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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
Commission file number 1-5571
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RADIOSHACK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1047710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Throckmorton Street, Suite 1800, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 415-3700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, par value $1 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
As of March 18, 2003, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $3,199,637,812 based on the New York Stock
Exchange closing price.
As of March 18, 2003, there were 169,563,463 shares of the registrant's Common
Stock outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are
incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS.
GENERAL
RadioShack Corporation was incorporated in Delaware in 1967. We primarily engage
in the retail sale of consumer electronic goods and services through our
RadioShack(R) store chain. Our strategy is to dominate cost-effective solutions
to meet everyone's routine electronics needs and families' distinct electronics
wants. Throughout this report, the terms "our," "we," "us" and "RadioShack"
refer to RadioShack Corporation, including its subsidiaries.
At December 31, 2002, we operated 5,161 company stores located throughout the
United States, as well as Puerto Rico and the U.S. Virgin Islands. These stores
average approximately 2,400 square feet and are located in major malls and strip
centers, as well as individual storefronts. Each location carries a broad
assortment of both private label and third-party branded products. Our product
lines include electronic parts, batteries and accessories; wireless and
conventional telephones; audio and video equipment; direct-to-home ("DTH")
satellite systems; and personal computers and related products, as well as
specialized products such as home air cleaners and unique toys. We also provide
consumers access to third-party services such as cellular and PCS phone and DTH
satellite activation, long distance telephone service, prepaid wireless airtime
and extended service plans. At December 31, 2002, we also had a network of 2,052
dealer/franchise outlets, including 58 located outside of the U.S. These outlets
provide private label and third-party branded products and services to smaller
communities. The dealers are generally engaged in other retail operations and
augment their businesses with our products and service offerings. Our sales
derived outside of the United States are not material.
Retail Support Operations. Our retail stores, along with our dealer outlets, are
supported by an established infrastructure. Below are the major components of
this support structure.
RadioShack International Procurement Limited Partnership ("RSIP") - RSIP,
which is owned by us, serves our wide-ranging international import/export,
sourcing, evaluation, logistics and quality control needs. While the
majority of RSIP's activities support our business, they also provide
services for outside customers.
Consumer Electronics Manufacturing - We operate seven manufacturing
facilities in the United States and one overseas manufacturing operation in
the Asia Pacific region. These eight manufacturing facilities employed
approximately 2,700 employees as of December 31, 2002. We manufacture a
variety of products, primarily sold through our retail outlets, including
telephony, antennas, wire and cable products, and a wide variety of "hard
to find" parts and accessories for consumer electronics products.
RadioShack.com - Products, services and information are available through
our Web site www.radioshack.com. Online customers can purchase, return or
exchange products available on our Web site or at their neighborhood
RadioShack location.
RadioShack Customer Support - Using state-of-the-art telephone and data
networks, RadioShack Customer Support responds to more than 5.6 million
phone calls and emails annually. The responses include answers to
customers' unique requests for hard to find parts, batteries and
accessories, customer service inquiries and direct sales requests related
to our Web site and retail stores.
RadioShack Installation Services ("RSIS") - RSIS, through its 47 field
offices located in 25 states, designs, installs and maintains cabling
systems for the transmission of video, voice and data, primarily for home
use. RSIS, also known as AmeriLink Corporation ("AmeriLink"), provides
these services to both RadioShack and other outside parties. Services for
RadioShack consist primarily of customer DTH satellite system
installations, but also include installations relating to broadband
Internet access.
RadioShack Service Centers - We maintain a service and support network to
service the consumer electronics and personal computer retail industry in
the U.S. At December 31, 2002, we had 47 RadioShack Service Centers in the
U.S. and one in Puerto Rico that repair name brand and private label
products sold through our various sales channels. We are also a
vendor-authorized service provider for such leading manufacturers as
Compaq, Sony, Hewlett-Packard, RCA/Thomson, Kyocera, Nokia, Samsung and LG
Electronics, among others. We also perform repairs for third-party service
centers and extended service plan providers.
RadioShack Technology Services ("RSTS") - Our management information system
architecture is composed of a distributed, online network of computers that
links all stores, customer channels, delivery locations, service centers,
credit providers, distribution facilities and our corporate offices into a
fully integrated system. Each store has its own server to support the point
of sale system. The majority of our company stores communicate through a
broadband network, which provides efficient access to customer support
data. This design also allows store management to track sales and/or
inventory at the product, customer or sales associate level. RSTS provides
the majority of our programming and systems analysis needs. In March 2003,
RSTS combined with our People department to become "Organizational Enabling
Services."
Regional Distribution Centers - We have seven distribution centers that
ship over one million cartons each month to our retail stores and
dealer/franchise outlets. Two of these distribution centers also serve as
fulfillment centers for our online purchasers.
SEASONALITY
As with other retailers, our net sales and operating revenues, operating profits
and cash flows are proportionally greater during the winter holiday season than
during other periods of the year. There is a corresponding pre-seasonal
inventory build-up, which requires working capital related to the anticipated
increased sales volume. This is further discussed below under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A") in the section titled "Cash Flow and Liquidity." Also, see Note 28 of
the "Notes to Consolidated Financial Statements" for our quarterly data. We
expect such seasonality to continue.
PATENTS AND TRADEMARKS
We own or are licensed to use many trademarks and service marks related to our
business in the United States and in foreign countries. Radio Shack, RadioShack,
RadioShack.com, and "You've got questions. We've got answers." are some of the
marks most widely used by us. We believe that the RadioShack name and marks are
well recognized by consumers and that the name and marks are associated with
high-quality service. Our private label manufactured products are sold primarily
under the RadioShack trademark. We also own various patents relating to
electronic products designed and manufactured by us. We believe that the loss of
the RadioShack name and RadioShack marks would be material to our business.
SUPPLIERS AND BRANDED RELATIONSHIPS
Our business strategy depends, in part, upon our ability to offer private label
and third-party branded products, as well as third-party services, to our
customers. We utilize a large number of suppliers located in various parts of
the world to obtain raw materials and private label merchandise. We obtain
approximately 66% of our products domestically, which accounted for
approximately 65% of our cost of products sold in 2002. We do not expect a lack
of availability of raw material or any single private label product to have a
material impact on our operations. We have formed vendor and third-party service
provider relationships with well-recognized companies, and in the aggregate,
certain of these relationships are important to our business and the loss of or
disruption in supply from them could have a material adverse effect on our net
sales and operating revenues. Additionally, we have been limited from time to
time by various vendors and suppliers strictly on an economic basis, where
demand has exceeded supply. In the aggregate, these relationships have or are
expected to have a significant impact on both our operations and financial
strategy. Our vendor and third-party relationships include the following
companies:
Compaq Computer Corporation ("Compaq") - Compaq is the sole supplier of
both desktop and laptop personal computers sold through our retail stores,
participating dealer/franchise outlets and on our Web site.
DIRECTV, Inc. ("DIRECTV") - We have a non-exclusive sales agency agreement
with DIRECTV to sell DTH satellite systems and acquire subscribers for the
multi-channel audio/video programming direct broadcast satellite services
of DIRECTV in the U.S. We purchase DIRECTV compatible satellite receivers
from Thomson Multimedia.
EchoStar Satellite Corporation ("DISH Network") - We have a sales incentive
agreement with DISH Network to acquire subscribers for the multi-channel
audio/video programming direct broadcast satellite services of DISH Network
in the U.S. This agreement allows us to provide our customers with an
additional offering in DTH satellite services.
Sprint Communications Company and Sprint PCS ("Sprint") - Through our
telecommunications relationship with Sprint, our customers have access to
wireless PCS telephones and service, prepaid calling cards and long
distance telephone service, as well as residential telephones and related
telephony products.
Thomson Multimedia ("Thomson") - Thomson, which owns the RCA brand,
supplies us with various RCA-branded audio and video components such as
televisions, DTH satellite systems (to support our DIRECTV arrangement),
VCRs, camcorders, DVD players, CD shelf systems and other digital
entertainment products.
Verizon Wireless ("Verizon") - Our relationship with the nation's largest
wireless communications service provider permits approximately 4,300
company stores to have a multiyear agreement with a single cellular service
provider, which creates training, marketing, inventory, repair and other
supply-chain synergies. We continue to offer cellular service in our other
retail outlets through various cellular carriers in areas not covered by
Verizon.
BACKLOG ORDERS
We have no material backlog of orders for the products or services that we sell.
COMPETITION
Due to rising consumer demand for wireless communications products and services,
as well as rapid consumer acceptance of new digital technology products, the
consumer electronics retail business continues to be highly competitive,
primarily driven by technology and product cycles.
In the consumer electronics retailing business, competitive factors include
price, product availability, quality and features, consumer services,
manufacturing and distribution capability, brand reputation and the number of
competitors. We compete in the sale of our products and services with several
retail formats. Consumer electronics retailers include both Circuit City and
Best Buy/MusicLand. Department and specialty stores, such as Sears and The Home
Depot, compete on a more select product category scale. Sprint and Verizon
compete directly with us in the wireless department through their own retail and
online presence. Mass merchants such as Wal-Mart and Target and other
alternative channels of distribution, such as mail order and e-commerce, compete
with us on a more widespread basis. Numerous domestic and foreign companies also
manufacture similar products to ours for other retailers, which are sold under
nationally-recognized brand names or private labels.
Management believes we have two primary factors differentiating us from our
competition. The first is our extensive physical retail presence with
approximately 7,200 conveniently located retail outlets in virtually every
neighborhood nationwide. Our specially trained sales staff is capable of
providing cost-effective solutions for our customers' routine electronics needs
and distinct electronics wants, assisting customers with service activation
where applicable, and assisting with the selection of appropriate products and
accessories.
Our relationships with well-recognized companies represent our other
differentiating factor. These relationships with such companies as Sprint,
Verizon, Thomson (RCA) and Compaq, among others, augment the strong position
that we have historically maintained in our core product categories such as
batteries, communications equipment, telephony, antennas, and parts and
accessories. Additionally, we are able to leverage name brand recognition,
marketing efforts and advertising campaigns with these vendors and also create
cross-revenue opportunities for repair service income, residual income, consumer
acquisition fees and rebates.
While we believe we have an effective business strategy, we cannot give
assurance that we will continue to compete successfully in the future, given the
highly competitive nature of the consumer electronics retail business. Also, in
light of the ever-changing nature of the consumer electronics retail industry,
we would be adversely affected if our competitors were able to offer their
products at significantly lower prices. Additionally, we would be adversely
affected if our competitors were able to introduce innovative or technologically
superior products not yet available to us, or if we were unable to obtain
certain products in a timely manner or for an extended period of time.
Furthermore, our business would be adversely affected if we fail to offer
value-added solutions or if our competition enhances their ability to provide
these value-added solutions.
Regarding the expansion of the Internet, we do not believe e-commerce retailers
currently represent significant competition because of our small average ticket
amount and the availability of high demand products in virtually every
neighborhood nationwide. This, however, could change and become significant over
time. We further believe that we are well positioned to meet the increasing
competition from Internet retailers with our www.radioshack.com Web site,
coupled with our extensive physical retail presence, service capabilities and
wide assortment of consumer electronics products.
EMPLOYEES
As of December 31, 2002, we had approximately 39,100 employees. We hired
approximately 11,800 temporary retail employees for the holiday selling season;
however, approximately 6,600 of these temporary employees remained at year-end.
Our employees are not covered by collective bargaining agreements, nor are they
members of labor unions. We consider our relationship with our employees to be
good.
AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and its rules and regulations. The Exchange Act requires us to
file reports, proxy statements and other information with the SEC. Copies of
these reports, proxy statements and other information can be inspected and
copied at:
SEC Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. You may also obtain copies of any material we
have filed with the SEC by mail at prescribed rates from:
Public Reference Section
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0004
You may obtain these materials electronically by accessing the SEC's home page
on the Internet at:
http://www.sec.gov
In addition, we make available, free of charge, on our Internet Web site, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file this material with, or furnish it to, the SEC. You may
review these documents, under the heading "Investor Relations," by accessing our
Web site:
http://www.radioshackcorporation.com
Also, reports and other information concerning us are available for inspection
and copying at:
New York Stock Exchange
20 Broad Street
New York, New York 10005
ITEM 2. PROPERTIES.
Information on our properties is located in MD&A and the financial statements
included in this Form 10-K and is incorporated into this Item 2 by reference.
The following items are discussed further on the referenced pages:
Page
Retail Outlets.......................... 11
Property, Plant and Equipment........... 40
Commitments and Contingent Liabilities... 46
We lease, rather than own, most of our retail and service center facilities. Our
stores are located primarily in major shopping malls, stand-alone buildings or
shopping centers owned by other entities. We lease all of the property on which
our executive offices are located in downtown Fort Worth, Texas, one
distribution center in the United States, and six administrative offices and one
manufacturing plant in the Asia Pacific region. RSIS headquarters and field
offices are also leased. We own the property on which the other six distribution
centers are located and all of our manufacturing facilities located throughout
the United States. We also beneficially own land purchased in 2001 in Fort
Worth, Texas, on which our new corporate headquarters is being constructed. This
land is currently held on our behalf by a local development agency operated by
the City of Fort Worth to facilitate various incentive programs provided by the
city.We periodically review our existing distribution centers and office
facilities to determine if these spaces are adequate to meet our needsfor the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
We have various pending claims, lawsuits, disputes with third parties,
investigations and actions incident to the operation of our business. Although
occasional adverse settlements or resolutions may occur and negatively impact
earnings in the year of settlement, it is our opinion that their ultimate
resolution will not have a materially adverse effect on our financial condition
or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT (SEE ITEM 10 OF PART III).
The following is a list of our executive officers and their ages, positions and
length of service with us as of March 18, 2003.
Position Years with
Name (Date Elected to Current Position) Age Company
---- --------------------------------- --- -------
Leonard H. Roberts Chairman of the Board (May 1999) and 54 9 (1)
Chief Executive Officer (January 1999)
David J. Edmondson President and Chief Operating Officer 44 8 (2)
(December 2000)
Evelyn V. Follit Senior Vice President - Organizational Enabling Services 56 5 (3)
(March 2003) and Chief Information Officer (October 1998)
Mark C. Hill Senior Vice President (October 1998), Corporate 51 6 (4)
Secretary and General Counsel (July 1997)
Laura K. Moore Senior Vice President - Public Relations and Corporate 40 4 (5)
Communications (October 2000)
Michael D. Newman Senior Vice President and Chief Financial 46 2 (6)
Officer (May 2001)
There are no family relationships among the executive officers listed, and there
are no arrangements or understandings under which any of them were appointed as
executive officers. All executive officers of RadioShack Corporation are
appointed by the Board of Directors annually to serve for the year, or until
their successors are appointed. All of the executive officers listed above have
served RadioShack in various capacities over the past five years, except for Mr.
Newman and Ms. Moore.
(1) Mr. Roberts was elected Chairman of the Board and Chief Executive Officer
of RadioShack Corporation effective May 1999. Mr. Roberts was President of
RadioShack Corporation from December 1995 until December 2000 and President
of the RadioShack division from July 1993 until December 2000.
(2) Mr. Edmondson served as Senior Vice President, RadioShack Corporation, and
Executive Vice President and Chief Operating Officer of the RadioShack
division from October 1998 to December 2000, prior to his appointment as
President and Chief Operating Officer, RadioShack Corporation. Mr.
Edmondson served as Senior Vice President of Marketing and Advertising of
the RadioShack division from November 1995 to October 1998.
(3) Ms. Follit served as Vice President and Chief Information Officer,
RadioShack Corporation, from July 1998 to May 1999, when she was appointed
Senior Vice President and Chief Information Officer, RadioShack
Corporation. Ms. Follit served as Vice President of Human Capital for
RadioShack Corporation from October 1997 to July 1998. In March 2003, she
also was appointed Senior Vice President - Organizational Enabling
Services.
(4) Mr. Hill served as Vice President, Corporate Secretary and General Counsel,
RadioShack Corporation, from July 1997 to October 1998, when he was
appointed Senior Vice President, RadioShack Corporation. He continues to
serve as our Corporate Secretary and General Counsel.
(5) Ms. Moore served as Vice President - Corporate Communications and Public
Relations for RadioShack Corporation from November 1998 to October 2000,
when she was appointed Senior Vice President - Public Relations and
Corporate Communications, RadioShack Corporation. Prior to joining
RadioShack Corporation, she was employed by Zale Corporation (a specialty
retailer of jewelry) where she served as Vice President, Corporate
Communications from 1995 to 1998.
(6) Mr. Newman has served as Senior Vice President and Chief Financial
Officer, RadioShack Corporation, since May 2001. Prior to joining
RadioShack Corporation, he was Vice President and Chief Financial Officer
of Intimate Brands, Inc. (a retailer of women's apparel and care products)
from June 2000 to December 2000, and Vice President and Chief Financial
Officer of Hussmann International, Inc. (a manufacturer of merchandising
equipment and refrigeration systems) from 1996 to 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the New York Stock Exchange and trades under the
symbol "RSH." The following table presents the high and low trading prices for
our common stock, as reported in the composite transactions quotations of
consolidated trading for issues on the New York Stock Exchange, for each quarter
of the two years ended December 31, 2002.
Dividends Dividends
Quarter Ended High Low Declared Paid
------------- ---- --- -------- ----
December 31, 2002 $ 24.72 $ 16.99 $ 0.220 $ 0.220
September 30, 2002 30.25 19.11 -- --
June 30, 2002 36.21 27.50 -- --
March 31, 2002 31.85 26.13 -- --
December 31, 2001 $ 31.60 $ 23.11 $ -- $ 0.055
September 30, 2001 33.85 20.10 0.055 0.055
June 30, 2001 38.50 25.27 0.055 0.055
March 31, 2001 56.50 31.31 0.055 0.055
HOLDERS OF RECORD
At March 18, 2003, there were 31,998 holders of record of our common stock.
DIVIDENDS
The Board of Directors annually reviews our dividend policy. On July 25, 2001,
we announced that we would pay cash dividends on an annual, instead of
quarterly, basis beginning in 2002. Dividends declared in 2002 and thereafter,
if any, are paid annually in December. On October 18, 2002, our Board of
Directors declared an annual dividend of $0.22 per common share. The dividend
was paid on December 19, 2002, to stockholders of record on December 1, 2002.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA (UNAUDITED)
RADIOSHACK CORPORATION AND SUBSIDIARIES
Year Ended December 31,
(Dollars and shares in millions, except per 2002 2001 2000 1999 1998 (1)
share amounts, ratios, outlets and square footage) --------- --------- --------- --------- ---------
Statements of Income Data
Net sales and operating revenues $ 4,577.2 $ 4,775.7 $ 4,794.7 $ 4,126.2 $ 4,787.9
Operating income $ 425.4 $ 359.3 $ 629.7 $ 497.3 $ 134.3
Net income $ 263.4 $ 166.7 $ 368.0 $ 297.9 $ 61.3
Net income available per common share:
Basic $ 1.50 $ 0.88 $ 1.94 $ 1.51 $ 0.28
Diluted $ 1.45 $ 0.85 $ 1.84 $ 1.43 $ 0.27
Shares used in computing earnings per common share:
Basic 173.0 183.8 187.3 194.2 201.2
Diluted 179.3 191.2 197.7 205.0 211.4
Gross profit as a percent of sales 48.9% 48.1% 49.4% 50.5% 41.9%
SG&A expense as a percent of sales 37.8% 35.9% 34.1% 36.2% 33.0%
Balance Sheet Data
Inventories $ 971.2 $ 949.8 $ 1,164.3 $ 861.4 $ 912.1
Total assets $ 2,227.9 $ 2,245.1 $ 2,576.5 $ 2,142.0 $ 1,993.6
Working capital $ 878.7 $ 887.9 $ 585.8 $ 478.1 $ 419.1
Capital structure:
Current debt $ 36.0 $ 105.5 $ 478.6 $ 188.9 $ 233.2
Long-term debt $ 591.3 $ 565.4 $ 302.9 $ 319.4 $ 235.1
Total debt $ 627.3 $ 670.9 $ 781.5 $ 508.3 $ 468.3
Total debt, net of cash and cash equivalents $ 180.8 $ 269.5 $ 650.8 $ 343.7 $ 403.8
Stockholders' equity $ 728.1 $ 778.1 $ 880.3 $ 830.7 $ 848.2
Total capitalization $ 1,355.4 $ 1,449.0 $ 1,661.8 $ 1,339.0 $ 1,316.5
Long-term debt as a % of total capitalization 43.6% 39.0% 18.2% 23.9% 17.9%
Total debt as a % of total capitalization (2) 46.3% 46.3% 47.0% 38.0% 35.6%
Book value per common share at year end $ 4.24 $ 4.40 $ 4.74 $ 4.36 $ 4.35
Financial Ratios
Return on average stockholders' equity 35.0% 20.1% 43.0% 35.5% 6.4%
Return on invested capital (3) 16.6% 11.4% 22.1% 26.5% 3.5%
Return on average assets 11.8% 6.9% 15.6% 14.4% 2.8%
Annual inventory turnover 2.4 2.3 2.4 2.3 2.6
Ratio of earnings to fixed charges (4) 4.40 3.28 5.69 5.51 1.84
Other Data
Dividends declared per common share $ 0.220 $ 0.165 $ 0.220 $ 0.205 $ 0.200
Dividends paid per common share $ 0.220 $ 0.220 $ 0.220 $ 0.200 $ 0.200
Capital expenditures $ 106.8 $ 139.2 $ 119.6 $ 102.4 $ 131.5
Number of RadioShack outlets at year end 7,213 7,373 7,199 7,186 7,030
Average square footage per company-owned store 2,400 2,350 2,300 2,300 2,200
Comparable company-owned store sales (decrease)
increase (1%) 1% 11% 12% 7%
This table should be read in conjunction with MD&A and the Consolidated
Financial Statements and related Notes.
(1) Includes operations of Computer City, Inc. for eight months, due to the sale
to CompUSA Inc. on August 31, 1998.
(2) Total debt includes capital leases and TESOP indebtedness. Capitalization is
defined as total debt plus total stockholders' equity.
(3) Return on invested capital is defined as adjusted operating income divided
by invested capital. Adjusted operating income is calculated by adding back
goodwill charges and adding implied interest of 7% on operating leases to
operating income; this total is then reduced by cash income taxes paid to
arrive at adjusted operating income. Invested capital is the sum of working
capital; property, plant and equipment, net; other assets, net; the present
value of operating leases and accumulated goodwill amortization. When
arriving at invested capital, working capital and other assets are reduced
by accounts and notes receivable which we do not consider a normal part of
our business. Return on invested capital is a financial measurement used by
management to measure the return on investment decisions and is not a
substitute for other financial measures calculated in accordance with GAAP.
(4) Earnings used in computing the ratio of earnings to fixed charges consist of
pre-tax earnings and fixed charges. Fixed charges are defined as interest
expense related to debt, amortization expense related to deferred financing
costs, and a portion of rental charges.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("MD&A").
FACTORS THAT MAY AFFECT FUTURE RESULTS
Matters discussed in MD&A and in other parts of this document include
forward-looking statements within the meaning of the federal securities laws.
This includes statements concerning management's plans and objectives relating
to our operations or economic performance and related assumptions.
Forward-looking statements are made based on management's current expectations
and beliefs concerning future events and, therefore, involve a number of risks
and uncertainties. Management cautions that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements. Important factors that could cause
our actual results of operations or financial condition to differ include, but
are not necessarily limited, to the following factors.
General Business Factors
o Changes in the national or regional U.S. economic conditions, including,
but not limited to, recessionary trends, level of the equity markets,
consumer credit availability, interest rates, inflation, consumers'
disposable income and spending levels, job security and unemployment, and
overall consumer confidence;
o continuing terrorist activities in the U.S., as well as the international
war on terrorism;
o the disruption of international, national or regional transportation
systems;
o changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail stores
and alternative methods or channels of distribution, such as e-commerce,
telephone shopping services and mail order;
o the lack of availability or access to sources of inventory;
o changes in the financial markets that would reduce or eliminate access to
longer term capital or short-term credit availability;
o the inability to attract, retain and grow an effective management team in a
dynamic environment or changes in the cost or availability of a suitable
work force to manage and support our service-driven operating strategies;
o the imposition of new restrictions or regulations regarding the sale of
products and/or services we sell or changes in tax rules and regulations
applicable to us;
o the occurrence of severe weather events or natural disasters, which could
destroy outlets or prohibit consumers from traveling to our retail
locations, especially during the peak winter holiday season;
RadioShack Specific Factors
o the failure to differentiate ourselves as an electronics specialty retailer
in the U.S. marketplace;
o the inability to successfully execute our solutions strategy to dominate
cost-effective solutions to meet everyone's routine electronics needs and
families' distinct electronics wants;
o the inability to successfully execute our strategic initiatives, including
our Anchor, Participatory and Opportunistic ("APOS") business model and
emerging sales channels strategies, as well as new business arrangements
which may be formed with other retailers, distributors and third-party
service providers;
o the inability to maintain profitable contracts or execute business plans
with providers of third-party branded products and with service providers
relating to cellular and PCS telephones and direct-to-home ("DTH")
satellite programming;
o the presence or absence of new services or products and product features in
the merchandise categories we sell and unexpected changes in our actual
merchandise sales mix;
o the inability to collect the level of anticipated residual income,
subscriber acquisition fees and rebates for products and third-party
services offered by us;
o the inability to successfully maintain our business arrangements, including
those with Compaq, DIRECTV, DISH Network, Thomson/RCA, Sprint, and Verizon
Wireless;
o contingent lease obligations relating to our discontinued retail operations
arising from a sub-lessee's failure to fulfill its lease commitments; or
o the inability to establish and implement our internal and external supply
chain initiatives.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make
estimates that affect the reported values of assets, liabilities, revenues and
expenses. Our estimates are based on historical experience and various other
factors that we believe to be reasonable under the circumstances, the results of
which form the basis for our conclusions. We continually evaluate the
information used to make these estimates as our business and the economic
environment changes. The use of estimates is pervasive throughout our financial
statements, but the accounting policies and estimates we consider most critical
are as follows:
Revenue Recognition: Our revenue is derived principally from the sale of private
label and third-party branded products and services to consumers. Revenue is
recognized, net of an estimate for customer refunds and product returns, when
delivery has occurred or services have been rendered, the sales price is fixed
or determinable, and collectibility is reasonably assured. Certain products,
such as wireless phones and satellite systems, require the customer to use the
services of a third-party service provider. In most cases, the third-party
service provider will pay us a fee or commission for obtaining a new customer,
as well as a monthly recurring residual amount based upon the ongoing
arrangement between the service provider and the customer. Fee or commission
revenue, net of estimated service disconnects, is generally recognized at the
time the customer is accepted as a subscriber of a third-party service provider.
Residual income is recognized as earned under the terms of each contract with
the service provider, which is typically as the service provider bills its
customer. Different revenues would have been recorded if we had made different
assumptions or evaluations. Material differences could result in the amount and
timing of our revenue for any period if actual returns, sales, fee or commission
revenue adjustments exceed our estimates.
Additionally, our retail operations offer repair service (i.e., non-warranty)
contracts on products sold. These contracts generally provide extended service
coverage for periods ranging from 12 to 60 months. We offer these contracts in
all but three states on behalf of an unrelated third-party obligor. We are not
considered the primary obligor on these contracts. In these circumstances, our
share of commission revenue is recognized as income at the time the contract is
sold. For the contracts offered in the three states where we are the primary
obligor, revenues from the sale of these contracts are recognized ratably over
the term of the contracts. Costs directly related to the sale of such contracts
are deferred and charged to cost of products sold proportionately as the
revenues are recognized. A loss is recognized on extended service contracts if
the sum of the expected costs of providing services pursuant to the contracts
exceeds the related unearned revenue.
Receivables: We record receivables based on the amount of revenue recognized as
described above. Our receivables are primarily comprised of amounts due from
certain vendors, third-party service providers, dealer/franchisees and
commercial customers. The carrying amount of the receivables is continually
evaluated based on the likelihood of collection. An allowance for doubtful
accounts is established for estimated losses resulting from the inability of our
vendors, third-party service providers and customers to make their required
payments. Factors such as these parties' creditworthiness, payment terms,
historical results and economic conditions are considered when making these
decisions. The actual collection of receivables could be different from our
recorded value. If any of these parties' creditworthiness deteriorates beyond
our expectations, or if any of their actual defaults exceed our historical
experience, material charges could be required to our selling, general and
administrative expenses.
Inventory: Inventory is our largest asset class. Our inventory is primarily
comprised of finished goods and is recorded at the lower of cost or market using
the average cost method. We make estimates regarding the carrying value of our
inventory on an item-by-item basis. If the amount we expect to receive from the
sale of the inventory is less than its cost, we write down the cost of the
inventory to its estimated realizable value based on assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, or if unexpected changes in technology
affect demand for certain products, we could be exposed to losses in excess of
our established reserves.
Accrued Expenses: The amount of liability we record for claims related to self
insurance, warranty and pending litigation requires us to make judgments about
the amount of expenses that will ultimately be incurred. We use our past history
and experience, as well as other specific circumstances surrounding these
claims, in evaluating the amount of liability that we should record. Actual
results may be materially different from these estimates. As additional
information becomes available, we assess the potential liability related to our
various claims and revise our estimates as appropriate. Such revisions could
materially impact our results of operations and financial position.
Income Taxes: We are subject to income taxes in many jurisdictions, including
the U.S., states and localities, and abroad. We must first determine which
revenues and expenses should be included in each taxing jurisdiction. This
process involves the estimation of our actual current tax exposure, together
with the assessment of temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences in the timing of
deductions result in deferred tax assets and liabilities that are recorded on
our balance sheet. If different judgments had been used, our tax liability could
have been materially different. If we prevail in matters for which accruals have
been established or are required to settle matters in excess of established
accruals, our effective tax rate for a particular period could be materially
affected. Furthermore, if our actual results differ from estimated results or if
we adjust our estimates in the future such that we would not expect to realize
all or part of our net deferred tax assets, we may need to establish a valuation
allowance against our deferred tax assets, also potentially impacting our
effective tax rate.
RETAIL OUTLETS
The table below shows our retail locations broken down between company and
dealer/franchise outlets. While the dealer outlets represent approximately 28%
of the RadioShack locations, sales to dealer/franchisees are less than 10% of
our total net sales and operating revenues (see "Results of Operations" below).
Average December 31,
Store Size ----------------------------------
(Sq. Ft.) 2002 2001 2000
- --------------------------------------------------------------------------------
Company 2,423 5,161 5,127 5,109
Cool Things @ Blockbuster (1) N/A --- 127 ---
Dealer/franchise N/A 2,052 2,119 2,090
------- ------- -------
7,213 7,373 7,199
======= ======= =======
(1) Test stores closed in early 2002.
In addition to our 5,161 company stores and 2,052 dealer/franchise outlets, our
existing and emerging sales channels include our www.radioshack.com Web site and
catalog operations, as well as sophisticated outbound and inbound telephone call
centers.
Space Owned and Leased
Approximate Square Footage
at December 31,
------------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
(In thousands) Owned Leased Total Owned Leased Total
- ----------------------------------------------------------------------------------------------------
Retail
RadioShack 18 12,486 12,504 18 12,268 12,286
Support Operations
Manufacturing 502 201 703 502 201 703
Distribution centers
and office space 3,022 2,481 5,503 3,176 2,927 6,103
------- -------- -------- ------- --------- -------
3,542 15,168 18,710 3,696 15,396 19,092
======= ======== ======== ======= ========= =======
RESULTS OF OPERATIONS
Net sales and operating revenues by channel of distribution are as follows:
Year Ended December 31,
-------------------------------
(In millions) 2002 2001 2000
- ------------- -------- -------- --------
Company retail sales $4,268.7 $4,280.7 $4,200.0
Dealer/franchise sales 223.9 365.4 422.6
-------- -------- --------
Total retail sales 4,492.6 4,646.1 4,622.6
Retail support operations sales 84.6 129.6 172.1
-------- -------- --------
Net sales and operating revenues $4,577.2 $4,775.7 $4,794.7
======== ======== ========
The following table provides a summary of our retail sales from company stores,
dealers and other channels by department and as a percent of total
retail sales (excluding retail support operation sales as described below).
Percent of RadioShack Retail Sales
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Wireless communication $1,408.1 31.3% $1,286.6 27.7% $1,123.5 24.3%
Wired communication 380.4 8.5 384.8 8.3 421.4 9.1
Radio communication 120.6 2.7 132.0 2.8 144.3 3.1
Home entertainment 854.0 19.0 1,122.3 24.2 1,123.3 24.4
Computer 457.5 10.2 461.1 9.9 550.9 11.9
Power and technical 623.9 13.9 618.7 13.3 606.5 13.1
Personal electronics, toys
and personal audio 576.2 12.8 561.9 12.1 593.8 12.8
Service plans, repair and
other 71.9 1.6 78.7 1.7 58.9 1.3
---------------- ---------------- ---------------
Total retail sales $4,492.6 100.0% $4,646.1 100.0% $4,622.6 100.0%
================ ================ ===============
See the preceding table for a reconciliation of total retail sales to our total
net sales and operating revenues, presented in accordance with GAAP.
2002 COMPARED WITH 2001
NET SALES AND OPERATING REVENUES
Sales decreased approximately 4.2% to $4,577.2 million in 2002 from $4,775.7
million in 2001. This decrease was primarily the result of a 35.3% decline in
sales to our dealer/franchise outlets in 2002, mainly due to the decline in DTH
unit sales. In addition, we also had a 1% decrease in comparable company store
sales due primarily to the decline of DTH unit sales and desktop computers, but
offset by sales increases in wireless handsets and related accessories.
Additionally, the number of company stores decreased slightly due to the closure
of 127 Cool Things @ Blockbuster test stores in early 2002, despite the opening
of 34 company stores, net of store closures. We expect a sales gain for 2003 as
discussed in further detail below.
Retail support operations sales are generated from the outside sales of our
retail support operations, consisting primarily of RadioShack Installation
Services ("RSIS"), repair centers, and domestic and overseas manufacturing. The
34.7% decrease in retail support operations sales from 2001 to 2002 primarily
resulted from a $19.1 million decrease in 2002 domestic manufacturing sales, due
to large Verizon fixture sales in 2001, and a $15.2 million decrease in RSIS
sales as a result of our exit from the national commercial installation business
at the end of 2001.
Sales in the wireless communication department, which is made up of wireless
handsets (including related services), accessories, and wireless services such
as prepaid airtime and bill payments, increased 9.4% in dollars and increased to
31.3% of our total retail sales in 2002 from 27.7% in 2001. This sales increase
was due to an increase in sales of wireless handsets and accessories which
resulted from our emphasis on national carrier offerings with desirable product
features and content, such as color screens, photo capability and Internet
access. Although we have previously experienced sales gains in this department,
we realize that the overall wireless industry is experiencing a slow-down in net
new customer activations. While there is no assurance that we can maintain these
sales gain levels, we believe our plans, if executed successfully, will result
in wireless sales increases.
Sales in the wired communication department, which includes residential
telephones, answering machines and other related telephony products, decreased
1.1% in dollars and increased slightly as a percentage of our total retail sales
to 8.5% in 2002 from 8.3% in 2001. Increased sales of cordless telephones were
more than offset by decreased sales of corded telephones. We anticipate sales in
this department will be relatively stable in 2003.
Sales in the radio communication department decreased 8.6% in dollars and
decreased slightly as a percentage of our total retail sales to 2.7% in 2002
from 2.8% in 2001. The decrease in this department was primarily the result of a
decrease in Family Radio Service ("FRS") and CB radio sales, scanner sales and
communication accessories, partially offset by a sales increase in GPS devices.
We believe that this department will experience a small sales gain in 2003 over
the prior year due to the anticipated introduction of new models in the second
half of the year.
Sales in the home entertainment department, which consists of all home audio and
video end-products and accessories, including DTH hardware and installation,
decreased 23.9% in dollars and decreased as a percentage of our total retail
sales to 19.0% in 2002 from 24.2% in 2001. Substantially all of the dollar
decrease was attributable to a decrease in sales of satellite dishes and related
installations. This decrease was partially offset by increased sales of DVD
players. We expect that satellite dish sales will continue to decline in 2003,
but at a reduced rate, as compared to the prior year. We anticipate that the
other categories within the home entertainment department will have gains to
offset this decline, resulting in overall flat sales in this department for
2003.
Sales in the computer department, which includes desktop, laptop, handheld
computers and related accessories, in addition to digital cameras and home
networking products, decreased slightly in dollars and increased as a percentage
of our total retail sales to 10.2% in 2002 from 9.9% in 2001. These sales
dollars were maintained primarily due to an increase in laptop computers,
computer accessories and digital camera sales, offset by a decline in unit sales
of desktop CPUs and monitors. We expect that sales in the computer department
will increase in 2003, driven by sales of the products discussed above,
particularly digital cameras and related accessories, with this increase
partially offset by a planned decrease in sales of desktop computers.
Sales in the power and technical department increased 0.8% in dollars and also
as a percentage of our total retail sales to 13.9% in 2002 from 13.3% in 2001.
These increases were primarily due to increased sales of general and special
purpose batteries, partially offset by decreased sales of bulk and packaged wire
and technical parts. We anticipate a slight sales increase in this department in
2003.
Sales in the personal electronics, toys and personal audio department increased
2.5% in dollars, as well as increasing as a percentage of our total retail sales
to 12.8% in 2002 from 12.1% in 2001, due primarily to increased sales of micro
radio controlled cars and related accessories, in addition to unique giftables.
We expect that sales in this department will continue to grow in 2003 as a
result of our additional name brand product offerings and our product line
increases in these areas.
GROSS PROFIT
Gross profit for 2002 was $2,238.3 million or 48.9% of net sales and operating
revenues, compared with $2,296.8 million or 48.1% of net sales and operating
revenues in 2001. Gross profit decreased $58.5 million or 2.5% in 2002,
primarily as a result of a 4.2% decrease in net sales and operating revenues.
Despite this decrease in gross profit dollars, the gross profit percentage
increased from 48.1% to 48.9% in 2002, due primarily to an increase in the gross
profit percentage in the home entertainment department and, to a lesser extent,
increases in both the power and technical and computer departments' gross profit
percentages.Our gross profit percentage increase was partially offset by
reductions in both the wireless and wired departments' gross profit percentages,
compounded by the increase in the wireless communication department's percent of
total retail sales. The reduction in gross profit dollars was partially offset
by a decrease in the total retail sales mix for the home entertainment
department, which has a lower gross profit percentage than our overall average
gross profit percentage, as well as an increase in gross profit dollars for the
power and technical department. Additionally, the gross profit percentage
improved for our retail support operations in 2002. We anticipate that gross
profit as a percentage of net sales and operating revenues will improve by the
end of 2003, when compared to 2002, enhanced by sales mix changes towards higher
margin products, such as computer accessories, batteries, toys, and personal
audio and electronics, and also enhanced by improved efficiencies realized from
supply chain management initiatives, particularly in vendor relations and
end-of-life inventory management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The table below summarizes the breakdown of various components of our
consolidated selling, general and administrative ("SG&A") expense and its
related percentage of total net sales and operating revenues.
Year Ended December 31,
---------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
% of % of % of
Sales & Sales & Sales &
(In millions) Dollars Revenues Dollars Revenues Dollars Revenues
- ------------------------------------------------- ----------------- -----------------
Payroll and commissions $ 728.0 15.9% $ 740.3 15.5% $ 748.7 15.6%
Rent 244.9 5.4 230.3 4.8 215.2 4.5
Advertising 241.0 5.3 253.9 5.3 227.1 4.7
Other taxes 105.9 2.3 111.8 2.4 98.6 2.1
Utilities and telephone 74.9 1.6 73.2 1.5 69.4 1.4
Insurance 71.0 1.6 60.6 1.3 56.4 1.2
Credit card fees 35.8 0.8 34.9 0.7 31.7 0.7
California lawsuit settlement 29.0 0.6 -- -- -- --
Stock purchase
and savings plans 20.8 0.5 20.3 0.4 22.8 0.5
Repairs and maintenance 12.0 0.3 11.4 0.2 11.6 0.2
Printing, postage and office
supplies 10.5 0.2 12.2 0.3 13.6 0.3
Travel 9.6 0.2 10.4 0.2 13.8 0.3
Loss on real estate
sub-lease 6.0 0.1 -- -- -- --
Bad debt 4.7 0.1 14.5 0.3 3.6 0.1
Store closing costs -- -- 7.6 0.2 -- --
Other 134.5 2.9 132.5 2.8 120.1 2.5
----------------- ----------------- -----------------
$1,728.6 37.8% $1,713.9 35.9% $1,632.6 34.1%
================= ================= =================
Our SG&A expense increased 0.9% in dollars and increased as a percent of net
sales and operating revenues to 37.8% for the year ended December 31, 2002, from
35.9% for the year ended December 31, 2001. The dollar increase for 2002 was
primarily due to a $29.0 million litigation charge related to the settlement of
a class action lawsuit in California and a $6.0 million charge to our 1996
restructuring reserve as a result of the bankruptcy of a sub-lessee in a former
Incredible Universe store site. A $14.6 million increase in our rent expense and
lower overall sales in 2002 also contributed to a higher SG&A expense ratio.
This was partially offset by a $7.6 million charge for store closing costs from
2001, which did not reoccur in 2002.
Payroll expense decreased by $12.3 million to $728.0 million in 2002, but
increased slightly as a percent of net sales and operating revenues to 15.9% in
2002, compared to 15.5% in 2001. The decrease in dollars was due primarily to
our reduction in headcount during the third quarter of 2001.
Rent expense increased by $14.6 million to $244.9 million in 2002 and increased
as a percent of net sales and operating revenues to 5.4% in 2002 from 4.8% in
2001. These increases were due primarily to lease renewals and relocations at
higher rates, as well as a slight increase in the average store size. We expect
a similar increase in 2003 rent for the same reasons described for the 2002 rent
increase.
Advertising expense decreased $12.9 million in 2002 to $241.0 million from
$253.9 million in 2001, while remaining at 5.3% percentage of net sales and
operating revenues during both 2002 and 2001. The dollar decrease was due
primarily to an increase in advertising contributions from our various vendors
and third-party service providers.
Insurance expense increased $10.4 million to $71.0 million in 2002 from $60.6
million in 2001 and increased as a percent of net sales and operating revenues
to 1.6% in 2002, compared to 1.3% in 2001. Substantially all of our insurance
expense relates to our self-insurance programs. We maintain reserves for
self-insurance liabilities related to our group medical and casualty losses,
which include general and product liability and workers' compensation. In some
cases, risks are insured through outside carriers for losses in excess of
self-insured amounts. These reserves are adjusted to reflect estimates based on
historical experience, estimated claims incurred but not reported, the impact of
risk management programs and the estimated effect of external factors. As of
December 31, 2002, actual losses had not exceeded our expectations. We expect
insurance expense to continue to increase in both dollars and as a percentage of
net sales and operating revenues due to the rising health care costs in the
U.S., in addition to increases in premiums resulting from the recent terrorist
activities.
In 2003, we expect SG&A expense to increase slightly in dollars, but decrease
slightly as a percentage of net sales and operating revenues due to increased
sales volume.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $13.6 million dollars to $94.7
million and decreased as a percent of net sales and operating revenues to 2.0%
in 2002 from 2.3% in 2001. These decreases are primarily attributable to the
elimination of goodwill amortization related to AmeriLink Corporation
("AmeriLink), as well as the sale of our corporate headquarters during the
fourth quarter of 2001. We expect depreciation and amortization expense to
increase slightly in 2003, due to depreciation increases associated with store
fixtures and capitalized software related to inventory management and other
information systems projects.
GAIN ON CONTRACT TERMINATION
RadioShack and Microsoft mutually agreed during 2002 to terminate their
agreement and settle the remaining commitments each had to one another. The
termination of this agreement took effect at the start of the fourth quarter of
2002, upon satisfaction of several contractual obligations. The net financial
result was an $18.5 million gain (principally cash received), driven primarily
by the settlement of a multi-year obligation Microsoft had to connect our stores
with broadband capabilities.
IMPAIRMENT OF LONG-LIVED ASSETS
As a result of continued difficulties in the DTH business and a refocus during
the fourth quarter on our satellite installation strategy, together with a
revised cash flow projection for our overall installation business, we
determined that the remaining long-lived assets associated with RSIS were
impaired. We compared the carrying value of these long-lived assets with their
fair value and determined that the remaining goodwill balance of $8.1 million
was impaired and we, therefore, recorded an impairment charge of this amount in
the accompanying 2002 Consolidated Statement of Income. As of December 31, 2002,
there was no remaining goodwill balance on our balance sheet relating to RSIS.
See the discussion below under the section titled "2001 Compared With 2000" for
further discussion of the RSIS business.
LOSS ON SALE OF ASSETS
There were no losses on the sale of assets in 2002. For information on prior
year losses, see the discussion below under the section titled "2001 Compared
With 2000."
EMPLOYEE SEPARATION AND OTHER COSTS
There were no employee separation or other costs in 2002. For information on
prior year employee separation and other costs, see the discussion below under
the section titled "2001 Compared With 2000."
NET INTEREST EXPENSE
Interest expense, net of interest income, was $34.4 million for 2002 versus
$37.8 million for 2001.
Interest expense decreased to $43.4 million in 2002 from $50.8 million in 2001.
This decrease was primarily the result of a reduction in the average debt
outstanding throughout 2002. In addition, our interest rate swap instruments
also lowered overall interest expense for the year ended December 31, 2002, when
compared to the same prior year period. Interest income decreased almost 31% to
$9.0 million in 2002 from $13.0 million in 2001, due primarily to CompUSA's
early payment of its note to us on June 22, 2001, which eliminated the
associated interest income.
Interest income, including accretion of discount as applicable, earned on the
amounts outstanding during the three years ended December 31, 2002, 2001 and
2000 was as follows:
Year Ended December 31,
------------------------------
(In millions) 2002 2001 2000
- ------------- -------- -------- --------
CompUSA note receivable $ -- $ 6.1 $ 12.9
Other (includes short-term
Investment interest) 9.0 6.9 4.9
-------- -------- --------
Total interest income $ 9.0 $ 13.0 $ 17.8
======== ======== ========
Interest expense, net of interest income, is expected to be flat during 2003,
when compared to 2002.
OTHER INCOME
In the second quarter of 2002, we received payments and recorded income of $27.7
million in partial settlement of amounts owed to us under a tax sharing
agreement that was the subject of an arbitration which commenced in July 1999
and was styled Tandy Corporation and T.E. Electronics, L.P. vs. O'Sullivan
Industries Holdings, Inc. ("O'Sullivan"). The arbitration ruling requires
O'Sullivan to comply with the tax sharing agreement that was entered into by
theparties at the time of O'Sullivan's initial public offering.
During the second half of 2002, we received two payments totaling $6.2 million
relating to quarterly payments under the tax sharing agreement with O'Sullivan.
Future payments will vary based on the level of O'Sullivan's future earnings. In
the near term, we expect that the quarterly payments to us will approximate
those received to date; however, these payments are dependent upon O'Sullivan's
overall financial condition and ability to pay. Consequently, there can be no
assurances that we will receive timely each payment that may be due to us under
the tax sharing agreement.
PROVISION FOR LOSS ON INTERNET-RELATED INVESTMENT
There were no losses on Internet-related investments in 2002. For information on
prior year losses on Internet-related investments, see the discussion below
under the section titled "2001 Compared With 2000."
PROVISION FOR INCOME TAXES
Our provision for income taxes reflects an effective income tax rate of 38.0%
for 2002 and 42.8% for 2001. The decrease in the effective tax rate in 2002 when
compared to 2001 was the result of the 2001 impairment of RSIS goodwill, which
was not deductible for tax purposes and caused the increased effective tax rate
in 2001. For further information, see the discussion below under the section
titled "2001 Compared With 2000." We anticipate that the effective tax rate for
2003 will be approximately 38.0%.
2001 COMPARED WITH 2000
NET SALES AND OPERATING REVENUES
Sales decreased slightly to $4,775.7 million in 2001 from $4,794.7 million in
2000. This decrease was primarily the result of a decline in sales to our
dealer/franchise outlets in 2001, partially offset by a 1% increase in
comparable company store sales and the opening of 18 new stores, net of store
closures. Sales in the wireless communication department increased 14.5% in
dollars and increased to 27.7% of total retail sales in 2001 from 24.3% in 2000.
This sales increase was due to an increase in sales of wireless phones and
accessories, offset somewhat by a decrease in prepaid wireless airtime. The
wired communication department, which includes residential telephones, answering
machines and other related telephony products, decreased 8.7% in dollars and
decreased as a percentage of total retail sales to 8.3% in 2001 from 9.1% in
2000. The decrease in this department was primarily the result of declining
sales of residential telephones, and was partially offset by increased sales of
telephone accessories. The radio communication department decreased 8.5% in
dollars and decreased as a percentage of total retail sales to 2.8% in 2001 from
3.1% in 2000. The decrease in this department was primarily the result of a
decrease in CB radio and scanner sales. The home entertainment department, which
consists of all home audio and video products, including DTH satellites and
installation services, decreased slightly in dollars and as a percentage of
total retail sales to 24.2% in 2001 from 24.4% in 2000. This dollar decrease was
primarily attributable to a decrease in sales of satellite dishes, which was
partially offset by increased sales of video and cable accessories. The computer
department, which includes not only computers and related accessories, but
narrow and broadband connectivity, as well as home automation and networking,
decreased 16.3% in dollars and decreased as a percentage of total retail sales
to 9.9% in 2001 from 11.9% in 2000. These decreases were primarily attributable
to a 26% decline in unit sales of CPUs and an 11% decrease in the average
selling price of CPUs from the prior year. The power and technical department
increased 2.0% in dollars and increased slightly as a percentage of total retail
sales to 13.3% in 2001 from 13.1% in 2000. These increases were primarily due to
increased sales of special purpose batteries. The personal electronics, toys and
personal audio department decreased 5.4% in dollars, as well as decreasing as a
percentage of total retail sales to 12.1% in 2001 from 12.8% in 2000, due
primarily to decreased sales of toys and giftables.
GROSS PROFIT
Gross profit in 2001 was $2,296.8 million or 48.1% of net sales and operating
revenues, compared with $2,369.6 million or 49.4% of net sales and operating
revenues in 2000. Gross profit for 2001 was reduced by a $26.2 million charge in
the fourth quarter for a write-down of non-strategic inventory product lines
which we intend to exit. In addition, the decline in the gross profit percentage
from 49.4% to 48.1% was affected by a decrease in the wired communication gross
margin. This gross profit decrease was partially offset by a decrease in the
total retail sales mix for the computer department, which has a lower gross
margin than our overall average gross margin, as well as an increase in the
computer department gross profit percentage. Increases in the gross profit
percentage for the wireless communication and power and technical departments,
coupled with an increase in the departments' gross profit percentages, also
favorably affected the overall gross profit percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Our SG&A expense increased 5.0% in dollars and increased as a percent of net
sales and operating revenues to 35.9% for the year ended December 31, 2001, from
34.1% for the year ended December 31, 2000. This 1.8 percentage point increase
in the SG&A percentage in 2001 was primarily attributable to an increase in
advertising expense during 2001, without proportional sales growth. An increase
in the rent expense in 2001 also contributed to the SG&A expense increase.
Payroll expense decreased by $8.4 million to $740.3 million in 2001 and
decreased as a percent of net sales and operating revenues to 15.5% in 2001,
compared to 15.6% in 2000. These decreases were due primarily to a reduction in
our labor force during 2001 and reduced incentive pay resulting from a decrease
in operating income. Advertising expense increased $26.8 million to $253.9
million and increased to 5.3% as a percentage of net sales and operating
revenues in 2001, compared to $227.1 million and 4.7% of sales in 2000. Both the
dollar and percentage point increases were due primarily to a decrease in
advertising contributions from our various vendors and third-party service
providers and, to a lesser extent, an increase in TV commercials. Rent expense
increased by $15.1 million to $230.3 million in 2001 and increased as a percent
of net sales and operating revenues to 4.8% in 2001 from 4.5% in 2000. The rent
increase was partially due to new company store openings throughout the year, as
well as the addition of the Cool Things @ Blockbuster test stores. The
relocation of existing stores to larger locations, as well as a renewal of store
leases at higher rates, also contributed to the rent expense increase. Bad debt
expense increased by $10.9 million to $14.5 million in 2001 and increased as a
percentage of net sales and operating revenues to 0.3% in 2001 from 0.1% in
2000. The bad debt increase was primarily related to both bankruptcies and
uncollected accounts receivable, as well as the write-off of a note receivable
from Digital:Convergence Corporation ("DC"). Store closing costs of $7.6 million
in 2001 relate to the closure of 35 underperforming stores prior to the
expiration of their leases.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.0 million dollars to $108.3
million and increased as a percent of net sales and operating revenues to 2.3%
in 2001 from 2.2% in 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
AmeriLink, also known as RSIS, was acquired in 1999 to provide us with
residential installation capabilities for the technologies and services offered
in our retail stores. Since its acquisition, RSIS has incurred operating losses
and negative cash flows. In 2000 and in 2001, we attempted to restructure and
reorganize RSIS, but due to the overall slowdown in the economy and the market
decline for professionally installed home Internet connectivity services, RSIS
continued to report losses. During the fourth quarter of 2001, we prepared a
revised analysis of estimated future cash flows for RSIS, which indicated that
its long-lived assets were impaired. The carrying value of RSIS's long-lived
assets (principally goodwill and fixed assets) exceeded the discounted present
value of the estimated future cash flows by approximately $37.0 million. An
impairment of goodwill for that amount was recorded and included in the
accompanying Consolidated Statement of Income.
Our test concept with Blockbuster to introduce a RadioShack
"store-within-a-store" at Blockbuster locations did not provide sufficient cash
flows to recover our investment in fixtures and other fixed assets. An
impairment loss of $2.8 million was recorded for those assets in 2001 and is
included in the accompanying Consolidated Statements of Income.
LOSS ON SALE OF ASSETS
In the fourth quarter of 2001, we sold and leased back most of our corporate
headquarters at a loss of $44.8 million. On June 22, 2001, we received $123.6
million for the settlement of the purchase price and settlement of the $136.0
million note which was received in connection with the sale of Computer City,
Inc. in 1998. Thus, we incurred an additional loss from the sale of Computer
City, Inc. of $12.4 million.
EMPLOYEE SEPARATION AND OTHER COSTS
During the third quarter of 2001, as part of our effort to control operating
costs, we incurred approximately $13.5 million in charges related to a reduction
of our labor force, primarily for early retirements and involuntary and
voluntary employee severance. In addition, during the fourth quarter of 2001,
$4.8 million in charges were incurred relating to the closure of RSIS's national
commercial installation business. These costs were primarily comprised of
severance costs, write-offs of certain fixed assets and future lease
commitments.
NET INTEREST EXPENSE
Interest expense, net of interest income, was $37.8 million for 2001 versus
$36.1 million for 2000.
Interest expense decreased to $50.8 million in 2001, from $53.9 million in 2000.
This decrease was primarily the result of a decrease in the average debt
outstanding throughout 2001. Interest income decreased almost 27% to $13.0
million in 2001 from $17.8 million in 2000, due primarily to repayment of
various notes receivable associated with our exit of other retail formats in
previous years.
PROVISION FOR LOSS ON INTERNET-RELATED INVESTMENT
During the second quarter of 2000, we made a $30.0 million investment in DC, a
privately-held Internet technology company. In the first quarter of 2001, we
concluded that our investment had experienced a decline in value that, in our
opinion, was other than temporary. This conclusion was based on DC's inability
to secure sufficient additional funding or to complete an initial public
offering. As such, we recorded a loss provision equal to our initial investment.
DC subsequently filed for bankruptcy on March 22, 2002.
PROVISION FOR INCOME TAXES
The provision for income taxes reflects an effective tax rate of 42.8% for 2001
and 38.0% for 2000. The increase in the effective tax rate in 2001 was the
result of the impairment of RSIS goodwill discussed above, which was not
deductible for tax purposes.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which is effective for fiscal years beginning
after June 15, 2002. SFAS No. 143 establishes financial accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. We adopted SFAS No. 143
effective January 1, 2003. We do not believe the standard will have a material
adverse effect on our consolidated financial statements.
On June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses significant issues
relating to the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities, and nullifies
the guidance in Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of SFAS No. 146 are effective for exit or disposal activities initiated after
December 31, 2002. Retroactive application of SFAS No. 146 is prohibited and,
accordingly, liabilities recognized prior to the initial application of SFAS No.
146 should continue to be accounted for in accordance with EITF 94-3 or other
applicable preexisting guidance. We adopted SFAS No. 146 effective January 1,
2003. We do not believe the standard will have a material adverse effect on our
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. We adopted the disclosure requirements of
SFAS No. 148 effective December 31, 2002, and we made no material adjustments as
a result of this adoption.
In December 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others." FIN 45 is effective for guarantees issued or modified
after December 31, 2002. The disclosure requirements were effective for the year
ended December 31, 2002, and expand the disclosures required by a guarantor
about its obligations under a guarantee. FIN 45 also requires that we recognize
guarantees entered into or modified after December 31, 2002, as a liability for
the fair value of the obligation undertaken in the issuance of the guarantee.
FIN 45 became effective January 1, 2003. We do not believe the interpretation
will have a material adverse effect on our consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities - An Interpretation of ARB No. 51." FIN 46 addresses consolidation by
business enterprises of variable interest entities that have certain
characteristics. The consolidation requirement of FIN 46 is applicable
immediately to variable interest entities created or obtained after January 31,
2003. For variable interest entities acquired before February 1, 2003, the
consolidation requirement of FIN 46 is applicable to us as of July 1, 2003. We
believe the adoption of FIN 46 will not have a material impact on our
consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 02-16, "Accounting
for Consideration Received from a Vendor by a Customer (Including a Reseller of
the Vendor's Products)." EITF 02-16 provides guidance on how cash consideration
received by a customer from a vendor should be classified in the customer's
statement of income. EITF 02-16 is effective prospectively for new arrangements
entered into after December 31, 2002 and income statements for prior periods
presented should be reclassified to comply with its consensus. We are analyzing
the provisions of EITF 02-16 as they relate to our accounting policies. The
impact, if any, of compliance with the consensus on EITF 02-16 has not been
determined at this time.
CASH FLOW AND LIQUIDITY
Year Ended December 31,
-------------------------------
(In millions) 2002 2001 2000
- ------------- -------- -------- --------
Operating activities $ 521.6 $ 775.8 $ 116.5
Investing activities (99.0) (2.3) (134.0)
Financing activities (377.5) (502.8) (16.4)
In 2002, cash flow provided by operating activities was $521.6 million, compared
to $775.8 million and $116.5 million in 2001 and 2000, respectively.
At December 31, 2002, changes in accounts receivable, consisting primarily of
amounts due from our various vendors and third party service providers, provided
$68.2 million in cash during 2002, when compared to $165.8 million from the
prior year. Cash provided by accounts receivable in 2002 and 2001 was due to
further reductions of vendor and service provider receivables and
dealer/franchise receivables as a result of an increase in collections after
increases in such balances in 2000.
At December 31, 2002, changes in inventory used $21.4 million in cash during
2002, compared to $213.9 million of cash provided during 2001. The increase in
inventory since December 31, 2001, was primarily the result of increases in
laptop computers, home theater-in-a-box systems, and televisions, as sales of
these products were less than anticipated. These increases in inventory were
partially offset by a reduction in wireless handsets.
Typically, our annual cash requirements for pre-seasonal inventory build-up
range between $200.0 million and $400.0 million. The funding required by this
build-up comes primarily from cash on hand and cash generated from net sales and
operating revenues. We had $446.5 million in cash and cash equivalents as of
December 31, 2002, as a resource for our funding needs. Additional capital is
available under our $600.0 million dollar commercial paper program, which is
supported by a bank credit facility which could be utilized in the event the
commercial paper market is unavailable to us. We currently do not expect,
however, that the commercial paper market would be unavailable to us and that we
would have to utilize the credit facility. As of December 31, 2002, we had no
commercial paper outstanding or utilization of our credit facility.
Additionally, during the year ended December 31, 2002, $118.8 million more in
cash was provided by changes in accounts payable, when compared to the prior
year period, due primarily to more favorable vendor terms.
Cash used in investing activities in 2002 was $99.0 million, compared to $2.3
million and $134.0 million used in 2001 and 2000, respectively. Our cash usage
in investing activities was higher in 2002 than 2001, primarily because of the
$123.6 million we received during the second quarter of 2001 for the settlement
of the purchase price of Computer City and settlement of the CompUSA note.
Capital expenditures were $106.8 million in 2002, compared to $139.2 million in
2001 and $119.6 million in 2000. Capital expenditures for these years were
primarily for our retail store expansions and remodels and upgrades of
information systems. In addition, we purchased land in 2001 for our new
corporate headquarters building, which totaled $18.3 million. We anticipate that
our capital expenditure requirements for 2003 will be approximately $210.0
million to $230.0 million. The $100.0 million increase over 2002 primarily
relates to our new corporate headquarters. See further discussion of the new
facilities, below in the section titled "Capital Structure and Financial
Condition." Store remodels and relocations and updated information systems
account for the balance of our anticipated 2003 capital expenditures. As of
December 31, 2002, we had $446.5 million in cash and cash equivalents. These
cash and cash equivalents, along with cash generated from our net sales and
operating revenues and, if necessary, both our short-term and long-term
financing facilities, are available to fund future capital expenditure needs.
Cash used in financing activities was $377.5 million in 2002, compared to $502.8
million and $16.4 million in 2001 and 2000, respectively. We used $329.9
million, $308.3 million and $400.6 million for the repurchase of our common and
preferred stock in 2002, 2001 and 2000, respectively. Repurchases of common
stock were made under our share repurchase and employee stock plans. See further
discussion of our stock repurchase programs below in the section titled "Capital
Structure and Financial Condition." The 2002, 2001 and 2000 stock repurchases
were partially funded by $49.6 million, $53.7 million and $66.3 million,
respectively, received from the sale of treasury stock to employee stock plans
and to a lesser extent from stock option exercises. The balance of capital to
repurchase shares was obtained from cash generated from operations. We purchased
all of Microsoft's preferred units in RadioShack.com LLC for $88.0 million
during the third quarter of 2001. We also received $32.3 million from the sale
and lease-back of our corporate technology center building during the second
quarter of 2002. This transaction was recorded as a financing obligation due to
responsibilities which we retain during the lease period. Dividends paid, net of
tax, in 2002, 2001 and 2000 amounted to $39.8 million, $43.7 million and $44.7
million, respectively. The long-term notes we issued in 2001 provided
approximately $346.1 million in cash, the majority of which was used to repay
short-term debt. In 2000, the increase in short-term debt was used primarily to
fund increases in accounts receivable, stock repurchases and additional
inventory.
Our free cash flow, defined as cash flow from operating activities less
dividends paid and additions to property, plant and equipment, was $375.0
million in 2002, compared to $592.9 million in 2001. We believe free cash flow
is an appropriate indication of the corporation's ability to fund share
repurchases, repay maturing debt, change dividend payments or fund other uses of
capital that management believes will enhance shareholder value. The 2002
decrease in free cash flow, compared to 2001, was due primarily to an increase
in the 2002 working capital components, principally inventory, as described
above. We expect free cash flow to be approximately $200.0 to $250.0 million in
2003. The anticipated decrease in free cash flow from 2002 to 2003 is primarily
related to the increase in 2003 capital expenditures noted above. The comparable
financial measure to free cash flow under GAAP is cash flow from operating
activities, which was $521.6 million and $775.8 million for the years ended
December 31, 2002 and 2001, respectively.
The following table is a reconciliation of cash provided from operating
activities to free cash flow.
Year Ended December 31,
------------------------------
(In millions) 2002 2001 2000
- ------------- -------- -------- --------
Net cash provided by operating activities $ 521.6 $ 775.8 $ 116.5
Less:
Additions to property, plant and equipment 106.8 139.2 119.6
Dividends paid 39.8 43.7 44.7
-------- -------- --------
Free (negative free) cash flow $ 375.0 $ 592.9 $ (47.8)
======== ======== ========
CAPITAL STRUCTURE AND FINANCIAL CONDITION
Management considers our financial structure and condition solid. At December
31, 2002, total capitalization was $1,355.4 million, consisting of $627.3
million of debt and $728.1 million of equity and resulting in a debt-to-total
capitalization ratio of 46.3%, which was equal to the prior year debt-to-total
capitalization ratio. The ratio remained the same as the prior year due to
proportional decreases in debt of $43.6 million and equity of $50.0 million from
2001.
Long-term debt as a percentage of total capitalization was 43.6% at December 31,
2002, compared to 39.0% at December 31, 2001, and 18.2% at December 31, 2000.
This increase in 2002 was due to the financing obligation resulting from the
sale and lease-back of our corporate technology center building and the
reduction of equity.
Our debt is considered investment grade by the rating agencies. There were no
changes to our debt ratings during the year. Below are their latest ratings by
category.
Standard
Category Moody's and Poor's Fitch
-------- ------- ---------- -----
Medium-term notes Baa1 A- A-
ESOP senior notes Baa1 A- A-
Commercial paper P-2 A-2 F2
Our debt primarily consists of medium-term notes and two issuances of 10-year
long-term notes.
We have a $300.0 million Debt Shelf Registration Statement ("1997 Shelf
Registration") which became effective in August 1997. In August 1997, we issued
$150.0 million of 10-year unsecured long-term notes under the 1997 Shelf
Registration. The interest rate on the notes is 6.95% per annum with interest
payable on September 1 and March 1 of each year, commencing March 1, 1998. These
notes are due September 1, 2007.
We also issued, in various amounts and on various dates from December 1997
through September 1999, medium-term notes totaling $150.0 million under the 1997
Shelf Registration. At December 31, 2002, $64.5 million of these notes remained
outstanding. The interest rates at December 31, 2002, for the outstanding $64.5
million medium-term notes ranged from 6.13% to 7.35% and had a weighted average
coupon rate of 6.86%. These notes have maturities ranging from 2003 to 2008. As
of December 31, 2002, there was no availability under this 1997 Shelf
Registration.
On May 11, 2001, we issued $350.0 million of 10-year 7 3/8% notes in a private
offering to initial purchasers who offered the notes to qualified institutional
buyers under SEC Rule 144A. The annual interest rate on the notes is 7.375% per
annum with interest payable on November 15 and May 15 of each year. Payment of
interest on the notes commenced on November 15, 2001, and the notes mature on
May 15, 2011. In August 2001, under the terms of an exchange offering filed with
the SEC, we exchanged substantially all of these notes for a similar amount of
publicly registered notes. Because no additional debt was issued in the exchange
offering, the net effect of this exchange was that no additional debt was issued
on August 3, 2001, and substantially all of the notes are now registered with
the SEC.
During the third quarter of 2001, we entered into several interest rate swap
agreements, with maturities ranging from 2004 to 2007, to manage our exposure to
interest rate movements by effectively converting a portion of our long-term
fixed rate debt to variable rates. We entered into these agreements to balance
our debt portfolio by changing from all fixed interest rates to a mixture of
fixed and floating interest rates, thereby taking advantage of lower short-term
rates. The notional amount of the interest rate swaps subject to variable rates
is $150.0 million. Under these agreements, we have contracted to pay a variable
rate based upon LIBOR and to receive fixed rate payments ranging from 6.95% to
7.35%. We have designated the agreements as fair value hedging instruments. At
December 31, 2002, we recorded an asset in other assets, net, of $15.4 million
(its fair value) for the swap agreements and adjusted the fair value of the
related debt by the same amount. The effect of these agreements was a reduction
in our interest expense of $5.1 million during 2002, when compared to the fixed
rates. At current interest rates, we expect this favorable condition to reoccur
in 2003.
From time to time, we utilize short-term debt such as commercial paper issuances
and uncommitted bank loans to supplement our short-term financing needs. The
commercial paper and the short-term seasonal bank debt have a typical maturity
of 90 days or less. The amount of commercial paper that can be outstanding is
limited to a maximum of the unused portion of our $600 million bank syndicated
revolving credit facility described in more detail below.
In the second quarter of 2002, we replaced our existing $600.0 million bank
syndicated credit facilities with new bank syndicated credit facilities, also
totaling $600.0 million. These facilities are comprised of a $300.0 million
364-day revolving credit facility maturing in June 2003 and a $300.0 million
five-year revolving credit facility maturing in June 2007. The terms of these
revolving credit facilities are substantially similar to the previous
facilities. The new revolving credit facilities will support any future
commercial paper borrowings and are otherwise available for our general
corporate purposes. We anticipate replacing our 364 day revolving credit
facility which matures in June 2003 with a new 364 day credit facility with
similar terms. As of December 31, 2002, there were no outstanding borrowings
under these credit facilities.
We use operating leases, primarily for our retail locations, distribution
centers and corporate headquarters, to lower our capital requirements. Other
than these operating leases, we do not have any off-balance sheet financing
arrangements or transactions, arrangements or relationships with "special
purpose entities." Our outstanding debt and bank syndicated credit facilities
have customary financial covenants.
Management believes that our present ability to borrow is greater than our
established credit lines and long-term debt in place. However, if market
conditions changed and sales were to be dramatically reduced or operating costs
could not be controlled, our cash flows and liquidity could be reduced.
Additionally, if a scenario as described above occurred, it could cause the
rating agencies to lower our credit ratings, thereby increasing our borrowing
costs, or even causing a reduction in or elimination of our access to debt
and/or equity markets.
We repurchased 10.7 million shares of our common stock for $275.0 million for
the year ended December 31, 2002, under our existing 25.0 million share
repurchase program. In connection with our share repurchase program, our Board
of Directors authorized us to enter into both equity forwards and put options,
with expiration dates no later than December 31, 2002, covering up to 4.0
million shares of our common stock; consequently, there were no outstanding
equity forward instruments or put options at December 31, 2002.
We may continue to execute share repurchases from time to time in order to take
advantage of attractive share price levels, as determined by management. The
timing and terms of the transactions depend on market conditions, our liquidity
and other considerations. On February 20, 2003, our Board of Directors
authorized a new repurchase program for 15.0 million shares, which is in
addition to our existing 25.0 million share repurchase program. At February 20,
2003, there were 18.6 million shares available to be repurchased under the two
repurchase programs. We anticipate that we will repurchase, under our authorized
repurchase programs, between $200.0 million and $250.0 million of our common
stock during 2003. This new program has no expiration date and allows shares to
be repurchased in the open market. The funding required for these share
repurchase programs will come from cash generated from net sales and operating
revenues and cash and cash equivalents. Under our programs described above, we
will also repurchase shares in the open market to offset the sales of shares to
our employee stock plans.
On October 10, 2002, our Board of Directors approved the conversion of our
RadioShack Series B convertible preferred stock, held by the RadioShack 401(k)
Plan, to RadioShack common stock effective December 31, 2002. On December 31,
2002, 0.1 million shares of this preferred stock, representing all the
outstanding Series B convertible preferred stock were converted to 5.1 million
shares of our common stock. The preferred stock was held by the RadioShack
401(k) Plan to fund RadioShack contributions to plan participants.
In the fourth quarter of 2001 and the second quarter of 2002, we sold our
corporate headquarters buildings and we are now constructing a new headquarters
in Fort Worth, Texas. We entered into sale-leaseback agreements in which our
existing corporate headquarters' land and buildings were sold and leased back to
us. These arrangements should provide us with the necessary time to construct
our new headquarters, which we expect to be completed by the end of 2004 or
early 2005. Currently, we plan to finance our new corporate headquarters, with
construction costs estimated to total $200.0 million during 2003 and 2004, with
cash from operations and, if needed, existing cash and cash equivalents.
The following tables, as well as the information contained in Note 7 -
"Indebtedness and Borrowing Facilities" to our "Notes to Consolidated Financial
Statements," provide a summary of our various contractual commitments, debt and
interest repayment requirements, and available credit lines.
The table below contains the contractual commitments associated with our
financing obligations, lease obligations, and marketing agreements.
(In millions) December 31,
- ---------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Debt principal $ 20.0 $ 39.5 $ -- $ 5.1 $ 150.0 $ 356.0 $ 570.6
Debt interest 39.7 38.6 36.7 36.7 33.1 87.3 272.1
Financing obligation -- 32.3 -- -- -- -- 32.3
Operating leases 186.0 162.5 125.1 87.2 55.6 101.1 717.5
Marketing agreements 8.1 1.5 -- -- -- -- 9.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 253.8 $ 274.4 $ 161.8 $ 129.0 $ 238.7 $ 44.4 $ 1,602.1
========== ========== ========== ========== ========== ========== ==========
The table below contains our credit commitments from various financial
institutions.
(In millions)
- ------------------------------------------------------------------------------------------------
Commitment Expiration Per Period
---------------------------------------------------
Total Amounts Less than 1
Credit Commitments Committed year 1-3 years 4-5 years Over 5 years
- ------------------------------------------------------------------------------------------------
Lines of credit $ 600.0 $ 300.0 $ -- $ 300.0 --
Stand-by letters of credit 12.4 10.9 1.5 -- --
------- ------- -------- -------- ----------
Total commercial commitments $ 612.4 $ 310.9 $ 1.5 $ 300.0 --
======= ======= ======== ======== ==========
We have contingent liabilities related to retail leases of locations which were
assigned to other businesses. The majority of these contingent liabilities
relate to various lease obligations arising from leases that were assigned to
CompUSA, Inc. as part of the sales of our Computer City, Inc. subsidiary to
CompUSA, Inc. in August 1998. In the event CompUSA or the other assignees, as
applicable, are unable to fulfill their obligations, we would be responsible for
rent due under the leases. Our rent exposure from the remaining undiscounted
lease commitments with no projected sublease income is approximately $214
million. Moreover, we have no reason to believe that CompUSA or the other
assignees will not fulfill their obligations under these leases; consequently,
we do not believe there will be a material impact on our financial statements.
INFLATION
Inflation has not significantly impacted us over the past three years. We do not
expect inflation to have a significant impact on our operations in the
foreseeable future, unless world events substantially affect the global economy.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 2002, we did not have any derivative instruments that materially
increased our exposure to market risks for interest rates, foreign currency
rates, commodity prices or other market price risks, other than the interest
rate swaps noted in MD&A. We do not use derivatives for speculative purposes.
Our exposure to interest rate risk results from changes in short-term interest
rates. Interest rate risk exists with respect to our net investment of $248.3
million, comprised of fluctuating short-term investments of $398.3 million and
offset by $150.0 million of indebtedness which, because of the interest rate
swaps discussed in MD&A, effectively bears interest at short-term floating
rates. In the future, an unfavorable change of 100 basis points in the interest
rate applicable to this floating-rate net exposure could result in an increase
in annual net interest expense of $2.5 million. This assumption assumes no
change in the net principal balance.
We also manage our portfolio of fixed rate debt to reduce our exposure to
interest rate changes. The fair value of our fixed rate long-term debt is
sensitive to interest rate changes. Interest rate changes would result in
increases or decreases in the fair value of our debt due to differences between
market interest rates and rates at the inception of the debt obligation. Based
on a hypothetical immediate 100 basis point increase in interest rates at
December 31, 2002 and 2001, the fair value of our fixed rate long-term debt
would decrease for both years by $32.9 million, respectively. Based on a
hypothetical immediate 100 basis point decrease in interest rates at December
31, 2002 and 2001, the fair value of our fixed rate long-term debt would
increase by $35.4 million and $35.6 million, respectively. Regarding the fair
value of our fixed rate debt, changes in interest rates have no impact on our
consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Index to our Consolidated Financial Statements is found on page 29. Our
Financial Statements and Notes to these Consolidated Financial Statements follow
the index.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
We will file a definitive proxy statement with the Securities and Exchange
Commission on or about April 7, 2003. The information called for by this Item
with respect to directors is incorporated by reference from the Proxy Statement
for the 2003 Annual Meeting under the heading "Item 1 - Election of Directors."
For information relating to our Executive Officers, see Part I of this report.
The Section 16(a) reporting information is incorporated by reference from the
Proxy Statement for the 2003 Annual Meeting under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item with respect to executive compensation
is incorporated by reference from the Proxy Statement for the 2003 Annual
Meeting under the headings "Director Compensation," "Management Development and
Compensation Committee Report on Executive Compensation," "Executive
Compensation," "Option Grants in the Last Fiscal Year," "Option Exercises in the
Last Year and Year-End Option Values," "Retirement and Deferred Compensation,"
"Executive Deferred Compensation Plans and Other Agreements," "Change in Control
Protections," "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information called for by this Item with respect to security ownership of
certain beneficial owners and management is incorporated by reference from the
Proxy Statement for the 2003 Annual Meeting under the heading "Security
Ownership of Certain Beneficial Owners of Company Voting Securities."
EQUITY COMPENSATION PLANS
The following table provides a summary of information as of December 31, 2002,
relating to our equity compensation plans in which our common stock is
authorized for issuance.
Equity Compensation Plan Information
(a) (b) (c)
Number of shares
Number of shares to remaining available for
be issued upon Weighted average future issuance under
exercise of exercise price of equity compensation
outstanding options, outstanding options, plans (excluding shares
(Share amounts in thousands) warrants and rights warrants and rights reflected in column (a))
- ---------------------------- ----------------------- ----------------------- -------------------------
Equity compensation plans approved
by shareholders (1) 13,943 (2) $ 32.57 7,703 (3)
Equity compensation plans not approved by
shareholders (4) 8,873 (5) 37.06 2,265 (6)
----------------------- ------------------------
Total 22,816 $ 34.32 9,968
======================= =========================
(1) Consists of the 1993 Incentive Stock Plan, the 1994 Stock Incentive Plan,
the 1997 Incentive Stock Plan and the 2001 Incentive Stock Plan. See Note 17
- "Stock Options and Performance Awards" ("Note 17") to our "Notes to
Consolidated Financial Statements" for further information.
(2) Includes 45,637 shares with a weighted average exercise price of $26.58
related to a plan assumed and adopted by us when we acquired RSIS in 1999.
No further shares will be issued under this plan. See Note 17 for further
information.
(3) Includes 107,647 shares available for grants in the form of restricted
stock. See Note 17 for further information.
(4) Consists of the 1999 Incentive Stock Plan (the "1999 ISP"), the RadioShack
Stock Purchase Plan ("SPP") and the RadioShack Supplemental Stock Program
("SUP"). See Note 17 for more information concerning the 1999 ISP and see
Note 20 - "Company Stock Purchase Plan" to our "Notes to Consolidated
Financial Statements" for further information concerning the SPP. The SUP
enables employee-participants of our 401(k) Plan who are no longer eligible
to make pre-tax contributions to the 401(k) Plan to make after-tax
contributions to the SUP to purchase our common stock. We match 80% of each
participant's contribution. When these employee participants are again
eligible to make pre-tax contributions to our 401(k) Plan, they are not
eligible to contribute under the SUP.
(5) Excludes shares to be issued under the SPP and the SUP.
(6) Includes shares available for future issuance under the SPP and the SUP. As
of December 31, 2002, an aggregate of 958,002 shares and 904,826 shares were
available for issuance under the SPP and the SUP, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item with respect to certain relationships
and transactions with management and others is incorporated by reference from
the Proxy Statement for the 2003 Annual Meeting under the heading "Certain
Transactions with Management and Others."
ITEM 14. CONTROLS AND PROCEDURES.
Our management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), has conducted an evaluation of the effectiveness of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14, as
of a date within 90 days of the filing date of this Annual Report on Form 10-K.
Based on that evaluation, the CEO and CFO have concluded that these disclosure
controls and procedures are effective in ensuring that all material information
required to be filed in this Annual Report has been made known to them in a
timely fashion. There were no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the CEO and CFO completed their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. Financial Statements
The financial statements filed as a part of this report are listed in the "Index
to Consolidated Financial Statements" on page 29.
2. None
3. Exhibits required by Item 601 of Regulation S-K
A list of the exhibits required by Item 601 of Regulation S-K and filed as part
of this report is set forth in the Index to Exhibits beginning on page 53, which
immediately precedes such exhibits.
Certain instruments defining the rights of holders of our long-term debt are not
filed as exhibits to this report because the total amount of securities
authorized thereunder does not exceed ten percent of our total assets on a
consolidated basis. We will furnish the Securities and Exchange Commission
copies of such instruments upon request.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, RadioShack Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
RADIOSHACK CORPORATION
March 20, 2003 /s/ Leonard H. Roberts
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Leonard H. Roberts
Chairman of the Board and
Chief Executive Officer,
RadioShack Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of RadioShack
Corporation and in the capacities indicated on this 20th day of March, 2003.
Signature Title
/s/ Leonard H. Roberts Chairman of the Board and Chief Executive Officer
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