BALDOR ELECTRIC CO - FORM 10-Q

BALDOR ELECTRIC CO - FORM 10-Q - August 11, 2010

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - BALDOR ELECTRIC CO	Financial_Report.xls
EX-32 - CERTIFICATIONS PURSUANT TO SECTION 906 - BALDOR ELECTRIC CO	dex32.htm
EX-31.2 - CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - BALDOR ELECTRIC CO	dex312.htm
EX-31.1 - CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - BALDOR ELECTRIC CO	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 01-07284

Baldor Electric Company

Exact name of registrant as specified in its charter


Missouri		43-0168840
State or other jurisdiction of incorporation		IRS Employer Identification No

5711 R. S. Boreham, Jr. St Fort Smith, Arkansas		72901
Address of principal executive offices		Zip Code

479-646-4711

Registrant’s telephone number, including area code

N/A

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At July 3, 2010, there were 46,979,185 shares of the registrant’s common stock outstanding.

Baldor Electric Company

Index


			Page
PART I – FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)	4

		Condensed Consolidated Balance Sheets - July 3, 2010 and January 2, 2010	4
		Condensed Consolidated Statements of Income - Six months ended July 3, 2010 and July 4, 2009	5
		Condensed Consolidated Statements of Shareholders’ Equity - Six months ended July 3, 2010	5
		Condensed Consolidated Statements of Cash Flows - Six months ended July 3, 2010 and July 4, 2009	6
		Notes to Unaudited Condensed Consolidated Financial Statements - July 3, 2010	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

	Item 3.	Defaults Upon Senior Securities	26

	Item 4.	Removed and Reserved	26

	Item 5.	Other Information	26

	Item 6.	Exhibits	26

SIGNATURE			27

INDEX OF EXHIBITS

Forward-looking Statements

This quarterly report, the documents incorporated by reference into this quarterly report, and other written reports and oral statements made time to time by Baldor and its representatives may contain statements that are forward-looking. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “assume”, “believe”, “can”, “continue”, “could”, “depend”, “estimate”, “expect”, “forecast”, “future”, “if”, “intend”, “may”, “ongoing”, “pending”, “probable”, “projected”, “should”, “subject to”, “will”, “would”, or any grammatical forms of these words or other similar words) are based on our current expectations and 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, including those described under “Risk Factors” in Part II, Item 1A of this report and Part I, Item 1A of our most recent Form 10-K filed with the SEC. Baldor is under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Baldor Electric Company

Condensed Consolidated Balance Sheets

(unaudited)


(In thousands, except share amounts)				July 3, 2010			January 2, 2010

ASSETS
Current Assets
Cash and cash equivalents				$	16,360		$	15,270
Accounts receivable, less allowance for doubtful accounts of $3,026 at July 3, 2010 and $4,023 at January 2, 2010					282,217			229,174
Inventories:
Finished products					154,462			163,861
Work-in-process					44,337			44,176
Raw materials					134,566			126,598

					333,365			334,635
LIFO valuation adjustment					(63,116	)		(58,071	)

					270,249			276,564
Prepaid expenses					6,252			3,150
Other current assets					66,627			79,076

Total Current Assets					641,705			603,234
Property, Plant and Equipment
Land and improvements					16,666			16,483
Buildings and improvements					122,061			121,643
Machinery and equipment					610,686			618,501
Allowances for depreciation and amortization					(402,973	)		(393,662	)

Net Property, Plant and Equipment					346,440			362,965
Other Assets
Goodwill					1,031,699			1,032,733
Intangible assets, net of amortization					628,799			637,070
Other					14,691			15,535

Total Assets				$	2,663,334		$	2,651,537

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable				$	95,214		$	61,776
Accrued employee compensation					13,765			7,436
Accrued profit sharing					7,785			7,815
Accrued warranty costs					10,268			9,330
Accrued insurance obligations					9,709			9,635
Accrued interest expense					26,858			27,782
Other accrued expenses					52,543			55,090
Dividends payable					7,983			7,924
Current maturities of long-term obligations					6,705			7,108

Total Current Liabilities					230,830			193,896

Long-term obligations					1,119,155			1,156,005
Other liabilities					57,625			69,581
Deferred income taxes					300,529			308,212
Commitments and Contingencies

		July 3, 2010	January 2, 2010
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 shares	55,982,819		55,538,933		5,598			5,554
Outstanding shares	46,979,185		46,612,596
Additional paid-in capital					566,301			551,830
Retained earnings					584,395			562,497
Accumulated other comprehensive loss					(8,769	)		(7,209	)
Treasury stock, at cost	9,003,634		8,926,337		(192,330	)		(188,829	)

Total Shareholders’ Equity					955,195			923,843

Total Liabilities and Shareholders’ Equity				$	2,663,334		$	2,651,537

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Condensed Consolidated Statements of Income

(unaudited)


	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Net sales	$	439,491		$	384,678		$	836,952		$	787,211
Cost of goods sold		303,099			275,456			579,447			561,886

Gross profit		136,392			109,222			257,505			225,325
Selling and administrative expenses		72,065			64,964			140,768			136,064

Operating profit		64,327			44,258			116,737			89,261
Other income (loss), net		(187	)		(1,114	)		920			(333	)
Gain on debt modification		0			0			0			35,740
Debt discount amortization		(2,484	)		(2,484	)		(4,968	)		(2,484	)
Interest expense		(26,195	)		(28,376	)		(53,720	)		(50,859	)

Income before income taxes		35,461			12,284			58,969			71,325
Provision for income taxes		12,694			4,489			21,134			27,109

Net income	$	22,767		$	7,795		$	37,835		$	44,216


Net earnings per common share – basic	$	0.49		$	0.17		$	0.81		$	0.95
Net earnings per common share – diluted	$	0.48		$	0.17		$	0.80		$	0.95

Weighted-average shares outstanding – basic		46,921			46,569			46,805			46,447
Weighted-average shares outstanding – diluted		47,585			46,821			47,399			46,619

Dividends declared per common share	$	0.17		$	0.17		$	0.34		$	0.34

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)


									Accumulated Other Comprehensive Income (Loss)
				Additional Paid-in Capital								Treasury Stock, at cost
	Common Stock					Retained Earnings
(In thousands, except per share amounts)	Shares	Amount				Retained Earnings									Total

BALANCE AT JANUARY 2, 2010	55,539	$	5,554	$	551,830	$	562,497		$	(7,209	)	$	(188,829	)	$	923,843
Comprehensive income
Net income	0		0		0		37,835			0			0			37,835
Other comprehensive income:
Postretirement plan actuarial adjustment net of income taxes of $3,715										6,013						6,013
Currency translation adjustments	0		0		0		0			(1,781	)		0			(1,781	)
Unrealized adjustment on derivatives net of income taxes of $3,791	0		0		0		0			(5,792	)		0			(5,792	)

Total other comprehensive income																(1,560	)

Total comprehensive income																36,275

Stock option plans (including 122 shares exchanged and $2,277 income tax benefit)	444		44		13,852		0			0			(4,456	)		9,440
Cash dividends at $0.34 per share	0		0		0		(15,937	)		0			0			(15,937	)
Treasury stock issued	0		0		619		0			0			955			1,574

BALANCE AT July 3, 2010	55,983	$	5,598	$	566,301	$	584,395		$	(8,769	)	$	(192,330	)	$	955,195

—	Total comprehensive income for the three and six months ending July 4, 2009 was $25.5 million and $72.7 million, respectively. Total comprehensive income for the three months ending July 3, 2010 was $14.5 million.

—	Unrealized after-tax losses on derivatives of $7.1 million and $1.3 million are included in accumulated other comprehensive income (loss) as of July 3, 2010 and January 2, 2010, respectively.

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Six Months Ended
(In thousands)	July 3, 2010			July 4, 2009

Operating activities:
Net income	$	37,835		$	44,216
Adjustments to reconcile net income to net cash provided by operating activities:
Losses on sales of assets		2,233			695
Mark to market adjustment on derivative instruments		(5,316	)		(2,597	)
Gain on debt modification		0			(35,740	)
Amortization of debt discount		4,968			2,484
Amortization of discontinued interest rate hedge		6,006			3,003
Depreciation		23,567			24,230
Amortization		11,151			11,340
Allowance for doubtful accounts receivable		(997	)		(314	)
Deferred income tax		(13,556	)		4,855
Share-based compensation expense		3,627			3,098
Cash provided by (used in) changes in operating assets and liabilities:
Receivables		(52,046	)		15,195
Inventories		3,036			33,641
Other current assets		(4,292	)		(8,007	)
Accounts payable		33,460			(18,997	)
Accrued expenses and other liabilities		6,145			15,760
Income taxes payable		1,491			7,390
Other assets, net		(4,310	)		5,651

Net cash provided by operating activities		53,002			105,903

Investing activities:
Purchases of property, plant and equipment		(13,115	)		(17,810	)
Proceeds from sale of assets		6,387			59

Net cash used in investing activities		(6,728	)		(17,751	)

Financing activities:
Proceeds from long-term obligations		50,000			45,059
Principal payments of long-term obligations		(92,214	)		(96,800	)
Principal payments on note payable		0			(735	)
Dividends paid		(15,878	)		(23,649	)
Stock option exercises		10,631			3,440
Excess tax benefits on share-based payments		2,277			1
Net decrease in bank overdrafts		0			(7,500	)
Debt amendment fees		0			(7,342	)

Net cash used in financing activities		(45,184	)		(87,526	)


Net increase in cash and cash equivalents		1,090			626
Beginning cash and cash equivalents		15,270			13,098

Ending cash and cash equivalents	$	16,360		$	13,724

Noncash items:

—	Additional paid-in capital resulting from shares traded for option exercises and taxes amounted to $4,128 and $133 in the first six months of 2010 and 2009, respectively.

—	Treasury shares amounting to $1,574 and $3,487 were issued in March 2010 and 2009 to fund the 2009 and 2008 accrued profit sharing contributions, respectively.

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements

July 3, 2010

NOTE A – Significant Accounting Policies

Basis of Presentation: The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements, and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended January 2, 2010. In the opinion of management, all adjustments (consisting of normal recurring items and the debt modification described in NOTE C) considered necessary for a fair presentation have been included. The results of operations for the six months ended July 3, 2010, may not be indicative of the results that may be expected for the fiscal year ending January 1, 2011.

Segment Reporting: The Company operates in one segment that markets, designs and manufactures industrial electric motors, drives, generators, and other mechanical power transmission products, within the power transmission equipment industry.

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 2010, ending on January 1, 2011, will contain 52 weeks. Fiscal year 2009 contained 52 weeks.

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 July 3, 2010 or January 2, 2010.

Inventories: The Company uses the last-in, first-out (LIFO) method of valuing inventories held in the United States. The LIFO calculation is made only at year-end based on the inventory levels and costs at that time. Accordingly, interim LIFO adjustments are based on management’s 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 cost measured using the first-in, first-out method (FIFO) or market.

Self-Insurance Liabilities: The Company’s self-insurance programs primarily cover exposure to general and 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 Company’s claims experience and risk exposure levels. Future adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors.

Business Combinations: The Company accounts 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. The judgments made in determining the estimated fair value assigned to each class of assets

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Accordingly, for significant items, the Company typically obtains 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.

There are multiple methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, the Company typically uses relief from royalty, income and market approach methodologies. These methodologies start with a forecast 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 asset’s 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.

Impairment of Goodwill and Indefinite Lived Intangibles: At July 3, 2010, goodwill and indefinite-lived intangibles amounted to $1.0 billion and $ 354.8 million, respectively. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually in the fourth quarter. However, the Company could be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if the Company experiences disruptions to the business, unexpected significant declines in operating results, divestiture of a significant component of the business or a sustained decline in market capitalization.

Goodwill impairment is determined using a two-step process. The first step (“Step 1”) is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. The second step compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied fair value of goodwill exceeds the carrying amount, then goodwill is not considered impaired. However, if the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the fair value of the reporting unit is allocated to all the assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit).

Fair value of a reporting unit is determined using a combination of the Income Approach, which utilizes a discounted cash flow model, and the Market Approach, which utilizes a guideline public company methodology. Judgments and assumptions related to revenue, gross profit, operating expenses, interest, capital expenditures, cash flows, and market conditions are inherent in developing the discounted cash flow model. In applying the guideline public company method, the Company utilized valuation multiples derived from stock prices and enterprise values of publicly traded companies comparable to Baldor.

For the other intangible assets, if the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized by an amount equal to that excess. A relief from royalty methodology is utilized to estimate the fair value of indefinite-lived intangible assets.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The Company’s fiscal 2009 annual impairment analyses of goodwill and other intangible assets did not result in an impairment charge. However, based on sensitivity analysis performed in conjunction with the 2009 annual test, a 5% decline in the estimated fair value of one of the Company’s indefinite-lived intangible assets with a carrying value of $225.9 million would have resulted in the estimated fair value falling below the carrying value by approximately $4.7 million. Accordingly, management continues to monitor business conditions and projected revenues related to its indefinite-lived intangibles and will perform additional interim testing if deemed necessary. Based upon second quarter and the first half of 2010 revenues, results of operations, and management’s current outlook for the remainder of 2010, management concluded that there were no indications that the assumptions utilized in the 2009 annual impairment testing would not be achieved. As a result, no interim test for impairment of goodwill or other indefinite-lived intangibles was performed.

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 engage in speculative transactions, nor does the Company 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 derivative’s change in fair value is recognized in income in the period of change.

Derivative assets and liabilities executed with the same counterparty under a master netting agreement and collateral accounts (i.e. margin deposits) are netted with the corresponding derivative assets and liabilities in the consolidated balance sheets.

Pension and Postretirement Health Plan: The Company uses the fiscal year end as a measurement date for its pension and postretirement health plans.

Income Taxes: The difference between the Company’s effective tax rate and the federal statutory tax rate for the three and six months ended July 3, 2010, and July 4, 2009, relates to state income taxes, permanent differences, changes in management’s assessment of the outcome of certain tax matters, and the composition of pre-tax income between domestic and international operations. The significant permanent tax differences primarily consist of the deduction for domestic production activities and nondeductible expenses.

In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate based on forecasted annual income and permanent items, statutory tax rates and tax planning opportunities. The impact of discrete items is separately recognized in the quarter in which they occur.

The effective tax rate for the three months ended July 3, 2010 and July 4, 2009 was 35.8% and 36.5%, respectively. The effective tax rate for the six months ended July 3, 2010 and July 4, 2009 was 35.8% and 38.0%, respectively. The change between the effective tax rates during the three and six months ending July 3, 2010, and July 4, 2009, primarily related to additional valuation allowances for net operating loss carryforwards generated by foreign affiliates recorded in the second quarter of 2009.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The Company provides for uncertain tax benefits, and the related interests and penalties, and adjusts its unrecognized tax benefits, accrued interest and penalties accordingly. The Company had $1.1 million in gross unrecognized tax benefits as of July 3, 2010 and January 2, 2010. Of this amount, $862,000 represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate.

The Company classifies interest and penalties on uncertain tax benefits as interest expense and selling and administrative expenses, respectively. At July 3, 2010, before any tax benefits, the Company had $505,000 of accrued interest and penalties on unrecognized tax benefits.

Product Warranties: The Company accrues for product warranty claims based on historical experience and the expected costs to provide warranty service. The warranty period generally ranges from one to two years. Changes in the carrying amount of product warranty reserves are as follows:


	Six Months Ended
(In thousands)	July 3, 2010			July 4, 2009

Balance at beginning of period	$	9,330		$	9,477
Charges to costs and expenses		5,615			5,726
Payments		(4,677	)		(5,987	)

Balance at end of period	$	10,268		$	9,216

Share-Based Compensation: The Company has share-based compensation plans, which are described more fully herein under NOTE F – Stock Plans.

Fair value of the stock options is estimated using a Black-Scholes option pricing formula. 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 Baldor’s 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 Baldor’s 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. Assumptions used in the fair-value valuation are adjusted to reflect current developments at the date of grant.

The simplified method for estimating the expected life for employee stock options uses the mid-point between the vesting term and the contractual term of the stock option. The Company used the simplified method through second quarter 2009 and began using historical data for grants issued beginning third quarter 2009. Prior to the third quarter 2009, the Company did not have a method to capture historical exercise data from which to estimate the expected term.

The Company has granted restricted stock units under its share-based compensation plans. The Company amortizes the fair value of restricted stock unit awards, which is based on the closing market price on the date of grant, to compensation expense generally on a straight-line basis over the vesting period, taking into consideration an estimate of shares expected to vest.

NOTE B – Financial Derivatives

The Company uses derivative financial instruments to reduce its exposure to the risk of increasing commodity prices by maintaining sufficient commodity hedge contracts to ensure the Company pays a certain price or remains within a limited price range even when market prices fluctuate outside that range. 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

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

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 hold or issue financial instruments for trading purposes.

The Company recognizes all of its derivative instruments as either assets or liabilities in the condensed consolidated balance sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument based upon the exposure being hedged (i.e., fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation).

Cash Flow Hedges

The Company has entered into certain commodity forward contracts to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. The effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of the effectiveness are recognized in earnings in the current period. Ineffective portions of the Company’s commodity cash flow hedges were not material during the three and six months ended July 3, 2010 and July 4, 2009.

As of July 3, 2010, the Company had the following outstanding commodity forward contracts:


Commodity		Volume in Pounds
Copper		13,885,200

Gains recognized on commodity cash flow hedges reduced cost of sales by $6.1 million in the second quarter of 2010 and losses recognized increased cost of sales by $5.2 million in the second quarter of 2009. Gains recognized on commodity cash flow hedges reduced cost of sales by $12.3 million in the first six months of 2010 and losses recognized increased cost of sales by $19.7 million in the first six months of 2009. The Company expects after-tax gains totaling $1.1 million at July 3, 2010, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next twelve months.

The Company has interest rate instruments related to variable rate long-term obligations. The notional amount is $350.0 million and the instruments mature on April 30, 2012. On March 31, 2009, the Company amended its senior secured credit agreement. In conjunction with the amendment, a LIBOR floor was added to the variable rate borrowings. As a result, the Company determined that its existing interest rate hedges were no longer expected to be highly effective. Accordingly, effective March 31, 2009, the interest rate hedge instruments were discontinued as cash flow hedges. Accumulated after-tax losses recorded in accumulated other comprehensive income (loss) prior to the discontinuance remain in accumulated other comprehensive income and are recognized in earnings as the forecasted transactions occur or become probable of not occurring. Amortization related to the discontinuance of the interest rate hedge was $3.0 million during the second quarter of 2010 and 2009 and is included in interest expense on the condensed consolidated statements of income. Amortization related to the discontinuance of the interest rate hedge was $6.0 million and $3.0 million during the first six months of 2010 and 2009, respectively, and is included in interest expense on the condensed consolidated statements of income. Unrealized after-tax losses of $8.2 million are recorded in accumulated other comprehensive income at July 3, 2010. The Company expects after-tax losses of approximately $5.9 million to be recognized in interest expense during the next twelve months.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the consolidated statements of income (in thousands):


Derivatives designated as hedging instruments – Cash flow hedges	Gain (Loss) Recognized in OCI on Derivative					Gain (Loss) Reclassified from Accumulated OCI into Income
	Three Months Ended					Three Months Ended
	July 3, 2010			July 4, 2009		July 3, 2010			July 4, 2009
Interest rate contracts ⁽¹⁾	$	0		$	0	$	(3,003	)	$	(3,003	)
Commodity contracts		(5,300	)		6,863		6,096			(5,244	)

Total	$	(5,300	)	$	6,863	$	3,093		$	(8,247	)


Derivatives designated as hedging instruments – Cash flow hedges	Gain (Loss) Recognized in OCI on Derivative						Gain (Loss) Reclassified from Accumulated OCI into Income
	Six Months Ended						Six Months Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009
Interest rate contracts ⁽¹⁾	$	0		$	(108	)	$	(6,006	)	$	(3,003	)
Commodity contracts		(3,284	)		13,883			12,325			(19,698	)

Total	$	(3,284	)	$	13,775		$	6,319		$	(22,701	)

⁽¹⁾	Effective March 31, 2009, the interest rate instruments were discontinued as cash flow hedges. The loss reclassified from Accumulated OCI into income for 2010 represents the amortization related to the discontinuance as cash flow hedge.


Derivatives not designated as hedging instruments	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		Three Months Ended				Six Months Ended
		July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009
Interest rate contracts ⁽ ²⁾	Interest Expense	$	3,151	$	2,597	$	5,316	$	2,597

Total		$	3,151	$	2,597	$	5,316	$	2,597

⁽ ² ⁾

Effective March 31, 2009, the interest rate instruments were discontinued as cash flow hedges.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The following table sets forth the fair value of all derivative instruments outstanding at July 3, 2010 and January 2, 2010 and the classification in the condensed consolidated balance sheets (in thousands):


	Balance Sheet Classification	July 3, 2010		January 2, 2010
Derivative Assets

Derivatives designated as hedging instruments

Commodity contracts	Other Current Assets	$	1,777	$	17,386

Total derivative assets – designated			1,777		17,386


Total derivative assets		$	1,777	$	17,386


Derivative Liabilities

Derivatives not designated as hedging instruments

Interest rate contracts ⁽ ³⁾	Other Accrued Expenses	$	16,653	$	21,969

Total derivative liabilities – not designated			16,653		21,969


Total derivative liabilities		$	16,653	$	21,969

⁽³⁾	Effective March 31, 2009, the interest rate instruments were discontinued as cash flow hedges.

Unrealized gains or losses related to the Company’s cash flow hedges are recorded in accumulated other comprehensive income (loss) at each measurement date. Unrealized gains or losses related to instruments that are not designated as hedges are recorded through the statement of income at each measurement date.

NOTE C – Long-term Obligations

Long-term obligations are as follows:


($ In thousands)	Interest Rate at July 3, 2010		July 3, 2010		January 2, 2010

Senior secured term loan, variable interest rate	7.849	%	$	612,000	$	654,026
Revolving credit facility, variable interest rate	5.250	%		0		0
Senior unsecured notes, fixed interest rate	8.625	%		550,000		550,000
Other	6.251	%		1,129		1,324

				1,163,129		1,205,350
Less current maturities				6,705		7,108

				1,156,424		1,198,242
Less discount on senior secured term loan				37,269		42,237

			$	1,119,155	$	1,156,005

Amendment of Senior Secured Term and Revolving Credit Facility

Effective March 31, 2009, the Company amended its senior secured credit facility. The amendment relaxed certain financial ratio covenants through the remaining term of the agreement. In conjunction with the amendment, pricing on the outstanding term loan borrowings and future revolver borrowings was increased from 1.75% to 3.25% and a LIBOR floor of 2.00% was added to the variable rate borrowings.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The modification of the senior secured term loan was accounted for as an extinguishment of debt. As a result, the senior secured term loan was recorded at fair value as of the modification date which resulted in a noncash debt discount of $49.7 million being recorded in long-term obligations on the condensed consolidated balance sheet and a $35.7 million gain on debt modification in income from continuing operations in the condensed consolidated statement of income. The discount is being amortized to other expense over the remaining term of the debt. Fees paid related to the amendment of $5.7 million along with unamortized fees related to the original agreement of $8.3 million were deducted when calculating the gain. The unamortized balance of the discount is $37.3 million at July 3, 2010. Amortization amounted to $2.5 million during the second quarter of 2010 and $5.0 million during the first six months of 2010.

The amendment did not change the borrowing capacity of the revolving credit facility; therefore, fees of $1.6 million related to the amendment were deferred and are being amortized over the remaining term of the facility agreement and unamortized fees of $1.1 million related to the original agreement continue to be amortized over the remaining term.

Senior Secured Term and Revolving Credit Facility

Interest on the term loan is due periodically and calculated based on 3.25% plus a variable adjusted London Inter-Bank Offered Rate (“LIBOR”) with a minimum LIBOR rate of 2.0%. Quarterly principal payments of $1.6 million are due beginning July 29, 2010, and continue through January 31, 2013, at which date subsequent quarterly principal payments increase to $148.7 million through the loan due date of January 31, 2014.

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 Company’s calculations for the fiscal year ended January 2, 2010. 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 July 3, 2010.

The revolving credit (“RC”) agreement, which matures April 30, 2012, 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. As of July 3, 2010, the Company had no outstanding borrowings under the revolver. An RC commitment fee is due quarterly at the annual rate of 0.625% on the unused amount of the RC commitment. At July 3, 2010, $23.4 million of LC’s were issued which reduces the aggregate LC and RC availability. Availability totaled $176.6 million at July 3, 2010. LC participation fees of 3.25% and fronting fees of 0.125% per annum on unissued LC’s are due quarterly based upon the aggregate amount of LC’s issued and available for issuance, respectively. Interest on RC borrowings accrues at 3.25% plus LIBOR (0.35% at July 3, 2010) with a minimum rate of 2.0% or 1.25% per annum plus Prime (3.25% at July 3, 2010).

The senior secured credit facility is collateralized by substantially all of the Company’s assets.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

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, 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.

NOTE D – Commitments and Contingencies

The Company is subject to a number of legal actions arising in the ordinary course of business. Management expects the ultimate resolution of these actions will not materially affect the Company’s financial position, results of operations, or cash flows.

Prior to the Company’s acquisition of Reliance Electric, Reliance’s parent company, Rockwell Automation, determined actions by a small number of employees at certain of Reliance’s operations in one jurisdiction may have violated the Foreign Corrupt Practices Act (“FCPA”) or other applicable laws. Reliance did 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 and certain other business arrangements involving potentially improper payment mechanisms for legitimate business expenses. 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. The Company conducts compliance training on a regular schedule.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

NOTE E – Profit –Sharing Plan, Pension Plan and Other Postretirement Benefits

The Company has a profit-sharing plan covering most domestic employees with more than two years of service. The Company’s contribution is derived by a formula that resulted in contributions of approximately 12% of pre-tax earnings of participating companies.

The Company has defined benefit pension and postretirement benefit plans covering certain union employees and retirees. Estimated liabilities amounting to approximately $36.3 million at July 3, 2010 and $48.4 million at January 2, 2010 are included in other liabilities on the condensed consolidated balance sheets. During the first quarter of 2010, certain active union employees were terminated from the plans as a result of the consolidation of a manufacturing facility. Accordingly, a curtailment gain of approximately $2.5 million was recorded as a reduction of the estimated liabilities. The reduction in liability was offset by a reduction in actuarial losses recorded in accumulated other comprehensive income.

Net periodic pension and other postretirement benefit costs include the following components for the three and six months ended July 3, 2010 and July 4, 2009:


Pension Benefits	Three Months Ended						Six Months Ended
(In thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	71		$	91		$	143		$	181
Interest cost		59			63			119			126
Expected return on assets		(50	)		(45	)		(100	)		(90	)
Amortization of prior service costs		3			3			5			5
Amortization of net loss		10			8			20			16
Curtailment		0			0			53			0

Net periodic benefit cost	$	93		$	120		$	240		$	238


Other Postretirement Benefits	Three Months Ended						Six Months Ended
(In thousands)	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009

Service cost	$	5		$	22		$	10		$	44
Interest cost		578			777			1,156			1,554
Expected return on assets		0			0			0			0
Amortization of prior service costs		0			0			0			0
Amortization of net loss		1			92			2			184

Net periodic benefit cost	$	584		$	891		$	1,168		$	1,782

The Company made contributions to the pension plans of approximately $119,000 and $112,000 for the three months ended July 3, 2010 and July 4, 2009, respectively and $176,000 and $216,000 for the six months ended July 3, 2010 and July 4, 2009, respectively. The Company made contributions to the postretirement plan of approximately $2.0 million for the three months ended July 3, 2010 and July 4, 2009 and $4.2 million and $3.8 million for the six months ended July 3, 2010 and July 4, 2009, respectively. The Company expects to contribute $550,000 to the pension plans and $8.4 million to the postretirement benefit plan in 2010.

NOTE F – Stock Plans

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 Company and aligns 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 Company does not re-price any outstanding options.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The Company’s 2006 Equity Incentive Plan (the “2006 Plan”) is the only Plan under which awards can be granted. When the 2006 Plan was adopted, the Company’s other stock plans were effectively cancelled except with respect to then outstanding grants and no further awards have since been or will be granted from those plans. In May 2009, shareholders approved an amendment to the 2006 Plan increasing the shares authorized by 1,500,000.

A summary of the Company’s stock plans and summary details about each Plan as of July 3, 2010, 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	4,500,000	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 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 lapsed after a period of five years or earlier under certain circumstances. All outstanding stock options granted under these plans are currently exercisable.

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 have 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. Option re-pricing is not permitted.

A summary of option activity during the six months ended July 3, 2010 is presented below:


	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value (In thousands)

Outstanding at January 2, 2010	3,046,437		$	28.80
Granted	388,440			33.00
Exercised	(356,026	)		22.21
Expired	(48,270	)		34.91
Forfeited	(22,920	)		32.96

Outstanding at July 3, 2010	3,007,661			30.00	6.7 years	$	23,557

Vested or expected to vest at July 3, 2010	2,914,400			30.07	6.6 years	$	22,816
Exercisable at July 3, 2010	1,700,980			27.94	5.4 years	$	14,883

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The weighted-average grant-date fair value of options granted was $12.42 and $3.57 during the first six months of 2010 and 2009, respectively. The total intrinsic value of options exercised was $5.2 million and $64,000 during the first six months of 2010 and 2009, respectively.

As of July 3, 2010, there was $6.1 million of total unrecognized compensation cost related to non-vested options granted under the Plans expected to be recognized over a weighted-average period of 1.6 years.

A summary of non-vested stock unit activity during the six months ended July 3, 2010 is presented below:


Non-vested Stock Units	Shares		Weighted-Average Grant-Date Fair Value Per Unit

Non-vested at January 2, 2010	147,376		$	19.86
Granted	14,040			38.41
Vested	(91,036	)		25.20
Forfeited	(2,725	)		11.23

Non-vested at July 3, 2010	67,655			16.87

The total fair value of stock units vested during the first six months of 2010 and 2009 was $2.9 million and $2.1 million, respectively.

As of July 3, 2010, there was $665,000 of total unrecognized compensation cost expected to be recognized over a weighted-average period of 1.0 year related to non-vested stock units granted under the Plans.

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. Listed in the table below are the weighted-average assumptions for those options granted in the period indicated.


	Six Months Ended
	July 3, 2010		July 4, 2009

Volatility	42.3	%	36.5	%
Risk-free interest rates	2.8	%	2.2	%
Dividend yields	2.1	%	4.8	%
Expected option life	6.8 years		6.0 years

NOTE G – Earnings Per Share

The table below details earnings per common share for the periods indicated:


	Three Months Ended				Six Months Ended
(In thousands, except per share data)	July 3, 2010		July 4, 2009		July 3, 2010		July 4, 2009

Numerator:
Net income	$	22,767	$	7,795	$	37,835	$	44,216

Denominator Reconciliation:
Weighted-average shares – basic		46,921		46,569		46,805		46,447
Effect of dilutive securities – stock options and non-vested stock units		664		252		594		172

Weighted-average shares – diluted		47,585		46,821		47,399		46,619


Earnings per common share – basic	$	0.49	$	0.17	$	0.81	$	0.95
Earnings per common share – diluted	$	0.48	$	0.17	$	0.80	$	0.95

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements—(Continued)

July 3, 2010

The total number of anti-dilutive securities excluded from the above calculations was 1,053,957 and 2,201,296 for the three months ended July 3, 2010 and July 4, 2009, respectively and 987,993 and 2,621,956 for the six months ended July 3, 2010 and July 4, 2009.

NOTE H – Fair Value Measurements

Fair value is generally determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy categorizes the inputs used in valuation techniques into three levels as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

Assets (liabilities) measured at fair value on a recurring basis are summarized below:


(In thousands)	Fair Value Measurements as of July 3, 2010
	Level 1		Level 2			Level 3		Total
Interest rate swap	$	0	$	(12,565	)	$	0	$	(12,565	)
Interest rate collar		0		(4,088	)		0		(4,088	)
Copper swaps		1,387		390			0		1,777

Total	$	1,387	$	(16,263	)	$	0	$	(14,876	)

The Company’s methods and assumptions used to estimate the fair value of derivative instruments include quoted market prices (level 1) and trading quotes (level 2) for commodity instruments, and derived values based on observable market interest rate inputs (level 2) for interest rate instruments.

The carrying amounts and estimated fair values of the Company’s long-term debt at July 3, 2010 are summarized below:


(In thousands)	Carrying Value		Estimated Fair Value
Senior notes	$	550,000	$	569,250
Term loan	$	574,731	$	574,731

The Company’s methods and assumptions used to estimate the fair value of debt include quoted market prices (level 1) for fixed rate debt and trading quotes (level 2) for variable rate debt.

The carrying amounts of cash and cash equivalents, receivables, and trade payables at July 3, 2010, approximate their fair value due to the short term maturity of these instruments.

NOTE I – Recently Issued Accounting Pronouncements

In January 2010, the FASB issued guidance that expands disclosure requirements regarding fair value measurements, specifically adding new requirements for disclosures about transfers into and out of Levels 1 and 2 in the fair value hierarchy and additional disclosures about purchases, sales, issuances, and settlements relating to Level 3 fair value measurements. The Company adopted the guidance during first quarter 2010 and the adoption did not have a material impact on the consolidated financial statements and disclosures.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading marketer, designer, and manufacturer of industrial electric motors, mechanical power transmission products, drives and generators, currently supplying over 10,000 customers in more than 200 industries. Our products are sold to a diverse customer base consisting of original equipment manufacturers (“OEM’s”) and distributors, serving markets in the United States and throughout the world. OEM’s primarily use our products in new installations which expands our installed base and leads to future replacement product sales. Overall, our domestic sales are generated equally between OEM’s and distributors. Approximately 60% of our industrial motor products and approximately 20% of our mechanical power transmission products are sold directly to OEM’s with the remainder being sold to distributors.

Generally, our financial performance is driven by industrial spending and the strength of the economies in which we sell our products, and is also influenced by:

•

Investments in manufacturing capacity, including upgrades, modifications, and expansions of existing manufacturing facilities, and the creation of new manufacturing facilities;

•

Capacity utilization;

•

Our customers’ needs for greater variety, timely delivery, and higher quality at a competitive cost; and

•

Our large installed base, which creates significant replacement demand.

Demand for our products is closely tied to growth trends in the economy and levels of industrial activity and capital investment. Specific drivers of demand for our products include process automation, efforts in energy conservation and productivity improvement, regulatory and safety requirements, new technologies and replacement of worn parts. Our products are typically critical parts of customers’ end-applications, and the end user’s cost associated with their failure is high. Consequently, we believe that end users of our products base their purchasing decisions on quality, reliability, efficiency and availability, as well as customer service. We believe key success factors in our industry include strong reputation and brand preference, good customer service and technical support, product availability and a strong distribution network.

Business conditions continued to improve throughout the second quarter of 2010. For the quarter ended July 3, 2010, our sales, operating profit, and net income increased 14.2%, 45.3%, and 192.1%, respectively, compared to second quarter 2009. As business has improved, we have maintained the significant cost reductions achieved during 2009, helping us achieve a record operating margin of 14.6% for the second quarter of 2010.

During second quarter 2010, sales to our domestic distributor and OEM customers increased 29.5% and 15.7%, respectively, compared to second quarter 2009. Distributors aggressively reduced inventories during 2009 and we believe they have yet to begin restocking their inventories. Consequently, we believe the increases in incoming order rates we have experienced so far this year are the result of improved end-market demand.

Sales of our Super-E premium-efficient motor products continued to grow during the quarter and increased 25.2% over second quarter 2009. While these motors sell at a 20% to 30% price premium over standard-efficiency motors, partly because they cost more to produce, they consume less energy and our customers realize a decrease in their total cost of ownership. Super-E motor products comprised 16.5% of total motor sales during second quarter 2010, compared to 14.8% for the same period last year. Once the Energy Independence and Security Act of 2007 (“EISA”) takes effect in 2011, we expect premium efficient motors to ultimately comprise approximately 50% of our total motor sales.

Results of Operations

Second quarter 2010 compared to second quarter 2009

Net income increased 192.1% to $22.8 million for second quarter 2010 compared to $7.8 million in second quarter 2009. Second quarter 2010 diluted earnings per share (EPS) was $0.48 compared to $0.17 in second quarter 2009, an increase of 182.4%.

Net sales for the quarter increased 14.2% to $439.5 million compared to $384.7 million in second quarter 2009. Sales of industrial electric motor products increased 12.2% from 2009 and comprised 63.4% of total sales for the second quarter compared to 64.5% for the same period last year. Sales of Super-E premium-efficient motors grew 25.2% for the quarter and increased to 16.5% of total motor sales in second quarter 2010 compared to 14.8% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products increased 16.1% from 2009 and comprised 30.3% of total sales in the second quarter of 2010 compared to 29.9% in 2009. Our mechanical power transmission product sales are heavily weighted toward distributor customers. Inventory destocking throughout 2009 resulted in our distributor customers’ inventories declining to historically low levels by the end of 2009. While end-market demand has improved during 2010, we believe distributors have not begun restocking inventories. Sales of other products increased 27.9% from second quarter 2009 and comprised 6.3% of total sales in second quarter 2010 compared to 5.6% in 2009.

Increased sales combined with product design improvements, cost reductions, and integration initiatives resulted in continued improvement in margins during the quarter. Gross margin increased to 31.0% in second quarter 2010 compared to 28.4% in second quarter 2009. Operating margin improved to 14.6% for second quarter 2010 compared to 11.5% in second quarter 2009. Selling and administrative expenses, as a percentage of sales, were 16.4%, compared to 16.9% in 2009.

Interest expense of $26.2 million decreased $2.2 million from second quarter 2009 as a result of repayments we have made on our outstanding debt. We continue to focus on aggressive debt reduction from operating profits and effective working capital management.

Pre-tax income of $35.5 million for second quarter 2010 increased 188.7% compared to second quarter 2009 pretax income of $12.3 million. Our effective income tax rate was 35.8% in second quarter 2010 compared to 36.5% in second quarter of 2009. The change between the effective income tax rates is primarily related to additional valuation allowances for net operating loss carryforwards generated by foreign affiliates recorded in the second quarter of 2009.

Six months ended July 3, 2010 compared to six months ended July 4, 2009

Net income was $37.8 million for the first six months of 2010 compared to $44.2 million for the first six months of 2009. Net income for the first six months of 2009 included $21.6 million related to the March 31, 2009 noncash gain on debt modification. Diluted EPS was $0.80 for the first six months of 2010 compared to $0.95 for the first six months of 2009. Diluted EPS for the first six months of 2009 included $0.47 related to the March 31, 2009 noncash gain on debt modification.

Net sales for the first six months of 2010 increased 6.3% to $837.0 million compared to $787.2 million for the first six months of 2009. Sales of industrial electric motor products increased 2.2% for the first six months of 2010 as compared to the first six months of 2009 and comprised 63.5% of total sales for the year compared to 66.1% for the same period last year. Sales of Super-E premium-efficient motors grew 17.0% for the first six months of 2010 as compared to the first six months of 2009. Sales of mounted bearings, gearing, and other mechanical power transmission products increased 12.7% for the first six months of 2010 as compared to the first six months in 2009 and comprised 30.1% of total sales compared to 28.4% for the same period last year. Sales of other products increased 22.7% for the first six months of 2010 when compared to the same period last year.

Gross margin was 30.8% for the first six months of 2010 compared to 28.6% for the first six months of 2009 and operating margin increased to 13.9% from 11.3% for the same period. As sales have grown through the first six months of the year, our continued focus on cost control has helped provide solid margin growth.

Interest expense of $53.7 million for the first six months of 2010 was $2.8 million higher than the first half of 2009. While we have benefited from reducing our outstanding debt balance, interest rates on our variable rate debt increased beginning in second quarter 2009 as a result of the March 31, 2009 amendment of our senior secured credit facility. Consequently, cash interest expense on the credit facility was $2.6 million higher in the first six months of 2010 when compared to the same period last year.

Pre-tax income was $59.0 million for the first six months of 2010 compared to $71.3 million for the first six months of 2009. Pre-tax income for first six months of 2009 included a $35.7 million noncash gain related to the March 31, 2009 amendment of our senior secured credit facility. Our effective income tax rate was 35.8% in the first six months of 2010 compared to 38.0% in first six months of 2009. The change between the effective income tax rates is primarily related to additional valuation allowances for net operating loss carryforwards generated by foreign affiliates recorded in the second quarter of 2009.

Current Outlook

We are maintaining the cost reductions achieved during 2009 and looking for additional efficiencies that will allow us to realize further cost reductions. We believe the long-term focus of our decisions during the recession positioned us to take advantage of opportunities as the economy recovers. Incoming orders grew at a double-digit rate during second quarter 2010 when compared to second quarter 2009. As demand for our products has increased steadily during the first six months of 2010, our inventory levels have remained adequate to serve our customers and we have realized solid revenue and margin growth. Currently, we expect third quarter 2010 net sales to increase 16% to 18% over third quarter 2009. (See “Forward-looking statements” concerning important factors that could impact actual results.)

Environmental Remediation

We believe, based on our internal reviews and other factors, that any future costs relating to environmental remediation and compliance will not have a material effect on our capital expenditures, earnings, cash flows, or competitive position.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and funds available under our senior secured revolving credit facility (revolver). We expect that short-term and long-term funding requirements will continue to be met by these sources. At July 3, 2010, we had no outstanding borrowings under the revolver and $23.4 million of LC’s were issued. Consequently, we have approximately $176.6 million of borrowing capacity under the revolver which matures in 2012.

Cash flows from operations amounted to $53.0 million in the first six months of 2010 compared to $105.9 million in the first six months of 2009. As business improved sharply during the first half of 2010, corresponding increases in accounts receivable used $52.0 million of working capital. This was partially offset by corresponding increases in accounts payable that contributed $33.5 million. While we increased production schedules during the first six months of this year, our inventories decreased slightly, contributing $3.0 million to working capital. In contrast, as business levels were declining during the first half of 2009, reductions in inventories and accounts receivables contributed $33.6 million and $15.2 million, respectively, to working capital and decreases in accounts payable used $19.0 million. In addition, during the first quarter of 2009 we recovered $19.1 million of margin deposits on our commodity hedges that were funded during the fourth quarter of 2008.

Net cash used in investing activities was $6.7 million in the first six months of 2010 and $17.8 million in the first six months of 2009 and primarily related to capital expenditures.

Net cash used in financing activities of $45.2 million in the first six months of 2010 included dividends paid to shareholders of $15.9 million, net debt payments of $42.2 million and proceeds from stock option exercises of $10.6 million. Financing activities in the first six months of 2009 included dividends paid to shareholders of $23.6 million, credit agreement amendment fees of $7.3 million, and net debt payments of $52.5 million. Due to the timing of our year end, we funded the fourth quarter 2008 dividend of $7.9 million in addition to the first quarter 2009 dividend during first quarter 2009, whereas the first quarter 2010 dividend was funded in second quarter 2010.

We have a corporate family credit rating of BB- and senior secured debt rating of Ba3 with a stable outlook by Moody’s Investors Services, Inc. (“Moody’s”). We have a long-term issuer credit rating of B1 and senior secured debt rating of BB+ with a stable outlook by Standard & Poor’s Rating Service (“S&P”). We have senior unsecured debt ratings of B3 by Moody’s and B by S&P. We have a Moody’s liquidity rating of SGL-2. Our senior secured credit facility has a downward rating trigger that increases the margin paid on variable rate borrowings from 3.25% to 3.50% for any period during which our Moody’s corporate family rating is below BB- or our S&P long-term issuer rating is below B1. We have no downward rating triggers that would accelerate the maturity of amounts drawn under our senior secured credit facility. Also, we have no downward rating triggers under our senior unsecured notes.

Our senior secured credit facility and senior unsecured notes contain various customary covenants, which limit, among other things, indebtedness and dispositions of assets and which require us to maintain compliance with certain quarterly financial ratios. The primary financial ratios in our credit agreement are total leverage (total debt/EBITDA, as defined) and senior secured leverage (senior secured debt/EBITDA, as defined). We have maintained compliance with all covenants and were in compliance at July 3, 2010. We expect to remain in compliance with these covenants in 2010.

Dividend Policy

Dividends paid to shareholders amounted to $0.34 per common share in the first six months of 2010 and 2009. Our objective is for shareholders to receive dividends while also participating in Baldor’s growth. The terms of our credit agreement and the indenture limit our ability to increase dividends in the future.

Recently Issued Accounting Pronouncements

See Note I, Recently Issued Accounting Pronouncements, of the Notes to Consolidated Financial Statements, included in Item 1 of this report for recently issued accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures about 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 help maintain stable pricing for customers, the Company enters into various commodity hedging transactions. To manage interest rate risk on variable rate outstanding debt, the Company enters into various interest rate hedging transactions.

Baldor is a purchaser of certain commodities, including copper and aluminum, 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. The Company had derivative contracts designated as commodity cash flow hedges with a fair value asset of $1.8 million recorded in other current assets at July 3, 2010.

Baldor’s interest rate risk is primarily related to its senior secured credit facility which bears interest at variable rates. Additionally, the Company’s long-term obligations include senior unsecured notes totalling $550.0 million which bear interest at a fixed rate of 8.625%. The Company utilizes various interest rate instruments to manage its future exposure to interest rate risk on a portion of the variable rate obligations. Effective March 31, 2009, the Company amended its senior secured credit agreement. In conjunction with the amendment, a LIBOR floor was added to the variable rate borrowings. As a result, the Company determined that its existing interest rate instruments were no longer expected to be highly effective and were discontinued as cash flow hedges.

Details regarding the instruments as of July 3, 2010, are as follows:


Instrument	Notional Amount		Maturity	Rate Paid		Rate Received ⁽¹⁾	Fair Value ⁽²⁾
(In millions)

Swap	$	250.0	April 30, 2012	5.12	%	LIBOR	$	(12.6	)
Collar	$	100.0	April 30, 2012	LIBOR		LIBOR – Floor 4.29%; Cap 6.50%	$	(4.1	)

⁽¹⁾	LIBOR is determined each reset date based on London and New York business days. Floating rates used in instruments are matched exactly to floating rate in credit agreement.

⁽²⁾	Fair value is an estimated amount the Company would have received (paid) to terminate the agreement.

Baldor’s 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. Accounts receivables are comprised of a large number of customers across broad industries and geographic areas.

Foreign affiliates comprise approximately 9.3% of our consolidated net sales. As a result, our exposure to foreign currency risk is not significant. We continue to monitor the effects of foreign currency exchange rates and will utilize foreign currency hedges where appropriate.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. Management is also responsible for maintaining adequate internal control over financial reporting.

Disclosure Controls and Procedures

An evaluation was performed by the Company’s management, including the Company’s CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 3, 2010. Based on such evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of July 3, 2010.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting or in other factors that occurred during the first six months of 2010 that have materially affected, or are reasonably likely to materially affect, these controls.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable.

Item 1A.

Risk Factors

The Company’s risk factors are fully described in the Company’s 2009 Form 10-K. No material changes to the risk factors have occurred since the Company filed its 2009 Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended July 3, 2010, the Company repurchased shares of the Company’s common stock in private transactions as summarized in the table below.


ISSUER PURCHASES OF EQUITY SECURITIES
	(a)	(b)		(c)	(d)
Period	Total Number of Shares (or Units) Purchased (1)	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
Month #1 April 4, 2010 – May 1, 2010	5,175	$	40.15	0	0
Month #2 May 2, 2010 – May 29, 2010	30,781	$	39.49	0	0
Month #3 May 30, 2010 – July 3, 2010	34,656	$	39.99	0	0

Total	70,612	$	39.78	0	0

(1)	Consists only of shares received from trades for payment of the exercise price or tax liability on stock option exercises.

During second quarter 2010, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). When exercised, the exercise price paid by the District Managers equals the market value of the stock on the date of the grant. When a District Manager exercises an option, the Company intends to use the proceeds from these option exercises for general corporate purposes. The total amount of shares that have been granted under the DM Plan is 1.0% of the outstanding shares of Baldor common stock. None of the transactions were registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration afforded by Section 4(2) of the Act. The Company deems this exemption to be appropriate given that there are a limited number of participants in the DM Plan and all parties are knowledgeable about the Company. In 2006, this DM Plan was effectively cancelled except with respect to then outstanding grants and no further awards have since been or will be granted from this Plan.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Removed and Reserved

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

See Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BALDOR ELECTRIC COMPANY
(Registrant)

By		/s/ GEORGE E. MOSCHNER
		George E. Moschner
		Chief Financial Officer and Secretary
		(on behalf of the Registrant and as Principal Financial Officer)

Date: August 11, 2010

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS


Exhibit No.		Description

3(i)	*	Articles of Incorporation (as restated and amended) of Baldor Electric Company, effective May 2, 1998, filed as Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.

3(ii)	*	Bylaws of Baldor Electric Company, as originally adopted on May 2, 1980, and amended effective August 4, 2008, and filed as Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 27, 2008.

4.1	*	Specimen of Common Stock representing Common Stock, par value $0.10 per share, filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed January 31, 2007.

4(ii).1	*	Indenture between the Company and Wells Fargo Bank, National Association, dated January 31, 2007, previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed February 6, 2007.

4(ii).2	*	First Supplemental Indenture between the Company, Baldor Sub 1, Inc., Baldor Sub 2, Inc., Baldor Sub 3, Inc. and Wells Fargo Bank, National Association, dated January 31, 2007, previously filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K, filed February 6, 2007.

4(ii).3	*	Second Supplemental Indenture between the Company, Reliance Electric Company, REC Holding, Inc., Reliance Electrical Technologies, LLC and Wells Fargo Bank, National Association, dated January 31, 2007, previously filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K, filed February 6, 2007.

4(ii).4	*	Form of 8 5/8% Senior Note due 2017 (incorporated by reference to Exhibit 4(ii).1).

10(i).1	*	Credit Agreement between the Company and BNP Paribas, as Administrative Agent, dated January 31, 2007, previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed February 6, 2007.

10(i).1.1	*	Amendment to Credit Agreement between the Company and BNP Paribas, as Administrative Agent, dated February 14, 2007, filed as Exhibit 10(i).2.1 to the Registrant’s Annual Report on Form 10-K, filed February 28, 2007.

10(i).1.2	*	Second amendment between the Company and BNP Paribas, as Administrative Agent, dated March 31, 2009, previously filed as Exhibit 10 to the Registrant’s Current Report on Form 8-K, filed April 4, 2009.

10(iii).1	* †	1994 Incentive Stock Option Plan, as restated and amended at the Company’s Annual Meeting on May 2, 1998, filed as Exhibit 10(iii)(A).1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.



10(iii).2	* †	1996 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on August 10, 1998, filed as Exhibit 10(iii)A.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.

10(iii).3	* †	Stock Option Plan for Non-Employee Directors, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.

10(iii).4	* †	Bonus Plan for Executive Officers, filed as Exhibit 10(iii).5 to the Registrant’s Annual Report on Form 10-K for the year ended January 2, 2010.

10(iii).5	* †	2006 Equity Incentive Plan, as amended effective May 2, 2009, filed as an appendix to the Registrant’s Proxy Statement dated April 3, 2009.

10(iii).6	* †	Plan for Tax Deductible Executive Incentive Compensation, filed as Exhibit A to the Registrant’s Proxy Statement dated April 3, 2009.

31.1		Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Previously filed.

† Management contract or compensatory plan or arrangement.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company