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 July 4, 2009

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 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  ¨    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 July 4, 2009, there were 46,574,299 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 4, 2009 and January 3, 2009	4
		Condensed Consolidated Statements of Income – Six months ended July 4, 2009 and June 28, 2008	5
		Condensed Consolidated Statements of Shareholders’ Equity – Six months ended July 4, 2009	5
		Condensed Consolidated Statements of Cash Flows – Six months ended July 4, 2009 and June 28, 2008	6
		Notes to Unaudited Condensed Consolidated Financial Statements – July 4, 2009	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	31
PART II – OTHER INFORMATION
	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	Item 3.	Defaults Upon Senior Securities	32
	Item 4.	Submission of Matters to a Vote of Security Holders	33
	Item 5.	Other Information	33
	Item 6.	Exhibits	34
SIGNATURE			34
INDEX OF EXHIBITS			35

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”, “would”, “subject to”, “depend”, “can”, “expectations”, “if”, “should”, “pending”, “assumes”, “continued”, “ongoing”, “assumption”, “forecast”, “projected”, “probable”, 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 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.

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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)	July 4, 2009			January 3, 2009
ASSETS
Current Assets
Cash and cash equivalents	$	13,724		$	13,098
Accounts receivable, less allowance for doubtful accounts of $3,932 at July 4, 2009 and $4,247 at January 3, 2009		260,908			275,789
Inventories:
Finished products		184,991			190,077
Work-in-process		47,331			56,716
Raw materials		143,387			164,574
		375,709			411,367
LIFO valuation adjustment		(64,460	)		(66,447	)
		311,249			344,920
Prepaid expenses		5,034			4,619
Other current assets		69,585			78,727
Total Current Assets		660,500			717,153
Property, Plant and Equipment
Land and improvements		16,625			17,070
Buildings and improvements		135,188			139,277
Machinery and equipment		615,816			603,913
Allowances for depreciation and amortization		(381,658	)		(359,914	)
Net Property, Plant and Equipment		385,971			400,346
Other Assets
Goodwill		1,036,857			1,033,575
Intangible assets, net of amortization		645,232			653,271
Other		23,125			29,814
Total Assets	$	2,751,685		$	2,834,159
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	71,549		$	98,046
Accrued employee compensation		11,752			11,165
Accrued profit sharing		3,825			16,554
Accrued warranty costs		9,216			9,477
Accrued insurance obligations		10,297			10,667
Accrued interest expense		27,856			22,830
Other accrued expenses		100,750			110,006
Dividends payable		—			7,863
Note payable		—			735
Current maturities of long-term obligations		7,452			7,609
Total Current Liabilities		242,697			294,952
Long-term obligations		1,219,900			1,318,578
Other liabilities		70,071			72,731
Deferred income taxes		315,878			308,371
Commitments and Contingencies

		July 4, 2009	January 3, 2009
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		55,453,254	55,388,068		5,544			5,538
Outstanding shares		46,574,299	46,253,575
Additional paid-in capital					547,559			546,313
Retained earnings					562,760			534,330
Accumulated other comprehensive loss					(25,260	)		(53,721	)
Treasury stock, at cost		8,878,955	9,134,493		(187,464	)		(192,933	)
Total Shareholders’ Equity					903,139			839,527
Total Liabilities and Shareholders’ Equity				$	2,751,685		$	2,834,159

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company

Condensed Consolidated Statements of Income

(unaudited)

	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Net sales	$	384,678		$	503,973		$	787,211		$	974,499
Cost of goods sold		275,456			351,127			561,886			677,929
Gross profit		109,222			152,846			225,325			296,570
Selling and administrative expenses		64,964			83,920			136,064			160,992
Operating profit		44,258			68,926			89,261			135,578
Other income (loss), net		(1,114	)		1,603			(333	)		1,604
Gain on debt modification		—			—			35,740			—
Debt discount amortization		(2,484	)		—			(2,484	)		—
Interest expense		(28,376	)		(24,630	)		(50,859	)		(51,222	)
Income before income taxes		12,284			45,899			71,325			85,960
Provision for income taxes		4,489			16,527			27,109			30,949
Net income	$	7,795		$	29,372		$	44,216		$	55,011
Net earnings per common share – basic	$	0.17		$	0.64		$	0.95		$	1.19
Net earnings per common share – diluted	$	0.17		$	0.63		$	0.95		$	1.19
Weighted-average shares outstanding – basic		46,569			46,152			46,447			46,073
Weighted-average shares outstanding – diluted		46,821			46,453			46,619			46,241
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)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock, at cost			Total
(In thousands, except per share amounts)	Shares	Amount
BALANCE AT JANUARY 3, 2009	55,388	$	5,538	$	546,313		$	534,330		$	(53,721	)	$	(192,933	)	$	839,527
Comprehensive income
Net income	—		—		—			44,216			—			—			44,216
Other comprehensive income:
Currency translation adjustments	—		—		—			—			6,402			—			6,402
Derivative unrealized loss adjustment net of income taxes of $14,417	—		—		—			—			22,059			—			22,059
Total other comprehensive income																	28,461
Total comprehensive income																	72,677
Stock option plans (including 20 shares exchanged and $321 income tax benefit)	65		6		3,569			—			—			(341	)		3,234
Cash dividends at $0.34 per share	—		—		—			(15,786	)		—			—			(15,786	)
Treasury stock issued	—		—		(2,323	)		—			—			5,810			3,487
BALANCE AT JULY 4, 2009	55,453	$	5,544	$	547,559		$	562,760		$	(25,260	)	$	(187,464	)	$	903,139

— Total comprehensive income for the three and six months ending June 28, 2008 was $34.9 million and $60.7 million, respectively. Total comprehensive income for the three months ending July 4, 2009 was $25.5 million.

— Unrealized after-tax losses on derivatives of $13.9 million and $36.0 million are included in accumulated other comprehensive income (loss) as of July 4, 2009 and January 3, 2009, respectively.

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended
(In thousands)	July 4, 2009			June 28, 2008
Operating activities:
Net income	$	44,216		$	55,011
Adjustments to reconcile net income to net cash provided by operating activities:
(Gains) Losses on sales of assets		695			945
Mark to market on derivative instruments		(2,597	)		—
Gain on debt modification		(35,740	)		—
Amortization of debt discount		2,484			—
Amortization of discontinued interest rate hedge		3,003			—
Depreciation		24,230			27,886
Amortization		11,340			11,077
Allowance for doubtful accounts receivable		(314	)		(11	)
Deferred income tax		4,855			(17,297	)
Share-based compensation expense		3,098			4,005
Cash provided by (used in) changes in operating assets and liabilities:
Receivables		15,195			(43,600	)
Inventories		33,641			(14,574	)
Other current assets		(8,007	)		7,159
Accounts payable		(18,997	)		37,394
Accrued expenses and other liabilities		15,760			(7,971	)
Income taxes payable		7,390			16,110
Other assets, net		5,651			(4,482	)
Net cash provided by operating activities		105,903			71,652
Investing activities:
Purchases of property, plant and equipment		(17,810	)		(14,645	)
Proceeds from sale of property, plant and equipment		59			31
Net cash used in investing activities		(17,751	)		(14,614	)
Financing activities:
Proceeds from long-term obligations		45,059			24,538
Principal payments of long-term obligations		(96,800	)		(72,000	)
Principal payments on note payable		(735	)		(12,321	)
Dividends paid		(23,649	)		(15,668	)
Stock option exercises		3,440			6,980
Excess tax benefits on share-based payments		1			298
Net decrease in bank overdrafts		(7,500	)		—
Debt amendment fees		(7,342	)		—
Net cash used in financing activities		(87,526	)		(68,173	)
Net increase (decrease) in cash and cash equivalents		626			(11,135	)
Beginning cash and cash equivalents		13,098			37,757
Ending cash and cash equivalents	$	13,724		$	26,622

Noncash items:

— Additional paid-in capital resulting from shares traded for option exercises amounted to $133 and $1,286 in the first six months of 2009 and 2008, respectively.

— Treasury shares issued in March 2009 in the amount of $5,810 to fund the 2008 accrued profit sharing contribution and $3,284 in March 2008 to fund the 2007 accrued profit sharing contribution.

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements

July 4, 2009

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 3, 2009. In the opinion of management, all adjustments (consisting of normal recurring items and adjustments to record the preliminary purchase allocation as described in NOTE B and the debt modification described in NOTE F) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended July 4, 2009, may not be indicative of the results that may be expected for the fiscal year ending January 2, 2010.

Management has evaluated whether subsequent events have occurred through August 13, 2009, the date of financial statement issuance, and has determined there have been no subsequent events requiring additional disclosure or recognition in this Form 10-Q.

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 2009 will contain 52 weeks. Fiscal year 2008 contained 53 weeks.

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

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.

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

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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 represents greater than 10% of net accounts receivable at July 4, 2009 or January 3, 2009.

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)	July 4, 2009			June 28, 2008
Balance at beginning of period	$	9,477		$	9,216
Charges to costs and expenses		5,726			4,760
Payments		(5,987	)		(5,588	)
Balance at end of period	$	9,216		$	8,388

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.

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 4, 2009, and June 28, 2008, 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 discrete items is separately recognized in the quarter in which they occur.

The effective tax rate for the three months ended July 4, 2009 and June 28, 2008 was 36.5% and 36.0%, respectively. The effective tax rate for the six months ended July 4, 2009 and June 28, 2008 was 38.0% and 36.0%, respectively. The change in the six months ended effective rate was primarily due to the additional valuation allowance for net operating loss carryforwards generated by foreign affiliates.

The Company accounts for uncertain income tax positions pursuant to Financial Accounting Standards Board Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).

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The Company recognizes interest and penalties related to uncertain tax positions as interest costs and selling and administrative costs, respectively. The Company had $696,000 and $824,000 in gross unrecognized tax benefits as of July 4, 2009 and January 3, 2009, respectively. Of these amounts, $452,000 and $536,000 represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at July 4, 2009 and January 3, 2009, respectively. The total amount of accrued interest and penalties for such unrecognized tax benefits was $383,000 at July 4, 2009.

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”.

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 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 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.

SEC Staff Accounting Bulletin No. 110, Share Based Payment, allows companies to continue to use the simplified method to estimate the expected term of stock options under certain circumstances. The simplified method for estimating the expected life uses the mid-point between the vesting term and the contractual term of the stock option. The Company has analyzed the circumstances in which the simplified method is allowed and is utilizing the simplified method for stock options granted.

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 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

9

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 4, 2009, 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 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.

In 2008, the first step of the annual impairment tests resulted in no indication of impairment. Subsequent to the annual testing at October 1, 2008, the Company’s market capitalization decreased significantly as a result of market-driven declines in the stock trading price. While the stock did not trade at a price below book value for a sustained period of time through year-end, the Company performed an interim test of goodwill values at January 3, 2009 due to the decline in market capitalization and overall market conditions. In updating the annual testing analysis from October 1, 2008, the Company reviewed expectations of cash flows and other critical assumptions utilized in the analysis. Based on results of the step one interim test, management concluded that goodwill was not impaired at January 3, 2009.

During the second quarter of 2009, management continued to monitor business conditions and other factors that impact expectations of future cash flows. Upon evaluation of operating results for the first six months of 2009 and current market conditions, management updated the projected revenues utilized in the January 3, 2009 interim testing at the reporting unit level. The

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revised revenue projections were then applied to a sensitivity analysis utilized at January 3, 2009. In addition, management monitored the Company’s market capitalization based on its stock trading price during and subsequent to the six months ended July 4, 2009. The Company’s stock trading price increased significantly during the second quarter and market capitalization has increased to a level in excess of book value. Management concluded based on the revised sensitivity analysis and market capitalization, that there is no indication that the Company’s goodwill values were impaired at July 4, 2009. Consequently an interim test was not performed. Management will continue to monitor business conditions, financial operating results, and other key indicators, and will perform additional interim testing if deemed necessary.

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.

The Company’s fiscal 2008 impairment analysis of the other intangible assets did not result in an impairment charge. However, a 5% decline in the estimated fair value of one of the Company’s indefinite-lived intangible assets would have resulted in the estimated fair value falling below the carrying value by approximately $5.5 million. In conjunction with management’s updated revenue and cash flow projections, revenue projections for the Company’s other intangibles were revised and applied to a sensitivity analysis utilized at January 3, 2009. As a result of the revised sensitivity analysis, an interim test of one of the Company’s indefinite-lived intangibles value was performed at July 4, 2009. In performing the interim test, management utilized the assistance of outside valuation experts to update critical assumptions utilized in the relief from royalty methodology. The interim impairment analysis did not result in an impairment charge. However, a 5% decline in the estimated fair value of this indefinite-lived intangible would result in the estimated fair value falling below the carrying value by approximately $7.7 million. Management will continue to monitor business conditions and projected revenues related to its indefinite-lived intangibles and will perform additional interim testing if deemed necessary.

NOTE B – Acquisitions

On August 29, 2008, Baldor acquired Poulies Maska, Inc. (Maska) of Ste-Claire, Quebec, Canada. The purchase price was $43.2 million which was funded by cash and borrowings under the revolving credit facility. Maska is a designer, manufacturer and marketer of sheaves, bushings, couplings and related mechanical power transmission components. The acquisition gives Baldor a second plant in both Canada and China and expands the Company’s market share of sheaves and bushings in North America. Maska’s results of operations are not material to the Company’s consolidated financial statements and accordingly, pro forma information has not been presented. The Company’s consolidated financial statements include the results of operations of Maska beginning August 30, 2008.

The purchase price allocation is preliminary, pending the finalization of asset valuations. The excess of the purchase price over the estimated fair values is assigned to goodwill. Adjustments to the estimated fair values may be recorded during the allocation period, not to exceed one year from the date of acquisition.

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The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition.

(In thousands)
Current assets	$	24,954
Property, plant and equipment		18,270
Intangible assets subject to amortization – Trade names (useful life of 10 years)		3,174
Goodwill		5,593
Total assets acquired		51,991
Current liabilities		5,512
Long-term obligations		2,311
Deferred income taxes		1,005
Total liabilities assumed		8,828
Net assets acquired	$	43,163

NOTE C – 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 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 4, 2009 and June 28, 2008.

As of July 4, 2009, the Company had the following outstanding commodity forward contracts:

Commodity	Volume in Pounds
Copper	20,907,500

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Losses recognized on commodity cash flow hedges increased cost of sales by $5.2 million in the second quarter of 2009 and gains recognized reduced cost of sales by $2.4 million in the second quarter of 2008. Losses recognized on commodity cash flow hedges increased cost of sales by $19.7 million in the first six months of 2009 and gains recognized reduced cost of sales by $3.8 million in the first six months of 2008. The Company expects after-tax gains totaling $1.5 million at July 4, 2009, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next eighteen months.

The Company has entered into 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. Unrealized after-tax losses of $15.4 million are recorded in accumulated other comprehensive income at July 4, 2009. 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 will remain in accumulated other comprehensive income and will be recognized in earnings when the forecasted transactions occur or become probable of not occurring. The change in fair value of the interest rate hedge instrument was $2.6 million for the three and six months ended July 4, 2009 and is included in interest expense on the condensed consolidated statements of income.

The following table sets forth the pretax impact of cash flow hedge derivative instruments on the condensed consolidated statement of income for the three and six months ended July 4, 2009 (in thousands):

Derivatives designated as hedging instruments under Statement 133 – Cash flow hedges	Gain (Loss) Recognized in OCI on Derivative					Gain (Loss) Reclassified from Accumulated OCI into Income
	July 4, 2009					July 4, 2009
	Three months		Six months			Three months			Six months
Interest rate contracts (1)	$	—	$	(108	)	$	(3,003	)	$	(3,003	)
Commodity contracts		6,863		13,883			(5,244	)		(19,698	)
Total	$	6,863	$	13,775		$	(8,247	)	$	(22,701	)

⁽¹⁾ Effective March 31, 2009, the interest rate instruments were discontinued as cash flow hedges. The loss reclassified from Accumulated OCI for the three and six months ended represents the amortization related to the discontinuance of cash flow hedges.

Derivatives not designated as hedging instruments under Statement 133	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		July 4, 2009
		Three months		Six months
Interest rate contracts (1)	Interest Expense	$	2,597	$	2,597
Total		$	2,597	$	2,597

⁽¹⁾ Effective March 31, 2009, the interest rate instruments were discontinued as cash flow hedges.

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The following table sets forth the fair value of all derivative instruments outstanding in the condensed consolidated balance sheets as of July 4, 2009 (in thousands):

	July 4, 2009
	Balance Sheet Classification	Fair Value
Derivative Assets
Derivatives designated as hedging instruments under Statement 133
Commodity contracts	Other Current Assets	$	3,469
Total derivative assets – designated			3,469
Total derivative assets		$	3,469
Derivative Liabilities
Derivatives designated as hedging instruments under Statement 133
Commodity contracts	Other Accrued Expenses	$	(914	)
Total derivative liabilities – designated			(914	)
Derivatives not designated as hedging instruments under Statement 133
Interest rate contracts (1)	Other Accrued Expenses		(25,932	)
Total derivative liabilities – not designated			(25,932	)
Total derivative liabilities		$	(26,846	)

⁽¹⁾ 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 D – Goodwill and Other Intangible Assets

The amounts of goodwill at July 4, 2009 and January 3, 2009 are as follows:

(In thousands)
Balance at January 3, 2009	$	1,033,575
Purchase accounting adjustments related to Maska valuation		3,506
Translation adjustment		(224	)
Balance at July 4, 2009	$	1,036,857

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

(In thousands)	July 4, 2009			January 3, 2009
Gross carrying value:
Tradenames – indefinite lived	$	354,800		$	354,800
Trademarks – definite lived		3,174			2,946
Customer relationships		292,000			292,000
Technology		32,000			32,000
Less accumulated amortization:
Trademarks		(265	)		—
Customer relationships		(31,195	)		(24,337	)
Technology		(5,282	)		(4,138	)
Total intangible assets	$	645,232		$	653,271

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. The principal balance was $735,000 at January 3, 2009 and was paid off during the first quarter of 2009.

NOTE F – Long-term Obligations

Long-term obligations are as follows:

($ In thousands)	Interest Rate at July 4, 2009		July 4, 2009		January 3, 2009
Senior secured term loan, variable interest rate	5.250	%	$	358,069	$	361,627
Senior secured term loan, variable interest rate – hedged	8.833	%		350,000		350,000
Revolving credit facility, variable interest rate	5.250	%		13,500		60,000
Senior unsecured notes, fixed interest rate	8.625	%		550,000		550,000
Other	3.860	%		2,988		4,560
				1,274,557		1,326,187
Less current maturities				7,452		7,609
				1,267,105		1,318,578
Less discount on senior secured term loan				47,205		—
			$	1,219,900	$	1,318,578

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.

The modification of the senior secured term loan was accounted for as an extinguishment of debt in accordance with Emerging Issues Task Force (EITF) 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”. As a result, the senior secured term loan was

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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. 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 discount is being amortized to other expense over the remaining term of the debt. Amortization amounted to $2.5 million for the three and six months ended July 4, 2009.

The modification of the revolving credit facility was accounted for in accordance with EITF 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”. 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 $1.78 million are due beginning July 31, 2009, and continue through January 31, 2013, at which date subsequent quarterly principal payments increase to $167.2 million through the loan due date of January 31, 2014 with a final payment of $179.7 million.

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 3, 2009. 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 4, 2009.

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 4, 2009, the Company had $13.5 million outstanding 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 4, 2009, $21.5 million of LC’s were issued which reduces the aggregate LC and RC availability. Availability totaled $165.0 million at July 4, 2009. 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 (0.32% at July 4, 2009) with a minimum rate of 2.0% or 1.25% per annum plus Prime (3.25% at July 4, 2009).

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

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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.

Interest paid was $9.5 million and $11.4 million in second quarter 2009 and 2008, respectively. Interest paid during the first six months of 2009 and 2008 was $41.7 million and $53.5 million, respectively.

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 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

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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.

NOTE H – 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.

As a result of the acquisition of Reliance, the Company assumed defined benefit pension and postretirement benefit plans covering certain union employees and retirees. Estimated liabilities amounting to approximately $49.3 million at July 4, 2009 and $51.9 million at January 3, 2009 are included in other liabilities on the condensed consolidated balance sheets.

Net periodic pension and other postretirement benefit costs include the following components for the three and six months ended July 4, 2009 and June 28, 2008, respectively.

Pension Benefits
	Three Months Ended						Six Months Ended
(In thousands)	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Service cost	$	87		$	121		$	172		$	241
Interest cost		52			48			103			96
Expected return on assets		(33	)		(57	)		(65	)		(115	)
Amortization of prior service costs		2			3			4			6
Amortization of net loss		—			—			—			—
Net periodic benefit cost	$	108		$	115		$	214		$	228
Other Postretirement Benefits
	Three Months Ended						Six Months Ended
(In thousands)	July 4, 2009			June 28, 2008			July 4, 2009			June 28, 2008
Service cost	$	25		$	40		$	47		$	80
Interest cost		805			710			1,533			1,420
Expected return on assets		—			—			—			—
Amortization of prior service costs		—			—			—			—
Amortization of net loss		—			—			—			—
Net periodic benefit cost	$	830		$	750		$	1,580		$	1,500

The Company made contributions to the pension plans of $112,000 and $117,000 for the three months ended July 4, 2009 and June 28, 2008, respectively and $216,000 and $236,000 for the six months ended July 4, 2009 and June 28, 2008, respectively. The Company made contributions to the postretirement plan of approximately $2.0 million for the three months ended July 4, 2009 and June 28, 2008, respectively and $3.8 million and $3.6 million for the six months ended July 4, 2009 and June 28, 2008, respectively. The Company expects to contribute a total of $400,000 to the pension plans in 2009 and expects to contribute a total of $4.6 million to the postretirement benefit plan in 2009.

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 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.

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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 4, 2009, 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 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 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 under the Plans during the six month period ended July 4, 2009, is presented below:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value (In thousands)
Outstanding at January 3, 2009	2,702,845		$	31.11
Granted	518,258			15.16
Exercised	(10,126	)		16.44
Expired	(81,391	)		22.59
Forfeited	(30,874	)		36.19
Outstanding at July 4, 2009	3,098,712			28.66	6.9 years	$	5,999
Vested or expected to vest at July 4, 2009	3,034,589			28.57	6.9 years	$	5,820
Exercisable at July 4, 2009	1,789,047			27.72	5.5 years	$	1,542

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The weighted-average grant-date fair value of options granted was $3.57 and $7.70 in the first six months of 2009 and 2008, respectively. The total intrinsic value of options exercised was $64,000 and $3.5 million during the first six months of 2009 and 2008, respectively.

As of July 4, 2009, there was $5.3 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 1.4 years.

A summary of non-vested stock unit activity under the Plans during the six month period ended July 4, 2009, is presented below:

Non-vested Stock Units	Shares		Weighted-Average Grant-Date Fair Value Per Unit
Non-vested at beginning of period	141,368		$	31.62
Granted	74,072			13.38
Vested	(57,514	)		36.28
Forfeited	(3,192	)		29.86
Non-vested at end of period	154,734			19.87

The total fair value of stock units vested during the first six months of 2009 and 2008 was $2.1 million and $1.4 million, respectively.

As of July 4, 2009, there was $1.4 million of total unrecognized compensation cost expected to be recognized over a weighted-average period of 1.1 years related to non-vested stock units granted under the Plans.

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

	Six Months Ended
	July 4, 2009		June 28, 2008
Volatility	36.5	%	30.9	%
Risk-free interest rates	2.2	%	3.0	%
Dividend yields	4.8	%	2.4	%
Expected option life	6.0 years		5.9 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)	July 4, 2009		June 28, 2008		July 4, 2009		June 28, 2008
Numerator:
Net income	$	7,795	$	29,372	$	44,216	$	55,011
Denominator Reconciliation:
Weighted-average shares – basic		46,569		46,152		46,447		46,073
Effect of dilutive securities – stock options and non-vested stock units		252		301		172		168
Weighted-average shares – diluted		46,821		46,453		46,619		46,241
Earnings per common share – basic	$	0.17	$	0.64	$	0.95	$	1.19
Earnings per common share – diluted	$	0.17	$	0.63	$	0.95	$	1.19

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The total number of anti-dilutive securities excluded from the above calculations was 2,201,296 and 955,558 for the three months ended July 4, 2009, and June 28, 2008, respectively and 2,621,956 and 960,858 for the six months ended July 4, 2009, and June 28, 2008, respectively.

NOTE K – Sale of Real Estate

In September 2008, the Company sold real property with a book value of $22.3 million. Proceeds from the sale totaled $30.7 million, of which $6.1 million was invested in the entity which acquired the real property. Due to continuing involvement in the property, no gain was recognized and the value of the real property remains on the consolidated balance sheets and continues to be depreciated. The proceeds received have been recorded as a liability and are included in other accrued expenses on the consolidated balance sheet at July 4, 2009.

NOTE L – Fair Value Measurements

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 thousands)	Fair Value Measurements as of July 4, 2009
	Level 1		Level 2			Level 3		Total
Interest rate swap	$	—	$	(19,697	)	$	—	$	(19,697	)
Interest rate collar		—		(6,235	)		—		(6,235	)
Copper swaps		3,975		(92	)		—		3,883
Copper collars		—		(1,328	)		—		(1,328	)
Total	$	3,975	$	(27,352	)	$	—	$	(23,377	)

The Company’s methods and assumptions used to estimate the fair value of debt include quoted market prices for fixed rate debt and other quoted prices for variable rate debt. The carrying amounts and estimated fair values of the Company’s long-term debt at July 4, 2009 is summarized below:

(In thousands)	Carrying Value		Estimated Fair Value
Senior notes	$	550.0	$	506.0
Term loan	$	660.9	$	641.7

The carrying amounts of cash and cash equivalents, receivables, and trade payables at July 4, 2009, approximate their fair value due to the short term maturity of these instruments.

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NOTE M – Restructuring Charges

In April, the Company announced a plan to consolidate manufacturing operations of its Ft. Mill, SC and Columbus, IN plants into other existing plants in the United States. Both restructurings are part of manufacturing integration resulting from the Company’s 2007 acquisition of Reliance Electric. One-time costs of $4.5 million related to the restructurings are expected to be incurred. The Company incurred restructuring charges of approximately $3.0 million during the three and six months ended July 4, 2009 and expects the additional $1.5 million to be incurred during the balance of 2009. These charges are included in cost of goods sold in the condensed consolidated statements of income.

A summary of the restructuring costs is below:

(In thousands)	Estimated Total Cost		YTD July 4, 2009		Costs Remaining at July 4, 2009
One-time termination costs	$	2,823	$	2,823	$	—
Employee relocation costs		104		104		—
Transportation costs		1,600		86		1,514
Total	$	4,527	$	3,013	$	1,514

Included in other current assets are long-lived assets amounting to $1.9 million that have been classified as held for sale.

NOTE N – Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurements” 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. 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. The Company adopted the provisions of the FSP at the beginning of 2009 and the adoption did not have a material impact on the consolidated financial statements.

FASB Statement No. 141 (Revised 2007), “Business Combinations” (FAS 141R), is applied 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, non-controlling 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 adopted FAS 141R at the beginning of 2009.

FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” 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; therefore, the Company adopted FAS 161 in the first quarter of fiscal 2009. See Note C: Financial Derivatives for required disclosures.

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The FASB issued FSP No. FAS 107-1 and Accounting Principles Board (APB) 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (FSP FAS 107-1), an amendment of FAS No. 107, “Disclosures about Fair Values of Financial Instruments” and APB No. 28, “Interim Financial Reporting” and requires disclosures about fair value of financial instruments in interim financial statements. FSP FAS 107-1 is effective for interim periods ending after June 15, 2009. The Company adopted the disclosure requirements of FSP FAS 107-1 in the second quarter of 2009. See Note L: Fair Value Measurements for required disclosures.

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009; therefore, the Company adopted FAS 165 in the second quarter of 2009. The adoption did not have a material impact on the consolidated financial statements and disclosures. See Note A, “Basis of Presentation” above for required disclosures.

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 mechanical power transmission products, currently supplying over 9,000 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 August 29, 2008, Baldor acquired Poulies Maska, Inc. (Maska) of Ste-Claire, Quebec, Canada. The purchase price was $43.2 million which was funded with cash and borrowings under the revolving credit facility. Maska is a designer, manufacturer and marketer of sheaves, bushings, couplings and related mechanical power transmission components. The acquisition gives Baldor a second plant in both Canada and China and expands the Company’s market share of sheaves and bushings in North America. The Company’s consolidated financial statements include the results of operations of Maska beginning August 30, 2008.

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 a significant replacement demand.

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 and six months

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ended July 4, 2009, and June 28, 2008. For the quarters ended July 4, 2009 and June 28, 2008, domestic net sales generated through distributors, representing primarily sales of replacement products, amounted to 48.1% and 49.1% of total product sales, respectively. For the six month periods ended July 4, 2009 and June 28, 2008, domestic net sales generated through distributors amounted to 47.6% and 48.7%, respectively. Domestic sales to OEMs were approximately 51.9% and 50.9% of total product sales for the quarters ended July 4, 2009 and June 28, 2008, respectively. For the six month periods ended July 4, 2009 and June 28, 2008, sales to OEMs were approximately 52.4% and 51.3%, respectively. OEMs primarily use our products in new installations. This expands our installed base and leads to future replacement product sales through distributors.

We manufacture substantially all of our products. Consequently, our costs include the cost of raw materials, including steel, copper and aluminum, and energy costs. Should these costs increase and our sales prices are not adjusted, our margins are negatively impacted. We seek to offset 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, hedging of certain raw material prices, and by modest price increases in our products. Our manufacturing facilities are also significant sources of fixed costs. Our margins are negatively impacted to the extent we cannot promptly decrease these costs to match declines in net sales. During the first six months of 2009, we have been successful in reducing our fixed costs sufficiently to more than offset the margin impact of declining sales in 2009.

Industry Trends

The demand for products in the industrial electric motor, generator, and mechanical 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, efficiency 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.

Second quarter 2009 domestic order rates continued to be slow across most of our product offerings. While distributors continued to reduce their inventories during the quarter as we expected, order rates improved as the quarter progressed. We have begun to see a decline in the rate of distributor destocking. Approximately 80% of our domestic mechanical power transmission products and approximately 40% of domestic motor sales are sold through distributors, so a slower destocking rate will be a benefit for those products as the year progresses. We expect third quarter 2009 net sales to be down approximately 20% from record third quarter sales in 2008. We believe a slower rate of customer inventory destocking, as well as our introduction of new products, and other sales initiatives, will benefit us in the second half of the year.

International sales of approximately $70.5 million for the second quarter of 2009 were down approximately 11.9% from the same period last year and comprised 18.3% of total product sales for the quarter compared to 15.9% for the same period last year. Sales in Asia Pacific increased 27.7% from second quarter 2008 and included record sales and earnings in China. We expect continued strong growth in our Asia Pacific business in the second half of the year.

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We remain focused on managing production and inventory levels and are adjusting them proactively as incoming order rates change. During the second quarter of 2009, we reduced total inventories approximately $33.6 million, primarily in raw materials and work-in-process. Having the appropriate quantities and mix of finished goods inventories is a competitive advantage for us, particularly as our distributors reduce their inventories. Effective management of our inventories allows us to maximize working capital utilization for debt reduction and take advantage of sales opportunities when they are presented. While we expect to further reduce inventories in the third quarter, we will manage them in a way that will not negatively impact our customers or inhibit our ability to take advantage of new order opportunities. Our manufacturing systems and proximity to our customers allow us to adjust inventories up or down quickly as incoming order rates change.

During the fourth quarter of 2008, we implemented cost reduction initiatives across the Company, and began accelerating integration projects related to our recent acquisitions. Through the second quarter of 2009, we are on track to achieve more than $90 million in annual cost reductions by the end of fiscal year 2009. Our proactive significant cost reduction achievements combined with continued productivity improvements are evident in our sequentially improving operating margins during the first two quarters of 2009 when compared to fourth quarter 2008. We expect our operating margin to continue to improve throughout the balance of the year. As part of our acceleration of integration projects in April 2009, we announced the consolidation of two of our manufacturing facilities into other existing facilities in the United States. We expect these consolidations to provide annual cost savings of approximately $9.0 million and a one-time cost of approximately $4.5 million. These consolidations were substantially completed during the second quarter of 2009 and will be finalized during the balance of 2009.

We have also implemented a bounty hunt sales strategy targeted to obtain specifically identified new customers in 2009 and have obtained in excess of 200 new customers since the beginning of the year. Our broad product offering, continuous introduction of new products, and manufacturing flexibility allows us to serve new customers quickly when business from our existing customers slows.

Results of Operations

Second quarter 2009 compared to second quarter 2008

Net sales for the quarter decreased 23.7% to $384.7 million, compared to $504.0 million in 2008. Sales of industrial electric motor products decreased 24.2% for the quarter as compared to second quarter 2008 and comprised 64.5% of total sales for the quarter compared to 65.0% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, decreased 19.9% for the quarter as compared to second quarter 2008 and comprised 29.9% of total sales compared to 28.5% for the same period last year. Second quarter 2009 sales include approximately $2.1 million from the operations of Maska. Sales of other products, including generators and drives, decreased 34.4% for the quarter as compared to second quarter 2008 and comprised 5.6% of total sales for the quarter compared to 6.5% for the same period last year. Sales of Super-E^® premium-efficient motors continue to grow at a steady pace, increasing 11.7% for the quarter when compared to second quarter 2008. We believe this trend will continue as customers prepare for the December 2010 implementation of the 2007 Energy Bill which raises the minimum efficiency requirement of many motors to the level of our Super-E premium efficient motors.

Gross profit margin decreased to 28.4% in the second quarter of 2009 compared to 30.3% in the second quarter 2008 and operating profit margin decreased to 11.5% from 13.7% in the second quarter 2008. Second quarter 2009 manufacturing costs included approximately $3.0 million of one-time costs related to the consolidations of our Ft. Mill, SC and Columbus, IN manufacturing

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facilities into other existing facilities in the U.S. As a result of continued product design improvements, reduction of waste, and price improvement in certain commodities, our materials cost as a percentage of sales improved in the second quarter of 2009 when compared to the same period last year. We expect continued improvement in the second half of the year. In addition, we achieved significant manufacturing cost reductions during the second quarter of 2009. These reductions combined with the improvement in materials costs partially offset the impact of decreased net sales and one-time restructuring costs on our gross profit margin. Materials and manufacturing cost savings combined with reductions in selling and administrative overhead costs, realized in the second quarter, helped to partially offset the impact of decreased net sales and resulted in sequential operating margin improvement when compared to first quarter 2009 and fourth quarter 2008.

Interest expense increased $3.7 million over second quarter 2008. While we reduced our outstanding debt balance by $44.6 million during the second quarter of 2009, interest rates on our variable rate debt increased as a result of the March 31, 2009 amendment of our senior secured credit facility. Pre-tax income of $12.3 million for second quarter 2009 decreased 73.2% compared to second quarter 2008 pre-tax income of $45.9 million. Second quarter 2009 includes $2.5 million noncash debt discount amortization expense related to the modification of our senior secured credit facility completed March 31, 2009. The total discount of approximately $49.7 million is being amortized over the remaining term of the credit facility which matures January 31, 2014.

Our effective income tax rate was 36.5% in second quarter 2009 compared to 36.0% in second quarter 2008. The change was primarily related to the composition of taxable income between domestic and international operations.

Net income of $7.8 million decreased 73.5% from second quarter 2008 net income of $29.4 million. Diluted earnings per common share decreased 73.0% to $0.17 compared to $0.63 in second quarter 2008. Average diluted shares outstanding was 46.8 million for second quarter 2009 compared to 46.5 million for second quarter 2008.

Six months ended July 4, 2009 compared to six months ended June 28, 2008

Net sales for the first six months of 2009 decreased 19.2% to $787.2 million, compared to $974.5 million in the first six months of 2008. Sales of industrial electric motor products decreased 18.0% for the first six months of 2009 as compared to the first six months of 2008 and comprised 66.2% of total sales compared to 65.1% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, decreased 20.5% for the first six months of 2009 as compared to the first six months of 2008 and comprised 28.4% of total sales compared to 28.8% for the same period last year. The first six months of sales for 2009 include approximately $10.4 million from the operations of Maska. Sales of other products, including generators and drives, decreased 26.8% for the first six months of 2009 as compared to the first six months of 2008 and comprised 5.5% of total sales compared to 6.1% for the same period last year. Sales of Super-E^® premium-efficient motors grew 20.0% for the first six months of 2009 when compared to the same period last year. We believe this trend will continue as customers prepare for the December 2010 implementation of the 2007 Energy Bill which raises the minimum efficiency requirement of many motors to the level of our Super-E premium efficient motors.

Gross profit margin decreased to 28.6% in the first six months of 2009 compared to 30.4% in the first six months of 2008 and operating profit margin decreased to 11.3% from 13.9% for the same period. Improved materials costs during the second quarter of 2009 combined with continued manufacturing cost reductions partially offset the impact of decreased net sales on our gross profit margin. Our materials cost improvements, and reductions in manufacturing costs and selling and administrative overhead costs, realized in the first six months of 2009,

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helped to partially offset the impact of decreased net sales and have resulted in sequentially improving operating margins during the first two quarters of 2009 when compared to fourth quarter 2008.

Interest expense decreased $.4 million over the first six months of 2008 as a result of reductions in our outstanding debt balance during the first six months of 2009, and decreased interest rates on our variable rate debt in the first quarter of 2009 prior to the amendment of our senior secured credit facility. Pre-tax income of $71.3 million for the first six months of 2009 decreased 17.0% compared to $86.0 for the first six months of 2008. Pretax income for the first six months of 2009 includes a $35.7 million noncash gain and $2.5 million noncash debt discount amortization expense, resulting from the modification of our senior secured credit facility completed on March 31, 2009. These amounts are included in income from continuing operations.

Our effective income tax rate was 38.0% in the first six months of 2009 compared to 36.0% in the first six months of 2008. The change was primarily due to the additional valuation allowance for net operating loss carryforwards generated by foreign affiliates.

Net income of $44.2 million, including $21.6 million, net of tax, related to the gain on debt modification, decreased 19.6% from the first six months of 2008 net income of $55.0 million. Diluted earnings per common share of $0.95, including $0.47 related to the gain on debt modification, decreased 20.2% compared to $1.19 in the first six months of 2008. Average diluted shares outstanding was 46.6 million for the first six months of 2009 compared to 46.2 million for the first six months of 2008.

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. We expect that ongoing requirements for working capital, capital expenditures, dividends, and debt service will be adequately funded from these sources. At July 4, 2009, we had approximately $165.0 million of borrowing capacity under the senior secured revolving credit facility which matures in 2012. The current financial market conditions have not affected our ability to borrow from our revolving credit facility.

Cash flows from operations amounted to $105.9 million in the first six months of 2009 and $71.7 million in the first six months of 2008. Reductions in inventories, particularly during the second quarter, contributed $33.6 million to operating cash flows in the first six months of 2009. During the first six months of 2009, we utilized cash flows from operations to fund property, plant and equipment additions of $17.8 million, pay dividends of $23.6 million to our shareholders, and fund $52.5 million of net debt reductions. In the first six months of 2008, we utilized cash flows from operations and accumulated cash 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.

Net cash used in investing activities was $17.8 million in the first six months of 2009 and $14.6 million in the first six months of 2008 and related primarily to capital expenditures.

Financing activities in the first six months of 2009 included dividends paid to shareholders of $23.6 million, amendment fees of $7.3 million to amend our senior secured credit agreement, and net debt payments of $52.5 million. Due to the timing of our quarter end, we funded the fourth quarter 2008 dividend in addition to the first quarter 2009 dividend during first quarter 2009.

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We have a corporate family credit rating of BB- and senior secured debt rating of Ba3 with a negative 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 negative 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. Both ratings agencies recently affirmed, and Moody’s upgraded our liquidity rating from SGL-3 to SGL-2, following the successful amendment of our credit agreement on March 31, 2009. 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 4, 2009. Our total leverage ratio and senior secured leverage ratios were 3.81x and 2.17x, respectively, at July 4, 2009. These were within our maximum covenant requirements of 5.25x and 2.75x, respectively.

On March 31, 2009, we amended our senior secured credit facility. The amendment relaxed our total leverage and senior secured leverage ratio requirements and will help to ensure we maintain sufficient headroom under our covenants as we navigate through the current economic recession. In conjunction with the amendment, the margin applied to LIBOR on our variable term loan and revolver borrowings was increased to 3.25%, and a LIBOR floor of 2.00% was implemented.

The amendment of the senior secured term loan was considered a substantial modification of the debt and was accounted for as an extinguishment of debt in accordance with Emerging Issues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”. 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 included in income from continuing operations in the condensed consolidated statement of income. Fees paid related to the amendment of $5.7 million along with unamortized fess related to the original agreement of $8.3 million were considered when calculating the gain. The discount is being amortized to other expense over the remaining term of the debt. Amortization amounted to $2.5 million for the three and six months ended July 4, 2009.

The amendment of the revolving credit facility was accounted for in accordance with EITF 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”. 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.

As a result of the senior secured credit facility 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.

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The table below summarizes Baldor’s contractual obligations related to long-term debt as of July 4, 2009.

(In thousands)			Payments due by years
	Total		Less than 1		1 – 3		3 – 5		More than 5
Contractual Obligations:
Long-term debt obligations (a)	$	1,857,542	$	104,925	$	223,857	$	836,310	$	692,450

(a) Includes interest on both fixed and variable rate obligations. Interest associated with variable rate obligations is based upon interest rates in effect at July 4, 2009. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

Dividend Policy: Dividends paid to shareholders amounted to $0.34 per common share in the first six months of 2009 and 2008. Our objective is for shareholders to receive dividends while also participating in Baldor’s growth. The terms of our credit agreement and indenture limit our ability to increase dividends in the future.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (FASB) Statement No. 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. 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. We adopted the provisions of the FSP at the beginning of 2009 and the adoption did not have a material impact on the consolidated financial statements.

FASB Statement No. 141 (Revised 2007), “Business Combinations” (FAS 141R), is applied 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, non-controlling 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. We adopted FAS 141R at the beginning of 2009.

FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” 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; therefore, we adopted FAS 161 in the first quarter of fiscal 2009. See Note C: Financial Derivatives for required disclosures.

The FASB issued FSP No. FAS 107-1 and Accounting Principles Board (APB) 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (FSP FAS 107-1), an amendment of FAS No. 107, “Disclosures about Fair Values of Financial Instruments” and APB No. 28, “Interim Financial Reporting”, and requires disclosures about fair value of financial instruments in interim financial statements. FSP FAS 107-1 is effective for interim periods ending after June 15, 2009. We adopted the disclosure requirements of FSP FAS 107-1 in the second quarter of 2009. See Note L: Fair Value Measurements for required disclosures.

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In May 2009, the FASB issued Statement No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009; therefore, we adopted FAS 165 in the second quarter of 2009. The adoption did not have a material impact on the consolidated financial statements and disclosures. See Note A, “Basis of Presentation” above for required disclosures.

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 liability of $.9 million recorded in other accrued expenses and a fair value asset of $3.5 million recorded in other current assets at July 4, 2009.

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 quarter end 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	$	(19.70	)
Collar	$	100.0	April 30, 2012	LIBOR	LIBOR – Floor 4.29%; Cap 6.50%	$	(6.23	)

⁽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.

Foreign affiliates comprise approximately 12.6% of our consolidated net sales for the six months ended July 4, 2009. 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.

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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 4, 2009. 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 4, 2009.

Changes in Internal Control Over Financial Reporting

As a result of the acquisition of Reliance on January 31, 2007 and Maska on August 29, 2008, certain information included in the Company’s consolidated financial statements for the quarter and six months ended July 4, 2009, was obtained from accounting and information systems utilized by Reliance and Maska that have not yet been integrated in the Company’s systems. The Company is currently in the process of integrating those systems. During the second quarter of 2009, some of Reliance and Maska’s accounting and financial reporting systems were integrated into the Company’s systems. As a result, certain processes were changed. There have been no other 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 2009 that has materially affected, or is reasonably likely to materially affect, these controls.

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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 2008 Form 10-K. No material changes to the risk factors have occurred since the Company filed its 2008 Form 10-K.

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

During the three months ended July 4, 2009, 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
Month #1
Apr 5, 2009 – May 2, 2009	2,104	$	19.98	—	—
Month #2
May 3, 2009 – May 30, 2009	559	$	21.40	—	—
Month #3
May 31, 2009 – July 4, 2009	5,236	$	25.71	—	—
Total	7,899	$	23.88	—	—

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

During the second quarter of 2009, 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.

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

The Company held its annual shareholders’ meeting on May 2, 2009, at which shareholders voted on four proposals.

Proposal 1 was the election of three Directors to the Company’s Board of Directors for terms expiring in 2012. The following is a list of the Board 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
Merlin J. Augustine, Jr.	29,950,095	3,808,850	—
John A. McFarland	30,320,620	3,438,325	—
Robert L. Proost	29,968,510	3,790,435	—

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

Jefferson W. Asher, Jr.	Richard E. Jaudes	Jean A. Mauldin
Robert J. Messey	R. L. Qualls	Barry K. Rogstad
	Ronald E. Tucker

Proposal 2 was to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal year 2009. Shareholders ratified this appointment as indicated below by the results of the shareholder voting on Proposal 2:

Votes For	Votes Against	Abstentions
33,090,979	641,233	26,733

Proposal 3 was to consider and act upon an amendment to the 2006 Equity Incentive Plan to increase the shares of Common Stock available for issuance by 1,500,000 shares. Voting results on Proposal 3 are as indicated below:

Votes For	Votes Against	Abstentions	Not Voted
26,341,371	4,287,115	129,392	3,001,067

Proposal 4 was to consider and act upon a Plan to create the Baldor Electric Company Plan for Tax Deductible Executive Incentive Compensation to permit the Company to take a tax deduction for the full amount of annual incentive compensation paid to employees who are “covered employees” under Section 162(m) of the Internal Revenue Code. Voting results on Proposal 4 are as indicated below:

Votes For	Votes Against	Abstentions
30,377,951	2,996,138	384,856

Item 5. Other Information

Not applicable.

33

Item 6. Exhibits

a. See Exhibit Index

S I G N A T U R E S

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 13, 2009	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary
		(on behalf of the Registrant
		and as Principal Financial Officer)

34

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(ii).1	*    †	1987 Incentive Stock Plan, originally filed as Appendix A to the Registrant’s Proxy Statement dated April 3, 1987, and refiled as Exhibit 10(iii)(A)(3) to the Registrant’ Annual Report on Form 10-K for the year ended December 31, 1994.

10(ii).2	*    †	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(ii).3	*    †	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(ii).4	*    †	Stock Option Plan for Non-Employee Directors, as approved by the Company’s Board of Directors on February 5, 2001, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.
10(ii).6	*    †	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 December 22, 2008, and filed as Exhibit 10(iii).5 to the Registrant’s Annual Report on Form 10-K for the year ended January 3, 2009.
10(iii).7	*	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).8	*	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.

* Previously filed.

† Management contract or compensatory plan or arrangement.

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 13, 2009	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 13, 2009	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 July 4, 2009, 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 13, 2009	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 July 4, 2009, 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 13, 2009	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary
		of Baldor Electric Company