Analysis: Baldor successfully cuts costs, but tough times ahead

An analysis from Jon Braatz at Kansas City Capital Associates notes that Baldor Electric Co. is doing a good job balancing the tough economic times with cost cuts and productivity gains.

However, Braatz advises that the Fort Smith-based company will continue to face tough conditions through 2010.

Baldor Electric reported July 30 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. The company said it believes the second quarter results will mark the financial bottom for fiscal 2009.

On the positive said, Braatz said Baldor’s cost savings and productivity improvements “have clearly been successful, and the company has maintained its 2009 target of $92 million in cost savings.”

The Braatz analysis also noted that the company was able to reduce inventories by $34 million and reduce debt by $44.6 million despite the tough global marketplace. Another positive was that sales in the Asia-Pacific region were up 28% in the quarter.

“These sales trends were very consistent with what we have been seeing from other industrial companies: weak markets domestically and relatively better in the Asia Pacific area,” Braatz noted.

Unfortunately, the non-operating factors of foreign currency losses ($2.7 million) and a quarterly charge ($2.5 million) related to financing its amended credit agreement “were a drag” on second quarter earnings and boosted expenses about $1 million more than Braatz expected.

Braatz predicts economic factors will continue to produce historically lower sales and earnings in 2009 and 2010. He estimates 2009 earnings per share at 99 cents, and 2010 earnings per share at $1.31. Actual earnings per share in 2008 was $2.15. Braatz said continued cost cuts at Baldor will improve operating margins and likely result in $92 million in 2009 cost savings. Despite the cost savings, Braatz reduced by $50 million his second-half revenue estimate for Baldor.

“Still, there is a ray of sunshine, as BEZ (Baldor) indicated that incoming orders rates have seen a slight improvement recently and that sales probably bottomed in the second quarter,” Braatz noted in his July 31 report.

Braatz closed his report with the following risk factors.
• Baldor’s operating results could be negatively impacted by “unanticipated and large increases in steel and copper.”

• The company continues to integrate Power Systems into the company and “any difficulty in that process could hurt operating results.”

• Baldor carries a lot of debt “and should any economic weakness persist for any extended period of time, the company’s ability to repay debt could be impaired.”