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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 June 28, 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 June 28, 2003, there were 32,756,374 shares of the registrant’s common stock outstanding.

PART 1. FINANCIAL INFORMATION

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
June 28, 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 and six months ended June 28, 2003, may not be indicative of the results that may be expected for the fiscal year ending January 3, 2004.

Segment Reporting

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

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 six months ended June 28, 2003, is as follows (in thousands):

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 accumulated 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 accumulated 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. Net gains (losses) recognized in earnings, related to cash flow hedges, in the second quarter 2003 and 2002 amounted to $170,000 and ($272,000), respectively, and for the first six months of 2003 and 2002 amounted to $252,000 and ($624,000), respectively.

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At June 28, 2003, and December 28, 2002, the Company had derivative related balances with a fair value of approximately $168,000 and ($99,000), respectively, recorded in other current assets. The Company had corresponding net after-tax gains (losses) of approximately $326,000 and ($61,000) recorded in accumulated other comprehensive income (loss) at June 28, 2003, and December 28, 2002, respectively. The Company expects that net after-tax gains, totaling approximately $326,000 included in accumulated other comprehensive income at June 28, 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.

Comprehensive Income

Total comprehensive income was approximately $6.9 million and $8.3 million for the second quarter of 2003 and 2002, respectively, and was approximately $13.4 million and $15.1 million for the first six months of 2003 and 2002, respectively. The components of comprehensive income are illustrated in the table below:

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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.

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Note B Earnings Per Share

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

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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 the Company’s trade accounts receivable and matures March 13, 2005. Interest is calculated at a relevant commercial paper rate plus applicable margin. At June 28, 2003, the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.17%.

Note D 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 June 28, 2003, the Company had repurchased 5.8 million of the 6.0 million shares authorized for repurchase.

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

Results of Operations

Net earnings for the second quarter of 2003 were $6.0 million or $0.18 per diluted share compared to $7.2 million or $0.21 per diluted share for the second quarter of 2002. Operating margin for the second quarter of 2003 amounted to 8.0% compared to 9.4% for the second quarter 2002. For the six months ended June 28, 2003, net earnings amounted to $12.2 million compared to $12.6 million for the same period last year. Earnings per diluted share were flat for the first six months, at $.36, as a result of share repurchases. Operating margin for the first six months of 2003 declined to 8.2% from 8.7% in 2002. The reduced operating margins for second quarter and the first six months resulted primarily from decreased net sales.

Second quarter 2003 versus Second quarter 2002

Net sales of $138.5 million for the second quarter 2003 declined 4.6% from second quarter 2002 net sales of $145.2 million. Although our focus on obtaining new customers has resulted in a substantial amount of new business, overall demand in our traditional markets and customers continued to lag. Sales of electric motor products in second quarter 2003 dropped 8.5% from second quarter 2002 and comprised 78.2% of total product sales in 2003 compared to 80.7% in 2002. Sales of drives products were flat for the quarter when compared to second quarter 2002. Drives products accounted for 17.3% of total product sales in second quarter 2003, up from 16.6% in second quarter 2002. Sales of generator products increased 57.8% from second quarter 2002, comprising 4.5% of total product sales this quarter compared to 2.7% in second quarter 2002. Our presence in the generator products market continues to grow through a combination of acquisitions and new opportunities with existing electric motor customers who are utilizing generator products for standby power as well as to help reduce electricity costs through peak-shaving.

Cost of sales increased to 72.7% of sales for the second quarter 2003 compared to 71.5% in second quarter 2002. Although we continue to make product and cost improvements, decreased net sales had a negative impact on the cost of sales percentage. In addition, we reduced our traditional two-week July plant vacation to one week. This gave our employees more flexibility with their vacation days and accommodated our customers relying on 10-day lead times. Consequently, we did not build up as much inventory in advance of the vacation as in prior quarters and this had a negative impact on cost of sales. We expect to recover the effects of the reduced plant vacation in the third quarter through better plant manufacturing efficiencies and inventory utilization.

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Although total selling and administrative expenses decreased from the same period last year, they amounted to 19.3% of second quarter 2003 sales compared to 19.1% in second quarter 2002 as a result of decreased net sales. Reductions in freight and warranty expenses amounted to approximately .2% of sales for second quarter 2003 compared to the same period in 2002.

Long-term debt was approximately $2 million lower during the second quarter 2003 compared to second quarter 2002. The reduced debt levels combined with continued favorable borrowing rates resulted in a decrease in interest expense of $157,000 for the second quarter 2003 as compared to the second quarter 2002.

Six months ended June 28, 2003, versus Six months ended June 29, 2002

Net sales of $275.9 million for the first six months of 2003 declined 1.0% from same period last year net sales of $278.7 million. Sales of electric motor products were 4.5% lower than 2002 and comprised 77.8% of total product sales in the first six months of 2003 compared to 80.3% in 2002. Sales of drives products were up 1.4% for the six month period when compared to same period of 2002. Drives products accounted for 17.6% of total product sales in the first six months of 2003, up from 17.1% in 2002. Sales of generator products increased 76.4% from the same period of 2002, comprising 4.6% of total product sales for the period compared to 2.6% for the first six months of 2002. As with the second quarter results, our addition of new business and expansion in the generator market has provided new revenues, but continued weakened demand in our traditional electric motor markets and customers has hampered our top line.

Cost of sales increased to 72.8% of sales for the first six months of 2003 compared to 71.8% in the first six months of 2002. Decreased top line had a negative impact on the cost of sales percentage. In addition, the mix of products sold during the first six months of 2003, a 76.4% increase in generator products, resulted in increased material costs as a percentage of net sales.

Selling and administrative expenses amounted to 19.0% of sales for the first six months of 2003 compared to 19.5% for the same period in 2002. Reductions in freight and warranty expenses amounted to approximately .5% of sales for the first six months of 2003 when compared to the same period last year.

Favorable borrowing rates resulted in a decrease in interest expense of $194,000 for the first six months of 2003 as compared to the same period of 2002.

Liquidity and Capital Resources

For the six months ended June 28, 2003, net cash flows from operations amounted to $28.3 million, increasing approximately $15.4 million from the same period of 2002. Strong accounts receivable collection and improved accounts payable management accounted for $6.7 million and $4.9 million, respectively, of improvement. There were no other significant fluctuations in the components of net cash flows that were inconsistent with normal balance sheet fluctuations and results of operations. The Company utilized cash flows from operations for the first six months of 2003 along with a portion of cash and marketable securities held at year-end 2002 to fund property, plant and equipment additions of $6.6 million, pay quarterly dividends to shareholders of $8.5 million, fund the acquisition of Energy Dynamics, Inc. in the amount of $5.8 million, and repurchase 1.5 million shares of the Company’s common stock for $26.7 million.

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At June 28, 2003, the Company had working capital of $175.7 million compared to $199.0 million at year-end 2002. The current ratio at June 28, 2003, was 3.2 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 of 2003.

Total long-term debt at June 28, 2003, was $104.5 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 during all of the periods presented in this report.

The company’s principal source of liquidity is operating cash flows. Accordingly, the Company is dependent primarily on continued demand for its products and collectibility of receivables from its customers. The Company’s broad base of customers and industries served, as well as its position in the marketplace, ensure that fluctuations in a particular customer or industry’s business will not have a material effect on the Company’s sales or collectibility of receivables. As a result, the company expects that its foreseeable cash needs for operations and capital expenditures will continue to be met through operating cash flows 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: The Company sells products to its customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. The Company has no further obligations associated with the product sale that would impact revenue recognition after the product is shipped.

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 asset 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 have concluded, based on their most recent evaluation under the supervision and with participation of the Company’s management, that the Company’s disclosure controls and procedures are effective. 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 4. Submission of Matters to a Vote of Security Holders

The Company held its annual meeting on May 3, 2003, at which shareholders voted on one proposal. Proposal I was the election of three Directors to the Company’s Board of Directors for terms expiring in 2006. The following is a list of the Board’s slate of nominees (who were the only nominees) each of whom were elected and the results of shareholder voting on Proposal I:

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

Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters

During the second quarter of 2003, 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 Manager equaled the fair market value on the date of the grant. The total amount of shares granted under the DM Plan is approximately 1% 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.

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Item 6. Exhibits and Reports on Form 8-K

   a. Exhibit Number       Description

b. Reports filed 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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