1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OUR BUSINESS Barnes Group is a worldwide manufacturer of precision
metal parts and a provider of industrial main-
tenance logistics solutions. The Company is comprised
of three business segments. The Associated Spring
segment is a manufacturer of assemblies, high
precision mechanical springs, nitrogen gas springs,
manifold systems, wireforms and stampings for the
transportation, industrial, electronics and
communications markets. The Barnes Aerospace segment
supplies precision components and fabricated
assemblies for commercial and military aircraft as
well as overhaul and repair services in support of
the global airline industry. The Bowman Distribution
segment provides consumable repair and replacement
products for industrial, heavy equipment and trans-
portation maintenance markets. Its Raymond
Distribution operation also distributes
close-tolerance engineered metal components
manufactured principally by Associated Spring.
Through these three businesses, Barnes Group works
with its customers' organizations to help them
realize the benefits of its manufacturing
capabilities and logistics management to enhance
their competitiveness and responsiveness.
ACQUISITION OF On August 30, 1999, Barnes Group purchased
NITROGEN GAS substantially all of the assets and liabilities of
SPRINGS BUSINESS the nitrogen gas springs business of the Teledyne
Fluid Systems Division of Teledyne Industries, Inc.,
for a total cost of $92.2 million. This operation is
a major supplier of nitrogen gas springs and manifold
systems for the metal forming markets. The
acquisition of the nitrogen gas springs business was
recorded using the purchase method of accounting and
is included in the Associated Spring business
segment. This strategic acquisition provides
Associated Spring with new spring technologies and
allows it to continue to develop and expand products,
markets and services. The operation's results have
been included in Barnes Group's consolidated
financial statements from the date of acquisition.
The funds used to purchase the business were borrowed
initially under the Company's revolving credit
agreement. In November 1999, Barnes Group refinanced
a portion of these borrowings through the issuance of
$70 million of long-term private placement senior
notes. This debt ranges in maturity from eight to
eleven years at an average annual interest rate of
7.75%.
RESULTS OF For 1999, Barnes Group reported net sales of $622
OPERATIONS million, down 4% from the record sales of $651
million in 1998. The reduction in sales was
attributable to shortfalls at Bowman Distribution and
Barnes Aerospace, partially offset by increased sales
at Associated Spring. In addition, the newly acquired
nitrogen gas springs business provided incremental
sales of $16 million in 1999. In 1998, sales were up
$8.5 million from 1997 levels, primarily a result of
improvements at Barnes Aerospace.
Operating income in 1999 was $45.3 million, versus
$55.2 million in 1998. The decline in 1999 operating
income was driven by the sales volume shortfalls at
Bowman Distribution and Barnes Aerospace.
Additionally, non-Y2K system implementation issues
resulted in higher expense levels at Bowman
Distribution's North American operation, which
negatively impacted profit. The reduced profit at
Bowman Distribution and Barnes Aerospace was
partially offset by results at Associated Spring,
where profit improved 44% over 1998, and a $12.9
million expense, included in 1998, for the
accelerated retirement package for the Company's
retired president. Associated Spring's performance
was driven by higher sales volume, productivity
improvements and the additional profits generated
from the newly acquired nitrogen gas springs
business. Operating income in 1998 declined $10.5
million from 1997 as a result of the $12.9 million
expense related to the accelerated retirement package
for the Company's retired president. Part of the
$12.9 million of expense is $2.7 million for
accelerated retirement benefits which are included in
the 1998 pension expense.
Operating margin in 1999 declined to 7.3% from 8.5%
in 1998 and 10.2% in 1997. In 1999, cost of sales as
a percentage of sales increased to 68.3% from 66.9%
in 1998, as Bowman Distribution's North American
operation incurred higher distribution costs as a
result of inefficiencies generated during the
implementation of the new distribution management
system. Selling and administrative expenses as a
percentage of sales declined slightly in 1999 due to
the $12.9 million of expense for the accelerated
retirement package for the Company's retired
president in 1998. Excluding the cost of the
accelerated retirement package, selling and
administrative expenses as a percentage of sales
increased in 1999, reflecting the impact of higher
administrative costs associated with the Bowman
system implementation coupled with a higher
investment in sales resources, throughout the
Company, for the purpose of increasing future sales
growth. The decline in operating margin in 1998,
compared to 1997, is attributable to the $12.9
million retirement package expense incurred in 1998.
SEGMENT REVIEW - Associated Spring sales for 1999 were $283 million,
SALES AND up $20.5 million from 1998. Sales in 1997 were $259
OPERATING PROFIT million. In 1999, sales at Associated Spring's North
American operations increased, reflecting the
continued strength of the domestic economy and
continued penetration in both automotive and
non-automotive markets. Excluding the acquisition,
Associated Spring's international operations sales
kept pace with 1998 levels, despite a 9% sales
decline in its Brazil operation, a direct fallout of
the devaluation of the Brazilian currency in early
1999. Additionally, the acquisition of the
nitrogen gas springs business contributed to sales
increases both domestically and internationally.
Associated Spring's 1998 sales increased slightly
over 1997 on the strength of its North American
operations, partially offset by sales declines in its
international operations.
5
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
Associated Spring reported profit of $33.5 million in
1999, compared to $23.2 million in 1998 and $24.5
million in 1997. The significant improvement in 1999
over 1998 results from the addition of the nitrogen
gas springs business, stabilization of the economic
situation in the Asia/Pacific region, manufacturing
efficiencies and lower operating expenses at
Associated Spring's headquarters. Profits declined in
1998, reflecting the adverse impact of the General
Motors strike, the turmoil within the Asia/Pacific
region and the cost of product line rationalization.
Partially offsetting the 1998 decline was the solid
year-over-year performance at Associated Spring's
North American operations and the strong turnaround
at its Mexican operation.
Barnes Aerospace sales were $121 million in 1999,
compared to $155 million in 1998 and $137 million
in 1997. Both the original equipment manufacturing
(OEM) business and the overhaul and repair business
were impacted by a slowdown in the aerospace markets,
which resulted in an industry-wide decline in new
orders and the cancellation or rescheduling of
existing orders. Though sales were down, Barnes
Aerospace continued to effectively penetrate new
markets and customers. In 1998, sales were up 13%
over 1997, driven by its OEM machining operation and
overhaul and repair units. This growth was partially
offset by lower sales at its OEM fabrication
operation in Ogden, Utah, which was impacted by
reduced customer backlog and changes in customer
requested delivery schedules.
Barnes Aerospace profit was $5.3 million, as compared
to $12.8 million in 1998 and $9.9 million in 1997.
The shortfalls in profit and margin were a direct
result of the sales volume decline. Effective cost
and expense control by Barnes Aerospace minimized the
adverse impact on profits from the sharp falloff in
sales volume. The increase in profits for 1998,
compared to 1997, reflected higher sales volume
coupled with ongoing productivity improvements and
cost containment.
Bowman Distribution sales for 1999 were $230 million,
compared to $247 million in 1998 and $259 million in
1997. Bowman's North American operation 1999 sales
decline was due to complications encountered in a
planned implementation of the fully integrated
distribution management system initiated in the first
half of 1999. This system installation encountered a
number of unanticipated software and implementation
issues that negatively impacted warehouse efficiency,
administrative costs and sales in 1999. Bowman
expects customer service levels to improve through
the first half of 2000 as system issues are
identified and process changes are implemented.
Bowman will continue to incur increased costs for
warehousing and administration until such
improvements are fully implemented. Bowman expects
to fully restore service levels to its customers'
satisfaction in 2000. In Europe, Bowman
Distribution's sales were down primarily from the
loss of a large customer and management's refocus
from smaller, less profitable accounts to larger
industrial accounts. Bowman's Raymond business
reported an increase in sales in 1999 as it continued
to penetrate new international markets. In 1998,
Bowman's sales were down 5% from 1997, primarily the
result of its North American business losing a major
customer and the continued refocus of its sales
efforts to meet the changing requirements of larger
customers.
Bowman Distribution's profit in 1999 was $9.9
million, compared to $35.0 million in 1998 and $32.6
million in 1997. The sharp decline in profits in 1999
was attributable to the sales volume decline, as well
as significantly higher warehousing and
administrative costs incurred in its North American
business to address operational issues caused by the
new system implementation. The 7.4% improvement in
profits in 1998 as compared to 1997 resulted from
lower operating expenses in both Bowman's North
American operation and Raymond Distribution.
NON-OPERATING Other income totaled $5.9 million in 1999, compared
INCOME/EXPENSE to $5.6 million in 1998 and $6.0 million in 1997. The
increase over 1998 reflects a higher gain on the sale
of underutilized assets and net foreign exchange
transaction gains. Partially offsetting the increase
in other income was lower equity income from the
Company's NASCO joint venture. The decrease in other
income in 1998, as compared to 1997, resulted from
lower foreign exchange gains offset by an increase in
equity income from the Company's NASCO joint venture.
Interest expense and other expenses increased in 1999
as a result of the acquisition of the nitrogen gas
springs business. Specifically, interest expense
increased as a result of additional borrowings used
to fund the acquisition. Other expenses increased
with the additional goodwill amortization associated
with the acquisition. Interest expense in 1998
declined compared to 1997, reflecting lower debt
levels and lower interest rates.
INCOME TAXES The Company's effective income tax rate has declined
steadily over the last six years. The Company's
effective tax rate was 33.0% in 1999, compared with
36.9% in 1998 and 37.3% in 1997. The lower rate in
1999 was due to lower state taxes, higher percentage
of foreign income with tax rates lower than the U.S.
statutory tax rate, and foreign tax benefits
associated with the acquisition of the nitrogen gas
springs business.
NET INCOME AND Consolidated net income was $28.6 million in 1999,
NET INCOME $34.5 million in 1998 and $40.4 million in 1997.
PER SHARE Basic earnings per share were $1.47 in 1999, compared
to $1.72 in 1998 and $2.00 in 1997. Diluted earnings
per share were $1.46 in 1999, compared to $1.69 in
1998 and $1.96 in 1997. The 1998 earnings included an
after-tax charge of $7.7 million, or $0.38 per share,
related to the accelerated retirement package of the
Company's retired president.
In April 1997, stockholders approved an increase in
authorized common shares from 20 million to 60
million and a three-for-one stock split. All per
share data reflect the stock split.
6
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
INFLATION Management believes that during 1997-1999, inflation
did not have a material impact on the Company's
historical financial statements.
LIQUIDITY AND
CAPITAL RESOURCES The Company's ability to generate cash from
operations in excess of its internal operating needs
is one of its financial strengths. In 1999, the
Company continued to effectively manage working
capital, and its efforts in accounts receivable,
inventories and accounts payable generated nearly $18
million in positive cash flow. Management will
continue to aggressively manage cash flows and
anticipates that operating activities in 2000,
combined with aggressive asset management, will
provide sufficient cash to take advantage of
opportunities for internal business expansion and to
meet the Company's current financial commitments.
External business expansion will be funded with a
combination of new debt and internal cash.
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.
Operating activities are the principal source of cash
flow for the Company, generating $62.8 million in
1999, down from the record of $76.0 million in 1998
and $71.6 million in 1997. The decrease in operating
cash flows is primarily related to the decline in the
Company's operating results, as well as the cash
payment of $7.8 million in 1999 associated with the
accelerated retirement package for the Company's
retired president. During the past three years,
operating activities provided over $210 million in
cash, which the Company used, in part, to pay
dividends to stockholders, repurchase Company stock
and fund significant investments in new equipment.
Continued emphasis on asset management eliminated the
need for additional investments in working capital
during the past three years.
Investing activities used cash of $117.0 million in
1999, compared with $35.3 million in 1998 and $34.2
million in 1997. The increase in cash used in 1999 is
attributable to the purchase of the nitrogen gas
springs business. In 1999, the Company reduced its
capital spending following five years of heavy
investments by all three business segments. The
Company's capital spending program continues to focus
on business growth and improvements in productivity
and quality. The Company expects capital spending in
2000 to continue at a strong pace.
In 1999, the Company's financing activities generated
cash of $58.8 million, compared to cash usage of
$31.9 million in 1998 and $26.6 million in 1997. Cash
was generated primarily through the issuance of $89.0
million of long-term debt to fund the purchase of the
nitrogen gas springs business. The increase in cash
from borrowings was also partially used to repurchase
$22.4 million of Company stock. Cash dividends
increased in 1999 for the fifth consecutive year, to
$0.75 per share. As a result, total cash used to pay
1999 dividends to stockholders increased to $14.6
million.
The Company has utilized and will continue to use
cash from non-U.S. subsidiaries to fund international
cash requirements, including acquisitions, when it is
cost effective. The repatriation of certain cash
balances to the U.S. could have adverse tax
consequences; however, those balances are generally
available to fund business needs outside the U.S.
In November 1999, the Company financed a portion of
the nitrogen gas springs business acquisition through
issuance of $70 million of private placement senior
notes (the Notes). The Notes, placed with seven
insurance companies, range in maturity from eight to
eleven years and bear an average annual interest rate
of 7.75%. The balance of the acquisition purchase
price is financed through borrowings under the
Company's long-term revolving credit agreement. The
issuance of the Notes and usage of the Company's
long-term revolving credit agreement will result in
both higher interest expense and higher
debt-to-capitalization ratios in the future.
To supplement internal cash generation, the Company
maintains substantial bank borrowing facilities. At
December 31, 1999, the Company had $150 million of
borrowing capacity available under a revolving credit
agreement, of which $32.5 million was borrowed at an
interest rate of 6.5%. Additionally, the Company had
$4.5 million in borrowings under uncommitted
short-term bank credit lines at an interest rate of
6.8%. The Company believes its bank credit
facilities, including the new Notes, coupled with
cash generated from operations, are adequate for its
anticipated future requirements.
MARKET RISK Market risk is the potential economic loss that may
result from adverse changes in the fair value of
financial instruments. The Company's financial
results could be impacted by changes in interest
rates, foreign currency exchange rates and commodity
price changes. The Company uses financial instruments
to reduce its cost of debt, and to hedge its exposure
to fluctuations in interest rates and foreign
exchange rates.
The Company's long-term debt portfolio consists of
fixed-rate and variable-rate instruments and is
managed to reduce the overall cost of borrowing while
also reducing the effect of changes in interest rates
on near-term earnings. The Company's primary interest
rate risk is derived from its outstanding
variable-rate debt obligations. At December 31, 1999,
the result of a hypothetical 1% increase in the
average cost of the Company's variable-rate debt,
including the interest rate exchange agreement, would
not have had a material impact on the pretax profit
of the Company or the fair value of the interest rate
exchange agreement.
7
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
In September 1999, the Company entered into a
three-year, $70 million cross-currency exchange
agreement. In effect, the agreement converts the
Company's U.S. dollar-denominated interest and
principal liabilities into Swedish krona-denominated
liabilities at a fixed interest rate for a three-year
period ending October 2002. Additionally, as part of
managing its debt portfolio, the Company maintains an
interest rate exchange agreement to convert a portion
of its 9.47% fixed-rate Senior Notes to variable-rate
debt. These agreements are viewed by the Company as
risk management tools and are not used for
speculative or trading purposes. The overall
objectives are to reduce the exposure associated with
currency fluctuations between the U.S. dollar and the
Swedish krona and to reduce the exposure to
variable-rate debt. The effect on 1999 earnings of
the U.S. dollar and Swedish krona cross-currency
exchange agreement and interest rate exchange
agreement was to decrease the Company's expense by
$0.2 million.
At December 31, 1999, the fair value of the Company's
fixed-rate debt was $106.8 million, compared to its
carrying amount of $107.3 million. The Company
estimates that a 1% decrease in market interest rates
at December 31, 1999 would have increased the fair
value of the Company's fixed-rate debt to $112.5
million.
The Company has manufacturing, sales and distribution
facilities around the world and thus makes
investments and conducts business transactions
denominated in various currencies. Foreign currency
commitments and transaction exposures are managed at
the operating units as an integral part of their
businesses. Residual exposures that cannot be offset
may be hedged. The Company does not hedge its foreign
currency net asset exposure.
The currencies that the Company was primarily exposed
to on December 31, 1999, were the Singapore dollar,
Mexican peso, Brazilian real, Canadian dollar and
Swedish krona. Based on a 10% adverse movement in all
currencies, the potential loss in fair value from the
Company's financial instruments at the end of 1999
would have resulted in reducing pretax profit by $2.4
million.
The Company's exposure to commodity price changes
relates primarily to certain manufacturing operations
that utilize steel spring wire and titanium. The
Company manages its exposure to changes in those
prices through its procurement and sales practices.
The Company is not dependent upon any single source
for any of its principal raw materials or products
for resale, and all such materials and products are
readily available.
FUTURE ACCOUNTING In June 1998, the Financial Accounting Standards
CHANGES Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard
requires that the Company recognize derivatives on
the balance sheet at fair value. In June 1999, the
statement's effective date was delayed by one year,
and it will be effective January 1, 2001, for the
Company. Management believes that adoption of this
standard will not have a material impact on the
Company's financial position, results of operations
or cash flows.
YEAR 2000 READINESS The Company's program to address the Y2K issue
consisted of the following phases: assessment,
remediation, testing and contingency planning. Barnes
Group met its commitment to be fully Y2K ready with
all of its critical business systems as of the end of
1999.
The costs specific to addressing the Y2K readiness
project were those directly related to upgrading
existing systems to be Y2K ready and costs related to
outside consultants assisting the Y2K project. These
costs were expensed as incurred and approximated $0.6
million in 1998 and $1.9 million in 1999. However, a
significant portion of the Company's overall
information technology (IT) expense approximating
$11.5 million in 1998 and $13.8 million in 1999 was
either directly or indirectly included to address Y2K
readiness either through software remediation or
implementation. In addition, capitalized IT-related
hardware and software expenditures approximated $12
million in both 1998 and 1999. Subsequent to 1999,
additional costs specific to ensuring the Company is
Y2K ready are not expected to be significant.
The Company completed its assessment of its Y2K risks
related to significant relationships with its
critical third-party suppliers and customers. Despite
these efforts, the Company can provide no assurance
that all supplier and customer Y2K compliance plans
were successfully completed in a timely manner,
although it is not currently aware of any problems
which would significantly impact its future
operations.
The foregoing Y2K readiness statements are designated
as a "Readiness Disclosure" within the meaning of the
Year 2000 Information and Readiness Disclosure Act of
1998.
FORWARD-LOOKING The Company cautions readers that certain factors may
STATEMENTS affect the Company's results for future fiscal
periods. These factors involve risks and
uncertainties that could cause future results to
differ materially from those expressed or implied in
any forward-looking statements made on behalf of the
Company. For this purpose, any statement other than
one of historical fact may be considered a
forward-looking statement. Some important factors
that could cause actual results to vary materially
from those anticipated in forward-looking statements
include economic volatility, currency fluctuations,
interest rate fluctuations, regulatory changes and
technological changes, all of which may affect the
Company's operations, products and markets.
8
5
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $622,356 $651,183 $642,660
Cost of sales 424,945 435,918 426,550
Selling and administrative expenses 152,161 160,044 150,344
- ------------------------------------------------------------------------------------------------------------------------------------
577,106 595,962 576,894
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 45,250 55,221 65,766
Other income 5,919 5,617 5,969
Interest expense 6,093 4,106 4,864
Other expenses 2,378 2,069 2,369
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 42,698 54,663 64,502
Income taxes 14,086 20,169 24,079
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 28,612 $ 34,494 $ 40,423
====================================================================================================================================
Per common share:
Net income:
Basic $ 1.47 $ 1.72 $ 2.00
Diluted 1.46 1.69 1.96
Dividends 0.75 0.69 0.65
Average common shares outstanding 19,417,856 20,095,710 20,236,884
See accompanying notes.
9
6
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, 1999 1998
ASSETS
Current assets
Cash and cash equivalents $ 43,632 $40,206
Short-term investments -- 2,566
Accounts receivable, less allowances
(1999 - $3,329; 1998 - $2,413) 91,701 82,809
Inventories 66,351 64,404
Deferred income taxes 9,398 11,660
Prepaid expenses 8,103 5,583
--------- --------
Total current assets 219,185 207,228
Deferred income taxes 23,797 25,136
Property, plant and equipment 145,105 139,247
Goodwill 88,562 18,224
Other assets 39,633 29,069
--------- --------
Total assets $516,282 $418,904
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 12,136 $ 6,766
Accounts payable 57,458 38,439
Accrued liabilities 46,426 52,934
Guaranteed ESOP obligation -- 2,205
--------- --------
Total current liabilities 116,020 100,344
Long-term debt 140,000 51,000
Accrued retirement benefits 66,973 68,129
Other liabilities 12,675 10,757
Commitments and contingencies
Stockholders' equity
Common stock - par value $0.01 per share
Authorized: 60,000,000 shares
Issued: 22,037,769 shares at par value 220 220
Additional paid-in capital 49,786 49,231
Treasury stock at cost (1999 - 3,187,242 shares;
1998 - 2,202,417 shares) (63,893) (42,893)
Retained earnings 218,388 204,364
Accumulated other comprehensive income (23,887) (20,043)
Guaranteed ESOP obligation -- (2,205)
--------- --------
Total stockholders' equity 180,614 188,674
--------- --------
Total liabilities and stockholders' equity $516,282 $418,904
========= ========
See accompanying notes.
10
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 28,612 $ 34,494 $ 40,423
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 30,602 28,431 28,123
(Gain) loss on sale of property,
plant and equipment (857) (741) 735
Changes in assets and liabilities:
Accounts receivable (1,731) 7,726 (4,786)
Inventories 1,980 (3,766) 3,150
Accounts payable 17,356 980 8,036
Accrued liabilities (9,524) 6,488 781
Deferred income taxes 3,655 (2,536) (1,215)
Other (7,296) 4,960 (3,607)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 62,797 76,036 71,640
INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 1,929 4,266 1,442
Capital expenditures (27,222) (34,571) (33,398)
Acquisition of nitrogen gas springs business (92,239) -- --
Redemption of short-term investments 2,566 -- --
Purchase of short-term investments -- (2,605) --
Other (2,019) (2,340) (2,266)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (116,985) (35,250) (34,222)
FINANCING ACTIVITIES:
Net increase in notes payable 5,249 4,539 813
Payments on long-term debt -- (9,000) (10,000)
Proceeds from the issuance of long-term debt 89,000 -- --
Proceeds from the issuance of common stock 1,486 3,598 6,476
Common stock repurchases (22,351) (17,042) (10,673)
Dividends paid (14,564) (13,951) (13,187)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 58,820 (31,856) (26,571)
Effect of exchange rate changes on cash flows (1,206) (1,254) (2,303)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 3,426 7,676 8,544
Cash and cash equivalents at beginning of year 40,206 32,530 23,986
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,632 $ 40,206 $ 32,530
===================================================================================================================================
See accompanying notes.
11
8
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-in Treasury Retained Comprehensive
(Dollars in thousands) Stock Capital Stock Earnings Income
- ------------------------------------------------------------------------------------------------------------------------------------
January 1, 1997 $ 15,737 $28,347 $(26,040) $156,698 $(10,087)
Comprehensive income:
Net income 40,423
Other comprehensive income -- (5,754)
-------- --------
Comprehensive income 40,423 (5,754)
Reduction in par value (15,517) 15,517
Dividends paid (13,187)
Common stock repurchases (10,673)
Employee stock plans 3,143 7,280 (181)
Guaranteed ESOP obligation
Income tax benefits on
unallocated ESOP dividends 104
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 220 47,007 (29,433) 183,857 (15,841)
Comprehensive income:
Net income 34,494
Other comprehensive income -- (4,202)
------- -------
Comprehensive income 34,494 (4,202)
Dividends paid (13,951)
Common stock repurchases (17,042)
Employee stock plans 2,224 3,582 (100)
Guaranteed ESOP obligation
Income tax benefits on
unallocated ESOP dividends 64
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 220 49,231 (42,893) 204,364 (20,043)
Comprehensive income:
Net income 28,612
Other comprehensive income -- (3,844)
-------- -------
Comprehensive income 28,612 (3,844)
Dividends paid (14,564)
Common stock repurchases (22,351)
Employee stock plans 555 1,351 (44)
Guaranteed ESOP obligation
Income tax benefits on
unallocated ESOP dividends 20
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 $ 220 $49,786 $(63,893) $218,388 $(23,887)
====================================================================================================================================
Guaranteed
ESOP Stockholders'
(Dollars in thousands) Obligation Equity
- -----------------------------------------------------------------------------
January 1, 1997 $(7,491) $157,164
Comprehensive income:
Net income 40,423
Other comprehensive income (5,754)
--------
Comprehensive income 34,669
Reduction in par value --
Dividends paid (13,187)
Common stock repurchases (10,673)
Employee stock plans 10,242
Guaranteed ESOP obligation 2,540 2,540
Income tax benefits on
unallocated ESOP dividends 104
- -----------------------------------------------------------------------------
December 31, 1997 (4,951) 180,859
Comprehensive income:
Net income 34,494
Other comprehensive income (4,202)
--------
Comprehensive income 30,292
Dividends paid (13,951)
Common stock repurchases (17,042)
Employee stock plans 5,706
Guaranteed ESOP obligation 2,746 2,746
Income tax benefits on
unallocated ESOP dividends 64
- -----------------------------------------------------------------------------
December 31, 1998 (2,205) 188,674
Comprehensive income:
Net income 28,612
Other comprehensive income (3,844)
---------
Comprehensive income 24,768
Dividends paid (14,564)
Common stock repurchases (22,351)
Employee stock plans 1,862
Guaranteed ESOP obligation 2,205 2,205
Income tax benefits on
unallocated ESOP dividends 20
- -----------------------------------------------------------------------------
December 31, 1999 $ -- $180,614
=============================================================================
See accompanying notes.
12
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per
share data and the tables in Note 13.)
1 SUMMARY OF GENERAL: The preparation of financial statements
SIGNIFICANT requires management to make estimates and assumptions
ACCOUNTING POLICIES 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. Actual results could
differ from those estimates.
Certain reclassifications have been made to prior
year amounts to conform to the current year pre-
sentation.
CONSOLIDATION: The accompanying consolidated
financial statements include the accounts of the
Company and all of its subsidiaries. Intercompany
transactions and account balances have been
eliminated. The Company accounts for its 45%
investment in the common stock of NASCO, an
automotive suspension spring company jointly owned
with NHK Spring Co., Ltd., of Japan, under the equity
method. Other income in the accompanying income
statements includes income of $1,714, $2,573 and
$1,763 for the years 1999, 1998 and 1997,
respectively, from the Company's investment in NASCO.
The Company received dividends from NASCO totaling
$1,006, $732 and $596 in 1999, 1998 and 1997,
respectively.
REVENUE RECOGNITION: Sales and related cost of sales
are recognized when products are shipped to
customers.
CASH AND CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS: Cash in excess of operating requirements
is invested in short-term, highly liquid, income
producing investments. All highly liquid investments
purchased with an original maturity of three months
or less are cash equivalents, while other investments
with an original maturity of one year or less are
classified as short-term investments. Both cash
equivalents and short-term investments are carried at
fair market value.
INVENTORIES: Inventories are valued at the lower of
cost or market. The last-in, first-out (LIFO) method
was used to accumulate the cost of the majority of
U.S. inventories, which represent 71% of total
inventories. The cost of all other inventories was
determined using the first-in, first-out (FIFO)
method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and
equipment is stated at cost. Depreciation is recorded
over estimated useful lives, ranging from twenty to
fifty years for buildings and three to seventeen
years for machinery and equipment. The straight-line
method of depreciation was adopted for all property,
plant and equipment placed into service after March
31, 1999. For property, plant and equipment placed
into service prior to April 1, 1999, depreciation is
provided using accelerated methods. The change in
accounting principle was made to reflect improvements
in the design and durability of machinery and
equipment. Management believes that the straight-line
method results in a better matching of revenues and
costs, and the new method is prevalent in the
industries in which the Company operates.
Additionally, in 1999, the Company adopted AICPA
Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for
Internal Use," which requires capitalization of
certain costs incurred in the development of
internal-use software. The change to straight-line
depreciation and the adoption of the AICPA Statement
of Position 98-1 did not have a material impact on
the Company's financial position, results of
operations or cash flows.
GOODWILL: Goodwill represents the excess purchase
price over the net assets of companies acquired in
business combinations. Goodwill acquired since 1970
is being amortized on a straight-line basis over
forty years; similar investments for businesses
acquired prior to 1970 (approximately $5,200) are
not being amortized. On a periodic basis, the Company
estimates future undiscounted cash flows of the
businesses to which goodwill relates to ensure that
the carrying value of goodwill has not been impaired.
Goodwill resulting from the purchase of the nitrogen
gas springs business was $71,482. At December 31,
1999 and 1998, accumulated amortization was $10,536
and $9,391, respectively.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities
of foreign operations, except those in countries with
high rates of inflation, are translated at year-end
rates of exchange; revenues and expenses are
translated at average annual rates of exchange. The
resulting translation gains and losses are reflected
in accumulated other comprehensive income within
stockholders' equity.
For operations in countries with high rates of
inflation, translation gains and losses are included
in net income. These translation effects, along with
foreign currency transactions, generated net gains of
$752, $240 and $2,095 in 1999, 1998 and 1997,
respectively.
NET INCOME PER COMMON SHARE: Earnings per share are
computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
Basic earnings per share are based on the weighted
average number of common shares outstanding during
the year. Diluted earnings per share reflect the
assumed exercise and conversion of all dilutive
securities. Shares held by the Guaranteed Stock Plan
are considered outstanding for both basic and diluted
earnings per share.
There are no adjustments to net income for purposes
of computing income available to common shareholders
for the years ended December 31, 1999, 1998 and 1997.
For purposes of computing diluted earnings per share,
the weighted average number of shares outstanding was
increased by 224,899 shares, 330,659 shares and
419,433 shares for 1999, 1998 and 1997, respectively,
representing the potential dilutive effects of
stock-based incentive plans.
13
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 ACQUISITION OF On August 30, 1999, the Company purchased substantially
NITROGEN GAS all of the assets and liabilities of the nitrogen gas
SPRINGS BUSINESS springs business of the Teledyne Fluid Systems Division
of Teledyne Industries, Inc., pursuant to an Asset
Purchase and Sale Agreement dated July 27, 1999. The
acquisition of the nitrogen gas springs business was
recorded using the purchase method of accounting and is
included in the Associated Spring business segment. The
$92.2 million acquisition cost has been allocated to
tangible and intangible assets and liabilities of the
nitrogen gas springs business based upon estimates of
their respective fair market values. The resulting
goodwill will be amortized over 40 years. The funds used
to purchase the assets and liabilities were initially
borrowed under the Company's $150 million revolving
credit agreement. On November 12, 1999, the Company
financed a portion of the acquisition through the
issuance of $70 million of long-term private placement
debt. The debt ranges in maturity from eight to eleven
years at an average annual interest rate of 7.75%. The
issuance of the long-term debt and use of the Company's
long-term revolving credit agreement will result in both
higher interest expense and higher
debt-to-capitalization ratios in the future.
Additionally, the consolidation of the nitrogen gas
springs business will reduce the Company's effective tax
rate as a result of the associated income being taxed at
lower foreign tax rates, as well as the result of
certain foreign tax benefits.
The following table reflects the operating results of
the Company for the years ended December 31, 1999 and
1998 on a pro forma basis, which gives effect to the
acquisition of the nitrogen gas springs business at the
beginning of each of the years presented. The pro forma
results are not necessarily indicative of the operating
results that would have occurred had the acquisition
been effective either January 1, 1999 or January 1,
1998, nor are they intended to be indicative of results
that may occur in the future. The underlying pro forma
information includes the amortization expense associated
with the assets acquired, the Company's financing
arrangements, certain purchase accounting adjustments
and related income tax effects.
(Unaudited) 1999 1998
--------------------------------------------------------------------------------
Net sales $652,486 $698,591
Income before income taxes 43,507 55,088
Net income 31,673 38,644
Per common share:
Basic $ 1.63 $ 1.92
Diluted 1.61 1.89
================================================================================
3 INVENTORIES Inventories at December 31 consisted of:
1999 1998
----------------------------------------------------------------------------------------------
Finished goods $39,573 $34,784
Work-in-process 12,861 15,309
Raw materials and supplies 13,917 14,311
----------------------------------------------------------------------------------------------
$66,351 $64,404
==============================================================================================
Inventories valued by the LIFO method aggregated $47,098
and $48,705 at December 31, 1999 and 1998, respectively.
If LIFO inventories had been valued using the FIFO
method, they would have been $13,995 and $14,097 higher
at those dates.
4 PROPERTY, PLANT Property, plant and equipment at December 31 consisted
AND EQUIPMENT of:
1999 1998
-----------------------------------------------------------------------------------------
Land $ 3,467 $ 3,292
Buildings 65,136 64,421
Machinery and equipment 299,588 283,080
-----------------------------------------------------------------------------------------
368,191 350,793
Less accumulated depreciation 223,086 211,546
-----------------------------------------------------------------------------------------
$145,105 $139,247
=========================================================================================
14
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 ACCRUED LIABILITIES Accrued liabilities at December 31 consisted of:
1999 1998
---------------------------------------------------------------------------------------------------
Payroll and other compensation $12,547 $13,413
Postretirement/postemployment benefits 8,103 15,001
Accrued income taxes 4,583 5,546
Other 21,193 18,974
---------------------------------------------------------------------------------------------------
$46,426 $52,934
===================================================================================================
6 DEBT AND Long-term debt at December 31 consisted of:
COMMITMENTS
1999 1998
------------------------------------------------------------------------------- -----------
Carrying Fair Carrying
Amount Value Amount
------------------------------------------------------------------------------- -----------
9.47% Notes $ 12,308 $ 12,644 $18,462
7.13% Notes 25,000 24,199 25,000
7.66% Notes 24,500 24,500 --
7.80% Notes 45,500 45,500 --
Revolving Credit 25,692 25,692 --
Industrial Revenue Bond 7,000 7,000 7,000
Other -- -- 538
------------------------------------------------------------------------------- -----------
$140,000 $139,535 $51,000
=============================================================================== ===========
The 9.47% Notes are payable in thirteen semiannual payments of $3,077 that began
on September 16, 1995, while the 7.13% Notes are payable in four equal annual
payments of $6,250, beginning on December 5, 2002. On November 12, 1999, the
Company issued $70,000 of privately placed debt securities comprising $24,500 of
7.66% Notes, payable in 2007, and $45,500 of 7.80% Notes, payable in three equal
annual payments of $15,167, beginning in 2008. The Notes are not redeemable
prior to maturity. Proceeds from the 7.66% and 7.80% Notes, in addition to
borrowings under the Company's revolving credit agreement, were used to fund the
acquisition of the nitrogen gas springs business. The fair values of these Notes
are determined using discounted cash flows based upon the Company's estimated
current interest cost for similar types of borrowings. The carrying values of
other long-term debt and notes payable approximate their fair market value.
The Company has a revolving credit agreement with five banks that allows
borrowings up to $150,000 under Notes due December 6, 2002. A fee of 0.115% per
annum is paid on the unused portion of the commitments. Under this agreement,
the Company had $32,500 borrowed at an interest rate of 6.5% at December 31,
1999, of which $25,692 is classified as long-term debt. The Company has
available approximately $35,000 in short-term bank credit lines, of which $4,500
was in use at both December 31, 1999 and 1998. The interest rate on these
borrowings was 6.8% and 5.6% at December 31, 1999 and 1998, respectively.
The Industrial Revenue Bond, due in 2008, has a variable interest rate. The
interest rate on this borrowing was 5.75% and 5.25% at December 31, 1999 and
1998, respectively.
At December 31, 1999, the Company classified $6,154 of its 9.47% Notes due
within one year as long-term debt. The Company has both the intent and the
ability, through its revolving credit agreement, to refinance these amounts on a
long-term basis.
Long-term debt is payable as follows: $44,250 in 2002, $6,250 in 2003, $6,250 in
2004 and $83,250 thereafter.
The Company had outstanding an interest rate swap (swap), a form of derivative,
which effectively converted half of its fixed-rate 9.47% Notes to variable-rate
debt with interest equal to London Interbank Offered Rate (LIBOR) plus 83 basis
points. The effective interest rate on the floating rate portion was 7.0% and
6.1% at December 31, 1999 and 1998, respectively. This swap decreases as the
Notes are repaid. The fair value of the swap is determined based upon current
market prices and was $251 at December 31, 1999. On September 7, 1999, the
Company entered into a three-year, $70 million cross-currency exchange agreement
to convert U.S. dollar-denominated interest and principal liabilities into
Swedish krona-denominated liabilities at a fixed interest rate during the
three-year period. The fair value of this foreign currency swap was determined
using current market prices and was $2,197 at December 31, 1999. The Company
does not use derivatives for speculative or trading purposes.
15
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company had outstanding letters of credit totaling $4,066 at
December 31, 1999.
Certain of the Company's debt arrangements contain requirements as to
maintenance of minimum levels of working capital and net worth, and place
certain restrictions on dividend payments and acquisitions of the Company's
common stock. Under the most restrictive covenant in any agreement, $28,784 was
available for dividends or acquisitions of common stock at December 31, 1999.
Interest paid was $5,505, $4,947 and $5,554 in 1999, 1998 and 1997,
respectively. Interest capitalized was $264, $711 and $472 in 1999, 1998 and
1997, respectively, and is being depreciated over the lives of the related fixed
assets.
7. INCOME TAXES The components of income before income taxes and the income
tax provision follow:
1999 1998 1997
- -----------------------------------------------------------------------------
Income before income taxes:
U.S. $27,585 $42,009 $49,517
International 15,113 12,654 14,985
- -----------------------------------------------------------------------------
$42,698 $54,663 $64,502
=============================================================================
Income tax provision:
Current:
U.S. - federal $5,233 $15,256 $16,339
U.S. - state 529 3,110 4,050
International 4,669 4,339 4,905
- -----------------------------------------------------------------------------
10,431 22,705 25,294
- -----------------------------------------------------------------------------
Deferred:
U.S. - federal 2,973 (2,214) (821)
U.S. - state 1,109 (94) (217)
International (427) (228) (177)
- -----------------------------------------------------------------------------
3,655 (2,536) (1,215)
- -----------------------------------------------------------------------------
$14,086 $20,169 $24,079
=============================================================================
Deferred income tax assets and liabilities at December 31 consist of the tax
effects of temporary differences related to the following:
Assets Liabilities
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 921 $ 829 $ -- $ --
Depreciation and amortization (6,293) (6,513) 3,727 2,527
Inventory valuation 6,400 5,039 613 468
Postretirement/postemployment costs 25,852 26,771 (333) (306)
Foreign tax loss carryforwards 9,923 9,517 -- --
Other 4,020 8,718 3,634 1,390
- ----------------------------------------------------------------------------------------------------------------------
40,823 44,361 7,641 4,079
Valuation allowance (7,628) (7,565) -- --
- ----------------------------------------------------------------------------------------------------------------------
$33,195 $36,796 $7,641 $4,079
======================================================================================================================
Current deferred income taxes $ 9,398 $11,660 $ 594 $ 455
Noncurrent deferred income taxes 23,797 25,136 7,047 3,624
- ----------------------------------------------------------------------------------------------------------------------
$33,195 $36,796 $7,641 $4,079
======================================================================================================================
The deferred income tax assets will be realized through reversals of existing
taxable temporary differences with the remainder, net of the valuation
allowance, dependent on future income. Management believes that sufficient
income will be earned in the future to realize the remaining net deferred income
tax assets. The tax loss carryforwards have remaining carryforward periods
ranging from five years to unlimited.
16
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has not recognized deferred income taxes on $106,562 of
undistributed earnings of its international subsidiaries, since such earnings
are considered to be reinvested indefinitely. If the earnings were distributed
in the form of dividends, the Company would be subject, in certain cases, to
both U.S. income taxes and foreign withholding taxes. Determination of the
amount of this unrecognized deferred income tax liability is not practicable.
A reconciliation of the U.S. federal statutory income tax rate to the
consolidated effective income tax rate follows:
1999 1998 1997
- ---------------------------------------------------------------------------
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State taxes (net of federal benefit) 2.5 3.6 3.9
Foreign losses without tax benefit 1.2 1.0 0.6
Foreign tax rates (3.7) (1.6) (1.5)
NASCO equity income (0.9) (1.0) (0.6)
Foreign sales corporation (0.8) (0.4) --
Other (0.3) 0.3 (0.1)
- ----------------------------------------------------------------------------
Consolidated effective income tax rate 33.0% 36.9% 37.3%
============================================================================
Income taxes paid, net of refunds, were $15,781, $18,473 and $25,337 in 1999,
1998 and 1997, respectively.
8 COMMON STOCK In 1999, 1998 and 1997, 105,189 shares, 270,854
shares and 566,077 shares, respectively, of common
stock were issued from treasury for the exercise of
stock options, purchases by the Employee Stock
Purchase Plan and various other incentive awards. In
1999, 1998 and 1997, the Company acquired 1,090,014
shares, 598,160 shares and 395,179 shares,
respectively, of the Company's common stock at a cost
of $22,351, $17,042 and $10,673, respectively. These
acquired shares were placed in treasury.
On April 2, 1997, the stockholders approved an
amendment to the Company's restated certificate of
incorporation providing for an increase in the number
of authorized common shares from 20 million to 60
million and a reduction in the par value of common
and preferred stock from $1.00 to $0.01 per share.
This enabled the Company to effect a three-for-one
stock split for stockholders of record on April 3,
1997. All references to shares and per share amounts
in the consolidated financial statements and
accompanying notes have been adjusted retroactively
for the three-for-one stock split. Stockholders'
equity at December 31, 1999, 1998 and 1997, reflects
the effect of the stock split and change in par value
per share. These changes reduced the common stock
account by $15,517 and increased the additional
paid-in capital account by a like amount in 1997.
In December 1996, the Company adopted a new
shareholder rights plan. Under the new plan, each
share of common stock contains one right (Right)
which entitles the holder to purchase one one-hun-
dredth of a share of Series A Junior Participating
Preferred Stock, for two hundred dollars. The Rights
generally will not become exercisable unless and
until, among other things, any person or group
acquires beneficial ownership of 35% or more of the
outstanding stock. The new Rights are generally
redeemable at $0.01 per Right at any time until ten
days following a public announcement that a 35% or
greater position in the Company's common stock has
been acquired and will expire, unless earlier
redeemed or exchanged, on December 23, 2006.
If, following the acquisition by a person or group of
35% or more of the outstanding shares of the
Company's common stock, the Company is acquired in a
merger or other business combination or 50% or more
of the Company's assets or earnings power is sold or
transferred, each outstanding Right becomes
exercisable for common stock or other securities of
the acquiring entity having a value of twice the
exercise price of the Right.
9 PREFERRED STOCK At December 31, 1999 and 1998, the Company had
3,000,000 shares of preferred stock authorized, none
of which were outstanding. As discussed in Note 8,
the par value of preferred stock was reduced from
$1.00 to $0.01 per share in 1997.
17
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 STOCK PLANS
All U.S. salaried and non-union hourly employees are
eligible to participate in the Company's Guaranteed
Stock Plan (GSP). The GSP provides for the investment
of employer and employee contributions in the
Company's common stock. The Company guarantees a
minimum rate of return on certain GSP assets. At
December 31, 1999, the Company's guarantee on these
assets was $2,321. This amount will only become a
liability for the Company if, and to the extent, the
value of the related Company stock does not cover the
guaranteed asset value on the day an employee
withdraws from the plan.
The GSP was a leveraged ESOP until mid-1999. In 1989,
the GSP purchased 1,737,930 shares of the Company's
common stock at a cost of $21,000 using the proceeds
of a loan guaranteed by the Company. These shares
were held in trust and were issued to employees'
accounts in the GSP as the loan was repaid. The loan
interest was based on LIBOR and generated interest
costs of $32, $212 and $387 in 1999, 1998 and 1997,
respectively. Contributions and certain dividends
received were used in part by the GSP to service its
debt. Contributions included both employee and
Company contributions.
The Company contributions were equal to the amount
required by the GSP to pay the principal and interest
due under the GSP loan plus that required to purchase
any additional shares required to be allocated to
employee accounts, less the sum of employee
contributions and dividends received by the GSP.
Effective July 2, 1999, the GSP is no longer
leveraged. The Company now contributes 50% of
employee contributions up to 6% of eligible
compensation plus any guarantee payments. Employees
may elect to contribute additional amounts up to a
total of 10% of eligible compensation. The GSP used
$1,012, $1,899 and $1,781 of Company dividends for
debt service in 1999, 1998 and 1997, respectively.
The Company expenses all cash contributions made to
the GSP. The Company recognized expense of $1,115 in
1999 and income of $403 and $498 in 1998 and 1997,
respectively. As of December 31, 1999, the GSP held
3,060,386 shares of the Company's common stock. For
financial statement purposes, the Company reflected
its guarantee of the GSP's debt as a liability with a
like amount reflected as a reduction of stockholders'
equity.
The Company has an Employee Stock Purchase Plan
(ESPP) under which eligible employees may elect to
have up to 10% of base compensation deducted from
payroll for the purchase of the Company's common
stock at 85% of market value on the date of purchase.
The maximum number of shares which may be purchased
under the ESPP is 2,025,000. The number of shares
purchased under the ESPP was 62,868, 45,599 and
46,600 in 1999, 1998 and 1997, respectively. As of
December 31, 1999, 457,011 additional shares may be
purchased.
The 1991 Barnes Group Stock Incentive Plan (1991
Plan) authorizes the granting of incentives to
executive officers, directors and key employees in
the form of stock options, stock appreciation rights,
incentive stock rights and performance unit awards. A
predecessor plan that provided for similar incentives
expired in 1991. Options granted under that plan
continue to be exercisable, and any options which
terminate without being exercised become available
for grant under the 1991 Plan. A maximum of 2,384,826
common shares are subject to issuance under this plan
after December 31, 1999. Compensation cost related to
these plans was $610, $1,596 and $1,150 in 1999, 1998
and 1997, respectively. The Company recorded, in
additional paid-in capital, tax benefits related to
stock options of $40, $1,573 and $2,404 in 1999, 1998
and 1997, respectively.
In 1998, 60,000 Incentive Stock Rights and 75,000
stock options were granted outside of the 1991 Plan.
The options are included in the tables below.
Data relating to options granted under these plans
follow:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average
Number Exercise Number Exercise Number Exercise
Of Shares Price of Shares Price of Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, January 1 1,238,587 $22.39 979,444 $16.13 1,088,991 $10.98
Granted 827,820 $19.20 566,770 $29.13 441,190 $22.96
Exercised 24,727 $18.96 224,332 $11.02 505,113 $10.79
Canceled 232,905 $24.57 83,295 $25.24 45,624 $18.44
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31 1,808,775 $20.70 1,238,587 $22.39 979,444 $16.13
===========================================================================================================================
Exercisable, December 31 696,965 $18.91 574,966 $16.94 478,680 $10.77
===========================================================================================================================
18
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ---------------------------------------------------------------------- ------------------------------
$ 7 to $14 365,979 4.5 $11.50 335,979 $11.24
$15 to $20 652,266 9.2 $19.04 2,700 $19.44
$21 to $23 313,840 7.7 $22.28 161,885 $22.32
$24 to $32 476,690 8.3 $28.99 196,401 $29.21
====================================================================== ==============================
As of December 31, 1999 and 1998, there were 412,024 shares and 928,050 shares,
respectively, available for future grant under the 1991 Plan and its predecessor
plan.
Incentive Stock Rights entitle the holder to receive, without payment, incentive
stock units (units), each of which is equivalent to one share of the Company's
common stock, after the lapse of the incentive period. Certain units are also
subject to the satisfaction of established performance goals. Additionally,
holders are credited with dividend equivalents, which are converted into
additional units. All units granted have up to a five-year incentive period. In
1999, 5,000 units were granted; 8,612 units were credited to holders for
dividend equivalents; 16,144 units, which include dividend equivalents, were
converted to an equivalent number of shares of common stock; and 92,501 units
were forfeited. Additionally, 125,199 units, which include dividend equivalents,
were terminated in 1998 in conjunction with the accelerated retirement agreement
for the Company's retired president. As of December 31, 1999, there were 299,027
units outstanding.
Under the Non-Employee Director Deferred Stock Plan, each non-employee director
is awarded 6,000 shares of the Company's common stock upon retirement. There
were no shares issued under this plan in 1999 and 1998, while 12,000 shares were
issued in 1997. Additionally, 6,000 shares were canceled as of December 31,
1999. There are 48,000 shares reserved for issuance under this plan.
Total shares reserved for issuance under all stock plans aggregated 2,889,837 at
December 31, 1999.
The Company applies APB Opinion 25 to account for stock-based compensation. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
- ------------------------------------------------------------------------
Net income:
As reported $28,612 $34,494 $40,423
Pro forma 27,053 33,543 39,898
Basic earnings per share:
As reported $ 1.47 $ 1.72 $ 2.00
Pro forma 1.39 1.67 1.97
Diluted earnings per share:
As reported $ 1.46 $ 1.69 $ 1.96
Pro forma 1.38 1.64 1.93
========================================================================
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 5.35% 5.35% 6.17%
Expected life 6 years 6 years 6 years
Expected volatility 30% 20% 20%
Expected dividend yield 3.54% 3.75% 4.00%
================================================================================
The weighted-average grant date fair values of options granted during 1999, 1998
and 1997 were $5.07, $5.63 and $4.97, respectively.
19
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 PENSION AND OTHER Defined benefit pension plans cover a majority of the
POSTRETIREMENT Company's worldwide employees at Associated Spring,
BENEFITS Bowman Distribution and its Executive Office. Plan
benefits for salaried and non-union hourly employees
are based on years of service and average salary.
Plans covering union hourly employees provide
benefits based on years of service. The Company funds
U.S. pension costs in accordance with the Employee
Retirement Income Security Act of 1974 (ERISA), as
amended. Plan assets consist primarily of common
stocks and fixed income investments, including
384,048 shares of Company stock. Additionally, the
Company has a defined contribution plan covering
employees of Barnes Aerospace and field sales
employees of Bowman Distribution's U.S. operation.
Company contributions under this plan are based
primarily on the performance of the business units
and employee compensation. Contribution expense under
this plan was $1,292, $2,029 and $2,593 in 1999, 1998
and 1997, respectively.
The Company provides certain other medical, dental
and life insurance postretirement benefits for a
majority of its retired employees in the U.S. and
Canada. It is the Company's practice to fund these
benefits as incurred.
A reconciliation of the beginning benefit obligations
to the ending benefit obligations follows:
Pensions Other Postretirement Benefits
-------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Benefit obligations, January 1 $252,036 $233,952 $63,957 $59,983
Service cost 6,218 5,645 629 521
Interest cost 16,944 16,908 4,445 4,359
Amendments (484) 2,889 746 --
Actuarial (gain) loss (28,231) 7,925 (3,953) 4,720
Benefits paid from plan assets (15,316) (15,283) (5,503) (5,626)
-------- -------- ------- -------
Benefit obligations, December 31 $231,167 $252,036 $60,321 $63,957
======== ======== ======= =======
Benefit obligations related to plans
with benefit obligations in excess of assets $ 8,868 $ 9,881 $60,321 $63,957
======== ======== ======= =======
A reconciliation of the beginning fair value of plan assets to the ending fair
value of plan assets follows:
Pensions
----------------------
1999 1998
---- ----
Fair value of plan assets, January 1 $318,358 $299,632
Actual return on plan assets 40,742 34,150
Company contributions 391 379
Benefits paid (15,316) (15,283)
Translation gains (losses) 272 (520)
-------- --------
Fair value of plan assets, December 31 $344,447 $318,358
======== ========
Assets related to plans with benefit
obligations in excess of plan assets $ -- $ 487
======== =========
20
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the funded status of the plans with the amounts recognized
in the accompanying balance sheets is set forth below:
Pensions Other Postretirement Benefits
------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Funded status $113,280 $ 66,321 $(60,321) $(63,957)
Adjustments for unrecognized:
Net (gains) losses (107,041) (60,445) 491 4,536
Prior service costs (benefits) 6,332 5,583 (4,852) (6,953)
Net asset at transition (2,425) (4,055) -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 10,146 $ 7,404 $(64,682) $(66,374)
======== ======== ======== ========
Significant assumptions used in determining pension and other postretirement
expense and the funded status of the plans were:
Pensions Other Postretirement Benefits
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Weighted average discount rate 8.00% 7.00% 7.50% 8.00% 7.00% 7.50%
Long-term rate of return on plan assets 9.75% 9.25% 9.00% -- -- --
Increase in compensation 4.75% 4.75% 5.25% 4.75% 4.75% 5.00%
==== ==== ==== ==== ==== ====
Pension and other postretirement benefit expenses consisted of the following:
Pensions Other Postretirement Benefits
----------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Service cost $ 6,218 $ 5,645 $ 5,384 $ 629 $ 521 $ 506
Interest cost 16,944 16,908 16,668 4,445 4,359 4,320
Return on plan assets (expected) (24,441) (22,264) (20,965) -- -- --
Amortization of transition assets (1,643) (1,643) (1,660) -- -- --
Recognized (gains) losses (753) 2,898 (531) 45 -- --
Prior service cost 1,048 861 872 (1,355) (1,422) (1,422)
------- ------- -------- ------ ------- ------
Benefit (credit) cost $(2,627) $ 2,405 $ (232) $3,764 $ 3,458 $3,404
======= ======= ======== ====== ======= ======
The Company's accumulated postretirement benefit obligations, exclusive of
pensions, take into account certain cost-sharing provisions. The annual rate of
increase in the cost of covered benefits (that is, healthcare cost trend rate)
is assumed to be 6.0% for 1999, reducing to 5.0% by the year 2001. A one
percentage point increase in the assumed healthcare cost trend rate would
increase the accumulated benefit obligations by approximately $2,188 at December
31, 1999, and would have increased the 1999 aggregate of the service and
interest cost components of postretirement benefit expense by approximately
$167. A one percentage point decrease in the assumed healthcare cost trend rate
would decrease the accumulated benefit obligations by approximately $2,122 at
December 31, 1999, and would have decreased the 1999 aggregate of the service
and interest cost components of postretirement benefit expense by approximately
$125.
12 LEASES The Company has various noncancellable operating leases for
buildings, office space and equipment. Capital leases were not
significant. Rent expense was $7,712, $7,133 and $7,178 for
1999, 1998 and 1997, respectively. Minimum rental commitments
under noncancellable leases in years 2000 through 2004 are
$6,097, $5,802, $4,678, $3,660, $3,063 and $7,246 thereafter.
21
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13 INFORMATION ON
BUSINESS SEGMENTS
The Company's reportable segments are strategic
business groups that offer different products and
services. Each segment is managed separately because
each business requires different technology and
marketing strategies. Specifically, the Company
operates three reportable business segments:
ASSOCIATED SPRING manufactures custom-made mechanical
and nitrogen gas springs, manifold systems and
other close-tolerance engineered metal components,
principally for the transportation, electronics and
industrial markets. Associated Spring's custom metal
parts are sold in the United States and through its
international subsidiaries. International
manufacturing operations are located in Brazil,
Sweden, Canada, Mexico and Singapore. The automotive
and automotive parts industries constitute Associated
Spring's largest markets.
BOWMAN DISTRIBUTION distributes fast-moving,
consumable repair and replacement products for
industrial, heavy equipment and transportation
maintenance markets. Additionally, it distributes
close-tolerance engineered metal components
principally manufactured by Associated Spring. Bowman
Distribution's operations and markets are located
primarily in the United States. Other important
locations include Canada and Europe.
BARNES AEROSPACE supplies precision machined and
fabricated components and assemblies for the
aerospace industry. Additionally, it refurbishes jet
engine components for many of the world's commercial
airlines and the military. Barnes Aerospace's
operations are primarily in the United States, with
additional locations in Europe and Singapore. Its
markets are located in the United States, Europe and
Asia.
The Company evaluates the performance of its
reportable segments based on operating profit of the
respective businesses. In 1999, segment operating
profit was modified to follow the accounting policies
described in Note 1. The equity income from the
Company's investment in the NASCO joint venture is
incorporated into the segment results of Associated
Spring. The Company evaluates the performance of its
reportable segments based on the operating profit of
the respective businesses, which includes net sales,
cost of sales, selling and administrative expenses
and certain components of other income and other
expenses, as well as the allocation of corporate
overhead expenses. Sales between the business
segments and between the geographic areas are
accounted for on the same basis as sales to
unaffiliated customers. Additionally, revenues are
attributed to countries based on location of
manufacturing or distribution facilities.
The following tables set forth information about the
Company's operations by its three reportable business
segments and by geographic area.
22
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATIONS BY (Dollars in millions) Associated Bowman Barnes
BUSINESS SEGMENT Revenues Spring Distribution Aerospace Other Total
===================================================================================================================================
1999 $282.6 $230.4 $121.3 $(11.9) $622.4
1998 262.1 246.9 154.6 (12.4) 651.2
1997 259.0 258.8 136.6 (11.7) 642.7
Operating profit
===================================================================================================================================
1999 $ 33.5 $ 9.9 $ 5.3 $ -- $ 48.7
1998 23.2 35.0 12.8 (12.9) 58.1
1997 24.5 32.6 9.9 -- 67.0
Assets
===================================================================================================================================
1999 $260.6 $ 94.8 $ 79.7 $ 81.2 $516.3
1998 160.1 86.7 92.3 79.8 418.9
1997 152.8 89.1 95.1 71.0 408.0
Depreciation & amortization
===================================================================================================================================
1999 $ 16.5 $ 6.0 $ 7.8 $ 0.3 $ 30.6
1998 15.3 5.4 7.5 0.2 28.4
1997 14.3 5.1 8.5 0.2 28.1
Capital expenditures
===================================================================================================================================
1999 $ 9.8 $ 9.4 $ 7.1 $ 0.9 $ 27.2
1998 18.3 7.5 8.3 0.5 34.6
1997 18.3 7.0 7.9 0.2 33.4
NOTES:
In 1999, sales from any one customer did not exceed 10% of the
Company's total revenues. In 1998, one customer accounted for
11.8% of the Company's total revenues.
"Other" revenues represent intersegment sales, of which the
majority are sales by Associated Spring to Bowman
Distribution.
The operating profit of Associated Spring includes income from
its equity investment in NASCO of $1.7 million, $2.6 million
and $1.8 million in 1999, 1998 and 1997, respectively.
"Other" operating profit in 1998 includes the $12.9 million
charge related to the accelerated retirement package for the
Company's retired president.
The assets of Associated Spring include the NASCO investment
of $9.5 million, $9.2 million and $7.8 million in 1999, 1998
and 1997, respectively.
"Other" assets include corporate controlled assets, the
majority of which are cash and deferred tax assets.
A reconciliation of the total reportable segments' operating
profit to income before income taxes follows:
1999 1998 1997
- ------------------------------------------------------------------------------
Operating profit $48.7 $58.1 $67.0
Interest income 1.0 1.4 1.2
Interest expense (6.1) (4.1) (4.9)
Other income (expense) (0.9) (0.7) 1.2
- ------------------------------------------------------------------------------
Income before income taxes $42.7 $54.7 $64.5
==============================================================================
23
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATIONS BY
GEOGRAPHIC AREA
(Dollars in millions) Inter-
Revenues Domestic International Geographical Total
=====================================================================================
1999 $488.2 $147.0 $(12.8) $622.4
1998 526.8 138.3 (13.9) 651.2
1997 515.0 139.5 (11.8) 642.7
=====================================================================================
Long-lived assets
=====================================================================================
1999 $164.5 $109.1 $ -- $273.6
1998 144.6 41.9 -- 186.5
1997 137.7 43.2 -- 180.9
=====================================================================================
NOTES:
International sales derived from any one country did not exceed 10% of total
revenues.
Intergeographical sales are equally distributed between domestic and
international.
REPORT OF TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INDEPENDENT BARNES GROUP INC.
ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets
[PRICEWATERHOUSE- and the related consolidated statements of income,
COOPERS LOGO] stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Barnes Group
Inc. and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for
each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally
accepted in the United States. 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 of
these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles
used and significant estimates made by management and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 8, 2000
24
21
QUARTERLY DATA (UNAUDITED)
First Second Third Fourth Full
(Dollars in millions, except per share data) Quarter Quarter Quarter Quarter Year
================================================================================================================================
1999
Net sales $162.2 $156.3 $154.0 $149.9 $622.4
Gross profit(1) 52.7 49.0 50.4 45.3 197.4
Operating income 14.8 12.5 13.4 4.6 45.3
Net income 10.0 8.2 8.9 1.5 28.6
Per common share:
Net income:
Basic 0.50 0.42 0.46 0.08 1.47
Diluted 0.50 0.41 0.45 0.08 1.46
Dividends 0.18 0.19 0.19 0.19 0.75
Market prices (high-low) $30.00-15.88 $25.50-18.56 $23.69-18.31 $22.75-15.25 $30.00-15.25
================================================================================================================================
1998
Net sales $168.8 $169.2 $158.3 $154.9 $651.2
Gross profit(1) 57.5 57.0 50.8 50.0 215.3
Operating income(2) 19.3 6.9 16.9 12.1 55.2
Net income(2) 11.9 4.6 10.7 7.3 34.5
Per common share:
Net income:
Basic(2) 0.59 0.23 0.53 0.37 1.72
Diluted(2) 0.58 0.23 0.52 0.36 1.69
Dividends 0.167 0.167 0.180 0.180 0.694
Market prices (high-low) $33.44-21.25 $34.00-26.50 $30.63-23.63 $31.88-24.56 $34.00-21.25
================================================================================================================================
(1) Sales less cost of sales.
(2) Includes the $12.9 million pretax, $7.7 million after-tax charge ($0.38
per share) against income related to the accelerated retirement package
for the retired president of the Company, recorded in the second
quarter.
25
22
SELECTED FINANCIAL DATA
1999 1998(3) 1997 1996 1995
=====================================================================
PER COMMON SHARE(1)(2)
Net Income
Basic $ 1.47 $ 1.72 $ 2.00 $ 1.63 $ 1.40
Diluted 1.46 1.69 1.96 1.61 1.38
Dividends paid 0.75 0.69 0.65 0.60 0.53
Stockholders' equity (at year-end) 9.58 9.51 8.97 7.86 6.55
Stock price (at year-end) 16.31 29.25 22.75 20.00 12.00
=====================================================================
FOR THE YEAR (in thousands)
Net sales $622,356 $651,183 $642,660 $594,989 $592,509
Operating income 45,250 55,221 65,766 55,316 48,804
As a percent of sales 7.3% 8.5% 10.2% 9.3% 8.2%
Income before income taxes $ 42,698 $ 54,663 $ 64,502 $ 52,310 $ 45,450
Income taxes 14,086 20,169 24,079 19,742 17,966
Net income 28,612 34,494 40,423 32,568 27,484
As a percent of average stockholders' equity 15.4% 18.4% 23.4% 22.8% 22.6%
Depreciation and amortization $ 30,602 $ 28,431 $ 28,123 $ 26,626 $ 26,750
Capital expenditures 27,222 34,571 33,398 33,892 35,820
Average common shares outstanding -- basic 19,418 20,096 20,237 19,924 19,640
=====================================================================
YEAR-END FINANCIAL POSITION (in thousands)
Working capital $103,165 $106,884 $113,092 $109,476 $ 95,280
Current ratio 1.9 to 1 2.1 to 1 2.3 to 1 2.4 to 1 2.2 to 1
Property, plant and equipment $145,105 $139,247 $133,830 $131,071 $122,870
Total assets 516,282 418,904 407,978 389,956 361,549
Long-term debt 140,000 51,000 60,000 70,000 70,000
Guaranteed ESOP obligation -- long-term portion -- -- 2,205 4,951 7,491
Stockholders' equity 180,614 188,674 180,859 157,164 128,841
Debt as a percent of total capitalization(4) 45.7% 24.1% 27.1% 33.5% 38.4%
=====================================================================
YEAR-END STATISTICS
Employees 4,020 3,847 3,872 3,761 3,880
=====================================================================
(1) All per share data, other than earnings per common share, are based on
common shares outstanding at the end of each year. Earnings per common
share are based on weighted average common shares outstanding during
each year.
(2) All per share data have been adjusted for the three-for-one stock split
effective April 1997.
(3) Includes the $12.9 million pretax, $7.7 million after-tax charge ($0.38
per share) against income related to the accelerated retirement package
for the retired president of the Company.
(4) Debt includes all interest-bearing debt including the guaranteed ESOP
obligation, and total capitalization includes interest-bearing debt and
stockholders' equity.
26