CompUSA 2009 Annual Report Download - page 81

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21
consumer and business to business sales as the result of a slowdown in economic activity. Sales in the Software Solutions segment
were not material in 2008 and 2007. The Company reorganized this segment in the fourth quarter of 2008 which resulted in a charge
to earnings of approximately $1.7 million.
GROSS MARGIN
Consolidated gross margin declined in 2009.as the Company lowered certain product prices and offered freight incentives in order to
maintain and grow market share and to respond to competitive pricing pressures that started in 2008. Additionally, consolidated gross
margin has been impacted by a shift in mix, as higher margin Industrial Products accounted for a smaller percentage of consolidated
revenues than in previous years. Gross margin is dependent on variables such as product mix, vendor price protection and other sales
incentives, competition, pricing strategy, cooperative advertising funds required to be classified as a reduction to cost of sales, freight
discounting and other variables, any or all of which may result in fluctuations in gross margin.
Consolidated gross margin declined during 2008 over 2007 due primarily to competitive pricing pressures in the Technology Products
segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in 2009 over 2008 primarily as a result of the increased 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. Significant expense increases include approximately $7.8 million in charges for severance
costs, litigation and contractual lease terminations of which approximately $2.9 million of winding down costs related to Software
Solutions segment, $4.3 million of increased credit card fees, and $1.8 million of increased consulting services primarily incurred for
new software implementation offset by savings in other various 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 2008 over 2007 primarily as a result of the increase in sales volume, added
personnel, facility and other operating costs associated with the CompUSA acquisition, as well as increased accounting, auditing, legal
and professional expenses and reorganization charges incurred in our Software segment. CompUSA operations accounted for $23.6
million of these cost increases. Included in 2007 is a gain of approximately $2.4 million from a lawsuit that was settled favorably.
OPERATING MARGIN
Technology products operating margin decreased in 2009 compared to 2008 due to decline in business to business sales as the result
of the global economic slowdown, price promotions and freight discounts offered during the year and costs related to the WStore
acquisition.
Industrial products operating margin decreased in 2009 compared to 2008 due to the slowdown in sales coupled with additional
information technology staffing and other costs for the support of new products added and the newly launched e-commerce website.
Software solutions segment operating margin increased due to revenue recognized from contract terminations. This segment has been
winding down operations since the second quarter of 2009.
Corporate and other expenses operating costs increased 16.5% in 2009 as compared to 2008 due to increased expenses for new
software implementation, acquisition related costs and additional staffing and overhead costs to support the growth in the Company’ s
business.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest expense was $.9 million, $.3 million, and $1.0 million in 2009, 2008 and 2007, respectively. The interest expense increase in
2009 compared to 2008 is primarily attributable to the WStore acquisition assumed short term debt and interest on capital lease
obligations. Interest expense decreased in 2008 and 2007 as a result of decreased short-term borrowings in the Company’ s subsidiaries
in the United Kingdom and the Netherlands. Interest and other income, net was $.8 million, $2.0 million, and $5.5 million in 2009,
2008 and 2007, respectively.
INCOME TAXES
The Company’ s effective tax rate was 36.8% in 2009 flat as compared to 36.9% in 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. The Company’ s effective tax rate will vary as the mix of pre tax income from the countries the Company does
business in varies.