Barnes Group (B)

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Barnes Group (B) makes parts used in a range of manufacturing and industrial applications, from parts for jet engines to mechanical springs. The company's customers are found in markets ranging from farm equipment to medical devices and include General Electric, Rolls-Royce, and the U.S. Department of Defense. General Electric Company (GE) made up 18% of the company's total sales in 2007^[1].

In 2007, Barnes Group had record sales of $1.4B and operating income increased by 30.2% to $152.4 million^[2]. In 2007, average sales per employee increased by ~11% to $220,000, a number that has risen nearly 50% since 2003^[3]. The company has also completed 5 acquisitions since 2005, another key growth driver in each of its three business segments^[4].

The company also benefited from the weakening dollar in 2007, as 40% of its sales came from outside the U.S.^[5]. The company's international exposure is larger than its international sales, because a good portion of Barnes Group's sales to its biggest client, GE, are destined for international end markets even though they are booked as domestic sales.^[6]

A number of Barnes Group's major customers operate in the transportation and aerospace markets, exposing the firm to two cyclical industries^[7]. The 2007 economic downturn hit Auto Makers hard, with the Big Three (General Motors (GM), Ford, DAIMLERCHRYSLER AG (DAI)) cutting production by ~7%^[8]. Lower consumer demand for the products of Barnes Group's customers means lower production levels and less demand for the parts used to make those products. Barnes Group is making efforts to limit its exposure to lower margin businesses in the auto industry. Demand for airplanes has remained strong in spite of the tougher economic environment and rising fuel costs. GE's jet engine sales increased 15% from 2006 to 2007, powered mainly by higher demand from developing countries like China and India^[9].

[edit] Business Financials

Barnes Group has three business segments: Barnes Aerospace (BA), Barnes Distribution (BD), and Barnes Industrial (BI)^[10]. The firm's 2007 sales growth was primarily driven by profitability gains in the BA and BI sectors^[11]. The backlog (total value of sales orders waiting to be filled) of company orders at the end of 2007 was $580 million, compared with $496 million at the end of 2006^[12]. Of the 2007 backlog, $473 million was attributable to BA, while the remainder was attributable to BI^[13].

B Annual Report^[14]

• Barnes Aerospace (27% of revenue)^[15] BA specializes in the manufacture of engineered parts used to build aircraft frames and jet engines^[16]. It also provides overhaul and repair services for many of the world's jet engine manufacturers, commercial airlines, and the military^[17]. BA participates in Revenue Sharing Programs (RSPs) with General Electric through which BA receives the exclusive right to provide supplementary and/or replacement parts to GE for the life of the related aircraft engine program^[18]. BA's sales in 2007 were $392 million, a 32% increase from 2006; operating profit was $74 million, a 73.5% increase from 2006^[19]. This gain was primarily due to increased sales in both the higher margin RSPs and in the manufacturing business^[20]. The company also entered into additional RSP agreements with General Electric in 2007, further solidifying its long-term position on aircraft engine parts^[21].

• Barnes Distribution (37% of revenue)^[22] BD is a vendor managed inventory distributor of industrial maintenance, repair, operating and production ("MROP") supplies ranging from fasteners to hydraulic pumps^[23]. Vendor managed inventory is a business model in which the supplier takes responsibility for maintaining an agreed inventory of the buyer's product^[24]. BD reported sales of $537.7 million in 2007, a 12.3% increase over 2006, chiefly driven by higher sales from the 2006 acquisition of KENT (a distributor of adhesives, sealants and cleaning chemicals to European markets) and a favorable translation of international sales amounting to ~$10 million^[25]. However, BD's 2007 operating profit fell by 49.5% from 2006, mainly due to a decrease in organic sales of $3 million and higher product and selling costs^[26].

• Barnes Industrial (36% of revenue)^[27] BI manufactures parts used in various industrial machines; it is North America's largest supplier of precision mechanical springs, compressor reed valves and nitrogen gas products^[28]. Sales at BI were $511.1 million in 2007, a 5.5% increase from 2006; operating profit was $69.2 million, a 24% increase from 2006^[29]. The increase reflects a $15.2 million favorable translation of international sales as foreign currencies strengthened against the dollar^[30]. Additionally, BI saw organic sales growth in its retention rings and gas springs business, as well as increased sales from its 2006 acquisition of Hänggi, a developer and manufacturer of various parts used in industrial machinery^[31].

B Annual Report^[32]

B Annual Report^[33]

B Annual Report^[34]

[edit] Trends and Forces

[edit] Barnes Group's sales are affected by the strength of the dollar

With 40% of sales coming from outside the U.S. in 2007, Barnes Group's earnings are greatly impacted by the relative strength of the dollar^[35]. International demand is understated because a good portion of Barnes Group's sales to its biggest client, GE, although counting as domestic sales, is actually for end markets that are international. The weakening of the dollar against foreign currencies, chiefly in Europe, increased net sales ~$25.2 million during 2007^[36]. The company’s international sales increased 30.5% from 2006 to 2007, while domestic sales increased 5.4%^[37]. Not counting the positive impact on sales of foreign currency translation, the firm's international sales increased by 24.9% in 2007 over 2006^[38]. If international sales growth continues to outpace domestic sales growth, a weakening dollar will have favorable results on the company's earnings.

[edit] Barnes Group's major customers operate in cyclical industries

A substantial portion of Barnes Group's customers (AirBus, Lockheed Martin (LMT), Volvo, Goodrich Corporation, etc) are found in the transportation and aerospace markets, two generally cyclical industries^[39]. When consumer demand is high, production levels rise along with demand for Barnes Group's engineered components. Conversely, when consumer demand is weak, production levels fall along with demand for the parts used to make those goods. In the transportation market, automakers and heavy-duty trucks have seen softer demand as gas prices continue to climb and consumers tighten their spending. This in turn translates into lower demand from auto manufacturers for Barnes Group's products. However, demand for airplanes has remained fairly strong even given the current economic downturn and rising fuel prices, powered mainly by increased demand from countries like China and India.

[edit] Interest Rates impact Barnes Group's ability to pay off its substantial debt load

Barnes Group is constrained by significant indebtedness, which amounted to $434.5 million at the end of 2007, or ~40% of the company's total capital^[40]. The firm will likely incur additional indebtedness in the coming years to finance its acquisition-oriented growth strategy^[41]. Of the company's $434.5 million debt load at the close of 2007, ~38% had interest rates that float with the market^[42]. Higher interest rates hurt Barnes Group's profitability by increasing its debt load, which consequently reduces the amount of cash flows available for working capital and other operations.

[edit] Barnes Group faces client concentration issues

Although Barnes Group's customer list numbers in the hundreds, a significant portion of its earnings depend on a small number of core customers. In 2007, net sales to General Electric Company (GE) and its subsidiaries comprised 18% of the company's total sales and 64% of BA's net sales^[43]. Additionally, ~20% of BI's sales in 2007 were to its three largest customers^[44]. A loss of any one of these core customers will significantly impair the company's earnings.

[edit] Competition

Barnes Group faces numerous competitors in each of its business segments. BA competes with leading jet engine manufacturers and a number of machining and fabrication companies like Ladish (LDSH) and Triumph Group (TGI). BD's competitors include Fastenal Company (FAST), Lawson Products (LAWS), W.W. Grainger (GWW) and MSC Industrial Direct Company (MSM). BI's closest competition is from firms that manufacture and sell custom metal components like NHK Spring and Chuo Spring.

[edit] References

1. ↑ B 2007 10K, Item 1A, pg.5
2. ↑ B 2007 10K, Item 7, pg.17
3. ↑ B 2007 10K, Item 7, pg.17
4. ↑ B 2007 10K, Item 7, pg.19
5. ↑ B 2007 10K, Item 1A, pg.5
6. ↑ B 2007 10K, Item 1A, pg.5
7. ↑ B 2007 10K, Item 1A, pg.10
8. ↑ CIBC World Markets Report, June 2007, pg. 20
9. ↑ The Boston Globe, "Demand for General Electric's jet engine way up worldwide", January 13, 2008
10. ↑ B 2007 10K, Item 1, pg.1
11. ↑ B 2007 10K, Item 7, pg.17
12. ↑ B 2007 10K, Item 1, pg.3
13. ↑ B 2007 10K, Item 1, pg.3
14. ↑ B 2007 10K, Item 6, pg.16
15. ↑ B 2007 10K, Item 7, pg.20
16. ↑ B 2007 10K, Item 1, pg.1
17. ↑ B 2007 10K, Item 1, pg.1
18. ↑ B 2007 10K, Item 1, pg.1
19. ↑ B 2007 10K, Item 7, pg.22
20. ↑ B 2007 10K, Item 7, pg.22
21. ↑ B 2007 10K, Item 7, pg.17
22. ↑ B 2007 10K, Item 7, pg.20
23. ↑ B 2007 10K, Item 1, pg.2
24. ↑ Wikipedia, "Vendor-managed inventory", April 15, 2008
25. ↑ B 2007 10K, Item 7, pg.23
26. ↑ B 2007 10K, Item 7, pg.23
27. ↑ B 2007 10K, Item 7, pg.20
28. ↑ B 2007 10K, Item 1, pg.2
29. ↑ B 2007 10K, Item 7, pg.24
30. ↑ B 2007 10K, Item 7, pg.24
31. ↑ B 2007 10K, Item 7, pg.24
32. ↑ B 2007 10K, Item 7, pg.22-24
33. ↑ B 2007 10K, Item 7, pg.22-24
34. ↑ B 2007 10K, Item 8, pg.61
35. ↑ B 2007 10K, Item 1A, pg.5
36. ↑ B 2007 10K, Item 7, pg.20
37. ↑ B 2007 10K, Item 7, pg.20
38. ↑ B 2007 10K, Item 7, pg.20
39. ↑ B 2007 10K, Item 1A, pg.10
40. ↑ B 2007 10K, Item 1A, pg.7
41. ↑ B 2007 10K, Item 1A, pg.5
42. ↑ B 2007 10K, Item 1A, pg.7
43. ↑ B 2007 10K, Item 1A, pg.5
44. ↑ B 2007 10K, Item 1A, pg.5
45. ↑ B 2007 10K, Item 6, pg.16
46. ↑ B 2007 10K, Item 6, pg.16
47. ↑ B 2007 10K, Item 1, pg.3
48. ↑ LDSH 2007 10K, Item 6, pg.14
49. ↑ LDSH 2007 10K, Item 6, pg.14
50. ↑ LDSH 2007 10K, Item 1, pg.6
51. ↑ LDSH 2007 10K, Item 1, pg.6
52. ↑ TGI 2007 10K, Item 6, pg.27
53. ↑ TGI 2007 10K, Item 6, pg.27
54. ↑ TGI 2007 10K, Item 1, pg.14
55. ↑ GWW 2007 10K, Item 6, pg.10
56. ↑ GWW 2007 10K, Item 6, pg.10
57. ↑ MSM 2007 10K, Item 6, pg.24
58. ↑ MSM 2007 10K, Item 6, pg.24
59. ↑ MSM 2007 10K, Item 6, pg.24
60. ↑ MSM 2007 10K, Item 6, pg.24