Baldor Electric Company (BEZ)

NOTE D – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a fair value liability of $11.9 million and $0.4 million recorded in other accrued expenses at January 3, 2009, and December 29, 2007, respectively. The fair value liability as of January 3, 2009, is net of $19.1 million of margin deposits. There were no margin deposits required at December 29, 2007.

Losses recognized on commodity cash flow hedges increased cost of sales by $0.7 million in 2008 and gains recognized reduced cost of sales by $1.3 million in 2007, respectively. Ineffective portions of the Company’s commodity cash flow hedges were not material during 2008 or 2007. The Company expects after-tax losses totaling $18.8 million at January 3, 2009, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next twelve months. The Company generally does not hedge forecasted transactions beyond 18 months.

During 2007, the Company entered into an interest rate swap and a collar that are designated as cash flow hedges related to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a fair value liability of $28.5 million and $11.5 million recorded in other accrued expenses at January 3, 2009 and December 29, 2007, respectively. Unrealized after-tax losses of $17.2 million are recorded in accumulated other comprehensive loss at January 3, 2009.

FAS No. 157, “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

Assets (liabilities) measured at fair value on a recurring basis are summarized below:

Unrealized gains or losses are recorded in accumulated other comprehensive income (loss) at each measurement date.

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NOTE D – Financial Derivatives

FACE="Times New Roman" SIZE="2">The Company had derivative contracts designated as commodity cash flow hedges with a fair value liability of $11.9 million and $0.4 million recorded in other accrued expenses at January 3, 2009, and
December 29, 2007, respectively. The fair value liability as of January 3, 2009, is net of $19.1 million of margin deposits. There were no margin deposits required at December 29, 2007.

NOTE C – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a negative fair value of $4.3 million and $0.4 million recorded in other accrued expenses at September 27, 2008 and December 29, 2007, respectively.

Gains recognized on commodity cash flow hedges reduced cost of sales by $3.2 million and $1.4 million in the third quarter of 2008 and 2007, respectively. Gains recognized as a reduction in cost of sales amounted to $7.0 million and $4.0 million in the first nine months of 2008 and 2007, respectively. Ineffective portions of the Company’s commodity cash flow hedges were not material during the third quarters or first nine months of 2008 or 2007. The Company expects after-tax losses totaling $2.6 million at September 27, 2008, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next six months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a negative fair value of $13.8 million and $11.5 million recorded in other accrued expenses at September 27, 2008 and December 29, 2007, respectively. Unrealized after-tax losses of $8.3 million and $7.0 million are recorded in accumulated other comprehensive income (loss) at September 27, 2008 and December 29, 2007, respectively.

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FAS No. 157, “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

Assets (liabilities) measured at fair value on a recurring basis are summarized below:

Unrealized gains or losses are recorded in accumulated other comprehensive income (loss) at each measurement date.

NOTE C – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a fair value of $8.5 million recorded in other current assets at June 28, 2008, and a negative fair value of $0.4 million recorded in other accrued expenses at December 29, 2007.

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Gains recognized on commodity cash flow hedges reduced cost of sales by $2.4 million and $0.6 million in the second quarter of 2008 and 2007, respectively. Gains recognized as a reduction in cost of sales amounted to $3.8 million and $2.6 million in the first six months of 2008 and 2007, respectively. Ineffective portions of the Company’s commodity cash flow hedges were not material during the second quarters or first six months of 2008 or 2007. The Company expects after-tax gains totaling $5.2 million at June 28, 2008, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next six months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a negative fair value of $12.8 million and $11.5 million recorded in other accrued expenses at June 28, 2008 and December 29, 2007, respectively. Unrealized after-tax losses of $7.8 million and $7.0 million are recorded in accumulated other comprehensive income (loss) at June 28, 2008 and December 29, 2007, respectively.

FAS No. 157, “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

Assets (liabilities) measured at fair value on a recurring basis are summarized below:

Unrealized gains or losses are recorded in accumulated other comprehensive income (loss) at each measurement date.

NOTE C – Financial Derivatives

The Company had derivative contracts designated as commodity cash flow hedges with a fair value of $9.0 million recorded in other current assets at March 29, 2008, and a negative fair value of $0.4 million recorded in other accrued expenses at December 29, 2007.

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The amount recognized on commodity cash flow hedges reduced cost of sales by $1.4 million and $2.0 million in the first quarter of 2008 and 2007, respectively. The ineffective portions of the Company’s commodity cash flow hedges were not material during the first quarters of 2008 or 2007. The Company expects that after-tax gains totaling $5.5 million at March 29, 2008, recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges, will be recognized in cost of sales within the next nine months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a negative fair value of $24.1 million and $11.5 million recorded in other accrued expenses at March 29, 2008 and December 29, 2007, respectively. Unrealized after-tax losses of $14.7 and $7.0 million are recorded in accumulated other comprehensive income loss at March 29, 2008 and December 29, 2007.

FAS No. 157, “Fair Value Measurements” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity, but which are significant to the fair value of the assets or liabilities as determined by market participants.

Assets (liabilities) measured at fair value on a recurring basis are summarized below:

Unrealized gains or losses are recorded in accumulated other comprehensive income (loss) at each measurement date.

NOTE D    FINANCIAL DERIVATIVES

The Company had derivative contracts related to cash flow hedges, with a negative fair value of $376,775 and $2.1 million recorded in other accrued expenses at December 29, 2007, and December 30, 2006, respectively.

The amount recognized in cost of sales on cash flow hedges amounted to reductions of approximately $1.3 million and $21.0 million in 2007 and 2006, respectively. The Company expects that after-tax losses, totaling approximately $230,000 recorded in accumulated other comprehensive loss at December 29, 2007, 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.

During 2007, the Company entered into interest rate swaps and collars that are designated as cash flow hedges related to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a fair value loss of $11.5 million recorded in other liabilities at December 29, 2007. Unrealized after-tax losses of $7.0 million are recorded in accumulated other comprehensive loss at December 29, 2007.

NOTE
D    FINANCIAL DERIVATIVES

The Company had derivative contracts related to cash flow hedges, with a negative fair value of $376,775
and $2.1 million recorded in other accrued expenses at December 29, 2007, and December 30, 2006, respectively.

The amount recognized in cost of
sales on cash flow hedges amounted to reductions of approximately $1.3 million and $21.0 million in 2007 and 2006, respectively. The Company expects that after-tax losses, totaling approximately $230,000 recorded in accumulated other comprehensive
loss at December 29, 2007, 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.

NOTE C – Financial Derivatives

The Company has derivative contracts designated as commodity cash flow hedges with a fair value of $7.0 million recorded in other current assets at September 29, 2007, and a loss of $2.1 million recorded in other accrued expenses at December 30, 2006.

The amount recognized on commodity cash flow hedges reduced cost of sales by $1.4 million and $8.3 million in the third quarter of 2007 and 2006, respectively. The amount recognized as a reduction in cost of sales amounted to $4.0 million and $13.4 million in the first nine months of 2007 and 2006, respectively. The ineffective portion of the Company’s commodity cash flow hedges was not material during the third quarters or first nine months of 2007 or 2006. The Company expects that after-tax gains recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges totaling $4.2 million at September 29, 2007, will be recognized in cost of sales within the next fifteen months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate swaps and collars designated as cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a fair value loss of $4.8 million recorded in other current assets at September 29, 2007. Unrealized gains (losses) are recorded in accumulated other comprehensive income (loss).

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NOTE C – Financial Derivatives

The Company has derivative contracts related to its commodity cash flow hedges with a fair value of $2.9 million recorded in other current assets at June 30, 2007, and a loss of $2.1 million recorded in other accrued expenses at December 30, 2006.

The amount recognized on commodity cash flow hedges reduced cost of sales by $624,000 and $4.8 million in second quarter of 2007 and second quarter of 2006, respectively. The amount recognized as a reduction in cost of sales amounted to $2.6 million and $5.1 million in the first six months of 2007 and 2006, respectively. The ineffective portion of the Company’s commodity cash flow hedges was not material during the second quarters or first six months of 2007 or 2006. The Company expects that after-tax gains recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges totaling $1.8 million at June 30, 2007, will be recognized in cost of sales within the next six months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company has interest rate swaps and collars designated as cash flow hedges that relate to variable rate long-term obligations. The notional amount is $350.0 million and matures on April 30, 2012. These instruments had a fair value gain of $1.9 million recorded in other current assets at June 30, 2007. Unrealized gains (losses) are recorded in accumulated other comprehensive income (loss).

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NOTE C – Financial Derivatives

The Company had derivative contracts related to its commodity cash flow hedges with a fair value of $1.0 million recorded in other current assets at March 31, 2007, and a fair value loss of $2.1 million recorded in other accrued expenses at December 30, 2006.

The amount recognized on commodity cash flow hedges reduced cost of sales by $2.0 million and $262,000 in first quarter of 2007 and the first quarter of 2006, respectively. The ineffective portion of the Company’s commodity cash flow hedges was not material during the first quarters of 2007 or 2006. The Company expects that after-tax gains recorded in accumulated other comprehensive income (loss) related to commodity cash flow hedges totaling $613,000 at March 31, 2007, will be recognized in cost of sales within the next nine months. The Company generally does not hedge forecasted transactions beyond 18 months.

The Company had interest rate swaps and collars designated as cash flow hedges, related to variable rate long-term debt, with a notional amount of $350.0 million and a maturity date of April 30, 2012. These instruments had a fair value loss of $3.1 million recorded in other liabilities at March 31, 2007. Unrealized gains (losses) are recorded in accumulated other comprehensive income (loss).

NOTE C FINANCIAL DERIVATIVES

The Company uses derivative financial instruments to reduce its exposure to various market risks. The Company does not regularly engage in speculative transactions, nor does the Company regularly hold or issue financial instruments for trading purposes. Generally, contract terms of the financial instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation and are recorded using hedge accounting. Instruments that do not meet the criteria for hedge accounting are marked to fair value with unrealized gains or losses reported currently in earnings.

The Company had derivative contracts related to cash flow hedges, with a fair value of $(2.1 million) recorded in other accrued expenses at December 30, 2006, and $938,000 recorded in other current assets at December 31, 2005.

The amount recognized as a reduction in cost of sales on cash flow hedges amounted to approximately $21.0 million in 2006 and $4.7 million in both 2005 and 2004. The Company expects that after-tax losses, totaling approximately $1.3 million recorded in accumulated other comprehensive loss at December 30, 2006, 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.

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 recognized in cost of sales, related to cash flow hedges, in the third quarter 2005 and 2004 amounted to approximately $1.2 million and $0.2 million, respectively, and for the first nine months of 2005 and 2004 amounted to $3.4 million and $3.8 million, respectively.

At October 1, 2005, and January 1, 2005, the Company had derivative related balances with a fair value of approximately $1.1 million and $2.7 million, respectively, recorded in other current assets. The Company had corresponding net after-tax gains of approximately $0.7 million and $1.6 million recorded in accumulated other comprehensive income at October 1, 2005, and January 1, 2005, respectively. The Company expects that the 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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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 recognized in cost of sales, related to cash flow hedges, in the second quarter 2005 and 2004 amounted to approximately $0.8 million and $1.4 million, respectively, and for the first six months of 2005 and 2004 amounted to $2.1 million and $3.7 million, respectively.

At July 2, 2005, and January 1, 2005, the Company had derivative related balances with a fair value of approximately $1.5 million and $2.7 million, respectively, recorded in other current assets. The Company had corresponding net after-tax gains of approximately $0.9 million and $1.6 million recorded in accumulated other comprehensive income at July 2, 2005, and January 1, 2005, respectively. The Company expects that the 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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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 recognized in cost of sales, related to cash flow hedges, in the first quarter 2005 and 2004 amounted to approximately $1,338,000 and $2,295,000, respectively.

At April 2, 2005, and January 1, 2005, the Company had derivative related balances with a fair value of approximately $2,001,000 and $2,650,000, respectively, recorded in other current assets. The Company had corresponding net after-tax gains of approximately $1,221,000 and $1,616,000 recorded in accumulated other comprehensive income at April 2, 2005, and January 1, 2005, 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.