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 September 27, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 01-07284
Baldor Electric Company
Exact name of registrant as specified in its charter
| Missouri | 43-0168840 | |
| State or other jurisdiction of incorporation | IRS Employer Identification No | |
5711 R. S. Boreham, Jr., St Fort Smith, Arkansas | 72901 | |
| Address of principal executive offices | Zip Code | |
Registrant’s telephone number, including area code 479-646-4711
N/A
Former name or former address, if changed since last report
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. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yesx No ¨
At September 27, 2003, there were 32,788,302 shares of the registrant’s common stock outstanding.
Baldor Electric Company and Affiliates
Index
| Part 1. | Financial Information | |||
| Item 1. | Financial Statements (Unaudited) | |||
| Condensed consolidated balance sheets — September 27, 2003 and December 28, 2002 | ||||
Condensed consolidated statements of earnings — Three and nine months ended September 27, 2003 and September 28, 2002 | ||||
| Condensed consolidated statements of cash flows — Nine months ended September 27, 2003 and September 28, 2002 | ||||
| Notes to unaudited condensed consolidated financial statements — September 27, 2003 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||
| Item 4. | Controls and Procedures | |||
| Part 2. | Other Information | |||
| Item 5. | Market for the Registrant’s Common Equity and Related Shareholder Matters | |||
| Item 6. | Exhibits and Reports on Form 8-K | |||
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Baldor Electric Company and Affiliates
Condensed Consolidated Balance Sheets (Unaudited)
| (in thousands, except share data) | Sep 27, 2003 | Dec 28, 2002 | ||||||||
| ASSETS | ||||||||||
| Current Assets: | Cash and cash equivalents | $ | 10,813 | $ | 24,515 | |||||
| Marketable securities | 31,339 | 27,155 | ||||||||
Receivables, less allowances for doubtful accounts of $4,145 and $4,031, respectively | 89,901 | 83,630 | ||||||||
| Inventories: | ||||||||||
| Finished products | 77,311 | 78,044 | ||||||||
| Work in process | 10,273 | 9,927 | ||||||||
| Raw materials | 49,894 | 50,237 | ||||||||
| 137,478 | 138,208 | |||||||||
| LIFO valuation adjustment | (25,505 | ) | (25,068 | ) | ||||||
| 111,973 | 113,140 | |||||||||
| Other current assets and deferred income taxes | 21,415 | 24,264 | ||||||||
| Total Current Assets | 265,441 | 272,704 | ||||||||
| Property, Plant | Land and improvements | 6,282 | 6,282 | |||||||
| and Equipment: | Buildings and improvements | 59,023 | 56,350 | |||||||
| Machinery and equipment | 281,364 | 274,314 | ||||||||
| Allowances for depreciation and amortization | (212,058 | ) | (200,279 | ) | ||||||
| Net Property, Plant and Equipment | 134,611 | 136,667 | ||||||||
| Other Assets: | Goodwill | 62,846 | 57,158 | |||||||
| Other | 5,368 | 6,232 | ||||||||
| $ | 468,266 | $ | 472,761 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||
| Current | Accounts payable | $ | 28,852 | $ | 25,289 | |||||
| Liabilities: | Employee compensation | 9,209 | 7,526 | |||||||
| Profit sharing | 3,993 | 5,279 | ||||||||
| Accrued warranty costs | 6,729 | 6,625 | ||||||||
| Accrued insurance obligations | 12,164 | 13,794 | ||||||||
| Other accrued expenses | 14,826 | 12,274 | ||||||||
| Income taxes payable | 10,958 | 1,004 | ||||||||
| Current maturities of long-term obligations | 819 | 1,890 | ||||||||
| Total Current Liabilities | 87,550 | 73,681 | ||||||||
| Long-Term Obligations | 104,468 | 105,285 | ||||||||
| Deferred Income Taxes | 19,546 | 19,197 | ||||||||
| 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: 39,919,546 and 39,693,091, respectively | 3,993 | 3,969 | ||||||||
| Additional capital | 52,073 | 48,657 | ||||||||
| Retained earnings | 336,740 | 331,373 | ||||||||
| Accumulated other comprehensive loss | (3,180 | ) | (4,880 | ) | ||||||
Treasury stock, at cost 7,131,244 shares and 5,553,633 shares, respectively | (132,924 | ) | (104,521 | ) | ||||||
| Total Shareholders' Equity | 256,702 | 274,598 | ||||||||
| $ | 468,266 | $ | 472,761 | |||||||
See notes to unaudited condensed consolidated financial statements.
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Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Earnings (Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||
| (in thousands, except per share data) | Sep 27, 2003 | Sep 28, 2002 | Sep 27, 2003 | Sep 28, 2002 | ||||||||||
Net sales | $ | 138,980 | $ | 134,890 | $ | 414,893 | $ | 413,575 | ||||||
Other income, net | 579 | 448 | 1,505 | 872 | ||||||||||
| 139,559 | 135,338 | 416,398 | 414,447 | |||||||||||
Cost and expenses: | Cost of goods sold | 102,154 | 98,758 | 302,927 | 298,917 | |||||||||
| Selling and administrative | 25,769 | 26,309 | 78,328 | 80,657 | ||||||||||
| Profit sharing | 1,335 | 1,161 | 3,992 | 3,991 | ||||||||||
| Interest | 674 | 900 | 2,216 | 2,637 | ||||||||||
| 129,932 | 127,128 | 387,463 | 386,202 | |||||||||||
Earnings before income taxes | 9,627 | 8,210 | 28,935 | 28,245 | ||||||||||
Income taxes | 3,562 | 3,038 | 10,706 | 10,451 | ||||||||||
| Net Earnings | $ | 6,065 | $ | 5,172 | $ | 18,229 | $ | 17,794 | ||||||
Net earnings per share-basic | $ | 0.19 | $ | 0.15 | $ | 0.55 | $ | 0.52 | ||||||
Net earnings per share-diluted | $ | 0.18 | $ | 0.15 | $ | 0.54 | $ | 0.51 | ||||||
Weighted average shares outstanding—basic | 32,770 | 34,113 | 32,972 | 34,037 | ||||||||||
Weighted average shares outstanding—diluted | 33,251 | 34,652 | 33,451 | 34,657 | ||||||||||
Dividends declared and paid per common share | $ | 0.13 | $ | 0.13 | $ | 0.39 | $ | 0.39 | ||||||
See notes to unaudited condensed consolidated financial statements.
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Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Nine Months Ended | ||||||||
| (in thousands) | Sep 27, 2003 | Sep 28, 2002 | ||||||
Operating activities: | ||||||||
Net earnings | $ | 18,229 | $ | 17,794 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Gains on sales of marketable securities | (441 | ) | (392 | ) | ||||
Depreciation | 12,512 | 13,171 | ||||||
Amortization | 1,289 | 1,144 | ||||||
Deferred income taxes | 455 | 3,393 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in receivables | (5,293 | ) | (9,771 | ) | ||||
Decrease in Inventories | 2,711 | 11,918 | ||||||
Decrease in other current assets | 3,629 | 4,087 | ||||||
Increase in accounts payable | 3,128 | 1,442 | ||||||
Increase in accrued expenses and other liabilities | 1,208 | 59 | ||||||
Increase (decrease) in income taxes payable | 9,841 | (3,619 | ) | |||||
Change in other, net | 44 | (1,216 | ) | |||||
Net cash provided by operating activities | 47,312 | 38,010 | ||||||
Investing activities: | ||||||||
Additions to property, plant and equipment | (9,548 | ) | (6,335 | ) | ||||
Marketable securities purchased | (31,828 | ) | (23,310 | ) | ||||
Marketable securities sold | 27,974 | 6,405 | ||||||
Acquisitions | (5,831 | ) | 0 | |||||
Net cash used in investing activities | (19,233 | ) | (23,240 | ) | ||||
Financing activities: | ||||||||
Additional long-term obligations | 0 | 14,000 | ||||||
Reduction of long-term obligations | (3,895 | ) | (7,266 | ) | ||||
Unexpended debt proceeds | 0 | (1 | ) | |||||
Dividends paid | (12,923 | ) | (13,283 | ) | ||||
Common stock repurchased | (26,686 | ) | 0 | |||||
Stock option plans | 1,723 | 2,923 | ||||||
Net cash used in financing activities | (41,781 | ) | (3,627 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (13,702 | ) | 11,143 | |||||
Beginning cash and cash equivalents | 24,515 | 5,564 | ||||||
Ending cash and cash equivalents | $ | 10,813 | $ | 16,707 | ||||
See notes to unaudited condensed consolidated financial statements.
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Baldor Electric Company and Affiliates
Notes to Unaudited Condensed Consolidated Financial Statements
September 27, 2003
Note A Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting 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 28, 2002. 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 three and nine months ended September 27, 2003, may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.
Segment Reporting
The Company has only one reportable segment; therefore, the condensed consolidated financial statements reflect segment information.
Financial Derivatives
The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. If a hedge transaction is terminated, any unrealized gain (loss) at the date of termination is carried in other comprehensive income (loss) until the hedged item is recognized as earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings in the period of change.
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. Net gains (losses) recognized in earnings, related to cash flow hedges, in the third quarter 2003 and 2002 amounted to $193,000 and ($427,000), respectively, and for the first nine months of 2003 and 2002 amounted to $445,000 and ($1,051,000), respectively.
At September 27, 2003, and December 28, 2002, the Company had derivative related balances with a fair value of approximately $949,000 and ($99,000), respectively, recorded in other current assets. The Company had corresponding net after-tax gains (losses) of approximately $683,000 and ($61,000) recorded in accumulated other comprehensive income (loss) at September 27, 2003, and December 28, 2002, respectively. The Company expects that net after-tax gains, totaling approximately $683,000 included in accumulated other comprehensive loss at September 27, 2003, 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.
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Comprehensive Income
Total comprehensive income was approximately $6.5 million and $3.6 million for the third quarter of 2003 and 2002, respectively, and was approximately $19.9 million and $18.7 million for the first nine months of 2003 and 2002, respectively. The components of comprehensive income are illustrated in the table below:
| Three Months Ended | ||||||||
| (in thousands) | Sep 27, 2003 | Sep 28, 2002 | ||||||
Net income | $ | 6,065 | $ | 5,172 | ||||
Other comprehensive income, net of tax: | ||||||||
Unrealized gains on securities: | ||||||||
Unrealized holding gains arising during period | 175 | 147 | ||||||
Reclassification adjustment for gains included in net income | (94 | ) | (90 | ) | ||||
Net change in current period hedging transactions | 357 | (1,546 | ) | |||||
Foreign currency translation adjustment | 11 | (87 | ) | |||||
Other comprehensive income, net of tax | 449 | (1,576 | ) | |||||
Total comprehensive income | $ | 6,514 | $ | 3,596 | ||||
| Nine Months Ended | ||||||||
| (in thousands) | Sep 27, 2003 | Sep 28, 2002 | ||||||
Net income | $ | 18,229 | $ | 17,794 | ||||
Other comprehensive income, net of tax: | ||||||||
Unrealized gains on securities: | ||||||||
Unrealized holding gains arising during period | 208 | 320 | ||||||
Reclassification adjustment for gains included in net income | (278 | ) | (247 | ) | ||||
Net change in current period hedging transactions | 744 | 436 | ||||||
Foreign currency translation adjustment | 1,026 | 421 | ||||||
Other comprehensive income, net of tax | 1,700 | 930 | ||||||
Total comprehensive income | $ | 19,929 | $ | 18,724 | ||||
Product Warranties
The Company accrues for product warranty claims based on historical experience and the expected costs to provide warranty service. The changes in the carrying amount of product warranty reserves during the nine months ended September 27, 2003, is as follows(in thousands):
Balance at Dec 28, 2002 | Charges to Costs and Expenses | Deductions | Balance at Sep 27, 2003 | |||
$6,625 | $2,125 | ($2,021) | $6,729 |
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Stock-Based Compensation
The Company has certain stock-based employee compensation plans. In accounting for these plans, the Company applies the intrinsic value method permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations.
SFAS No. 123 requires pro forma disclosure of the effects on net income and earnings per share when applying the fair value method of valuing stock-based compensation. The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option pricing model. For purposes of this disclosure, the estimated fair value of the options is amortized over the applicable compensatory periods.
| Three Months Ended | ||||||||||||||
| Sep 27, 2003 | Sep 28, 2002 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||
Net income, as reported | $ | 6,065 | $ | 5,172 | ||||||||||
Less: Stock-based employee compensation expense determined under fair value method, net of tax effects | (143 | ) | (132 | ) | ||||||||||
Pro forma net income | $ | 5,922 | $ | 5,040 | ||||||||||
| Earnings per share: | Basic | Diluted | Basic | Diluted | ||||||||||
Reported | $ | 0.19 | $ | 0.18 | $ | 0.15 | $ | 0.15 | ||||||
Pro forma | $ | 0.18 | $ | 0.18 | $ | 0.15 | $ | 0.15 | ||||||
| Nine Months Ended | ||||||||||||||
| Sep 27, 2003 | Sep 28, 2002 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||
Net income, as reported | $ | 18,229 | $ | 17,794 | ||||||||||
Less: Stock-based employee compensation expense determined under fair value method, net of tax effects | (253 | ) | (435 | ) | ||||||||||
Pro forma net income | $ | 17,976 | $ | 17,359 | ||||||||||
| Earnings per share: | Basic | Diluted | Basic | Diluted | ||||||||||
Reported | $ | 0.55 | $ | 0.54 | $ | 0.52 | $ | 0.51 | ||||||
Pro forma | $ | 0.55 | $ | 0.54 | $ | 0.51 | $ | 0.50 | ||||||
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Note B Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS):
| Three Months Ended | ||||||
| Sep 27, 2003 | Sep 28, 2002 | |||||
(In thousands, except per share data) | ||||||
Numerator Reconciliation: | ||||||
Net earnings | $ | 6,065 | $ | 5,172 | ||
Denominator Reconciliation: | ||||||
The denominator for basic EPS: | ||||||
Weighted average shares | 32,770 | 34,113 | ||||
Effect of dilutive securities: | ||||||
Stock options | 481 | 539 | ||||
The denominator for diluted EPS: | ||||||
Adjusted weighted average shares | 33,251 | 34,652 | ||||
Basic earnings per share | $ | 0.19 | $ | 0.15 | ||
Diluted earnings per share | $ | 0.18 | $ | 0.15 | ||
| Nine Months Ended | ||||||
| Sep 27, 2003 | Sep 28, 2002 | |||||
(In thousands, except per share data) | ||||||
Numerator Reconciliation: | ||||||
Net earnings | $ | 18,229 | $ | 17,794 | ||
Denominator Reconciliation: | ||||||
The denominator for basic EPS: | ||||||
Weighted average shares | 32,972 | 34,037 | ||||
Effect of dilutive securities: | ||||||
Stock options | 479 | �� | 620 | |||
The denominator for diluted EPS: | ||||||
Adjusted weighted average shares | 33,451 | 34,657 | ||||
Basic earnings per share | $ | 0.55 | $ | 0.52 | ||
Diluted earnings per share | $ | 0.54 | $ | 0.51 | ||
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Note C Credit Facilities
The Company has a loan agreement (“the facility”) with a bank, which provides the Company up to $70 million of borrowing capacity, which was renewed March 5, 2003. The facility is secured with Company’s trade accounts receivable and matures March 13, 2005. Interest is calculated at a relevant commercial paper rate plus applicable margin. At September 27, 2003, the Company had outstanding borrowings on the facility amounting to $47.1 million at an interest rate of 1.08%.
Note D Stock Repurchase
On February 14, 2003, pursuant to the Company’s stock repurchase plan, the Company repurchased 1.5 million shares of its common stock for cash in the amount of $26.7 million. As of September 27, 2003, the Company had repurchased 5.8 million of the 6.0 million shares authorized for repurchase.
Note E Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to December 31, which results in a 52-week or 53-week year. Fiscal year 2003 will contain 53 weeks. Fiscal year 2002 contained 52 weeks.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings for the third quarter of 2003 increased to $6.1 million or $0.18 per diluted share from $5.2 million or $0.15 per diluted share for the third quarter of 2002. Operating margin for third quarter 2003 improved to 8.0% compared to 7.3% for third quarter 2002. For the nine months ended September 27, 2003, net earnings amounted to $18.2 million compared to $17.8 million for the same period last year and earnings per diluted share amounted to $.54, up 5.9% from $.51 for the same period last year. Share repurchases completed in the first quarter of 2003 accounted for a portion of the improvement in quarterly and year-to-date EPS. Operating margin for the first nine months of 2003 was 8.1% compared to 8.2% in 2002.
Third quarter 2003 versus Third quarter 2002
Net sales of $139.0 million for the third quarter 2003 grew 3.0% from third quarter 2002 net sales of $134.9 million. The continued addition of new business resulted in slightly improved top line results during third quarter 2003. Sales of electric motor products in third quarter 2003 were up 4.1% from third quarter 2002 and comprised 78.4% of total product sales in 2003 compared to 77.7% in 2002. Sales of drives products decreased 7.8% for the quarter when compared to third quarter 2002. Drives products accounted for 16.5% of total product sales in third quarter 2003, compared to 18.4% in third quarter 2002. Sales of generator products increased 32.7% from third quarter 2002 and comprised 5.1% of total product sales this quarter compared to 3.9% in third quarter 2002. Generator sales continue to increase rapidly. This growth is largely attributable to a renewed focus on the importance of standby power and increasing utilization of Baldor’s strong distribution network.
Cost of sales increased to 73.5% of sales for the third quarter 2003 compared to 73.2% in third quarter 2002. The mix of products sold during the third quarter of 2003, including a 32.7% increase in generator products, resulted in increased material costs as a percentage of net sales.
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Total selling and administrative expenses decreased from the same period last year and amounted to 18.5% of third quarter 2003 sales compared to 19.5% in third quarter 2002. Combined reductions in freight and warranty expenses amounted to approximately .3% of sales for third quarter 2003 compared to the same period in 2002. The remaining improvement was primarily a result of increased net sales.
Average long-term debt was approximately $1.4 million lower during third quarter 2003 compared to third quarter 2002. The reduced debt levels combined with continued favorable borrowing rates resulted in a decrease in interest expense of approximately $227,000 for third quarter 2003 as compared to third quarter 2002.
Nine months ended September 27, 2003 versus Nine months ended September 28, 2002
Net sales of $414.9 million for the first nine months of 2003 increased slightly from same period last year net sales of $413.6 million. Sales of electric motor products were 1.4% lower than 2002 and comprised 78.0% of total product sales in the first nine months of 2003 compared to 79.4% in 2002. Sales of drives products were down 1.7% for the nine month period when compared to same period of 2002. Drives products accounted for 17.2% of total product sales in the first nine months of 2003, decreasing from 17.6% in 2002. Sales of generator products increased 58.0% from the same period of 2002, comprising 4.8% of total product sales for the first nine months of 2003 compared to 3.06% for the first nine months of 2002. As with the third quarter results, our expansion in the generator market has provided new revenues.
Cost of sales increased to 73.0% of sales for the first nine months of 2003 compared to 72.3% in the first nine months of 2002. The mix of products sold during the first nine months of 2003, including a 58.0% increase in generator products, resulted in increased material costs as a percentage of net sales.
Selling and administrative expenses declined to 18.9% of sales for the first nine months of 2003 compared to 19.5% for the same period in 2002. Combined reductions in freight and warranty expenses amounted to approximately .4% of sales for the first nine months of 2003 when compared to the same period last year.
Reductions in borrowing rates on long-term debt obligations resulted in a decrease in interest expense of approximately $420,000 for the first nine months of 2003 as compared to the same period of 2002.
Liquidity and Capital Resources
For the nine months ended September 27, 2003, net cash flows from operations amounted to $47.3 million, increasing approximately $9.3 million from the same period of 2002. Strong accounts receivable collection and improved accounts payable management accounted for $4.5 million and $1.7 million, respectively, of improvement. There were no other significant fluctuations in the components of net cash flows that were inconsistent with normal balance sheet fluctuations and results of operations. The Company utilized cash flows from operations for the first nine months of 2003 along with a portion of cash and marketable securities held at year-end 2002 to fund property, plant and equipment additions of $9.5 million, pay quarterly dividends to shareholders of $12.9 million, fund the acquisition of Energy Dynamics, Inc. in the amount of $5.8 million, and repurchase 1.5 million shares of the Company’s common stock for $26.7 million.
At September 27, 2003, the Company had working capital of $177.9 million compared to $199.0 million at year-end 2002. The current ratio at September 27, 2003, was 3.0 to 1 compared to 3.7
11
to 1 at year-end 2002. The decreases in working capital and current ratio were primarily due to cash and marketable securities held at year-end to fund the repurchase of common stock during the first quarter of 2003 and fluctuations in accrued income tax liabilities resulting from the timing of estimated tax payments.
Total long-term debt at September 27, 2003, was $104.5 million compared to $105.3 million at December 28, 2002. The Company’s credit agreements contain various covenants. The Company was in compliance with these covenants during all of the periods presented in this report.
The Company’s principal source of liquidity is operating cash flows. Accordingly, the Company is dependent primarily on continued demand for its products and collectibility of receivables from its customers. The Company’s broad base of customers and industries served, as well as its position in the marketplace, ensure that fluctuations in a particular customer’s or industry’s business will not have a material effect on the Company’s sales or collectibility of receivables. As a result, the Company expects that its foreseeable cash needs for operations and capital expenditures will continue to be met through operating cash flows and existing credit facilities.
Critical Accounting Policies
The Company believes the following are the critical accounting policies, which could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management.
Revenue Recognition:The Company sells products to its customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. The Company has no further obligations associated with the product sale that would impact revenue recognition after the product is shipped.
Allowance for Doubtful Accounts: The Company records allowances for doubtful accounts based on customer-specific analysis, general matters such as current assessments of past due balances and economic conditions, and historical losses. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company had anticipated or for customer-specific circumstances, such as financial difficulty.
Inventories: Inventories are valued at the lower of cost or market, with cost being determined principally by the last-in, first-out (LIFO) method, except for non-U.S. inventories, which are determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The Company reviews the net realizable value of inventory on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, adjustments to inventory values may be required.
Self-Insurance Liabilities: The Company’s self-insurance programs include primarily product liability, workers’ compensation and health. The Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Company’s claims experience and risk exposure levels for the periods being valued. Adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors.
Long-Lived Assets and Goodwill:The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events indicate that the carrying amount of an asset may
12
not be fully recoverable. The Company evaluates the recoverability of goodwill and other intangible assets with indefinite lives annually or more frequently if events indicate that an asset may be impaired. The Company uses judgment when applying the impairment rules to determine when an impairment test is necessary. The Company is required to make estimates of its future cash flows related to the asset subject to review. These estimates require assumptions about demand for the Company’s products, future market conditions, technological developments, and future discount rates and growth rates.
Forward-looking Statements
This document contains statements that are forward-looking, i.e., 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”, “ensure”, “will”, “will not”, “believes”, “could”) 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company’s operations result primarily from changes in commodity prices, interest rates, and foreign exchange rates. To maintain stable pricing for its customers, the Company enters into various hedging transactions as described below.
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 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.
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Item 4. Controls and Procedures
The Company has established and maintains disclosure controls and procedures to ensure that information required to be disclosed is gathered, analyzed and disclosed in its reports filed pursuant to the Securities and Exchange Act of 1934. The Company’s principal executive officer and principal financial officer have concluded, based on their most recent evaluation under the supervision and with participation of the Company’s management, that the Company’s disclosure controls and procedures are effective. In addition, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART 2. OTHER INFORMATION
Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters
During the third quarter of 2003, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). The exercise price paid by the District Manager equaled the fair market value on the date of the grant. The total amount of shares granted under the DM Plan is approximately 1% of the outstanding shares of Baldor common stock. None of the transactions were registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration afforded by Section 4(2) of the Act. The Company deems this exemption to be appropriate given that there are a limited number of participants in the DM Plan and all parties are knowledgeable about the Company.
Item 6. Exhibits and Reports on Form 8-K
| a. | Exhibit Number | Description | ||
| 31.1 | Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31.2 | Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| b. | Reports filed on Form 8-K | |||
The Company furnished a Current Report on Form 8-K dated July 11, 2003, announcing earnings for the three and six months ended June 28, 2003, and attaching a press release related thereto. | ||||
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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: November 11, 2003 | By: | /s/ Ronald E. Tucker | ||||||
Ronald E. Tucker Chief Financial Officer (on behalf of the Registrant and as Chief Financial Officer) | ||||||||
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