Barnes (US:B)2023-07-30 16:00Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements and accompanying notes for Q2 and H1 2023 and 2022 Condensed Consolidated Statements of Income (Loss) (in thousands) | | Three Months Ended June 30, | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2023 | 2022 | 2023 | 2022 | | Net sales | $338,984 | $321,268 | $674,341 | $633,651 | | Operating income (loss) | $26,009 | $(28,187) | $49,293 | $2,926 | | Net income (loss) | $17,352 | $(39,552) | $30,511 | $(19,068) | | Diluted EPS | $0.34 | $(0.78) | $0.60 | $(0.37) | Condensed Consolidated Balance Sheet Highlights (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $766,917 | $732,304 | | Total assets | $2,440,679 | $2,413,730 | | Total current liabilities | $334,756 | $305,073 | | Total liabilities | $1,063,692 | $1,067,403 | | Total stockholders' equity | $1,376,987 | $1,346,327 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $42,467 | $8,519 | | Net cash used by investing activities | $(22,190) | $(15,076) | | Net cash used by financing activities | $(24,090) | $(24,387) | Note 3: Revenue Revenue is mainly recognized at shipment (75% in Q2 2023), with detailed disaggregation by segment and region Revenue by Segment (Three Months Ended June 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Industrial | $216,969 | $212,115 | | Aerospace | $122,015 | $109,153 | | Total | $338,984 | $321,268 | Revenue by Geographic Region (Three Months Ended June 30, 2023, in thousands) | Region | Amount | | :--- | :--- | | Americas | $181,103 | | Europe | $101,422 | | Asia | $52,462 | | Rest of World | $3,997 | - As of June 30, 2023, the company had remaining performance obligations of $292.5 million for contracts longer than one year, with approximately 75% expected to be recognized as revenue in the next 12 months39 Note 7: Goodwill and Other Intangible Assets Goodwill totaled $842.2 million as of June 30, 2023, with no impairment identified in the Q2 2023 annual test - Management performed its annual impairment testing of goodwill and indefinite-lived trade names in Q2 2023 and determined that there was no impairment5052 Goodwill by Segment (in thousands) | Segment | Dec 31, 2022 | June 30, 2023 | | :--- | :--- | :--- | | Industrial | $804,686 | $811,366 | | Aerospace | $30,786 | $30,786 | | Total | $835,472 | $842,152 | Note 8: Debt Total debt was $574.4 million; credit facility amended for MB Aerospace acquisition, with covenant compliance maintained - On June 5, 2023, the company amended its credit agreements to facilitate the acquisition of MB Aerospace, which will increase the maximum leverage ratio to 5.50:1 post-closing, with subsequent step-downs58 - As of June 30, 2023, the company was in compliance with all debt covenants. The most restrictive covenant, the Senior Debt Ratio, was 2.56 times, below the maximum of 3.25 times60 Debt Composition (June 30, 2023, in thousands) | Type | Carrying Amount | | :--- | :--- | | Effective Date Credit Agreement | $462,651 | | 3.97% Senior Notes | $100,000 | | Other Borrowings & Leases | $11,777 | | Total | $574,428 | Note 14: Information on Business Segments Operates in Industrial and Aerospace segments; Q2 2023 saw modest Industrial growth and significant Aerospace sales increase Segment Performance (Three Months Ended June 30, in thousands) | Segment | Net Sales 2023 | Operating Profit (Loss) 2023 | Net Sales 2022 | Operating Profit (Loss) 2022 | | :--- | :--- | :--- | :--- | :--- | | Industrial | $216,971 | $9,429 | $212,115 | $(48,743) | | Aerospace | $122,015 | $16,580 | $109,153 | $20,556 | - The Industrial segment's operating loss in 2022 included a $68.2 million goodwill impairment charge, which was absent in 2023, leading to a significant year-over-year improvement in reported operating profit9596 Note 15: Commitments and Contingencies Details commitments, primarily the pending $740 million cash acquisition of MB Aerospace, expected to close by year-end - On June 5, 2023, the company entered into an agreement to acquire MB Aerospace for $740 million in cash. The transaction is expected to close by the end of 2023102 Note 16: Business Reorganizations Significant restructuring actions in 2022 and 2023 aim to optimize infrastructure, incurring pre-tax charges with more expected - In July 2022, the company initiated restructuring actions ("2022 Actions") in the Industrial segment, incurring charges and expecting completion in 2023103 - In April 2023, additional restructuring actions ("2023 Actions") were authorized for both segments, resulting in $9.5 million of pre-tax charges in Q2 2023, with an expected $19 million in additional costs through 2025103105 Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Q2/H1 2023 financial results, including 5.5% sales growth, MB Aerospace acquisition, and restructuring for $50M savings - Q2 2023 net sales increased 5.5% to $339.0 million, with organic sales up 5.1%. Aerospace organic sales grew 11.8%, and Industrial organic sales grew 1.6%111 - The company is acquiring MB Aerospace for $740 million in cash, a strategic move to expand its aerospace business. The deal is expected to close by the end of 2023112 - Ongoing restructuring initiatives announced in 2022 and 2023 are targeting over $50 million in annualized savings to improve profitability and reduce complexity114 Results of Operations Q2 2023 net sales rose 5.5% to $339.0 million, with operating income turning profitable due to no goodwill impairment Operating Results Summary (Q2 2023 vs Q2 2022, in millions) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $339.0 | $321.3 | +5.5% | | Gross Profit | $114.4 | $108.5 | +5.4% | | Operating Income (Loss) | $26.0 | $(28.2) | +$54.2M | | Operating Margin | 7.7% | (8.8)% | +16.5pp | - Q2 2023 operating income was negatively impacted by $13.9 million in restructuring charges and $3.6 million in acquisition transaction costs111119 Financial Performance by Business Segment Industrial sales grew 2.3% with profit recovery; Aerospace sales rose 11.8% but profit declined due to costs and mix Industrial Segment Industrial sales increased 2.3% to $217.0 million, with operating profit recovering due to the absence of prior impairment Industrial Segment Performance (Q2, in millions) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Sales | $217.0 | $212.1 | | Operating Profit (Loss) | $9.4 | $(48.7) | | Operating Margin | 4.3% | (23.0)% | - The outlook for Industrial is impacted by economic headwinds, with varied performance across regions: Europe sales improved, North America was flat, and China declined. Order rates were flat in Europe, down in China, but improved in North America130 Aerospace Segment Aerospace sales grew 11.8% to $122.0 million, but operating profit declined due to acquisition costs and product mix Aerospace Segment Performance (Q2, in millions) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Sales | $122.0 | $109.2 | | Operating Profit | $16.6 | $20.6 | | Operating Margin | 13.6% | 18.8% | - Aerospace backlog increased 7.3% to $804.8 million at June 30, 2023, from $750.1 million at December 31, 2022135 Liquidity and Capital Resources Strong liquidity with $74.7M cash and $537.3M credit; H1 2023 operating cash flow improved to $42.5M, debt covenants met - Net cash from operating activities increased to $42.5 million in H1 2023 from $8.5 million in H1 2022, primarily due to better working capital management154 Debt Covenant Compliance (as of June 30, 2023) | Covenant | Actual Ratio | Requirement | | :--- | :--- | :--- | | Ratio of Consolidated Senior Debt to Consolidated EBITDA | 2.56 | Max 3.25 | | Ratio of Consolidated Total Debt to Consolidated EBITDA | 2.56 | Max 3.75 | | Ratio of Consolidated EBITDA to Consolidated Cash Interest Expense | 11.46 | Min 4.25 | - At June 30, 2023, the company had $537.3 million unused on its credit facility, though borrowing capacity was limited to $266.0 million by debt covenants149160 Critical Accounting Policies Critical accounting policies include annual goodwill impairment testing, with no impairment identified in Q2 2023 - The annual goodwill impairment test was conducted in Q2 2023, and no impairment was identified. This contrasts with Q2 2022, when a non-cash goodwill impairment charge was recorded for the Automation reporting unit162 Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk exposure occurred in H1 2023; refer to 2022 10-K for detailed discussion - There have been no material changes to the Company's market risk exposure during the six months ended June 30, 2023167 Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period168 - There were no material changes to the company's internal control over financial reporting during the second quarter of 2023169 Part II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, not expecting a material adverse financial impact - The company expects that the outcome of pending litigation and other proceedings will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations171 Risk Factors New risks from the MB Aerospace acquisition include completion failure, business disruption, costs, and increased leverage - The pending acquisition of MB Aerospace introduces several risks, including failure to complete the transaction, disruption of business relationships, significant costs, and increased indebtedness173 - The company faces challenges related to the integration of MB Aerospace, which will greatly expand the size and complexity of its aerospace business175 Unregistered Sales of Equity Securities and Use of Proceeds No open market share repurchases in Q2 2023; 3.4 million shares remain authorized for repurchase - No shares were repurchased as part of the publicly announced repurchase program in Q2 2023. All equity acquisitions were for tax withholding on employee stock awards180 - As of June 30, 2023, 3.4 million shares may yet be purchased under the company's stock repurchase program180181