UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: Commission File Number:
January 2, 1999 1-7284
B A L D O R E L E C T R I C C O M P A N Y
(Exact name of registrant as specified in its charter)
Missouri 43-0168840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5711 R. S. Boreham, Jr St, Fort Smith, Arkansas 72908 (501) 646-4711
(Address of principal executive offices) (Zip Code) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
Common Stock, $0.10 Par Value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant based on the closing price on February 27, 1999, was $ 505,116,323.
At February 27, 1999, there were 36,222,522 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended January
2, 1999 (the "Annual Report to Shareholders for 1998"), are incorporated by
reference into Part I and Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held May 1, 1999 (the "1999 Proxy Statement"), are incorporated by reference
into Parts I and III.
<PAGE>
PART I
Item 1. Business
Baldor Electric Company ("Baldor" or the "Company") was incorporated in Missouri
in 1920. The Company operates in one industry segment which includes the design,
manufacture, and sale of electric motors and drives. In addition to electric
motors and drives, products include speed reducers, industrial grinders,
buffers, polishing lathes, stampings, castings, and repair parts. Baldor has
made several small acquisitions; however, the majority of its growth has come
internally through broadening its markets and product lines.
Products
Sales of industrial electric motors represented approximately 76% of the
Company's net sales in 1998, 1997 and 1996. The AC motor product and controls
line presently ranges in size from 1/50 up to 1000 horsepower. The DC motor
product line presently ranges from 1/50 through 700 horsepower.
The Company also sells industrial control products, which include servo
products, DC controls, position controls, and inverter and vector drives. The
Company's line of adjustable speed controls ranges from 1/50 to 800 horsepower.
With these products, the Company provides its customers the ability to purchase
a "Drive" which Baldor defines as an industrial motor and an electronic control,
from one manufacturer. Sales of drives were approximately 23% of total 1998 and
1997 sales, and 22% of total 1996 sales.
Baldor's motors and drives are designed, manufactured, and marketed for general
purpose uses ("stock products") and for individual customer requirements and
specifications ("custom products"). Stock product sales represented
approximately 63% of sales for 1998, 1997 and 1996. Most stock product sales are
to customers who place their orders for immediate shipment from current
inventory. Custom products generally are shipped within three weeks from the
date of order. Because of these and other factors, the Company does not believe
that its backlog represents an accurate indication of future shipments.
Sales and Marketing
The products of the Company are marketed throughout the United States and in
more than 60 foreign countries. The company's field sales organization,
comprised of independent manufacturer's representatives and company sales
offices, consists of more than 51 groups, including 37 in the United States. The
remainder of the Company's representatives are located in various parts of the
world, including Canada, Europe, Latin America, Australia, and the Far East.
Custom products and stock products are sold to original equipment manufacturers
("OEMs") . Stock products are also sold to independent distributors for resale,
often as replacement components in industrial machinery which is being
modernized or upgraded for improved performance.
No single customer accounted for more than 4% of sales, therefore the Company
does not believe that the loss of any single customer would have a material
effect on its total business.
Competition
The Company faces substantial competition in the sales of its products in all
markets served. Some of the Company's competitors are larger in size or are
divisions of large diversified companies and have substantially greater
financial resources. The Company competes by providing its customers better
value through product quality and efficiency and better services, including
availability, shorter lead-times, on-time delivery, product literature, and
training.
The Company is not aware of any industry-wide statistics from which it can
precisely determine its relative position in the industrial electric motor
industry. In the United States, certain industry statistics are available from
the U.S. Department of Commerce and the National Electric Manufacturers
Association. However, these sources do not include all competitors or all sizes
of motors. The Company believes that it is a significant factor in the markets
it serves and that its share of the market has increased over the past several
years.
Manufacturing
The Company manufactures many of the components used in its products including
laminations, motor hardware, and aluminum die castings. Manufacturing many of
its own components permits the Company to better manage cost, quality, and
availability. In addition to the manufacture of components, the Company's motor
manufacturing operations include machining, welding, winding, assembling, and
finishing operations.
The raw materials necessary for the Company's manufacturing operations are
available from several sources. These materials include steel, copper wire, gray
iron castings, aluminum, and insulating materials, many of which are purchased
from more than one supplier; the Company believes that alternative sources are
available for such materials.
Research and Engineering
The Company's design and development of electric motors and drives includes both
the development of products which extend the product lines and the modification
of existing products to meet new application requirements. Additional
development work is done to improve production methods. Costs associated with
research, new product development, and product and cost improvements are treated
as expenses when incurred and amounted to $25,300,000 in 1998, $22,900,000 in
1997, and $19,900,000 in 1996.
Environment
Compliance with laws relating to the discharge of materials into the environment
or otherwise relating to the protection of the environment has not had a
material effect on capital expenditures, earnings, or the financial position of
the Company and is not expected to have such an effect.
Employees
As of January 2, 1999, the Company had 3,865 employees.
Executive Officers of the Registrant
Information regarding executive officers is contained in Part III, Item 10, and
incorporated herein by reference.
International Operations
For each of the three fiscal years in the period ended January 2, 1999, export
and international sales revenues have increased and represented approximately
15% of consolidated sales. See also Note H on page 24 of the Annual Report to
Shareholders for 1998, incorporated by reference.
The Company's products are distributed in more than 60 foreign countries,
principally in Canada, Europe, Australia, the Far East, and Latin America. The
Company's international operations include the Baldor Europe group of companies
which was acquired in 1983. Baldor Europe has sales offices in Switzerland,
Germany, Italy, and the United Kingdom. Baldor Europe also has development and
manufacturing operations in Germany. In April 1997, the Company acquired the
UK-based Optimised Control Ltd to create Baldor England. Baldor England has
sales offices and two development and manufacturing facilities. The Company also
owns majority interests in Baldor Electric (Far East) Pte. Ltd., located in
Singapore, and Australian Baldor Pty. Limited which has locations in Sydney and
Melbourne. The Company wholly owns Baldor de Mexico, S.A. de C.V., located in
Leon, Mexico.
The Company believes that it is in a position to act on global opportunities as
they become available. The Company also believes that there are additional risks
attendant to international operations including currency fluctuations and
possible restrictions on the movement of funds. However, these risks have not
had a significant adverse effect on the Company's business.
<PAGE>
Item 2. Properties
The Company believes that its facilities, including equipment and machinery, are
in good condition, suitable for current operations, adequately maintained and
insured, and capable of sufficient additional production levels. The Company
also has other properties for possible future expansion. The following table
sets forth certain information with respect to the Company's properties.
AREA
LOCATION PRIMARY USE (SQ. FT.)
- -------- ----------- ---------
Fort Smith, AR AC motor production 298,150
Distribution and service center 208,000
Administration and engineering offices 70,950
Aluminum die casting 76,400
Drives production center 98,500
St. Louis County, MO Metal stamping and engineering toolroom 133,850
DC and miscellaneous motor production 55,600
Columbus, MS AC motor production 191,000
Westville, OK AC and DC motor production 207,900
Fort Mill, SC DC motor, AC motor 108,000
and tachometer production
Clarksville, AR Subfractional motor, gear motor, 167,000
and worm-gear speed reducer production
Ozark, AR AC motor production 84,050
Four other Metal stamping and motor, drives,
domestic locations and servomotor production 85,900
Ten foreign Sales and distribution centers
locations and servodrive production 84,200
---------
1,869,500
=========
Certain properties listed above (430,400 sq. ft. in the aggregate) are leased,
principally pursuant to Industrial Revenue Bond agreements, and where material,
are accounted for as capitalized lease obligations. Certain lease agreements
contain purchase options at varying prices and/or renewal options at reduced
rentals for extended additional periods.
Item 3. Legal Proceedings
The Company is party to a number of legal proceedings incidental to its
business, none of which is deemed to be material to its operations or business.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters Information under the captions "Dividends paid", "Common stock price
range", and "Shareholders" on page 29 of the Annual Report to Shareholders for
1998 is incorporated herein by reference.
During the forth quarter of 1998, certain District Managers exercised
non-qualified stock options previously granted to them under the Baldor Electric
Company 1990 Stock Option Plan for District Managers (the DM Plan). The exercise
price paid by the District Manager equaled the fair market value on the date of
grant. The total amount of shares granted under the DM Plan is less than 1% of
the outstanding shares of Baldor common stock.
None of the transactions were registered under the Securities Act of 1933, as
amended (the "Act"), in reliance upon the exemption from registration afforded
by Section 4(2) of the Act. The Company deems this exemption to be appropriate
given that there are a limited number of participants in the DM Plan and all
parties are knowledgeable about the Company.
Item 6. Selected Financial Data
Information under the caption "Eleven-Year Summary of Financial Data" only for
years 1994 through 1998 for net sales, net earnings, net earnings per share,
dividends per share, long-term obligations, and total assets on page 14 of the
Annual Report to Shareholders for 1998 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 16 and 17 of the Annual Report to Shareholders
for 1998, is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Information under the caption "Market Risk" of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 17 of the
Annual Report to Shareholders for 1998, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company on pages 18 through 26, the
"Report of Ernst & Young LLP, Independent Auditors," on page 26, and the
"Summary of Quarterly Results of Operations (Unaudited)" on page 19 of the
Annual Report to Shareholders for 1998, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information contained in the 1999 Proxy Statement under the caption "Proposal 1
- -- Election of Directors -- Information Regarding the Nominees for Directors to
be Elected in 1999 for Terms Ending in 2002" and under the caption "--
Information the Directors who are Not Nominees for Election and Whose Terms
Continue Beyond 1999 or Expire during 1999," is incorporated herein by
reference.
The current executive officers of the Company, each of whom is elected for a
term of one year or until his successor is elected and qualified, are:
Served as
Officer
Name Age Position Since
- ---- --- -------- -----
R. S. Boreham, Jr. 74 Chairman of the Board 1961
R. L. Qualls 65 Vice Chairman 1986
John A. McFarland 47 President 1990
Charles H. Cramer 54 Vice President-Personnel 1984
Lloyd G. Davis 51 Chief Financial Officer, 1992
Executive Vice President - Finance,
Secretary, and Treasurer
Gene J. Hagedorn 51 Vice President - Materials 1994
James R. Kimzey 60 Executive Vice President - 1984
Research and Engineering
Randy L. Colip 39 Vice President - Sales 1997
Jerry D. Peerbolte 42 Vice President - Marketing 1990
Randal G. Waltman 49 Vice President - Engineering 1997
and Motor Operations
Ronald E. Tucker 41 Controller 1997
John L. Peeples, III 46 Vice President-International 1998
Eddie L. Holderfield 59 Vice President-Fort Smith 1999
Motor Manufacturing
Each of the executive officers, has served as an officer or in a management
capacity with the Company for the last five years. There are no family
relationships among the directors or executive officers.
<PAGE>
Item 11. Executive Compensation
Information contained in the 1999 Proxy Statement under the caption "Information
About the Board of Directors and Committees of the Board -- Director
Compensation" and information under the caption "Executive Compensation" and all
sub-captions thereof, except for the information contained in sub-captions
"Report of the Executive and Stock Option Committees" and "Performance Graph" is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the 1999 Proxy Statement is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Information about Mr. Richard E. Jaudes under the caption "Proposal 1 --
Election of Directors -- Information Regarding the Nominees for Directors to be
Elected in 1999 for Terms Ending in 2002" and information about Mr. Robert L.
Proost under the caption "-- Information the Directors who are Not Nominees for
Election and Whose Terms Continue Beyond 1999 or Expire during 1999," is
incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) - The response to this portion of Item 14 is submitted as a
separate section of this Report at page 13 hereof.
(3) Listing of Exhibits
Exhibit 3(i) - The Restated Articles of Incorporation (as amended)
of Baldor Electric Company, incorporated herein by reference as
Exhibit 3(i) to Form 10-Q for the quarter ended July 4, 1998.
Exhibit 3(ii) - Bylaws of Baldor Electric Company (as amended)
incorporated herein by reference as Exhibit 3(ii) to Form 10-Q for the
quarter ended October 3, 1998.
Exhibit 4(i)(a) - Rights Agreement dated May 6, 1988, between Baldor
Electric Company and Wachovia Bank of North Carolina, N.A. (formerly
Wachovia Bank & Trust Company, N.A.), as Rights Agent originally filed
as Exhibit 1 to Registrant's Form 8-K Current Report, dated May 13,
1988, and refiled as Exhibit 4(i) to Form 10-K for the year ended
December 31, 1994.
Exhibit 4(i)(b) - Amendment Number 1 to the Shareholders' Rights
Agreement dated February 5, 1996 filed as Exhibit 2 to Registrant's
Form 8-A/A dated March 21, 1996.
Exhibit 4(iii) - The Registrant agrees to furnish to the Securities
and Exchange Commission upon request pursuant to Item 601(b)(4)(iii)
of Regulation S-K copies of instruments defining the rights of the
holders of long-term debt of the Registrant and its consolidated
affiliates.
Exhibit (10) - Exhibits 10(iii)(A)(1) through 10(iii)(A)(6) were
previously submitted as exhibits and are incorporated herein by
reference:
o 10(iii)(A)(1) 1982 Incentive Stock Option Plan (originally filed
as Exhibit 10.8 to Form 10-K for year ended December 31, 1981,
filed as Exhibit 10.1 to Form10-K for the year ended December 28,
1991).
o 10(iii)(A)(2) Officers Compensation Plan (originally filed as
Exhibit 10.6 to Form 10-K for year ended December 31, 1988, and
filed as Exhibit 10(iii)(A)(2) to Form 10-K for the year ended
December 31, 1994).
o 10(iii)(A)(3) 1987 Incentive Stock Plan (originally filed as
Appendix A to Registrant's Proxy Statement dated April 3, 1987,
and refiled as Exhibit 10(iii)(A)(3) to Form 10-K for the year
ended December 31, 1994.
<PAGE>
o 10(iii)(A)(4) 1989 Stock Option Plan for Non-Employee Directors
(as amended) incorporated herein by reference to Exhibit 10 (iii)
A.2 to Form 10-Q for quarter ended July 4,1998.
o 10(iii)(A)(5) 1994 Incentive Stock Option Plan as (amended)
incorporated herein by reference as Exhibit 10(iii)A.1 to Form
10-Q for the quarter ended July 4, 1998.
o 10(iii)(A)(6) 1996 Stock Option Plan for Non-Employee Directors
(as amended) incorporated herein by reference as Exhibit A
(iii)A.3 to Form 10-Q for the quarter ended July 4, 1998).
For a listing of all management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K, see
the exhibits listed above under Exhibit 10.
Exhibit (11) - Incorporated by reference in Note J of the Annual
Report to Shareholders for 1998 filed as Exhibit (13).
Exhibit (13) - Portions of the Annual Report to Shareholders for 1998.
The Annual Report is being filed as an exhibit solely for the
purpose of incorporating certain provisions thereof by reference.
Portions of the Annual Report not specifically incorporated are
not deemed "filed" for the purposes of the Securities Exchange
Act of 1934, as amended.
Exhibit (21) - Affiliates of the Registrant filed herewith.
Exhibit (23) - Consent of Independent Auditors filed herewith.
Exhibit (24) - Powers of Attorney. Included on signature pages 11 and
12.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this Report.
(c) Exhibits
See Exhibit Index at page 16 of this Report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report at page 14 hereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALDOR ELECTRIC COMPANY
(Registrant)
By /s/ R. S. Boreham, Jr.
---------------------------
Chairman
(Principal Executive Officer)
Date: March 26, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints R. S. Boreham, Jr., R. L. Qualls, and John A.
McFarland, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign this Report and any and all
amendments to this Report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
they might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ R. S. Boreham, Jr. Chairman and Director March 26, 1999
- ----------------------
R. S. Boreham, Jr. (Principal Executive Officer)
/s/ R. L. Qualls Vice Chairman and Director March 26, 1999
- ----------------
R. L. Qualls
/s/ John A. McFarland President and Director March 26, 1999
- ---------------------
John A. McFarland
/s/ Lloyd G. Davis Chief Financial Officer, March 26, 1999
- ------------------
Lloyd G. Davis Executive Vice President -
Finance, Secretary, and
Treasurer (Principal Financial
and Accounting Officer)
/s/ Jefferson W. Asher, Jr. Director March 26, 1999
- ---------------------------
Jefferson W. Asher, Jr.
/s/ Fred C. Ballman Director March 26, 1999
- -------------------
Fred C. Ballman
/s/ O. A. Baumann Director March 26, 1999
O. A. Baumann
/s/ Robert J. Messey Director March 26, 1999
- --------------------
Robert J. Messey
/s/ Robert L. Proost Director March 26, 1999
- --------------------
Robert L. Proost
/s/ Willis J. Wheat Director March 26, 1999
- -------------------
Willis J. Wheat
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
YEAR ENDED JANUARY 2, 1999
BALDOR ELECTRIC COMPANY
FORT SMITH, ARKANSAS
<PAGE>
FORM 10-K, ITEM 14(a)(1) and (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
BALDOR ELECTRIC COMPANY AND AFFILIATES
The following consolidated financial statements of Baldor Electric Company and
Affiliates, included in the Annual Report to Shareholders for 1998, are
incorporated by reference in Item 8:
o Consolidated Balance Sheets
- January 2, 1999 and January 3, 1998
o Consolidated Statements of Earnings
- for the three years in the period ended January 2, 1999
o Consolidated Statements of Cash Flows
- for the three years in the period ended January 2, 1999
o Consolidated Statements of Shareholders' Equity
- for the three years in the period ended January 2, 1999
o Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Baldor Electric
Company and Affiliates is included in Item 14(d):
o Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE>
BALDOR ELECTRIC COMPANY AND AFFILIATES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
---------------------------
Charged to Charged to
Balance at Costs Other Balance
Beginning and Accounts Additions at End of
Description of Period Expenses Describe Describe Period
- ----------- --------- -------- -------- -------- ------
(In thousands)
Deducted from current assets:
Allowance for doubtful accounts
1998 $3,525 $ 511 $206(A) $520(C) $4,350
1997 3,200 509 184(A) 3,525
1996 2,800 695 295(A) 3,200
Included in current liabilities:
Anticipated warranty costs
1998 $5,200 $ 725(B) $5,925
1997 4,500 700(B) 5,200
1996 4,100 400(B) 4,500
(A) Net uncollectible accounts written off during year.
(B) Additions to reserve for anticipated warranty costs, net of expenses
incurred.
(C) Additions to reserve for acquisition, net of expenses incurred.
<PAGE>
BALDOR ELECTRIC COMPANY AND AFFILIATES
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
---------- ---------------------
11 Computation of Earnings Per Common Share - Incorporated by
reference in Note J of the Annual Report to Shareholders
for 1998 in Exhibit (13)
13 Portions of the Annual Report to Shareholders for 1998-
filed herewith
21 Affiliates of the Registrant - filed herewith
23 Consent of Independent Auditors - filed herewith
24 Powers of Attorney - Included on signature pages 11 and 12
27 Financial Data Schedules - filed herewith
<PAGE>
Management's Discussion and Analysis of Financial
Results of Operations
Summary
Baldor posted record sales and earnings for the seventh consecutive year. For
the fiscal year 1998, a 6% increase in sales was leveraged into an 11% increase
in net earnings. This leverage is attributable to improved margins through
increased productivity, lowered manufacturing costs and improved quality of
products and services for our customers. As announced in October 1998, the lead
times at all manufacturing plants was reduced from 4 to 3 weeks, the best in the
industry.
Net Sales
Baldor reached a record sales level of $589.4 million in 1998, a 6% increase
over 1997 sales of $557.9 million. Sales in 1996 were $502.9 million. In 1998,
sales to distributor customers increased slightly compared with sales to OEM
customers. The mix of sales between distributor and OEM customers remained
consistent in 1998 and 1997, at 49% distributor sales and 51% OEM sales. 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 4% of sales in any year
covered by this report. During the past two years, we saw growth in a variety of
products. During 1998, Baldor introduced nearly 300 new products in response to
customer feedback. Sales for 1998 and 1997 were generated without a price
increase, with the exception of the increase on EPAct-related products effective
after October 24, 1997. Sales of products introduced in the previous five years
accounted for approximately 30% of 1998 and 1997 sales.
Net Earnings
Net earnings of $44.6 million in 1998 exceeded 1997 net earnings of $40.4
million by 11%. Net earnings in 1996 were $35.2 million. Pre-tax margins
improved to 12.2% in 1998 from 11.8% in 1997 and 11.4% in 1996. Selling prices
remained flat during 1998, while net earnings improved to a record level due to
productivity improvements and cost reduction programs. Gross margin, operating
margin and pre-tax margin improved in 1998 compared to 1997. The gross margin
improved to 30.3% in 1998 from 30.2% in 1997 and 29.7% in 1996. Manufacturing
costs continued to improve in 1998 compared to 1997 and 1996. Selling and
administrative costs as a percent of sales improved to 16.6% in 1998 compared to
16.8% in 1997 and 1996. Baldor continues to increase its sales volumes with a
corresponding decrease in selling and administrative support costs. Our tax rate
improved to 38.0% in 1998 compared to 38.5% in 1997 and 1996.
International Operations
Sales from international operations (foreign affiliates and exports) were $90.0
million in 1998, up from $84.2 million in 1997, and $72.8 million in 1996. Sales
from international operations rose 6% compared to 1997. We saw strong sales
increases in Mexico and Europe during 1998. Sales in Australia and the Far East
continued to be weaker in 1998 and 1997. Even though foreign sales experienced
only a moderate growth in 1998, foreign pre-tax earnings increased significantly
in 1998 compared to 1997. The increase in foreign pre-tax earnings is a
continuation of Baldor's efforts to increase productivity and improve costs on
an international level.
Environmental Remediation
Management believes, based on their internal reviews and other factors, that the
future costs relating to environmental remediation and compliance will not have
a material effect on the capital expenditures, earnings, or competitive position
of the Company.
Year 2000
The Company's comprehensive Year 2000 initiative is being managed internally.
The Company's goal is to ensure that there is no material adverse effect on
operations and that transactions with customers, vendors and financial
institutions will be operational in the year 2000. A new Company-wide
information system that is certified by the vendor to be Year 2000 compliant was
purchased in 1996. This fully integrated information reporting system was
purchased to improve visibility and reaction time to customer orders, reduce
lead times, support international operations, improve productivity and better
manage inventory. The Company is adhering to its implementation schedule with
75% completion as of year end 1998, with the remaining scheduled for completion
in mid 1999. The only product that the Company presently produces that utilizes
a real-time clock and a date stamp is the Baldor SmartMotor_. This date stamp is
used only for run time and fault logging. It is not used in any control function
and in this capacity will function in the year 2000. The Company has evaluated
other potential areas, such as vendor compliance, shop floor technology, and
other infrastructure such as phone and alarm systems. These non-information
systems are expected to function properly in the year 2000. The cost of
addressing these systems for the year 2000 is not expected to be material.
Recently, a review of vendors was completed with written verification of their
compliance status. Based on the certifications received, the Year 2000 problem
is not expected to have a material adverse effect on business operations with
our vendors. The Company's financial institutions have provided reasonable
assurance that they are Year 2000 operational. While we cannot guarantee the
performance of outside parties, we will establish contingency plans, when
needed, in an attempt to minimize disruptions. Based upon the procedures
described and results achieved, the Company does not anticipate a materially
adverse affect from the Year 2000. We will continue to monitor our vendors,
customers and financial institutions for any adverse reactions to their Year
2000 compliance. If the situation arises, we will establish contingency plans to
address complications.
16
<PAGE>
Financial Position
Summary
Baldor's financial position continued to remain strong in 1998. We improved our
financial strength by expanding research and development for new and existing
products, by capital investments in our manufacturing facilities, and by making
additional investments in both our employees and customers through education and
training. Also in 1998, the Company initiated a stock repurchase program. Our
financial strength is an important competitive advantage which provides a strong
base to better serve our customers and finance future growth opportunities.
Investments
Baldor believes the investment in our employees through training and education
is a key to continued success and shareholder value. Once again, this investment
was recognized when we were honored for the second consecutive year in Fortune
magazine's list of "100 Best Companies To Work For In America." Investments in
property, plant and equipment for 1998 were $38.2 million compared to $26.9
million in 1997 and $23.1 million in 1996. The 1998 investments in property,
plant and equipment were made to centralize operations, increase capacity, and
improve quality and productivity. The new Fort Smith Drives Center opened in
1998 and has received ISO 9000 certification. This new Drives Center is the
consolidation of three locations and has resulted in quality and service
improvements for our customers at less cost. These investments helped to improve
operating margin to 13.8% in 1998 from 13.4% in 1997, the best levels achieved
since 1981. Baldor's commitment to research and development continues to help it
maintain a leadership position in the marketplace and to satisfy customers'
needs. In 1998, Baldor increased its investments in research and development to
$25.3 million compared to $22.9 million in 1997 and $19.9 million in 1996. We
also continue to make investments in our existing products for greater
performance, energy efficiency improvements, and manufacturability. In 1998 and
1997, new products developed in the last five years as a result of these
investments accounted for approximately 30% of the Company's total sales.
Current Liquidity
Baldor's liquidity position in 1998 improved over 1997 with an increase in
working capital of 24.6% and an increase in the current ratio to 3.2. Working
capital was $176.1 million at the end of 1998 compared to $141.3 million in
1997, and $146.9 million in 1996. The current ratio was 3.2 in 1998 and 2.8 in
1997. The Company also has available lines of credit to support operations.
Long-Term Debt and Shareholders' Equity
Long-term debt increased to 17.7% of total capitalization at the end of 1998
compared to 10.3% in 1997. The increase in 1998 reflects the mid-term loan
funded to repurchase common stock. Baldor also refinanced certain bond issues in
1998 to lower its cost of debt. Baldor repurchased 655,700 shares of common
stock during 1998 and increased dividends per share by 11% over 1997.
Shareholders' equity was $264.3 million at the end of 1998 compared to $243.4
million in 1997. Return on average shareholders' equity was 17.6% in 1998
compared to 18.2% in 1997.
Dividend Policy
Dividends per share for 1998 increased 11% over 1997. There have been six
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 arises from its available-for-sale securities
and long-term debt. Approximately 75% of the Company's securities portfolio
mature within one year. Due to the short-term nature of these securities,
anticipated interest rate risk is not considered material. The Company's
fixed-rate debt is 61% of the total debt obligations. A one percent adverse move
in interest 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
effect on earnings in a given year.
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Baldor Electric Company and Affiliates
JANUARY 2 JANUARY 3
1999 1998
<S> <C> <C> <C>
ASSETS (In thousands, except share data) ---- ----
CURRENT ASSETS: Cash and cash equivalents ................................ $ 24,793 $ 9,575
Marketable securities .................................... 13,996 11,900
Receivables, less allowances
of $4,350 and $3,525, respectively ....................... 90,045 88,740
Inventories: Finished products ........................... 74,561 71,616
Work-in-process ............................. 12,939 10,675
Raw materials ............................... 42,477 41,793
------ ------
129,977 124,084
LIFO valuation adjustment (deduction) .................... (26,170) (27,543)
------- -------
103,807 96,541
Other current and deferred tax assets .................... 23,847 12,684
------ ------
TOTAL CURRENT ASSETS ..................................... 256,488 219,440
OTHER ASSETS ............................................................... 32,301 32,352
PROPERTY, PLANT Land and improvements .................................... 6,007 4,533
AND EQUIPMENT: Buildings and improvements ............................... 42,283 33,227
Machinery and equipment .................................. 213,793 190,009
Allowances for depreciation and amortization
(deduction) .............................................. (138,946) (123,672)
-------- --------
Net property, plant and equipment ........................ 123,137 104,097
$ 411,926 $ 355,889
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT Accounts payable ......................................... $ 18,900 $ 19,935
LIABILITIES: Employee compensation .................................... 5,620 5,684
Profit sharing ........................................... 9,420 8,858
Anticipated warranty costs ............................... 5,925 5,200
Accrued insurance obligations ............................ 15,960 13,836
Other accrued expenses ................................... 20,052 22,003
Income taxes ............................................. 3,505 1,586
Current maturities of long-term obligations .............. 980 1,070
--- -----
TOTAL CURRENT LIABILITIES ................................ 80,362 78,172
LONG-TERM OBLIGATIONS ...................................................... 57,015 27,929
DEFERRED INCOME TAXES ...................................................... 10,257 6,354
SHAREHOLDERS' Preferred stock, $0.10 par value
EQUITY: Authorized shares: 5,000,000
Issued and outstanding shares: None
Common stock, $0.10 par value
Authorized shares: 1998 - 150,000,000; 1997 - 50,000,000
Issued shares: 1998 - 38,409,135; 1997 - 37,951,901 ... 3,841 3,795
Additional capital ....................................... 31,495 44,606
Retained earnings ........................................ 264,545 233,602
Accumulated other comprehensive income ................... (428) (582)
Treasury stock at cost (1,732,116 shares in 1998
and 1,923,142 shares in 1997) ............................ (35,161) (37,987)
------- -------
TOTAL SHAREHOLDERS' EQUITY ............................... 264,292 243,434
------- -------
$ 411,926 $ 355,889
=========== ===========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Baldor Electric Company and Affiliates
Years ended
-----------
January 2 January 3 December 28
(In thousands, except share data) 1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Net sales ................................................ $ 589,406 $ 557,940 $ 502,875
Other income, net ........................................ 2,019 1,843 2,497
----- ----- -----
591,425 559,783 505,372
Costs and expenses: Cost of goods sold ............... 410,747 389,711 353,345
Selling and administrative ....... 97,566 93,455 84,522
Profit sharing ................... 9,439 8,858 7,645
Interest ......................... 1,721 2,124 2,668
----- ----- -----
519,473 494,148 448,180
Earnings before income taxes ............................. 71,952 65,635 57,192
Income taxes ............................................. 27,342 25,270 22,019
------ ------ ------
NET EARNINGS ..................... $ 44,610 $ 40,365 $ 35,173
=========== =========== ===========
Net earnings per share-diluted ........................... $ 1.17 $ 1.09 $ 0.97
=========== =========== ===========
Net earnings per share-basic ............................. $ 1.21 $ 1.13 $ 1.00
=========== =========== ===========
Weighted average shares outstanding-diluted .............. 38,067,014 37,062,624 36,290,312
========== ========== ==========
Weighted average shares outstanding-basic ................ 36,911,175 35,691,572 35,091,161
========== ========== ==========
</TABLE>
See notes to consolidated financial statements
19
<PAGE>
<TABLE>
<CAPTION>
Summary of Quarterly Results of Operations (unaudited)
Baldor Electric Company and Affiliates
Quarter
----------------------------------------------------
First Second Third Fourth Total
(In thousands, except per share data): ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
1997: Net sales ......................... $129,914 $141,929 $142,492 $143,605 $557,940
Gross profit ...................... 39,077 42,841 42,983 43,328 168,229
Net earnings ...................... 9,392 10,258 10,291 10,424 40,365
Net earnings per share-diluted .... 0.26 0.28 0.27 0.28 1.09
Net earnings per share-basic ..... 0.27 0.29 0.29 0.29 1.13
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flow
Baldor Electric Company and Affiliates
Years Ended
January 2 January 3 December 28
(In thousands) 1999 1998 1996
---- ---- ----
<S> <S> <C> <C> <C>
Operating activities: Net earnings ............................................. $ 44,610 $ 40,365 $ 35,173
Adjustments Depreciation and amortization ............ 20,511 19,337 17,277
to reconcile Deferred income taxes .................... 2,968 5,316 (1,943)
net earnings Changes in Receivables ............... (931) (7,295) (2,815)
to net cash operating Inventories ............... (7,312) (3,181) (8,698)
provided by assets and Other current assets ...... (9,851) (813) (2,826)
operating liabilities: Accounts payable .......... (1,280) (1,093) 1,318
activities: Accrued expenses .......... (617) 7,558 7,149
Income taxes .............. 2,249 447 (1,201)
Other, net ................ 191 (2,498) (873)
--- ------ ----
Net cash from operating activities ....................... 50,538 58,143 42,561
Investing activities: Additions to property, plant and equipment ............... (38,210) (26,857) (23,183)
Marketable securities purchased .......................... (17,996) (14,847) (33,315)
Marketable securities sold ............................... 15,900 20,839 43,910
Acquisitions ............................................. 732 (7,597)
--- ------ -----
Net cash used in investing activities .................... (39,574) (28,462) (12,588)
Financing activities: Additional long-term borrowings 30,750 38,000
Reduction of long-term obligations ....................... (1,754) (17,141) (18,093)
Unexpended debt proceeds ................................. 466 (367) 353
Dividends paid ........................................... (14,832) (12,958) (10,498)
Stock option plans ....................................... 3,073 2,410 3,902
Common stock repurchased ................................. (13,449) (42,009)
------- ------ -------
Net cash from (used in) financing activities ............. 4,254 (28,056) (28,345)
----- ------- -------
Net increase in cash and cash equivalents .......................................... 15,218 1,625 1,628
Beginning cash and cash equivalents ................................................ 9,575 7,950 6,322
----- ----- -----
Ending cash and cash equivalents ................................................... $ 24,793 $ 9,575 $ 7,950
======== ======== ========
</TABLE>
See notes to consolidated financial statements
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Baldor Electric Company and Affiliates
Other
Accumulated Treasury
Additional Retained Comprehensive Stock
(In thousands, except per share amounts) Shares Amount Capital Earnings Income (at cost) Total
------ ------ ------- -------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 27,870 $2,817 $32,476 $182,354 $ 1,246 $ (7,516) $211,377
Comprehensive income
Net earnings 35,173 35,173
Other comprehensive income
Securities valuation adjustment,
net of taxes of $22 35 35
Translation adjustments,
net of taxes of $563 (900) (900)
----
Total other comprehensive income (865)
----
Total comprehensive income $ 34,308
========
Stock option plans (net of shares exchanged) 380 45 5,290 (1,433) 3,902
Cash dividends at $0.30 per 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 37,112 207,029 381 (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
====== ====== ======= ======== ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
Baldor Electric Company and Affiliates January 2, 1999
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 1998 and 1996 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
$16,718,000 in 1998, $13,882,000 in 1997 and $14,166,000 in 1996 at foreign
locations, valued by the first-in, first-out method (FIFO).
Property, Plant and Equipment: Property, plant and equipment, including assets
under capital leases, are stated at cost. Depreciation and amortization are
computed principally using the straight-line method over the estimated useful
lives of the assets and the remaining term of capital leases, respectively.
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 2, 1999 and January 3, 1998.
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 $25,300,000 in 1998, $22,900,000 in 1997, and
$19,900,000 in 1996.
Comprehensive Income: In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. This
statement requires companies to classify components of other comprehensive
income by their nature in a financial statement and disclose the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
effect of the adoption was not material.
Segment Reporting: In 1998, the Company adopted SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. The statement requires public
companies to report financial and descriptive information about their reportable
operating segments. Currently, the Company has only one reportable segment.
Therefore, adoption of SFAS No. 131 was not material.
Computer Software Costs: In March 1998, the AICPA issued Statement of Position
(SOP) 98-1, Accounting For the Costs of Computer Software Developed For or
Obtained For Internal-Use. The SOP is effective for fiscal years beginning after
December 15, 1998, with early adoption encouraged. The Company adopted the SOP
at the beginning of 1998. The SOP requires the capitalization of certain costs
incurred with developing or obtaining software for internal-use. The effect of
this accounting change did not have a material effect on the Company's results
of operations.
Financial Derivatives: In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement becomes effective for fiscal year 2000. 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.
22
<PAGE>
NOTE B LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
(In thousands) 1998 1997
Industrial Development Bonds: ------ ------
due through 2004 at 5.30% fixed rate .................... $ 3,970 $ 4,515
due through 2004 at 4.15% variable rate ................. 2,300 2,300
due through 2004 at 6.0% fixed rate ..................... 15 24
due through 2009 at 7.75% fixed rate (refinanced in 1998) 2,860
due through 2009 at 7.875% fixed rate ................... 6,495 6,860
due through 2010 at 3.15% variable rate ................. 3,440 3,440
due through 2010 at 4.10% variable rate ................. 2,025
Notes payable to banks:
due March 1, 2000 at 5.55% variable rate ................ 14,750 9,000
due October 23, 2001 at 5.07% fixed rate ................ 25,000
------ ------
57,995 28,999
Less current maturities .................................. 980 1,070
--- -----
$57,015 $27,929
======= =======
At January 2, 1999, Industrial Development Bond proceeds of $6,291,000 are
included in Other Assets. Certain long-term obligations are collateralized by
property, plant and equipment with a net book value of $8,882,000 at January 2,
1999.
Maturities of long-term obligations during each of the five fiscal years ending
2003 are: 1999 - $980,000; 2000 - $15,790,000; 2001 - $26,100,000; 2002 -
$2,265,000; and 2003 - $2,420,000. Industrial Development Bonds include capital
lease obligations of $2,040,000 at January 2, 1999. Aggregate future minimum
capital lease payments at January 2, 1999 are $3,505,000 including interest of
$1,465,000.
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 $15,204,000 at January 2, 1999, were
unrestricted. At January 2, 1999, the Company had outstanding letters of credit
totaling $8,733,000.
Interest paid was $2,233,000 in 1998, $3,577,000 in 1997, and $2,988,000 in
1996.
The Company had lines of credit aggregating $15,000,000 available at January 2,
1999, with no outstanding borrowings under these lines. 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.
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 2, 1999, and January 3, 1998 are not material
and are included in Other 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:
January 2 January 3
(In thousands) 1999 1998
------ ------
Municipal debt securities ....... $19,759 $ 3,858
U.S. corporate debt securities .. 12,909 5,213
U.S. Treasury & agency securities 1,500 5,500
Other debt securities ........... 6,010 563
----- ---
40,178 15,134
Less cash equivalents ........... 26,182 3,234
------ -----
$13,996 $11,900
======= =======
The estimated fair value of marketable debt and equity securities at January 2,
1999, was $30,259,000 due in one year or less, $5,466,000 due in one to three
years, and $4,453,000 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 $23,694,000 in 1998, $24,101,000 in
1997, and $22,718,000 in 1996. Income tax expense consists of the following:
(In thousands) 1998 1997 1996
---- ---- ----
Current: Federal ........................ $20,820 $22,879 $19,887
State .......................... 2,646 2,949 2,591
Foreign ........................ 908 573 637
Deferred: ............................... 2,968 (1,131) (1,096)
----- ------ ------
$27,342 $25,270 $22,019
======= ======= =======
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:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate . 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.8 2.9 3.0
Other ............................. 0.2 0.6 0.5
--- --- ---
Effective income tax rate ......... 38.0% 38.5% 38.5%
==== ==== ====
23
<PAGE>
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 net unamortized costs with respect to the Company's metal hedging programs
were not material at January 2, 1999, and January 3, 1998.
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 1998,
$5,500,000 in 1997, and $4,800,000 in 1996. Future minimum payments for
operating leases having noncancelable lease terms in excess of one year are:
1999 - $2,271,000; 2000 - $2,434,000; 2001 - $2,050,000; 2002 - $2,004,000; 2003
- - $1,645,000; 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) 1998 1997 1996
-------- ------- --------
Net Sales:
United States Companies
Domestic customers ........... $499,390 $473,702 $430,014
Export customers ............. 41,855 38,762 30,831
------ ------ ------
541,245 512,464 460,845
Foreign Affiliates ................. 48,161 45,476 42,030
------ ------ ------
$589,406 $557,940 $502,875
======== ======== ========
Earnings Before Income Taxes:
United States Companies ...... $ 69,164 $ 64,710 $ 55,160
Foreign Affiliates ........... 2,788 925 2,032
----- --- -----
$ 71,952 $ 65,635 $ 57,192
======== ======== ========
Assets:
United States Companies ...... $378,468 $322,245 $297,496
Foreign Affiliates ........... 33,458 33,644 27,990
------ ------ ------
$411,926 $355,889 $325,486
======== ======== ========
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.
24
<PAGE>
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.
<TABLE>
<CAPTION>
Plan Type Administrator Recipients Status
- ---- ---- ------------- ---------- ------
<S> <C> <C> <C> <C>
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
</TABLE>
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 1998, 1997, and 1996
follows.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Variables
Volatility ................................... 16.6% 22.4% 19.2%
Risk-free interest rates ..................... 5.7% 6.4% 7.9%
Dividend yields .............................. 1.7% 1.7% 1.8%
Expected option life ......................... 7.0 years 7.0 years 7.1 years
Remaining contractual life ................... 6.3 years 6.4 years 6.6 years
Fair value per share price granted during year
At market price ......................... $ 6.24 $ 6.21 $ 4.01
At less than market price ............... $ 9.31 $ 10.26 $ 7.93
Pro Forma Information
Pro forma net income (in thousands) .......... $ 41,602 $ 37,537 $ 33,989
Pro forma earnings per share ................. $ 1.10 $ 1.02 $ 0.95
Stock Option Activity Weighted Weighted Weighted
Average Average Average
Shares Price/Share Shares Price/Share Shares Price/Share
------ ----------- ------ ----------- ------ -----------
Total options outstanding
Beginning Balance ....................... 2,766,005 $ 11.44 2,804,114 $ 9.60 2,784,838 $ 7.27
Granted ............................. 497,400 21.67 446,618 17.80 813,066 13.89
Exercised ........................... (459,768) 7.57 (426,641) 5.56 (728,640) 4.94
Canceled ............................ (123,034) 17.12 (58,086) 14.92 (65,150) 10.85
-------- ------- -------
Ending Balance .......................... 2,680,603 13.74 2,766,005 11.44 2,804,114 9.60
========= ========= =========
Shares authorized for grant .................. 11,991,600 9,991,600 9,991,600
Shares exercisable ........................... 1,704,866 1,955,856 1,811,808
Shares reserved for future grants ............ 2,745,305 1,133,103 1,539,506
</TABLE>
25
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator Reconciliation:
The numerator is the same for
diluted and basic EPS:
Net earnings (in thousands) ........... $ 44,610 $ 40,365 $ 35,173
=========== =========== ===========
Denominator Reconciliation:
The denominator for basic earnings per share:
Weighted average shares 36,911,175 35,691,572 35,091,161
Effect of dilutive securities:
Stock options .................... 1,155,839 1,371,052 1,199,151
--------- --------- ---------
The denominator for diluted
earnings per share:
Adjusted weighted
average shares ........................ 38,067,014 37,062,624 36,290,312
========== ========== ==========
Basic Earnings Per Share ...................... $ 1.21 $ 1.13 $ 1.00
Diluted Earnings Per Share .................... $ 1.17 $ 1.09 $ 0.97
</TABLE>
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.
26
<PAGE>
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 2, 1999 and January 3, 1998, and the
related consolidated statements of earnings, cash flows and shareholders' equity
for each of the three years in the period ended January 2, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Baldor Electric
Company and affiliates at January 2, 1999 and January 3, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
- ----------------------
Little Rock, Arkansas
February 3, 1999
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 Manager of Audit Services, as
well as with Baldor management, to review accounting, auditing, internal
accounting controls and financial reporting matters. The independent auditors,
Ernst & Young LLP, and the Manager of Audit Services, have direct access to the
Audit Committee without the presence of management to discuss the results of
their audits.
Ernst & Young LLP, independent certified public accountants, have audited
Baldor's financial statements. Management has made available to Ernst & Young
LLP all of the Company's financial records and related data, as well as the
minutes of shareholders' and directors' meetings.
/s/ R.S. Boreham, Jr. /s/ R.L. Qualls
- -------------------- ---------------
R. S. BOREHAM, JR. R. L. QUALLS
Chairman of the Board Vice Chairman
/s/ John McFarland /s/ Lloyd G. Davis
- -------------------- ------------------
President Chief Financial Officer
Executive Vice President-Finance
Secretary, and Treasurer
27
<PAGE>
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.
Member - Nominating Committee.
John A. McFarland, President
Officer since 1990.
Director since 1996.
Chairman - Nominating Committee.
Member - Executive 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.
Robert J. Messey
Senior Vice President, CFO, and
Director of Sverdrup Corporation,
a wholly owned subsidiary of Jacobi
Engineering Corp. (NYSE).
Director since 1993.
Chairman - Stock Option Committee.
Member - Audit Committee.
Robert L. Proost
Corporate Vice President, Treasurer,
and Director of Administration of
A.G. Edwards & Sons, Inc.
Director since 1988.
Member - Audit Committee.
Member - Stock Option Committee.
Willis J. Wheat
President Emeritus
of Oklahoma City University.
Director since 1991.
Member - Stock Option Committee.
Page 29
Shareholder Information
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 for 1998 remained at $0.10 per quarter. There have been
six dividend increases in the last five years.
1998 1997 1996
---- ---- ----
1st quarter $0.10 $0.08 $0.07
2nd quarter 0.10 0.09 0.07
3rd quarter 0.10 0.09 0.08
4th quarter 0.10 0.10 0.08
---- ---- ----
Year $0.40 $0.36 $0.30
===== ===== =====
Common stock price range
1998 1997
------------------ ------------------
HIGH LOW HIGH LOW
1st quarter 27.1875 21.0625 19.9688 18.1875
2nd quarter 26.8750 23.0000 22.3125 18.4688
3rd quarter 26.0000 19.6250 23.8125 21.7969
4th quarter 22.0000 19.0625 23.4844 21.2500
Shareholders
At January 2, 1999, there were 5,400 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
Blackwell Sanders Peper Martin LLP
720 Olive Street - Suite 2400
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 (without
charge) by contacting the Company's Investor Relations Department.
Shareholder inquiries
To request additional copies of the Annual Report, or other materials and
information about Baldor Electric Company, please contact us at:
Baldor Electric Company
Attn: Investor Relations
P. O. Box 2400
Fort Smith, Arkansas 72902
Phone: (501) 646-4711
Fax: (501) 648-5752
Internet: www.baldor.com
Transfer agent and registrar
Wachovia Bank, N.A.
c/o Boston EquiServe, LP
P.O. Box 8217
Boston, Massachusetts 02266-8217
(800) 633-4236
<PAGE>
EXHIBIT 21
BALDOR ELECTRIC COMPANY AND AFFILIATES
AFFILIATES OF THE REGISTRANT
NAME OF AFFILIATE
- -----------------
Baldor of Arkansas Arkansas
Baldor of Nevada, Inc. Nevada
BEC Business Trust Massachusetts
Baldor of Texas, L.P Texas
Baldor International, Inc. U.S.Virgin Islands
Southwestern Die Casting, Inc. Arkansas
Baldor UK Holdings, Inc. Delaware
Baldor Optimised Control Limited United Kingdom
Optimized Control (NZ) Limited New Zealand
Baldor Holdings, Inc. Delaware
Baldor de Mexico, S.A. de C.V. Mexico
Baldor ASR, AG Switzerland
Baldor ASR GmbH fuer Antriebstechnik Germany
Baldor ASR U.K. Limited United Kingdom
Baldor Italia S.R.L. Italy
Australian Baldor Pty. Limited Australia
Baldor Electric (Far East) PTE. Ltd. Singapore
Baldor Electric (Thailand) Limited Thailand
Baldor Industrial Automation PTE.Ltd. Singapore
Northern Magnetics, Inc. California
Baldor Japan Corporation Japan
Baldor (Taiwan) Ltd. Taiwan
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Baldor Electric Company and affiliates of our report dated February 3, 1999,
included in the 1998 Annual Report to Shareholders of Baldor Electric Company
and affiliates.
Our audits also included the financial statement schedule of Baldor Electric
Company and affiliates listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8, No. 2-77046) pertaining to the Baldor Electric Company 1982 Incentive
Stock Option Plan, (Form S-8, No. 33-16766) pertaining to the Baldor Electric
Company 1987 Incentive Stock Plan, (Form S-8, No. 33-28239) pertaining to the
Baldor Electric Company Employee Savings Plan, (Form S-8, No. 33-36421)
pertaining to the Baldor Electric Company 1989 Stock Option Plan for
Non-Employee Directors, (Forms S-8, No. 33-60731 and No. 333-62331) pertaining
to the Baldor Electric Company 1994 Incentive Stock Plan, (Form S-8, No.
333-33109) pertaining to the Baldor Electric Company 1996 Stock Option Plan for
Non-Employee Directors, and (Form S-8, No. 333-33287) pertaining to the Baldor
Electric Company Employees' Profit Sharing and Savings Plan of our report dated
February 3, 1999, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the proceeding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Baldor Electric Company and affiliates.
/s/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Little Rock, Arkansas
March 26, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Amounts from audited financial statements for Baldor Electric Company and
Affiliates as of January 3, 1998 and January 2, 1999. Amounts for January 3,
1998 have been restated to reflect current presentation.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-03-1998 JAN-02-1999
<PERIOD-END> JAN-03-1998 JAN-02-1999
<CASH> 9575 24793
<SECURITIES> 11900 13996
<RECEIVABLES> 92265 94395
<ALLOWANCES> 3525 4350
<INVENTORY> 96541 103807
<CURRENT-ASSETS> 219440 256488
<PP&E> 227769 262083
<DEPRECIATION> 123672 138946
<TOTAL-ASSETS> 355889 411926
<CURRENT-LIABILITIES> 78172 80362
<BONDS> 0 0
0 0
0 0
<COMMON> 3795 3841
<OTHER-SE> 239639 260451
<TOTAL-LIABILITY-AND-EQUITY> 355889 411926
<SALES> 557940 589406
<TOTAL-REVENUES> 559783 591425
<CGS> 389711 410747
<TOTAL-COSTS> 492024 517752
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 509 511
<INTEREST-EXPENSE> 2124 1721
<INCOME-PRETAX> 65635 71952
<INCOME-TAX> 25270 27342
<INCOME-CONTINUING> 40365 44610
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40365 44610
<EPS-PRIMARY> 1.13 1.21
<EPS-DILUTED> 1.09 1.17
</TABLE>
