-----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, RMH/K4HK2F4ocCsK17sCQ3Pb5QcJfL4rQJJKvHAXnTHlH8SFDOFX5WQNGdtaR2iL INSxUptRpzZowMT5QyAuCg== 0000009342-98-000004.txt : 19980330 0000009342-98-000004.hdr.sgml : 19980330 ACCESSION NUMBER: 0000009342-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980327 SROS: NYSE 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-K405 SEC ACT: SEC FILE NUMBER: 001-07284 FILM NUMBER: 98575861 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-K405 1 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 ACTOF 1934 For the fiscal year ended: Commission File Number: January 3, 1998 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 St, Fort Smith, Arkansas 72908 (501) 646-4711 - ----------------------------------------- --------------- (Address of principal executive offices) (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 27, 1998, was $689,146,181. At February 27, 1998, there were 36,111,501 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 3, 1998 (the "Annual Report to Shareholders for 1997"), are incorporated by reference into Part II. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 2, 1998 (the "1998 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. In addition to electric motors and drives, products include speed reducers, industrial grinders, buffers, polishing lathes, stampings, castings, and repair parts. Baldor has made several small acquisitions; however, the majority of its growth has come internally through broadening its markets and product lines. Products Sales of industrial electric motors represented approximately 76% of the Company's business in 1997, 76% in 1996 and 78% in 1995. The AC motor product line presently ranges in size from 1/50 through 800 horsepower. The DC motor product line presently ranges from 1/50 through 700 horsepower. The Company also sells industrial control products, which include servo products, DC controls, position controls, and inverter and vector drives. The Company's line of adjustable speed controls ranges from 1/50 to 600 horsepower. With these products, the Company provides its customers the ability to purchase a "Drive" which Baldor defines as an industrial motor and an electronic control, from one manufacturer. Sales of drives were approximately 23% of total 1997 sales, 22% of total 1996 sales, and 20% of total 1995 sales. 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 62% of the Company's total sales in 1997, 63% in 1996, and 62% in 1995. Most stock product sales are to customers who place their orders for immediate shipment from current inventory. Custom products generally are shipped within four 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 55 foreign countries. The company's field sales organization consists of more than 50 groups of independent manufacturer's representatives, including 28 in the United States. The remainder of the Company's representatives are located in various parts of the world, including Canada, 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. The Company conducts business with a large number of customers and 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 manufacture 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 $22,900,000 in 1997, $19,900,000 in 1996, and $17,200,000 in 1995. 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 3, 1998, the Company had 3,843 employees. Executive Officers of the Registrant Information regarding executive officers is contained in Part III, Item 10, and incorporated herein by reference. International Operations For each of the three fiscal years in the period ended January 3, 1998, export and international sales revenues have increased and represented 15.1% of consolidated sales in 1997, 14.5% in 1996, and 14.0% in 1995. See also Note H on page 24 of the Annual Report to Shareholders for 1997. The Company's products are distributed in more than 55 foreign countries, principally in Canada, Europe, Australia, the Far East, and Latin America. The Company's international operations include the Baldor ASR group of companies which was acquired in 1983. Baldor ASR has sales offices in Switzerland, Germany, Italy, and the United Kingdom. Baldor ASR also has development and manufacturing operations in Germany. In April 1997, the Company acquired the UK-based Optimised Control Ltd. Baldor Optimised Control has sales offices, development and manufacturing facilities located in the U.K. The Company also owns majority interests in Baldor Electric (Far East) Pte. Ltd., located in Singapore, and Australian Baldor Pty. Limited which has locations in Sydney and Melbourne. The Company wholly owns Baldor de Mexico, S.A. de C.V., located in Mexico City. 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 sets forth certain 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 76,400 St. Louis County, MO Metal stamping and engineering toolroom 133,850 DC and miscellaneous motor production 55,600 Columbus, MS AC motor production 191,000 Westville, OK AC and DC motor production 207,900 Fort Mill, SC DC motor, AC motor 108,000 and tachometer production Clarksville, AR Subfractional motor, gear motor, 167,000 and worm-gear speed reducer production Ozark, AR AC motor production 84,050 Five other Metal stamping and motor, drives, domestic locations and servomotor production 141,900 Ten foreign Sales and distribution centers locations and servodrive production 84,200 ---------- 1,827,000 Certain properties listed above (486,400 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. 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 "Dividends paid", "Common stock price range", and "Shareholders" on page 29 of the Annual Report to Shareholders for 1997 is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- Information under the caption "Eleven-Year Summary of Financial Data" only for years 1993 through 1997 for net sales, net earnings, net earnings per share, dividends per share, long-term obligations, and total assets on page 14 of the Annual Report to Shareholders for 1997 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 16 and 17 of the Annual Report to Shareholders for 1997 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------- The consolidated financial statements of the Company on pages 18 through 26, the "Report of Ernst & Young LLP, Independent Auditors," on page 26, and the "Summary of Quarterly Results of Operations (Unaudited)" on page 19 of the Annual Report to Shareholders for 1997 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 - -------------------------------------------------------------- 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. 73 Chairman of the Board 1961 R. L. Qualls 64 Vice Chairman 1986 John A. McFarland 46 President 1990 Robert D. Butler 55 Executive Vice President - 1996 Operations Ronald E. Tucker 40 Controller 1997 Charles H. Cramer 53 Vice President - Personnel 1984 Lloyd G. Davis 50 Chief Financial Officer, 1992 Executive Vice President-Finance, Secretary, and Treasurer Gene J. Hagedorn 50 Vice President - Materials 1994 James R. Kimzey 59 Executive Vice President - 1984 Research and Engineering Randy L. Colip 38 Vice President - Sales 1997 Jerry D. Peerbolte 41 Vice President - Marketing 1990 Randal G. Waltman 48 Vice President - Engineering 1997 Each of the executive officers, except Robert D. Butler, has served as an officer or in a management capacity with the Company for the last five years. Mr. Butler, who joined the Company in 1996, previously operated Manufacturing Services International which provided manufacturing consulting services to small and medium sized U.S. based companies for more than the previous five years. There are no family relationships among the directors or executive officers. The information under the caption "Election of Directors" of the 1998 Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation - ------------------------------------------------- Information contained in the 1998 Proxy Statement under the caption "Information About the Board of Directors and Committees of the Board -- Director Compensation" and information under the caption "Executive Compensation", except for the information contained in the sub-captions "Report of the Executive and Stock Option Committees" 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 1998 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) and (2) - The response to this portion of Item 14 is submitted as a separate section of this Report at page 13 hereof. (3) Listing of Exhibits Exhibit 3(i) - The Restated Articles of Incorporation of Baldor Electric Company, effective March 14, 1995, filed as Exhibit 3(i) to Form 10-K for the year ended December 31, 1994. Exhibit 3(ii) - Bylaws of Baldor Electric Company (as amended) dated February 6, 1995, filed as Exhibit 3(ii) to Form 10-K for the year ended December 31, 1994. Exhibit 4(i)(a) - Rights Agreement dated May 6, 1988, 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 Registrant's Form 8-K Current Report, dated May 13, 1988, and refiled as Exhibit 4(i) to Form 10- K for the year ended December 31, 1994. Exhibit 4(i)(b) - Amendment Number 1 to the Shareholders' Rights Agreement dated February 5, 1996 filed as Exhibit 2 to Registrant's Form 8-A/A dated March 21, 1996. Exhibit 4(iii) - The Registrant agrees to furnish to the Securities and Exchange Commission upon request pursuant to Item 601(b)(4)(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. Exhibit (10) - Exhibits 10(iii)(A)(1) through 10(iii)(A)(6) were previously submitted as exhibits and are incorporated herein by reference: * 10(iii)(A)(1) 1982 Incentive Stock Option Plan (originally filed as Exhibit 10.8 to Form 10-K for year ended December 31, 1981, refiled as Exhibit 10.1 to For 10-K for the year ended December 28, 1991). * 10(iii)(A)(2) Officers Compensation Plan (originally filed as Exhibit 10.6 to Form 10-K for year ended December 31, 1988, and refiled as Exhibit 10(iii)(A)(2) to Form 10-K for the year ended December 31, 1994). * 10(iii)(A)(3) 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 Form 10-K for the year ended December 31, 1994. * 10(iii)(A)(4) 1989 Stock Option Plan for Non-Employee Directors (filed as Exhibit 10 to Form 10-Q for quarter ended September 29, 1990). * 10(iii)(A)(5)(a) 1994 Incentive Stock Option Plan (filed as Exhibit A to Registrant's Proxy Statement dated April 4, 1994). * 10(iii)(A)(5)(b) Amendment #1 to the 1994 Incentive Stock Option Plan filed as Exhibit 10(iii)(A)(5)(b) to Form 10-K for the year ended December 28, 1996. * 10(iii)(A)(6) 1996 Stock Option Plan for Non-Employee Directors (filed as Exhibit A to Registrant's Proxy Statement dated March 28, 1996). For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K, see the exhibits listed above under Exhibit 10. Exhibit (11) - Incorporated by reference in Note J of the Annual Report to Shareholders for 1997 filed as Exhibit (13). Exhibit (13) - Portions of the Annual Report to Shareholders for 1997. 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. Exhibit (21) - Affiliates of the Registrant filed herewith. Exhibit (23) - Consent of Independent Auditors filed herewith. Exhibit (24) - Powers of Attorney. Included on signature pages 11 and 12. (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 16 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 14 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 27, 1998 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 Director ) - ------------------------------ (Principal Executive Officer) ) R. S. Boreham, Jr. ) ) /s/ R. L. Qualls Vice Chairman and Director ) - ------------------------------ ) R. L. Qualls ) ) ) /s/ John A. McFarland President and Director ) - ------------------------------ ) John A. McFarland ) ) ) /s/ Lloyd G. Davis Chief Financial Officer, ) - ------------------------------ Executive Vice President - ) Lloyd G. Davis Finance, Secretary, and ) Treasurer (Principal Financial ) and Accounting Officer) ) ) /s/ Jefferson W. Asher, Jr. Director ) March 27, 1998 - ------------------------------ ) Jefferson W. Asher, Jr. ) ) /s/ Fred C. Ballman Director ) - ------------------------------ ) Fred C. Ballman) ) ) /s/ O. A. Baumann Director ) - ------------------------------ ) O. A. Baumann ) ) ) /s/ Robert J. Messey Director ) - ------------------------------ ) Robert J. Messey ) ) ) /s/ Robert L. Proost Director ) - ------------------------------ ) Robert L. Proost ) ) /s/ Willis J. Wheat Director ) - ------------------------------ ) Willis J. Wheat ) ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS FINANCIAL STATEMENT SCHEDULE CERTAIN EXHIBITS YEAR ENDED JANUARY 3, 1998 BALDOR ELECTRIC COMPANY FORT SMITH, ARKANSAS FORM 10-K, ITEM 14(a)(1) and (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE BALDOR ELECTRIC COMPANY AND AFFILIATES The following consolidated financial statements of Baldor Electric Company and Affiliates, included in the Annual Report to Shareholders for 1997, are incorporated by reference in Item 8: * Consolidated Balance Sheets - January 3, 1998 and December 28, 1996 * Consolidated Statements of Earnings - for the three years in the period ended January 3, 1998 * Consolidated Statements of Cash Flows - for the three years in the period ended January 3, 1998 * Consolidated Statements of Shareholders' Equity - for the three years in the period ended January 3, 1998 * Notes to Consolidated Financial Statements The following consolidated financial statement schedule of Baldor Electric Company and Affiliates is included in Item 14(d): * Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 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 Deductions at End of Description of Period Expenses Describe Describe Period - ----------- --------- -------- -------- -------- ------ (In thousands) Deducted from current assets: Allowance for doubtful accounts 1997 $3,200 $ 509 $ 184(A) $3,525 1996 2,800 695 295(A) 3,200 1995 2,250 886 336(A) 2,800 Included in current liabilities: Anticipated warranty costs 1997 $4,500 $ 700(B) $5,200 1996 4,100 400(B) 4,500 1995 3,700 400(B) 4,100 (A) Net uncollectible accounts written off during year. (B) Additions to reserve for anticipated warranty costs, net of expenses incurred. BALDOR ELECTRIC COMPANY AND AFFILIATES INDEX OF EXHIBITS EXHIBIT NUMBER DESCRIPTION ------------- --------------------- 11 Computation of Earnings Per Common Share- Incorporated by reference in Note J of the Annual Report to Shareholders for 1997 in Exhibit (13) 13 Portions of the Annual Report to Shareholders for 1997- filed herewith 21 Affiliates of the Registrant - filed herewith 23 Consent of Independent Auditors - filed herewith 24 Powers of Attorney - Included on signature pages 11 and 12 27 Financial Data Schedules - filed herewith 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. ------------------------------------- R. S. Boreham, Jr. Chairman and Principal Executive Officer Date: March 27, 1998 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. EX-13 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Summary Baldor extended its growth trend for the sixth consecutive year by posting record sales and earnings for 1997. An 11% increase in sales was leveraged into a 14.8% increase in net earnings. 1997 saw the successful introduction of our new Standard-E line of motors. In addition to conforming to the new Energy Policy Act (EPAct) efficiency requirements, this line offers improved overall value to our customers. This improved value includes longer service life, reduced energy cost, quieter running and less vibration achieved by using more and better materials and improved manufacturing methods. During 1997, Baldor continued to focus on product innovations, service, inventory availability and shortened lead times. We believe an emphasis on taking better care of our customer (rather than emulating our competitors) will translate into a competitive advantage and continue to add shareholder value. Net Sales Baldor reached a record sales level of $557.9 million in 1997, an 11% increase over 1996 sales of $502.9 million. Sales in 1995 were $473.1 million. Sales to distributor customers in 1997 increased 8.8%, while sales to OEM customers in 1997 increased 13.7%, continuing a good balance between OEM and distributors. In 1996, sales to distributors increased 8.7% over 1995 levels and OEM sales increased 5.9% over 1995 levels. Baldor serves many industries and geographic regions be selling to a broad base of distributors and OEMs both domestically and in more than 55 countries around the world. No single customer accounted for more than 4% of sales in any year covered by this report. During 1997, we saw strong growth in motor products for blowers, fans, conveyers, HVAC, pumps, construction machinery and crane and hoist equipment. Sales of Super-E premium-efficient motors continued their history of more than doubling the overall growth rate. In addition, sales increases for our drives, DC motors, hostile environment and pump motors continued to be strong. Sales of products introduced in the previous five years accounted for 30% of 1997 and 1996 sales. The strong sales growth in 1997 was generated without a price increase with the exception of the increase on EPAct-related products effective after October 24, 1997. The overall modest sales increase in 1996 included good growth in farm products, most of our drives and our Super-E premium-efficient motors. Volume increase accounted for approximately 75% of the 1996 sales growth. Net Earnings Net earnings of $40.4 million in 1997 exceeded 1996 net earnings of $35.2 million by 15%. Net earnings in 1995 were $32.3 million. In spite of an overall softening in selling prices, net earnings during 1997 improved to a record level primarily due to volume increases and slightly lower material costs. The gross margin percentage improved to 30.2% in 1997 from 29.7% in 1996 and 29.3% in 1995. Manufacturing costs continued to improve in 1997 compared to 1996 and 1995. Selling and administrative costs as a percent of sales remained level at 16.8% in 1997 compared to 16.8% in 1996 and 16.9% in 1995. Baldor continues to increase its sales volumes without a corresponding increase in selling and administrative support costs. Pre-tax margins improved to 11.8% in 1997 from 11.4% in 1996 and 11.2% in 1995. Our tax rate remained 38.5% in 1997 compared to 38.5% in 1996 and 39.0% in 1995. International Operations Sales from international operations (foreign affiliates and exports) were $84.2 million in 1997 up from $72.8 million in 1996, and $66.0 million in 1995. This marks our sixth consecutive year of double digit sales growth in our international operations. Our export sales to many countries, especially to Canada, continued strong in 1997. We saw very strong sales increases in Mexico and increased sales in Europe due in part to our acquisition of the UK-based Optimised Control Ltd. in April 1997. Sales in Australia and the Far East were weaker in 1997 due to the overall weakening of these economies and the strengthening of the U.S. dollar during the year. Foreign pre-tax earnings were down in 1997 compared to 1996 and 1995 due to lower earnings in Europe and the Far East. 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. Year 2000 We are in the process of implementing a new, fully-integrated, company-wide information system that will improve visibility and reaction time to customer orders, reduce lead times, support international operations, improve productivity and better manage our inventory. In addition, the new system is year 2000 certified. Portions of the project are completed and the rest are scheduled to be completed by early 1999. Hardware and networks are already year 2000 compliant. Financial Position Summary In 1997, Baldor continued to improve its strong financial position. Baldor continued to invest in its future by expanding research and development for new and existing products, by continuing capital investments for capacity, productivity and cost improvements, and by making additional investments in both its employees and customers through education and training. Based on the Company's strong financial position, in 1997 the Board of Directors approved a four-for-three stock split and two cash dividend increases. Our financial strength is an important competitive advantage which provides a strong base to better serve our customers and finance future growth opportunities. Investments Baldor continues to believe that the investment in our employees through emphasis on training and education is a key to our continuing success. This investment was recognized when we were honored to be included in Fortune magazine's list of "100 Best Companies to Work For In America." Investments in property, plant and equipment for 1997 were $26.9 million compared to $23.2 million in 1996, and $23.1 million in 1995. Our 1997 property, plant and equipment investments were made for increased capacity, and quality and productivity improvements. In 1997, Baldor also increased its investments in research and development to $22.9 million compared to $19.9 million in 1996 and $17.2 million in 1995. Baldor's commitment to research and development continues to help it maintain a leadership position in the marketplace and to satisfy its customers' needs. We also continue to make investments in our existing products for greater performance, energy efficiency improvements, and manufacturability. In 1996 and 1997, new products developed in the last five years as a result of these investments accounted for 30% of the Company's total sales. Current Liquidity Cash flow from operations improved to $58.1 million in 1997 from $42.6 million in 1996 and $24.2 million in 1995. In 1997, we increased inventory and receivables $10.5 million, compared to $11.5 million in 1996 and $26.9 million in 1995. Working Capital was $141.3 million at the end of 1997 compared to $146.9 million in 1996, and $145.1 million in 1995. The current ratio was 2.8 in 1997 compared to 3.1 in 1996 and 3.2 at the end of 1995. This decrease was due to the increased volume of business and the repayment of mid-term borrowings used for the repurchase of stock in 1996. Baldor also has available lines of credit of $30 million to support operations. There was no borrowing under these lines at the end of 1997 or 1996. Long-Term Debt and Shareholder's Equity Long-term obligations decreased to 10.3% of total capitalization at the end of 1997 compared to 18.4% in 1996 and 10.7% in 1995. The 1997 weighted average interest rate on long-term debt was 6.0%. Shareholders' equity continued to increase and reached a record level of $243.4 million at the end of 1997 compared to $200.3 million in 1996 and $211.4 million at the end of 1995. Return on average shareholders' equity increased to 18.2% in 1997 compared to 17.1% in 1996 and 16.3% in 1995. Dividend Policy In 1997, the Board of Directors approved two cash dividend increases. A 9% increase was approved in the second quarter and an 11% increase was approved in the fourth quarter. The cash dividend was also increased 21% in 1996 and 12.5% in 1995. There have been ten dividend increases since the first quarter of 1992. 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. CONSOLIDATED BALANCE SHEETS BALDOR ELECTRIC COMPANY AND AFFILIATES JANUARY 3 DECEMBER 28 1998 1996 ---- ---- ASSETS (In thousands) CURRENT ASSETS: Cash and cash equivalents ................. $ 9,575 $ 7,950 Marketable securities ..................... 11,900 17,892 Receivables, less allowances of $3,525 and $3,200, respectively ...... 88,740 80,183 Inventories: Finished products ...................... 71,616 66,528 Work-in-process ........................ 10,675 13,483 Raw materials .......................... 41,793 39,162 ------ ------ 124,084 119,173 LIFO valuation adjustment (deduction) (27,543) (26,786) ------- ------- 96,541 92,387 Other current and deferred tax assets ... 12,684 19,745 ------ ------ TOTAL CURRENT ASSETS ......... 219,440 218,157 OTHER ASSETS ................................... 32,352 11,965 PROPERTY, PLANT AND EQUIPMENT: Land and improvements ..................... 4,533 3,869 Buildings and improvements ................ 33,227 32,059 Machinery and equipment ................... 190,009 166,542 Allowances for depreciation and amortization (deduction) ................ (123,672) (107,106) -------- -------- NET PROPERTY, PLANT AND EQUIPMENT .................. 104,097 95,364 ------- ------ $ 355,889 $ 325,486 ========= ========== See notes to consolidated financial statements . CONSOLIDATED BALANCE SHEETS BALDOR ELECTRIC COMPANY AND AFFILIATES JANUARY 3 DECEMBER 28 1998 1996 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands, except share data) CURRENT LIABILITIES: Accounts payable ............................ $ 19,935 $ 20,314 Employee compensation ....................... 5,684 5,932 Profit sharing .............................. 8,858 7,645 Anticipated warranty costs .................. 5,200 4,500 Accrued insurance obligations ............... 13,836 14,286 Other accrued expenses ...................... 22,003 16,626 Income taxes ................................ 1,586 766 Current maturities of long-term obligations . 1,070 1,113 --------- --------- TOTAL CURRENT LIABILITIES ...... 78,172 71,182 LONG-TERM OBLIGATIONS ............................ 27,929 45,027 DEFERRED INCOME TAXES ............................ 6,354 8,952 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: 50,000,000 Issued shares: 1997- 37,951,901; 1996-37,351,160 ......... 3,795 2,862 Additional capital .......................... 44,606 37,112 Retained earnings ........................... 233,637 207,064 Cumulative translation adjustments .......... (617) 346 Treasury stock at cost (1,923,142 shares in 1997 and 2,417,247 shares in 1996) ........... (37,987) (47,059) --------- --------- TOTAL SHAREHOLDERS' EQUITY ..... 243,434 200,325 --------- --------- $ 355,889 $ 325,486 ========= ========= See notes to consolidated financial statements. CONSOLIDATED STATEMENT OF EARNINGS BALDOR ELECTRIC COMPANY AND AFFILIATES YEARS ENDED ---------------------------------------- JANUARY 3 DECEMBER 28 DECEMBER 30 1998 1996 1995 ---- ---- ---- (In thousands, except share data) Net sales ......................... $ 557,940 $ 502,875 $ 473,103 Other income, net ................. 1,843 2,497 2,596 ----- ----- ----- 559,783 505,372 475,699 Costs and expenses: Cost of goods sold ............. 389,711 353,345 334,306 Selling and administrative ..... 93,455 84,522 80,019 Profit sharing ................. 8,858 7,645 7,168 Interest ....................... 2,124 2,668 1,260 ----- ----- ----- 494,148 448,180 422,753 Earnings Before Income Taxes ...... 65,635 57,192 52,946 Income taxes ...................... 25,270 22,019 20,641 ------ ------ ------ NET EARNINGS .............. $ 40,365 $ 35,173 $ 32,305 =========== =========== =========== NET EARNINGS PER SHARE-DILUTED .... $ 1.09 $ 0.97 $ 0.84 =========== =========== =========== NET EARNINGS PER SHARE-BASIC ...... $ 1.13 $ 1.00 $ 0.88 =========== =========== =========== Weighted average shares outstanding - diluted .......... 37,062,624 36,290,312 38,521,714 ========== ========== ========== Weighted average shares outstanding - basic ............. 35,691,572 35,091,161 36,862,329 ========== ========== ========== See notes to consolidated financial statements SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited) BALDOR ELECTRIC COMPANY AND AFFILIATES QUARTER ----------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL ----- ------ ----- ------ ----- (In thousands, except per share data): 1997: Net sales ............. $129,914 $141,929 $142,494 $143,605 $557,940 Gross profit .......... 39,077 42,841 42,983 43,328 168,229 Net earnings ......... 9,392 10,258 10,291 10,424 40,365 Net earnings per share-Diluted ....... 0.26 0.28 0.27 0.28 1.09 Net earnings per share-Basic ......... 0.27 0.29 0.29 0.29 1.13 1996: Net sales ............. $121,553 $129,906 $125,111 $126,305 $502,875 Gross profit .......... 35,811 38,425 37,310 37,984 149,530 Net earnings .......... 8,327 8,971 8,733 9,142 35,173 Net earnings per share-Diluted ........ 0.22 0.25 0.25 0.25 0.97 Net earnings per share-Basic ......... 0.23 0.26 0.25 0.26 1.00 CONSOLIDATED STATEMENTS OF CASH FLOWS BALDOR ELECTRIC COMPANY AND AFFILIATES YEARS ENDED ------------------------------------ JANUARY 3 DECEMBER 28 DECEMBER 30 1998 1996 1995 ---- ---- ---- In thousands) Operating activities: Net earnings ........................... $ 40,365 $ 35,173 $ 32,305 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ....... 19,337 17,277 15,583 Deferred income taxes ............... 5,316 (1,943) (1,979) Changes in operating assets and liabilities: Receivables ......................... (7,295) (2,815) (7,315) Inventories ......................... (3,181) (8,698) (19,591) Other current assets ................ (813) (2,826) (3,020) Accounts payable .................... (1,093) 1,318 194 Accrued expenses .................... 7,558 7,149 4,967 Income taxes ........................ 447 (1,201) (810) Other, net .......................... (2,498) 873 3,851 ------ --- ----- Net cash from operating activities .... 58,143 42,561 24,185 Investing activities: Additions to property, plant and equipment ......................... (26,857) (23,183) (23,112) Marketable securities purchased ......... (14,847) (33,315) (50,881) Marketable securities sold .............. 20,839 43,910 48,987 Acquisition of Optimised Control Ltd. ... (7,597) ------ ------- -------- Net cash used in investing activities .... (28,462) (12,588) (25,006) Financing activities: Additional long-term borrowings ........ 38,000 Reduction of long-term obligations ..... (17,141) (18,093) (995) Unexpended debt proceeds ............... (367) 353 5,641 Dividends paid ......................... (12,958) (10,498) (9,416) Stock option plans ..................... 2,410 3,902 3,065 Common stock repurchased ............... (42,009) ------- ------- ------- Net cash used in financing activities .... (28,056) (28,345) (1,705) ------- ------- ------ Net increase (decrease) in cash and cash equivalents ....................... 1,625 1,628 (2,526) Beginning cash and cash equivalents ...... 7,950 6,322 8,848 ----- ----- ----- Ending cash and cash equivalents ......... $ 9,575 $ 7,950 $ 6,322 ======== ======== ======== See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY BALDOR ELECTRIC COMPANY AND AFFILIATES
Cumulative Treasury Common Stock Additional Retained Translation Stock Shares Amount Capital Earnings Adjustments (at cost) Total ------ ------ ------- -------- ----------- --------- ----- (In thousands, except per share amounts) BALANCE AT DECEMBER 31, 1994 ........... 18,310 $ 1,847 $ 25,871 $ 160,024 $ 449 $ (3,929) $ 184,262 Stock option plans (net of shares exchanged) ........................... 332 47 6,605 (3,587) 3,065 Translation adjustments ................ 797 797 Net earnings ........................... 32,305 32,305 Securities valuation adjustment, net of deferred taxes of $233 ........ 364 364 Three-for-two common stock split effected in the form of a 50% stock dividend ................. 9,228 923 (923) Cash dividends at $0.26 per common share ..................... (9,416) (9,416) ------ ------ ------ ------ ----- ------ ------- BALANCE AT DECEMBER 30, 1995 ........... 27,870 2,817 32,476 182,354 1,246 (7,516) 211,377 Stock option plans (net of shares exchanged) ........................... 380 45 5,290 (1,433) 3,902 Translation adjustments ................ (900) (900) Net earnings ........................... 35,173 35,173 Securities valuation adjustment, net of deferred taxes of $11 ......... 35 35 Cash dividends at $0.30 per common share .................... (10,498) (10,498) Common stock repurchased ............... (2,210) (42,009) (42,009) Contributions to benefit plans ......... 160 (654) 3,899 3,245 --- ---- ----- ------- ------- ------- -------- BALANCE AT DECEMBER 28, 1996 ........... 26,200 2,862 37,112 207,064 346 (47,059) 200,325 Stock option plans (net of shares exchanged) ........................... 263 33 4,365 (1,988) 2,410 Translation adjustments ................ (963) (963) Net earnings ........................... 40,365 40,365 Four-for-three common stock split effected in the form of a 33% stock dividend ................. 8,999 900 (900) Cash dividends at $0.36 per common share ..................... (12,958) (12,958) Contributions to benefit plans ......... 115 647 2,242 2,889 Acquisitions ........................... 452 2,482 8,818 11,300 Miscellaneous adjustments .............. 66 66 ------ -------- ------- ------- -------- ------- ------- BALANCE AT JANUARY 3, 1998 ............. 36,029 $ 3,795 $44,606 $233,637 $ (617) $ (37,987) $ 243,434 ====== ========= ======= ======== ========= ========= =========
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BALDOR ELECTRIC COMPANY AND AFFILIATES January 3, 1998 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES Line of Business: The Company operates primarily 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 1997 contained 53 weeks and fiscal years 1996 and 1995 each contained 52 weeks. 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 Retained Earnings. 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 $13,882,000 in 1997 and $14,166,000 in 1996 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. Long-Lived Assets: Impaired 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 over two years 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. Net Earnings Per Common Share: The Company has historically reported diluted net earnings per common share. Diluted net earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents (dilutive stock options) outstanding during the year. Basic net earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. Basic net earnings per share gives no consideration to common stock equivalents. Stock-Based Compensation: In fiscal year 1996, the Company adopted Statement of Financial Accounting Standards No.123 (SFAS No. 123), Accounting for Stock-Based Compensation, which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 requires that the fair value of employee stock-based compensation plans be recorded as a component of compensation expense as of the grant date or, in lieu of expense recognition under SFAS No. 123, companies may follow current guidance under Accounting Principals Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Companies electing to remain with APB 25 accounting guidance must provide pro forma disclosures of net income and earnings per share as if the fair value based method defined in SFAS No. 123 had not been applied. The Company has elected to continue accounting for its stock-based compensation under the provisions of APB 25. As such, SFAS No. 123 did not have an effect on the Company's reported financial results for 1997. Research and Engineering: Costs associated with research, new product development and product cost improvements are treated as expenses when incurred and amounted to approximately $22,900,000 in 1997, $19,900,000 in 1996, and $17,200,000 in 1995. Reclassification: The Company has reclassified the presentation of certain prior year information to be consistent with the presentation in the current year. Comprehensive Income: In June 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement becomes effective for fiscal year 1998 and requires companies to classify components of other comprehensive income by their nature in a financial statement and disclose the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company's comprehensive income items are not material. Therefore, the Company does not believe adopting this statement will have a material effect. Segment Reporting: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. The statement requires public companies to report financial and descriptive information about their reportable operating segments. Currently, the Company has only one reportable segment; therefore, management expects the adoption of this statement in 1998 to have no material effect. NOTE B -- LONG-TERM OBLIGATIONS Long-term obligations consist of the following: 1997 1996 ---- ---- (In thousands) Industrial Development Bonds: due through 1997 at 6.0% fixed rate (paid in 1997) .......................... $ $ 113 due through 2004 at 5.29% fixed rate ...... 4,515 5,030 due through 2004 at 3.95% variable rate ... 2,300 2,300 due through 2004 at 6.0% fixed rate ....... 24 57 due through 2009 at 7.75% fixed rate ...... 2,860 3,000 due through 2009 at 7.875% fixed rate ..... 6,860 7,200 due through 2010 at 3.95% variable rate ... 3,440 3,440 Notes payable to banks: due March 1, 1999 at 6.175% variable rate 9,000 25,000 ------- ------- 28,999 46,140 Less current maturities ................... 1,070 1,113 ------- ------- $27,929 $45,027 ======= ======= At January 3, 1998, Industrial Development Bond proceeds of $6,757,000 are included in Other Assets. Certain long-term obligations are collateralized by property, plant and equipment with a net book value of $10,209,000 at January 3, 1998. Maturities of long-term obligations during each of the five fiscal years ending 2002 are: 1998--$1,070,000; 1999--$10,145,000; 2000--$1,215,000; 2001--$1,290,000; and 2002--$2,470,000. Industrial Development Bonds include capital lease obligations of $2,883,000 at January 3, 1998. Aggregate future minimum capital lease payments at January 3, 1998, are $4,641,000 including interest of 1,758,000. Certain long-term obligations require, among other things, that the Company maintain certain financial ratios and restrict cumulative cash dividends and other distributions. Retained earnings of $21,180,000 at January 3, 1998, were unrestricted. At January 3, 1998, the Company had outstanding letters of credit totaling $6,709,000. Interest paid was $3,577,000 in 1997, $2,988,000 in 1996 and, $1,730,000 in 1995. The Company had lines of credit aggregating $30,000,000 available at January 3, 1998. These arrangements do not have termination dates but are reviewed annually. Interest on these lines of credit is at rates mutually agreed upon at the time of borrowing. There were no outstanding borrowings under these lines at January 3, 1998. NOTE C -- MARKETABLE SECURITIES Baldor currently invests in only high-quality, short-term investments which it classifies as available-for-sale. There were no significant differences between amortized cost and estimated fair value at January 3, 1998, or December 28, 1996. 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: January 3 December 28 1998 1996 ---- ---- (In thousands) Municipal debt securities ....... $ 3,858 $12,843 U.S. corporate debt securities .. 5,213 2,925 U.S. Treasury & agency securities 5,500 7,331 Other debt securities ........... 563 5,039 ------- ------- 15,134 28,138 Less cash equivalents ........... 3,234 10,246 ------- ------- $11,900 $17,892 ======= ======= The estimated fair value of marketable debt and equity securities at January 3, 1998, was $2,167,000 due in one year or less, $4,911,000 due in one to three years, and $4,849,000 due after three years. Because of the short-term nature of the investments, expected maturities and contractual maturities are normally the same. NOTE D -- INCOME TAXES The Company made income tax payments of $24,101,000 in 1997, $22,718,000 in 1996, and $21,643,000 in 1995. Income tax expense consists of the following: 1997 1996 1995 ------- ------ ------ (in thousands) Current: Federal ..... $ 22,879 $ 19,887 $ 19,125 State ....... 2,949 2,591 2,614 Foreign ..... 573 637 776 Deferred ................ (1,131) (1,096) (1,874) ------ ------ ------ $ 25,270 $ 22,019 $ 20,641 ======== ======== ======== 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: 1997 1996 1995 ------- ------ ------- Statutory federal income tax rate ....... 35.0% 35.0% 35.0% State taxes, net of federal benefit ..... 2.9 3.0 3.3 Other ................................... 0.6 0.5 0.7 --- --- --- Effective income tax rate ............... 38.5% 38.5% 39.0% ==== ==== ==== NOTE E -- FINANCIAL DERIVATIVES Hedging of Foreign Exchange Risks As a result of having various foreign operations, the Company engages in a limited amount of hedging to minimize the effects of fluctuating foreign currencies on its intercompany pricing. The Company's investment in foreign currency options is included in Other Current Assets at cost, net of realized gains deferred, and is amortized to Other Income over the period in which intercompany sales of foreign affiliates occur, generally within the following twelve months. At January 3, 1998, and December 28, 1996, the Company had no investments in foreign currency 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. Any cost is carried in Other Current Assets, net of realized gains deferred, and is amortized to Cost of Goods Sold over the period that the metal is used. The net unamortized costs with respect to the Company's metal hedging programs were not material at January 3, 1998, and December 28, 1996. NOTE F -- SHAREHOLDERS' EQUITY On November 13, 1997, the Company's Board of Directors authorized a four-for-three stock split effected in the form of a 33% stock dividend payable December 15, 1997, to shareholders of record on December 1, 1997. 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. Until a Right is exercised, the holder of the Right is not entitled to any of the benefits of being a shareholder of the Company. 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 $5,500,000 in 1997, $4,800,000 in 1996, and $4,300,000 in 1995. Future minimum payments for operating leases having noncancelable lease terms in excess of one year are: 1998--$2,843,000; 1999--$2,652,000; 2000--$1,958,000; 2001--$764,000, 2002--$640,000; 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: 1997 1996 1995 ---- ---- ---- (In thousands) Net Sales: United States Companies Domestic customers ............ $473,702 $430,014 $407,078 Export customers .............. 38,762 30,831 25,068 ------ ------ ------ 512,464 460,845 432,146 Foreign Affiliates ............... 45,476 42,030 40,957 ------ ------ ------ $557,940 $502,875 $473,103 ======== ======== ======== Earnings Before Income Taxes: United States Companies .......... $ 64,710 $ 55,160 $ 51,723 Foreign Affiliates .............. 925 2,032 1,223 --- ----- ----- $ 65,635 $ 57,192 $ 52,946 ======== ======== ======== Assets: United States Companies .......... $322,245 $297,496 $285,381 Foreign Affiliates ............... 33,644 27,990 28,081 ------ ------ ------ $355,889 $325,486 $313,462 ======== ======== ======== 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 Cumulative Translation Adjustment account 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. Incentive stock options to purchase shares at prices not less than the market value at the date of grant and non-qualified stock options to purchase shares of restricted stock equal to and less than the stock's market value at the date of grant have been granted. The grants made from each plan expire 10 years from date of grant except for grants made from the 1990 Plan which expire six years from date of grant. A summary of the Company's current stock option plans is below: PLAN PLAN ADMINISTRATOR RECIPIENTS - ---- ------------- ---------- Compensatory Plans (see note 1) 1987 (see note 3 Stock Option Committee Employees 1989 (see note 3) Executive Committee Non-employee directors 1994 Stock Option Committee Employees 1996 Executive Committee Non-employee directors Non-compensatory Plans (see note 2) 1981 (see note 3) Board of Directors Employees 1990 Stock Option Committee District Managers Note 1: Under the 1987 Plan and the 1994 Plan, incentive stock options vest and become fully exercisable at the end of six months or three years of continued employment for officers and non-officers, respectively. Grants can include incentive stock options, non-qualified stock options, restricted shares, formula price shares, and stock appreciation rights. 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. Under the 1996 Plan, each non-employee director is granted an annual grant consisting of a non-qualified stock option to purchase 2,160 shares at prices equal to the market value at the date of grant and a non-qualified stock option to purchase 3,240 shares at prices equal to 50% of the market value at the date of grant. 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. Note 2: Under the 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 in connection with the non-compensatory stock option plans. Note 3: This plan has expired except for unexercised options outstanding. 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 option valuation models. The Company uses the Black-Scholes option valuation model which was developed for use in estimating the fair value of traded options. Traded options have no vesting restrictions and are fully transferable. The Black-Scholes model also requires the input of highly subjective assumptions including the expected stock price volatility and the estimated life of the option. The Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input 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 employee stock options. The pro forma information regarding net income and earnings per share required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated as of the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997 and 1996, respectively: 1997 1996 ---- ---- Volatility factors of the expected market price of the Company's common stock ...... 22.4% 19.2% Risk-free interest rates ...................... 6.4% 7.9% Dividends yields .............................. 1.7% 1.8% Weighted-average expected option life ......... 7.0 years 7.1 years For purposes of pro forma disclosures, the estimated fair value of the options 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 stock option activity and the Company's pro forma earnings information for fiscal 1997 and fiscal 1996 follows: 1997 1996 ------------------- ------------------- Weighted Weighted Average Price Average Price STOCK OPTION ACTIVITY Shares per Share Shares per Share - --------------------- ------ --------- ------- --------- Total options outstanding: Beginning Balance ...... 2,804,114 $ 9.60 2,784,838 $ 7.27 Granted ................ 446,618 17.80 813,066 13.89 Exercised .............. (426,641) 5.56 (728,640) 4.94 Canceled ............... (58,086) 14.92 (65,151) 10.85 ------- ------- Ending Balance ........ 2,766,005 11.44 2,804,114 9.60 ========= ========= Shares authorized for grant: .... 9,991,600 9,991,600 Shares exercisable: ............. 1,955,856 1,811,808 Shares reserved for future grants: ............... 1,133,103 1,539,506 Weighted average remaining contractual life: .... 6.4 years 6.6 years Weighted average fair value per share of options granted during the year At market price ........... $ 6.21 $ 4.01 At less than market ....... $10.26 $ 7.93 PRO FORMA INFORMATION (in thousands, except for earnings per share information) - ------------------------------------------------------------------------------- Pro forma net income $37,537 $33,989 Pro forma earnings per share $1.02 $0.95 Note J--EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Baldor has historically presented diluted earnings per share in all financial reports. The presentation of financial results now includes both diluted earnings per share and basic earnings per share. 1997 1996 1995 ---- ---- ---- Numerator Reconciliation: The numerator is the same for diluted and basic EPS: Net earnings (in thousands) ...... $ 40,365 $ 35,173 $ 32,305 =========== =========== =========== Denominator Reconciliation: The denominator for basic earnings per share: Weighted average shares ............ 35,691,572 35,091,161 36,862,329 Effect of dilutive securities: Stock options .................. 1,371,052 1,199,151 1,659,385 --------- --------- --------- The denominator for diluted earnings per share: Adjusted weighted average shares ......... 37,062,624 36,290,312 38,521,714 ========== ========== ========== Basic earnings per share ............. $ 1.13 $ 1.00 $ 0.88 Diluted earnings per share ........... $ 1.09 $ 0.97 $ 0.84 Note K--ACQUISITIONS On April 5, 1997, Baldor Electric Company acquired Optimised Control Ltd. for cash and shares of the Company's common stock. The acquisition has been accounted for as a purchase and the results of operations of Optimised Control Ltd. have been included in the accompanying financial statements beginning April 1997. Optimised Control Ltd.'s operations are not material to the Company's results of operations in prior years. Goodwill associated with the acquisition is being amortized on a straight-line basis over 25 years. NOTE L--SUBSEQUENT EVENTS On March 3, 1998, the Company reached an agreement to acquire Northern Magnetics, Inc., a motor manufacturer. The financial results of operations for Northern Magnetics for the years 1997, 1996, and 1995 are not anticipated to be material to Baldor's results of operations. 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 3, 1998 and December 28, 1996, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended January 3, 1998. 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 generally accepted auditing standards. 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 3, 1998 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP - ---------------------------------- Ernst & Young LLP Little Rock, Arkansas February 3, 1998, except for Note L, as to which the date is March 3, 1998 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 control that provides 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 Manager 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 Manager 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 - ------------------------------------- ------------------------------- R. S. Boreham, Jr. R. L. Qualls Chairman of the Board Vice Chairman /s/ John McFarland /s/ Lloyd G. Davis - ------------------------------------- ------------------------------ John McFarland Lloyd G. Davis President Executive Vice President-Finance, Chief Financial Officer, Secretary and Treasurer SHAREHOLDER INFORMATION STOCK SPLITS Baldor Electic Company distributed a four-for-three stock split effected in the form of a 33% stock dividend on December 15, 1997. All applicable financial reports have been restated to reflect this stock split. 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 was increased twice in 1997. There have been ten dividend increases since the 1st quarter of 1992. 1997 1996 1995 ---- ---- ---- 1st quarter $0.08 $0.07 $0.06 2nd quarter 0.09 0.07 0.06 3rd quarter 0.09 0.08 0.07 4th quarter 0.10 0.08 0.07 ----- ----- ----- Year $0.36 $0.30 $0.26 ===== ===== ===== COMMON STOCK PRICE RANGE 1997 1996 ---- ---- High Low High Low ---- --- ---- --- 1st quarter 19.9688 18.1875 16.7813 13.8750 2nd quarter 22.3125 18.4688 18.7500 14.2500 3rd quarter 23.8125 21.7969 16.8750 14.3438 4th quarter 23.4844 21.2500 18.5625 13.9688 SHAREHOLDERS At January 3, 1998, there were 4,921 shareholders of record and employee shareholders through participation in the benefit plans. INDEPENDENT AUDITORS Ernst & Young LLP 425 West Capitol - Suite 3600 Little Rock, Arkansas 72201 GENERAL COUNSEL Peper, Martin, Jensen, Maichel and Hetlage 720 Olive Street 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. Shareholders may obtain a copy of the Form 10-K report (without charge) by contacting the Company's Investor Relations Department. 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 Wachovia Bank of North Carolina, N.A. Wachovia Shareholder Services P.O. Box 8218 Boston, Massachusetts 02266-8218 (800) 633-4236 SHAREHOLDERS' ANNUAL MEETING The Company's Annual Meeting of Shareholders will be held at 10:30 a.m., Saturday, May 2, 1998, at the Holiday Inn, 700 Rogers Avenue, Fort Smith, Arkansas. EX-21 3 EXHIBIT 21 BALDOR ELECTRIC COMPANY AND AFFILIATES AFFILIATES OF THE REGISTRANT NAME OF AFFILIATE - ----------------- Baldor of Arkansas 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, Inc. Arkansas Baldor UK Holding Company, Inc. Delaware Optimised LTD United Kingdom Optimized NZ New Zealand Baldor Holdings, Inc. Delaware Baldor de Mexico, S.A. de C.V. Mexico Baldor ASR, AG Switzerland Baldor ASR GmbH fuer 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 EX-23 4 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 3, 1998, except for Note L, as to which the date is March 3, 1998, included in the 1997 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 and (Forms S-8, No. 33-59281 and No. 33-60731) 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, (Form S-8, No. 333-33287) pertaining to the Baldor Electric Company Employees' Profit Sharing and Savings Plan of our report dated February 3, 1998, except for Note L, as to which the date is March 3, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the proceeding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Baldor Electric Company and affiliates. /s/ Ernst & Young LLP - --------------------- Ernst & Young LLP Little Rock, Arkansas March 27, 1998 EX-27 5
5 Amounts from the audited financial statements for Baldor Electric Company as of January 3, 1998. 1000 YEAR JAN-03-1998 JAN-03-1998 9575 11900 92265 3525 96541 219440 227769 123672 355889 78172 0 0 0 3795 239639 355889 557940 559783 389711 494148 0 509 2124 65635 25270 0 0 0 0 40365 1.13 1.09
EX-27.1 6 RESTATEMENT FOR SFAS NO 128 FOR 1996 & 1995
5 0000009342 BALDOR ELECTRIC COMPANY 1000 YEAR YEAR DEC-28-1996 DEC-30-1995 DEC-28-1996 DEC-30-1995 7950 6322 17892 28487 83383 80568 3200 2800 92387 83689 218157 212095 202470 182214 107106 93143 325486 313462 71182 67026 45027 25255 0 0 0 0 2862 2817 197463 208561 325486 313462 502875 473103 505372 475699 353345 334306 448180 422753 0 0 695 886 2668 1260 57192 52946 22019 20641 35173 32305 0 0 0 0 0 0 35173 32305 1.00 0.88 0.97 0.84
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