-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N4Oub1l6dwxLeXTpV+dlPjHu30lEpokTaUZk9C/+qck4FdN8D+V/OLp8UX+ExV0u DSnyccCiFgIyxcJ3PaVnpw== 0000009342-00-000001.txt : 20000323 0000009342-00-000001.hdr.sgml : 20000323 ACCESSION NUMBER: 0000009342-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALDOR ELECTRIC CO CENTRAL INDEX KEY: 0000009342 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 430168840 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07284 FILM NUMBER: 575298 BUSINESS ADDRESS: STREET 1: 5711 R S BOREHAM JR ST STREET 2: P O BOX 2400 CITY: FORT SMITH STATE: AR ZIP: 72902-2400 BUSINESS PHONE: 5016464711 10-K 1 BALDOR ELECTRIC COMPANY'S 1999 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: Commission File Number: -------------------------- ------------------------ January 1, 2000 01-07284 B A L D O R E L E C T R I C C O M P A N Y ------------------------------------------- (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. St, Fort Smith, Arkansas 72908 (501) 646-4711 - ------------------------------------------------------- -------------- (Address of principal executive offices) (Zip Code) (Telephone Number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of Each Class which registered ------------------- ---------------- Common Stock, $0.10 Par Value New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price on February 29, 2000, was $391,956,517. At February 29, 2000, there were 34,110,183 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the fiscal year ended January 1, 2000 (the "Annual Report to Shareholders for 1999"), are incorporated by reference into Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 29, 2000 (the "2000 Proxy Statement"), are incorporated by reference into Parts I and III. PART I Item 1. Business Baldor Electric Company ("Baldor" or the "Company") was incorporated in Missouri in 1920. The Company operates in one industry segment which includes the design, manufacture, and sale of electric motors and drives and related products. Baldor has made several small acquisitions; however, the majority of its growth has come internally through broadening its markets and product lines. Products The AC motor product and controls line presently ranges in size from 1/50 up to 1200 horsepower. The DC motor product line presently ranges from 1/50 through 700 horsepower. The adjustable speed controls product line ranges from 1/50 to 1000 horsepower. The Company's industrial control products include servo products, DC controls, position controls, and inverter and vector drives. With these products, the Company provides its customers the ability to purchase a "Drive" from one manufacturer. Baldor defines a "Drive" as an industrial motor and an electronic control. Sales of industrial electric motors represented approximately 79% of the Company's business in 1999 and 76% in each of the years 1998 and 1997. The bulk of the remaining sales are the results of sales from the drives product line. In addition to electric motors and drive products, Baldor's other product lines include speed reducers, industrial grinders, buffers, polishing lathes, stampings, castings, and repair parts. Baldor's motors and drives are designed, manufactured, and marketed for general purpose uses ("stock products") and for individual customer requirements and specifications ("custom products"). Stock product sales represented approximately 63% of sales for each of the years 1999, 1998, and 1997. Most stock product sales are to customers who place their orders for immediate shipment from current inventory. Custom products generally are shipped within three weeks from the date of order. Because of these and other factors, the Company does not believe that its backlog represents an accurate indication of future shipments. Sales and Marketing The products of the Company are marketed throughout the United States and in more than 60 foreign countries. The Company's field sales organization, comprised of independent manufacturer's representatives and Company sales offices, consists of more than 51 groups, including 40 in North America. The remainder of the Company's representatives is located in various parts of the world including Europe, Latin America, Australia, and the Far East. Custom products and stock products are sold to original equipment manufacturers ("OEMs") . Stock products are also sold to independent distributors for resale, often as replacement components in industrial machinery which is being modernized or upgraded for improved performance. No single customer accounted for more than 5% of sales; therefore, the Company does not believe that the loss of any single customer would have a material effect on its total business. Competition The Company faces substantial competition in the sales of its products in all markets served. Some of the Company's competitors are larger in size or are divisions of large diversified companies and have substantially greater financial resources. The Company competes by providing its customers better value through product quality and efficiency and better services including availability, shorter lead-times, on-time delivery, product literature, and training. The Company is not aware of any industry-wide statistics from which it can precisely determine its relative position in the industrial electric motor industry. In the United States certain industry statistics are available from the U.S. Department of Commerce and the National Electric Manufacturers Association. However, these sources do not include all competitors or all sizes of motors. The Company believes that it is a significant factor in the markets it serves and that its share of the market has increased over the past several years. Manufacturing The Company manufactures many of the components used in its products including laminations, motor hardware, and aluminum die castings. Manufacturing many of its own components permits the Company to better manage cost, quality, and availability. In addition to the manufacturing of components, the Company's motor manufacturing operations include machining, welding, winding, assembling, and finishing operations. The raw materials necessary for the Company's manufacturing operations are available from several sources. These materials include steel, copper wire, gray iron castings, aluminum, and insulating materials, many of which are purchased from more than one supplier. The Company believes that alternative sources are available for such materials. Research and Engineering The Company's design and development of electric motors and drives includes both the development of products which extend the product lines and the modification of existing products to meet new application requirements. Additional development work is done to improve production methods. Costs associated with research, new product development, and product and cost improvements are treated as expenses when incurred and amounted to $24,881,000 in 1999, $25,300,000 in 1998, and $22,900,000 in 1997. Environment Compliance with laws relating to the discharge of materials into the environment or otherwise relating to the protection of the environment has not had a material effect on capital expenditures, earnings, or the financial position of the Company and is not expected to have such an effect. Employees As of January 1, 2000, the Company had 3,854 employees. Executive Officers of the Registrant Information regarding executive officers is contained in Part III, Item 10, and incorporated herein by reference. International Operations Sales from international operations (foreign affiliates and exports) were approximately 14% of total sales in 1999 and 15% of total sales for 1998 and 1997. See also Note H on page 24 of the Annual Report to Shareholders for 1999. The Company's products are distributed in more than 60 foreign countries, principally in Canada, Europe, Australia, the Far East, and Latin America. In April 1997, the Company acquired the UK-based Optimised Control Ltd. This wholly-owned affiliate has sales offices in New Zealand and the UK and a development facility and a manufacturing facility in the UK. The Baldor Europe group of companies has sales offices in Switzerland, Germany, Italy, and the United Kingdom, and development and manufacturing operations in Germany. The Company owns majority interests in Australian Baldor Pty. Limited, which has locations in Sydney and Melbourne. The Company wholly owns Baldor Electric (Far East) Pte. Ltd., located in Singapore, and in the last two years, the Company has opened sales offices in Taiwan, Japan, and the Philippines. The Company also wholly owns Baldor de Mexico, S.A. de C.V., located in Leon, Mexico. The Company believes that it is in a position to act on global opportunities as they become available. The Company also believes that there are additional risks attendant to international operations including currency fluctuations and possible restrictions on the movement of funds. However, these risks have not had a significant adverse effect on the Company's business. Item 2. Properties The Company believes that its facilities, including equipment and machinery, are in good condition, suitable for current operations, adequately maintained and insured, and capable of sufficient additional production levels. The following table contains information with respect to the Company's properties. AREA LOCATION PRIMARY USE (SQ.FT.) - -------- ----------- ---------- Fort Smith, AR AC motor production 298,150 Distribution and service center 208,000 Administration and engineering offices 70,950 Aluminum die casting 79,330 Drives production center 162,000 St. Louis County, MO Metal stamping and engineering toolroom 108,560 DC and miscellaneous motor production 78,825 Columbus, MS AC motor production 156,000 Westville, OK AC and DC motor production 207,250 Fort Mill, SC DC motor, AC motor 108,000 and tachometer production Clarksville, AR Subfractional motor, gear motor, *165,735 and worm-gear speed reducer production Ozark, AR AC motor production 84,070 Four other Metal stamping and motor, drives, domestic locations and servomotor production 133,158 Ten foreign Sales and distribution centers locations and servodrive production 84,200 --------- 1,944,228 Certain properties listed above (*165,735 sq. ft. in the aggregate) are leased, principally pursuant to Industrial Revenue Bond agreements, and where material, are accounted for as capitalized lease obligations. Certain lease agreements contain purchase options at varying prices and/or renewal options at reduced rentals for extended additional periods. The Company also has available approximately 350,000 sq. ft. of space available for expansion. Item 3. Legal Proceedings The Company is party to a number of legal proceedings incidental to its business, none of which is deemed to be material to its operations or business. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters Information under the captions "Ticker", "Dividends paid", "Common stock price range", and "Shareholders" on page 29 of the Annual Report to Shareholders for 1999 is incorporated herein by reference. Item 6. Selected Financial Data Information concerning net sales, net earnings, net earnings per share, dividends per share, long-term obligations, and total assets for the years ended 1995 through 1999 is contained under the caption "Eleven-Year Summary of Financial Data" on page 14 of the Annual Report to Shareholders for 1999 and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information under the captions "Management's Discussion and Analysis of Financial Condition" and "Results of Operations" on pages 16 and 17 of the Annual Report to Shareholders for 1999 is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosure about Market Risk Information under the sub-caption "Market Risk" of the captions "Management's Discussion and Analysis of Financial Condition" and "Results of Operations" on page 17 of the Annual Report to Shareholders for 1999 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company and related notes on pages 18 through 26, the "Report of Ernst & Young LLP, Independent Auditors" on page 27, and the "Summary of Quarterly Results of Operations (Unaudited)" on page 19 of the Annual Report to Shareholders for 1999 are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information contained in the 2000 Proxy Statement under the caption "Proposal 1- Election of Directors" is incorporated herein by reference. The current executive officers of the Company, each of whom is elected for a term of one year or until his successor is elected and qualified, are: Served as Officer Name Age Position Since - ---- --- -------- ----- R. S. Boreham, Jr. 75 Chairman 1961 R. L. Qualls 66 Vice Chairman 1986 John A. McFarland 48 President and 1990 Chief Executive Officer Charles H. Cramer 55 Vice President - Personnel 1984 Lloyd G. Davis 52 Executive Vice President, 1992 Chief Operating Officer, and Secretary Ronald E. Tucker 42 Chief Financial Officer and 1997 Treasurer Gene J. Hagedorn 52 Vice President - Materials 1994 James R. Kimzey 61 Executive Vice President - 1984 Research and Reliability Randy L. Colip 40 Vice President - Sales 1997 Jerry D. Peerbolte 43 Vice President - Marketing 1990 Randal G. Waltman 50 Vice President - Motor 1997 Engineering and Operations John L. Peeples, III 47 Vice President - International 1998 Eddie L. Holderfield, Sr. 60 Vice President - Fort Smith 1999 Motor Manufacturing Each of the executive officers has served as an officer or in a management capacity with the Company for the last five years. There are no family relationships among the directors or executive officers. Item 11. Executive Compensation Information contained in the 2000 Proxy Statement under the caption "Executive Compensation", except for the information contained in the sub-captions "Report of the Board of Directors on Executive Compensation" and "Performance Graph" is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The security ownership by officers and directors included under the caption "Security Ownership of Certain Beneficial Owners and Management" of the 2000 Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) The following consolidated financial statements of Baldor Electric Company and its affiliates, included in the Annual Report to Shareholders for 1999, are incorporated by reference in Item 8 of this Report: o Consolidated Balance Sheets - January 1, 2000 and January 2, 1999 o Consolidated Statements of Earnings - for each of the three years in the period ending January 1, 2000 o Consolidated Statements of Cash Flows - for each of the three years in the period ending January 1, 2000 o Consolidated Statements of Shareholders' Equity - for each of the three years in the period ending January 1, 2000 o Notes for Consolidated Financial Statements (2) The following consolidated financial statement schedule of Baldor Electric Company and its affiliates is included in Item 14(d) of this Report: o Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable. (3) See Exhibit Index at page 13 of this Report. (b) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this Report. (c) Exhibits See Exhibit Index at page 13 of this Report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this Report at page 12 hereof. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By /s/ R. S. Boreham, Jr. ----------------------------- Chairman (Principal Executive Officer) Date: March 24, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. S. Boreham, Jr., R. L. Qualls, and John A. McFarland, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Report and any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ R. S. Boreham, Jr. Chairman and March 24, 2000 - ------------------------------ R. S. Boreham, Jr. Director /s/ R. L. Qualls Vice Chairman and March 24, 2000 - ------------------------------ R. L. Qualls Director /s/ John A. McFarland President, March 24, 2000 - ------------------------------ John A. McFarland Chief Executive Officer, and Director (Principal Executive Officer) /s/ Lloyd G. Davis Executive Vice President, March 24, 2000 - ------------------------------ Lloyd G. Davis Chief Operating Officer, and Secretary /s/ Ronald E. Tucker Chief Financial Officer and March 24, 2000 - ------------------------------ Ronald E. Tucker Treasurer (Principal Financial Officer) /s/ Jefferson W. Asher, Jr. Director March 24, 2000 - ------------------------------ Jefferson W. Asher, Jr. /s/ Fred C. Ballman Director March 24, 2000 - ------------------------------ Fred C. Ballman /s/ O. A. Baumann Director March 24, 2000 - ------------------------------ O. A. Baumann /s/ Richard E. Jaudes Director March 24, 2000 - ------------------------------ Richard E. Jaudes /s/ Robert J. Messey Director March 24, 2000 - ------------------------------ Robert J. Messey /s/ Robert L. Proost Director March 24, 2000 - ------------------------------ Robert L. Proost BALDOR ELECTRIC COMPANY AND AFFILIATES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Charged to Charged to Balance at Costs Other Balance Beginning and Accounts Additions at End of Description of Period Expenses Describe Describe Period - ----------- --------- -------- -------- -------- ------ (In thousands) Deducted from current assets: Allowance for doubtful accounts 1999 $4,350 $ 568 $ 568(A) $ 0 $4,350 1998 3,525 511 206(A) 520(C) 4,350 1997 3,200 509 184(A) 3,525 Included in current liabilities: Anticipated warranty costs 1999 $5,925 $ 0 $5,925 1998 5,200 725(B) 5,925 1997 4,500 700(B) 5,200
(A) Net uncollectible accounts written off during year. (B) Additions to reserve for anticipated warranty costs, net of expenses incurred. (C) Additions to reserve for acquisition, net of expenses incurred. BALDOR ELECTRIC COMPANY AND AFFILIATES INDEX OF EXHIBITS Exhibit No. Description 3(i) * Articles of Incorporation (as restated and amended) of Baldor Electric Company, effective May 2, 1998, filed as Exhibit 3(i) to the Registrant's Current Report on Form 10-Q for the quarter ended July 4, 1998. 3(ii) * Bylaws of Baldor Electric Company (as restated and amended), dated August 2, 1999, filed as Exhibit 3(ii) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999. 4(i) * Rights Agreement, dated May 6, 1998, between Baldor Electric Company and Wachovia Bank of North Carolina, N.A. (formerly Wachovia Bank & Trust Company, N.A.), as Rights Agent, originally filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated May 13, 1988, and refiled as Exhibit 4(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 4(ii) * Amendment Number 1 to the Rights Agreement, dated February 5, 1996, filed as Exhibit 2 to the Registrant's Registration Statement on Form 8-A/A dated March 21, 1996. 4(iii) * Amendment Number 2 to the Rights Agreement, dated June 1, 1999, filed as Exhibit 4(i)(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999. 10(i) * + 1982 Incentive Stock Option Plan, originally filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for year ended December 31, 1981, refiled as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 1991. 10(ii) * + Officers Compensation Plan, originally filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for year ended December 31, 1988, and refiled as Exhibit 10(iii)(A)(2) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10(iii) * + 1987 Incentive Stock Plan, originally filed as Appendix A to Registrant's Proxy Statement dated April 3, 1987, and refiled as Exhibit 10(iii)(A)(3) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (continued on next page) BALDOR ELECTRIC COMPANY AND AFFILIATES INDEX OF EXHIBITS (continued from previous page) Exhibit No. Description 10(iv) * + 1989 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on August 10, 1998, filed as Exhibit 10(iii)A.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998. 10(v) * + 1994 Incentive Stock Option Plan, as restated and amended at the Company's Annual Meeting on May 2, 1998, filed as Exhibit 10(iii)A.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998. 10(vi) * + 1996 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on August 10, 1998, filed as Exhibit 10(iii)A.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998. 11 Computation of Earnings Per Share, incorporated by reference in Note J of the Annual Report to Shareholders for 1999 filed as Exhibit 13. 13 Portions of the Annual Report to Shareholders for 1999. The Annual Report is being filed as an exhibit solely for the purpose of incorporating certain provisions thereof by reference. Portions of the Annual Report not specifically incorporated are not deemed "filed" for the purposes of the Securities Exchange Act of 1934, as amended. 21 Affiliates of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney (set forth on signature page hereto). 27 Financial Data Schedule. The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, pursuant to Item 601(b)(iii) of Regulation S-K, copies of instruments defining the rights of the holders of long-term debt of the Registrant and its consolidated affiliates. - -------------- * Previously filed. + Management contract or compensatory plan or arrangement. EX-13 2 PORTIONS OF BALDOR'S 1999 ANNUAL REPORT ELEVEN YEAR SUMMARY OF FINANCIAL DATA (In thousands, except percentages and per-share data)
PER SHARE DATA ------------------------------ PERCENT COST DILUTED BASIC RETURN ON LONG NET GOODS NET NET NET AVERAGE SHAREHOLDERS' TOTAL TERM WORKING SALES SOLD EARNINGS EARNINGS EARNINGS DIVIDENDS EQUITY EQUITY ASSETS OBLIGATIONS CAPITAL ----- ---- -------- -------- -------- --------- ------ ------ ------ ----------- ------- 1999 577,319 399,833 43,723 1.19 1.21 0.45 16.5% 266,109 423,941 56,305 183,956 1998 589,406 410,748 44,610 1.17 1.21 0.40 17.6% 264,292 411,926 57,015 177,126 1997 557,940 389,711 40,365 1.09 1.13 0.36 18.2% 243,434 355,889 27,929 141,268 1996 502,875 353,345 35,173 0.97 1.00 0.30 17.1% 200,325 325,486 45,027 146,975 1995 473,103 334,306 32,305 0.84 0.88 0.26 16.3% 211,377 313,462 25,255 145,069 1994 418,152 297,212 26,359 0.69 0.73 0.21 15.3% 184,262 283,155 26,303 118,550 1993 356,595 255,557 19,426 0.52 0.54 0.17 12.7% 160,539 237,950 22,474 108,601 1992 318,930 229,686 15,264 0.42 0.43 0.14 10.9% 145,226 211,941 23,209 97,343 1991 286,495 206,953 11,922 0.33 0.34 0.14 9.3% 133,663 203,277 24,376 84,740 1990 294,030 211,342 14,137 0.40 0.41 0.14 11.9% 123,932 200,694 25,299 75,306 1989 281,462 204,321 13,107 0.38 0.37 0.12 12.0% 114,301 185,474 22,543 69,788
Page 16 Management's Discussion and Analysis of Financial Results of Operations Summary In 1999, Baldor's sales and net earnings decreased 2% from 1998. This was the first decline in eight years. One of the factors affecting 1999 was the softening of some of the industries that we serve. Fortunately, these industries are improving, ranging from slight improvements in agriculture to significant improvements in the semiconductor equipment industry. Continuing our efforts from 1998, Baldor improved margins through increased productivity, reduced manufacturing costs and improved quality of products and services for our customers during the current year. Record operating and pre-tax margins coupled with the Company's stock repurchase program helped to increase diluted earnings per share to $1.19 from $1.17; the 8th consecutive year of increased EPS. Also during 1999, the Company raised dividends twice, from $.10 per share to $0.12. This was a 20% increase. Net Sales Baldor's 1999 sales were $577.3 million, down 2% from 1998 sales of $589.4 million. Sales in 1997 were $557.9 million. Over the past three years, sales to distributor and OEM customers have remained consistent at approximately 50% each. Baldor serves many industries and geographic regions by selling to a broad base of distributors and OEMs both domestically and in more than 60 countries around the world. No single customer accounted for more than 5% of sales in any year covered by this report. During the past two years, we saw growth in a variety of products. During 1999, based on customer demand Baldor developed more than 350 new products for introduction in 2000. Sales for 1999 were generated without a price increase from 1998. Net Earnings Net earnings in 1999 were $43.7 million, which declined 2% compared to 1998 earnings of $44.6 million. Net earnings in 1998 exceeded 1997 net earnings of $40.4 million by 11%. Gross margins, operating margins and pre-tax margins have continued to improve over the past three years. Gross margin improved to 30.7% in 1999 from 30.3% in 1998 and 30.2% in 1997. Manufacturing costs continued to improve in 1999 compared to the prior two years. Selling and administrative costs as a percent of sales in 1999 was 16.7% compared to 16.6% in 1998 and 16.8% in 1997. The Company's concentration on improvements resulted in a record-breaking operating margin of 14.0% in 1999 compared to 13.8% and 13.4% in 1998 and 1997, respectively. Pre-tax margins were 12.2% for 1999 and 1998 compared to 11.8% in 1997. Our tax rate remained at 38% for 1999 and 1998 compared to 38.5% in 1997. International Operations Sales from international operations (foreign affiliates and exports) were $80.3 million in 1999, down from $90.0 million in 1998 and $84.2 million in 1997. Australia, Mexico and the Far East all experienced sales increases for 1999 over 1998. We experienced decreased sales in our European operations due to a weak economy and the strengthening of the US dollar against the local currency. Foreign pre-tax earnings were $1.8 million in 1999 compared to $2.8 million in 1998 and $0.9 million in 1997. The decrease in 1999 foreign pre-tax earnings is also due to a decrease in sales from our European operations and the deterioration of the local currency. Foreign pre-tax earnings increased significantly in 1998 compared to 1997, due in part to productivity improvements and cost reductions. Environmental Remediation Management believes, based on their internal reviews and other factors, that the future costs relating to environmental remediation and compliance will not have a material effect on the capital expenditures, earnings, or competitive position of the Company. environmental remediation and compliance will not have a material effect on the capital expenditures, earnings, or competitive position of the Company. Year 2000 The Company's comprehensive Year 2000 initiative was implemented timely and successfully with no significant problems. We did not experience any disruptions from our suppliers or financial institutions nor has any Baldor product been affected by the 2000 date. We are ready with our new Company-wide information system to improve visibility and reaction time to customer orders, reduce lead times, support international operations, improve productivity and better manage inventory for the new millennium. Financial Position Summary Baldor's financial position remained strong through 1999. We maintained our financial strength by continuing research and development for new and existing products, by making capital investments in our manufacturing facilities, and by continuing to invest in both our employees and customers through education and training. The Company's 3 million-share stock repurchase program is two-thirds complete as of year-end 1999. Our financial strength is an important competitive advantage, which provides a strong base to better serve our customers and finance future growth opportunities. Based upon our financial strength, in 1999 the Board of Directors approved two separate dividend increases totaling a 20% increase. Page 17 Condition and Results of Operations Investments Baldor believes the investment in our employees through training and education is a key to continued success and shareholder value. Baldor continues to be a leader not only in employee education, but also in customer training. Investments in property, plant and equipment for 1999 were $14.3 million compared to $38.2 million in 1998 and $26.9 million in 1997. These investments in property, plant and equipment were made to centralize operations, increase capacity, and improve quality and productivity, all resulting in improved margins. Baldor's commitment to research and development continues to help it maintain a leadership position in the marketplace and to satisfy customers' needs. In 1999, Baldor continued its investments in research and development of $24.9 million compared to $25.3 million in 1998 and $22.9 million in 1997. We also continue to make investments in our existing products for improved performance, increased energy efficiency, and manufacturability. Current Liquidity Baldor's liquidity position in 1999 remained strong compared to 1998 with an increase in working capital of 4% and a current ratio of 3.1. Working Capital was $184.0 million at year-end 1999 compared to $176.1 million at the end of 1998. Liquidity was also strengthened by cash flows from operations of $52.9 million in 1999 compared to $50.5 million in 1998. The Company also has available lines of credit to support operations, if needed. Long-Term Debt and Shareholders' Equity Long-term debt was 17.4% in 1999 and 17.7% in 1998 of total capitalization at the end of each year. During 1999, Baldor refinanced certain bond issues to lower its cost of debt. Baldor repurchased 1,321,000 shares of common stock during 1999. During the first quarter of 2000, the Board of Directors approved the repurchase of an additional 1.5 million shares of stock that will expire December 31, 2001. This brings the total share authorized for repurchase since September 1998 to 4.5 million. Shareholders' equity was $266.1 million at year-end 1999 compared to $264.3 million at the end of 1998. Return on average shareholders' equity was 16.5% in 1999 compared to 17.6% in 1998. Dividend Policy Annual dividends per share for 1999 increased 12% over 1998, which increased 11% over 1997. During 1999, the Company increased the dividend twice. There have been seven dividend increases in the last five years. These increases were in line with Baldor's policy of making increases periodically, as earnings and financial strength warrant, and reinvesting a major portion of earnings to finance growth opportunities. The objective is for shareholders to obtain dividend increases over time while also participating in the growth of the Company. Market Risk The Company's interest rate risk relates from its available-for-sale securities and long-term debt. Approximately 60% of the Company's securities portfolio mature within three years. Due to the short-term nature of these securities, anticipated interest rate risk is not considered material. The Company's fixed rate debt is 50% of the total debt obligations. An adverse ten percent change in the end-of-year market rates would not materially affect earnings in a given year. The Company's risk to foreign currency exchange rates has historically been minimal. Foreign affiliates comprise less than 10% of 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 utilizes short-term swaps to hedge against the fluctuations in copper prices. The hedges are for materials to be used in production and are not speculative. A 10% adverse movement in the price of copper would not result in a material affect on earnings in a given year. Forward-looking Statements This annual report and other written reports and oral statements made from time to time by the Company and its representatives may contain forward-looking statements with respect to their current views and estimates of future economic circumstances, industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company's actual results and experiences to differ materially from the anticipated results and expectations expressed in such forward-looking statements. You are cautioned that actual results and experiences may differ materially from the forward-looking statements as a result of many factors, possibly including changes in economic conditions, competition, fluctuations in raw materials, and other unanticipated events and conditions. Page 18
Consolidated Balance Sheets Baldor Electric Company and Affiliates JANUARY 1 JANUARY 2 ASSETS (In thousands, except share data) 2000 1999 CURRENT ASSETS: Cash and cash equivalents .............................. $ 12,103 $ 24,793 Marketable securities .................................. 30,805 13,996 Receivables, less allowances of $4,350 for both years ............................... 98,470 90,045 Inventories: Finished products ....................... 75,351 74,561 Work-in-process ......................... 9,728 12,939 Raw materials ........................... 47,677 42,477 ------ ------ 132,756 129,977 LIFO valuation adjustment (deduction) ......... (26,571) (26,170) ------- ------- 106,185 103,807 Other current assets and deferred taxes ................ 24,767 23,847 ------ ------ TOTAL CURRENT ASSETS ................................... 272,330 256,488 OTHER ASSETS .................................................... 26,809 32,301 PROPERTY, PLANT Land and improvements ................... 5,957 6,007 AND EQUIPMENT: Buildings and improvements .............. 43,644 42,283 Machinery and equipment ................. 231,437 213,793 Allowances for depreciation and amortization (deduction) ................ (156,236) (138,946) -------- -------- Net property, plant and equipment ....... 124,802 123,137 ------- ------- $ 423,941 $ 411,926 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Accounts payable .............................. $ 26,774 $ 18,900 LIABILITIES: Employee compensation ......................... 6,021 5,620 Profit sharing ................................ 9,417 9,420 Anticipated warranty costs .................... 5,925 5,925 Accrued insurance obligations ................. 15,675 15,960 Other accrued expenses ........................ 18,205 20,052 Income taxes .................................. 5,752 3,505 Current maturities of long-term obligations ... 605 980 --- --- TOTAL CURRENT LIABILITIES ..................... 88,374 80,362 LONG-TERM OBLIGATIONS ........................................... 56,305 57,015 DEFERRED INCOME TAXES ........................................... 13,153 10,257 SHAREHOLDERS' EQUITY: Preferred stock, $0.10 par value Authorized shares: 5,000,000 Issued and outstanding shares: None Common stock, $0.10 par value Authorized shares: 150,000,000 Issued shares: 1999 - 38,722,508; 1998 - 38,409,135 ...................... 3,872 3,841 Additional capital ............................ 34,971 31,495 Retained earnings ............................. 291,741 264,545 Accumulated other comprehensive income ........ (2,676) (428) Treasury stock at cost (3,130,950 shares in 1999 and 1,732,116 shares in 1998) ................. (61,799) (35,161) ------- ------- TOTAL SHAREHOLDERS' EQUITY .................... 266,109 264,292 ------- ------- $ 423,941 $ 411,926 ============= ============= See notes to consolidated financial statements.
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Consolidated Statements of Earnings Baldor Electric Company and Affiliates Years ended ------------------------------------------- January 1 January 2 January 3 (In thousands, except share data) 2000 1999 1998 ---- ---- ---- Net sales ......................................... $ 577,319 $ 589,406 $ 557,940 Other income, net ................................. 1,943 2,019 1,843 ----- ----- ----- 579,262 591,425 559,783 Costs and expenses: Cost of goods sold .......... 399,833 410,747 389,711 Selling and administrative .. 96,671 97,566 93,455 Profit sharing .............. 9,445 9,439 8,858 Interest .................... 2,790 1,721 2,124 ----- ----- ----- 508,739 519,473 494,148 Earnings before income taxes ...................... 70,523 71,952 65,635 Income taxes ...................................... 26,800 27,342 25,270 ------ ------ ------ NET EARNINGS ................ $ 43,723 $ 44,610 $ 40,365 =========== =========== =========== Net earnings per share-diluted .................... $ 1.19 $ 1.17 $ 1.09 =========== =========== =========== Net earnings per share-basic ...................... $ 1.21 $ 1.21 $ 1.13 =========== =========== =========== Weighted average shares outstanding-diluted ....... 36,787,349 38,067,014 37,062,624 ========== ========== ========== Weighted average shares outstanding-basic ......... 36,077,484 36,911,175 35,691,572 ========== ========== ========== See notes to consolidated financial statements.
Summary of Quarterly Results of Operations (unaudited) Baldor Electric Company and Affiliates Quarter -------------------------------------------------- (In thousands, except per share data): First Second Third Fourth Total 1999: Net sales ....................... $142,133 $152,130 $144,349 $138,707 $577,319 Gross profit .................... 43,639 46,336 44,238 43,273 177,486 Net earnings .................... 10,731 11,030 11,043 10,919 43,723 Net earnings per share-diluted .. 0.29 0.30 0.30 0.30 1.19 *Net earnings per share-basic ... 0.30 0.30 0.31 0.31 1.21 1998: Net sales ....................... $154,209 $152,083 $147,358 $135,756 $589,406 Gross profit .................... 46,583 46,122 44,550 41,404 178,659 Net earnings .................... 11,580 11,544 11,192 10,294 44,610 Net earnings per share-diluted .. 0.31 0.30 0.29 0.27 1.17 Net earnings per share-basic .... 0.32 0.31 0.30 0.28 1.21 *The sum of the quarter amounts does not agree to the total for 1999, due to rounding.
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Consolidated Statements of Cash Flow Baldor Electric Company and Affiliates Years ended --------------------------------------- January 1 January 2 January 3 (In thousands) 2000 1999 1998 ---- ---- ---- Operating activities: Net earnings ............................................ $43,723 $44,610 $40,365 Adjustments Depreciation and amortization .......... 20,767 20,511 19,337 to reconcile Deferred income taxes .................. 2,896 2,968 5,316 net earnings Changes in Receivables ............... (8,425) (931) (7,295) to net cash operating Inventories .............. (2,378) (7,312) (3,181) provided by assets and Other current operating liabilities: assets ................... (856) (9,851) (813) activities: Accounts payable ................... 7,874 (1,280) (1,093) Accrued expenses .................. (1,734) (617) 7,558 Income taxes .............. 2,247 2,249 447 Other, net ................ (11,172) 191 (2,498) ------- --- ------ Net cash from operating activities ...................... 52,942 50,538 58,143 Investing activities: Additions to property, plant and equipment ............... (14,298) (38,210) (26,857) Marketable securities purchased .......................... (35,052) (17,996) (14,847) Marketable securities sold ............................... 18,243 15,900 20,839 Acquisitions ............................................. 732 (7,597) ------ --- ------ Net cash used in investing activities .................... (31,107) (39,574) (28,462) Financing activities: Additional long-term borrowings .......................... 6,000 30,750 Reduction of long-term obligations ....................... (7,085) (1,754) (17,141) Unexpended debt proceeds ................................. 5,890 466 (367) Dividends paid ........................................... (16,199) (14,832) (12,958) Stock option plans ....................................... 2,001 3,073 2,410 Common stock repurchased ................................. (25,132) (13,449) ------- ------- ------- Net cash from (used in) financing activities ............. (34,525) 4,254 (28,056) ------- ----- ------- Net increase (decrease) in cash and cash equivalents .............. (12,690) 15,218 1,625 Beginning cash and cash equivalents ............................... 24,793 9,575 7,950 ------ ----- ----- Ending cash and cash equivalents ..................................$ 12,103 $ 24,793 $ 9,575 ========= ========= ========= See notes to consolidated financial statements.
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Consolidated Statements of Shareholders' Equity Baldor Electric Company and Affiliates Other Accumulated Treasury Common Stock Additional Retained Comprehensive Stock (In thousands, except per share amounts) Shares Amount Capital Earnings Income (at cost) Total - ---------------------------------------- ------ ------ ------- -------- ------ --------- ----- BALANCE AT DECEMBER 29, 1996 .................. 26,200 $ 2,862 $ 37,112 $ 207,029 $ 381 $ (47,059) $ 200,325 Comprehensive income Net earnings ......................... 40,365 40,365 Other comprehensive income Translation adjustments, net of taxes of $603 .......................... (963) (963) Total comprehensive income .................... $ 39,402 Stock option plans (net of shares exchanged) .. 263 33 4,365 (1,988) 2,410 Four-for-three common stock split ............. 8,999 900 (900) Cash dividends at $0.36 per share ............. (12,958) (12,958) Contributions to benefit plans ................ 115 647 2,242 2,889 Acquisition and other ......................... 452 2,482 66 8,818 11,366 --- ----- ----- -- ---- ----- ------ BALANCE AT JANUARY 3, 1998 .................... 36,029 3,795 44,606 233,602 (582) (37,987) 243,434 Comprehensive income Net earnings ......................... 44,610 44,610 Other comprehensive income Securities valuation adjustment, net of taxes of $54 ................ 87 87 Translation adjustments, net of taxes of $41 ................ 67 67 Total other comprehensive income ..... 154 Total comprehensive income .................... $ 48,505 Stock option plans (net of shares exchanged) .. 355 46 5,547 (2,520) 3,073 Cash dividends at $0.40 per share ............. (14,832) (14,832) Common stock repurchased ...................... (656) (13,449) (13,449) Acquisition and other ......................... 949 (18,658) 1,165 18,795 1,302 --- ----- ------- ----- ----- ------ ----- BALANCE AT JANUARY 2, 1999 .................... 36,677 3,841 31,495 264,545 (428) (35,161) 264,292 Comprehensive income Net earnings ......................... 43,723 43,723 Other comprehensive income Securities valuation adjustment, net of taxes of $169 ............... (274) (274) Translation adjustments, net of taxes of $1,209 ............. (1,974) (1,974) Total other comprehensive income ..... (2,248) Total comprehensive income .................... $ 41,475 Stock option plans (net of shares exchanged) .. 236 31 3,476 (1,506) 2,001 Cash dividends at $0.45 per share ............. (16,199) (16,199) Common stock repurchased ...................... (1,321) (25,132) (25,132) Other ......................................... (328) (328) ----- ----- ------ ---- ------- ------- ---- BALANCE AT JANUARY 1, 2000 .................... 35,592 $ 3,872 $ 34,971 $ 291,741 $(2,676) $ (61,799) $ 266,109 ====== ======= ========= ========= ======= ========= ========= See notes to consolidated financial statements.
Page 22 Notes to Consolidated Financial Statements Baldor Electric Company and Affiliates - January 1, 2000 NOTE A SIGNIFICANT ACCOUNTING POLICIES Line of Business: The Company operates in one industry segment which includes the design, manufacture, and sale of electric motors and drives. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the statements and accompanying notes. Actual results may differ from those estimates. Consolidation: The consolidated financial statements include the accounts of the Company and all its affiliates. Intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year: The Company's fiscal year ends on the Saturday nearest to December 31 which results in a 52- or 53-week year. Fiscal year 1999 and 1998 contained 52 weeks, while fiscal year 1997 contained 53 weeks. In 1998, the Company changed the fiscal year end of certain foreign affiliates from November 30 to December 31. The extra month was recorded as an adjustment to retained earnings. Cash Equivalents: Cash equivalents consist of highly liquid investments having original maturities of three months or less and are valued at cost which approximates market. Marketable Securities: All marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Those securities are stated at estimated fair value based upon market quotes. Unrealized gains and losses, net of tax, are computed on the basis of specific identification and are included in Accumulated Other Comprehensive Income. Realized gains, realized losses, and declines in value, judged to be other-than- temporary, are included in Other Income. The cost of securities sold is based on the specific identification method and interest earned is included in Other Income. Inventories: The Company values inventories at the lower of cost or market, cost being determined principally by the last-in, first-out method (LIFO), except for $12,886,000 in 1999, $16,718,000 in 1998, and $13,882,000 in 1997 at foreign locations, valued by the first-in, first-out method (FIFO). Property, Plant and Equipment: Property, plant and equipment, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets and the remaining term of capital leases, respectively. Fair Value of Financial Instruments: The Company's methods and assumptions used to estimate the fair value of financial instruments include quoted market prices for marketable securities and discounted cash flow analysis for fixed long-term debt. The Company estimates that the fair value of its financial instruments approximates carrying value at January 1, 2000 and January 2, 1999. Long-Lived Assets: Impairment losses are recognized on long-lived assets when information indicates the carrying amount of these assets, intangibles and any goodwill related to long-lived assets will not be recovered through future operations or sale. Benefit Plans: The Company has a profit-sharing plan covering most employees with more than two years of service. Baldor contributes 12% of earnings before income taxes of participating companies to the Plan. Income Taxes: Income taxes are provided based on the liability method of accounting. Deferred income taxes are provided for the expected future tax consequences of temporary differences between the basis of assets and liabilities reported for financial and tax purposes. Research and Engineering: Costs associated with research, new product development and product cost improvements are treated as expenses when incurred and amounted to approximately $24,881,000 in 1999, $25,300,000 in 1998, and $22,900,000 in 1997. Financial Derivatives: In June 1999, the Financial Accounting Standards Board issued SFAS No. 137 to defer the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 now becomes effective for Baldor in the first quarter of 2001. The Statement will require companies to recognize all derivatives on the balance sheet at fair value. The Company's use of derivatives is minimal, and management continues to study the effects of adopting the standard and currently believes the adoption will not have a material effect. Reclassification: The Company has reclassified the presentation of certain prior year information to be consistent with the presentation in the current year. Page 23
NOTE B LONG-TERM OBLIGATIONS Long-term obligations consist of the following: (In thousands) 1999 1998 ---- ---- Industrial Development Bonds: due through 2004 at 5.50% fixed rate $ 3,395 $ 3,970 due through 2004 at 3.62% variable rate 2,300 2,300 due through 2004 at 6.0% fixed rate (paid off in 1999) 15 due through 2009 at 7.875% fixed rate (paid off in 1999) 6,495 due through 2010 at 3.52% variable rate 3,440 3,440 due through 2010 at 3.55% variable rate 2,025 2,025 Notes payable to banks: due January 17, 2000 at 7.2% variable rate 6,000 due March 1, 2001 at 6.37% variable rate 14,750 14,750 due October 23, 2001 at 5.07% fixed rate 25,000 25,000 ------ ------ 56,910 57,995 Less current maturities 605 980 --- --- $ 56,305 $ 57,015 ======== ========
Certain long-term obligations are collateralized by property, plant and equipment with a net book value of $5,122,000 at January 1, 2000. Maturities of long-term obligations during each of the five fiscal years ending 2004 are: 2000 -- $605,000; 2001 -- $46,390,000; 2002 -- $1,760,000; 2003 -- $1,880,000; 2004 and thereafter -- $6,275,000. Industrial Development Bonds include capital lease obligations of $2,025,000 at January 1, 2000. Aggregate future minimum capital lease payments at January 1, 2000 are $3,418,000 including interest of $1,393,000. Certain long-term obligations require that the Company maintain certain financial ratios. These financial ratios were all met for 1999 and 1998. At January 1, 2000, the Company had outstanding letters of credit totaling $8,625,000. Interest paid was $3,117,000 in 1999, $2,233,000 in 1998, and $3,577,000 in 1997. The Company had lines of credit aggregating $16,500,000 available at January 1, 2000, with $6,000,000 borrowed under these lines at January 1, 2000. These arrangements do not have termination dates but are renewed annually. Interest on these lines of credit is at rates mutually agreed upon at the time of borrowing. NOTE C MARKETABLE SECURITIES Baldor currently invests in only high-quality, short-term investments which it classifies as available-for-sale. Differences between amortized cost and estimated fair value at January 1, 2000, and January 2, 1999 are not material and are included in Other Accumulated Comprehensive Income. Because investments are predominantly short-term and are generally allowed to mature, realized gains and losses for both years have been minimal. The following table presents the estimated fair value breakdown of investments by category: (In thousands) 1999 1998 ---- ---- Municipal debt securities $ 18,128 $ 19,759 U.S. corporate debt securities 11,183 12,909 U.S. Treasury & agency securities 8,441 1,500 Other debt securities 1,219 6,010 ----- ----- 38,971 40,178 Less cash equivalents 8,166 26,182 ----- ------ $ 30,805 $ 13,996 ======== ======== The estimated fair value of marketable debt and equity securities at January 1, 2000, was $12,088,000 due in one year or less, $10,388,000 due in one to three years, and $16,495,000 due after three years. Because of the short-term nature of the investments, expected maturities and contractual maturities are generally the same. NOTE D INCOME TAXES The Company made income tax payments of $22,743,000 in 1999, $23,694,000 in 1998, and $24,101,000 in 1997. Income tax expense consists of the following: (In thousands) 1999 1998 1997 ---- ---- ---- Current: Federal $20,661 $20,820 $22,879 State 2,690 2,646 2,949 Foreign 553 908 573 Deferred: 2,896 2,968 (1,131) ----- ----- ------ $26,800 $27,342 $25,270 ======= ======= ======= Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The sources of these differences relate primarily to depreciation, certain liabilities, and bad debt expense. The following table reconciles the difference between the Company's effective income tax rate and the federal corporate statutory rate: 1999 1998 1997 Statutory federal income tax rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.6 2.8 2.9 Other 0.4 0.2 0.6 --- --- --- Effective income tax rate 38.0% 38.0% 38.5% ==== ==== ==== The principal components of deferred tax assets (liabilities) follow: 1999 1998 Property, plant, equipment and intangibles $(17,666) $(14,163) Accrued liabilities 8,607 8,130 Employee compensation and benefits 2,164 1,971 ----- ----- Total deferred tax assets (liabilities) $ (6,895) $ (4,062) ======== ======== Page 24 Notes to Consolidated Financial Statements (continued) NOTE E FINANCIAL DERIVATIVES Hedging of Copper and Aluminum Requirements The Company purchases significant amounts of copper and aluminum, key ingredients in its motor production, under short-term firm price contracts which are renegotiated annually. In order to hedge itself from exposure to price fluctuations on these two metals, the Company utilizes options and swaps for quantities of metal estimated to be used in our product in the future. Option costs are carried in Other Current Assets, net of realized gains deferred, and are amortized to Cost of Goods Sold over the period that the metal is used. Gains and losses on swaps are recorded in Cost of Goods Sold when the contracts are settled. The off-balance sheet fair values and net unamortized costs with respect to the Company's metal hedging programs were not material at January 1, 2000, and January 2, 1999. NOTE F SHAREHOLDERS' EQUITY In 1997, the Company's Board of Directors authorized a four-for-three stock split effected in the form of a 33% stock dividend. This resulted in the issuance of 8,999,078 additional shares of common stock. All per share and weighted average share amounts have been restated to reflect this stock split. The Company maintains a shareholder rights plan intended to encourage a potential acquirer to negotiate directly with the Board of Directors. The purpose of the plan is to ensure the best possible treatment for all shareholders. Under the terms of the plan, one Common Stock Purchase Right (a Right) is associated with each outstanding share of common stock. If an acquiring person acquires 20% or more of the Baldor common stock then outstanding, the Rights become exercisable and would cause substantial dilution. Effectively, each such Right would entitle its holder (excluding the 20% owner) to purchase shares of Baldor common stock for half of the then current market price, subject to certain restrictions under the plan. A Rights holder is not entitled to any benefits of the Right until it is exercised. The Rights, which expire in May 2008, may be redeemed by the Company at any time prior to someone acquiring 20% or more of Baldor's outstanding common stock and in certain events thereafter. NOTE G COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company leases certain computers, buildings, and other equipment under operating lease agreements. Related rental expense was $4,800,000 in 1999 and 1998, and $5,500,000 in 1997. Future minimum payments for operating leases having noncancelable lease terms in excess of one year are: 2000 -- $2,417,000; 2001 -- $2,054,000; 2002 -- $1,980,000; 2003 -- $1,864,000; 2004 -- $267,000; and decline substantially thereafter. Legal Proceedings The Company is subject to a number of legal actions arising in the ordinary course of business. In management's opinion, the ultimate resolution of these actions will not materially affect the Company's financial position or results of operations. NOTE H FOREIGN OPERATIONS The Company's foreign operations include both export sales and the results of its foreign affiliates in Europe, Australia, Singapore and Mexico. Consolidated sales, earnings before income taxes, and identifiable assets consist of the following: (In thousands) 1999 1998 1997 Net Sales: United States Companies Domestic customers $497,039 $499,390 $473,702 Export customers 36,981 41,855 38,762 ------ ------ ------ 534,020 541,245 512,464 Foreign Affiliates 43,299 48,161 45,476 ------ ------ ------ $577,319 $589,406 $557,940 ======== ======== ======== Earnings Before Income Taxes: United States Companies $ 68,772 $ 69,164 $ 64,710 Foreign Affiliates 1,751 2,788 925 ----- ----- --- $ 70,523 $ 71,952 $ 65,635 ======== ======== ======== Assets: United States Companies $394,610 $378,468 $322,245 Foreign Affiliates 29,331 33,458 33,644 ------ ------ ------ $423,941 $411,926 $355,889 ======== ======== ======== Assets and liabilities of foreign affiliates are translated into U. S. dollars at year-end exchange rates. Income statement items are generally translated at average exchange rates prevailing during the period. Translation adjustments are recorded in the Accumulated Other Comprehensive Income in Shareholders' Equity. NOTE I STOCK PLANS The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Grants can and have included: (1) incentive stock options to purchase shares at prices not less than the market value at grant date, and/or (2) non- qualified stock options to purchase shares of restricted stock equal to and less than the stock's market value at grant date. Grants expire 10 years from the grant date (except for grants made from the 1990 Plan which expire six years from grant date). The 1981, 1987, and 1989 Plans have expired except for options outstanding. A summary of the Company's stock plans follows. Page 25 1990 Plan -- Only non-qualified options can be granted and options vest and become 50% exercisable at the end of one year and 100% exercisable at the end of two years. There are no charges to income. 1981, 1987 and 1994 Plans -- Incentive stock options vest and become fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. Related compensation expense for the non-qualified stock options is amortized over the restriction period. 1996 Plan -- Each non-employee director is granted an annual grant consisting of non-qualified stock options to purchase: (1) 3,240 shares at a price equal to the market value at grant date, and (2) 2,160 shares at a price equal to 50% of the market value at grant date. These options become exercisable in five equal installments beginning on the grant's first anniversary. Related compensation expense on the options granted at 50% of market is amortized over the restriction period.
Plan Type Administrator Recipients Status - ---- ---- ------------- ---------- ------ 1981 Non-compensatory Board of Directors Employees Expired 1987 Compensatory Stock Option Committee Employees Expired 1989 Compensatory Executive Committee Non-employee directors Expired 1990 Non-compensatory Stock Option Committee District Managers Active 1994 Compensatory Stock Option Committee Employees Active 1996 Compensatory Executive Committee Non-employee directors Active
The alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, requires the use of an option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and requires input of highly subjective assumptions. Traded options have no vesting restrictions and are fully transferable. The Company's stock options have characteristics significantly different from those of traded options and the assumptions can materially affect the fair value estimate. Therefore, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, net income and earnings per share required by SFAS No. 123 have been determined as if the Company had accounted for its stock options under SFAS No. 123 using the Black-Scholes model. The fair value for these options was estimated as of the grant date. The estimated fair value of the option is amortized to expense over the options' vesting periods. The initial impact on pro forma net income and net income per share may not be representative of the compensation expense in future years when the effect of the amortization of multiple awards would be reflected in the pro forma disclosure. A summary of the Company's weighted average variables, pro forma information, and stock option activity for fiscal years 1999, 1998, and 1997 follows.
1999 1998 1997 ----------------------- ------------------------- ----------------------- Weighted Average Variables - -------------------------- Volatility 2.3% 16.6% 22.4% Risk-free interest rates 5.1% 5.7% 6.4% Dividend yields 2.1% 1.7% 1.7% Expected option life 6.9 years 7.0 years 7.0 years Remaining contractual life 6.1 years 6.3 years 6.4 years Fair value per share price granted during year At market price $ 3.03 $ 6.24 $ 6.21 At less than market price $ 8.54 $ 9.31 $10.26 Pro Forma Information - --------------------- Pro forma net income (in thousands) $41,728 $41,602 $37,537 Pro forma earnings per share $ 1.14 $ 1.10 $1.02 Stock Option Activity Weighted Weighted Weighted Average Average Average Shares Price/Share Shares Price/Share Shares Price/Share ----------------------- ------------------------- ----------------------- Total options outstanding Beginning Balance 2,680,603 $ 13.74 2,766,005 $ 11.44 2,804,114 $ 9.60 Granted 414,250 17.27 497,400 21.67 446,618 17.80 Exercised (313,373) 8.12 (459,768) 7.57 (426,641) 5.56 Canceled (70,663) 20.25 (123,034) 17.12 (58,086) 14.92 ------- -------- ------- Ending Balance 2,710,817 14.85 2,680,603 13.74 2,766,005 11.44 ========= ========= ========= Shares authorized for grant 11,991,600 11,991,600 9,991,600 Shares exercisable 2,029,852 1,704,866 1,955,856 Shares reserved for future grants 2,403,253 2,745,305 1,133,103
Page 26 Notes to Consolidated Financial Statements (continued) NOTE J EARNINGS PER SHARE The Company's presentation of financial results now includes both diluted earnings per share and basic earnings per share in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes all common stock equivalents. The table below details earnings per share for the years indicated:
1999 1998 1997 ---- ---- ---- Numerator Reconciliation: The numerator is the same for diluted and basic EPS: Net earnings (in thousands) $ 43,723 $ 44,610 $ 40,365 ======== ======== ======== Denominator Reconciliation: The denominator for basic earnings per share: Weighted average shares 36,077,484 36,911,175 35,691,572 Effect of dilutive securities: Stock options 709,865 1,155,839 1,371,052 ------- --------- --------- The denominator for diluted earnings per share: Adjusted weighted average shares 36,787,349 38,067,014 37,062,624 ========== ========== ========== Basic Earnings Per Share $1.21 $1.21 $1.13 Diluted Earnings Per Share $1.19 $1.17 $1.09
NOTE K ACQUISITIONS In 1997, the Company acquired Optimised Controls Ltd. for cash and shares of the Company's common stock. The acquisition has been accounted for as a purchase. Goodwill associated with the acquisition is being amortized on a straight-line basis over 25 years. On March 5, 1998, the Company issued 951,000 shares of common stock for all of the outstanding stock of Northern Magnetics, Inc., a motor manufacturer. The transaction was accounted for as a pooling of interests. Northern Magnetics' results of operations in prior years was not material to the Company's financial statements. As such, prior year financial statements have not been restated. Page 27 Report of Ernst & Young LLP, Independent Auditors Shareholders and Board of Directors, Baldor Electric Company and Affiliates We have audited the accompanying consolidated balance sheets of Baldor Electric Company and affiliates as of January 1, 2000 and January 2, 1999, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended January 1, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldor Electric Company and affiliates at January 1, 2000 and January 2, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 1, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP - --------------------- Ernst & Young LLP Little Rock, Arkansas February 4, 2000 Report of Management on Responsibility for Financial Reporting Baldor management is responsible for the integrity and objectivity of the financial information contained in this annual report. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, applying informed judgements and estimates where appropriate. Baldor maintains a system of internal accounting controls that provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The Audit Committee of the Board of Directors is composed solely of outside directors and is responsible for recommending to the Board the independent accounting firm to be retained for the coming year. The Audit Committee meets regularly with the independent auditors, with the Director of Audit Services, as well as with Baldor management, to review accounting, auditing, internal accounting controls and financial reporting matters. The independent auditors, Ernst & Young LLP, and the Director of Audit Services, have direct access to the Audit Committee without the presence of management to discuss the results of their audits. Ernst & Young LLP, independent certified public accountants, have audited Baldor's financial statements. Management has made available to Ernst & Young LLP all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. /s/ R. S. Boreham, Jr. /s/ R. L. Qualls /s/ John McFarland - ---------------------- ---------------- ------------------ R. S. BOREHAM, JR. R. L. QUALLS JOHN McFARLAND Chairman of the Board Vice Chairman President and Chief Executive Officer /s/ Lloyd G. Davis /s/ Ronald E. Tucker - ------------------ -------------------- LLOYD G. DAVIS RONALD E. TUCKER Executive Vice President, Chief Financial Officer, Chief Operating Officer, and Treasurer and Secretary Page 28 Board of Directors Roland S. Boreham, Jr., Chairman Chairman of the Board since 1981. Former Chief Executive Officer. Officer since 1961. Director since 1961. Chairman - Executive Committee. Member - Nominating Committee. R. L. Qualls, Vice Chairman Vice Chairman of the Board since 1996. Former Chief Executive Officer. Officer since 1986. Director since 1987. Member - Executive Committee. Chairman - Nominating Committee. John A. McFarland, President and Chief Executive Officer Officer since 1990. Director since 1996. Member - Executive Committee. Member - Nominating Committee. Jefferson W. Asher, Jr. Independent management consultant. Director since 1973. Chairman - Audit Committee. Fred C. Ballman Former Chairman. Former Chief Executive Officer. Director from 1944 to 1982 and since 1992. O. A. Baumann The Company's manufacturer's sales representative in St. Louis, Missouri, from 1947 to 1987. Director since 1961. Richard E. Jaudes Partner, Thompson Coburn LLP, Attorneys at Law Director since 1999. Member - Stock Option Committee. Robert J. Messey Vice President, Financial Services, Sverdrup Corporation, a wholly owned subsidiary of Jacobs Engineering Group (NYSE). Director since 1993. Chairman - Stock Option Committee. Member - Audit Committee. Robert L. Proost Corporate Vice President, Chief Financial Officer, and Director of Administration of A.G. Edwards & Sons, Inc. Director since 1988. Member - Audit Committee. Member - Stock Option Committee. Officers Randy L. Colip Vice President - Sales Officer since 1997. Charles H. Cramer Vice President - Personnel Officer since 1984. Lloyd G. Davis Executive Vice President, Chief Operating Officer and Secretary Officer since 1992. Gene J. Hagedorn Vice President - Materials Officer since 1994. Eddie L. Holderfield, Sr. Vice President - Fort Smith Motor Manufacturing Officer since 1999. James R. Kimzey Executive Vice President - Research and Reliability Officer since 1984. John L. Peeples, III Vice President - International Officer since 1998. Jerry D. Peerbolte Vice President - Marketing Officer since 1990. Ronald E. Tucker Chief Financial Officer and Treasurer Officer since 1997. Randal G. Waltman Vice President - Motor Engineering and Operations Officer since 1997. Page 29 Dividend policy Baldor's dividend policy is to periodically increase dividends as earnings and financial strength warrant, but also to reinvest a major portion of earnings to help finance growth opportunities. The objective is for shareholders to obtain dividend increases over time while also participating in the growth of the Company. Dividends paid Baldor's dividend rate increased twice in 1999. There have been 7 dividend increases in the last five years, and 14 increases in the last ten years. 1999 1998 1997 ---- ---- ---- 1st quarter $0.11 $0.10 $0.08 2nd quarter 0.11 0.10 0.09 3rd quarter 0.11 0.10 0.09 4th quarter 0.12 0.10 0.10 ---- ---- ---- Year $0.45 $0.40 $0.36 ===== ===== ===== Common stock price range 1999 1998 ----------------------- --------------------- HIGH LOW HIGH LOW ---- --- ---- --- 1st quarter 20.5 18.875 27.1875 21.0625 2nd quarter 21.6875 18.25 26.8750 23.0000 3rd quarter 20.25 17.25 26.0000 19.6250 4th quarter 20.5 17.00 22.0000 19.0625 Shareholders At January 1, 2000, there were 5,842 shareholders of record including employee shareholders through participation in the benefit plans. Independent auditors Ernst & Young LLP 425 West Capitol - Suite 3600 Little Rock, Arkansas 72201 General counsel Thompson Coburn LLP 1 Mercantile Center St. Louis, Missouri 63101 Ticker The common stock of Baldor Electric Company trades on the New York Stock Exchange (NYSE) with the ticker symbol BEZ. Form 10-K report Baldor's Form 10-K report is filed with the Securities and Exchange Commission and the NYSE. Shareholders may obtain a copy of the Form 10-K report, including the financial statements and financial statement schedules, by written request (without charge) from the Company's Investor Relations Department at the address under shareholder inquiries. Shareholder inquiries To request additional copies of the Annual Report, or other materials and information about Baldor Electric Company, please contact us at: Baldor Electric Company Attn: Investor Relations P. O. Box 2400 Fort Smith, Arkansas 72902 Phone: (501) 646-4711 Fax: (501) 648-5752 Internet: www.baldor.com Transfer agent and registrar Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 (800) 509-5586 EX-21 3 BALDOR ELECTRIC COMPANY'S AFFILIATES EXHIBIT 21 BALDOR ELECTRIC COMPANY AND AFFILIATES AFFILIATES OF THE REGISTRANT NAME OF AFFILIATE LOCATION - ----------------- -------- Baldor of Arkansas, Inc. Arkansas Baldor of Nevada, Inc. Nevada BEC Business Trust Massachusetts Baldor of Texas, L.P. Texas Baldor International, Inc. U.S.Virgin Islands Southwestern Die Casting Company, Inc. Arkansas Baldor UK Holdings, Inc. Delaware Baldor Optimised Control Limited United Kingdom Baldor Optimized Control (NZ) Ltd. New Zealand Baldor Holdings, Inc. Delaware Baldor de Mexico, S.A. de C.V. Mexico Baldor ASR AG Switzerland Baldor ASR GmbH fur Antriebstechnik Germany Baldor ASR U.K. Limited United Kingdom Baldor Italia S.r.l. Italy Australian Baldor Pty Limited Australia Baldor Electric (Far East) PTE, Ltd. Singapore Baldor Electric (Thailand) Ltd. Thailand Baldor Industrial Automation PTE. Ltd. Singapore Northern Magnetics, Inc. California Baldor Japan Corporation Japan Baldor (Taiwan) Ltd Taiwan EX-23 4 1999 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Baldor Electric Company and affiliates of our report dated February 4, 2000, included in the 1999 Annual Report to Shareholders of Baldor Electric Company and affiliates. Our audits also included the financial statement schedule of Baldor Electric Company and affiliates listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8, No. 2-77046) pertaining to the Baldor Electric Company 1982 Incentive Stock Option Plan, (Form S-8, No. 33-16766) pertaining to the Baldor Electric Company 1987 Incentive Stock Plan, (Form S-8, No. 33-28239) pertaining to the Baldor Electric Company Employee Savings Plan, (Form S-8, No. 33-36421) pertaining to the Baldor Electric Company 1989 Stock Option Plan for Non-Employee Directors, (Forms S-8, No. 33-59281, No. 33-60731, and No. 333-62331) pertaining to the Baldor Electric Company 1994 Incentive Stock Plan, (Form S-8, No. 333-33109) pertaining to the Baldor Electric Company 1996 Stock Option Plan for Non-Employee Directors, and (Form S-8, No. 333-33287) pertaining to the Baldor Electric Company Employees' Profit Sharing and Savings Plan of our report dated February 4, 2000, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Baldor Electric Company and affiliates. Ernst & Young LLP /s/ Ernst & Young LLP - ---------------------- Little Rock, Arkansas March 22, 2000 EX-27 5 BALDOR ELECTRIC COMPANY'S 1999 FDS
5 1000 YEAR JAN-01-2000 JAN-01-2000 12103 30805 102820 4350 106185 272330 281038 156236 423941 88374 56305 0 0 3872 262237 423941 577319 579262 399833 96103 9445 568 2790 70523 26800 43723 0 0 0 73723 1.21 1.19
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