True Value 2009 Annual Report Download - page 21

Management’s Discussion and Analysis
of Financial Condition and Results of Operation
6 True Value Company
Selling, general and $ Expense
administrative expenses 2008 2007 (Decrease)
For the Year Ended $93,913 $101,160 $(7,247)
Percent to Net Revenue 4.7% 5.0%
SG&A expenses decreased by $7,247, or 7.2%, as compared
to the prior year. SG&A expenses decreased primarily due to
lower achievement of performance targets resulting in lower
incentive expense of $5,123, a net favorable adjustment to an
arbitration matter of $3,007 and a favorable vacation policy
adjustment of $2,500 in 2008 compared to same period last
year. In addition, DTV model store expenses primarily related
to development and marketing were lower by $2,352. Partially
offsetting these decreases were higher bad debt expense of
$2,091 due to additional reserves on high-risk members, higher
salary and wages of $1,653 primarily related to merit increases,
higher health benefits of $1,609 and the 53rd week of salaries and
related benefits included in True Value’s 2008 fiscal year of $1,256.
$ Expense
Interest expense 2008 2007 (Decrease)
Third-parties $5,435 $8,081 $(2,646)
Percent to Net Revenue 0.3% 0.4%
Third-party interest expense decreased by $2,646, or 32.7%,
as compared to the prior year. This decrease in expense was
primarily due to lower average Bank Facility interest rates of
approximately 2.3%.
$ Net
Margin
Net margin 2008 2007 Increase
For the Year Ended $64,228 $63,767 $461
Percent to Net Revenue 3.2% 3.1%
The 2008 Net margin of $64,228 increased by $461, or 0.7%, from
the 2007 Net margin of $63,767 for reasons as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
True Value generated cash of $94,321, $44,318 and $64,666 from
operating activities for 2009, 2008 and 2007, respectively. The
increase in cash generated from operating activities in 2009
compared to 2008 was primarily due to the continued level of
profitability and a decrease in inventory levels of $22,854. True
Value lowered inventory levels as a result of the lower sales vol-
ume while improving fill rates to 96.0%. The decrease in cash
generated from operating activities in 2008 compared to 2007
was primarily due to the decrease in accounts payable of $46,659
partially offset by a decrease in accounts receivable of $13,132.
The decrease in accounts payable was primarily a result of lower
product purchases and the decrease in accounts receivable was
mainly due to the 53rd week of collections that exceeded the
53rd week of sales in True Value’s 2008 fiscal year.
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 pay-
able is generally during the month of December. 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 2009, 2008 and
2007 of $6,195, $12,669 and $17,353, respectively. Investing activ-
ities primarily include capital expenditures. The decrease in cash
used for investing activities was mainly due to information system
enhancements related to True Value’s implementation of its new
merchandising system in 2008 that did not reoccur at the same
level in 2009 and the general deferral of 2009 capital spending
due to the economic recession.
The net excess cash generated from operating and investing
activities in 2009, 2008 and 2007 was used primarily for financing
activities, which used cash of $68,458, $30,799 and $48,198 for
2009, 2008 and 2007, respectively. In particular, True Value used
cash for payment of the patronage dividend and the redemption
of Class A and Class B common stock in 2007, 2008 and 2009, and
applied the net excess cash provided by operating and invest-
ing activities to reducing its debt in 2007 and 2009.
True Value’s net working capital at January 2, 2010, January 3, 2009
and December 29, 2007, was $174,712, $186,637 and $155,638,
respectively. The current ratio at January 2, 2010, January 3, 2009
and December 29, 2007, was 1.54, 1.56 and 1.39, respectively.
The decrease in both True Value’s net working capital and cur-
rent ratio in 2009 compared to 2008 was primarily due to lower
inventory levels as a result of the lower product purchases par-
tially offset by higher cash and cash equivalents. The increase in
both True Value’s net working capital and current ratio in 2008
compared to 2007 was primarily due to lower accounts payable
as a result of the lower product purchases partially offset by lower
accounts receivable as a result of the 53rd week of collections
exceeding the 53rd week of sales.
($ in thousands)