Barnes (B) - 2020 Q4 - Annual Report

Part I Business Overview Barnes Group Inc. is a global provider of highly engineered products and industrial technologies, operating through two segments: Industrial and Aerospace, with a strategy focused on high-margin businesses, intellectual property, and effective capital allocation - The company operates under two global business segments: Industrial and Aerospace, encompassing Molding Solutions, Force & Motion Control, Automation, Engineered Components, Original Equipment Manufacturing (OEM), and Aftermarket businesses[12] - The COVID-19 pandemic negatively affected sales and financial results in 2020, causing a global slowdown in aerospace markets, lower aircraft utilization, and the removal of aircraft from service[8] - The company's strategy is built on four pillars: focusing on high-margin/high-growth businesses, leveraging the Barnes Enterprise System (BES), expanding intellectual property, and effective capital allocation to drive shareholder return[9][10] - In the Industrial segment, the four largest customers accounted for approximately 10% of sales in 2020[15] - In the Aerospace segment, the three largest customers, General Electric, Rolls-Royce, and Raytheon Technologies Corporation, accounted for approximately 55%, 15%, and 5% of its sales in 2020, respectively[19] - As of December 31, 2020, the company had approximately 5,000 employees worldwide, with 40% in the Americas, 40% in Europe, Middle East and Africa, and 20% in the Asia-Pacific region[20] Risk Factors The company identifies significant risks, with the COVID-19 pandemic being a primary concern due to its adverse effects on the global economy and particularly the aerospace industry, alongside business, operational, and financial risks - The COVID-19 pandemic has had a material impact on the air travel and aviation industries, causing reductions in demand for commercial aircraft which could continue to materially affect the Aerospace business[39] - The company has significant customer concentration risk: in 2020, sales to General Electric (GE) accounted for 17% of total sales and 55% of Aerospace sales, while Rolls-Royce and Raytheon accounted for 15% and 5% of Aerospace sales, respectively[41] - Order backlog decreased from $1,080.0 million at the end of 2019 to $832.7 million at the end of 2020, with the majority related to Aerospace OEM customers, and there is no assurance that projected revenues from the backlog will be realized[43] - The company has significant indebtedness, with consolidated debt obligations of $704.3 million as of December 31, 2020, representing approximately 34% of total capital[77] - Goodwill totaled $1,011.6 million as of December 31, 2020, and an impairment of goodwill could negatively affect results of operations and total capitalization[80] - In 2020, the company recorded $19.1 million of restructuring charges, primarily related to employee severance and other termination benefits, in response to market conditions[89] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[95] Properties The company operates a total of 27 owned and 82 leased facilities across its Industrial and Aerospace segments in North America, Europe, Asia, and Central/Latin America Owned Facilities | Location | Industrial | Aerospace | Other | Total | |---|---|---|---|---| | Owned Manufacturing | 17 | 7 | 0 | 24 | | Owned Non-Manufacturing | 2 | 0 | 1 | 3 | | Total Owned | 19 | 7 | 1 | 27 | Leased Facilities | Location | Industrial | Aerospace | Other | Total | |---|---|---|---|---| | Leased Manufacturing | 12 | 9 | 0 | 21 | | Leased Non-Manufacturing | 57 | 3 | 1 | 61 | | Total Leased | 69 | 12 | 1 | 82 | Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business but does not anticipate that the outcomes will have a material adverse effect on its financial position, cash flows, or results of operations - The company expects that the outcome of pending litigation, suits, and claims will not have a material adverse effect on its consolidated financial position, cash flows, or results of operations[99] Mine Safety Disclosures This item is not applicable to the company - Not applicable[99] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Barnes Group Inc.'s common stock trades on the New York Stock Exchange under the symbol 'B', with approximately 1,713 holders of record as of February 17, 2021, and the company repurchased 3,902 shares in Q4 2020 for tax withholding obligations - The company's common stock is traded on the New York Stock Exchange under the symbol 'B'[102] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased as Part of Program | Max Shares Remaining for Purchase | |---|---|---|---|---| | Oct 1-31, 2020 | 460 | $37.41 | — | 3,704,000 | | Nov 1-30, 2020 | 37 | $46.83 | — | 3,704,000 | | Dec 1-31, 2020 | 3,405 | $50.57 | — | 3,704,000 | | Total Q4 2020 | 3,902 | $48.98 | — | 3,704,000 | Selected Financial Data The company presents a five-year summary of key financial data, showing 2020 net sales of $1.12 billion, a decrease from $1.49 billion in 2019, with net income falling to $63.4 million from $158.4 million Selected Financial Data (in thousands, except per share data) | | 2020 | 2019 | |---|---|---| | Net sales | $1,124,391 | $1,491,118 | | Operating income | $123,370 | $236,448 | | Net income | $63,375 | $158,350 | | Diluted EPS | $1.24 | $3.07 | | Dividends declared and paid per share | $0.64 | $0.64 | | Total assets | $2,676,226 | $2,738,335 | | Long-term debt and notes payable | $704,259 | $834,775 | | Stockholders' equity | $1,382,677 | $1,270,528 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of the COVID-19 pandemic on 2020 financial results, with net sales decreasing 24.6% to $1.12 billion and operating income falling 47.8% to $123.4 million, while maintaining sufficient liquidity Key Financial Metrics | Metric | 2020 | 2019 | % Change | |---|---|---|---| | Net Sales | $1,124.4 M | $1,491.1 M | (24.6)% | | Operating Income | $123.4 M | $236.4 M | (47.8)% | | Operating Margin | 11.0% | 15.9% | -4.9 p.p. | - The company took restructuring and workforce reduction actions in 2020, resulting in pre-tax charges of $19.1 million, to align costs with the business environment impacted by COVID-19[118][169] - As of December 31, 2020, the company had $79.1 million in cash and $406.4 million of undrawn borrowing capacity under its credit facility, though covenants limited actual additional borrowing to $161.5 million[118][178] - The effective tax rate increased to 37.6% in 2020 from 23.4% in 2019, primarily due to a decrease in earnings in lower-tax jurisdictions, tax expense from the Seeger business sale, and the impact of GILTI[146] Cash Flow Summary (in millions) | (in millions) | 2020 | 2019 | % Change | |---|---|---|---| | Operating Activities | $215.5 | $248.3 | (13.2)% | | Investing Activities | ($4.2) | ($62.2) | 93.3% | | Financing Activities | ($219.7) | ($192.0) | (14.4)% | Results of Operations In 2020, total net sales decreased by 24.6% to $1,124.4 million, driven by organic sales declines of 13.6% in Industrial and 35.9% in Aerospace due to COVID-19, leading to a 47.8% fall in operating income Sales by Segment ($ in millions) | ($ in millions) | 2020 | 2019 | $ Change | % Change | |---|---|---|---|---| | Industrial Sales | $770.1 | $938.5 | ($168.4) | (17.9)% | | Aerospace Sales | $354.3 | $552.6 | ($198.3) | (35.9)% | | Total Sales | $1,124.4 | $1,491.1 | ($366.7) | (24.6)% | Gross Profit and Operating Income ($ in millions) | ($ in millions) | 2020 | 2019 | $ Change | % Change | |---|---|---|---|---| | Gross Profit | $403.2 | $547.0 | ($143.8) | (26.3)% | | Operating Income | $123.4 | $236.4 | ($113.1) | (47.8)% | | Operating Margin | 11.0% | 15.9% | - | - | - Net income per diluted share decreased by 59.6% from $3.07 in 2019 to $1.24 in 2020, reflecting the significant drop in net income[150] Financial Performance by Business Segment The Industrial segment's sales fell 17.9% to $770.1 million in 2020, while the Aerospace segment experienced a more severe downturn, with sales dropping 35.9% to $354.3 million, as both segments were impacted by the global slowdown Industrial Segment Performance ($ in millions) | Industrial Segment ($ in millions) | 2020 | 2019 | % Change | |---|---|---|---| | Sales | $770.1 | $938.5 | (17.9)% | | Operating Profit | $66.6 | $114.0 | (41.6)% | | Operating Margin | 8.6% | 12.1% | - | Aerospace Segment Performance ($ in millions) | Aerospace Segment ($ in millions) | 2020 | 2019 | % Change | |---|---|---|---| | Sales | $354.3 | $552.6 | (35.9)% | | Operating Profit | $56.8 | $122.5 | (53.6)% | | Operating Margin | 16.0% | 22.2% | - | - Aerospace OEM backlog decreased by 28.6% from $800.7 million at year-end 2019 to $572.0 million at year-end 2020, reflecting changes in customer production schedules for aircraft engines[162] Liquidity and Capital Resources The company maintained sufficient liquidity in 2020, generating $215.5 million in cash from operations, reducing total debt to $704.3 million, and remaining in compliance with all debt covenants - The company generated $215.5 million in cash from operating activities in 2020, compared to $248.3 million in 2019[185] - In February 2021, the company entered into a sixth amended and restated credit agreement, maintaining the $1 billion facility and extending the maturity date to February 2026[175] Debt Covenant Ratios (as of Dec 31, 2020) | Debt Covenant Ratios (as of Dec 31, 2020) | Actual Ratio | Covenant Limit | |---|---|---| | Consolidated Senior Debt to EBITDA | 3.05x | 3.75x | | Consolidated Total Debt to EBITDA | 3.05x | 3.75x | | Consolidated EBITDA to Cash Interest Expense | 14.48x | 4.25x | - The company repurchased 0.4 million shares of its common stock for $15.6 million in 2020[177] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates, foreign currency exchange rates, and commodity prices, which it manages using derivatives - A hypothetical 100 basis point increase in the interest rate on the average variable-rate debt during 2020 would have reduced annual pretax profit by $5.7 million[222] - A 10% adverse change in foreign currencies relative to the U.S. dollar at December 31, 2020 would have resulted in a $2.8 million loss in the fair value of financial instruments[223] - The company uses an interest rate swap to convert the interest on the first $100.0 million of its LIBOR-based borrowings from a variable rate to a fixed rate of 1.92% plus the borrowing spread, expiring in January 2022[222] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal year ended December 31, 2020, reflecting a significant decline in performance compared to prior years Consolidated Statements of Income (in thousands) | | 2020 | 2019 | 2018 | |---|---|---|---| | Net sales | $1,124,391 | $1,491,118 | $1,495,889 | | Operating income | $123,370 | $236,448 | $231,764 | | Net income | $63,375 | $158,350 | $166,186 | | Diluted EPS | $1.24 | $3.07 | $3.15 | Consolidated Balance Sheets (in thousands) | | Dec 31, 2020 | Dec 31, 2019 | |---|---|---| | Total current assets | $642,345 | $764,390 | | Total assets | $2,676,226 | $2,738,335 | | Total current liabilities | $295,379 | $342,875 | | Long-term debt | $699,868 | $825,017 | | Total stockholders' equity | $1,382,677 | $1,270,528 | Consolidated Statements of Cash Flows (in thousands) | | 2020 | 2019 | 2018 | |---|---|---|---| | Net cash provided by operating activities | $215,462 | $248,301 | $237,199 | | Net cash used in investing activities | ($4,187) | ($62,220) | ($493,186) | | Net cash (used) provided by financing activities | ($219,666) | ($191,993) | $215,564 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[486] Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[487] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[489] Other Information The company reports no other information for this item - None[491] Part III Directors, Executive Officers and Corporate Governance This section provides a list of the company's executive officers as of December 31, 2020, with information regarding directors and corporate governance incorporated by reference from the 2021 proxy statement Executive Officers | Executive Officer | Position | |---|---| | Patrick J. Dempsey | President and Chief Executive Officer | | Marian Acker | Interim Chief Financial Officer and Vice President, Controller | | Michael A. Beck | Senior Vice President, Barnes Group Inc., and President, Barnes Aerospace | | Dawn N. Edwards | Senior Vice President, Human Resources | | Patrick T. Hurley | Senior Vice President & Chief Technology Officer | | Stephen G. Moule | Senior Vice President, Barnes Group Inc., and President, Barnes Industrial | | James C. Pelletier | Senior Vice President, General Counsel and Secretary | Items 11-14 Information required for Items 11 through 14, covering executive compensation, security ownership, certain relationships and related transactions, and principal accountant fees and services, is incorporated by reference from the company's definitive proxy statement - Information for Items 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships and Related Transactions), and 14 (Principal Accountant Fees and Services) is incorporated by reference from the company's Proxy Statement[502] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits that are filed as part of the Form 10-K report, with financial statements included under Item 8 and other exhibits in the Exhibit Index - This section lists the financial statements and schedules filed with the report, including the Consolidated Statements of Income, Balance Sheets, Comprehensive Income, Cash Flows, and Changes in Stockholders' Equity[505] Form 10-K Summary The company indicates that there is no Form 10-K summary - None[506]