CompUSA 2013 Annual Report Download - page 33

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OPERATING MARGIN
The slight improvement in Technology Products operating margin for 2013 was due to improvement in freight performance and lower SG&A in
North America, offset by increased expenses in Europe due to duplication of local functions and other redundancies until completion of the
transition of the European shared services center.
The decline in Technology products operating margin in 2012 was due to $39.9 million of asset impairment charges, $6.4 million of severance
and other reorganization related charges, $1.8 million of patent settlements with non-
practicing entities offset by net recoveries of $3.9 million
for litigation costs and settlements related to a former officer and director of the Company. Excluding these net charges, Technology Products
operating margin would have declined compared to 2012 due to the soft demand for personal computers and consumer electronics, a decline in
vendor co-
operative funding within the North America technology business, and lower sales and gross profit to cover fixed SG&A expenses,
partially offset by continued strength in B2B operations.
The increase in the Industrial Products operating margin for 2013 compared to 2012 is due to improvement in freight performance, expansion of
private label and brand name selections, increased utilization of the New Jersey distribution center and approximately $0.3 million benefit from
an adjustment to lease termination costs offset by $0.1 million of personnel costs related to the planned closing and relocation of one of our
smaller distribution centers to a new, significantly larger, distribution and call center in the second quarter of 2012.
The decline in the Industrial Products operating margin for 2012 compared to 2011 was due to a shift towards drop shipped products which tend
to lower consolidated profit margins, a decline in freight margins, costs incurred for the new distribution and call center which opened in the
second quarter 2012, and sales and other personnel costs as the segment continues to expand into newer product categories.
Operating margin for our North American businesses (which is comprised of part of our Technology Segment and our entire Industrial Products
and Corporate and Other Segments) improved to an operating loss of $14.9 million in 2013 compared to an operating loss of $63.6 million in
2012. This decline was primarily attributable to a reduction in special charges incurred of approximately $27.6 million, an improvement in gross
profit, primarily attributable to the Industrial Products segment, of approximately $7.2 million and a reduction in selling general and
administrative expenses of approximately $14.4 million. The overall loss in North America was driven by weakness in the Technology Products
business. Within this business, the major drivers of the weakness were web, television and retail store sales declines, resulting from sales volume
and selling price erosion in certain core product categories such as personal computers and televisions. The Company believes the decline in
sales and price pressures for consumer electronics are attributable to a variety of well publicized industry and market trends, including consumer
preferences for new generation tablets, which erode laptop and desktop PC sales, the market share for tablets held by a major manufacturer,
which does not sell to the Company for U.S. markets, the consolidation of prior generations of separate devices and functions into a single
integrated device (such as GPS and cameras being integrated with smart phones), the ongoing movement of traditional brick and mortar store
sales to online/ecommerce vendors, and the increasing influence of a dominant company in the online/ecommerce market.
Operating margin for our European business was a loss of $5.7 million in 2013 compared to an operating income of $23.7 million in 2012. The
operating loss in 2013 was the result of the decrease in revenues of approximately $31.3 million and a corresponding reduction in gross margin
of approximately $8.6 million and, as described above, an increase in selling general and administrative costs of approximately $16.6 million
and an increase in restructuring costs of approximately $3.5 million. The expense increase for Europe includes approximately $12.7 million of
salary and related costs due to additional sales personnel and additional headcount for the shared services center.
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