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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 March 29, 2003

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

Commission File Number 1-7284

BALDOR ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)

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

(479) 646-4711
(Registrant's Telephone Number, including Area Code)

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 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 an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

At April 26, 2003, there were 32,696,458 shares of the registrant’s common stock outstanding.

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Baldor Electric Company and Affiliates
Condensed Consolidated Balance Sheets (Unaudited)

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Earnings (Unaudited)

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company and Affiliates
Condensed Consolidated Statements of Cash Flows (Unaudited)

See notes to unaudited condensed consolidated financial statements.

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Baldor Electric Company and Affiliates
Notes to Unaudited Condensed Consolidated Financial Statements
March 29, 2003

Note A Significant Accounting Policies

Basis of Presentation: The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with 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 accounting principles generally accepted in the United States 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 28, 2002. In the opinion of management, all adjustments (consisting only of normal recurring items) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 29, 2003 may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.

Comprehensive Income: Total comprehensive income was approximately $6.5 million and $6.8 million for the first quarter of 2003 and 2002, respectively. The components of comprehensive income are illustrated in the table below:

Segment Reporting: The Company has only one reportable segment; therefore, the condensed consolidated financial statements reflect segment information.

Financial Derivatives: The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. If a hedge transaction is terminated, any unrealized gain (loss) at the date of termination is carried in other comprehensive income (loss) until the hedged item is recognized as earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings in the period of change.

The Company uses derivatives to moderate the commodity market risks of its business operations. Derivative products, such as futures and option contracts, are considered to be a hedge against changes in the amount of future cash flows related to commodities procurement.

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Net gains (losses) recognized in earnings, related to cash flow hedges, in the first quarter 2003 and 2002 amounted to $82,300 and ($351,600), respectively.

At March 29, 2003, and December 28, 2002, the Company had derivative related balances with a fair value of approximately $293,000 and ($99,000), respectively, recorded in other current assets. The Company had corresponding net after-tax gains (losses) of approximately $179,000 and ($61,000) recorded in accumulated other comprehensive income (loss) at March 29, 2003, and December 28, 2002, respectively. The Company expects that net after-tax gains, totaling approximately $179,000 included in accumulated other comprehensive loss at March 29, 2003, related to cash flow hedges, will be recognized in cost of sales within the next twelve months. The Company generally does not hedge anticipated transactions beyond 18 months.

Stock-Based Compensation: The Company has certain stock-based employee compensation plans. In accounting for these plans, the Company applies the intrinsic value method permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations.

SFAS No. 123 requires pro forma disclosure of the effects on net income and earnings per share when applying the fair value method of valuing stock-based compensation. The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option pricing model. For purposes of this disclosure, the estimated fair value of the options is amortized over the applicable compensatory periods.

Product Warranties: The Company accrues for product warranty claims based on historical experience and the expected costs to provide warranty service. The changes in the carrying amount of product warranty reserves during the three-months ended March 29, 2003 is as follows (in thousands):

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Note B Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS):

Note C Credit Facilities

The Company has a loan agreement (“the facility”) with a bank, which provides the Company up to $70 million of borrowing capacity, which was renewed March 5, 2003. The facility is secured with Company’s trade accounts receivable and matures March 13, 2005. Interest is calculated at a relevant commercial paper rate plus applicable margin. At March 29, 2003, the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.27%.

Note D Acquisition

On February 13, 2003, the Company acquired all of the stock of Energy Dynamics, Inc. (“EDI”) for cash amounting to approximately $5.5 million. EDI is a designer, assembler, and marketer of industrial generator sets. The acquisition has been accounted for as a purchase and the amount of resulting goodwill has not yet been determined. EDI’s results of operations for the quarter ended March 29, 2003 were not material to the Company’s condensed consolidated financial statements. Accordingly, pro-forma information has not been presented. The Company’s condensed consolidated financial statements include the results of operations and the assets and liabilities of EDI after February 12, 2003.

Note E Stock Repurchase

On February, 14, 2003, pursuant to the Company’s stock repurchase plan, the Company repurchased 1.5 million shares of its common stock for cash in the amount of $26.7 million. As of March 29, 2003 the Company had repurchased 5.8 million of the 6.0 million shares authorized for repurchase.

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

Results of Operations

Net earnings for the first quarter of 2003 were $6.2 million or $0.18 per diluted share compared to $5.4 million or $0.16 per diluted share for the first quarter of 2002. Operating margin for the first quarter of 2003 amounted to 8.4% compared to 7.9% for the first quarter 2002. Increased sales and reduced freight and warranty costs contributed to the improvement in operating margin.

First quarter 2003 versus First quarter 2002

Sales of $137.4 million for the first quarter 2003 represented an increase of 2.9% from the same period last year. While overall demand remained weak, our success in obtaining new customers provided a modest increase from last year.

Cost of sales amounted to 72.7% of sales for the first quarter 2003 compared to 72.2% in first quarter 2002. Although we continued to make product and cost improvements, the mix of products sold during the quarter had an average material cost greater than that of the same period last year.

Selling and administrative expenses amounted to 18.9% of first quarter 2003 sales compared to 19.9% in first quarter 2002. The improvements resulted primarily from decreased freight and warranty costs.

Long-term debt was approximately $1.6 million lower during the first quarter 2003 as compared to first quarter 2002. The reduced debt levels combined with continued favorable borrowing rates resulted in a decrease in interest expense of $37,000 for the first quarter 2003 as compared to the first quarter 2002.

Liquidity and Capital Resources

For the three months ended March 29, 2003, net cash flows from operations amounted to $16.1 million. The Company utilized cash flows from operations along with a portion of cash and marketable securities held at year-end 2002 to fund property, plant and equipment additions, pay quarterly dividends to shareholders, fund the acquisition of Energy Dynamics, Inc., and repurchase 1.5 million shares of the Company’s common stock.

At March 29, 2003, the Company had working capital of $172.2 million compared to $199.0 million at year-end 2002. The current ratio at March 29, 2003 was 3.1 to 1 compared to 3.7 to 1 at year-end 2002. The decreases in working capital and current ratio were primarily due to cash and marketable securities held at year-end to fund the repurchase of common stock during the first quarter.

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Total long-term debt at March 29, 2003 was $105.6 million compared to $105.3 million at December 28, 2002. The Company’s credit agreements contain various covenants. The Company was in compliance with these covenants at March 29, 2003.

The Company expects that its foreseeable cash needs for operations and capital expenditures will continue to be met through cash flows from operating activities and existing credit facilities.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies, which could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management.

Revenue Recognition: In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," the Company recognizes revenue at the time product is shipped and title passes to the customer, the amount due from the customer is fixed and collectibility of the related receivable is reasonably assured.

Allowance for Doubtful Accounts: The Company records allowances for doubtful accounts based on customer-specific analysis, general matters such as current assessments of past due balances and economic conditions, and historical losses. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company had anticipated or for customer-specific circumstances, such as financial difficulty.

Inventories: Inventories are valued at the lower of cost or market, with cost being determined principally by the last-in, first-out (LIFO) method, except for non-U.S. inventories, which are determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The Company reviews the net realizable value of inventory on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, adjustments to inventory values may be required.

Self-Insurance Liabilities: The Company’s self-insurance programs include primarily product liability, workers’ compensation and health. 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 claim experience and risk exposure levels for the periods being valued. Adjustments to the self-insured liabilities may be required to reflect emerging claims experience and other factors.

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Long-Lived Assets and Goodwill: The Company evaluates the recoverability of the carrying amount of long-lived assets whenever events indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates the recoverability of goodwill and other intangible assets with indefinite lives annually or more frequently if events indicate that an asset may be impaired. The Company uses judgment when applying the impairment rules to determine when an impairment test is necessary. The Company is required to make estimates of its future cash flows related to the assets subject to review. These estimates require assumptions about demand for the Company’s products, future market conditions, technological developments, and future discount rates and growth rates.

Forward-looking Statements

This document contains statements that are forward-looking, ie, not historical facts. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “outlook”, “optimistic”, “trends”, “expect(s)", “assuming”, “expectations”, “forecasted”, “estimates”, “expected”) are based on the Company’s current expectations and some of them 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. The factors that might cause such differences include, among others, the following: (i) changes in economic conditions, (ii) developments of new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs of select raw materials, (iv) the success in increasing sales and maintaining or improving the operating margins of the Company, and (v) other factors including those identified in the Company’s press releases and other filings made from time-to-time with the Securities and Exchange Commission. These statements should be read in conjunction with the Company’s most recent annual report (as well as the Company’s Form 10-K and other reports filed with the Securities and Exchange Commission) containing a discussion of the Company’s business and of various factors that may affect it.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to the Company’s operations result primarily from changes in commodity prices, interest rates, and foreign exchange rates. To maintain stable pricing for its customers, the Company enters into various hedging transactions as described below.

As a purchaser of certain commodities, primarily copper, aluminum, and steel, the Company periodically utilizes commodity futures and options for hedging purposes to reduce the effect of changing commodity prices and as a mechanism to procure materials. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts meeting this risk reduction and correlation criteria are recorded using hedge accounting, as described in Note A to the unaudited condensed consolidated financial statements.

The Company’s interest rate risk is related to its available-for-sale securities and long-term debt. Due to the short-term nature of the Company’s securities portfolio, anticipated interest rate risk is not considered material. The Company’s debt obligations include certain notes payable to banks bearing interest at a quarterly variable rate. The Company does not currently utilize derivatives for managing interest rate risk, but continues to monitor changes in market interest rates.

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Although the Company has risk related to changes in foreign currency exchange rates, foreign affiliates comprise less than 10% of the Company’s total assets. The Company does not anticipate the use of derivatives for managing foreign currency risk, but continues to monitor the effects of foreign currency exchange rates.

Item 4. Controls and Procedures

The Company has established and maintains disclosure controls and procedures to ensure that information required to be disclosed is gathered, analyzed and disclosed in its reports filed pursuant to the Securities and Exchange Act of 1934. The Company’s principal executive officer and principal financial officer (the “certifying officers”) have concluded, based on their evaluation within 90 days of the filing of this report, that the Company’s disclosure controls and procedures are effective. Their certifications pursuant to Exchange Act Rules 13a-14 and 15d-14 are included in the Certifications section of this report. In addition, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART 2. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

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.

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CERTIFICATIONS

I, John A. McFarland, certify that:

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May 13, 2003

/s/ John A. McFarland
President and Chief Executive Officer

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I, Ronald E. Tucker, certify that:

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May 13, 2003

/s/ Ronald E. Tucker
Chief Financial Officer

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