Baldor sees income decline; continues to reduce debt (Updated)

Officials with Fort Smith-based Baldor Electric Co. said Thursday (July 30) they are hopeful a second quarter net income decline of 73.4% represents the most difficult quarter of 2009.

Baldor Electric reported in its second quarter earnings statement that net sales for the quarter were $384.67 million, down 24% from the same quarter of 2008. The company reported $7.79 million in net income for the quarter, down more than 73% over the same quarter in 2008.

For the first six months of the year, Baldor’s net sales totaled $787.21 million, down 19%; and net income in the six-month period was $44.21 million, down 20% from the same period in 2008.

“While we were disappointed by a 24% sales decline this quarter, sales trends during May and June lead us to believe second quarter will be our most challenging quarter of the year,” Baldor Chairman and CEO John McFarland said in the earnings statement. “April was the weakest month of the quarter and the year. Incoming orders began to improve slightly during May, and June’s order rates improved slightly over May.”

McFarland said he thinks third quarter sales will dip just 20% from what was a record quarter in the third quarter of 2008.

More importantly, the company maintains it is on track to reduce the significant long-term debt incurred with the $1.8 billion acquisition of competitor Reliance/Dodge in November 2006. The company, using increased cash flow ($104.52 million year-to-date as of June 30, compared to $71.65 million year-to-date as of June 30, 2008) resulting from improved operating margins has reduced the debt from $1.319 billion in the second quarter of 2008 to $1.274 billion in the second quarter of 2009.

While some see that as no small sum for Baldor, Kristine Kubacki, a senior analyst with Nashville-based Avondale Partners, said in a Feb. 18 report that she is not overly concerned about the company’s ability to manage the debt and its associated covenants.

“(Baldor) plans to reduce debt by a minimum of $125 million during 2009. The current debt to EBITDA (earnings before interest, taxes, debt and amortization) ratio for Baldor is 3.81 and this ratio needs to be reduced to 3.75 by Dec. 31 2009. Management stated that with the planned debt reduction, cost reduction plans and current sales initiatives that they don’t see 3.75 being difficult to achieve,” Kubacki wrote.

Updated info: Baldor announced April 1 it was able to amend a credit agreement — for a fee of $6.83 million — so as to avoid future problems related to meeting their debt covenants. Specifically, a debt ratio of 3.75 to be met by Dec. 31, 2009 has been relaxed to 5.25. Essentially what was amended was $911 million in debt — a $711 million outstanding balance along with a $200 million revolving loan.

The company is now targeting a fiscal 2009 debt reduction goal of “at least $100 million.”

“Since we took on the debt 29 months ago, we have repaid $275 million. Debt reduction remains the priority for free cash flow. We expect to reduce our debt by at least $100 million this year,” McFarland noted in the earnings statement.

Baldor outlined in its statement the sources of its sales declines.
• Sales of industrial motors were $248 million, down 24%.
• Sales of mechanical power transmission products were $115 million, down 20%.
• Sales to domestic distributors were down 29%.
• Sales to domestic original equipment makers (OEM) were down 26%.
• International sales of $70 million comprised 18% of sales for the quarter, down 12% from last year.

Part of the sales decline is attributed to suppliers and OEM reducing inventories. McFarland said the company expects such reductions to “diminish over the balance of the year.”

Baldor’s bright spot is overseas. The company reported that sales in the Asia Pacific region increased 28% for the quarter, and shipments and earnings from its plants in China were an all-time record.

Baldor, a maker, designer and marketer of electric motors, motor drives, power transmissions and generators, posted record sales in 2008 of $1.95 billion. The company employs between 7,500 and 8,000 in 28 plants in five countries and sales offices serving more than 80 countries. About 2,000 are employed in the Fort Smith area.

Shares of Baldor (NYSE: BEZ) closed Thursday (July 30) at $27.60, down 9 cents. The company issued its quarterly report after the markets closed. During the past 52 weeks, the share price has ranged from a $39.25 high to a $10.21 low.