Circuit City 2010 Annual Report Download - page 25

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES/REORGANIZATION AND OTHER CHARGES
Selling, general and administrative expenses increased in 2010 over 2009 primarily as a result of the increased sales volume, increases in facility
and other operating costs related to opening additional retail stores and reorganization costs related to the WStore acquisition. Selling, general
and administrative costs as a percent of sales declined 30 basis points as sales grew at a faster rate than costs. Retail expansion in the United
States and the inclusion of WStore results
for a full year were primary drivers of the cost increases in 2010. Significant expense increases include
approximately $28.1 million of increased payroll, severance and related costs of which $3.0 million related to reorganization charges related to
the merger of the Company’s Misco and WStore operations in Europe, other exit costs related to the merger of $1.0 million, $8.5 million of
increased internet advertising expenses, $5.6 million of increased rent and related expenses primarily related to retail stores, $2.8 million of
increased credit card fees, $2.5 million of additional depreciation and amortization expense offset by approximately $9.7 million of increased
vendor consideration related to advertising expenses. Also included in 2009 is a gain of approximately $1.8 million from a lawsuit that was
settled favorably.
Selling, general and administrative expenses increased in 2009 over 2008 primarily as a result of the increase in sales volume, facility and other
operating costs related to opening additional retail stores, costs related to winding down the Software Solutions segment and costs related to the
WStore acquisition. Selling, general and administrative costs as a percent of sales declined 20 basis points as sales grew at a faster rate than
costs. Significant expense increases include approximately $7.8 million in charges for severance costs, litigation and contractual lease
terminations of which approximately $2.9 million related to winding down costs related to Software Solutions segment. Also included in 2009 is
a gain of approximately $1.8 million from a lawsuit that was settled favorably.
OPERATING MARGIN
Technology products operating margin decreased 100 basis points in 2010 versus 2009 due to price promotions, freight discounts offered during
the year, start up costs related to the new distribution center in North America and reorganization costs related to the WStore integration which
could not be fully offset by cost reduction initiatives. Technology products operating margin decreased 40 basis points in 2009 versus 2008 due
to the global economic slowdown, price promotions, freight discounts and other cost increases which were not fully offset by cost reduction
initiatives.
Industrial products operating margin increased by 20 basis points in 2010 versus 2009 due to improved economic conditions in North America,
resulting in increased demand for the segment’s various products and prudent cost management. Industrial products operating margin decreased
30 basis points in 2009 versus 2008 due to the slowdown in sales coupled with additional information technology staffing and other costs for the
support of the new products added and the newly launched e-commerce website.
Corporate and other expenses operating costs decreased 30.4% during 2010 due to cost savings from winding down the ProfitCenter Software
segment in 2009, reduced consulting and outside services for the software implementation which began in 2009 and significantly less legal and
professional fees incurred in 2010 compared to 2009. Corporate and other expenses decreased 6.5% due to winding down the ProfitCenter
Software segment in 2009 offset by expenses for new software implementation, acquisition related costs and additional staffing and overhead
costs to support the growth in the Company’s business.
INTEREST EXPENSE
Interest expense was $1.8 million, $1.4 million, and $0.8 million in 2010, 2009 and 2008, respectively. The interest expense increase in 2010
compared to 2009 is primarily attributable to a full year of interest expense related to the debt assumed in the WStore acquisition, higher average
outstanding balances under the Company’s revolving credit agreement and interest on the Recovery Zone Bond entered into to finance the
equipment for the new distribution center opened in 2010. Interest expense increased in 2009 over 2008 primarily as a result of the short term
debt assumed in the WStore acquisition and interest on capital lease obligations. Interest and other income, net was $0.8 million, $1.0 million,
and $2.2 million in 2010, 2009 and 2008, respectively. The changes are a result of the Company’s investable cash fluctuations due to cash
sources and uses for operating, investing and financing activities.
INCOME TAXES
The Company’s effective tax rate was 35.6% in 2010 as compared to 36.8% in 2009. The lower tax rate in 2010 is primarily attributed to
reversals of valuation allowances of approximately $0.5 million. If excluded, the Company’s effective tax rate would have been 36.3%. The
lower tax rate in 2010 is primarily attributed to a higher percentage of taxable income in countries that have lower corporate tax rates. The
Company’s effective tax rate will vary as the mix of pretax income from the countries the Company does business in varies.
The effective tax rate in 2009 was flat compared to 2008. Included in the 2009 rate was a reversal of tax reserves of approximately $0.9 million,
as a result of statute expirations. If excluded, the Company’s effective tax rate would have been 38.4%. The higher tax rate in 2009 is primarily
attributed to a higher percentage of taxable income in countries that have higher corporate tax rates.
21