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 28, 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 72901
(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 October 26, 2002, there were 34,133,070 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-September 28, 2002 and December 29, 2001
Condensed consolidated statements of earnings-Three and nine months ended
September 28, 2002 and September 29, 2001
Condensed consolidated statements of cash flows-Nine months ended
September 28, 2002 and September 29, 2001
Notes to condensed consolidated financial statements-September 28, 2002
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 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) September 28 December 29
2002 2001
Assets
Current Assets: Cash and cash equivalents $16,707 $5,564
Marketable securities 28,465 11,052
Receivables, less allowances for doubtful accounts
of $3,900 in 2002 and $4,600 in 2001. 92,953 83,182
Inventories:
Finished products 76,720 83,919
Work in process 10,585 10,155
Raw materials 52,294 56,751
139,599 150,825
LIFO valuation adjustment (25,296) (24,604)
114,303 126,221
Other current assets and deferred income taxes 21,289 25,262
Total Current Assets 273,717 251,281
Property, Plant Land and improvements 6,280 6,267
and Equipment: Buildings and improvements 56,166 54,372
Machinery and equipment 269,909 266,627
Allowances for depreciation and amortization (195,929) (185,151)
Net Property, Plant and Equipment 136,426 142,115
Other Assets: Goodwill 57,158 57,158
Other 6,052 6,973
$473,353 $457,527
Liabilities and Shareholders' Equity
Current Accounts payable $30,272 $28,830
Liabilities: Employee compensation 7,571 5,997
Profit sharing 3,985 5,102
Accrued warranty costs 6,625 6,625
Accrued insurance obligations 14,281 15,694
Other accrued expenses 15,685 14,670
Income taxes payable (receivable) (4,665) (1,046)
Current maturities of long-term obligations 1,890 1,771
Total Current Liabilities 75,644 77,643
Long-Term Obligations 105,287 98,673
Deferred Income Taxes 21,943 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: (39,674,976 in 2002 3,967 3,941
and 39,411,473 in 2001)
Additional capital 48,410 44,224
Retained earnings 329,955 325,642
Accumulated other comprehensive loss (7,406) (8,164)
Treasury stock (5,550,038 shares in 2002
and 5,493,053 shares in 2001), at cost (104,447) (103,158)
Total Shareholders' Equity 270,479 262,485
$473,353 $457,527
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Earnings (Unaudited)
Three Months Ended Nine Months Ended
September 28 September 29 September 28 September 29
(In thousands, except share data) 2002 2001 2002 2001
Net sales $134,890 $138,126 $413,575 $434,948
Other income, net 448 354 872 526
135,338 138,480 414,447 435,474
Cost and expenses: Cost of goods sold 98,758 99,077 298,917 311,497
Selling and administrative 26,309 28,481 80,657 85,479
Profit sharing 1,161 1,197 3,991 4,260
Interest 900 1,118 2,637 4,018
127,128 129,873 386,202 405,254
Earnings before income taxes 8,210 8,607 28,245 30,220
Income taxes 3,038 3,184 10,451 11,181
Net Earnings $5,172 $5,423 $17,794 $19,039
Net earnings per share-basic $0.15 $0.16 $0.52 $0.56
Net earnings per share-diluted $0.15 $0.16 $0.51 $0.55
Weighted average shares outstanding-basic 34,113,297 33,938,429 34,036,770 33,897,279
Weighted average shares outstanding-diluted 34,652,310 34,562,089 34,657,431 34,528,932
Dividends declared and paid per common share $0.13 $0.13 $0.39 $0.39
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 28 September 29
(In thousands) 2002 2001
Operating activities:
Net earnings $17,794 $19,039
Depreciation 13,171 12,549
Amortization 1,144 2,625
Deferred income taxes 3,538 1,267
Changes in operating assets and liabilities:
Receivables (9,771) 2,344
Inventories 11,918 (1,022)
Other current assets 4,087 5,414
Accounts payable 1,442 5,683
Accrued expenses and other liabilities 59 (8,870)
Income taxes (3,619) (4,797)
Other - net (1,361) (3,608)
Net cash provided by operating activities 38,402 30,624
Investing activities:
Additions to property, plant and equipment (6,335) (10,747)
Marketable securities purchased (23,310) (5,185)
Marketable securities sold 6,013 5,900
Net cash used in investing activities (23,632) (10,032)
Financing activities:
Additional long-term obligations 14,000 59,500
Reduction of long-term obligations (7,266) (66,027)
Unexpended debt proceeds (1) 1
Dividends paid (13,283) (13,232)
Common stock repurchased 0 (2,289)
Stock option plans 2,923 3,124
Net cash used in financing activities (3,627) (18,923)
Net increase in cash and cash equivalents 11,143 1,669
Beginning cash and cash equivalents 5,564 5,868
Ending cash and cash equivalents $16,707 $7,537
See notes to unaudited condensed consolidated financial statements.
Baldor Electric Company and Affiliates Notes to Unaudited Condensed Consolidated Financial Statements September 28, 2002
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 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 three and nine months ended September 28, 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 $4.1 million and $3.7 million for the third quarter of 2002 and 2001, respectively, and was approximately $19.2 million and $16.4 million for the first nine months of 2002 and 2001, respectively. The components of comprehensive income are illustrated in the table below:
Three Months Ended
Sep 28, 2002 Sep 29, 2001
Net income $5,172 $5,423
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 120 89
Less: reclassification adjustment for
gains included in net income (90) (44)
30 45
Net change in current period hedging transactions (1,547) (641)
Foreign currency translation adjustment 415 (1,096)
Other comprehensive income, net of tax (1,102) (1,692)
Total comprehensive income $4,070 $3,731
Nine Months Ended
Sep 28, 2002 Sep 29, 2001
Net income $17,794 $19,039
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 293 196
Less: reclassification adjustment for
gains included in net income (247) (142)
46 54
Net change in current period hedging transactions 435 (883)
Foreign currency translation adjustment 923 (1,847)
Other comprehensive income, net of tax 1,404 (2,676)
Total comprehensive income $19,198 $16,363
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 third quarter 2002 did not have a material effect on the consolidated financial statements.
At September 28, 2002, and December 29, 2001, the Company had derivative related balances with a fair value of approximately ($1,129,000) and ($769,000), respectively, recorded in other current assets. The Company had corresponding net after-tax losses of approximately $925,000 and $1,360,000 recorded in accumulated other comprehensive income (loss) at September 28, 2002, and December 29, 2001, respectively. The Company expects that net after-tax losses, totaling approximately $925,000 included in accumulated other comprehensive income (loss) at September 28, 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) Sep 28, 2002 Sep 29, 2001
Numerator Reconciliation:
Net earnings $ 5,172 $ 5,423
Denominator Reconciliation:
The denominator for basic EPS:
Weighted average shares 34,113 33,938
Effect of dilutive securities:
Stock options 539 624
The denominator for diluted EPS-adjusted
weighted average shares 34,652 34,562
Basic earnings per share $ 0.15 $ 0.16
Diluted earnings per share $ 0.15 $ 0.16
Nine Months Ended
(In thousands, except per share data) Sep 28, 2002 Sep 29, 2001
Numerator Reconciliation:
Net earnings $ 17,794 $ 19,039
Denominator Reconciliation:
The denominator for basic EPS:
Weighted average shares 34,037 33,897
Effect of dilutive securities:
Stock options 620 632
The denominator for diluted EPS-adjusted
weighted average shares 34,657 34,529
Basic earnings per share $ 0.52 $ 0.56
Diluted earnings per share $ 0.51 $ 0.55
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 are no longer amortized but are 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. The Company’s first annual test for impairment will be completed during the fourth quarter of 2002. Had the provisions of SFAS 142 been in effect during the three and nine months ended September 29, 2001, an increase in net income of $268,000 or $.008 per diluted share and $864,000 or $.025, respectively, would have been recorded.
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 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 September 28, 2002, the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.80%.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsNet earnings for the third quarter of 2002 were $5.2 million or $0.15 per diluted share compared to $5.4 million or $0.16 per diluted share for the third quarter of 2001. Net earnings for the first nine months of 2002 amounted to $17.8 million or $0.51 per diluted share compared to $19.0 million or $0.56 per diluted share for the same period last year.
Cost of sales amounted to 73.2% of sales compared to 71.7% in third quarter 2001. Reduced lead times resulted in increased costs of the recurring two-week summer plant vacation. This, combined with weaker sales demand, increased the cost of sales percentage.
Selling and administrative expenses decreased $2.2 million. The improvements resulted primarily from reduced freight and warranty costs and the Company’s overall fixed cost reduction program. As a percentage of sales, selling and administrative expenses decreased to 19.5% from 20.6%.
Interest expense decreased $217,000 from the same period last year as a result of decreased average interest rates on outstanding debt.Nine months Ended September 28, 2002 versus Nine months Ended September 29, 2001
Sales of $413.6 million decreased 4.9% from the same period last year as a result of overall economic conditions.Cost of sales was 72.3% of sales compared to 71.6% during the same period last year, primarily resulting from decreased sales volume and higher product costs.
Selling and administrative expenses decreased $4.8 million. Fixed selling and administrative costs decreased $2.4 million as a result of the Company’s overall cost reduction programs. As a percentage of revenue, selling and administrative expenses improved to 19.5% from 19.7% for the same period last year.
Interest expense decreased $1.4 million from the same period last year as a result of decreased average interest rates on outstanding debt.For the nine months ended September 28, 2002, net cash flows from operations amounted to $38.4 million. The Company utilized a portion of cash from operations to fund property, plant and equipment additions of $6.3 million and pay quarterly dividends of $13.3 million to shareholders.
At September 28, 2002, working capital was $198.0 million compared to $173.6 million at year-end 2001, an increase of $24.4 million. The current ratio at September 28, 2002 was 3.6 to 1 compared to 3.2 to 1 at year-end 2001.Total debt at September 28, 2002 was $107.2 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 September 28, 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.
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.
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 (the “certifying officers”) have concluded, based on their evaluation within 90 days of the filing of this report, that the Company’s disclosure controls and procedures are effective. Their certifications pursuant to Exchange Act Rules 13a-14 and 15d-14 are included in the Certifications section of this report. 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 6. Exhibits and Reports on Form 8-K
a. Exhibit Number Description
99 Certifications Pursuant to Section 906 of the 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: November 12, 2002 By: /s/ Ronald E. Tucker
Ronald E. Tucker - Chief Financial Officer (on
behalf of the Registrant and as Chief
Financial Officer)
CERTIFICATIONS
I, John A. McFarland, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Baldor Electric Company;
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition,
results of operations, and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Effective Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which
could adversely affect the registrant's ability to record, process, summarize, and
report financial data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002 /s/ John A. McFarland
President and Chief Executive Officer
I, Ronald E. Tucker, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Baldor Electric Company;
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the statements
made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition,
results of operations, and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Effective Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which
could adversely affect the registrant's ability to record, process, summarize, and
report financial data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this quarterly report
whether or not there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
November 12, 2002 /s/ Ronald E. Tucker
Chief Financial Officer