Barnes Group Inc.
04/29/2024 | Press release | Distributed by Public on 04/29/2024 15:12
Quarterly Report for Quarter Ending March 31, 2024 (Form 10-Q)
b-20240331
(A)Industrial amounts are net of accumulated goodwill impairment losses of $68,194.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2024
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-4801
BARNES GROUP INC.
(Exact name of registrant as specified in its charter)
| Delaware | 06-0247840 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 123 Main Street | ||
| Bristol | ||
| Connecticut | 06010 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(860) 583-7070
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| Common Stock, par value $0.01 per share | B | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YesxNo ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YesxNo ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☒ |
The registrant had outstanding 50,702,072 shares of common stock as of April 24, 2024.
1
Barnes Group Inc.
Index to Form 10-Q
For the Quarterly Period Ended March 31, 2024
| Page | ||
| Part I. | FINANCIAL INFORMATION | |
| Item 1. |
Financial Statements (Unaudited)
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3
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Condensed Consolidated Statements of Income for the three months ended March 31, 2024 and 2023
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3
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Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended March31, 2024 and 2023
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4
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Condensed Consolidated Balance Sheets as of March31, 2024 and December 31,2023
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5
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Condensed Consolidated Statements of Cash Flows for the three months ended March31, 2024 and 2023
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6
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Notes to Condensed Consolidated Financial Statements
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7
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations
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24
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| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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33
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| Item 4. |
Controls and Procedures
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33
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| Part II. | OTHER INFORMATION | |
| Item 1. |
Legal Proceedings
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35
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| Item 1A. |
Risk Factors
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35
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| Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
35
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| Item 3. |
Defaults Upon Senior Securities
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35
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| Item 4. |
Mine Safety Disclosures
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35
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| Item 5. |
Other Information
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35
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| Item 6. |
Exhibits
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36
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Signatures
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38
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This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See "FORWARD-LOOKING STATEMENTS" under Part I - Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
|
Three Months Ended March 31, |
||||
| 2024 | 2023 | |||
| Net sales | $ | 430,638 | $ | 335,357 |
| Cost of sales | 300,096 | 226,242 | ||
| Selling and administrative expenses | 90,860 | 85,831 | ||
| 390,956 | 312,073 | |||
| Operating income | 39,682 | 23,284 | ||
| Interest expense | 24,831 | 5,308 | ||
| Other expense (income), net | 1,696 | 1,340 | ||
| Income before income taxes | 13,155 | 16,636 | ||
| Income taxes | 11,208 | 3,477 | ||
| Net income | $ | 1,947 | $ | 13,159 |
| Per common share: | ||||
| Basic | $ | 0.04 | $ | 0.26 |
| Diluted | 0.04 | 0.26 | ||
| Weighted average common shares outstanding: | ||||
| Basic | 51,224,884 | 50,989,169 | ||
| Diluted | 51,293,673 | 51,264,435 |
See accompanying notes.
3
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
(Unaudited)
|
Three Months Ended March 31, |
||||
| 2024 | 2023 | |||
| Net income | $ | 1,947 | $ | 13,159 |
| Other comprehensive (loss) income, net of tax | ||||
|
Unrealized gain (loss) on hedging activities, net of tax (1)
|
9,347 | (886) | ||
|
Foreign currency translation adjustments, net of tax (2)
|
(38,683) | 18,473 | ||
|
Defined benefit pension and other postretirement benefits, net of tax (3)
|
1,266 | 11,622 | ||
| Total other comprehensive (loss) income, net of tax | (28,070) | 29,209 | ||
| Total comprehensive (loss) income | $ | (26,123) | $ | 42,368 |
(1) Net of tax of $3,030 and $(276) for the three months ended March 31, 2024 and 2023, respectively.
(2) Net of tax of $0 for three months ended March 31, 2024 and 2023.
(3) Net of tax of $475 and $3,639 for the three months ended March 31, 2024 and 2023, respectively.
See accompanying notes.
4
BARNES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
| March 31, 2024 | December 31, 2023 | |||
| Assets | ||||
| Current assets | ||||
| Cash and cash equivalents | $ | 81,638 | $ | 89,827 |
|
Accounts receivable, less allowances (2024 - $6,994; 2023 - $7,258)
|
308,732 | 353,923 | ||
| Inventories | 336,153 | 365,221 | ||
| Prepaid expenses and other current assets | 103,699 | 97,749 | ||
| Assets held for sale | 84,778 | - | ||
| Total current assets | 915,000 | 906,720 | ||
| Deferred income taxes | - | 10,295 | ||
| Property, plant and equipment | 817,384 | 1,031,495 | ||
| Less accumulated depreciation | (468,875) | (628,798) | ||
| 348,509 | 402,697 | |||
| Goodwill | 1,102,353 | 1,183,624 | ||
| Other intangible assets, net | 684,392 | 706,471 | ||
| Other assets | 109,174 | 98,207 | ||
| Assets held for sale | 114,339 | - | ||
| Total assets | $ | 3,273,767 | $ | 3,308,014 |
| Liabilities and Stockholders' Equity | ||||
| Current liabilities | ||||
| Notes and overdrafts payable | $ | 10,025 | $ | 16 |
| Accounts payable | 145,694 | 164,264 | ||
| Accrued liabilities | 186,707 | 221,462 | ||
| Long-term debt - current | 10,922 | 10,868 | ||
| Liabilities held for sale | 25,860 | - | ||
| Total current liabilities | 379,208 | 396,610 | ||
| Long-term debt | 1,293,109 | 1,279,962 | ||
| Accrued retirement benefits | 41,477 | 45,992 | ||
| Deferred income taxes | 121,722 | 120,608 | ||
| Long-term tax liability | 21,714 | 21,714 | ||
| Other liabilities | 77,143 | 80,865 | ||
| Liabilities held for sale | 8,045 | - | ||
| Commitments and contingencies (Note 16) | ||||
| Stockholders' equity | ||||
|
Common stock - par value $0.01 per share
Authorized: 150,000,000 shares
Issued: at par value (2024 - 64,615,788 shares; 2023 - 64,600,635 shares)
|
646 | 646 | ||
| Additional paid-in capital | 541,391 | 537,948 | ||
|
Treasury stock, at cost (2024 - 13,916,108 shares; 2023 - 13,914,076 shares)
|
(532,486) | (532,415) | ||
| Retained earnings | 1,544,997 | 1,551,213 | ||
| Accumulated other non-owner changes to equity | (223,199) | (195,129) | ||
| Total stockholders' equity | 1,331,349 | 1,362,263 | ||
| Total liabilities and stockholders' equity | $ | 3,273,767 | $ | 3,308,014 |
See accompanying notes.
5
BARNES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
Three Months Ended March 31, |
||||
| 2024 | 2023 | |||
| Operating activities: | ||||
| Net income | $ | 1,947 | $ | 13,159 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||
| Depreciation and amortization | 31,009 | 24,048 | ||
| Loss (gain) on disposition of property, plant and equipment | 67 | (55) | ||
| Stock compensation expense | 3,422 | 2,627 | ||
| Changes in assets and liabilities, net of the effects of acquisition: | ||||
| Accounts receivable | (896) | (2,209) | ||
| Inventories | (6,500) | (7,062) | ||
| Prepaid expenses and other current assets | (11,416) | (3,412) | ||
| Accounts payable | (1,494) | 6,450 | ||
| Accrued liabilities | (22,984) | (636) | ||
| Deferred income taxes | 9,792 | 1,356 | ||
| Long-term retirement benefits | (4,395) | (3,883) | ||
| Other | (867) | 1,832 | ||
| Net cash (used) provided by operating activities | (2,315) | 32,215 | ||
| Investing activities: | ||||
| Proceeds from disposition of property, plant and equipment | 20 | 190 | ||
| Capital expenditures | (12,838) | (10,946) | ||
| Business acquisitions, net of cash acquired | 159 | - | ||
| Other | - | (525) | ||
| Net cash used by investing activities | (12,659) | (11,281) | ||
| Financing activities: | ||||
| Net change in other borrowings | 10,049 | (109) | ||
| Payments on long-term debt | (70,587) | (44,343) | ||
| Proceeds from the issuance of long-term debt | 90,000 | 31,208 | ||
| Proceeds from the issuance of common stock | 67 | 94 | ||
| Dividends paid | (8,111) | (8,096) | ||
| Withholding taxes paid on stock issuances | (71) | (252) | ||
| Cash settlement of foreign currency hedges related to intercompany financing | (11,213) | 1,353 | ||
| Other | (1,556) | (2,492) | ||
| Net cash provided (used) by financing activities | 8,578 | (22,637) | ||
| Effect of exchange rate changes on cash flows | (1,546) | 1,438 | ||
| (Decrease) increase in cash, cash equivalents and restricted cash | (7,942) | (265) | ||
| Cash, cash equivalents and restricted cash at beginning of period | 92,039 | 81,128 | ||
| Cash, cash equivalents and restricted cash at end of period | 84,097 | 80,863 | ||
| Less: Restricted cash, included in Prepaid expenses and other current assets | - | (2,179) | ||
| Less: Cash, included in Assets held for sale | (2,459) | - | ||
| Cash and cash equivalents at end of period | $ | 81,638 | $ | 78,684 |
See accompanying notes.
6
BARNES GROUP INC.
NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts included in the notes are stated in thousands except per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet and the related Condensed Consolidated Statements of Income, Comprehensive (Loss) Income and Cash Flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Condensed Consolidated Financial Statements do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The balance sheet as of December 31, 2023 has been derived from the 2023 financial statements of Barnes Group Inc. (the "Company"). For additional information, please refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair statement of the results, have been included. Operating results for the three month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
2. Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") establishes changes to accounting principles under U.S. generally accepted accounting principles ("US GAAP") through the use of Accounting Standards Updates ("ASUs") to the FASB's Accounting Standards Codification. The Company evaluates the applicability and potential impacts of recent ASUs on its Condensed Consolidated Financial Statements and related disclosures.
Recently Issued Accounting Standards
In November 2023, the FASB amended its guidance related to segment reporting requirements. The amended guidance serves to improve segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amended guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The guidance requires application on a retrospective basis to all periods presented. The Company is currently evaluating the impact that the guidance may have on the disclosures within its Consolidated Financial Statements.
In December 2023, the FASB amended its guidance related to income tax disclosure requirements. The amended guidance requires establishes new income tax disclosure requirements including providing greater disaggregation in the rate reconciliation and information on taxes paid. The amended guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the guidance may have on the disclosures within its Consolidated Financial Statements.
3. Divestiture
On January 11, 2024, the Company entered into a Share Purchase and Asset Agreement ("SPA") with One Equity Partners ("OEP") to sell its Associated Spring™ and Hänggi™ businesses (the "Businesses") for $175,000, subject to certain adjustments (the "Sale"). The Businesses operate within the Motion Control Solutions business. The Company classified the assets and liabilities of the Businesses, which operate within the Industrial segment, as "held for sale" on the Consolidated Balance Sheet as of March 31, 2024. Pursuant to the required accounting guidance, the Company allocated $58,900 of goodwill from the Motion Control Solutions reporting unit to the Businesses based on the estimated relative fair values of the Businesses to be disposed of and the portion of the reporting unit that will be retained.
The Businesses' assets and liabilities held for sale are comprised of the following as of March 31, 2024:
7
| Assets | ||
| Cash | $ | 2,459 |
| Accounts receivable, less allowance of $821 | 44,537 | |
| Inventories | 32,818 | |
| Prepaid expenses and other current assets | 4,964 | |
| Current assets held for sale | 84,778 | |
| Property, plant and equipment, net | 51,428 | |
| Goodwill | 58,900 | |
| Other assets | 4,011 | |
| Non-current assets held for sale | 114,339 | |
| Liabilities | ||
| Accounts payable | $ | 17,605 |
| Accrued liabilities | 8,255 | |
| Current liabilities held for sale | 25,860 | |
| Accrued retirement benefits | 4,570 | |
| Other liabilities | 3,475 | |
| Non-current liabilities held for sale | 8,045 |
The Company completed the Sale to OEP on April 4, 2024. Pursuant to the terms of an Amended Share Purchase and Asset Agreement SPA (the "Amended SPA"), total cash consideration is estimated at $172,998, inclusive of $2,459 of cash sold, subject to post-closing adjustments. At the time of closing on April 4, 2024, $151,638 was received. The residual $21,360 of the $172,998 relates to two foreign facilities and is expected to be received upon completion of the transfer of the foreign assets. Expected net cash proceeds of approximately $150,000 will be used to reduce debt. The Company expects to record a pre-tax gain of approximately $6,000 inclusive of transaction costs, of which $4,504 expense was recorded in the first quarter. The expected tax charges related to the Sale are estimated to approximate $16,000, with $5,724 (including a discrete tax charge of $6,794) of these charges being recorded during the first quarter of 2024. The residual is expected to be recorded during 2024, following the completion of the Sale and the transfer of the assets.
4. Revenue
The Company is a global provider of highly engineered products, differentiated industrial technologies, and innovative solutions, serving a wide range of end markets and customers. Its specialized products and services are used in far-reaching applications in aerospace, healthcare, automation, packaging, mobility and manufacturing.
Revenue is recognized by the Company when control of the product or solution is transferred to the customer. Control is generally transferred when products are shipped or delivered to customers, title is transferred, the significant risks and rewards of ownership have transferred, and the Company has rights to payment and the rewards of ownership pass to the customer. Customer acceptance may also be a factor in determining whether control of the product has transferred. Although revenue is generally recognized at a point in time, a certain portion of the Company's businesses with customized products or contracts in which the Company performs work on customer-owned assets requires the use of an over-time recognition model as certain contracts meet one or more of the established criteria pursuant to the accounting guidance. Also, service revenue is recognized as control transfers, which is concurrent with the services being performed.
The following table presents the Company's revenue disaggregated by products and services, and geographic regions, by segment:
8
|
Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
|||||||||||
| Aerospace | Industrial | Total Company | Aerospace | Industrial | Total Company | |||||||
|
Products and Services(A)
|
||||||||||||
| Aerospace Original Equipment Manufacturing Products | $ | 134,827 | $ | - | $ | 134,827 | $ | 72,738 | $ | - | 72,738 | |
| Aerospace Aftermarket Products and Services | 86,544 | - | 86,544 | 44,518 | - | 44,518 | ||||||
| Motion Control Solutions Products | - | 93,122 | 93,122 | - | 98,474 | 98,474 | ||||||
| Molding Solutions Products | - | 101,394 | 101,394 | - | 103,527 | 103,527 | ||||||
| Automation Products | - | 14,751 | 14,751 | - | 16,100 | 16,100 | ||||||
| $ | 221,371 | $ | 209,267 | $ | 430,638 | $ | 117,256 | $ | 218,101 | $ | 335,357 | |
|
Geographic Regions (B)
|
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| Americas | $ | 155,031 | $ | 90,017 | $ | 245,048 | $ | 84,572 | $ | 95,940 | $ | 180,512 |
| Europe | 41,956 | 79,574 | 121,530 | 20,667 | 79,608 | 100,275 | ||||||
| Asia | 22,143 | 37,556 | 59,699 | 10,022 | 40,111 | 50,133 | ||||||
| Rest of World | 2,241 | 2,120 | 4,361 | 1,995 | 2,442 | 4,437 | ||||||
| $ | 221,371 | $ | 209,267 | $ | 430,638 | $ | 117,256 | $ | 218,101 | $ | 335,357 | |
(A) The results of MB Aerospace, from the acquisition on August 31, 2023, have been included within the Company's revenue disaggregated by products and services, and geographic regions within the Aerospace Segment for the three month periods ended March 31, 2024.
(B) Sales by geographic region arebased on the location to which the product is shipped and services are delivered.
Revenue from products and services transferred to customers at a point in time accounted for approximately 75 percent and 80 percent of total revenue for the three month periods ended March 31, 2024 and March 31, 2023, respectively. A majority of revenue within the Industrial segment and Aerospace Original Equipment Manufacturing Products business ("OEM"), along with a portion of revenue within the Aerospace Aftermarket Products and Services business ("Aftermarket"), is recognized at a point in time, primarily when the product or solution is shipped to the customer.
Revenue from products and services transferred to customers over-time accounted for approximately 25 percent of total revenue and 20 percent of total revenue for the three month periods ended March 31, 2024 and March 31, 2023, respectively. The Company recognizes revenue over-time in instances where a contract supports a continual transfer of control to the customer. Substantially all of our revenue in the Aerospace Aftermarket maintenance repair and overhaul business (within Aftermarket Products and Services) and a portion of the revenue forMotion Control Solutions products, Molding Solutions products and Aerospace OEM products is recognized over-time. Within the Molding Solutions and Aerospace Aftermarket businesses, this continual transfer of control to the customer partially results from repair and refurbishment work performed on customer-controlled assets. With other contracts, this continual transfer of control to the customer is supported by clauses in the contract, or governing commercial law of the relevant jurisdiction, where we deliver products that do not have an alternative use and require an enforceable right to payment of costs incurred (plus a reasonable profit) or the Company has a contractual right to complete any work in process and receive full contract price.
The majority of our revenue is from contracts that are for less than one year, however certain Aerospace OEM and Molding Solutions business contracts extend beyond one year. In the Industrial segment, customers are typically OEMs or suppliers to OEMs and, in some businesses, distributors. In the Aerospace segment, customers include commercial airlines, OEMs, defense-related manufacturers, and industry parts and service providers.
A performance obligation represents a promise within a contract to provide a distinct good or service to the customer. Revenue is recognized in an over-time model based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company utilizes the cost-to-cost measure of progress for over-time contracts as we believe this measure best depicts the transfer of control to the customer, which occurs as we incur costs on contracts.
9
Adjustments to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. Revenue recognized from performance obligations satisfied in previous periods was not material in both the three month period ended March 31, 2024 and 2023.
Contract Balances. The timing of revenue recognition, invoicing and cash collections affects accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.
Unbilled Receivables (Contract Assets) - Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when 1) the cost-to-cost method is applied and 2) such revenue exceeds the amount invoiced to the customer. Unbilled receivables are included within Prepaid Expenses and Other Current Assets on the Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023.
Customer Advances and Deposits (Contract Liabilities) - The Company may receive a customer advance or deposit, or have an unconditional right to receive a customer advance, prior to revenue being recognized. Certain contracts within the Molding Solutions business, for example, may require such advances. Since the performance obligations related to such advances have not been satisfied, a contract liability is established. An offsetting asset of equal amount is recorded as an account receivable until the advance is collected. Advances and deposits are included within Accrued Liabilities on the Condensed Consolidated Balance Sheets until the respective revenue is recognized. Advance payments are not considered a significant financing component as they are generally received less than one year before the customer solution is completed. These assets and liabilities are reported on the Condensed Consolidated Balance Sheets on an individual contract basis at the end of each reporting period.
Net contract assets (liabilities) consisted of the following:
| March 31, 2024 | December 31, 2023 | $ Change | % Change | |||||
| Unbilled receivables (contract assets) | $ | 68,685 | $ | 59,652 | $ | 9,033 | 15 | % |
| Contract liabilities | (38,093) | (42,428) | 4,335 | (10) | % | |||
| Net contract assets | $ | 30,592 | $ | 17,224 | $ | 13,368 | 78 | % |
Contract liabilities balances at March 31, 2024 and December 31, 2023 include $11,014 and $10,032, respectively, of customer advances for which the Company has not yet collected payment, but has an unconditional right to collect payment. Accounts receivable, as presented on the Condensed Consolidated Balance Sheet, includes corresponding balances at March 31, 2024 and December 31, 2023, respectively.
Changes in the net contract assets during the three month period ended March 31, 2024 included a $9,033 increase in contract assets, driven primarily by contract progress (i.e., unbilled receivable), partially offset by earlier contract progress being invoiced to the customer. Adding to this net contract increase was a $4,335 decrease in contract liabilities, driven primarily by revenue recognized in the current period, partially offset by new customer advances.
The Company recognized approximately 55% of the revenue related to the contract liabilities balance as of December 31, 2023 during the three month period ended March 31, 2024, and approximately 40% of the revenue related to the contract liabilities balance as of December 31, 2022 during the three month period ended March 31, 2023, primarily representing revenue from the sale of molds and hot runners within the Molding Solutions business.
Remaining Performance Obligations. The Company has elected to disclose remaining performance obligations only for contracts with an original duration of greater than one year. Such remaining performance obligations represent the transaction price of firm orders for which work has not yet been performed and, for Aerospace, excludes projections of components and assemblies that Aerospace OEM customers anticipate purchasing in the future under existing programs, which represent orders that are beyond lead time and do not represent performance obligations pursuant to accounting guidance. As of March 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $573,830. The Company expects to recognize revenue on approximately 65% of the remaining performance obligations over the next 12 months, with the remainder to be recognized within 24 months.
10
5. Stockholders' Equity
A schedule of consolidated changes in equity for the three months ended March 31, 2024 is as follows (number of shares in thousands):
|
Common Stock (Number of Shares) |
Common Stock (Amount) |
Additional Paid-In Capital |
Treasury Stock (Number of Shares) |
Treasury Stock (Amount) |
Retained Earnings |
Accumulated Other Non-Owner Changes to Equity |
Total Stockholders' Equity |
|||||||
| December 31, 2023 | 64,600 | $ | 646 | $ | 537,948 | 13,914 | $ | (532,415) | $ | 1,551,213 | $ | (195,129) | $ | 1,362,263 |
| Comprehensive loss | - | - | - | - | - | 1,947 | (28,070) | (26,123) | ||||||
|
Dividends declared ($0.16 per share)
|
- | - | - | - | - | (8,111) | - | (8,111) | ||||||
| Employee stock plans | 16 | - | 3,443 | 2 | (71) | (52) | - | 3,320 | ||||||
| March 31, 2024 | 64,616 | $ | 646 | $ | 541,391 | 13,916 | $ | (532,486) | $ | 1,544,997 | $ | (223,199) | $ | 1,331,349 |
A schedule of consolidated changes in equity for the three months ended March 31, 2023 is as follows (number of shares in thousands):
|
Common Stock (Number of Shares) |
Common Stock (Amount) |
Additional Paid-In Capital |
Treasury Stock (Number of Shares) |
Treasury Stock (Amount) |
Retained Earnings |
Accumulated Other Non-Owner Changes to Equity |
Total Stockholders' Equity |
|||||||
| December 31, 2022 | 64,481 | $ | 645 | $ | 529,791 | 13,891 | $ | (531,507) | $ | 1,567,898 | $ | (220,500) | $ | 1,346,327 |
| Comprehensive income | - | - | - | - | - | 13,159 | 29,209 | 42,368 | ||||||
|
Dividends declared ($0.16 per share)
|
- | - | - | - | - | (8,096) | - | (8,096) | ||||||
| Residual interest in subsidiary | - | - | (2,381) | - | - | - | - | (2,381) | ||||||
| Employee stock plans | 23 | - | 2,665 | 6 | (252) | (83) | - | 2,330 | ||||||
| March 31, 2023 | 64,504 | $ | 645 | $ | 530,075 | 13,897 | $ | (531,759) | $ | 1,572,878 | $ | (191,291) | $ | 1,380,548 |
6. Net Income Per Common Share
For the purpose of computing diluted net income per common share, the weighted-average number of common shares outstanding is increased for the potential dilutive effects of stock-based incentive plans. For the purpose of computing diluted net income per common share for the three month periods ended March 31, 2024 and 2023, the weighted-average number of common shares outstanding was increased by 68,789 and275,266, respectively.
The calculation of weighted-average diluted shares outstanding excludes all shares that would have been anti-dilutive. During the three month periods ended March 31, 2024 and 2023, the Company excluded 1,962,390 and 805,977 stock awards, respectively, from the calculation of weighted-average diluted shares outstanding as the stock awards were considered anti-dilutive.
The Company granted 144,100 stock options, 196,660 restricted stock unit awards and 145,100 performance share awards ("PSAs") in February 2024 as part of its annual long-term incentive equity grant awards. All of the stock options and the restricted stock unit awards vest upon meeting certain service conditions. The restricted stock unit awards are included in basic weighted-average common shares outstanding as they contain nonforfeitable rights to dividend payments. The PSAs are part of the long-term Performance Share Award Program and are based on performance goals that are driven by a combination of independently measured metrics (depending on the grant year). The metrics for awards granted in 2024 include the Company's total shareholder return ("TSR"), return on invested capital ("ROIC") and operating income before depreciation and amortization growth ("EBITDA growth") with metrics weighted 50%, 25% and 25%, respectively. The TSR and EBITDA growth metrics are designed to assess the long-term Company performance relative to the performance of companies included in the Russell 2000 Index over a three-year performance period. ROIC is designed to assess the Company's performance compared to pre-established Company targets over a three-year performance period. The participants can earn from zero to 200% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. The fair value of the TSR is determined using a Monte Carlo valuation method as the award contains a market condition.
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7. Inventories
The components of inventories consisted of:
| March 31, 2024 | December 31, 2023 | ||||
| Finished goods | $ | 90,695 |
|
$ | 104,801 |
| Work-in-process | 114,841 | 105,737 | |||
| Raw material and supplies | 130,617 | 154,683 | |||
| $ | 336,153 | $ | 365,221 |
8. Goodwill and Other Intangible Assets
Goodwill:
The following table sets forth the change in the carrying amount of goodwill for each reportable segment and for the Company as of and for the period ended March 31, 2024:
| Aerospace | Industrial | Total Company | ||||
|
December 31, 2023 (A)
|
$ | 352,352 | $ | 831,272 | $ | 1,183,624 |
| Reclassified to assets held for sale (see Note 3) | - | (58,900) | (58,900) | |||
| Foreign currency translation | (784) | (21,587) | (22,371) | |||
| March 31, 2024 | $ | 351,568 | $ | 750,785 | $ | 1,102,353 |
The Company completed the Sale of the Businesses in April 2024. See Note 3. Pursuant to the required accounting guidance, the Company allocated $58,900 of goodwill within the Motion Control Solutions reporting unit to the Businesses based on the estimated relative fair values of the businesses.
Other Intangible Assets:
Other intangible assets consisted of:
| March 31, 2024 | December 31, 2023 | ||||||||
|
Range of Life -Years |
Gross Amount | Accumulated Amortization | Gross Amount | Accumulated Amortization | |||||
| Amortized intangible assets: | |||||||||
| Revenue Sharing Programs (RSPs) |
Up to 30
|
$ | 299,500 | $ | (179,695) | $ | 299,500 | $ | (176,143) |
| Component Repair Programs (CRPs) |
Up to 30
|
111,839 | (51,430) | 111,839 | (49,577) | ||||
| Customer relationships |
10-16
|
579,050 | (181,220) | 586,189 | (180,679) | ||||
| Patents and technology |
4-18
|
174,280 | (97,764) | 178,433 | (100,662) | ||||
| Trademarks/trade names |
10-30
|
7,153 | (6,399) | 10,949 | (10,910) | ||||
| Other |
Up to 10
|
26,334 | (15,783) | 26,334 | (14,857) | ||||
| 1,198,156 | (532,291) | 1,213,244 | (532,828) | ||||||
| Unamortized intangible assets: | |||||||||
| Trade names | 55,670 | - | 55,670 | - | |||||
| Foreign currency translation | (37,143) | - | (29,615) | - | |||||
| Other intangible assets | $ | 1,216,683 | $ | (532,291) | $ | 1,239,299 | $ | (532,828) |
Gross amounts of $7,139, $4,153 and $3,821 that were included within customer relationships, patents and technology, and trademarks, respectively, at December 31, 2023, were related to the Businesses, and are therefore classified within Assets Held for Sale as of March 31, 2024. The gross amounts were fully amortized at March 31, 2024.
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Amortization of intangible assets for the three months period ended March 31, 2024 and March 31, 2023 was $17,562 and $11,620, respectively. Estimated amortization of intangible assets for future periods is as follows: 2024 (remainder) - $53,000; 2025 - $71,000; 2026 - $68,000; 2027 - $66,000; 2028 - $63,000 and 2029 - $62,000.
9. Debt
Long-term debt and notes and overdrafts payable at March 31, 2024 and December 31, 2023 consisted of:
| March 31, 2024 | December 31, 2023 | |||||||
|
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||
| Revolving Credit Facility | $ | 655,902 | $ | 670,196 | $ | 642,988 | $ | 646,843 |
| Term Loan Facility | 646,750 | 647,966 | 648,375 | 651,215 | ||||
| Unamortized deferred financing costs and original issue discount - Term Loan Facility | (12,062) | - | (12,532) | - | ||||
| Borrowings under lines of credit and overdrafts | 10,025 | 10,025 | 16 | 16 | ||||
| Finance leases | 13,441 | 13,335 | 11,999 | 11,732 | ||||
| 1,314,056 | 1,341,522 | 1,290,846 | 1,309,806 | |||||
| Less current maturities | (20,947) | (10,884) | ||||||
| Long-term debt | $ | 1,293,109 | $ | 1,279,962 |
On February 10, 2021, the Company and certain of its subsidiaries entered into the sixth amended and restated senior unsecured revolving credit agreement (the "Unsecured Credit Agreement") and retained Bank of America, N.A. as the Administrative Agent for the lenders. The $1,000,000 Unsecured Credit Agreement was to mature in February 2026. Borrowings under the Unsecured Credit Agreement bore interest at either the Eurocurrency rate, as defined in the Unsecured Credit Agreement, plus a margin of 1.175% to 1.775% or the base rate, as defined in the Unsecured Credit Agreement, plus a margin of 0.175% to 0.775%, depending on the Company's leverage ratio at the time of the borrowing. Multi-currency borrowings, pursuant to the Unsecured Credit Agreement, bore interest at their respective interbank offered rate (i.e. Euribor) or 0.00% (higher of the two rates) plus a margin of between 1.175% and 1.775%. The Unsecured Credit Agreement required the Company to maintain a Senior Debt Ratio of not more than 3.25 times. In addition, the Unsecured Credit Agreement required the Company to maintain a Total Debt Ratio of not more than 3.75 times for each fiscal quarter. A ratio of Consolidated EBITDA to Consolidated Cash Interest Expense, as defined, of not less than 4.25 times, was also required at the end of each fiscal quarter. The Company subsequently amended the Unsecured Credit Agreement on October 11, 2021 (the "LIBOR Transition Amendment"), defining certain applicable multi-currency borrowing rates that could be used as replacement rates for LIBOR, which was expected to be discontinued by reference rate reform.
On April 6, 2022, the Company entered into Amendment No. 1 to the Unsecured Credit Agreement ("Amendment No. 1"), which (i) replaced the LIBOR interest rate for U.S. dollar loans to a term Secured Overnight Financing Rate including a Secured Overnight Financing Rate adjustment (or "SOFR", as defined in the Unsecured Credit Agreement), (ii) added a daily SOFR option for U.S. dollar loans and a term SOFR option for U.S. dollar loans, and (iii) added the ability to borrow foreign swing line loans based on the Euro Short Term Rate ("€STR") (as defined) with the same interest spread as the interest spread for SOFR Loans (as defined) and Alternative Currency Loans (defined as loans denominated in Euro, Sterling, Swiss Francs or Yen). In addition, Amendment No. 1 lowered the interest rate spread on (i) SOFR Loans and Alternative Currency Loans to a range from0.975% to 1.70%, depending on the leverage ratio (the "Leverage Ratio") of Consolidated Total Debt (as defined) to Consolidated EBITDA (as defined) as of the end of each fiscal quarter, and (ii) loans based on the Base Rate (as defined), to a range from 0.00% to 0.70%, depending on the Company's Leverage Ratio as of the end of each fiscal quarter. Amendment No. 1 also lowered the facility fee, which was required to be paid by the Company under the Unsecured Credit Agreement and was calculated on the full amount of the revolving facility, to a range from0.15% to 0.30%, depending on the Company's Leverage Ratio at the end of each fiscal quarter. In April 2022, the Company paid fees and expenses of $1,037 in conjunction with executing Amendment No. 1. Such fees have been deferred within Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense on the Condensed Consolidated Statements of Income through its maturity. Cash used to pay these fees was recorded through other financing activities on the Condensed Consolidated Statements of Cash Flows.
The United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced its intent to phase out the use of LIBOR by December 31, 2021. The U.S. Federal Reserve, in conjunction with the
13
Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, identified SOFR as its preferred benchmark alternative to U.S. dollar LIBOR. Published by the Federal Reserve Bank of New York, SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. The Company's Unsecured Credit Agreement and corresponding interest rate swap were tied to LIBOR, with each maturing in February 2026. In March 2021, the ICE Benchmark Association announced that it would extend the publication of overnight, 1, 3, 6 and 12 month LIBOR rates until June 30, 2023, while ceasing publication of all other LIBOR rates including 1 week and 2 month rates. The Company's Unsecured Credit Agreement was further amended in October 2021 and in April 2022 to address the replacement of LIBOR, which, as a result of the Company's contract amendments as discussed above, did not have a material impact on our business, financial condition, results of operations or cash flow.
On June 5, 2023, the Company entered into the Agreement with MB Aerospace Group Holdings Limited, a Cayman Islands limited company. In connection with entry into the Agreement, on June 5, 2023, the Company entered into the Second Amendment (the "Second Amendment") to Note Purchase Agreement and Amendment No. 2 ("Amendment No. 2") to Unsecured Credit Agreement to facilitate the Transaction, as well as a commitment letter with Bank of America, N.A. and BofA Securities, Inc. (collectively, the "Commitment Parties"), pursuant to which the Commitment Parties agreed to provide, subject to the satisfaction of customary closing conditions contained therein, a $1,000,000 backstop senior secured revolving credit facility and a $700,000 senior secured 364-day bridge loan facility ("Bridge Loan Facility"). The Bridge Loan Facility was only intended to be drawn to the extent that the Company did not obtain alternative financing prior to the closing of the Transaction. The Company recorded fees of $9,500 in conjunction with the Bridge Loan Facility and $1,000,000 backstop senior secured revolving credit facility into interest expense on the Condensed Consolidated Statements of Income in 2023. On the Acquisition Date, pursuant to the terms of the Agreement, the Company completed the Transaction for an aggregate purchase price of $728,448, subject to customary and specified closing adjustments, as set forth in the Agreement. Concurrently, the Company entered into a new Credit Agreement (the "Credit Agreement") among the Company and certain of its subsidiaries, the issuing banks, lenders and other parties party thereto, and Bank of America, N.A., as administrative agent, as collateral agent and as swingline lender, which provides for senior secured financing of $1,650,000, consisting of a term loan facility (the "Term Loan Facility") in an aggregate principal amount of $650,000, at an original issue discount of $4,875, and a revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Facilities") in an aggregate principal amount of up to $1,000,000, including a letter of credit sub-facility of up to $50,000. Proceeds of the loans borrowed under the Senior Facilities on the Acquisition Date, net of a 0.75% original issue discount on the Term Loan Facility, were used to fund, in part, the transactions contemplated by the Agreement, including the consummation of the Transaction, the repayment in full of the 3.97% Senior Notes, and to pay related fees and expenses. As of the Acquisition Date, the Revolving Credit Facility had outstanding borrowings in an aggregate principal amount of approximately $698,000. Proceeds of any loans under the Revolving Credit Facility borrowed after the Acquisition Date will be used for general corporate purposes. The Company paid fees and expenses of $3,058 in conjunction with executing the Revolving Credit Facility. Such fees have been deferred within Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense on the Condensed Consolidated Statements of Income through the maturity of the Credit Agreement with the previously recorded debt issuance costs. The Company incurred $8,283 of debt issuance costs in conjunction with executing the Term Loan Facility. Such fees have been recorded as a direct deduction from the carrying amount of the Term Loan Facility and will be amortized into interest expense on the Condensed Consolidated Statements of Income through the maturity of the Term Loan Facility. Cash used to pay these fees was recorded through financing activities on the Condensed Consolidated Statements of Cash Flows. On August 31, 2023, in connection with the Credit Agreement and the closing of the Transaction, the Bridge Loan Facility was terminated.
On March 19, 2024, the Company entered into a Refinancing Amendment ("Amendment No. 2") to the Credit Agreement which replaced the outstanding principal amount of term loans under the Term Loan Facility (the "Existing Term Loans") with an equal amount of new term loans (the "New Term Loans") having substantially similar terms as the Existing Term Loans, except with respect to the interest rate applicable to the New Term Loans and certain other provisions. The interest rate margin applicable to the New Term Loans was reduced to 1.50%, in the case of ABR loans, and 2.50%, in the case of Term SOFR loans (with the Term SOFR floor remaining at 0.0%). The interest rate margin applicable to the Existing Term Loans was 2.00%, in the case of ABR loans, and 3.00%, in the case of Term SOFR loans. In addition, the Term SOFR adjustment applicable to the New Term Loans was reduced to 0.00%, from 0.10% for the Existing Term Loans. The Company recorded fees of $1,579 in conjunction with Amendment No. 2 within interest expense on the Condensed Consolidated Statements of Income in the three months ended March 31, 2024.
The Senior Facilities are guaranteed by each of the Company's wholly owned domestic subsidiaries and are secured by substantially all assets of the Company and of each subsidiary guarantor, in each case subject to certain exceptions.
14
Borrowings under the Senior Facilities bear interest at a rate per annum equal to, at the Company's option, either Term SOFR (subject to a 0.00% floor) or an alternate base rate ("ABR"), in each case plus an applicable margin of (i) in the case of borrowings under the Term Loan Facility, 2.50% for Term SOFR loans and 1.50% for ABR loans and (ii) in the case of borrowings under the Revolving Credit Facility, initially, 2.375% for Term SOFR loans and 1.375% for ABR loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company's total net leverage ratio. At March 31, 2024, the applicable margin for borrowings under the Revolving Credit Facility was 2.125%. The Company is also required to pay a commitment fee initially equal to 0.35% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee under the Revolving Credit Facility varies depending on the Company's total net leverage ratio. At March 31, 2024, the commitment fee under the Revolving Credit Facility was 0.30%.
The Term Loan Facility matures on the seven-year anniversary of the Acquisition Date and amortizes in equal quarterly installments ($6,500 annually), starting with the first full fiscal quarter after the Acquisition Date, of 0.25% of the initial principal amount. The Revolving Credit Facility matures on the five-year anniversary of the Acquisition Date (August 31, 2028). In addition, the Company is required to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with up to 50% of the Company's annual excess cash flow (as defined under the Credit Agreement) in excess of the greater of $50,000 and 15.0% of Last Twelve Months ("LTM") Adjusted Consolidated EBITDA (as defined in the Credit Agreement) as of the applicable time, and with up to 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales (which percentages vary depending on the Company's first lien secured net leverage ratio).
The Company may generally prepay outstanding loans under the Senior Facilities at any time, without prepayment premium or penalty, subject to customary "breakage" costs with respect to Term SOFR loans. Prepayments of the Term Loan Facility in connection with certain "repricing events" resulting in a lower yield occurring at any time during the first six months following the Company's execution of Amendment No. 2 must be accompanied by a 1.00% prepayment premium.
The Revolving Credit Facility requires that the Company maintain a maximum Total Net Leverage Ratio, as defined in the Credit Agreement, initially of 5.50 to 1.00 as of the last day of each fiscal quarter for which financials have been (or were required to be) delivered, commencing with the first full fiscal quarter after the Acquisition Date, stepping down to 4.00 to 1.00 over time. For material acquisitions in certain circumstances, such ratio may be increased by up to 0.50 to 1.00. The actual ratio, as defined, was 3.62 at March 31, 2024. The Revolving Credit Facility also requires that the Company not permit the Interest Coverage Ratio as of the last day of any test period to be less than 3.00 to 1.00. The actual ratio, as defined, was 3.58 as of March 31, 2024. At March 31, 2024, the Company was in compliance with all applicable covenants.
The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. The Senior Facilities also contain certain events of default, including relating to a change of control. If an event of default occurs, the lenders under the Senior Facilities will be entitled to take various actions, including the acceleration of amounts due under the Senior Facilities.
Borrowings and availability under the Revolving Credit Facility were $655,902 and $344,098, respectively, at March 31, 2024 and $642,988 and $357,012, respectively, at December 31, 2023, subject to covenants discussed above. The average interest rate on these borrowings was 6.77% and 6.76% on March 31, 2024 and December 31, 2023, respectively. The average interest rate excludes the impact of the Company's interest swap agreements. See Note 10. Borrowings included Euro-denominated borrowings of 296,500 Euros ($320,902) at March 31, 2024 and 296,500 Euros ($327,988) at December 31, 2023. The fair value of the borrowings is based on observable Level 2 inputs. The borrowings were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
Borrowings under the Term Loan Facility were $646,750 and $648,375at March 31, 2024 and December 31, 2023, respectively. The average interest rate on these borrowings was 7.83% and 8.46% on March 31, 2024 and December 31, 2023, respectively. The average interest rate excludes the impact of the Company's interest swap agreements. See Note 10. The fair value of the borrowings is based on the quoted market price of the borrowings on March 31, 2024, which represents Level 1 observable inputs.
In addition, the Company has approximately $81,000 in uncommitted short-term bank credit lines ("Credit Lines") and overdraft facilities. The Credit Lines are accessed locally and are available primarily within the U.S., Europe and Asia. The Credit Lines are subject to the applicable borrowing rates within each respective country and vary between jurisdictions (i.e. LIBOR, Euribor, etc.). Under the Credit Lines, $10,000 was borrowed at March 31, 2024 at an average rate of 7.83%. The Company had no borrowings under the Credit Lines at December 31, 2023. The Company had borrowed $25 and $16 under the
15
overdraft facilities at March 31, 2024 and December 31, 2023, respectively. Repayments under the Credit Lines are due within one month after being borrowed. Repayments of the overdrafts are generally due within two days after being borrowed. The carrying amounts of the Credit Lines and overdrafts approximate fair value due to the short maturities of these financial instruments.
The Company also has finance leases under which $13,441 and $11,999 was outstanding at March 31, 2024 and December 31, 2023, respectively. The fair value of the finance leases is based on observable Level 2 inputs. These instruments were valued using discounted cash flows based upon the Company's estimated interest costs for similar types of borrowings.
10. Derivatives
The Company has manufacturing, service and sales 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.
Derivative financial instruments have been used by the Company to hedge its exposure to fluctuations in interest rates. On March 24, 2021, the Company entered into an interest rate swap agreement (the "2021 Swap") with one bank that commenced on January 31, 2022 and that converted the interest on $100,000 of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.17% plus the borrowing spread. Effective, April 30, 2022, the Company amended the 2021 Swap (the "Amended 2021 Swap"), such that the one-month SOFR-based borrowing rate replaced the one-month LIBOR-based borrowing rate. The Amended 2021 Swap, which will expire on January 30, 2026, converts the interest on $100,000 of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.075% plus the borrowing spread. On July 19, 2023, the Company entered into an interest rate swap agreement (the "Euribor Swap") with one bank that commenced on July 31, 2023, which converts the interest on €150,000 of the Company's Euribor-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 3.257% plus the borrowing spread. Under the Euribor Swap, €50,000 will expire on July 31, 2026, with the remaining balance of €100,000 expiring on July 31, 2028. On September 12, 2023, the Company entered into six additional interest rate swap agreements (the "2023 Swaps") with six different banks that commenced on September 29, 2023, which convert the interest on $600,000 of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a blended fixed rate of 4.321% plus the borrowing spread. Under the 2023 Swaps, $50,000 will expire on August 31, 2026, $100,000 will expire on August 31, 2027, $200,000 will expire on August 31, 2028, $50,000 will expire on August 31, 2029 and the remaining balance of $200,000 will expire on August 31, 2030. The execution of the interest rate swap agreements in 2023 did not have a material impact on our business, financial condition, results of operations or cash flow. These interest rate swap agreements (the "Swaps") are accounted for as cash flow hedges.
The Company also uses derivative financial instruments to hedge its exposures to fluctuations in foreign currency exchange rates. The Company has various contracts outstanding which primarily hedge recognized assets or liabilities and anticipated transactions in various currencies including the Euro, British pound sterling, U.S. dollar, Japanese yen, Singapore dollar, Korean won, Swedish kroner, Chinese renminbi, Mexican peso, Hong Kong dollar and Swiss franc. Certain foreign currency derivative instruments are treated as cash flow hedges of forecasted transactions. All foreign exchange contracts are due within two years.
The Company does not use derivatives for speculative or trading purposes or to manage commodity exposures.
The Company records the derivatives at fair value on the Condensed Consolidated Balance Sheets within Prepaid Expenses and Other Current Assets, Other Assets, Accrued Liabilities or Other Liabilities depending on their fair value and remaining contractual period. Changes in the fair market value of derivatives accounted for as cash flow hedges are recorded to accumulated other comprehensive income (loss) and reclassified to earnings in a manner that matches the earnings impact of the hedged transaction. Reclassifications to earnings for the Swaps are recorded through interest expense and reclassifications to earnings for foreign exchange contracts are recorded through net sales. Changes in the fair market value of the foreign exchange contracts that are not designated hedging instruments are recorded directly to earnings through Other expense (income), net.
The fair values of the Amended 2021 Swap were $6,183 and $5,976 as of March 31, 2024 and December 31, 2023, respectively, and were recorded in Other Assets in the Condensed Consolidated Balance Sheets for the periods. The fair values of the Euribor Swap were $(3,545) and $(5,485) as of March 31, 2024 and December 31, 2023, respectively, and were recorded in Other Liabilities in the Condensed Consolidated Balance Sheets for the periods. The fair values of the 2023 Swaps were $(9,352) and $(19,984) as of March 31, 2024 and December 31, 2023, respectively, and were recorded in Other Liabilities in the Condensed Consolidated Balance Sheets for the periods. The fair values of the Company's other derivatives were not
16
material to the Company's Condensed Consolidated Balance Sheets as of March 31, 2024 or December 31, 2023. See Note 11. The activity related to the derivatives that have been designated hedging instruments was not material to the Company's Condensed Consolidated Financial Statements for the periods ended March 31, 2024 or 2023. The Company recognized losses of $11,903 and gains of $(1,599) related to the foreign exchange contracts that are not accounted for as hedging instruments within other expense (income), net, in the Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2024 and 2023, respectively. Such losses (gains) were substantially offset by net gains (losses) recorded on the underlying hedged asset or liability (the "underlying"). Offsetting net gains (losses) on the underlying are also recorded within Other expense (income), net.
The Company's policy for classifying cash flows from derivatives is to report the cash flows consistent with the underlying hedged item. Other financing cash flows during the three month periods ended March 31, 2024 and 2023, as presented on the Condensed Consolidated Statements of Cash Flows, include $11,213 and $(1,353), respectively, of net cash payments (proceeds) related to the settlement of foreign currency hedges related to intercompany financing.
11. Fair Value Measurements
The provisions of the accounting standard for fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard classifies the inputs used to measure fair value into the following hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 Unobservable inputs for the asset or liability.
The following table provides the assets and liabilities reported at fair value and measured on a recurring basis as of March 31, 2024 and December 31, 2023:
| Fair Value Measurements Using | ||||||||
| Description | Total |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs (Level 3) |
||||
| March 31, 2024 | ||||||||
| Asset derivatives | $ | 6,183 | $ | - | $ | 6,183 | $ | - |
| Liability derivatives | (14,018) | - | (14,018) | - | ||||
| Bank acceptances | 10,002 | - | 10,002 | - | ||||
| Rabbi trust assets | 1,994 | 1,994 | - | - | ||||
| Total | $ | 4,161 | $ | 1,994 | $ | 2,167 | $ | - |
| December 31, 2023 | ||||||||
| Asset derivatives | $ | 6,420 | $ | - | $ | 6,420 | $ | - |
| Liability derivatives | (25,885) | - | (25,885) | - | ||||
| Bank acceptances | 12,161 | - | 12,161 | - | ||||
| Rabbi trust assets | 1,923 | 1,923 | - | - | ||||
| Total | $ | (5,381) | $ | 1,923 | $ | (7,304) | $ | - |
The derivative contracts are valued using observable current market information as of the reporting date such as the prevailing SOFR-based interest rates and foreign currency spot and forward rates. Bank acceptances represent financial instruments accepted from certain China-based customers in lieu of cash paid on receivables, have maturities of one year or less and are guaranteed by banks. The carrying amounts of the bank acceptances, which are included within prepaid expenses and other current assets, approximate fair value due to their short maturities. The fair values of rabbi trust assets are based on quoted market prices from various financial exchanges.
17
12. Pension and Other Postretirement Benefits
Pension and other postretirement benefits (income) cost consisted of the following:
|
Three Months Ended March 31, |
||||
| Pensions | 2024 | 2023 | ||
| Service cost | $ | 300 | $ | 773 |
| Interest cost | 4,628 | 4,895 | ||
| Expected return on plan assets | (7,407) | (7,534) | ||
| Amortization of prior service cost | 27 | 87 | ||
| Amortization of actuarial losses | 602 | 417 | ||
| Curtailment loss | 1,370 | - | ||
| Net periodic benefit income | $ | (480) | $ | (1,362) |
|
Three Months Ended March 31, |
||||
| Other Postretirement Benefits | 2024 | 2023 | ||
| Service cost | $ | 10 | $ | 13 |
| Interest cost | 262 | 285 | ||
| Amortization of prior service cost | - | 3 | ||
| Amortization of actuarial gains | (40) | (25) | ||
| Net periodic benefit cost | $ | 232 | $ | 276 |
The service cost component of net periodic benefit cost is included within Cost of sales and Selling and administrative expenses. The components of net periodic benefit (income) cost other than the service cost component are included in Other expense (income), net on the Condensed Consolidated Statements of Income. See Note 14.
13. Income Taxes
The Company's effective tax rate for the first three months of 2024 was 85.2% compared with 20.9% in the first three months of 2023 and 51.9% for the full year 2023. The increase in the effective tax rate during the first three months of 2024, as compared with the rate for the full year 2023, is driven primarily by the inclusion of $6,794 of tax expense (rate impact of 51.6%) relating to the Sale of the Associated Spring and Hanggi businesses. The Company determined during the first quarter of 2024, in conjunction with the Sale, that its investment in a certain disposed foreign subsidiary no longer met the classification as "permanently reinvested". The Company has therefore recognized income taxes related to this entity as of March 31, 2024, in advance of the completion of the Sale on April 4, 2024.
The Aerospace and Industrial segments have a number of multi-year tax holidays in Malaysia and Singapore. The tax holiday in China expired at the end of 2023. The Company plans to re-apply for approval of a potential three-year holiday in China but, under China rules, cannot file the application until after June 2024 and does not expect a decision regarding approval of the holiday until the end of 2024. Aerospace was granted an income tax holiday for operations recently established in Malaysia. This holiday commenced effective November 2020 (retroactively) and remains effective for a period of ten years. The Aerospace business was granted additional tax holidays in Singapore under the Pioneer program in the fourth quarter of 2022. This holiday provides reduced tax rates for certain Aerospace programs manufactured at the Singapore location and will continue through December 2025. All of the holidays are subject to the Company meeting certain commitments in the respective jurisdictions.
In October 2021, the Organization for Economic Co-operation and Development ("OECD") introduced an inclusive framework to address tax challenges arising from the digitalization of the economy through a two-pillar solution. One of the components of the solution is the implementation of a global minimum corporate tax rate of 15% for large multinational corporations ("Pillar Two"). The OECD continues to release additional guidance on the two-pillar solution with implementation to begin in 2024 while reporting of the tax applicable will not occur until 2026. As of the first quarter of 2024, the Company does not anticipate any additional taxes in 2024 relating to the implementation of Pillar Two.
18
On August 31, 2023, the Company completed its acquisition of MB Aerospace by acquiring all of the issued and outstanding shares of capital stock of MB Aerospace Holdings Inc., a Delaware corporation, in a taxable stock transaction. For accounting purposes, the assets and liabilities of MB Aerospace have been stepped up to fair market value which require the recording of deferred taxes on the associated step up. The Company has also determined that it is unlikely to recognize a tax benefit associated with MB Aerospace disallowed interest, net operating loss and credit carryforwards. As a result, the Company booked a valuation allowance associated with these carryforwards. Additionally, the Company evaluated the impact of the MB Aerospace acquisition on the deferred tax assets of the Company. The Company determined that it was unlikely to be able to utilize legacy disallowed interest carryforwards and recorded a corresponding valuation allowance. The Company will continue to evaluate associated Pillar Two impacts, and how they will be applied within the combined group of companies.
14. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following tables set forth the changes in accumulated other comprehensive income (loss), net of tax, by component for the three month periods ended March 31, 2024 and 2023:
| Gains and Losses on Cash Flow Hedges | Pension and Other Postretirement Benefit Items | Foreign Currency Items | Total | |||||
| December 31, 2023 | $ | (14,504) | $ | (100,776) | $ | (79,849) | $ | (195,129) |
| Other comprehensive income (loss) before reclassifications | 11,518 | (218) | (38,683) | (27,383) | ||||
| Amounts reclassified from accumulated other comprehensive income to the Condensed Consolidated Statements of Income | (2,171) | 1,484 | - | (687) | ||||
| Net current-period other comprehensive income (loss) | 9,347 | 1,266 | (38,683) | (28,070) | ||||
| March 31, 2024 | $ | (5,157) | $ | (99,510) | $ | (118,532) | $ | (223,199) |
| Gains and Losses on Cash Flow Hedges | Pension and Other Postretirement Benefit Items | Foreign Currency Items | Total | |||||
| December 31, 2022 | $ | 5,941 | $ | (108,640) | $ | (117,801) | $ | (220,500) |
| Other comprehensive income (loss) before reclassifications | (352) | 11,249 | 18,473 | 29,370 | ||||
| Amounts reclassified from accumulated other comprehensive income to the Condensed Consolidated Statements of Income | (534) | 373 | - | (161) | ||||
| Net current-period other comprehensive income (loss) | (886) | 11,622 | 18,473 | 29,209 | ||||
| March 31, 2023 | $ | 5,055 | $ | (97,018) | $ | (99,328) | $ | (191,291) |
19
The following table sets forth the reclassifications out of accumulated other comprehensive loss by component for the three month periods ended March 31, 2024 and 2023:
| Details about Accumulated Other Comprehensive Income (Loss) Components | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Condensed Consolidated Statements of (Loss) Income | |||
|
Three Months Ended March 31, 2024 |
Three Months Ended March 31, 2023 |
||||
| Cash flow hedges | |||||
|
Interest rate contracts
|
$ | 2,844 | $ | 865 | Interest expense |
|
Foreign exchange contracts
|
(64) | (159) | Net sales | ||
| 2,780 | 706 | Total before tax | |||
| (609) | (172) | Tax expense | |||
| 2,171 | 534 | Net of tax | |||
| Pension and other postretirement benefit items | |||||
| Amortization of prior service costs | $ | (27) | $ | (90) | (A) |
| Amortization of actuarial losses | (562) | (392) | (A) | ||
| Curtailment loss | (1,370) | - | (A) | ||
| (1,959) | (482) | Total before tax | |||
| 475 | 109 | Tax benefit | |||
| (1,484) | (373) | Net of tax | |||
| Total reclassifications in the period | $ | 687 | $ | 161 |
(A) These accumulated other comprehensive income (loss) components are included within the computation of net periodic Pension and Other Postretirement Benefits cost. See Note 12.
15. Information on Business Segments
The Company is organized based upon the nature of its products and services and reports under two global business segments: Aerospace and Industrial. Segment information is consistent with how management reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Company has not aggregated operating segments for purposes of identifying these two reportable segments.
Aerospace is a global manufacturer of complex fabricated and precision machined components and assemblies for turbine engines, nacelles and structures for both commercial and defense-related aircraft. The Aerospace Aftermarket business provides aircraft engine component MRO services, including services performed under our Component Repair Programs ("CRPs"), for many of the world's major turbine engine manufacturers, commercial airlines and the defense market. The Aerospace Aftermarket activities also include the manufacture and delivery of aerospace aftermarket spare parts, including through revenue sharing programs ("RSPs") under which the Company receives an exclusive right to supply designated aftermarket parts over the life of specific aircraft engine programs.
Industrial is a global provider of highly-engineered, high-quality precision components, products and systems for critical applications serving a diverse customer base in end-markets such as industrial equipment, automation, personal care, packaging, electronics, mobility and medical devices. Focused on innovative custom solutions, Industrial participates in the design phase of components and assemblies whereby customers receive the benefits of application and systems engineering, new product development, testing and evaluation, and the manufacturing of final products. Products are sold primarily through its direct sales force and global distribution channels. Industrial's Molding Solutions business designs and manufactures customized hot runner systems, advanced mold cavity sensors and process control systems, and precision high cavitation mold assemblies - collectively, the enabling technologies for many complex injection molding applications. The Automation business designs and develops robotic grippers, advanced end-of-arm tooling systems, sensors and other automation components for intelligent robotic handling solutions and industrial automation applications. The Motion Control Solutions business provides innovative cost-effective force and motion control solutions for a wide range of metal forming and other industrial markets and manufactures and supplies precision mechanical products used in mobility and industrial applications. See Note 3 as the Company completed the Sale of its Associated Spring™ and Hänggi™ businesses, both within the Motion Control Solutions business, in April 2024.
20
The following tables set forth information about the Company's operations by its two reportable segments:
|
Three Months Ended March 31, |
||||
| 2024 | 2023 | |||
| Net sales | ||||
|
Aerospace(A)
|
$ | 221,371 | $ | 117,256 |
| Industrial | 209,267 | 218,109 | ||
| Intersegment sales | - | (8) | ||
| Total net sales | $ | 430,638 | $ | 335,357 |
| Operating profit | ||||
|
Aerospace(A)
|
$ | 31,087 | $ | 18,751 |
| Industrial | 8,595 | 4,533 | ||
| Total operating profit | 39,682 | 23,284 | ||
| Interest expense | 24,831 | 5,308 | ||
| Other expense (income), net | 1,696 | 1,340 | ||
| Income before income taxes | $ | 13,155 | $ | 16,636 |
(A) The results of MB Aerospace have been included within the Company's Consolidated Financial Statements in the Aerospace segment for the three months ended March 31, 2024.
| March 31, 2024 | December 31, 2023 | ||||
| Assets | |||||
| Aerospace | $ | 1,498,177 | $ | 1,465,347 | |
| Industrial | 1,609,467 | 1,685,304 | |||
|
Other (A)
|
166,123 | 157,363 | |||
| Total assets | $ | 3,273,767 | $ | 3,308,014 |
(A) "Other" assets include corporate-controlled assets, the majority of which are cash and cash equivalents and deferred tax assets.
16. Commitments and Contingencies
Product Warranties
The Company provides product warranties in connection with the sale of certain products. From time to time, the Company is subject to customer claims with respect to product warranties. The Company accrues its estimated exposure for warranty claims at the time of sale based upon the length of the warranty period, historical experience and other related information known to the Company. Liabilities related to product warranties and extended warranties were not material as of March 31, 2024 and December 31, 2023.
In July 2021, a customer asserted breach of contract and contractual warranty claims regarding a part manufactured by the Company. The Company disputes the asserted claims and no litigation or other proceeding has been initiated. While it is currently not possible to determine the ultimate outcome of this matter, the Company intends to vigorously defend its position and believes that the ultimate resolution will not have a material adverse effect on the Company's consolidated financial position or liquidity, but could be material to the consolidated results of operations of any one period.
Litigation
The Company is subject to litigation from time to time in the ordinary course of business and various other suits, proceedings and claims are pending involving the Company and its subsidiaries. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with the Company's beliefs, the Company expects that the outcome of such proceedings, individually or in the aggregate, will not have a material adverse effect on financial condition or results of operations.
21
Supplier Finance Programs
The Company participates in a Supplier Finance Program (the "Program") under which it agrees to pay a third-party finance provider the stated amount of confirmed invoices from participating suppliers based on the original invoice due date. Suppliers, at their sole discretion, may elect to finance confirmed invoices prior to their scheduled due date at a discounted price with the Company's third-party finance provider. Outstanding obligations related to the Program were not material as of March 31, 2024 and December 31, 2023. These obligations were recorded within Accounts Payable on the Condensed Consolidated Balance Sheets. The Company does not have any assets nor any other forms of guarantees pledged as security to the third-party finance provider as part of the Program.
17. Business Reorganizations
In July 2022, Company management, commenced a systematic multi-phased initiative to significantly reduce costs and integrate the Company's operations, decreasing complexity and focusing on improved performance across Industrial. More specifically, at this time, the Company announced a restructuring program to further reduce costs within the Industrial segment and, more broadly, transform our businesses in response to macroeconomic disruptions. Additional actions were subsequently announced in October 2022, April 2023 (including Aerospace) and September 2023 (including Aerospace). Management continues to adjust its cost structures to align with market conditions.
2022 Actions
The Company authorized restructuring actions ("2022 Actions") focused on the consolidation of two manufacturing sites and a number of branch offices and changes in infrastructure to eliminate certain roles across a number of locations in the Industrial segment businesses in July and October 2022. The 2022 Actions resulted in pre-tax charges of $17,986 and $10,328 recorded in 2022 (recorded in second half of 2022) and 2023 (recorded primarily in the first and third quarters of 2023), respectively. Of the aggregate pre-tax charges of $10,328 recorded in 2023, $3,990 were recorded in the first quarter, primarily within Cost of sales in the accompanying Condensed Consolidated Statements of Income, and primarily related to $1,593 of accelerated depreciation of assets and $2,397 of transfer of work charges.
During the first quarter of 2024, additional pre-tax charges of $2,367 related to the 2022 Actions, including $1,553 primarily related to site consolidation and transfer of work charges, and $724 of accelerated depreciation of assets, were recorded within Cost of sales, and $90 of expenses were recorded within Selling and administrative expenses in the accompanying Condensed Consolidated Statements of Income. The Company does not expect any additional costs related to the 2022 Actions to be significant.
A corresponding liability of $509, per below, related to the employee termination costs remained and was included within accrued liabilities as of March 31, 2024.
The following table sets forth the change in the liability for the employee termination benefits related to the 2022 Actions:
| December 31, 2023 | $ | 538 |
| Payments | (29) | |
| March 31, 2024 | $ | 509 |
April 2023 Actions
In April 2023, the Company authorized restructuring actions ("April 2023 Actions") focused on manufacturing footprint optimization, including the consolidation of manufacturing sites and optimization of production. These actions include the geographic transfer of certain programs within both the Industrial and Aerospace segments and changes in infrastructure to drive improvements and efficiencies in business processes, including the elimination of certain roles across several locations. The April 2023 Actions resulted in pre-tax charges of $13,783 in 2023 (recorded primarily in the second and third quarters of 2023).
During the first quarter of 2024, additional pre-tax charges of $595 related to the April 2023 Actions, primarily related to $470 of transfer of work charges, were recorded within Cost of sales and $125 of expenses were recorded within selling and administrative expenses, in the accompanying Condensed Consolidated Statements of Income. Of the aggregate charges recorded, $232 was reflected within the results of the Industrial segment and $363 was reflected within the results of the Aerospace segment.
22
A corresponding liability of $1,699, per below, related to the employee termination costs remained and was included within accrued liabilities as of March 31, 2024. The Company expects to incur additional costs of approximately $13,000 related to the April 2023 Actions, which are primarily related to transfer of work charges. Of the aggregate, approximately $10,000 and $3,000 relate to the Aerospace and Industrial segments, respectively. The April 2023 Actions are expected to be completed throughout multiple periods, with completion in 2025.
The following table sets forth the change in the liability for the employee termination benefits related to the April 2023 Actions:
| December 31, 2023 | $ | 6,247 |
| Payments | (4,548) | |
| March 31, 2024 | $ | 1,699 |
September 2023 Actions
In September 2023, the Company authorized restructuring actions ("September 2023 Actions") including organizational realignment within a Barnes Industrial business and within Barnes Aerospace following the MB Aerospace acquisition. Resulting pre-tax charges of $7,878 were recorded primarily in the third quarter of 2023 related to employee termination costs, primarily employee severance and other termination benefits, which are expected to be paid in cash by the end of 2025. The Company does not expect any additional costs related to the September 2023 Actions to be significant.
A corresponding liability of $1,563, per below, related to the employee termination costs remained and was included within accrued liabilities as of March 31, 2024.
The following table sets forth the change in the liability for the employee termination benefits related to the September 2023 Actions:
| December 31, 2023 | $ | 2,736 |
| Employee severance and other termination benefits | 23 | |
| Payments | (1,196) | |
| March 31, 2024 | $ | 1,563 |
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Please refer to the Overview in the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. The Annual Report on Form 10-K, along with the Company's other filings, can be found on the Securities and Exchange Commission's website, www.sec.gov, as well as on the Company's website: www.onebarnes.com.
First Quarter Highlights
On January 11, 2024, the Company entered into a Share Purchase and Asset Agreement ("SPA") with One Equity Partners ("OEP") to sell its Associated Spring™ and Hänggi™ businesses (the "Businesses"). The Company completed the sale of the Businesses to OEP on April 4, 2024. See Note 3 of the Consolidated Financial Statements for additional discussion related to the divestiture of the Businesses.
The Company reported net sales of $430.6 million in the first quarter of 2024, an increase of $95.3 million or 28.4% from the first quarter of 2023. Organic sales increased by $12.8 million, or 3.8%, including an increase of $21.9 million, or 18.7%, at Aerospace, partially offset by a decrease of $9.1 million, or 4.2%, at Industrial. The year-over-year increase at Aerospace was driven by volume increases within both the Original Equipment Manufacturing ("OEM") and the Aftermarket businesses, reflecting continued strength in aerospace end markets. The acquisition of MB Aerospace in August 2023 provided incremental sales of $82.2 million within the Aerospace segment during the three months ended March 31, 2024. From an Industrial standpoint, the year-over-year decrease was driven by volume decreases within the each of the businesses, partially offset by favorable pricing initiatives. The weakening of the U.S. dollar against foreign currencies increased net sales within the Industrial segment by approximately $0.3 million. Operating margins increased from 6.9% in the 2023 period to 9.2% in the current period, largely a result of lower pre-tax charges related to restructuring and transformation related actions and favorable pricing initiatives, partially offset by $2.1 million of short-term purchase accounting adjustments and $5.4 million of increased amortization costs on other acquired long-term intangible assets related to the acquisition of MB Aerospace. As well, divestiture transaction costs related to the sale of the Associated Spring and Hanggi businesses and shareholder advisory costs approximated $3.1 million and $2.0 million, respectively. Pre-tax charges related to restructuring, transformation approximated $4.1 million within the current period, compared with $13.9 million in the prior year period.
Impact of Macroeconomic Trends and Management Actions
Certain of the macroeconomic trends that have presented challenges across our businesses in the prior year, including rising interest rates, inflationary pressures and labor constraints began to stabilize during recent periods, whereas supply chain constraints continue to linger, thereby continuing to impact the performance of the businesses. Management continues to take actions to mitigate the lingering impacts of these events and circumstances and remains proactive in addressing any potential future impacts.
Management has continued to implement pricing actions and drive productivity initiatives to mitigate these macroeconomic pressures. Management also continues to focus on driving core business execution through revenue growth, margin expansion, and new business development. Management's attention also remains directed towards integrating our existing businesses, consolidating operations and facilities where appropriate, and rationalizing operational costs and investments; all with the goal of improving profitability and return on invested capital. Management is leading a systematic multi-phased initiative to significantly reduce costs and integrate the Company's operations, decreasing complexity and focusing on improved performance across Industrial. More specifically, the Company has announced restructuring programs (see Note 17 of the Consolidated Financial Statements) to further reduce costs primarily within both segments, in response to changes in macroeconomic factors. Management also continues to evaluate the ongoing geopolitical risks, such as the Russia-Ukraine war, China-Taiwan relations and Red Sea freight disruptions, for any potential for impacts on the Company's Consolidated Financial Statements.
24
RESULTS OF OPERATIONS
Net Sales
|
Three Months Ended March 31, |
||||||||
| (in millions) | 2024 | 2023 | Change | |||||
| Aerospace | $ | 221.4 | $ | 117.3 | $ | 104.1 | 88.8 | % |
| Industrial | 209.3 | 218.1 | (8.8) | (4.1) | % | |||
| Total | $ | 430.6 | $ | 335.4 | $ | 95.3 | 28.4 | % |
The Company reported net sales of $430.6 million in the first quarter of 2024, an increase of $95.3 million from the first quarter of 2023. Organic sales increased by $12.8 million, or 3.8%, including an increase of $21.9 million at Aerospace, partially offset by a decrease of $9.1 million at Industrial. The year-over-year increase at Aerospace was driven by volume increases within both the OEM and the Aftermarket businesses, reflecting ongoing strength within aerospace end markets. The acquisition of MB Aerospace in August 2023 provided incremental sales of $82.2 million within the segment during the three months ended March 31, 2024, impacting both the OEM and Aftermarket businesses. From an Industrial standpoint, the year-over-year decrease was primarily driven by volume decreases across each of the businesses, partially offset by favorable pricing actions. The weakening of the U.S. dollar against foreign currencies increased net sales within the Industrial segment by approximately $0.3 million.
Expenses and Operating Income
|
Three Months Ended March 31, |
||||||||
| (in millions) | 2024 | 2023 | Change | |||||
| Cost of sales | $ | 300.1 | $ | 226.2 | $ | 73.9 | 32.6 | % |
| % sales | 69.7 | % | 67.5 | % | ||||
|
Gross profit (1)
|
$ | 130.5 | $ | 109.1 | $ | 21.4 | 19.6 | % |
| % sales | 30.3 | % | 32.5 | % | ||||
| Selling and administrative expenses | $ | 90.9 | $ | 85.8 | $ | 5.0 | 5.9 | % |
| % sales | 21.1 | % | 25.6 | % | ||||
| Operating income | $ | 39.7 | $ | 23.3 | $ | 16.4 | 70.4 | % |
| % sales | 9.2 | % | 6.9 | % |
(1) Sales less cost of sales .
Cost of sales in the first quarter of 2024 increased 32.6% from the 2023 period and gross profit margin decreased from 32.5% in the 2023 period to 30.3% in the 2024 period. Within Industrial, gross profit and gross profit margin decreased primarily as a result of the profit contribution of lower sales within each of the businesses, offset by pricing actions taken by the businesses. Gross profit increased and gross profit margin decreased within Aerospace during the first quarter of 2024. Within Aerospace, higher volumes within both the OEM and Aftermarket business, driven by the acquisition of MB Aerospace positively impacted gross profit. Unfavorable productivity and $2.1 million of short-term purchase accounting adjustments related to the acquisition of MB Aerospace negatively impacted both gross profit and gross profit margin within the segment, partially offset by a favorable Aftermarket mix. As well, $2.7 million of pre-tax charges related to restructuring and transformation related actions (aggregate of $4.1 million, including selling and administrative costs) impacted gross profit across the segments. Pre-tax charges impacting gross profit related to restructuring and workforce reduction actions during the comparable three month period of 2023 were $3.4 million (aggregate of $13.9 million). Selling and administrative expenses in the first quarter of 2024 increased 5.9% from the 2023 period, whereas sales increased by 28.4% between the comparable 2024 and 2023 periods. As a percentage of sales, selling and administrative costs decreased from 25.6% in the first quarter of 2023 to 21.1% in the 2024 period. The decrease in selling and administrative costs as a percentage of sales was primarily driven by an increase in sales
partially offset by $3.1 million of divestiture transaction costs, $5.4 million of long-term purchase accounting adjustments related to the acquisition of MB Aerospace, $2.0 million of shareholder advisory costs and $1.4 million (aggregate of $4.1 million) of restructuring and transformation related charges. Pre-tax charges impacting selling and administrative expenses related to restructuring and workforce reduction actions during the comparable three month period of 2023 were $10.5 million
25
(aggregate of $13.9 million). Operating income in the first quarter of 2024 increased by 70.4% to $39.7 million, compared with the first quarter of 2023, and operating income margin increased from 6.9% to 9.2%, driven by the items noted above.
Interest expense
Interest expense increased by $19.5 million in the first quarter of 2024 as compared with the prior year period, primarily a result of a higher average interest rate, given the recapitalization of the Company's debt structure since the prior year period and higher average borrowings, largely related to the acquisition of MB Aerospace.
Other expense (income), net
Other expense (income), net in the first quarter of 2024 was $1.7 million compared to $1.3 million in the first quarter of 2023. This increase in expense was primarily driven by a reduction in income from the other components of net periodic benefit costs related to pension and other postretirement benefits.
Income Taxes
The Company's effective tax rate for the first three months of 2024 was 85.2% compared with 20.9% in the first three months of 2023 and 51.9% for the full year 2023. The increase in the effective tax rate during the first three months of 2024, as compared with the rate for the full year 2023, is driven primarily by the inclusion of $6.8 million of tax expense (rate impact of 51.6%) relating to the Sale of the Associated Spring and Hanggi businesses. The Company determined during the first quarter of 2024, in conjunction with the Sale, that its investment in a certain disposed foreign subsidiary no longer met the classification as "permanently reinvested". The Company has therefore recognized income taxes related to this entity as of March 31, 2024, in advance of the completion of the Sale on April 4, 2024.
The Aerospace and Industrial segments have a number of multi-year tax holidays in Malaysia and Singapore. The tax holiday in China expired at the end of 2023. The Company plans to re-apply for approval of a potential three-year holiday in China but, under China rules, cannot file the application until after June 2024 and does not expect a decision regarding the approval of the holiday until the end of 2024. Aerospace was granted an income tax holiday for operations recently established in Malaysia. This holiday commenced effective November 2020 (retroactively) and remains effective for a period of ten years. The Aerospace business was granted additional tax holidays in Singapore under the Pioneer program in the fourth quarter of 2022. This holiday provides reduced tax rates for certain Aerospace programs manufactured at the Singapore location and will continue through December 2025. All of the holidays are subject to the Company meeting certain commitments in the respective jurisdictions.
Income and income per Share
|
Three Months Ended March 31, |
||||||||
| (in millions, except per share) | 2024 | 2023 | Change | |||||
| Net income | $ | 1.9 | $ | 13.2 | $ | (11.2) | (85.2) | % |
| Net income per common share: | ||||||||
| Basic | $ | 0.04 | $ | 0.26 | $ | (0.22) | (84.6) | % |
| Diluted | 0.04 | 0.26 | (0.22) | (84.6) | % | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 51.2 | 51.0 | 0.2 | 0.5 | % | |||
| Diluted | 51.3 | 51.3 | - | 0.1 | % |
Basic and diluted net income per common share decreased from the three months periods ended March 31, 2024 and March 31, 2023 due to decreases in net income during the periods. Basic and diluted weighted average common shares outstanding were consistent for the periods during the first three months of 2023 as part of the Company's publicly announced Repurchase Program (as defined herein) as well as the issuance of additional shares for employee stock plans.
26
Financial Performance by Business Segment
Aerospace
|
Three Months Ended March 31, |
||||||||
| (in millions) | 2024 | 2023 | Change | |||||
| Sales | $ | 221.4 | $ | 117.3 | $ | 104.1 | 88.8 | % |
| Operating profit | 31.1 | 18.8 | 12.3 | 65.8 | % | |||
| Operating margin | 14.0 | % | 16.0 | % |
The Aerospace segment reported sales of $221.4 million in the first quarter of 2024, an 88.8% increase from the first quarter of 2023. Excluding MB Aerospace, organic sales increased 15.8% and 23.4% within the OEM and Aftermarket businesses, respectively, relative to the comparable 2023 period. The acquisition of MB Aerospace provided incremental sales of $82.2 million within the segment during the three months ended March 31, 2024, impacting both the OEM and Aftermarket businesses. The year-over-year increase in organic OEM sales was driven primarily by continued growth within narrow-body airframe production, although wide-body airframe production also continued to improve during the 2024 period. Organic sales within the Aftermarket Maintenance Repair and Overhaul ("MRO") also improved during the first quarter of 2024 relative to the comparable period as airline traffic and aircraft utilization have continued to ramp. Sales within the segment are largely denominated in U.S. dollars and therefore were not significantly impacted by changes in foreign currency.
Operating profit at Aerospace in the first quarter of 2024 increased 65.8% from the first quarter of 2023 to $31.1 million, largely a result of the contribution of higher organic sales volumes, inclusive of pricing, favorable mix and the contribution of MB Aerospace sales, partially offset by unfavorable productivity, restructuring and transformation related charges and acquisition related costs related to the acquisition of MB Aerospace. More specifically, operating results were impacted by $2.1 million of short-term purchase accounting adjustments (amortization of customer backlog and inventory step-up), $5.4 million of increased amortization costs for other acquired long-term intangible assets and $0.4 million of pre-tax restructuring and transformation related charges. Pre-tax restructuring charges in the prior year period approximated $1.8 million. Operating margin decreased from 16.0% in the 2023 period to 14.0% in the 2024 period, largely as a result of the Aerospace MB acquisition-related items and their relative sales mix impact on overall Aerospace operating margins. Shareholder advisory costs of $1.0 million were also allocated to the segment during the 2024 period.
Outlook:
Sales in the Aerospace OEM business are based on the general state of the aerospace market driven by the global economy and are supported by its order backlog through participation in certain strategic commercial and defense-related engine and airframe programs. As noted earlier, the Company completed its acquisition of MB Aerospace during 2023. MB Aerospace represents a strategic fit for Barnes Aerospace, with highly complementary programs, global operations, technical capabilities, and product and service offerings. OEM sales grew in 2024 relative to the comparable 2023 period, as customer aircraft production schedules continue to ramp. The Company expects that the OEM business will see continued strength in demand for its manufactured components as narrow body airframe production remains strong, and wide body airframe production improves. Aerospace management continues to work with customers to evaluate engine and airframe build schedules, giving management the ability to react timely to such changes. Management is working closely with suppliers to align raw material schedules with production requirements.
Management also remains focused on labor and supply chain constraints that continue to impact the business, executing long-term agreements, and expanding our share of production on key programs. Backlog at OEM, including that of the acquired MB Aerospace business, was $1,463.6 million at March 31, 2024, an increase of 18.6% since December 31, 2023, at which time backlog was $1,233.6 million. Approximately 45% of OEM backlog is expected to be recognized over the next 12 months. The Aerospace OEM business may also be impacted by changes in the content levels on certain platforms, changes in customer sourcing decisions, adjustments to customer inventory levels, labor and commodity availability (including the availability of commodities such as titanium sourced in Russia) and pricing, vendor sourcing capacity and the use of alternate materials. Additional impacts may include the redesign of parts, quantity of parts per engine, cost schedules agreed to under contract with the engine and airframe manufacturers, as well as the pursuit and duration of new programs. Fluctuations in fuel costs, interest rates, and potential changes in regulatory requirements could impact airlines' decisions on maintaining, deferring or canceling new aircraft purchases, in part based on the value associated with new fuel-efficient technologies and targets established by airlines to reduce greenhouse gas emissions.
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The Aerospace Aftermarket business continues to demonstrate strong performance as airline traffic and aircraft utilization trends remain healthy. Domestic and international passenger traffic have improved with growth forecasted throughout 2024. Freight-related air traffic remains solid. Sales in the Aerospace Aftermarket business may continue to be impacted by inventory management and changes in customer sourcing, deferred or limited maintenance activity during engine shop visits and the use of surplus (used) material during the engine repair and overhaul process. Management believes that the Aerospace Aftermarket business continues to be competitively positioned based on well-established long-term customer relationships, including maintenance and repair contracts in the MRO business and long-term Revenue Sharing Programs ("RSPs") and Component Repair Programs ("CRPs"). The MRO business may also be impacted by airlines electing to closely manage their aftermarket costs as engine performance and quality improves. Fluctuations in fuel costs, interest rates and potential changes in regulatory requirements and their corresponding impacts on airline profitability and behaviors within the aerospace industry could also impact levels and frequency of aircraft maintenance and overhaul activities, and airlines' decisions on maintaining, deferring or canceling new aircraft purchases, in part based on the economics associated with new fuel-efficient technologies. Challenges experienced by aircraft OEMs to increase the delivery of new aircraft may serve to benefit our aftermarket business as older aircraft fill the need, especially as it relates to narrow-body platforms.
The Company remains focused on proactive cost management and improved productivity to mitigate continued pressure on operating profit. The segment continued to take restructuring actions throughout the first quarter of 2024. Aerospace will continue to explore additional productivity opportunities, including working closely with vendors and customers as it relates to the timing of deliveries and pricing initiatives. Also, management seeks additional opportunities to leverage cost and facility synergies from the integration of our legacy Aerospace business with MB Aerospace. Management also remains focused on growth through strategic investments, acquisitions and new product and process introductions. Driving productivity continues as a key initiative. Operating profit may be impacted by changes in sales volume, mix and pricing, particularly as they relate to the higher profit Aftermarket RSP spare parts business, and investments made in each of its businesses. Operating profits may also be impacted by potential changes in tariffs, trade agreements and trade policies that may affect the cost and/or availability of goods and labor constraints. Costs associated with new product and process introductions, the physical transfer of work to other global regions, additional productivity initiatives and restructuring activities to drive improved operating profit in the longer term, while potentially negatively impacting operating profit in the short-term.
Industrial
|
Three Months Ended March 31, |
||||||||
| (in millions) | 2024 | 2023 | Change | |||||
| Sales | $ | 209.3 | $ | 218.1 | $ | (8.8) | (4.1) | % |
| Operating profit | 8.6 | 4.5 | 4.1 | 89.6 | % | |||
| Operating margin | 4.1 | % | 2.1 | % |
Sales at Industrial were $209.3 million in the first quarter of 2024, a $8.8 million, or 4.1%, decrease from the first quarter of 2023. Organic sales decreased by $9.1 million, or 4.2%, during the 2024 period, primarily driven by volume decreases within each of the businesses, partially offset by favorable pricing actions. Foreign currency increased sales on a year-over-year basis by approximately $0.3 million as the U.S. dollar weakened against foreign currencies.
Operating profit at Industrial in the first quarter of 2024 increased 89.6% from the first quarter of 2023 to $8.6 million. Operating results were impacted by lower pre-tax charges related to restructuring and transformation related actions recorded by the segment in the first quarter of 2024, favorable pricing and Barnes Transformation Office cost saving initiatives (described further below), partially offset by $3.1 million of divestiture transaction costs, lower organic sales volumes and unfavorable mix. More specifically, operating results were impacted by $3.7 million of pre-tax restructuring and transformation related charges during the current period, as compared with $12.1 million of such costs during the prior year period. The divestiture transactions costs related to the agreement to sell our Associated Spring and Hänggi businesses (see Note 3 to the Consolidated Financial Statements). Shareholder advisory costs of $1.0 million were also allocated to the segment during the 2024 period. Operating margin increased from 2.1% in the 2023 period to 4.1% in the 2024 period, primarily as a result of the items describe above.
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Outlook:
At Industrial, management remains focused on generating organic sales growth through additional sales and marketing resources and expanded go-to-market strategies to leverage the Company's full product portfolio across customers and global industrial end-markets. Our business remains impacted by continuing headwinds including inflation and China weakness. Order rates declined on a year-over-year basis driven by weakness in China, North American and European markets. From a macro environment standpoint, the manufacturing Purchasing Managers' Index ("PMI") ended the quarter above 50 in the United States and China, while Europe ended the quarter below 50. Management closely monitors the impact of pricing changes and lead times on raw materials and freight, given the continued ongoing pressure of supply chain constraints. Following the April 2024 sale of the Associated Spring and Hanggi businesses that serve the automotive component manufacturing end market, the outlook for global automotive production will not be as meaningful a metric moving forward. Orders for the remaining Motion Control Solutions business were favorable in general industrial markets but softer within tool and die. At our Molding Solutions business, orders within medical end markets improved on a year-over year basis, while transportation, personal care and packaging end markets softened. Sales volumes at certain of our businesses is dependent upon the need for equipment used in plastic injection molding markets, which may be significantly influenced by the demand for plastic products, the capital investment needs of companies in the plastic injection molding and plastics processing industries, changes in technological advances and changes in laws or regulations such as those related to single-use plastics, product and packaging composition and recycling. Automation orders softened on a year over-year basis. To the extent that the U.S. dollar fluctuates relative to other foreign currencies, our sales may be impacted relative to the prior year periods. The relative impact on operating profit is not expected to be as significant as the impact on sales as most of our businesses have expenses primarily denominated in local currencies, where their revenues reside, however operating margins may be impacted. Management is focused on sales growth through customer engagement, innovation and expanding geographic reach. Strategic investments in new technologies, manufacturing processes and product development are expected to provide benefits over the long term, and management continues to evaluate such opportunities.
The Company is focused on the proactive management of costs to increase competitiveness and productivity, and to mitigate the ongoing impacts of the current macroeconomic environments, including the continuing risks of supply chain constraints and broad-based inflation on operating profit. The Company continues to manage its cost structure to align with the intake of orders and sales given remaining uncertainty within certain end-markets. In 2022, management commenced a systematic multi-phased restructuring initiative (the "Actions") to significantly reduce costs and integrate the Company's operations, decreasing complexity and focusing on improved performance across Industrial. More specifically, the Company has announced restructuring programs (see Note 17 of the Consolidated Financial Statements) to further reduce costs primarily within the Industrial segment, in response to the macroeconomic disruptions. These actions include organizational realignment including elimination of certain roles across several locations.
During 2023, we formed the Barnes Transformation Office to enable a more agile, responsive organization using standard tools, processes and systems. We are currently executing numerous transformation initiatives that support the acceleration of growth and profitability. We are advancing our manufacturing facility optimization through footprint rationalization with plant closures in Molding Solutions, Motion Control Solutions and several smaller underperforming technology and service centers in the Automation business. Management will continue to explore opportunities for additional cost savings, while working closely with vendors and customers as it relates to the timing of deliveries and pricing initiatives. Operating profit may continue to be impacted by changes in sales volume, mix and pricing, inflation, labor costs, utility cost, and the levels of investments in growth and innovation that are made within each of the Industrial businesses. Operating profit may also be impacted by enactment of or changes in tariffs, trade agreements and trade policies that may affect the cost, lead times and/or availability of goods, including but not limited to, steel and aluminum. Costs associated with new product and process introductions, restructuring and other cost initiatives, and strategic investments may negatively impact operating profit.
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 lines of credit. The Company currently maintains sufficient liquidity and will continue to evaluate ways to enhance its liquidity position as it navigates through the macroeconomic trends discussed above.
The Company believes that its 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 management, and anticipates that operating activities in 2024 will generate sufficient cash to fund operations. See additional discussion regarding currently
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available debt facilities below. The Company continues to invest within its businesses, with its estimate of 2024 capital spending to approximate $70 million.
On June 5, 2023, the Company entered into a Stock Purchase Agreement with MB Aerospace Group Holdings Limited, a Cayman Islands limited company (the "Agreement"). In connection with entry into the Agreement, on June 5, 2023, the Company entered into the Second Amendment (the "Second Amendment") to Note Purchase Agreement (as defined below) and Amendment No. 2 ("Amendment No. 2") to the restated senior unsecured revolving credit agreement ("Unsecured Credit Agreement") to facilitate the Transaction, as well as a commitment letter with Bank of America, N.A. and BofA Securities, Inc. (collectively, the "Commitment Parties"), pursuant to which the Commitment Parties agreed to provide, subject to the satisfaction of customary closing conditions contained therein, a $1,000.0 million backstop senior secured revolving credit facility and a $700.0 million senior secured 364-day bridge loan facility ("Bridge Loan Facility"). The Bridge Loan Facility was only intended to be drawn to the extent that the Company did not obtain alternative financing prior to the closing of the Transaction. The Company expensed fees of $9.5 million in conjunction with the Bridge Loan Facility and $1,000.0 million backstop senior secured revolving credit facility into interest expense on the Consolidated Statements of Income in the year ended December 31, 2023. On August 31, 2023 (the "Acquisition Date"), pursuant to the terms of the Agreement, the Company completed the Transaction for an aggregate purchase price of $728.4 million, subject to customary and specified closing adjustments, as set forth in the Agreement. Concurrently, the Company entered into a new Credit Agreement (the "Credit Agreement") among the Company and certain of its subsidiaries, the issuing banks, lenders and other parties party thereto, and Bank of America, N.A., as administrative agent, as collateral agent and as swingline lender, which provides for senior secured financing of $1,650.0 million, consisting of a term loan facility (the "Term Loan Facility") in an aggregate principal amount of $650.0 million, with an original issue discount of $4.9 million, and a revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Facilities") in an aggregate principal amount of up to $1,000.0 million, including a letter of credit sub-facility of up to $50.0 million. Proceeds of the loans borrowed under the Senior Facilities on the Acquisition Date, net of a 0.75% original issue discount on the Term Loan Facility, were used to fund, in part, the transactions contemplated by the Agreement, including the consummation of the Transaction, the repayment in full of the Notes, and to pay related fees and expenses. As of the Acquisition Date, the Revolving Credit Facility had outstanding borrowings in an aggregate principal amount of approximately $698.0 million. Proceeds of any loans under the Revolving Credit Facility borrowed after the Acquisition Date will be used for general corporate purposes. The Company paid fees and expenses of $3.1 million in conjunction with executing the Revolving Credit Facility. Such fees have been deferred within Other Assets on the Consolidated Balance Sheets and will be amortized into interest expense on the Consolidated Statements of Income through the maturity of the Credit Agreement with the previously recorded debt issuance costs. The Company incurred $8.3 million of debt issuance costs in conjunction with executing the Term Loan Facility. Such fees have been recorded as a direct deduction from the carrying amount of the Term Loan Facility and will be amortized into interest expense on the Consolidated Statements of Income through the maturity of the Term Loan Facility. Cash used to pay these fees was recorded through financing activities on the Consolidated Statements of Cash Flows. On August 31, 2023, in connection with the Credit Agreement and the closing of the Transaction, the Bridge Loan Facility was terminated.
On March 19, 2024, the Company entered into a Refinancing Amendment ("Amendment No. 2") to the Credit Agreement which replaced the outstanding principal amount of term loans under the Term Loan Facility (the "Existing Term Loans") with an equal amount of new term loans (the "New Term Loans") having substantially similar terms as the Existing Term Loans, except with respect the interest rate applicable to the New Term Loans and certain other provisions. The interest rate margin applicable to the New Term Loans was reduced to 1.50%, in the case of ABR loans, and 2.50%, in the case of Term SOFR loans (with the Term SOFR floor remaining at 0.0%). The interest rate margin applicable to the Existing Term Loans was 2.00%, in the case of ABR loans, and 3.00%, in the case of Term SOFR loans. In addition, the Term SOFR adjustment applicable to the New Term Loans was reduced to 0.00%. The Term SOFR adjustment applicable to the Existing Term Loans was 0.10%. The Company recorded fees of $1.6 million in conjunction with Amendment No. 2 within interest expense on the Condensed Consolidated Statements of Income in the three months ended March 31, 2024.
The Senior Facilities are guaranteed by each of the Company's wholly owned domestic subsidiaries and are secured by substantially all assets of the Company and of each subsidiary guarantor, in each case subject to certain exceptions.
Borrowings under the Senior Facilities bear interest at a rate per annum equal to, at the Company's option, either Term SOFR (subject to a 0.00% floor) or an alternate base rate ("ABR"), in each case plus an applicable margin of (i) in the case of borrowings under the Term Loan Facility, 2.50% for Term SOFR loans and 1.50% for ABR loans and (ii) in the case of borrowings under the Revolving Credit Facility, initially, 2.375% for Term SOFR loans and 1.375% for ABR loans. The applicable margin for borrowings under the Revolving Credit Facility varies depending on the Company's total net leverage ratio. At March 31, 2024, the applicable margin for borrowings under the Revolving Credit Facility was 2.125%. The Company is also required to pay a commitment fee initially equal to 0.35% per annum to the lenders under the Revolving Credit Facility
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in respect of the unutilized commitments thereunder. The commitment fee under the Revolving Credit Facility varies depending on the Company's total net leverage ratio. At March 31, 2024, the commitment fee under the Revolving Credit Facility was 0.30%.
The Term Loan Facility matures on the seven-year anniversary of the Acquisition Date and amortizes in equal quarterly installments ($6.5 million annually), starting with the first full fiscal quarter after the Acquisition Date, of 0.25% of the initial principal amount. The Revolving Credit Facility matures on the five-year anniversary of the Acquisition Date. In addition, the Company is required to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with up to 50% of the Company's annual excess cash flow (as defined under the Credit Agreement) in excess of the greater of $50.0 million and 15.0% of Adjusted Consolidated EBITDA (as defined in the Credit Agreement) during the last twelve months ("LTM") as of the applicable time, and with up to 100% of the net cash proceeds of certain recovery events and non-ordinary course asset sales (which percentages vary depending on the Company's first lien secured net leverage ratio).
The Company may generally prepay outstanding loans under the Senior Facilities at any time, without prepayment premium or penalty, subject to customary "breakage" costs with respect to Secured Overnight Financing Rate ("SOFR") loans. Prepayments of the Term Loan Facility in connection with certain "repricing events" resulting in a lower yield occurring at any time during the first six months following the Company's execution of Amendment No. 2 must be accompanied by a 1.00% prepayment premium.
The Revolving Credit Facility requires that the Company maintain a maximum Total Net Leverage Ratio, as defined in the Credit Agreement, initially of 5.50 to 1.00 as of the last day of each fiscal quarter for which financials have been (or were required to be) delivered, commencing with the first full fiscal quarter after the Acquisition Date, stepping down to 4.00 to 1.00 over time. The actual ratio, as defined, was 3.62 as of March 31, 2024. For material acquisitions in certain circumstances, such ratio may be increased by up to 0.50 to 1.00. The Revolving Credit Facility also requires that the Company not permit the Interest Coverage Ratio as of the last day of any test period to be less than 3.00 to 1.00. The actual ratio, as defined, was 3.58 as of March 31, 2024. At March 31, 2024, the Company was in compliance with all applicable covenants.
The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, asset sales and acquisitions, pay dividends and make other restricted payments and enter into transactions with affiliates. The Senior Facilities also contain certain events of default, including relating to a change of control. If an event of default occurs, the lenders under the Senior Facilities will be entitled to take various actions, including the acceleration of amounts due under the Senior Facilities.
On January 11, 2024, the Company entered into a Share Purchase and Asset Agreement ("SPA") with One Equity Partners ("OEP") to sell its Associated Spring™ and Hänggi™ businesses for $175.0 million, subject to certain adjustments. These businesses operate within the Motion Control Solutions business. See Note 3 of the Consolidated Financial Statements for additional disclosure related to the Sale of these businesses that closed in April 2024, with the proceeds being used to repay debt.
The Company did not repurchase any shares of the Company's common stock during the first quarter of 2024 or 2023. Management will continue to evaluate additional repurchases based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. See "Part II - Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities".
Operating cash flow may be supplemented with external borrowings to meet near-term business expansion needs and the Company's current financial commitments. The Company has assessed its credit facilities in conjunction with the Credit Agreement and currently expects that its bank syndicate, comprised of 10 banks, will continue to support its Revolving Credit Facility, which matures in August 2028. At March 31, 2024, the Company had $344.1 million unused and available for borrowings under its $1,000.0 million Revolving Credit Facility. The Company intends to use borrowings under its Revolving Credit Facility to support the Company's ongoing growth initiatives. While the Company continues to evaluate potential acquisition targets, it is now more narrowly assessing acquisitions, primarily with Aerospace, as evidenced by the consummation of the Transaction on August 31, 2023. Management remains focused on driving core business execution and financial performance via the planned integration and consolidation actions described above. The Company believes its credit facilities and access to capital markets, coupled with cash generated from operations, are adequate for its anticipated future requirements. See additional discussion above related to the Transaction and the Credit Agreement. The Company maintains communication with its bank syndicate as it continues to monitor its cash requirements.
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The Company had $10.0 million of borrowings under short-term bank credit lines at March 31, 2024.
On March 24, 2021, the Company entered into an interest rate swap agreement (the "2021 Swap") with one bank that commenced on January 31, 2022 and that converted the interest on $100.0 million of the Company's one-month LIBOR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.17% plus the borrowing spread. Effective April 30, 2022, the Company amended the 2021 Swap (the "Amended 2021 Swap") such that the one-month SOFR-based borrowing rate replaced the one-month LIBOR-based borrowing rate. The Amended 2021 Swap, which will expire on January 30, 2026, converts the interest on $100.0 million of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 1.075% plus the borrowing spread.
On July 19, 2023, the Company entered into an interest rate swap agreement (the "Euribor Swap") with one bank that commenced on July 31, 2023, which converts the interest on €150.0 million of the Company's Euribor-based borrowings from a variable rate plus the borrowing spread to a fixed rate of 3.257% plus the borrowing spread. Under the Euribor Swap, €50.0 million will expire on July 31, 2026, with the remaining balance of €100.0 million expiring July 31, 2028. On September 12, 2023, the Company entered into six additional interest rate swap agreements (the "2023 Swaps") with six different banks that commenced on September 29, 2023, which convert the interest on $600.0 million of the Company's one-month SOFR-based borrowings from a variable rate plus the borrowing spread to a blended fixed rate of 4.321% plus the borrowing spread. Under the 2023 Swaps, $50.0 million will expire on August 31, 2026, $100.0 million will expire on August 31, 2027, $200.0 million will expire on August 31, 2028, $50.0 million will expire on August 31, 2029 and the remaining balance of $200.0 million will expire on August 31, 2030. The execution of the interest rate swap agreements in 2023 did not have a material impact on our business, financial condition, results of operations or cash flow. These interest rate swap agreements (the "Swaps") are accounted for as cash flow hedges. At March 31, 2024, the Company's total borrowings were comprised of 64% fixed rate debt and 36% variable rate debt. At December 31, 2023, the Company's total borrowings were comprised of 67% fixed rate debt and 33% variable rate debt.
At March 31, 2024, the Company held $81.6 million in cash and cash equivalents, the majority of which was held by foreign subsidiaries. These amounts have no material regulatory or contractual restrictions and, on a long-term basis, are expected to primarily fund international investments.
Cash Flow
|
Three Months Ended March 31, |
||||||
| (in millions) | 2024 | 2023 | Change | |||
| Operating activities | $ | (2.3) | $ | 32.2 | $ | (34.5) |
| Investing activities | (12.7) | (11.3) | (1.4) | |||
| Financing activities | 8.6 | (22.6) | 31.2 | |||
| Exchange rate effect | (1.5) | 1.4 | (3.0) | |||
| (Decrease) increase in cash, cash equivalents and restricted cash | $ | (7.9) | $ | (0.3) | $ | (7.7) |
Operating activities used $2.3 million in the first three months of 2024 and provided $32.2 million in the first three months of 2023. The 2023 period included a use of cash for working capital of $2.8 million, with $7.1 million reflecting growth in inventories, compared to the 2024 period, which included a use of cash for working capital of $8.9 million, with $6.5 million reflecting continued growth in inventories. Operating cash flows in the 2024 period were also negatively impacted by higher outflows for accrued liabilities ($22.9 million), primarily related to payments of incentive compensation, severance and income taxes, whereas an increase in contract assets (included within Other Current Assets) drove an $12.1 million use of cash.
Investing activities used $12.7 million in the first three months of 2024 compared to $11.3 million in the first three months of 2023. Investing activities in the 2024 period primarily included capital expenditures of $12.8 million compared to $10.9 million in the 2023 period. Investing activities in the current period also included outflows of $0.2 million used to fund the MB Aerospace Acquisition (post-closing adjustments). The Company expects capital spending in 2024 to approximate $70 million.
Financing activities in the first three months of 2024 included a net increase in borrowings of $29.5 million compared to a net decrease in borrowings of $13.2 million in the comparable 2023 period. Proceeds from the issuance of common stock were $0.1 million in both the 2024 and 2023 periods. Total cash used to pay dividends was also $8.1 million in both periods. Financing cash flows during the first three months of 2024 and 2023 also included $11.2 million of payments and $1.4 million of proceeds, respectively, resulting from the settlement of foreign currency hedges related to intercompany financing.
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OTHER MATTERS
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. Significant accounting policies are disclosed in Note 1 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. The most significant areas involving management judgments and estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Actual results could differ from those estimates. There have been no material changes to such judgments and estimates.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future operating and financial performance and financial condition, and often contain words such as "anticipate," "believe," "expect," "plan," "estimate," "project," "continue," "will," "should," "may," and similar terms. These forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. These risks and uncertainties include, among others: the Company's ability to manage economic, business and geopolitical conditions, including rising interest rates, global price inflation and shortages impacting the availability of materials; the duration and severity of unforeseen events such as an epidemic or a pandemic, including their impacts across our business on demand, supply chains, operations and liquidity; failure to successfully negotiate collective bargaining agreements or potential strikes, work stoppages or other similar events; changes in market demand for our products and services; rapid technological and market change; the ability to protect and avoid infringing upon intellectual property rights; challenges associated with the introduction or development of new products or transfer of work; higher risks in global operations and markets; the impact of intense competition; the physical and operational risks from natural disasters, severe weather events, and climate change which may limit accessibility to sufficient water resources, outbreaks of contagious diseases and other adverse public health developments; acts of war, terrorism and other international conflicts; the failure to achieve anticipated cost savings and benefits associated with workforce reductions and restructuring actions; currency fluctuations and foreign currency exposure; impacts from goodwill impairment and related charges; our dependence upon revenues and earnings from a small number of significant customers; a major loss of customers; inability to realize expected sales or profits from existing backlog due to a range of factors, including changes in customer sourcing decisions, material changes, production schedules and volumes of specific programs; the impact of government budget and funding decisions; our ability to successfully integrate and achieve anticipated synergies associated with recently announced and future acquisitions, including the acquisition of MB Aerospace; government-imposed sanctions, tariffs, trade agreements and trade policies; changes or uncertainties in laws, regulations, rates, policies or interpretations that impact the Company's business operations or tax status, including those that address climate change, environmental, health and safety matters, and the materials processed by our products or their end markets; fluctuations in the pricing or availability of raw materials, freight, transportation, energy, utilities and other items required by our operations; labor shortages or other business interruptions at transportation centers, shipping ports, our suppliers' facilities or our facilities; disruptions in information technology systems, including as a result of cybersecurity attacks or data security breaches; the ability to hire and retain senior management and qualified personnel; the continuing impact of prior acquisitions and divestitures, and any ongoing and future strategic actions, and our ability to achieve the financial and operational targets set in connection with any such actions; the ability to achieve social and environmental performance goals; the outcome of pending and future litigation and governmental proceedings; the impact of actual, potential or alleged defects or failures of our products or third-party products within which our products are integrated, including product liabilities, product recall costs and uninsured claims; future repurchases of common stock; future levels of indebtedness; the impact of shareholder activism; and other risks and uncertainties described in documents filed with or furnished to the Securities and Exchange Commission ("SEC") by the Company, including, among others, those in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors sections of the Company's filings. The Company assumes no obligation to update its forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For discussion of the Company's exposure to market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to such risk during the three months ended March 31, 2024.
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Item 4. Controls and Procedures
Management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. We completed the acquisition of MB Aerospace on August 31, 2023. In accordance with applicable SEC guidance, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include MB Aerospace as it was not practical to do so given the date of acquisition. MB Aerospace's total assets excluded from the scope of our assessment represent approximately 8% of the related consolidated assets as of March 31, 2024. MB Aerospace's total net sales excluded from the scope of our assessment represent approximately 19% of consolidated total net sales for the three months ended March 31, 2024, respectively. Based upon, and as of the date of, that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, and designed to provide reasonable assurance that the information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, is (i) recorded, processed, summarized and reported as and when required and (ii) is accumulated and communicated to the Company's management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the Company's first quarter of 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to litigation from time to time in the ordinary course of business and various other suits, proceedings and claims are pending against us and our subsidiaries. While it is not possible to determine the ultimate disposition of each of these proceedings and whether they will be resolved consistent with our beliefs, we expect that the outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, cash flows or results of operations.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
(c) Issuer Purchases of Equity Securities
| Period |
|
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid Per Share (or Unit) |
|
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
|
(d)
Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(2)
|
| January 1-31, 2024 | 361 | $ | 32.04 | - | 3,404,000 | ||
| February 1-29, 2024 | 971 | $ | 35.09 | - | 3,404,000 | ||
| March 1-31, 2024 | 700 | $ | 36.76 | - | 3,404,000 | ||
| Total | 2,032 |
(1)
|
$ | 35.12 | - |
(1)All acquisitions of equity securities during the first quarter of 2024 were the result of the operation of the terms of the Company's stockholder-approved equity compensation plans and the terms of the equity rights granted pursuant to those plans to pay for the related income tax upon issuance of shares. The purchase price of a share of stock used for tax withholding is the market price on the date of issuance.
(2)At March 31, 2019, 1.5 million shares of common stock had not been purchased under the publicly announced Repurchase Program (the "Program"). On April 25, 2019, the Board of Directors of the Company increased the number of shares authorized for repurchase under the Program by 3.5 million shares of common stock (5.0 million authorized, in total). The Program permits open market purchases, purchases under a Rule 10b5-1 trading plan and privately negotiated transactions.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the three months ended March 31, 2024, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
35
Item 6. Exhibits
Refer to the Exhibit Index immediately following this page.
36
EXHIBIT INDEX
Barnes Group Inc.
Quarterly Report on Form 10-Q
For the Quarter ended March 31, 2024
| Exhibit No. | Description | Reference |
| 10.1 | Amendment No. 1 to Credit Agreement, dated as of February 6, 2024, by and among Barnes Group Inc., certain subsidiaries thereto, the lenders and other parties signatory thereto and Bank of America, N.A., as administrative agent. | |
| 10.2 |
Amendment to Transition and Retirement Agreement, dated as of January 17, 2024. |
|
| 10.3 | Amendment No. 2, dated as of March 19, 2024, by and among Barnes, Barnes Group Switzerland GmbH, a limited liability company (Gesellschaft mit beschränkter Haftung) organized under the laws of Switzerland, Barnes Group Acquisition GmbH, a limited liability company (Gesellschaft mit beschränkter Haftung) incorporated under the laws of Germany, the lenders party thereto from time to time, and Bank of America, N.A., as Administrative Agent and as Collateral Agent. | |
| 10.4 | Cooperation Agreement, dated as of March 5, 2024, by and among Barnes Group Inc., Irenic Capital Management LP, and other parties set forth on the signature pages thereto. | |
| 31.1 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed with this report. |
| 31.2 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed with this report. |
| 32 |
Certification pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
Furnished with this report. |
| Exhibit 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed with this report. |
| Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document. | Filed with this report. |
| Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed with this report. |
| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed with this report. |
| Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | Filed with this report. |
| Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed with this report. |
| 104 | Cover Page Interactive Data File (formatted is Inline XBRL and contained in Exhibit 101). | Filed with this report. |
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Barnes Group Inc.
|
||
|
(Registrant)
|
||
|
Date:
|
April 29, 2024 |
/s/ JULIE K. STREICH
|
|
Julie K. Streich
|
||
|
Senior Vice President, Finance
|
||
|
Chief Financial Officer
|
||
| (Principal Financial Officer) | ||
|
Date:
|
April 29, 2024 |
/s/ MARIAN ACKER
|
|
Marian Acker
|
||
|
Vice President, Controller
|
||
|
(Principal Accounting Officer)
|
38