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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended October 2, 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, 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    x  Yes    ¨  No

At October 30, 2004, there were 32,985,506 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 (unaudited)

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

October 2, 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 and nine months ended October 2, 2004, may not be indicative of the results that may be expected for the fiscal year ending January 1, 2005.

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.

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 (reductions) increases recognized in cost of sales, related to cash flow hedges, in the third quarter 2004 and 2003 amounted to approximately ($166,000) and $193,000, respectively, and for the first nine months of 2004 and 2003 amounted to ($3,845,000) and $445,000, respectively.

At October 2, 2004, and January 3, 2004, the Company had derivative related balances with a fair value of approximately $1,608,000 and $2,426,000, respectively, recorded in other current assets. The Company had corresponding net after-tax gains of approximately $981,000 and $1,480,000 recorded in accumulated other comprehensive income at October 2, 2004, and January 3, 2004, respectively. The Company expects that net after-tax gains, 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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Segment Reporting

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

Comprehensive Income

Total comprehensive income was approximately $9.8 million and $6.5 million for the third quarter of 2004 and 2003, respectively, and was approximately $23.6 million and $19.9 million for the first nine months of 2004 and 2003, respectively. The components of comprehensive income are illustrated in the table below:

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 nine months ended October 2, 2004, is as follows (in thousands):

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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):

NOTE C - Credit Facilities

The Company has a loan agreement (“the facility”) with a bank, which provides the Company up to $60 million of borrowing capacity, which was renewed March 5, 2004. The facility is secured with Company’s trade accounts receivable and matures January 31, 2007. Interest is calculated at a relevant commercial paper rate plus applicable margin. At October 2, 2004, the Company had outstanding borrowings on the facility amounting to $47 million at an interest rate of 1.84%.

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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 third quarter of 2004 increased to $8.7 million or $0.26 per diluted share from $6.1 million or $0.18 per diluted share for the third quarter of 2003. Operating margin for third quarter 2004 improved to 9.5% compared to 8.0% for third quarter 2003.

Third Quarter 2004 versus Third Quarter 2003

Net sales of $168.8 million for third quarter 2004 grew 21.5% from third quarter 2003 net sales of $139.0 million. Sales of electric motor products in third quarter 2004 were up 15.0% from third quarter 2003 and comprised 74.0% of total product sales in 2004 compared to 78.4% in 2003. Sales of drives products increased 27.2% for the quarter when compared to third quarter 2003. Drives products accounted for 17.5% of total product sales in third quarter 2004, compared to 16.7% in third quarter 2003. Sales of generator products increased 103.4% from third quarter 2003 and comprised 8.5% of total product sales this quarter compared to 5.0% in third quarter 2003.

Cost of sales amounted to 73.5% of sales for third quarter 2004 and 2003. Manufacturing costs, benefiting from better productivity and increased sales volume, decreased as a percent of sales. Further increases in raw material costs were offset with product design improvements and price increases.

Selling and administrative expenses amounted to 17.0% of sales for third quarter 2004, decreasing from 18.5% for the same period last year. Freight and warranty expenses continued to improve as a percentage of sales, decreasing by approximately 0.4% of sales for third quarter 2004 compared to third quarter 2003. Administrative expenses were $90,000 lower for third quarter 2004 compared to the same period in 2003. Increased sales provided greater leverage over administrative overhead costs and accounted for the remainder of improvement.

Nine Months Ended October 2, 2004 versus Nine Months Ended September 27, 2003

Net sales increased 17.0% to $485.4 million for the first nine months of 2004 compared to $414.9 million in the first nine months of 2003. Sales of electric motor products in the first nine months of 2004 were up 13.4% from the same period in 2003 and comprised 75.6% of total product sales in 2004 compared to 78.0% in 2003. Sales of drives products grew 18.0% for the first nine months of 2004 when compared to the same period of 2003. Drives products accounted for 17.3% of total product sales in the first nine months of 2004, compared to 17.2% in the first nine months of 2003. Sales of generator products were up 71.9% from the first nine months of 2003 and comprised 7.0% of total product sales, compared to 4.8% in 2003.

Cost of sales improved to 72.9% for the first nine months of 2004, from 73.0% during the same period of 2003. Improvements in manufacturing costs resulting from increased productivity and higher sales volume helped to overcome the effects of increased materials costs.

Selling and administrative expenses amounted to 17.8% of sales for the nine months ended October 2, 2004, declining from 18.9% for the nine months ended September 27, 2003. Freight and warranty costs as a percentage of sales were 0.6% lower in 2004 than in 2003. Increased sales provided greater leverage over administrative overhead costs and accounted for the remainder of improvement.

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Liquidity and Capital Resources

For the nine months ended October 2, 2004, net cash flows from operations amounted to $25.6 million, a decrease of $21.7 million from the same period of 2003. As a result of the 17.0% increase in net sales, customer accounts receivables increased $24.2 million during the first nine months of 2004 compared to an increase of $5.3 million in the first nine months of 2003. 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 $8.4 million during the first nine months of 2004 and $9.5 million in the first nine months of 2003. In addition, dividends were paid to shareholders amounting to $13.8 million and $12.9 million during the first nine months of 2004 and 2003, respectively. During the first nine months of 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 $104.0 million at October 2, 2004, down from $105.3 million at 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. 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

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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.

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 “ensure”, “will”, “expects”, “estimates”, “could”, “believes”, “would”, “may”, “estimated”, “future”) 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.

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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.

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 as of the end of the period covered by this report. In addition, 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 period covered by this report that has materially affected, or is reasonably likely to materially affect, these controls.

PART II – OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

During the third 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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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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