True Value 2010 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operation
6 True Value Company
lower fuel costs, rates and lower volume this year compared to
the prior year. Second, gross margin on delivery of product to the
members improved by $5,290 as compared to the prior year, as
a result of True Value no longer absorbing a portion of the costs
in 2009. Third, lower subsidy of $2,566 due to lower volume of
color centers to members this year compared to 2008. Fourth,
product margin rates were higher by $1,826. The 2009 increased
product margin rates were primarily the result of inflationary
price increases passed onto the membership in the second half
of 2008. Fifth, change in inventory reserves was favorable by
$1,695 primarily due to lower levels of inventory. The remaining
favorability was predominately related to net improvements in
miscellaneous programs and events with certain vendors in 2009
compared to 2008.
Logistics and $ Expense
manufacturing expenses 2009 2008 (Decrease)
For the Year Ended $57,876 $61,438 $(3,562)
Percent to Net Revenue 3.2% 3.1%
Logistics and manufacturing expenses decreased by $3,562, or
5.8%, as compared to the prior year primarily due to lower direct
warehouse wages and lower fixed costs.
Selling, general and $ Expense
administrative expenses 2009 2008 (Decrease)
For the Year Ended $92,784 $93,913 $(1,129)
Percent to Net Revenue 5.1% 4.7%
SG&A expenses decreased by $1,129, or 1.2%, as compared to
the prior year. SG&A expenses decreased predominately due
to lower overall expenses on items including outside services,
rents and leases, severance, software maintenance, travel and
various other favorable items. In addition, True Value’s 2008 fis-
cal year included a 53rd week of salaries and related benefits of
$1,256 compared to 2009 which only included 52 weeks. Partially
offsetting these favorable SG&A variances were a 2008 favorable
vacation policy adjustment of $2,500 and a 2008 net favorable
adjustment to an arbitration matter of $3,007 that did not reoc-
cur in 2009. In addition, the overall achievement of performance
targets was higher in 2009 resulting in higher incentive expense
of $1,723 and bad debt expense was higher by $2,100 due to
additional reserves on high-risk members.
$ Expense
Interest expense 2009 2008 (Decrease)
Third-parties $3,168 $5,435 $(2,267)
Percent to Net Revenue 0.2% 0.3%
Third-party interest expense decreased by $2,267, or 41.7%, as
compared to the prior year. This decrease in expense was due
to both lower Bank Facility interest rates and a lower average
outstanding debt level. True Value’s average interest rate and
daily outstanding debt level were lower by 2.4% and $32,967,
respectively, compared to 2008.
$ Net
Margin
Net margin 2009 2008 Increase
For the Year Ended $65,446 $64,228 $1,218
Percent to Net Revenue 3.6% 3.2%
The 2009 Net margin of $65,446 increased by $1,218, or 1.9%, from
the 2008 Net margin of $64,228 for reasons as discussed above.
liquidity and capital resOurces
True Value generated cash of $44,563, $94,321 and $44,318 from
operating activities for 2010, 2009 and 2008, respectively. The
decrease in cash generated from operating activities in 2010
compared to 2009 was primarily due to an increase in accounts
and notes receivable of $30,212 and an increase in inventory
levels of $16,431. The increase in accounts and notes receivable
was primarily due to a higher level of promotional sales with
extended dating terms and the higher inventory levels were
driven by increased import purchases for seasonal and promo-
tional product. 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. In 2009, True Value lowered inventory levels as a result
of the lower sales volume while improving fill rates to 96.0%.
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. Although year-end
account balances fluctuate from year to year, the low point for
accounts receivable, inventory and accounts payable is generally
during the month of December. Cash needed to meet accounts
payable obligations will be provided by cash generated from col-
lections of accounts receivable and from future sales of inventory.
True Value used cash for investing activities in 2010, 2009 and
2008 of $14,510, $6,195 and $12,669, respectively. Investing
activities primarily consist of capital expenditures. In 2010, the
increase in cash used for investing activities was mainly due to
the carry-over of capital spending that was deferred from 2009
due to the economic recession. In 2009, the decrease in cash
used for investing activities was mainly due to information system
enhancements related to True Value’s implementation of its new
merchandising system in 2008 that did not reoccur at the same
level in 2009 and the general deferral of 2009 capital spending
due to the economic recession.
($ in thousands)