True Value 2007 Annual Report Download - page 28

2007 FINANCIAL REPORT | 7
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
($ in thousands)
impacted by higher product margins, the favorable impact from
freezing the pension plan and lower legal cost related to the
E&Y arbitration. Partially offsetting these favorable items was
the net decrease from the 2005 gain on sale of assets and the
2006 bank fee write off, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
True Value generated cash of $66,525 and $85,503 from operat-
ing activities for 2007 and 2006, respectively, while it used cash
for operating activities in 2005 of $9,055. The decrease in cash
generated from operating activities in 2007 compared to 2006
was predominately due to increased accounts receivables of
$16,555 as a result of higher December sales and the timing
of the fall market. The fall market was held in late October
2007 compared to mid September 2006 and therefore moved
extended invoice terms on certain 2007 market sales into 2008.
Inventory also increased in 2007 compared to 2006 by $22,513
in order to improve fill rates and for products ordered at the
later fall market for shipment in January 2008. These increased
usages of cash were partially funded by an increase in accounts
payable of $22,446. The change in cash generated from operat-
ing activities in 2006 from cash used for operating activities in
2005 was primarily due to the inventory buildup in 2005 and
the subsequent inventory reduction in 2006. The inventory
buildup in 2005 was primarily due to increased inventory in
order to improve seasonal and promotional product fill rates
and new product offerings. In addition, inventory increased with
the establishment of two China warehouse operations in the
third quarter of 2005 to handle increased importing activities.
The 2006 inventory reduction was due, in part, to True Value
management’s effort to improve inventory productivity while
maintaining acceptable product fill rates.
True Value’s major working capital components individually move
in the same direction with the seasonality of the business. The
spring and early fall are the most active periods for True Value
and require the highest levels of working capital. The low point
for accounts receivable, inventory and accounts payable is at the
end of the calendar year. Cash needed to meet accounts payable
obligations will be provided by cash generated from collections
of accounts receivable and from future sales of inventory.
True Value used cash for investing activities in 2007 and 2006 of
$17,353 and $9,245, respectively, while it generated cash from
investing activities in 2005 in the amount of $7,455. Investing
activities include capital expenditures and proceeds from sales
of properties. The reason 2005 generated cash from investing
activities was predominately due to proceeds of $16,313 from
the sale of two properties in 2005, which was related to the sale
of the Chicago, Illinois, oil-based paint manufacturing facility on
December 28, 2005, and the sale of the East Butler, Pennsylvania,
warehouse and office facility on April 20, 2005.
The net excess cash generated from operating and investing
activities in 2007 and 2006 was used primarily for financing activ-
ities, which used cash of $50,057 and $80,205 for 2007 and 2006,
respectively. In particular, True Value applied the cash provided
by operating and investing activities to reducing its debt in both
years. In addition, True Value used cash for payment of the
patronage dividend and the redemption of Class A and Class B
common stock.
True Value generated cash from its financing activities in 2005
of $4,386. The cash was generated from proceeds from the
mortgage transaction on its Manchester, New Hampshire,
distribution center in the amount of $21,600 (see Note 4, “Debt
Arrangements – Mortgage Transaction,” to the Consolidated
Financial Statements). These proceeds were used to fund the
additional amount of True Value’s operating activities that were
not covered by its investing activities, as well as a reduction of
debt and payment of the patronage dividend.
True Value’s net working capital at December 29, 2007, Decem-
ber 30, 2006 and December 31, 2005, was $147,846, $123,993
and $139,769, respectively. The current ratio at December 29,
2007, December 30, 2006 and December 31, 2005, was 1.37,
1.31 and 1.31, respectively. The increase in both True Value’s net
working capital and current ratio in 2007 compared to 2006 was
primarily due to its revolving credit facility being classified
entirely as long-term debt as a result of lower total debt.
True Value’s management believes that its cash from operations
and existing Bank Facility will provide sufficient liquidity to meet
its working capital needs, planned capital expenditures and debt
obligations due to be repaid in 2008. The Bank Facility should
provide sufficient liquidity for future needs until it expires in 2011.
CRITICAL ACCOUNTING POLICIES
True Value’s significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements.
The financial statements have been prepared in conformity
with accounting principles generally accepted in the United
States of America and, accordingly, include amounts based on