on using a micrometer, we make sure
our employees are given the opportunity to expand their skills. Our
management development process includes the identification of specific
employee needs and also sponsors group training for supervisors and
management.
We foster communication throughout the organization with cross functional
work teams, round table discussions, plant meetings, "state of the
business" meetings, and newsletters. Many of our employees have also
participated in management training to enhance feedback and communication
skills.
PHOTO - Arlon technicians use reference materials from their new R&D
library and conference area. We are committed to creating an
environment conducive to employee development and learning.
We strive to develop internal advancement programs for our employees and
always look first within the organization when filling open positions. All
of our employees participate in incentive programs: from corporate
accountants to band saw blade welding operators. These incentive programs
are tied to realistic performance goals.
We believe that development, education, communication, goal setting, and
rewards are keys to the successful management of our people.
PHOTO - Arlon employees discuss process improvements and new product
development within the Microwave Materials product line.
Cross-functional meetings facilitate information sharing and project
management.
Our products, our processes:
We believe that the continuous improvement and development of our products
and processes are vital to our success. Total customer satisfaction can
only be achieved by delivering products that meet and exceed customer
needs. Because these customers needs continue to evolve, we are committed
to continuous investment in product development, process improvements,
capacity expansion, and research and development to insure we deliver
products that are competitive in the market.
PHOTO - An Arlon technical director reviews a polyimide reaction with a
chemist. Sharing knowledge is crucial to employee development.
Arlon Engineered Materials and Components
Bairnco designs, manufactures, and sells engineered materials and
components for the electronic, industrial and commercial markets under the
Arlon brand identity. These products are based on common technologies in
coating, laminating, polymers, and dispersion chemistry.
Arlon Materials for Electronics has an international reputation as the
premier supplier of high technology materials for the printed circuit board
industry. These products are marketed principally to printed circuit board
manufacturers and OEM's by a direct sales force in concert with strong
technical support teams in the U.S. and through distributors and
manufacturers representatives in Europe, the Far East, and South America.
Our Electronic Substrates product line includes high temperature, high
performance thermoset laminates and prepreg bonding plies used in circuit
boards for sophisticated commercial applications and military electronics.
These applications require materials, which withstand high continuous
operating temperatures, provide ease of field reparability, are highly
reliable, and improve fabrication yields. Intermediate temperature
laminates, which provide improved product reliability and ease of
manufacture at a lower cost, are also key to the line.
The Microwave Materials product line offers application matched, reinforced
PTFE laminates providing high yields and high performance for temperature
and frequency dependent microwave applications. The applications for this
product line include digital cordless telephones, cellular phone systems,
direct broadcast satellite TV systems, personal communications networks,
global positioning satellites, local area networks, collision avoidance
systems, and radar detection systems.
The markets served by Electronic Substrates and Microwave Materials
continue to migrate toward lower cost solutions to allow for greater
commercialization and consumer penetration of electronic applications. To
support this trend we have made significant investments in new equipment,
product development, and research and development:
New lamination presses with increased capacity and the ability to press
larger sheet sizes.
New material handling equipment and clean rooms to improve efficiency and
product quality.
Research and development laboratory expansion to reduce time to market
with new products.
Arlon's 25N series, a laminate system based on aromatic polyolefin resin
that offers many of the performance advantages of PTFE materials with the
cost and processing advantages of traditional thermoset materials,
targeted for commercial electronics.
Arlon's Thermount nonwoven, aramid reinforced materials that offer many
advantages for specialty applications at a more attractive cost-
performance ratio than woven aramids.
Arlon's AD Series substrate materials: a PTFE based laminate system that
offers all the performance characteristics of PTFE with lower cost
targeted for commercial applications.
PHOTO - Coater operators inspect Thermount 85NT being produced at Arlon's
Rancho Cucamonga, CA facility. Thermount 85NT is a new product being
widely used for surface mount technology such as in sophisticated
avionics used in commercial and military aircraft.
PHOTO - Arlon chemists study the reaction of a developmental resin in a new
laboratory facility at Rancho Cucamonga, CA. Arlon has made a major
commitment to new product development by investing in facility and
personnel additions.
PHOTO - The press operator explains the control panel on Rancho Cucamonga's,
CA new press to lamination employees. The new press has
approximately 30% more capacity than the older presses and can press
a larger sheet to supply a wider variety of customer specified
finished panel sizes.
PHOTO - A new lamination press, lay up room, and material handling system
at Arlon's Bear, DE facility will improve the production efficiency
and the product quality of Arlon's Microwave Materials product line.
PHOTO - Lay up operators at the Bear, DE facility assemble Arlon's AD
Series laminates in a new clean room. AD Series substrate materials
designate a cost competitive PTFE based system that offers all the
performance characteristics of PTFE at a lower cost.
Bairnco manufactures and markets, under the Calon brand name, cast and
calendered vinyl films in a wide variety of colors, face stocks and
adhesive systems. These vinyl films are used in commercial and electrical
signage, point of purchase displays, highway signage, fleet markings, and
other commercial advertising applications.
We have continued to invest in new product development and to improve the
quality of our current product line. During 1997 we extended our line of
translucent vinyl for back lit applications with diffuser films and
additional colors. We also introduced several products for the digital
imaging market, including a vinyl for electrostatic printed graphics. We
will continue to expand and improve our products for use in commercial and
electrical signage and in fleet graphics in 1998.
Our product development is supported with investments in manufacturing
process improvements, research and development and distribution. In 1997,
these investments and improvements included:
Optimization of production processes to improve the quality of our
translucent vinyl for back lit applications;
Investment in new coating technology to reduce the variability of our
films' thickness profile;
Optimization of chemical formulas to improve the physical properties of
our films;
Decreased the production time of custom colored vinyl films;
Increased research and development staff;
Expanded regional distribution for improved product delivery.
We will continue to make these investments because we are committed to
delivering high quality competitive products to our customers.
PHOTO - Arlon is an established fleet vinyl supplier, with fleet graphic
installations around the world. Arlon continues to make product
advances in this market.
PHOTO - Arlon's engineers and operators review new coating heads on a vinyl
coating line at the Santa Ana, CA facility. This equipment upgrade
has improved the film's thickness profile, leading to better physical
properties and color consistency.
PHOTO - Calon translucent vinyl is used in back lit applications all over
the world. A complete line of translucent and diffuser film is
available, as well as a custom color program to match corporate
identification needs.
We manufacture and market custom-engineered laminates and coated products
under the Arlon brand identity. Typical applications include insulating
foam tapes for thermopane windows, specialty circuit materials, electrical
insulation materials for motors and transformers, thermal insulation panels
for appliances and cars, identification cards and labels, durable printing
stock, and other custom engineered laminates for specific industrial
applications.
The key to Arlon's success in custom-engineered laminates and coated
products is our knowledge base of materials technology, process technology,
and customer applications. In 1998 we will be expanding our research and
development facilities and staff to support our strategy of increasing this
business. Our strategy and knowledge base has led to several recent
product developments.
We have expanded our product offering of specialty circuit materials with
the addition of polyimide coated copper foils for use in printed circuit
board manufacturing.
We introduced an improved glazing tape, AWT2, which provides enhanced
adhesive properties on vinyl, wood, and aluminum sash materials.
PHOTO - An engineer at Arlon's East Providence, RI facility is analyzing
Duralon using a precision smoothness tester. Duralon is a tear
resistant paper/film/paper laminate whose applications include
durable printing stock, envelopes, and printable file folders.
PHOTO - Arlon glazing tapes consist of closed cell copolymer foam coated on
both sides with an aggressive acrylic adhesive system. This adhesive
system provides optimum compatibility with a variety of sash
materials.
PHOTO - Arlon produces electrical insulation over a broad performance range
for use in motors, generators, and transformers. Substrates used
include papers, fabrics, and dielectric films, which are combined
with polymer adhesives and coatings.
Bairnco manufactures a line of silicone rubber materials used in a broad
range of consumer, industrial and commercial products. Typical
applications of these materials include:
Silicone rubber for molding composites;
Silicone rubber insulating tape for electric traction motor coil windings;
Insulation for industrial flexible heaters;
Thermal and electrical conductivity applications;
Insulating tape for electrical splices.
The silicone rubber product line provides significant opportunity for Arlon
in a number of areas:
The product line and equipment acquired in 1996 from Permacel was
integrated into our business in 1997. We fully realized the gains in
capability and capacity we expected with this acquisition. Additional
capacity is available for growth.
Thermabond(R) is a compliant, thermally conductive silicone sheet adhesive
with elastic properties. It continues to penetrate the market and
commercial applications continue to be identified. In 1998 we will
continue to focus application development efforts on thermally and
electrically conductive sheet adhesives for electrical and electronic
markets.
Our fusible tape business will benefit by the installation of a new
extruder line completed in 1997. This equipment gives us improved
production capabilities and lower costs that allow us to more competitively
address retail applications and other commercial markets.
PHOTO - The new extruder installed at Arlon's Bear, DE facility increases
the production capacity of silicone extruded fusible tape. Arlon is
poised to address new markets in silicone extruded tape using the
new extruder, along with a new oven and an automatic windup station.
PHOTO - An Arlon operator uses a micrometer to measure thickness of
flexible heater material. This production line performs precision
calendering and fabric coating to produce a family of silicone
products for industrial markets.
Kasco Replacement Products and Services
Kasco is the leading manufacturer and supplier of replacement products and
services principally to supermarkets; meat and deli operations; and meat,
poultry and fish processing plants throughout the United States, Canada and
Europe. These products and services include:
Band saw blades for cutting meat and fish;
Chopper plates and knives for grinding meat;
Seasoning products;
Preventive maintenance for equipment in meat and deli operations;
Other related butcher supply products.
Kasco also manufactures small band saw blades for cutting metal and wood,
and large band saw blades for use at lumber mills. Kasco has manufacturing
operations in St. Louis, Missouri; Toronto, Canada; Gwent, Wales, United
Kingdom; and Pansdorf, Germany. In France, in addition to providing its
replacement products, Kasco distributes equipment used in the supermarket
industry and in the food processing industry.
Kasco introduced several new products in 1997. One of the most exciting is
the Predator Series of custom splitter blades. These splitter blades offer
reduced workplace noise, peak high speed cutting performance, and increased
durability with a unique Gold Tooth Hardening process.
The Mealtime Solutions seasoning program continues to be a success as sales
for home meal replacement items within supermarkets increase. Mealtime
Solutions offers a package of seasoning blends, recipes and instructions
which allows a supermarket to present value-added products in their meat
and deli departments. To support this growing market, Kasco has moved
seasoning manufacturing from City of Industry, CA to St. Louis, MO and
built a formulation lab and test kitchen.
In North America, Kasco supplies its products and services directly to the
supermarket and meat cutting industries through a continent-wide network of
service professionals and exclusive distributors. During 1997 Kasco
reorganized this network to better serve its customers, and also designed
an extensive training program that will be implemented in 1998. In
addition, Kasco has increased its emphasis on preventive maintenance,
increasing the value-added service its network of professionals provides to
customers.
PHOTO - Kasco's Mealtime Solutions seasoning program offers a package of
seasoning blends, recipes, and instructions which allows a
supermarket to present an attractive ready-to-cook home meal to
their customers.
PHOTO - The Predator Series of splitter blades from Kasco features a Gold
Tooth Hardening process which offers high speed, high volume cutting
with less waste, straighter cuts, less workplace noise, and less
operator fatigue.
PHOTO - Kasco's investment in seasoning production in 1997 included the
form and fill machine featured here; other mixing, blending, and
handling equipment; and a new building to accommodate the expanded
seasoning operation in St. Louis, MO.
Directors
1. Luke E. Fichthorn III
Chairman and CEO
Bairnco Corporation
2. Charles T. Foley
President
Estabrook Capital Management, Inc.
3. Richard A. Shantz
Private Investor
4. William F. Yelverton
Independent Business Consultant
Management:
1. Jeffrey M. Berresford
President
Kasco Corporation
2. Robert M. Carini
President
Arlon Materials for Electronics
3. James W. Lambert
Controller
Bairnco Corporation
4. Elmer G. Pruim
President
Arlon Adhesives & Films
5. J. Robert Wilkinson
Vice President Finance & Treasurer
Bairnco Corporation
FINANCIAL HISTORY
1997 1996 1995 1994 1993
Summary of Operations
($ in thousands)
Net sales $158,708 150,234 150,507 145,522 134,958
Gross profit $ 53,996 52,536 53,317 53,177 52,645
Earnings before interest,
charges & taxes (a) $ 15,592 14,956 14,633 13,654 13,617
Operating profit $ 15,592 14,956 14,633 13,654 4,874
Interest expense, net $ 1,834 1,725 2,026 2,144 2,248
Income before income taxes $ 13,758 13,231 12,607 11,510 2,626
Provision for income taxes $ 4,987 4,896 4,826 4,255 1,809
Income from continuing
operations $ 8,771 8,335 7,781 7,255 817
Return from continuing
operations on:
Net sales % 5.5 5.5 5.2 5.0 0.6
Stockholders' investment % 17.4 17.2 16.7 17.4 1.4
Capital employed % 12.2 12.3 11.9 10.6 2.0
Year-End Position
($ in thousands)
Working capital $ 35,712 30,341 28,350 26,277 20,098
Plant and equipment, net $ 39,913 38,276 34,449 36,289 38,654
Total assets excluding
discontinued operations $109,286 102,600 98,196 99,243 95,547
Net assets of discontinued
operations $ -- -- -- 3,529 12,434
Total assets $109,286 102,600 98,196 102,772 107,981
Total debt $ 30,318 28,179 24,578 31,775 43,718
Stockholders' investment $ 52,469 49,464 48,024 43,997 38,515
Capital employed - total $ 82,787 77,643 72,602 75,772 82,233
Per Common Share Data
Income from continuing
operations - Basic $ 0.96 0.85 0.75 0.69 0.08
Income from continuing
operations - Diluted $ 0.94 0.85 0.75 0.69 0.08
Cash dividend $ 0.20 0.20 0.20 0.20 0.20
Stockholders' investment $ 5.61 5.02 4.60 4.19 3.67
Market price:
High $ 11-1/4 8-1/2 6 5-1/2 8-1/2
Low $ 6-3/8 5-1/2 3-7/8 3 3-3/8
Other Data (in thousands)
Depreciation and amortization $ 6,516 6,305 6,314 6,502 6,700
Capital expenditures $ 8,789 10,131 4,831 5,176 6,318
Average common shares outstanding 9,151 9,753 10,433 10,500 10,500
Diluted common shares outstanding 9,350 9,851 10,440 10,500 10,500
Current ratio 2.6 2.4 2.2 2.0 1.8
Number of common stockholders 1,574 1,773 1,967 2,198 2,326
Average number of employees 850 825 874 915 920
Sales per employee $186,710 182,100 172,200 159,040 146,700
(a) Excludes impact of non-recurring litigation and restructuring costs of
$8,743 (pre-tax) in 1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes which begin on page 18.
Results of Operations: 1997 Compared to 1996
Net sales for the year ended December 31, 1997 increased 5.6% to
$158,708,000 from $150,234,000 in 1996. Arlon's sales increased 8.3% as
all markets served experienced growth although there was substantial
volatility within the electronics market. Kasco's sales declined 0.2% as
growth in the US markets, especially in the seasonings for ready-to-cook
foods for supermarkets and special products areas, was offset by the
planned discontinuation of equipment sales in certain Canadian markets and
the negative impact of currency translation rates on sales of Kasco's
European operations.
In 1997, gross profit increased 2.8% to $53,996,000 from $52,536,000 in the
prior year Gross profit increased 2.6% at Arlon and 1.0% at Kasco with
increased sales. However, the strong US dollar also negatively impacted
the translation of foreign gross profit. Gross profit margins declined to
34.0% from 35.0% last year. Profit margins were lower primarily due to
plant and labor inefficiencies caused by swings in demand during the year,
new equipment start-ups at three plants, and the two week strike at the
Bear, Delaware facility
Selling and administrative expenses increased 2.2% to $38,404,000 from
$37,580,000 in 1996. As a percent of sales, these expenses decreased to
24.2% in 1997 from 25.0% in 1996. Selling expenses were relatively
unchanged. General and administrative expenses increased $543,000 or 4.4%
reflecting the Company's on-going investment in recruiting, management
development and incentive compensation programs. Research and development
expenses increased 17.2% as Bairnco continued to invest in the development
of new products and improved quality.
Operating profit in 1997 was $15,592,000, or 9.8% of net sales, compared to
operating profit in 1996 of $14,956,000, or 10.0% of net sales.
Net interest expense increased $109,000 or 6.3% from $1,725,000 to
$1,834,000. The increase was due to increased average debt outstanding.
Income before income taxes increased 4.0% to $13,758,000 in 1997 as
compared to $13,231,000 in 1996. The effective tax rate decreased to 36.2%
from 37.0% in 1996 due primarily to the tax benefits attendant with
Bairnco's foreign sales corporation. The provision for income taxes in
both years includes all applicable federal, state, local and foreign income
taxes. Audits of the Corporation's consolidated US federal income tax
returns have been completed for all years through 1992.
Net income increased 5.2% to $8,771,000 in 1997 as compared to $8,335,000
in 1996. Diluted earnings per share increased 10.6% to $.94 from $.85 last
year. As a result of the stock repurchase program, the average number of
diluted shares outstanding in 1997 was 9,350,000, a 5.1% decrease from the
9,851,000 average outstanding in 1996.
Results of Operations: 1996 Compared to 1995
Net sales for 1996 of $150,234,000 were level with net sales for 1995 of
$150,507,000. Arlon's sales increased 4.1%. Sales to the graphics and
electrical insulation markets continued to grow which more than offset
lower sales to the electronics industry caused by the industry inventory
correction primarily in the second and third quarters. Kasco's sales
decreased 8.5%, part of which was consistent with the program to refocus
Kasco North America on its core business and part of which was due to the
severe impact of BSE ("mad cow disease") on meat consumption in Europe and
its attendant impact on Kasco's replacement and equipment business in
Europe.
In 1996, gross profit decreased 1.5% to $52,536,000 from $53,317,000 in the
prior year. Gross profit margins declined to 35.0% from 35.4% last year.
Arlon's gross profit increased 3.7% as a result of sales growth and a mix
change, which was partially offset by lower yields in two plants caused by
the gyrations in the electronics market during the year resulting in lower
gross profit margins as a percent of sales. Kasco's gross profit declined
8.6% as a result of the sales decrease. The program to refocus Kasco's
North America operations was substantially completed and gross profit
margin increased 1.5% on lower sales. However these improvements were more
than offset by the $1.1 million reduced gross margin in Europe most of
which occurred in the second and third quarters from the BSE panic. Meat
consumption and the confidence of the European meat processing and
distribution markets began to recover in the fourth quarter.
Selling and administrative expenses decreased $1,104,000 or 2.9% to
$37,580,000 from $38,684,000 in 1995. As a percent of sales, these
expenses decreased to 25.0% in 1996 from 25.7% in 1995. Selling expense
decreased slightly. Kasco's expenses were reduced consistent with its
plan. Arlon's sales and marketing expenses increased in accord with its
continued investment in sales and marketing. Administrative expenses
continued to be reduced both absolutely and as a percentage of sales.
Research and development expenses increased 1.5% as Bairnco continued to
invest in the development of new products and improved quality.
Operating profit in 1996 was $14,956,000, or 10.0% of net sales, compared
to operating profit in 1995 of $14,633,000, or 9.7% of net sales.
Net interest expense decreased $301,000 or 14.9% from $2,026,000 to
$1,725,000. The decrease was due primarily to lower interest rates.
Income before income taxes increased 4.9% to $13,231,000 in 1996 as
compared to $12,607,000 in 1995. The effective tax rate decreased to 37.0%
from 38.3% in 1995 due primarily to the tax benefits attendant with the
establishment of Bairnco's foreign sales corporation. The provision for
income taxes in both years includes all applicable federal, state, local
and foreign income taxes.
Net income increased 7.1% to $8,335,000 in 1996 as compared to $7,781,000
in 1995. Earnings per share increased 13.3% to $.85 from $.75 last year.
As a result of the stock repurchase program, the average number of shares
outstanding in 1996 was 9,851,000, a 5.6% decrease from the 10,440,000
average outstanding in 1995.
Liquidity and Capital Resources
At December 31, 1997, Bairnco had working capital of $35.7 million compared
to $30.3 million at December 31, 1996. The increase in accounts receivable
relates primarily to the increased sales activity during the fourth quarter
of 1997 over that of the fourth quarter 1996 and to growing export sales.
Inventories, which increased $2.9 million or 12.3%, were built in response
to increased sales and customer demand for reduced lead times. Other
current assets decreased as a result of the anticipated tax refund received
during the first quarter 1997. The increase in accounts payable results
primarily from the corresponding increase in inventories.
At December 31, 1997, $30.3 million of total debt was outstanding compared
to $28.2 million at the end of 1996. As of December 31, 1997,
approximately $15.7 million was available for borrowing under the
Corporation's secured reducing revolving credit agreement, as amended. In
addition, approximately $5.6 million was available under various short-term
domestic and foreign uncommitted credit facilities. Debt as a percent of
equity increased slightly to 57.8% at the end of 1997 from 57.0% at the end
of 1996.
Bairnco made $8.8 million of capital expenditures in 1997 as compared to
its plan of approximately $13.3 million. Improvements in operating
efficiencies in 1997 and planned for 1998 permitted the postponement of
some planned capital expenditures. Total capital expenditures in 1998 are
expected to be approximately $12.0 million. Depreciation and amortization
is estimated to be approximately $7.0 million. The planned capital
expenditures include cost reduction projects, replacements, quality
improvements, new product developments, new processing equipment and
capacity additions. Approximately $3.0 million of the planned capital
expenditures are for additional capacity and is contingent upon the growth
being realized.
In 1997, Bairnco's Board of Directors authorized an additional $5,000,000
to be available for the ongoing repurchase of its common stock. The
authorization was in addition to the $2,008,000 still unused from the prior
year $5,000,000 authorization. During the year the Company repurchased
424,800 shares for $3,255,000. The Board has authorized management to
continue its stock repurchase program in 1998 subject to market conditions
and the capital requirements of the business.
Cash provided by operating activities plus the amounts available under the
existing credit facilities are expected to be sufficient to fulfill
Bairnco's anticipated cash requirements in 1998.
Year 2000 Date Conversion
The Corporation has evaluated and identified the risks of software failure
due to processing errors arising from calculations using the Year 2000
date. A plan for conversion has been established to maintain the integrity
of its financial systems and ensure the reliability of its operating
systems. The cost of achieving Year 2000 compliance is estimated to be
approximately $250,000, which includes software and installation, and will
be incurred during 1998 and 1999.
Other Matters
Bairnco Corporation and its subsidiaries are defendants in a number of
legal actions and proceedings that are discussed in more detail in Note 9
to the Consolidated Financial Statements. Management of Bairnco believes
that the disposition of these actions and proceedings will not have a
material adverse effect on the consolidated results of operations or the
financial position of Bairnco Corporation and its subsidiaries as of
December 31, 1997.
Outlook
Management is not aware of any adverse trends that would materially affect
the Company's strong financial position. The outlook for 1998 is for
improved sales and earnings. It is expected that the combination of
general economic growth, growth from new products, and higher growth in
certain niche markets will result in increased sales. Improved earnings
are expected both from increased sales and from continuing efficiency and
yield improvement programs.
Quarterly Results of Operations (Unaudited)
(In thousands except per share data)
1st 1st 2nd 2nd 3rd 3rd 4th 4th Total Total
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
Net Sales $37,445 $38,094 $41,128 $37,323 $39,814 $36,152 $40,321 $38,665 $158,708 $150,234
Cost of sales 24,465 24,656 27,020 24,067 26,228 23,645 26,999 25,330 104,712 97,698
Gross Profit 12,980 13,438 14,108 13,256 13,586 12,507 13,322 13,335 53,996 52,536
Selling and
administrative
expenses 9,116 9,621 9,981 9,276 9,717 8,965 9,590 9,718 38,404 37,580
Operating
Profit 3,864 3,817 4,127 3,980 3,869 3,542 3,732 3,617 15,592 14,956
Interest
expense, net 415 415 460 433 486 417 473 460 1,834 1,725
Income before
income taxes 3,449 3,402 3,667 3,547 3,383 3,125 3,259 3,157 13,758 13,231
Provision for
income taxes 1,276 1,293 1,320 1,348 1,218 1,187 1,173 1,068 4,987 4,896
Net Income $ 2,173 $ 2,109 $ 2,347 $ 2,199 $ 2,165 $ 1,938 $ 2,086 $ 2,089 $ 8,771 $ 8,335
Basic Earnings
per Share $ 0.23 $ 0.21 $ 0.26 $ 0.22 $ 0.24 $ 0.20 $ 0.23 $ 0.22 $ 0.96 $ 0.85
Diluted
Earnings per
Share $ 0.23 $ 0.21 $ 0.25 $ 0.22 $ 0.23 $ 0.20 $ 0.23 $ 0.22 $ 0.94 $ 0.85
Market Price:
High $ 7-5/8 $ 8-1/2 $ 8-3/8 $ 7-5/8 $ 11 $ 7-3/8 $11-1/4 $ 6-7/8 $ 11-1/4 $ 8-1/2
Low 6-3/8 5-7/8 6-7/8 6-5/8 8 5-1/2 6-11/16 5-3/4 6-3/8 5-1/2
"Safe Harbor" Statement under the Private Securities Reform Act of 1995
Certain of the statements contained in this annual report (other than the
financial statements and statements of historical fact), including, without
limitation, statements as to management expectations and belief presented
under the captions "Letter to Our Stockholders" and "Management's
Discussion and Analysis", are forward-looking statements. Forward-looking
statements are made based upon management's expectations and belief
concerning future developments and their potential effect upon the
Corporation. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Corporation will be those anticipated by management.
The Corporation wishes to caution readers that the assumptions which form
the basis for forward-looking statements with respect to or that may impact
earnings for the year ended December 31, 1998 and thereafter include many
factors that are beyond the Corporation's ability to control or estimate
precisely. These risks and uncertainties include, but are not limited to,
the market demand and acceptance of the Corporation's existing and new
products, the impact of competitive products, changes in the market for
raw or packaging materials which could impact the Corporation's
manufacturing costs, changes in product mix, changes in the pricing of the
products of the Corporation or its competitors, the loss of a significant
customer or supplier, production delays or inefficiencies, the costs and
other effects of complying with environmental regulatory requirements,
losses due to natural disasters where the Corporation is self insured, the
costs and other effects of legal and administrative cases and proceedings,
settlements and investigations, and changes in US or international economic
or political conditions, such as inflation or fluctuations in interest or
foreign exchange rates.
While the Corporation periodically reassesses material trends and
uncertainties affecting the Corporation's results of operations and
financial condition in connection with its preparation of the stockholders'
letter and management's discussion and analysis contained in its annual
reports, the Corporation does not intend to review or revise any particular
forward-looking statement referenced herein in light of future events.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Bairnco Corporation:
We have audited the accompanying consolidated balance sheets of
Bairnco Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' investment and cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Bairnco Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Orlando, Florida
January 22, 1998
Arthur Andersen LLP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
Bairnco Corporation and Subsidiaries
1997 1996 1995
Net Sales $158,708,000 $150,234,000 $150,507,000
Cost of sales 104,712,000 97,698,000 97,190,000
Gross Profit 53,996,000 52,536,000 53,317,000
Selling and administrative expenses 38,404,000 37,580,000 38,684,000
Operating Profit 15,592,000 14,956,000 14,633,000
Interest expense, net 1,834,000 1,725,000 2,026,000
Income before Income Taxes 13,758,000 13,231,000 12,607,000
Provision for income taxes (Note 3) 4,987,000 4,896,000 4,826,000
Net Income $ 8,771,000 $ 8,335,000 $ 7,781,000
Basic Earnings per Share of Common
Stock (Note 2) $ 0.96 $ 0.85 $ 0.75
Diluted Earnings per Share of Common
Stock (Note 2) $ 0.94 $ 0.85 $ 0.75
Dividends per Share of Common Stock $ 0.20 $ 0.20 $ 0.20
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
Bairnco Corporation and Subsidiaries
1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 1,217,000 $ 855,000
Accounts receivable, less allowances of
$943,000 and $822,000, respectively 24,939,000 21,476,000
Inventories:
Raw materials and supplies 5,646,000 4,733,000
Work in process 6,402,000 5,999,000
Finished goods 14,350,000 12,767,000
26,398,000 23,499,000
Deferred income taxes (Note 3) 2,641,000 2,922,000
Other current assets 2,748,000 3,748,000
Total current assets 57,943,000 52,500,000
Plant and Equipment, at cost:
Land 1,541,000 1,560,000
Buildings and leasehold interests and
improvements 16,659,000 16,451,000
Machinery and equipment 71,670,000 66,520,000
89,870,000 84,531,000
Less - Accumulated depreciation and
amortization (49,957,000) (46,255,000)
39,913,000 38,276,000
Cost in Excess of Net Assets of Purchased
Businesses (Note 1) 7,607,000 7,922,000
Other Assets (Note 1) 3,823,000 3,902,000
$109,286,000 $102,600,000
Liabilities and Stockholders' Investment
Current Liabilities:
Short-term debt (Note 5) $ 3,018,000 $ 3,337,000
Current maturities of long-term debt (Note 5) 9,000 125,000
Accounts payabl 8,661,000 7,383,000
Accrued expenses (Note 4) 10,543,000 11,314,000
Total current liabilities 22,231,000 22,159,000
Long-Term Debt (Note 5) 27,291,000 24,717,000
Deferred Income Taxes (Note 3) 4,098,000 3,114,000
Other Liabilities 3,197,000 3,146,000
Stockholders' Investment (Notes 2, 5 and 6):
Preferred stock, par value $.01, 5,000,000
shares authorized, none issued -- --
Common stock, par value $.01, 30,000,000
shares authorized, 11,160,774 and 11,155,499
issued respectively 112,000 112,000
Paid-in capital 49,030,000 49,004,000
Retained earnings 22,802,000 15,858,000
Currency translation adjustment (Note 1) 1,572,000 2,282,000
Treasury stock, at cost, 2,166,765 and
1,741,965 shares, respectively (21,047,000) (17,792,000)
Total stockholders' investment 52,469,000 49,464,000
$109,286,000 $102,600,000
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
Bairnco Corporation and Subsidiaries
1997 1996 1995
Cash Flows from Operating Activities:
Income from continuing operations $ 8,771,000 $ 8,335,000 $ 7,781,000
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 6,516,000 6,305,000 6,314,000
Loss on disposal of plant and
equipment 34,000 203,000 294,000
Deferred income taxes 1,265,000 373,000 1,561,000
Change in operating assets and
liabilities:
(Increase) in accounts receivable,
net (3,463,000) (4,000) (587,000)
(Increase) decrease in inventories (2,899,000) 237,000 (3,694,000)
Decrease (increase) in other
current assets 1,000,000 (1,618,000) 3,205,000
Increase (decrease) in accounts
payable 1,278,000 (502,000) (1,877,000)
(Decrease) in accrued expenses (771,000) (451,000) (1,019,000)
Cash provided by discontinued operations -- -- 1,988,000
Other 472,000 734,000 699,000
Net cash provided by operating
activities 12,203,000 13,612,000 14,665,000
Cash Flows from Investing Activities:
Capital expenditures (8,789,000) (10,131,000) (4,831,000)
Proceeds from sale of plant and
equipment 219,000 138,000 328,000
Proceeds from sale of discontinued
operations -- -- 100,000
Net cash (used in) investing
activities (8,570,000) (9,993,000) (4,403,000)
Cash Flows from Financing Activities:
Net borrowings (repayments) of
external debt 2,434,000 3,968,000 (7,427,000)
Payment of dividends (1,827,000) (1,937,000) (2,087,000)
Purchase of treasury stock (3,255,000) (5,412,000) (2,580,000)
Exercise of stock options 26,000 472,000 560,000
Net cash (used in) financing
activities (2,622,000) (2,909,000) (11,534,000)
Effect of foreign currency exchange
rate changes on cash and cash
equivalents (649,000) (463,000) 402,000
Net increase (decrease) in cash and
cash equivalents 362,000 247,000 (870,000)
Cash and cash equivalents, beginning
of year 855,000 608,000 1,478,000
Cash and cash equivalents, end of year $ 1,217,000 $ 855,000 $ 608,000
Supplemental Disclosures of Cash Flow
Information:
Cash paid (received) during the year
for:
Interest $ 1,824,000 $ 1,696,000 $ 1,992,000
Income taxes $ 2,805,000 $ 5,378,000 $ (310,000)
Non-cash investing activities:
Notes received from sale of
discontinued operations $ -- $ -- $ 2,500,000
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the years ended December 31, 1997, 1996 and 1995
Bairnco Corporation and Subsidiaries
Currency
Common Paid-in Retained Translation Treasury
Stock Capital Earnings Adjustment Stock
Balance, December 31, 1994 $109,000 $47,975,000 $ 3,766,000 $1,947,000 $ (9,800,000)
Net income -- -- 7,781,000 -- --
Cash dividends ($.20 per
share) -- -- (2,087,000) -- --
Issuance of 110,375 shares
pursuant to exercise of
stock options 2,000 558,000 -- -- --
Acquisition of treasury
stock (486,200 shares at
cost) -- -- -- -- (2,580,000)
Currency translation
adjustment (Note 1) -- -- -- 353,000 --
Balance, December 31, 1995 111,000 48,533,000 9,460,000 2,300,000 (12,380,000)
Net income -- -- 8,335,000 -- --
Cash dividends ($.20 per
share) -- -- (1,937,000) -- --
Issuance of 93,000 shares
pursuant to exercise of
stock options 1,000 471,000 -- -- --
Acquisition of treasury
stock (803,900 shares at
cost) -- -- -- -- (5,412,000)
Currency translation
adjustment (Note 1) -- -- -- (18,000) --
Balance, December 31, 1996 112,000 49,004,000 15,858,000 2,282,000 (17,792,000)
Net income -- -- 8,771,000 -- --
Cash dividends ($.20 per
share) -- -- (1,827,000) -- --
Issuance of 5,275 shares
pursuant to exercise of
stock options -- 26,000 -- -- --
Acquisition of treasury
stock (424,800 shares at
cost) -- -- -- -- (3,255,000)
Currency translation
adjustment (Note 1) -- -- -- (710,000) --
Balance, December 31, 1997 $112,000 $49,030,000 $22,802,000 $1,572,000 $(21,047,000)
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies
Nature of operations:
Bairnco Corporation is a diversified multinational company that operates
two business sectors: Engineered Materials and Components which are
designed, manufactured and sold under the Arlon brand identity to
electronic, industrial and commercial markets worldwide; and, Replacement
Products and Services which are manufactured and distributed under the
Kasco brand identity principally to retail food stores and meat, poultry
and fish processing plants throughout the United States, Canada and Europe.
Arlon's products are based on a common technology in coating, laminating
and dispersion chemistry. Arlon's principal products include high
performance materials for the printed circuit board industry, cast and
calendered vinyl film systems, custom engineered laminates and pressure
sensitive adhesive systems, and calendered and extruded silicone rubber
insulation products used in a broad range of industrial, consumer and
commercial products.
Kasco's principal products include replacement band saw blades for
cutting meat, fish, wood and metal, on-site maintenance services and
seasonings for ready-to-cook foods for the retail food industry primarily
in the meat and deli departments. Kasco also distributes equipment to the
food industry in Canada and France.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Bairnco Corporation and its subsidiaries (Bairnco or the Corporation) after
the elimination of all material inter-company accounts and transactions.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Consolidated statements of cash flows:
The Corporation considers cash in banks, commercial paper, demand notes
and similar investments with a maturity of less than three months as cash
and cash equivalents for the purposes of the consolidated statements of
cash flows.
Inventories:
Inventories are stated at cost, which is not in excess of market.
Inventory costs include material, labor and overhead. Inventories are
stated principally on a first-in, first-out (FIFO) basis.
Plant and equipment:
The Corporation provides for depreciation of plant and equipment
principally on a straight-line basis by charges to income in amounts
estimated to allocate the cost of these assets over their useful lives.
Rates of depreciation vary among the several classifications as well as
among the constituent items in each classification, but generally fall
within the following ranges:
Years
Buildings and leasehold interests and improvements 5 - 40
Machinery and equipment 3 - 20
When property is sold or otherwise disposed of, the asset cost and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in the statement of income.
Leasehold interests and improvements are amortized over the terms of the
respective leases, or over their estimated useful lives, whichever is
shorter.
Maintenance and repairs are charged to operations. Renewals and
betterments are capitalized.
Accelerated methods of depreciation are used for income tax purposes,
and appropriate provisions are made for the related deferred income taxes.
Depreciation expense of $6,333,000, $6,123,000 and $6,131,000 was
recognized during 1997, 1996 and 1995, respectively.
Cost in excess of net assets of purchased businesses:
Cost in excess of net assets of purchased businesses acquired prior to
1971 of approximately $3.5 million is not being amortized since, in the
opinion of management, there has been no diminution in value. For
businesses acquired subsequent to 1970, the cost in excess of net assets of
purchased businesses, aggregating $5,625,000 and $5,833,000 at December 31,
1997 and 1996, respectively, is being amortized over 40 years. Accumulated
amortization at December 31, 1997 and 1996, was $1,504,000 and $1,396,000,
respectively. Amortization expense of $146,000, $149,000 and $150,000 was
recognized during 1997, 1996 and 1995, respectively.
At each balance sheet date, the Corporation evaluates the realizability
of its cost in excess of net assets of purchased businesses based upon
expectations of non-discounted cash flows and operating income for each
division having a material cost in excess of net assets of purchased
businesses balance. Based upon its most recent analysis, the Corporation
believes that no material impairment of its cost in excess of net assets of
purchased businesses exists at December 31, 1997.
Intangibles:
Intangible assets of purchased businesses, net of amortization, are
included in other assets and totaled $99,000 and $136,000 at December 31,
1997 and 1996, respectively. These items are amortized over their
estimated lives, which generally range from three to twenty years.
Amortization expense recognized was $37,000 during 1997 and $33,000 during
1996 and 1995.
Revenue recognition:
Revenues are recognized when products are shipped or when services are
rendered.
Income taxes:
The Corporation accounts for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Corporation's financial statements or tax returns.
In estimating future tax consequences, the Corporation generally considers
all expected future events other than enactment of changes in the tax law
or changes in tax rates. Changes in tax laws or rates will be recognized
in the future years in which they occur. Temporary differences between
income for financial reporting and income tax purposes arise primarily from
the timing of the deduction of certain accruals and from the use of
accelerated methods of depreciation for income tax reporting purposes
compared to the method of depreciation used for financial reporting
purposes.
Accrued expenses:
Accrued expenses-insurance represents the estimated costs of known and
anticipated claims under the Corporation's general liability, automobile
liability, property and workers compensation insurance policies for all of
its US operations. The Corporation provides reserves on reported claims
and claims incurred but not reported at each balance sheet date based upon
the estimated amount of the probable claim or the amount of the deductible,
whichever is lower. Such estimates are reviewed and evaluated in light of
emerging claim experience and existing circumstances. Any changes in
estimates from this review process are reflected in operations currently.
Stock options:
The Corporation accounts for stock options under Accounting Principles
Board Opinion No. 25 ("APB 25"), under which no compensation expense has
been recognized. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which is effective for years
beginning after December 15, 1995. SFAS 123 established financial
accounting and reporting standards for stock-based employee compensation
plans. The statement defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their stock
compensation plans. However, it also allows an entity to continue to
measure compensation costs for those plans using the intrinsic value based
method of accounting prescribed by APB 25, but requires pro-forma
disclosure of net income and earnings per share for the effects on
compensation expense had the accounting guidance for SFAS 123 been adopted.
Compensation costs determined consistent with SFAS 123 did not have a
material impact on the accompanying consolidated net earnings and earnings
per share.
Translation of foreign currencies:
Balance sheet accounts of foreign subsidiaries are translated at the
rates of exchange in effect at the balance sheet date while income and
expenses are translated at the monthly average rates of exchange in effect
during the year.
Fair value of financial instruments:
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, approximate fair value due to the
short-term maturities of these assets and liabilities.
The carrying amount of the Corporation's short-term and long-term debt
approximates fair value, since the debt is at floating rates or rates
approximating rates currently offered to the Corporation for debt of the
same remaining maturities.
(2) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share,"
effective for reporting periods ending after December 15, 1997. SFAS No.
128 requires companies to present basic earnings per share ("EPS") and
diluted earnings per share, instead of primary and fully diluted EPS
previously required. The new standard also requires additional
informational disclosures and makes certain modifications to the EPS
calculations previously reported under Accounting Principles Board No. 15.
The Corporation has adopted SFAS No. 128 effective December 15, 1997 and,
as a result, the Corporation's reported quarterly EPS for 1997 have been
restated. This accounting change had no effect on previously reported EPS
data for 1996 and 1995. The following disclosures comply with the
requirements of SFAS No. 128.
1997 1996 1995
Basic Earnings per Common Share:
Net Income $8,771,000 $8,335,000 $ 7,781,000
Average common shares outstanding 9,151,000 9,753,000 10,433,000
Basic Earnings Per Common Share $ 0.96 $ 0.85 $ 0.75
Diluted Earnings per Common Share:
Net Income $8,771,000 $8,335,000 $ 7,781,000
Average common shares outstanding 9,151,000 9,753,000 10,433,000
Common shares issuable in respect
to options issued to employees,
with a dilutive effect 199,000 98,000 7,000
Total diluted common shares
outstanding 9,350,000 9,851,000 10,440,000
Diluted Earnings Per Common Share $ 0.94 $ 0.85 $ 0.75
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share includes the effect of all
dilutive stock options.
(3) Income Taxes
The components of income from continuing operations before income taxes and
the provisions for domestic and foreign income taxes on continuing
operations are as follows:
1997 1996 1995
Income before Income Taxes:
Domestic $12,765,000 $13,176,000 $11,360,000
Foreign 993,000 55,000 1,247,000
Total Income before Income
Taxes $13,758,000 $13,231,000 $12,607,000
Provision for Income Taxes:
Domestic:
Currently payable $ 3,616,000 $ 4,096,000 $ 1,671,000
Deferred 1,102,000 594,000 2,413,000
Foreign:
Currently payable 106,000 452,000 943,000
Deferred 163,000 (246,000) (201,000)
Total Provision for Income
Taxes $ 4,987,000 $ 4,896,000 $ 4,826,000
Bairnco's restated net current and non-current deferred tax assets
(liabilities) include the following at December 31:
1997 1996 1995
Current Deferred Tax Items:
Accrued Expenses $ 1,584,000 $ 1,887,000 $ 2,211,000
Inventories 847,000 872,000 961,000
Other 210,000 163,000 224,000
Net Current Deferred
Tax Asset 2,641,000 2,922,000 3,396,000
Non-Current Deferred Tax
Items:
Fixed Assets (3,291,000) (2,889,000) (2,650,000)
Pensions (1,051,000) (1,149,000) (938,000)
Intangible Assets 21,000 15,000 (107,000)
Other 223,000 909,000 480,000
Net Non-Current
Deferred Tax Liability (4,098,000) (3,114,000) (3,215,000)
Net Deferred Tax
(Liability) Asset $(1,457,000) $ (192,000) $ 181,000
Management expects that future operations will generate sufficient taxable
income to realize the existing net temporary differences. As a result, the
Corporation has not recorded any valuation allowances against its deferred
tax assets.
Other current assets on the balance sheet include current income taxes
receivable of approximately $0.2 million at December 31, 1997 and $1.1
million at December 31, 1996.
In 1997, 1996 and 1995 the Corporation's effective tax rates were 36.2%,
37.0% and 38.3%, respectively, of income before income taxes. An analysis
of the differences between these rates and the US federal statutory income
tax rate is as follows:
1997 1996 1995
Computed income taxes at
statutory rate $ 4,678,000 $ 4,499,000 $ 4,287,000
State and local taxes, net of
federal tax benefit 368,000 321,000 205,000
Dividend income 1,303,000 198,000 193,000
Amortization of goodwill 9,000 9,000 9,000
Foreign income taxed at
different rates (69,000) 187,000 318,000
Tax credits (1,182,000) (271,000) (281,000)
Benefit of Foreign Sales
Corporation (289,000) (413,000) --
Other, net 169,000 366,000 95,000
Provision for income taxes $ 4,987,000 $ 4,896,000 $ 4,826,000
Audits of the federal income tax returns of the Corporation and its
subsidiaries have been completed through 1992.
Provision has not been made for US income taxes on approximately
$2.3 million of undistributed earnings of international subsidiaries.
These earnings could become subject to additional tax if they were remitted
as dividends or if the Corporation should sell its stock in the
subsidiaries. It is not practicable to estimate the amount of additional
tax that might be payable on the foreign earnings; however, the Corporation
believes that US foreign tax credits would largely eliminate any US income
tax incurred.
(4) Accrued Expenses
Accrued expenses consisted of the following as of December 31, 1997 and
1996, respectively:
1997 1996
Salaries and wages $ 2,353,000 $ 2,708,000
Income taxes 139,000 245,000
Insurance 2,216,000 2,648,000
Litigation 1,461,000 1,654,000
Other accrued expenses 4,374,000 4,059,000
Total accrued expenses $10,543,000 $11,314,000
(5) Debt
Long-term debt consisted of the following as of December 31, 1997 and 1996,
respectively:
1997 1996
Revolving Credit Notes $24,291,000 $21,707,000
Equipment Loans -- 115,000
Industrial Revenue Bonds 3,000,000 3,000,000
Other 9,000 20,000
27,300,000 24,842,000
Less Current Maturities 9,000 125,000
Total $27,291,000 $24,717,000
The Corporation has a credit agreement ("Credit Agreement") with a
consortium of four banks led by Bank of America, Illinois, and including
SunTrust Bank, First Union Bank of Florida and First National Bank of
Maryland. The Credit Agreement provides a secured, reducing revolving
credit facility for a maximum loan commitment at December 31, 1997 of $40
million and a letter of credit facility of $10 million, although the letter
of credit facility may be increased up to $20 million with a corresponding
decrease in the revolving credit facility. At December 31, 1997, $24.3
million of revolving credit was outstanding and payable in 2000 and 2001.
In addition, approximately $8.3 million of irrevocable standby letters of
credit were outstanding under the Credit Agreement, which are not reflected
in the accompanying consolidated financial statements. $5.0 million of the
letters of credit guarantee various trade and insurance activities. An
outstanding $3.3 million letter of credit supports the Industrial Revenue
Bonds. Interest rates vary on the revolving credit and are set at the time
of borrowing in relationship to one of several reference rates, as selected
by the Corporation at the time of the borrowing. Interest rates on the
revolving credit outstanding at December 31, 1997, were 6.4% on US
borrowings and 4.1% to 8.0% on European borrowings. A commitment fee is
paid on the unused portion of the total credit. The interest rate on the
Industrial Revenue Bonds was 4.3% at December 31, 1997.
Substantially all of the assets of the Corporation and its US subsidiaries
are pledged as collateral under the Credit Agreement, which expires on
December 31, 2001.
The Credit Agreement contains covenants, which require the Corporation to
meet minimum interest coverage ratios, and which limit the ratio of total
debt to capital employed as defined in the Credit Agreement. In addition,
minimum levels of stockholders' investment must be maintained. At December
31, 1997 the Corporation was in compliance with all covenants contained in
the Credit Agreement.
The Corporation has mortgages and other short-term debt outstanding at
rates of 4.2% to 6.0% due in 1998.
The annual maturity requirements for long-term debt due after December 31,
1997, are summarized as follows:
Year Ended December 31,
1998 $ 9,000
1999 --
2000 6,000,000
2001 18,291,000
2002 --
Due after December 31, 2002 3,000,000
Total Long-Term Debt $27,300,000
(6) Stock Options
The Corporation has a stock incentive plan which was established in 1990
("1990 Plan"). The 1990 Plan permits the grant of options to purchase not
more than 2,500,000 shares of common stock. The 1990 Plan provides for the
grant of non-qualified options and options qualifying as incentive stock
options under the Internal Revenue Code to key employees and each outside
Director of the Corporation at an option price equal to the fair market
value on the date of grant. Non-qualified stock options may also be
granted at book value. The term of each option may not exceed 10 years
from the date the option becomes exercisable (or, in the case of an
incentive stock option, 10 years from the date of grant).
A senior executive of the Corporation presently holds performance based,
non-qualified stock options granted under the 1990 Plan to purchase a total
of 250,000 shares of common stock at option prices equal to the fair market
value on the date of grant. Two-thirds of these performance options became
exercisable as a result of the Corporations earnings performance in 1992
and 1995 with the remaining one-third becoming fully exercisable on the
tenth anniversary of the date of grant if the executive is still employed
by the Corporation. These options remain exercisable for ten years from
the date they first become exercisable.
Changes in the stock options granted under the 1990 Plan during 1997, 1996
and 1995 were as follows:
1997 1996 1995
Wtd Avg Wtd Avg Wtd Avg
1997 Exercise 1996 Exercise 1995 Exercise
Options Price Options Price Options Price
Outstanding at
beginning of 684,225 $5.71 716,950 $5.56 982,150 $5.44
year
Granted 33,400 8.24 78,000 6.32 21,600 4.70
Exercised (5,275) 4.93 (93,000) 5.09 (110,375) 5.06
Canceled (78,600) 5.39 (17,725) 5.28 (176,425) 5.13
Outstanding at
end of year 633,750 $5.89 684,225 $5.71 716,950 $5.56
Exercisable at
end of year 465,563 $5.70 501,513 $5.62 506,917 $5.48
At December 31, 1997, 1996 and 1995, 1,490,475, 1,495,925 and 1,556,200
shares, respectively, were available for option grants under the 1990 Plan.
The weighted average contractual life of the 633,750 options outstanding at
December 31, 1997 was 3.68 years. There were no charges to income in
connection with stock option grants or exercises during 1997, 1996 and
1995.
(7) Pension Plans
The Corporation has several pension plans which cover substantially all of
its employees. The benefits paid under these plans generally are based on
employees' years of service and compensation during the last years of
employment. Annual contributions made to the US plans are determined in
compliance with the minimum funding requirements of ERISA using a different
actuarial cost method and actuarial assumptions than are used for
determining pension expense for financial reporting purposes. Plan assets
consist primarily of publicly traded equity and debt securities. The
Corporation maintains unfunded supplemental plans in the United States to
provide retirement benefits in excess of levels provided under the
Corporation's other plans. The Corporation's foreign subsidiaries provide
retirement benefits for employees consistent with local practices. The
foreign plans are not significant in the aggregate and therefore are not
included in the following disclosures.
The following table describes the funded status of US pension plans.
Overfunded plans are those in which the amount provided for future benefits
(fair value of plan assets) exceeds the accumulated benefit obligation
(actuarial present value of benefits earned to date based on present pay
levels).
1997 1997 1996 1996
Overfunded Underfunded Overfunded Underfunded
Actuarial present value
of benefit obligation:
Vested $(19,931,000) $(3,021,000) $(19,242,000) $(2,476,000)
Non-vested (292,000) (15,000) (225,000) (24,000)
Accumulated benefit
obligation (20,223,000) (3,036,000) (19,467,000) (2,500,000)
Additional amounts
related to projected
pay increases (2,311,000) (69,000) (2,209,000) (65,000)
Projected benefit
obligation (22,534,000) (3,105,000) (21,676,000) (2,565,000)
Plan assets at fair value 28,066,000 2,368,000 22,531,000 1,841,000
Plan assets in excess of
(less than) projected
benefit obligation 5,532,000 (737,000) 855,000 (724,000)
Unrecognized net
transition obligation 195,000 253,000 255,000 291,000
Unrecognized prior
service costs (86,000) 409,000 (83,000) 94,000
Unrecognized net (gain)
loss (2,796,000) (43,000) 1,171,000 207,000
Adjustment to recognize
minimum liability -- (550,000) -- (527,000)
Prepaid (accrued)
pension costs
recognized in balance
sheet at September 30 2,845,000 (668,000) 2,198,000 (659,000)
Fourth quarter accruals (72,000) (53,000) (91,000) (64,000)
Fourth quarter
contributions -- 55,000 -- 65,000
Prepaid (accrued) pension
costs at December 31 $ 2,773,000 $ (666,000) $ 2,107,000 $ (658,000)
The discount rate used in determining the actuarial present value of the
projected benefit obligations in the table above was 7.5% at both September
30, 1997 and 1996. The rate of projected pay increases, where applicable,
was 5% at both September 30, 1997 and 1996. The expected long-term rate of
return on retirement plan assets was 9% at both September 30, 1997 and
1996.
Net periodic pension cost for the US plans included the following:
1997 1996 1995
Service cost-benefits earned
during the year $ 771,000 $ 716,000 $ 858,000
Interest cost on projected
benefit obligation 1,823,000 1,695,000 1,646,000
Return on plan assets:
Expected return-(gain) (2,252,000) (2,018,000) (1,666,000)
Asset (gain) (4,471,000) (434,000) (2,879,000)
Actual return-(gain) (6,723,000) (2,452,000) (4,545,000)
Net amortization and deferral 4,631,000 566,000 (3,135,000)
Net periodic pension cost $ 502,000 $ 525,000 $ 1,094,000
(8) Business Segment Data
The Corporation operates two distinct businesses: Arlon - Engineered
Materials and Components' segment; and, Kasco - Replacement Products
and Services' segment. Information about the Corporation's major
lines of business for the years ended December 31, 1997, 1996 and 1995
is as follows:
Segment Depreciation
Operating Capital and
Net Sales Profit(Loss) Assets Expenditures Amortization
1997
Arlon $112,036,000 $15,873,000 $ 65,525,000 $ 5,438,000 $3,665,000
Kasco 46,672,000 3,495,000 38,617,000 3,252,000 2,791,000
Corporate -- (3,776,000) 5,144,000 99,000 60,000
Total $158,708,000 $15,592,000 $109,286,000 $ 8,789,000 $6,516,000
1996
Arlon $103,449,000 $16,159,000 $ 61,118,000 $ 7,255,000 $3,312,000
Kasco 46,785,000 2,649,000 35,161,000 2,830,000 2,933,000
Corporate -- (3,852,000) 6,321,000 46,000 60,000
Total $150,234,000 $14,956,000 $102,600,000 $10,131,000 $6,305,000
1995
Arlon $ 99,391,000 $15,389,000 $ 55,108,000 $ 1,999,000 $3,274,000
Kasco 51,116,000 2,889,000 38,690,000 2,805,000 2,975,000
Corporate -- (3,645,000) 4,398,000 27,000 65,000
Total $150,507,000 $14,633,000 $ 98,196,000 $ 4,831,000 $6,314,000
The Corporation has operations in Canada and several European
countries. Information about the Corporation's operations by
geographical area for the years ended December 31, 1997, 1996 and 1995
is as follows:
Segment
Operating
Net Sales Profit Assets
1997
United States $136,010,000 $13,886,000 $ 92,393,000
Foreign 22,698,000 1,706,000 16,893,000
Total $158,708,000 $15,592,000 $109,286,000
1996
United States $124,154,000 $14,564,000 $ 84,269,000
Foreign 26,080,000 392,000 18,331,000
Total $150,234,000 $14,956,000 $102,600,000
1995
United States $122,510,000 $12,797,000 $ 77,917,000
Foreign 27,997,000 1,836,000 20,279,000
Total $150,507,000 $14,633,000 $ 98,196,000
(9) Contingencies
Bairnco has been named as a defendant in a number of personal injury and
wrongful death cases in which it is alleged that Bairnco is derivatively
liable for the asbestos-related claims against its former subsidiary, Keene
Corporation ("Keene"). On December 6, 1993, Keene filed for protection
under Chapter 11 of the Bankruptcy Code. On June 8, 1995, the Keene
Creditors' Committee commenced an adversary proceeding in the Bankruptcy
Court against Bairnco, certain of its present and former officers and
directors, and others alleging that the transfer of assets for value by
Keene to other subsidiaries of Bairnco, and the spin-offs of certain other
subsidiaries by Bairnco, were fraudulent and otherwise violative of law
(the "Transactions Lawsuit") and seeking compensatory damages of $700
million, plus interest and punitive damages. The complaint in the
Transactions Lawsuit includes a count under the civil RICO statute, 18
U.S.C. Section 1964, pursuant to which compensatory damages are trebled.
Bairnco is party to a separate action brought by Keene in the United States
Bankruptcy Court for the Southern District of New York in which Keene seeks
the exclusive benefit of tax refunds attributable to the carryback by Keene
of certain net operating losses ("NOL Refunds"), notwithstanding certain
provisions of tax sharing agreements between Keene and Bairnco (the "NOL
Lawsuit"). (After filing the NOL Lawsuit, Keene ceded control of the
action to the Creditors' Committee.) Pending resolution of the NOL
Lawsuit, any refunds actually received are to be placed in escrow. Through
December 31, 1997, approximately $28.5 million of NOL Refunds had been
received and placed in escrow. There can be no assurance whatsoever that
resolution of the NOL Lawsuit will result in the release of any portion of
the NOL Refunds to Bairnco.
Keene's plan of reorganization was approved and became effective on July
31, 1996. The plan, as approved, creates a Creditors Trust that has
succeeded to all of Keene's asbestos liabilities, and also has succeeded to
the right to prosecute both the Transactions Lawsuit and the NOL Lawsuit.
The plan also includes a permanent injunction under which only the
Creditors Trust, and no other entity, can sue Bairnco in connection with
the claims asserted in these lawsuits.
By order entered April 10, 1997, the Transactions Lawsuit was transferred
from the Bankruptcy Court to the United States District Court for the
Southern District of New York, where it will be litigated. On September
15, 1997, Bairnco and other defendants filed motions to dismiss the
complaint for failure to state a claim as well as motions for summary
judgment on the grounds that the complaint is time-barred. Briefing on
these motions is complete. Subsequent to year-end, the court issued an
opinion granting the motions to dismiss four of the twenty-one defendants
in the Transactions Lawsuit. The court reserved decision on the motions of
the other defendants. There can be no assurance that the remaining motions
will result in dismissal of the Transactions Lawsuit or any part thereof.
On January 6, 1998, the Creditors Trust filed a motion, to which Bairnco
consented, to have the NOL Lawsuit transferred from the Bankruptcy Court to
the District Court. That motion is pending.
Management believes that Bairnco has meritorious defenses to all claims or
liability purportedly derived from Keene and that it is not liable, as an
alter ego, successor, fraudulent transferee or otherwise, for the asbestos-
related claims against Keene or with respect to Keene products.
Bairnco Corporation and its subsidiaries are defendants in a number of
other actions. Management of Bairnco believes that the disposition of these
other actions, as well as the actions and proceedings described above, will
not have a material adverse effect on the consolidated results of
operations or the financial position of Bairnco Corporation and its
subsidiaries as of December 31, 1997.
CORPORATE INFORMATION
Corporate Office
Suite 300, 2251 Lucien Way
Maitland, Florida 32751
(407) 875-2222
www.bairnco.com
Principal Facilities
Bear, Delaware
East Providence, Rhode Island
Rancho Cucamonga, California
St. Louis, Missouri
Santa Ana, California
Toronto, Ontario, Canada
Gwent, Wales, United Kingdom
Paris, France
Pansdorf, Germany
Transfer Agent and Registrar
Trust Company Bank
P.O. Box 4625
Atlanta, Georgia 30302
(404) 588-7815
Independent Certified Public Accountants
Arthur Andersen LLP
200 South Orange Avenue, Suite 2100
Orlando, Florida 32801
(407) 841-4601
Stock Listing
Bairnco common stock is listed on the New York Stock Exchange.
Symbol - BZ.
Annual Meeting
The annual stockholders meeting will be held at Bairnco's Corporate Office
on April 24, 1998 at 10:00 a.m.
Form 10-K
Stockholders may obtain without charge a copy of Bairnco's Form 10-K filed
with the Securities and Exchange Commission by writing to Investor
Relations at the Corporate Office address.
Investor Relations Information
Contact Investor Relations at Bairnco's Corporate Office.
BAIRNCO CORPORATION
Suite 300, 2251 Lucien Way
Maitland, Florida 32751
407-875-2222
FAX 407-875-3398
www.bairnco.com