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.
Page 19
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.
Page 20
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.
Page 21
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