EXHIBIT 13*** 

 

 

 

 

 

 

 

 
**BAIRNCO CORPORATION

2001 ANNUAL REPORT
* 

 

 

Our mission

Bairnco is an organization of people committed to providing value-added industrial and commercial products and services to niche markets which meet or exceed our customers' requirements leading to the creation of stockholder and employee value.
***Our strategy

Bairnco strives to develop true partnership relationships with its customers in selected markets through close cooperation in developing value-added solutions to their needs.  Bairnco seeks to identify and participate in those markets that will provide growth opportunities due to either technical developments or the changing needs of customers.

Bairnco implements this mission and strategy through two business segments:

Engineered materials and components are designed, manufactured and sold under the Arlon brand identity.

Replacement products and services are manufactured and distributed under the Kasco brand identity.
***Our objectives

Bairnco believes that concentrating its resources in selected market niches can provide the basis to achieve both superior profitability and growth. Management's long-term objectives are to achieve:

10% compound rate of earnings growth

20% return on stockholders' investment

15% return on total capital employed
** 
*Our values

Values are the core of Bairnco's corporate culture.  They are the basis for the decisions made regarding the development and deployment of people, the improvement and investment in processes, and the manufacture and distribution of products.

Bairnco's values are:

·	Personal and corporate integrity

·	The inevitability and opportunity of change

·	Continuous improvement and development

·	Total customer satisfaction

·	Decentralized organization and empowered employees

·	Superior rewards for superior performance

·	Have fun - enjoy your work and your life
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CONTENTS**
Financial Highlights
1
Letter to Our Stockholders
2
Engineered Materials & Components (Arlon)
4
Replacement Products & Services (Kasco)
7 
Directors and Management
8 
Financial History
9
Management's Discussion and Analysis
10
Quarterly Results of Operations
13
Report of Independent Certified Public Accountants
14
Consolidated Financial Statements
15
Notes to Consolidated Financial Statements
19**FINANCIAL HIGHLIGHTS

Percentage
Change
(In thousands except per share data) 
2001
2000
1999
01/00
00/99
Net Sales
$   160,369
$   187,513
$   168,881
(14%)
11%      
Earnings before interest, provision for litigation costs and taxes (a)
$       7,395
$     16,544
$     15,002
(55%)
10%      
Operating Profit
$       1,195
$     15,544
$     15,002
(92%)
4%      
Net Income (Loss)
$       (308)
$       8,233
$       8,641
(104%)
(5%)      
Diluted Earnings per Share
$      (0.04)
$         1.07
$         1.08
(104%)
(1%)      
Cash Dividends per Share
$         0.20
$         0.20
$         0.20
0%
0%      
Stockholders' Investment per Average 
  Diluted Common Share Outstanding 
$         6.83
$         6.86
$         6.24
(0%)
10%      
Total Assets
$   118,255
$   135,769
$   119,145
(13%)
14%      
Stockholders' Investment
$     50,018
$     52,709
$     50,167
(5%)
5%      
Weighted Average Diluted Common Shares Outstanding
7,321
7,678
8,038
(5%)
(4%)
     
(a) Excludes impact of provision for litigation costs of $6.2 million (pre-tax) in 2001 and $1.0 million (pre-tax) in 2000.

 
**(Data for Bar Charts for Five Years 1997 to 2001; in 000's)**
 

Year
Net Sales
Operating Profit
Net Income (Loss)
Diluted Earnings (Loss) per Share     
1997
$158,708
$15,592
$8,771
$0.94
1998
$156,456
$4,529
$1,594
$0.18
1998(b)
$156,456
$12,029
$6,320
$0.72
1999
$168,881
$15,002
$8,641
$1.08
2000
$187,513
$15,544
$8,233
$1.07
2000(b)
$187,513
$16,544
$8,873
$1.16
2001
$160,369
$1,195
$(308)
$(0.04)
2001(b)
$160,369
$7,395
$3,660
$0.50
(b) Prior to impact on operating profit, net income and diluted earnings per share of $7.5 million (pre-tax) provision for litigation costs in the fourth quarter of 1998, $1.0 million (pre-tax) provision for litigation costs in the fourth quarter of 2000 and $6.2 million (pre-tax) provision for litigation costs in the third quarter of 2001.
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 **
 
**LETTER TO OUR STOCKHOLDERS**
2001 was a challenging year as the economy and our served markets were substantially weaker that we had anticipated. As the year unfolded our plan was to maintain our core competencies, maximize cash generation, continuously reduce costs in line with the respective market outlooks and continue to invest in new products for future growth.  

Aggressive working capital management, reduced capital expenditures and expense control gave rise to strong cash generation which resulted in debt being reduced by $12.6 million even after a small acquisition. Cost reduction actions continued throughout 2001. Bairnco ended the year in strong financial condition. 

It appears many of our served markets are now bottoming although no meaningful recovery is expected until well into 2002. The combined effects of both completed and continuing cost reductions together with smaller inventory reductions are expected to produce improved results for the second half and full year 2002 as compared to 2001 excluding the litigation charge.
**FINANCIAL RESULTS

Sales for the year ended December 31, 2001 decreased 14.5% to $160,369,000 from $187,513,000 in 2000. The economy and especially the wireless telecommunication and electronic materials markets deteriorated throughout 2001. The tragic events of September 11 further contributed to the economic slowdown. Arlon's sales decreased 13.3% from last year. There were widespread and varying declines in all markets served with certain electronics markets being down over 50%.  The Viscor acquisition in the first quarter increased Arlon's sales approximately 5.5%.  Kasco's sales decreased 18.6% as compared to the last year due to lower seasoning sales as a major chain shifted its ready-to-cook meat products to central processors at the end of 2000 and selected supermarket chains shifted towards case-ready product offerings.

Gross profit decreased 23.2% to $46,535,000 from $60,556,000 in 2000 due to reduced sales and reduced pricing due to competitive pressures in the recessionary economy.  Gross profit was further reduced by lower production levels which reduced inventories by $4.5 million during the year (excludes the initial increase in inventories due to the Viscor acquisition). The gross profit margin as a percent of sales decreased to 29.0% from 32.3%.

In the third quarter of 2001, Bairnco recorded a $6.2 million pre-tax provision for litigation in connection with a change in estimate to defend the Transactions Lawsuit. Bairnco recorded a similar $1.0 million charge in the fourth quarter of 2000. The $6.2 million provision for litigation reduced net income in 2001 by approximately $3,968,000, or $.54 per share. The $1.0 million provision for litigation reduced net income in 2000 by approximately $640,000, or $.09 per share. 

Selling and administrative expenses, which exclude the litigation provisions, decreased 11.1% to $39,140,000 from $44,012,000 as costs were reduced in light of the depressed markets and continuing efforts to improve Kasco's financial performance. As a percent of sales, selling and administrative expenses increased to 24.4% in 2001 as compared to 23.5% in 2000. 

Operating profit before the litigation provisions was $7,395,000 in 2001, a decrease of 55.3% from $16,544,000 in 2000. 

Net interest expense decreased to $2,486,000 in 2001 as compared to $3,481,000 in 2000 due to debt reductions that resulted from strong cash generation as working capital efficiency was improved and capital expenditures were reduced, as well as lower average interest rates.  No shares were repurchased on the open market during 2001.

Income before income taxes in 2001 decreased to a loss of $(1,291,000) as compared to income of $12,063,000 in 2000. Excluding the litigation provisions, income before income taxes decreased 62.4% to $4,909,000 from $13,063,000 in 2000.

The effective tax rate increased to 76.1% as compared to 31.8% in 2000 due primarily to the pre-tax operating loss position in 2001 resulting from the impact of the $6.2 million provision for litigation and the benefits of the foreign sales corporation on both years. The effect of the higher tax rate is a larger tax benefit from the loss.  Net income decreased to a loss of $(308,000) in 2001 from income of $8,233,000 in 2000.  Diluted earnings per common share decreased to a loss of $(0.04) in 2001 from $1.07 in 2000.  Excluding the litigation provisions, net income decreased 58.8% to $3,660,000, or $0.50 per share, from $8,873,000 or $1.16 per share in 2000. 
**PRODUCTIVITY AND CONTINUOUS IMPROVEMENT**
As the forecasted bumpy landing for 2001 turned into a major decline, our management teams moved to reduce costs. Material costs were reduced.  Headcount declined by 17.9% from 990 at the beginning of the year to 813 at the end of the year, with both numbers including the impact from the Viscor acquisition.  Productivity as measured by sales per average employee declined 5.8% as the average number of employees were reduced by 85, or 9.2%, while sales declined 14.5%.

To improve productivity, reduce costs and improve product development focus, Arlon's Northbrook, Illinois plant was closed at yearend and the production was moved to the Santa Ana, California and East Providence, Rhode Island plants.  The transitions were coordinated with our major customers and have gone smoothly.

Continuous improvement programs continue with the goal of a meaningful improvement in productivity in 2002.
**ACQUISITIONS**
On****January 10, 2001, Bairnco purchased selected net assets ("Viscor") of Viscor, Inc. located in Dallas, Texas. Viscor's sales for the six months ended December 31, 2000, were approximately $3.4 million.  Viscor's engineered, coated products include transfer adhesives, single and double-coated foam and film tapes, and other custom coated products. 

The acquisition complements Arlon's industrial products with product line extensions, product development synergies, and penetration into new customer segments and markets. The acquisition also expanded Arlon's coating and converting capacity.
**FINANCIAL MANAGEMENT**
Excluding the litigation charges, return on average capital employed decreased to 5.6% from 11.5% last year and return on stockholders' investment decreased to 7.1% in 2001 compared to 17.1% last year. 

The Board has authorized management to continue its stock repurchase program in 2002 subject to market conditions and the capital requirements of the business.

Total debt decreased to $33,584,000 from  $46,190,000 at the end of 2000. Debt as a percent of equity decreased to 67.1% from 87.6% in 2000.  At year-end 2001, Bairnco had $34.8 million available under its revolving credit agreement.

Working capital as a percent of sales decreased to 16.1% from 18.6%.  Our management teams did an excellent job of reducing working capital by 26.1% while sales declined 14.5%, generating approximately $9 million in cash.

Bairnco made $3,081,000 of capital expenditures in 2001 as compared to plan of approximately $10 million and to depreciation and amortization of $9,082,000. In concert with the economic downturn, capital expenditures were reduced and focused on cost reduction projects, necessary equipment replacements, and new information systems software and hardware.

 

Total capital expenditures planned in 2002 are approximately $5 million. Depreciation is estimated to be approximately $8.3 million. These capital expenditures are for cost reductions and necessary replacements. Prior to commitment, planned capital expenditures will be reviewed and adjusted based on economic and business conditions and levels of new business.

 
**DIVIDEND**
The quarterly $.05 per share cash dividend was maintained during the year.
****
MANAGEMENT**
Jim Lambert resigned as VP Finance in February of 2002 to pursue another opportunity.  Jim made major contributions to Bairnco and we wish him well in his new job.  A search is underway for his replacement.

Especially in a time of cut backs, the retention and development of our key employees is more important than ever. During 2001 the management development program continued to make progress in all operations. To achieve our new product sales goal we continued our investment in existing and new people related to product development.  During 2001, the Six-Sigma program was continued in our operations. The continuous improvement and development of all our employees remains a key element in Bairnco's success.

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