BRISTOL, Conn.--(BUSINESS WIRE)--Barnes Group Inc. (NYSE: B), a global provider of highly engineered products, differentiated industrial technologies, and innovative solutions, today reported financial results for the second quarter 2020.
“As expected, the severe disruption brought on by the COVID-19 pandemic significantly impacted our businesses across the globe. The aerospace industry was virtually shut down as aircraft manufacturers halted production and airlines cut flights, parked aircraft, and curtailed spending. Industrial end markets struggled as customers’ manufacturing operations were offline or operating at a fraction of their normal capacity,” said Patrick J. Dempsey, President and Chief Executive Officer of Barnes Group Inc. “In anticipation of the approaching disruption, we took comprehensive pre-emptive actions to adjust our cost structure and preserve cash. While restructuring initiatives are never easy, our actions position the Company to remain competitive in a very challenging environment and will contribute to a more expedient recovery and a stronger business,” added Dempsey.
Second Quarter Highlights
Second quarter 2020 net sales of $236 million were down 37% from $372 million in the prior year period, with organic sales (1) declining 32%. Divested Seeger sales had a negative impact of 4%, while foreign exchange had a negative impact of 1%. Operating income was $10.1 million versus $57.0 million a year ago.
On July 6, 2020, the Company announced a second quarter restructuring charge, primarily related to workforce reductions, of approximately $18 million. Excluding this restructuring charge, and $1.4 million of Gimatic short-term purchase accounting adjustments last year, adjusted operating income was $27.8 million versus $58.3 million a year ago, a decrease of 52%. Adjusted operating margin was 11.8%, down 390 bps from 15.7% in the prior year period.
Interest expense was $3.9 million, a decrease of $1.5 million from the prior year period, due to decreased average borrowings and the benefit of a lower average interest rate.
Other expense was $1.1 million compared to $1.7 million a year ago, primarily as a result of a lower foreign currency loss this year versus last year.
The Company's effective tax rate for the second quarter of 2020 was 89.0% compared with 24.5% in the second quarter of 2019 and 23.4% for the full year 2019. The increase in the second quarter of 2020 effective tax rate from the full year 2019 rate is primarily due to a change in the forecasted geographic sources of income relative to our prior forecast with reductions occurring in several low tax jurisdictions, partially offset by a benefit related to a refund of withholding taxes and a reduction of the statutory tax rate at one of our international operations. Our full year 2020 tax rate, which includes the recognition of tax expense related to the Seeger sale, is forecasted to be approximately 34%.
Net income for the second quarter was $0.6 million, or $0.01 per diluted share, compared to $37.6 million, or $0.73 per diluted share, a year ago. On an adjusted basis, net income per share of $0.27 was down 64% from a year ago. Adjusted net income per diluted share in the second quarter of 2020 excludes $0.26 of restructuring charges, while last year’s second quarter excludes $0.02 of Gimatic short-term purchase accounting adjustments.
Year-to-date 2020 cash provided by operating activities was $123.1 million versus $108.2 million in the prior year period. Free cash flow was $103.3 million compared to $82.7 million last year-to-date. Capital expenditures year-to-date were $19.8 million, down $5.6 million from last year-to-date.
Segment Performance and End Market Outlook
Industrial
Second quarter sales were $165.0 million, down 29% from $233.4 million in the prior year period. Organic sales decreased 22% primarily related to a significant volume decrease caused by the impact of the COVID-19 pandemic on automotive and industrial end markets. Divested Seeger revenues of $14.3 million had a negative impact of 6%, while unfavorable foreign exchange decreased sales by $2.7 million, or 1%.
Operating loss in the second quarter was $0.3 million, versus $27.4 million operating profit in the prior year period. The operating profit decrease was driven by the lower sales volumes and a restructuring charge of $15.8 million, partially offset by cost initiatives such as workforce furloughs, temporary salary reductions, and the curtailing of discretionary expenses. Excluding the restructuring charge in this year’s second quarter, and the Gimatic short-term purchase accounting adjustments last year, adjusted operating profit was $15.5 million, down 46% as compared to $28.8 million a year ago. Adjusted operating margin was 9.4%, down 290 bps from 12.3% last year.
The global COVID-19 pandemic continues to have an impact on our order rates and recovery expectations for our industrial end markets. With automotive plants coming back online, albeit with reduced capacity, we are experiencing the green shoots of a recovery. However, significant uncertainty remains regarding automotive investment and new program launches. General industrial markets likewise are showing signs of gradual recovery. Automation and medical end markets have remained relative bright spots, with some order improvement in personal care and packaging realized in the second quarter.
Aerospace
Second quarter sales were $70.5 million, down 49% from $138.3 million in the same period last year as the COVID-19 pandemic essentially shut down global aerospace end markets. Aerospace original equipment manufacturing (“OEM”) sales decreased 52% while aftermarket sales decreased 42%.
Operating profit was $10.4 million, down 65% from $29.5 million in the prior year period, reflecting the lower sales volumes and a restructuring charge of $1.9 million, partially offset by cost containment initiatives similar to those in Industrial. Excluding the restructuring charge in this year’s second quarter, adjusted operating profit was $12.4 million, down 58% from a year ago. Adjusted operating margin was 17.5%, down 390 bps from 21.4% last year.
Aerospace OEM backlog ended the quarter at $555 million, down 21% from March 2020. The Company expects to ship approximately 45% of this backlog over the next 12 months.
In the second quarter, aerospace end markets were severely impacted by the global pandemic. Our OEM business will experience lower demand for its manufactured products as production cuts at Boeing and Airbus have been initiated. Recovery of OEM markets is anticipated to take several years. For the aftermarket, significantly reduced aircraft utilization, increased levels of aircraft removed from service, and reduced airline profitability will impact our business. As flight activity resumes, we anticipate the aftermarket business to gradually recover. However, the duration of the disruption is unknown, and we anticipate the aftermarket recovery to lag the improvement in aircraft utilization.
Balance Sheet and Liquidity
Barnes Group’s balance sheet remains well-positioned with sufficient liquidity to fund operations. The Company has liquidity of $74 million in cash and $393 million of undrawn revolving credit facility available for deployment, with the latter limited to approximately $260 million on June 30, 2020 based on defined senior debt covenants. With respect to the balance sheet, our “Debt to EBITDA” ratio, as defined in our revolving credit agreement, was maintained at 2.4 times, unchanged from both December 2019 and March 2020. The Company is in full compliance with all covenants under the revolving credit agreement which matures in February 2022.
2020 Full Year Outlook Remains Suspended
Barnes Group believes that the prevailing business environment does not allow for the forecast of performance with reasonable precision, and as such the Company continues to suspend its 2020 full year outlook. As clarity in our end markets returns, the Company will reestablish its practice of providing annual guidance.
For the third quarter of 2020, we will continue to be impacted by the COVID-19 global pandemic. As such, our current view is for organic sales to be lower than last year’s third quarter by approximately 30%, though up sequentially from the second quarter of 2020 by approximately 6%. Operating margin is expected to approximate 10.0%. Adjusted earnings per share are anticipated to be in the range of $0.22 to $0.32. Our full year 2020 capital expenditures forecast of $40 to $45 million is down slightly from our prior view.
Note:
(1) Organic sales decline represents the total reported sales decrease within the Company’s ongoing businesses less the impact of foreign currency translation and acquisition and divestitures completed in the preceding twelve months.
About Barnes Group
Barnes Group Inc. (NYSE: B) 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 including aerospace, transportation, manufacturing, automation, healthcare, and packaging. Barnes Group’s skilled and dedicated employees around the globe are committed to the highest performance standards and achieving consistent, sustainable profitable growth. For more information, visit www.BGInc.com.
