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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended April 3, 2004

OR

Commission File Number 01-07284

Baldor Electric Company

Exact name of registrant as specified in its charter

479-646-4711

Registrant’s telephone number, including area code

N/A

Former name or former address, 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 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 3, 2004, there were 32,926,518 shares of the registrant’s common stock outstanding.

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Baldor Electric Company and Affiliates

Index

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PART I. 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

April 3, 2004

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 January 3, 2004. 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 April 3, 2004, may not be indicative of the results that may be expected for the fiscal year ending January 1, 2005.

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. Net (reductions) increases in cost of sales, related to cash flow hedges, in the first quarter 2004 and 2003 amounted to approximately ($2,295,000) and $82,300, respectively.

At April 3, 2004, and January 3, 2004, the Company had derivative related balances with a fair value of approximately $1,941,000 and $2,426,000, respectively, recorded in other current assets. The Company had corresponding net after-tax gains of approximately $1,184,000 and $1,500,000 recorded in accumulated other comprehensive income (loss) at April 3, 2004, and January 3, 2004, respectively. The Company expects that net after-tax gains, totaling approximately $1,184,000 included in accumulated other comprehensive income (loss) at April 3, 2004, 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.

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Comprehensive Income

Total comprehensive income was approximately $7.2 million and $6.5 million for the first quarter of 2004 and 2003, respectively. The components of comprehensive income are illustrated in the table below:

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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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 2004 will contain 52 weeks. Fiscal year 2003 contained 53 weeks.

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 April 3, 2004, is as follows (in thousands):

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, providing the Company up to $60 million of borrowing capacity, which was renewed March 5, 2004. The facility is secured with the Company’s trade accounts receivable and matures January 31, 2007. Interest is calculated at a relevant commercial paper rate plus applicable margin. At April 3, 2004, the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.08%.

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Results of Operations

Net earnings for the first quarter of 2004 increased to $7.4 million or $0.22 per diluted share from $6.2 million or $0.18 per diluted share for the first quarter of 2003. Operating margin for first quarter 2004 improved to 8.9% compared to 8.4% for first quarter 2003.

First quarter 2004 versus First quarter 2003

Net sales of $152.8 million for the first quarter 2004 grew 11.2% from first quarter 2003 net sales of $137.4 million. Sales of electric motor products in first quarter 2004 were up 10.8% from first quarter 2003 and comprised 76.8% of total product sales in 2004 compared to 77.4% in 2003. Sales of drives products increased 10.0% for the quarter when compared to first quarter 2003. Drives products accounted for 17.6% of total product sales in first quarter 2004, compared to 17.8% in first quarter 2003. Sales of generator products increased 30.5% from first quarter 2003 and comprised 5.6% of total product sales this quarter compared to 4.8% in first quarter 2003.

Cost of sales amounted to 72.4% of sales for the first quarter 2004 compared to 72.8% in first quarter 2003. The modest improvement in cost of sales resulted primarily from increased sales volume. Raw material prices increased through the first quarter of 2004 at a pace greater than originally anticipated. The Company instituted a price increase on March 1, 2004 and will implement an additional price increase on June 1, 2004. To minimize the impact on our customers, the Company is aggressively reviewing product designs to identify opportunities to use less material, without sacrificing quality.

Total selling and administrative expenses decreased from the same period last year and amounted to 18.7% of first quarter 2004 sales compared to 18.8% in first quarter 2003. Combined reductions in freight and warranty expenses amounted to approximately 0.8% of sales for first quarter 2004 when compared to the same period in 2003. Advertising and promotional expenses increased by approximately 0.4% of net sales in first quarter 2004 as compared to first quarter 2003.

Liquidity and Capital Resources

For the three months ended April 3, 2004, net cash flows from operations amounted to $8.0 million, a decrease of $8.0 million from the same period of 2003. As a result of the 11.2% increase in net sales, customer accounts receivables increased $13.7 million during first quarter 2004 compared to an increase of $4.5 million during first quarter 2003. This was a normal fluctuation relative to the increase in net sales and subsequent collection of these receivables will result in increased operating cash flows from receivables in the second quarter. 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 a portion of cash flows from operations to fund property, plant and equipment additions of approximately $2.5 million in both first quarter 2004 and first quarter 2003. In addition, dividends were paid to shareholders amounting to $4.6 million and $4.2 million during first quarter 2004 and 2003, respectively. During first quarter 2003, the Company repurchased 1.5 million shares of common stock for $26.7 million.

Total long-term debt, including amounts classified as current maturities, was $105.3 million at April 3, 2004 and January 3, 2004. 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.

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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’s 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 claims 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.

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.

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Forward-looking Statements

This document contains statements that are forward-looking, i.e., 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”, “ensure”, “will”, “will not”, “believes”, “could”) 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.

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.

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.

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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 as of the end of the periods covered by 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 II. OTHER INFORMATION

During the first quarter of 2004, 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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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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