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Black & Decker is a manufacturer and marketer of power tools, accessories, hardware, and home improvement products, as well as advanced fastening systems. The company is a number one or two leader in each of its three reportable product segments, Power Tools & Accessories, Hardware & Home Improvement, and Fastening & Assembly Systems. It operates in over 100 countries, though the United States and Europe, particularly the UK, are its most significant markets.

The company has built several successful brands, specifically in its largest segment, Power Tools & Accessories (PTA), where it commands a market share of approximately 40% through brands such as its namesake, Black & Decker, DeWalt, and others. Black & Decker has leveraged respected brand names and consumer relationships in recent years, continuing roll outs of improved products coupled with successful, synergistic acquisitions which have expanded market share.

After experiencing significant top and bottom line growth during 2002-2005, the company’s expansion has slowed as its markets continue to mature and the housing market slumps. While growth by acquisition and growth abroad may fuel expansion going forward, the company has focused recently on returning cash to shareholders, especially in the form of stock buybacks, purchasing nearly 10% of its outstanding shares in the last few years.

Contents 1 History 2 Products & Segments 3 Business Drivers 3.1 Housing Sector 3.2 Dependence on Home Depot and Lowe’s 3.3 Innovation 3.4 Market Saturation and International Prospects 3.5 Acquisitions and Use of Cash 3.6 Raw Material Costs 4 Competition 4.1 Comparison/Operating Metrics 4.2 Advantages 5 References

[edit] History

Black & Decker was founded in 1910 by Duncan Black and Alonzo Decker, who eventually created and patented the electric drill in 1917. The company expanded quickly, and its shares began trading on the New York Stock Exchange in 1936. The company continued its growth, eventually investing in plants overseas and entering the United Kingdom and European markets. The company weathered a major reorganization in the 1980s and shut down several plants, eventually emerging profitable. Through the 1990s, Black & Decker launched a number of brands, including DeWalt, and acquired several companies, including GE’s electronic home appliance business, which was rebranded as Black & Decker.

[edit] Products & Segments

• Power Tools and Appliances (PTA): B&D’s largest and most profitable segment includes electric tools and equipment, garden tools, portable power products, and others. Products are wide-ranging and include drills, vacuums, hammers, wrenches, lawnmowers, saws, generators, etc. The segment manufactures products under more than 30 brand names, and no product accounts for over 10% of segment sales, indicating a diversified product line.

• Hardware and Home-improvement (HH): Products include security and decorative hardware, kitchen and bathroom accessories and replacement parts, and general hardware. The segment also manufactures products under numerous brand names, and no product accounts for over 10% of segment sales.

• Fastening and Assembly Systems (FA): This segment sells an extensive line of fasteners and fastening systems, which include screws, nuts, bolts, metal and plastic fasteners, riveting systems, etc. As with PTA and HH, no product comprises over 10% of segment revenue and products are manufactured under a number of brand names.

B&D also groups products into several sub-divisions, including power tools, lawn and garden equipment, accessories, and others (see table below).

	2004	2005	2006
Consumer and industrial power tools and product services	$2,888	$3,640	$3,481
Lawn and garden products	339	518	458
Consumer and industrial accessories	379	459	475
Cleaning, automotive, lighting and household	180	185	319
Security hardware	730	745	752
Plumbing products	260	308	296
Fastening and assembly systems	622	669	666
Total	$5,398	$6,524	$6,447

Source: Company Reports.

[edit] Business Drivers

Black & Decker’s success hinges on several key business drivers and risks.

[edit] Housing Sector

B&D sales are dependent upon activity in the housing sector, and growth in the company’s top line is linked to housing starts, existing home sales (which can fuel demand for remodeling), and general residential construction (and to a lesser extend commercial construction). Demand for housing drives demand for tools, accessories, and equipment to construct, furnish, and decorate homes, and, as such, B&D’s sales are reliant on the housing environment. Housing activity has declined substantially during the recent cyclical slump, and B&D experienced a decline in sales in 2006 for the first time in nearly 10 years.

A diverse product line spreads the company’s risk across a number of different macroeconomic housing metrics. As such, the company has successfully weathered cyclical housing downturns throughout its history, but results still tend to lag for as long as the housing sector cools.

[edit] Dependence on Home Depot and Lowe’s

B&D sells approximately one-third of its products to retailers Home Depot (HD) (20.1% of 2006 sales) and Lowe's Companies (LOW) home improvement warehouse (13.9% of 2006 sales). This heavy reliance on two major customers exposes the company to greater risk of materially adverse results if one or both of the relationships deteriorate or if one of those two customers run into trouble and decrease purchases from B&D.

Changes in the operations of these two customers (for instance, tighter inventory controls of discontinuing the sale of B&D products) due to their own corporate policy or end-user demand can greatly effect sales. Furthermore, because both Lowe’s and HD benefit from economies of scale, they generally obtain lower pricing from suppliers like B&D. These suppliers, then, sacrifice profit margin for volume. If HD and Lowe’s continue to expand and capture market share, and, hence, further economies of scale, B&D’s results may suffer. However, B&D is a large and important supplier for both customers, and it is unlikely that dramatically adverse events will hamper the relationships or financial results.

[edit] Innovation

Black & Decker seems far from a high-tech business with a need for heavy R&D, but the company does depend upon the successful rollout of new products with greater ease of use and generally utility to end customers. Tools, equipment, accessories, etc. tend to be durable, but can more easily become obsolete under heavy use and if better and more efficient competing products come to market. Improved products and new product lines tend to be a very important driver of revenue for the company, and staying ahead of the competition in terms of being first to market is vital to the continued success of the company. This is especially so as the company experiences declines in core product lines and must seek new streams of revenue to remain competitive. To date, the company has been successful in converting innovation into revenue: approximately 35% of the company’s sales are from products released in the trailing twelve months.

[edit] Market Saturation and International Prospects

The company’s largest markets, North America and Europe, are considered mature and as the company maintains an approximate 40% market share in its most important segment, B&D has arguably achieved market saturation in its largest regions. However, the company has room to grow in several large and more rapidly expanding markets, where its market share is still small and the market at large grows, including Latin America and Asia. Sales in Latin America, for instance, are growing at a double digit pace. Some local companies in such regions may enjoy greater market share. As such, the company may choose to compete directly to capture share or otherwise consider mergers, acquisitions, or joint ventures in these markets.

[edit] Acquisitions and Use of Cash

B&D has sought growth in large part from the acquisition of brands and whole companies. This strategy seeks to leverage the company’s relationships, reputability, and scale in order to achieve respectable returns on investment through top and bottom line growth. When the acquisition environment is competitive and the company cannot secure reasonable prices on target companies, it tends to return cash to shareholders through the form of dividends and share repurchases. During the past five years, the company has repurchased over $1.5 billion of its own shares, which represents nearly 10% of shares outstanding over this time. This practice tends normally enhances shareholder returns by decreasing the share base over which earnings per share is calculated. The company has found itself to be a good alternative investment when acquisitions are overpriced.

Use of cash is critical to the shareholders of the company, which generates free cash flow typically in excess of reported GAAP earnings. In order to achieve out-sized returns for shareholders, the company must carefully steward the cash it generates and invest it sensibly. With returns on equity in excess of 30% and growing cash flow, the management of B&D seems to be successful in its use of cash.

[edit] Raw Material Costs

The company has experienced pressure on gross margins due to increasing commodities prices in the last few years. Its major commodity inputs include steel, resins, copper, aluminum, and zinc which are used in the manufacture of its products. The company attempts to hedge against price fluctuations using derivative contracts, but the steady increase in the prices of these major inputs over time has led to unavoidable cost increases. If prices of these inputs fall, the company will experience higher margins, but prices may continue to rise. Unless B&D can pass on these costs to consumers with its own price increases, margins will suffer. In 2006, moderate product price increases helped absorb these increases, but they were not enough to prevent margin decline.

[edit] Competition

In 2006, Americans spent approximately $181 billion on home improvements, $54 billion on repairs and replacements, and $75 billion on direct construction expenses. These markets are the primary drivers of Black & Decker’s, and its competitors, sales. B&D has no competitor which competes in all of the company’s segments, but it has several which compete in each segment individually. Major competitors include Snap-On (SNA), American Standard Companies (ASD) , Makita (MKTAY), and Danaher (DHR). The company also faces many small, private label competitors, especially overseas where its market penetration is not nearly what it is in the United States and Europe. Black & Decker is clearly the market leader in its bread and butter segment, Power Tools and Accessories, with the most broadly recognized brand name and approximate 40% market share.

[edit] Comparison/Operating Metrics

Snap-On (SNA) makes and markets power tools (among other non-competing products), and competes with BDK via this division of its operations. Makita (MKTAY) offers general purpose tools and woodworking machinery. Its largest business is general purpose tools, which compete directly with BDK. Danaher (DHR) also offers tools and industrial equipment through one of its divisions. American Standard Companies (ASD) offers air conditioning systems, but competes marginally with BDK via smaller operations focusing on selling home appliances and fixtures. Generally, each company markets these competing products directly to industrial users as well as to do-it-yourself retailers like Home Depot (HD) and Lowe's Companies (LOW).

2006 Operating Metrics

	Operating Metrics	BDK	SNA	MKTAY	DHR	ASD
Operating Margin		11.4%	7.4%	16.5%	14.6%	7.1%
Revenue per Employee		$254,729	$212,968	NA	$222,417	$183,778
ROIC (5 yr)		13.60%	5.80%	9.00%	12.20%	11.10%

B&D tends to be more efficiently run in terms of margins, advantages of scale, and returns on capital. While some of its competitors are larger by revenue and market capitalization measures, most do not focus on the same core product-type offering as B&D. This confers several competitive advantages upon B&D.

[edit] Advantages

While the company faces a number of formidable competitors, though it is arguably the most well-known and respected brand names in its major categories. For example, DeWalt, which comprises around 40% of the company’s top line, maintains a very strong and loyal customer base. The B&D/DeWalt faithful are arguably cult-like in their purchasing habits. Customers are also retained in part because of DeWalt’s interchangeable battery, since they are more likely to buy new products for which they already have the battery. The interchangeability also enables the company to leverage its diverse product offering, affording the company a unique cross-selling advantage. For instance, a customer is more likely to buy a drill from DeWalt if he/she already has a DeWalt nail gun with the same battery. In this way, then, the company has an additional economy of scale that more narrowly focused competitors do not enjoy.

The company also maintains advantages in its ability to deploy financial resources in order to innovate. For example, B&D products typically have better weight-to-power ratios thanks to the company’s production of lithium-ion batteries while competitors typically sport Nicad batteries.

[edit] References

• Company Website
• Power Tools

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