Notes to Consolidated Financial Statements
December 29, 2007
NOTE A SIGNIFICANT ACCOUNTING POLICIES
Line of Business:
The Company operates in one
segment that markets, designs and manufactures industrial electric motors, drives, generators, and other power transmission products, within the power transmission equipment industry
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 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 Companys fiscal year ends on the Saturday nearest to December 31, which results
in a 52-week or 53-week year. Fiscal years 2007, 2006, and 2005 each contained 52 weeks.
Cash Equivalents:
Cash equivalents consist of highly
liquid investments having original maturities of three months or less.
Accounts Receivable:
Trade receivables are recorded in the balance sheets at
the outstanding balance, adjusted for charge-offs and allowance for doubtful accounts. Allowance for doubtful accounts are recorded based on customer-specific analysis, general matters such as current assessments of past due balances 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 and industries. The Company generally does not require that its customers provide
collateral. No single customer represented greater than 10% of net accounts receivable at December 29, 2007, and December 30, 2006. Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 29,
2007
|
|
|
December 30,
2006
|
|
|
December 31,
2005
|
|
Balance at beginning of year
|
|
$
|
1,744
|
|
|
$
|
3,124
|
|
|
$
|
3,308
|
|
Amounts assumed in acquisition
|
|
|
2,715
|
|
|
|
|
|
|
|
|
|
Charges (reductions) to costs and expenses
|
|
|
888
|
|
|
|
(718
|
)
|
|
|
201
|
|
Deductions
|
|
|
(1,221
|
)
|
|
|
(662
|
)
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
4,126
|
|
|
$
|
1,744
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories:
The Company uses the last-in, first-out (LIFO) method of valuing inventories held in the U.S.
An actual LIFO inventories valuation is made only at year-end based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on managements estimates of expected year-end inventory levels and costs which
are subject to the final year-end LIFO inventories valuation. Inventories held at foreign locations are valued using the lower of the first-in, first-out method (FIFO) or market.
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
- 32 -
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 $26.3 million and $25.3 million, net of accumulated amortization, at December 29, 2007, and December 30, 2006, 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 Companys
methods and assumptions used to estimate the fair value of financial instruments include quoted market prices for fixed rate long-term debt. At December 29, 2007, fixed-rate long-term debt having a carrying value of $550.0 million had an
estimated fair value of $567.0 million. The carrying amounts of cash and cash equivalents, receivables, and trade payables approximated fair value at December 29, 2007, and December 30, 2006, due to the short-term maturities of these
instruments.
Self-Insurance Liabilities:
The Companys self-insurance programs primarily cover exposure to product liability, workers
compensation and health insurance. The Company self-insures 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 Companys claims experience and risk exposure levels. Future adjustments to the self-insured liabilities may be required to reflect emerging
claims experience and other factors.
Goodwill and Indefinite-Lived Intangibles:
Goodwill and intangible assets with indefinite useful lives are
tested at least annually in the fourth quarter for impairment and more frequently if indicators of impairment warrant additional analysis. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets
acquired. In order to test for impairment, goodwill acquired is assigned to reporting units that are expected to benefit from the synergies of the related business combination. The Company determines reporting units pursuant to SFAS No. 142.
Goodwill is evaluated for impairment by first comparing managements estimate of the fair value of a reporting unit with its carrying value, including goodwill. 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 units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in the amount of the
excess. Management utilizes a discounted cash flows analysis to determine the estimated fair value of reporting units. Judgments and assumptions related to revenue, gross profit, operating expenses, interest, capital expenditures, cash flows, and
market conditions are inherent in these estimates. Use of alternate judgments and/or assumptions could result in a fair value that differs from this estimate which could ultimately result in the recognition of impairment charges in the financial
statements. The results of the discounted cash flows analysis are then compared to the carrying value of the reporting unit. Management utilizes a relief from royalty methodology to estimate the fair value of indefinite-lived intangibles. If the
carrying value of indefinite-lived intangibles exceeds the estimate fair value of those intangibles, an impairment loss is recognized in the amount of the excess.
Business Combinations:
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values.
Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development and backlog are expensed at the date of acquisition. The judgments
made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, we typically obtain
assistance from third party valuation specialists. The valuations are based on information available near the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management.
- 33 -
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For
intangible assets, we typically use relief from royalty and income methods. This method starts with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate
that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows; the discount
rate selected to measure the risks inherent in the future cash flows; and the assessment of the assets life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers
to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
Long-Lived Assets:
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets, when events or
circumstances warrant such a review. The Company recognizes impairment losses equal to the excess of the carrying value over the estimated fair value of long-lived assets used in operations when indicators of impairment are present and the
undiscounted cash flows expected to be generated by the asset are not sufficient to recover the carrying amount of the asset. Fair value is generally derived using a discounted cash flow model.
Financial Derivatives:
The Company uses derivative financial instruments to reduce its exposure to the risk of increasing commodity prices. Contract terms of the
hedging instrument closely mirror those of the hedged forecasted transaction providing for the hedge relationship to be highly effective both at inception and continuously throughout the term of the hedging relationship. Additionally, the Company
utilizes derivative financial instruments to limit exposure to increasing interest rates on variable rate borrowings. The Company does not regularly engage in speculative transactions, nor does the Company regularly hold or issue financial
instruments for trading purposes.
The Company recognizes all derivatives on the balance sheets at fair value. Derivatives that do not meet the criteria
for hedge accounting are adjusted to fair value through income. If the derivative is designated as a cash flow hedge, changes in the fair value are recognized in accumulated other comprehensive income (loss) until the hedged transaction is
recognized in income. If a hedging instrument is terminated, any unrealized gain (loss) at the date of termination is carried in accumulated other comprehensive income (loss) until the hedged transaction is recognized in income. The ineffective
portion of a derivatives change in fair value is recognized in income in the period of change.
Postretirement Health Plan:
The Company
accounts for its postretirement health plan in accordance with Statement of Financial Accounting Standards No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions (FAS 106) and Statement of
Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (FAS 158). The Company uses
December 31 as a measurement date for its postretirement health plan.
Income Taxes:
Provisions for 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.
- 34 -
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 $34.3 million in 2007, $25.0 million in 2006, and $24.4 million in 2005.
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 $48.6 million in 2007, $29.0 million in 2006, and $25.8 million in 2005.
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. Volume discounts and
rebates are recorded as a reduction of revenue in conjunction with the sale of the related products. Reserves for sales returns and allowances are recorded as a reduction to revenues, based on historical experience and any specifically known
amounts.
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)
|
|
December 29,
2007
|
|
|
December 30,
2006
|
|
Balance at beginning of year
|
|
$
|
5,566
|
|
|
$
|
5,584
|
|
Charges to costs and expenses
|
|
|
11,202
|
|
|
|
5,400
|
|
Amounts assumed in acquisition
|
|
|
3,480
|
|
|
|
|
|
Deductions
|
|
|
(11,032
|
)
|
|
|
(5,418
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,216
|
|
|
$
|
5,566
|
|
|
|
|
|
|
|
|
|
|
Amounts included in selling and administrative costs related to product warranty expense amounted to $11.2 million
in 2007, $5.4 million in 2006, and $5.0 million in 2005.
Foreign Currency Translation:
Assets and liabilities of foreign affiliates are translated
into U.S. dollars at year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the period. Foreign affiliates generally conduct business in their respective local currencies. 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.
Earnings Per Common Share:
Basic earnings per common share is based upon the weighted average number of common shares outstanding. Diluted earnings per common share includes all dilutive common stock
equivalents.
Share-Based Compensation:
The Company has certain share-based compensation plans, which are described in Note L
Stock
Plans
. Beginning in 2006, the Company applies the fair value method, pursuant to Statement of Financial Accounting Standards (FAS) No. 123R Shared-Based Payments, in accounting for these plans. The following table
illustrates the effect on net income and earnings per common share for 2005 as if the Company had applied the fair value recognition provisions of Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and related Interpretations, to options granted under the Companys stock option plans in 2005.
- 35 -
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2005
|
|
Net income, as reported
|
|
$
|
|
|
|
43,021
|
|
Add:
|
|
Stock-based compensation expense included in reported net income, net of tax effects, including options issued at a discount
|
|
|
|
|
|
831
|
|
Less:
|
|
Stock-based compensation expense determined under fair value method, net of related tax effects
|
|
|
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
|
|
|
42,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Reported
|
|
$
|
1.30
|
|
$
|
1.28
|
|
Pro forma
|
|
$
|
1.27
|
|
$
|
1.25
|
|
NOTE B ACQUISITION
On January 31, 2007, Baldor completed the acquisition of all of the equity of Reliance Electric (Reliance) from Rockwell Automation, Inc. and certain of its affiliates (Rockwell). Reliance
is a leading manufacturer of industrial electric motors and other power transmission products. The acquisition extends Baldors product offerings, provides a manufacturing base in China for the Asian markets, increases the Companys
manufacturing capabilities and flexibility, strengthens the management team, and provides strong opportunities for synergies and cost savings. The purchase price was $1.83 billion, consisting of $1.78 billion in cash and 1.58 million shares of
Baldor common stock valued at $50.93 million, based on the average closing price per share of Baldors common stock on the New York Stock Exchange for the three days preceding and the three days subsequent to November 6, 2006, the date of
the definitive purchase agreement. The cash portion of the purchase price was funded with proceeds from the issuance of 10,294,118 shares of Baldor common stock at a price of $34.00 per common share, proceeds from the issuance of $550.0 million of
8.625% senior notes due 2017, and borrowings of $1.00 billion under a new $1.20 billion senior secured credit facility. In conjunction with an over-allotment option in the common stock offering, 1,430,882 additional common shares were issued at a
price of $34.00 per share. Proceeds from the over-allotment offering of approximately $46.5 million were utilized to reduce borrowings under the senior secured credit facility. Reliances results of operations are included in the consolidated
financial statements beginning February 1, 2007.
The excess of the purchase price over the estimated fair values of assets acquired and liabilities
assumed is assigned to goodwill. During the fourth quarter of 2007, goodwill was reduced by $7.4 million related to final adjustments of initial asset valuations. The following table summarizes the fair values of assets acquired and liabilities
assumed at the date of acquisition.
- 36 -
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Current assets
|
|
|
|
|
$
|
378,244
|
Property, plant and equipment
|
|
|
|
|
|
265,147
|
Intangible assets not subject to amortization trade names
|
|
|
|
|
|
354,800
|
In process research and development and backlog
|
|
|
|
|
|
1,700
|
Intangible assets subject to amortization
(twenty-six year weighted-average useful life):
|
|
|
|
|
|
|
Customer relationships
(thirty year weighted-average useful life)
|
|
$
|
292,000
|
|
|
|
Technology
(twelve year weighted-average useful life)
|
|
|
32,000
|
|
|
324,000
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
3,243
|
Goodwill
|
|
|
|
|
|
984,276
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
2,311,410
|
|
|
|
Current liabilities
|
|
|
|
|
|
110,831
|
Other liabilities
|
|
|
|
|
|
77,714
|
Deferred income taxes
|
|
|
|
|
|
292,096
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
|
|
|
480,641
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
$
|
1,830,769
|
|
|
|
|
|
|
|
In process research and development amounting to $1.0 million and backlog amounting to $0.7 million were expensed
as of the acquisition date and included in cost of goods sold in 2007.
Included in current assets acquired are long-lived assets amounting to $10.4
million, classified as held for sale, related to certain electric motor service centers. In June 2007, the Company sold these electric motor service centers for cash amounting to $49.9 million resulting in no gain. The related assets and results of
operations were not material to the Companys financial statements.
The Company executed a plan to exit the Madison, Indiana production facility,
which was included in the acquisition. Costs included post-exit lease costs, inventory obsolescence, and involuntary employee termination costs. A liability of $7.2 million was accrued and classified in other current liabilities in the opening
balance sheet. Exit costs amounting to $7.0 million have been paid and charged against the liability. The Company expects the remainder of the liability to be paid during the first quarter of 2008.
The table below presents summarized unaudited pro forma results of operations as if the acquisition had been effective at the beginning of the fiscal years ended
December 29, 2007, and December 30, 2006.
|
|
|
|
|
|
|
(in millions, except for per share data)
|
|
2007
|
|
2006
|
Net sales
|
|
$
|
1,919.0
|
|
$
|
1,861.9
|
Income before income taxes
|
|
|
151.3
|
|
|
112.6
|
Net income
|
|
|
96.7
|
|
|
70.9
|
|
|
|
Net earnings per common share - diluted
|
|
$
|
2.09
|
|
$
|
1.53
|
- 37 -
NOTE C MARKETABLE SECURITIES
The following table presents the estimated fair value of investments by category:
|
|
|
|
|
|
|
(In thousands)
|
|
December 29,
2007
|
|
December 30,
2006
|
Municipal debt securities
|
|
$
|
|
|
$
|
12,147
|
U.S. corporate debt securities
|
|
|
|
|
|
1,289
|
U.S. Treasury & agency securities
|
|
|
|
|
|
9,599
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
23,035
|
|
|
|
|
|
|
|
At December 30, 2006, the marketable securities portfolio had unrealized losses totaling $598,000. In
conjunction with the acquisition of Reliance, all of the marketable securities held by the Company were sold in January 2007 and the related losses were realized. Accordingly, the Company determined that unrealized loss positions existing at
December 30, 2006, were other than temporary and an impairment loss of $598,000 was recognized in fiscal year ended December 30, 2006.
NOTE
D FINANCIAL DERIVATIVES
The Company had derivative contracts related to cash flow hedges, with a negative fair value of $376,775
and $2.1 million recorded in other accrued expenses at December 29, 2007, and December 30, 2006, respectively.
The amount recognized in cost of
sales on cash flow hedges amounted to reductions of approximately $1.3 million and $21.0 million in 2007 and 2006, respectively. The Company expects that after-tax losses, totaling approximately $230,000 recorded in accumulated other comprehensive
loss at December 29, 2007, 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.
During 2007, the Company entered into interest rate swaps and collars that are designated as cash flow hedges related to variable rate long-term obligations. The
notional amount is $350.0 million and matures on April 30, 2012. These instruments had a fair value loss of $11.5 million recorded in other liabilities at December 29, 2007. Unrealized after-tax losses of $7.0 million are recorded in
accumulated other comprehensive loss at December 29, 2007.
NOTE E GOODWILL AND OTHER INTANGIBLE ASSETS
The amount of goodwill at December 29, 2007, and December 30, 2006, is as follows:
|
|
|
|
|
(In millions)
|
|
2007
|
|
Balance at December 30, 2006
|
|
$
|
63
|
|
Acquisition
|
|
|
984
|
|
Divestiture of service centers
|
|
|
(23
|
)
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
1,024
|
|
|
|
|
|
|
- 38 -
The amount of other intangible assets by type at December 29, 2007, and December 30, 2006, are as follows:
|
|
|
|
|
(In millions)
|
|
2007
|
|
Gross carrying value:
|
|
|
|
|
Trademarks
|
|
$
|
355
|
|
Customer relationships
|
|
|
292
|
|
Technology
|
|
|
32
|
|
Less accumulated amortization:
|
|
|
|
|
Customer relationships
|
|
|
(9
|
)
|
Technology
|
|
|
(3
|
)
|
|
|
|
|
|
Total intangible assets
|
|
$
|
667
|
|
|
|
|
|
|
Other intangible assets resulted from the acquisition of Reliance on January 31, 2007. Amortization expense
on customer relationships and technology of $9.0 million and $3.0 million, respectively, was recognized during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Estimated amortization expense of intangible assets
|
|
$
|
15.7
|
|
$
|
16.0
|
|
$
|
16.2
|
|
$
|
16.5
|
|
$
|
15.9
|
Intangibles are amortized over their estimated period of benefit of five to 30 years, beginning with the date the
benefits from intangible items are realized.
NOTE F INCOME TAXES
The Company made income tax payments of $44.6 million in 2007, $25.9 million in 2006, and $22.8 million in 2005. Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
2005
|
Current:
|
|
Federal
|
|
$
|
41,918
|
|
|
$
|
23,714
|
|
$
|
16,925
|
|
|
State
|
|
|
8,608
|
|
|
|
1,646
|
|
|
3,651
|
|
|
Foreign
|
|
|
5,048
|
|
|
|
912
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,574
|
|
|
|
26,272
|
|
|
20,923
|
Deferred:
|
|
Federal
|
|
|
(2,316
|
)
|
|
|
602
|
|
|
2,675
|
|
|
State
|
|
|
(197
|
)
|
|
|
728
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,513
|
)
|
|
|
1,330
|
|
|
3,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,061
|
|
|
$
|
27,602
|
|
$
|
24,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
- 39 -
The principal components of deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 29,
2007
|
|
|
December 30,
2006
|
|
Accrued liabilities
|
|
$
|
8,768
|
|
|
$
|
2,916
|
|
Bad debt reserves
|
|
|
880
|
|
|
|
472
|
|
Foreign net operating losses
|
|
|
1,526
|
|
|
|
1,005
|
|
Employee compensation and benefits
|
|
|
5,987
|
|
|
|
461
|
|
Post retirement benefits
|
|
|
20,159
|
|
|
|
|
|
Derivative unrealized losses
|
|
|
4,624
|
|
|
|
827
|
|
Securities valuation
|
|
|
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
41,944
|
|
|
|
5,914
|
|
|
|
|
Property, plant, equipment and intangibles
|
|
|
(351,685
|
)
|
|
|
(31,215
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(351,685
|
)
|
|
|
(31,215
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(309,741
|
)
|
|
$
|
(25,301
|
)
|
|
|
|
|
|
|
|
|
|
The Company has accumulated but undistributed earnings of foreign subsidiaries aggregating approximately $26.9
million at December 29, 2007, that are expected to be indefinitely 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.
The following table reconciles the difference between the Companys effective income tax rate and the federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
3.7
|
%
|
|
3.7
|
%
|
|
4.2
|
%
|
Other
|
|
(2.6
|
)%
|
|
(2.2
|
)%
|
|
(3.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
36.1
|
%
|
|
36.5
|
%
|
|
36.1
|
%
|
|
|
|
|
|
|
|
|
|
|
The Company adjusted certain income tax liabilities during 2006 and 2005 to reflect current exposure. These
adjustments amounted to approximately $474,000 in 2006 and $403,000 in 2005 and accounted for the reduction in effective income tax rate for each year, respectively. The adjustments are included in Other in the above reconciliation.
Effective January 1, 2007, the Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48),
which provides a comprehensive model for the recognition, measurement and disclosure in financial statements of uncertain income tax positions a company has taken or expects to take on a tax return. As a result of the adoption of FIN 48, the Company
determined no additional reserves for uncertain tax positions were required. The Company considered the provisions of FIN 48 in the purchase price allocation for Reliance (see Note B) and recorded a gross liability of $802,000: $481,000 in taxes and
$321,000 in interest and penalties. The uncertain tax positions relate to state tax filing positions taken prior to the acquisition of Reliance. The Company recognizes interest and penalties related to uncertain tax positions as interest costs and
selling and administrative costs, respectively. Total interest and penalties recognized in expense amount to $183,000 in 2007. The balance of the liability amounted to approximately $530,000 at December 29, 2007.
- 40 -
The following table summarizes the activity related to the unrecognized tax benefits:
|
|
|
|
|
Balance at December 30, 2006
|
|
$
|
|
|
Additions as a result of the acquisition
|
|
|
802,000
|
|
Additions during the year, related to positions taken in prior years
|
|
|
454,500
|
|
Settlements
|
|
|
(432,400
|
)
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
824,100
|
|
|
|
|
|
|
Total unrecognized tax benefits, if recognized, would affect the effective tax rate. Tax years 2005 and forward
remain subject to federal examination while tax years 2004 and forward generally remain subject to examination by most state tax authorities.
NOTE
G NOTE PAYABLE
The Companys wholly-owned Chinese subsidiary entered into a short-term note payable amounting to $12.3
million during the fourth quarter of 2007 to fund a non-taxable dividend to the Company. Proceeds from the note payable were utilized by the Company to make principal payments on the term loan under the Companys senior secured credit facility.
The note payable bears interest at a fixed rate, and matures April 2008.
NOTE H LONG-TERM OBLIGATIONS
Senior Secured Term and Revolving Credit Facility
Interest on the
term loan is due periodically based upon a variable adjusted London Inter-Bank Offered Rate (LIBOR). Quarterly principal payments of $2.0 million are due beginning January 31, 2008, and continue through January 31, 2013, at
which date subsequent quarterly principal payments increase to $188.5 million through the loan due date of January 31, 2014, when the remaining balance is due.
Additional principal payments may be due based upon a prescribed annual excess cash flow calculation until such time as a prescribed total leverage ratio is achieved. There were no additional payments due based on the
Companys calculations for the fiscal year ended December 29, 2007. Additional principal payments may also be due based upon the net available proceeds from the disposition of assets, a casualty event, an equity issuance or incurrence of
additional debt.
This loan agreement limits and restricts certain dividend and capital expenditure payments, establishes maximum total leverage and senior
secured leverage ratios, and requires the Company maintain a fixed charge ratio. These restrictions and ratios were all met as of December 29, 2007.
The revolving credit (RC) agreement provides for aggregate borrowings of up to $200.0 million, including a swingline loan commitment not to exceed $20.0 million and letter of credit (LC) commitment not to exceed
$30.0 million, and contains minimum borrowing thresholds for each type of borrowing. There were no outstanding revolving credit borrowings or swingline loans at December 29, 2007. A RC commitment fee is due quarterly at the annual rate of
0.375% on the unused amount of the RC commitment. At December 29, 2007, $26.7 million of LCs were issued which reduces the aggregate LC and RC availability. LC participation fees of 1.75% and fronting fees of 0.125% per annum on
unissued LCs are due quarterly based upon the aggregate amount of LCs issued and available for issuance, respectively. Interest on any RC borrowings would be 1.75% plus LIBOR (5.131% at December 29, 2007) or lenders prime rate
(7.25% at December 29, 2007) plus 1.25% per annum.
- 41 -
The senior secured credit facility is collateralized by substantially all of the Companys assets.
Senior Unsecured Notes
The senior unsecured notes are general
unsecured obligations of the Company, subordinated to the senior secured credit facility described above and mature February 15, 2017. Interest is at a fixed rate and is payable semi-annually in arrears on February 15 and August 15
commencing August 15, 2007.
At any time prior to February 15, 2010, the Company may redeem up to 35.0% of the aggregate principal amount of the
notes at a redemption price of 108.625% of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings with certain restrictions. At any time prior to February 15,
2012, the Company may redeem all or a part of the notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) the applicable premium as defined in the agreement as of the date of redemption, plus
(iii) accrued and unpaid interest to the redemption date. On or after February 15, 2012, the Company may redeem all or a part of the notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued
and unpaid interest on the notes redeemed to the applicable redemption date.
|
|
|
|
Year
|
|
Percentage
|
|
2012
|
|
104.313
|
%
|
2013
|
|
102.875
|
%
|
2014
|
|
101.438
|
%
|
2015 and thereafter
|
|
100.000
|
%
|
The indenture agreement contains certain restrictions and requirements including restrictions and requirements
regarding mergers, consolidation or sale of assets, certain payments, the incurrence of indebtedness and liens, and issuance of preferred stock, and note holder options if a change of control occurs. These notes are also subject to the term and
revolving credit loans maximum total leverage and fixed charges ratios.
Current Long-term Obligations
Long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
($ In thousands)
|
|
Interest Rate
at
December 29,
2007
|
|
|
December 29,
2007
|
|
December 30,
2006
|
Industrial Development Bonds:
|
|
|
|
|
|
|
|
|
|
Due in 2013, variable interest rate
|
|
3.540
|
%
|
|
$
|
2,025
|
|
$
|
2,025
|
Notes payable to banks:
|
|
|
|
|
|
|
|
|
|
Term loan, variable interest rate
|
|
7.046
|
%
|
|
|
812,000
|
|
|
|
Due October 25, 2009, variable interest rate
|
|
|
|
|
|
|
|
|
25,000
|
Due September 30, 2009, fixed interest rate
|
|
|
|
|
|
|
|
|
15,000
|
Due January 31, 2008, variable interest rate
|
|
|
|
|
|
|
|
|
43,000
|
Due April 15, 2008, variable interest rate
|
|
|
|
|
|
|
|
|
12,000
|
Senior unsecured notes, fixed interest rate
|
|
8.625
|
%
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,364,025
|
|
|
97,025
|
Less current maturities
|
|
|
|
|
|
8,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,355,905
|
|
$
|
97,025
|
|
|
|
|
|
|
|
|
|
|
- 42 -
Maturities of long-term obligations are as follows: 2008 $8.1 million; 2009 $8.1 million; 2010 $8.1
million; 2011 $8.1 million; 2012 $8.1 million; and thereafter $1.32 billion.
Interest paid was $76.4 million in 2007, $5.9 million in 2006,
and $3.8 million in 2005.
On January 31, 2007, the Company refinanced all of its then existing bank debt with the senior secured credit facility and
senior unsecured notes in connection with the acquisition of Reliance.
NOTE I COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain computers,
buildings, and other equipment under operating lease agreements. Related rental expense was $11.4 million in 2007, $4.0 million in 2006, and $5.2 million in 2005. Future minimum payments for operating leases having non-cancelable lease terms in
excess of one year are: 2008 $12.1 million; 2009 $10.2 million; 2010 $9.0 million; 2011 $5.8 million; 2012 $4.6 million; and thereafter $25.9 million.
On July 21, 2005, the Company entered into a five-year operating lease agreement on a new manufacturing facility in Columbus, Mississippi. At the end of the initial
five-year lease term, the Company has the option to extend the lease for up to two successive five-year periods under terms similar to the terms of the original lease or purchase the property at a stated amount that approximates the fair value of
the property. The Company has annual operating lease commitments of $1.2 million related to the lease. 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 $13.6 million should the property become worthless by the end of the lease term. In accordance with Financial Interpretation
(FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
, the Company has recorded a liability of $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.
The Company leases certain manufacturing facilities under operating leases entered into by Reliance in a November 2005 sale-leaseback transaction. Reliance retained rights to reacquire land adjacent to three of the
properties included in the transaction. As a result, no sale was recorded on these three properties and the assets continue to be carried in Property, Plant and Equipment on the Companys balance sheet at a net book value of $8.1 million as of
December 29, 2007. Proceeds of $18.7 million from the sale-leaseback transaction are recorded as a deferral in Other Liabilities at December 29, 2007. Operating lease payments of $1.4 million per year related to these properties are
included in future minimum lease payments.
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 Companys financial position, results of operations, or cash flows.
Prior to the Companys acquisition of Reliance,
Rockwell determined actions by a small number of employees at certain of Reliances operations in one jurisdiction may have violated the Foreign Corrupt Practices Act (FCPA) or other applicable laws. Reliance does business in this
jurisdiction with government owned enterprises or government owned enterprises evolving to commercial businesses. These actions involved payments for non-business travel expenses
- 43 -
and certain other business arrangements involving potentially improper payment mechanisms for legitimate business expenses. Special outside counsel has been
engaged by Rockwell to investigate the actions. Their review is ongoing. Rockwell voluntarily disclosed these actions to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) beginning in
September 2006. Rockwell has agreed to update the DOJ and SEC periodically regarding any further developments as the investigation continues. If violations of the FCPA occurred, Rockwell and Reliance may be subject to consequences that could include
fines, penalties, other costs and business-related impacts. Rockwell and Reliance could also face similar consequences from local authorities. The Company has been indemnified by Rockwell against government penalties arising from these potential
violations. This indemnification covers only penalties and may not cover expenses incurred by the Company for future compliance.
Prior to the
Companys acquisition of Reliance, potential violations of the U.S. Arms Export Control Act and the International Traffic in Arms Regulations (ITAR) were identified. Reliance voluntarily disclosed these potential violations to
the U.S. Office of Defense Trade Controls Compliance. The potential violations involved exports without proper licensure from the U.S. Department of State of certain vessel motors that were built to U.S. Navy specifications. Based on an initial
review, the exports were primarily to Canada and Australia and small quantities were also exported to the United Kingdom and the Federal Republic of Germany. Reliance has notified the U.S. Office of Defense Trade Controls Compliance that it has
established a procedure to ensure it seeks State Department licenses for future exports of vessel motors adapted to meet U.S. Navy performance characteristics. Reliance also has notified the U.S. Office of Defense Trade Controls Compliance that it
has undertaken a review of its export compliance program to ensure that all ITAR requirements are met in the future. If violations of ITAR occurred, the Company may be subject to consequences that could include fines, penalties, other costs, loss of
ability to do business with the U.S. government and other business-related impacts. However, such fines, penalties or costs, if any, are not expected to have a material impact on the Companys financial position.
NOTE J 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 Companys 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 Companys outstanding common stock and in certain events thereafter.
Share Repurchases
During 2006, the Company repurchased approximately 1.2 million shares for $38.5 million,
including approximately 1.0 million shares from the estate of R. S. Boreham, Jr., former Chairman and Director of the Company, for $31.1 million. During 2005, the Company repurchased approximately 300,000 shares of its common stock for $7.6
million. Future repurchases are limited under terms of the Companys senior secured credit facility.
- 44 -
Accumulated Other Comprehensive Income (Loss)
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in shareholders equity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains
(Losses) on
|
|
|
Post
Retirement
Plan
Adjustment
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
(In thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
|
|
Balance at January 1, 2005
|
|
$
|
(121
|
)
|
|
$
|
1,616
|
|
|
$
|
|
|
|
$
|
(445
|
)
|
|
$
|
1,050
|
|
Net change 2005
|
|
|
(418
|
)
|
|
|
(1,044
|
)
|
|
|
|
|
|
|
(1,978
|
)
|
|
|
(3,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
(539
|
)
|
|
|
572
|
|
|
|
|
|
|
|
(2,423
|
)
|
|
|
(2,390
|
)
|
Net change 2006
|
|
|
539
|
|
|
|
(1,865
|
)
|
|
|
|
|
|
|
2,789
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
|
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
366
|
|
|
|
(927
|
)
|
Net change 2007
|
|
|
|
|
|
|
(5,940
|
)
|
|
|
(1,471
|
)
|
|
|
8,311
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
|
|
|
$
|
(7,233
|
)
|
|
$
|
(1,471
|
)
|
|
$
|
8,677
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE K PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
As a result of the acquisition of Reliance, the Company assumed defined benefit pension and postretirement benefit plans covering certain union employees and retirees.
Estimated liabilities amounting to approximately $49.4 million are included in other liabilities on the balance sheet.
The following table provides a
reconciliation of the changes in the plans benefit obligations, assets and funded status at December 29, 2007:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Change in benefit obligation
:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Acquisition
|
|
|
|
|
|
|
52,057
|
|
Service cost
|
|
|
291
|
|
|
|
152
|
|
Interest cost
|
|
|
|
|
|
|
2,674
|
|
Actuarial (gain) loss
|
|
|
|
|
|
|
2,330
|
|
Benefits paid
|
|
|
|
|
|
|
(6,490
|
)
|
Divestiture
|
|
|
(27
|
)
|
|
|
(1,628
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
264
|
|
|
|
49,095
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
|
6,490
|
|
Benefits paid
|
|
|
|
|
|
|
(6,490
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(264
|
)
|
|
$
|
(49,095
|
)
|
|
|
|
|
|
|
|
|
|
- 45 -
Amounts recognized in the Consolidated Balance Sheets at year ending December 29, 2007, consist of:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Accrued benefit liability
|
|
$
|
(264
|
)
|
|
$
|
(49,095
|
)
|
Accumulated other comprehensive loss (pretax)
|
|
|
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(264
|
)
|
|
$
|
(46,765
|
)
|
|
|
|
|
|
|
|
|
|
The Company does not expect any of the unrecognized loss to be amortized in 2008.
Net Periodic Benefit Cost
Components of net periodic benefit cost
for pension and postretirement benefit plans recognized in the Consolidated Statements of Income for the year ended December 29, 2007, are as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
Service cost
|
|
$
|
291
|
|
$
|
152
|
Interest cost
|
|
|
|
|
|
2,674
|
Expected return on assets
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
291
|
|
$
|
2,826
|
|
|
|
|
|
|
|
Assumptions
Weighted average assumptions are as follows:
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Discount rate to determine net periodic benefit cost
|
|
6.00
|
%
|
|
6.00
|
%
|
Discount rate to determine benefit obligations
|
|
6.25
|
%
|
|
6.25
|
%
|
Medical trend current year
|
|
N/A
|
|
|
9.00
|
%
|
Medical trend ultimate year 2012
|
|
N/A
|
|
|
5.50
|
%
|
A one-percentage point change in assumed healthcare cost trend rate would impact the postretirement benefit
obligation and total service and interest cost by approximately $4.0 million and $250,000, respectively.
Contributions
The Companys policy is to fund at least the minimum contribution required to meet applicable employee benefit tax laws. In the Companys sole discretion,
additional amounts may be funded from time to time. The Company currently expects to make no contributions to the pension plan in 2008 and expects to make contributions of approximately $5 million to the postretirement plan in 2008.
- 46 -
Estimated Future Benefit Payments
The following is a summary of expected future benefit payments:
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
2008
|
|
$
|
5
|
|
$
|
5,183
|
2009
|
|
|
11
|
|
|
4,988
|
2010
|
|
|
20
|
|
|
4,756
|
2011
|
|
|
31
|
|
|
4,543
|
2012
|
|
|
43
|
|
|
4,333
|
2013-2017
|
|
|
417
|
|
|
18,969
|
NOTE L STOCK PLANS
The 2006 Equity Incentive Plan authorizes the Companys Board of Directors to grant: (1) stock appreciation rights, (b) restricted stock, (c) performance awards, (d) incentive stock options,
(e) nonqualified stock options, and (f) stock units. When the 2006 Plan was adopted, the Companys other stock plans were effectively cancelled and no further awards will be granted from those plans. The 2006 Plan is the only Plan
under which awards can now be granted. A summary of the Companys stock plans as of December 29, 2007, follows.
|
|
|
|
|
|
|
Plan
|
|
Shares
Authorized
|
|
Current Plan Status
|
|
Typical
Grant Life
|
1990
|
|
501,600
|
|
Cancelled in 2006; except for options outstanding
|
|
6 years
|
1994
|
|
4,000,000
|
|
Cancelled in 2006; except for options outstanding
|
|
10 years
|
1996
|
|
200,000
|
|
Expired in 2001; except for options outstanding
|
|
10 years
|
2001
|
|
200,000
|
|
Cancelled in 2006; except for options outstanding
|
|
10 years
|
2006
|
|
3,000,000
|
|
Active
|
|
10 years
|
1990 Plan
: Only non-qualified options were granted from this Plan. Options vest and become 50% exercisable
at the end of one year and 100% exercisable at the end of two years. All outstanding stock options granted under this Plan are currently exercisable.
1994 Plan
: Incentive stock options vested and became fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapsed after a period
of five years or earlier under certain circumstances. All outstanding non-qualified stock options granted under this Plan are currently exercisable. All incentive stock options granted under this Plan continue to vest according to the terms of the
applicable agreements.
1996 and 2001 Plans
: Each non-employee director was granted an annual grant consisting of non-qualified stock options to
purchase: (1) 3,240 shares at a price equal to the market value at date of grant, and (2) 2,160 shares at a price equal to 50% of the market value at date of grant. These options immediately vested and became exercisable on the date of
grant.
2006 Plan
: Awards granted under the 2006 Plan included: incentive stock options, non-qualified stock options, and non-vested stock units.
Non-vested stock units were awarded with no exercise price. Other awards permitted under this Plan include: stock appreciation rights, restricted stock, and performance awards; however, no such awards have been granted.
The purpose of granting stock options and non-vested stock units is to encourage ownership in the Company. This provides an incentive for the participants to contribute
to the success of the
- 47 -
Company and align the interests of the participants with the interests of the shareholders of the Company. Historically, the Company has used newly-issued
shares to fulfill stock option exercises. Once options are granted, the Companys policy is to not re-price any outstanding options.
A summary of
option activity under the Plans during 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year ended December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2006
|
|
2,003,976
|
|
|
$
|
23.89
|
|
|
|
|
|
Granted
|
|
827,007
|
|
|
|
44.58
|
|
|
|
|
|
Exercised
|
|
(348,862
|
)
|
|
|
20.75
|
|
|
|
|
|
Expired
|
|
(6,245
|
)
|
|
|
22.26
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(63,476
|
)
|
|
|
34.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
2,412,400
|
|
|
|
31.16
|
|
6.9 years
|
|
$
|
16,097
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
at December 29, 2007
|
|
2,318,046
|
|
|
|
30.48
|
|
6.7 years
|
|
$
|
16,073
|
Exercisable at December 29, 2007
|
|
1,164,983
|
|
|
|
23.09
|
|
4.9 years
|
|
$
|
14,374
|
The weighted-average grant-date fair value of options granted was $13.62 in 2007, $11.66 in 2006, and $7.73 in
2005. The total intrinsic value of options exercised was $4.8 million during 2007, $9.8 million during 2006, and $3.8 million during 2005.
As of
December 29, 2007, there was $6.3 million of total unrecognized compensation cost related to non-vested options granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.2 years.
A summary of non-vested stock unit activity under the Plans during 2007 is presented below:
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 29,
2007
|
Non-vested Stock Units
|
|
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Non-vested at beginning of period
|
|
59,119
|
|
|
$
|
32.42
|
Granted
|
|
61,016
|
|
|
|
39.72
|
Vested
|
|
(9,253
|
)
|
|
|
33.27
|
Cancelled
|
|
(2,961
|
)
|
|
|
35.47
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at ending of period
|
|
107,921
|
|
|
|
36.35
|
|
|
|
|
|
|
|
The total fair value of stock units that vested during 2007 and 2006 was $308,000 and $416,000, respectively.
As of December 29, 2007, there was $1.6 million of total unrecognized compensation cost related to non-vested stock units granted under the Plans.
That cost is expected to be recognized over a weighted-average period of 1.1 years.
- 48 -
On April 21, 2006, the Company modified certain stock options that were originally granted during the years 2000
through 2005 with an exercise price less than the fair market value of the stock on the original grant date. This modification affected 45 employees. The unexercised options were modified as follows:
|
a)
|
the exercise price of the remaining options was increased to equal the fair market price at date of the original grant;
|
|
b)
|
2/3 of the original discount was replaced by non-vested stock units valued at fair market price at April 21, 2006, and vesting over a one to four-year time period from the 2006
grant date; and
|
|
c)
|
1/3 of the original discount was replaced by cash that vested immediately, but is payable to the employee over the same one to four-year time period as the non-vested stock units.
|
The remaining incremental compensation cost to be recognized over the remaining 1 to 25-month time period as a result of these modifications
totaled $250,000.
The fair value of options is estimated using a Black-Scholes option pricing formula and is amortized to expense over the options
applicable vesting periods. The variables used in the option pricing formula for each grant are determined at the time of grant as follows: (1) volatility is based on the daily composite closing price of Baldors stock over a look-back
period of time that approximates the expected option life; (2) risk-free interest rates are based on the yield of U.S. Treasury Strips as published in the
Wall Street Journal
or provided by a third-party on the date of the grant for the
expected option life; (3) dividend yields are based on the Companys dividend yield published in the
Wall Street Journal
or provided by a third-party on the date of the grant; and (4) expected option life represents the period
of time the options are expected to be outstanding and is estimated based on historical experience. Listed in the table below are the weighted-average assumptions and the weighted-average remaining contractual life for those options granted in the
period indicated.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 29,
2007
|
|
|
December 30,
2006
|
|
|
December 31,
2005
|
|
|
|
Reported
|
|
|
Reported
|
|
|
Pro Forma
|
|
Volatility
|
|
25.2
|
%
|
|
23.0
|
%
|
|
1.0
|
%
|
Risk-free interest rates
|
|
5.1
|
%
|
|
4.9
|
%
|
|
3.8
|
%
|
Dividend yields
|
|
1.5
|
%
|
|
1.9
|
%
|
|
2.2
|
%
|
Expected option life
|
|
6.4 years
|
|
|
6.0 years
|
|
|
5.2 years
|
|
NOTE M EARNINGS PER SHARE
The table below details earnings per common share for the years indicated:
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
94,102
|
|
$
|
48,118
|
|
$
|
43,021
|
|
|
|
|
|
|
|
|
|
|
Denominator Reconciliation:
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic
|
|
|
44,674
|
|
|
32,529
|
|
|
33,170
|
Effect of dilutive securities Stock options and non-vested stock units
|
|
|
568
|
|
|
425
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted
|
|
|
45,242
|
|
|
32,954
|
|
|
33,728
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic
|
|
$
|
2.11
|
|
$
|
1.48
|
|
$
|
1.30
|
Earnings per common share diluted
|
|
$
|
2.08
|
|
$
|
1.46
|
|
$
|
1.28
|
- 49 -
The total number of anti-dilutive securities excluded from the above calculations was 439,816 at December 29, 2007,
and 190,941 at December 30, 2006, and 452,100 at December 31, 2005.
NOTE N FOREIGN OPERATIONS
The Companys foreign operations include both export sales and the results of its foreign subsidiaries in Canada, Europe, Australia, Far East, and Mexico.
Consolidated sales, income before income taxes, and identifiable assets consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
2006
|
|
2005
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
United States Companies
|
|
|
|
|
|
|
|
|
|
Domestic customers
|
|
$
|
1,509,586
|
|
$
|
698,717
|
|
$
|
618,476
|
Export customers
|
|
|
122,642
|
|
|
61,598
|
|
|
54,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,632,228
|
|
|
760,315
|
|
|
672,786
|
Foreign Affiliates
|
|
|
192,671
|
|
|
50,965
|
|
|
48,783
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,824,899
|
|
$
|
811,280
|
|
$
|
721,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes:
|
|
|
|
|
|
|
|
|
|
United States Companies
|
|
$
|
124,982
|
|
$
|
73,100
|
|
$
|
65,459
|
Foreign Affiliates
|
|
|
22,181
|
|
|
2,620
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
147,163
|
|
$
|
75,720
|
|
$
|
67,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
United States Companies
|
|
$
|
2,699,104
|
|
$
|
497,960
|
|
$
|
486,396
|
Foreign Affiliates
|
|
|
122,522
|
|
|
26,022
|
|
|
20,809
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,821,626
|
|
$
|
523,982
|
|
$
|
507,205
|
|
|
|
|
|
|
|
|
|
|
NOTE O SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
(In thousands, except per share data)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2007:
|
|
Net sales
|
|
$
|
395,694
|
|
$
|
491,615
|
|
$
|
480,595
|
|
$
|
456,995
|
|
|
Gross profit
|
|
|
112,562
|
|
|
148,584
|
|
|
144,387
|
|
|
139,114
|
|
|
Net income
|
|
|
20,869
|
|
|
25,212
|
|
|
24,645
|
|
|
23,377
|
|
|
Net earnings per common share basic
|
|
|
0.51
|
|
|
0.55
|
|
|
0.54
|
|
|
0.51
|
|
|
Net earnings per common share diluted
|
|
|
0.50
|
|
|
0.54
|
|
|
0.53
|
|
|
0.51
|
|
|
|
|
|
|
2006:
|
|
Net sales
|
|
$
|
192,314
|
|
$
|
205,607
|
|
$
|
212,905
|
|
$
|
200,454
|
|
|
Gross profit
|
|
|
52,612
|
|
|
53,452
|
|
|
54,587
|
|
|
53,402
|
|
|
Net income
|
|
|
11,367
|
|
|
12,397
|
|
|
12,182
|
|
|
12,172
|
|
|
Net earnings per common share basic
|
|
|
0.34
|
|
|
0.38
|
|
|
0.38
|
|
|
0.38
|
|
|
Net earnings per common share diluted
|
|
|
0.34
|
|
|
0.38
|
|
|
0.37
|
|
|
0.37
|
NOTE P RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued FAS 157, Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value in
accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. The Company is
required to adopt FAS 157 effective December 30, 2008, and management does not expect FAS 157 to have a significant impact on the financial results.
- 50 -
In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115. FAS 159 permits entities to choose to measure certain financial instruments and certain other items at fair value, and expands the use of fair value measurement in order to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is
effective beginning in 2008 and management has determined that FAS 159 will have no impact on the financial results.
In December 2007, the FASB issued FAS
141 (Revised 2007),
Business Combinations
(FAS 141R), effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. FAS 141R establishes principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill
or gain from a bargain purchase and accounting for transaction costs. Additionally, FAS 141R determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. The Company will adopt FAS 141R upon its effective date as appropriate for any future business combinations.
NOTE
Q SUBSEQUENT EVENT (Unaudited)
In February 2008, the Company began executing a plan to sell real property in Crossville,
Tennessee. The facility houses a distribution center and had a carrying value of $22.5 million recorded in property, plant and equipment at December 29, 2007. The property will be classified as held for sale beginning February 2008. The
estimated fair value, net of expected costs to sell, exceeds the carrying value.