LETTER TO STOCKHOLDERS
Black & Decker anticipated that 2007 would be a
challenging year. With a declining housing market
and commodity cost pressures, we did not expect
to grow sales or earnings. Both of these factors
turned out to be even more challenging than forecast.
Housing starts in the U.S. decreased approximately
25% from 2006, and we believe that the related
credit market disruption exacerbated the decline in
our end markets. In addition, commodity inflation
hurt our operating income much more than we
initially expected.
Despite this difficult environment, Black & Decker’s
earnings per share were only 4% below the range we
 | Nolan D. Archibald
Chairman, President,
and Chief Executive Officer |
projected at the beginning of the year*. In addition, we generated $623 million of free cash flow*, setting
a record for the sixth consecutive year. We recognize
the cyclicality in our end-markets, and have taken
steps to position the business for these circumstances.
Throughout this annual report, you will see the
elements of our proven long-term approach that
enable us to remain market leaders: superior brands,
world-class innovation, end-user focus, and strong
global distribution. We combine these strengths with a
disciplined approach to cost control, cash generation
and cash deployment. Our success in these areas is
achieved by highly dedicated, experienced and creative
employees throughout the world. Thanks to our
strategy and outstanding team, we are a stronger,
better-balanced company than in the past.
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To understand the benefits of Black & Decker’s
structural improvements, it is helpful to compare
our current situation with the 2001 recession. In
2001, the company’s sales declined 3%, excluding
currency translation. Our operating margins fell
significantly that year, resulting in more than a 35%
decline in EPS. Since then, we have strengthened
our international operations, moved manufacturing
to low-cost regions, reduced our fixed costs, improved
working capital management, and effectively deployed
$3 billion of free cash flow. As a result, a 4% organic
sales decline over the past two years has not prevented
us from delivering over $6.00 EPS each year.
FINANCIAL OVERVIEW
Sales increased 2%, despite a decline in the U.S., due
to outstanding international growth and favorable
currency translation. We estimate that 15% to 20%
of our sales are tied to domestic homebuilding;
therefore, we estimate that the housing decline
negatively affected our sales by roughly 4% to 5%.
We are proud of our international team’s efforts to
offset this pressure.
Our operating margin, however, declined more
than we expected. Because of our improved cost
position, we believed we could sustain double-digit
margins in 2007. Despite ongoing cost pressure in
key commodities, we were on track to meet this goal
through the third quarter. Late in the year, demand
dropped well below our expectations, driving a
significant margin decline for the fourth quarter.
In December, we acted quickly and responsibly to
recall certain DEWALT® drill/drivers because of a
potential safety issue, which also hurt our margins.
As a result, we missed our margin target, but believe
the model is still sound: improve productivity,
manage expenses carefully, and invest wisely in
growth businesses.
Separate from the performance of underlying
businesses, our earnings benefited from the settlement
of a tax case, partly offset by reserves established for
restructuring and an environmental matter. Earnings
per share decreased 8%, excluding these items,
primarily due to margin pressure*. Notwithstanding this, EPS has |