Circuit City 2011 Annual Report Download - page 27

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SPECIAL (GAINS) CHARGES
The Company recorded a net special gain of approximately $5.6 million primarily related to the investigation and settlement with a former officer and
director of the Company. A special gain of approximately $8.4 million related to this settlement was recorded in the second quarter of 2011. This gain
was partially offset by charges for related investigative, legal and professional fees of approximately $2.8 million for the year (See Note 8 of Notes to
Consolidated Financial Statements).
The Company’s WStore France subsidiary incurred integration related charges of approximately $4.0 million for severances and other costs related to
the merger of its Misco and WStore operations and the Company incurred $0.3 million in contract terminations costs related to the exit of its Software
Solutions segment.
OPERATING MARGIN
Technology Products operating margin increased 10 basis points in 2011 versus 2010 due to the effect of a special gain recorded in 2011 related to the
investigation of the former officer and director of the Company and the special charges incurred in 2010 for the WStore integration. Excluding these
gains and charges, Technology Products operating margin would have declined compared to 2010 due to continuing price promotions offered and
increased spending related to the retail stores, additional headcount and a full year of operation of the second distribution center. Technology Products
operating margin decreased 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.
Industrial Products operating margin increased 130 basis points in 2011 due to increased demand for the segment’
s various products, the availability of
additional products on the Company’s websites and in its catalogs and additional sales personnel. Industrial Products operating margin increased in
2010 compared to 2009 due to prudent cost management and improved economic conditions in North America, resulting in increased demand for the
segment’s various products.
Corporate and other operating costs increased 13.2% during 2011 primarily as a result of increased personnel costs and increased tax and accounting
fees offset by savings in general consulting fees. Corporate and other operating costs decreased 29.6% during 2010 due to cost savings from winding
down the ProfitCenter Software segment in 2009, reduced consulting and outside services for software implementation which began in 2009 and
significantly less legal and professional fees incurred in 2010 compared to 2009.
INTEREST EXPENSE
Interest expense was $2.2 million, $1.8 million, and $1.4 million in 2011, 2010 and 2009, respectively. The interest expense increase in 2011
compared to 2010 is primarily the result of a full year of interest on the Recovery Zone Bond entered into to finance the equipment for the second
Technology Products distribution center opened in 2010. 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.
INCOME TAXES
The Company’s effective tax rate was 30.9% in 2011 as compared to 35.6% in 2010. The lower tax rate in 2011 is primarily the result of the
company’
s France operations having sufficient income to partially utilize net operating loss carryforwards that have a full valuation allowance applied.
The effective tax rate in 2010 was 35.6% 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.
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