True Value 2007 Annual Report Download - page 27

6 | TRUE VALUE COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
Selling, general and $ Expense
administrative expenses 2006 2005 (Decrease)
For the Year Ended $94,527 $102,527 $(8,000)
Percent to Net Revenue 4.6% 5.0%
SG&A expenses decreased primarily due to lower labor expense
of $2,679. The lower labor expense consisted of favorable pen-
sion expense of $4,101 mainly as a result of True Value freezing
its pension plan and lower severance charges of $2,651 partially
offset by higher incentive expense of $3,915 due to higher goal
attainment in 2006 compared to 2005. In addition, legal costs
principally related to the prior-year E&Y arbitration were lower
by $2,525 and development expenses were lower by $2,658.
The development expense was favorable mainly due to lower
store merchandising program expenses related to paint and
tool shops, lower retail system software expense and lower new
store design layout, signage and fixture costs.
Arbitration and litigation $ Expense
provisions/(benefits) 2006 2005 (Decrease)
For the Year Ended $(5,745) $18,200 $(23,945)
Percent to Net Revenue (0.3%) 0.9%
On April 3, 2006 the arbitration panel in the E&Y matter issued
its final award. The panel ordered True Value to pay to E&Y,
attorneys’ fees and expenses totaling $12,191 and reimburse-
ment of American Arbitration Association fees and expenses
totaling $384. As a result, True Value reduced its initial 2005
reserve of $18,200 that was recorded in the third quarter of
2005 based upon the arbitration panel’s original decision, and
recorded an adjustment to the prior year arbitration reserve of
$5,625, in the quarterly period ended April 1, 2006. In the third
quarter 2006, E&Y filed a motion seeking interest on the final
award. On October 27, 2006, the trial court granted E&Y’s
motion and ordered True Value to pay $530 in interest.
On June 2, 2006, the Kentucky Appellate Court in the Flegles
action, after having heard arguments from both sides, reversed
the judgment of the Kentucky Trial Court. Accordingly, True
Value reversed its prior years’ litigation reserve and recognized
$650 of income in the quarterly period ended July 1, 2006.
(Gain)/loss on sale of assets 2006 2005 $ Decrease
For the Year Ended $(1,090) $(8,333) $(7,243)
Percent to Net Revenue (0.1%) (0.4%)
Gain on sale of assets decreased $7,243, or 86.9%, as compared
to the prior year. The 2006 gain on sale of assets was mainly
related to the sale of tractors and trailers. The 2005 gain on sale
of assets primarily included a $9,080 gain on sale of the Chicago,
Illinois, manufacturing facility partially offset by a $942 impair-
ment charge on the East Butler, Pennsylvania, facility.
Other income, net 2006 2005 $ Decrease
For the Year Ended $(1,310) $(2,597) $(1,287)
Percent to Net Revenue (0.1%) (0.1%)
Other income, net decreased by $1,287, or 49.6%, as compared
to the prior year. The lower income in 2006 was due to 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 Financial Statements).
$ Expense
(Decrease)/
Interest expense 2006 2005 Increase
Member $ 4,450 $ 5,507 $ (1,057)
Percent to Net Revenue 0.2% 0.3%
Third-parties $ 10,141 $ 8,706 $ 1,435
Percent to Net Revenue 0.5% 0.4%
Member interest expense decreased by $1,057, or 19.2%, as
compared to the prior year. This decrease in expense was primar-
ily due to lower interest rates and a lower average debt level.
Third-party interest expense increased by $1,435, or 16.5%,
as compared to the prior year. This increase in expense was
primarily due to higher interest rates partially offset by a lower
average debt level as a result of decreased inventory levels.
$ Net
Margin
Net margin 2006 2005 Increase
For the Year Ended $72,779 $47,555 $25,224
Percent to Net Revenue 3.6% 2.3%
The 2006 Net margin of $72,779 increased from the 2005 Net
margin of $47,555. The primary reasons for the $25,224 increase
in 2006 were the 2005 arbitration provision of $18,200 that did
not reoccur in 2006 along with the net favorable adjustments
made to the arbitration and other litigation reserves of $5,745
in 2006. In addition, the 2006 Net margin was also favorably