| BARNES GROUP INC Item 1A Risk Factors Our business, financial condition or results of operations could be materially adversely affected by any of these risks |
| Please note that additional risks not presently known to us or that we currently deem immaterial may also impact our business and operations |
| 4 ______________________________________________________________________ [27]Table of Contents RISKS RELATED TO OUR BUSINESS Changes in the availability or price of materials and energy resources could adversely affect our costs and profitability |
| We may be adversely affected by the availability or price of raw materials and energy resources, particularly related to certain manufacturing operations that utilize high-grade steel spring wire and titanium |
| The availability and price of raw materials and energy resources may be subject to curtailment or change due to, among other things, new laws or regulations, global economic or political events including strikes, terrorist attacks and war, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and prevailing price levels |
| Although we are not dependent upon any single source for any of our principal raw materials or products for resale, and such materials and products have, historically, been readily available, we cannot assure you that such raw materials and products will continue to be readily available |
| Disruption in the supply of raw materials, products or energy resources or our inability to come to favorable agreements with our suppliers could impair our ability to manufacture, sell and deliver our products and require us to pay higher prices |
| Any increase in prices for such raw materials, products or energy resources could materially affect our costs and our profitability |
| We depend on revenues from a small number of significant customers |
| Any loss, cancellation, reduction or delay in purchases by these customers could harm our business |
| Our success will depend on our continued ability to develop and manage relationships with significant customers |
| We cannot assure you that we will be able to retain our largest customers |
| Some of our customers may in the future shift their purchases from us to our competitors, in-house or to other sources |
| While we have long-term agreements with most of our significant customers, the terms of some of these agreements provide that until a firm order is placed by a customer for a particular product, the customer may unilaterally reduce or discontinue its projected purchases without penalty |
| The loss of one or more of our largest customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with new customers, or future price concessions we make to retain customers could significantly reduce our sales and profitability |
| The global nature of our business exposes us to foreign currency fluctuations that may affect our future revenues and profitability |
| We have manufacturing, sales and distribution facilities around the world, and the majority of our foreign subsidiaries use the local currency as their functional currency |
| Because our financial statements are denominated in US dollars, changes in currency exchange rates between the US dollar and other currencies expose us to translation risk when the local currency financial statements are translated to US dollars, our functional currency |
| Changes in currency exchange rates may also expose us to transaction risk |
| We may buy protecting or offsetting positions or hedges in certain currencies to reduce our exposure to currency exchange fluctuations; however, these transactions may not be adequate or effective to protect us from the exposure for which they are purchased |
| We have not engaged in any speculative hedging activities |
| Currency fluctuations may impact our revenues and profitability in the future |
| Our operations depend on our manufacturing, distribution, sales and service facilities in various parts of the world which are subject to physical, financial, regulatory and other risks that could disrupt our operations |
| The international scope of our business subjects us to risks such as a threat of war, terrorism or instability of governments and legal systems in countries in which we or our customers conduct business |
| The terrorist attacks of September 11, 2001 adversely impacted the US and world economies and a wide range of industries |
| These terrorist attacks and the war in the Middle East may lead to future acts of terrorism and additional hostilities, including possible retaliatory attacks, as well as financial, economic and political instability |
| In addition, because we depend upon our information systems to help process orders, to manage inventory and accounts receivables collections, to purchase, sell and ship products efficiently and on a timely basis, to maintain cost-effective operations, and to help provide superior service to our customers, any disruption in the operation of our information systems, including widespread power outages such as those that affected the northeastern and midwestern United States in August 2003, could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Although we have obtained property damage and business interruption insurance, a major catastrophe such as an earthquake, hurricane, flood or other natural disaster at any of our sites, or significant labor strikes, work 5 ______________________________________________________________________ [28]Table of Contents stoppages, political unrest, or any of the events described above, some of which may not be covered by our insurance, in any of the areas where we conduct operations could result in a prolonged interruption of our business |
| Any disruption resulting from these events could cause significant delays in the manufacture or shipment of products or the provision of repair and other services that may result in our loss of sales and customers |
| Our insurance will not cover all potential risks, and we cannot assure you that we will have adequate insurance to compensate us for all losses that result from any insured risks |
| Any material loss not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows |
| We cannot assure you that insurance will be available in the future at a cost acceptable to us or at a cost that will not have a material adverse effect on our gross margins, net income and cash flows |
| Our significant international operations and assets subject us to additional financial and regulatory risks |
| We have operations and assets in various parts of the world |
| In addition, we sell our products and services in foreign countries and seek to increase our level of international business activity |
| Accordingly, we are subject to various risks, including: US-imposed embargoes of sales to specific countries; foreign import controls (which may be arbitrarily imposed or enforced); export regulations (which require us to comply with stringent licensing regimes); anti-dumping regulations; price and currency controls; exchange rate fluctuations; dividend remittance restrictions; expropriation of assets; war, civil uprisings and riots; government instability; the necessity of obtaining governmental approval for new and continuing products and operations; legal systems or decrees, laws, taxes, regulations, interpretations and court decisions that are not always fully developed and that may be retroactively or arbitrarily applied; and difficulties in managing a global enterprise |
| We have experienced minor or technical violations of some of these regulations, including export regulations, in the past, none of which have had or, we believe, will have a material adverse effect on our business |
| However, any significant violations of these regulations in the future could result in civil or criminal sanctions, the loss of export or other licenses which could have a material adverse effect on our business |
| We may also be subject to unanticipated income taxes, excise duties, import taxes, export taxes or other governmental assessments |
| In addition, our organizational structure may limit our ability to transfer funds between countries, particularly into and out of the United States, without incurring adverse tax consequences |
| Any of these events could result in a loss of business or other unexpected costs that could reduce sales or profits and have a material adverse effect on our financial condition, results of operations and cash flows |
| We maintain pension and other postretirement benefit plans in the US and certain international locations |
| Declines in the stock market, prevailing interest rates and rising medical costs may cause an increase in our pension and other postretirement benefit expenses in the future and result in reductions in our pension fund asset values and increases in our pension and other postretirement benefit obligations |
| These changes have caused and may continue to cause a significant reduction in our net worth and may require us to make higher cash contributions to our pension and postretirement plans in the future |
| We have significant indebtedness that could affect our operations and financial condition |
| We may incur additional indebtedness to finance future acquisitions |
| Our level of indebtedness and the significant debt servicing costs associated with that indebtedness could have important effects on our operations and financial condition and may adversely affect the value or trading price of our outstanding equity securities and debt securities |
| For example, our indebtedness could require us to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing the amount of our cash flows available for working capital, capital expenditures, acquisitions, dividends and other general corporate purposes; limit our flexibility in planning for, or reacting to, changes in the industries in which we compete; place us at a competitive disadvantage compared to our competitors, some of whom have lower debt service obligations and greater financial resources than we do; limit our ability to borrow additional funds; and increase our vulnerability to general adverse economic and industry conditions |
| Our failure to meet certain financial covenants required by our debt agreements may materially and adversely affect our assets, financial position and cash flows |
| Certain of our debt arrangements require us to maintain certain interest coverage and leverage ratios and a minimum net worth |
| These requirements could limit 6 ______________________________________________________________________ [29]Table of Contents our ability to obtain future financing and may prevent us from taking advantage of attractive business opportunities |
| Our ability to meet the financial covenants or requirements in our debt arrangements may be affected by events beyond our control, and we cannot assure you that we will satisfy such covenants and requirements |
| A breach of these covenants or our inability to comply with the restrictions could result in an event of default under our debt arrangements, which in turn could result in an event of default under the terms of our other indebtedness |
| Upon the occurrence of an event of default under our debt arrangements, after the expiration of any grace periods, our lenders could elect to declare all amounts outstanding under our debt arrangements, together with accrued interest, to be immediately due and payable |
| If this happens, we cannot assure you that our assets would be sufficient to repay in full the payments due under those arrangements or our other indebtedness |
| We have significant goodwill and an impairment of our goodwill could cause a decline in our net worth |
| Our total assets include substantial goodwill |
| The goodwill results from our acquisitions, representing the excess of the purchase price we paid over the fair value of the tangible and intangible assets we acquired |
| We assess whether there has been an impairment in the value of our goodwill during each calendar year or sooner if triggering events warrant |
| If future operating performance at one or more of our businesses does not meet expectations, we may be required to reflect, under current applicable accounting rules, a non-cash charge to operating results for goodwill impairment |
| The recognition of an impairment of a significant portion of goodwill would negatively affect our results of operations and total capitalization, the effect of which could be material |
| A reduction in our stockholders’ equity due to an impairment of goodwill may affect our ability to maintain the required net worth ratios under our debt arrangements |
| There can be no assurances that the revenues projected in our backlog will be realized or, if realized, will result in profits |
| We consider backlog to be firm customer orders for future delivery |
| From time to time, OEM customers of Associated Spring and Barnes Aerospace provide projections of components and assemblies that they anticipate purchasing in the future under new and existing programs |
| Such projections are not included in our backlog unless we have received a firm release from our customers |
| Our customers may have the right under certain circumstances and with certain penalties or consequences to terminate, reduce or defer firm orders that we have in backlog |
| If our customers terminate, reduce or defer firm orders, we may be protected from certain costs and losses, but our sales will nevertheless be adversely affected |
| Although we strive to maintain ongoing relationships with our customers, there is an ongoing risk that orders may be cancelled or rescheduled due to fluctuations in our customers’ business needs or purchasing budgets |
| Also, our realization of sales from new and existing programs is inherently subject to a number of important risks and uncertainties, including whether our customers will execute the launch of product programs on time, or at all, the number of units that our customers will actually produce and the timing of production |
| In addition, until firm orders are placed, our customers generally have the right to discontinue a program or replace us with another supplier at any time without penalty |
| Our failure to realize sales from new and existing programs could have a material adverse effect on our net sales, results of operations and cash flows |
| We may not recover all of our up-front costs related to new or existing programs |
| New programs require significant up-front investments and capital expenditures for engineering, design and tooling |
| As OEMs in the automotive and aerospace industries have looked to suppliers to bear increasing responsibility for the design, engineering and manufacture of systems and components, they have increasingly shifted the financial risk associated with those responsibilities to the suppliers as well |
| This trend is likely to continue and is most evident in the area of engineering cost reimbursement |
| Historically, these investments have been fully reimbursed by OEMs, but in the future there may be other mechanisms established by OEMs that could result in less than full reimbursement or no reimbursement |
| We cannot assure you that we will have adequate funds to make such up-front investments and capital expenditures |
| In the event that we are unable to make such investments and expenditures, or to recover them through sales or direct reimbursement of our engineering expenses from our customers, our profitability, liquidity and cash flows may be adversely affected |
| In addition, we incur costs and 7 ______________________________________________________________________ [30]Table of Contents make capital expenditures for new program awards based upon certain estimates of production volumes |
| While we attempt to recover such costs and capital expenditures by appropriately pricing our products, the prices of our products are based in part upon planned production volumes |
| If the actual production is significantly less than planned, we will be unable to recover such costs |
| In addition, because a significant portion of our overall costs is fixed, declines in our customers’ production levels can adversely affect the level of our reported results even if our up-front investments and capital expenditures are recovered |
| We may not recover all of our up-front costs related to RSPs |
| We participate in aftermarket RSPs under which we receive an exclusive right to supply designated aftermarket parts to a large aerospace manufacturer over the life of an aircraft engine program |
| As consideration, we pay participation fees, which are recorded as long-lived intangible assets, and are recognized as a reduction to sales over the life of the program |
| The recoverability of the asset is dependent upon future revenues related to the program’s aftermarket parts |
| The potential exists that actual revenues will not meet expectations |
| A shortfall in future revenues may result in the failure to recover the total amount of the investments, which could adversely affect our financial condition and results of operations and cash flows |
| We face risks of cost overruns and losses on fixed-price contracts |
| We sell certain of our products under firm, fixed-price contracts providing for a fixed price for the products regardless of the production costs incurred by us |
| The cost of producing products may be adversely affected by increases in the cost of labor, materials, fuel, outside processing, overhead and other factors, including manufacturing inefficiencies |
| Increased production costs may result in cost overruns and losses on contracts |
| The departure of existing management and key personnel, a shortage of skilled employees or a lack of qualified sales professionals could materially affect our business, operations and prospects |
| Our executive officers are important to the management and direction of our business |
| Our future success depends, in large part, on our ability to retain these officers and other capable management personnel |
| Although we believe we will be able to attract and retain talented personnel and replace key personnel should the need arise, our inability to do so could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| Because of the complex nature of many of our products and services, we are generally dependent on an educated and highly skilled workforce |
| In addition, there are significant costs associated with the hiring and training of sales professionals |
| We could be adversely affected by a shortage of available skilled employees or the loss of a significant number of our sales professionals |
| Any product liability claims in excess of insurance may adversely affect our financial condition |
| Our operations expose us to potential product liability risks that are inherent in the design, manufacture and sale of our products |
| For example, we may be exposed to potential liability for personal injury or death as a result of the failure of a spring or other part in a vehicle or an aircraft component designed, manufactured or sold by us or the failure of an aircraft component that has been serviced by us |
| While we believe that our liability insurance is adequate to protect us from these liabilities, our insurance may not cover all liabilities |
| Additionally, insurance coverage may not be available in the future at a cost acceptable to us |
| Any material liability not covered by insurance or for which third-party indemnification is not available could have a material adverse effect on our financial condition, results of operations and cash flows |
| Our business, financial condition, results of operations and cash flows could be adversely impacted by strikes or work stoppages |
| Certain of our US employees and our non-US employees are covered by collective bargaining agreements which expire between 2006 and 2009 |
| Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements |
| Any potential strikes or work stoppages, and the resulting adverse impact on our relationships with customers, could have a material adverse effect on our business, financial condition, results of operations or cash flows |
| Similarly, a protracted strike or work stoppage at any of our major customers, suppliers or other vendors could materially adversely affect our business |
| 8 ______________________________________________________________________ [31]Table of Contents RISKS RELATED TO ACQUISITIONS We may not be able to effectively integrate acquired companies into our operations |
| We seek acquisition opportunities that complement and expand our operations and that will help create stockholder value over the long term |
| We cannot assure you that we will be able to effectively integrate our recent or future acquisitions into our operations |
| We may not be able to do so successfully without substantial costs, delays or other difficulties |
| We could face significant challenges in consolidating functions and integrating procedures, information technology systems, personnel, product lines and operations in a timely and efficient manner |
| We may encounter difficulties in training our sales forces to work with new products and customers |
| We may not be able to realize the anticipated cost savings, synergies or revenue enhancements from acquisitions, and we may incur significant costs to achieve these savings |
| Even if we are able to integrate successfully the operations of our Company and our recent and any future acquisitions, we may not be able to realize the cost savings, synergies or revenue enhancements that we anticipate from these acquisitions, either as to amount or in the time frame that we expect |
| Our ability to realize anticipated cost savings, synergies and revenue enhancements may be affected by a number of factors, including the following: our ability to effectively eliminate duplicative backoffice overhead and overlapping sales personnel, rationalize manufacturing capacity, consolidate warehousing and distribution facilities and shift production to more economical facilities; our incurrence of significant cash and non-cash integration and implementation costs or charges in order to achieve those cost savings, which could offset any such savings and other synergies resulting from our recent or future acquisitions; and our ability to avoid labor disruption in connection with integration efforts |
| In addition, our growth to date has placed, and future acquisitions could continue to place, significant demand on our administrative, operational and financial resources |
| Future acquisitions are a key component of our anticipated growth |
| We may not be able to identify or complete future acquisitions |
| A significant portion of the industries that we serve are mature industries |
| As a result, our recent growth has resulted in large part from, and our future growth will depend in part on, the successful acquisition and integration of businesses into our existing operations |
| While we are focused on adding strategic pieces to our operations by acquiring companies, manufacturing and service assets and technologies that complement our three existing businesses, we may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, obtain regulatory approval or otherwise complete acquisitions in the future |
| RISKS RELATED TO THE INDUSTRIES IN WHICH WE OPERATE We operate in very competitive markets |
| We may not be able to compete effectively with our competitors, and competitive pressures could adversely affect our business, financial condition and results of operations |
| Our three business segments compete with a number of larger and smaller companies in the markets we serve |
| Some of our competitors have greater financial, production, research and development or other resources than we do |
| Within Barnes Aerospace, certain of our OEM customers compete with our repair and overhaul business |
| Some of our OEM customers in the aerospace industry also compete with us where they have the ability to manufacture the components and assemblies that we supply to them but have chosen, for capacity limitations, cost considerations or other reasons, to outsource the manufacture to us |
| Our three businesses compete on the basis of price, service, quality, reliability of supply, technology, innovation and, in the case of Associated Spring and Barnes Aerospace, design |
| We must continue to make investments to maintain and improve our competitive position |
| We cannot assure you that we will have sufficient resources to continue to make such investments or that we will be successful in maintaining our competitive position |
| Our competitors may develop products or services, or methods of delivering those products or services, that are superior to our products, services or methods |
| Our competitors may also adapt more quickly than we to new technologies or evolving customer requirements |
| Pricing pressures could cause us to adjust the prices of certain of our products to stay competitive |
| We cannot assure you that we will be able to compete successfully with our existing or future competitors |
| Also, if consolidation of our existing competitors occurs, we expect the competitive pressures 9 ______________________________________________________________________ [32]Table of Contents we face to increase |
| Our failure to compete successfully could adversely affect our business, financial condition, results of operations and cash flows |
| Our customers’ businesses are generally cyclical |
| Weaknesses in the industries in which our customers operate could impact our revenues and profitability |
| The industries to which we sell our products are cyclical and tend to decline in response to overall declines in industrial production |
| Associated Spring is dependent on the transportation industry, and Barnes Aerospace is heavily dependent on the aerospace industry |
| As a result, our business is also cyclical and impacted by overall levels of industrial production and fluctuations in the transportation and aerospace industries |
| In addition, many of our customers have historically experienced periodic downturns, which often have had a negative effect on demand for our products |
| For example, lower production rates in the transportation markets and reduced overall sales of telecommunications and electronics products adversely affect the volume and price of orders placed for products used to manufacture these products, including our springs |
| Prior industry downturns have negatively affected our net sales, gross margin, net income and cash flows |
| For instance, the aerospace industry recently had a period of downturn |
| While there has been a recovery in commercial air traffic, the commercial airline industry continues to be subject to financial difficulties, which could adversely affect our business, financial condition, results of operations and cash flows |
| Original equipment manufacturers in the automotive and aerospace industries have significant pricing leverage over suppliers and may be able to achieve price reductions over time |
| There is substantial and continuing pressure from OEMs in the automotive and aerospace industries to reduce the prices they pay to suppliers |
| We attempt to manage such downward pricing pressure, while trying to preserve our business relationships with our customers, by seeking to reduce our production costs through various measures, including purchasing raw materials and components at lower prices and implementing cost-effective process improvements |
| However, our suppliers, in the past, have resisted and, in the future, may resist pressure to lower their prices and may seek to impose price increases |
| In 2005, our efforts to convince our key automotive OEM customers to share in raw material price increases were met with limited success |
| If we are unable to offset OEM price reductions through these measures, our gross margins, profitability and cash flows could be adversely affected |
| In addition, OEMs have substantial leverage in setting purchasing and payment terms, including the terms of accelerated payment programs under which payments are made prior to the account due date in return for an early payment discount |
| OEMs can unexpectedly change their purchasing policies or payment practices, which could have a negative impact on our short-term working capital |
| Demand for our defense-related products depends on government spending |
| An increasing portion of Barnes Aerospace’s sales are derived from the military market |
| The military market is largely dependent upon government budgets, particularly the US defense budget |
| The funding of government programs is subject to Congressional appropriation |
| Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may be expected to continue for several years |
| Consequently, programs are often only partially funded and additional funds are committed only as Congress makes further appropriations |
| We cannot assure you that an increase in defense spending will be allocated to programs that would benefit our business |
| Moreover, we cannot assure you that new military aircraft programs in which we participate will enter full-scale production as expected |
| A decrease in levels of defense spending or the government’s termination of, or failure to fully fund, one or more of the contracts for the programs in which we participate could have a material adverse effect on our financial position and results of operations |
| A downturn in the automotive industry could adversely affect our business and financial results |
| We derive a significant portion of our sales from sales to the automotive industry |
| Recently, the automotive industry has suffered from certain financial pressures which have had negative consequences for companies in or with customers in the automotive industry |
| The automotive industry has generally suffered from unfavorable pricing pressures in North America and Europe |
| The operation of our business within the automotive industry subjects us to the pressures applicable to all companies operating in the automotive industry |
| While the precise effects of such instability on the automotive industry are difficult to determine, they may negatively impact our business, financial condition, results of operations and cash flows |
| 10 ______________________________________________________________________ [33]Table of Contents The consolidation occurring in the industries in which we operate could adversely affect our business and financial results |
| The industries in which we operate have been experiencing consolidation, particularly in the aerospace industry |
| There has been consolidation of both suppliers, including us and our competitors, and the customers we serve |
| Supplier consolidation is in part attributable to OEMs more frequently awarding long-term sole source or preferred supplier contracts to the most capable suppliers in an effort to reduce the total number of suppliers from whom components and systems are purchased |
| We cannot assure you that our business, financial condition, results of operations or cash flows will not be adversely impacted as a result of consolidation by our competitors or customers |
| The aerospace industry is highly regulated |
| Complications related to aerospace regulations may adversely affect Barnes Aerospace |
| A substantial portion of our income is derived from our aerospace business |
| The aerospace industry is highly regulated in the United States by the Federal Aviation Administration, or FAA, and in other countries by similar regulatory agencies |
| We must be certified by these agencies and, in some cases, by individual OEMs in order to engineer and service systems and components used in specific aircraft models |
| If material authorizations or approvals were delayed in being issued, revoked or suspended, Barnes Aerospace would be adversely affected |
| New or more stringent governmental regulations may be adopted, or industry oversight heightened, in the future, and we may incur significant expenses to comply with any new regulations or any heightened industry oversight |
| Environmental regulations impose costs and regulatory requirements on our operations |
| Environmental compliance may be more costly than we expect, and we may be subject to material environmental-based claims in the future |
| Our past and present business operations and past and present ownership and operations of real property subject us to extensive and changing federal, state and local environmental laws and regulations, as well as those of other countries, pertaining to the discharge of materials into the environment, the handling and disposition of wastes (including hazardous wastes) or otherwise relating to protection of the environment |
| We have experienced, and expect to continue to experience, costs to comply with environmental laws and regulations |
| In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs or become subject to new or increased liabilities that could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| We use and generate hazardous substances and wastes in our operations |
| In addition, many of our current and former properties are or have been used for industrial purposes |
| Accordingly, we monitor hazardous waste management and applicable environmental permitting and reporting for compliance with applicable laws at our locations in the ordinary course of our business |
| We may be subject to potential material liabilities relating to any investigation and clean-up of our locations or properties where we delivered hazardous waste for handling or disposal that may be contaminated and to claims alleging personal injury |
| High fuel prices may impact our operating results |
| Fuel costs constitute a significant portion of operating expenses for companies in the aerospace industry |
| Recent hurricanes caused widespread disruption to oil production, refinery operations and pipeline capacity in certain areas of the United States, and, as a result, the price of jet fuel has increased significantly |
| Because many of our customers and we are in the aerospace industry, increased fuel costs could have a material adverse effect on our financial condition or results of operations |
| Additionally, the sales force of our distribution business incurs significant fuel costs in the course of business |