Overview

The Corporation is a global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. As more fully described in Note 16 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments - Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems - with these business segments comprising approximately 73%, 15%, and 12%, respectively, of the Corporation's sales in 2008.

The Corporation markets its products and services in over 100 countries. During 2008, approximately 55%, 25%, and 20% of its sales were made to customers in the United States, in Europe (including the United Kingdom and Middle East), and in other geographic regions, respectively. The Power Tools and Accessories and Hardware and Home Improvement segments are subject to general economic conditions in the countries in which they operate as well as the strength of the retail economies. The Fastening and Assembly Systems segment is also subject to general economic conditions in the countries in which it operates as well as to automotive and industrial demand.

An overview of certain aspects of the Corporation's performance during the year ended December 31, 2008, follows:

• The Corporation faced an increasingly difficult demand environment during 2008. That difficult environment was exacerbated by the global economic crisis that began in the latter part of the year and resulted in tightening consumer credit and declining consumer confidence levels. U.S. housing starts, which declined by approximately 30% in the first nine months of 2008, as compared to the 2007 level, declined by approximately 43% in the fourth quarter of 2008, for an annual 2008 rate of decline of approximately 33%. Global automotive production, which declined by approximately 1% in the first nine months of 2008, as compared to the 2007 level, declined by approximately 23% in the fourth quarter of 2008, for an annual 2008 rate of decline of approximately 7%. The effects of a weaker U.S. dollar, against most major currencies, resulted in a 4% increase in the Corporation's sales for the first nine months of 2008, as compared to the 2007 levels. However, the effects of a stronger U.S. dollar, against most major currencies, resulted in a 4% decline in the Corporation's consolidated sales for the fourth quarter of 2008, as compared to the 2007 levels, resulting in an annual 2008 rate of sales increase attributable to foreign currency of 2% over the 2007 level. In total, the Corporation's consolidated sales for the first nine months of 2008 declined by 4% from the 2007 level, or an 8% decline excluding the effects of foreign currency translation. In total, the Corporation's consolidated sales for the fourth quarter of 2008 declined by 17% from the 2007 level, or a 13% decline excluding the effects of foreign currency translation. The Corporation believes that the current global economic crisis will cause demand in most of its markets to weaken further in 2009 and, given the strengthening of the U.S. dollar against most other currencies late in 2008, that foreign currency translation will have an unfavorable impact on sales in 2009 absent a change from current exchange rates. In addition, the Corporation believes that it is likely that certain retailers may reduce their inventory levels in early 2009. As a result, the Corporation anticipates a double-digit rate of decline in sales in 2009, excluding the effects of foreign currency translation, from the 2008 level. The Corporation anticipates that operating income as a percentage of sales will approximate 5% in 2009. The Corporation expects that operating income in 2009 will be unfavorably impacted by the de-leveraging of expenses over a lower sales base and by higher commodity costs as the Corporation will be unable to benefit from declines in certain commodity prices that occurred in late 2008 until the expiration of its supply agreements at various points in 2009.

• Sales for 2008 were $6,086.1 million, which represented a 7% decrease from 2007 sales of $6,563.2 million, consisting of a 9% decrease associated with lower unit volume partially offset by a 2% increase associated with foreign currency translation. That unit volume decline was primarily driven by lower sales in the United States, due to general economic conditions in the U.S., including lower housing starts, and in Western Europe due to weakening economic conditions. The effects of a weaker U.S. dollar, as compared to most other currencies, particularly the euro, Japanese yen, Brazilian real and Canadian dollar, resulted in a 2% increase in consolidated sales over the 2007 level. The effect of pricing actions did not have a material effect on sales in 2008.

• Operating income as a percentage of sales for 2008 decreased by approximately 200 basis points from the 2007 level to 6.9%. Of that decline, approximately 110 basis points was attributable to a reduction in gross margin, approximately 30 basis points was attributable to an increase in selling, general, and administrative expenses, and approximately 60 basis points was attributable to a $54.7 million pre-tax restructuring charge. The decrease in gross margin was driven by the negative effects of commodity inflation - together with the change in China's value added tax and appreciation of the Chinese renminbi - which, in the aggregate, increased cost of goods

sold over the 2007 level by approximately $160 million. In addition, the comparison of gross margin as a percentage of sales to the 2007 level was negatively impacted by the effects of unfavorable product mix as well as the de-leveraging of fixed costs over a lower sales base. Those negative factors were partially offset by the favorable effects of productivity and restructuring initiatives, foreign currency transaction gains, and lower customer consideration and cost of sales promotions.

• Interest expense (net of interest income) decreased by $19.9 million in 2008 from the 2007 level, primarily due to lower interest rates, including the impact on the Corporation's foreign currency hedging activities.

• Net earnings were $293.6 million, or $4.82 per diluted share, for the year ended December 31, 2008, as compared to $518.1 million, or $7.85 per diluted share, in 2007. Net earnings for the year ended December 31, 2008, included the effect of an after-tax restructuring charge of $39.6 million ($54.7 million before taxes). Net earnings for the year ended December 31, 2007, included the effects of the following three items: (i) a $153.4 million tax benefit resulting from a settlement agreement reached on an income tax litigation matter; (ii) an after-tax charge of $20.6 million ($31.7 million before taxes) associated with an environmental remediation matter; and (iii) an after-tax restructuring charge of $12.8 million ($19.0 million before taxes).

• Cash flow from operating activities decreased by $300.5 million from the 2007 level to $425.4 million for the year ended December 31, 2008. The decrease in cash provided by operating activities in 2008 was primarily due to lower net earnings, higher usage of cash associated with other assets and liabilities, including the impact of the Corporation's foreign currency hedging activities, lower cash generated from working capital, and increased cash spending associated with restructuring activities and tax payments.

• Under an ongoing share repurchase program, the Corporation repurchased approximately 3.1 million shares of its common stock during 2008 at a cost of $202.3 million. As a result of those repurchases, shares used in computing annual diluted earnings per share for 2008 declined by 8%, as compared to 2007.

The preceding information is an overview of certain aspects of the Corporation's performance during the year ended December 31, 2008, and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in its entirety.

In the discussion and analysis of financial condition and results of operations that follows, the Corporation generally attempts to list contributing factors in order of significance to the point being addressed. Also, the Corporation has attempted to differentiate between sales of its "existing" businesses and sales of acquired businesses. That differentiation includes sales of businesses where year-to-year comparability exists in the category of "existing" or "legacy" businesses. For example, in 2006, the sales of Vector are included in sales of acquired businesses.

Results of Operations

SALES

The following chart provides an analysis of the consolidated changes in sales
for the years ended December 31, 2008, 2007, and 2006.

(DOLLARS IN MILLIONS)             2008            2007            2006
Total sales                  $ 6,086.1       $ 6,563.2       $ 6,447.3
Unit volume - existing (a)          (9 ) %          (1 ) %          (2 ) %

(a) Represents change in unit volume for businesses where year-to-year comparability exists.

(b) Represents change in unit volume for businesses that were acquired and were not included in prior period results.

Total consolidated sales for the year ended December 31, 2008, were $6,086.1 million, which represented a decrease of 7% from 2007 sales of $6,563.2 million. As compared to the 2007 level, unit volume decreased 9% in 2008. That unit volume decline was primarily driven by lower sales in the United States, due to general economic conditions in the U.S., including lower housing starts, and in Western Europe due to weakening economic conditions. Neither the effects of pricing actions nor the effects of acquired businesses had a material effect on sales in 2008. The effects of a weaker U.S. dollar, as compared to most other currencies, particularly the euro, Japanese yen, Brazilian real, and Canadian dollar, caused the Corporation's consolidated sales for 2008 to increase by 2% over the 2007 level.

Total consolidated sales for the year ended December 31, 2007, were $6,563.2 million, which represented a 2% increase over 2006 sales of $6,447.3 million. As compared to the 2006 level, unit volume declined by 1% in 2007. That unit volume decline was driven by lower sales in the United States and was partially offset by higher sales outside of the United States. Sales to U.S. customers in 2007 declined by 5% from the 2006 level due, in part, to sharply lower housing starts. The effect of pricing actions did not have a material effect on sales in 2007. While the Corporation implemented price increases in late 2006, the impact of those pricing increases in 2007 was mitigated by pricing and promotional actions undertaken to stimulate demand. The effects of a weaker U.S. dollar, as

compared to most other currencies, particularly the euro and pound sterling, caused the Corporation's consolidated sales for 2007 to increase by 3% over the 2006 level.

EARNINGS

A summary of the Corporation's consolidated gross margin, selling, general, and administrative expenses, restructuring and exit costs, and operating income - all expressed as a percentage of sales - follows:

                                                         YEAR ENDED DECEMBER 31,
     (PERCENTAGE OF SALES)                               2008         2007       2006
     Gross margin                                        32.8 %       33.9 %     34.8 %
     Selling, general, and administrative expenses       25.0 %       24.7 %     23.3 %
     Restructuring and exit costs                          .9 %         .3 %        - %
     Operating income                                     6.9 %        8.9 %     11.5 %

The Corporation reported consolidated operating income of $422.1 million on sales of $6,086.1 million in 2008, as compared to operating income of $582.2 million on sales of $6,563.2 million in 2007 and to operating income of $740.4 million on sales of $6,447.3 million in 2006.

Consolidated gross margin as a percentage of sales declined by approximately 110 basis points from the 2007 level to 32.8% in 2008. That decrease in gross margin was driven by the negative effects of commodity inflation - together with the change in China's value added tax and appreciation of the Chinese renminbi - which, in the aggregate, increased cost of goods sold over the 2007 level by approximately $160 million in 2008. In addition, the comparison of gross margin as a percentage of sales for the year ended December 31, 2008, to the 2007 level was negatively impacted by the effects of unfavorable product mix as well as the de-leveraging of fixed costs over a lower sales base. Those negative factors were partially offset by the favorable effects of productivity and restructuring initiatives, foreign currency transaction gains, and lower customer consideration and cost of sales promotions.

Consolidated gross margin as a percentage of sales declined by approximately 90 basis points from the 2006 level to 33.9% in 2007. That decrease in gross margin was primarily a result of rising commodity costs which, coupled with the effects of the change in China's value added tax and appreciation of the Chinese renminbi, added approximately $180 million of incremental costs over 2006. In addition, gross margin in 2007 was burdened by a $21.3 million pre-tax charge associated with the recall of certain DeWALT XRP cordless drills. However, those negative effects were partially offset by the favorable effects of productivity and restructuring initiatives, pricing actions, product mix, and currency.

Consolidated selling, general, and administrative expenses as a percentage of sales were approximately 25.0% in 2008 and 24.7% in 2007. Consolidated selling, general, and administrative expenses in 2008 decreased by $104.2 million from the 2007 level. The favorable effects of cost control and restructuring initiatives, coupled with the effect of lower sales on certain volume-sensitive expenses (such as promotion, transportation, and distribution), and lower environmental expense offset the unfavorable effects of foreign currency translation and additional selling, general, and administrative expenses to support increased sales in certain markets outside of the United States and Europe.

Consolidated selling, general, and administrative expenses as a percentage of sales were approximately 24.7% in 2007 and 23.3% in 2006. Consolidated selling, general, and administrative expenses in 2007 increased by $124.7 million over the 2006 level. The effect of foreign currency translation accounted for approximately one-third of that increase and the remainder was primarily attributable to additional selling, general, and administrative expenses to support increased sales in certain markets outside of the United States and to higher environmental expenses.

In 2008, the Corporation recognized $54.7 million of pre-tax restructuring and exit costs related to actions in each of its business segments as well as its corporate office. The 2008 restructuring charge reflects actions to reduce the Corporation's manufacturing cost base as well as selling, general, and administrative expenses.

In 2007, the Corporation recognized $19.0 million of pre-tax restructuring and exit costs related to actions in its Power Tools and Accessories and Hardware and Home Improvement segments. The 2007 restructuring charge reflects actions to reduce the Corporation's manufacturing cost base as well as selling, general, and administrative expenses in those segments.

Consolidated net interest expense (interest expense less interest income) was $62.4 million in 2008, as compared to $82.3 million in 2007 and $73.8 million in 2006. The decrease in net interest expense in 2008, as compared to 2007, was primarily the result of lower interest rates, including the impact on the Corporation's foreign currency hedging activities. The increase in net interest expense in 2007, as compared to 2006, was primarily the result of lower interest income associated with reduced levels of cash and cash equivalents.

Other (income) expense was $(5.0) million in 2008, as compared to $2.3 million in 2007 and $2.2 million in 2006. Other (income) expense for the year ended December 31, 2008, benefited from a gain on the sale of a non-operating asset.

Consolidated income tax expense (benefit) of $71.1 million, $(20.5) million, and $178.3 million was recognized on the Corporation's earnings before income taxes of $364.7 million, $497.6 million, and $664.4 million, for 2008, 2007, and 2006, respectively. The effective tax rate of 19.5% recognized for the year ended December 31, 2008, was primarily due to the following factors: (i) the favorable resolution of certain tax audits in 2008; (ii) a $15.1 million tax benefit associated with a $54.7 million pre-tax restructuring charge; and (iii) favorability associated with the finalization of closing agreements of the settlement of income tax litigation between the Corporation and the U.S. government agreed to in late 2007. Income tax expense (benefit) in 2007 reflects: (i) the effect of a $153.4 million tax benefit associated a settlement reached on an income tax litigation matter; (ii) an $11.1 million tax benefit associated with a $31.7 million pre-tax charge for an environmental remediation matter; and (iii) a $6.2 million tax benefit associated with a $19.0 million pre-tax restructuring charge. The previously described items had a significant impact on the Corporation's effective income tax rates in 2008 and 2007. A further analysis of taxes on earnings is included in Note 11 of Notes to Consolidated Financial Statements.

The Corporation reported net earnings of $293.6 million, $518.1 million, and $486.1 million, or $4.82, $7.85 and $6.55 per share on a diluted basis, for the years ended December 31, 2008, 2007, and 2006, respectively. Net earnings for the year ended December 31, 2008, included the effect of an after-tax restructuring charge of $39.6 million ($54.7 million before taxes). Net earnings for the year ended December 31, 2007, included the effect of: (i) a $153.4 million tax benefit resulting from a settlement agreement reached on an income tax litigation matter; (ii) an after-tax charge of $20.6 million ($31.7 million before taxes) associated with an environmental remediation matter; and (iii) an after-tax restructuring charge of $12.8 million ($19.0 million before taxes).

In addition to the matters previously noted, diluted earnings per share for 2008 and 2007 benefited from lower weighted-average shares outstanding, principally as a result of the Corporation's purchases of its common stock under a previously announced share repurchase program. The 60.9 million weighted-average shares outstanding used in the computation of diluted earnings per share for 2008 represented an 8% decline from the 66.0 million average shares outstanding used in the 2007 computation. The 66.0 million weighted-average shares outstanding used in the computation of diluted earnings per share for 2007 represented an 11% decline from the 74.2 million average shares outstanding used in the 2006 computation.

Business Segments

As more fully described in Note 16 of Notes to Consolidated Financial Statements, the Corporation operates in three reportable business segments:
Power Tools and Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems.

POWER TOOLS AND ACCESSORIES

Segment sales and profit for the Power Tools and Accessories segment, determined
on the basis described in Note 16 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):

YEAR ENDED DECEMBER 31,                2008          2007          2006
Sales to unaffiliated customers   $ 4,371.6     $ 4,843.7     $ 4,907.3
Segment profit                        321.3         488.8         591.3

Sales to unaffiliated customers in the Power Tools and Accessories segment during 2008 decreased 10% from the 2007 level. That decline primarily resulted from the North American business, which faced weak housing and discretionary spending all year, and a slowdown in Europe which accelerated during the second half of the year.

Sales in North America decreased at a double-digit rate during 2008, as compared to the 2007 level, primarily as a result of weak demand in the United States as a result of depressed housing and decelerating commercial construction. Sales of the Corporation's industrial power tools and accessories business in the United States decreased at a low-double-digit rate due to declines in all major product categories and in most channels due primarily to broad market weakness. Sales of the consumer power tools and accessories business in the United States decreased by more than 20% primarily due to lost listings in the pressure washer category, weak demand, and the effects of a transition from the Firestorm® to the Porter-Cable® brand of power tools and accessories at a large customer. Most other product categories also declined in comparison to 2007, but those declines were partially offset by increased sales in outdoor products. In Canada, sales increased at a mid-single-digit rate over the 2007 level, primarily due to a double-digit rate of increase of sales of industrial power tools and accessories that partially offset a double-digit rate of decline of sales of consumer power tools and accessories.

Sales of the European power tools and accessories business during 2008 decreased at a low-double-digit rate from the level experienced in 2007 as a result of deteriorating economic conditions in Western Europe, which were partially offset by growth in the Eastern Europe and Middle East/Africa regions due to growth in the first nine months of 2008 which offset declines in the fourth quarter. The decline in sales of the European power tools and accessories business reflected a rapid deterioration in the second half of 2008, following a mid-single-digit decline in the first half of the year. Sales of both the Corporation's industrial and consumer power tools and accessories businesses in Europe decreased at a double-digit rate during 2008 from the 2007 level.

Sales in other geographic areas increased at a double-digit rate in 2008 over the 2007 level. That growth primarily resulted from a double-digit rate of increase in Latin America and a low-single-digit rate of increase in the Asia/Pacific region, where sales growth in Asia offset declines in Australia and New Zealand.

Segment profit as a percentage of sales for the Power Tools and Accessories segment was 7.4% for 2008, as compared to 10.1% for 2007. Gross margin as a percentage of sales for 2008 declined in comparison to 2007 primarily as a result of commodity inflation (together with the change in China's value added tax and appreciation of the Chinese renminbi), unfavorable product mix, and the de-leveraging of fixed costs, partially offset by the favorable effects of productivity and restructuring initiatives and the absence of a significant product recall that occurred in 2007. Selling, general, and administrative expenses as a percentage of sales for 2008 increased over the 2007 level due primarily to the de-leveraging of expenses over lower sales volumes.

Sales to unaffiliated customers in the Power Tools and Accessories segment during 2007 decreased 1% from the 2006 level. That decline, which primarily resulted from lower sales in the United States and Canada, was partially offset by higher sales outside of North America.

Sales in North America decreased at a mid-single-digit rate during 2007, as compared to the 2006 level. Sales of the Corporation's industrial power tools and accessories business in the United States decreased at a mid-single-digit rate - due, in part to lower housing starts - as a high-single-digit rate of decline in sales to the independent channel was coupled with sales to major retailers that approximated the 2006 level. Sales of industrial power tools and accessories in the United States declined in 2007 across most product categories. Sales of the consumer power tools and accessories business in the United States decreased at a high-single-digit rate due primarily to lower sales of power tools and accessories, automotive and electronic products, and pressure washers. In Canada, sales decreased at a high-single-digit rate from the 2006 level, with high-single-digit rates of decline in sales of both industrial and consumer power tools and accessories.

Sales of the European power tools and accessories business during 2007 increased at a mid-single-digit rate over the level experienced in 2006. While sales grew in 2007 across most markets, excluding the United Kingdom, a double-digit rate of growth was experienced in the Eastern European, Nordic, and Middle East/Africa regions. Sales of the Corporation's industrial power tools and accessories business in Europe increased at a double-digit rate while sales of the consumer power tools and accessories business increased at a low-single-digit rate during 2007 due to the introduction of consumer portable power products.

Sales in other geographic areas increased at a double-digit rate in 2007 over the 2006 level. That increase resulted from a double-digit rate of increase in Latin America and a high-single-digit rate of increase in Asia.

Segment profit as a percentage of sales for the Power Tools and Accessories segment was 10.1% for 2007, as compared to 12.0% for 2006. Gross margin as a percentage of sales for 2007 declined in comparison to the 2006 level primarily as a result of the negative effects of commodity inflation (including the change in China's value-added tax and appreciation of the Chinese renminbi), pricing actions, and the recall of certain DeWALT XRP drills. Those negative effects on gross margin in 2007 were partially offset by the favorable effects of productivity and restructuring initiatives, product mix, and currency. Selling, general, and administrative expenses as a percentage of sales for 2007 increased over the 2006 level due primarily to, in North America, the de-leveraging of expenses over a lower sales base.

HARDWARE AND HOME IMPROVEMENT

Segment sales and profit for the Hardware and Home Improvement segment,
determined on the basis described in Note 16 of Notes to Consolidated Financial
Statements, were as follows (in millions of dollars):

YEAR ENDED DECEMBER 31,              2008          2007          2006
Sales to unaffiliated customers   $ 896.6     $ 1,006.7     $ 1,014.5
Segment profit                       76.9         114.9         138.3

Sales to unaffiliated customers in the Hardware and Home Improvement segment during 2008 decreased 11% from the 2007 level. Sales of security hardware in the United States declined at a double-digit rate due, in part, to the negative effects of the U.S. housing slowdown. Sales of plumbing products in the United States declined at a high-single-digit rate in 2008, driven by the U.S. housing slowdown. Sales of the Hardware and Home Improvement segment outside of the United States declined at a low-single-digit rate in 2008 from the 2007 level, principally due to weakness in Canada.

Segment profit as a percentage of sales in the Hardware and Home Improvement segment decreased from 11.4% in 2007 to 8.6% in 2008. Gross margin as a percentage of sales declined slightly in 2008, as compared to 2007, as the negative effects of commodity inflation and lower volumes were only partially . . .