CompUSA 2010 Annual Report Download - page 72

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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.