10-Q

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 June 28, 2008

OR

¨ 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 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).

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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 June 28, 2008, there were 46,209,655 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 - June 28, 2008 and December 29, 2007	4
		Condensed Consolidated Statements of Income - Three and six months ended June 28, 2008 and June 30, 2007	5
		Condensed Consolidated Statement of Shareholders’ Equity - Six months ended June 28, 2008 and December 29, 2007	5
		Condensed Consolidated Statements of Cash Flows - Six months ended June 28, 2008 and June 30, 2007	6
		Notes to Unaudited Condensed Consolidated Financial Statements - June 28, 2008	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Submission of Matters to a Vote of Security Holders	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	25
SIGNATURE			26
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 “estimate”, “believe”, “will”, “intend”, “expect”, “may”, “could”, “future”, “susceptible”, “unforeseen”, “anticipate”, “would”, “subject to”, “depend”, “uncertainties”, “predict”, “can”, “expectations”, “if”, “unpredictable”, “unknown”, “pending”, “assumes”, “continued”, “ongoing”, “assumption”, 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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Baldor Electric Company

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share amounts)					Jun 28, 2008			Dec 29, 2007
ASSETS
Current Assets	Cash and cash equivalents				$	26,622		$	37,757
	Accounts receivable, less allowance for doubtful accounts of $4,115 at June 28, 2008 and $4,126 at December 29, 2007					325,340			281,729
	Inventories:
	Finished products					170,746			155,769
	Work in process					61,761			51,642
	Raw materials					147,937			146,582
						380,444			353,993
	LIFO valuation adjustment					(55,558	)		(44,072	)
						324,886			309,921
	Prepaid expenses					4,261			5,742
	Other current assets					58,089			59,847
	Total Current Assets					739,198			694,996
Property, Plant and Equipment
	Land and improvements					16,751			17,290
	Buildings and improvements					134,107			122,570
	Machinery and equipment					565,488			568,421
	Allowances for depreciation and amortization					(335,268	)		(311,733	)
	Net Property, Plant and Equipment					381,078			396,548
Other Assets	Goodwill					1,031,972			1,023,639
	Intangible assets, net of amortization					659,661			667,403
	Other					32,200			39,040
	Total Assets				$	2,844,109		$	2,821,626
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities	Accounts payable				$	115,225		$	77,831
	Employee compensation					18,858			15,205
	Accrued profit sharing					10,256			17,311
	Accrued warranty costs					8,388			9,216
	Accrued insurance obligations					11,083			11,285
	Accrued interest expense					22,083			27,729
	Other accrued expenses					64,763			61,595
	Dividends payable					7,849			7,809
	Income taxes payable					22,270			6,089
	Note payable					4,377			12,321
	Current maturities of long-term obligations					7,400			8,120
	Total Current Liabilities					292,552			254,511
Long-term obligations						1,304,879			1,355,905
Other liabilities						68,678			70,353
Deferred income taxes						312,006			330,088
			Jun 28, 2008	Dec 29, 2007
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:		55,340,155	55,137,057		5,533			5,513
	Outstanding shares:		46,209,655	45,941,417
	Additional paid-in capital					541,939			532,603
	Retained earnings					505,642			466,299
	Accumulated other comprehensive income (loss)					5,672			(27	)
	Treasury stock, at cost:		9,130,500	9,195,640		(192,792	)		(193,619	)
	Total Shareholders’ Equity					865,994			810,769
	Total Liabilities and Shareholders’ Equity				$	2,844,109		$	2,821,626

See notes to unaudited condensed consolidated financial statements.

4

Baldor Electric Company

Condensed Consolidated Statements of Income

(unaudited)

	Three Months Ended						Six Months Ended
(in thousands, except per share amounts)	Jun 28, 2008			Jun 30, 2007			Jun 28, 2008			Jun 30, 2007
Net sales	$	503,973		$	491,615		$	974,499		$	887,309
Cost of goods sold		351,127			341,531			677,929			623,663
Gross profit		152,846			150,084			296,570			263,646
Selling and administrative expenses		83,920			81,081			160,992			142,403
Operating profit		68,926			69,003			135,578			121,243
Other income, net		1,603			773			1,604			1,670
Interest expense		(24,630	)		(30,385	)		(51,222	)		(50,913	)
Income before income taxes		45,899			39,391			85,960			72,000
Provision for income taxes		16,527			14,179			30,949			25,920
Net income	$	29,372		$	25,212		$	55,011		$	46,080
Net earnings per common share – basic	$	0.64		$	0.55		$	1.19		$	1.06
Net earnings per common share – diluted	$	0.63		$	0.54		$	1.19		$	1.04
Weighted-average shares outstanding – basic		46,152			45,811			46,073			43,452
Weighted-average shares outstanding – diluted		46,453			46,566			46,241			44,110
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 Statement of Shareholders’ Equity

(unaudited)

(in thousands, except per share amounts)				Additional Paid-in		Retained			Accumulated Other Comprehensive			Treasury Stock, at
	Common Stock
	Shares	Amount		Capital		Earnings			Income (Loss)			cost			Total
BALANCE AT DECEMBER 29, 2007	55,137	$	5,513	$	532,603	$	466,299		$	(27	)	$	(193,619	)	$	810,769
Comprehensive income
Net income	—		—		—		55,011			—			—			55,011
Other comprehensive income (loss)
Currency translation adjustments	—		—		—		—			1,066			—			1,066
Derivative unrealized gain adjustment net of income taxes of $2,962)	—		—		—		—			4,633			—			4,633
Total other comprehensive income																5,699
Total comprehensive income																60,710
Stock option plans (including 53 shares exchanged and $827 income tax benefit)	203		20		8,544		—			—			(1,665	)		6,899
Cash dividends at $0.34 per share	—		—		—		(15,668	)		—			—			(15,668	)
Treasury stock issued	—		—		792		—			—			2,492			3,284
BALANCE AT JUNE 28, 2008	55,340	$	5,533	$	541,939	$	505,642		$	5,672		$	(192,792	)	$	865,994

See notes to unaudited condensed consolidated financial statements.

5

Baldor Electric Company

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
(in thousands)	Jun 28, 2008			Jun 30, 2007
Operating activities:
Net income	$	55,011		$	46,080
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of marketable securities		—			(32	)
Losses (gains) on sales of assets		945			(62	)
Depreciation		27,886			24,353
Amortization		11,077			10,342
Allowance for doubtful accounts receivable		(11	)		2
Deferred income tax benefit		(17,297	)		(13,144	)
Share-based compensation expense		4,005			2,136
Cash provided by (used in) changes in operating assets and liabilities:
Receivables		(43,600	)		(27,480	)
Inventories		(14,574	)		(13,227	)
Other current assets		7,159			6,954
Accounts payable		37,394			17,389
Accrued expenses and other liabilities		(7,971	)		32,762
Income taxes payable		16,110			16,712
Other assets, net		(4,482	)		9,239
Net cash provided by operating activities		71,652			112,024
Investing activities:
Purchases of property, plant and equipment		(14,645	)		(18,628	)
Proceeds from sale of property, plant and equipment		31			2,898
Proceeds from sale of marketable securities		—			23,034
Acquisitions (net of cash acquired)		—			(1,764,868	)
Divestitures		—			49,886
Net cash used in investing activities		(14,614	)		(1,707,678	)
Financing activities:
Proceeds from long-term obligations		24,538			1,550,000
Principal payments of long-term obligations		(72,000	)		(220,000	)
Debt issuance costs		—			(30,519	)
Principal payments on note payable		(12,321	)		—
Proceeds from common stock issued		—			379,857
Dividends paid		(15,668	)		(15,574	)
Stock option exercises		6,980			5,277
Excess tax benefits on share-based payments		298			1,200
Net decrease in bank overdrafts		—			(4,624	)
Net cash (used in) provided by financing activities		(68,173	)		1,665,617
Net (decrease) increase in cash and cash equivalents		(11,135	)		69,963
Beginning cash and cash equivalents		37,757			12,737
Ending cash and cash equivalents	$	26,622		$	82,700

Noncash items:

— Additional paid-in capital resulting from shares traded for option exercises amounted to $1,286 and $2,006 in the first six months of 2008 and 2007, respectively.

— Common stock valued at $50,932 was issued January 31, 2007 in conjunction with the acquisition of Reliance Electric (see NOTE B).

— Treasury shares issued in March 2008 in the amount of $3,284 to fund 2007 accrued profit sharing contribution

See notes to unaudited condensed consolidated financial statements.

6

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements

June 28, 2008

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 December 29, 2007. In the opinion of management, all adjustments (consisting of normal recurring items and adjustments to record the preliminary purchase allocation in 2007 as described in NOTE B) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 28, 2008, may not be indicative of the results that may be expected for the fiscal year ending January 3, 2009.

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 2008 will contain 53 weeks. Fiscal year 2007 contained 52 weeks.

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

Reclassifications: Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. For second quarter 2007, approximately $1.5 million was reclassified from cost of goods sold to selling and administrative expenses. For the six months ended June 28, 2007, approximately $2.5 million was reclassified from cost of goods sold to selling and administrative expenses.

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 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.

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

7

are limited due to the large number of customers and their dispersion across geographic areas and industries. No single customer represents greater than 10% of net accounts receivable at June 28, 2008 or December 29, 2007.

Inventories: The Company uses the last-in, first-out (LIFO) method of valuing inventories held in the U.S. 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.

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:

	Six Months Ended
(in thousands)	Jun 28, 2008			Jun 30, 2007
Balance at beginning of period	$	9,216		$	5,566
Charges to costs and expenses		4,760			5,778
Amounts assumed in acquisition		—			3,480
Payments		(5,588	)		(5,607	)
Balance at end of period	$	8,388		$	9,217

Self-Insurance Liabilities: The Company’s 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 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.

Income Taxes: The difference between the Company’s effective tax rate and the federal statutory tax rate for the three and six months ended June 28, 2008, and June 30, 2007, relates to state income taxes, permanent differences, changes in management’s assessment of the outcome of certain tax matters, and the composition of taxable income between domestic and international operations. The significant permanent tax items 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 differences, statutory tax rates and tax planning opportunities. The impact of significant discrete items is separately recognized in the quarter in which they occur.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board 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. The Company recognizes interest and penalties related to uncertain tax positions as interest costs and selling and administrative costs, respectively.

Share-Based Compensation: The Company has share-based compensation plans, which are described more fully herein under NOTE I – Stock Plans. Compensation expense is recognized using the fair value recognition provisions of Statement of Financial Accounting Standards (“FAS”) No. 123R, “Share-Based Payments”.

8

FAS 123R requires cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

Fair value of the 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 and is estimated based on historical experience. Assumptions used in the fair-value valuation are periodically monitored and adjusted to reflect current developments at the date of grant.

Business Combinations: The Company accounts for acquired businesses using the purchase method of accounting which requires that assets acquired and liabilities assumed be recorded at their respective fair values at the date of acquisition. 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 the Company’s results of operations. Accordingly, for significant items, the Company typically obtains assistance from third party valuation specialists. Valuations are based on information available near the acquisition date and are based on expectations and assumptions deemed reasonable by management.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, the Company typically uses the relief from royalty and income methods. These methods start 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 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 requires judgment because different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

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 estimated 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 Statement of Financial Accounting Standards (“FAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is evaluated for impairment by first comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, a computation of the implied fair value of goodwill is compared with its related carrying value. If the carrying value of the reporting unit’s goodwill

9

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 estimated fair value of those intangibles, an impairment loss is recognized in the amount of the excess.

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 Baldor’s product offerings, provides a manufacturing base in China for the Asian markets, increases the Company’s 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 Baldor’s 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 net proceeds from the issuance of 10,294,118 shares of Baldor common stock at a price of $34.00 per common share, net proceeds from the issuance of $550.0 million of 8.625% senior notes due 2017, and borrowings of $1.0 billion under a new $1.2 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. Net proceeds from the over-allotment offering of approximately $46.5 million were utilized to reduce borrowings under the senior secured credit facility. Reliance’s results of operations are included in the consolidated financial statements beginning February 1, 2007.

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 the first quarter of 2007.

The table below presents summarized pro forma results of operations as if the acquisition had been effective at the beginning of the six month period ended June 30, 2007.

(in millions, except for per share data)	Six Months Ended Jun 30, 2007
Net sales	$	981.4
Income before income taxes		76.1
Net income		48.7
Net earnings per common share - diluted	$	1.05

NOTE C – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a fair value of $8.5 million recorded in other current assets at June 28, 2008, and a negative fair value of $0.4 million recorded in other accrued expenses at December 29, 2007.

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Gains recognized on commodity cash flow hedges reduced cost of sales by $2.4 million and $0.6 million in the second quarter of 2008 and 2007, respectively. Gains recognized as a reduction in cost of sales amounted to $3.8 million and $2.6 million in the first six months of 2008 and 2007, respectively. Ineffective portions of the Company’s commodity cash flow hedges were not material during the second quarters or first six months of 2008 or 2007. The Company expects after-tax gains totaling $5.2 million at June 28, 2008, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next six months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a negative fair value of $12.8 million and $11.5 million recorded in other accrued expenses at June 28, 2008 and December 29, 2007, respectively. Unrealized after-tax losses of $7.8 million and $7.0 million are recorded in accumulated other comprehensive income (loss) at June 28, 2008 and December 29, 2007, respectively.

FAS No. 157, “Fair Value Measurements” defines fair value as 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. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

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 millions)	Fair Value Measurements as of June 28, 2008
	Total			Level 1		Level 2			Level 3
Interest rate swap	$	(10.1	)	$	—	$	(10.1	)	$	—
Interest rate collar		(2.7	)		—		(2.7	)		—
Copper derivatives		8.5			3.0		5.5			—
Total	$	(4.3	)	$	3.0	$	(7.3	)	$	—

Unrealized gains or losses are recorded in accumulated other comprehensive income (loss) at each measurement date.

NOTE D – Goodwill and Other Intangible Assets

The amounts of goodwill at June 28, 2008 and December 29, 2007 are as follows:

(in millions)
Balance at December 29, 2007	$	1,023.6
Purchase accounting adjustment related to final valuations		8.4
Balance at June 28, 2008	$	1,032.0

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The amounts of other intangible assets by type are as follows:

(in millions)	Jun 28, 2008			Dec 29, 2007
Gross carrying value:
Trademarks	$	354.8		$	354.8
Customer relationships		292.0			292.0
Technology		32.0			32.0
Less accumulated amortization:
Customer relationships		(15.5	)		(2.5	)
Technology		(3.6	)		(8.9	)
Total intangible assets	$	659.7		$	667.4

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 E – Note Payable

The Company’s wholly-owned Chinese subsidiary entered into a short-term note payable 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 Company’s senior secured credit facility. The note was refinanced during the second quarter of 2008. The principal balance was $4.4 million and $12.3 million at June 28, 2008 and December 29, 2007, respectively. The note payable bears interest at a variable rate (7.227% at June 28, 2008) and matures October 2008.

NOTE F – Long-term Obligations

Long-term obligations are as follows:

(dollars in thousands)	Interest Rate at Jun 28, 2008	Jun 28, 2008		Dec 29, 2007
Senior secured term loan, variable interest rate	5.377%	$	740,000	$	812,000
Revolving credit facility, variable interest rate	4.250%		20,000		—
Senior unsecured notes, fixed interest rate	8.625%		550,000		550,000
Other	1.730%		2,279		2,025
			1,312,279		1,364,025
Less current maturities			7,400		8,120
		$	1,304,879	$	1,355,905

Interest paid was $11.4 million and $6.0 million in second quarter 2008 and 2007, respectively. Interest paid during the first six month of 2008 and 2007 was $53.5 million and $17.9 million, respectively.

Term and Revolving Credit Loans

Interest on the term loan is due periodically based upon a variable adjusted London Inter-Bank Offered Rate (“LIBOR”). Quarterly principal payments of $1.85 million are due beginning July 31, 2008, and continue through January 31, 2013, at which date the subsequent quarterly principal payments increase to $173.9 million through the loan due date of January 31, 2014 with a final payment of $183.2 million.

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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 2007 annual calculation. 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 that the Company maintain a fixed charge ratio. These restrictions and ratios were all met as of June 28, 2008.

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. As of June 28, 2008, the Company had $20.0 million of borrowings outstanding under the revolver. An RC commitment fee is due quarterly at the annual rate of 0.375% on the unused amount of the RC commitment. At June 28, 2008, $27.8 million of LC’s were issued which reduced the aggregate LC and RC availability. Availability totaled $152.2 million at June 28, 2008. LC participation fees of 1.75% 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 any RC borrowings is 1.75% plus LIBOR (2.50% at June 28, 2008) or 1.25% per annum plus prime (5.00% at June 28, 2008).

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

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NOTE G – 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, Rockwell 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 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 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.

NOTE H – 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 $47.9 million at June 28, 2008 and $50.0 million at December 29, 2007 are included in other liabilities on the balance sheets.

Net periodic pension and other postretirement benefit costs include the following components for the three and six-month periods ended June 28, 2008 and June 30, 2007, respectively.

Pension Benefits	Three Months Ended						Six Months Ended
(in thousands)	Jun 28, 2008			Jun 30, 2007			Jun 28, 2008			Jun 30, 2007
Service cost	$	121		$	129		$	241		$	218
Interest cost		48			42			96			70
Expected return on assets		(57	)		(49	)		(115	)		(82	)
Amortization of prior service costs		3			—			6			—
Amortization of net loss		—			—			—			—
Net periodic benefit cost	$	115		$	122		$	228		$	206
Other Postretirement Benefits	Three Months Ended						Six Months Ended
(in thousands)	Jun 28, 2008			Jun 30, 2007			Jun 28, 2008			Jun 30, 2007
Service cost	$	40		$	42		$	80		$	70
Interest cost		710			740			1,420			1,242
Expected return on assets		—			—			—			—
Amortization of prior service costs		—			—			—			—
Amortization of net loss		—			—			—			—
Net periodic benefit cost	$	750		$	782		$	1,500		$	1,312

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No contributions were made to the pension plans during the three and six months ended June 28, 2008 and June 30, 2007. The Company made contributions to the postretirement plan of approximately $3.6 million and $1.3 million for the six months ended June 29, 2008 and June 30, 2007, respectively. The Company made contributions to the postretirement plan of approximately $2.0 million and $1.3 million for the three months ended June 29, 2008 and June 30, 2007, respectively. The Company expects to make no contributions to the pension plans in 2008 and expects to contribute $7.0 million to the postretirement benefit plan in 2008.

NOTE I – 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 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 Company’s policy is to not re-price any outstanding options. 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 will be granted from those plans.

A summary of the Company’s stock plans and summary details about each Plan as of June 28, 2008, follows.

Plan	Shares Authorized	Current Plan Status	Typical Grant Life
1990	501,600	Cancelled; except for options outstanding	6 years
1994	4,000,000	Cancelled; except for options outstanding	10 years
1996	200,000	Expired; except for options outstanding	10 years
2001	200,000	Cancelled; 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 Plans: Incentive stock options vest and become fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. All outstanding non-qualified stock options granted under these plans 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.

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A summary of option activity under the Plans during the six month period ended June 28, 2008, is presented below:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
						(in thousands)
Outstanding at December 29, 2007	2,412,400		$	31.16
Granted	532,587			28.89
Exercised	(163,906	)		22.38
Expired	(7,183	)		24.40
Cancelled	(300	)		28.62
Forfeited	(33,786	)		38.93
Outstanding at June 28, 2008	2,739,812			31.17	7.2 years	$	18,701
Vested or expected to vest at June 28, 2008	2,659,204			30.72	7.2 years	$	18,590
Exercisable at June 28, 2008	1,604,967			26.90	5.8 years	$	16,130

The weighted-average grant-date fair value of options granted was $7.70 and $11.83 in the first six months of 2008 and 2007, respectively. The total intrinsic value of options exercised was $3.5 million and $7.3 million during the first six months of 2008 and 2007, respectively.

As of June 28, 2008, there was $7.4 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 1.8 years.

A summary of non-vested stock unit activity under the Plans during the six month period ended June 28, 2008, is presented below:

Non-vested Stock Units	Shares		Weighted-Average Grant-Date Fair Value Per Unit
Non-vested at beginning of period	107,921		$	36.35
Granted	78,773			27.80
Vested	(39,192	)		36.92
Forfeited	(2,543	)		31.04
Non-vested at end of period	144,959			31.64

The total fair value of stock units vested during the first six months of 2008 and 2007 was $1.4 million and $146,000, respectively.

As of June 28, 2008, there was $2.4 million of total unrecognized compensation cost expected to be recognized over a weighted-average period of 1.3 years related to non-vested stock units granted under the Plans.

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

	Six Months Ended
	Jun 28, 2008	Jun 30, 2007
Volatility	30.9%	24.0%
Risk-free interest rates	3.0%	5.2%
Dividend yields	2.4%	1.7%
Expected option life	5.9 years	6.4 years

NOTE J – 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)	Jun 28, 2008		Jun 30, 2007		Jun 28, 2008		Jun 30, 2007
Numerator:
Net income	$	29,372	$	25,212	$	55,011	$	46,080
Denominator Reconciliation:
Weighted-average shares – basic		46,152		45,811		46,073		43,452
Effect of dilutive securities – stock options and non-vested stock units		301		755		168		658
Weighted-average shares – diluted		46,453		46,566		46,241		44,110
Earnings per common share – basic	$	0.64	$	0.55	$	1.19	$	1.06
Earnings per common share – diluted	$	0.63	$	0.54	$	1.19	$	1.04

The total number of anti-dilutive securities excluded from the above calculations was 955,558 and 68,116 for the three month periods ended June 28, 2008, and June 30, 2007, respectively, and 960,858 and 68,116 for the six-month periods ended June 28, 2008, and June 30, 2007, respectively.

NOTE K – 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 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 adopted FAS 157 on December 30, 2007. The adoption of FAS 157 has not had a material impact on the financial results or financial position. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP amends FAS 157 to delay the effective date for nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis. The deferred effective date for such nonfinancial assets and liabilities is for fiscal years beginning after November 15, 2008.

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

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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 for any future business combinations.

In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133”. FAS 161 expands disclosure requirements about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption encouraged.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP determined that unvested share-based payment awards with rights to receive dividends or dividend equivalents should be considered participating securities; and therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, “Earnings per Share”. This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF 03-6-1 to have a significant effect on our consolidated financial statements.

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

Overview

Baldor is a leading manufacturer of industrial electric motors, drives, generators, and other power transmission products, currently supplying over 9,500 customers in more than 160 industries. Our products are sold to a diverse customer base consisting of original equipment manufacturers and distributors serving markets in the United States and throughout the world. We focus on providing customers with value through a combination of quality products and customer service, as well as short lead times and attractive total cost of ownership, which takes into account initial product cost, product life, maintenance costs, and energy consumption.

On January 31, 2007, Baldor completed the acquisition of Reliance from Rockwell. Reliance is a leading manufacturer of industrial electric motors, and other power transmission products sold under the Reliance and Dodge brand names. The acquisition extends Baldor’s product offerings, provides a manufacturing base in China for the Asian markets, increases the Company’s manufacturing capabilities and flexibility, strengthens the management team, and provides strong opportunities for synergies and cost savings. Reliance’s results of operations are included in the consolidated financial statements beginning February 1, 2007.

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;

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

• Our large installed base, which creates a significant replacement demand.

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We are not dependent on any one industry or customer for our financial performance, and no single customer represented more than 10% of our net sales for the quarters ended June 29, 2008, and June 30, 2007. For the quarter ended June 28, 2008, approximately 48% of our domestic net sales were generated through distributors and represented primarily sales of replacement products, compared to 49% for the same period in 2007. Domestic sales to OEMs were approximately 52% for the quarter ended June 28, 2008, compared to 51% for the same period in 2007. OEMs primarily use our products in new installations. This expands our installed base and leads to replacement product sales by distributors in the future.

We manufacture substantially all of our products. Consequently, our costs include the cost of raw materials, including steel, copper and aluminum, and energy costs. Each of these costs has increased in the past few years and increased significantly in the past few months due to growing global demand for these commodities, impacting our cost of sales. We seek to offset these increases through a continued focus on product design improvements, including redesigning our products to reduce material content and investing in capital equipment that assists in eliminating waste, and by modest price increases in our products. Our manufacturing facilities are also significant sources of fixed costs. Our margin is impacted when we cannot promptly decrease these costs to match declines in net sales.

Industry Trends

The demand for products in the industrial electric motor, generator, and power transmission industries is closely tied to growth trends in the economy and levels of industrial activity and capital investment. We believe that 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, and availability as well as customer service, rather than the price alone. 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.

Results of Operations

Second quarter 2008 compared to second quarter 2007

Net sales for the quarter increased 2.5% to $504.0 million, compared to $491.6 million in the second quarter of 2007. Sales of industrial electric motor products grew 5.3% for the quarter as compared to second quarter 2007 and comprised 64.7% of total sales compared to 63.0% for the same period last year. Sales of mounted bearings, gearing, and other power transmission products grew 6.1% and accounted for approximately 27.9% of total sales for the second quarter of 2008, compared to 27.0% for the same period last year. During second quarter 2008, sales of generator products increased 5.7% from second quarter 2007 and comprised 2.7% of total sales for the current quarter compared to 2.6% for the same period last year. Sales of drives and motion control products decreased 2.8% from second quarter 2007 and accounted for 4.5% of total sales, compared to 4.8% in second quarter 2007. Sales of Super-E^® premium-efficient motors continue to grow at a faster pace than standard-efficiency motors, increasing more than 25% for the quarter when compared to second quarter 2007.

Gross profit margins decreased slightly to 30.3% in second quarter 2008 compared to 30.5% in second quarter 2007 and operating profit margins decreased to 13.7% from 14.0% in second quarter 2007. Our continued focus on product design improvements and manufacturing efficiency, along with a price increase on our products implemented earlier in the year, helped to offset higher raw

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materials prices. However, costs for steel, copper, cast iron, and transportation continue to increase at a faster rate than we expected, resulting in decreased margins. In reaction to the continuing inflation in our materials and transportation costs, we announced an additional 5 to 8% price increase across our entire product line effective on July 13.

Interest expense decreased $5.8 million from second quarter 2007. Interest rates on our outstanding variable rate debt decreased during the quarter when compared to the same period last year. We repaid an additional $40.0 million of debt during the second quarter of 2008.

Pre-tax income of $45.9 million for the quarter was up 16.5% compared to second quarter 2007 pre-tax income of $39.4 million.

Net income of $29.3 million for the quarter was up 16.5% from second quarter 2007 net income of $25.2 million. Diluted earnings per common share grew by 16.7% to $0.63 compared to $0.54 in second quarter 2007. The effective tax rate was 36.0% for both periods.

Six months ended June 28, 2008 compared to six months ended June 30,2007

Net sales for the first six month of 2008 increased 9.8% to $974.5 million, compared to $887.3 million in the first six months of 2007. Sales of industrial electric motor products grew 10.8% for the first six months of 2008 as compared to the first six months of 2007 and comprised 65.0% of total sales compared to 64.4% for the same period last year. Sales of mounted bearings, gearing, and other power transmission products grew 24.9% and accounted for approximately 28.0% of total sales for the first six months of 2008, compared to 24.6% for the same period last year. During the first six months of 2008, sales of generator products decreased 13.8% from the same period last year and comprised 2.1% of total sales for the first six months of 2008 compared to 2.6% for the same period last year. Sales of drives and motion control products increased 4.0% from the first six months of 2007 and accounted for 4.8% of total sales, compared to 5.1% for the same period last year.

Gross profit margins improved to 30.4% for the first six months of 2008 compared to 29.7% in the first six months of 2007 and operating profit margins improved to 13.9% from 13.7% in the first six months of 2007. While 2008 reflects six full months of Reliance operations, the benefit to our margins has been diluted by continued increases in materials and transportation costs.

Interest expense increased $0.3 million over the first six months of 2007. There are only five months of interest expense in 2007 related to the debt incurred on January 31, 2007 to fund our acquisition of Reliance. We repaid $59.8 million of debt during the first six months of 2008. In addition, interest rates on our variable rate debt decreased during the first six months of 2008.

Pre-tax income of $86.0 million for the first six months of 2008 was up 19.4% compared to pre-tax income of $72.0 million for the first six months of 2007.

Net income of $55.0 million for the first six months of 2008 was up 19.4% from the first six months of 2007 net income of $46.1 million. Diluted earnings per common share grew by 14.4% to $1.19 compared to $1.04 in the first six months of 2007. The effective tax rate was 36.0% for both periods.

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: Working capital amounted to $446.6 million at June 28, 2008, compared to $440.5 million at December 29, 2007.

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Liquidity was supported by cash flows from operations of $71.7 million in the first six months of 2008 as compared to $112.0 million in the first six months of 2007. Operating cash flows decreased primarily due the timing of interest payments, including a semi-annual $23.7 million interest payment on our senior unsecured notes, paid in February 2008.

During the first six months of 2008, we utilized cash flows from operations to fund property, plant and equipment additions of $14.6 million, pay dividends of $15.7 million to our shareholders, and reduce our net outstanding debt by $59.8 million. In the first six months of 2007, we utilized cash flow from operations to fund property, plant and equipment additions of $18.6 million, pay dividends of $15.6 million to our shareholders, and repay $28.6 million of debt.

Net cash used in investing activities was $14.6 million in the first six months of 2008 compared to $1.71 billion in the first six months of 2007. The change was primarily related to the $1.76 billion (net of cash acquired) used to acquire Reliance on January 31, 2007.

Net cash used in financing activities was $68.2 million in the first six months of 2008 compared to net cash provided of $1.67 billion in first six months of 2007. The first six months of 2007 included proceeds from new debt acquired and the issuance of Baldor common stock to finance the purchase of Reliance.

Total outstanding debt was $1.32 billion at June 28, 2008, compared to $1.38 billion at December 29, 2007. In conjunction with our acquisition of Reliance on January 31, 2007, we borrowed a total of $1.55 billion under our senior secured credit facility and senior unsecured notes. A portion of the proceeds from new borrowings were utilized to repay $95.0 million of long-term debt that existed at December 30, 2006. During the first six months of 2008, net outstanding debt decreased $59.8 million.

Our primary sources of liquidity are cash flows from operations and funds available under our senior secured credit facility. At June 28, 2008, we had approximately $152.2 million of borrowing capacity under the senior secured credit facility. We expect that ongoing requirements for debt service, operations, capital expenditures and dividends will be funded from these sources. We have senior secured debt ratings of Ba3 with a stable outlook by Moody’s Investors Services, Inc. (“Moody’s”) and BB+ with a stable outlook by Standard & Poor’s Rating Service (“S&P”). We have a senior unsecured debt rating of B3 with a stable outlook by Moody’s. We have no downward rating triggers that would accelerate the maturity of amounts drawn under our senior secured credit facility and our senior unsecured notes. Our senior secured credit facility and senior unsecured credit facility 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. As of June 28, 2008, we were in compliance with all covenants.

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 2007 annual calculation. 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.

Dividend Policy: Dividends paid to shareholders amounted to $0.34 per common share in the first six months of 2008 compared to $0.34 per common share in the first six months of 2007. Our objective is for shareholders to receive dividends while also participating in Baldor’s growth. Terms of our credit agreement and indenture related to financing the acquisition of Reliance limit our ability to increase dividends.

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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 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 adopted FAS 157 on December 30, 2007. The adoption of FAS 157 has not had a material impact on the financial results or financial position. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP amends FAS 157 to delay the effective date for nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis. The deferred effective date for such nonfinancial assets and liabilities is for fiscal years beginning after November 15, 2008.

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 for any future business combinations.

In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133”. FAS 161 expands disclosure requirements about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption encouraged.

In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. This FSP determined that unvested share-based payment awards with rights to receive dividends or dividend equivalents should be considered participating securities; and therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, “Earnings per Share”. This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF 03-6-1 to have a significant effect on our consolidated financial statements.

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, steel and aluminum, and periodically utilizes commodity futures and options for hedging purposes to reduce the effects of changing commodity prices. Contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation.

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

22

8.625%. The Company utilizes various interest rate hedge instruments to manage its future exposure to interest rate risk on a portion of the variable rate obligations. Critical terms (notional amount, interest reset dates, and underlying index) of the hedge instruments coincide with those of the credit facility. Consequently, the hedges are expected to offset changes in the expected cash flows due to fluctuations in the interest rate over the term of the hedge instrument.

Details regarding the instruments as of June 28, 2008, 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	$	(10.14	)
Collar	$	100.0	April 30, 2012	LIBOR		LIBOR – Floor 4.29%; Cap 6.50%	$	(2.67	)

⁽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) at June 28, 2008, 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.

Foreign affiliates comprise approximately 10% 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 December 29, 2007. Based on such evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of June 28, 2008.

Changes in Internal Control Over Financial Reporting

As a result of the acquisition of Reliance on January 31, 2007, certain information included in the Company’s consolidated financial statements for the quarter and six months ended June 28, 2008, was obtained from accounting and information systems utilized by Reliance that have not yet been integrated in the Company’s systems. The Company is currently in the process of integrating those systems. There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation or in other factors that occurred during the first six months of 2008 that has materially affected, or is reasonably likely to materially affect, these controls.

23

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 2007 Form 10-K. No material changes to the risk factors have occurred since the Company filed its 2007 Form 10-K.

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

On November 11, 2003, the Company publicly announced the approval of a share repurchase program that authorized the repurchase of up to three million shares between January 1, 2004, and December 31, 2008.

During the three months ended June 28, 2008, the Company repurchased shares of the Company’s common stock in private transactions as summarized in the table below.

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs (2)
Month #1
Mar 30, 2008 – Apr 26, 2008	6,655	$	28.34	—	1,451,623
Month #2
Apr 27, 2008 – May 24, 2008	6,548	$	34.05	—	1,451,623
Month #3
May 25, 2008 – Jun 28, 2008	5,210	$	38.96	—	1,451,623
Total	18,413	$	33.38	—	1,451,623

(1) Consists only of shares received from trades for payment of the exercise price or tax liability on stock option exercises, neither of which reduces the number of shares available under the share repurchase program.

(2) Future repurchases are limited under terms of the Company’s senior secured credit facility.

During the second quarter of 2008, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). The exercise price paid by the District Managers equaled the market value of the stock on the date of the grant. The Company intends to use the proceeds from these option exercises for general corporate purposes. The total amount of shares 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.

24

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual shareholders’ meeting on April 26, 2008, at which shareholders voted on three proposals.

Proposal 1 was the election of three Directors to the Company’s Board of Directors for terms expiring in 2011. The following is a list of the Board slate of nominees (who were the only nominees) each of whom were elected, and the results of shareholder voting on Proposal 1:

Director Nominee	Votes For	Votes Withheld	Abstentions and Broker Non-votes
Jefferson W. Asher, Jr.	35,625,175	1,021,889	—
Richard E. Jaudes	21,618,445	15,028,619	—
Robert J. Messey	35,702,425	944,639	—

The remaining board members are listed below and each is expected to serve out their respective term:

Merlin J. Augustine, Jr.	John A. McFarland	Barry K. Rogstad
Jean A. Mauldin	Robert L. Proost	Ronald E. Tucker
	R. L. Qualls

Proposal 2 was to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year 2008. Shareholders ratified this appointment as indicated below by the results of the shareholder voting on Proposal 2:

Votes For	Votes Against	Abstentions
36,320,011	299,229	27,824

Proposal 3 was to consider and act upon a shareholder proposal regarding a classified board. Shareholders voted in favor of a shareholder proposal to declassify the Company’s Board of Directors. As such, the Board will review and consider amendments to the Company’s articles of incorporation and by-laws prior to the next meeting of the shareholders. Voting results on Proposal 3 are as indicated below:

Votes For	Votes Against	Abstentions	Not Voted
21,866,312	11,259,864	325,536	3,195,352

Item 5. Other Information

Not applicable.

Item 6. Exhibits

a. See Exhibit Index

25

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)
Date: August 7, 2008	By:	/s/ Ronald E. Tucker
		Ronald E. Tucker
		President, Chief Operating Officer, and Director
		(on behalf of the Registrant)
Date: August 7, 2008	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary
		(Principal Financial Officer)

26

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS

Exhibit No.	Description
4(i).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, and incorporated herein by reference.
4(i).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, and incorporated herein by reference.
4(i).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, and incorporated herein by reference.
4(i).4	Form of 8  5/8% Senior Note due 2017 (incorporated by reference to Exhibit 4(i).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, and incorporated herein by reference.
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, and incorporated herein by reference.
10(iii).1	Bonus Plan for Executive Officers, as approved by the Company’s Compensation Committee of the Board of Directors and the Company’s Board of Directors on February 25, 2008, and filed as Exhibit 10(iii).1 to the Registrant’s Quarterly Report on Form 10-Q on May 8, 2008, and incorporated herein by reference.
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.

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John A. McFarland, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Baldor Electric Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2008	By:	/s/ John A. McFarland
		John A. McFarland
		Chairman and Chief Executive Officer of Baldor Electric Company

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, George E. Moschner, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of Baldor Electric Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2008	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary of Baldor Electric Company

EX-32

EXHIBIT 32

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baldor Electric Company (the “Company”) on Form 10-Q for the period ending June 28, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. McFarland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 7, 2008	By:	/s/ John A. McFarland
		John A. McFarland
		Chairman and Chief Executive Officer of Baldor Electric Company

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Baldor Electric Company (the “Company”) on Form 10-Q for the period ending June 28, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George E. Moschner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 7, 2008	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary of Baldor Electric Company