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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, 2004
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
________________________
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.)
Mail Stop CF3-203, 300 RadioShack Circle, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 415-3011
________________________
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. X .
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 June 30, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $4,589,175,199 based on the New York Stock
Exchange closing price.
As of February 18, 2005, there were 157,888,296 shares of the registrant's
Common Stock outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2005 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 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.
Company-Operated Stores: At December 31, 2004, we operated 5,046 company stores
located throughout the United States, as well as in Puerto Rico and the U.S.
Virgin Islands. These stores 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 consumer electronics products. Our product
lines include wireless phones and communication devices such as scanners and
two-way radios; residential telephones, DVD players, computers and
direct-to-home ("DTH") satellite systems; home entertainment, wireless, imaging
and computer accessories; general and special purpose batteries; wire, cable and
connectivity products; and digital cameras, radio-controlled cars and other
toys, satellite radios, memory players and wellness products. We also provide
consumers access to third-party services such as cellular and PCS phone and DTH
satellite activation, satellite radio service, prepaid wireless airtime and
extended service plans.
Dealer Outlets: At December 31, 2004, we also had a network of 1,788 dealer
outlets, including 45 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.
Company-Operated Kiosks: At December 31, 2004, we operated 599 kiosks located
throughout the United States. These kiosks are primarily inside SAM'S CLUB
locations, as well as in major malls. These locations, which are not
RadioShack-branded, offer product lines including wireless telephones and
associated accessories. We also provide consumers access to third-party cellular
and PCS phone services.
Retail Support Operations. Our retail stores, along with our kiosks and dealer
outlets, are supported by an established infrastructure. Below are the major
components of this support structure:
RadioShack Global Sourcing ("RSGS") - RSGS serves our wide-ranging
international import/export, sourcing, evaluation, logistics and quality
control needs. While the majority of RSGS's activities support our
business, RSGS also provides services for outside customers.
Consumer Electronics Manufacturing - We operate three manufacturing
facilities in the United States and one overseas manufacturing operation in
the Asia-Pacific region. These four manufacturing facilities employed
approximately 2,400 employees as of December 31, 2004. 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 through this Web site either online or at their
neighborhood RadioShack location.
RadioShack Customer Support - Using state-of-the-art telephone systems, Web
self-help guides and data networks, RadioShack Customer Support responds to
more than 3.2 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 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, 2004, we had 15 RadioShack service centers in the
U.S. and one in Puerto Rico that repair name brand and private label
products sold through various sales channels. We are also a vendor-
authorized service provider for third parties such as Compaq, Sony,
Hewlett-Packard, RCA/Thomson, Kyocera, Nokia, Samsung, ATC Logistics &
Electronics and LG Electronics, among others. In addition, we 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 home office into a fully
integrated system. Each store has its own server to support the
point-of-sale ("POS") 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.
Distribution Centers - We have eight distribution centers that ship over
one million cartons each month to our retail stores and dealer outlets.
Two of these distribution centers also serve as fulfillment centers for our
online customers.
SEASONALITY
As with most other retailers, our net sales and operating revenues, operating
income 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 described in more detail 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,
refer to Note 25 of the "Notes to Consolidated Financial Statements" for our
quarterly data, which shows seasonality trends. 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. 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 products and services. We also believe that the loss of the
RadioShack name and RadioShack marks would have a material impact on our
business. Our private label manufactured products are sold primarily under the
RadioShack trademark. We also own various patents and patent applications
relating to electronic products sold by RadioShack.
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 do not
expect a lack of availability of raw materials 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;
the loss of or disruption in supply from these relationships 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 companies such as Sprint PCS, Verizon Wireless, Echo Star Satellite
Corporation (DISH Network), Hewlett-Packard Company and Sirius Radio.
ORDER BACKLOG
We have no material backlog of orders for the products or services that we sell.
COMPETITION
Due to rising consumer demand for wireless 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. Department and specialty stores, such as Sears and The Home Depot,
compete on a more select product category scale. Sprint, Verizon and other
wireless providers compete directly with us in the wireless phone category
through their own retail and online presence. Mass merchants such as Wal-Mart,
Target and other alternative channels of distribution, such as mail order and
e-commerce retailers, compete with us on a more widespread basis. Numerous
domestic and foreign companies also manufacture products similar to ours for
other retailers, which are sold under nationally-recognized brand names or
private labels.
Management believes we have three primary factors differentiating us from our
competition. First is our extensive physical retail presence with approximately
7,400 convenient retail locations in virtually every neighborhood nationwide.
Second, 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, when applicable, and
assisting with the selection of appropriate products and accessories. Third is
our proven ability to accelerate the adoption rate of new technologies.
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.
EMPLOYEES
As of December 31, 2004, we had approximately 42,000 employees, including
temporary seasonal employees. Approximately 9,400 temporary employees, hired for
the holiday selling season, 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, amendments to these reports, and proxy statements 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
Property, Plant and Equipment............. 46
Commitments and Contingent Liabilities.... 53
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 two distribution centers in
the United States and six administrative offices and one manufacturing plant in
the Asia-Pacific region. We own the property on which the other six distribution
centers and three manufacturing facilities are located within the United States.
We beneficially own all of the property on which our new corporate offices are
located in downtown Fort Worth, Texas. 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.
RETAIL OUTLETS
The table below shows our retail locations broken down between company-operated
stores, kiosks and dealer outlets.
Average At December 31,
Store Size ------------------------------
(Sq. Ft.) 2004 2003 2002
- --------------------------------------------------------------------------------
Company-operated stores (1) 2,529 5,046 5,121 5,161
Kiosks (2) 89 599 9 ---
Dealer outlets (3) N/A 1,788 1,921 2,052
------- ------- -------
Total number of retail locations 7,433 7,051 7,213
======= ======= =======
(1) Over the past two years, we have closed over 100 company-operated stores,
net of new store openings and relocations. This trend is due to not
renewing locations that fail to meet our financial return hurdles. It is
anticipated that company-operated stores will decline in 2005 by about 50
stores.
(2) Kiosks consist of 546 SAM'S CLUB locations and 53 Sprint locations at the
end of 2004 and 9 Sprint locations at year end 2003. SAM'S CLUB has the
unconditional right to assume the operation of up to 75 locations (in
total) and to date has provided us with notice that, effective April 2005,
SAM'S CLUB will assume operation of 23 kiosk locations previously operated
by us. We expect the number of Sprint kiosks to increase by approximately
150 during 2005.
(3) Over the past two years, we have closed over 250 dealer outlets, net of new
outlet openings or conversion to company-operated stores. This trend is due
to the closure of smaller outlets that failed to meet our minimum purchase
requirements. It is anticipated that dealer outlets in 2005 will not change
materially from 2004.
Real Estate Owned and Leased
Approximate Square Footage
at December 31,
---------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
(In thousands) Owned Leased Total Owned Leased Total
- -------------------------------------------------------------------------------------------------------
Retail
Company-operated
stores 18 12,744 12,762 18 12,416 12,434
Kiosks -- 53 53 -- 1 1
Support Operations
Manufacturing 196 208 404 157 208 365
Distribution centers
and office space 3,248 1,648 4,896 2,610 2,557 5,167
---------- ---------- ---------- ---------- ---------- ----------
3,462 14,653 18,115 2,785 15,182 17,967
========== ========== ========== ========== ========== ==========
Below is a complete listing of our top 40 dominant marketing areas for
company-operated stores, kiosks and dealers.
- --------------------------------------------------------------------------------
Company Stores,
Dominant Marketing Area Kiosks and Dealers
- --------------------------------------------------------------------------------
1 New York City 397
2 Los Angeles 328
3 Chicago 196
4 Philadelphia 184
5 Ft. Worth-Dallas 176
6 Washington DC 147
7 Houston 146
8 Boston 140
9 San Francisco-Oakland-San Jose 133
10 Atlanta 130
11 Denver 116
12 Seattle-Tacoma 105
13 Cleveland 104
14 Phoenix 103
15 Minneapolis-St. Paul 103
16 Detroit 93
17 Miami-Ft. Lauderdale 89
18 Tampa-St. Petersburg 88
19 Pittsburgh 85
20 Sacramento-Stockton-Modesto 82
21 St. Louis 77
22 Orlando-Daytona Beach-Melbourne 75
23 Salt Lake City 68
24 Portland, Oregon 66
25 Indianapolis 65
26 Hartford-New Haven 61
27 Raleigh-Durham 60
28 Nashville 58
29 Cincinnati 58
30 Charlotte 57
31 Baltimore 57
32 Kansas City 56
33 San Antonio 55
34 Norfolk-Portsmouth-Newport News 55
35 Columbus 55
36 San Diego 54
37 Greenville-Spartanburg-Asheville 53
38 Grand Rapids-Kalamazoo-Battle Creek 50
39 Albuquerque-Santa Fe 49
40 Milwaukee 49
------------------
TOTAL: 4,123
ITEM 3. LEGAL PROCEEDINGS.
We are currently a party to various class action lawsuits alleging that we
misclassified certain RadioShack store managers as exempt from overtime in
violation of the Fair Labor Standards Act, including a lawsuit styled Alphonse
L. Perez, et al. v. RadioShack Corporation, filed in the United States District
Court for the Northern District of Illinois. While the alleged damages in these
lawsuits are undetermined, they could be substantial. We believe that we have
meritorious defenses, and we are vigorously defending these cases. Furthermore,
we fully expect these cases to be favorably determined as a matter of federal
law. If, however, an adverse resolution of any of these lawsuits occurs, we
believe they could have a material adverse effect on our results of operations
for the year in which resolution occurs. However, we do not believe that such an
adverse resolution would have a material impact on our financial condition or
liquidity. The liability, if any, associated with these lawsuits was not
determinable at December 31, 2004.
We have various other pending claims, lawsuits, disputes with third parties,
investigations and actions incidental to the operation of our business. Although
occasional adverse settlements or resolutions may occur and negatively impact
earnings in the period or year of settlement, it is our belief that their
ultimate resolution will not have a material 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 2004.
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 February 18, 2005.
Position Years with
Name (Date Elected to Current Position) Age Company
---- ---------------------------------- --- -------
Leonard H. Roberts (1) Chairman of the Board (May 1999) and 55 11
Chief Executive Officer (January 1999)
David J. Edmondson (2) President and Chief Operating Officer 45 10
(December 2000)
Evelyn V. Follit (3) Senior Vice President - Chief Organizational Enabling 58 7
Services Officer (October 2003) and Chief Information
Officer (July 1998)
Mark C. Hill (4) Senior Vice President - Chief Administrative Officer 53 8
(October 2003) and Secretary and General Counsel
(July 1997)
Laura K. Moore (5) Senior Vice President - Chief Communications Officer 42 6
(March 2003)
David P. Johnson (6) Acting Chief Financial Officer (July 2004) and 52 32
Senior Vice President and Controller (May 2002)
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 to serve until their successors are
appointed. All of the executive officers listed above have served RadioShack in
various capacities over the past five years.
(1) Mr. Roberts has been Chairman of the Board of Directors since May 1999 and
Chief Executive Officer since January 1999. Previously, Mr. Roberts was
President from December 1995 to December 2000. Effective May 19, 2005, Mr.
Roberts will retire as Chief Executive Officer, but will remain an employee
and will serve as Executive Chairman of the Board (subject to re-election
as a director by stockholders).
(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. Effective May 19, 2005, Mr.
Edmondson will be appointed Chief Executive Officer. Mr. Edmondson was also
appointed as a member of the Board of Directors in February 2005.
(3) Ms. Follit served as Vice President and Chief Information Officer from July
1998 to May 1999, when she was appointed Senior Vice President and Chief
Information Officer. In March 2003, she was appointed Senior Vice President
- Organizational Enabling Services and Chief Information Officer and, in
October 2003, she was appointed Senior Vice President - Chief
Organizational Enabling Services Officer and Chief Information Officer.
Effective February 28, 2005, Ms. Follit retired from RadioShack.
(4) Mr. Hill has served as Senior Vice President, Corporate Secretary and
General Counsel since October 1998. In October 2003, he was appointed
Senior Vice President - Chief Administrative Officer, and he continues to
serve as our Secretary and General Counsel.
(5) Ms. Moore served as Vice President - Corporate Communications and Public
Relations from November 1998 to October 2000, when she was appointed Senior
Vice President - Public Relations and Corporate Communications, RadioShack
Corporation. In March 2003, she was appointed Senior Vice President - Chief
Communications Officer.
(6) Mr. Johnson served as Senior Vice President and Controller of the
RadioShack division from February 1998 to December 2000, when he was
appointed Senior Divisional Vice President of Shared Services. In May 2002,
Mr. Johnson was appointed Senior Vice President and Controller of
RadioShack Corporation. Additionally, in July 2004, he was appointed Acting
Chief Financial Officer.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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
in the two years ended December 31, 2004.
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
December 31, 2004 $ 34.06 $ 28.09 $ --
September 30, 2004 31.27 26.04 0.25
June 30, 2004 33.73 28.28 --
March 31, 2004 36.24 28.86 --
December 31, 2003 $ 32.48 $ 27.90 $ 0.25
September 30, 2003 31.62 25.37 --
June 30, 2003 27.00 21.45 --
March 31, 2003 22.65 18.74 --
HOLDERS OF RECORD
At February 18, 2005, there were 28,710 holders of record of our common stock.
DIVIDENDS
The Board of Directors annually reviews our dividend policy. On September 24,
2004, our Board of Directors declared an annual dividend of $0.25 per common
share. The dividend was paid on December 20, 2004, to stockholders of record on
December 1, 2004.
The following table sets forth information concerning purchases made by or on
behalf of RadioShack or any affiliated purchaser (as defined in the SEC's rules)
of RadioShack common stock for the periods indicated.
PURCHASES OF EQUITY SECURITIES BY RADIOSHACK
Total Number Maximum
of Shares Number of
Purchased as Shares That
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Purchased (1) per Share Programs (2) Programs (2)
------------- ------------ ------------ ------------
October 1 - 31, 2004 498,800 $ 29.27 423,800 3,637,600
November 1 - 30, 2004 275,000 $ 32.45 100,000 3,537,600
December 1 - 31, 2004 675,000 $ 31.54 450,000 3,087,600
------------- ------------
Total 1,448,800 $ 30.93 973,800
============= ============
(1)The total number of shares purchased includes all repurchases made during the
periods indicated. Shares totaling 75,000, 175,000 and 225,000 were
repurchased in October, November and December 2004, respectively, through
other than a publicly announced plan or program in open-market transactions.
These repurchases were used to satisfy our share delivery obligations under
our employee benefit plans.
(2)These publicly announced plans or programs consist of RadioShack's 15 million
share repurchase program. This program was announced on February 20, 2003,
and has no expiration date. During the period covered by the table, no
publicly announced plan or program expired or was terminated, and no
determination was made by RadioShack to suspend or cancel purchases under our
program. On February 25, 2005, however, the Board of Directors approved an
additional share repurchase program. See "Share Repurchases" in MD&A
below.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA (UNAUDITED)
RADIOSHACK CORPORATION AND SUBSIDIARIES
Year Ended December 31,
(Dollars and shares in millions, except per share 2004 2003 2002 2001 2000
amounts, ratios, locations and square footage) --------- --------- --------- --------- ---------
Statements of Income Data
Net sales and operating revenues $4,841.2 $4,649.3 $4,577.2 $4,775.7 $4,794.7
Operating income $ 558.3 $ 483.7 $ 425.4 $ 359.3 $ 629.7
Net income $ 337.2 $ 298.5 $ 263.4 $ 166.7 $ 368.0
Net income available per common share:
Basic $ 2.09 $ 1.78 $ 1.50 $ 0.88 $ 1.94
Diluted $ 2.08 $ 1.77 $ 1.45 $ 0.85 $ 1.84
Shares used in computing earnings per common share:
Basic 161.0 167.7 173.0 183.8 187.3
Diluted 162.5 168.9 179.3 191.2 197.7
Gross profit as a percent of sales 50.3% 49.8% 48.9% 48.1% 49.4%
SG&A expense as a percent of sales 36.7% 37.4% 37.8% 35.9% 34.1%
Operating income as a percent of sales 11.5% 10.4% 9.3% 7.5% 13.1%
Balance Sheet Data
Inventories $1,003.7 $ 766.5 $ 971.2 $ 949.8 $1,164.3
Total assets $2,516.7 $2,243.9 $2,227.9 $2,245.1 $2,576.5
Working capital $ 817.7 $ 808.5 $ 878.7 $ 887.9 $ 585.8
Capital structure:
Current debt $ 55.6 $ 77.4 $ 36.0 $ 105.5 $ 478.6
Long-term debt $ 506.9 $ 541.3 $ 591.3 $ 565.4 $ 302.9
Total debt $ 562.5 $ 618.7 $ 627.3 $ 670.9 $ 781.5
Total debt, net of cash and cash equivalents $ 124.6 $ (16.0) $ 180.8 $ 269.5 $ 650.8
Stockholders' equity $ 922.1 $ 769.3 $ 728.1 $ 778.1 $ 880.3
Total capitalization (1) $1,484.6 $1,388.0 $1,355.4 $1,449.0 $1,661.8
Long-term debt as a % of total capitalization (1) 34.1% 39.0% 43.6% 39.0% 18.2%
Total debt as a % of total capitalization (1) 37.9% 44.6% 46.3% 46.3% 47.0%
Book value per common share at year end $ 5.83 $ 4.73 $ 4.24 $ 4.40 $ 4.74
Financial Ratios
Return on average stockholders' equity 39.9% 39.9% 35.0% 20.1% 43.0%
Return on average assets 14.2% 13.4% 11.8% 6.9% 15.6%
Annual inventory turnover 2.7 2.7 2.4 2.3 2.4
Other Data
Dividends declared per common share $ 0.250 $ 0.250 $ 0.220 $ 0.165 $ 0.220
Dividends paid per common share $ 0.250 $ 0.250 $ 0.220 $ 0.220 $ 0.220
Capital expenditures $ 229.4 $ 189.6 $ 106.8 $ 139.2 $ 119.6
Number of retail locations at year end 7,433 7,051 7,213 7,373 7,199
Average square footage per company-operated store 2,529 2,450 2,400 2,350 2,300
Comparable company store sales increase (decrease) 3% 2% (1%) 1% 11%
Shares outstanding 158.2 162.5 171.7 176.8 185.8
This table should be read in conjunction with MD&A and the Consolidated
Financial Statements and related Notes.
(1) Capitalization is defined as total debt plus total stockholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ("MD&A").
This MD&A section discusses our results of our operations, liquidity and
financial condition, risk management practices and certain factors that may
affect our future results, including economic and industry-wide factors, as well
as our critical accounting policies and estimates. You should read MD&A in
conjunction with our consolidated financial statements and accompanying notes
included in this Annual Report.
OVERVIEW
RadioShack is primarily a retailer of consumer electronics and services. We seek
to differentiate ourselves from our various competitors by focusing on
dominating cost-effective solutions to meet everyone's routine electronics needs
and families' distinct electronics wants. This strategy allows us to take
advantage of the unique opportunities provided by our extensive retail presence,
knowledgeable sales staff, and relationships with reputable vendors. We believe
this strategy provides us with the opportunity to increase our market share in
the highly competitive consumer electronics area. In addition, we continue to
focus on methods to reduce the costs of products sold and selling, general and
administrative expense as a percentage of net sales and operating revenues.
Furthermore, we believe that by focusing on opportunities such as innovative
products, new markets, licensing opportunities and creative distribution
channels, we can ultimately generate increased financial returns for our
shareholders over the long term.
We have identified two key opportunities to drive company growth, which are in
alignment with our overall strategy described above. We are focusing on growth
of our core business, which includes our company-operated stores, dealers and
our Web site www.radioshack.com, as well as businesses that we consider to be
close to our core strengths, which includes retail services, international
operations and consumer electronics repairs.
With respect to our core business, our strategy is to enhance our brands and
customer experiences in our stores. We are accomplishing this by focusing on
improvement of our product assortment, store personnel and store environment. In
order to improve our product assortment, we are customizing key stores by market
area, with the goal of providing products that are tailored to the customers of
that particular market. We are also focusing on high-performing product
categories, while de-emphasizing other product categories that have had lower
historical performances. In addition, we are attempting to identify technologies
that we believe we can grow, based on our established ability to accelerate the
adoption rate of new technologies. With respect to store personnel, we are
enhancing our training, compensation and store operating procedures, including
our receiving, labor scheduling and hours of operation. Finally, we have
improved our store environment by rolling out an updated store format to nearly
300 more stores in 2004. We intend to accelerate this roll-out in 2005. In
addition, we make continuous enhancements to our store format as stores are
rolled out.
We are also focusing on businesses that are considered to be close to our core
strengths. This close-to-core strategy includes expanding our retail services
business, recognizing innovative product channels and opportunities, and
identifying international expansion opportunities. In order to identify
innovative product channels and opportunities, we are focusing on creating
innovative relationships with key parties such as vendors and product
developers, utilizing new channels, and obtaining intellectual property and
licensing rights to innovative products.
In 2004, we significantly expanded our retail services business by purchasing
the wireless kiosks in SAM'S CLUB. During the fourth quarter of fiscal year
2004, we acquired wireless kiosk fixtures and inventory located within SAM'S
CLUB retail locations, as well as certain other assets and liabilities from
Wireless Retail, Inc. ("WRI"). The total purchase price was $59.1 million. In
conjunction with this transaction, we received cash and commitments from
wireless carriers of $40.3 million. Regarding our SAM'S CLUB operations, we pay
rent for the use of the kiosk area within SAM'S CLUB locations, and while
utilizing our own employees, POS system, and store fixtures.
Another component of our retail services business is our Sprint kiosk locations,
which are Sprint-branded and are located in malls. At these locations, which we
staff, we sell Sprint wireless hardware and related accessories. We have a
profit-sharing and working-capital arrangement with Sprint related to these
locations. We expect to continue to identify additional opportunities in our
overall retail services business in 2005.
KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT
To identify our progress in achieving our solutions strategy, we use several key
financial performance metrics, including net sales and operating revenues
metrics, gross margin metrics, and selling, general and administrative ("SG&A")
expense and operating margin metrics.
Net Sales and Operating Revenues Metrics
As a retailer, we consider growth in revenue to be a key indicator of our
overall financial performance. We examine our revenue by using several key
metrics, including overall change in net sales and operating revenue, comparable
company store sales growth, average tickets per store and average sales per
ticket.
The change in net sales and operating revenue provides us with an overall
indication of the demand for our products and services. Comparable company store
sales growth indicates the extent to which sales were impacted by growth in
existing sales channels. Comparable company store sales include the sales of any
domestic, retail location where we have a physical presence, including
company-operated stores and kiosks, that has more than 12 full months of
recorded sales. Average tickets per store, in conjunction with average sales per
ticket, provide us with an indication of whether the changes in revenues were
generated by a higher volume of purchases or by purchases of products with
higher prices.
The table below summarizes these revenue metrics for the years indicated:
2004 2003 2002
-------- -------- --------
Net sales and operating revenues growth 4.1% 1.6% (4.2%)
Comparable store sales growth 3% 2% (1%)
Average tickets per store per day 66 72 73
Average sales per ticket $34.17 $30.77 $29.40
In addition to the metrics above, we review the revenue per square foot of our
various channels of distribution to determine productivity of our product
assortment and the overall distribution channel.
Gross Margin Metrics
We also view our gross margin as a key metric of our financial performance, as
it indicates the extent to which we are able to reduce our product costs and
optimize product mix.
The table below summarizes gross margin for the years indicated:
2004 2003 2002
-------- -------- --------
Gross margin 50.3% 49.8% 48.9%
SG&A Expense and Operating Margin Metrics
We believe that our ability to leverage our fixed expense base and, accordingly,
increase operating margin is an important indicator of our financial performance
and process efficiency.
The table below summarizes these metrics for the years indicated:
2004 2003 2002
-------- -------- --------
SG&A expense as a percentage of sales 36.7% 37.4% 37.8%
Operating margin 11.5% 10.4% 9.3%
RETAIL OUTLETS
The table below shows our retail locations broken down between company-operated
stores, kiosks and dealer outlets. While the dealer outlets represented
approximately 24% of RadioShack's total retail locations at December 31, 2004,
our product sales to dealers are less than 10% of our total net sales and
operating revenues (see "Results of Operations" below).
Average At December 31,
Store Size ----------------------------
(Sq. Ft.) 2004 2003 2002
- ----------------------------------------------------------------------------
Company-operated stores (1) 2,529 5,046 5,121 5,161
Kiosks (2) 89 599 9 ---
Dealer outlets (3) N/A 1,788 1,921 2,052
-------- -------- --------
Total number of retail locations 7,433 7,051 7,213
======== ======== ========
(1) Over the past two years, we have closed over 100 company-operated stores,
net of new store openings and relocations. This trend is due to not
renewing locations that fail to meet our financial return hurdles. It is
anticipated that company-operated stores will decline in 2005 by about 50
stores.
(2) Kiosks consist of 546 SAM'S CLUB locations and 53 Sprint locations at the
end of 2004 and 9 Sprint locations at year end 2003. SAM'S CLUB has the
unconditional right to assume the operation of up to 75 locations (in
total) and to date has provided us with notice that, effective April 2005,
SAM'S CLUB will assume operation of 23 kiosk locations previously operated
by us. We expect the number of Sprint kiosks to increase by approximately
150 during 2005.
(3) Over the past two years, we have closed over 250 dealer outlets, net of new
outlet openings or conversion to company-operated stores. This trend is due
to the closure of smaller outlets that failed to meet our minimum purchase
requirements. It is anticipated that dealer outlets in 2005 will not change
materially from 2004.
RESULTS OF OPERATIONS
Net sales and operating revenues by channel of distribution are as follows:
Year Ended December 31,
----------------------------
(In millions) 2004 2003 2002
- ------------- -------- -------- --------
Company-operated store sales $4,472.3 $4,342.6 $4,231.2
Kiosk sales 56.4 0.7 ---
Dealer and other sales 312.5 306.0 346.0
-------- -------- --------
Net sales and operating revenues $4,841.2 $4,649.3 $4,577.2
======== ======== ========
Dealer and other sales not only include our sales to the independent dealers,
but also include sales and operating revenues generated from our
www.radioshack.com Web site, outbound and inbound call centers, and our retail
support operations.
The following table provides a summary of our net sales and operating revenues
by platform and as a percent of net sales and operating revenues. Platform sales
include sales from company-operated stores, kiosks, dealer outlets, and our
RadioShack.com Web site.
Net Sales and Operating Revenues
Year Ended December 31,
----------------------------------------------------
(In millions) 2004 2003 2002
---------------- ---------------- ----------------
Wireless $1,636.0 33.8% $1,335.8 28.7% $1,164.8 25.4%
Accessory 1,009.4 20.8 1,018.9 21.9 1,013.1 22.1
Modern home 700.3 14.5 812.9 17.5 973.4 21.3
Personal electronics 653.3 13.5 615.9 13.2 588.1 12.9
Power 312.0 6.4 312.4 6.7 296.4 6.5
Service 210.7 4.4 227.7 4.9 207.2 4.5
Technical 204.2 4.2 216.2 4.7 229.4 5.0
Retail support operations,
service plans, and other 115.3 2.4 109.5 2.4 104.8 2.3
---------------- ---------------- ----------------
Net sales and operating
revenues $4,841.2 100.0% $4,649.3 100.0% $4,577.2 100.0%
================ ================ ================
2004 COMPARED WITH 2003
NET SALES AND OPERATING REVENUES
Sales increased 4.1% to $4,841.2 million in 2004 from $4,649.3 million in 2003.
We had a 3% increase in comparable company store sales. These increases were
primarily the result of a 22.5% increase in our wireless platform sales. An
increase in average store volume and the addition of 590 kiosk locations also
contributed to our overall sales increase.
Dealer and other sales, which include sales to our dealer outlets, in addition
to retail support operations and other sales, were up $6.5 million for 2004, or
an increase of 2.1%, when compared to 2003. Sales to our dealers remain
substantially less than 10% of our total sales. Revenue from our retail support
operations, service plans and other sales is generated primarily from outside
sales of our repair centers and domestic and overseas manufacturing, in addition
to our e-commerce revenue. The increase in these sales in 2004 was primarily a
result of our restructuring of our extended service contract, partially offset
due to the disposition of RadioShack Installation Services ("AmeriLink") in
September 2003.
Sales in our wireless platform (which is made up of wireless handsets and
communication devices such as scanners and two-way radios) increased in dollars
and as a percentage of net sales and operating revenues in 2004 compared to
2003. This sales increase was due to both an increase in wireless handset unit
sales and an increase in the revenue per wireless handsets. Emphasis on national
carrier service and product offerings with desirable product features and
content, such as color screens and cameras also drove the favorable results. We
anticipate sales in the wireless platform will increase for 2005, primarily as a
result of a full year of SAM'S CLUB kiosk sales and the planned expansion of our
Sprint kiosks.
Sales in our accessory platform (which includes accessories for home
entertainment products, wireless handsets, digital imaging products and
computers, as well as residential phones and power) decreased in both dollars
and as a percentage of net sales and operating revenues in 2004, compared to
2003. The decrease in this platform resulted primarily from a decline in home
entertainment accessories, mostly offset by increases in wireless power and
digital imaging accessories.
Sales in our modern home platform (which consists of residential telephones, all
home audio and video end-products, and direct-to-home ("DTH") satellite systems,
as well as desktop, laptop and handheld computers) decreased in both dollars and
as a percentage of net sales and operating revenues in 2004, compared to 2003.
These decreases were primarily due to a sales decrease in DTH satellite systems,
audio products and cordless telephones, as well as a planned decrease in DTH
installation revenue resulting from our sale of AmeriLink.
Sales in our personal electronics platform (which includes digital cameras,
camcorders, toys, wellness products, memory players and satellite radios)
increased in dollars and as a percentage of net sales and operating revenues in
2004, compared to 2003. These increases were driven primarily by a sales
increase in digital imaging products, memory players and the introduction of our
satellite radio offering.
Sales in our power platform (which includes general and special purpose
batteries and battery chargers) decreased slightly in both dollars and as a
percentage of net sales and operating revenues in 2004, compared to 2003. These
declines were primarily the result of a sales decline in special purpose
batteries and battery chargers; however, the decline was substantially offset by
a sales increase in general purpose batteries.
Sales in our service platform (which includes prepaid wireless airtime, bill
payment revenue and warranty service plans) decreased in dollars and as a
percentage of net sales and operating revenues in 2004, compared to 2003. These
decreases were primarily due to a decrease in wireless-related services.
Sales in our technical platform (which includes wire and cable, connectivity
products, components and tools, as well as hobby and robotic end products)
decreased in both dollars and as a percentage of net sales and operating
revenues in 2004, compared to 2003. These decreases were primarily due to a
sales decline in wire and cable products and the related connectivity products.
GROSS PROFIT
Gross profit for 2004 was $2,434.5 million or 50.3% of net sales and operating
revenues, compared with $2,315.7 million or 49.8% of net sales and operating
revenues in 2003, resulting in a 5.1% increase in gross profit and a 50 basis
point increase in our gross profit percentage. These increases over the prior
year were primarily due to significantly less margin erosion from price
markdowns; we sold over 40% less in discontinued and devalued merchandise in
2004 versus the prior year. In addition, the benefits of centralized procurement
and better vendor management enabled us to sell like-products year over year at
higher gross margins.
These increases were partially offset by a change in merchandise mix among
platforms, resulting in increased sales of lower margin products, notably
wireless, and decreased sales of higher margin products like accessories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The table below summarizes the breakdown of various components of our
consolidated SG&A expense and its related percentage of total net sales and
operating revenues.
Year Ended December 31,
----------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
% of % of % of
Sales & Sales & Sales &
(In millions) Dollars Revenues Dollars Revenues Dollars Revenues
- -------------------------------------------- ------------------ ------------------
Payroll and commissions $ 769.3 15.9% $ 751.9 16.2% $ 728.0 15.9%
Advertising 271.5 5.6 254.4 5.5 241.0 5.3
Rent 259.4 5.3 250.1 5.4 244.9 5.4
Other taxes (excludes
income taxes) 105.9 2.2 106.9 2.3 105.9 2.3
Insurance 80.8 1.7 81.5 1.8 71.0 1.6
Utilities and telephone 72.9 1.5 75.8 1.6 74.9 1.6
Credit card fees 37.7 0.8 36.1 0.8 35.8 0.8
Lawsuit settlement -- -- -- -- 29.0 0.6
Stock purchase
and savings plans 20.2 0.4 21.5 0.4 20.8 0.5
Repairs and maintenance 12.4 0.3 11.6 0.2 12.0 0.3
Printing, postage and
office supplies 9.6 0.2 10.0 0.2 10.5 0.2
Travel 9.6 0.2 8.6 0.2 9.6 0.2
Loss on real estate
sub-lease -- -- 5.6 0.1 6.0 0.1
Bad debt (0.3) -- 0.4 -- 4.7 0.1
Other 125.8 2.6 125.6 2.7 134.5 2.9
------------------ ------------------ ------------------
$1,774.8 36.7% $1,740.0 37.4% $1,728.6 37.8%
================== ================== ==================
Our SG&A expense increased 2.0% in dollars, but decreased as a percent of net
sales and operating revenues to 36.7% for the year ended December 31, 2004, from
37.4% for the year ended December 31, 2003. The dollar increase for 2004 was
primarily due to an increase in both payroll and commissions and advertising.
Payroll expense increased in dollars, but decreased as a percentage of net sales
and operating revenues. This dollar increase was due to the higher sales-based
compensation we paid as a result of our 3% increase in company comparable store
sales, as well as our acquisition of the SAM'S CLUB kiosk locations and related
personnel in October 2004. We expect payroll expense to increase in 2005 due to
the full-year effect of the acquisition of the SAM'S CLUB kiosk business and our
planned increase in the number of Sprint kiosk locations.
Advertising expense increased in both dollars and as a percent of net sales and
operating revenues. This increase is primarily related to an increase in
expenditures associated with the holiday selling season. Additionally, we
received fewer contributions from our vendors. We expect our advertising expense
to increase in 2005 in dollars but decrease as a percentage of net sales and
operating revenues, as a result of increased sales from our kiosk operations and
an improvement in operating efficiencies.
Rent expense increased in dollars, but decreased as a percent of net sales and
operating revenues. The dollar increase was due primarily to lease renewals and
relocations at higher rates, as well as the acquisition of the SAM'S CLUB kiosk
business in October 2004. We expect an increase in 2005 rent expense, primarily
as a result of the full-year effect of the acquisition of the SAM'S CLUB kiosk
business and Sprint kiosk expansion.
Insurance expense decreased in both dollars and as a percent of net sales and
operating revenues, as a result of both fewer claims and a decrease in the
number of participants in our insurance programs. Our insurance expense relates
to losses, claims and insurance premiums, which are partially offset by
contributions from health insurance participants.
In 2005, we expect SG&A expense to increase in dollars, due to the full-year
effect of our acquisition of the SAM'S CLUB kiosk business and our planned
Sprint kiosk expansion. We anticipate a slight decrease as a percentage of net
sales and operating revenues, due to anticipated increased sales volume and a
continued focus on leveraging our fixed expense base.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $9.4 million dollars to $101.4
million and increased to 2.1% of net sales and operating revenues, compared to
2.0% for 2003. The increase in depreciation was primarily attributable to new
store fixtures for existing company-operated stores, as well as the hardware and
software associated with information systems upgrades. We expect depreciation
and amortization expense to increase by at least 10% in 2005 due to increases
associated with our new corporate headquarters, which is now substantially
complete and occupied, increased spending for our store remodel program,
information system projects, and the amortization of intangibles related to our
SAM'S CLUB kiosk business acquisition.
GAIN ON CONTRACT TERMINATION
There was no gain on contract termination in 2004. For information on the prior
year gain on contract termination, see the discussion below under the section
titled "2003 Compared with 2002."
IMPAIRMENT OF LONG-LIVED ASSETS
There was no significant impairment of long-lived assets in 2004. For
information on the prior year impairment of long-lived assets, see the
discussion below under the section titled "2003 Compared with 2002."
NET INTEREST EXPENSE
Interest expense, net of interest income, was $18.2 million for 2004 versus
$22.9 million for 2003, a decrease of $4.7 million or 20.5%.
Interest expense decreased to $29.6 million in 2004 from $35.7 million in 2003.
This decrease was primarily the result of a reduction in the average debt
outstanding throughout 2004. In addition, the capitalization of $6.6 million of
interest expense related to the construction of our new corporate campus also
lowered overall interest expense for the year ended December 31, 2004, when
compared to the same prior year period.
Interest income decreased approximately 11% to $11.4 million in 2004 from $12.8
million in 2003, despite an increase in investment rates. This was primarily the
result of a $1.3 million decrease in interest received from tax settlements in
2004 compared to 2003, as well as a lower average investment balance.
Interest expense, net of interest income, is expected to increase by more than
$6 million in 2005, when compared to 2004, due to the elimination of capitalized
interest expense as a result of the substantial completion of the construction
of our corporate headquarters.
OTHER INCOME, NET
During the year ended December 31, 2004, we received payments and recorded
income of $2.0 million under our tax sharing agreement with O'Sullivan
Industries Holdings, Inc. ("O'Sullivan"), compared to $3.1 million received and
recorded in the corresponding prior year period. Future payments under the tax
sharing agreement will vary based on the level of O'Sullivan's future earnings
and are also dependent on O'Sullivan's overall financial condition and ability
to pay. We cannot give any assurances as to the amount or frequency of payment,
if any, that we may receive from O'Sullivan in future periods.
PROVISION FOR INCOME TAXES
Our provision for income taxes reflects an effective income tax rate of 37.8%
for 2004 and 36.9% for 2003. The increase in the effective tax rate for 2004,
when compared to 2003, was the result of a favorable tax settlement during 2003,
relating to prior year tax matters. We anticipate that the effective tax rate
for 2005 will be approximately 38.2%.
2003 COMPARED WITH 2002
NET SALES AND OPERATING REVENUES
Sales increased approximately 1.6% to $4,649.3 million in 2003 from $4,577.2
million in 2002. We had a 2% increase in comparable company store sales. These
sales increases were possible because of an increase in average store volume,
despite a decrease in 2003 of 40 company stores, net of store openings.
Sales to our dealer outlets and other sales, including retail support
operations, were down for 2003, when compared to 2002. Sales to our dealer
outlets remained substantially less than 10% of our total sales. Retail support
operation sales were generated primarily from outside sales of our repair
centers, AmeriLink, and domestic and overseas manufacturing. The decrease in
retail support operations sales from 2003 to 2002 was primarily the result of an
overall decline in our AmeriLink commercial installation business, the closure
of several of our manufacturing facilities in the third quarter of 2003, and the
sale of AmeriLink in September 2003.
Sales in our wireless platform increased in dollars and as a percentage of net
sales and operating revenues in 2003, compared to 2002. This sales increase was
due primarily to an increase in the average selling price of our wireless
handsets as a result of our continued emphasis on national carrier service and
product offerings with desirable product features and content, such as color
screens and cameras.
Sales in our accessory platform increased in dollars, but decreased as a
percentage of net sales and operating revenues in 2003, compared to 2002. The
dollar increase in this platform was primarily the result of increases in both
wireless power and imaging accessories sales, but partially offset by a decline
in sales of residential telephone and home entertainment accessories.
Sales in our modern home platform decreased in both dollars and as a percentage
of net sales and operating revenues in 2003, compared to 2002. These decreases
were primarily due to decreased sales of satellite dishes and their related
installation services, in addition to desktop CPUs and monitors.
Sales in our personal electronics platform increased in dollars and as a
percentage of net sales and operating revenues in 2003, compared to 2002. These
increases were driven primarily by sales increases in digital cameras and
camcorders, micro radio-controlled cars and, to a lesser extent, wellness
products sold under our LifewiseTM brand. This sales increase was partially
offset by decreased sales of educational toys.
Sales in our power platform increased in both dollars and as a percentage of net
sales and operating revenues in 2003, compared to 2002. This sales gain was
primarily due to increased sales of general and special purpose batteries.
Sales in our service platform increased in dollars and as a percentage of net
sales and operating revenues in 2003, compared to 2002. These increases were
primarily due to an increase in our wireless services sales.
Sales in our technical platform decreased in both dollars and as a percentage of
net sales and operating revenues in 2003, compared to 2002. These decreases were
primarily due to a decline in sales of bulk and packaged wire, as well as sales
decreases for technical components and hobby products.
GROSS PROFIT
Gross profit for 2003 was $2,315.7 million or 49.8% of net sales and operating
revenues, compared with $2,238.3 million or 48.9% of net sales and operating
revenues in 2002, resulting in a 3.5% increase in gross profit and a 90 basis
point increase in our gross profit percentage. These increases over the prior
year were primarily due to the following:
We experienced over $40.0 million in benefit from our supply chain vendor and
strategic pricing initiatives. In connection with these initiatives, we utilized
online reverse auctions, realized more favorable terms from vendors, improved
the impact of markdowns, priced our products more appropriately, and utilized
other techniques and incentives to optimize gross profit.
We also improved our merchandise mix within platforms by increasing the sales
mix for many of our higher margin products, while managing the mix down for many
lower margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Our SG&A expense increased 0.7% in dollars, but decreased as a percent of net
sales and operating revenues to 37.4% for the year ended December 31, 2003, from
37.8% for the year ended December 31, 2002. The dollar increase for 2003 was
primarily due to an increase in both payroll and commissions and advertising,
partially offset by a litigation charge in 2002 related to the settlement of a
class action lawsuit in California.
Payroll expense increased in both dollars and as a percentage of net sales and
operating revenues in 2003, due primarily to an increase in incentive pay based
on increased earnings, as well as the 2.6% increase in company store sales.
Advertising expense increased in dollars and as a percentage of net sales and
operating revenues in 2003. These increases related to an increase in television
advertising, as well as a decrease in contributions from vendors.
Rent expense increased in dollars for 2003 due primarily to lease renewals and
relocations at higher rates, as well as a slight increase in the average store
size. Rent expense as a percent of net sales and operating revenues remained the
same for 2003, compared to 2002, due to fewer company stores and our continued
rent reduction efforts.
Insurance expense increased in both dollars and as a percent of net sales and
operating revenues in 2003, when compared to 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $2.7 million dollars to $92.0
million and remained at 2.0% of net sales and operating revenues for both 2003
and 2002.
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
AmeriLink was acquired in 1999 to provide us with residential installation
capabilities for the technologies and services offered in our retail stores. As
a result of continued difficulties in the DTH business and a refocus during the
fourth quarter of 2002 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 AmeriLink 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
AmeriLink. We sold AmeriLink in September 2003.
NET INTEREST EXPENSE
Interest expense, net of interest income, was $22.9 million for 2003 versus
$34.4 million for 2002, a decrease of $11.5 million or 33.4%.
Interest expense decreased to $35.7 million in 2003 from $43.4 million in 2002
primarily as a result of a reduction in the average debt outstanding throughout
2003. In addition, our interest rate swap instruments and the capitalization of
$2.6 million of interest expense related to the construction of our new
corporate campus also lowered overall interest expense for the year ended
December 31, 2003, when compared to the same prior year period.
Interest income increased over 42% to $12.8 million in 2003 from $9.0 million in
2002, primarily as a result of a $5.6 million increase in interest received from
income tax settlements in 2003, as compared to 2002.
OTHER INCOME, NET
In July 2003, we received payment of $15.7 million resulting from the favorable
settlement of a lawsuit we had previously filed. We recorded this settlement in
the third quarter of 2003 as other income of $10.7 million, net of legal
expenses of $5.0 million paid as a result of the lawsuit.
In September 2003 we sold our wholly-owned subsidiary AmeriLink to INSTALLS inc,
LLC in a cash-for-stock sale, resulting in a loss of $1.8 million, based on
AmeriLink's book value, which was recorded in other income.
For the year ended December 31, 2003, we received and recorded income of $3.1
million owed to us under a tax sharing agreement with O'Sullivan, compared to
$33.9 million received and recorded in the corresponding prior year period. In
the second quarter of 2002, we received and recorded income of $27.7 million in
partial settlement of amounts owed to us under this tax sharing agreement. This
partial settlement followed a ruling in our favor by an arbitration panel.
Future payments under the tax sharing agreement will vary based on the level of
O'Sullivan's future earnings and are also dependent on O'Sullivan's overall
financial condition and ability to pay.
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.
PROVISION FOR INCOME TAXES
Our provision for income taxes reflects an effective income tax rate of 36.9%
for 2003 and 38.0% for 2002. The decrease in the effective tax rate for 2003,
when compared to 2002, was the result of a favorable tax settlement related to
prior year tax matters.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (the "FASB") issued
revised FIN 46, "Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51" ("FIN 46R"). FIN 46R requires the
consolidation of an entity in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity (variable interest entities or "VIEs"). FIN 46R is
applicable for financial statements of public entities that have interests in
VIEs or potential VIEs referred to as special-purpose entities for periods
ending after December 31, 2003. Applications by public entities for all other
types of entities are required in financial statements for periods ending after
March 15, 2004. The application of FIN 46R did not have a material impact on our
results of operations, financial position or liquidity, and does not apply to
our dealer outlets.
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123R "Share-Based Payment." SFAS No. 123R establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the fair value of
such equity instruments be recognized as an expense in the historical financial
statements as services are performed. Prior to SFAS 123R, only certain pro forma
disclosures of fair value were required. We will adopt the provisions of SFAS
No. 123R beginning with the third quarter of 2005. We intend to elect the
modified prospective transition method, which will require that we recognize
compensation expense for all new and unvested share-based payment awards from
the effective date. Based on our preliminary analysis of SFAS No. 123R, we
anticipate the after-tax impact of adoption on our results of operations for the
six months ending December 31, 2005, will be an expense of approximately $6.8
million.
During fiscal year 2004, we adopted Emerging Issues Task Force ("EITF") Issue
No. 03-10, "Application of Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers," which amends EITF No. 02-16. According
to the amended guidance, if certain criteria are met, consideration received by
a reseller in the form of reimbursement from a vendor for honoring the vendor's
sales incentives offered directly to consumers (i.e., manufacturers' coupons)
should not be recorded as a reduction of the cost of the reseller's purchases
from the vendor. The adoption of EITF No. 03-10 did not materially impact our
results of operations, financial position or liquidity in fiscal year 2004.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The new
Statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. SFAS 151 requires that
these items be recognized as current-period charges and requires that allocation
of fixed production overhead to the cost of conversion be based on the normal
capacity of the production facilities. This statement is effective for fiscal
years beginning after June 15, 2005. We do not expect adoption of this statement
to have a material impact on our financial condition or results of operations.
CASH FLOW AND LIQUIDITY
A summary of cash flows from operating, investing and financing activities is
outlined in the table below.
Year Ended December 31,
----------------------------
(In millions) 2004 2003 2002
- ------------- -------- -------- --------
Operating activities $ 352.5 $ 651.9 $ 521.6
Investing activities (290.2) (188.9) (99.0)
Financing activities (259.1) (274.8) (377.5)
Cash Flow - Operating Activities
In 2004, cash flows provided by operating activities were $352.5 million,
compared to $651.9 million and $521.6 million in 2003 and 2002, respectively.
During the year ended December 31, 2004, increases in accounts receivable,
consisting primarily of amounts due from our various vendors and third-party
service providers, used $53.0 million in cash, compared to $17.2 million
provided in the prior year. An increase in vendor and service provider
receivables due to an increase in sales of wireless services resulted in a cash
usage by accounts receivable in 2004, while cash provided in 2003 was the result
of reductions of vendor and service provider receivables and dealer receivables
from increased collections and lower sales of satellite television hardware.
During the year ended December 31, 2004, increases in inventory used $234.2
million in cash, compared to $202.3 million provided during 2003. The increase
in inventory since December 31, 2003, was primarily the result of abnormally low
inventory levels during the holiday selling season of 2003 and additional
inventory purchased to stock the new kiosk locations during the fourth quarter
of 2004.
Typically, our annual cash requirements for pre-seasonal inventory build-up
range between $200 million and $400 million. The funding required for this
build-up comes primarily from cash on hand and cash generated from net sales and
operating revenues. We had $437.9 million in cash and cash equivalents as of
December 31, 2004, as a resource for our funding needs. Additional capital is
available under our $600 million dollar commercial paper program, which is
supported by a bank credit facility that could be utilized in the event the
commercial paper market is unavailable to us. We currently do not expect the
commercial paper market to become unavailable to us nor that; we will need to
utilize our credit facility. As of December 31, 2004, we had no commercial paper
outstanding, nor had we utilized any of our credit facility.
During the year ended December 31, 2004, $161.8 million more in cash was
provided by accounts payable as a result of effective management of our payables
in 2004 and an increase in inventory levels, when compared to the prior year.
Cash Flow - Investing Activities
Cash used in investing activities in 2004 was $290.2 million, compared to $188.9
million and $99.0 million used in 2003 and 2002, respectively. Capital
expenditures for 2004 and 2003 increased over 2002, primarily due to the
continued construction of our new corporate campus in 2004 and 2003, while
capital expenditures for 2002 were primarily for our retail store expansions and
remodels and information systems upgrades. We also had capital expenditures
relating to retail stores and information systems in both 2004 and 2003. We
anticipate that our capital expenditure requirements for 2005 will be
approximately $200.0 million to $240.0 million. Although capital expenditures
for 2005 will be about the same as 2004, expenditures will occur in different
areas. Company-operated store remodels and relocations, approximately 150 new
Sprint kiosks and updated information systems account for the majority of our
anticipated 2005 capital expenditures. See further discussion on our new
corporate headquarters below in the section titled "Capital Structure and
Financial Condition." During the fourth quarter of fiscal year 2004, we acquired
certain assets and assumed certain liabilities of Wireless Retail, Inc. ("WRI").
These assets included wireless kiosks and inventory located within SAM'S CLUB
retail locations. The total purchase price was $59.1 million. See further
discussion on our SAM'S CLUB kiosk business above in the section titled
"Overview." As of December 31, 2004, we had $437.9 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, from our credit facilities,
are available to fund future capital expenditure needs.
Cash Flow - Financing Activities
Cash used in financing activities was $259.1 million in 2004, compared to $274.8
million and $377.5 million in 2003 and 2002, respectively. We used $251.1
million for the repurchase of our common stock in 2004 and $286.2 million and
$329.9 million for the repurchase of our common stock in 2003 and 2002,
respectively. Repurchases of common stock were made under our share repurchase
and employee stock programs. See the further discussion of our stock repurchase
programs below in the section titled "Capital Structure and Financial
Condition." The 2004, 2003 and 2002 stock repurchases were partially funded by
$85.8 million, $51.5 million and $49.6 million, respectively, received from the
sale of treasury stock to employee benefit plans and from stock option
exercises. The balance of capital to repurchase shares was obtained from cash
generated from operations. We received $32.3 million from the sale and
lease-back of our former 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. Additionally, our net
borrowings decreased $54.1 million in 2004, compared to a slight increase in
2003 and a decrease of $89.7 million in 2002. Dividends paid, net of tax, in
2004, 2003 and 2002 amounted to $39.7 million, $40.8 million and $39.8 million,
respectively. This change in dividends paid over the last three years was
affected by a dividend per share increase and yearly share repurchases,
resulting in fewer shares outstanding.
Free Cash Flow
Our free cash flow, defined as cash flows from operating activities less
dividends paid and additions to property, plant and equipment, was $83.4 million
in 2004, $421.5 million in 2003 and $375.0 million in 2002. The decrease in free
cash flow in 2004 was the result of a cash usage in working capital components,
primarily inventory. The increase in free cash flow between 2002 and 2003 was
the result of supply chain initiatives, including a greater focus on reducing
inventory weeks-of-supply. We expect free cash flow to be approximately $200
million to $240 million in 2005. The increase from 2004 is based substantially
on the anticipated increase in cash generated from working capital, primarily
from inventory reductions.
We believe free cash flow is an appropriate indication of our 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
comparable financial measure to free cash flow under generally accepted
accounting principles is cash flows from operating activities, which were $352.5
million in 2004, $651.9 million in 2003 and $521.6 million in 2002. We do not
intend the presentation of free cash flow, a non-GAAP financial measure, to be
considered in isolation or as a substitute for measures prepared in accordance
with GAAP.
The following table is a reconciliation of cash flows from operating activities
to free cash flow.
Year Ended December 31,
----------------------------
(In millions) 2004 2003 2002
- ------------- -------- -------- --------
Net cash provided by operating activities $ 352.5 $ 651.9 $ 521.6
Less:
Additions to property, plant and equipment 229.4 189.6 106.8
Dividends paid 39.7 40.8 39.8
-------- -------- --------
Free cash flow $ 83.4 $ 421.5 $ 375.0
======== ======== ========
CAPITAL STRUCTURE AND FINANCIAL CONDITION
We consider our financial structure and condition to be sound. We had $437.9
million in cash and cash equivalents at December 31, 2004, as a resource for our
funding needs. Additionally, borrowings are available under our $600.0 million
commercial paper program, which is supported by bank credit facilities and can
be utilized in the event the commercial paper market becomes unavailable to us.
However, we currently expect that the commercial paper market would be available
to us, thus we do not expect to utilize our credit facilities. As of December
31, 2004, we had no commercial paper outstanding and had not utilized our credit
facilities.
Debt Obligations
Debt Ratings: Our debt is considered investment grade by the rating agencies.
Below are the agencies' latest ratings by category, as well as their respective
current outlook for the ratings.
Standard
Category Moody's and Poor's Fitch
-------- ------- ---------- -----
Senior unsecured debt Baa1 A- BBB+
Commercial paper P-2 A-2 F2
Outlook Stable Stable Stable
Factors that can impact our credit ratings include changes in our operating
performance, the economic environment, conditions in the retail and consumer
electronics industries, our financial position and changes in our business
strategy. We do not currently foresee any reasonable circumstances under which
our credit ratings would be significantly downgraded. If a downgrade were to
occur, it could adversely impact, among other things, our future borrowing
costs, access to capital markets, vendor financing terms and future new store
occupancy costs.
Our senior unsecured debt primarily consists of two issuances of 10-year
long-term notes and an issuance of medium-term notes.
Long-Term Notes: We have a $300.0 million debt shelf registration statement
which became effective in August 1997. In August 1997, we issued $150.0 million
of 10-year unsecured long-term notes under this 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. These notes are due September 1, 2007.
On May 11, 2001, we issued $350.0 million of 10-year 7 3/8% notes in a private
offering to initial purchasers who in turn 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. 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, and substantially all of the notes were
registered with the SEC.
During the third quarter of 2001, we entered into an interest rate swap
agreement with underlying notional amount of $110.5 million with a maturity in
2007. In June and August 2003, we entered into interest rate swap agreements
with underlying notional amounts of debt of $100.0 million and $50.0 million,
respectively, and both with maturities in May 2011. These swaps effectively
convert a portion of our long-term fixed rate debt to a variable rate. We
entered into these agreements to balance our fixed versus floating rate debt
portfolio to continue to take advantage of lower short-term interest rates.
Under these agreements, we have contracted to pay a variable rate of LIBOR plus
a markup and to receive a fixed rate of 6.95% for the swap entered into in 2001
and 7.375% for the swaps entered into in 2003. We have designated these
agreements as fair value hedging instruments.
Medium-Term Notes: 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 shelf registration described above. At December 31, 2004, $5.0 million
of these notes remained outstanding. The interest rate at December 31, 2004, for
the outstanding $5.0 million in medium-term notes was 6.42%. These notes have a
maturity in 2008. As of December 31, 2004, there was no availability under this
shelf registration.
Available Financing
Commercial Paper: We have access to short-term debt instruments, such as
commercial paper issuances, which are available to supplement our short-term
financing needs. The commercial paper program, when utilized, has 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
revolving credit facilities described in more detail below. We currently have no
commercial paper outstanding.
Credit Facilities: In the second quarter of 2004, we replaced our existing
$300.0 million 364-day revolving credit facility with a new five-year credit
facility maturing in June 2009. The terms of this revolving credit facility are
substantially similar to the previous facility. This credit facility, in
addition to our existing $300.0 million five-year credit facility, which expires
in June 2007, will support our commercial paper borrowings and is otherwise
available for general corporate purposes. As of December 31, 2004, there were no
outstanding borrowings under these credit facilities. Our outstanding debt and
bank syndicated credit facilities have customary covenants, and we were in
compliance with these covenants as of December 31, 2004.
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 change and sales were to dramatically decline or we could not control
operating costs, 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.
Dividends
We have paid common stock cash dividends for 18 years. On September 24, 2004,
our Board of Directors declared an annual dividend of $0.25 per common share.
The dividend was paid on December 20, 2004, to shareholders of record on
December 1, 2004. The dividend payment of $39.7 million was funded from cash on
hand.
Operating Leases
We use operating leases, primarily for our retail locations and two distribution
centers, to lower our capital requirements.
Share Repurchases
We repurchased 6.9 million shares of our common stock for $210.9 million during
the year ended December 31, 2004, under our share repurchase program.
We intend 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 these transactions depend on market conditions, our
liquidity and other considerations. In February 2003, our Board of Directors
authorized a repurchase program for 15.0 million shares, which was in addition
to our 25.0 million share repurchase program that was completed during the
second quarter of 2003. At February 18, 2005, there were 2.5 million shares
available to be repurchased under this 15.0 million share repurchase program.
The 15.0 million share repurchase program has no expiration date and allows
shares to be repurchased in the open market. On February 25, 2005, our Board of
Directors approved a new share repurchase program. This new program allows
management to repurchase up to $250 million in open market purchases and has no
expiration date. We anticipate that we will repurchase, under our authorized
repurchase programs, between $200.0 million and $250.0 million of our common
stock during 2005. The funding required for these share repurchase programs will
come from cash generated from net sales and operating revenues and cash and cash
equivalents. We will also repurchase shares in the open market to offset the
sales of shares to our employee benefit plans.
Construction of Corporate Headquarters
In the fourth quarter of 2001 and the second quarter of 2002, we sold our former
corporate headquarters buildings. We entered into sale-leaseback agreements in
which our former corporate headquarters' land and buildings were sold and leased
back to us. These arrangements provided us with the necessary time to construct
our new headquarters, which we began partially occupying during the fourth
quarter of 2004. Our total campus costs are estimated to be $261.5 million, with
completion expected during the first quarter of 2005.
Capitalization
The following table sets forth information about our capitalization at the dates
indicated.
December 31,
-------------------------------------------------------------------
2004 2003
------------------------------------------------------------------
% of Total % of Total
($ in millions) Dollars Capitalization Dollars Capitalization
- -----------------------------------------------------------------------------------------
Current debt $ 55.6 3.7% $ 77.4 5.6%
Long-term debt 506.9 34.2% 541.3 39.0%
--------------- ---------------
Total debt $ 562.5 37.9% $ 618.7 44.6%
Stockholders' equity 922.1 62.1% 769.3 55.4%
--------------- ---------------
Total capitalization $1,484.6 100.0% $1,388.0 100.0%
=============== ===============
Our debt-to-total capitalization ratio decreased in 2004 from 2003, due
primarily to an increase in equity of $152.8 million from 2003. Long-term debt
as a percentage of total capitalization decreased in 2004 due to a decrease in
long-term debt, as current maturities of our outstanding notes moved to the
short-term debt classification, as well as the increase in equity of $152.8
million from 2003.
Treasury Stock
On December 11, 2003, our Board of Directors approved the retirement of 45.0
million shares of our common stock held as treasury stock. These shares returned
to the status of authorized and unissued. See our 2003 Consolidated Statement of
Stockholders' Equity for additional details of this transaction.
Contractual and Credit Commitments
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 our known contractual commitments as of December 31,
2004.
(In millions)
- ---------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------
Total Amounts Less than 1
Contractual Obligations Committed year 1-3 years 3-5 years Over 5 years
- ---------------------------------------------------------------------------------------------------------------
Long-term debt obligations $ 506.9 $ -- $ 158.2 $ 5.0 $ 343.7
Interest obligations 193.9 36.8 69.9 51.7 35.5
Capital lease obligations 0.6 0.6 -- -- --
Operating lease obligations 669.5 182.3 270.2 136.4 80.6
Purchase obligations(1) 485.9 464.2 18.3 3.4 --
Other long-term liabilities
reflected on the balance sheet 130.3 27.1 50.5 37.8 14.9
-----------------------------------------------------------------------------
Total $1,987.1 $ 711.0 $ 567.1 $ 234.3 $ 474.7
=============================================================================
(1) Purchase obligations include our product commitments, marketing agreements
and freight commitments.
For more information regarding long-term debt and lease commitments, refer to
Notes 7 and 15, respectively, of our "Notes to Consolidated Financial
Statements."
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 3-5 years Over 5 years
- ---------------------------------------------------------------------------------------------------------------
Lines of credit $ 600.0 $ -- $ 300.0 $ 300.0 --
Stand-by letters of credit 18.5 0.9 17.6 -- --
-----------------------------------------------------------------------------
Total commercial commitments $ 618.5 $ 0.9 $ 317.6 $ 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 sale 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 $154
million. However, we have no reason to believe that CompUSA or the other
assignees will not fulfill their obligations under these leases or that we would
be unable to sublet the properties; consequently, we do not believe there will
be a material impact on our financial statements from any fulfillment of these
contingencies.
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases described above, we do not have any off-balance
sheet financing arrangements, transactions, or special purpose entities.
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 international events substantially affect the global
economy.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principals ("GAAP") in the United States. The application of
GAAP requires us to make estimates and assumptions that affect the reported
values of assets and liabilities at the date of the financial statements, the
reported amount of revenues and expenses during the reporting period, and the
related disclosures of contingent assets and liabilities. The use of estimates
is pervasive throughout our financial statements and is affected by management
judgment and uncertainties. Our estimates, assumptions and judgments are based
on historical experience, current market trends and other factors that we
believe to be relevant and reasonable at the time the consolidated financial
statements are prepared. We continually evaluate the information used to make
these estimates as our business and the economic environment changes. Actual
results may differ materially from these estimates under different assumptions
or conditions.
In the Notes to Consolidated Financial Statements, we describe our significant
accounting policies used in the preparation of the consolidated financial
statements. The accounting policies and estimates we consider most critical are:
revenue recognition; inventory valuation under the cost method; estimation of
reserves and valuation allowances, specifically related to insurance, tax and
legal contingencies; and valuation of long-lived assets and intangibles,
including goodwill.
We consider an accounting policy or estimate to be critical if it requires our
most difficult, subjective or complex judgments, and is material to the
portrayal of our financial condition, changes in financial condition or results
of operations. The selection, application and disclosure of our critical
accounting policies and estimates have been reviewed by the Audit and Compliance
Committee of our Board of Directors.
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
persuasive evidence of an arrangement exists, 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 telephones and satellite systems, require the
customer to use the services of a third-party service provider. In most cases,
the third-party service provider pays 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 a reserve for estimated service deactivations, is generally
recognized at the time the customer is accepted as a subscriber of a third-party
service provider.
Estimated product refunds and returns, service plan deactivations, residual
revenue and commission revenue adjustments are based on historical information
pertaining to these items. If actual results differ from these estimates due to
various factors, the amount of revenue recorded could be materially affected. A
10% difference in our reserves for the estimates noted above would have affected
net sales and operating revenues by approximately $1.7 million for the fiscal
year ended December 31, 2004.
Inventory Valuation: Our inventory consists primarily of finished goods
available for sale at our retail locations or within our distribution centers
and is recorded at the lower of average cost or expected sales price (i.e.,
market value). The cost components recorded within inventory are the vendor
invoice cost and certain allocated external and internal freight, distribution,
warehousing and other costs required to transport the merchandise from the
vendor to the point-of-sale, usually a store.
Typically, the market value of our inventory is higher than its cost.
Determination of the market value may be very complex and, therefore, requires a
high degree of judgment. In order for management to make the appropriate
determination of market value, the following items are commonly considered:
inventory turnover statistics, current selling prices, seasonality factors,
consumer trends, competitive pricing, performance of similar products or
accessories, planned promotional incentives, and estimated costs to sell or
dispose of merchandise such as sales commissions.
If the calculated market value is determined to be less than the recorded
average cost, a provision is made to reduce the carrying amount of the inventory
item. Differences between management estimates and actual performance and
pricing of our merchandise could result in inventory valuations that differ from
the amount recorded at the financial statement date, and could also cause
fluctuations in the amount of recorded cost of products sold.
If our estimates regarding market value are inaccurate or changes in consumer
demand affect certain products in an unforeseen manner, we may be exposed to
material losses or gains in excess of our established valuation reserve.
Estimation of Reserves and Valuation Allowances: The amount of liability we
record for claims related to insurance, tax and legal contingencies 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. As additional information becomes available, we assess the potential
liability related to our various claims and revise our estimates as appropriate.
These revisions could materially impact our results of operations and financial
position or liquidity.
We are insured for certain losses related to workers' compensation, property and
other liability claims, with deductibles up to $0.5 million per occurrence. This
insurance coverage limits our exposure for any catastrophic claims that may
arise above the deductible. We also have a self-insured health program
administered by a third party covering the majority of our employees that
participate in our health insurance programs. We estimate the amount of our
reserves for all insurance programs discussed above at the end of each reporting
period. This estimate is based on information provided by either an independent
actuarial firm or third party. The information includes historical claims
experience, demographic factors, severity factors, and other factors we deem
relevant. A 10% change in our insurance reserves at December 31, 2004, would
have affected net income by approximately $7.5 million for the fiscal year ended
December 31, 2004. As of December 31, 2004, actual losses had not exceeded our
expectations.
We are subject to periodic audits from multiple domestic and foreign tax
authorities related to income tax, sales and use tax, personal property tax, and
other forms of taxes. These audits examine our tax positions, timing of income
and deductions, and allocation procedures across multiple jurisdictions. As part
of our evaluation of these tax issues, we establish reserves in our consolidated
financial statements based on our estimate of current probable tax exposures.
Depending on the nature of the tax issue, it could be subject to audit over
several years; therefore, our estimated reserve balances might exist for
multiple years before an issue is resolved by the taxing authority.
Additionally, we are involved in legal proceedings and governmental inquiries
associated with employment and other matters. A reserve has been established
based on our best estimates of the potential liability in these matters. This
estimate has been developed in consultation with in-house and outside counsel
and is based upon a combination of litigation and settlement strategies.
Although we believe that our tax and legal reserves are based on reasonable
judgments and estimates, actual results could differ which may expose us to
material gains or losses in future periods. These actual results could
materially affect our effective tax rate, earnings, deferred tax balances and
cash in the period of resolution.
Valuation of Long-Lived Assets and Intangibles, Including Goodwill: Long-lived
assets, such as property and equipment, are reviewed for impairment when events
or changes in circumstances indicate that the carrying value of the assets
contained in our financial statements may not be recoverable. Our evaluation of
potential impairment involves comparing the carrying value of the asset to the
estimated fair value of the asset. The fair value is determined by estimating
the future undiscounted cash flows that the asset will generate. If the fair
value calculated is less than the carrying value, we calculate the discounted
cash flows of the asset and record an impairment loss. The impairment loss is
the difference between the fair value and the carrying value of the asset and is
recorded as a charge to earnings in the period the impairment occurs. The
carrying value of the asset is adjusted to the new carrying value, and any
subsequent increases in fair value are not recorded. Additionally, if it is
determined that the estimated remaining useful life of the asset should be
decreased, the periodic depreciation expense is adjusted based on the new
carrying value of the asset.
The impairment calculation requires us to apply judgment and estimates
concerning the future cash flows, strategic plans, useful life and discount
rates. If actual results are not consistent with our estimates and assumptions,
we may be exposed to additional impairment charges which could be material to
our results of operations.
We have acquired goodwill and other separately identifiable intangibles related
to business acquisitions that have occurred during the current and prior years.
The original valuation of these intangibles is typically performed by a
third-party appraiser and may include the use of estimates that we provide
concerning future profitability, cash flows and other judgmental factors. We
review our goodwill and intangible balances on an annual basis, typically near
our fiscal year end, and whenever events or changes in circumstances indicate
the carrying value of the goodwill or intangibles might exceed their current
fair value.
The determination of fair value is based on various valuation techniques such as
discounted cash flow and other comparable market analyses. These valuation
techniques require us to make estimates and assumptions regarding future
profitability, industry factors, planned strategic initiatives, discount rates
and others factors. If actual results or performance of certain business units
are different from our estimates, we may be exposed to an impairment charge
related to our goodwill or intangibles. The total value of our goodwill and
intangibles at December 31, 2004, was $46.7 million.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Matters discussed in MD&A and in other parts of this report include
forward-looking statements within the meaning of the federal securities laws.
These matters include statements concerning management's plans and objectives
relating to our operations or economic performance and related assumptions. We
specifically disclaim any duty to update any of the information set forth in
this report, including any forward-looking statements. 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 our 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 materially
include, but are not necessarily limited to, the following factors.
General Business Factors
o Changes in national or regional U.S. economic conditions, including, but
not limited to, recessionary or inflationary trends, equity market levels,
consumer credit availability, interest rates, consumers' disposable income
and spending levels, continued rise of oil prices, job security and
unemployment, and overall consumer confidence;
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 any potential tariffs imposed on products that we import from China, as
well as the potential strengthening of China's cu