Barnes (B) - 2022 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for the three and six months ended June 30, 2022, and 2021, including statements of (loss) income, comprehensive (loss) income, balance sheets, and cash flows, with detailed notes and a significant $68.2 million goodwill impairment charge recorded in Q2 2022 Consolidated Financial Statements The company reported a net loss of $39.6 million for Q2 2022, a sharp decline from a net income of $24.5 million in Q2 2021, primarily due to a significant goodwill impairment charge, resulting in a $19.1 million net loss for the six months ended June 30, 2022, and a decrease in total assets to $2.40 billion from $2.58 billion at year-end 2021 Consolidated Statements of (Loss) Income (in thousands, except per share data) | | Three Months Ended June 30, | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2022 | 2021 | 2022 | 2021 | | Net sales | $321,268 | $321,158 | $633,651 | $622,787 | | Operating (loss) income | $(28,187) | $38,543 | $2,926 | $70,923 | | Goodwill impairment charge | $68,194 | $— | $68,194 | $— | | Net (loss) income | $(39,552) | $24,491 | $(19,068) | $43,873 | | Diluted EPS | $(0.78) | $0.48 | $(0.37) | $0.86 | Consolidated Balance Sheet Highlights (in thousands) | | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $690,423 | $680,209 | | Goodwill | $827,131 | $955,370 | | Total assets | $2,401,096 | $2,576,820 | | Total current liabilities | $284,862 | $310,394 | | Long-term debt | $582,537 | $599,932 | | Total stockholders' equity | $1,320,094 | $1,428,766 | Consolidated Statements of Cash Flows (in thousands) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,519 | $85,721 | | Net cash used by investing activities | $(15,076) | $(14,507) | | Net cash used by financing activities | $(24,387) | $(58,567) | | (Decrease) increase in cash | $(35,419) | $11,395 | Notes to Consolidated Financial Statements The notes provide detailed explanations for the financial statements, including revenue disaggregation, a $68.2 million goodwill impairment charge related to the Automation reporting unit, debt facility details, segment performance, and new restructuring actions authorized in July 2022 - Revenue from products and services transferred at a point in time accounted for approximately 80% of total revenue for the six months ended June 30, 2022 and 2021. The remaining 20% is recognized over-time, primarily in the Aerospace Aftermarket MRO business[33][34] - A non-cash goodwill impairment charge of $68.2 million was recorded in Q2 2022 related to the Automation reporting unit. This was triggered by deteriorating macro-economic conditions, including inflation, rising interest rates, and supply chain constraints[52][53] - In July 2022, the company authorized restructuring actions focused on consolidating manufacturing sites and offices within the Industrial segment. These actions are expected to result in pretax charges of approximately $24 million and generate annualized cost savings of about $14 million[100][102] Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP reviewed the interim financial information and, based on their review, are not aware of any material modifications required for U.S. GAAP conformity, noting that their review is less extensive than an audit and thus no audit opinion is expressed - The independent accounting firm, PricewaterhouseCoopers LLP, stated that based on their review, they are not aware of any material modifications that should be made to the interim financial information[105] - The review was conducted in accordance with PCAOB standards and is substantially less in scope than an audit, therefore no audit opinion is expressed[107] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2022 financial results, noting flat net sales of $321.3 million with 4.5% organic growth offset by currency effects, and an operating margin decline to (8.8)% due to a $68.2 million goodwill impairment charge, while addressing segment performance, liquidity, and macroeconomic challenges Results of Operations Q2 2022 net sales were flat YoY at $321.3 million, with 4.5% organic sales growth offset by a $14.5 million negative currency impact, leading to a $28.2 million operating loss due to a $68.2 million goodwill impairment charge, while Industrial sales fell 9.6% to $212.1 million and Aerospace sales grew 26.2% to $109.2 million Net Sales by Segment (in millions) | Segment | Q2 2022 | Q2 2021 | % Change | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Industrial | $212.1 | $234.7 | (9.6)% | $423.8 | $454.7 | (6.8)% | | Aerospace | $109.2 | $86.5 | 26.2% | $209.9 | $168.1 | 24.8% | | Total | $321.3 | $321.2 | —% | $633.7 | $622.8 | 1.7% | Operating (Loss) Income Summary (in millions) | | Q2 2022 | Q2 2021 | % Change | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating (loss) income | $(28.2) | $38.5 | (173.1)% | $2.9 | $70.9 | (95.9)% | | % of sales | (8.8)% | 12.0% | | 0.5% | 11.4% | | | Goodwill impairment charge | $68.2 | $— | 100.0% | $68.2 | $— | 100.0% | - The Industrial segment's operating results were significantly impacted by a $68.2 million goodwill impairment charge in Q2 2022. Excluding this charge, the operating profit was $19.5 million and the operating margin was 9.2%[126] - The Aerospace segment's operating profit increased 82.4% in Q2 2022 to $20.6 million, with operating margin expanding from 13.0% to 18.8%, driven by higher sales in the high-margin Aftermarket business[130][131] Liquidity and Capital Resources The company maintains sufficient liquidity with $72.3 million in cash and $521.1 million available under its revolving credit facility as of June 30, 2022, despite operating cash flow decreasing to $8.5 million from $85.7 million in H1 2021 due to increased working capital, and remains in compliance with all debt covenants after amending its credit agreement Cash Flow Summary (in millions) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Operating activities | $8.5 | $85.7 | | Investing activities | $(15.1) | $(14.5) | | Financing activities | $(24.4) | $(58.6) | - As of June 30, 2022, the company had $521.1 million unused and available for borrowing under its $1.0 billion Amended Credit Facility and was in compliance with all debt covenants[147] - The company's Senior Debt to Consolidated EBITDA ratio was 2.33x, well below the maximum covenant of 3.25x[157] - The company repurchased 0.2 million shares of its common stock for $6.7 million during the second quarter of 2022[146] Other Matters This section details the critical accounting policy for Goodwill and Indefinite-Lived Intangible Assets, explaining that a triggering event in Q2 2022 due to deteriorating macroeconomic conditions led to a $68.2 million non-cash impairment charge for the Automation reporting unit, reducing its carrying value to fair value, and also provides a non-GAAP reconciliation for EBITDA - A goodwill impairment charge of $68.2 million was recorded for the Automation reporting unit in Q2 2022. This was due to a triggering event caused by deteriorating macro-economic conditions, including inflationary pressures, rising interest rates, and worsening global supply chain constraints[161] - Following the impairment, there is no excess of fair value over the carrying amount for the Automation reporting unit, indicating a risk of future impairments if economic conditions worsen[164] Reconciliation of Net (Loss) Income to EBITDA (in millions) | | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net (loss) income | $(19.1) | $43.9 | | Interest expense | $6.9 | $8.4 | | Income taxes | $13.9 | $15.9 | | Depreciation and amortization | $44.9 | $44.7 | | Non-cash goodwill impairment charge | $68.2 | $— | | EBITDA | $114.8 | $112.9 | Quantitative and Qualitative Disclosures About Market Risk The company states there have been no material changes to its market risk exposure during the six months ended June 30, 2022, referring to its Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion - There have been no material changes to the company's market risk exposure in the first six months of 2022, with the company referring to its 2021 Form 10-K for a full discussion[170] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2022, with no material changes to internal control over financial reporting occurred during Q2 2022 that materially affected, or are reasonably likely to materially affect, internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[171] - No material changes to internal control over financial reporting occurred in the second quarter of 2022[172] Part II. OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business, but management does not anticipate that pending litigation from the ordinary course of business will have a material adverse effect on its financial position, cash flows, or results of operations - The company does not anticipate that pending litigation from the ordinary course of business will have a material adverse effect on its financial condition or results[174] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2022, the company repurchased 200,000 shares of its common stock as part of its publicly announced repurchase program at an average price of $33.60 per share, with 3,404,000 shares remaining authorized for repurchase under the program as of June 30, 2022 Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | Max Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | :--- | | May 1-31, 2022 | 200,566 | $33.60 | 200,000 | 3,404,000 | | Total Q2 | 203,010 | $33.63 | 200,000 | 3,404,000 | - The company repurchased 200,000 shares in Q2 2022 under its authorized program. 3.4 million shares remain available for repurchase under the program as of June 30, 2022[176][177] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, employment-related agreements for executives, Sarbanes-Oxley certifications, and XBRL data files - Key exhibits filed with this report include an amendment to the Senior Unsecured Revolving Credit Agreement, employment agreements for the new CEO Thomas J. Hook and former CEO Patrick J. Dempsey, and required SOX certifications[179][183]