Baldor Annual Report 2005

Transcription

the sign
of quality
annual report 2005
In Memoriam
Roland S. Boreham, Jr.
September 2, 1924 – February 5, 2006
Roland S. Boreham, Jr., Baldor’s CEO from 1978
to 1992 and Chairman from 1981 to 2004, passed
away on February 5, 2006.
Rollie began his career with Baldor as a
manufacturer’s representative in Los Angeles,
California. After years selling and promoting
Baldor in California, he moved to Fort Smith,
Arkansas, in 1961 to become Baldor’s Sales
Manager. Shortly thereafter, Rollie was appointed
to the position of Vice President of Sales. In
1978, he became CEO. He eventually became
Chairman and served in that position until he
retired in 2004. In 2002, he was inducted into
the Arkansas Business Hall of Fame.
Rollie’s vision and leadership proved to be
great for Baldor. The Company grew under his
leadership to become the industry leader in
industrial electric motors. Rollie’s commitment
to education and training, building good quality
products, and understanding value as perceived
by the customer, continue to be key elements in
Baldor’s success. Baldor employees, customers
and industry leaders held Rollie in the highest
esteem and will miss him.
Table of Contents
Letter to Shareholders . . . . . . 2-3
Mission Statement
A Quality Foundation . . . . . . . 4-5
To be the best (as determined
Quality Customers Demand
Quality Products . . . . . . . . . . . 6-7
by our customers) marketers,
Quality by Design . . . . . . . . . . 8-9
designers and manufacturers
Quality People Produce
Quality Results . . . . . . . . . . 10-11
of industrial electric motors,
Quality Investments
in Productivity . . . . . . . . . . 12-13
Planning a Quality Future. . 14-15
drives and generators.
Eleven-Year Summary . . . . . . . 16
“It takes good people with the
right
knowledge and the proper equipment to
produce quality products...”
Management’s Discussion
and Analysis of Financial
Condition and Results of
Operations . . . . . . . . . . . . . 17-20
Financial Statements
and Notes . . . . . . . . . . . . . . 21-33
Shareholder Information . . . . . 33
77
79
81
83
85
87
89
91
Total dividends paid in 2005 – $20.6 million
93
95
97
99
01
03
05
About the Cover:
On the cover is a “nameplate”
placed on all of the products we
manufacture. The nameplate not
only represents the specifications
for a particular product, but
also the individual pride and
craftsmanship of our employees.
It is our commitment that
Baldor products will always be
synonymous with quality.
Shareholders, Employees,
Customers and Friends
2005 was a year of success at Baldor.
Sales were a record $721.6 million,
up 11.3% over the previous year. Net
earnings were $43.0 million, up 22.7%
over the previous year. Earnings per
share were $1.28 compared to $1.05, up
21.8%. We are pleased with this good
growth in sales and earnings.
Our strategy is to make the best
quality industrial motors, drives and
generators available. We sell to valueminded customers who recognize
that the highest quality, most reliable
products using a minimum amount of
energy are the best value.
During 2005, we were able to build
on our reputation for high quality by
reducing our warranty cost for the sixth
straight year. We expect to continue
reducing warranty cost and increasing
the quality of our products this year. In
the industrial world, the name Baldor
means quality and value, and we’re
proud of this!
In 2005, we continued to improve
our productivity by investing in modern
equipment and employee training.
Sales per employee reached a record,
up 11.4% over 2004. We were able
to increase our sales by $73.4 million
without adding additional people.
That’s good productivity growth!
We also improved the utilization of
our assets. During the year, we reduced
debt by $9.0 million, repurchased $7.5
million in stock, invested $22.4 million
in new equipment and facilities and
paid $20.6 million in dividends. We
generated $73.4 million more in sales
with $7.4 million less inventory, and we
collected receivables three days faster
in 2005 than in 2004. Cash flow from
operations increased by $22.2 million to
$55.9 million.
In 2005, our generator business
exceeded $50 million for the first time.
We like the generator business, and it’s
an important part of our growth strategy.
2
We expect generator sales to double every
three to four years.
Another key component of our growth
strategy is the drives business. While sales
were down slightly during 2005, we built
the foundation for future growth. Our motion
control product line is among the most
capable in the market. An increased focus
on automation and our excellent products,
position us for growth. We are completing
the development of our H2® product line,
which will provide customers with easy-touse, high performance drives often used to
reduce energy costs.
The large motor business (60 horsepower
and up) grew by more than 25% during
2005. Our strategy is to increase our product
offering and capability in large motors. We
FINANCIAL HIGHLIGHTS
2005
% Change
$721,569
+11.3%
$43,021
+22.7%
Net earnings per share - diluted
$1.28
+21.8%
Cash dividends per share
$0.62
+8.8%
Weighted average shares
outstanding - diluted
33,728
+0.7%
(In thousands, except per share data)
Net sales
Net earnings
had more success in 2005 with this strategy
than any year in our history. A new plant
is being built in Columbus, Mississippi, to
expand our manufacturing capability in large
motors. This plant will be one of the most
productive in the motor industry.
During 2005, industrial users saw a large
increase in their electricity cost. More and
more customers are recognizing the value of
our Super-E® high efficiency motors. Since the
founding of our Company, we’ve viewed the
efficiency of a motor as a measure of quality.
Baldor has the broadest line of high
efficiency motors available. In 2005,
sales of Super-E motors were up over
25% as more customers recognized the
opportunity to reduce their electricity bill
by using Baldor Super-E high efficiency
motors.
As we write this early in 2006,
we are saddened by the loss of our
longtime friend, supporter and mentor,
Rollie Boreham. Rollie passed away
on February 5, 2006. Rollie served our
Company for 59 years. He worked every
day to help Baldor to be the best. We
will miss him.
As we look forward to 2006, we
continue to see good opportunities to
build on the success we’ve had since
the Company’s beginning in 1920.
Today we have an outstanding team
of people at Baldor working every day
to provide our customers with more
value than any of our competitors. Our
facilities are modern, clean and safe. Our
sales organization is the best industrial
sales organization in the United
States and perhaps the world. Our
financial position is the strongest in the
Company’s history. Our reputation for
quality products and service continues
to grow.
Baldor...the sign of quality!
Best regards,
John McFarland
Chairman and CEO
Ronald Tucker
President, CFO and Secretary
3
A Quality Foundation
If you ask any Baldor employee
their expectations. Independent
what the “mission” of the
industry preference studies
Company is, you will likely be
done each year by various trade
recited the Company’s mission
publications consistently score
statement. The mission statement,
Baldor as the “most preferred”
created over 20 years ago, is the
industrial electric motor. We
cornerstone of the Company’s
believe this preference indicates
values and principles.
we are doing a good job for
our customers and is a leading
Baldor’s Mission
Statement
“Baldor is to be the best (as
indicator of future market share.
Baldor markets, designs and
manufactures the products we
determined by our customers)
sell. We believe these are all
marketers, designers and
key competitive advantages and
manufacturers of industrial electric
have chosen not to outsource
motors, drives and generators.”
these functions as others in our
To do this, we must:
Customer preference
leads to market share.
industry have done. We believe
• Provide better value as perceived
our customers appreciate this
by our customers.
strategy and recognize the value it
• Attract and retain competent
provides.
employees committed to reaching
our goals and objectives.
• Produce good, long-term results
for our shareholders.
When we discuss the mission
Powering Industry
Today and Tomorrow
One word in our mission
statement also defines the markets
statement with customers and
we serve. The word “industrial”
shareholders, there are several
clearly identifies the type of
key elements that we believe are
customers we sell to and where
critical to our success. First, we
you will find our products. It
don’t believe in “grading our own
also describes the quality and
papers.” Customers should feel
ruggedness you can expect from a
that we have performed to
Baldor motor, drive or generator.
4
Industrial electric motors, drives
and generators are our business.
BALDOR COMPANY TIMELINE
1920
Motors, Drives and
Generators
We also define the business we are
in directly in our mission statement:
Motors, drives and generators. Motors
remain the core of Baldor’s business;
drives and generators are significant
growth areas for Baldor.
Baldor Electric Company was founded
in St. Louis, Missouri, by Edwin Ballman,
an engineer,
and Emil Doerr,
a machinist.
1924
In the Company’s first product catalog,
Baldor established
its charter to “build a
Great People, Great
Products
better motor” which
requires “a minimum
We are fortunate to have a
of energy.”
dedicated and experienced workforce.
Many of our 3,800 employees have
more than 20 years experience
with the Company. Having good
1926
associates is crucial to achieving the
Baldor expanded its product line and
Company’s mission. Attracting and
was able to produce single phase
retaining competent employees who
and polyphase
understand our objectives gives us a
motors up to
competitive edge.
7 horsepower
As a public company, Baldor
and DC
strives to produce good, long-term
motors up to
results for our shareholders. We feel
3 horsepower.
it is important that our shareholders
understand our mission, our values,
1930s
our products and our culture.
The Company began producing special
duty motors such as short motors for
floor sanders and vertical motors for
pumps.
Our experienced workforce is a
competitive advantage.
5
Quality Customers
Demand Quality Products
Baldor’s customer base is
divided almost equally between
distributors and original
equipment manufacturers
Our Products are Part
of Some of the Best
Products in the World
Leading OEMs around the
(OEMs). Distributors typically
world choose Baldor products
sell replacement products to
for our quality, availability and
customers such as large pulp
dependability. Our products are
and paper companies, petroleum
integrated into the products of
refineries, mining operations and
OEMs who build equipment for
other process industries. To these
pump, compressor, HVAC, material
customers, reduced downtime and
handling, medical, semiconductor
availability of replacement parts
and other industrial applications.
are crucial to the operation of their
Our customers demand the highest
plants. Baldor’s local offices and
quality, quickest delivery and most
warehouses provide the expertise
reliable products available.
and product availability to satisfy
Put it all together and it
the needs of these customers
spells Value!
better than anyone in the industry.
A Baldor large motor operating in a
cement plant application.
6
1956
The first motor manufacturing plant in
Fort Smith, Arkansas, was opened. It has
If Baldor Doesn’t Stock it,
Nobody Does
Baldor also maintains the widest
breadth of inventory available for
common industrial
applications. This
allows distributors
to sell replacement
products where
application
configurations
may be common,
Baldor is the motor
choice for food
processors around the
world.
but operating
conditions are anything but. An
example of a stock product designed
for a specific application with many
special features, is our washdown
Our premium efficient motors
from 1 – 1500 horsepower
provide superior reliability and
energy savings.
duty motors for the food processing
industry. These specially designed
motors help food processors improve
their productivity by reducing
downtime.
Our reputation for product quality,
diversity and worldwide availability
is why the leading companies prefer
Baldor.
since moved to a different location in
Fort Smith and has grown to be Baldor’s
largest production facility.
1957
A profit sharing plan was established for
all employees. This plan is still in effect
and is an important part of Baldor’s
philosophy to share profits with our
employees.
1961
Fred Ballman, son of
our Founder Edwin
Ballman and the
Company’s Chief
Engineer, became the
second CEO in the
Company’s history.
1966
The Company sold and manufactured
more than $10 million in one year for
the first time.
1967
The Company’s corporate headquarters
were moved from St. Louis, Missouri, to
Fort Smith, Arkansas.
7
Quality by Design
The Gold Standard in
Energy Efficiency
Since our beginning, we have
led the industry in developing
products that deliver greater
types, offering our customers
different enclosures, mountings,
electrical windings, shafts and
colors.
Today, 40% of the motors
performance and reliability while
we produce are designed and
using less electricity. Our founders
manufactured to specific OEM
were way ahead of their time
requirements. This ability to
when they decided in 1924
produce such a wide variety
to “build a better motor which
of designs is one of the key
requires a minimum of energy.”
reasons Baldor is the motor of
That commitment lives on today
choice on premier industrial
with continued development
products.
of our Super-E motors. Super-E
motors range in horsepower from
1 to 1500, the broadest offering of
A New Generation in
Drive Technology
energy efficient motors available
Baldor’s H2 Series of drives
in the industry. In 2005, sales of
delivers a new benchmark for
Super-E motors grew at twice
industrial drive performance
the rate of our standard industrial
and reliability. The H2 Series is
motors.
designed, tested and manufactured
to be the most reliable, easy-to-
Baldor Custom Solutions
While we manufacture
thousands of stock motors, every
use, high performance industrial
drive you can buy.
This new technology allows
day we design and manufacture a
“point and click” setup from your
large variety of custom motors. In
desktop. Customers are able to
M
TO M
S
US
OTO
R
C
fact, our custom
motor designs
anywhere in the world, without
exceed 100,000
the need to be present on site.
different
specification
8
monitor the drive's operation
The new H2 Series will
Our new H2 industrial drives
continue the legacy of the original provide unmatched reliability.
Research and
Development
DOLLARS (IN MILLIONS)
1971
Baldor acquired Southwestern Die
Casting Co., Inc., an aluminum die
casting facility still located in Fort Smith,
Arkansas.
1975
The Company’s products included
“harmonized” drives introduced
motors ranging from fractional to 50
by Baldor, which became known
horsepower as well as dental lathes
throughout the industry as the easiest
and grinders.
drive to program and operate.
Power to Spare
Baldor generators are used in a
wide variety of standby and prime
power applications including rental,
telecommunications and military.
With generators ranging from 1
to 2000 kilowatts, we have
solutions to power problems.
No matter the application, all
Baldor generators are designed
and manufactured to the same
specifications suitable for the
military. For this reason, when
customers require exceptional
quality and guaranteed
reliability in generators, Baldor
is the clear choice.
1976
Baldor became a public company on
the American Stock Exchange. Four
years later,
we moved
to the New
York Stock
Exchange
where we are currently listed under
the symbol BEZ.
1978
The Company sold and produced $100
million worth of products during the
year, completing 18 consecutive years
of growth.
R.S. Boreham, Jr. was named the third
CEO in the Company's history.
Six Baldor 2 megawatt generators
provide power for a global glass
bottle manufacturer.
9
Quality People
Produce Quality Results
It takes a dedicated workforce to
rather than lose experienced
design and produce the range of
employees. This has paid off with
products Baldor sells. In 2005, our
record sales, product innovations
employees produced record results
and stronger-than-ever customer
without any additional people.
relationships.
We believe this accomplishment
is a result of maintaining our
Education is Key
Having the best employees
experienced workforce during
the industrial recession and good
in the industry starts with our
investments in equipment and
commitment to training and
training.
education. For years, Baldor has
DOLLARS (IN THOUSANDS)
led the industry in our efforts to
educate and train our employees
“to be the best.” We have been
recognized both locally and
nationally for our efforts over the
years, and our commitment to
education is stronger than ever.
Sales per Employee
Our 3,800 employees, located
in 15 plants, warehouses and
offices around the world bring
great value to Baldor. More than
half of our employees have ten
years or more experience with
the Company. This provides our
customers with consistent quality
and experience unmatched in
the industry. Baldor has always
maintained a no-layoff philosophy
10
Employees and customers enjoy the classroom and “hands
on” education and training at Baldor.
1981
R.S. Boreham, Jr. was named the third
In 2005, we broke ground on a
new facility dedicated to the training
and education of our customers and
employees. The new learning center
is set to open in early 2006.
Chairman in the Company’s history.
1983
Baldor entered the drives business
with the purchase of ASR Servotron
in Germany. The Company enhanced
this product line with three more
acquisitions over the next three years.
1985
The Company was the first to introduce
Washdown Duty motors to the food
processing industry. These motors can
withstand moisture, high-pressure hose
downs and
frequent
exposure
The new R.S. Boreham, Jr. Learning Center will feature a 100-seat
auditorium, hands-on training lab and several meeting rooms.
to caustic
solutions for extended periods.
The new facility will host more than
forty 3-day customer workshops and
numerous employee training classes.
Knowledge is the foundation for
1993
R.L. Qualls was named the fourth CEO
in the Company’s history.
quality products, good manufacturing
processes and excellent customer
relationships.
11
Quality Investments
in Productivity
We’ve known for a long time
our customers. An example of such
that an employee’s capabilities
an investment is a new lamination
are limited if not provided with
stamping press recently installed
the right tools and equipment
in our St. Louis plant. This press
to perform the job. Whether it
allows quicker setup and change
is a gauge used to measure or a
over and produces more parts
machine used to manufacture,
with higher accuracy and less
every piece of equipment is an
down time.
take care of our customers.
Modern, Efficient
and Safe
Last year, we invested $22.4
million in modern equipment,
tooling and facilities. These
Property, Plant
and Equipment
Additions
investment our employees use to
investments allow our employees
to be more productive and to
produce better products for
When customer requirements or
expectations change, it’s important
we change with them. The new
varnish system being installed
in our Fort Smith motor plant
provides a better insulation system
and improved winding protection
for motors. The process is cleaner,
safer and faster than our previous
method. Our customers get a
A progressive-die lamination press
improves productivity and quality, while
our proprietary annealing process
improves motor efficiency.
12
product that meets or exceeds
their quality standards, while
Baldor improves productivity.
1996/1997
Baldor purchased Optimised Controls
in Bristol, England. The following year,
Growth is Good
Normag Linear Motors was purchased.
As our large motor business grows,
the need for additional capacity
1998/1999
increases. A new
For two years in a row, Baldor was
facility to be completed
named to Fortune
in 2006, located a few
magazine’s “100
miles from the old one,
Best Companies to
will be home for our
Work for in America.”
Columbus, Mississippi,
Robots in our die-casting foundry
have significantly improved
productivity and safety.
employees. This
1999
facility will provide
Baldor introduced commercial, light-
a more efficient
duty industrial motors and completed
and automated
a Development and Testing Lab for our
manufacturing process,
drives products.
continuing to improve the value we
provide to our customers.
2000
The Company entered the generator
business with its acquisition of
Pow’R Gard Generators in Oshkosh,
Wisconsin. Three years later, the
acquisition of Energy Dynamics in
Mukwonago, Wisconsin, gave Baldor
the broadest generator product line in
the industry.
John McFarland was named the fifth
CEO in the Company’s history. The
Company’s earnings were an all-time
record at $46.3 million.
The new Columbus, Mississippi, motor plant and distribution center
will be operational in 2006.
13
14
Planning a
Quality Future
Opportunities for 2006 and
beyond look great! We have built
a foundation for continued growth
Automation Requires
Motion Control
As many plants automate their
with new products, new markets
processes, our motion control
and new customers.
products' high-performance, broad
Electricity – A Cost You
Can Control
With electricity prices at alltime highs, we expect sales of our
premium efficient Super-E motors
to continue selling at a faster rate
than our standard motors. We have
many new Super-E designs in
capabilities, superior quality and
ease-of-use are exactly what
customers are looking for to
provide more flexibility, increased
productivity and higher quality
output.
Generator Growth to
Double Every 3-4 Years
development and will maintain our
In 2005, our generator business
position as the industry’s leader for
exceeded $50 million! We believe
premium efficient motors.
the generator business will
Most Reliable Industrial
Drive You Can Buy
Our H2 line of drives is now
available from 1 – 60 horsepower
with over 1,000 units in the field.
We will continue the development
of this product line up to 1,000
continue to grow at a quick rate. In
2006, we will begin an expansion
of our Oshkosh, Wisconsin, plant to
handle increased business.
Large Horsepower
Market Share Growth
For years we have recognized
horsepower. We have seen a
large motors as a growth
dramatic improvement in reliability
opportunity. In 2005, efforts to
with the H2 drives and have the
grow our share of this market paid
best industrial drive you can buy.
off. Large motors sales were up
14
Baldor motion control products
are used in many applications
requiring automation and
precision.
2004
International sales exceeded
more than 25% for the year and over
35% for the last half of the year. The
new plant in Columbus, Mississippi,
will give us the ability to make more
motors for this growing part of our
business. With the improved plant
layout, new equipment and highly
productive employees, this plant will
be the best in the world for large
motor production.
Plan Your Work and
Work Your Plan
It’s always nice when a plan comes
$100 million for the first time.
2005
The Company’s sales reached an all-time
record of $721.6 million. Net earnings
increased 22.7% over the previous year
to $43.0 million. Debt was reduced by
$9.0 million and $7.5 million in stock
was repurchased by the Company. The
Company also invested $22.4 million in
new equipment and facilities. Cash flow
from operations increased by
$22.2 million while inventories were
reduced by $7.4 million.
together. We believe we have a good
plan, and we work the plan everyday.
The new H2 Series
The result is quality products, a highly
industrial adjustable
productive workforce, long-
speed drives were
term customer relationships
introduced.
and consistent returns
for our shareholders. The
Generator sales
future is definitely bright for
exceeded $50.0 million for the first time.
Baldor!
Baldor wins Food Processing magazine's
Reader’s Choice Award in the category of
Motors and Drives.
Our market share of large motors continues to
grow because of superior reliability and quick
delivery.
15
Eleven-Year Summary of Financial Data
(In thousands, except percentages and per share data)
$721,569
648,195
561,391
549,507
557,459
621,242
585,551
596,660
564,756
508,526
478,315
$519,840
473,752
409,294
396,815
401,471
423,861
399,833
410,748
389,711
353,345
334,306
Per Share Data
Diluted
Net
Net
Earnings Earnings
$43,021
35,052
24,779
23,895
22,385
46,263
43,723
44,610
40,365
35,173
32,305
$1.28
1.05
0.74
0.69
0.65
1.34
1.19
1.17
1.09
0.97
0.84
Basic
Percent Return
Net
On Average Shareholders’ Total
Earnings Dividends
Equity
Equity
Assets
$1.30
1.06
0.75
0.70
0.66
1.36
1.21
1.21
1.13
1.00
0.88
$0.62
0.57
0.53
0.52
0.52
0.50
0.45
0.40
0.36
0.30
0.26
14.8%
12.9%
9.2%
8.9%
8.6%
17.6%
16.5%
17.6%
18.2%
17.1%
16.3%
$504,602
501,560
476,955
472,761
457,527
464,978
423,941
411,926
355,889
325,486
313,462
$170,025
104,025
79,465
105,285
98,673
99,832
56,305
57,015
27,929
45,027
25,255
99%
19.0%
26.8%
23.3%
27.7%
27.3%
27.7%
17.5%
17.7%
10.3%
18.4%
10.7%
Operating Margin
Earnings Per Share
(Diluted)
PERCENT
Net Sales
Dividends
Per Share
DOLLARS
16
$299,455
283,615
261,488
274,598
262,485
260,845
266,109
264,292
243,434
200,325
211,377
Debtto
toTotal
Total
Long-Term Debt
Obligations Capitalization
Capitalization
DOLLARS
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Net
Sales
Cost of
Goods
Sold
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Forward-looking Statements
This annual report and other written reports and oral
statements made from time to time by Baldor and its
representatives may contain forward-looking statements.
The forward-looking statements (generally identified
by words or phrases indicating a projection or future
expectation such as “believe,” “could,” “may,” “potential,”
“will,” “expect,” “anticipate,” “continue,” “becomes,” “would,”
“projected,” “forecasted,” “estimate,” or any grammatical
forms of these words) are based on the management’s
current expectations and some of them are subject to risks
and uncertainties. Accordingly, you are cautioned that any
such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected
in the forward-looking statements as a result of various
factors. The factors that might cause such differences
include, but are not limited to, the following: (i) changes in
economic conditions, (ii) developments or new initiatives
by our competitors in the markets in which we compete,
(iii) fluctuations in the costs of select raw materials, (iv) the
success in increasing sales and maintaining or improving
operating margins, and (v) other factors including those
identified in the Baldor’s filings made from time to time
with the Securities and Exchange Commission.
Results of Operations
Baldor had another strong year of sales growth in 2005.
Total sales increased 11.3% to a record $721.6 million.
While raw materials prices continued to increase during the
year, we were able to mitigate their effects with continued
improvements in manufacturing efficiencies and a modest
price increase. During 2005 we relocated our linear
motor manufacturing to Fort Smith, resulting in significant
manufacturing efficiencies in that product line. In addition,
we continue to gain leverage of selling and administrative
overhead expenses by supporting sales growth without
the addition of significant overhead. As a result of solid
top line growth, manufacturing efficiencies and leverage
of overhead, our gross and operating margins improved
over those of 2004. Net earnings rose 22.7% to $43.0
million in 2005 and diluted earnings per share were up
21.8% to $1.28. International sales initiatives continued to
show results in 2005, with record international sales and
improved profitability in our international affiliates. Strong
operating results and cash flows allowed us to reduce
debt, repurchase stock, invest in manufacturing equipment,
and increase dividends paid to our shareholders. Baldor
serves many industries and geographic regions by selling
to a broad base of distributors and Original Equipment
Manufacturers (OEMs) both domestically and in more than
60 countries around the world. Total sales were allocated
approximately 50% each to distributors and OEMs for all
years presented in this report.
2005 compared to 2004
Total sales for 2005 increased 11.3% to $721.6 million,
compared to sales of $648.2 million in 2004. Sales of
industrial electric motor products grew 14.3% during 2005
and that growth was spread among most of the industries
and geographical areas we serve. Large motors (60-1500
horsepower) and Super-E® high-efficiency motors in all
sizes had the strongest growth in 2005. As energy costs
have increased, our Super-E high-efficiency motors have
become increasingly valuable to our industrial users.
Industrial electric motors comprised 78.3% of total product
sales in 2005 compared to 76.2% in 2004. During 2005,
sales of generator products rose 16.5% from 2004 levels and
comprised 7.0% of total product sales in 2005 compared
to 6.7% in 2004. While a portion of the growth was
related to the need for alternate power in areas affected
by the hurricanes, we saw substantial growth in a number
of customer markets. Sales of drives and motion control
products declined 3.9% in 2005, following strong growth
in 2004. During 2005, we completed development of new
motion control products and the first phase of our H2®
series of drives. We expect the availability of these new
products to result in steady growth in the drives and motion
control product lines in 2006. Drive products accounted for
14.7% of total product sales in 2005 and 17.1% in 2004.
Gross margin was 28.0% in 2005 compared to 26.9% in
2004. During 2005, copper prices reached record highs,
driving up the cost of our materials. A continued focus on
product design improvements, along with a modest price
increase on our products, helped to mitigate the effects of
increased material costs. Those initiatives combined with
improved manufacturing efficiencies and increased sales
volume accounted for most of the improvement in gross
margin for 2005. During 2005 we adjusted certain selfinsurance liabilities to reflect current exposures, resulting
in an increase in the gross margin of 0.5% of sales.
Operating margin for 2005 improved to 10.9% from 9.3%
in 2004. Selling and administrative expenses decreased
to 17.1% of sales in 2005 compared to 17.6% in 2004.
During 2005 we did not add substantial fixed selling
and administrative costs. As a result, total selling and
administrative expenses for 2005 declined as a percentage
of sales. Our ability to support increased 2005 sales
volume without the addition of significant overhead, along
with the product design improvements and manufacturing
efficiencies, resulted in improved operating margin.
Pre-tax margin improved to 9.3% for 2005 from 8.1% in
2004. Interest rates on outstanding long-term debt facilities
increased during 2005. In response, we utilized a portion
of operating cash flows to reduce our debt by approximately
$9.0 million. While we incurred more interest expense
than in 2004, we reduced our exposure to continued rising
rates with the reduction of a portion of our variable rate
debt. Net earnings for 2005 of $43.0 million were up 22.7%
from 2004 earnings of $35.1 million. Diluted earnings
per share grew by 21.8% to $1.28 compared to $1.05 in
2004. Adjustments to our self-insurance liabilities during
the fourth quarter of 2005 increased diluted EPS by $0.04
per share. In addition, income tax liabilities were adjusted
in the fourth quarter of 2005 due to resolution of certain
state tax liabilities, resulting in an increase in diluted
EPS of $0.01 per share. These adjustments compared to
adjustments of income tax liabilities made in the fourth
quarter of 2004 amounting to $0.06 per diluted share.
2004 compared to 2003
Total sales for 2004 were $648.2 million, rising 15.5%
above 2003 net sales of $561.4 million. Sales of electric
17
motors increased 13.5% in 2004 and amounted to 76.2%
of total product sales compared to 77.5% in 2003. Sales of
drives products were up 15.7% for the year and amounted
to 17.1% of total product sales in 2004 compared to 17.0%
in 2003. Sales of generator products rose 41.8% during the
year and comprised 6.7% of total product sales versus 5.5%
in 2003.
Gross margin of 26.9% in 2004 declined from 27.1% in
2003. During 2004, raw material costs increased sharply
and although productivity and product design improvements
and price increases mitigated much of the effects of
increased copper and steel costs, gross margin suffered
during 2004.
Operating margin of 9.3% in 2004 was an increase
over 2003 operating margin of 8.2%. Most of the 2004
improvement resulted from our ability to support a 15.5%
increase in 2004 total sales without adding fixed selling
and administrative costs. Selling and administrative costs
were 17.6% of sales in 2004 compared to 18.9% in 2003.
During the fourth quarter of 2004, certain contingent
liabilities were adjusted by approximately $1.5 million to
reflect current exposures, resulting in a reduction in selling
and administrative expenses of 0.2% of sales.
While increased material costs in 2004 had a negative
effect on the 2004 gross margin, efficiencies in selling and
administrative costs combined with increased sales volume
resulted in a pre-tax margin of 8.1% for 2004 compared to
7.0% in 2003. Net earnings increased to $35.1 million, or
$1.05 per diluted share, in 2004 compared to $24.8 million,
or $0.74 per diluted share, in 2003. During the fourth
quarter of 2004, certain accrued income tax liabilities were
adjusted to reflect current exposure, resulting in an increase
in earnings of $0.06 per diluted share.
International Sales:
International sales (foreign affiliates
and exports) increased 2.0% in 2005 to a record $103.1
million compared to $101.1 million in 2004 and $82.8
million in 2003. In 2005, our export sales from the U.S.
to non-affiliate customers increased 17.1% or $7.9 million.
Sales from our European affiliates to foreign customers
declined 10.0% primarily due to general business conditions
in Europe and the anticipated availability in early 2006
of new motion control products. We expect to see steady
growth in the motion control products during 2006.
Environmental Remediation: Management believes,
based on its internal reviews and other factors, that any
future costs relating to environmental remediation and
compliance will not have a material effect on the capital
expenditures, earnings, cash flows, or competitive position
of the Company.
Financial Position
The Company’s financial position remained strong through
2005. We continued to increase our financial strength while
investing in research and development for new and existing
products, making capital investments in our manufacturing
facilities and information systems, expanding into new
markets, and continuing to invest in both our employees’
and customers’ education and training. We believe the
investment in our employees through training and education
is a key to continued success and improved shareholder
value. Investments in property, plant and equipment, and
information systems amounted to $22.4 million in 2005,
$20.6 million in 2004, and $17.4 million in 2003. These
18
investments were made primarily to improve quality and
productivity. The Company’s commitment to research and
development continues to help us maintain a leadership
position in the marketplace and satisfy customers’ needs.
Investments in research and development amounted to
$24.4 million in 2005, $25.4 million in 2004, and $21.9
million in 2003. We continue to make investments in new
product development as well as in existing products for
improved performance, increased energy efficiency, and
manufacturability.
Liquidity and Capital Resources:
Our liquidity
position remained solid in 2005. Working capital amounted
to $189.0 million at December 31, 2005, and $213.1 million
at January 1, 2005. The ratio of current assets to current
liabilities was 2.8 to 1 at year-end 2005, compared to 3.5
to 1 at the end of fiscal year 2004. The decrease in
working capital and current ratio in 2005 was primarily
related to reclassification of $25.0 million of long-term debt
due to mature in 2006.
Liquidity was supported by cash flows from operations of
$55.9 million in 2005, $33.7 million in 2004, and $65.0
million in 2003. While the increase in sales in 2005
required an investment in accounts receivable, we were
able to reduce the average number of days it takes to
collect our accounts. This accounted for $14.5 million of
the improvement in operating cash flows in 2005 compared
to 2004. In addition, we increased our inventory turns,
which allowed us to reduce our inventory by $4.1 million
during the year without affecting customer deliveries. The
decrease in inventory contributed an additional $13.5
million in operating cash flows when compared to 2004. In
addition, approximately $3.3 million of generator inventory,
classified in other assets, was transferred to our rental
program in 2005 with no resulting effect on cash flows.
Accounts payable used $12.1 million more operating cash
in 2005 than in 2004, primarily due to differences in the
timing of cash disbursements between the two years. In
2005, we utilized operating cash flows to fund property,
plant and equipment additions of $22.4 million, pay
dividends to our shareholders of $20.6 million, repurchase
approximately 300,000 shares of our common stock for $7.6
million, and acquire the remaining minority interest in our
Australian affiliate for $2.4 million. During 2004, operating
cash flows and accumulated cash were utilized to fund
property, plant and equipment additions of $20.6 million
and pay dividends to our shareholders of $19.1 million.
In 2003, we utilized operating cash flows and accumulated
cash to fund property, plant and equipment additions of
$17.4 million, pay dividends to our shareholders of $17.5
million, repurchase 1.5 million shares of our common stock
for $26.7 million, and acquire Energy Dynamics, Inc. for
$5.8 million.
Total long-term debt, including amounts classified as
current maturities, was $95.0 million at December 31,
2005, compared to $104.0 million at January 1, 2005.
Management expects that amounts maturing in 2006
will be renewed, unless it becomes advantageous to repay
those amounts. Baldor’s credit agreements contain various
financial covenants, and we were in compliance with those
covenants during all of the periods presented in this report.
Baldor’s principal source of liquidity is operating cash
flows. Accordingly, we are dependent primarily on
continued demand for our products as well as collectability
of receivables from our customers. Our broad base of
customers, industries and geographic areas served, as well
as our favorable position in the marketplace, ensure that
fluctuations in a particular customer’s or industry’s business
will not have a material effect on our sales or collectability
of receivables. As a result, management expects that
our foreseeable cash needs for operations and capital
expenditures will continue to be met through operating cash
flows and existing credit facilities.
The table below summarizes Baldor’s contractual obligations
as of December 31, 2005.
(In thousands)
Contractual Obligations:
Long-term debt obligations (a)
Operating lease obligations
Other Commercial Commitments:
Letters of Credit
Payments due by years
Total Less than 1
1-3
3 - 5 More Than 5
$101,831
14,025
2,257
$29,132 $54,823 $15,663
1,990
4,262 3,618
2,257
-
$2,213
4,155
-
-
(a) Includes interest on both fixed and variable rate obligations. Interest
associated with variable rate obligations is based upon interest rates in effect
at December 31, 2005. The contractual amounts to be paid on variable rate
obligations are affected by changes in market interest rates. Future changes in
market interest rates could materially affect the contractual amounts to be paid.
Dividend Policy: Dividends paid to shareholders
amounted to $0.62 per share in 2005 and $0.57 per share
in 2004. There have been three dividend increases in
the last five years and 10 increases in the last 10 years.
These increases were in line with Baldor’s policy of making
increases periodically, as earnings and financial strength
warrant. The objective is for shareholders to obtain dividend
increases over time while also participating in the growth
of the Company.
Market Risk: Market risks relating to Baldor’s operations
result primarily from changes in commodity prices, interest
rates, concentrations of credit, and foreign exchange rates.
To maintain stable pricing for our customers, we enter into
various hedging transactions as described below.
Baldor is a purchaser of certain commodities, primarily
copper, aluminum, and steel, and periodically utilizes
commodity futures and options for hedging purposes
to reduce the effects of changing commodity prices.
Generally, contract terms of a hedge instrument closely
mirror those of the hedged item providing a high degree
of risk reduction and correlation. Contracts that are highly
effective at meeting this risk reduction and correlation
criteria are recorded using hedge accounting. At December
31, 2005, and January 1, 2005, all of our open positions
were designated as cash flow hedges. The underlying
commodities hedged have a correlation to price changes
of the derivative positions such that the values of the
commodidites hedged based on differences between
commitment prices and market prices and the value of
the derivative positions used to hedge these commodity
obligations are inversely correlated. Management has
determined that a hypothetical 10% change in the fair value
of open positions would not have a material effect on the
Company’s results of operations.
Our interest rate risk is related to available-for-sale
securities and long-term debt. Due to the short-term nature
of the securities portfolio, anticipated interest rate risk is not
considered material. Our debt obligations include certain
notes payable to banks bearing interest at a quarterly
variable rate. We manage our interest rate risk exposure by
maintaining a mix of fixed and variable rates for debt. A
1.0% increase in variable borrowing rates would not have
a material effect on Baldor’s consolidated balance sheets,
results of operations, or cash flows.
Our financial instruments that are exposed to concentrations
of credit risk consist primarily of cash equivalents and trade
receivables. Cash equivalents are in high quality securities
placed with major banks and financial institutions.
Concentrations of credit risk with respect to receivables
are limited due to the large number of customers and their
dispersion across geographic areas. We perform periodic
credit evaluations of our customers’ financial conditions
and generally do not require collateral. No single customer
represents more than 10% of net accounts receivable.
Foreign affiliates generally conduct business in their
respective local currencies which minimizes our foreign
currency risk. We do not anticipate the use of derivatives
for managing foreign currency risk, but continue to monitor
the effects of foreign currency exchange rates.
Critical Accounting Policies
The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted
in the United States, which require management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during
the periods reported. Actual results could differ from those
estimates. Management believes the following are the
critical accounting policies, which could have the most
significant effect on Baldor’s reported results and require
subjective or complex judgments by management.
Revenue Recognition: We sell products to our
customers FOB shipping point. Title passes to the customer
when the product is shipped. Accordingly, revenue is
recognized when the product is shipped. Baldor has no
further obligations associated with the product sale that
would impact revenue recognition after the product is
shipped.
Allowance for Doubtful Accounts: We record
allowances for doubtful accounts based on customer-specific
analysis, general matters such as current assessments of
past due balances and economic conditions, and historical
experience. Additional allowances for doubtful accounts
may be required if there is deterioration in past due
balances, if economic conditions are less favorable than
anticipated, or for customer-specific circumstances, such as
financial difficulty.
Inventories: Inventories are valued at the lower of cost or
market, with cost being determined principally by the lastin, first-out (LIFO) method, except for non-U.S. inventories,
which are determined by the first-in, first-out (FIFO)
method. The valuation of LIFO inventories is made at the
end of each year based on inventory levels and costs at that
time. The net realizable value of inventory is reviewed on
an on-going basis, with consideration given to deterioration,
obsolescence, and other factors. If actual market conditions
differ from those projected by management, adjustments to
inventory values may be required.
Self-Insurance Liabilities: Baldor’s self-insurance
programs primarily include product liability, workers’
compensation, and health. We self-insure from the first
dollar of loss up to specified retention levels. Eligible losses
in excess of self-insurance retention levels and up to stated
limits of liability are covered by policies purchased from
third-party insurers. The aggregate self-insurance liability
19
is estimated using claims experience and risk exposure
levels for the periods being valued and current conditions.
Adjustments to the self-insurance liabilities may be required
to reflect emerging claims experience and other factors.
Goodwill: Goodwill and intangible assets with indefinite
useful lives are tested at least annually for impairment.
Goodwill represents the excess of the purchase price of
acquisitions over the fair value of the net assets acquired.
Goodwill is evaluated for impairment by first comparing
management’s estimate of the fair value of a reporting unit
with its carrying value, including goodwill. Management
utilizes a discounted cash flow analysis to determine the
estimated fair value of our reporting units. Judgments and
assumptions related to revenue, gross margin, operating
expenses, interest, capital expenditures, cash flow, and
market assumptions are inherent in these estimates. As a
result, use of alternate judgments and/or assumptions could
result in a fair value that differs from our estimate and
ultimately results in the recognition of impairment charges
in the financial statements. We utilize various assumption
scenarios and assign probabilities to each of these scenarios
in our discounted cash flow analysis. The results of the
discounted cash flow analysis are then compared to the
carrying value of the reporting unit. If the carrying value of
a reporting unit exceeds its fair value, a computation of the
implied fair value of goodwill is compared with its related
carrying value. If the carrying value of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in the amount of the excess.
If an impairment charge is incurred, it would negatively
impact our results of operations and financial position. We
perform our annual analysis during the fourth quarter of
each fiscal year and in any other period in which indicators
of impairment warrant an additional analysis.
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards
Board (the “FASB”) issued Statements of Financial
Accounting Standards (“SFAS”) No. 151, “Inventory Costs.”
SFAS 151 is an amendment of Accounting Research Bulletin
(“ARB”) No. 43, “Inventory Pricing.” Among other items, SFAS
151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage). In accordance with SFAS 151, such items must be
recognized as current-period charges regardless of whether
they meet the criterion of “so abnormal” and allocation of
fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.
Baldor is required to adopt SFAS 151 no later than January
1, 2006. Management does not expect the adoption of SFAS
151 to have a significant impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment.” SFAS 123(R) is a revision of SFAS
No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees.” Among
other items, SFAS 123(R) eliminates the use of APB 25 and
the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services
received in exchange for awards of equity instruments,
based on the grant date fair value of those awards, in the
financial statements. In accordance with SFAS 123(R),
the cost will be based on the grant-date fair value of the
award and will be recognized over the period for which
an employee is required to provide service in exchange for
20
the award. Baldor will adopt SFAS 123(R) on a modified
prospective basis beginning January 1, 2006. While we are
currently evaluating the impact SFAS 123(R) will have on
our financial results, we do not expect the impact to differ
materially from the pro forma disclosures currently required
by SFAS 123 and described herein under “Stock-based
Compensation.”
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS 154 replaces APB
No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
Among other items, SFAS 154 applies to changes required
by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition
provisions. Baldor is required to adopt SFAS 154 no later
than January 1, 2006. Management does not expect the
adoption of SFAS 154 to have a significant impact on our
financial statements.
Consolidated Balance Sheets
Baldor Electric Company and Affiliates
ASSETS
CURRENT ASSETS:
(In thousands, except share data)
Cash and cash equivalents
Marketable securities
Receivables, less allowances
for doubtful accounts of $3,124 in 2005 and $3,308 in 2004
Inventories:
Finished products
Work in process
Raw materials
December 31
2005
$
11,474
32,592
LIFO valuation adjustment
PROPERTY, PLANT
AND EQUIPMENT:
OTHER ASSETS:
Prepaid expenses
Other current assets and deferred income taxes
TOTAL CURRENT ASSETS
Land and improvements
Buildings and improvements
Machinery and equipment
Allowances for depreciation and amortization
NET PROPERTY, PLANT AND EQUIPMENT
Goodwill
Other
TOTAL ASSETS
$
104,488
76,632
12,670
60,401
149,703
(35,607)
114,096
4,482
27,485
294,617
6,813
56,980
320,340
(243,838)
140,295
63,043
6,647
504,602
$
$
January 1
2005
12,054
32,392
101,088
81,078
12,239
59,732
153,049
(31,544)
121,505
3,920
26,786
297,745
6,126
60,179
303,281
(232,376)
137,210
62,785
3,820
501,560
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT
LIABILITIES:
Accounts payable
Employee compensation
Profit sharing
Accrued warranty costs
Accrued insurance obligations
Other accrued expenses
Dividends payable
Income taxes payable
Current maturities of long-term obligations
TOTAL CURRENT LIABILITIES
$
LONG-TERM OBLIGATIONS
OTHER LIABILITIES
DEFERRED INCOME TAXES
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.10 par value
Authorized shares: 5,000,000
Issued and outstanding shares: None
Common stock, $0.10 par value
Authorized shares: 150,000,000
Issued:
2005 - 40,807,250 2004 - 40,423,054
Outstanding: 2005 - 33,073,438 2004 - 33,109,762
Additional capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock: 2005 - 7,733,812 2004 - 7,313,292
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
$
37,036
9,201
8,938
5,584
7,421
7,187
5,295
25,000
105,662
70,025
393
29,067
$
39,075
7,825
6,885
6,335
11,613
6,037
4,959
1,871
84,600
104,025
29,320
4,081
4,042
68,562
377,154
(2,390)
(147,952)
299,455
504,602
61,117
354,696
1,050
(137,290)
283,615
501,560
$
21
Consolidated Statements of Earnings
(In thousands, except share and per share data)
Net sales
Cost of goods sold
Gross Profit
Selling and administrative
Operating Profit
Other income, net
Profit sharing
Interest
Earnings before income taxes
Income taxes
NET EARNINGS
Net earnings per share - basic
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
Dividends declared and paid per common share
Year Ended
January 1
2005
$
648,195
473,752
174,443
113,933
60,510
1,938
6,885
3,235
52,328
17,276
$
35,052
$
1.06
$
1.05
32,953,382
33,485,261
$
0.57
December 31
2005
$
721,569
519,840
201,729
123,392
78,337
1,976
8,938
4,080
67,295
24,274
$
43,021
$
1.30
$
1.28
33,170,241
33,727,946
$
0.62
$
$
$
$
$
January 3
2004
561,391
409,294
152,097
106,343
45,754
1,960
5,436
2,949
39,329
14,550
24,779
0.75
0.74
32,928,369
33,404,733
0.53
Summary of Quarterly Results of Operations (Unaudited)
(In thousands, except per share data)
Quarter
First
Second
Third
Fourth
(2)
Total
(3)
2005:
Net sales
Gross profit
Net earnings
$
170,596
46,411
9,022
0.27
0.27
$
178,292
48,661
9,712
0.29
0.29
$
190,019
52,822
11,161
0.34
0.33
$
182,662
53,835
13,126
0.40
0.39
$ 721,569
201,729
43,021
1.30
1.28
2004:
Net sales
Gross profit
Net earnings
$
152,823
42,188
7,439
0.23
0.22
$
163,695
44,616
8,472
0.26
0.25
$
168,832
44,739
8,731
0.26
0.26
$
162,845
42,900
10,410
0.31
0.31
$ 648,195
174,443
35,052
1.06
1.05
(1)
(1)
(2)
(3)
The sum of the quarter amounts does not agree to the total due to rounding.
Second quarter 2005 includes self-insurance liability adjustments of $(775,000), net of tax.
Fourth quarter 2005 includes income tax adjustments of $(353,000) and self-insurance liability adjustments of $(1.3) million, net of tax.
Fourth quarter 2004 includes income tax adjustments of $(2.1) million and contingency reserve adjustments of $(838,000), net of tax.
22
Consolidated Statements of Cash Flows
(In thousands)
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Gains) losses on sales of assets
Depreciation
Amortization
Deferred income taxes
Changes in operating assets and liabilities:
(Increase) decrease in receivables
Decrease (increase) in inventories
(Increase) decrease in other current assets
(Decrease) increase in accounts payable
(Decrease) increase in accrued expenses and other liabilities
(Decrease) increase in income taxes payable
Other - net
Net cash provided by operating activities
Investing activities: Additions to property, plant and equipment
Proceeds from sale of property, plant and equipment
Marketable securities purchased
Marketable securities sold
Acquisitions (net of cash acquired)
Net cash used in investing activities
Financing activities: Additional long-term obligations
Reduction of long-term obligations
Unexpended debt proceeds
Dividends paid
Common stock repurchased
Stock option plans
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Operating activities:
Y
December 31
2005
$
43,021
Year ended
January 1
2005
$
35,052
d
January 3
2004
$
24,779
(550)
16,178
2,063
3,351
165
17,271
1,872
583
(94)
17,180
1,659
8,909
(3,400)
4,094
(5,871)
(2,039)
(28)
(1,871)
925
55,873
(22,375)
2,015
(14, 476)
13,547
(2,423)
(23,712)
(9,000)
(20,563)
(7,557)
4,379
(32,741)
(580)
12,054
11,474
(17,888)
(9,382)
235
10,109
169
(5,709)
1,219
33,696
(20,612)
(29,176)
33,024
(16,764)
43,000
(44,259)
396
(19,052)
4,402
(15,513)
1,419
10,635
12,054
1,408
2,561
(1,593)
3,242
(2,227)
3,640
5,543
65,007
(17,368)
(39,152)
29,516
(5,831)
(32,835)
(3,898)
2
(17,518)
(26,686)
2,048
(46,052)
(13,880)
24,515
10,635
$
$
e
$
Noncash items:
Inventory transferred to other assets, for rental, amounted to $3.3 million in 2005.
23
Consolidated Statements of Shareholders’ Equity
(Table data in thousands)
BALANCE AT DECEMBER 29, 2002
Common Stock
Shares
Amount
39,693 $
3,969
Additional
Capital
$ 48,657
Retained
Earnings
$ 331,373
Accumulated
Other
Comprehensive
Income (Loss)
$ (4,880)
Treasury
Stock
(at cost)
Total
$ (104,521) $ 274,598
Comprehensive income
Net earnings
24,779
24,779
Other comprehensive income (loss)
Securities valuation adjustment,
net of tax benefits of $85,000
(145)
(145)
Translation adjustments
2,809
2,809
Derivative unrealized gain adjustment,
net of tax expense of $985,000
1,541
1,541
Total other comprehensive income
4,205
Total comprehensive income
Stock option plans (net of 134,890 shares exchanged
and $321,000 tax benefit)
28,984
325
33
5,026
Cash dividends at $0.53 per share
(3,011)
(17,518)
Acquisition
62
62
Common stock repurchased (1,500,000 shares)
BALANCE AT JANUARY 3, 2004
(26,686)
40,018
$
4,002
$
53,683
$ 338,696
2,048
(17,518)
$
(675)
(26,686)
$ (134,218) $ 261,488
Net earnings
35,052
35,052
Derivative unrealized gain adjustment,
net of tax expense of $87,000
(157)
(157)
1,746
1,746
136
136
1,725
36,777
405
40
7,434
BALANCE AT JANUARY 1, 2005
(3,072)
(19,052)
40,423
$
4,042
$
61,117
$ 354,696
4,402
(19,052)
$
1,050
$ (137,290) $ 283,615
Net earnings
43,021
43,021
(418)
(418)
(1,978)
(1,978)
Derivative unrealized loss adjustment,
(1,044)
(1,044)
(3,440)
39,581
384
39
7,445
(3,105)
(20,563)
Common stock repurchased (300,231 shares)
BALANCE AT DECEMBER 31, 2005
24
(7,557)
40,807
$
4,081
$
68,562
$ 377,154
4,379
(20,563)
$
(2,390)
(7,557)
$ (147,952) $ 299,455
Notes to Consolidated Financial Statements
Baldor Electric Company and Affiliates • December 31, 2005
NOTE A
SIGNIFICANT ACCOUNTING POLICIES
Line of Business:
The Company operates in one industry
segment that includes the design, manufacture and sale
of industrial electric motors, drives and generators. The
products of the Company are marketed throughout the United
States and in more than 60 foreign countries.
Use of Estimates:
The preparation of financial statements
in conformity with accounting principles generally accepted
in the United States requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial 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. The Company does not have
any investments in, or contractual arrangements with, any
variable interest entities.
Fiscal Year:
The Company’s fiscal year ends on the
Saturday nearest to December 31, which results in a
52-week or 53-week year. Fiscal year 2005 contained
52 weeks. Fiscal year 2004 contained 52 weeks, and fiscal
year 2003 contained 53 weeks.
Cash Equivalents:
Cash equivalents consist of highly
liquid investments having original maturities of three
months or less.
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.
Accounts Receivable: Trade receivables are recorded
in the balance sheet at outstanding principal, adjusted
for charge-offs and allowances for doubtful accounts.
Allowances for doubtful accounts are recorded based on
customer-specific analysis, general matters such as current
assessments of past due balances and economic conditions,
and historical experience. Concentrations of credit risk with
respect to receivables are limited due to the large number of
customers and their dispersion across geographic areas. No
single customer represents greater than 10% of net accounts
receivable at December 31, 2005, and January 1, 2005.
Inventories:
The Company values inventories at the lower
of cost or market, with cost being determined principally by
the last-in, first-out method (LIFO), except for $13.4 million
in 2005 and $16.8 million in 2004, at foreign locations,
valued by the first-in, first-out method (FIFO).
Property, Plant and Equipment: Property, plant and
equipment are stated at cost. Depreciation and amortization
are computed principally using the straight-line method over
the estimated useful lives of the assets ranging from 10 to
39 years for buildings and improvements and 3 to 15 years
for machinery and equipment. Capitalized software costs
amounting to $24.6 million and $24.8 million, net of
accumulated amortization, at December 31, 2005, and
January 1, 2005, respectively, are included in machinery and
equipment and are amortized over their estimated useful life
of 15 years. Costs associated with repairs and maintenance
are expensed as incurred.
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 rate long-term debt. The Company estimates that the
fair value of its financial instruments approximates carrying
value at December 31, 2005, and January 1, 2005. The
carrying amounts of cash and cash equivalents, receivables,
and trade payables approximated fair value at December 31,
2005, and January 1, 2005, due to the short-term maturities
of these instruments.
Self-Insurance Liabilities:
The Company’s selfinsurance programs include primarily product liability,
workers’ compensation, and health. The Company selfinsures from the first dollar of loss up to specified retention
levels. Eligible losses in excess of self-insurance retention
levels and up to stated limits of liability are covered by
policies purchased from third-party insurers. The aggregate
self-insurance liability is estimated using the Company’s
claims experience and risk exposure levels for the periods
being valued and current conditions. Certain self-insurance
liabilities were reduced by approximately $3.5 million in
2005 to reflect changes in expected liabilities. Further
adjustments to the self-insurance liabilities may be required
to reflect emerging claims experience and other factors.
Goodwill:
Goodwill and intangible assets with indefinite
useful lives are tested at least annually for impairment.
Goodwill represents the excess of the purchase price of
acquisitions over the fair value of the net assets acquired.
Goodwill is evaluated for impairment by first comparing
management’s estimate of the fair value of a reporting unit
with its carrying value, including goodwill. Management
utilizes a discounted cash flow analysis to determine the
estimated fair value of the Company’s reporting units.
Judgments and assumptions related to revenue, gross
margin, operating expenses, interest, capital expenditures,
cash flow, and market assumptions are inherent in these
estimates. As a result, use of alternate judgments and/or
assumptions could result in a fair value that differs
from management’s estimate and ultimately results in
the recognition of impairment charges in the financial
statements. The Company utilizes various assumption
scenarios and assigns probabilities to each of these
scenarios in the discounted cash flow analysis. The results
of the discounted cash flow analysis are then compared
to the carrying value of the reporting unit. If the carrying
value of a reporting unit exceeds its fair value, a computation
of the implied fair value of goodwill is compared with
its related carrying value. If the carrying value of the
reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in the amount
of the excess. If an impairment charge is incurred, it would
negatively impact the Company’s results of operations and
financial position. The annual analysis is performed during
the fourth quarter of each fiscal year and in any other period
in which indicators of impairment warrant an additional
analysis. The 2005 and 2004 annual impairment tests
resulted in no impairment.
25
Long-Lived Assets: Impairment losses are recognized on
long-lived assets when information indicates the carrying
amount of these assets will not be recovered through future
operations or sale.
Derivatives:
The Company recognizes all derivatives
on the balance sheet at fair value. Derivatives that are not
designated as hedges are adjusted to fair value through
earnings. If the derivative is a cash flow hedge, changes
in the fair value are recognized in accumulated other
comprehensive income (loss) until the hedged item is
recognized in earnings. If a hedge transaction is terminated,
any unrealized gain (loss) at the date of termination is
carried in accumulated other comprehensive income (loss)
until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value
is recognized in earnings in the period of change. The
ineffective portion of the Company’s cash flow hedges was
not material during the years 2005, 2004, and 2003.
Benefit Plans:
The Company has a profit-sharing plan
covering most employees with more than two years of
service. The Company contributes 12% of pre-tax earnings
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 and cost
improvements are treated as expenses when incurred and
amounted to approximately $24.4 million in 2005, $25.4
million in 2004, and $21.9 million in 2003.
Shipping and Handling Costs:
The Company classifies
all amounts billed to customers for shipping and handling
as revenue and classifies gross shipping and handling
costs paid as selling expense. Costs included in selling and
administrative expenses related to shipping and handling
amounted to approximately $25.8 million in 2005, $22.8
million in 2004, and $20.9 million in 2003.
Revenue Recognition:
The Company sells products
to its customers FOB shipping point. Title passes to the
customer when the product is shipped. Accordingly, revenue
is recognized when the product is shipped. The Company
has no further obligations associated with the product sale
that would impact revenue recognition after the product is
shipped.
Earnings Per Share:
Basic earnings per share is based
upon the weighted average number of common shares
outstanding and diluted earnings per share includes all
dilutive common stock equivalents.
Stock-Based Compensation: The Company has certain
stock-based employee compensation plans, which are
described more fully in Note I. In accounting for these plans,
the Company applies the intrinsic value method permitted
under Statements of Financial Accounting Standards (“SFAS”)
No. 123, “Accounting for Stock-Based Compensation,” as
amended by SFAS No. 148, Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations.
SFAS 123 requires pro forma disclosure of the effects on net
income and earnings per share as if the fair value method
of valuing stock-based compensation was applied. The
following table sets forth the pro forma disclosure of net
income and earnings per share using the Black-Scholes
26
option-pricing model. For purposes of this disclosure,
the estimated fair value of options is amortized over the
applicable compensatory periods.
Pro Forma Information (In thousands except per share data)
2005
Net income, as reported
Add: Stock-based compensation expense
included in reported net income,
net of tax effects
Less: Stock-based compensation expense
determined under fair value method,
net of related tax effects
Pro forma net income
Earnings per share:
Reported
Pro forma
2004
net of tax effects
Basic
$1.30
$1.27
Earnings per share:
Reported
Pro forma
2003
net of tax effects
Basic
$1.06
$1.05
Earnings per share:
Reported
Pro forma
Basic
$0.75
$ 0.74
$43,021
831
(1,654)
$42,198
Diluted
$1.28
$1.25
$35,052
161
(632)
$ 34,581
Diluted
$1.05
$1.03
$ 24,779
446
(807)
$ 24,418
Diluted
$0.74
$ 0.73
Product Warranties: The Company accrues for product
warranty claims based on historical experience and the
expected costs to provide warranty service. Changes in
the carrying amount of product warranty reserves are as
follows:
(In thousands)
Balance at beginning of year
Charges to costs and expenses
Deductions
Balance at end of year
December 31
2005
$
6,335
5,027
(5,778)
$
5,584
January 1
2005
$
6,625
5,486
(5,776)
$
6,335
Amounts included in selling and administrative costs
amounted to $5.0 million in 2005, $5.5 million in 2004, and
$6.3 million in 2003.
Foreign Currency Translation: Assets and liabilities
of foreign affiliates are translated into U.S. dollars at yearend exchange rates. Income statement items are generally
translated at average exchange rates prevailing during the
period. Translation adjustments, including those related to
intercompany advances that are of a long-term investment
nature, are recorded in accumulated other comprehensive
income (loss) in shareholders’ equity.
Reclassifications: Certain prior year amounts have been
table presents the estimated fair value breakdown of
investments by category:
reclassified to conform to current year presentation.
(In thousands)
NOTE B FINANCIAL DERIVATIVES
The Company uses derivative financial instruments to reduce
its exposure to various market risks. The Company does not
regularly engage in speculative transactions, nor does the
Company regularly hold or issue financial instruments for
trading purposes. Generally, contract terms of the financial
instrument closely mirror those of the hedged item providing
a high degree of risk reduction and correlation and are
recorded using hedge accounting. Instruments that do not
meet the criteria for hedge accounting are marked to fair
value with unrealized gains or losses reported currently in
earnings.
The Company had derivative contracts related to cash flow
hedges, with a fair value of $0.9 million and $2.6 million
recorded in other current assets at December 31, 2005, and
January 1, 2005, respectively.
The amount recognized in cost of sales on cash flow hedges
amounted to approximately $(4.7 million) in both 2005 and
2004. The Company expects that after-tax gains, totaling
approximately $0.6 million recorded in accumulated other
comprehensive income (loss) at December 31, 2005, related
to cash flow hedges, will be recognized in cost of sales
within the next twelve months. The Company generally does
not hedge anticipated transactions beyond 18 months.
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 December 31, 2005, and January 1, 2005, are not material
and are included in accumulated other comprehensive
income (loss). Because investments are predominantly shortterm and are generally allowed to mature, realized gains
and losses for both years have been minimal. The following
(In thousands)
U.S. corporate debt securities
Obligations of states and
political subdivisions
Securities of U.S.
Government agencies
Total temporarily impaired securities
(In thousands)
Obligations of states and
political subdivisions
Securities of U.S.
Government agencies
Total temporarily impaired securities
Less than 12 months
Estimated
Unrealized
Fair Value
Loss
$
854
$
96
8,383
$
4,442
13,679
62
268
Less than 12 months
Estimated
Unrealized
Fair Value
Loss
$
1,446
$
28
7,059
$
4,771
13,276
Municipal debt securities
U.S. Treasury & agency securities
Other debt securities
Less cash equivalents
In evaluating the Company’s unrealized loss positions for
other-than-temporary impairment, management considers
the credit quality of the issuer, the nature and cause
of the unrealized loss and the severity and duration of
the impairments. At December 31, 2005, and January 1,
2005, management determined that substantially all of its
unrealized losses were the result of fluctuations in interest
rates and did not reflect deteriorations of the credit quality
of the investments. Accordingly, management believes that
its unrealized losses on investment securities are temporary
in nature, and the Company has both the ability and intent
to hold these investments until maturity or until such time
as fair value recovers above amortized cost.
The table below shows gross unrealized losses and
estimated fair value of available-for-sale investment
securities, aggregated by investment category and length
of time that individual investment securities have been in
a continuous unrealized loss position.
December 31, 2005
12 months or more
Estimated
Unrealized
Fair Value
Loss
$
1,227
$
122
9,765
$
29
377
7,538
18,530
$
4,993
$
3,947
8,940
Estimated
Fair Value
$
2,081
257
212
591
January 1, 2005
12 months or more
Estimated
Unrealized
Fair Value
Loss
$
$
-
320
$
January 1
2005
$ 18,865
1,696
11,831
1,412
33,804
1,412
$ 32,392
The estimated fair value of marketable securities at
December 31, 2005, was $5.2 million due in one year or
less, $19.0 million due in one to five years, $10.8 million
due in five to ten years, and $2.5 million due after ten
years. Estimated fair value was based on contractual
maturities. Expected maturities and contractual maturities
are generally the same.
110
$
December 31
2005
$
18,531
2,081
11,980
4,957
37,549
4,957
$
32,592
54
132
Unrealized
Loss
$
218
18,148
$
11,980
32,209
Estimated
Fair Value
$
1,446
78
$
Total
367
$
Total
Unrealized
Loss
$
28
12,052
$
8,718
22,216
274
859
398
$
83
509
27
NOTE D INCOME TAXES
The Company made income tax payments of $22.8 million
in 2005, $21.9 million in 2004, and $1.8 million in 2003.
Income tax expense consists of the following:
(In thousands)
Current:
Federal
State
Foreign
Deferred:
2004
2005
$
Federal
State
Foreign
$
16,925
3,651
347
20,923
2,675
676
3,351
24,274
$
13,056
2,968
669
16,693
46
537
583
17,276
$
2003
$
$
3,908
1,456
277
5,641
8,418
491
8,909
14,550
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:
Statutory federal income tax rate
State taxes, net of federal benefit
Other
Effective income tax rate
2004
35.0%
4.4%
(6.4%)
33.0%
2005
35.0%
4.2%
(3.1%)
36.1%
2003
35.0%
3.3%
(1.3%)
37.0%
at December 31, 2005, that are expected to be permanently
reinvested in the business. It is not currently practicable
to estimate the tax liability that might be payable on the
repatriation of these foreign earnings.
NOTE E LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
(In thousands)
December 31
2005
Industrial Development Bonds:
Due in 2013 at variable rate of 3.60%
$
Notes payable to banks:
Due October 25, 2006 at 3.62% fixed rate
Due September 30, 2009 at 4.63% fixed rate
Due January 31, 2007 at 4.93% variable rate
Due March 15, 2007 at 5.06% variable rate
Less current maturities
$
January 1
2005
2,025 $
2,025
25,000
15,000
41,000
12,000
95,025
25,000
70,025 $
25,000
15,000
47,000
15,000
104,025
104,025
Certain long-term obligations are collateralized by property,
plant and equipment with a net book value of approximately
$0.6 million at December 31, 2005.
Maturities of long-term obligations for the five-year period
ending 2010 are: 2006 - $25.0 million; 2007 - $53.0 million;
2008 - $0; 2009 - $15.0 million, 2010 and thereafter - $2.0
million. Amounts included in current maturities are related
to a note payable to bank with an original maturity date of
October 25, 2009, containing a first call provision at October
25, 2006, which the Company expects to be exercised.
The Company adjusted certain income tax liabilities during
the fourth quarter of 2005 and 2004 to reflect current
exposure. These adjustments amounted to approximately
$0.4 million in 2005 and $2.1 million in 2004 and accounted
for the reduction in effective income tax rate for each year,
respectively. The adjustments are included in "Other" in the
above reconciliation.
Certain long-term obligations require that the Company
maintain various financial ratios. These ratios were all met
for 2005 and 2004. At December 31, 2005, the Company
had outstanding letters of credit totaling $2.3 million that
will expire between February 28, 2006, and July 1, 2006.
The Company expects to renew these letters of credit prior to
expiration.
The principal components of deferred tax assets (liabilities)
are as follows:
Interest paid was $3.8 million in 2005, $3.0 million in 2004,
and $2.9 million in 2003.
(In thousands)
The Company has a credit facility with a bank that provides
up to $60.0 million of borrowing capacity. At December 31,
2005, the Company had borrowings of $41.0 million under
the facility. Borrowings are secured by all trade accounts
receivables. The Company utilizes a wholly owned special
purpose entity (“SPE”) to securitize the receivables. The SPE
has no other purpose other than the securitization and is
consolidated in the Company’s financial statements.
Accrued liabilities
Bad debt reserves
Foreign net operating losses
Employee compensation and benefits
Securities valuation
Valuation allowance
Deferred tax assets
December 31 January 1
2005
2005
$
2,970 $
3,653
811
900
1,249
1,382
898
317
5,347
6,833
(388)
(388)
4,959
6,445
Property, plant, equipment and intangibles
Employee compensation and benefits
Derivative unrealized (gains) losses
Securities valuation
Deferred tax liabilities
Net deferred tax liabilities
$
(28,276)
(916)
(366)
(29,558)
(27,295)
(1,033)
(70)
(28,398)
(24,599) $
(21,953)
Valuation allowance of $0.4 million is to adjust foreign net
operating loss carryforwards to expected future utilization.
The Company has accumulated but undistributed earnings of
foreign subsidiaries aggregating approximately $8.8 million
28
The Company had lines of credit aggregating $25.0 million
available at December 31, 2005, with $12.0 million borrowed
under these lines. Interest on lines of credit is at rates
mutually agreed upon at time of borrowing.
NOTE F SHAREHOLDERS’ EQUITY
Shareholder Rights Plan
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 Company’s
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 the Company’s outstanding common stock and in
certain events thereafter.
Accumulated Other Comprehensive Income (Loss)
Balances of related after-tax components comprising
accumulated other comprehensive income (loss), included in
shareholders’ equity are as follows:
(In thousands)
Balance at December 29, 2002
Net change 2003
Balance at January 3, 2004
Net change 2004
Balance at January 1, 2005
Net change 2005
Balance at December 31, 2005
Unrealized
Gains (Losses) on
Securities
Derivatives
$ 181
$
(61)
(145)
1,541
36
1,480
(157)
136
(121)
1,616
(418)
(1,044)
$ (539)
$ 572
Total
Foreign Accumulated
Currency
Other
Translation Comprehensive
Adjustments Income (Loss)
$ (5,000)
$ (4,880)
2,809
4,205
(2,191)
(675)
1,746
1,725
(445)
1,050
(1,978)
(3,440)
$ (2,423)
$ (2,390)
$5.4 million. As the likelihood of making any payments
on this guarantee is remote, no liability has been accrued.
As part of the lease agreement, the Company is subject to
an 82% residual value guarantee at the end of the lease
term in the event the value of the property has decreased.
The maximum potential liability under the residual value
guarantee would be approximately $13.6 million should the
property become worthless by the end of the lease term.
In accordance with Financial Interpretation (“FIN”) 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others,” the Company has recorded a liability of
approximately $393,000 classified in other liabilities, which
represents the fair value of the guarantee, based on a
probability-weighted calculation of the expected value of the
property at the end of the lease term.
Legal Proceedings and Contingent Liabilities
The Company is subject to a number of legal actions arising
in the ordinary course of business. Management expects that
the ultimate resolution of these actions will not materially
affect the Company’s financial position, results of operations,
or cash flows. During the fourth quarter of 2004, certain
contingent liabilities were adjusted by approximately $1.5
million to reflect current exposures, resulting in a reduction
in selling and administrative expenses.
NOTE H EARNINGS PER SHARE
The table below details earnings per share for the years
indicated:
Share Repurchases
During 2005, the Company, pursuant to its stock repurchase
plan, repurchased approximately 300,000 shares of its
common stock for cash in the amount of $7.6 million. No
shares were repurchased in 2004. During 2003, the
Company, pursuant to its stock repurchase plan, repurchased
1.5 million shares for cash in the amount of $26.7 million.
NOTE G COMMITMENTS AND
CONTINGENCIES
Operating Lease Commitments
The Company leases certain computers, buildings, and
other equipment under operating lease agreements. Related
rental expense was $5.2 million in 2005, $6.1 million in
2004, and $6.6 million in 2003. Future minimum payments
for operating leases having non-cancelable lease terms in
excess of one year are: 2006 - $2.0 million; 2007 - $2.2
million; 2008 - $2.0 million; 2009 - $1.9 million; 2010 and
thereafter - $5.9 million.
On July 21, 2005, the Company entered into a five-year
operating lease agreement on a new facility in Columbus,
Mississippi. Beginning in the fourth quarter of 2006, the
Company will have annual operating lease commitments
of approximately $850,000 related to the lease. The new
facility will replace the Company’s existing facility in
Columbus, Mississippi. During the construction period,
the Company is acting as construction managers under a
construction management agreement. In accordance with
Emerging Issues Task Force (“EITF”) 97-10, “The Effect
of Lessee Involvement in Asset Construction,” during the
construction period, the Company has a maximum guarantee
of 89.9% of the construction costs to date. As of December
31, 2005, the construction costs to date are approximately
2005
Numerator:
Net earnings (in thousands)
Denominator Reconciliation:
Weighted average
shares - basic
Effect of dilutive
securities - stock options
Weighted average
shares - diluted
Earnings Per Share - basic
Earnings Per Share - diluted
43,021 $
$
2004
2003
35,052 $
24,779
33,170,241
32,953,382
32,928,369
557,705
531,879
476,364
33,727,946
33,485,261
33,404,733
$
$
1.30 $
1.28 $
1.06 $
1.05 $
0.75
0.74
The total number of anti-dilutive securities excluded from the
above calculations was approximately 452,100 at December
31, 2005, 192,000 at January 1, 2005, and 747,000 at
January 3, 2004.
NOTE I STOCK PLANS
At December 31, 2005, the Company had various stock plans.
Grants can and have included: (1) incentive stock options
to purchase shares at market value at grant date, and/or
(2) non-qualified stock options to purchase shares of stock
equal to and less than the stock’s market value at grant
date. Grants from the 1990 Plan expire six years from the
grant date. All other grants expire 10 years from the date of
grant. The 1987, 1989, and 1996 Plans have expired except
for options outstanding. A summary of the Company’s stock
plans follows.
1990 Plan – Only non-qualified options can be granted
from this Plan. Options vest and become 50% exercisable at
29
1989, 1996 and 2001 Plans – Each non-employee
the end of one year and 100% exercisable at the end of two
years. Shares authorized for grants: 1990 Plan - 501,600.
director is granted an annual grant consisting of nonqualified 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 are immediately exercisable and related
compensation expense on the options granted at 50% of
market is recognized at date of grant. Shares authorized for
grants: 1989 Plan - 540,000; 1996 Plan - 200,000; 2001
Plan - 200,000.
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 nonqualified stock options is amortized over the applicable
compensatory period. Shares authorized for grants:
1987 Plan – 2,700,000; 1994 Plan - 4,000,000.
1987 and 1994 Plans
1990 Plan
Type
Administrator
Recipients
Status
Non-compensatory
Compensation &
Stock Option Committee
District Managers
Active
Granted at
Market
Options Outstanding at Fiscal Year-End
Range of exercise prices
1989, 1996 and 2001 Plans
Compensatory
Compensation &
Stock Option Committee
Employees
Active - 1994 Plan
Expired - 1987 Plan
Granted at
Market
$17.06 - $24.75 $14.44 - $27.60
Granted at
Less than
Market
Compensatory
Executive Committee
Non-employee Directors
Active - 2001 Plan
Expired - 1989 & 1996 Plans
Granted at
Market
Granted at
Less than
Market
$7.22 - $20.70 $15.38 - $24.81
$7.69 - $11.70
Options outstanding
Weighted-average exercise price
Weighted-average remaining
contractual life
104,052
$22.29
1,927,155
$22.20
215,601
$11.53
169,776
$21.89
79,711
$10.62
3.9 years
5.7 years
6.2 years
5.9 years
5.1 years
Options currently exercisable
Weighted-average exercise price
57,552
$20.31
1,237,115
$20.53
214,601
$11.49
169,776
$21.89
79,711
$10.62
A summary of the Company’s weighted average variables, using the Black-Scholes option pricing model, and stock option
activity for fiscal years 2005, 2004, and 2003 follows.
Weighted Average Variables
Volatility
Risk-free interest rates
Dividend yields
Expected option life
Remaining contractual life
Per share price of options granted
during year
At market price
At less than market price
30
2004
2003
1.0%
3.8%
2.2%
5.2 years
5.7 years
1.4%
4.0%
2.3%
7.5 years
5.2 years
2.0%
3.7%
2.6%
6.7 years
5.4 years
Exercise
Price
Fair
Value
Exercise
Price
Fair
Value
Exercise
Price
Fair
Value
$27.05
$13.63
$1.87
$7.59
$23.85
$11.70
$2.34
$ 6.14
$20.27
$10.11
$1.45
$4.55
Shares
Weighted
Average
Price/Share
Shares
Weighted
Average
Price/Share
Shares
Weighted
Average
Price/Share
Stock Option Activity
Total options outstanding
Beginning Balance
Granted
Exercised
Expired
Ending Balance
Shares authorized for grant
Shares exercisable, at year end
Shares reserved for future grants,
at year end
2005
2,269,875
677,966
(384,196)
(67,350)
2,496,295
8,141,600
1,758,755
668,845
$18.82
25.07
15.66
22.97
20.89
19.10
2,491,187
244,600
(404,793)
(61,119)
2,269,875
8,141,600
1,907,875
1,280,867
$17.99
23.10
15.79
22.42
18.82
18.32
2,499,790
421,500
(325,170)
(104,933)
2,491,187
8,141,600
1,993,787
1,466,348
$17.26
18.85
16.30
19.13
17.99
17.29
NOTE J FOREIGN OPERATIONS
The Company’s foreign operations include both export sales
and the results of its foreign affiliates in Europe, Australia,
Far East, and Mexico. Consolidated sales, earnings before
income taxes, and identifiable assets consist of the following:
(In thousands)
Net Sales:
United States Companies
Domestic customers
Export customers
Foreign Affiliates
$ 618,476
54,310
672,786
48,783
$ 721,569
Earnings Before Income Taxes:
United States Companies $ 65,459
Foreign Affiliates
1,836
$ 67,295
Assets:
United States Companies
Foreign Affiliates
2004
2005
$ 483,349
21,253
$ 504,602
2003
$ 547,092
46,396
593,488
54,707
$ 648,195
$ 479,414
40,926
520,340
41,051
$ 561,391
$
$
$
50,217
2,111
52,328
$ 480,865
20,695
$ 501,560
$
39,076
253
39,329
$ 457,727
19,228
$ 476,955
NOTE K ACQUISITIONS
On October 11, 2005, the Company acquired the remaining
40% minority interest in its consolidated affiliate Australian
Baldor Pty Limited for cash in the amount of $2.4 million.
The acquisition has been accounted for as a purchase with
resulting goodwill of approximately $258,000. The results
of operations for the remaining 40% interest for the year
ended January 31, 2005, were not material to the Company’s
consolidated financial statements. Accordingly, pro forma
information has not been presented. As of October 11, 2005,
Australian Baldor Pty Limited is a wholly owned subsidiary
of the Company.
they meet the criterion of “so abnormal” and allocation of
fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.
The Company is required to adopt SFAS 151 no later than
January 1, 2006. Management does not expect adoption
of SFAS 151 to have a significant impact on the Company’s
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment.” SFAS 123(R) is a revision of SFAS
No. 123, “Accounting for Stock-Based Compensation,” and
supersedes Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees.” Among
other items, SFAS 123(R) eliminates the use of APB 25 and
the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based
on the grant date fair value of those awards, in the financial
statements. In accordance with SFAS 123(R), the cost will be
based on the grant-date fair value of the award and will be
recognized over the period for which an employee is required
to provide service in exchange for the award. Baldor will
adopt SFAS 123(R) on a modified prospective basis beginning
January 1, 2006. While the Company is currently evaluating
the impact SFAS 123(R) will have on its financial results,
management does not expect the impact to differ materially
from the pro forma disclosures currently required by SFAS
123 and described herein under “Stock-based Compensation.”
In May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections.” SFAS 154 replaces APB
No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
Among other items, SFAS 154 applies to changes required
by an accounting pronouncement in the unusual instance
that the pronouncement does not include specific transition
provisions. The Company’s adoption of SFAS 143 on January
1, 2006, is not expected to have a significant effect on the
On February 13, 2003, the Company acquired all of the stock
of Energy Dynamics, Inc. (“EDI”) for cash in the amount of
$5.8 million. EDI is a designer, assembler, and marketer of
industrial generator sets. The acquisition has been accounted
for as a purchase with resulting goodwill of approximately
$5.8 million. EDI’s results of operations for the year ended
January 3, 2004, were not material to the Company’s
consolidated financial statements. Accordingly, pro forma
information has not been presented. The Company’s
consolidated financial statements include the results of
operations and the assets and liabilities of EDI after February
12, 2003.
NOTE L RECENTLY ISSUED ACCOUNTING
STANDARDS
In November 2004, the Financial Accounting Standards
Board (the “FASB”) issued Statements of Financial Accounting
Standards (“SFAS”) No. 151, “Inventory Costs.” SFAS 151
is an amendment of Accounting Research Bulletin (“ARB”)
No. 43, “Inventory Pricing.” Among other items, SFAS 151
clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). In accordance with SFAS 151, such items must be
recognized as current-period charges regardless of whether
31
Report of Independent Registered
Public Accounting Firm
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 31, 2005, and January 1, 2005, and the
related consolidated statements of earnings, cash flows,
and shareholders’ equity for each of the three years in the
period ended December 31, 2005. 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 the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Baldor Electric Company
and Affiliates at December 31, 2005, and January 1, 2005,
and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United
States), the effectiveness of Baldor Electric Company and
Affiliates’ internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission
and our report dated February 22, 2006 expressed an
unqualified opinion thereon.
Tulsa, Oklahoma
February 22, 2006
Report of Independent Registered
Public Accounting Firm
Shareholders and Board of Directors,
We have audited management’s assessment, included in
the accompanying Report of Management on Internal Control
over Financial Reporting, that Baldor Electric Company and
Affiliates maintained effective internal control over financial
reporting as of December 31, 2005, based on the criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Baldor Electric
Company and Affiliates’ management is responsible for
32
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that Baldor
Electric Company and Affiliates maintained effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on the COSO
criteria. Also in our opinion, Baldor Electric Company and
Affiliates maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2005, based on the COSO criteria.
We have also audited, in accordance with the standards
States), the accompanying consolidated balance sheets of
Baldor Electric Company and Affiliates as of December 31,
2005, and January 1, 2005, and the related consolidated
statements of earnings, cash flows and shareholders’ equity
for each of the three years in the period ended December 31,
2005, and our report dated February 22, 2006 expresses an
unqualified opinion on these statements.
Tulsa, Oklahoma
February 22, 2006
Report of Management on
Responsibility for Financial Reporting
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 accounting standards
generally accepted in the United States, applying informed
judgments and estimates where appropriate.
The Audit Committee of the Board of Directors is
composed solely of outside directors and is responsible for
recommending to the Board the independent registered
public accounting firm to be retained for the coming year.
The Audit Committee meets regularly with the independent
registered public accounting firm, 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 registered
public accounting firm, 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.
JOHN A. MCFARLAND
Chairman and
Chief Executive Officer
RONALD E. TUCKER
President, Chief
Financial Officer and
Secretary
Report of Management on Internal
Control over Financial Reporting
Management is responsible for establishing and
maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f) and 15d-15(f). We maintain a system
of internal controls that provide reasonable assurance
that transactions are executed in accordance with
management’s authorization and recorded properly to permit
the preparation of consolidated financial statements in
accordance with accounting principles generally accepted
in the United States and that assets are safeguarded from
unauthorized use or disposition.
We conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the
framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of
the Treadway Commission. This assessment included
review of the documentation of controls, assessment of
the design effectiveness of the controls, testing of the
operating effectiveness of controls, and a conclusion on
this assessment. Although there are inherent limitations
in the effectiveness of any system of internal controls over
financial reporting, based on our assessment, we have
concluded that our internal control over financial reporting
was effective as of December 31, 2005. Ernst & Young
LLP, an independent registered public accounting firm, has
issued an attestation report on management’s assessment of
internal control over financial reporting, which is included
in this report.
JOHN A. MCFARLAND
Chairman and
Chief Executive Officer
RONALD E. TUCKER
President, Chief
Financial Officer and
Secretary
Shareholder Information
Dividends Paid
Baldor’s annual dividend rate for 2005 increased 9% over
the 2004 rate. There have been three dividend increases
in the last five years and 10 increases in the last 10 years.
1st quarter
2nd quarter
3rd quarter
4th quarter
Year
2004
$0.14
0.14
0.14
0.15
$0.57
2005
$0.15
0.15
0.16
0.16
$0.62
2003
$0.13
0.13
0.13
0.14
$0.53
Common Stock Price Range
As reported by the NYSE, the high and low composite sale
prices per share for the Company’s common stock for each
quarterly period during the past two fiscal years is listed
below.
2005
1st quarter
2nd quarter
3rd quarter
4th quarter
HIGH
$28.35
26.63
26.47
27.02
2004
LOW
$25.18
23.81
22.70
23.19
HIGH
$24.70
24.21
24.35
28.75
LOW
$22.18
21.90
21.32
22.65
Shareholders
At December 31, 2005, there were 4,592 shareholders
of record including employee shareholders through
participation in the benefit plans.
Shareholders’ Annual Meeting
The Company’s Annual Meeting of Shareholders will be
held at 10:30 a.m. local time, Saturday, April 22, 2006, at
the Fort Smith Convention Center in Fort Smith, Arkansas.
Independent Registered Public
Accounting Firm
Ernst & Young LLP
1700 One Williams Center
Tulsa, Oklahoma 74172
General Counsel
Thompson Coburn LLP
One US Bank Plaza
St. Louis, Missouri 63101
Certifications
The Company has filed the Chief
Executive Officer and Chief
Financial Officer certifications
required by Section 302 of the
Sarbanes-Oxley Act in its Form
10-K. Additionally, the Chief
Executive Officer has provided the
required annual certifications to
the New York Stock Exchange.
Corporate Documents
Baldor’s Form 10-K is filed with
the Securities and Exchange
Commission and the NYSE. Copies
of the Form 10-K, Code of Ethics
for Certain Executives, and certain
other corporate governance
documents are available, without
charge, by submitting a written
request to Baldor’s Investor
Relations Department. These
documents can also be viewed at
Baldor’s corporate website. Please
refer to the contact information
under “Shareholder Information.”
Ticker
The common stock of Baldor
Electric Company trades on the
New York Stock Exchange (NYSE)
with the ticker symbol BEZ.
Shareholder Information
To request additional copies
of the Annual Report to
Shareholders, or other materials
and information about Baldor
Electric Company, please contact
us at:
Attn: Investor Relations
Baldor Electric Company
P. O. Box 2400
Fort Smith, Arkansas 72902
Phone: (479) 646-4711
Fax: (479) 648-5752
Internet: www.baldor.com
Transfer Agent and Registrar
Continental Stock Transfer &
Trust Company
17 Battery Place - Floor 8
New York, New York 10004
Toll-free: (800) 509-5586
Phone: (212) 509-4000
Fax: (212) 509-5150
Internet:
www.continentalstock.com
This annual report is printed on
recycled paper using soy-based inks.
Board of Directors
John A. McFarland
Chairman and Chief Executive Officer
Jefferson W. Asher, Jr.
Independent Management Consultant
Merlin J. Augustine, Jr.
Assistant Vice Chancellor of Finance and Administration at the
University of Arkansas
Richard E. Jaudes
Partner at Thompson Coburn LLP, Attorneys at Law
Robert J. Messey
Senior Vice President and Chief Financial Officer
of Arch Coal, Inc.
Robert L. Proost
Financial Consultant and Lawyer
Former Corporate Vice President, Chief Financial Officer,
& Director of Administration of A.G. Edwards & Sons, Inc.
R. L. Qualls
Independent Business and Financial Consultant
Director of Bank of the Ozarks, Inc.
Former CEO of Baldor Electric Company
Barry K. Rogstad
Independent Business Consultant
Former President of American Business Conference
The Value Formula
illustrates the importance
of Quality, Service, Cost
and Time in shaping our
customers’ perception
of Value.
Qp x S p
Vp =
CxT
Officers
John A. McFarland
Chairman and Chief Executive Officer
Ronald E. Tucker
President, Chief Financial Officer and Secretary
Randall P. Breaux
Vice President – Marketing
Roger V. Bullock
Vice President – Drives
V = Value
Q = Quality
S = Service
C = Cost
T = Time
p = perceived
Randy L. Colip
Vice President – Sales
Charles H. Cramer
Vice President – Human Resources
Gene J. Hagedorn
Vice President – Materials
Jeffrey R. Hubert
Vice President – Sales
Tracy L. Long
Vice President – Investor Relations and Assistant Secretary
L. Edward Ralston
Vice President – Finance and Treasurer
Ronald W. Thurman
Vice President – Engineering
Randal G. Waltman
Vice President – Operations
Electric Motors, Drives
and Generators
P.O. Box 2400
Fort Smith, Arkansas 72902
www.baldor.com
©2006 Baldor Electric Company

Baldor Annual Report 2005

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