True Value 2007 Annual Report Download - page 25

4 | TRUE VALUE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
Gross
Margin
Gross margin 2007 2006 Increase
For the Year Ended $234,417 $232,611 $1,806
Percent to Net Revenue 11.5% 11.3%
Gross margin for the year ended December 29, 2007, increased
by $1,806, or 0.8%, over the prior year. The increase in gross
margin was driven by Comp Store Sales growth in products sold
through True Value’s distribution network and improved returns
on liquidated sales of excess inventory. Partially offsetting these
gross margin increases were the continued erosion of ware-
house sales from the change in participating members, the
impact from new business model policy changes announced
at the 2006 fall market and higher freight-in expense due to
increased importing. The business policy changes, which reduced
the members’ cost of doing business with True Value, include
full credit on Policy A returned goods, free freight on promotional
orders placed in the early order windows and co-op reimburse-
ment for True Value produced circulars.
Logistics and $ Expense
manufacturing expenses 2007 2006 Increase
For the Year Ended $61,350 $58,805 $2,545
Percent to Net Revenue 3.0% 2.9%
Logistics and manufacturing expenses increased by $2,545, or
4.3%, as compared to the prior year. The increase in expense
was primarily due to increased labor expense resulting from
higher volumes sold through True Value’s distribution network.
Selling, general and $ Expense
administrative expenses 2007 2006 Increase
For the Year Ended $98,729 $94,527 $4,202
Percent to Net Revenue 4.8% 4.6%
SG&A expenses increased by $4,202, or 4.4%, as compared
to the prior year. SG&A expenses increased primarily due to
expenses related to developing and marketing the DTV model
store of $2,849, increased labor expense of $1,928 and lease
expense of $773. Partially offsetting these increases were lower
outside legal services of $945. The 2006 curtailment gain that
resulted from True Value freezing its two noncontributory defined
benefit retirement plans for its nonunion participants was
matched by the retirement benefit expense savings realized in
2007 from freezing the two retirement plans in 2006.
Arbitration and litigation Expense
provisions/(benefits) 2007 2006 Increase
For the Year Ended $600 $(5,745) $6,345
Percent to Net Revenue 0.0% (0.3%)
The change in arbitration and litigation reserves of $6,345 was
primarily due to the partial reversals of prior years’ reserves of
$6,275 which was predominately related to the arbitration with
Ernst & Young LLP.
Expense
(Gain)/loss on sale of assets 2007 2006 Increase
For the Year Ended $173 $(1,090) $(1,263)
Percent to Net Revenue 0.0% (0.1%)
Gain/loss on sale of assets was expense of $173 for 2007 com-
pared to income of $1,090 in 2006. The 2006 gain on sale of
assets was mainly related to the sale of tractors and trailers.
Other income, net 2007 2006 $ Decrease
For the Year Ended $(2,697) $(1,310) $(1,387)
Percent to Net Revenue (0.1%) (0.1%)
Other income, net increased by $1,387, or 105.9%, as compared
to the prior year. The lower income in 2006 was due to costs
associated with True Value terminating its asset-based revolving
credit facility and obtaining a new senior secured revolving
credit facility. Upon terminating the asset-based credit facility
True Value wrote off related bank fees of $1,346 (see Note 4,
“Debt Arrangements – Bank Facility,” to the Consolidated Finan-
cial Statements).
$ Expense
Interest expense 2007 2006 (Decrease)
Third-parties $8,081 $10,141 $(2,060)
Percent to Net Revenue 0.4% 0.5%
Third-party interest expense decreased by $2,060, or 20.3%, as
compared to last year. This decrease in expense was due to
lower interest rates and a lower average debt level. True Value’s
daily outstanding revolving credit facility borrowings were approx-
imately $8,300 lower compared to 2006.