Barnes Group Inc. (NYSE:B) Q2 2023 Earnings Call Transcript July 28, 2023
Barnes Group Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.54.
Operator: Ladies and gentlemen, good morning, my name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Barnes Second Quarter 2023 Earnings Conference Call and Webcast. Today’s conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And I will now turn the conference over to Bill Pitts, Vice President of Investor Relations. You may begin.
Bill Pitts: Thank you, Abby. Good morning, and thank you for joining us for our second quarter 2023 earnings call. With me are Barnes President and Chief Executive Officer, Thomas Hook; and Senior Vice President, Finance and Chief Financial Officer, Julie Streich. If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at onebarnes.com, that’s O-N-E-B-A-R-N-E-S.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on the website. Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission. Be advised that certain statements we make on today’s call, both during the opening remarks and during the question-and-answer session, maybe forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today’s call and are described in our periodic filings with the SEC. These filings are available through the Investor Relations section of our corporate website at onebarnes.com.
Let me now turn the call over to Tom for his opening remarks. Then, Julie, will provide a review of our financial performance and details of our updated 2023 outlook. After that, we’ll open up the call for questions. Tom?
Thomas Hook: Thank you Bill and good morning everybody. I just like to start first by wishing my wife Happy Birthday. Barnes delivered a good performance in the second quarter generating topline growth and improvement in adjusted operating income and margin. The team accomplished this while simultaneously advancing the substancial transformation underway at Barnes. Our progress is encouraging although asymmetric across the company. And there remain further opportunities to drive to integrate, consolidate and rationalize optimization strategy. Our multiphase initiative to improve core business execution continues and some early progress can be seen in the improved industrial results in the quarter. While industrial performance is not at the desired level, there is movement in the right direction.
For the time being, I am taking a more active role with each industrial SBU and I have temporarily assumed the Molding Solution’s Presidents role. While the ultimate organization structure for industrial is under development, when settled it would be an efficient structure built to support the execution of our strategic plans. For industrial, organic orders were flat as compared to a year ago, though book-to-bill was approximately 1.1 times. From a macro standpoint, trends we have discussed previously are still visible with several end markets performing well and others seen on-going challenges. Automation has delivered an increase in sequential revenues for three quarters in a row and our multi cavity molds systems business continues to be strong.
On the other hand, our automotive hot runners in sheet metal forming product lines had seen weakness. Across industrial markets China has been particularly soft. Julie will touch upon these highlights in a moment. There is a rich organic growth opportunity at industrial and we are re-directing our sales efforts to drive a strong, vibrant sales funnel focussing on improved commercial practises and a new customer acquisition. Building net commercial pipeline is a key step to generating the performance we expect from the business. At Aerospace, the market remains very favorable. Our OEM business will benefit from on-going productionary increases by both Boeing and Airbus. In the aftermarket, we continue to deliver strong sales growth given improved passenger traffic and the resurgence of wide-body activity.
Clearly the market vibrancy supports our aerospace strategy to enhance, focus, and grow this business. In support of our strategy to grow our military aftermarket business, we have reached an agreement with Blue Raven to provide U.S. military aftermarket distribution support for Barnes Aerospace products and services. This agreement will help grow our U.S. military aftermarket business through Blue Raven’s tech-enabled, scalable supply chain solutions. While top-line performance at aerospace has been particularly good, we did take a step back with respect to adjusted operating margin performance in the second quarter. There are two factors driving this dynamic. First, we have experienced productivity challenges in some facilities. These challenges are within our control and are actively being addressed.
Second, within OEM, we experienced a product mix impact on margin resulting from less fabrication work and more machining. That said, I am pleased with the overall performance and direction of our Aerospace business and expect our margin performance to get back on track in the second half. Before I conclude my remarks, I’d like to provide an update on our pending acquisition with MB Aerospace. MB Aerospace is an exceptional strategic fit for Barnes Aerospace with highly complementary programs, global operation, technical capabilities, and product and services offerings. The transaction is progressing as expected through the regulatory approval process and we anticipate closing the transaction before the end of the year. Upon closing, we will immediately begin integration and driving organizational synergies.
At that time, we will also be able to share more detailed financial and operational aspects of the combined business. We’re excited about the acquisition and like the balance it brings to our portfolio. To close my prepared remarks, our actions across the company target the core business performance improvement we expect to deliver. These actions, whether transformation related or acquisition integrated related, are all part of the same value equation. There is considerable work in progress and still much more to do. However, we have the systems, investments, and global team to execute these simultaneous objectives. We’re on the appropriate path and our commitment to the process is unwavering. Let me now pass the call over to Julie for a discussion of our second quarter performance as well as some end market color.
Julie Streich: Good morning everyone and thank you, Tom. Let me begin with highlights of our second quarter results on slide four of our supplement. Second quarter sales were $339 million, up 6% from the prior year period, with organic sales increasing 5%. Foreign exchange had a modest favorable impact on sales. Adjusted operating income was $43.5 million this year, up 8% from $40.1 million a year ago, and adjusted operating margin of 12.8% was up 30 basis points. Net income was $17.4 million or $0.34 per diluted share, compared to a net loss of $39.6 million or negative $0.78 per diluted share a year ago. On an adjusted basis, net income per share of $0.58 was up 4% from $0.56 a year ago. Adjusted net income per share in the second quarter of 2023 excludes $0.19 of restructuring and transformation related charges and $0.05 of acquisition related charges.
Last year’s adjusted net income per share excludes a goodwill impairment charge of $1.34. Interest expense was $6.5 million, an increase of $3.2 million due to a higher average interest rate. Other income was $2.9 million, up $2.5 million from last year, driven by an increase in non-operating pension income. The effective tax rate in the second quarter of 2023 was 22.5%, compared to negative 27.1% in the year ago period and 64.7% for the full year 2022. The decrease in the second quarter 2023 effective tax rate from the full year 2022 rate is primarily due to the absence of a goodwill impairment charge, which is not tax deductible for book purposes. Now I’ll turn to our segment performance, beginning with industrial. For the second quarter, sales were $217 million, up 2% from the prior year period.
Similarly, organic sales increased approximately 2%. Favorable foreign exchange was a modest positive to sales. Industrial’s operating profit was $9.4 million versus a loss of $48.7 million a year ago. Excluding $13.4 million of restructuring and transformation related charges in the current year, adjusted operating profit of $22.8 million was up 17%, and adjusted operating margin of 10.5% was up 130 basis points. Adjusted operating profit benefited from positive pricing and favorable productivity. With respect to orders and sales for the quarter across our industrial businesses, Molding Solutions organic orders increased 6%, while organic sales decreased 2%. Our multi-cavity mold systems product line was once again solid, with personal care and general industrial end markets propelling orders, and medical, personal care, and general industrial lifting the sales.
These were offset by weakness in our hot runner product line serving automotive end markets. For 2023, we now expect Molding Solutions organic sales to increase low single digits down slightly from our prior expectation. At Motion Control Solutions, organic orders were down 5% in the quarter, while organic sales grew 4%. As was the case last quarter, we saw good orders and sales driven by transportation related end markets, while we saw softness in the sheet metal forming end market. We continue to forecast mid-single digit organic sales growth for MCS in 2023. At Automation, our organic orders were down 3%, while organic sales increased 5%. We expect high single digit organic sales growth for automation in 2023, unchanged from our prior view.
For the industrial segment, we anticipate low to mid-single digit organic sales growth for 2023, with adjusted operating margin between 9.5% to 10.5%, the latter consistent with our previous outlook. At Aerospace, sales were $122 million, up 12% from a year ago. OEM sales grew 8%, while aftermarket sales grew by 18% in total. Within the aftermarket, MRO was up 26%, and spare parts were up 7%. Operating profit was $16.6 million, down 19%. Excluding restructuring and transformation related charges of $0.5 million and MB Aerospace acquisition related charges of $3.6 million, adjusted operating profit was $20.7 million, essentially flat year-over-year. Adjusted operating margin was 17%, down 190 basis points from a year ago. As Tom mentioned, adjusted operating profit and margin were impacted by unfavorable productivity and product mix within the OEM business, offset in part by the benefits of higher sales volume.
OEM orders were down 18% in the quarter, though that relates to the lumpiness of order patterns and is not concerning. Book-to-bill was 1.2 times in the quarter and 1.5 times in the first half, so a healthy order level. Our OEM backlog grew to $805 million, an increase of 2% sequentially from March 2023, and up 7% as compared to a year ago. We expect to convert approximately 50% of this backlog to revenue over the next 12 months. Our OEM sales outlook for 2023 is up low 20%, a more favorable view than our April outlook. For the aftermarket, we forecast 2023 growth of mid-teens for MRO and low double digits for spare parts, both representing an increase from our prior view. Our forecast for aerospace adjusted operating margin is approximately 18%, a small down tick from our prior view.
With respect to cash, first half cash provided by operating activities was $42 million versus $9 million in the prior year period. The primary drivers continue to be from lower paid incentive compensation in 2023 relative to 2022 and a lower change in working capital compared to the prior year period. Free cash flow was $21 million versus a negative $5 million last year and capital expenditures were $22 million up approximately $8 million from the prior year. With our balance sheet, the debt-to-EBITDA ratio as defined by our credit agreement was 2.56 times at quarter end. When considering our cash position at the end of the second quarter on a net-debt-to EBITDA basis, we’d be approximately 2.2 times. Our second quarter average diluted shares outstanding were 51.2 million shares and period m shares outstanding were 50.6 million shares.
During the quarter, we did not repurchase any shares. Turning to slide 6 of our supplement, let me share details of our updated outlook for 2023. We now expect organic sales to be up 7% to 9% for the year with adjusted operating margin between 12.5% and 13.5%. We continue to expect adjusted EPS in the range of $2.15 to $2.30 up 9% to 16% from 2022’s adjusted earnings of $1.98 per share. 2023 adjusted earnings per share are anticipated to exclude $0.54 from the restructuring and transformation related activities announced to date and $0.08 related to the pending MB Aerospace Acquisition. We estimate the remaining adjustments to be $0.10 in Q3 and $0.07 in Q4. Please note that the closing and other deal costs associated with the pending MB Aerospace Acquisition are not included in our outlooks.
Like last year, we do expect adjusted EPS in the third quarter to be lower than that of the second quarter by a few cents. A few other outlook items. Interest expense is anticipated to be approximately $26 million and other income to be approximately $1 million. Please note this excludes $1.4 million of pension income attributable to our restructuring activities. We anticipate a full-year effective tax rate between 24% and 25% CapEx of approximately 50 million average diluted shares of approximately 51 million and cash conversion of approximately 100%. In closing, we generated good second quarter result and our transformation efforts remain on track. That said, we see pockets of suboptimal productivity and the pace of working capital improvement hasn’t gained sufficient traction.
We are actively addressing both of these items with our focus on driving revenues, managing working capital and delivering core business execution. Operator, we will now open the call for questions.
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Q&A Session
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Operator: Thank you. [Operator Instructions] We will take our first question from Matt Summerville with D. A. Davidson. Your line is open.
Matt Summerville: Thanks, morning. Can you maybe expand a little bit on the productivity issues you encountered in aerospace? Maybe triangulate a little bit on exactly what they were and why you feel maybe their transitory in nature and then maybe Julie, if you can comment on how much you think that weight on margins in the quarter and the net fall?
Thomas Hook: Sure, Matt. In Aerospace, we run a series of facilities across North American and Asia and in some of our facilities that have seen a significant amount of new employee hiring and we attempted to smooth out train in ramp production. We run into inefficient operations. There are all things within our control through training development in obviously leadership and management of the facility led. We’re putting the improvements in place. Those productivity challenges are part of the ramp difficulties and headwinds that we’ve experienced. Not all facilities have experienced these productivity challenges. We’ve had good ramps through the recovery of the Aerospace industry. We were able to hire and train and onboard people effectively, but two facilities have struggled with that since the recovery from the pandemic and while we have the teams on board are still hiring people, we’re still struggling with getting the teams efficient and productive from a productivity standpoint.
And that was one of the reasons that we saw a drag on Aerospace profitability in the quarter, and we expect to have that corrected in the second half of the year with regards to the productivity. And the facilities progressively over the course of the next two quarters, but we’ll get ourselves a more productive track over the balance of the year. We won’t fully recover from the performance we’ve had in the second quarter. It’ll take another several quarters to get there.
Matt Summerville: And then as a follow-up, you may be talk about the magnitude of pricing you’re realizing in industrial, is there still more to be had relative to what you saw in Q2? And can you also remind just the timing of the cost savings cadence associated with your multi-phase restructure in there and whether or not any of that has changed. Thank you.
Thomas Hook: Yes. I’ll address pricing first since last year, we’ve been on a progressive and continuous journey with regards to pricing to reflect the inflationary push-throughs both on labor and materials, freight, energy and other factors. So given for the past year that we’ve had a lot of that, some $40 plus million hit us in terms of inflationary effects, even pricing to offset that in the industrial business. As you know, in Aerospace, we have more contractual hedges against inflationary pressures, particularly on the material side. In industrial, we do not have to negotiate an item. Expectations are for price. We will continue to prospectively on adopt practices, with regards to price mitigations with our customers.
So the current deployment plans are still precipitating into our delivered financial results. And prospectively on a go-forward basis, we will continue to manage pricing very carefully, our industrial company, customer to reflect costs appropriately for them. Of course, in parallel with that, we also do productivity efforts across industrial to make sure that we’re holding ourselves accountable for efficiency gains within the business as well. But you can expect that there’ll be continued price effects going forward in industrial in response to what we see is still an inflationary environment globally and a lot of markets part of that will be passed on to customers in pricing. Some of that will be at the added selling prices, and some will be in search targets, depending on what the inflationary effect is.
