Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Summary
Baldor extended its growth trend for the fifth consecutive year
by posting record sales and earnings for 1996. A modest 6.3%
increase in sales was leveraged into an 8.9% increase in net earnings.
Increased sales and improved productivity, together with a 2.2 million
share stock repurchase, yielded an earnings per share increase of
15.2% -- one way in which Baldor has provided bettervalue for its
shareholders.
The year of 1996 was one of improved balance for Baldor --
better balance in the inventories of products demanded by our
customers, better balance in the sales between our OEM and Distributor
distribution channels, better balance in our production capacity, and a
more balanced availability of people to serve our customers through the
addition of four new North American sales offices. Financial strength and
good balance have positioned us to meet the aggressive growth strategies
that we have set forth in this report.
Net Sales
Baldor reached a record sales level of $502.9 million in 1996, a
6.3% increase over 1995 sales of $473.1 million. Sales in 1994 were
$418.2 million. Sales to distributor customers in 1996 increased 8.7%,
while sales to OEM customers in 1996 increased 5.9%, which brings us to a
balanced mix between selling channels. In 1995, salesto distributors
increased 14.2% over 1994 levels and OEM sales increased 17.5% over 1994
levels. Baldor serves many industries and geographic regions by 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 4.0% of sales in any year covered by this report.
During 1996, we saw modest growth in motor products for pumps,
blowers, fans, conveyers, and crane and hoist equipment. Growth in
1996 was especially good for a number of our products such as Super-E7
premium-efficient motors, farm products, and most of our drives products.
These products grew at over twice our overall rate. Sales of products
introduced in the previous five years accounted for over 25% of 1996 and
1995 sales. Volume increase accounted for approximately 75% of the 1996
sales growth. Baldor's last announced price increase was 3.3% in October
1995.
The increase in 1995 sales over 1994 levels was about evenly split
between improved pricing, increased volumes, and product mix shifts. Sales
of drives grew at more than double the overall 1995 sales growth rate and
sales of Super-E7 premium-efficient motors were also strong.
Net Earnings
Net earnings of $35.2 million in 1996 exceeded 1995 net earnings
of $32.3 million by 8.9%. Net earnings in 1994 were $26.4 million.
A modest sales growth in 1996 was leveraged into a good increase in
net earnings through improvements in both the manufacturing and the
sales and administrative areas.
The gross margin percentage improved to 29.7% in 1996 from 29.3%
in 1995 and 28.9% in 1994. Baldor benefited from manufacturing
productivity improvements in both 1996 and 1995. Selling and
administrative costs as a percent of sales improved to 16.8% in 1996 from
$16.9% in 1995 and 17.3% in 1994. Baldor continues to increase its sales
volumes without corresponding increases in administrative support costs.
Pre-tax margins improved to 11.4% in 1996 from 11.2% in 1995 and 10.3% in
1994. Our tax rate was lowered to 38.5% in 1996 from 39.0% in 1995 and
1994.
International Operations
Sales from international operations (foreign affiliates and exports)
were $72.8 million in 1996, up from $66.0 million in 1995 and $54.6 million
in 1994. This marks our fifth consecutive year of double-digit sales
growth in our international operations. Our export sales to many countries
were particularly strong in 1996, most notably export sales into Canada.
In addition, we saw good sales increases from our Australian and Latin
American operations in 1996. Sales in Europe were particularly strong for
both 1995 and 1994, but were essentially flat in 1996.
Foreign pre-tax earnings were $2.0 million in 1996, compared to
$1.2 million in 1995 and $1.7 million in 1994. The decline in 1995
was due primarily to the decline in the Mexican peso that year.
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.
Financial Position
Summary
In 1996, Baldor continued to strengthen its position through
reinvestment in our company -- our people, our products and
manufacturing facilities, and our Company's stock. In 1996, we
expanded our manufacturing capacity, continued to make investments in
training and in research and development, and repurchased 2.2
million shares of Baldor common stock. In addition, we increased our
dividend during 1996 -- twice. This makes seven increases in the past
five years.
Investments
In 1996, Baldor completed a 2.2 million share repurchase. Two
million shares were purchased from the estate of the late Mr. G.A.
Schock in February of 1996. An additional 200,000 shares were
purchased on the open market over the course of 1996. In the fourth
quarter of 1996, the Board of Directors authorized the Company to
repurchase an additional 1.0 million shares of Baldor common through
December 31, 1997.
Investments in property, plant and equipment for 1996 were $23.2
million, compared to $23.1 million in 1995. In 1996, we completed an
84,000 square foot expansion of our Clarksville facility to house our
expanded gear production, and we completed a 46,000 square foot
expansion of the finished goods warehouse in Fort Smith. We also
leased additional space in Seattle, Washington, to expand our larger
horsepower drives manufacturing -- all of which contribute to a
better manufacturing balance to meet our customers' needs.
In 1996, Baldor also increased its investments in research and
development to $19.9 million from $17.2 million in 1995 and $14.8
million in 1994. Baldor's commitment to research and development
continues to help it maintain a leadership position in the marketplace
and to satisfy its customers' needs. Over the past three years Baldor has
introduced many new product lines to the marketplace. We also continue to
make investments in our existing products for greater performance, energy
efficiency improvements, and manufacturability.
Current Liquidity
Cash flow from operations improved to $42.6 million in 1996 from
$24.2 million in 1995. In 1996, we increased inventory and
receivables only $11.5 million , compared to $26.9 million in 1995.
Working Capital was $146.9 million at the end of 1996, compared to
$145.1 million and $118.6 million at the end of 1995 and 1994,
respectively. The current ratio was 3.1 at the end of 1996 compared
to 3.2 at the end of 1995. Baldor also has available lines of credit
of $30 million to support operations. There were no borrowings
outstanding under these lines at the end of 1996 or 1995.
Long-Term Debt and Shareholder's Equity
Long-term obligations increased to 18.4% of total capitalization
at the end of 1996. The increase over the 1995 level of 10.7%
reflects the mid-term loan that funded the purchase of stock from Mr.
Schock's estate. The 1996 weighted average interest rate on long-term
debt was 6.0%. Shareholders' equity decreased from $211.4 million at
the end of 1995 to $200.3 million at the end of 1996 due to the share
repurchases. Return on average shareholders' equity increased to
17.1% in 1996 from 16.3% in 1995 and from 15.3% in 1994.
Dividend Policy
In the fourth quarter of 1996, the Board of Directors approved a 10%
increase in the quarterly cash dividend. This was in addition to the
11% increase approved in the second quarter of 1996. The cash
dividend was also increased 12.5% in 1995 and 20% in 1994. These
increases were in line with Baldor's policy of making increases
periodically, as earnings and financial strength warrant, but also of
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
DECEMBER 28 DECEMBER 30
1996 1995
----------- -----------
ASSETS (In thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 7,950 $ 6,322
Marketable securities 17,892 28,487
Receivables, less allowances
of $3,200 and $2,800, respectively 80,183 77,768
Inventories:
Finished products 66,528 61,681
Work-in-process 13,483 11,978
Raw materials 39,162 36,972
-------- --------
119,173 110,631
LIFO valuation adjustment(deduction) (26,786) (26,942)
-------- --------
92,387 83,689
Other current and deferred tax assets 19,745 15,829
-------- --------
TOTAL CURRENT ASSETS 218,157 212,095
OTHER ASSETS 11,965 12,296
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 3,869 3,558
Buildings and improvements 32,059 29,587
Machinery and equipment 166,542 149,069
Allowances for depreciation and
amortization (deduction) (107,106) (93,143)
-------- --------
NET PROPERTY, PLANT AND
EQUIPMENT 95,364 89,071
-------- --------
$ 325,486 $ 313,462
======== ========
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
BALDOR ELECTRIC COMPANY AND AFFILIATES
DECEMBER 28 DECEMBER 30
1996 1995
----------- -----------
(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,314 $ 18,996
Employee compensation 5,932 5,110
Profit sharing 7,645 7,168
Anticipated warranty costs 4,500 4,100
Accrued insurance obligations 14,286 12,627
Other accrued expenses 16,626 16,080
Income taxes 766 1,967
Current maturities of
long-term obligations 1,113 978
--------- ---------
TOTAL CURRENT LIABILITIES 71,182 67,026
LONG-TERM OBLIGATIONS 45,027 25,255
DEFERRED INCOME TAXES 8,952 9,804
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:
1996-28,617,688; 1995-28,168,038 2,862 2,817
Additional capital 37,112 32,476
Retained earnings 207,064 182,354
Cumulative translation adjustments 346 1,246
Treasury Stock at Cost
(2,417,247 shares in 1996 and
297,741 shares in 1995) (47,059) (7,516)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 200,325 211,377
--------- ---------
$ 325,486 $ 313,462
========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF EARNINGS
BALDOR ELECTRIC COMPANY AND AFFILIATES
YEARS ENDED
---------------------------------------
DECEMBER 28 DECEMBER 30 DECEMBER 31
1996 1995 1994
---------------------------------------
(In thousands, except share data)
Net sales $ 502,875 $ 473,103 $ 418,152
Other income, net 2,497 2,596 1,668
--------- --------- ---------
505,372 475,699 419,820
Costs and expenses:
Cost of goods sold 353,345 334,306 297,212
Selling and administrative 84,522 80,019 72,329
Profit sharing 7,645 7,168 5,788
Interest 2,668 1,260 1,279
--------- --------- ---------
448,180 422,753 376,608
Earnings Before Income Taxes 57,192 52,946 43,212
Income taxes 22,019 20,641 16,853
--------- --------- ---------
NET EARNINGS $ 35,173 $ 32,305 $ 26,359
========= ========= =========
NET EARNINGS PER COMMON SHARE $1.29 $1.12 $0.92
========= ========= =========
Weighted average common shares
outstanding 27,217,741 28,891,293 28,503,273
========== ========== ==========
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 share data)
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
common share 0.30 0.33 0.32 0.34 1.29
1995
Net sales $114,585 $121,839 $120,044 $116,635 $473,103
Gross profit 33,558 35,698 35,190 34,351 138,797
Net earnings 7,671 8,261 8,276 8,097 32,305
Net earnings per
common share 0.26 0.29 0.29 0.28 1.12
CONSOLIDATED STATEMENTS OF CASH FLOWS
BALDOR ELECTRIC COMPANY AND AFFILIATES
YEARS ENDED
---------------------------------------
DECEMBER 28 DECEMBER 30 DECEMBER 31
1996 1995 1994
---------------------------------------
(In thousands)
Operating activities:
Net earnings $ 35,173 $ 32,305 $ 26,359
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 17,277 15,583 13,121
Deferred income taxes (1,943) (1,979) (3,882)
Changes in operating assets and
liabilities:
Receivables (2,815) (7,315) (11,887)
Inventories (8,698) (19,591) (10,480)
Other current assets (2,826) (3,020) (52)
Accounts payable 1,318 194 6,113
Accrued expenses 7,149 4,967 12,017
Income taxes (1,201) (810) 656
Other, net (873) 3,851 (70)
--------- --------- ---------
Net cash from operating activities 42,561 24,185 31,895
Investing activities:
Additions to property, plant
and equipment (23,183) (23,112) (22,131)
Marketable securities purchased (33,315) (50,881) (45,153)
Marketable securities sold 43,910 48,987 41,388
--------- --------- ---------
Net cash used in
investing activities (12,588) (25,006) (25,896)
Financing activities:
Additional long-term borrowings 38,000 6,000
Reduction of long-term obligations (18,093) (995) (1,737)
Unexpended debt proceeds 353 5,641 (5,220)
Dividends paid (10,498) (9,416) (7,648)
Stock option plans 3,902 3,065 4,144
Common stock repurchased (42,009)
--------- --------- ---------
Net cash used in
financing activities (28,345) (1,705) (4,461)
Net increase (decrease) in cash and
cash equivalents 1,628 (2,526) 1,538
Beginning cash and
cash equivalents 6,322 8,848 7,310
--------- --------- ---------
Ending cash and
cash equivalents $ 7,950 $ 6,322 $ 8,848
========= ========= =========
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 JANUARY 1, 1994 17,968 $1,809 $20,830 $141,729 $ (835) $ (2,994) $160,539
Stock option plans, net
of shares exchanged 342 38 5,041 (935) 4,144
Translation adjustments 1,284 1,284
Net earnings 26,359 26,359
Securities valuation adjustment,
net of deferred taxes of $267 (416) (416)
Cash dividends at $0.28
per common share (7,648) (7,648)
------ ------ ---------- -------- ---------- -------------- ---------
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 $0.34 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 $0.40
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
====== ====== ========== ======== ========== ============== =========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALDOR ELECTRIC COMPANY AND AFFILIATES
December 28, 1996
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 years
1996, 1995 and 1994 all 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 $14,166,000 in 1996 and $10,836,000 in 1995
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: In fiscal year 1996, the Company adopted Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires impairment losses to be
recognized when information indicates the carrying amount of
long-lived assets, intangibles and any goodwill related to those
assets will not be recovered through future operations or sale. SFAS
No. 121 was applied prospectively from the date of adoption and the
effect of adoption was not material.
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: Net earnings per common share are
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. Since the dilutive effect of
common stock options is similar in both calculations, net earnings
per common share reflects both primary and fully diluted earnings per
share.
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 1996.
Research and Engineering: Costs associated with research, new
product development and product cost improvements are treated as
expenses when incurred and amounted to approximately $19,900,000 in
1996, $17,200,000 in 1995, and $14,800,000 in 1994.
Reclassification: The Company has reclassified the presentation of
certain prior year information to be consistent with the presentation
in the current year.
NOTE B -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1996 1995
---- ----
(in thousands)
Industrial Development Bonds:
due through 1997 at 6.0% fixed rate $ 113 $ 245
due through 2004 at 5.29% fixed rate 5,030 5,525
due through 2004 at 4.35% variable rate 2,300 2,300
due through 2004 at 6.0% fixed rate 57 63
due through 2004 at 8.25% fixed rate(paid in 1996) 4,365
due through 2009 at 7.75% fixed rate 3,000 3,000
due through 2009 at 7.875% fixed rate 7,200 7,200
due through 2010 at 4.15% variable rate 3,440 3,440
Notes payable to banks:
due March 1, 1999 at 5.85% variable rate 25,000
due November 1, 2003 at 11.8% (paid in 1996) 95
------- -------
46,140 26,233
Less current maturities 1,113 978
------- -------
$45,027 $25,255
======= =======
At December 28, 1996, Industrial Development Bond proceeds of
$6,389,000 are included in Other Assets. Certain long-term
obligations are collateralized by property, plant and equipment with
a net book value of $11,863,000 at December 28, 1996.
Maturities of long-term obligations during each of the five fiscal
years ending 2001 are: 1997--$1,113,000; 1998--$1,070,000;
1999--$26,145,000; 2000--$1,215,000; and 2001--$1,290,000.
Industrial Development Bonds include capital lease obligations of
$3,170,000 at December 28, 1996. Aggregate future minimum capital
lease payments at December 28, 1996, are $6,187,000 including
interest of $3,017,000.
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
$13,955,000 at December 28, 1996, were unrestricted. At December 28,
1996, the Company had outstanding letters of credit totaling
$6,709,000.
Interest paid was $2,988,000 in 1996, $1,730,000 in 1995 and,
$1,565,000 in 1994.
The Company had lines of credit aggregating $30,000,000 available at
December 28, 1996. 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 December 28, 1996.
NOTE C -- MARKETABLE SECURITIES
Baldor currently invests in only high-quality, short-term investments
which it classifies as available-for-sale. As such, there were no significant
differences between amortized cost and estimated fair value at December 28,
1996 or December 30, 1995. Additionally, because investments are 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:
December 28 December 30
1996 1995
----------- -----------
(In thousands)
Municipal debt securities $12,843 $18,079
U.S. corporate debt securities 2,925 10,970
U.S. Treasury & agency securities 7,331 2,938
Other debt securities 5,039 4,871
----------- -----------
28,138 36,858
Less cash equivalents 10,246 8,371
----------- -----------
$17,892 $28,487
=========== ===========
The estimated fair value of marketable debt and equity securities at
December 28, 1996, was $10,799,000 due in one year or less,
$2,243,000 due in one to three years, and $4,850,000 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 $22,718,000 in 1996,
$21,643,000 in 1995, and $18,830,000 in 1994. Income tax expense
consists of the following:
1996 1995 1994
---- ---- ----
(in thousands)
Current: Federal $19,887 $19,125 $18,679
State 2,591 2,614 1,757
Foreign 637 776 566
Deferred (1,096) (1,874) (4,149)
-------- -------- --------
$22,019 $20,641 $16,853
======== ======== ========
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:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.0 3.3 3.4
Other 0.5 0.7 0.6
---- ---- ----
Effective income tax rate 38.5% 39.0% 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 December 28, 1996 and December 30, 1995, the investments in
foreign currency derivatives were not significant.
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
purchases various options, the cost of which 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 December 28, 1996, and December 30,
1995.
NOTE F -- SHAREHOLDERS' EQUITY
On August 7, 1995, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a 50% stock
dividend payable September 6, 1995, to shareholders of record on
August 18, 1995. This resulted in the issuance of 9,228,086
additional shares of common stock. All per share and weighted
average share amounts have been restated to reflect this stock split.
On February 16, 1996, Baldor purchased 2,000,000 shares of its common
stock from the estate of Mr. G. A. Shock for $19.00 per share. This
purchase was at a discount to the market and was funded with a
mid-term bank loan.
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 -- OPERATING LEASES
The Company leases certain computers, buildings, and other equipment
under operating lease agreements. Related rental expense was
$4,800,000 in 1996, $4,300,000 in 1995, and $3,900,000 in 1994.
Future minimum payments for operating leases having noncancelable
lease terms in excess of one year are: 1997 -- $2,225,000; 1998 --
$1,885,000; 1999 -- $1,761,000; 2000 -- $1,681,000; 2001 -- $609,000;
and decline substantially thereafter.
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:
1996 1995 1994
---- ---- ----
(in thousands)
Net Sales:
United States Companies
Domestic customers $430,014 $407,078 $363,548
Export customers 30,831 25,068 21,232
-------- -------- --------
460,845 432,146 384,780
Foreign Affiliates 42,030 40,957 33,372
-------- -------- --------
$502,875 $473,103 $418,152
======== ======== ========
Earnings Before Income Taxes:
United States Companies $ 55,160 $ 51,723 $ 41,508
Foreign Affiliates 2,032 1,223 1,704
-------- -------- --------
57,192 $ 52,946 43,212
======== ======== ========
Assets:
United States Companies $297,496 $285,381 $261,984
Foreign Affiliates 27,990 28,081 21,171
-------- -------- --------
$325,486 $313,462 $283,155
======== ======== ========
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 as discussed in more detail below. 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 ten 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 Stock Option Committee Employees
1994 Stock Option Committee Employees
1989 (see note 3) Executive Committee Non-employee directors
1996 Executive Committee Non-employee directors
Non-compensatory Plans (see note 2)
1981 (see note 3) Board of Directors Employees
1990 Board of Directors 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 1,620
shares at prices equal to the market value at the date of grant and a
non-qualified stock option to purchase 1,080 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 1995 and 1996,
respectively: risk-free interest rates of 7.9% and 5.7%; dividends
yields of 1.8% for both years; volatility factors of the expected
market price of the Company's common stock of 19.2% and 20.0%; and
weighted average expected option life of 7.1 years and 6.4 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 1996 and fiscal 1995 follows:
1996 1995
--------------------- ---------------------
Weighted Weighted
Average Price Average Price
STOCK OPTION ACTIVITY Shares per Share Shares per Share
--------------------- --------------------- ---------------------
Total options outstanding:
Beginning Balance 2,088,629 $ 9.688 2,258,118 $12.120
Granted 609,800 18.514 314,100 16.807
Exercised (546,480) 6.587 (461,839) 6.987
Canceled (48,863) 14.468 (21,750) 14.815
---------- ----------
Ending Balance 2,103,086 12.799 2,088,629 9.688
========== ==========
Shares available for grant: 7,493,700 7,343,700
Shares exercisable: 1,358,856 1,602,260
Shares reserved for
future grants: 1,154,630 1,678,967
Weighted average
remaining contractual life 6.6 years 6.0 years
Weighted average fair value per share
of options granted during the year
At market price $5.34 $6.29
At less than market price $10.57 $10.84
PRO FORMA INFORMATION (in thousands, except for earnings per share
information)
Pro forma net income $33,989 $31,781
Pro forma earnings per share $1.26 $1.10
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 December 28, 1996 and
December 30, 1995, and the related consolidated statements of
earnings, cash flows and shareholders' equity for each of the three
years in the period ended December 28, 1996. 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 December 28, 1996 and
December 30, 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 28, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
----------------------
Little Rock, Arkansas
January 31, 1997
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 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.
--------------------------- -------------------------
R. S. Boreham, Jr. R. L. Qualls
Chairman of the Board Vice Chairman and Chief
Executive Officer
----------------------------- --------------------------
John McFarland Lloyd G. Davis
President Chief Financial Officer,
Executive Vice
President- Finance,
Secretary, and Treasurer
SHAREHOLDER INFORMATION
DIVIDEND POLICY
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 being for shareholders
to obtain dividend increases over time, while also participating in
the growth of the Company.
DIVIDENDS PAID 1996 1995 1994
1st quarter $.09 $.08 $.06
2nd quarter .10 .08 .07
3rd quarter .10 .09 .07
4th quarter .11 .09 .08
---- ---- ----
Year $.40 $.34 $.28
COMMON STOCK PRICE RANGE
NYSE SYMBOL-BEZ 1996 1995
----------- ------------
High Low High Low
1st quarter 22-3/8 18-1/2 19-1/2 17-1/4
2nd quarter 25 19 19-7/8 18-3/8
3rd quarter 22-1/2 19-1/8 26-1/2 19-1/8
4th quarter 24-3/4 18-5/8 25-1/4 20
SHAREHOLDERS
4,568 at December 28, 1996 including shareholders of record and
employees through benefit plans.
TRANSFER AGENT AND REGISTRAR
Wachovia Bank of North Carolina, N.A.
Wachovia Shareholder Services
P.O. Box 8217
Boston, Massachusetts 02266-8217
(800) 633-4236
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
FORM 10-K REPORT
Shareholders may obtain additional financial information about Baldor
from the Company's Form 10-K report filed with the Securities and
Exchange Commission. Copies are available on request without charge.
INVESTOR INFORMATION INQUIRIES
Requests for additional copies of the Annual Report, or other
materials and information you may wish regarding the condition and
prospects of the Company, should be directed to: Investor Relations,
Baldor Electric Company, P.O. Box 2400, Fort Smith, Arkansas 72902.
SHAREHOLDERS' ANNUAL MEETING
The Annual Meeting of the Shareholders of Baldor Electric Company
will be held at 10:30 a.m., Saturday, May 3, 1997, at the Holiday
Inn, 700 Rogers Avenue, Fort Smith, Arkansas 72901.