Exhibit 13
BARNES GROUP INC.
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MANAGEMENT'S DISCUSSION & ANALYSIS
OUR BUSINESS
Barnes Group is a diversified international manufacturer of precision
components and assemblies 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, retaining rings
and injection-molded plastic components that are used in a variety of
industries, including transportation, consumer goods, electronics and
telecommunications. The Barnes Aerospace segment supplies precision machined and
fabricated components and assemblies for commercial and military aircraft and
industrial gas turbines, as well as engine component overhaul and repair
services in support of the global airline industry. The Barnes Distribution
segment is an international distributor of MRO supplies and a full-service
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 Barnes Group's
manufacturing and logistics management capabilities.
KEY BUSINESS DRIVERS
There are a number of end-market demand factors that impact sales in
each of the three businesses. Key sales drivers for Associated Spring are: light
vehicle production in North America and Europe, which correlates well with the
sales of automotive springs and with tool and die build, which impacts the
Company's nitrogen gas spring sales; sales of cell phone handsets and other
electronic products in the telecommunications, computer and optical device
markets; and sales of white goods, small engines, compressors, heavy duty trucks
and similar products that impact the Company's industrial springs.
For original equipment manufacturer (OEM) components produced at
Barnes Aerospace, key sales drivers include new commercial and military aircraft
production and land-based industrial gas turbine deliveries. The number of
commercial aircraft in the active fleet and the number of revenue passenger
miles flown by the world's airlines are key drivers of sales for the Barnes
Aerospace overhaul and repair operations.
General industrial activity in North America and Europe is the key
sales driver for Barnes Distribution, as Barnes Distribution's customer base is
well diversified through many different economic sectors.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and assump-tions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant accounting
policies are disclosed in Note 1 to the Consolidated Financial Statements. The
most significant areas involving management judgments and estimates are
described below. Actual results could differ from such estimates.
INVENTORY VALUATION
Inventories are valued at the lower of cost or market. The last-in,
first-out (LIFO) method is used to value the majority of domestic inventories.
Provisions are made to reduce excess or obsolete inventories to their estimated
net realizable value. Loss provisions, if any, on contracts are established when
reasonably expected. Loss provisions are based on the excess inventoriable costs
over the net revenues of the products or group of related products under
contract. The process for evaluating the value of excess and obsolete inventory
often requires the Company to make subjective judgments and estimates concerning
future sales levels, quantities and prices at which such inventory will be sold
in the normal course of business. Accelerating the disposal process or incorrect
estimates of future sales potential may necessitate future adjustments to these
provisions.
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BARNES GROUP INC.
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MANAGEMENT'S DISCUSSION & ANALYSIS
BUSINESS ACQUISITIONS
Assets and liabilities acquired in a business combination are recorded
at their estimated fair values at the acquisition date. At December 31, 2002,
the Company had $164.6 million of goodwill, representing the cost of
acquisitions in excess of fair values assigned to the underlying net assets of
acquired companies. In accordance with Statement of Financial Accounting
Standards (SFAS) 142, goodwill and intangible assets deemed to have indefinite
lives are not amortized but are subject to annual impairment testing. The
assessment of goodwill involves the estimation of the fair value of "reporting
units," as defined by SFAS 142. Management completed this assessment during the
second quarter of 2002 based on the best information available as of the date of
the assessment, which incorporated management assumptions about expected future
cash flows. Based on this assessment, there was no goodwill impairment in 2002.
Future cash flows can be affected by changes in the global economy and local
economies, industries and markets in which the Company sells products or
services, and the execution of management's plans, particularly with respect to
integrating acquired companies. There can be no assurance that future events
will not result in impairment of goodwill or other intangible assets.
REORGANIZATION OF BUSINESSES
The Company records a liability for reorganization initiatives at the
time that management approves and commits to a reorganization plan. Such a plan
identifies all significant actions to be taken and specifies an expected
completion date that is within a reasonable period of time. The liability
includes those costs that can be reasonably estimated. These estimates are
subject to adjustments based upon actual costs incurred (see "Recent Accounting
Changes" on page 16).
PENSION AND OTHER POSTRETIREMENT BENEFITS
Accounting policies and significant assumptions related to pension and
other postretirement benefits are disclosed in Note 10 to the Consolidated
Financial Statements.
In 2002, the portfolio managers authorized to invest pension trust
funds were changed and the mix of assets in which managers invest was revised.
The following table provides a breakout of the new targeted mix of investments,
by asset classification, along with the historical rates of return for each
asset class and the long-term projected rates of return.
Annual Return %
- ---------------------------------------------------------------
Asset Mix Long-Term
Asset Class % Historical/(1)/ Projection
- ---------------------------------------------------------------
Large Cap Growth 20 11.4 10.4
Large Cap Value 20 13.1 12.1
Small Cap Growth 9 8.9 7.9
Small Cap Value 9 14.7 13.7
Non-U.S. Equity 9 10.2 9.2
Real Estate-Related 5 14.9 12.9
Fixed Income 27 9.3 7.3
Cash 1 7.1 5.1
Weighted Average 11.3 9.9
/(1)/ Historical returns based on the life of the respective index,
approximately 20 to 25 years.
The historical rates of return were calculated based upon compounded
average rates of return of published indices. The fixed income investments
represent approximately 27% of the trust asset mix and are estimated to be 5% to
10% lower than the fixed income components of typical pension trusts. The fixed
income investments include a higher-than-average component of yield-aggressive
investments, including high-yield corporate bonds. Based on the overall
historical and projected rates of return, management is projecting the long-term
rate of return on pension assets to be 9.5%.
A one-quarter percentage point change in the assumed long-term rate of
return would impact the Company's pretax income by approximately $0.8 million
annually. A one-quarter percentage point change in the discount rate would
impact the Company's pretax income by approximately $0.3 million annually. The
Company reviews these and other assumptions at least annually.
The Company uses a calculated value to determine the market-related
value of pension plan assets. This approach results in a market-related value of
pension assets that differs from the fair
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MANAGEMENT'S DISCUSSION & ANALYSIS
market value of plan assets. This difference results from the deferment in the
recognition of asset gains and losses above or below expected returns on assets
for a period of approximately five years. At December 31, 2002, the
market-related value of pension assets exceeded the fair market value by $70.0
million. This difference under SFAS 87 will increase pension expense by $3.1
million in 2003 and an additional $2.3 million in 2004.
INCOME TAXES
As of December 31, 2002, the Company had recognized $38.6 million of
deferred tax assets, net of valuation reserves. The realization of these
benefits is dependent on future taxable income.For those jurisdictions where the
expiration date of tax carry-forwards or the projected operating results
indicate that realization is not likely, a valuation allowance is provided.
Management believes that sufficient income will be earned in the future to
realize deferred income tax assets, net of valuation allowances recorded. The
recognized net deferred tax asset is based on the Company's estimates of future
taxable income and its tax planning strategies. The realization of these
deferred tax assets can be impacted by changes to tax codes, statutory tax rates
and future taxable income levels.
ACQUISITIONS
During the past three years, the Company acquired a number of
businesses, which were accounted for using the purchase method. Accordingly, the
results of operations of the acquired companies have been included in the
consolidated results from their respective acquisition dates.
In May 2000, the Company purchased substantially all of the assets and
liabilities of Curtis Industries, Inc. (Curtis) for $63.4 million. Curtis, a
distributor of MRO supplies and high-quality security products, was combined
with Bowman Distribution to form Barnes Distribution. This business combination
created a broader product offering, enhanced service capabilities and
opportunities for increased sales penetration. The combination also created
significant cost savings opportunities, primarily through headquarters and
distribution center consolidations and increased purchasing leverage. The
majority of these cost savings were realized in 2002.
In connection with the Curtis acquisition, the Company incurred
certain integration costs. The integration plan included combining the
headquarters functions and consolidating warehousing and distribution networks.
As a result, the Company recorded total costs of $6.4 million, relating
primarily to lease consolidation costs, facility closure costs and reductions in
personnel. Costs of $4.7 million associated with the acquired business were
reflected as assumed liabilities in the allocation of the purchase price to net
assets acquired. The remaining integration costs of $1.7 million were reflected
in expenses in 2000. As of December 31, 2002, $1.5 million remained as
liabilities related primarily to future lease payments.
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 $40.9 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 augmented Barnes Aerospace by extending product depth
and customer penetration, and also provided an additional FAA-licensed aircraft
engine repair facility.
In 2001, the Company completed two bolt-on acquisitions, for a
combined purchase price of $3.8 million. In January 2001, the Company acquired
Euro Stock Springs & Components Limited (Euro Stock). Euro Stock distributes
standard springs through catalogs to customers located primarily in Europe. This
business, which is included in the Barnes Distribution segment, expanded Barnes
Distribution's presence in Europe and added a new sales channel through Euro
Stock's product catalog. In November 2001, the Company acquired certain assets
of Forward Industries, L.L.C., and its subsidiary Forward Industries, Ltd.
Forward Industries designs and manufactures nitrogen gas springs that are used
in the appliance, automotive, heating and cooling and electrical industries.
This acquisition has been integrated with the Company's existing nitrogen gas
spring business and is included in the Associated Spring segment. The
acquisition broadened the nitrogen gas spring product line offering of
Associated Spring.
In 2002, the Company completed two acquisitions for a total purchase
price of $34.0 million. Consideration for the acquisitions included cash of
approximately $31.0 million, of which $2.0 million
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BARNES GROUP INC.
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MANAGEMENT'S DISCUSSION & ANALYSIS
will be paid in two equal installments in April 2003 and April 2004, and
issuance of 119,048 shares of Barnes Group common stock (at a market value at
the time of the acquisition of approximately $3.0 million). In February 2002,
the Company acquired substantially all of the manufacturing assets of
Seeger-Orbis GmbH & Co. OHG of Germany (Seeger-Orbis) from TransTechnology
Corporation. Seeger-Orbis is a leading manufacturer of retaining rings used in a
number of transportation and industrial applications. The Seeger-Orbis
acquisition expanded Associated Spring's product line and geographic reach,
particularly into the automotive and industrial manufacturing markets of Western
Europe. In April 2002, the Company acquired Spectrum Plastics Molding Resources,
Inc. of Ansonia, Connecticut (Spectrum). Spectrum is a premier manufacturer of
plastic injection-molded components and assemblies that are used primarily in
the telecommunications, electronics, medical and consumer goods industries.
Spectrum, which is included in the Associated Spring segment, provides
Associated Spring with the capability of providing more complete product
solutions with discrete or continuous metal-in-plastic and plastic-on-metal
injection-molded components.
The purchase price of each acquisition has been allocated to tangible
and intangible assets and liabilities of the businesses, based upon estimates of
their respective fair values. For acquisitions initiated prior to June 30, 2001,
the resulting goodwill had been amortized over a 40-year life. Beginning in
2002, goodwill is no longer amortized, as the lives are considered indefinite.
See Note 1 to the Consolidated Financial Statements.
On February 6, 2003, the Company acquired Kar Products LLC of Des
Plaines, Illinois, and certain assets and liabilities of its Canadian business,
A.&H. Bolt & Nut Company Ltd. (Kar Products). Kar Products adds to the Barnes
Distribution segment a diversified customer base that operates in all 50 states,
Puerto Rico and Canada, further enhancing Barnes Distribution's international
presence and leadership position within the MRO market. The purchase price of
$78.5 million was paid through a combination of $60.0 million cash and $18.5
million (923,506 shares) of Barnes Group common stock. The Company expects to
achieve a number of post-acquisition cost savings and other synergies through
headquarters and infrastructure consolidation. The Company also anticipates that
the acquisition will be accretive in the first year.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated statement of
income data as a percentage of revenue:
2002 2001 2000
- ----------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 67.6% 67.6% 66.0%
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Gross profit 32.4% 32.4% 34.0%
Selling and administrative expenses 26.7% 27.2% 25.5%
- ----------------------------------------------------------------
Operating income 5.7% 5.2% 8.5%
Other income 0.5% 0.5% 0.6%
Interest expense 1.9% 2.1% 2.0%
Other expense 0.1% 0.6% 0.5%
Income taxes 0.7% 0.5% 1.8%
- ----------------------------------------------------------------
Net income 3.5% 2.5% 4.8%
================================================================
Barnes Group reported record net sales of $784 million in 2002, an
increase of $15 million, or 2%, over 2001 net sales of $769 million. The sales
increase reflected the Company's recent acquisitions, which contributed $40
million, all to Associated Spring's sales, as well as organic growth in
Associated Spring. This growth was partially offset by a 9% decline in sales at
Barnes Aerospace, which coincides with a sharp decline in the commercial
aerospace markets, and a 4% sales decline at Barnes Distribution. The decline at
Barnes Distribution reflects the impact of adverse market conditions in the
manufacturing, industrial and transport services sectors. From a geographic
perspective, the Company's foreign sales increased 17% year-over-year, while
domestic sales decreased 3%.
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BARNES GROUP INC.
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MANAGEMENT'S DISCUSSION & ANALYSIS
In 2001, Barnes Group net sales were up $29 million, or 4%, over 2000,
reflecting a sharp rise in sales at Barnes Aerospace and sales from the
Company's 2000 and 2001 acquisitions. This growth was partially offset by a
decline in transportation- and telecommunications-related sales at Associated
Spring and the adverse impact of weak economic conditions on Barnes
Distribution's sales. The businesses acquired in 2000 and 2001 provided
incremental sales of $61 million in 2001: $1 million to Associated Spring, $34
million to Barnes Aerospace and $26 million to Barnes Distribution.
Operating income was $44.8 million in 2002, an increase of 11.2%
compared with $40.3 million in 2001. These results reflect higher operating
profit at Associated Spring and Barnes Distribution. The year-over-year increase
in operating profit was impacted positively by a $4.8 million pretax business
consolidation charge, relating primarily to the Associated Spring segment, taken
in the fourth quarter of 2001, which did not recur in 2002. In addition,
operating income in 2002 benefited from efficiencies gained from the actions
taken in this business consolidation. These improvements were partially offset
by lower profits at Barnes Aerospace due to lower sales volume and additional
severance expense, higher postretirement benefit expense at Associated Spring
and lower pension income Companywide. Pension income decreased by $1.2 million
due primarily to reduced investment performance of plan assets and a lower
discount rate. The cost of postretirement benefits, other than pensions,
increased $1.4 million due to increased benefit levels provided to certain U.S.
employees.
Overall operating income margin was 5.7% in 2002 compared with 5.2% in
2001. While gross profit margin held steady at 32.4% in 2002, gross profit
margins improved at both Associated Spring and Barnes Distribution. The decline
in gross profit margin in Barnes Aerospace, due directly to the sales shortfall,
offset the improvements in the other two businesses. Total selling and
administrative expenses declined to 26.7% as a percentage of sales, from 27.2%
in 2001. In total dollars, selling and administrative expenses increased $0.2
million to $209.2 million in 2002, which included $5.8 million in selling and
administrative expenses related to the recent acquisitions, offset by the impact
of the $4.8 million fourth-quarter 2001 charge. Reductions in selling and
administrative expenses resulting from synergies realized from Barnes
Distribution's integration of Curtis were partially offset by the higher
pension, postretirement and other compensation costs, including the higher
severance expense at Barnes Aerospace.
Operating income was $40.3 million in 2001, compared with $62.9
million in 2000. A number of items contributed to the operating income decline.
The primary factors were the impact of a weak industrial economy on sales volume
and a shift in the overall sales mix to lower-margin businesses. The $29 million
net sales increase was comprised of $61 million in incremental sales from the
2001 and 2000 acquisitions and a $31 million increase in the existing Aerospace
business, which was substantially offset by a $63 million sales decrease in the
higher-gross-margin Associated Spring and Barnes Distribution businesses. Also
impacting operating income were higher personnel costs, specifically health
insurance and pension costs. Selling and administrative expenses increased $20.5
million in 2001 over 2000, reflecting the fourth-quarter charge and the costs
attributable to the newly acquired businesses, as well as the continued
investment made in the sales, marketing and engineering functions throughout the
Company.
SEGMENT REVIEW
Associated Spring sales for 2002 were $322 million, up $43 million, or
15%, from sales of $279 million in 2001. Sales were a record $327 million in
2000. Sales in 2002 increased over 2001 due to higher light vehicle production
in the domestic transportation markets as well as from incremental sales from
the acquisitions of Forward Industries, Seeger-Orbis and Spectrum, which in the
aggregate totaled $40 million. Offsetting these increases was a sharp drop in
organic sales of telecommunications and electronics products, as sales to those
end markets fell by over 40% in 2002. Domestic sales at Associated Spring grew
by approximately 5% in 2002, while foreign sales increased by approximately 38%
to $120 million. Sales grew sharply in Europe in 2002, reflecting the
Seeger-Orbis acquisition and organic growth in nitrogen gas spring sales from
Sweden, but were lower in Asia, reflecting the weakness in the
telecommunications and electronics markets. Associated Spring's sales fell in
2001 compared with 2000, due to the sharp contraction in domestic light vehicle
production, a weak domestic economy and a worldwide decline in
telecommunications and electronics sales.
Associated Spring reported operating profit of $28.1 million in 2002,
compared with $19.4 million in 2001 and $44.0 million in 2000. The increase in
operating profit in 2002 reflects
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MANAGEMENT'S DISCUSSION & ANALYSIS
the higher sales volume; higher profits resulting from actions taken since late
2000 to reduce the business's cost structure; operational improvements,
particularly in Mexico; and the absence of a $4.6 million charge taken in 2001
to reduce the business unit's infrastructure. This increase was partially offset
by a decline in sales of more profitable telecommunications and electronics
products, and one-time costs related to the purchase accounting step-up of
inventory to fair value at Seeger-Orbis. In 2002, the closure of the Texas
spring plant was completed, with retained business from the Texas plant being
relocated to other Associated Spring facilities, improving their capacity
utilization. As of December 31, 2002, the remaining accrual balance of $0.5
million related primarily to facility holding costs for the Texas plant, which
is currently held for sale. Management anticipates that the impact of the
transfer of business from the Texas plant will continue to be accretive to
operating profit in 2003. The decrease in operating profit in 2001 reflects the
sales volume decline and, in particular, the significant shortfall in the more
profitable electronics business. In addition, operating profit was significantly
impacted in the fourth quarter of 2001 from expenses immediately recognized at
the time of the announcement of the Texas plant closure.
Barnes Aerospace sales for 2002 were $183 million, down $17 million,
or 9%, from a record $200 million in 2001. Sales in 2000 totaled $135 million.
The sales decline in 2002 largely reflected the sharp decrease in global new
commercial aircraft deliveries and continued aircraft order cancellations or
deferrals by the major airlines in the wake of the events of September 11, 2001.
The 2002 decline also reflects lower overhaul and repair sales, as a significant
number of aircraft were removed from the active fleet in response to continued
low passenger traffic. These factors were partially offset by higher direct and
indirect military sales. Sales increased in 2001 versus 2000 as Barnes Aerospace
benefited from the successful cultivation of new markets and customers and from
approximately $34 million in incremental sales related to the acquisition of
Kratz-Wilde/Apex. Total orders for 2002 were $178 million, compared with $216
million in 2001. Order backlog declined to $152 million at December 31, 2002,
from $159 million at December 31, 2001. Both orders and order backlog were
affected by the same factors that negatively impacted sales in 2002.
Barnes Aerospace operating profit was $10.8 million in 2002, compared
with $16.4 million in 2001 and $8.0 million in 2000. Operating profit fell in
2002 primarily as a result of the decline in sales volume. In addition, during
2002, management addressed what is likely to be a protracted recovery in the
aerospace industry by reducing employment by approximately 20%, resulting in
severance expenses of $1.3 million. Management believes that these headcount
reductions and other steps to reduce costs, such as work furloughs and reduced
overtime, have properly positioned the business for the current economic
environment. Operating profit increased in 2001 versus 2000, reflecting the
sharply higher sales volume and the benefit of lean manufacturing initiatives
completed throughout the year.
Sales at Barnes Distribution were $287 million in 2002, down $11
million, or 4%, from $298 million in 2001; sales in 2000 were $291 million.
Sales fell in 2002 due to weak economic conditions within the manufacturing and
industrial sectors in the United States and many international markets, which
have persisted since late 2000. This was partially offset by new sales
initiatives, including an increased focus on national and regional account
development, which generated more than $3 million in sales during 2002. This
initiative, combined with electronic commerce initiatives, will be a growth
driver in 2003 and beyond. Sales increased in 2001 versus 2000 as a result of
incremental sales from acquisitions of $26 million, which was largely offset by
a $19 million decline in organic sales driven by the weak economic conditions
noted above.
Despite the year-over-year decline in sales, operating profit at
Barnes Distribution increased to $7.5 million in 2002 from $5.5 million in 2001.
The increase largely reflects higher operating efficiency as synergies from the
Curtis acquisition were successfully realized. Operating profit also benefited
from an improvement in gross profit margin stemming from selective price
increases and lower product procurement costs. Operating profit decreased in
2001 from $12.9 million in 2000 as a result of lower organic sales volume, which
more than offset the benefits from incremental sales volume and early
realization of synergies from the Curtis acquisition.
OTHER INCOME/EXPENSE
Other income totaled $3.7 million in 2002, compared with $3.9 million
in 2001 and $4.8 million in 2000. The decrease in other income in 2002, compared
with 2001, was due to foreign exchange transaction gains of $1.2 million in 2002
compared with gains of $1.9 million in 2001,
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offset by higher equity income from the Company's NASCO joint venture. The
foreign exchange gains related primarily to exposures on U.S. dollar-denominated
financial instruments, primarily in the Company's Brazil operation. The
Company's policy is to hedge foreign currency transaction exposure except in
locations where the local currency has historically weakened against the U.S.
dollar. The decrease in 2001, compared with 2000, was due to lower equity income
from NASCO, offset in part by higher net foreign exchange transaction gains.
Lower interest expense in 2002, compared with 2001, was a result of
lower market interest rates and a fixed-to-variable interest rate swap agreement
that collectively more than offset the impact of an increase in average
borrowings. Other expenses declined in 2002 due to an accounting change that
eliminated goodwill amortization of $4.2 million in 2001. This change is more
fully described in Note 1 to the Consolidated Financial Statements.
Interest expense and other expenses increased in 2001 as a result of
acquisitions. Interest expense increased due to significantly higher borrowings,
offset in part by lower average interest rates. Other expenses increased with
the additional goodwill amortization associated with the acquisitions.
INCOME TAXES
The Company's effective tax rate was 18.0% in 2002, compared with
18.5% in 2001 and 26.6% in 2000. The decline in the tax rate in both 2002 and
2001 is due to a significant shift in the overall mix of income to a higher
percentage of foreign income, in jurisdictions with tax rates lower than the
U.S. statutory tax rate. In addition, the lower tax rate in 2002 reflects the
benefit of an ESOP dividend distribution tax deduction. The 2002 tax deduction
includes a retroactive election for the 2001 dividend distribution, the result
of an amendment to the Company's Retirement Savings Plan (RSP). The effective
tax rate is expected to be in the range of 22.0% to 25.0% in 2003, assuming a
single-year deduction for the RSP dividends and an anticipated shift in earnings
to countries with higher tax rates, primarily the United States.
NET INCOME AND NET INCOME PER SHARE
Consolidated net income was $27.2 million in 2002, $19.1 million in
2001 and $35.7 million in 2000. Basic earnings per share was $1.45 for 2002,
compared with $1.03 in 2001 and $1.92 in 2000. Diluted earnings per share was
$1.42 for 2002, $1.01 for 2001 and $1.90 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company's liquidity in terms of its overall
ability to generate cash to fund its operating and investing activities. Of
particular importance in the management of liquidity are cash flows generated
from operating activities, capital expenditure levels, dividends, capital stock
transactions, effective utilization of surplus cash positions overseas and
adequate bank lines of credit.
The Company's ability to generate cash from operations in excess of
its internal operating needs is one of its financial strengths. Management
continues to focus on cash flow and working capital and anticipates that
operating activities in 2003 will provide sufficient cash to take advantage of
opportunities for organic business expansion and to meet the Company's current
financial commitments. Future acquisitions are expected to be financed through a
mix of internal cash, borrowing and equity.
Operating activities are the principal source of cash flow for the
Company, generating $54.4 million in 2002, $65.0 million in 2001 and $51.9
million in 2000. Operating cash flow in 2002 reflects higher net income when
compared with 2001. The reduction in depreciation and amortization was due to
the absence of $4.2 million of goodwill amortization in 2002, as discussed in
Note 1 to the Consolidated Financial Statements. In addition, depreciation
declined $0.7 million due to lower capital spending over the past three years
and the retirement of older assets. Management continues to stress the need for
effective working capital management, which contributed to positive cash flow in
2002. Significant progress was made in reducing inventory levels, primarily at
Barnes Distribution and Barnes Aerospace. Accounts payable decreased in part due
to reduced inventory purchases, combined with the impact, in 2002, of aggressive
working capital management at the end of 2001. The increase in deferred taxes
reflects operating loss carry-forwards generated in 2002 that will be utilized
in the future and the impact of a minimum pension liability adjustment. In 2001,
the increase
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in operating cash flow was due primarily to significant improvements in working
capital, which more than offset the lower net income in that year.
Investing activities used cash of $48.0 million in 2002, compared with
$26.0 million in 2001 and $134.5 million in 2000. Investing activities in 2002
included the acquisitions of Seeger-Orbis and Spectrum. The Seeger-Orbis
acquisition was funded from cash held by the Company outside the United States.
In 2001, funds used for two bolt-on acquisitions were offset in part by a
favorable purchase price adjustment received in 2001 on the Kratz-Wilde/Apex
acquisition. The significant cash use in 2000 is attributable to the purchases
of Curtis and Kratz-Wilde/Apex. The Company's capital spending program focuses
on business growth and improvements in productivity and quality. In 2002,
capital spending was reduced in response to the economic downturn. The Company
expects to increase capital spending in 2003 to roughly 2001 levels.
Net cash used by financing activities was $24.4 million in 2002 and
$13.3 million in 2001, compared with net cash provided by financing activities
of $64.8 million in 2000. Cash from financing activities in 2002 included $4.7
million of cash proceeds from the termination of an interest rate swap. This
cash, combined with cash provided by operating activities, proceeds from
additional borrowings and excess cash, was used to fund acquisitions and capital
expenditures and to pay dividends. Cash dividends were held at $0.80 per share.
Total cash used to pay 2002 dividends to stockholders was $15.0 million. In
2001, proceeds from the sale of a cross-currency debt swap, combined with strong
cash flow from operating activities, were used in part to fund capital
expenditures, pay dividends, repurchase the Company's stock and reduce debt. In
2000, the increase in borrowings reflected the issuance of additional long-term
debt to fund business acquisitions as well as to supplement cash generated by
operating activities.
The Company maintains bank-borrowing facilities to supplement internal
cash generation. At December 31, 2002, the Company had a $150 million borrowing
facility under a three-year revolving credit agreement, of which $32 million was
borrowed at an interest rate of 3.05%. Additionally, the Company had $6.0
million in borrowings under uncommitted short-term bank credit lines, at an
interest rate of 2.38%. The revolving credit borrowing facility was signed in
June 2002 and replaced a revolving credit facility that was due to expire in
December 2002.
Borrowing capacity is limited by various debt covenants. The most
restrictive covenant requires the Company to maintain a ratio of Total Debt to
EBITDA, as defined in the revolving credit agreement, of not more than 3.0 times
at December 31, 2002. The actual ratio at December 31, 2002, was 2.66 times and
would have allowed additional borrowings of $27.6 million. In conjunction with
the Kar Products acquisition, the Company amended the revolving credit
agreement, pursuant to which the ratio was increased to 3.25 times for the first
three quarters of 2003 and will return to 3.0 times at December 31, 2003, a
ratio the Company expects to meet. In connection with the financing of the
acquisition, the Company borrowed an additional $56 million under the revolving
credit facility.
At December 31, 2002, the Company held $28.4 million in cash and
equivalents, predominately in its non-U.S. subsidiaries. Although repatriation
of certain non-U.S. cash balances to the U.S. could have adverse tax
consequences, cash held outside the U.S. is available to fund international cash
requirements, including acquisitions.
The Company believes its credit facilities, coupled with cash
generated from operations, are adequate for its anticipated future requirements.
In November 2000, the Company financed a portion of the Curtis and
Kratz-Wilde/Apex business acquisitions by issuing $60 million of privately
placed Senior Notes (Notes) with three insurance companies. These Notes bear an
annual fixed rate of 9.34% and are payable in three equal annual installments
beginning in 2006. In August 2002, the Company terminated an interest rate swap
agreement that had effectively converted the Notes to variable-rate debt. In
connection with the swap agreement termination, the Company received a cash
payment of $4.7 million. The corresponding adjustment to the carrying value of
the debt is being amortized against interest expense over the remaining life of
the Notes.
The funded status of the Company's pension plans is dependent upon
many factors, including returns on invested assets and the level of market
interest rates. Recent declines in the value of securities traded in equity
markets and declines in long-term interest rates have had a negative impact
Page 14
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
MANAGEMENT'S DISCUSSION & ANALYSIS
on the funded status of the plans. In 2002, no contribution was required and no
cash contribution was made to any of the U.S. qualified pension plans.
Furthermore, no significant cash contributions to the qualified plans are
anticipated in 2003. In accordance with SFAS 87, "Employers' Accounting for
Pensions," the Company recorded a minimum pension liability adjustment for
under-funded plans as of December 31, 2002, through an after-tax charge of $16.8
million to accumulated other non-owner changes to equity.
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 hedge its exposure to fluctuations in interest rates and foreign
currency 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 minimizing the effect of changes in interest rates on near-term
earnings. In August 2002, the Company entered into an interest rate swap
agreement that effectively converts $18.8 million of its fixed-rate Senior Notes
to variable-rate debt. This interest swap agreement had a positive impact on
2002 earnings, reducing interest expense by $0.1 million.
The Company's primary interest rate risk is derived from its
outstanding variable-rate debt obligations. At December 31, 2002, the result of
a hypothetical 1% increase in the average cost of the Company's variable-rate
debt, including the interest rate swap agreement, would have reduced annual
pretax profit by $0.6 million.
At December 31, 2002, the fair value of the Company's fixed-rate debt
was $153.0 million, compared with its carrying amount of $156.9 million. The
Company estimates that a 1% decrease in market interest rates at December 31,
2002, would have increased the fair value of the Company's fixed-rate debt to
$158.5 million.
The Company has manufacturing, sales and distribution facilities
around the world and thus makes investments and conducts business transactions
denominated in various currencies. The currencies of the locations where the
Company's business operations are conducted are the U.S. dollar, Singapore
dollar, Euro, British pound, Mexican peso, Brazilian real, Canadian dollar,
Swedish krona and Chinese renminbi. The Company is exposed primarily to U.S.
dollar-denominated financial instruments at its international locations. A 10%
adverse change in all currencies at December 31, 2002, would have resulted in a
$1.0 million loss in the fair value of those financial instruments.
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 investment exposure. To
reduce foreign currency exposure in countries where the local currency is
strengthening against the U.S. dollar, management has converted U.S
dollar-denominated cash and short-term investments to local currency and is
using forward currency contracts for other U.S. dollar-denominated assets in an
effort to reduce the effect of the volatility of changes in foreign exchange
rates on the income statement. In weaker currency countries, such as Brazil and
Mexico, management continues to invest excess cash in U.S. dollar-denominated
instruments.
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.
INFLATION
Management believes that during the 2000-2002 period, inflation did
not have a material impact on the Company's financial statements.
Page 15
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
MANAGEMENT'S DISCUSSION & ANALYSIS
RECENT ACCOUNTING CHANGES
The Company adopted SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires companies to account
for acquisitions entered into after June 30, 2001, using the purchase method and
establishes criteria to be used in determining whether acquired intangible
assets are to be recorded separately from goodwill. SFAS 142 sets forth the
accounting for goodwill and other intangible assets. Goodwill and other
intangible assets with indefinite lives are no longer amortized but instead are
evaluated at least annually for impairment by comparing the carrying value to
the fair value at the reporting unit level. Intangible assets with finite lives
will be amortized over their useful lives. SFAS 142 is effective for
acquisitions completed after June 30, 2001, and, as of January 1, 2002, became
effective for all other prior acquisitions.
In August 2001, SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," was issued. This statement was effective on January 1,
2002, for the Company. Adoption of this standard did not have a material impact
on the Company's financial position, results of operations or cash flows.
In April 2002, SFAS 145, "Rescission of FASB Statements No. 4, 44, and
64, amendment of FASB Statement No. 13, and Technical Corrections," was issued.
The standard eliminates an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The adoption of this statement is not expected to have a material
impact on the Company's financial position, results of operations or cash flows.
In June 2002, SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with exit or disposal
activities and requires that such liabilities be recognized when incurred. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002, and does not impact the Company's existing accruals. Adoption
of this standard may impact the timing of recognition of costs associated with
future exit and disposal activities.
In November 2002, the FASB issued FASB Interpretation 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others." FIN 45 expands disclosure
requirements and requires that a guarantor recognize, at fair value, a liability
for its obligation under a guarantee. The recognition and measurement
requirements are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. Management believes that FIN 45 will not have
a material impact on the Company's financial position, results of operations or
cash flows. The Company has complied with the expanded disclosure requirements.
In December 2002, SFAS 148, "Accounting for Stock Compensation -
Transition and Disclosure," was issued. This statement addresses transition
provisions and disclosure requirements. The Company has complied with the
amended disclosure requirements.
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: the ability of the Company to integrate
newly acquired businesses and to realize acquisition synergies on schedule;
changes in market demand for the types of products and services produced and
sold by the Company; the Company's success in identifying and attracting
customers in new markets; the Company's timely ability to develop new and
enhanced products to meet customers' needs; the effectiveness of the Company's
marketing and sales programs; increased competitive activities that could
adversely affect customer demand for the Company's products; changes in economic
and political conditions worldwide and in the locations where the Company does
business; interest and foreign exchange rate fluctuations; and regulatory
changes.
Page 16
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------
Net sales $ 784,036 $ 768,821 $ 740,032
Cost of sales 530,004 519,536 488,634
Selling and administrative expenses 209,192 208,965 188,449
- -----------------------------------------------------------------------------------------
739,196 728,501 677,083
- -----------------------------------------------------------------------------------------
Operating income 44,840 40,320 62,949
Other income 3,651 3,890 4,773
Interest expense 14,823 16,161 15,140
Other expenses 557 4,590 3,992
- -----------------------------------------------------------------------------------------
Income before income taxes 33,111 23,459 48,590
Income taxes 5,960 4,338 12,925
- -----------------------------------------------------------------------------------------
Net income $ 27,151 $ 19,121 $ 35,665
=========================================================================================
Per common share:
Net income:
Basic $ 1.45 $ 1.03 $ 1.92
Diluted 1.42 1.01 1.90
Dividends 0.80 0.80 0.79
Average common shares outstanding:
Basic 18,750,442 18,506,247 18,568,359
Diluted 19,185,332 18,919,968 18,791,227
See accompanying notes
Page 17
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, 2002 2001
- -------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 28,355 $ 48,868
Accounts receivable, less allowances
(2002-$2,891; 2001-$3,114) 97,533 94,124
Inventories 88,809 85,721
Deferred income taxes 16,024 16,702
Prepaid expenses 7,916 11,120
- -------------------------------------------------------------------------------
Total current assets 238,637 256,535
Deferred income taxes 22,610 5,783
Property, plant and equipment 159,440 152,943
Goodwill 164,594 159,836
Other assets 67,249 61,408
- -------------------------------------------------------------------------------
Total assets $ 652,530 $ 636,505
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ -- $ 5,500
Accounts payable 63,389 71,410
Accrued liabilities 61,853 59,118
Long-term debt - current 6,837 47,576
- -------------------------------------------------------------------------------
Total current liabilities 132,079 183,604
Long-term debt 214,125 178,365
Accrued retirement benefits 87,162 63,610
Other liabilities 10,944 12,089
Commitments and contingencies (Notes 9 and 18)
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 53,511 54,874
Treasury stock at cost (2002 - 3,081,718 shares;
2001 - 3,576,322 shares) (61,847) (76,903)
Retained earnings 255,147 243,369
Accumulated other non-owner changes to
equity (38,811) (22,723)
- -------------------------------------------------------------------------------
Total stockholders' equity 208,220 198,837
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 652,530 $ 636,505
===============================================================================
See accompanying notes.
Page 18
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 27,151 $ 19,121 $ 35,665
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 33,626 37,045 35,871
Loss (gain) on disposition of property, plant and
equipment (222) 2,093 (1,960)
Changes in assets and liabilities:
Accounts receivable 5,692 11,378 1,087
Inventories 9,843 (3,629) (7,631)
Prepaid expenses 3,095 (1,884) (1,425)
Accounts payable (12,626) 13,514 (5,415)
Accrued liabilities (87) (5,552) 1,026
Deferred income taxes (15,941) 6,510 5,863
Long-term pension asset (2,070) (7,514) (8,249)
Other 5,950 (6,044) (2,975)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 54,411 65,038 51,857
INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment 3,592 1,093 2,744
Capital expenditures (19,367) (24,857) (28,042)
Business acquisitions, net of cash acquired (31,189) (1,036) (104,935)
Other (1,003) (1,209) (4,309)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (47,967) (26,009) (134,542)
FINANCING ACTIVITIES:
Net decrease in notes payable (2,935) (1,463) (5,201)
Payments on long-term debt (61,004) (28,000) (60,000)
Proceeds from the issuance of long-term debt 48,000 23,711 150,000
Proceeds from the issuance of common stock 3,792 2,845 3,920
Common stock repurchases (1,147) (8,798) (9,197)
Dividends paid (15,018) (14,806) (14,677)
Proceeds from the sale of swaps 4,702 13,766 --
Other (752) (584) --
- --------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (24,362) (13,329) 64,845
Effect of exchange rate changes on cash flows (2,595) (135) (2,489)
- --------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (20,513) 25,565 (20,329)
Cash and cash equivalents at beginning of year 48,868 23,303 43,632
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,355 $ 48,868 $ 23,303
========================================================================================================
Supplemental Disclosure of Cash Flow Information:
Non-cash financing and investing activities include the 2002 issuance of $3.0
million of treasury stock and $2.0 million in installment payments in connection
with the Spectrum acquisition.
See accompanying notes.
Page 19
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Additional Non-Owner Total
Common Paid-in Treasury Retained Changes to Stockholders'
(Dollars in thousands) Stock Capital Stock Earnings Equity Equity
- -----------------------------------------------------------------------------------------------------------------------------
January 1, 2000 $ 220 $ 49,786 $ (63,893) $ 218,388 $ (23,887) $ 180,614
Comprehensive income:
Net income 35,665 35,665
Foreign currency translation adjustments 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
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2000 220 51,845 (69,181) 239,266 (20,817) 201,333
Comprehensive income:
Net income 19,121 19,121
Foreign currency translation adjustments (1,244) (1,244)
Unrealized losses on hedging activities (662) (662)
--------- ----------- -------------
Comprehensive income 19,121 (1,906) 17,215
Dividends paid (14,806) (14,806)
Common stock repurchases (8,798) (8,798)
Employee stock plans 3,029 1,076 (212) 3,893
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2001 220 54,874 (76,903) 243,369 (22,723) 198,837
Comprehensive income:
Net income 27,151 27,151
Foreign currency translation adjustments 1,236 1,236
Unrealized losses on hedging activities (502) (502)
Minimum pension liability adjustment (16,822) (16,822)
--------- ----------- -------------
Comprehensive income 27,151 (16,088) 11,063
Dividends paid (15,018) (15,018)
Stock issued for the purchase of Spectrum (358) 3,358 3,000
Stock issued for charitable contribution (90) 488 398
Common stock repurchases (1,147) (1,147)
Employee stock plans (915) 12,357 (355) 11,087
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 2002 $ 220 $ 53,511 $ (61,847) $ 255,147 $ (38,811) $ 208,220
=============================================================================================================================
See accompanying notes.
Page 20
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
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 17.)
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 the 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. The
NASCO investment of $9,908 and $9,431 as of December 31, 2002 and 2001, respec-
tively, is included in other assets. Other income in the accompanying income
statements includes income of $1,090, $408 and $1,611 for the years 2002, 2001
and 2000, respectively, from the Company's investment in NASCO. The Company
received dividends from NASCO totaling $44, $464 and $666 in 2002, 2001 and
2000, 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 a maturity of three months or less are cash
equivalents. Cash equivalents are carried at fair 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 66% of total inventories. The cost
of all other inventories was determined using the first-in, first-out (FIFO)
method. Loss provisions, if any, on contracts are established when reasonably
expected. Loss provisions are based on the excess inventoriable costs over the
net revenues of the products or group of related products under contract.
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 in service after March 31, 1999. For property, plant and
equipment placed into service prior to April 1, 1999, depreciation is calculated
using accelerated methods.
Goodwill: Goodwill represents the excess purchase price over the net
assets of companies acquired in business combinations. In accordance with SFAS
142, "Goodwill and Other Intangible Assets," effective January 1, 2002, goodwill
is not being amortized, as the lives are considered indefinite. For periods
prior to January 1, 2002, goodwill acquired since 1970 but prior to July 1,
2001, was being amortized on a straight-line basis over 40 years. Annually,
goodwill is subject to impairment testing in accordance with SFAS 142. Based on
this assessment, there was no goodwill impairment in 2002.
Page 21
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents income adjusted to exclude goodwill
amortization expense recognized in the prior periods:
2002 2001 2000
- -------------------------------------------------------------------------------
Net income, as reported $ 27,151 $ 19,121 $ 35,665
Add back: goodwill amortization,
net of income taxes -- 3,449 2,899
- -------------------------------------------------------------------------------
Adjusted net income $ 27,151 $ 22,570 $ 38,564
===============================================================================
Basic earnings per share, as
reported $ 1.45 $ 1.03 $ 1.92
Add back: goodwill amortization,
net of income taxes -- .19 .16
- -------------------------------------------------------------------------------
Adjusted basic earnings per share $ 1.45 $ 1.22 $ 2.08
===============================================================================
Diluted earnings per share, as
reported $ 1.42 $ 1.01 $ 1.90
Add back: goodwill amortization,
net of income taxes -- .18 .15
- -------------------------------------------------------------------------------
Adjusted diluted earnings per
share $ 1.42 $ 1.19 $ 2.05
===============================================================================
Derivatives: The Company has manufacturing, sales and distribution
facilities around the world and thus makes investments and conducts business
transactions denominated in various currencies. The Company is also exposed to
fluctuations in interest rates and commodity price changes. These financial
exposures are monitored and managed by the Company as an integral part of its
risk management program. The Company uses financial instruments to hedge its
exposure to fluctuations in interest rates and foreign currency exchange rates
but does not use derivatives for speculative or trading purposes. The Company
also does not use derivatives to manage commodity exposures or hedge its foreign
currency net investment exposure.
The Company adopted SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, on January 1, 2001. The standard requires
that all derivative instruments be recorded on the balance sheet at fair value.
The accounting for changes in the fair value depends on how the derivative is
used and designated. In accordance with the transition provisions of SFAS 133,
the Company recorded a $400 gain on January 1, 2001, which was entirely offset
by a loss recorded on the re-measurement of underlying balance sheet items.
There was no transition adjustment to other non-owner changes to equity.
Foreign currency contracts qualify as fair value hedges of
unrecognized firm commitments, or cash flow hedges of recognized assets and
liabilities or anticipated transactions. Gains and losses on derivatives are
recorded directly to earnings or other non-owner changes to equity, depending on
the designation. Amounts recorded to other non-owner changes to equity are
reclassified to earnings in a manner that matches the earnings impact of the
hedged transaction. Any ineffective portion is recorded directly to earnings.
The Company's policy for classifying cash flows from derivatives is to report
the cash flows consistent with the underlying instrument.
At December 31, 2002, the fair value of derivatives held by the
Company was a net liability of $1,833. During 2002, losses of $279 included in
other non-owner changes to equity were reclassified to earnings. Amounts in
other non-owner changes to equity expected to be reclassified to earnings within
the next year are not material. During 2002, gains or losses related to hedge
ineffectiveness were immaterial. Foreign currency transaction gains included in
income were $1,172, $1,874 and $1,012 in 2002, 2001 and 2000, respectively,
inclusive of gains and losses on foreign currency derivatives.
Foreign currency translation: The majority of the Company's foreign
subsidiaries use the local currency as the functional currency. Assets and
liabilities of foreign operations 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
non-owner changes to equity within stockholders' equity.
Page 22
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation: The Company has stock-based employee
compensation plans, which are described more fully in Note 15. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
2002 2001 2000
- ------------------------------------------------------------------------
Net income, as reported $ 27,151 $ 19,121 $ 35,665
Add: Stock-based employee
compensation expense included in
reported net income, net of
related tax effects 1,589 1,227 431
Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (5,970) (4,962) (3,108)
- ------------------------------------------------------------------------
Pro forma net income $ 22,770 $ 15,386 $ 32,988
========================================================================
Earnings per share:
Basic - as reported $ 1.45 $ 1.03 $ 1.92
Basic - pro forma 1.21 .83 1.78
Diluted - as reported 1.42 1.01 1.90
Diluted - pro forma 1.18 .81 1.76
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:
2002 2001 2000
- ------------------------------------------------------------------------
Risk-free interest rate 3.69% 4.84% 6.65%
Expected life 4.0 years 4.3 years 5.0 years
Expected volatility 35% 35% 30%
Expected dividend yield 3.51% 3.40% 3.57%
The weighted-average grant date fair values of options granted during
2002, 2001 and 2000 were $5.37, $4.77 and $4.44, respectively.
2. ACQUISITIONS
During the past three years, the Company has acquired a number of
businesses, all of which were accounted for using the purchase method.
Accordingly, the results of operations of the acquired companies have been
included in the consolidated results from their respective acquisition dates.
In May 2000, the Company purchased substantially all of the assets and
liabilities of Curtis for $63,363. Curtis, a distributor of MRO supplies and
high-quality security products, was combined with Bowman Distribution to form
Barnes Distribution. This business combination created a broader product
offering, enhanced service capabilities and increased sales penetration for the
business segment. The combination also created significant cost savings
opportunities, primarily through headquarters and distribution center
consolidations and increased purchasing leverage. A majority of these cost
savings were realized in 2002. In connection with the Curtis acquisition, the
Company incurred certain integration costs which are more fully discussed in
Note 8.
In September 2000, the Company purchased substantially all of the
assets and liabilities of Kratz-Wilde Machine Company and Apex Manufacturing
Inc. (Kratz-Wilde/Apex) for $40,938. 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
Page 23
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
acquisition augmented Barnes Aerospace by extending product depth and customer
penetration, and also provided an additional FAA-licensed aircraft engine repair
facility.
In 2001, the Company completed two bolt-on acquisitions for a combined
purchase price of $3,830. In January 2001, the Company acquired Euro Stock. Euro
Stock distributes standard springs through catalogs to customers located
primarily in Europe. This business, which is included in the Barnes Distribution
segment, expanded Barnes Distribution's presence in Europe and added a new sales
channel through Euro Stock's product catalog. In November 2001, the Company
acquired certain assets of Forward Industries, L.L.C., and its subsidiary
Forward Industries, Ltd. Forward Industries designs and manufactures nitrogen
gas springs that are used in the appliance, automotive, heating and cooling and
electrical industries. This acquisition has been integrated with the Company's
existing nitrogen gas spring business and is included in the Associated Spring
segment. The acquisition broadened the nitrogen gas spring product line offering
of Associated Spring.
In 2002, the Company completed two acquisitions for a total purchase
price of $34,029. Consideration for the acquisitions included cash of
approximately $31,029, of which $2,000 will be paid in two equal installments in
April 2003 and April 2004, and issuance of 119,048 shares of Barnes Group common
stock (at a market value at the time of the acquisition of approximately
$3,000). In February 2002, the Company acquired substantially all of the
manufacturing assets of Seeger-Orbis GmbH & Co. OHG of Germany (Seeger-Orbis)
from TransTechnology Corporation. Seeger-Orbis is a leading manufacturer of
retaining rings used in a number of transportation and industrial applications.
The Seeger-Orbis acquisition expanded Associated Spring's product line and
geographic reach, particularly into the automotive and industrial manufacturing
markets of Western Europe. In April 2002, the Company acquired Spectrum Plastics
Molding Resources, Inc. of Ansonia, Connecticut (Spectrum). Spectrum is a
premier manufacturer of plastic injection-molded components and assemblies that
are used primarily in the telecommunications, electronics, medical and consumer
goods industries. Spectrum, which is included in the Associated Spring segment,
provides Associated Spring with the capability of providing more complete
product solutions with discrete or continuous metal-in-plastic and
plastic-on-metal injection molded components.
The purchase prices for these acquisitions have been allocated to
tangible and intangible assets and liabilities of the businesses based upon
estimates of their respective fair values.
The 2002 and 2001 acquisitions provided incremental sales of $39,659
in 2002. The 2001 and 2000 acquisitions provided incremental sales of $60,860 in
2001. Pro forma net profit has not been presented for the 2002 and 2001
acquisitions because the results would not be significantly different than
historical results.
The following table reflects the operating results of the Company for
the year ended December 31, 2000, on a pro forma basis, which gives effect to
the acquisitions of the two businesses acquired in 2000 at the beginning of the
year. The pro forma results are not necessarily indicative of the operating
results that would have occurred had the acquisitions been effective January 1,
2000; 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 effects of synergies and cost reduction
initiatives related to the acquisitions.
(Unaudited) 2000
- ----------------------------------------------
Net sales $ 798,652
Income before income taxes 48,309
Net income 35,449
Per common share:
Basic $ 1.91
Diluted 1.89
3. SUBSEQUENT EVENT
On February 6, 2003, the Company acquired Kar Products, a leading
full-service distributor of MRO supplies to industrial, construction,
transportation and other markets. The acquisition expands both the geographic
scope and product line reach of the Barnes Distribution segment. Kar Products
has a diversified customer base that operates in all 50 states, Puerto Rico and
Canada, further enhancing
Page 24
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Barnes Distribution's leadership position within the MRO market and
its international presence. The purchase price of $78,500 was financed through a
combination of $4,000 of cash, $56,000 of debt and $18,500 (923,506 shares) of
Barnes Group common stock. The Company expects to achieve a number of
post-acquisition cost savings and other synergies through headquarters and
infrastructure consolidation. The costs related to the consolidation efforts
have not been finalized and therefore are not included in the pro forma data
that follows.
The Company is in the process of obtaining third-party valuations of
certain assets acquired with Kar Products. Thus, the allocation of the purchase
price is subject to refinement. Any amounts attributable to such assets are
expected to be finalized during 2003. The following pro forma data summarize the
combined balance sheets of the Company and Kar Products as if the acquisition
had occurred at December 31, 2002.
(Unaudited) As Reported Kar/(1)/ Other/(2)/ Pro forma
- --------------------------------------------------------------------------------------
Current assets $ 238,637 $ 29,543 $ (4,000) $ 264,180
Non-current assets 249,299 7,052 256,351
Goodwill 164,594 50,247 214,841
- --------------------------------------------------------------------------------------
Total assets $ 652,530 $ 86,842 $ (4,000) $ 735,372
======================================================================================
Current liabilities $ 132,079 $ 8,342 $ - $ 140,421
Long term debt 241,125 56,000 270,125
Other liabilities 98,106 98,106
Stockholders' equity/net assets 208,220 78,500 (60,000) 226,720
- --------------------------------------------------------------------------------------
Liabilities and stockholders'
equity $ 652,530 $ 86,842 $ (4,000) $ 735,372
======================================================================================
/(1)/ The Kar amounts represent the estimated fair values of the assets acquired
and liabilities assumed.
/(2)/ Other includes the acquisition financing. The net increase in shareholders
equity reflects the $18,500 issuance of shares.
4. INVENTORIES
Inventories at December 31 consisted of:
2002 2001
- -----------------------------------------------------------
Finished goods $ 58,244 $ 51,839
Work-in-process 16,993 18,370
Raw materials and supplies 13,572 15,512
- -----------------------------------------------------------
$ 88,809 $ 85,721
===========================================================
Inventories valued by the LIFO method aggregated $58,506 and $66,092
at December 31, 2002 and 2001, respectively. If LIFO inventories had been valued
using the FIFO method, they would have been $12,567 and $13,135 higher at those
dates.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of:
2002 2001
- -----------------------------------------------------------
Land $ 9,087 $ 4,046
Buildings 79,578 74,191
Machinery and equipment 340,647 328,402
- -----------------------------------------------------------
429,312 406,639
Less accumulated depreciation 269,872 253,696
- -----------------------------------------------------------
$ 159,440 $ 152,943
===========================================================
Depreciation expense was $29,304, $30,008 and $30,314 for 2002, 2001 and 2000,
respectively.
Page 25
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill: The following table sets forth the change in the carrying
amount of goodwill for each reportable segment:
Associated Barnes Barnes Total
Spring Aerospace Distribution BGI
- -------------------------------------------------------------------------------
January 1, 2001 $ 71,416 $ 26,127 $ 58,124 $ 155,667
Goodwill acquired (1,120) 6,275 3,230 8,385
Goodwill amortization (1,791) (987) (1,438) (4,216)
- -------------------------------------------------------------------------------
December 31, 2001 68,505 31,415 59,916 159,836
Goodwill acquired 7,872 (515) (2,599) 4,758
- -------------------------------------------------------------------------------
December 31, 2002 $ 76,377 $ 30,900 $ 57,317 $ 164,594
===============================================================================
During 2002, an additional $1,035 of goodwill was recognized related
to Associated Spring's November 2001 acquisition of Forward Industries assets,
related primarily to an adjustment to the fair value of the equipment acquired,
and $6,837 million for the April 2002 acquisition of Spectrum. No goodwill
resulted in connection with the acquisition of Seeger-Orbis. Goodwill related to
the Barnes Aerospace 2000 acquisition of Kratz-Wilde/Apex decreased $515 in
2002, the result of the reduction of accrued acquisition costs. Also in 2002,
goodwill was reduced by $2,599 related to Barnes Distribution's Curtis
acquisition. This reduction relates primarily to an adjustment to the
reorganization accrual and inventory valuation.
In 2001, Associated Spring's goodwill related to the acquisition of
the nitrogen gas spring business was reduced by $1,272, reflecting the
adjustment to accrued acquisition costs. Initial goodwill of $152 was recorded
for the acquisition of certain assets of Forward Industries. The $6,275 increase
in goodwill resulted from the completion of the purchase price allocation to the
Barnes Aerospace segment valuation of inventories, backlog and fixed assets,
offset by a $700 purchase price adjustment. Barnes Distribution's business
reorganization of Curtis, acquired in 2000, and the completion of the purchase
price allocation resulted in $2,332 of additional goodwill being recognized. In
addition, $898 of goodwill was recorded in Barnes Distribution related to the
acquisition of Euro Stock.
At December 31, 2002, $80,524 of goodwill is tax deductible.
Acquired Intangible Assets: Intangible assets, other than goodwill,
consist of registered trademarks, purchased in the acquisition of the nitrogen
gas spring business in 1999, and registered trademarks and patents purchased in
the 2002 acquisitions of Seeger-Orbis and Spectrum. The amounts attributable to
these intangible assets are included in the purchase price allocations.
Trademarks acquired with the purchase of the nitrogen gas spring
business are being amortized over their estimated useful lives of 30 years. At
December 31, 2002, the gross carrying amount of trademarks was $4,395 and
accumulated amortization was $488. The aggregate amortization expense is
approximately $146 in each of the years 2003 through 2007.
Intangible assets that were acquired with Seeger-Orbis were $3,047 and
consist of trademarks and patents with estimated useful lives of 30 and 15
years, respectively. The accumulated amortization at the end of 2002 was $197.
The aggregate amortization expense is approximately $236 in each of the years
2003 through 2007.
Intangible assets that were acquired with Spectrum were $2,400 and
consist primarily of trade-marks with estimated useful lives of 30 years. The
accumulated amortization at the end of 2002 was $57. The aggregate amortization
expense is $87 in each of the years 2003 through 2007.
7. ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of:
2002 2001
- ------------------------------------------------------------------
Payroll and other compensation $ 16,063 $ 13,503
Postretirement/postemployment benefits 9,315 9,283
Other 36,475 36,332
- ------------------------------------------------------------------
$ 61,853 $ 59,118
==================================================================
Page 26
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BUSINESS REORGANIZATION ACCRUALS
Business reorganization accruals are included in accrued liabilities.
In connection with the Curtis acquisition in May 2000, the Company
incurred certain integration costs. The Company recorded total costs of $6,405
related primarily to lease consolidation costs, facility closure costs and
reductions in personnel. At December 31, 2001, $5,537 remained as liabilities
related to future lease payments and facility closure costs. During 2002, $2,010
of the accrual was utilized in connection with warehouse closures. In addition,
$2,030 of accruals were reduced with a corresponding reduction to goodwill. As
of December 31, 2002, an accrual of approximately $1,497 remained which related
to future lease payments, which will continue through the remaining lives of the
leases.
During the fourth quarter of 2001, the Company recorded pretax charges
of $4,842, primarily for Associated Spring, related to actions aimed at reducing
the Company's infrastructure. Such actions included the closure of an Associated
Spring plant in Texas. Additional costs to transfer certain retained business to
other Associated Spring plants in 2002 were not accruable in 2001 and were
recognized as incurred in 2002. The 2001 charges included $179 recorded in cost
of sales and $4,663 in selling and administrative expenses, and related to net
workforce reductions of approximately 122 salaried and hourly employees, the
elimination of approximately 128,500 square feet of facilities and the disposal
of assets. At December 31, 2001, the accrual balance of $2,223 related to
facility holding costs and severance. During 2002, $1,695 of the accrual was
utilized. As of December 31, 2002, the remaining balance of $528 related to
post-closure holding costs for the Texas plant, which is currently for sale.
9. DEBT AND COMMITMENTS
Long-term debt at December 31 consisted of:
2002 2001
- -----------------------------------------------------------------------------
Carrying Fair Carrying
Amount Value Amount
- -----------------------------------------------------------------------------
7.13% Notes, including interest swap $ 19,028 $ 18,724 $ 25,000
7.66% Notes 24,500 24,530 24,500
7.80% Notes 45,500 44,861 45,500
9.34% Notes, including deferred gain 64,379 61,066 61,741
2.15% Notes 20,205 20,198 22,200
Revolving Credit 32,000 32,000 40,000
Industrial Revenue Bonds 7,000 7,000 7,000
Borrowings under lines of credit 6,000 6,000 -
Capital leases 2,350 2,350 -
- -----------------------------------------------------------------------------
220,962 216,729 225,941
Less current maturities (6,837) (6,837) (47,576)
- -----------------------------------------------------------------------------
Total $ 214,125 $ 209,892 $ 178,365
=============================================================================
The 7.13% Notes are payable in four equal annual installments of
$6,250 that began 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.
The 9.34% Notes are payable in three equal installments beginning in 2006.
In July 2001, the Company borrowed Yen 3,000 million, under a term
loan facility with The Development Bank of Singapore Limited. The loan is
payable in ten semi-annual installments of Yen 87.3 million that began on
December 28, 2001, with a balloon payment of Yen 2,214.3 million due June 30,
2006. The borrowing has a stated interest rate of 2.15%. In connection with the
Yen borrowing, the Company entered into a series of forward currency exchange
contracts, a form of derivative, that effectively convert the Yen principal
payments to Singapore dollar payments. The forward contracts are cash flow
hedges, and increased the effective interest rate of the borrowing to 5.5%. On
December 30, 2002, the Company prepaid the next four consecutive semi-annual
installments totaling Yen 349.2 million (U.S. equivalent $2,917). As a result of
this prepayment, there are no scheduled principal payments due on the Yen note
until June 2005. The Company also
Page 27
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
paid $475 in settlement of the corresponding forward contracts. The fair value
of the remaining forward contracts at December 31, 2002, was a liability of
approximately $2,029.
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.
In June 2002, the Company replaced its revolving credit agreement with
a new three-year agreement with 11 banks that allows borrowings up to $150,000
under Notes due June 14, 2005. A fee of 0.45% per annum is paid on the unused
portion of the commitments. The Company had $32,000 borrowed under this
agreement at an interest rate of 3.05% at December 31, 2002. The Company also
has available approximately $15,000 in uncommitted short-term bank credit lines,
of which $6,000 and $5,500 was borrowed at December 31, 2002 and 2001,
respectively. The interest rate on these borrowings was 2.38% and 2.78% at
December 31, 2002 and 2001, respectively.
The Industrial Revenue Bonds, due in 2008, have variable interest
rates. The interest rates on this borrowing were 1.70% and 1.80% at December 31,
2002 and 2001, respectively.
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
and to mitigate fluctuations in interest rates. Interest rate fluctuations
result in changes in the market value of the Company's fixed-rate debt. In
August 2002, the Company entered into an interest rate swap agreement, a form of
derivative, which effectively converts $18,750 of 7.13% fixed-rate Senior Notes
to variable-rate debt equal to LIBOR plus 425 basis points. The effective rate
of the borrowing was 5.71% on December 31, 2002. This interest rate contract is
a fair value hedge, which is effective in offsetting fluctuations in the fair
value of the debt instrument. The gains and losses on the interest rate contract
are recorded to earnings and are offset by gains and losses recorded on the
re-measurement of the underlying debt. The fair value of the swap is determined
based upon current market prices and was approximately $278 at December 31,
2002.
The Company assumed $2,750 of debt related to capital leases with the
acquisition of Spectrum in April 2002. The weighted average interest rate on
these borrowings was 7.81% at December 31, 2002. This debt has an interest rate
equalization prepayment penalty.
In August 2002, the Company terminated its $60,000 interest rate swap
dated July 2001. This agreement had converted $60,000 of fixed-rate 9.34% debt
to floating rate at LIBOR plus 276 basis points. The Company received a payment
of $5,286 at termination. The payment represented $4,702 for the fair value of
the swap plus $584 for accrued interest at the time of termination. The
accumulated adjustment to the carrying value of the debt is being amortized in
accordance with the terms of the underlying debt, which effectively reduces the
fixed rate of the debt to 7.84%.
At December 31, 2002, the Company classified $6,000 of borrowings
under lines of credit due within one year as long-term debt. The Company has
both the intent and the ability, through its revolving credit facility, to
refinance this amount on a long-term basis.
Long-term debt, excluding the fair value of the swap and the deferred
gain on the terminated swap, is payable as follows: $6,837 in 2003, $6,884 in
2004, $46,389 in 2005, $39,089 in 2006, $44,606 in 2007 and $72,500 thereafter.
In addition, the Company had outstanding letters of credit totaling
$3,668 at December 31, 2002.
The Company's debt agreements contain financial covenants that require
the maintenance of interest coverage and leverage ratios, and minimum levels of
net worth. The agreements also place certain restrictions on indebtedness,
capital expenditures and investments by the Company and its subsidiaries. Such
covenants and restrictions determine the amount of borrowings, dividends or
treasury stock purchases the Company can make under such agreements.
Under the most restrictive borrowing capacity covenant in any
agreement, $27,600 of additional capacity was available at December 31, 2002.
Under the most restrictive net worth covenant in any agreement, $8,409 was
available for dividends or acquisitions of common stock at December 31, 2002.
The future level of dividend payments is a function of future net income and the
issuance of common stock. The acquisition of Kar Products included the issuance
of $18,500 of Company common stock on February 6, 2003, which increased equity
and the amount of net worth available for dividends dollar for dollar.
Page 28
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002, the Company is required to maintain a ratio
of Total Debt to EBITDA, as defined in the revolving credit agreement, of not
more than 3.0 times. This ratio requirement will increase to 3.25 at March 31,
2003, and will return to 3.0 at December 31, 2003. The actual ratio at December
31, 2002, was 2.66 times.
Interest paid was $9,496, $16,076 and $17,945 in 2002, 2001 and 2000,
respectively. The amount paid in 2002 reflects the $4,702 of cash received for
the swap termination. Interest capitalized was $128, $163 and $188 in 2002, 2001
and 2000, respectively, and is being depreciated over the lives of the related
fixed assets.
10. PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined benefit pension plans cover a majority of the Company's
worldwide employees at Associated Spring and the Company's Corporate 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
616,310 shares of Company stock. Additionally, the Company has defined
contribution plans covering a majority of the employees of Barnes Aerospace,
certain field sales employees of Barnes Distribution's U.S. operation, employees
of Spectrum, non-union employees of Barnes Distribution Canada and union
employees of Associated Spring-Milwaukee. Company contributions under these
plans are based primarily on the performance of the business units and employee
compensation. The Spectrum defined contribution plan was terminated effective
January 1, 2003. Contribution expense under these defined contribution plans was
$1,727, $1,803 and $1,447 in 2002, 2001 and 2000, respectively. Most U.S.
salaried and non-union hourly employees are eligible to participate in the
Company's 401(k) program. See Note 15 for further discussion of this plan.
In accordance with SFAS 87, "Employers' Accounting for Pensions," the
Corporation has recorded a non-cash minimum pension liability adjustment for
underfunded plans of $25,920 at December 31, 2002, representing the excess of
the unfunded accumulated benefit obligation ("ABO") over previously recorded
pension cost liabilities. The minimum pension liability adjustment is included
in accrued retirement benefits on the balance sheet. An after-tax charge of
$16,822 is included in accumulated other non-owner changes to equity, which is
part of shareholders' equity. The principal cause of the accrual for a minimum
pension liability adjustment was the decline in the value of equity securities
held by the pension trusts.
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:
Other
Pensions Postretirement Benefits
- ----------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
Benefit obligation, January 1 $ 264,261 $ 245,250 $ 72,060 $ 73,676
Service cost 8,034 7,436 726 562
Interest cost 18,622 18,224 5,231 5,114
Amendments 3,538 -- 3,914 --
Actuarial loss 8,980 11,013 9,999 848
Benefits paid (17,554) (16,612) (7,905) (8,083)
Acquisition 3,851 -- -- --
Curtailment (576) -- - --
Foreign exchange rate changes 2,675 (1,050) 15 (57)
- ----------------------------------------------------------------------------------------------------
Benefit obligation, December 31 $ 291,831 $ 264,261 $ 84,040 $ 72,060
====================================================================================================
Projected benefit obligations related to plans
with benefit obligations in excess of assets $ 274,644 $ 20,603
====================================================================================================
Accumulated benefit obligations related to plans
with accumulated benefit obligations in
excess of assets $ 120,007 $ 18,704
====================================================================================================
Page 29
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning fair value of plan assets to the
ending fair value of plan assets follows:
Pension
- ------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------
Fair value of plan assets, January 1 $ 307,135 $ 324,370
Actual return on plan assets (45,642) (346)
Company contributions 1,836 821
Plan participants' contributions 156 138
Benefits paid (17,554) (16,612)
Foreign exchange rate changes 1,368 (1,236)
- ------------------------------------------------------------------------
Fair value of plan assets, December 31 $ 247,299 $ 307,135
========================================================================
Assets related to plans with projected
benefit obligations in excess of plan assets $ 224,392 $ 7,705
========================================================================
Assets related to plans with accumulated
benefit obligations in excess of plan assets $ 83,795 $ 7,705
========================================================================
A reconciliation of the funded status of the plans with the amounts
recognized in the accompanying balance sheets is set forth below:
Other
Pensions Postretirement Benefits
- ------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------
Funded status $ (44,532) $ 42,874 $ (84,040) $ (72,060)
Adjustments for unrecognized:
Net (gains) losses 62,045 (24,888) 21,981 13,486
Prior services costs (benefits) 7,742 5,365 3,112 (2,245)
Net asset at transition (114) (292) -- --
- ------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 25,141 $ 23,059 $ (58,947) $ (60,819)
====================================================================================
Amounts recognized in the accompanying balance sheets consists of:
Other
Pensions Postretirement Benefits
- ------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------
Other assets
Prepaid benefit cost $ 29,996 $ 34,421 $ -- $ --
Intangible asset 6,524 -- -- --
Accrued liabilities (1,082) (1,082) (9,042) (8,594)
Accrued retirement benefits (36,217) (10,280) (49,905) (52,225)
Accumulated other
non-owner changes to equity 25,920 -- -- --
- ------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 25,141 $ 23,059 $ (58,947) $ (60,819)
==============================================================================
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:
2002 2001 2000
- ------------------------------------------------------------------
Weighted average discount rate 6.75% 7.25% 7.75%
Long-term rate of return on plan assets 9.50% 9.75% 9.75%
Increase in compensation 4.50% 4.50% 4.75%
Page 30
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension and other postretirement benefit expenses consisted of the
following:
Other
Pensions Postretirement Benefits
- ----------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Service cost $ 8,034 $ 7,436 $ 6,264 $ 776 $ 562 $ 481
Interest cost 18,622 18,224 17,707 5,231 5,114 5,148
Expected return on plan assets (30,153) (29,130) (27,601) -- -- --
Amortization of transition assets (191) (442) (1,636) -- -- --
Recognized (gains) losses (1,499) (2,934) (3,420) 731 253 144
Curtailment (572) -- -- -- -- --
Prior service cost (benefits) 1,169 1,096 1,113 (718) (1,320) (1,321)
- ----------------------------------------------------------------------------------------------------
Benefit (credit) cost $ (4,590) $ (5,750) (7,573) $ 6,020 $ 4,609 $ 4,452
====================================================================================================
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 (i.e., healthcare cost
trend rate) is assumed to be 14% at December 31, 2002, decreasing gradually to
an ultimate rate of 5% at December 31, 2012. A one percentage point change in
the assumed healthcare cost trend rate would have changed the ABO by
approximately $1,490 at December 31, 2002, and would have changed the 2002
aggregate of the service and interest cost components of postretirement benefit
expense by approximately $45.
11. INCOME TAXES
The components of income before income taxes and the income tax
provision follow:
2002 2001 2000
- -----------------------------------------------------------------------------
Income before taxes:
U.S. $ 7,120 $ 2368 $ 19,763
International 25,991 21,091 28,827
- -----------------------------------------------------------------------------
Income before income taxes $ 33,111 $ 23,459 $ 48,590
=============================================================================
Income tax provision:
Current:
U.S. - federal $ 4,870 $ (3,407) $ 2,353
U.S. - state 2,213 (713) 674
International 4,050 3,699 4,035
- -----------------------------------------------------------------------------
11,133 (421) 7,062
- -----------------------------------------------------------------------------
Deferred:
U.S. - federal (4,350) 4,470 3,726
U.S. - state (1,751) 1,121 683
U.S. - state rate reduction -- -- 1,181
International 928 (832) 273
- -----------------------------------------------------------------------------
(5,173) 4,759 5,863
- -----------------------------------------------------------------------------
Income tax provision $ 5,960 $ 4,338 $ 12,925
=============================================================================
Page 31
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
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
- -----------------------------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------
Allowance for doubtful accounts $ 512 $ 756 $ -- $ --
Depreciation and amortization (13,729) (9,023) 1,791 2,930
Inventory valuation 6,593 7,472 1,007 782
Postretirement/postemployment costs 22,548 23,325 (265) (249)
Tax loss carry-forwards 28,156 10,762 -- --
Other 2,129 (2,883) 4,158 3,293
- -----------------------------------------------------------------------------
46,659 30,409 6,691 6,756
Valuation allowance (8,025) (7,924) -- --
- -----------------------------------------------------------------------------
$ 38,634 $ 22,485 $ 6,691 $ 6,756
=============================================================================
Current deferred income taxes $ 16,024 $ 16,702 $ 946 $ 688
Non-current deferred income taxes 22,610 5,783 5,745 6,068
- -----------------------------------------------------------------------------
$ 38,634 $ 22,485 $ 6,691 $ 6,756
=============================================================================
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. Tax loss carry-forwards of $67,523 have remaining carry-forward
periods ranging from two years to unlimited. The Company has tax credit
carry-forwards of $4,097, with remaining carry-forward periods ranging from one
to 10 years.
The Company has not recognized deferred income taxes on $149,937 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:
2002 2001 2000
- ---------------------------------------------------------------------
U.S. federal statutory income tax rate 35.0% 35.0% 35.0%
State taxes (net of federal benefit) 0.9 1.1 1.8
State tax rate reduction -- -- 1.6
Foreign losses without tax benefit 3.6 3.6 0.8
Tax on foreign operations (16.0) (22.8) (12.7)
NASCO equity income (0.4) 0.1 (0.5)
Export sales benefit (1.3) (1.5) (0.9)
ESOP dividend (5.8) -- --
Other 2.0 3.0 1.5
- ---------------------------------------------------------------------
Consolidated effective income tax rate 18.0% 18.5% 26.6%
=====================================================================
Income taxes paid, net of refunds, were $1,906, $2,046 and $7,165 in
2002, 2001 and 2000, respectively.
Page 32
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period
except those resulting from investment by, and distributions to, stockholders.
For the Company, comprehensive income includes net income and other non-owner
changes to equity, which comprises foreign currency translation adjustments,
deferred gains and losses related to certain derivative instruments and the
minimum pension liability adjustment. The components of accumulated other
non-owner changes to equity follow:
Foreign Unrealized Minimum
Currency Losses on Pension
Translation Hedging Liability
Adjustments Activities Adjustment Total
- ---------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $ (23,887) $ -- $ -- $ (23,887)
2000 Change 3,070 -- -- 3,070
- ---------------------------------------------------------------------------------------------------
December 31, 2000 (20,817) -- -- (20,817)
2001 Change (1,244) (662) -- (1,906)
- ---------------------------------------------------------------------------------------------------
December 31, 2001 (22,061) (662) -- (22,723)
2002 Change 1,236 (502) (16,822) (16,088)
- ---------------------------------------------------------------------------------------------------
December 31, 2002 $ (20,825) $ (1,164) $ (16,822) $ (38,811)
===================================================================================================
13. COMMON STOCK
In 2002, 2001 and 2000, 414,944 shares, 290,591 shares and 351,237
shares, respectively, of common stock were issued from treasury for the exercise
of stock options, various other incentive awards, purchases by the Employee
Stock Purchase Plan and matching contributions to the RSP. In addition, 119,048
shares and 17,500 shares were issued from treasury in 2002, in connection with
the acquisition of Spectrum and for the payment of charitable contributions,
respectively. In 2002, 2001 and 2000, the Company acquired 56,888 shares,
436,502 shares and 594,406 shares, respectively, of the Company's common stock
at a cost of $1,147, $8,798 and $9,197, respectively. These amounts exclude
shares issued and reacquired in connection with certain stock-for-stock
exercises under the Company's stock option plans. These reacquired shares were
placed in treasury.
The Company has a shareholder rights plan under which each share of
common stock contains one right (Right) that entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock for
$200. 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.
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.
14. PREFERRED STOCK
At December 31, 2002 and 2001, the Company had 3,000,000 shares of
preferred stock authorized, none of which were outstanding.
15. STOCK PLANS
Most U.S. salaried and non-union hourly employees are eligible to
participate in the Company's 401(k) plan. Effective April 1, 2001, the 401(k)
plan, previously called the Barnes Group Inc. Guaranteed Stock Plan (GSP), was
amended and renamed the Barnes Group Inc. Retirement Savings Plan (RSP). The RSP
continues to provide for the investment of employer and employee contributions
in the Company's common stock and also provides other investment alternatives
for employee contributions. Employee contributions to the RSP for investment in
the Company's
Page 33
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock after March 31, 2001, are no longer guaranteed a minimum rate of
return. However, the Company continues to guarantee a minimum rate of return on
certain pre-April 1, 2001, assets of the plan (see Note 18).
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 Company expenses all contributions made to the RSP.
The Company recognized expense of $2,990, $3,560 and $2,295 in 2002, 2001 and
2000, respectively. As of December 31, 2002, the RSP held 3,167,133 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 $21,250 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 which may be purchased under the ESPP is 2,025,000. The number of shares
purchased under the ESPP was 62,741, 62,691, and 75,052 in 2002, 2001 and 2000,
respectively. As of December 31, 2002, 256,527 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 future grants under the 1991 Plan.
A maximum of 1,945,984 common shares are subject to issuance under this plan
after December 31, 2002. As of December 31, 2002 and 2001, there were 171,832
and 627,421 shares, respectively, available for future grant under the 1991
Plan.
The Barnes Group Inc. Employee Stock and Ownership Program (2000 Plan)
was approved on April 12, 2000, and subsequently amended on April 10, 2002, by
the Company's stockholders. 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 3,450,000 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 grants under the 2000 Plan. A maximum of 3,292,333 common
shares are subject to issuance under this plan after December 31, 2002. As of
December 31, 2002 and 2001, there were 749,432 and 325,125 shares, respectively,
available for future grants under the 2000 Plan.
In 1998, 60,000 incentive units and 75,000 stock options were granted
under the Key Executive Stock Plan (Key Plan). There are no additional shares
available for future grant. A maximum of 104,806 common shares are subject to
issuance under the Key Plan after December 31, 2002.
Compensation cost related to these plans was $2,588, $1,974 and $798
in 2002, 2001 and 2000, respectively. The Company recorded, in additional
paid-in capital, tax benefits related to stock options of $1,148, $650 and $776
in 2002, 2001 and 2000, respectively.
Data relating to options granted under these plans follow:
2002 2001 2000
- -------------------------------------------------------------------------------------------------
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------
Outstanding, January 1 3,374,792 $ 19.61 2,471,992 $ 19.74 1,808,775 $ 20.70
Granted 1,242,843 $ 22.66 1,447,681 $ 18.81 1,207,622 $ 16.88
Exercised 616,348 $ 17.81 379,435 $ 17.11 324,036 $ 12.75
Cancelled 53,396 $ 23.13 165,446 $ 20.33 220,369 $ 22.22
- -------------------------------------------------------------------------------------------------
Outstanding, December 31 3,947,891 $ 20.80 3,374,792 $ 19.61 2,471,992 $ 19.74
=================================================================================================
Exercisable, December 31 2,065,666 $ 21.29 1,388,325 $ 21.34 899,926 $ 21.36
=================================================================================================
Page 34
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices of Shares Life (Years) Price of Shares Price
- -------------------------------------------------------------------------
$ 10 to $ 19 1,554,404 7.56 $ 17.46 645,363 $ 16.94
$ 19 to $ 23 1,069,164 6.60 $ 20.75 918,458 $ 20.88
$ 23 to $ 31 1,324,323 7.87 $ 24.75 501,845 $ 27.63
Incentive stock rights under the 1991 Plan (rights) and restricted
stock awards under the 2000 Plan and Key Plan (awards) entitle the holder to
receive, without payment, one share of the Company's common stock after the
expiration of the vesting period. Certain rights are also subject to the
satisfaction of established performance goals. Additionally, holders of stock
units and rights are credited with dividend equivalents, which are converted
into additional units or rights, as the case may be. All rights have up to a
five-year vesting period. In 2002, 213,300 rights and awards were granted;
14,609 rights and awards were credited to holders for dividend equivalents;
25,028 rights and awards, which include dividend equivalents, were converted to
an equivalent number of shares of common stock; and 16,000 rights and awards
were forfeited. As of December 31, 2002, there were 451,857 rights and awards
outstanding.
Under the Non-Employee Director Deferred Stock Plan each non-employee
director is granted the right to receive 6,000 shares of the Company's common
stock upon retirement. There were 6,000, 6,000 and 12,000 shares granted to new
directors in 2002, 2001 and 2000, respectively. There are 54,000 shares reserved
for issuance under this plan.
Total shares reserved for issuance under all stock plans aggregated
5,653,650 at December 31, 2002.
16. AVERAGE SHARES OUTSTANDING
Net income per common share is computed in accordance with SFAS 128,
"Earnings per Share." Basic earnings per share is calculated using 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 RSP 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, 2002, 2001 and 2000. A reconciliation of the average number of
common shares outstanding used in the basic and diluted EPS computation follows:
Average Common Shares Outstanding
- --------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------
Basic 18,750,442 18,506,247 18,568,359
Dilutive effect of:
Stock options 288,036 273,651 101,413
Stock incentive units 127,431 122,869 104,307
Non-Employee
Director Stock Plan 19,423 17,201 17,148
- --------------------------------------------------------------------
Diluted 19,185,332 18,919,968 18,791,227
====================================================================
As of December 31, 2002, there were 3,947,891 stock options outstanding,
of which 2,239,515 were considered dilutive and 1,708,376 were anti-dilutive.
Page 35
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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, as
follows:
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, Germany, Singapore and China.
Barnes Aerospace supplies precision machined and fabricated components
and assemblies for the aerospace and industrial gas turbine industries.
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 and Singapore. Its
markets are located primarily in the U.S., Europe and Asia.
Barnes Distribution is an international distributor of MRO supplies
and a full-service provider of logistics management services 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., with additional locations in Canada, Europe, Asia, Mexico
and Brazil. As indicated in Note 3, the Company acquired Kar Products, a leading
full-service distributor of MRO supplies, on February 6, 2003. Kar Products will
be included in the Barnes Distribution segment.
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.
Page 36
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables (dollars shown in millions) set forth information
about the Company's operations by its three reportable business segments and by
geographic area.
OPERATIONS BY REPORTABLE BUSINESS SEGMENT
Associated Barnes Barnes Total
Spring Aerospace Distribution Other BGI
- ---------------------------------------------------------------------------
Revenues
- ---------------------------------------------------------------------------
2002 $ 321.7 $ 183.0 $ 286.7 $ (7.4) $ 784.0
2001 279.2 200.4 298.4 (9.2) 768.8
2000 327.3 135.1 291.1 (13.5) 740.0
Operating profit
- ---------------------------------------------------------------------------
2002 $ 28.1 $ 10.8 $ 7.5 $ -- $ 46.4
2001 19.4 16.4 5.5 -- 41.3
2000 44.0 8.0 12.9 -- 64.9
Assets
- ---------------------------------------------------------------------------
2002 $ 283.8 $ 123.9 $ 168.5 $ 76.3 $ 652.5
2001 244.1 141.4 171.5 79.5 636.5
2000 273.6 130.1 178.6 54.6 636.9
Depreciation and amortization
- ---------------------------------------------------------------------------
2002 $ 15.5 $ 9.2 $ 7.7 $ 1.2 $ 33.6
2001 16.8 9.7 9.9 0.6 37.0
2000 17.8 8.6 9.0 0.5 35.9
Capital expenditures
- ---------------------------------------------------------------------------
2002 $ 6.5 $ 4.5 $ 7.4 $ 1.0 $ 19.4
2001 8.7 10.0 6.0 0.2 24.9
2000 14.2 5.6 5.5 2.7 28.0
Notes:
In 2002 and 2001, respectively, one customer accounted for 11% and 13% of the
Company's total revenue. In 2000, sales from any one customer did not exceed 10%
of the Company's total revenues.
"Other" revenues represent the elimination of 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 $1.1 million, $0.4 million and $1.6 million in 2002, 2001
and 2000, respectively.
The assets of Associated Spring include the NASCO investment of $9.9 million,
$9.4 million and $10.0 million in 2002, 2001 and 2000, respectively.
"Other" assets include corporate controlled assets, the majority of which are
cash and deferred tax assets.
Page 37
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the total reportable segments' operating profit to
income before income taxes follows:
2002 2001 2000
- -------------------------------------------------------
Operating profit $ 46.4 $ 41.3 $ 64.9
Interest income 0.9 0.9 1.5
Interest expense (14.8) (16.2) (15.1)
Other income (expense) 0.6 (2.5) (2.7)
- -------------------------------------------------------
Income before income taxes $ 33.1 $ 23.5 $ 48.6
=======================================================
OPERATIONS BY GEOGRAPHIC AREA
Inter-
- ----------------------------------------------------------------------------
Revenues Domestic International geographical Total BGI
- ----------------------------------------------------------------------------
2002 $ 606.6 $ 200.8 $ (23.4) $ 784.0
2001 625.7 172.2 (29.1) 768.8
2000 580.6 186.3 (26.9) 740.0
- ----------------------------------------------------------------------------
Long-lived assets
- ----------------------------------------------------------------------------
2002 $ 269.7 $ 121.6 $ -- $ 391.3
2001 266.4 107.8 -- 374.2
2000 262.4 118.2 -- 380.6
===========================================================================
Notes:
International sales derived from any one country did not exceed 10% of the
Company's total revenues.
Intergeographical sales are equally distributed between domestic and
international.
18. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has various noncancellable operating leases for buildings,
office space and equipment. As discussed in Note 9, the Company assumed certain
debt related to capital leases with the acquisition of Spectrum. The balance of
this debt at December 31, 2002, was $2,350. Rent expense was $10,257, $9,942 and
$9,127 for 2002, 2001 and 2000, respectively. Minimum rental commitments under
noncancellable leases in years 2003 through 2007 are $7,784, $6,816, $5,776,
$4,843 and $1,960 and $7,187 thereafter.
RETIREMENT SAVINGS PLAN
The Company continues to guarantee a minimum rate of return on certain
pre-April 2001 assets of its 401(k) Retirement Savings Plan (the Plan). This
guarantee will become a liability for the Company only if, and to the extent
that, the value of the related Company stock does not cover the guaranteed asset
value when an employee who had invested in the Barnes Group stock investment
election or vested in the Company match, which is paid in Barnes Group stock,
withdraws from the Plan.
The following table provides a number of hypothetical market values of
the Company's stock compared to the estimated guarantee amounts based on those
market values:
Stock Price Plan
Per Share Guarantee
- ---------------------------------------------------
$ 25.00 $ 30
20.00 400
15.00 4,200
10.00 13,100
5.00 22,400
0.00 33,300
At December 31, 2002, the value of the Company's guarantee on these
assets was approximately $320.
Page 38
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTRICTIONS ON STOCK CONSIDERATION FOR SPECTRUM
The sole shareholder of Spectrum received 119,048 shares of the
Company's common stock as partial consideration for Spectrum. For the one-year
period following the required holding period under the federal securities laws,
the sole shareholder has agreed not to sell the Company shares received in the
acquisition at a price below $25.20 per share without the consent of the
Company. In the event he sells any of the shares during that period with the
consent of the Company or during the one month following that period, the
Company will pay to him an amount equal to the difference between $25.20 per
share and a lesser price at which he sells such shares.
PRODUCT WARRANTIES
The Company provides product warranties in connection with the sale of
products. Product warranty liabilities were not significant as of December 31,
2002 and 2001.
Page 39
[LOGO OF PRICEWATERHOUSECOOPERS]
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
REPORT OF INDEPENDENT ACCOUNTANTS
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, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Barnes
Group Inc. and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, 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 our opinion.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards, No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
January 31, 2003,
except for Note 3, which is as of February 6, 2003.
Page 40
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, First Second Third Fourth Full
except per share data) Quarter Quarter Quarter Quarter(1) Year
====================================================================================================================
2002
Net sales $ 194.2 $ 209.4 $ 196.8 $ 183.6 $ 784.0
Gross Profit/(2)/ 63.9 67.2 62.3 60.6 254.0
Operating income 11.6 13.7 10.0 9.5 44.8
Net income 6.8 8.7 6.9 4.8 27.2
Per common share:
Net income:
Basic $ 0.37 $ 0.46 $ 0.37 $ 0.25 $ 1.45
Diluted 0.36 0.45 0.36 0.25 1.42
Dividends 0.20 0.20 0.20 0.20 0.80
Market prices
(high-low) $ 26.35-21.60 $ 25.80-21.00 $ 23.38-18.45 $ 22.90-17.50 $ 26.35-17.50
====================================================================================================================
2001
Net sales $ 199.3 $ 199.5 $ 186.5 $ 183.5 $ 768.8
Gross profit/(2)/ 66.7 65.6 61.3 55.7 249.3
Operating income 13.8 13.4 11.6 1.5 40.3
Net income 7.3 6.9 5.7 (0.8) 19.1
Per common share:
Net income
Basic $ 0.39 $ 0.37 $ 0.31 $ (0.04) $ 1.03
Diluted 0.39 0.36 0.30 (0.04) 1.01
Dividends 0.20 0.20 0.20 0.20 0.80
Market prices
(high-low) $ 21.00-18.00 $ 24.70-18.25 $ 24.80-19.48 $ 24.94-19.20 $ 24.94-18.00
====================================================================================================================
/(1)/ The fourth quarter of 2001 includes a pre-tax charge of $4.8 million
primarily related to a plant closure and severance costs.
/(2)/ Sales less cost of sales.
Page 41
BARNES GROUP INC.
[GRAPHIC APPEARS HERE]
SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998/(1)/
=========================================================================================
Per common share/(2)/
- -----------------------------------------------------------------------------------------
Net income
- -----------------------------------------------------------------------------------------
Basic $ 1.45 $ 1.03 $ 1.92 $ 1.47 $ 1.72
- -----------------------------------------------------------------------------------------
Diluted 1.42 1.01 1.90 1.46 1.69
- -----------------------------------------------------------------------------------------
Dividends paid 0.80 0.80 0.79 0.75 0.69
- -----------------------------------------------------------------------------------------
Stockholders' equity
(at year-end) 10.98 10.77 10.82 9.58 9.51
- -----------------------------------------------------------------------------------------
Stock price (at
year-end) 20.35 23.99 19.88 16.31 29.25
=========================================================================================
FOR THE YEAR (in
thousands)
- -----------------------------------------------------------------------------------------
Net sales $ 784,036 $ 768,821 $ 740,032 $ 622,356 $ 651,183
- -----------------------------------------------------------------------------------------
Operating income 44,840 40,320 62,949 46,107 55,279
- -----------------------------------------------------------------------------------------
As a percent of sales 5.7% 5.2% 8.5% 7.4% 8.5%
- -----------------------------------------------------------------------------------------
Income before income $ 33,111 $ 23,459 $ 48,590 $ 42,698 $ 54,663
taxes
- -----------------------------------------------------------------------------------------
Income taxes 5,960 4,338 12,925 14,086 20,196
- -----------------------------------------------------------------------------------------
Net income 27,151 19,121 35,665 28,612 34,494
- -----------------------------------------------------------------------------------------
As a percent of
average stockholders'
equity 13.0% 9.5% 19.1% 15.4% 18.4%
- -----------------------------------------------------------------------------------------
Depreciation and
amortization $ 33.626 $ 37,045 $ 35,871 $ 30,602 $ 28,431
- -----------------------------------------------------------------------------------------
Capital expenditures 19,367 24,857 28,042 27,823 34,843
- -----------------------------------------------------------------------------------------
Average common shares
outstanding/(3)/ 18,750 18,506 18,568 19,418 20,096
=========================================================================================
YEAR-END FINANCIAL
POSITION (in thousands)
- -----------------------------------------------------------------------------------------
Working capital $ 106,558 $ 72,931 $ 114,502 $ 103,165 $ 106,884
- -----------------------------------------------------------------------------------------
Current ratio 1.8 to 1 1.4 to 1 1.9 to 1 1.9 to 1 2.1 to 1
- -----------------------------------------------------------------------------------------
Property, plant and
equipment $ 159,440 $ 152,943 $ 163,766 $ 145,105 $ 139,247
- -----------------------------------------------------------------------------------------
Total assets 652,530 636,505 636,941 516,282 418,904
- -----------------------------------------------------------------------------------------
Long-term debt(4) 220,962 225,941 230,000 140,000 51,000
- -----------------------------------------------------------------------------------------
Stockholders' equity 208,220 198,837 201,333 180,614 188,674
- -----------------------------------------------------------------------------------------
Debt as a percent of
total capitalization/(5)/ 51.5% 53.8% 54.1% 45.7% 24.1%
=========================================================================================
YEAR-END STATISTICS
Employees 5,172 5,150 5,471 4,020 3,847
=========================================================================================
/(1)/ 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 Company's former president.
/(2)/ 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.
/(3)/ Basic shares.
/(4)/ Long-term debt includes current and long-term portion.
/(5)/ Debt includes all interest-bearing debt and total capitalization includes
interest-bearing debt and stockholders' equity.
Page 42