UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7284
BALDOR ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Missouri 43-0168840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5711 R.S. Boreham, Jr Street, Fort Smith, Arkansas 72908
(Address of principal executive offices) (Zip Code)
(479) 646-4711
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [ ]
At June 29, 2002, there were 34,099,822 shares of the registrant's common stock outstanding.
Index
Baldor Electric Company and Affiliates
Part 1. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-June 29, 2002 and December 29, 2001
Condensed consolidated statements of earnings-Three and six months ended
June 29, 2002 and June 30, 2001
Condensed consolidated statements of cash flows-Six months ended
June 29, 2002 and June 30, 2001
Notes to condensed consolidated financial statements-June 29, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part 2. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Baldor Electric Company and Affiliates
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share data) June 29 December 29
2002 2001
Assets
Current Assets: Cash and cash equivalents $6,691 $5,564
Marketable securities 19,953 11,052
Receivables, less allowances for doubtful accounts
of $3,900 in 2002 and $4,600 in 2001. 94,646 83,182
Inventories:
Finished products 79,649 83,919
Work in process 9,877 10,155
Raw materials 53,971 56,751
143,497 150,825
LIFO valuation adjustment (24,918) (24,604)
118,579 126,221
Other current assets and deferred income taxes 22,407 25,262
Total Current Assets 262,276 251,281
Property, Plant Land and improvements 6,268 6,267
and Equipment: Buildings and improvements 55,935 54,372
Machinery and equipment 267,760 266,627
Allowances for depreciation and amortization (191,614) (185,151)
Net Property, Plant and Equipment 138,349 142,115
Other Assets: Goodwill 57,158 57,158
Other 6,006 6,973
$463,789 $457,527
Liabilities and Shareholders' Equity
Current Accounts payable $24,077 $28,830
Liabilities: Employee compensation 6,352 5,997
Profit sharing 2,824 5,102
Accrued warranty costs 6,625 6,625
Accrued insurance obligations 14,148 15,694
Other accrued expenses 13,212 14,670
Income taxes payable (recoverable) (1,753) (1,046)
Current maturities of long-term obligations 1,809 1,771
Total Current Liabilities 67,294 77,643
Long-Term Obligations 106,455 98,673
Deferred Income Taxes 19,046 18,726
Shareholders' Equity:
Preferred stock, $.10 par value
Authorized shares: 5,000,000
Issued and outstanding shares: None
Common stock, $.10 par value
Authorized shares: 150,000,000
Issued shares: (39,643,269 in 2002 3,964 3,941
and 39,411,473 in 2001)
Additional capital 47,802 44,224
Retained earnings 329,190 325,642
Accumulated other comprehensive income (5,658) (8,164)
Treasury stock (5,543,447 shares in 2002
and 5,493,053 shares in 2001), at cost (104,304 (103,158)
Total Shareholders' Equity 270,994 262,485
$463,789 $457,527
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Earnings (Unaudited)
Three Months Ended Six Months Ended
June 29 June 30 June 29 June 30
(In thousands, except share data) 2002 2001 2002 2001
Net sales $145,176 $146,668 $278,686 $296,823
Other income, net 278 22 424 172
145,454 146,690 279,110 296,995
Cost and expenses: Cost of goods sold 103,805 104,875 200,160 212,420
Selling and administrative 27,768 28,703 54,348 56,998
Profit sharing 1,585 1,508 2,830 3,063
Interest 877 1,367 1,737 2,901
134,035 136,453 259,075 275,382
Earnings before income taxes 11,419 10,237 20,035 21,613
Income taxes 4,224 3,788 7,413 7,997
Net Earnings $7,195 $6,449 $12,622 $13,616
Net earnings per share-basic $0.21 $0.19 $0.37 $0.40
Net earnings per share-diluted $0.21 $0.19 $0.36 $0.39
Weighted average shares outstanding-basic 34,046,746 33,903,133 33,998,507 33,876,705
Weighted average shares outstanding-diluted 34,784,338 34,539,381 34,662,763 34,511,122
Dividends declared and paid per common share $0.13 $0.13 $0.26 $0.26
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 29 June 30
(In thousands) 2002 2001
Operating activities:
Net earnings $12,622 $13,616
Depreciation 8,839 8,364
Amortization 763 1,027
Deferred income taxes 1,602 1,593
Changes in operating assets and liabilities:
Receivables (11,464) 56
Inventories 7,642 (1,523)
Other current assets 1,573 1,761
Accounts payable (4,753) 1,475
Accrued expenses and other liabilities (4,927) (10,943)
Income taxes (707) (3,369)
Other - net 1,754 (2,405)
Net cash provided by operating activities 12,944 9,652
Investing activities:
Additions to property, plant and equipment (4,346) (7,338)
Marketable securities purchased (10,939) (1,291)
Marketable securities sold 2,038 5,390
Net cash used in investing activities (13,247) (3,239)
Financing activities:
Additional long-term obligations 14,000 44,546
Reduction of long-term obligations (6,179) (45,320)
Unexpended debt proceeds 1 5
Dividends paid (8,847) (8,818)
Common stock repurchased 0 (780)
Stock option plans 2,455 2,770
Net cash provided by (used in) financing activities 1,430 (7,597)
Net increase in cash and cash equivalents 1,127 (1,184)
Beginning cash and cash equivalents 5,564 5,868
Ending cash and cash equivalents $6,691 $4,684
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates Notes to Unaudited Condensed Consolidated Financial Statements June 29, 2002
principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements, and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 29, 2001. In the opinion of management, all adjustments (consisting only of normal recurring items) considered necessary for a fair presentation have been included. The results of operations for the six months ended June 29, 2002 may not be indicative of the results that may be expected for the fiscal year ending December 28, 2002.
Comprehensive Income:Total comprehensive income was approximately $8.3 million and $6.1 million for the second quarter of 2002 and 2001, respectively and was approximately $15.1 million and $12.6 million for the first six months of 2002 and 2001, respectively. The components of comprehensive income are illustrated in the table below:
Three Months Ended
June 29, 2002 June 30, 2001
Net income $7,195 $6,449
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 141 49
Less: reclassification adjustment for gains
included in net income (87) (50)
54 (1)
Net change in current period hedging transactions 195 (210)
Foreign currency translation adjustment 837 (126)
Other comprehensive income, net of tax 1,086 (337)
Total comprehensive income $8,281 $6,112
Six Months Ended
June 29, 2002 June 30, 2001
Net income $12,622 $13,616
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 173 107
Less: reclassification adjustment for gains
included in net income (157) (98)
16 9
Net change in current period hedging transactions 1,982 (242)
Foreign currency translation adjustment 508 (752)
Other comprehensive income, net of tax 2,506 (985)
Total comprehensive income $15,128 $12,631
Segment Reporting: The Company has only one reportable segment; therefore, the condensed consolidated financial statements reflect segment information.
Financial Derivatives:Effective December 31, 2000, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) as amended. This statement requires the company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings (fair value hedges), or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings (cash flow hedges). The ineffective portion of a derivative’s change in fair value is recognized in earnings.
The Company uses derivatives to moderate the commodity market risks of its business operations. Derivative products, such as futures and option contracts, are considered to be a hedge against changes in the amount of future cash flows related to commodities procurement. The amount recognized on cash flow hedges in second quarter 2002 did not have a material effect on the consolidated financial statements.
At June 29, 2002 and December 29, 2001, the Company had derivative related balances with a fair value of approximately $1,793,000 and ($769,000), respectively, recorded in other current assets. The Company had corresponding net after-tax gains (losses) of approximately $621,000 and ($1,400,000) recorded in other comprehensive income (loss) at June 29, 2002 and December 29, 2001, respectively. The Company expects that net after-tax gains, totaling approximately $621,000 included in other comprehensive income at June 29, 2002, related to cash flow hedges, will be recognized in cost of sales within the next twelve months. The Company generally does not hedge anticipated transactions beyond 18 months.
Three Months Ended
(In thousands, except per share data) June 29, 2002 June 30, 2001
Numerator Reconciliation:
Net earnings $ 7,195 $ 6,449
Denominator Reconciliation:
The denominator for basic EPS:
Weighted average shares 34,047 33,903
Effect of dilutive securities:
Stock options 737 636
The denominator for diluted EPS-adjusted
weighted average shares 34,784 34,539
Basic earnings per share $ 0.21 $ 0.19
Diluted earnings per share $ 0.21 $ 0.19
Six Months Ended
(In thousands, except per share data) June 29, 2002 June 30, 2001
Numerator Reconciliation:
Net earnings $ 12,622 $ 13,616
Denominator Reconciliation:
The denominator for basic EPS:
Weighted average shares 33,999 33,877
Effect of dilutive securities:
Stock options 664 634
The denominator for diluted EPS-adjusted
weighted average shares 34,663 34,511
Basic earnings per share $ 0.37 $ 0.40
Diluted earnings per share $ 0.36 $ 0.39
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other definite-lived intangible assets will continue to be amortized over their useful lives. The new rules on accounting for goodwill and other intangible assets became effective for the Company beginning in the first quarter of 2002. The Company assessed its goodwill for impairment upon adoption, and will test for impairment at least annually thereafter. The Company’s transitional impairment test did not indicate any impairment losses. Had the provisions of SFAS 142 been in effect during the six months ended June 30, 2001, an increase in net income of $575,000 or $.016 per diluted share, would have been recorded. The effect on net income and earnings per share for the three months ended June 30, 2001 would not have been significant.
In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supercedes SFAS 121. Generally, SFAS 144 retains the fundamental provisions of SFAS 121 related to the recognition and measurement of the impairment of long-lived assets, except for the indefinite-lived intangible assets, which are covered by SFAS 142. However, SFAS 144 provides more guidance on estimating cash flows when performing a recoverability test, requires that a long-lived asset to be disposed of other than by sale be classified as “held and used” until it is disposed of, and establishes more restrictive criteria to classify an asset as “held for sale.” SFAS 144 became effective for the Company beginning December 30, 2001. The Company’s adoption of SFAS 144 has had no material effect on its consolidated financial position, results of operations or cash flows.
On March 16, 2001, the Company entered into a loan agreement (“the facility”) with a bank, which provides the Company up to $70 million of borrowing capacity. The facility is secured with Company’s trade accounts receivable and matures March 15, 2004. Interest is calculated at a relevant commercial paper rate plus applicable margin. At June 29, 2002 the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.84%.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsEarnings for the second quarter of 2002 increased to $7.2 million or $0.21 per diluted share compared to $6.4 million or $0.19 per diluted share for the second quarter of 2001. Earnings for the first six months of 2002 amounted to $12.6 million or $0.36 per diluted share compared to $13.6 million or $0.39 per diluted share for the same period last year. Improvement in the second quarter resulted from gradually increasing orders, primarily from new customers, the Company’s cost reduction program and continued investments in productivity.
Cost of sales as a percentage of sales remained at 71.5% . Improvements in manufacturing efficiencies were offset by decreased sales volume.
Selling and administrative expenses decreased $935,000. The improvements resulted primarily from the Company’s overall cost reduction programs. As a percentage of sales, selling and administrative expenses decreased to 19.1% from 19.6%.
Interest expense decreased $490,000 from the same period last year as a result of decreased average interest rates on outstanding debt. Six Months Ended June 29, 2002 versus Six Months Ended June 30, 2001 Sales of $278.7 million decreased 6.1% as a result of overall economic conditions.Cost of sales as a percentage of sales increased to 71.8% from 71.6% during the same period last year. Improvements in manufacturing efficiencies were offset by a decrease in sales volume.
Selling and administrative expenses decreased $2.7 million as a result of the Company’s overall cost reduction programs. As a percentage of revenue, selling and administrative expenses were 19.5% compared to 19.2% for the same period last year. This was a result of decreased sales volume.
Interest expense decreased $1.2 million from the same period last year as a result of decreased average interest rates on outstanding debt.
For the six months ended June 29, 2002, net cash flows from operations amounted to $12.9 million. The Company utilized cash from operations to fund property, plant and equipment additions of $4.3 million and pay quarterly dividends of $8.8 million to shareholders.
At June 29, 2002, working capital was $195.0 million compared to $173.6 million at year-end 2001, an increase of $21.4 million. The current ratio at June 29, 2002 was 3.9 to 1 compared to 3.2 to 1 at year-end 2001.
Total debt at June 29, 2002 was $108.2 million compared to $100.4 million at December 29, 2001. The Company’s credit agreements contain various covenants. The Company was in compliance with these covenants at June 29, 2002.
The Company expects that its foreseeable cash needs for operations and capital expenditures will continue to be met through cash flows from operating activities and existing credit facilities.
This document contains statements that are forward-looking, ie, not historical facts. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “outlook”, “optimistic”, “trends”, “expect(s)", “assuming”, “expectations”, “forecasted”, “estimates”, “expected”) are based on the Company’s current expectations and some of them are subject to risks and uncertainties. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the following: (i) changes in economic conditions, (ii) developments of new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs of select raw materials, (iv) the success in increasing sales and maintaining or improving the operating margins of the Company, and (v) other factors including those identified in the Company’s press releases and other filings made from time-to-time with the Securities and Exchange Commission. These statements should be read in conjunction with the Company’s most recent annual report (as well as the Company’s Form 10-K and other reports filed with the Securities and Exchange Commission) containing a discussion of the Company’s business and of various factors that may affect it.
As a purchaser of certain commodities, primarily copper, aluminum and steel, the Company periodically utilizes commodity futures and options for hedging purposes to reduce the effect of changing commodity prices and as a mechanism to procure materials. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts that are highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting, as described in Note A to the unaudited condensed consolidated financial statements.
The Company’s interest rate risk is related to its available-for-sale securities and long-term debt. Due to the short-term nature of the Company’s securities portfolio, anticipated interest rate risk is not considered material. The Company’s debt obligations include certain notes payable to banks bearing interest at a quarterly variable rate. The Company does not currently utilize derivatives for managing interest rate risk, but continues to monitor changes in market interest rates.
Although the Company has risk related to changes in foreign currency exchange rates, foreign affiliates comprise less than 10% of the Company’s total assets. The Company does not anticipate the use of derivatives for managing foreign currency risk, but continues to monitor the effects of foreign currency exchange rates.
The Company held its annual meeting on April 20, 2002, at which shareholders voted on one proposal. Proposal I was the election of three Directors to the Company’s Board of Directors for terms expiring in 2005. The following is a list of the Board’s slate of nominees (who were the only nominees) each of whom were elected, and the results of shareholder voting on Proposal I:
Votes Votes
Proposal I For Withheld
Jefferson W. Asher, Jr. 26,806,617 642,481
Richard E. Jaudes 26,995,831 453,267
Robert J. Messey 26,850,167 598,931
The remaining board members are listed below and each is expected to serve out his
respective term:
Merlin J. Augustine, Jr. John A. McFarland R. L. Qualls
R. S. Boreham, Jr. Robert L. Proost Barry K. Rogstad
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Number Description
99 Certifications Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
b. The registrant did not file any reports on Form 8-K during the most recently
completed fiscal quarter.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BALDOR ELECTRIC COMPANY
(Registrant)
Date: August 13, 2002 By: /s/ Ronald E. Tucker
Ronald E. Tucker - Chief Financial Officer (on
behalf of the Registrant and as Chief
Financial Officer)