Exhibit 13
Management's Discussion & Analysis
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Our Business
Barnes Group is a diversified international manufacturer of precision metal
parts and distributor of industrial supplies. The Company is comprised of three
business segments. The Associated Spring segment is a manufacturer of precision
mechanical and nitrogen gas springs for the electronics, telecommunications and
transportation markets. The Barnes Aerospace segment supplies precision machined
and fabricated components and assemblies for commercial and military aircraft,
as well as engine component overhaul and repair services in support of the
global airline industry. The Barnes Distribution segment, formerly known as
Bowman Distribution, is a distributor of maintenance, repair, and operating
(MRO) supplies and a provider of logistics management services for industrial,
heavy equipment and transportation maintenance markets. It also distributes
close-tolerance engineered metal components manufactured principally by
Associated Spring. Through these three businesses, Barnes Group helps its
customers enhance their competitiveness and responsiveness by realizing the
benefits of its manufacturing and logistics management capabilities.
Acquisitions
During the past two years, the Company acquired a number of businesses, which
were recorded using the purchase method of accounting. Accordingly, the results
of operations of the acquired companies have been included in the consolidated
results from their respective acquisition dates.
In August 1999, the Company purchased substantially all of the assets and
liabilities of the nitrogen gas spring business of Teledyne Industries, Inc.,
for a total acquisition cost of $92.2 million. This operation is a major
supplier of nitrogen gas springs and manifold systems for the metal forming
industries. The nitrogen gas spring business is included in the Associated
Spring segment. This strategic acquisition provides Associated Spring with new
spring technologies and allows it to continue to develop and expand products,
markets, and services.
In May 2000, the Company purchased substantially all of the assets and
liabilities of Curtis Industries, Inc. (Curtis) for a total acquisition cost of
$63.3 million. Curtis, a distributor of MRO supplies and high quality security
products, was combined with Bowman Distribution to form the Barnes Distribution
segment. This business combination provides a broader product offering, enhanced
service capabilities, increased sales penetration and cost savings
opportunities.
In September 2000, the Company purchased substantially all of the assets and
liabilities of AVS/Kratz-Wilde Machine Company and Apex Manufacturing, Inc.
(Kratz-Wilde/Apex) for a total acquisition cost of $41.6 million.
Kratz-Wilde/Apex fabricates and machines intricate aerospace components for jet
engines and auxiliary power units. These businesses are included in the Barnes
Aerospace segment. This acquisition augments Barnes Aerospace by extending
product depth and customer penetration.
The funds used to purchase the businesses were borrowed initially under the
Company's revolving credit agreement. The Company refinanced a portion of these
borrowings through the issuance of $70 million of long-term private placement
debt in November 1999 and the issuance of $60 million of long-term private
placement debt in November 2000.
Results of Operations
For the year 2000, Barnes Group reported record net sales of $740 million, an
increase of $118 million, or 19%, over net sales of $622 million in 1999. The
increase in net sales reflects acquisitions and internal growth in each of the
three businesses. Geographically, foreign sales increased 27% year-over-year,
while U.S. sales increased 19% year-over-year. The newly acquired businesses
provided incremental sales of $101 million: $32 million to Associated Spring,
$13 million to Barnes Aerospace, and $56 million to Barnes Distribution. In
1999, Barnes Group net sales were down $29 million from 1998 levels, primarily
as a result of reductions at Barnes Distribution and Barnes Aerospace.
Operating income in 2000 increased 37%, to $62.9 million, compared with $46.1
million in 1999. The increase was driven by double-digit sales and profit growth
in each of the three businesses. Lower pension expense, which primarily reflects
solid investment performance on plan assets, contributed $4.9 million of
incremental operating income over the comparable 1999 period. Operating income
in 1999 declined $9.2 million from 1998 due to reduced profits at Barnes
Distribution and Barnes Aerospace, partially offset by strong results at
Associated Spring and a $12.9 million expense in 1998 for the accelerated
retirement package for the Company's former president.
3
Management's Discussion & Analysis
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Operating margin in 2000 improved to 8.5%, compared with 7.4% in 1999. The
year-over-year operating margin increase reflects an improvement in gross profit
to 34.0% of sales in 2000, compared with 31.7% in 1999. The improvement in gross
margin reflects higher manufacturing productivity at both Associated Spring and
Barnes Aerospace as well as a shift in the overall sales mix toward the higher
gross margin Barnes Distribution business. This was offset in part by higher
selling and administrative expenses. Selling and administrative expenses
increased $37.1 million in 2000 over 1999, of which $33.6 million is
attributable to the newly acquired businesses. Also reflected in selling and
administrative expenses is the additional investment made in sales and marketing
functions throughout the Company. Included in operating income in 2000 is a gain
of $2.2 million related to the sale of a corporate asset and $1.7 million of
one-time integration costs related to the Curtis acquisition. The decline in
operating margin in 1999, compared with 1998, reflected the impact of higher
administrative costs associated with a system implementation at Barnes
Distribution, coupled with a higher investment in sales resources throughout the
Company.
Segment Review - Sales and Operating Profit
Associated Spring sales for 2000 were $327 million, up $45 million from 1999.
Sales in 1998 were $262 million. The 2000 sales increase included both domestic
and foreign sales growth. In 2000, sales at Associated Spring's U.S. operations
increased, reflecting continued penetration of the electronics and
transportation markets and the strength of the domestic economy. Associated
Spring's international sales increased significantly in the Pacific Rim as well
as in Brazil. Additionally, the full year impact in 2000 of the August 1999
acquisition of the nitrogen gas spring business contributed to sales increases
both domestically and internationally. Associated Spring's 1999 sales increased
over 1998 on the strength of its U.S. operations and the addition of the
nitrogen gas spring business.
Associated Spring reported operating profit of $44.0 million in 2000, compared
with $33.5 million in 1999 and $23.2 million in 1998. The significant
improvement in 2000 over 1999 reflects a full year of ownership of the nitrogen
gas spring business, increased sales to new sectors, higher manufacturing
productivity and lower operating expenses.
Barnes Aerospace sales were $135 million in 2000, up 11% compared with $121
million in 1999. Sales in 1998 were $155 million. Barnes Aerospace continued to
penetrate new markets and customers, primarily in the original equipment
manufacturing businesses. Total orders for the year were $171 million, up 118%
from $79 million in 1999. Order backlog rose to a record $145 million at
December 31, 2000, compared with $80 million last year. Sales were down in the
overhaul and repair unit, driven by overall weakness in that market. The
acquisition of Kratz-Wilde/Apex added $13 million in sales in 2000. In 1999, the
original equipment manufacturing business as well as the overhaul and repair
business were impacted by a slowdown in the aerospace markets, which in turn
resulted in an industry-wide decline in new orders and the cancellation or
rescheduling of existing orders.
Barnes Aerospace operating profit was $8.0 million in 2000, as compared with
$5.3 million in 1999 and $12.8 million in 1998. The increase in 2000 profit and
margin reflects higher sales volume and benefits from lean manufacturing
initiatives. The decrease in profits for 1999, compared with 1998, was a direct
result of lower sales volume.
Barnes Distribution sales for 2000 were $291 million, compared with $230 million
in 1999 and $247 million in 1998. Geographically, Barnes Distribution achieved
double-digit growth both in U.S. and foreign sales. The acquisition of Curtis in
May 2000 contributed $56 million in sales. The remaining increase reflects
higher sales in the North American business. This increase reflects significant
improvement in a distribution management system that had negatively impacted
customer service and sales in 1999. Customer service has been restored to levels
that now meet customer expectations, which is positively impacting sales volume.
In 1999, Barnes Distribution's sales were down nearly 7%, due in large part to
complications encountered in the distribution system implementation.
Barnes Distribution operating profit in 2000 was $12.9 million, compared with
$9.9 million in 1999 and $35.0 million in 1998. The increase in profits reflects
increased sales volume, offset in part by one-time integration costs of $1.7
million related to the acquisition of Curtis. The sharp decline in profits in
1999 was attributable to the sales volume decline, as well as to significantly
higher warehousing and administrative costs incurred in its North American
business to address operational issues caused by the new distribution system
implementation. Management continues to address the higher administrative costs
4
Management's Discussion & Analysis
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and warehouse inefficiencies created by the system implementation and expects
that greater efficiencies will help drive considerable improvement in
profitability in 2001.
Non-Operating Income/Expense
Other income totaled $4.8 million in 2000, compared with $4.4 million in 1999
and $4.6 million in 1998. The increase over 1999 reflects higher interest income
and net foreign exchange transaction gains. The decrease in other income in
1999, compared with 1998, was due to lower equity income from the Company's
NASCO joint venture, offset in part by higher net foreign exchange transaction
gains. Interest expense and other expenses increased as a result of the 1999 and
2000 acquisitions. In each year, interest expense increased as a result of
additional borrowings used to fund acquisitions, and other expenses increased
with the additional goodwill amortization associated with the acquisitions.
Income Taxes
The Company's effective tax rate was 26.6% in 2000, compared with 33.0% in 1999
and 36.9% in 1998. The lower rate in 2000 was due to a higher percentage of
foreign income, with tax rates lower than the U.S. statutory tax rate.
Net Income and Net Income Per Share
Consolidated net income was $35.7 million in 2000, $28.6 million in 1999, and
$34.5 million in 1998. Basic earnings per share was $1.92 for 2000, compared
with $1.47 in 1999 and $1.72 in 1998. Diluted earnings per share was $1.90 for
2000, as compared with $1.46 in 1999 and $1.69 in 1998. The 1998 earnings
included an after-tax charge of $7.7 million, or $0.38 per share, related to the
accelerated retirement package for the Company's former president.
Inflation
Management believes that during the 1998-2000 period 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. Management continues to focus
on cash flow and anticipates that operating activities in 2001, 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.
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 $51.9 million in 2000, down from $62.8 million in 1999 and $76.0
million in 1998. In 2000, improved operating results contributed significantly
to operating cash flow, but this increase was more than offset by higher
investments in working capital and other non-cash income. This contrasts with
both 1999 and 1998, when an overall reduction in working capital contributed to
operating cash flow. Management continues to stress the need for efficient asset
utilization, in particular working capital, as a necessary ingredient of
internal cash generation. Management expects that its efforts will result in
working capital contributing to operating cash flow in 2001. During the past
three years, operating activities provided over $190 million in cash, which the
Company used, in part, to pay dividends to stockholders, repurchase Company
stock, and fund significant investments in new plants and equipment.
Investing activities used cash of $134.5 million in 2000, compared with $117.0
million in 1999 and $35.3 million in 1998. The increase in cash used in 2000 is
attributable to the purchase of Curtis and Kratz-Wilde/Apex. The increase in
cash used in 1999 compared with 1998 is attributed to the purchase of the
nitrogen gas spring business. The Company's capital spending program focuses on
business growth and improvements in productivity and quality. In 2000, capital
spending approximated 1999 levels. The reduced spending level in both 2000 and
1999 follows five years of heavy investment by all three business segments. The
Company expects capital spending in 2001 to approximate 2000 levels, barring any
major economic downturn.
5
Management's Discussion & Analysis
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In 2000, the Company's financing activities generated cash of $64.8 million,
compared with $58.8 million in 1999 and a cash usage of $31.9 million in 1998.
Cash was generated primarily through the issuance of long-term debt, net of
repayments, of $90 million and $89 million in 2000 and 1999, respectively, to
fund business acquisitions. The increase in cash from borrowings was partially
offset by funds used to repurchase Company stock. Additionally, cash dividends
increased in 2000, for the seventh consecutive year, to $0.79 per share. As a
result, total cash used to pay 2000 dividends to stockholders was $14.7 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 spring
business acquisition through the issuance of $70 million of private placement
Senior 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 was financed through
borrowings under the Company's revolving credit agreement.
In November 2000, the Company financed a portion of the Curtis and
Kratz-Wilde/Apex business acquisitions through issuance of $60 million of
privately placed Senior Notes with three insurance companies. The Notes have an
effective interest rate of 9.34%. These Notes are payable in three equal annual
installments beginning in 2006. Proceeds from the Notes were used to repay
borrowings under the Company's revolving credit agreement. The additional
borrowings will result in higher interest expense in 2001.
To supplement internal cash generation, the Company maintains substantial bank
borrowing facilities. At December 31, 2000, the Company had $150 million of
borrowing capacity available under a revolving credit agreement, of which $50
million was borrowed at an interest rate of 7.03%. Additionally, the Company had
$15 million in borrowings under uncommitted short-term bank credit lines, at an
interest rate of 7.70%. The Company believes its bank credit facilities, 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 does not use derivatives for speculative or
trading purposes.
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, 2000, 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.
In September 2000, the Company amended its $70 million cross-currency exchange
agreement by extending the maturity from October 2002 to October 2009. 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 the period ending October 2009. The overall objective is to
reduce the exposure associated with currency fluctuations between the U.S.
dollar and the Swedish krona.
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. The effect on 2000 earnings of the interest rate exchange
agreement and the U.S. dollar and Swedish krona cross-currency exchange
agreement was a decrease in the Company's interest expense by $0.6 million.
At December 31, 2000, the fair value of the Company's fixed rate debt was $164.9
million, compared with its carrying amount of $161.2 million. The fair value of
the interest rate component of the cross-currency swap as of December 31, 2000,
was not significant. The Company estimates that a 1% decrease in market interest
rates at December 31, 2000 would have increased the fair value of the Company's
fixed rate debt to $173.1 million.
6
Management's Discussion & Analysis
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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 in
accordance with a corporate policy that addresses acceptable levels of foreign
currency exposures. The Company does not hedge its foreign currency net asset
exposure.
The currencies of the environments in which the Company's business operations
are conducted are the U.S. dollar, Singapore dollar, French franc, British
pound, Mexican peso, Brazilian real, Canadian dollar and Swedish krona. The
Company is exposed primarily to U.S. dollar-denominated financial instruments at
its international locations. 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 2000 would have resulted in reducing pretax profit by $2.5 million.
The Company's exposure to commodity price changes relates primarily to certain
manufacturing operations that utilize high-grade 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 Changes
In June 1998, the Financial Accounting Standards 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. The statement, as amended, 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.
Forward-Looking Statements
This Annual Report may contain certain forward-looking statements as defined in
the Public Securities Litigation and Reform Act of 1995. These forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially from those contained in the statements. Investors are
encouraged to consider these risks and uncertainties as described within the
Company's periodic filings with the Securities and Exchange Commission,
including the following: changes in market demand for the types of products and
services produced and sold by Barnes Group, changes in world-wide economic and
political conditions, interest and foreign exchange rate fluctuations, and
regulatory changes.
7
Consolidated Statements of Income
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(Dollars in thousands, except per share data)
Years ended December 31, 2000 1999 1998
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Net sales $ 740,032 $ 622,356 $ 651,183
Cost of sales 488,634 424,945 435,918
Selling and administrative expenses 188,449 151,304 159,986
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677,083 576,249 595,904
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Operating income 62,949 46,107 55,279
Other income 4,773 4,400 4,640
Interest expense 15,140 6,093 4,106
Other expenses 3,992 1,716 1,150
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Income before income taxes 48,590 42,698 54,663
Income taxes 12,925 14,086 20,169
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Net income $ 35,665 $ 28,612 $ 34,494
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Per common share:
Net income:
Basic $ 1.92 $ 1.47 $ 1.72
Diluted 1.90 1.46 1.69
Dividends 0.79 0.75 0.69
Average common shares outstanding 18,568,359 19,417,856 20,095,710
See accompanying notes.
8
Consolidated Balance Sheets
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(Dollars in thousands)
December 31, 2000 1999
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Assets
Current assets
Cash and cash equivalents $ 23,303 $ 43,632
Accounts receivable, less allowances
(2000 -- $2,720; 1999 -- $3,329) 107,434 91,701
Inventories 88,514 66,351
Deferred income taxes 12,647 9,398
Prepaid expenses 9,450 8,103
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Total current assets 241,348 219,185
Deferred income taxes 15,010 23,797
Property, plant and equipment 163,766 145,105
Goodwill 155,667 88,562
Other assets 61,150 39,633
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Total assets $ 636,941 $ 516,282
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Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 6,896 $ 12,136
Accounts payable 59,767 57,458
Accrued liabilities 60,183 46,426
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Total current liabilities 126,846 116,020
Long-term debt 230,000 140,000
Accrued retirement benefits 67,686 66,973
Other liabilities 11,076 12,675
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 51,845 49,786
Treasury stock at cost (2000 -- 3,430,411 shares;
1999 -- 3,187,242 shares) (69,181) (63,893)
Retained earnings 239,266 218,388
Accumulated other comprehensive income (20,817) (23,887)
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Total stockholders' equity 201,333 180,614
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Total liabilities and stockholders' equity $ 636,941 $ 516,282
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See accompanying notes.
9
Consolidated Statements of Cash Flows
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(Dollars in thousands)
Years ended December 31, 2000 1999 1998
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Operating activities:
Net income $ 35,665 $ 28,612 $ 34,494
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 35,871 30,602 28,431
Gain on sale of property, plant
and equipment (1,960) (857) (741)
Changes in assets and liabilities:
Accounts receivable 1,087 (1,731) 7,726
Inventories (7,631) 1,980 (3,766)
Accounts payable (5,415) 17,356 980
Accrued liabilities 1,026 (9,524) 6,488
Deferred income taxes 5,863 3,655 (2,536)
Other (12,649) (7,296) 4,960
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Net cash provided by operating activities 51,857 62,797 76,036
Investing activities:
Proceeds from sale of property, plant and equipment 2,744 1,929 4,266
Capital expenditures (26,575) (27,222) (34,571)
Business acquisitions (104,935) (92,239) --
Redemption (purchase) of short-term investments -- 2,566 (2,605)
Other (5,776) (2,019) (2,340)
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Net cash used by investing activities (134,542) (116,985) (35,250)
Financing activities:
Net increase (decrease) in notes payable (5,201) 5,249 4,539
Payments on long-term debt (60,000) (70,000) (9,000)
Proceeds from the issuance of long-term debt 150,000 159,000 --
Proceeds from the issuance of common stock 3,920 1,486 3,598
Common stock repurchases (9,197) (22,351) (17,042)
Dividends paid (14,677) (14,564) (13,951)
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Net cash provided (used) by financing activities 64,845 58,820 (31,856)
Effect of exchange rate changes on cash flows (2,489) (1,206) (1,254)
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Increase (decrease) in cash and cash equivalents (20,329) 3,426 7,676
Cash and cash equivalents at beginning of year 43,632 40,206 32,530
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Cash and cash equivalents at end of year $ 23,303 $ 43,632 $ 40,206
=============================================================================================
See accompanying notes.
10
Consolidated Statements of Changes in Stockholders' Equity
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Accumulated
Additional Other Guaranteed Total
Common Paid-In Treasury Retained Comprehensive ESOP Stockholders'
(Dollars in thousands) Stock Capital Stock Earnings Income Obligation Equity
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January 1, 1998 $ 220 $ 47,007 $ (29,433) $ 183,857 $ (15,841) $ (4,951) $180,859
Comprehensive income:
Net income 34,494 34,494
Other comprehensive income -- (4,202) (4,202)
--------- --------- --------
Comprehensive income 34,494 (4,202) 30,292
Dividends paid (13,951) (13,951)
Common stock repurchases (17,042) (17,042)
Employee stock plans 2,224 3,582 (100) 5,706
Guaranteed ESOP obligation 2,746 2,746
Income tax benefits on
unallocated ESOP dividends 64 64
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December 31, 1998 220 49,231 (42,893) 204,364 (20,043) (2,205) 188,674
Comprehensive income:
Net income 28,612 28,612
Other comprehensive income -- (3,844) (3,844)
--------- --------- --------
Comprehensive income 28,612 (3,844) 24,768
Dividends paid (14,564) (14,564)
Common stock repurchases (22,351) (22,351)
Employee stock plans 555 1,351 (44) 1,862
Guaranteed ESOP obligation 2,205 2,205
Income tax benefits on
unallocated ESOP dividends 20 20
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December 31, 1999 220 49,786 (63,893) 218,388 (23,887) -- 180,614
Comprehensive income:
Net income 35,665 35,665
Other comprehensive income -- 3,070 3,070
--------- --------- --------
Comprehensive income 35,665 3,070 38,735
Dividends paid (14,677) (14,677)
Common stock repurchases (9,197) (9,197)
Employee stock plans 2,059 3,909 (110) 5,858
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December 31, 2000 $ 220 $ 51,845 $ (69,181) $ 239,266 $ (20,817) $ -- $201,333
=================================================================================================================================
See accompanying notes.
11
Notes to Consolidated Financial Statements
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(All dollar amounts included in the notes are stated in thousands except per
share data and the tables in Note 13.)
1. Summary of Significant Accounting Policies
General: The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
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, a 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 $1,611, $1,714, and
$2,573 for the years 2000, 1999, and 1998, respectively, from the Company's
investment in NASCO. The Company received dividends from NASCO totaling $666,
$1,006, and $732 in 2000, 1999, and 1998, respectively.
Revenue recognition: Sales and related cost of sales are recognized when
products are shipped to customers and title has passed.
Cash and cash equivalents: 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. Cash equivalents 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 73% 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 20 to 50 years
for buildings and three to 17 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 calculated
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 40 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 1999
purchase of the nitrogen gas spring business was $71,482. The acquisition in
2000 of Curtis and Kratz-Wilde/Apex resulted in additions to goodwill of $53,267
and $17,095, respectively. At December 31, 2000 and 1999, accumulated
amortization was $13,904 and $10,536, 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 that have high rates of inflation, translation gains
and losses are included in net income. In 2000, 1999, and 1998, the Company did
not operate in countries with high rates of inflation. Foreign currency
transactions generated net gains of $1,012, $752, and $240 in 2000, 1999, and
1998, respectively, which are included in net income.
Net income per common share: Earnings per share is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
earnings per share is 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 stockholders for the years ended December 31, 2000, 1999,
and 1998. For purposes of computing diluted earnings per share, the weighted
average number of shares outstanding was increased by 222,868 shares, 224,899
shares, and 330,659 shares for 2000, 1999, and 1998, respectively, representing
the potential dilutive effects of stock-based incentive plans.
12
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Acquisitions
During the past two years, the Company has acquired a number of businesses, all
of which were recorded using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included in the
consolidated results from their respective acquisition dates.
In August 1999, the Company purchased substantially all of the assets and
liabilities of the nitrogen gas spring business of Teledyne Industries, Inc.,
for a total acquisition cost of $92,239. The nitrogen gas spring business is
included in the Associated Spring segment.
In May 2000, the Company purchased substantially all of the assets and
liabilities of Curtis Industries, Inc. (Curtis), for a total acquisition cost of
$63,341. Curtis, a distributor of maintenance, repair, and operating supplies
and high quality security products, is included in the Barnes Distribution
segment.
In September 2000, the Company purchased substantially all of the assets and
liabilities of AVS/Kratz-Wilde Machine Company and Apex Manufacturing, Inc.
(Kratz-Wilde/Apex), for a total acquisition cost of $41,594. Kratz-Wilde/Apex
fabricates and machines intricate aerospace components for jet engines and
auxiliary power units. Kratz-Wilde/Apex is included in the Barnes Aerospace
business segment.
The acquisition costs have been allocated to tangible and intangible assets and
liabilities of the businesses based upon estimates of their respective fair
market values. The resulting goodwill will be amortized over 40 years.
In connection with the Curtis acquisition, the Company incurred certain one-time
integration costs. The integration plan includes combining the headquarters
functions and warehousing and distribution networks. As a result, the Company
recorded total costs of $5,813, relating primarily to lease consolidation costs
and reductions in personnel. Costs of $4,070 not associated with the generation
of future revenue are reflected as assumed liabilities in the allocation of the
purchase price to net assets acquired. The remaining integration costs of $1,743
are reflected in expenses.
The following table reflects the operating results of the Company for the years
ended December 31, 2000 and 1999 on a pro forma basis, which gives effect to the
acquisitions of the three businesses at the beginning of 1999. The pro forma
results are not necessarily indicative of the operating results that would have
occurred had the acquisitions been effective January 1, 1999; 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. The pro forma results do
not include the effect of synergies and cost reduction initiatives related to
the acquisitions. These actions have already commenced and are expected to
continue in the year 2001.
(Unaudited) 2000 1999
- --------------------------------------------------------------------------------
Net sales $798,652 $780,042
Income before income taxes 48,309 44,908
Net income 35,449 32,607
Per common share:
Basic $ 1.91 $ 1.68
Diluted 1.89 1.66
3. Inventories
Inventories at December 31 consisted of:
2000 1999
- --------------------------------------------------------------------------------
Finished goods $ 59,665 $ 39,573
Work-in-process 13,605 12,861
Raw materials and supplies 15,244 13,917
- --------------------------------------------------------------------------------
$ 88,514 $ 66,351
================================================================================
Inventories valued by the LIFO method aggregated $64,422 and $47,098 at December
31, 2000 and 1999, respectively. If LIFO inventories had been valued using the
FIFO method, they would have been $13,283 and $13,995 higher at those dates.
13
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment at December 31 consisted of:
2000 1999
- --------------------------------------------------------------------------------
Land $ 4,181 $ 3,467
Buildings 73,400 65,136
Machinery and equipment 322,738 299,588
- --------------------------------------------------------------------------------
400,319 368,191
Less accumulated depreciation 236,553 223,086
- --------------------------------------------------------------------------------
$163,766 $145,105
================================================================================
5. Accrued Liabilities
Accrued liabilities at December 31 consisted of:
2000 1999
- --------------------------------------------------------------------------------
Payroll and other compensation $ 19,909 $ 12,547
Postretirement/
postemployment benefits 7,949 8,103
Accrued income taxes 3,036 4,583
Other 29,289 21,193
- --------------------------------------------------------------------------------
$ 60,183 $ 46,426
================================================================================
6. Debt and Commitments
Long-term debt at December 31 consisted of:
2000 1999
- --------------------------------------------------------------------------------
Carrying Fair Carrying
Amount Value Amount
- --------------------------------------------------------------------------------
9.47% Notes $ 6,154 $ 6,263 $ 12,308
7.13% Notes 25,000 24,575 25,000
7.66% Notes 24,500 24,463 24,500
7.80% Notes 45,500 44,893 45,500
9.34% Notes 60,000 64,723 --
Revolving Credit 50,000 50,000 25,692
Industrial Revenue Bond 7,000 7,000 7,000
Borrowings under lines of credit 11,846 11,846 --
- --------------------------------------------------------------------------------
$230,000 $233,763 $140,000
================================================================================
The 9.47% Notes are payable in 13 semi-annual installments of $3,077 that began
on September 16, 1995. The 7.13% Notes are payable in four equal annual
installments of $6,250 beginning on December 5, 2002. The 7.66% Notes are
payable in 2007. The 7.80% Notes are payable in three equal annual installments
beginning in 2008. On November 21, 2000, the Company issued $60 million of
privately placed Notes with three insurance companies. These Notes, which have
an effective interest rate of 9.34%, are payable in three equal installments
beginning in 2006 and are not redeemable by the Noteholders prior to maturity.
Proceeds from these Notes were used to repay borrowings under the Company's
revolving credit agreement.
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 values.
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. The Company had $50,000
borrowed under this agreement at an interest rate of 7.03% at December 31, 2000.
The Company also has available approximately $25,000 in short-term bank credit
lines, of which $15,000 and $4,500 was in use at December 31, 2000 and 1999,
respectively. The interest rate on these borrowings was 7.7% and 6.8% at
December 31, 2000 and 1999, respectively.
14
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Industrial Revenue Bond, due in 2008, has a variable interest rate. The
interest rate on this borrowing was 5.10% and 5.75% at December 31, 2000 and
1999, respectively.
At December 31, 2000, the Company classified $11,846 of borrowings under lines
of credit and $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: $74,250 in 2002, $6,250 in 2003, $6,250 in
2004, $6,250 in 2005, and $137,000 thereafter.
The Company has an outstanding interest rate swap, a form of derivative, which
effectively converts $3,100 of its fixed rate 9.47% Notes to variable rate debt
with interest equal to LIBOR plus 83 basis points. The effective interest rate
on the floating rate portion was 7.4% and 7.0% at December 31, 2000 and 1999,
respectively. This swap decreases as the Notes are repaid. The fair value of the
swap is determined based upon current market prices and was approximately $100
at December 31, 2000.
In September 2000, the Company amended its $70 million cross-currency exchange
agreement by extending the final maturity date from October 2002 to October
2009. This agreement converts U.S. dollar-denominated interest and principal
liabilities into Swedish krona-denominated liabilities at a fixed interest rate
during the agreement period. The fair value of this foreign currency swap,
determined using current market prices, was approximately $9,600 at December 31,
2000. The Company does not use derivatives for speculative or trading purposes.
In addition, the Company had outstanding letters of credit totaling $3,557 at
December 31, 2000.
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, $30,045 was
available for dividends or acquisitions of common stock at December 31, 2000.
Interest paid was $14,601, $5,505, and $4,947 in 2000, 1999, and 1998,
respectively. Interest capitalized was $188, $264, and $711 in 2000, 1999, and
1998, 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:
2000 1999 1998
- --------------------------------------------------------------------------------
Income before income taxes:
U.S. $19,763 $ 27,585 $ 42,009
International 28,827 15,113 12,654
- --------------------------------------------------------------------------------
$48,590 $ 42,698 $ 54,663
================================================================================
Income tax provision:
Current:
U.S. -- federal $ 2,353 $ 5,233 $ 15,256
U.S. -- state 674 529 3,110
International 4,035 4,669 4,339
- --------------------------------------------------------------------------------
7,062 10,431 22,705
- --------------------------------------------------------------------------------
Deferred:
U.S. -- federal 3,726 2,973 (2,214)
U.S. -- state 683 1,109 (94)
U.S. -- state rate reduction 1,181 -- --
International 273 (427) (228)
- --------------------------------------------------------------------------------
5,863 3,655 (2,536)
- --------------------------------------------------------------------------------
$12,925 $ 14,086 $ 20,169
================================================================================
15
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred income tax assets and liabilities at December 31 consisted of the tax
effects of temporary differences related to the following:
Assets Liabilities
- ------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 780 $ 921 $ -- $ --
Depreciation and amortization (5,447) (6,293) 3,506 3,727
Inventory valuation 7,168 6,400 983 613
Postretirement/postemployment costs 24,676 25,852 (306) (333)
Foreign tax loss carryforwards 10,062 9,923 -- --
Other (1,898) 4,020 3,476 3,634
- ------------------------------------------------------------------------------------------
35,341 40,823 7,659 7,641
Valuation allowance (7,684) (7,628) -- --
- ------------------------------------------------------------------------------------------
$ 27,657 $ 33,195 $ 7,659 $ 7,641
- ------------------------------------------------------------------------------------------
Current deferred income taxes $ 12,647 $ 9,398 $ 1,062 $ 594
Noncurrent deferred income taxes 15,010 23,797 6,597 7,047
- ------------------------------------------------------------------------------------------
$ 27,657 $ 33,195 $ 7,659 $ 7,641
==========================================================================================
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 of $27,885 have remaining carryforward
periods ranging from four years to unlimited.
The Company has not recognized deferred income taxes on $131,784 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:
2000 1999 1998
- --------------------------------------------------------------------------------
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State taxes (net of federal benefit) 1.8 2.5 3.6
State tax rate reduction 1.6 -- --
Foreign losses without tax benefit 0.8 1.2 1.0
Tax on foreign operations (12.7) (3.7) (1.6)
NASCO equity income (0.5) (0.9) (1.0)
Foreign sales corporation (0.9) (0.8) (0.4)
ESOP dividend -- (1.2) (1.3)
Other 1.5 0.9 1.6
- --------------------------------------------------------------------------------
Consolidated effective income tax rate 26.6% 33.0% 36.9%
================================================================================
Income taxes paid, net of refunds, were $7,165, $15,781, and $18,473 in 2000,
1999, and 1998, respectively.
8. Common Stock
In 2000, 1999, and 1998, 351,237 shares, 105,189 shares, and 270,854 shares,
respectively, of common stock were issued from treasury for the exercise of
stock options, various other incentive awards and purchases by the Employee
Stock Purchase Plan. In 2000, 1999, and 1998, the Company acquired 594,406
shares, 1,090,014 shares and 598,160 shares, respectively, of the Company's
common stock, at a cost of $9,197, $22,351, and $17,042, respectively. These
amounts exclude shares issued and reacquired in connection with certain non-cash
exercises under the Company's stock option plans. The acquired shares were
placed in treasury.
In December 1996, the Company adopted a new shareholder rights plan. Under the
plan, each share of common stock contains one right (Right) which entitles the
holder to purchase one one-hundredth 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 Rights are
generally redeemable at $0.01 per Right at any time until 10 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.
16
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
If, following the acquisition 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, 2000 and 1999, the Company had 3,000,000 shares of preferred
stock authorized, none of which was outstanding.
10. Stock Plans
Most 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, 2000, the Company's guarantee on these assets equaled $401. This amount will
only become a liability for the Company if, and to the extent that, the value of
the related Company stock does not cover the guaranteed asset value 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 until the loan was repaid in
mid-1999. The loan interest was based on LIBOR and generated interest costs of
$32 and $212 in 1999 and 1998, respectively. Contributions and certain dividends
received were used in part by the GSP to service its debt. Contributions
included both employee contributions 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 participant accounts, less the sum
of participant contributions and dividends received by the GSP.
Now that the GSP is no longer leveraged, the Company contributes an amount equal
to 50% of employee contributions up to 6% of eligible compensation plus any
guarantee payment. Employees may elect to contribute additional amounts up to a
total of 10% of eligible compensation. The GSP used $1,012 and $1,899 of Company
dividends for debt service in 1999 and 1998, respectively. The Company expenses
all contributions made to the GSP. The Company recognized expense of $2,295 and
$1,115 in 2000 and 1999, respectively, and income of $403 in 1998. As of
December 31, 2000, the GSP held 3,440,507 shares of the Company's common stock.
The Company has an Employee Stock Purchase Plan (ESPP) under which eligible
employees may elect to have up to the lesser of twenty-five thousand dollars or
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 that may be purchased under the ESPP is 2,025,000. The number of
shares purchased under the ESPP was 75,052, 62,868, and 45,599 in 2000, 1999,
and 1998, respectively. As of December 31, 2000, 381,959 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. Options granted under the 1991 Plan that terminate
without being exercised become available for grant under the 1991 Plan. As of
December 31, 2000 and 1999, there were 502,319 shares and 412,024 shares,
respectively, available for future grant under the 1991 Plan. A maximum of
2,131,106 common shares are subject to issuance under this plan after December
31, 2000.
On April 12, 2000, the Company's Board of Directors adopted and the stockholders
approved the Barnes Group Inc. Employee Stock and Ownership Program (2000 Plan).
Effective February 1, 2000, the 2000 Plan permits the granting of incentive
stock options, nonqualified stock options, restricted stock awards, performance
share or cash unit awards, and stock appreciation rights, or any combination of
the foregoing, to eligible employees to purchase up to 2,500,000 shares of the
Company's common stock. Such shares have been authorized and reserved. Options
granted under the 2000 Plan that terminate without being exercised become
available for future grant under the 2000 Plan. As of December 31, 2000, there
were 1,462,497 shares available for future grant under the 2000 Plan. A maximum
of 2,425,469 common shares are subject to issuance under this plan after
December 31, 2000.
Compensation cost related to these plans was $798, $610, and $1,596 in 2000,
1999, and 1998, respectively. The Company recorded, in additional
paid-in-capital, tax benefits related to stock options of $776, $40, and $1,573
in 2000, 1999, and 1998, respectively.
17
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In 1998, 60,000 incentive stock units 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:
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding, January 1 1,808,775 $20.70 1,238,587 $22.39 979,444 $16.13
Granted 1,207,622 $16.88 827,820 $19.20 566,770 $29.13
Exercised 324,036 $12.75 24,727 $18.96 224,332 $11.02
Cancelled 220,369 $22.22 232,905 $24.57 83,295 $25.24
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31 2,471,992 $19.74 1,808,775 $20.70 1,238,587 $22.39
- --------------------------------------------------------------------------------------------------------------------------------
Exercisable, December 31 899,926 $21.36 696,965 $18.91 574,966 $16.94
================================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices of Shares Life (Years) Price of Shares Price
- --------------------------------------------------------------------------------
$ 7 to $14 224,674 6.7 $12.93 93,980 $10.79
$15 to $17 1,016,525 9.1 $16.97 180,134 $16.97
$18 to $23 812,488 7.8 $20.33 370,131 $20.82
$24 to $32 418,305 7.4 $28.98 255,681 $29.10
================================================================================
Incentive stock units (units) entitle the holder to receive, without payment,
one share of the Company's common stock after the expiration 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 incentive stock unit awards have
up to a five-year incentive period. In 2000 no units were granted; 10,261 units
were credited to holders for dividend equivalents; 4,215 units, which include
dividend equivalents, were converted to an equivalent number of shares of common
stock; and 50,306 units were forfeited. Additionally, 125,199 units, which
included dividend equivalents, were terminated in 1998 in conjunction with the
accelerated retirement agreement for the Company's former president. As of
December 31, 2000, there were 254,767 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 12,000 shares issued under this plan in 2000, and no shares were issued in
1999 and 1998. Additionally, 6,000 shares were cancelled in 1999. There are
42,000 shares reserved for issuance under this plan.
Total shares reserved for issuance under all stock plans aggregated 4,980,534 at
December 31, 2000.
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:
2000 1999 1998
- --------------------------------------------------------------------------------
Net income:
As reported $35,665 $28,612 $34,494
Pro forma 32,988 27,053 33,543
Basic earnings per share:
As reported $ 1.92 $ 1.47 $ 1.72
Pro forma 1.78 1.39 1.67
Diluted earnings per share:
As reported $ 1.90 $ 1.46 $ 1.69
Pro forma 1.76 1.38 1.64
================================================================================
18
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The fair value of each stock option grant on the date of grant has been
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------
Risk-free interest rate 6.65% 5.35% 5.35%
Expected life 5 years 6 years 6 years
Expected volatility 30% 30% 20%
Expected dividend yield 3.57% 3.54% 3.75%
The weighted-average grant date fair values of options granted during 2000,
1999, and 1998 were $4.44, $5.07, and $5.63, respectively.
11. Pension and Other Postretirement Benefits
Defined benefit pension plans cover a majority of the Company's worldwide
employees at Associated Spring, its Executive Office, and a substantial portion
of the employees at Barnes Distribution. 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, as amended (ERISA). 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 certain field sales employees of
Barnes 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 $1,447, $1,292, and
$2,029 in 2000, 1999, and 1998, 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
- ----------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Benefit obligation, January 1 $ 231,167 $ 252,036 $ 60,321 $ 63,957
Service cost 6,264 6,218 481 629
Interest cost 17,707 16,944 5,148 4,445
Amendments 232 (484) -- 746
Actuarial loss (gain) 4,855 (28,443) 12,519 (3,975)
Benefits paid from plan assets (15,719) (15,316) (6,510) (5,503)
Acquisition 2,048 -- 1,747 --
Foreign exchange rate changes (1,304) 212 (30) 22
- ----------------------------------------------------------------------------------------------------------------
Benefit obligation, December 31 $ 245,250 $ 231,167 $ 73,676 $ 60,321
================================================================================================================
Projected benefit obligations related to plans
with benefit obligations in excess of assets $ 12,204 $ 8,868 $ 73,676 $ 60,321
================================================================================================================
A reconciliation of the beginning fair value of plan assets to the ending fair
value of plan assets follows:
Pensions
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Fair value of plan assets, January 1 $ 344,447 $ 318,358
Actual return on plan assets (4,610) 40,742
Company contributions 292 269
Plan participants' contributions 120 122
Benefits paid (15,719) (15,316)
Foreign exchange rate changes (2,014) 272
Acquisition 1,854 --
- --------------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 324,370 $ 344,447
================================================================================
Assets related to plans with benefit
obligations in excess of plan assets $ 1,808 $ --
================================================================================
19
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
- -------------------------------------------------------------------------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------
Funded status $ 79,120 $ 113,280 $(73,676) $(60,321)
Adjustments for unrecognized:
Net (gains) losses (66,668) (107,041) 12,862 491
Prior service costs (benefits) 6,171 6,332 (3,531) (4,852)
Net asset at transition (758) (2,425) -- --
- -------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 17,865 $ 10,146 $(64,345) $(64,682)
===========================================================================================
Pension deferred gains and losses that fall outside of a 10% corridor are
amortized over 8.7 years or the remaining average service life of active
participants, whichever is shorter.
Significant assumptions used in determining pension and other postretirement
expense and the funded status of the plans were:
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Weighted average discount rate 7.75% 8.00% 7.00%
Long-term rate of return on plan assets 9.75% 9.75% 9.25%
Increase in compensation 4.75% 4.75% 4.75%
================================================================================
Pension and other postretirement benefit expenses consisted of the following:
Pensions Other Postretirement Benefits
- --------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Service cost $ 6,264 $ 6,218 $ 5,645 $ 481 $ 629 $ 521
Interest cost 17,707 16,944 16,908 5,148 4,445 4,359
Expected return on plan assets (27,601) (24,441) (22,264) -- -- --
Amortization of transition assets (1,636) (1,643) (1,643) -- -- --
Recognized (gains) losses (3,420) (753) 2,898 144 45 --
Prior service cost 1,113 1,048 861 (1,321) (1,355) (1,422)
- --------------------------------------------------------------------------------------------------------------
Benefit (credit) cost $ (7,573) $ (2,627) $ 2,405 $ 4,452 $ 3,764 $ 3,458
==============================================================================================================
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 11% in 2000, decreasing gradually to an ultimate rate of 5% in
2006. A one percentage point increase in the assumed healthcare cost trend rate
would have increased the accumulated benefit obligations by approximately $2,458
at December 31, 2000, and would have increased the 2000 aggregate of the service
and interest cost components of postretirement benefit expense by approximately
$169. A one percentage point decrease in the assumed healthcare cost trend rate
would have decreased the accumulated benefit obligations by approximately $2,378
at December 31, 2000, and would have decreased the 2000 aggregate of the service
and interest cost components of postretirement benefit expense by approximately
$168.
12. Leases
The Company has various noncancellable operating leases for buildings, office
space and equipment. Capital leases were not significant. Rent expense was
$9,127, $7,712, and $7,133 for 2000, 1999, and 1998, respectively. Minimum
rental commitments under noncancellable leases in years 2001 through 2005 are
$7,487, $6,696, $5,085, $4,634, and $4,462, and $7,882 thereafter.
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 precision mechanical and nitrogen gas springs,
manifold systems, and other close-tolerance engineered metal components,
principally for the electronics, telecommunications, and transportation markets.
Associated Spring's custom metal parts are sold in the U.S. and through its
international subsidiaries. International manufacturing operations are located
in Brazil, Sweden, Canada, Mexico, and Singapore.
20
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 U.S., with additional locations in
Europe, Singapore, and Mexico. Its markets are located in the U.S., Europe, and
Asia.
Barnes 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. Barnes Distribution,
formerly known as Bowman Distribution, was formed from the combination of the
Curtis acquisition and Bowman Distribution. Barnes Distribution's operations and
markets are located primarily in the U.S. Other important locations include
Canada and Europe.
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. The equity income from the Company's investment in the NASCO joint
venture is incorporated into the segment results of Associated Spring. Sales
between the business segments and between the geographic areas in which the
businesses operate 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.
Operations by Reportable Business Segment
(Dollars in millions)
Associated Barnes Barnes
Revenues Spring Aerospace Distribution Other Total
=================================================================================================================
2000 $327.3 $135.1 $291.1 $(13.5) $740.0
1999 282.6 121.3 230.4 (11.9) 622.4
1998 262.1 154.6 246.9 (12.4) 651.2
Operating profit
=================================================================================================================
2000 $ 44.0 $ 8.0 $ 12.9 $ -- $ 64.9
1999 33.5 5.3 9.9 -- 48.7
1998 23.2 12.8 35.0 (12.9) 58.1
Assets
=================================================================================================================
2000 $273.6 $130.1 $178.6 $ 54.6 $636.9
1999 260.6 79.7 94.8 81.2 516.3
1998 160.1 92.3 86.7 79.8 418.9
Depreciation and amortization
=================================================================================================================
2000 $ 17.8 $ 8.6 $ 9.0 $ 0.5 $ 35.9
1999 16.5 7.8 6.0 0.3 30.6
1998 15.3 7.5 5.4 0.2 28.4
Capital expenditures
=================================================================================================================
2000 $ 14.2 $ 4.2 $ 5.5 $ 2.7 $ 26.6
1999 9.8 7.1 9.4 0.9 27.2
1998 18.3 8.3 7.5 0.5 34.6
Notes:
In 2000 and 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, the majority of which are sales
by Associated Spring to Barnes Distribution.
The operating profit of Associated Spring includes income from its equity
investment in NASCO of $1.6 million, $1.7 million, and $2.6 million in 2000,
1999, and 1998, respectively.
"Other" operating profit in 1998 includes a $12.9 million charge related to the
accelerated retirement package for the Company's former president.
The assets of Associated Spring include the NASCO investment of $10.0 million,
$9.5 million and $9.2 million in 2000, 1999 and 1998, respectively.
"Other" assets include corporate-controlled assets, the majority of which are
cash and deferred tax assets.
21
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A reconciliation of the total reportable segments' operating profit to income
before income taxes follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Operating profit $ 64.9 $48.7 $58.1
Interest income 1.5 1.0 1.4
Interest expense (15.1) (6.1) (4.1)
Other income (expense) (2.7) (0.9) (0.7)
- --------------------------------------------------------------------------------
Income before income taxes $ 48.6 $42.7 $54.7
================================================================================
Operations by Geographic Area
(Dollars in millions)
Inter-
Revenues Domestic International geographical Total
================================================================================
2000 $580.6 $186.3 $(26.9) $740.0
1999 488.2 147.0 (12.8) 622.4
1998 526.8 138.3 (13.9) 651.2
================================================================================
Long-lived assets
- --------------------------------------------------------------------------------
2000 $262.4 $118.2 $ -- $380.6
1999 164.5 109.1 -- 273.6
1998 144.6 41.9 -- 186.5
================================================================================
Note:
International sales derived from any one country did not exceed 10% of the
Company's total revenues.
================================================================================
Report of Independent Accountants [LOGO]
To the Board of Directors and Stockholders of Barnes Group Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Barnes Group Inc.
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 of America, 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.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 8, 2001
22
Quarterly Data (Unaudited)
- --------------------------------------------------------------------------------
First Second Third Fourth Full
(Dollars in millions, except per share data) Quarter Quarter Quarter Quarter Year
====================================================================================================================================
2000
Net sales $ 173.0 $ 188.5 $ 190.6 $ 187.9 $ 740.0
Gross profit(1) 56.7 65.6 67.0 62.1 251.4
Operating income 15.8 16.1 17.0 14.0 62.9
Net income 9.4 9.1 9.3 7.9 35.7
Per common share:
Net income:
Basic 0.51 0.49 0.50 0.42 1.92
Diluted 0.50 0.49 0.49 0.41 1.90
Dividends 0.19 0.20 0.20 0.20 0.79
Market prices (high-low) $16.50-12.00 $18.25-14.63 $20.25-16.44 $22.38-17.63 $22.38-12.00
====================================================================================================================================
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 14.7 13.2 13.3 4.9 46.1
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
====================================================================================================================================
(1) Sales less cost of sales.
23
Selected Financial Data
- --------------------------------------------------------------------------------
2000 1999 1998(3) 1997 1996
============================================================================================================================
Per common share (1) (2)
Net Income
- ----------------------------------------------------------------------------------------------------------------------------
Basic $ 1.92 $ 1.47 $ 1.72 $ 2.00 $ 1.63
- ----------------------------------------------------------------------------------------------------------------------------
Diluted 1.90 1.46 1.69 1.96 1.61
- ----------------------------------------------------------------------------------------------------------------------------
Dividends paid 0.79 0.75 0.69 0.65 0.60
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (at year-end) 10.82 9.58 9.51 8.97 7.86
- ----------------------------------------------------------------------------------------------------------------------------
Stock price (at year-end) 19.88 16.31 29.25 22.75 20.00
============================================================================================================================
For the year (in thousands)
Net sales $740,032 $622,356 $651,183 $642,660 $594,989
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 62,949 46,107 55,279 65,031 55,844
- ----------------------------------------------------------------------------------------------------------------------------
As a percent of sales 8.5% 7.4% 8.5% 10.1% 9.4%
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 48,590 $ 42,698 $ 54,663 $ 64,502 $ 52,310
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes 12,925 14,086 20,169 24,079 19,742
- ----------------------------------------------------------------------------------------------------------------------------
Net income 35,665 28,612 34,494 40,423 32,568
- ----------------------------------------------------------------------------------------------------------------------------
As a percent of average stockholders' equity 19.1% 15.4% 18.4% 23.4% 22.8%
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 35,871 $ 30,602 $ 28,431 $ 28,123 $ 26,626
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 26,575 27,222 34,571 33,398 33,892
- ----------------------------------------------------------------------------------------------------------------------------
Average common shares outstanding -- basic 18,568 19,418 20,096 20,237 19,924
============================================================================================================================
Year-end financial position (in thousands)
Working capital $114,502 $103,165 $106,884 $113,092 $109,476
- ----------------------------------------------------------------------------------------------------------------------------
Current ratio 1.9 to 1 1.9 to 1 2.1 to 1 2.3 to 1 2.4 to 1
- ----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment $163,766 $145,105 $139,247 $133,830 $131,071
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 636,941 516,282 418,904 407,978 389,956
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt 230,000 140,000 51,000 60,000 70,000
- ----------------------------------------------------------------------------------------------------------------------------
Guaranteed ESOP obligation -- long-term portion -- -- -- 2,205 4,951
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 201,333 180,614 188,674 180,859 157,164
- ----------------------------------------------------------------------------------------------------------------------------
Debt as a percent of total capitalization(4) 54.1% 45.7% 24.1% 27.1% 33.5%
============================================================================================================================
Year-end statistics
Employees 5,624 4,020 3,847 3,872 3,761
============================================================================================================================
(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 a $12.9 million pretax, $7.7 million after-tax charge ($0.38 per
share) against income related to the accelerated retirement package for
the Company's former president.
(4) Debt includes all interest-bearing debt, including the guaranteed ESOP
obligation, and total capitalization includes interest-bearing debt and
stockholders' equity.
24