Overview

Baldor is a leading manufacturer of industrial electric motors, drives, generators, and other mechanical power transmission products, currently supplying over 9,000 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 August 29, 2008, Baldor acquired Poulies Maska, Inc. (Maska) of Ste-Claire, Quebec, Canada. The purchase price was $43.2 million which was funded with 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 gives Baldor a second plant in both Canada and China and expands the Company's market share of sheaves and bushings in North America. The Company's consolidated financial statements include the results of operations of Maska beginning August 30, 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;

• Capacity utilization;

• 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 six months

ended July 4, 2009, and June 28, 2008. For the quarters ended July 4, 2009 and June 28, 2008, domestic net sales generated through distributors, representing primarily sales of replacement products, amounted to 48.1% and 49.1% of total product sales, respectively. For the six month periods ended July 4, 2009 and June 28, 2008, domestic net sales generated through distributors amounted to 47.6% and 48.7%, respectively. Domestic sales to OEMs were approximately 51.9% and 50.9% of total product sales for the quarters ended July 4, 2009 and June 28, 2008, respectively. For the six month periods ended July 4, 2009 and June 28, 2008, sales to OEMs were approximately 52.4% and 51.3%, respectively. OEMs primarily use our products in new installations. This expands our installed base and leads to future replacement product sales through distributors.

We manufacture substantially all of our products. Consequently, our costs include the cost of raw materials, including steel, copper and aluminum, and energy costs. Should these costs increase and our sales prices are not adjusted, our margins are negatively impacted. We seek to offset 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, hedging of certain raw material prices, and by modest price increases in our products. Our manufacturing facilities are also significant sources of fixed costs. Our margins are negatively impacted to the extent we cannot promptly decrease these costs to match declines in net sales. During the first six months of 2009, we have been successful in reducing our fixed costs sufficiently to more than offset the margin impact of declining sales in 2009.

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, efficiency 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.

Second quarter 2009 domestic order rates continued to be slow across most of our product offerings. While distributors continued to reduce their inventories during the quarter as we expected, order rates improved as the quarter progressed. We have begun to see a decline in the rate of distributor destocking. Approximately 80% of our domestic mechanical power transmission products and approximately 40% of domestic motor sales are sold through distributors, so a slower destocking rate will be a benefit for those products as the year progresses. We expect third quarter 2009 net sales to be down approximately 20% from record third quarter sales in 2008. We believe a slower rate of customer inventory destocking, as well as our introduction of new products, and other sales initiatives, will benefit us in the second half of the year.

International sales of approximately $70.5 million for the second quarter of 2009 were down approximately 11.9% from the same period last year and comprised 18.3% of total product sales for the quarter compared to 15.9% for the same period last year. Sales in Asia Pacific increased 27.7% from second quarter 2008 and included record sales and earnings in China. We expect continued strong growth in our Asia Pacific business in the second half of the year.

We remain focused on managing production and inventory levels and are adjusting them proactively as incoming order rates change. During the second quarter of 2009, we reduced total inventories approximately $33.6 million, primarily in raw materials and work-in-process. Having the appropriate quantities and mix of finished goods inventories is a competitive advantage for us, particularly as our distributors reduce their inventories. Effective management of our inventories allows us to maximize working capital utilization for debt reduction and take advantage of sales opportunities when they are presented. While we expect to further reduce inventories in the third quarter, we will manage them in a way that will not negatively impact our customers or inhibit our ability to take advantage of new order opportunities. Our manufacturing systems and proximity to our customers allow us to adjust inventories up or down quickly as incoming order rates change.

During the fourth quarter of 2008, we implemented cost reduction initiatives across the Company, and began accelerating integration projects related to our recent acquisitions. Through the second quarter of 2009, we are on track to achieve more than $90 million in annual cost reductions by the end of fiscal year 2009. Our proactive significant cost reduction achievements combined with continued productivity improvements are evident in our sequentially improving operating margins during the first two quarters of 2009 when compared to fourth quarter 2008. We expect our operating margin to continue to improve throughout the balance of the year. As part of our acceleration of integration projects in April 2009, we announced the consolidation of two of our manufacturing facilities into other existing facilities in the United States. We expect these consolidations to provide annual cost savings of approximately $9.0 million and a one-time cost of approximately $4.5 million. These consolidations were substantially completed during the second quarter of 2009 and will be finalized during the balance of 2009.

We have also implemented a bounty hunt sales strategy targeted to obtain specifically identified new customers in 2009 and have obtained in excess of 200 new customers since the beginning of the year. Our broad product offering, continuous introduction of new products, and manufacturing flexibility allows us to serve new customers quickly when business from our existing customers slows.

Results of Operations

Second quarter 2009 compared to second quarter 2008

Net sales for the quarter decreased 23.7% to $384.7 million, compared to $504.0 million in 2008. Sales of industrial electric motor products decreased 24.2% for the quarter as compared to second quarter 2008 and comprised 64.5% of total sales for the quarter compared to 65.0% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, decreased 19.9% for the quarter as compared to second quarter 2008 and comprised 29.9% of total sales compared to 28.5% for the same period last year. Second quarter 2009 sales include approximately $2.1 million from the operations of Maska. Sales of other products, including generators and drives, decreased 34.4% for the quarter as compared to second quarter 2008 and comprised 5.6% of total sales for the quarter compared to 6.5% for the same period last year. Sales of Super-E® premium-efficient motors continue to grow at a steady pace, increasing 11.7% for the quarter when compared to second quarter 2008. We believe this trend will continue as customers prepare for the December 2010 implementation of the 2007 Energy Bill which raises the minimum efficiency requirement of many motors to the level of our Super-E premium efficient motors.

Gross profit margin decreased to 28.4% in the second quarter of 2009 compared to 30.3% in the second quarter 2008 and operating profit margin decreased to 11.5% from 13.7% in the second quarter 2008. Second quarter 2009 manufacturing costs included approximately $3.0 million of one-time costs related to the consolidations of our Ft. Mill, SC and Columbus, IN manufacturing

facilities into other existing facilities in the U.S. As a result of continued product design improvements, reduction of waste, and price improvement in certain commodities, our materials cost as a percentage of sales improved in the second quarter of 2009 when compared to the same period last year. We expect continued improvement in the second half of the year. In addition, we achieved significant manufacturing cost reductions during the second quarter of 2009. These reductions combined with the improvement in materials costs partially offset the impact of decreased net sales and one-time restructuring costs on our gross profit margin. Materials and manufacturing cost savings combined with reductions in selling and administrative overhead costs, realized in the second quarter, helped to partially offset the impact of decreased net sales and resulted in sequential operating margin improvement when compared to first quarter 2009 and fourth quarter 2008.

Interest expense increased $3.7 million over second quarter 2008. While we reduced our outstanding debt balance by $44.6 million during the second quarter of 2009, interest rates on our variable rate debt increased as a result of the March 31, 2009 amendment of our senior secured credit facility. Pre-tax income of $12.3 million for second quarter 2009 decreased 73.2% compared to second quarter 2008 pre-tax income of $45.9 million. Second quarter 2009 includes $2.5 million noncash debt discount amortization expense related to the modification of our senior secured credit facility completed March 31, 2009. The total discount of approximately $49.7 million is being amortized over the remaining term of the credit facility which matures January 31, 2014.

Our effective income tax rate was 36.5% in second quarter 2009 compared to 36.0% in second quarter 2008. The change was primarily related to the composition of taxable income between domestic and international operations.

Net income of $7.8 million decreased 73.5% from second quarter 2008 net income of $29.4 million. Diluted earnings per common share decreased 73.0% to $0.17 compared to $0.63 in second quarter 2008. Average diluted shares outstanding was 46.8 million for second quarter 2009 compared to 46.5 million for second quarter 2008.

Six months ended July 4, 2009 compared to six months ended June 28, 2008

Net sales for the first six months of 2009 decreased 19.2% to $787.2 million, compared to $974.5 million in the first six months of 2008. Sales of industrial electric motor products decreased 18.0% for the first six months of 2009 as compared to the first six months of 2008 and comprised 66.2% of total sales compared to 65.1% for the same period last year. Sales of mounted bearings, gearing, and other mechanical power transmission products, decreased 20.5% for the first six months of 2009 as compared to the first six months of 2008 and comprised 28.4% of total sales compared to 28.8% for the same period last year. The first six months of sales for 2009 include approximately $10.4 million from the operations of Maska. Sales of other products, including generators and drives, decreased 26.8% for the first six months of 2009 as compared to the first six months of 2008 and comprised 5.5% of total sales compared to 6.1% for the same period last year. Sales of Super-E® premium-efficient motors grew 20.0% for the first six months of 2009 when compared to the same period last year. We believe this trend will continue as customers prepare for the December 2010 implementation of the 2007 Energy Bill which raises the minimum efficiency requirement of many motors to the level of our Super-E premium efficient motors.

Gross profit margin decreased to 28.6% in the first six months of 2009 compared to 30.4% in the first six months of 2008 and operating profit margin decreased to 11.3% from 13.9% for the same period. Improved materials costs during the second quarter of 2009 combined with continued manufacturing cost reductions partially offset the impact of decreased net sales on our gross profit margin. Our materials cost improvements, and reductions in manufacturing costs and selling and administrative overhead costs, realized in the first six months of 2009,

helped to partially offset the impact of decreased net sales and have resulted in sequentially improving operating margins during the first two quarters of 2009 when compared to fourth quarter 2008.

Interest expense decreased $.4 million over the first six months of 2008 as a result of reductions in our outstanding debt balance during the first six months of 2009, and decreased interest rates on our variable rate debt in the first quarter of 2009 prior to the amendment of our senior secured credit facility. Pre-tax income of $71.3 million for the first six months of 2009 decreased 17.0% compared to $86.0 for the first six months of 2008. Pretax income for the first six months of 2009 includes a $35.7 million noncash gain and $2.5 million noncash debt discount amortization expense, resulting from the modification of our senior secured credit facility completed on March 31, 2009. These amounts are included in income from continuing operations.

Our effective income tax rate was 38.0% in the first six months of 2009 compared to 36.0% in the first six months of 2008. The change was primarily due to the additional valuation allowance for net operating loss carryforwards generated by foreign affiliates.

Net income of $44.2 million, including $21.6 million, net of tax, related to the gain on debt modification, decreased 19.6% from the first six months of 2008 net income of $55.0 million. Diluted earnings per common share of $0.95, including $0.47 related to the gain on debt modification, decreased 20.2% compared to $1.19 in the first six months of 2008. Average diluted shares outstanding was 46.6 million for the first six months of 2009 compared to 46.2 million for the first six months of 2008.

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: Our primary sources of liquidity are cash flows from operations and funds available under our senior secured revolving credit facility. We expect that ongoing requirements for working capital, capital expenditures, dividends, and debt service will be adequately funded from these sources. At July 4, 2009, we had approximately $165.0 million of borrowing capacity under the senior secured revolving credit facility which matures in 2012. The current financial market conditions have not affected our ability to borrow from our revolving credit facility.

Cash flows from operations amounted to $105.9 million in the first six months of 2009 and $71.7 million in the first six months of 2008. Reductions in inventories, particularly during the second quarter, contributed $33.6 million to operating cash flows in the first six months of 2009. During the first six months of 2009, we utilized cash flows from operations to fund property, plant and equipment additions of $17.8 million, pay dividends of $23.6 million to our shareholders, and fund $52.5 million of net debt reductions. In the first six months of 2008, we utilized cash flows from operations and accumulated cash to fund property, plant and equipment additions of $14.6 million, pay dividends of $15.7 million to our shareholders, and reduce our net outstanding debt by $59.8 million.

Net cash used in investing activities was $17.8 million in the first six months of 2009 and $14.6 million in the first six months of 2008 and related primarily to capital expenditures.

Financing activities in the first six months of 2009 included dividends paid to shareholders of $23.6 million, amendment fees of $7.3 million to amend our senior secured credit agreement, and net debt payments of $52.5 million. Due to the timing of our quarter end, we funded the fourth quarter 2008 dividend in addition to the first quarter 2009 dividend during first quarter 2009.

We have a corporate family credit rating of BB- and senior secured debt rating of Ba3 with a negative outlook by Moody's Investors Services, Inc. ("Moody's"). We have a long-term issuer credit rating of B1 and senior secured debt rating of BB+ with a negative outlook by Standard & Poor's Rating Service ("S&P"). We have senior unsecured debt ratings of B3 by Moody's and B by S&P. Both ratings agencies recently affirmed, and Moody's upgraded our liquidity rating from SGL-3 to SGL-2, following the successful amendment of our credit agreement on March 31, 2009. Our senior secured credit facility has a downward rating trigger that increases the margin paid on variable rate borrowings from 3.25% to 3.50% for any period during which our Moody's corporate family rating is below BB- or our S&P long-term issuer rating is below B1. We have no downward rating triggers that would accelerate the maturity of amounts drawn under our senior secured credit facility. Also, we have no downward rating triggers under our senior unsecured notes.

Our senior secured credit facility and senior unsecured notes 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. The primary financial ratios in our credit agreement are total leverage (total debt/EBITDA, as defined) and senior secured leverage (senior secured debt/EBITDA, as defined). We have maintained compliance with all covenants and were in compliance at July 4, 2009. Our total leverage ratio and senior secured leverage ratios were 3.81x and 2.17x, respectively, at July 4, 2009. These were within our maximum covenant requirements of 5.25x and 2.75x, respectively.

On March 31, 2009, we amended our senior secured credit facility. The amendment relaxed our total leverage and senior secured leverage ratio requirements and will help to ensure we maintain sufficient headroom under our covenants as we navigate through the current economic recession. In conjunction with the amendment, the margin applied to LIBOR on our variable term loan and revolver borrowings was increased to 3.25%, and a LIBOR floor of 2.00% was implemented.

The amendment of the senior secured term loan was considered a substantial modification of the debt and was accounted for as an extinguishment of debt in accordance with Emerging Issues Task Force 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments". As a result, the senior secured term loan was recorded at fair value as of the modification date which resulted in a noncash debt discount of $49.7 million being recorded in long-term obligations on the condensed consolidated balance sheet and a $35.7 million gain on debt modification included in income from continuing operations in the condensed consolidated statement of income. Fees paid related to the amendment of $5.7 million along with unamortized fess related to the original agreement of $8.3 million were considered when calculating the gain. The discount is being amortized to other expense over the remaining term of the debt. Amortization amounted to $2.5 million for the three and six months ended July 4, 2009.

The amendment of the revolving credit facility was accounted for in accordance with EITF 98-14, "Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements". The amendment did not change the borrowing capacity of the revolving credit facility; therefore, fees of $1.6 million related to the amendment were deferred and are being amortized over the remaining term of the facility agreement and unamortized fees of $1.1 million related to the original agreement continue to be amortized over the remaining term.

As a result of the senior secured credit facility amendment, pricing on the outstanding term loan borrowings and future revolver borrowings was increased from 1.75% to 3.25% and a LIBOR floor of 2.00% was added to the variable rate borrowings.

The table below summarizes Baldor's contractual obligations related to long-term debt as of July 4, 2009.

                                                                      Payments due by years
(In thousands)                             Total       Less than 1      1 - 3       3 - 5      More than 5
Contractual Obligations:
Long-term debt obligations (a)          $ 1,857,542   $     104,925   $ 223,857   $ 836,310   $     692,450

(a) Includes interest on both fixed and variable rate obligations. Interest associated with variable rate obligations is based upon interest rates in effect at July 4, 2009. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

Dividend Policy: Dividends paid to shareholders amounted to $0.34 per common share in the first six months of 2009 and 2008. Our objective is for shareholders to receive dividends while also participating in Baldor's growth. The terms of our credit agreement and indenture limit our ability to increase dividends in the future.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (FASB) Statement No. 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. 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. We adopted the provisions of the FSP at the beginning of 2009 and the adoption did not have a material impact on the consolidated financial statements.

FASB Statement No. 141 (Revised 2007), "Business Combinations" (FAS 141R), is applied 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, non-controlling 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. We adopted FAS 141R at the beginning of 2009.

FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133" 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; therefore, we adopted FAS 161 in the first quarter of fiscal 2009. See Note C: Financial Derivatives for required disclosures.

The FASB issued FSP No. FAS 107-1 and Accounting Principles Board (APB) 28-1, "Interim Disclosures About Fair Value of Financial Instruments" (FSP FAS 107-1), an amendment of FAS No. 107, "Disclosures about Fair Values of Financial Instruments" and APB No. 28, "Interim Financial Reporting", and requires disclosures about fair value of financial instruments in interim financial statements. FSP FAS 107-1 is effective for interim periods ending after June 15, 2009. We adopted the disclosure requirements of FSP FAS 107-1 in the second quarter of 2009. See Note L: Fair Value Measurements for required disclosures.

In May 2009, the FASB issued Statement No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. FAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009; therefore, we adopted FAS 165 in the second quarter of 2009. The adoption did not have a material impact on the consolidated financial statements and disclosures. See Note A, "Basis of Presentation" above for required disclosures.