Baldor Electric 10Q 2009 Q3 Quarterly report

Baldor Electric Inactive 10-Q2009 Q3 Quarterly report

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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 September 27, 2008

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

Commission File Number 01-07284

Baldor Electric Company

Exact name of registrant as specified in its charter

Missouri

43-0168840

State or other jurisdiction

of incorporation

IRS Employer

Identification No

5711 R. S. Boreham, Jr. St

Fort Smith, Arkansas

72901

Address of principal executive offices

Zip Code

479-646-4711

Registrant’s telephone number, including area code

N/A

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

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

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

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 September 27, 2008, there were 46,244,215 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	4
		- September 27, 2008 and December 29, 2007
		Condensed Consolidated Statements of Income	5
		- Three and nine months ended September 27, 2008 and September 29, 2007
		Condensed Consolidated Statements of Shareholders’ Equity	5
		- Nine months ended September 27, 2008 and December 29, 2007
		Condensed Consolidated Statements of Cash Flows	6
		- Nine months ended September 27, 2008 and September 29, 2007
		Notes to Unaudited Condensed Consolidated Financial Statements	7
		- September 27, 2008

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	25

PART II – OTHER INFORMATION

	Item 1.	Legal Proceedings	26

	Item 1A.	Risk Factors	26

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

	Item 3.	Defaults Upon Senior Securities	27

	Item 4.	Submission of Matters to a Vote of Security Holders	27

	Item 5.	Other Information	27

	Item 6.	Exhibits	27

SIGNATURE			27

INDEX OF EXHIBITS			28

Forward-looking Statements

This quarterly report, the documents incorporated by reference into this quarterly report, and other written reports and oral statements made time to time by Baldor and its representatives may contain statements that are forward-looking. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “estimate”, “believe”, “will”, “intend”, “expect”, “may”, “could”, “future”, “susceptible”, “unforeseen”, “anticipate”, “would”, “subject to”, “depend”, “uncertainties”, “predict”, “can”, “expectations”, “if”, “unpredictable”, “unknown”, “pending”, “assumes”, “continued”, “ongoing”, “assumption”, or any grammatical forms of these words or other similar words) are based on our current expectations and are subject to risks and uncertainties. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including those described under “Risk Factors” in Part II, Item 1A of this report and Part I, Item 1A of our most recent Form 10-K filed with the SEC. Baldor is under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Baldor Electric Company

Condensed Consolidated Balance Sheets

(unaudited)


*(In thousands, except share amounts)*		Sep 27, 2008			Dec 29, 2007
ASSETS
Current Assets	Cash and cash equivalents	$	10,037		$	37,757
	Accounts receivable, less allowance for doubtful accounts of $4,099 at September 27, 2008 and $4,126 at December 29, 2007		346,938			281,729
	Inventories:
	Finished products		189,672			155,769
	Work in process		65,774			51,642
	Raw materials		161,911			146,582

			417,357			353,993
	LIFO valuation adjustment		(67,043	)		(44,072	)

			350,314			309,921
	Prepaid expenses		4,543			5,742
	Other current assets		62,851			59,847

	Total Current Assets		774,683			694,996
Property, Plant and Equipment
	Land and improvements		17,110			17,290
	Buildings and improvements		139,895			122,570
	Machinery and equipment		588,202			568,421
	Allowances for depreciation and amortization		(347,376	)		(311,733	)

	Net Property, Plant and Equipment		397,831			396,548
Other Assets	Goodwill		1,033,838			1,023,639
	Intangible assets, net of amortization		658,023			667,403
	Other		35,257			39,040

	Total Assets	$	2,899,632		$	2,821,626


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities	Accounts payable	$	131,864		$	77,831
	Employee compensation		20,103			15,205
	Accrued profit sharing		14,529			17,311
	Accrued warranty costs		9,073			9,216
	Accrued insurance obligations		11,856			11,285
	Accrued interest expense		9,655			27,729
	Other accrued expenses		94,688			61,595
	Dividends payable		7,861			7,809
	Income taxes payable		—			6,089
	Note payable		4,407			12,321
	Current maturities of long-term obligations		7,729			8,120

	Total Current Liabilities		311,765			254,511

Long-term obligations			1,325,399			1,355,905
Other liabilities			67,170			70,353
Deferred income taxes			322,475			330,088


		Sep 27, 2008	Dec 29, 2007
Shareholders’ Equity	Preferred stock, $0.10 par value
	Authorized shares: 5,000,000
	Issued and outstanding shares: None
	Common stock, $0.10 par value
	Authorized shares: 150,000,000
	Issued shares:	55,378,262	55,137,057		5,537			5,513
	Outstanding shares:	46,244,215	45,941,417
	Additional paid-in capital				544,794			532,603
	Retained earnings				523,592			466,299
	Accumulated other comprehensive income (loss)				(8,175	)		(27	)
	Treasury stock, at cost:	9,134,047	9,195,640		(192,925	)		(193,619	)

	Total Shareholders’ Equity				872,823			810,769

	Total Liabilities and Shareholders’ Equity			$	2,899,632		$	2,821,626

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Condensed Consolidated Statements of Income

(unaudited)


	Three Months Ended						Nine Months Ended
*(in thousands, except per share amounts)*	Sep 27, 2008			Sep 29, 2007			Sep 27, 2008			Sep 29, 2007
Net sales	$	506,154		$	480,595		$	1,480,653		$	1,367,904
Cost of goods sold		359,400			334,708			1,037,328			958,371

Gross profit		146,754			145,887			443,325			409,533
Selling and administrative expenses		84,997			78,693			245,989			221,096

Operating profit		61,757			67,194			197,336			188,437
Other income, net		1,192			110			2,797			1,780
Interest expense		(24,456	)		(28,821	)		(75,680	)		(79,733	)

Income before income taxes		38,493			38,483			124,453			110,484
Provision for income taxes		12,683			13,838			43,631			39,758

Net income	$	25,810		$	24,645		$	80,822		$	70,726


Net earnings per common share – basic	$	0.56		$	0.54		$	1.75		$	1.60
Net earnings per common share – diluted	$	0.55		$	0.53		$	1.74		$	1.58

Weighted-average shares outstanding – basic		46,229			45,880			46,125			44,261
Weighted-average shares outstanding – diluted		46,601			46,559			46,361			44,904

Dividends declared per common share	$	0.17		$	0.17		$	0.51		$	0.51

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		Additional Paid-in Capital		Retained Earnings						Treasury Stock, at cost			Total
BALANCE AT DECEMBER 29, 2007	55,137	$	5,513	$	532,603	$	466,299		$	(27	)	$	(193,619	)	$	810,769
Comprehensive income
Net income	—		—		—		80,822			—			—			80,822
Other comprehensive income (loss)
Currency translation adjustments	—		—		—		—			(4,690	)		—			(4,690	)
Derivative unrealized loss adjustment net of income taxes of $2,513	—		—		—		—			(3,676	)		—			(3,676	)
Post retirement plan adjustment net of income taxes of $108	—		—		—		—			218			—			218

Total other comprehensive income																(8,148	)

Total comprehensive income																72,674

Stock option plans (including 57 shares exchanged and $947 income tax benefit)	241		24		11,399		—			—			(1,798	)		9,625
Cash dividends at $0.51 per share	—		—		—		(23,529	)		—			—			(23,529	)
Treasury stock issued	—		—		792		—			—			2,492			3,284

BALANCE AT SEPTEMBER 27, 2008	55,378	$	5,537	$	544,794	$	523,592		$	(8,175	)	$	(192,925	)	$	872,823

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended
*(in thousands)*	Sep 27, 2008			Sep 29, 2007
Operating activities:
Net income	$	80,822		$	70,726
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of marketable securities		—			(32	)
Losses (gains) on sales of assets		1,254			(361	)
Depreciation		43,295			38,910
Amortization		16,064			14,390
Allowance for doubtful accounts receivable		(88	)		(235	)
Deferred income tax benefit		(16,594	)		(8,212	)
Share-based compensation expense		5,834			4,061
Cash provided by (used in) changes in operating assets and liabilities:
Receivables		(59,550	)		(42,599	)
Inventories		(23,905	)		(6,379	)
Other current assets		10,734			(3,005	)
Accounts payable		42,228			16,720
Accrued expenses and other liabilities		(8,991	)		7,273
Income taxes payable		(14,385	)		19,606
Other assets, net		(14,369	)		4,941

Net cash provided by operating activities		62,349			115,804

Investing activities:
Purchases of property, plant and equipment		(25,426	)		(23,474	)
Proceeds from sale of property, plant and equipment		48			2,898
Proceeds from sale of marketable securities		—			23,034
Acquisitions net of cash acquired		(40,397	)		(1,765,431	)
Divestitures		—			49,886
Net proceeds from sale of real estate		23,310			—

Net cash used in investing activities		(42,465	)		(1,713,087	)

Financing activities:
Proceeds from long-term obligations		77,546			1,550,000
Principal payments of long-term obligations		(119,371	)		(253,000	)
Debt issuance costs		—			(30,519	)
Principal payments on note payable		—			—
Proceeds from common stock issued		—			379,857
Dividends paid		(23,529	)		(23,375	)
Stock option exercises		9,442			7,602
Excess tax benefits on share-based payments		569			536
Net increase (decrease) in bank overdrafts		7,739			(4,624	)

Net cash (used in) provided by financing activities		(47,604	)		1,626,477

Net (decrease) increase in cash and cash equivalents		(27,720	)		29,194
Beginning cash and cash equivalents		37,757			12,737

Ending cash and cash equivalents	$	10,037		$	41,931

Noncash items:

•

Additional paid-in capital resulting from shares traded for option exercises amounted to $1,411 and $2,173 in the first nine months of 2008 and 2007, respectively.

•

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

•

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

See notes to unaudited condensed consolidated financial statements.

Baldor Electric Company

Notes to Unaudited Condensed Consolidated Financial Statements

September 27, 2008

NOTE A – Significant Accounting Policies

Basis of Presentation:The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements, and therefore should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 29, 2007. In the opinion of management, all adjustments (consisting of normal recurring items and adjustments to record the preliminary purchase allocation as described in NOTE B) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 27, 2008, may not be indicative of the results that may be expected for the fiscal year ending January 3, 2009.

Fiscal Year:The Company’s fiscal year ends on the Saturday nearest to December 31, which results in a 52-week or 53-week year. Fiscal year 2008 will contain 53 weeks. Fiscal year 2007 contained 52 weeks.

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

Reclassifications:Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. For third quarter 2007, approximately $1.5 million was reclassified from cost of goods sold to selling and administrative expenses. For the nine months ended September 29, 2007, approximately $4.0 million was reclassified from cost of goods sold to selling and administrative expenses.

Financial Derivatives:The Company uses derivative financial instruments to reduce its exposure to the risk of increasing commodity prices. Contract terms of the hedging instrument closely mirror those of the hedged forecasted transaction providing for the hedge relationship to be highly effective both at inception and continuously throughout the term of the hedging relationship. Additionally, the Company utilizes derivative financial instruments to limit exposure to increasing interest rates on variable rate borrowings. The Company does not regularly engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes.

The Company recognizes all derivatives on the balance sheets at fair value. Derivatives that do not meet the criteria for hedge accounting are adjusted to fair value through income. If the derivative is designated as a cash flow hedge, changes in the fair value are recognized in accumulated other comprehensive income (loss) until the hedged transaction is recognized in income. If a hedging instrument is terminated, any unrealized gain (loss) at the date of termination is carried in accumulated other comprehensive income (loss) until the hedged transaction is recognized in income. The ineffective portion of a derivative’s change in fair value is recognized in income in the period of change.

Accounts Receivable: Trade receivables are recorded in the balance sheets at the outstanding balance, adjusted for charge-offs and allowance for doubtful accounts. Allowance for doubtful accounts are recorded based on customer-specific analysis, general matters such as current

assessments of past due balances and historical experience. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas and industries. No single customer represents greater than 10% of net accounts receivable at September 27, 2008 or December 29, 2007.

Inventories:The Company uses the last-in, first-out (LIFO) method of valuing inventories held in the U.S. The LIFO calculation is made only at year-end based on the inventory levels and costs at that time. Accordingly, interim LIFO adjustments are based on management’s estimates of expected year-end inventory levels and costs which are subject to the final year-end LIFO inventories valuation. Inventories held at foreign locations are valued using the lower of cost measured using the first-in, first-out method (FIFO) or market.

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


	Nine Months Ended
*(in thousands)*	Sep 27, 2008			Sep 29, 2007
Balance at beginning of period	$	9,216		$	5,566
Charges to costs and expenses		7,505			8,328
Amounts assumed in acquisition		—			3,480
Payments		(7,648	)		(8,381	)

Balance at end of period	$	9,073		$	8,993

Self-Insurance Liabilities: The Company’s self-insurance programs primarily cover exposure to product liability, workers’ compensation and health insurance. The Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Company’s claims experience and risk exposure levels. Future adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors.

Income Taxes:The difference between the Company’s effective tax rate and the federal statutory tax rate for the three and nine months ended September 27, 2008, and September 29, 2007, relates to state income taxes, permanent differences, changes in management’s assessment of the outcome of certain tax matters, and the composition of taxable income between domestic and international operations. The significant permanent tax items primarily consist of the deduction for domestic production activities and nondeductible expenses.

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

The effective tax rate for the three months ended September 27, 2008 and September 29, 2007 was 33.0% and 36.0%, respectively. The rate was impacted in the current quarter by a change in the estimated effective state rate and adjustments to certain deferred tax items. The effective tax rate for the nine months ended September 27, 2008 and September 29, 2007 was 35.1% and 36.0%, respectively.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which provides a comprehensive model for the recognition, measurement and disclosure in financial statements

of uncertain income tax positions a company has taken or expects to take on a tax return. The Company recognizes interest and penalties related to uncertain tax positions as interest costs and selling and administrative costs, respectively.

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

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

Fair value of the options is estimated using a Black-Scholes option pricing formula. The variables used in the option pricing formula for each grant are determined at the time of grant as follows: (1) volatility is based on the daily composite closing price of Baldor’s stock over a look-back period of time that approximates the expected option life; (2) risk-free interest rates are based on the yield of U.S. Treasury Strips as published in theWall 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 theWall Street Journal or provided by a third-party on the date of the grant; and (4) expected option life represents the period of time the options are expected to be outstanding and is estimated based on historical experience. Assumptions used in the fair-value valuation are periodically monitored and adjusted to reflect current developments at the date of grant.

Business Combinations: The Company accounts for acquired businesses using the purchase method of accounting which requires that assets acquired and liabilities assumed be recorded at their respective fair values at the date of acquisition. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to acquired in-process research and development and backlog are expensed at the date of acquisition. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results of operations. Accordingly, for significant items, the Company typically obtains assistance from third party valuation specialists. Valuations are based on information available near the acquisition date and are based on expectations and assumptions deemed reasonable by management.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, the Company typically uses the relief from royalty and income methods. These methods start with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset requires judgment because different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Goodwill and Indefinite Lived Intangibles: Goodwill and intangible assets with indefinite useful lives are tested at least annually in the fourth quarter for impairment and more frequently if indicators of impairment warrant additional analysis. Goodwill represents the excess of the purchase price of acquisitions over the estimated fair value of the net assets acquired. In order to test for impairment, goodwill acquired is assigned to reporting units that are expected to

benefit from the synergies of the related business combination. The Company determines reporting units pursuant to Statement of Financial Accounting Standards (“FAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is evaluated for impairment by first comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, a computation of the implied fair value of goodwill is compared with its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in the amount of the excess. Management utilizes a discounted cash flows analysis to determine the estimated fair value of reporting units. Judgments and assumptions related to revenue, gross profit, operating expenses, interest, capital expenditures, cash flows, and market conditions are inherent in these estimates. Use of alternate judgments and/or assumptions could result in a fair value that differs from this estimate which could ultimately result in the recognition of impairment charges in the financial statements. The results of the discounted cash flows analysis are then compared to the carrying value of the reporting unit. Management utilizes a relief from royalty methodology to estimate the fair value of indefinite-lived intangibles. If the carrying value of indefinite-lived intangibles exceeds the estimated fair value of those intangibles, an impairment loss is recognized in the amount of the excess.

NOTE B – Acquisitions

On January 31, 2007, Baldor completed the acquisition of all of the equity of Reliance Electric (“Reliance”) from Rockwell Automation, Inc. and certain of its affiliates (“Rockwell”). Reliance is a leading manufacturer of industrial electric motors and other mechanical power transmission products. The acquisition extends Baldor’s product offerings, provides a manufacturing base in China for the Asian markets, increases the Company’s manufacturing capabilities and flexibility, strengthens the management team, and provides strong opportunities for synergies and cost savings. The purchase price was $1.83 billion, consisting of $1.78 billion in cash and 1.58 million shares of Baldor common stock valued at $50.93 million, based on the average closing price per share of Baldor’s common stock on the New York Stock Exchange for the three days preceding and the three days subsequent to November 6, 2006, the date of the definitive purchase agreement. The cash portion of the purchase price was funded with net proceeds from the issuance of 10,294,118 shares of Baldor common stock at a price of $34.00 per common share, net proceeds from the issuance of $550.0 million of 8.625% senior notes due 2017, and borrowings of $1.0 billion under a new $1.2 billion senior secured credit facility. In conjunction with an over-allotment option in the common stock offering, 1,430,882 additional common shares were issued at a price of $34.00 per share. Net proceeds from the over-allotment offering of approximately $46.5 million were utilized to reduce borrowings under the senior secured credit facility. Reliance’s results of operations are included in the consolidated financial statements beginning February 1, 2007.

In process research and development amounting to $1.0 million and backlog amounting to $0.7 million were expensed as of the acquisition date and included in cost of goods sold in the first quarter of 2007.

The table below presents summarized pro forma results of operations as if the acquisition had been effective at the beginning of the nine month period ended September 29, 2007.


*(in millions, except for per share data)*	Nine Months Ended Sep 29, 2007
Net sales	$	1,462.0
Income before income taxes		114.6
Net income		73.3

Net earnings per common share - diluted	$	1.58

On August 29, 2008, Baldor acquired Poulies Maska, Inc. (Maska) of Ste-Claire, Quebec, Canada. The purchase price was $41.97 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 will give Baldor a second plant in China to support international growth and results in leading 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 and working capital adjustments. 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. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition.


*(in thousands)*
Current assets	$	24,867
Property, plant and equipment		22,334
Intangible assets subject to amortization – Trade names (useful life of 10 years)		2,946
Goodwill		2,039

Total assets acquired		52,186


Current liabilities		5,097
Long term obligations		2,311
Deferred income taxes		2,805

Total liabilities assumed		10,213

Net assets acquired	$	41,973

NOTE C – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a negative fair value of $4.3 million and $0.4 million recorded in other accrued expenses at September 27, 2008 and December 29, 2007, respectively.

Gains recognized on commodity cash flow hedges reduced cost of sales by $3.2 million and $1.4 million in the third quarter of 2008 and 2007, respectively. Gains recognized as a reduction in cost of sales amounted to $7.0 million and $4.0 million in the first nine months of 2008 and 2007, respectively. Ineffective portions of the Company’s commodity cash flow hedges were not material during the third quarters or first nine months of 2008 or 2007. The Company expects after-tax losses totaling $2.6 million at September 27, 2008, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next six months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a negative fair value of $13.8 million and $11.5 million recorded in other accrued expenses at September 27, 2008 and December 29, 2007, respectively. Unrealized after-tax losses of $8.3 million and $7.0 million are recorded in accumulated other comprehensive income (loss) at September 27, 2008 and December 29, 2007, respectively.

FAS No. 157, “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

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

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

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

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


	Fair Value Measurements as of September 27, 2008
*(in millions)*	Total			Level 1			Level 2			Level 3
Interest rate swap	$	(10.9	)	$	—		$	(10.9	)	$	—
Interest rate collar		(2.9	)		—			(2.9	)		—
Copper derivatives		(4.3	)		(1.2	)		(3.1	)		—

Total	$	(18.1	)	$	(1.2	)	$	(16.9	)	$	—

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

NOTE D – Goodwill and Other Intangible Assets

The amounts of goodwill at September 27, 2008 and December 29, 2007 are as follows:


*(in thousands)*
Balance at December 29, 2007	$	1,023,639
Purchase accounting adjustment related to final valuations on Reliance acquisition		8,137
Acquisition of Maska		2,062

Balance at September 27, 2008	$	1,033,838

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


*(in thousands)*	Sep 27, 2008			Dec 29, 2007
Gross carrying value:
Trademarks	$	357,746		$	354,800
Customer relationships		292,000			292,000
Technology		32,000			32,000
Less accumulated amortization:
Customer relationships		(19,795	)		(8,922	)
Technology		(3,928	)		(2,475	)

Total intangible assets	$	658,023		$	667,403

Intangibles are amortized over their estimated period of benefit of five to 30 years, beginning with the date the benefits from intangible items are realized.

NOTE E – Note Payable

The Company’s wholly-owned Chinese subsidiary entered into a short-term note payable during the fourth quarter of 2007 to fund a non-taxable dividend to the Company. Proceeds from the note payable were utilized by the Company to make principal payments on the term loan under the Company’s senior secured credit facility. The note was refinanced during the second quarter of 2008. The principal balance was $4.4 million and $12.3 million at September 27, 2008 and December 29, 2007, respectively. The note payable bears interest at a variable rate (7.227% at September 27, 2008) and matures October 2008.

NOTE F – Long-term Obligations

Long-term obligations are as follows:


*(dollars in thousands)*	Interest Rate at Sep 27, 2008		Sep 27, 2008		Dec 29, 2007
Senior secured term loan, variable interest rate	5.895	%	$	715,000	$	812,000
Revolving credit facility, variable interest rate	5.250	%		63,000		—
Senior unsecured notes, fixed interest rate	8.625	%		550,000		550,000
Other	4.732	%		5,128		2,025

				1,333,128		1,364,025
Less current maturities				7,729		8,120

			$	1,325,399	$	1,355,905

Interest paid was $34.6 million and $42.6 million in third quarter 2008 and 2007, respectively. Interest paid during the first nine months of 2008 and 2007 was $87.8 million and $60.3 million, respectively.

Term and Revolving Credit Loans

Interest on the term loan is due periodically based upon a variable adjusted London Inter-Bank Offered Rate (“LIBOR”). Quarterly principal payments of $1.79 million are due beginning October 31, 2008, and continue through January 31, 2013, at which date the subsequent quarterly principal payments increase to $168.0 million through the loan due date of January 31, 2014 with a final payment of $178.8 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 2007 annual calculation. Additional principal payments may also be due based upon the net available proceeds from the disposition of assets, a casualty event, an equity issuance or incurrence of additional debt.

This loan agreement limits and restricts certain dividend and capital expenditure payments, establishes maximum total leverage and senior secured leverage ratios, and requires that the Company maintain a fixed charge ratio. These restrictions and ratios were all met as of September 27, 2008.

The revolving credit (“RC”) agreement provides for aggregate borrowings of up to $200.0 million, including a swingline loan commitment not to exceed $20.0 million and letter of credit (“LC”) commitment not to exceed $30.0 million, and contains minimum borrowing thresholds for each type of borrowing. As of September 27, 2008, the Company had $63.0 million of borrowings outstanding under the revolver. An RC commitment fee is due quarterly at the annual rate of

0.375% on the unused amount of the RC commitment. At September 27, 2008, $17.3 million of LC’s were issued which reduced the aggregate LC and RC availability. Availability totaled $119.7 million at September 27, 2008. LC participation fees of 1.75% and fronting fees of 0.125% per annum on unissued LC’s are due quarterly based upon the aggregate amount of LC’s issued and available for issuance, respectively. Interest on any RC borrowings is 1.75% plus LIBOR (5.19% at September 27, 2008) or 1.25% per annum plus prime (5.0% at September 27, 2008).

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

Senior Unsecured Notes

The senior unsecured notes are general unsecured obligations of the Company, subordinated to the senior secured credit facility described above and mature February 15, 2017. Interest is at a fixed rate and is payable semi-annually in arrears on February 15 and August 15 commencing August 15, 2007.

At any time prior to February 15, 2010, the Company may redeem up to 35.0% of the aggregate principal amount of the notes at a redemption price of 108.625% of the principal amount, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings with certain restrictions. At any time prior to February 15, 2012, the Company may redeem all or a part of the notes at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) the applicable premium as defined in the agreement as of the date of redemption, plus (iii) accrued and unpaid interest to the redemption date. On or after February 15, 2012, the Company may redeem all or a part of the notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest on the notes redeemed to the applicable redemption date.


Year	Percentage
2012	104.313	%
2013	102.875	%
2014	101.438	%
2015 and thereafter	100.000	%

The indenture agreement contains certain restrictions and requirements including restrictions and requirements regarding mergers, consolidation or sale of assets, certain payments, the incurrence of indebtedness and liens, and issuance of preferred stock, and note holder options if a change of control occurs. These notes are also subject to the term and revolving credit loans maximum total leverage and fixed charges ratios.

NOTE G – Commitments and Contingencies

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

Prior to the Company’s acquisition of Reliance, Rockwell determined actions by a small number of employees at certain of Reliance’s operations in one jurisdiction may have violated the Foreign Corrupt Practices Act (“FCPA”) or other applicable laws. Reliance does business in this jurisdiction with government owned enterprises or government owned enterprises evolving to commercial businesses. These actions involved payments for non-business travel expenses and certain other business arrangements involving potentially improper payment mechanisms for legitimate business expenses. Rockwell voluntarily disclosed these actions to the U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) beginning

in September 2006. Rockwell has agreed to update the DOJ and SEC periodically regarding any further developments as the investigation continues. If violations of the FCPA occurred, Rockwell and Reliance may be subject to consequences that could include fines, penalties, other costs and business-related impacts. Rockwell and Reliance could also face similar consequences from local authorities. The Company has been indemnified by Rockwell against government penalties arising from these potential violations. This indemnification covers only penalties and may not cover expenses incurred by the Company for future compliance.

NOTE H – Pension Plan and Other Postretirement Benefits

As a result of the acquisition of Reliance, the Company assumed defined benefit pension and postretirement benefit plans covering certain union employees and retirees. Estimated liabilities amounting to approximately $46.2 million at September 27, 2008 and $49.7 million at December 29, 2007 are included in other liabilities on the balance sheets.

Net periodic pension and other postretirement benefit costs include the following components for the three and nine-month periods ended September 27, 2008 and September 29, 2007, respectively.


Pension Benefits	Three Months Ended						Nine Months Ended
*(in thousands)*	Sep 27, 2008			Sep 29, 2007			Sep 27, 2008			Sep 29, 2007
Service cost	$	121		$	115		$	363		$	334
Interest cost		48			42			145			113
Expected return on assets		(58	)		(49	)		(174	)		(132	)
Amortization of prior service costs		3			—			8			—
Amortization of net loss		—			—			—			—

Net periodic benefit cost	$	114		$	108		$	342		$	315


Other Postretirement Benefits	Three Months Ended				Nine Months Ended
*(in thousands)*	Sep 27, 2008		Sep 29, 2007		Sep 27, 2008		Sep 29, 2007
Service cost	$	40	$	36	$	122	$	106
Interest cost		710		721		2,129		1,963
Expected return on assets		—		—		—		—
Amortization of prior service costs		—		—		—		—
Amortization of net loss		—		—		—		—

Net periodic benefit cost	$	750	$	757	$	2,251	$	2,069

We made contributions to the pension plans of $.1 million for the three month periods ended September 27, 2008 and September 29, 2007, respectively, and $.4 million and $.2 million for the nine month periods ended September 27, 2008 and September 29, 2007, respectively. The Company made contributions to the postretirement plan of approximately $5.4 million and $4.5 million for the nine months ended September 27, 2008 and September 29, 2007, respectively. The Company expects to contribute $.5 million to the pension plans in 2008 and expects to contribute $7.0 million to the postretirement benefit plan in 2008.

NOTE I – Stock Plans

The purpose of granting stock options and non-vested stock units is to encourage ownership in the Company. This provides an incentive for the participants to contribute to the success of the Company and align the interests of the participants with the interests of the shareholders of the Company. Historically, the Company has used newly-issued shares to fulfill stock option

exercises. Once options are granted, the Company’s policy is to not re-price any outstanding options. The 2006 Plan is the only Plan under which awards can be granted. When the 2006 Plan was adopted, the Company’s other stock plans were effectively cancelled except with respect to then outstanding grants and no further awards will be granted from those plans.

A summary of the Company’s stock plans and summary details about each Plan as of September 27, 2008, follows.


Plan	Shares Authorized	Current Plan Status	Typical Grant Life
1990	501,600	Cancelled; except for options outstanding	6 years
1994	4,000,000	Cancelled; except for options outstanding	10 years
1996	200,000	Expired; except for options outstanding	10 years
2001	200,000	Cancelled; except for options outstanding	10 years
2006	3,000,000	Active	10 years

1990 Plan: Only non-qualified options were granted from this Plan. Options vest and become 50% exercisable at the end of one year and 100% exercisable at the end of two years. All outstanding stock options granted under this Plan are currently exercisable.

1994 Plans: Incentive stock options vest and become fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. All outstanding non-qualified stock options granted under these plans are currently exercisable. All incentive stock options granted under this Plan continue to vest according to the terms of the applicable agreements.

1996 and 2001 Plans: Each non-employee director was granted an annual grant consisting of non-qualified stock options to purchase: (1) 3,240 shares at a price equal to the market value at date of grant, and (2) 2,160 shares at a price equal to 50% of the market value at date of grant. These options immediately vested and became exercisable on the date of grant.

2006 Plan: Awards granted under the 2006 Plan included: incentive stock options, non-qualified stock options, and non-vested stock units. Non-vested stock units were awarded with no exercise price. Other awards permitted under this Plan include stock appreciation rights, restricted stock, and performance awards; however, no such awards have been granted.

A summary of option activity under the Plans during the nine month period ended September 27, 2008, is presented below:


	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
						*(in thousands)*
Outstanding at December 29, 2007	2,412,400		$	31.16
Granted	558,087			29.11
Exercised	(202,013	)		22.68
Expired	(11,383	)		26.80
Cancelled	(300	)		28.62
Forfeited	(41,286	)		39.78

Outstanding at September 27, 2008	2,715,505			31.26	7.0 years	$	10,611

Vested or expected to vest at September 27, 2008	2,637,892			30.85	7.0 years	$	10,573
Exercisable at September 27, 2008	1,574,460			26.95	5.6 years	$	10,479

The weighted-average grant-date fair value of options granted was $7.96 and $13.68 in the first nine months of 2008 and 2007, respectively. The total intrinsic value of options exercised was $2.9 million and $5.2 million during the first nine months of 2008 and 2007, respectively.

As of September 27, 2008, there was $6.3 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 1.7 years.

A summary of non-vested stock unit activity under the Plans during the nine month period ended September 27, 2008, is presented below:


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

Non-vested at end of period	144,959			31.64

The total fair value of stock units vested during the first nine months of 2008 and 2007 was $1.4 million and $308,000, respectively.

As of September 27, 2008, there was $1.9 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.


	Nine Months Ended
	Sep 27, 2008		Sep 29, 2007
Volatility	31.1	%	25.1	%
Risk-free interest rates	3.1	%	5.1	%
Dividend yields	2.3	%	1.5	%
Expected option life	6.0 years		6.4 years

NOTE J – Earnings Per Share

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


		Three Months Ended				Nine Months Ended
*(in thousands, except per share data)*		Sep 27, 2008		Sep 29, 2007		Sep 27, 2008		Sep 29, 2007
Numerator:
Net income		$	25,810	$	24,645	$	80,822	$	70,726

Denominator Reconciliation:
Weighted-average shares – basic			46,229		45,880		46,125		44,261
Effect of dilutive securities – stock options and non-vested stock units			372		679		236		643

Weighted-average shares – diluted			46,601		46,559		46,361		44,904

Earnings per common share – basic		$	0.56	$	0.54	$	1.75	$	1.60
Earnings per common share – diluted	��	$	0.55	$	0.53	$	1.74	$	1.58

The total number of anti-dilutive securities excluded from the above calculations was 775,753 and 445,816 for the three month periods ended September 27, 2008, and September 29, 2007, respectively, and 979,558 and 445,916 for the nine-month periods ended September 27, 2008, and September 29, 2007, 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 sheet 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 September 27, 2008.

NOTE L – Recently Issued Accounting Pronouncements

In September 2006, the FASB issued FAS 157, “Fair Value Measurements”. FAS 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. The Company adopted FAS 157 on December 30, 2007. The adoption of FAS 157 has not had a material impact on the financial results or financial position. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP amends FAS 157 to delay the effective date for nonfinancial assets and liabilities, except for those that are recognized or disclosed at fair value on a recurring basis. The deferred effective date for such nonfinancial assets and liabilities is for fiscal years beginning after November 15, 2008.

In December 2007, the FASB issued FAS 141 (Revised 2007), “Business Combinations” (FAS 141R), effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FAS 141R establishes principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs. Additionally, FAS 141R determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company will adopt FAS 141R upon its effective date for any future business combinations.

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

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

Item 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 9,500 customers in more than 160 industries. Our products are sold to a diverse customer base consisting of original equipment manufacturers and distributors serving markets in the United States and throughout the world. We focus on providing customers with value through a combination of quality products and customer service, as well as short lead times and attractive total cost of ownership, which takes into account initial product cost, product life, maintenance costs, and energy consumption.

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

On August 29, 2008, Baldor acquired Poulies Maska, Inc. (Maska) of Ste-Claire, Quebec, Canada. The purchase price was $41.97 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 will give Baldor a second plant in China to support international growth and results in leading market share of sheaves and bushings in North America. Maska’s results of operations are included in the consolidated financial statements beginning August 30, 2008 and are not material to the financial statements at September 27, 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;

•

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 nine month periods ended September 27, 2008, and September 29, 2007. For the quarter ended September 27, 2008, approximately 48.9% of our domestic net sales were generated through distributors and represented primarily sales of replacement products, compared to 49.8% for the same period in 2007 and 48.3% for the nine months ended September 27, 2008 compared to 51.7% for the same period in 2007. Domestic sales to OEMs were approximately 51.1% for the quarter ended September 27, 2008, compared to 50.2% for the same period in 2007 and 49.6% for the nine months ended September 27, 2008 compared to 50.4% for the same period in 2007. OEMs primarily use our products in new installations. This expands our installed base and leads to replacement product sales by distributors in the future.

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

Industry Trends

The demand for products in the industrial electric motor, generator, and 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, 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. While demand for our products remains steady today, we are taking steps to prepare our business for potentially slower economic growth in the coming year. We remain focused on managing production and inventory levels and will adjust them proactively as incoming order rates change. In addition we are accelerating integration projects where possible and minimizing discretionary spending.

Results of Operations

Third quarter 2008 compared to third quarter 2007

Net sales for the quarter increased 5.3% to $506.2 million, compared to $480.6 million in the third quarter of 2007. Sales of industrial electric motor products grew 7.9% for the quarter as

compared to second quarter 2007 and comprised 64.8% of total sales compared to 63.3% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, including one month of sales from our Maska acquisition, grew 2.3% and accounted for approximately 28.2% of total sales for the third quarter of 2008, compared to 29.1% for the same period last year. During third quarter 2008, sales from other products including, generators, drives, and metal stampings, decreased 3.9% from third quarter 2007 and comprised 6.8% of total sales for the current quarter compared to 7.4% for the same period last year. Sales of Super-E^® premium-efficient motors continue to grow at a faster pace than standard-efficiency motors, increasing more than 25.0% for the quarter when compared to third quarter 2007. As electricity prices have increased, more customers have switched to premium efficient products, helping them reduce their electricity costs.

Gross profit margins decreased slightly to 29.0% in third quarter 2008 compared to 30.4% in third quarter 2007 and operating profit margins decreased to 12.2% from 14.0% in third quarter 2007. Raw materials costs continued to increase and remained substantially higher in the third quarter than they were during the same period last year. While increased costs have been partially offset by product design improvements and price increases implemented during the year, they have had a negative impact on margins.

Interest expense decreased $4.4 million from third quarter 2007. Interest rates on our outstanding variable rate debt were lower during the quarter when compared to the same period last year as was our average outstanding debt balance.

Pre-tax income was $38.5 million for the quarters ended September 27, 2008 and September 29, 2007.

Net income of $25.8 million for the quarter was up 4.7% from third quarter 2007 net income of $24.6 million. Diluted earnings per common share grew by 3.8% to $0.55 compared to $0.53 in third quarter 2007.

The effective tax rate for the three months ended September 27, 2008 and September 29, 2007 was 33.0% and 36.0%, respectively. The rate was impacted in the current period by a change in the estimated effective state rate and adjustments to certain deferred tax items.

Nine months ended September 27, 2008 compared to nine months ended September 29, 2007

Net sales for the first nine months of 2008 increased 8.2% to $1,480.1 million, compared to $1,367.9 million in the first nine months of 2007. Sales of industrial electric motor products grew 10.1% for the first nine months of 2008 as compared to the first nine months of 2007 and comprised 65.1% of total sales compared to 64.0% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, including one month of sales from our Maska acquisition, grew 15.6% and accounted for approximately 28.0% of total sales for the first nine months of 2008, compared to 26.2% for the same period last year. During the first nine months of 2008, sales of other products, including generators, drives, and metal stampings, decreased 3.2% from the same period last year and comprised 6.8% of total sales for the first nine months of 2008 compared to 7.6% for the same period last year.

Gross profit margins were 29.9% for the first nine months of 2008 and 2007 and operating profit margins decreased slightly to 13.3% from 13.8% in the first nine months of 2007. While 2008 reflects nine full months of Reliance operations, the benefit to our margins has been diluted by continued increases in materials and transportation costs.

Interest expense decreased $4.1 million over the first nine months of 2007. There are only eight months of interest expense in 2007 related to the debt incurred on January 31, 2007 to fund our

acquisition of Reliance. We reduced outstanding debt by $38.8 million during the first nine months of 2008. In addition, interest rates on our variable rate debt decreased during the first nine months of 2008 when compared to the same period last year.

Pre-tax income of $124.5 million for the first nine months of 2008 was up 12.6% compared to $110.5 million for the first nine months of 2007.

Net income of $80.8 million for the first nine months of 2008 was up 14.3% from $70.7 million for the first nine months of 2007. Diluted earnings per common share grew by 10% to $1.74 compared to $1.58 in the first nine months of 2007.

The effective tax rate was 35.1% and 36.0% for the nine months ended September 27, 2008 and September 29, 2007, respectively. The effective tax rate was impacted in the current period by a change in the estimated effective state rate and adjustments to certain deferred tax items.

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

Liquidity and Capital Resources:Working capital amounted to $462.9 million at September 27, 2008, compared to $440.5 million at December 29, 2007.

Liquidity was supported by cash flows from operations of $62.3 million in the first nine months of 2008 as compared to $115.8 million in the first nine months of 2007. Operating cash flows decreased $23.7 million as a result of the timing of semi-annual interest payments on our senior unsecured notes. In addition, we made income tax payments of $65.2 million during the first nine months of 2008, compared to $32.0 million during the same period last year.

Net cash used in investing activities was $42.5 million in the first nine months of 2008 compared to $1.71 billion in the first nine months of 2007. During the first nine months of 2008, we funded purchases of property, plant, and equipment amounting to $25.4 million compared to $23.5 million during the same time period in 2007. During the first nine months of 2008, we used $40.4 million to fund our acquisition of Maska on August 28, 2008 compared to $1.76 billion to fund our acquisition of Reliance on January 31, 2007. Cash provided by the sale of real estate amounting to $23.3 million is included in 2008.

Net cash used in financing activities was $47.6 million in the first nine months of 2008 compared to net cash provided of $1.63 billion in first nine months of 2007. During the first nine months of 2008, we paid dividends of $23.5 million compared to $23.4 million during the same period in 2007. During the first nine months of 2008, we borrowed $40.0 million to fund our acquisition of Maska; however, our net outstanding debt decreased $38.8 million. The first nine months of 2007 included proceeds from new debt acquired and the issuance of Baldor common stock to finance the purchase of Reliance.

Total outstanding debt was $1.34 billion at September 27, 2008, compared to $1.38 billion at December 29, 2007. In conjunction with our acquisition of Reliance on January 31, 2007, we borrowed a total of $1.55 billion under our senior secured credit facility and senior unsecured notes. A portion of the proceeds from new borrowings were utilized to repay $95.0 million of long-term debt that existed at December 30, 2006. During the first nine months of 2008, our outstanding debt balance decreased $38.8 million, net of borrowings of $40.0 million to fund the acquisition of Maska.

Our primary sources of liquidity are cash flows from operations and funds available under our senior secured credit facility. At September 27, 2008, we had approximately $119.7 million of borrowing capacity under the senior secured credit facility. We expect that ongoing

requirements for debt service, operations, capital expenditures and dividends will be funded from these sources. We have senior secured debt ratings of Ba3 with a negative outlook by Moody’s Investors Services, Inc. (“Moody’s”) and BB+ with a stable outlook by Standard & Poor’s Rating Service (“S&P”). We have a senior unsecured debt rating of B3 with a stable outlook by Moody’s. We have no downward rating triggers that would accelerate the maturity of amounts drawn under our senior secured credit facility and our senior unsecured notes. Our senior secured credit facility and senior unsecured credit facility contain various customary covenants, which limit, among other things, indebtedness and dispositions of assets, and which require us to maintain compliance with certain quarterly financial ratios. As of September 27, 2008, we were in compliance with all covenants.

Additional principal payments may be due based upon a prescribed annual excess cash flow calculation until such time as a prescribed total leverage ratio is achieved. There were no additional payments due based on the Company’s 2007 annual calculation and no additional payments are expected for 2008. Additional principal payments may also be due based upon the net available proceeds from the disposition of assets, a casualty event, an equity issuance or incurrence of additional debt.

Dividend Policy:Dividends paid to shareholders amounted to $0.51 per common share in each of the first nine months of 2008 and 2007. Our objective is for shareholders to receive dividends while also participating in Baldor’s growth. Terms of our credit agreement and indenture related to financing the acquisition of Reliance limit our ability to increase dividends.

Recently Issued Accounting Pronouncements

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to Baldor’s operations result primarily from changes in commodity prices, interest rates, concentrations of credit, and foreign exchange rates. To help maintain stable pricing for customers, the Company enters into various commodity hedging transactions. To manage interest rate risk on variable rate outstanding debt, the Company enters into various interest rate hedging transactions.

Baldor is a purchaser of certain commodities, including copper and aluminum, and periodically utilizes commodity futures and options for hedging purposes to reduce the effects of changing commodity prices. 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 negative fair value of $4.3 million recorded in other accrued expenses at September 27, 2008.

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

Details regarding the instruments as of September 27, 2008, are as follows:


Instrument	Notional Amount		Maturity	Rate Paid	Rate Received ⁽¹⁾	Fair Value ⁽²⁾
*(in millions)*
Swap	$	250.0	April 30, 2012	5.12%	LIBOR	$	(10.88	)
Collar	$	100.0	April 30, 2012	LIBOR	LIBOR – Floor 4.29%; Cap 6.50%	$	(2.87	)

⁽¹⁾	LIBOR is determined each reset date based on London and New York business days.

Floating rates used in instruments are matched exactly to floating rate in credit agreement.

⁽²⁾	Fair value is an estimated amount the Company would have received (paid) at September 27, 2008, to terminate the agreement.

Baldor’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are in high-quality securities placed with major banks and financial institutions.

Foreign affiliates comprise approximately 10% of our consolidated net sales. As a result, our exposure to foreign currency risk is not significant. We continue to monitor the effects of foreign currency exchange rates and will utilize foreign currency hedges where appropriate.

Item 4.

Controls and Procedures

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

Disclosure Controls and Procedures

An evaluation was performed by the Company’s management, including the Company’s CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 27, 2008. Based on such evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of September 27, 2008.

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 nine months ended September 27, 2008, 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. There have been no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation or in other factors that occurred during the first nine months of 2008 that has materially affected, or is reasonably likely to materially affect, these controls.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable.

Item 1A.

Risk Factors

The Company’s risk factors are fully described in the Company’s 2007 Form 10-K. No material changes to the risk factors have occurred since the Company filed its 2007 Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

During the three months ended September 27, 2008, the Company repurchased shares of the Company’s common stock in private transactions as summarized in the table below.


ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs (2)
Month #7 Jun 29, 2008 – Jul 26, 2008	416	$	39.40	—	1,451,623
Month #8 Jul 27, 2008 – Aug 23, 2008	137	$	37.82	—	1,451,623
Month #9 Aug 24, 2008 – Sep 27, 2008	2,994	$	36.67	—	1,451,623

Total	3,547	$	37.03	—	1,451,623

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

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

During the third quarter of 2008, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). The exercise price paid by the District Managers equaled the market value of the stock on the date of the grant. The Company intends to use the proceeds from these option exercises for general corporate purposes. The total amount of shares granted under the DM Plan is 1.0% of the outstanding shares of Baldor common stock. None of the transactions were registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration afforded by Section 4(2) of the Act. The Company deems this exemption to be appropriate given that there are a limited number of participants in the DM Plan and all parties are knowledgeable about the Company.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

See Exhibit Index

SIGNATURES

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


	BALDOR ELECTRIC COMPANY
	(Registrant)

Date: November 6, 2008	By:	/s/ George E. Moschner
		George E. Moschner
		Chief Financial Officer and Secretary
		(on behalf of the Registrant and as Principal Financial Officer)

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS


Exhibit No.		Description
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) hereto.

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

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

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

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

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

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

10(iii).1		Bonus Plan for Executive Officers, as approved by the Company’s Compensation Committee of the Board of Directors and the Company’s Board of Directors on February 25, 2008, and filed as Exhibit 10(iii).1 to the Registrant’s Quarterly Report on Form 10-Q on May 8, 2008, and incorporated herein by reference.

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

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

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company