True Value 2008 Annual Report Download - page 27

management’s discussion and analysis
of financial condition and results of operation
6 :: TR UE VALUE C OMPAN Y
offset by the retirement benefit expense savings realized in 2007
from freezing the two retirement plans in 2006.
Arbitration and litigation $ Expense
provisions/(benefits) 2007 2006 Increase
For the Year Ended $600 $(5,745) $6,345
Percent to Net Revenue 0.0% (0.3%)
The change in arbitration and litigation reserves of $6,345 was
primarily due to the partial reversals of prior years’ reserves of
$6,275 which was predominately related to the arbitration with
Ernst & Young LLP.
$ Income
Other income, net 2007 2006 Increase
For the Year Ended $(2,524) $(2,400) $124
Percent to Net Revenue (0.1%) (0.1%)
Other income, net increased by $124, or 5.2%, as compared
to the prior year. The lower income in 2006 was due to costs
associated with True Value terminating its asset-based revolv-
ing credit facility and obtaining a new senior secured revolving
credit facility. Upon terminating the asset-based credit facility True
Value wrote off related bank fees of $1,346 (see Note 4, “Debt
Arrangements – Bank Facility,” to the Consolidated Financial
Statements). This was predominately offset by a gain on sale of
assets in 2006 of $1,090 which was mainly related to the sale of
tractors and trailers.
$ Expense
Interest expense 2007 2006 (Decrease)
Third-parties $8,081 $10,141 $(2,060)
Percent to Net Revenue 0.4% 0.5%
Third-party interest expense decreased by $2,060, or 20.3%, as
compared to last year. This decrease in expense was due to lower
interest rates and a lower average debt level. True Value’s daily
outstanding revolving credit facility borrowings were approxi-
mately $8,300 lower compared to 2006.
$ Net
Margin
Net margin 2007 2006 (Decrease)
For the Year Ended $63,767 $72,779 $(9,012)
Percent to Net Revenue 3.1% 3.6%
The 2007 Net margin of $63,767 decreased by $9,012, or 12.4%,
from the 2006 Net margin of $72,779. The primary reason for the
decrease in 2007 was the net favorable adjustment made to the
arbitration and other litigation reserves of $5,745 and $4,166 in
one-time net gains from changes in various employee benefit
plans, primarily the freezing of the qualified pension plan in 2006,
which did not reoccur in 2007.
LIQUIDITY AND CAPITAL RESOURCES
True Value generated cash of $44,318, $64,666 and $85,233 from
operating activities for 2008, 2007 and 2006, respectively. The
decrease in cash generated from operating activities in 2008
compared to 2007 was primarily due to the decrease in accounts
payable of $46,659 partially offset by a decrease in accounts
receivable of $13,132. The decrease in accounts payable was
primarily a result of lower product purchases and the decrease in
accounts receivable was mainly due to the 53rd week of collections
that exceeded the 53rd week of sales in True Value’s 2008 fiscal
year. The decrease in cash generated from operating activities
in 2007 compared to 2006 was predominately due to increased
accounts receivables of $18,425 as a result of higher December
sales and the timing of the fall market. The fall market was held
in late October 2007 compared to mid September 2006 and,
therefore, moved extended invoice terms on certain 2007 market
sales into 2008. Inventory also increased in 2007 compared to
2006 by $22,513 in order to improve fill rates and for products
ordered at the later fall market for shipment in January 2008. These
increased usages of cash were partially funded by an increase in
accounts payable of $22,446.
True Value’s major working capital components individually
move in the same direction with the seasonality of the business.
The spring and early fall are the most active periods for True
Value and require the highest levels of working capital. The low
point for accounts receivable, inventory and accounts payable
is generally during the month of December. Cash needed to
meet accounts payable obligations will be provided by cash
generated from collections of accounts receivable and from
future sales of inventory.
True Value used cash for investing activities in 2008, 2007 and 2006
of $12,669, $17,353 and $9,245, respectively. Investing activities
primarily include capital expenditures.
The net excess cash generated from operating and investing
activities in 2008, 2007 and 2006 was used primarily for financing
activities, which used cash of $30,799, $48,198 and $79,935 for
2008, 2007 and 2006, respectively. In particular, True Value used
cash for payment of the patronage dividend and the redemption
of Class A and Class B common stock in 2006, 2007 and 2008, and
applied the net excess cash provided by operating and investing
activities to reducing its debt in 2006 and 2007.
True Value’s net working capital at January 3, 2009, Decem-
ber 29, 2007 and December 30, 2006, was $186,637, $155,638
and $132,172, respectively. The current ratio at January 3, 2009,
December 29, 2007 and December 30, 2006, was 1.56, 1.39 and
1.34, respectively. The increase in both True Value’s net working
($ in thousands)