Baldor Electric Co. Rides Out Downturn

Baldor Electric Co. has gained a reputation for doing a mean impersonation of the American economy. The performance of the Fort Smith motor manufacturer has become a reliable gauge of the performance of America’s industrial sector.

John McFarland, Baldor’s chief executive officer, reports the company is holding its own while riding out the economic downturn.

“We haven’t lost any customers, but they’re not ordering as many motors because they’re not producing as much equipment,” McFarland said. “We thought we were through the worst part of it and were looking for things to get better next year.

“I’m less certain of that now [following the Sept. 11 terrorist attacks] but still expect things to improve.”

Baldor’s earnings apparently won’t improve before the end of the third quarter. On Sept. 25, the company issued a stern warning that earnings would be lower than previously expected.

According to its Securities Exchange Commission filings, Baldor now expects 15- to 17-cents per share earnings for the third quarter compared with the 20- to 22-cents per share guidance it gave in July. Despite the bad news, McFarland said sales did improve slightly during September.

“At the time of our July 16th earnings guidance for the third quarter, we expected gradually improving sales during the quarter,” McFarland. “While we have seen some slight improvement in September, sales during the quarter have been weaker than we initially anticipated … We believe we are doing the things necessary to improve our sales over the longer term.”

Baldor’s third quarter earnings forecast was based on achieving improved sales and planned cost reduction targets. The company is reaching its cost reduction targets, according to SEC filings. Analysts expect its third quarter gross margin to be approximately the same as the second quarter, in spite of lower sales and the company’s plant vacations that occur during the third quarter.

Baldor’s third quarter numbers will be released Oct. 15.

Sales declined 7.6 percent to $146 million during the first half of 2001 while earnings plunged 45 percent to $6.4 million.

“That’s primarily because we haven’t laid off any people,” the 49-year-old executive said. “It’s a long-term decision to keep our skilled work force intact and be in a position to take advantage of that when the economy bounces back.”

Scott Alaniz, an analyst at Stephens Inc. in Little Rock, applauds that perspective.

“That’s the right thing to do because they invest a lot of money in their employees,” Alaniz said. “That’s one of the neat things about their company.”

Overall, Baldor employs 3,700 worldwide, making electric motors and related products. The company is small in comparison to some of its competitors such as General Electric Co. of Fairfield, Conn., and Emerson Electric Co. of St. Louis.

But Baldor is adept at mixing it up with the big boys.

“We have a strong presence in the energy-efficient market,” McFarland said. “A quarter of all electricity consumed in America is by electric motors. Our motors have the highest efficiencies of any in the nation.”

The company has an ever-growing list of awards recognizing its dedication to quality in all facets of its operations.

One of the most recent is the “Excellence in Manufacturing Technology Achievement Award” presented by American Machinist magazine.

The performance and repeatability award is based on surveys conducted of manufacturing managers and engineers in the machine tool and metalworking industries.

New Products

Last year, the company rolled out a multitude of new products that were envisioned to expand earnings. But with the economic downturn, the sale of new products has turned out to be a safety net to stabilize Baldor’s profit picture.

“When times are slow like this, customers have time to evaluate new suppliers,” McFarland said. “We’ve had good success in developing new customers.

“We serve just about every industry, and the new customers are scattered across the board. Some are big, and some are small.

“Our focus today is on taking care of customers, continuing to train our employees, working to develop new products and improving productivity.”

Baldor continues to repurchase shares of its stock, a familiar move by companies seeking to help boost return on equity.

During the first half of 2001, the company acquired 37,900 shares under the stock repurchase program dating back to September 1998.

So far, Baldor has repurchased 4.2 million shares of the 6 million shares authorized under program.

Baldor Operations — SF

Fort Smith

AC motor production — 294,969

Distribution and service center — 208,000

Administration and engineering offices — 79,675

Aluminum die casting — 79,330

Drives production center — 162,000

St. Louis

Metal stamping and engineering toolroom — 108,560

DC and miscellaneous motor production — 78,825

Columbus, Miss.t

AC motor production — 156,000

Westville, Okla.

AC and DC motor production — 207,250

Fort Mill, S.C.t

DC motor, AC motor and tachometer production — 108,000

Clarksvillet

Subfractional motor, gear motor, and worm-gear speed reducer production — 165,735*

Ozarkt

AC motor production — 151,783

Five other domestic locationst

Metal stamping and motor, drives, domestic locations, servomotor and generator production — 253,158

10 Foreign Locationst

Sales and distribution centers locations and servodrive production — 99,200

Total — 2,152,485

*This property is leased pursuant to an industrial revenue bond agreement.

The company also has approximately 350,000 SF of space available for expansion currently fully leased to outside firms.

Baldor Inside Investors

Shareholder — Position — % Owned* — Shares* — Value#

Fred C. Ballman — retired CEO — 9.0% — 3,052,900 — $63,652,965

R. S. Boreham, Jr. — chairman — 4.8% — 1,620,893 — $33,795,619

Lloyd G. Davis — executive vice president, COO — 0.9% — 306,030 — $6,380,726

All executive officers and directors as a group (21 persons) — 18.9% — 6,652,571 — $138,706,105

The Baldor Electric Company Profit Sharing and Savings Plan — 11.6% — 3,930,766 — $81,956,471

* Includes stock options #Based on recent price of $20.85 per share

Top Baldor Institutional Investors

Investor — % Owned — Shares — Value

Mackenzie Financial Corp., Toronto — 4.4% — 1,610,766 — $33,584,471

Franklin Resources Inc., San Mateo, Calif. — 2.3% — 764,499 — $15,939,804

Barclays Bank Plc, London — 1.8% — 607,576 — $12,667,960