BARNES GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, excep
ID: 2741732 • Letter: B
Question
BARNES GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) 2015 2014 2013 Net sales $1,193,975 $1,262,006 $1,091,566 Cost of sales 782,817 829,648 738,170 Selling and administrative expenses 242,762 252,384 230,195 1,025,579 1,082,032 968,365 Operating income 168,396 179,974 123,201 Operating margin 14.1% 14.3% 11.3% Interest expense 10,698 11,392 13,090 Other (income) expense, net (248) 2,082 2,537 Income from continuing operations before income taxes 157,946 166,500 107,574 Income taxes 36,566 45,959 35,253 Income from continuing operations 121,380 120,541 72,321 Loss from discontinued operations, net of income taxes - (2,171) 198,206 Net income $121,380 $118,370 $270,527 Common dividends $26,176 $24,464 $22,422 Per common share: Basic: Income from continuing operations $2.21 $2.20 $1.34 Loss from discontinued operations, net of income taxes - (0.04) 3.68 Net income $2.21 $2.16 $5.02 Diluted: Income from continuing operations $2.19 $2.16 $1.31 Loss from discontinued operations, net of income taxes - (0.04) 3.61 Net income $2.19 $2.12 $4.92 Dividends 0.48 0.45 0.42 Weighted average common shares outstanding: Basic 55,028,063 54,791,030 53,860,308 Diluted 55,513,219 55,723,267 54,973,344 BARNES GROUP INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) December 31, 2015 December 31, 2014 December 31, 2013 Assets Current assets Cash and cash equivalents $83,926 $46,039 $70,856 Accounts receivable 261,757 275,890 258,664 Inventories 208,611 212,044 211,246 Deferred income taxes 24,825 31,849 18,226 Prepaid expenses and other current assets 32,469 22,574 18,204 Total current assets 611,588 588,396 577,196 Deferred income taxes 1,139 10,061 2,314 Property, plant and equipment, net 308,856 299,435 302,558 Goodwill 587,992 594,949 649,697 Other intangible assets, net 528,322 554,694 534,293 Other assets 23,969 26,350 57,615 Total assets $2,061,866 $2,073,885 $2,123,673 Liabilities and Stockholders' Equity Current liabilities Notes and overdrafts payable $22,680 $8,028 $1,074 Accounts payable 97,035 94,803 88,721 Accrued liabilities 131,320 161,397 154,514 Long-term debt - current 1,515 862 56,009 Total current liabilities 252,550 265,090 300,318 Long-term debt 485,711 495,844 490,341 Accrued retirement benefits 112,888 115,057 80,884 Deferred income taxes 62,364 70,147 94,506 Other liabilities 20,600 15,954 16,210 Total stockholders' equity 1,127,753 1,111,793 1,141,414 Total liabilities and stockholders' equity $2,061,866 $2,073,885 $2,123,673 BARNES GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Cash Flow 2015 2014 Operating activities: Net income $121,380 $118,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78,242 81,395 Amortization of convertible debt discount - 731 (Gain) loss on disposition of property, plant and equipment (1,128) 143 Stock compensation expense 9,258 7,603 Withholding taxes paid on stock issuances (4,913) (4,367) Loss on the sale of businesses - 1,586 Pension lump-sum settlement charge 9,856 - Changes in assets and liabilities, net of the effect of acquisitions: Accounts receivable 14,027 (21,367) Inventories (1,190) (10,092) Prepaid expenses and other current assets (2,645) (7,137) Accounts payable (2,936) 8,123 Accrued liabilities (16,833) 24,402 Deferred income taxes 3,121 (9,841) Long-term retirement benefits 1,081 (7,584) Other 2,575 4,933 Net cash provided by operating activities 209,895 186,898 Investing activities: Proceeds from disposition of property, plant and equipment 3,442 849 Payments for the sale of businesses - (1,181) Change in restricted cash - 4,886 Capital expenditures (45,982) (57,365) Business acquisitions, net of cash acquired (51,954) - Component Repair Program payments (21,000) (70,100) Other - (1,338) Net cash used by investing activities (115,494) (124,249) Financing activities: Net change in other borrowings 14,680 7,009 Payments on long-term debt (171,198) (332,336) Proceeds from the issuance of long-term debt 159,264 293,291 Payment of assumed liability to Otto Männer Holding AG - (19,796) Premium paid on convertible debt redemption - (14,868) Proceeds from the issuance of common stock 11,425 11,460 Common stock repurchases (52,103) (8,389) Dividends paid (26,176) (24,464) Excess tax benefit on stock awards 2,667 4,888 Other 9,850 (338) Net cash used by financing activities (51,591) (83,543) Effect of exchange rate changes on cash flows (4,923) (3,923) Increase (decrease) in cash and cash equivalents 37,887 (24,817) Cash and cash equivalents at beginning of year 46,039 70,856 Cash and cash equivalents at end of year $83,926 $46,039 BARNES GROUP INC. RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW (Dollars in thousands) (Unaudited) Cash Flow 2015 2014 2013 Free cash flow: Net cash provided by operating activities $209,895 $186,898 $10,090 Capital expenditures (45,982) (57,365) (57,304) Free cash flow(1) $163,913 $129,533 $(47,214) Free cash flow to net income cash conversion ratio (as adjusted): Free cash flow (from above) $163,913 $129,533 $(47,214) Income tax reduction related to the gain on the sale of BDNA - (12,608) 130,004 Free cash flow (as adjusted)(2) 163,913 116,925 82,790 Net income 121,380 118,370 270,527 Pension lump-sum settlement charge, net of tax 6,182 - (195,317) Net income (as adjusted)(2) $127,562 $118,370 $75,210 Free cash flow to net income cash conversion ratio (as adjusted)(2) 128% 99% 110% 7.8% 57.4% Barnes Group Inc. YEAR 2015 2014 2013 Selected Income Statement Information EBIT 163,396 179,974 123,201 Interest Expense 10,698 11,392 13,090 Income Before Tax 157,946 166,500 107,574 Income Tax Expense 36,566 45,959 35,253 Net Income $121,380.00 $118,370.00 $270,527.00 Selected Balance Sheet Information Current Assets Cash and Cash Equivalents $83,926 $46,039 $70,856 Net Receivables 261,757 275,890 258,664 Inventory 208,611 212,044 211,246 Total Current Assets 611,588 588,396 577,196 Property Plant and Equipment 308,856 299,435 302,558 Total Assets $2,061,866.00 $2,073,885.00 $2,123,673.00 Current Liabilities Accounts Payable 97,035 94,803 88,721 Total Current Liabilities 252,550 265,090 300,318 Total Long Term Debt 485,711 495,844 490,341 Total Liabilities $2,061,866.00 $2,073,885.00 $2,123,673.00 Calculated Tax Rate 23.15% 27.60% 32.77% Net Operating Profit AfterTaxes $125,568.27 $130,295.77 $82,826.89 Net Operating Working Capital $457,259.00 $439,170.00 $452,045.00 Total Net Operating Capital $766,115.00 $738,605.00 $754,603.00 Net Investment in Operating Capital $27,510.00 $(15,998.00) Free Cash-flow $98,058.27 $146,293.77 SHARE PRICE $36.64 Barnes Group Capital Structure Value in Million Proportion Debt $503,500,000.00 30.10% Preferred Stock 0 0.00% Equity $1,200,000,000.00 69.99% Total $1,703,500,000.00 100.00% Dividend Yield increased in Q2 2015 to $0.52 annually per share (0.42, 0.45 and 0.48 in 2013, 2014 and 2015 respectively)Diluted EPS forecasted to be $2.43 to $2.58 for 2016 (1.31, 2.16 and 2.19 in 2013, 2014 and 2015 respectively) Name of Bond Maturity Date Price N PV Payment Required Return Barnes Grp 144A Cv 3.375% 3/15/27 100 11 $1,000.00 $33.75 3.38% Barnes Grp Cv 3.75% 8/1/25 100 9 $1,000.00 $37.50 3.75% Barnes Grp Cv 3.375% 3/15/27 55.6 11 $556.00 $33.75 10.31% The market would expect a return between 3.38% and 10.31% depending on the maturity Date B Return NYSE Return Covariance Variance (Market) 1-Feb-16 -6.15% -3.85% 0.24% 0.15% 1-Mar-16 8.45% 1.60% 0.14% 0.03% 1-Apr-16 -0.54% 4.59% -0.03% 0.21% 1-May-16 -4.35% 2.70% -0.12% 0.07% 1-Jun-16 0.96% -0.39% 0.00% 0.00% Average (Expected) -0.33% 0.93% Sum 0.23% 0.46% BETA 0.49 rs = rf + (rm - rf)B= 0.30% * 12 + (8.5% - 0.30% * 12) * 0.58 = 6.44% Required rate of return = 6.44% Future cash flows to infinity? Weighted average cost of capital (WACC) ? Cost of Debt? Estimated rate of return? Estimated rate of return of commodity stock? Estimated the weighted average cost of capital ? Value of the company today and companys price? BARNES GROUP INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) 2015 2014 2013 Net sales $1,193,975 $1,262,006 $1,091,566 Cost of sales 782,817 829,648 738,170 Selling and administrative expenses 242,762 252,384 230,195 1,025,579 1,082,032 968,365 Operating income 168,396 179,974 123,201 Operating margin 14.1% 14.3% 11.3% Interest expense 10,698 11,392 13,090 Other (income) expense, net (248) 2,082 2,537 Income from continuing operations before income taxes 157,946 166,500 107,574 Income taxes 36,566 45,959 35,253 Income from continuing operations 121,380 120,541 72,321 Loss from discontinued operations, net of income taxes - (2,171) 198,206 Net income $121,380 $118,370 $270,527 Common dividends $26,176 $24,464 $22,422 Per common share: Basic: Income from continuing operations $2.21 $2.20 $1.34 Loss from discontinued operations, net of income taxes - (0.04) 3.68 Net income $2.21 $2.16 $5.02 Diluted: Income from continuing operations $2.19 $2.16 $1.31 Loss from discontinued operations, net of income taxes - (0.04) 3.61 Net income $2.19 $2.12 $4.92 Dividends 0.48 0.45 0.42 Weighted average common shares outstanding: Basic 55,028,063 54,791,030 53,860,308 Diluted 55,513,219 55,723,267 54,973,344 BARNES GROUP INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) December 31, 2015 December 31, 2014 December 31, 2013 Assets Current assets Cash and cash equivalents $83,926 $46,039 $70,856 Accounts receivable 261,757 275,890 258,664 Inventories 208,611 212,044 211,246 Deferred income taxes 24,825 31,849 18,226 Prepaid expenses and other current assets 32,469 22,574 18,204 Total current assets 611,588 588,396 577,196 Deferred income taxes 1,139 10,061 2,314 Property, plant and equipment, net 308,856 299,435 302,558 Goodwill 587,992 594,949 649,697 Other intangible assets, net 528,322 554,694 534,293 Other assets 23,969 26,350 57,615 Total assets $2,061,866 $2,073,885 $2,123,673 Liabilities and Stockholders' Equity Current liabilities Notes and overdrafts payable $22,680 $8,028 $1,074 Accounts payable 97,035 94,803 88,721 Accrued liabilities 131,320 161,397 154,514 Long-term debt - current 1,515 862 56,009 Total current liabilities 252,550 265,090 300,318 Long-term debt 485,711 495,844 490,341 Accrued retirement benefits 112,888 115,057 80,884 Deferred income taxes 62,364 70,147 94,506 Other liabilities 20,600 15,954 16,210 Total stockholders' equity 1,127,753 1,111,793 1,141,414 Total liabilities and stockholders' equity $2,061,866 $2,073,885 $2,123,673 BARNES GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Cash Flow 2015 2014 Operating activities: Net income $121,380 $118,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78,242 81,395 Amortization of convertible debt discount - 731 (Gain) loss on disposition of property, plant and equipment (1,128) 143 Stock compensation expense 9,258 7,603 Withholding taxes paid on stock issuances (4,913) (4,367) Loss on the sale of businesses - 1,586 Pension lump-sum settlement charge 9,856 - Changes in assets and liabilities, net of the effect of acquisitions: Accounts receivable 14,027 (21,367) Inventories (1,190) (10,092) Prepaid expenses and other current assets (2,645) (7,137) Accounts payable (2,936) 8,123 Accrued liabilities (16,833) 24,402 Deferred income taxes 3,121 (9,841) Long-term retirement benefits 1,081 (7,584) Other 2,575 4,933 Net cash provided by operating activities 209,895 186,898 Investing activities: Proceeds from disposition of property, plant and equipment 3,442 849 Payments for the sale of businesses - (1,181) Change in restricted cash - 4,886 Capital expenditures (45,982) (57,365) Business acquisitions, net of cash acquired (51,954) - Component Repair Program payments (21,000) (70,100) Other - (1,338) Net cash used by investing activities (115,494) (124,249) Financing activities: Net change in other borrowings 14,680 7,009 Payments on long-term debt (171,198) (332,336) Proceeds from the issuance of long-term debt 159,264 293,291 Payment of assumed liability to Otto Männer Holding AG - (19,796) Premium paid on convertible debt redemption - (14,868) Proceeds from the issuance of common stock 11,425 11,460 Common stock repurchases (52,103) (8,389) Dividends paid (26,176) (24,464) Excess tax benefit on stock awards 2,667 4,888 Other 9,850 (338) Net cash used by financing activities (51,591) (83,543) Effect of exchange rate changes on cash flows (4,923) (3,923) Increase (decrease) in cash and cash equivalents 37,887 (24,817) Cash and cash equivalents at beginning of year 46,039 70,856 Cash and cash equivalents at end of year $83,926 $46,039 BARNES GROUP INC. RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES TO FREE CASH FLOW (Dollars in thousands) (Unaudited) Cash Flow 2015 2014 2013 Free cash flow: Net cash provided by operating activities $209,895 $186,898 $10,090 Capital expenditures (45,982) (57,365) (57,304) Free cash flow(1) $163,913 $129,533 $(47,214) Free cash flow to net income cash conversion ratio (as adjusted): Free cash flow (from above) $163,913 $129,533 $(47,214) Income tax reduction related to the gain on the sale of BDNA - (12,608) 130,004 Free cash flow (as adjusted)(2) 163,913 116,925 82,790 Net income 121,380 118,370 270,527 Pension lump-sum settlement charge, net of tax 6,182 - (195,317) Net income (as adjusted)(2) $127,562 $118,370 $75,210 Free cash flow to net income cash conversion ratio (as adjusted)(2) 128% 99% 110% 7.8% 57.4% Barnes Group Inc. YEAR 2015 2014 2013 Selected Income Statement Information EBIT 163,396 179,974 123,201 Interest Expense 10,698 11,392 13,090 Income Before Tax 157,946 166,500 107,574 Income Tax Expense 36,566 45,959 35,253 Net Income $121,380.00 $118,370.00 $270,527.00 Selected Balance Sheet Information Current Assets Cash and Cash Equivalents $83,926 $46,039 $70,856 Net Receivables 261,757 275,890 258,664 Inventory 208,611 212,044 211,246 Total Current Assets 611,588 588,396 577,196 Property Plant and Equipment 308,856 299,435 302,558 Total Assets $2,061,866.00 $2,073,885.00 $2,123,673.00 Current Liabilities Accounts Payable 97,035 94,803 88,721 Total Current Liabilities 252,550 265,090 300,318 Total Long Term Debt 485,711 495,844 490,341 Total Liabilities $2,061,866.00 $2,073,885.00 $2,123,673.00 Calculated Tax Rate 23.15% 27.60% 32.77% Net Operating Profit AfterTaxes $125,568.27 $130,295.77 $82,826.89 Net Operating Working Capital $457,259.00 $439,170.00 $452,045.00 Total Net Operating Capital $766,115.00 $738,605.00 $754,603.00 Net Investment in Operating Capital $27,510.00 $(15,998.00) Free Cash-flow $98,058.27 $146,293.77 SHARE PRICE $36.64 Barnes Group Capital Structure Value in Million Proportion Debt $503,500,000.00 30.10% Preferred Stock 0 0.00% Equity $1,200,000,000.00 69.99% Total $1,703,500,000.00 100.00% Dividend Yield increased in Q2 2015 to $0.52 annually per share (0.42, 0.45 and 0.48 in 2013, 2014 and 2015 respectively)
Diluted EPS forecasted to be $2.43 to $2.58 for 2016 (1.31, 2.16 and 2.19 in 2013, 2014 and 2015 respectively) Name of Bond Maturity Date Price N PV Payment Required Return Barnes Grp 144A Cv 3.375% 3/15/27 100 11 $1,000.00 $33.75 3.38% Barnes Grp Cv 3.75% 8/1/25 100 9 $1,000.00 $37.50 3.75% Barnes Grp Cv 3.375% 3/15/27 55.6 11 $556.00 $33.75 10.31% The market would expect a return between 3.38% and 10.31% depending on the maturity Date B Return NYSE Return Covariance Variance (Market) 1-Feb-16 -6.15% -3.85% 0.24% 0.15% 1-Mar-16 8.45% 1.60% 0.14% 0.03% 1-Apr-16 -0.54% 4.59% -0.03% 0.21% 1-May-16 -4.35% 2.70% -0.12% 0.07% 1-Jun-16 0.96% -0.39% 0.00% 0.00% Average (Expected) -0.33% 0.93% Sum 0.23% 0.46% BETA 0.49 rs = rf + (rm - rf)B= 0.30% * 12 + (8.5% - 0.30% * 12) * 0.58 = 6.44% Required rate of return = 6.44% Future cash flows to infinity? Weighted average cost of capital (WACC) ? Cost of Debt? Estimated rate of return? Estimated rate of return of commodity stock? Estimated the weighted average cost of capital ? Value of the company today and companys price?
Explanation / Answer
Please Note: Data given in the question contradict each other and are ambiguous. I have solved it using best judgment.
1. FCF (to infinity or steady state)
We need to find internal growth rate (g) = ROA x b / (1-ROA x b) where ROA is return on asset = Net Income / Avg total asset , b is retention ratio = 1- dividend payout
ROA= Net Income / Avg. Total Asset = 121380 /((2061866 + 2073885)/2) = 5.8698% where 121380 is Net Income of FY'15 and 2061866 and 2073885 are total assets at FY'15 and FY'14
b = 1- 26176/121380 = 7.84347% where 26176 is dividend in FY'15 and 121380 is Net Income in FY'15
g = ROA x b / (1-ROA xb) = 4.83%
Cost of Debt (Kd) = weighted sum of required return on bonds of different maturities
There are 3 different bonds with required return of 3.38%, 3.75% and 10.31% the Present Value of these are 1000, 1000 and 556 .
Sum of PV = 1000 +1000 + 556 =2556
Kd = 3.38% x 1000/2556 + 3.75% x 1000/2556 + 10.31% x 556/2556 = 5.03%
Cost of Equity (Ke) = 6.44% (calculated in the table above in the question)
Weight of Equity (We) = 69.99% Weight of Debt (Wd) = 30.10%
Tax Rate (T) = 23.15% (as calculated in the table in question)
WACC = We x Ke + Wd x Kd x (1-T) = 5.67%
FCF of FY'15 = 163913
FCF(to infinity or stable state) = FCF x (1+g)/(WACC-g) =163913 x (1+4.83%) / (5.67% - 4.83%) = 20455952
2. WACC = 5.67% (as calculated in 1)
3. Cost of Debt = 5.03% (as calculated in 1)
4. Estimated Rate of Return - Not clear / Ambiguous
5. Return of common stock = Return of Equity = Net Income / Book Value of Equity at Beginning of Year = 121380 / 1111793 = 10.91%
6. Value of Company:
EV = FCF1/ (1 + WACC), from part 1 above FCF1 or free cash flow in steady state = 20455952 and WACC = 5.67%
EV = 19358334 ,
Equity Value = EV - Debt Value + Cash = 19358334 - 487226 + 83926 = 18955034
Value Per Share = 18955034 / No. of shares (550280.6) = $34. 46
Price Per Share = $ 36.64
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