UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________________
FORM
10-K
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[x] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year
ended December 31, 2007
OR
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[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ________ to
___________
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Commission file
number 1-5571
________________________
RADIOSHACK
CORPORATION
(Exact name of
registrant as specified in its charter)
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Delaware
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75-1047710
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(State or
other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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Mail Stop
CF3-201, 300 RadioShack Circle, Fort Worth, Texas
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76102
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(Address of
principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code (817)
415-3011
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________________________
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of each
exchange
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Title of each
class
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on which
registered
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Common Stock,
par value $1 per share
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New York
Stock Exchange
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes X
No __
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes __ No X
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X
No __
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check
mark if the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer [ X ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [ ]
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes __ No X
As
of June 30, 2007, the aggregate market value of the voting common stock of
the registrant held by non-affiliates of the registrant, based on the closing
sale price of those shares on the New York Stock Exchange reported on
June 29, 2007, was $3,380,254,316. For the purposes of this disclosure
only, the registrant has assumed that its directors, executive officers and
beneficial owners of 5% or more of the registrant’s common stock as of June
30, 2007, are the affiliates of the registrant.
As
of February 15, 2008, there were 131,098,588 shares of the registrant's Common
Stock outstanding.
Documents
Incorporated by Reference
Portions of the
Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by
reference into Part III.
2
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Page
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PART
I
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Business
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4
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Risk
Factors
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8
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Unresolved
Staff Comments
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11
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Properties
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11
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Legal
Proceedings
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14
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Submission of
Matters to a Vote of Security Holders
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14
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Executive
Officers of the Registrant
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PART
II
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Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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Selected
Financial Data
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17
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Quantitative
and Qualitative Disclosures about Market Risk
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41
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Financial
Statements and Supplementary Data
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41
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Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
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41
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Controls and
Procedures
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41
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Other
Information
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42
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PART
III
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Directors,
Executive Officers and Corporate Governance
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42
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Executive
Compensation
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42
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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42
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Certain
Relationships and Related Transactions, and Director
Independence
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43
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Principal
Accountant Fees and Services
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43
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PART
IV
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Exhibits,
Financial Statement Schedules
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43
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44
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45
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46
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85
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PART
I
ITEM 1. BUSINESS.
GENERAL
RadioShack
Corporation was incorporated in Delaware in 1967. We primarily engage in the
retail sale of consumer electronics goods and services through our RadioShack
store chain and non-RadioShack branded kiosk operations. Our strategy is to
provide cost-effective solutions to meet the routine electronics needs and
distinct electronics wants of our customers. Throughout this report, the terms
“our,” “we,” “us” and “RadioShack” refer to RadioShack Corporation,
including its subsidiaries.
Our day-to-day
focus is concentrated in four major areas:
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Provide our
customers a positive in-store
experience
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Grow gross
profit dollars by increasing the overall value of each
ticket
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Control costs
continuously throughout the
organization
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Utilize the
funds generated from operations appropriately and invest only in projects
that have an adequate return or are operationally
necessary
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Additional
information regarding our business segments is presented below and in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) elsewhere in this Annual Report on Form 10-K. For
information regarding the net sales and operating revenues and operating income
for each of our business segments for fiscal years ended December 31, 2007, 2006
and 2005, please see Note 28 – “Segment Reporting” in the
Notes to Consolidated Financial Statements.
RADIOSHACK
COMPANY-OPERATED STORES
At
December 31, 2007, we operated 4,447 company-operated stores under the
RadioShack brand located throughout the United States, as well as in Puerto Rico
and the U.S. Virgin Islands. These stores are located in major shopping 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 telephones and
communication devices such as scanners and two-way radios; flat panel
televisions, 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 and memory players. We also provide consumers access to third-party
services such as wireless telephone and DTH satellite activation, satellite
radio service, prepaid wireless airtime and extended service plans.
KIOSKS
At
December 31, 2007, we operated 739 kiosks located throughout the United States.
These kiosks are primarily inside SAM’S CLUB locations, as well as stand-alone
Sprint Nextel kiosks in shopping malls. These locations, which are not
RadioShack-branded, offer primarily wireless handsets and their associated
accessories. We also provide consumers access to third-party wireless telephone
services.
OTHER
In
addition to the reportable segments discussed above, we have other sales
channels and support operations described as follows:
Dealer
Outlets: At December 31, 2007, we had a network of 1,484 RadioShack
dealer outlets, including 36 located outside of North America. These outlets
provide private label and third-party branded products and services, typically
to smaller communities. These independent dealers are often engaged in other
retail operations and augment their businesses with our products and service
offerings. Our dealer sales derived outside of the United States are not
material.
RadioShack.com:
Products and information are available through our commercial Web site www.radioshack.com.
Online customers can purchase, return or exchange various products available
through this Web site. Additionally, certain products ordered online may be
picked up, exchanged or returned at RadioShack 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. We are a
vendor-authorized service provider for many top tier manufacturers, such as
Hewlett-Packard, LG Electronics, Motorola, Nokia, RCA/Thomson, and Sony, among
others. In addition, we perform repairs for third-party extended service plan
providers. At December 31, 2007, we had eight RadioShack service centers in the
U.S. and one in Puerto Rico that repair certain name-brand and private label
products sold through our various sales channels.
International
Operations: As of January 31, 2007, we had closed all of our locations in
Canada. As of December 31, 2007, there were 176 RadioShack-branded stores and
17 dealers in Mexico. These RadioShack-branded stores and dealer outlets
are overseen by a joint venture in which we are a minority owner with Grupo
Gigante, S.A. de C.V. Our revenues from foreign customers are not material, and
we do not have a material amount of long-lived assets located outside of the
United States. We do not consolidate the operations of the Mexican joint venture
in our consolidated financial statements.
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.
Distribution
Centers - At December 31, 2007, we had five distribution centers
shipping over 800 thousand cartons each month, on average, to our retail stores
and dealer outlets. One of these distribution centers also serves as a
fulfillment center for our online customers. Additionally, we have a
distribution center that ships fixtures to our company-operated stores. During
the first half of 2008, we will close our distribution center in Columbus,
Ohio.
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-operated stores communicate through a
broadband network, which provides efficient access to customer support data.
This design also allows store management to track sales and inventory at the
product or sales associate level. RSTS provides the majority of our programming
and systems analysis needs.
RadioShack Global
Sourcing (“RSGS”) - RSGS serves our wide-ranging international
import/export, sourcing, evaluation, logistics and quality control needs. RSGS’s
activities support our branded and private label business.
Consumer
Electronics Manufacturing - We operate two manufacturing facilities in
the United States and one overseas manufacturing operation in China. These three
manufacturing facilities employed approximately 1,900 employees as of December
31, 2007. We manufacture a variety of products, primarily sold through our
retail outlets, including telephony, antennas, wire and cable products, and a
variety of “hard-to-find” parts and accessories for consumer electronics
products.
SEASONALITY
As
with most other specialty retailers, our net sales and operating revenues,
operating income and cash flows are 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 “Cash Flow and Liquidity” under
MD&A. Also, refer to Note 27 – “Quarterly Data
(Unaudited)” in the Notes to Consolidated Financial Statements for data showing
seasonality trends. We expect this seasonality to continue.
PATENTS
AND TRADEMARKS
We
own or are licensed to use many trademarks and service marks related to our
RadioShack stores in the United States and in foreign countries. We believe 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 the loss of the RadioShack name and RadioShack marks would have a
material adverse impact on our business. Our private label manufactured products
are sold primarily under the RadioShack trademark and under the Accurian or
Gigaware trademark. We also own various patents and patent applications relating
to consumer electronics products.
We
do not own any material patents or trademarks associated with our kiosk
operations.
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 to provide our customers access to
third-party services. 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 overall or on any of our
operating segments. We have formed vendor and third-party service provider
relationships with well-recognized companies such as Sprint Nextel, AT&T,
Apple Computer, EchoStar Satellite Corporation (DISH Network), Hewlett-Packard
Company and Sirius Satellite Radio Inc. (“Sirius.”) In the aggregate, these
relationships have or are expected to have a significant impact on both our
operations and financial strategy. 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.
ORDER
BACKLOG
We
have no material backlog of orders in any of our operating segments for the
products or services that we sell.
COMPETITION
Due to 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, driven primarily 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,
including consumer electronics retailers such as Circuit City and Best Buy.
Department and specialty retail stores, such as Sears and The Home Depot,
compete in more select product categories. AT&T, Sprint Nextel, and other
wireless providers compete directly with us in the wireless telephone category
through their own retail and online presence. Mass merchandisers such as
Wal-Mart and 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 two primary factors differentiating us from our competition. First, we
have an extensive physical retail presence with convenient locations throughout
the United States. Second, our specially trained sales staff is capable of
providing cost-effective solutions for our customers’ routine electronics needs
and distinct electronics wants, assisting with the selection of appropriate
products and accessories and, when applicable, assisting customers with service
activation.
We
cannot give assurance that we will 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 failed to offer
value-added solutions or if our competitors were to enhance their ability to
provide these value-added solutions.
EMPLOYEES
As
of December 31, 2007, we had approximately 35,800 employees, including 1,900
temporary seasonal employees. 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
100 F Street,
N.E.
Room
1580
Washington,
D.C. 20549-0213
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
100 F Street,
N.E.
Washington,
D.C. 20549-0213
You may obtain
these materials electronically by accessing the SEC’s home page on the Internet
at:
http://www.sec.gov
In
addition, we make available, free of charge on our Internet Web site, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as well as our proxy statements, 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 corporate Web site:
http://www.radioshackcorporation.com
ITEM 1A. RISK FACTORS.
One should
carefully consider the following risks and uncertainties described below, as
well as other information set forth in this Annual Report on Form 10-K. There
may be additional risks that are not presently material or known, and the
following list should not be construed as an exhaustive list of all factors that
could cause actual results to differ materially from those expressed in
forward-looking statements made by us.
We
may be unable to successfully execute our strategy to provide cost-effective
solutions to meet the routine electronics needs and distinct electronics wants
of our customers.
To
achieve our strategy, we have undertaken a variety of strategic initiatives. Our
failure to successfully execute our strategy or the occurrence of any of the
following events could have a material adverse effect on our
business:
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·
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Our inability
to keep our extensive store distribution system updated and conveniently
located near our target customers
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·
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Our
employees’ inability to provide solutions, answers, and information
related to increasingly complex consumer electronics
products
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·
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Our inability
to recognize evolving consumer electronics trends and offer products that
customers need and want
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Adverse
changes in national or regional U.S. economic conditions could negatively affect
our financial results.
Adverse economic
changes could have a significant negative impact on U.S. consumer spending,
particularly discretionary spending for consumer electronics products, which, in
turn, could directly affect our overall sales. Consumer confidence, recessionary
and inflationary trends, equity market levels, consumer credit availability,
interest rates, consumers’ disposable income and spending levels, energy prices,
job growth and unemployment rates may impact the volume of customer traffic and
level of sales in our locations. Negative trends of any of these economic
conditions, whether national or regional in nature, could adversely affect our
financial results, including our net sales and profitability.
Our
inability to increase or maintain profitability in both our wireless and
non-wireless platforms could adversely affect our results.
A
critical component of our business strategy is to improve our overall
profitability. Our ability to increase profitable sales in existing stores may
also be affected by:
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·
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Our success
in attracting customers into our
stores
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Our ability
to choose the correct mix of products to
sell
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Our ability
to keep stores stocked with merchandise customers will
purchase
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Our ability
to maintain fully-staffed stores and trained
employees
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Any
reductions or changes in the growth rate of the wireless industry or changes in
the dynamics of the wireless communications industry could cause a material
adverse effect on our financial results.
Sales of wireless
handsets and the related commissions and residual income constitute
approximately one-third of our total revenue. Consequently, changes in the
wireless industry, such as those discussed below, could have a material adverse
effect on our results of operations and financial condition.
Lack of growth in
the overall wireless industry tends to have a corresponding effect on our
wireless sales. Because growth in the wireless industry is often driven by the
adoption rate of new wireless handset technologies, the absence of these new
technologies, or the lack of consumer interest in adopting these new
technologies, could lead to slower growth or a decline in wireless industry
profitability, as well as in our overall profitability.
Another change in
the wireless industry that could materially and adversely affect our
profitability is wireless industry consolidation. Consolidation in the wireless
industry could lead to a concentration of competitive strength, particularly
competition from wireless carriers’ retail stores, which could adversely affect
our business as competitive levels increase.
Our
inability to effectively manage our receivable levels, particularly with our
service providers, could adversely affect our financial results.
We
maintain significant receivable balances from various service providers (i.e.
Sprint Nextel, ATT, Sirius and DISH) consisting of commissions, residuals and
marketing development funds. Changes in the financial markets or financial
condition of these service providers could cause a delay or failure in receiving
these funds. Failure to receive these payments could have an adverse affect on
our financial results.
We
may not be able to maintain our historical gross margin levels.
Historically, we
have maintained gross margin levels ranging from 45% to 48%. We may not be able
to maintain these margin levels in the future due to various factors, including
increased higher sales of lower margin products such as personal electronics
products and third-party branded products. If sales of these lower margin items
continue to increase and replace sales of higher margin items, our gross margin
and overall gross profit levels will be adversely affected.
Our
competition is both intense and varied, and our failure to effectively compete
could adversely affect our financial results.
In
the retail consumer electronics marketplace, the level of competition is
intense. We compete primarily with traditional consumer electronics retail
stores and, to a lesser extent, with alternative channels of distribution such
as e-commerce, telephone shopping services and mail order. We also compete with
wireless carriers’ retail presence, as discussed above. Changes in the amount
and degree of promotional intensity or merchandising strategy exerted by our
current competitors and potential new competition could present us with
difficulties in retaining existing customers, attracting new customers and
maintaining our profit margins.
In
addition, some of our competitors may use strategies such as lower pricing,
wider selection of products, larger store size, higher advertising intensity,
improved store design, and more efficient sales methods. While we attempt to
differentiate ourselves from our competitors by focusing on the electronics
specialty retail market, our business model may not enable us to compete
successfully against existing and future competitors.
Our
inability to effectively manage our inventory levels, particularly excess or
inadequate amounts of inventory, could adversely affect our financial
results.
We
source inventory both domestically and internationally, and our inventory levels
are subject to a number of factors, some of which are beyond our control. These
factors, including technology advancements, reduced consumer spending and
consumer disinterest in our product offerings, could lead to excess inventory
levels. Additionally, we may not accurately assess appropriate product life
cycles or end-of-life products, leaving us with excess inventory. To reduce
these inventory levels, we may be required to lower our prices, adversely
impacting our financial results.
Alternatively, we
may have inadequate inventory levels for particular items, including popular
selling merchandise, due to factors such as unanticipated high demand for
certain products, unavailability of products from our vendors, import delays,
labor unrest, untimely deliveries or the disruption of international, national
or regional transportation systems. The effect of the occurrence of any of these
factors on our inventory supply could adversely impact our financial
results.
Our inability to
attract, retain and grow an effective management team or changes in the cost or
availability of a suitable workforce to manage and support our operating
strategies could cause our operating results to suffer.
Our success depends
in large part upon our ability to attract, motivate and retain a qualified
management team and employees. Qualified individuals needed to fill necessary
positions could be in short supply. The inability to recruit and retain such
individuals on a continuous basis could result in high employee turnover at our
stores and in our company overall, which could have a material adverse effect on
our business and financial results. Additionally, competition for qualified
employees requires us to continually assess our compensation structure.
Competition for qualified employees has required, and in the future could
require, us to pay higher wages to attract a sufficient number of qualified
employees, resulting in higher labor compensation expense. In addition, mandated
changes in the federal minimum wage may adversely affect our compensation
expense.
Our
inability to successfully identify and enter into relationships with developers
of new technologies or the failure of these new technologies to be adopted by
the market could impact our ability to increase or maintain our sales and
profitability. Additionally, the absence of new services or products and product
features in the merchandise categories we sell could adversely affect our sales
and profitability.
Our ability to
maintain and increase revenues depends, to a large extent, on the periodic
introduction and availability of new products and technologies. If we fail to
identify these new products and technologies, or if we fail to enter into
relationships with their developers prior to widespread distribution within the
market, our sales and profitability could be adversely affected. Furthermore, it
is possible that these new products or technologies will never achieve
widespread consumer acceptance, also adversely affecting our sales and
profitability. Finally, the lack of innovative consumer electronics products,
features or services that can be effectively featured in our store model could
also impact our ability to increase or maintain our sales and
profitability.
Failure
to enter into, maintain and renew profitable relationships with providers of
third-party branded products could adversely affect our sales and
profitability.
Our large selection
of third-party branded products makes up a significant portion of our overall
sales. If we are unable to create, maintain or renew our relationships with the
suppliers of these products, our sales and our profitability could be adversely
impacted.
The
occurrence of severe weather events or natural disasters could significantly
damage or destroy outlets or prohibit consumers from traveling to our retail
locations, especially during the peak winter holiday shopping
season.
If
severe weather or a catastrophic natural event, such as a hurricane or
earthquake, occurs in a particular region and damages or destroys a significant
number of our stores in that area, our overall sales would be reduced
accordingly. In addition, if severe weather, such as heavy snowfall or extreme
temperatures, discourages or restricts customers in a particular region from
traveling to our stores, our sales would also be adversely affected. If severe
weather occurs during the fourth quarter holiday season, the adverse impact to
our sales and gross profit could be even greater than at other times during the
year because we generate a significant portion of our sales and gross profit
during this period.
We
have contingent lease obligations related to our discontinued retail operations
that, if realized, could materially and adversely affect our financial
results.
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 assigned to CompUSA,
Inc. as part of the sale of our Computer City, Inc. subsidiary to CompUSA in
August 1998. In the event CompUSA or the other assignees, as applicable, are
unable to fulfill these obligations, we may be responsible for rent due under
the leases, which could have a material adverse affect on our financial
results.
Failure
to comply with, or the additional implementation of, restrictions or regulations
regarding the products and/or services we sell or changes in tax rules and
regulations applicable to us could adversely affect our business and our
financial results.
We
are subject to various federal, state, and local laws and regulations including,
but not limited to, the Fair Labor Standards Act and ERISA, each as amended, and
regulations promulgated by the Internal Revenue Service, the United States
Department of Labor, the Occupational Safety and Health Administration, and the
Environmental Protection Agency. Failure to properly adhere to these and other
applicable laws and regulations could result in the imposition of penalties or
adverse legal judgments and could adversely affect our business and our
financial results. Similarly, the cost of complying with newly-implemented laws
and regulations could adversely affect our business and our financial
results.
Any
potential tariffs imposed on products that we import from China, as well as any
significant strengthening of China’s currency against the U.S. dollar, could
negatively impact our financial results.
We
purchase a significant portion of our inventory from manufacturers located in
China. Changes in trade regulations (including tariffs on imports) or the
continued strengthening of the Chinese currency against the U.S. dollar could
increase the cost of items we purchase, which in turn could have a material
adverse effect on our financial results.
Failure
to protect the integrity and security of our customers’ information could expose
us to litigation, as well as materially damage our standing with our
customers.
Increasing costs
associated with information security, including increased investments in
technology, the costs of compliance with consumer protection laws, and costs
resulting from consumer fraud could cause our business and results of
operations to suffer materially. Additionally, if a significant compromise in
the security of our customer information, including personal identification
data, were to occur, it could have a material adverse effect on our reputation,
business, operating results and financial condition, and could increase the
costs we incur to protect against such security breaches.
Any
terrorist activities in the U.S., as well as the international war on terror,
could adversely affect our results of operations.
A
terrorist attack or series of attacks on the United States could have a
significant adverse impact on the United States’ economy. This downturn in the
economy could, in turn, have a material adverse effect on our results of
operations. The potential for future terrorist attacks, the national and
international responses to terrorist attacks, and other acts of war or hostility
could cause greater uncertainty and cause the economy to suffer in ways that we
cannot predict.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Information on our
properties is located in MD&A and the financial statements included in this
Annual Report on Form 10-K and is incorporated into this Item 2 by reference.
The following items are discussed further in the Notes to Consolidated Financial
Statements:
We lease, rather than own, most of our retail
facilities. Our stores are located in shopping malls, stand-alone buildings and
shopping centers owned by other entities. We lease one distribution center in
the United States and four administrative offices and one manufacturing plant in
China. Our leased distribution center in Columbus, Ohio, will be closed during
the first half of 2008. We own the property on which the other five distribution
centers and two manufacturing facilities are located within the United States.
We sold and leased back the buildings and certain property at our corporate
headquarters located in downtown Fort Worth, Texas. In connection with this transaction,
we entered into a 20-year lease agreement in December 2005, with four five-year
options to renew.
RETAIL
OUTLETS
The table below
shows our retail locations at December 31, 2007, allocated among domestic
RadioShack company-operated stores, kiosks and dealer and other
outlets.
|
Average
Store
Size
(Sq.
Ft.)
|
At December
31,
|
||||||
|
2007
|
2006
|
2005
|
|||||
|
RadioShack
company-operated stores (1)
|
2,527
|
4,447
|
4,467
|
4,972
|
|||
|
Kiosks
(2)
|
99
|
739
|
772
|
777
|
|||
|
Dealer
and other outlets (3)
|
N/A
|
1,484
|
1,596
|
1,711
|
|||
|
Total
number of retail locations
|
6,670
|
6,835
|
7,460
|
||||
|
(1)
|
In 2007, we
closed 20 RadioShack company-operated stores, net of new store openings
and relocations. Our 2006 decline resulted primarily from the
implementation of our restructuring program, which included the closure of
481 company-operated stores, as well as our decision not to renew leases
on other locations that failed to meet our financial return goals. See
“2006 Restructuring Review” included in MD&A below.
|
|
(2)
|
Kiosks, which
include Sprint-branded and SAM’S CLUB kiosks, decreased by 33 locations
during 2007. As of December 31, 2007, SAM’S CLUB had the unconditional
right to assume the operation of up to 125 kiosk locations based on
contractual rights and our failure to achieve certain performance metrics.
No kiosk operations were unilaterally assumed by SAM’S CLUB during 2006 or
2007.
|
|
(3)
|
During 2007, our dealer and other outlets
decreased by 112 locations, net of new openings. This decline was
primarily due to the closure of smaller outlets and conversion of dealers
to RadioShack company-operated stores. Additionally, as of January 31,
2007, we had closed all of our locations in Canada. In 2006, we closed 115
dealer locations, net of new openings, primarily due to the closure
of smaller outlets that did not meet our financial return
goals.
|
Real
Estate Owned and Leased
|
Approximate
Square Footage
At December
31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
(In
thousands)
|
Owned
|
Leased
|
Total
|
Owned
|
Leased
|
Total
|
||||||||||||||||||
|
Retail
|
||||||||||||||||||||||||
|
RadioShack
company-
operated
stores
|
18 | 11,218 | 11,236 | 18 | 11,134 | 11,152 | ||||||||||||||||||
|
Kiosks
|
-- | 73 | 73 | -- | 78 | 78 | ||||||||||||||||||
|
Canadian
company-
operated
stores
|
-- | -- | -- | -- | 23 | 23 | ||||||||||||||||||
|
Support
Operations
|
||||||||||||||||||||||||
|
Manufacturing
|
134 | 466 | 600 | 134 | 320 | 454 | ||||||||||||||||||
|
Distribution
centers
and
office space
|
2,229 | 1,543 | 3,772 | 2,229 | 1,750 | 3,979 | ||||||||||||||||||
| 2,381 | 13,300 | 15,681 | 2,381 | 13,305 | 15,686 | |||||||||||||||||||
Below is a complete
listing at December 31, 2007, of our top 40 dominant marketing areas for
RadioShack company-operated stores, kiosks and dealers.
|
|
Dominant Marketing Area |
Company
Stores,
Kiosks and
Dealers
|
|
1
|
New York
City
|
386
|
|
|
2
|
Los
Angeles
|
304
|
|
|
3
|
Chicago
|
167
|
|
|
4
|
Fort
Worth-Dallas
|
161
|
|
|
5
|
Philadelphia
|
160
|
|
|
6
|
Washington,
DC
|
137
|
|
|
7
|
Houston
|
131
|
|
|
8
|
Boston
|
129
|
|
|
9
|
San
Francisco-Oakland-San Jose
|
124
|
|
|
10
|
Atlanta
|
115
|
|
|
11
|
Denver
|
102
|
|
|
12
|
Seattle-Tacoma
|
99
|
|
|
13
|
Minneapolis-St.
Paul
|
97
|
|
|
14
|
Cleveland
|
94
|
|
|
15
|
Phoenix
|
93
|
|
|
16
|
Tampa-St.
Petersburg
|
88
|
|
|
17
|
Detroit
|
84
|
|
|
18
|
Miami-Ft.
Lauderdale
|
84
|
|
|
19
|
St.
Louis
|
79
|
|
|
20
|
Orlando-Daytona
Beach-Melbourne
|
74
|
|
|
21
|
Sacramento-Stockton-Modesto
|
69
|
|
|
22
|
Pittsburgh
|
68
|
|
|
23
|
Portland,
Oregon
|
65
|
|
|
24
|
Salt Lake
City
|
64
|
|
|
25
|
Indianapolis
|
63
|
|
|
26
|
Raleigh-Durham
|
60
|
|
|
27
|
Baltimore
|
57
|
|
|
28
|
Hartford-New
Haven
|
56
|
|
|
29
|
Charlotte
|
55
|
|
|
30
|
Nashville
|
51
|
|
|
31
|
Norfolk-Portsmouth-Newport
News
|
51
|
|
|
32
|
Cincinnati
|
50
|
|
|
33
|
Kansas
City
|
50
|
|
|
34
|
Greenville-Spartanburg-Asheville
|
49
|
|
|
35
|
San
Antonio
|
49
|
|
|
36
|
Milwaukee
|
47
|
|
|
37
|
San
Diego
|
46
|
|
|
38
|
Albuquerque-Santa
Fe
|
45
|
|
|
39
|
Columbus
|
44
|
|
|
40
|
Grand
Rapids-Kalamazoo-Battle Creek
|
42
|
|
|
TOTAL:
|
3,789
|
ITEM 3. LEGAL PROCEEDINGS.
Refer to Note 13 –
“Litigation” in the Notes to Consolidated Financial
Statements.
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 2007.
EXECUTIVE
OFFICERS OF THE REGISTRANT (SEE ITEM 10 OF PART III).
The following is a
list, as of February 15, 2008, of our executive officers and their ages and
positions.
|
Name
|
Position
(Date Appointed to Current
Position)
|
Executive Officer
Since
|
Age
|
|
Julian C. Day
(1)
|
Chief
Executive Officer and Chairman of the Board (July
2006)
|
2006
|
55
|
|
Bryan Bevin
(2)
|
Executive
Vice President – Store Operations (January
2008)
|
2008
|
45
|
|
James F.
Gooch (3)
|
Executive
Vice President and Chief Financial Officer (August 2006)
|
2006
|
40
|
|
Peter J.
Whitsett (4)
|
Executive
Vice President – Chief Merchandising Officer (December 2007)
|
2007
|
42
|
|
Robert J.
Kilinski (5)
|
Senior Vice
President – Marketing and Wireless (July
2007)
|
2007
|
50
|
|
Cara D.
Kinzey (6)
|
Senior Vice
President – Information Technology (March
2006)
|
2006
|
41
|
|
John G.
Ripperton (7)
|
Senior Vice
President – Supply Chain (August
2006)
|
2006
|
54
|
|
Martin O.
Moad (8)
|
Vice
President and Controller (August
2007)
|
2007
|
51
|
There are no family
relationships among the executive officers listed, and there are no undisclosed
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.
|
(1)
|
Mr. Day was
appointed Chief Executive Officer and Chairman of the Board of RadioShack
in July 2006. Prior to his appointment, Mr. Day was a private
investor. Mr. Day became the President and Chief Operating Officer of
Kmart Corporation in March 2002 and served as Chief Executive Officer of
Kmart from January 2003 to October 2004. Following the merger of Kmart and
Sears, Roebuck and Co., Mr. Day served as a Director of Sears Holding
Corporation (the parent company of Sears, Roebuck and Co. and Kmart
Corporation) until April 2006. Mr. Day joined Sears as Executive Vice
President and Chief Financial Officer in 1999, and was promoted to Chief
Operating Officer and a member of the Office of the Chief Executive, where
he served until 2002.
|
|
(2)
|
Mr. Bevin was
appointed Executive Vice President – Store Operations in January 2008.
Before joining RadioShack, Mr. Bevin was Senior Vice President, U.S.
Operations, for Blockbuster Entertainment from January 2006 until October
2007, and Senior Vice President/General Manager – Games from June 2005
until December 2005. Prior to joining Blockbuster, Mr. Bevin was Vice
President of Retail for Cingular and Managing Director for Interactive
Telecom Solutions.
|
|
(3)
|
Mr. Gooch was
appointed Executive Vice President and Chief Financial Officer in August
2006. Previously, Mr. Gooch served as Executive Vice President
– Chief Financial Officer of Entertainment Publications from May 2005 to
August 2006. From 1996 to May 2005, Mr. Gooch served in various
positions at Kmart Corporation, including Vice President, Controller and
Treasurer, and Vice President, Corporate Financial Planning and
Analysis.
|
|
(4)
|
Mr. Whitsett
was appointed Executive Vice President – Chief Merchandising Officer in
December 2007. Previously, Mr. Whitsett was Senior Vice
President, Kmart Merchandising Officer, from July 2005 until November
2007. He joined Kmart in 1999 as Director, Merchandise Planning &
Replenishment, and later served as Divisional Vice President, Merchandise
Planning, Divisional Vice President, Merchandising Consumables, Vice
President/General Merchandise Manager, Drug Store and Food, and Vice
President/General Merchandise Manager.
|
|
(5)
|
Mr. Kilinski
was appointed Senior Vice President – Marketing and Wireless in July 2007.
Mr. Kilinski joined RadioShack in 1978 and has served as Vice President -
Marketing & Wireless, Vice President - Brand Development &
Communications, Vice President – Marketing, Vice President - Customer
Acquisition & Retention, Senior Vice President - Marketing
Implementation & Services, Senior Division Vice President &
General Manager - Connecting Places, Senior Division Vice President -
Strategic Services, Division Vice President - Service & Support, and
Executive Vice President and Director for AmeriLink Corp. and Nacom
Corporation, two former wholly-owned subsidiaries of
RadioShack.
|
|
(6)
|
Ms. Kinzey
was appointed Senior Vice President – Information Technology in March
2006. Before joining RadioShack, Ms. Kinzey served as Vice President –
Membership, Member Services and Credit for SAM’S CLUB and as Vice
President – HR/Finance/Corporate Systems and Vice President of Store
Systems for Wal-Mart Stores, Inc.
|
|
(7)
|
Mr. Ripperton
was appointed Senior Vice President – Supply Chain Management in August
2006. Mr. Ripperton joined RadioShack in 2000 and has served as Vice
President – Distribution, Division Vice President - Distribution, Group
General Manager, and Distribution Center Manager.
|
|
(8)
|
Mr. Moad was
appointed Vice President and Controller in August 2007. He has worked for
RadioShack for more than 25 years, and has served as Vice President and
Treasurer, Vice President - Investor Relations, Director - Investor
Relations, Vice President – Controller (InterTAN, Inc.), Vice President –
Assistant Secretary (InterTAN, Inc.), Assistant Secretary (InterTAN,
Inc.), Controller – International Division, and Staff Accountant –
International Division. InterTAN, Inc., was an NYSE-registered
spin-off of RadioShack’s international
units.
|
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 transaction quotations of consolidated trading for
issues on the New York Stock Exchange, for each quarter in the two years ended
December 31, 2007.
|
Dividends
|
||||||||||||
|
Quarter
Ended
|
High
|
Low
|
Declared
|
|||||||||
|
December 31,
2007
|
$ | 23.42 | $ | 16.72 | $ | 0.25 | ||||||
|
September 30,
2007
|
34.98 | 20.09 | -- | |||||||||
|
June 30,
2007
|
35.00 | 26.66 | -- | |||||||||
|
March 31,
2007
|
27.88 | 16.69 | -- | |||||||||
|
December 31,
2006
|
$ | 20.40 | $ | 16.49 | $ | 0.25 | ||||||
|
September 30,
2006
|
19.71 | 13.76 | -- | |||||||||
|
June 30,
2006
|
18.83 | 14.00 | -- | |||||||||
|
March 31,
2006
|
22.90 | 18.74 | -- | |||||||||
HOLDERS
OF RECORD
At
February 15, 2008, there were 19,484 holders of record of our common
stock.
DIVIDENDS
The
Board of Directors annually reviews our dividend policy. On November 12,
2007, our Board of Directors declared an annual dividend of $0.25 per share. The
dividend was paid on December 19, 2007, to stockholders of record on November
29, 2007.
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
of Shares Purchased
|
Average Price
Paid per Share
|
Total Number of Shares
Purchased as Part of Publicly Announced Plans
or Programs
(1)
|
Approximate Dollar Value of
Shares That May Yet Be Purchased Under the Plans or Programs (1)
|
|||||||||||||
|
October 1 –
31, 2007
|
---
|
$ |
---
|
---
|
$ | 1,390,147 | ||||||||||
|
November 1 –
30, 2007
|
---
|
$ |
---
|
---
|
$ | 1,390,147 | ||||||||||
|
December 1 –
31, 2007
|
---
|
$ |
---
|
---
|
$ | 1,390,147 | ||||||||||
|
Total
|
---
|
$ |
---
|
---
|
||||||||||||
|
(1)
|
These
publicly announced plans or programs consist of RadioShack’s $250 million
share repurchase program, which was announced on March 16, 2005, and has
no expiration date. On August 5, 2005, we suspended purchases under the
$250 million share repurchase program during the period in which a
financial institution purchased shares pursuant to an overnight share
repurchase program. During March 2007, management resumed share
repurchases under the $250 million program; however, no shares were
repurchased during the second and fourth quarters of 2007. For the
twelve months ended December 31, 2007, we repurchased 8.7 million shares
or $208.5 million of our common stock. As of December 31, 2007, there was
$1.4 million available for share repurchases under the $250 million share
repurchase program. During the period covered by this 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.
|
|
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 amounts, ratios, locations and square
footage)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Statements
of Income Data
|
||||||||||||||||||||
|
Net sales and
operating revenues
|
$ | 4,251.7 | $ | 4,777.5 | $ | 5,081.7 | $ | 4,841.2 | $ | 4,649.3 | ||||||||||
|
Operating
income
|
$ | 381.9 | $ | 156.9 | $ | 349.9 | $ | 558.3 | $ | 483.7 | ||||||||||
|
Net
income
|
$ | 236.8 | $ | 73.4 | $ | 267.0 | $ | 337.2 | $ | 298.5 | ||||||||||
|
Net income
per share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.76 | $ | 0.54 | $ | 1.80 | $ | 2.09 | $ | 1.78 | ||||||||||
|
Diluted
|
$ | 1.74 | $ | 0.54 | $ | 1.79 | $ | 2.08 | $ | 1.77 | ||||||||||
|
Shares used
in computing income per share:
|
||||||||||||||||||||
|
Basic
|
134.6 | 136.2 | 148.1 | 161.0 | 167.7 | |||||||||||||||
|
Diluted
|
135.9 | 136.2 | 148.8 | 162.5 | 168.9 | |||||||||||||||
|
Gross profit as a percent of sales (1)
|
47.6 | % | 44.6 | % | 44.6 | % | 48.2 | % | 47.4 | % | ||||||||||
|
SG&A expense as a percent of sales (1)
|
36.2 | % | 37.9 | % | 35.5 | % | 34.8 | % | 35.3 | % | ||||||||||
|
Operating
income as a percent of sales
|
9.0 | % | 3.3 | % | 6.9 | % | 11.5 | % | 10.4 | % | ||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Inventories,
net
|
$ | 705.4 | $ | 752.1 | $ | 964.9 | $ | 1,003.7 | $ | 766.5 | ||||||||||
|
Total
assets
|
$ | 1,989.6 | $ | 2,070.0 | $ | 2,205.1 | $ | 2,516.7 | $ | 2,243.9 | ||||||||||
|
Working
capital
|
$ | 818.8 | $ | 615.4 | $ | 641.0 | $ | 817.7 | $ | 808.5 | ||||||||||
|
Capital
structure:
|
||||||||||||||||||||
|
Current
debt
|
$ | 61.2 | $ | 194.9 | $ | 40.9 | $ | 55.6 | $ | 77.4 | ||||||||||
|
Long-term
debt
|
$ | 348.2 | $ | 345.8 | $ | 494.9 | $ | 506.9 | $ | 541.3 | ||||||||||
|
Total
debt
|
$ | 409.4 | $ | 540.7 | $ | 535.8 | $ | 562.5 | $ | 618.7 | ||||||||||
|
Total
debt, net of cash and cash equivalents
|
$ | (100.3 | ) | $ | 68.7 | $ | 311.8 | $ | 124.6 | $ | (16.0 | ) | ||||||||
|
Stockholders'
equity
|
$ | 769.7 | $ | 653.8 | $ | 588.8 | $ | 922.1 | $ | 769.3 | ||||||||||
|
Total capitalization (2)
|
$ | 1,179.1 | $ | 1,194.5 | $ | 1,124.6 | $ | 1,484.6 | $ | 1,388.0 | ||||||||||
|
Long-term debt as a % of
total capitalization (2)
|
29.5 | % | 29.0 | % | 44.0 | % | 34.1 | % | 39.0 | % | ||||||||||
|
Total debt as a % of total
capitalization (2)
|
34.7 | % | 45.3 | % | 47.6 | % | 37.9 | % | 44.6 | % | ||||||||||
|
Book
value per share at year end
|
$ | 5.87 | $ | 4.81 | $ | 4.36 | $ | 5.83 | $ | 4.73 | ||||||||||
|
Financial
Ratios
|
||||||||||||||||||||
|
Return on
average stockholders' equity
|
33.2 | % | 11.8 | % | 35.3 | % | 39.9 | % | 39.9 | % | ||||||||||
|
Return on
average assets
|
12.3 | % | 3.4 | % | 11.3 | % | 14.2 | % | 13.4 | % | ||||||||||
|
Annual
inventory turnover
|
3.3 | 2.9 | 2.7 | 2.6 | 2.8 | |||||||||||||||
|
Other
Data
|
||||||||||||||||||||
|
EBITDA (3)
|
$ | 494.6 | $ | 285.1 | $ | 473.7 | $ | 659.7 | $ | 575.7 | ||||||||||
|
Dividends
declared per share
|
$ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||||
|
Capital
expenditures
|
$ | 45.3 | $ | 91.0 | $ | 170.7 | $ | 229.4 | $ | 189.6 | ||||||||||
|
Number of
retail locations at year end
|
6,670 | 6,835 | 7,460 | 7,433 | 7,051 | |||||||||||||||
|
Average
square footage per RadioShack
company-operated
store
|
2,527 | 2,496 | 2,489 | 2,529 | 2,450 | |||||||||||||||
|
Comparable
store sales (decrease) increase
|
(8.2 | %) | (5.6 | %) | 0.9 | % | 3.2 | % | 2.4 | % | ||||||||||
|
Shares
outstanding
|
131.1 | 135.8 | 135.0 | 158.2 | 162.5 | |||||||||||||||
This table should
be read in conjunction with MD&A and the Consolidated Financial Statements
and related Notes.
|
(1)
|
Amounts have
been revised. Refer to Note 2 – “Summary of Significant
Accounting Policies” under the section titled “Revision of Expense
Classification” in the Notes to Consolidated Financial Statements
for a complete discussion regarding the revision. Further, as a result of
the revision for years 2004 and 2003, costs of products sold increased by
$100.8 million and $110.5 million, SG&A decreased by $90.2 million and
$97.7 million, and depreciation included in operating expenses decreased
by $10.6 million and $12.8 million, respectively.
|
|
(2)
|
Capitalization
is defined as total debt plus total stockholders'
equity.
|
|
(3)
|
EBITDA, a
non-GAAP financial measure, is defined as earnings before interest, taxes,
depreciation and amortization. The comparable financial measure to EBITDA
under GAAP is net income. EBITDA is used by management to evaluate the
operating performance of our business for comparable periods. EBITDA
should not be used by investors or others as the sole basis for
formulating investment decisions as it excludes a number of important
items. We compensate for this limitation by using GAAP financial measures
as well in managing our business. In the view of management, EBITDA is an
important indicator of operating performance because EBITDA excludes the
effects of financing and investing activities by eliminating the effects
of interest and depreciation costs.
|
The following table
is a reconciliation of EBITDA to net income.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Reconciliation
of EBITDA to Net Income
|
||||||||||||||||||||
|
EBITDA
|
$ | 494.6 | $ | 285.1 | $ | 473.7 | $ | 659.7 | $ | 575.7 | ||||||||||
|
Interest
expense, net of interest income
|
(16.2 | ) | (36.9 | ) | (38.6 | ) | (18.2 | ) | (22.9 | ) | ||||||||||
|
Provision for
income taxes
|
(129.8 | ) | (38.0 | ) | (51.6 | ) | (204.9 | ) | (174.3 | ) | ||||||||||
|
Depreciation
and amortization
|
(112.7 | ) | (128.2 | ) | (123.8 | ) | (101.4 | ) | (92.0 | ) | ||||||||||
|
Other income
(loss), net
|
0.9 | (8.6 | ) | 10.2 | 2.0 | 12.0 | ||||||||||||||
|
Cumulative
effect of change in accounting
principle,
net of $1.8 million tax benefit in 2005
|
-- | -- | (2.9 | ) | -- | -- | ||||||||||||||
|
Net
income
|
$ | 236.8 | $ | 73.4 | $ | 267.0 | $ | 337.2 | $ | 298.5 | ||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS
OF OPERATIONS (“MD&A”).
This MD&A
section discusses our results of operations, liquidity and financial condition,
risk management practices, critical accounting policies, and estimates and
certain factors that may affect our future results, including economic and
industry-wide factors. Our MD&A should be read in conjunction with our
consolidated financial statements and accompanying notes, included in this
Annual Report on Form 10-K, as well as the Risk Factors set forth in Item 1A
above.
Subsequent to the end of 2007, we determined that we
should revise the classification of certain expenses relating to
merchandise acquisition and the operation of our distribution centers, including
depreciation, in our Consolidated Statements of Income. This revision had no
impact on previously reported operating income, net income, financial position,
stockholder's equity, comprehensive income, or cash flows from operating
activities. Our policy is, and historically has been, to capitalize
such amounts into inventory. However, historically upon capitalization of
these expenses, we increased inventory and previously decreased cost of products
sold, rather than decreasing selling, general and administrative (“SG&A”)
expense where these expenses were originally recorded. As a result, we
had understated cost of products sold and overstated SG&A expense
and, to a lesser extent, depreciation. We believe the revised presentation
provides consistency between our consolidated balance sheets and statements of
income by aligning the classification of our distribution costs within our
statements of income in the manner in which these costs are included in our
inventory balance. Refer
to Note 2 – “Summary of Significant
Accounting Policies” under the section titled “Revision of Expense
Classification” in the Notes
to Consolidated Financial Statements for a complete discussion regarding the
revision. The following discussion and analysis has been updated to reflect this
revision.
OVERVIEW
Highlights related
to the year ended December 31, 2007, include:
|
·
|
Net sales and operating
revenues decreased $525.8 million to $4,251.7 million, compared to the
corresponding prior year period. Comparable store sales
decreased 8.2%. This decline was primarily due to a sales decrease
in our wireless and personal electronics platforms.
|
|
·
|
Gross margin
increased 300 basis points to 47.6% compared to the corresponding prior
year period. This increase was primarily due to
improved inventory
management and a shift in our product mix.
|
|
·
|
SG&A expense decreased
$272.2 million to $1,538.5 million, compared to the corresponding prior
year period. As a percentage of net sales and operating revenues,
SG&A declined 170 basis points to 36.2%. A significant portion
of this improvement was attributable
to decreased compensation as a result of reductions in our corporate and
store personnel in 2006 and better management of store labor hours.
Other factors leading to the decline of SG&A included a decrase in
professional fees driven by reduced legal costs related to our defense of
certain class action lawsuits during 2006, as well as a reduction in the
use of consultants. The SG&A improvement also resulted from
$44.6 million in severance and other restructuring charges recognized in
2006, and a $14.3 million reduction of accrued vacation in 2007 in
connection with the modification of our employee vacation policy during
2007.
|
|
·
|
Operating income
increased $225.0 million to $381.9 million, and net income increased
$163.4 million to $236.8 million, compared to the corresponding prior year
period. The results for the year ended December 31, 2006, included
pre-tax impairment charges of $44.3 million. Net income per diluated
share was $1.74 for the year ended December 31, 2007, compared to $0.54
for the corresponding prior year
period.
|
2006
RESTRUCTURING REVIEW
Due to negative
trends that developed in our business during calendar year 2005, we announced a
restructuring program on February 17, 2006, that contained four key
components:
|
·
|
Update our
inventory
|
|
·
|
Focus on our
top-performing RadioShack company-operated stores, while closing 400 to
700 RadioShack company-operated stores, and aggressively
relocate
other RadioShack company-operated
stores
|
|
·
|
Consolidate
our distribution centers
|
|
·
|
Reduce our
overhead costs
|
Through December
31, 2006, we conducted a liquidation of certain inventory during the summer and
fall of 2006, and replaced underperforming merchandise with new faster-moving
merchandise. During the summer of 2006, we also focused on our top-performing
stores and completed the closure of 481 underperforming stores, reducing the
number of retail employees in connection with these closures. Additionally, we
consolidated our distribution centers in the fall of 2006. Management also
reduced our cost structure; including our advertising spend rate and our
workforce within our corporate headquarters. A number of other cost reductions
were implemented. As of December 31, 2006, we considered our restructuring
program to be substantially complete.
The 2006
restructuring affects comparability in certain areas of this MD&A discussion
and is discussed where necessary.
See “Financial
Impact of Restructuring Program” below for a discussion of the financial impact
of our 2006 restructuring program.
RESULTS
OF OPERATIONS
NET SALES AND
OPERATING REVENUES
Consolidated
net sales decreased 11.0%
or $525.8 million
to $4,251.7 million
for the year ended December 31, 2007, from $4,777.5
million in the corresponding prior year period. This decrease was primarily due
to a comparable store sales decline of 8.2%
for the year ended December 31, 2007, in addition to the closure of 481
company-operated stores during June and July 2006 as part of our 2006
restructuring. Approximately 290 of the 481 stores were closed in July 2006,
with a majority of the remainder closed in the last half of June 2006. The
decrease in comparable store sales was primarily caused by a decline in our
wireless and personal electronics platform sales.
Consolidated net
sales and operating revenues for our two reportable segments and other sales are
as follows:
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
RadioShack
company-operated stores
|
$ | 3,637.7 | $ | 4,079.8 | $ | 4,480.8 | ||||||
|
Kiosks
|
297.0 | 340.5 | 262.7 | |||||||||
|
Other
sales
|
317.0 | 357.2 | 338.2 | |||||||||
|
Consolidated
net sales and operating revenues
|
$ | 4,251.7 | $ | 4,777.5 | $ | 5,081.7 | ||||||
|
Consolidated net sales and
operating revenues (decrease)
increase
|
(11.0
|
%) | (6.0 | %) | 5.0 | % | ||||||
|
Comparable store sales (decrease) increase
(1)
|
(8.2 | %) | (5.6 | %) | 0.9 | % |
|
(1)
|
Comparable
store sales include the sales of RadioShack company-operated stores and
kiosks with more than 12 full months of recorded
sales.
|
The following table
provides a summary of our consolidated net sales and operating revenues by
platform and as a percent of net sales and operating revenues. These
consolidated platform sales include sales from our RadioShack company-operated
stores and kiosks, as well as other sales.
|
Consolidated
Net Sales and Operating Revenues
|
||||||||||||||||||||||||
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
Wireless
|
$ | 1,416.4 | 33.3 | % | $ | 1,654.8 | 34.6 | % | $ | 1,746.0 | 34.4 | % | ||||||||||||
|
Accessory
|
1,029.7 | 24.2 | 1,087.6 | 22.8 | 1,040.1 | 20.5 | ||||||||||||||||||
|
Personal
electronics
|
650.7 | 15.3 | 751.8 | 15.7 | 746.7 | 14.7 | ||||||||||||||||||
|
Modern
home
|
556.1 | 13.1 | 611.9 | 12.8 | 672.6 | 13.2 | ||||||||||||||||||
|
Power
|
251.3 | 5.9 | 271.4 | 5.7 | 302.3 | 5.9 | ||||||||||||||||||
|
Technical
|
184.4 | 4.3 | 198.4 | 4.2 | 205.2 | 4.0 | ||||||||||||||||||
|
Service
|
100.5 | 2.4 | 106.3 | 2.2 | 262.5 | 5.2 | ||||||||||||||||||
|
Service
centers and other
sales (1)
|
62.6 | 1.5 | 95.3 | 2.0 | 106.3 | 2.1 | ||||||||||||||||||
|
Consolidated
net sales and
operating revenues
|
$ | 4,251.7 | 100.0 | % | $ | 4,777.5 | 100.0 | % | $ | 5,081.7 | 100.0 | % | ||||||||||||
|
(1)
|
Service
centers and other sales include outside sales from our service centers, in
addition to RadioShack company-operated store repair revenue, and outside
sales of our global sourcing operations and domestic and overseas
manufacturing facilities.
|
2007
COMPARED WITH 2006
RadioShack
Company-Operated Stores
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 for the RadioShack
segment.
|
Net Sales and
Operating Revenues
|
||||||||||||||||||||||||
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
Wireless
|
$ | 1,085.6 | 29.8 | % | $ | 1,288.1 | 31.6 | % | $ | 1,453.3 | 32.4 | % | ||||||||||||
|
Accessory
|
949.3 | 26.1 | 1,006.6 | 24.7 | 976.8 | 21.8 | ||||||||||||||||||
|
Personal
electronics
|
589.8 | 16.2 | 683.1 | 16.8 | 680.1 | 15.2 | ||||||||||||||||||
|
Modern
home
|
494.5 | 13.6 | 539.5 | 13.2 | 602.4 | 13.4 | ||||||||||||||||||
|
Power
|
235.8 | 6.5 | 258.1 | 6.3 | 289.1 | 6.5 | ||||||||||||||||||
|
Technical
|
171.9 | 4.7 | 184.6 | 4.5 | 192.1 | 4.3 | ||||||||||||||||||
|
Service
|
97.3 | 2.7 | 102.3 | 2.5 | 255.3 | 5.7 | ||||||||||||||||||
|
Other
revenue
|
13.5 | 0.4 | 17.5 | 0.4 | 31.7 | 0.7 | ||||||||||||||||||
|
Net sales and
operating revenues
|
$ | 3,637.7 | 100.0 | % | $ | 4,079.8 | 100.0 | % | $ | 4,480.8 | 100.0 | % | ||||||||||||
To
assist in comparability, the revenue discussion presented below primarily
analyzes results excluding the closed stores in 2006.
Excluding the
effects of the 2006 store closures, sales in our wireless platform (includes
postpaid and prepaid wireless handsets, commissions, residual income and
communication devices such as scanners and GPS) decreased 13.7% for the year
ended December 31, 2007, when compared to the corresponding prior year period.
This decrease was primarily driven by a decline in postpaid wireless sales for
our two main wireless carriers. We believe that these sales declines were the
result of increased wireless competition, a challenging wireless industry
environment, and a shift to prepaid handsets and corresponding service plans.
This decrease, however, was partially offset by increased sales of GPS products,
particularly in the fourth quarter of 2007, and prepaid wireless handset sales.
Including the effects of the 2006 store closures, wireless platform sales for
the year ended December 31, 2007, decreased 15.7%.
Excluding the
effects of the 2006 store closures, sales in our accessory platform (includes
home entertainment, wireless, music and computer accessories; media storage;
power adapters; digital imaging products and headphones) decreased 2.3%
for the year ended December 31, 2007, when compared to the corresponding prior
year period. This decrease was primarily the result of declines in wireless and
home entertainment accessory sales, but partially offset by increases in media
storage and imaging accessories sales. Including the effects of the 2006 store
closures, accessory platform sales for the year ended December 31, 2007,
decreased 5.7%.
Excluding the
effects of the 2006 store closures, sales in our personal electronics platform
(includes digital cameras, digital music players, toys, satellite radios,
camcorders, general radios, and wellness products) decreased 11.7%
for the year ended December 31, 2007, when compared to the corresponding prior
year period. This decrease was driven primarily by sales declines in satellite
radios and digital music players, but was partially offset by increased sales of
video gaming products. Including the effects of the 2006 store closures,
personal electronics platform sales for the year ended December 31, 2007,
decreased 13.7%.
Excluding the
effects of the 2006 store closures, sales in our modern home platform (includes
residential telephones, home audio and video end-products, direct-to-home
(“DTH”) satellite systems, and computers) decreased 5.7%,
for the year ended December 31, 2007, when compared to the corresponding prior
year period. This decrease was the result of sales declines in residential
telephones, and DVD players and recorders, offset by increased sales of laptop
computers, PC peripherals, and flash drives. Including the effects of the 2006
store closures, modern home platform sales for the year ended December 31, 2007,
decreased 8.3%.
Excluding the
effects of the 2006 store closures, sales in our power platform (includes
general and special purpose batteries and battery chargers) decreased 5.6%
for the year ended December 31, 2007, when compared to the corresponding prior
year period. This sales decline was the result of decreased sales of general
purpose and special purpose telephone batteries. Including the effects of the
2006 store closures, power platform sales for the year ended December 31, 2007,
decreased 8.6%.
Excluding the
effects of the 2006 store closures, sales in our technical platform (includes
wire and cable, connectivity products, components and tools, as well as hobby
and robotic products) decreased 2.2%
for the year ended December 31, 2007, when compared to the corresponding prior
year period. This sales decline was due primarily to a decrease in sales of
robotic kits, metal detectors and tools, partially offset by an increase in
audio cable sales. Including the effects of the 2006 store closures, technical
platform sales for the year ended December 31, 2007, decreased 6.9%.
Excluding the
effects of the 2006 store closures, sales in our service platform (includes
prepaid wireless airtime, extended service plans and bill payment revenue)
decreased 2.6%
for the year ended December 31, 2007, when compared to the corresponding prior
year period. Prepaid airtime sales increased for the year ended December 31,
2007; however, this gain was more than offset by decreases in bill payment
revenue. Including the effects of the 2006 store closures, service platform
sales for the year ended December 31, 2007, decreased 4.9%.
Other revenue
(includes RS company-operated store repair revenue and other revenue) decreased
$4.0 million or 22.9% for the year ended December 31, 2007, compared to the
prior year, due in part to the 2006 store closures and to a decline in store
repair revenue.
Kiosks
Kiosk sales consist
primarily of handset sales, postpaid and prepaid commission revenue and related
wireless accessory sales. Kiosk sales decreased 12.8% or $43.5 million for the
year ended December 31, 2007, when compared to the corresponding prior year
period. While this decrease is partially attributable to fewer kiosk locations
compared to the prior year, we believe that this sales decline was primarily the
result of increased wireless competition, a challenging wireless industry
environment, and a customer shift to prepaid handsets which are generally priced
lower than postpaid handsets.
Other
Sales
Other sales include
sales to our independent dealers, outside sales through our service centers,
sales generated by our www.radioshack.com
Web site, sales to our Mexican joint venture, sales to commercial customers,
outside sales of our global sourcing operations and manufacturing facilities
and, in 2006, sales of our now closed Canadian company-operated stores. Other
sales were down $40.2
million or 11.3%
for the year ended December 31, 2007, respectively, when compared to the
corresponding prior year period. This sales decrease was primarily due to the
sale or closure of five service centers late in the second quarter of 2006,
fewer dealer outlets in 2007, and a decline in product sales to the remaining
dealers.
GROSS
PROFIT
Consolidated gross
profit and gross margin are as follows:
|
|
Year Ended
December 31,
|
|||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Gross
profit
|
$ | 2,025.8 | $ | 2,129.4 | $ | 2,266.7 | ||||||
|
Gross profit
decrease
|
(4.9 | %) | (6.1 | %) | (2.9 | %) | ||||||
|
Gross
margin
|
47.6 | % | 44.6 | % | 44.6 | % | ||||||
Consolidated gross
profit and gross margin for the year ended December 31, 2007, were $2,025.8
million and 47.6%, respectively, compared with $2,129.4 million and 44.6% in the
corresponding prior year period, resulting in a 4.9% decrease in gross profit
dollars and a 300 basis point increase in our gross margin.
The
decrease in gross profit for the year ended December 31, 2007, was the result of
a decline in net sales and operating revenues primarily due to a comparable
store sales decrease and store closures associated with our 2006 restructuring.
Our 2007 gross margin increased primarily due to an improvement in our
inventory management and a shift in product mix. In addition, refunds of $14.0
million and $5.2 million for federal telecommunications excise taxes were
recorded in the first and fourth quarters of 2007, respectively. A portion of
these refunds totaling $18.8 million was recorded as a reduction to cost of
products sold, which accounted for a 44 basis point increase in our gross
margin. See Note 12 – “Federal Excise Tax” for a
discussion of the impact of the federal telecommunications excise
tax.
SELLING, GENERAL
AND ADMINISTRATIVE (“SG&A”) EXPENSE
Our consolidated
SG&A expense decreased 15.0% or $272.2 million for the year ended December
31, 2007, when compared to the corresponding prior year period. This represents
a 170 basis point decrease as a percentage of net sales and operating revenues
compared to the corresponding prior year period.
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,
|
||||||||||||||||||
|
2007
|
2006 (1)
|
2005 (1)
|
||||||||||||||||
|
Dollars
|
% of Sales
& Revenues
|
Dollars
|
% of Sales
& Revenues
|
Dollars
|
% of Sales
& Revenues
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||||
|
Payroll and
commissions
|
$ | 638.6 | 15.0 | % | $ | 798.2 | 16.7 | % | $ | 767.9 | 15.1 | % | ||||||
|
Rent
|
304.7 | 7.2 | 312.1 | 6.5 | 292.1 | 5.7 | ||||||||||||
|
Advertising
|
208.8 | 4.9 | 216.3 | 4.5 | 263.1 | 5.2 | ||||||||||||
|
Other taxes
(excludes income
taxes)
|
103.0 | 2.4 | 121.2 | 2.5 | 120.8 | 2.4 | ||||||||||||
|
Utilities and
telephone
|
61.4 | 1.4 | 64.7 | 1.4 | 68.5 | 1.4 | ||||||||||||
|
Insurance
|
58.1 | 1.4 | 62.8 | 1.3 | 63.1 | 1.2 | ||||||||||||
|
Credit card
fees
|
37.8 | 0.9 | 40.1 | 0.8 | 40.4 | 0.8 | ||||||||||||
|
Professional
fees
|
19.1 | 0.4 | 49.2 | 1.0 | 43.3 | 0.9 | ||||||||||||
|
Licenses
|
12.7 | 0.3 | 13.2 | 0.3 | 13.4 | 0.3 | ||||||||||||
|
Repairs and
maintenance
|
10.9 | 0.3 | 11.7 | 0.3 | 11.6 | 0.2 | ||||||||||||
|
Printing,
postage and office supplies
|
9.6 | 0.2 | 11.7 | 0.3 | 10.3 | 0.2 | ||||||||||||
|
Stock
purchase and savings
plans
|
7.2 | 0.2 | 11.1 | 0.2 | 15.5 | 0.3 | ||||||||||||
|
Recruiting,
training & employee
relations
|
6.8 | 0.2 | 12.3 | 0.3 | 14.6 | 0.3 | ||||||||||||
|
Travel
|
5.2 | 0.1 | 8.3 | 0.2 | 10.3 | 0.2 | ||||||||||||
|
Warranty and
product repair
|
5.1 | 0.1 | 7.1 | 0.1 | 11.9 | 0.2 | ||||||||||||
|
Other
|
49.5 | 1.2 | 70.7 | 1.5 | 56.5 | 1.1 | ||||||||||||
| $ | 1,538.5 | 36.2 | % | $ | 1,810.7 | 37.9 | % | $ | 1,803.3 | 35.5 | % | |||||||
|
(1)
|
Amounts have
been revised. Refer to Note 2 – “Summary of Significant
Accounting Policies” under the section titled “Revision of Expense
Classification” in the Notes to Consolidated Financial Statements
for a complete discussion.
|
Payroll and
commissions expense decreased in dollars and as a percentage of net sales and
operating revenues. This decrease was primarily driven by a reduction in our
corporate support staff, a reduction of store personnel from store closures in
2006, and better management of store labor hours. Additionally, compensation
included an $8.5 million charge recorded in the first quarter of 2007 associated
with the reduction of approximately 280 corporate support employees, while the
year ended December 31, 2006, included employee separation charges of
approximately $16.1 million connected with the 2006 restructuring. Furthermore,
our accrued vacation was reduced $14.3 million during the year ended December
31, 2007, in connection with the modification of our employee vacation policy
during 2007.
Rent expense
decreased in dollars, but increased as a percent of net sales and operating
revenues. The rent decrease was primarily driven by store closures from our 2006
restructuring.
Advertising expense
decreased in dollars, but increased as a percent of net sales and operating
revenues. This decrease was primarily due to a change in our media strategy, as
we changed the mix of media used in our advertising program from television to
more radio and newspaper usage, as well as reduced sponsorship
programs.
Professional fees
decreased in both dollars and as a percent of net sales and operating revenues.
The decrease relates to a decline in our use of consultants and lower fees
incurred as a result of our defense of certain class action lawsuits during
2006, as well as prior year recognition of $5.1 million of the $8.8 million
charge to establish a legal reserve for the settlement of these lawsuits. See Note 13 – “Litigation” in the Notes to Consolidated Financial
Statements for a discussion of these lawsuits.
DEPRECIATION AND
AMORTIZATION
The table below
gives a summary of our total depreciation and amortization by
segment.
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005 (1)
|
|||||||||
|
RadioShack
company-operated stores
|
$ | 53.4 | $ | 58.2 | $ | 52.1 | ||||||
|
Kiosks
|
6.3 | 10.2 | 9.0 | |||||||||
|
Other
|
1.7 | 2.3 | 2.3 | |||||||||
|
Unallocated
|
51.3 | 57.5 | 60.4 | |||||||||
|
Total
depreciation and amortization
|
$ | 112.7 | $ | 128.2 | $ | 123.8 | ||||||
|
(1)
|
Amounts have
been retrospectively adjusted to conform to current year presentations.
Certain prior year amounts have been reallocated between the segments and
other business activities and the unallocated
category.
|
The table below
provides an analysis of total depreciation and amortization.
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Depreciation
and amortization expense
|
$ | 102.7 | $ | 117.5 | $ | 113.5 | ||||||
|
Depreciation
and amortization included in cost of
products sold
|
10.0 | 10.7 | 10.3 | |||||||||
|
Total
depreciation and amortization
|
$ | 112.7 | $ | 128.2 | $ | 123.8 | ||||||
Total depreciation
and amortization for the year ended December 31, 2007, declined $15.5 million or
12.1%. This decrease was primarily due to the closure of stores and acceleration
of depreciation as part of our 2006 restructuring, as well as a reduction in our
capital expenditures during 2007. Additionally, the 2007 decline within the
kiosk segment was the result of an impairment recorded during the third quarter
of 2006.
IMPAIRMENT OF
LONG-LIVED ASSETS AND OTHER CHARGES
During 2007, we
recorded impairment charges for long-lived assets related primarily to our
Sprint Nextel kiosk operations and company-operated stores of $2.7 million. This
charge was comprised of $0.6 million, $0.5 million, $1.0 million and $0.6
million recorded in the first, second, third and fourth quarters, respectively.
We recorded this amount based on the remaining estimated future cash flows
related to these specific stores. It was determined that the net book value of
many of the stores' long-lived assets was not recoverable. For the stores with
insufficient estimated cash flows, we wrote down the associated long-lived
assets to their estimated fair value.
For a complete
discussion on the 2006 impairment, see the subsection titled “Impairment of
Long-Lived Assets and Other Charges” below, under the section titled “2006
Compared to 2005” of MD&A.
These impairment
charges, aggregating $2.7 million and $44.3 million, respectively, for 2007 and
2006 were recorded within impairment of long-lived assets and other charges in
the accompanying Consolidated Statement of Income.
NET INTEREST
EXPENSE
Consolidated
interest expense, net of interest income, was $16.2 million for 2007 versus
$36.9 million for 2006, a decrease of $20.7 million or 56%.
Interest expense
decreased 12% to $38.8 million in 2007 from $44.3 million in 2006. This decrease
was attributable to lower average outstanding debt, which was partially offset
by rising interest rates on our floating rate debt exposure.
Interest income
increased 205% to $22.6 million in 2007 from $7.4 million in 2006. This increase
was due to a higher average investment balance for 2007, as well as higher
average investment rates. Additionally, we recorded $2.6
million of interest income related to federal telecommunications excise tax
refunds during 2007. See Note 12 – “Federal Excise
Tax” for a discussion of the impact of the federal telecommunications excise
tax.
We
anticipate net interest expense for 2008 will be below the 2007 level, due to
larger average cash balances when compared to the prior year.
OTHER INCOME
(LOSS)
For the year ended
December 31, 2007, we recognized a net gain of $0.9 million relating to our
derivative exposure to Sirius. During the third quarter of 2007, we modified the
expected date at which we would settle the warrants, resulting in a $2.4 million
unrealized gain, which was offset by mark-to-market losses of $1.5 million
during the year, compared to a loss of $5.9 million for the year ended December
31, 2006.
Additionally, for
the year ended December 31, 2006, we had a $2.7 million loss related to an other
than temporary impairment of other investments.
INCOME TAX
PROVISION
The income tax provision for each quarterly period
reflects our current estimate of the effective tax rate for the full year,
adjusted for any discrete events that are reported in the quarterly period in
which they occur. Our effective tax rate for the year ended December 31, 2007,
was 35.4% compared to 34.1% for the corresponding prior year period. The 2007
effective tax rate was impacted by the net reversal in June 2007 of
approximately $10.0 million in unrecognized tax benefits, deferred tax assets
and accrued interest. Refer to Note 11 – “Income Taxes” of
our consolidated financial statements for additional information. This $10.0
million reversal lowered our effective tax rate 273 basis points for the year
ended December 31, 2007. Furthermore, the effective tax rate for 2006 was
primarily affected by the tax benefit associated with inventory donations
occurring in the quarter ended June 30, 2006. During the second quarter of 2006,
we donated approximately $20 million in inventory to charitable organizations in
a manner that provided us with a tax deduction in excess of the inventory cost.
The entire tax benefit attributable to this charitable donation deduction is
reflected in the effective tax rate for the second quarter of
2006.
2006
COMPARED WITH 2005
RESULTS
OF OPERATIONS
NET SALES AND
OPERATING REVENUES
Sales decreased 6.0% to $4,777.5 million in 2006 from
$5,081.7 million in 2005. We also had a 5.6% decrease in comparable store sales.
These changes were primarily the result of a 59.5% decrease in our service
platform sales due primarily
to the manner in which we began recognizing sales of prepaid wireless airtime in
2006 and a 5.2% decrease in our wireless platform sales. In addition, all platforms were
affected by the decline in the number of RadioShack company-operated stores as a
result of our restructuring program.
RadioShack
Company-Operated Stores
All sales in the
platforms below were impacted by the closure of the RadioShack company-operated
stores related to our restructuring program.
Sales in our
wireless platform decreased in dollars, but increased as a percentage of net
sales and operating revenues in 2006, compared to 2005. These decreases were
primarily driven by a decline in unit sales of wireless handsets. Factors
contributing to this sales decline included an unfavorable mix shift to prepaid
handsets from postpaid, a sluggish wireless industry environment, a sharp unit
sales decline in the northeastern United States, and fewer RadioShack stores.
These decreases were partially offset by the introduction of various GPS
products.
Sales in our
accessory platform increased in dollars and as a percentage of net sales and
operating revenues in 2006, compared to 2005. These increases were primarily the
result of higher sales of digital music accessories associated with higher sales
of digital music players included in our personal electronics platform, in
addition to higher Bluetooth wireless accessories and flash memory sales. These
increases were partially offset by a decline in home entertainment accessory
sales.
Sales in our
personal electronics platform increased in both dollars and as a percentage of
net sales and operating revenues in 2006, compared to 2005. These sales
increases were driven primarily by increased sales of digital music players,
offset by decreases in most of the remaining personal electronics
categories.
Sales in our modern
home platform decreased in both dollars and as a percentage of net sales and
operating revenues in 2006, compared to 2005. These decreases were primarily due
to lower sales of telephones, home computers, and DVD players, which were
partially offset by increased sales of flat panel televisions.
Sales in our power
platform decreased in both dollars and as a percentage of net sales and
operating revenues in 2006, compared to 2005. These sales decreases were due
primarily to a decrease in sales of both general and special purpose batteries
caused by factors such as reduced sales of products requiring batteries and
customer tendencies to simply replace older cordless phones rather than
replacing their batteries.
Sales in our
technical platform decreased in dollars, but increased slightly as a percentage
of net sales and operating revenues in 2006, compared to 2005. The dollar
decrease was primarily the result of a decrease in sales of specialty
tools.
Sales in our
service platform decreased in dollars and as a percentage of net sales and
operating revenues in 2006, compared to 2005. These decreases were primarily
attributable to a change in the manner in which we recognize income associated
with sales of prepaid wireless airtime. Beginning in 2006, principally as a
result of changes in our agreements with wireless carriers, we no longer record
the full value of airtime purchased by customers, but rather record only our
markup on the sale as revenue. This change reduced our total company-operated
stores revenue by approximately $134.6 million for 2006, as compared to the
corresponding prior year period, but had no impact on our gross profit or
operating income.
Other revenue
decreased in both dollars and as a percentage of net sales and operating
revenues, due primarily to our 2006 store closures and, to a lesser extent, a
decline in store repair revenue.
Kiosks
Kiosk sales
increased $77.8 million for the year ended December 31, 2006, when compared to
the prior year period. This increase was primarily the result of an increase in
the number of Sprint Nextel kiosks in late 2005 that operated for all of
2006.
Other
Sales
Other sales were up
$19.0 million for 2006, or an increase of 5.6%, when compared to 2005. These
sales increases were primarily due to an increase in sales to our network of
independent dealers and an increase in Web site sales. These increases were
partially offset by the negative impact of five service centers, which we sold
or closed in 2006.
GROSS
PROFIT
Consolidated gross profit for 2006 was $2,129.4
million or 44.6% of net sales and operating revenues, compared with $2,266.7
million or 44.6% of net sales and operating revenues in 2005, resulting in a
6.1% decrease in gross profit. The decrease in gross profit dollars was
primarily the result of a decrease in net sales and operating revenues; the
impact of inventory liquidation related to the store closures involved in the
restructuring program; a mix
change toward lower gross margin products, including higher relative sales of
wireless prepaid and upgrade handsets and lower margin accessories; and more
aggressive promotional activity. The gross margin rate was positively
affected by the change in the manner in which we began recognizing income
associated with sales of prepaid wireless airtime in 2006, as discussed
above.
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSE
Our consolidated
SG&A expense increased slightly in dollars and increased as a percent of net
sales and operating revenues to 37.9% for the year ended December 31, 2006, from
35.5% for the year ended December 31, 2005. The dollar increase for 2006 was
primarily due to an increase in payroll and commissions, plus rent expense; this
increase was substantially offset by a decrease in advertising expense. However,
headcount reductions from store closures, service center closures and
corporate headquarters reductions helped lower compensation expense (excluding
the severance charges) in the third and fourth quarters of 2006.
Payroll and
commissions expense increased in dollars and as a percentage of net sales and
operating revenues. These increases were primarily the result of pay plan
changes for RadioShack company-operated stores initiated in early 2006,
severance related to our restructuring program, utilization of more labor hours
in our company-operated stores during the first half of the year, and increased
headcount in our kiosk operations. We also began the required expensing of stock
options as of January 1, 2006, which increased compensation expense by $12.0
million, when compared to 2005.
Rent expense
increased in both dollars and as a percent of net sales and operating revenues.
The rent increase was primarily driven by a full year of rental payments on our
corporate campus, as well as the addition of kiosk locations, which was
partially offset by store closures.
Advertising expense
decreased in both dollars and as a percent of net sales and operating revenues.
This decrease was primarily due to a change in our media strategy, as we changed
the mix of media used in our advertising program from television to more radio
and newspaper usage, as well as reduced sponsorship programs.
Professional fees
increased in both dollars and as a percent of net sales and operating revenues.
The increase relates to the defense costs for certain class action lawsuits,
including $5.1 million of the $8.8 million discussed under Note 13 - "Litigation" to our Notes to Consolidated Financial
Statements, as well as the cost of consultants engaged in various
projects.
DEPRECIATION AND
AMORTIZATION
Total depreciation
and amortization increased $4.4 million to $128.2 million and increased to 2.7%
of net sales and operating revenues, compared to 2.4% for 2005. The increase in
depreciation was primarily attributable to our new corporate headquarters,
increased spending for our store remodel program, information system projects,
and the amortization of intangibles related to our SAM’S CLUB kiosk
business.
IMPAIRMENT OF
LONG-LIVED ASSETS AND OTHER CHARGES
In
February 2006, as part of our restructuring program, our board of directors
approved the closure of 400 to 700 RadioShack company-operated stores. During
the first half of 2006, we identified the stores for closure and subsequently
performed the impairment test. Based on the remaining estimated future cash
flows related to these specific stores, it was determined that the net book
value of some of the stores' long-lived assets to be held for use was not
recoverable. For the stores with insufficient estimated cash flows, we wrote
down the associated long-lived assets to their estimated fair value, resulting
in a $9.2 million impairment loss related to our RadioShack company-operated
store segment. By July 31, 2006, we had closed 481 specific stores under the
restructuring program; there were no additional closures under this program for
the remainder of the year.
Also, we purchased
certain assets from Wireless Retail, Inc. during the fourth quarter of 2004 for
$59.6 million, which resulted in the recognition of $18.6 million of goodwill
and a $32.1 million intangible asset related to a five-year agreement with SAM'S
CLUB to operate wireless kiosks in approximately 540 SAM'S CLUB locations
nationwide. These assets relate to our kiosk segment. As a result of continued
company and wireless industry growth challenges, together with changes in our
senior leadership team during the third quarter of 2006 that resulted in a
refocus on allocation of capital and resources towards other areas of our
business, we determined that our long-lived assets, including goodwill
associated with our kiosk operations, were impaired. We performed impairment
tests on both the long-lived assets associated with our SAM'S CLUB agreement,
including the intangible asset relating to the five-year agreement, and the
accompanying goodwill.
With respect to the
long-lived tangible and intangible assets, we compared their carrying values
with their estimated fair values using a discounted cash flow model, which
reflected our lowered expectations of wireless revenue growth and the ceased
expansion of our kiosk business, and determined that the intangible asset
relating to the five-year agreement was impaired. This assessment resulted in a
$10.7 million impairment charge to the intangible asset related to our kiosk
segment in 2006. The remaining intangible balance will be amortized over the
remaining life of the SAM'S CLUB agreement, which is scheduled to expire in
September 2009. The balance at December 31, 2006, was $7.8 million.
With respect to the
goodwill of $18.6 million, we estimated the fair value of the SAM'S CLUB
reporting unit using a discounted cash flow model similar to that used in the
long-lived asset impairment test. We compared it with the carrying value of the
reporting unit and determined that the goodwill was impaired. As the
carrying value of the reporting unit exceeded its estimated fair value, we then
compared the implied fair value of the reporting unit's goodwill with the
carrying amount of goodwill. This resulted in an $18.6 million impairment of
goodwill related to our kiosk segment in 2006.
Additionally, based
on historical and expected cash flows for company-operated stores and kiosks, we
recorded an impairment charge of $4.6 million related to property and equipment
and an impairment charge of $1.2 million related to goodwill.
These impairment
charges, aggregating $44.3 million, were recorded within impairment of
long-lived assets and other charges in the accompanying 2006 Consolidated
Statement of Income.
NET INTEREST
EXPENSE
Consolidated
interest expense, net of interest income, was $36.9 million for 2006 versus
$38.6 million for 2005, a decrease of $1.7 million or 4%.
Interest expense
decreased slightly to $44.3 million in 2006 from $44.5 million in 2005. This
decrease in the interest expense during 2006 was attributable to lower average
outstanding debt, which was partially offset by rising interest rates on our
floating rate debt exposure.
Interest income
increased 25% to $7.4 million in 2006 from $5.9 million in 2005. These changes
were due to a higher average investment balance for 2006, as well as increases
in investment rates.
OTHER INCOME
(LOSS)
For the year ended
December 31, 2006, we recognized a loss of $8.6 million in other income (loss).
This loss included $5.9 million relating to our derivative exposure to Sirius
warrants, which was a result of the required mark-to-market accounting treatment
of these warrants. The additional $2.7 million related to an other than
temporary impairment of other investments.
During the first
quarter of 2005, we sold all rights, title and interest to the “Tandy” name
within Australia and New Zealand to an affiliate of Dick Smith Electronics, an
Australia-based consumer electronics retailer. This transaction resulted in the
recognition of $10.2 million in other income in 2005.
INCOME TAX
PROVISION
Our provision for
income taxes reflects an effective income tax rate of 34.1% for 2006, and 16.0%
for 2005. The fluctuation in the effective tax rate during 2006 was due
primarily to the tax benefit associated with inventory donations occurring in
the quarter ended June 30, 2006. During the second quarter of 2006, we donated
approximately $20 million in inventory to charitable organizations in a manner
that provided us with a tax deduction in excess of the inventory cost. The
entire tax benefit attributable to this charitable donation deduction is
reflected in the effective tax rate for the second quarter. The lower effective
tax rate in 2005 was principally due to a favorable non-cash income tax benefit
of $56.5 million relating to the release of a tax contingency reserve upon the
expiration of the associated statute of limitations. This reserve related to
losses sustained in connection with our European operations, which were fully
dissolved by 1995. The release of the reserve occurred in the third quarter of
2005 because the statute of limitations governing these issues expired on
September 30, 2005.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 – “Summary of Significant
Accounting Policies” under the section titled “Recently Issued Accounting
Pronouncements” in the Notes to Consolidated Financial Statements.
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)
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
activities
|
$ | 379.0 | $ | 314.8 | $ | 362.9 | ||||||
|
Investing
activities
|
(42.0 | ) | (79.3 | ) | 39.3 | |||||||
|
Financing
activities
|
(299.3 | ) | 12.5 | (616.1 | ) | |||||||
Cash
Flow – Operating Activities
Cash flows from
operating activities provide us with the majority of our liquidity. Cash
provided by operating activities in 2007 was $379.0 million, compared to $314.8
million and $362.9 million in 2006 and 2005, respectively. Cash provided by net
income plus non-cash adjustments to net income was $358.9 million in 2007
compared to $230.7 million in 2006. The 2007 increase was due to an increase in
operating income in 2007, compared to the prior year. Cash provided by working
capital components was $20.1 million and $84.1 million for years ended December
31, 2007 and 2006, respectively.
Cash
Flow – Investing Activities
Cash used in
investing activities was $42.0 million and $79.3 million in 2007 and 2006,
respectively, while $39.3 million in cash was provided in 2005. The 2007
decrease was primarily the result of reduced capital spending during 2007.
Capital expenditures for these periods related primarily to retail stores and
information systems projects. We received $220.4 million in net proceeds from
the sale and leaseback of our corporate campus during the fourth quarter of
2005. We anticipate that our capital expenditure requirements for 2008 will
range from $80 million to $100 million. RadioShack company-operated store
remodels and relocations, as well as information systems updates, will account
for the majority of our anticipated 2008 capital expenditures. As of December
31, 2007, we had $509.7 million in cash and cash equivalents. Cash and cash
equivalents, along with cash generated from our net sales and operating revenues
and, when necessary, from our credit facilities, are available to fund future
capital expenditure needs.
Cash Flow – Financing
Activities
Cash used in financing activities was $299.3 million
and $616.1 million for 2007 and 2005, respectively, compared to cash provided of
$12.5 million in 2006. We used
cash of $208.5 million to repurchase our common stock during 2007; however,
we did not repurchase any shares of our common stock during 2006. The
2007 stock repurchases were partially funded by $81.3 million received from
stock option exercises. The balance of capital to repurchase shares was obtained
from cash generated from operations. Additionally, we paid off our $150.0
million ten-year unsecured note payable which matured on September 4,
2007.
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 $300.9 million in 2007, $189.9
million in 2006 and $158.5 million in 2005. The consecutive increases in free
cash flow were the result of a decrease in cash used by working capital
components, primarily inventory, as well as a decrease in capital
expenditures.
We
believe free cash flow is a relevant indicator of our ability to 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 was $379.0 million in 2007, $314.8 million in 2006
and $362.9 million in 2005. We do not intend for 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)
|
2007
|
2006
|
2005
|
|||||||||
|
Net cash
provided by operating activities
|
$ | 379.0 | $ | 314.8 | $ | 362.9 | ||||||
|
Less:
|
||||||||||||
|
Additions
to property, plant and equipment
|
45.3 | 91.0 | 170.7 | |||||||||
|
Dividends
paid
|
32.8 | 33.9 | 33.7 | |||||||||
|
Free cash
flow
|
$ | 300.9 | $ | 189.9 | $ | 158.5 | ||||||
CAPITAL
STRUCTURE AND FINANCIAL CONDITION
We
consider our capital structure and financial condition to be sound. We had
$509.7 million in cash and cash equivalents at December 31, 2007, as a resource
for our funding needs. Additionally, we have available to us $625 million of
bank credit facilities. As of December 31, 2007, we had no borrowings under
these credit facilities. For a discussion of the expected effect of our
restructuring program on capital structure and financial condition, see
“Financial Impact of Restructuring Program” below.
Debt
Obligations
Debt
Ratings: Below are the agencies’ ratings by category, as well as their
respective current outlook for the ratings, as of February 15,
2008.
|
Category
|
Standard and
Poor’s
|
Moody's
|
Fitch
|
|||
|
Senior
unsecured debt
|
BB
|
Ba1
|
BB
|
|||
|
Outlook
|
Negative
|
Stable
|
Negative
|
On
March 12, 2007, Moody’s lowered its long-term rating to Ba1, long-term outlook
to stable, and short-term rating to NP. These actions followed the announcement
of our 2006 financial results. On June 21, 2007, Fitch lowered its long-term
rating to BB and kept its rating outlook as negative. Factors that could impact
our future credit ratings include free cash flow and cash levels, changes in our
operating performance, the adoption of a more aggressive financial strategy, the
economic environment, conditions in the retail and consumer electronics
industries, continued sales declines in comparable stores, our financial
position and changes in our business strategy. If further downgrades occur, they
will adversely impact, among other things, our future borrowing costs, access to
debt capital markets, vendor financing terms and future new store occupancy
costs. Due to improvements in liquidity, we terminated our commercial paper
program during the third quarter of 2007.
Our senior
unsecured debt primarily consists of an issuance of 10-year long-term notes and
an issuance of a medium term note.
Long-Term
Notes: We have a $300 million debt shelf registration statement which
became effective in August 1997. In August 1997, we issued $150 million of
10-year unsecured long-term notes under this shelf registration. The interest
rate on the notes was 6.95% per annum with interest payable on September 1 and
March 1 of each year. These notes contained customary non-financial covenants.
In September 2007, our $150 million ten-year unsecured note payable came due.
Upon maturity, we paid off the $150 million note payable utilizing our available
cash and cash equivalents.
On
May 11, 2001, we issued $350 million of 10-year 7.375% 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 contain certain non-financial covenants and 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. The exchange resulted in substantially all of the
notes becoming registered with the SEC and did not result in additional debt
being issued.
During the third
quarter of 2001, we entered into an interest rate swap agreement with an
underlying notional amount of $110.5 million and a maturity in September 2007.
This interest rate swap agreement expired in conjunction with the maturity of
the note payable. In June and August 2003, we entered into interest rate swap
agreements with underlying notional amounts of debt of $100 million and $50
million, respectively, and 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. We recorded an amount in other
non-current liabilities, net, of $1.5 million and $8.5 million (their fair
value) at December 31, 2007 and 2006, respectively, for the swap agreements and
adjusted the fair value of the related debt by the same amount. Fair value was
computed based on the market’s current anticipation of quarterly LIBOR rate
levels from the present until the swaps’ maturities.
Medium-Term
Notes: We also issued, in various amounts and on various dates from
December 1997 through September 1999, medium-term notes totaling $150 million
under the shelf registration described above. At December 31, 2007, $5 million
of these notes remained outstanding with an interest rate of 6.42%; they
contained customary non-financial covenants. As of December 31, 2007, there was
no availability under this shelf registration. In January 2008, the remaining $5
million of the medium-term notes payable came due, and was paid off utilizing
our available cash and cash equivalents.
Available
Financing
Credit
Facilities: At December 31, 2007, we had an aggregate of $625 million
borrowing capacity available under our existing credit facilities. These
facilities consist of the following:
|
Amount
of Facility
|
Expiration
Date
|
|
$300
million
|
June
2009
|
|
$325
million
|
May
2011
|
These credit
facilities support commercial paper issuance, as well as provide us a source of
liquidity if the commercial paper market is unavailable to us. As of December
31, 2007, there were no outstanding borrowings under these credit facilities,
nor were these facilities utilized during 2007. Interest charges under these
facilities are derived using a base LIBOR rate plus a margin which changes based
on our credit ratings. Our bank syndicated credit facilities have customary
terms and covenants, and we were in compliance with these covenants at December
31, 2007.
In
June 2006, we replaced our existing $300 million five-year credit facility,
which was to expire in June 2007, with a $325 million five-year credit agreement
expiring May 2011. The new facility has a more favorable fixed charge coverage
ratio and provides for the exclusion of cash restructuring expenses from the
covenant calculation. We also amended the $300 million facility expiring in June
2009 to include similar covenants and terminated our $130 million 364-day
revolving credit facility.
We
believe that our present ability to borrow is adequate for our business needs.
However, if market conditions change, gross profit 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 further, thereby increasing our
borrowing costs, or even causing a further reduction in or elimination of our
access to debt and/or equity markets.
Capitalization
The following table
sets forth information about our capitalization on the dates
indicated.
|
December
31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
(Dollars
in millions)
|
Dollars
|
% of Total
Capitalization
|
Dollars
|
% of Total
Capitalization
|
||||||||||||
|
Current
debt
|
$ | 61.2 | 5.2 | % | $ | 194.9 | 16.3 | % | ||||||||
|
Long-term
debt
|
348.2 | 29.5 | 345.8 | 29.0 | ||||||||||||
|
Total
debt
|
409.4 | 34.7 | 540.7 | 45.3 | ||||||||||||
|
Stockholders’
equity
|
769.7 | 65.3 | 653.8 | 54.7 | ||||||||||||
|
Total
capitalization
|
$ | 1,179.1 | 100.0 | % | $ | 1,194.5 | 100.0 | % | ||||||||
Our debt-to-total
capitalization ratio decreased in 2007 from 2006, due primarily to a $131.3
million decrease in total debt primarily related to the repayment of our
medium-term notes payable in September 2007.
Dividends
We
have paid common stock cash dividends for 21 consecutive years. On
November 12, 2007, our Board of Directors declared an annual dividend of $0.25
per share. The dividend was paid on December 19, 2007, to stockholders of record
on November 29, 2007. The
dividend payment of $32.8 million was funded from cash on
hand.
Operating
Leases
We
use operating leases, primarily for our retail locations, two distribution
centers, and our corporate campus, to lower our capital
requirements.
Share
Repurchases
On
February 25, 2005, our Board of Directors approved a share repurchase program
with no expiration date authorizing management to repurchase up to $250 million
in open market purchases. On August 5, 2005, we suspended purchases under
the $250 million share repurchase program during the period in which a financial
institution purchased shares pursuant to an overnight share repurchase program.
During March 2007, management resumed share repurchases under the $250 million
program; however, no shares were repurchased during the second and fourth
quarters of 2007. For the twelve months ended December 31, 2007, we repurchased
8.7 million shares or $208.5 million of our common stock. As of December 31,
2007, there was $1.4 million available for share repurchases under the $250
million share repurchase program.
Seasonal
Inventory Buildup
Typically, our
annual cash requirements for pre-seasonal inventory buildup range between $200
million and $400 million. The funding required for this buildup comes primarily
from cash on hand and cash generated from net sales and operating revenues. We
had $509.7 million in cash and cash equivalents as of December 31, 2007, as a
resource for our funding needs. Additionally, borrowings may be utilized to fund
the inventory buildup as described in “Available Financing” above.
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, 2007.
|
(In
millions)
|
Payments Due
by Period
|
|||||||||||||||||||
|
Contractual
Obligations
|
Total Amounts
Committed
|
Less Than 1
Year
|
1-3
Years
|
3-5
Years
|
Over 5
Years
|
|||||||||||||||
|
Long-term
debt obligations
|
$ | 356.0 | $ | 5.0 | $ | -- | $ | 350.0 | $ | 1.0 | ||||||||||
|
Interest
obligations
|
88.5 | 26.3 | 52.4 | 9.7 | 0.1 | |||||||||||||||
|
Operating
lease obligations
|
922.6 | 196.0 | 305.9 | 153.7 | 267.0 | |||||||||||||||
|
Purchase obligations (1)
|
334.3 | 310.5 | 23.8 | -- | -- | |||||||||||||||
|
Other
long-term liabilities
reflected on the balance sheet
(2)
|
123.7 | -- | 60.3 | 26.3 | 37.1 | |||||||||||||||
|
Total
|
$ | 1,825.1 | $ | 537.8 | $ | 442.4 | $ | 539.7 | $ | 305.2 | ||||||||||
|
(1)
|
Purchase
obligations include our product commitments, marketing agreements and
freight commitments.
|
|
(2)
|
Includes
$58.1 million FIN 48 reserve.
|
For more
information regarding long-term debt and lease commitments, refer to Note 7 – “Indebtedness and Borrowing Facilities” and Note 14 – Commitments and Contingent Liabilities”,
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
|
|||||||||||||||||||
|
Credit
Commitments
|
Total Amounts
Committed
|
Less Than 1
Year
|
1-3
Years
|
3-5
Years
|
Over 5
Years
|
|||||||||||||||
|
Lines of
credit
|
$ | 625.0 | $ | -- | $ | 300.0 | $ | 325.0 | $ | -- | ||||||||||
|
Standby
letters of credit
|
70.3 | 70.3 | -- | -- | -- | |||||||||||||||
|
Total
commercial commitments
|
$ | 695.3 | $ | 70.3 | $ | 300.0 | $ | 325.0 | $ | -- | ||||||||||
Contractual
and Credit Commitments
We
have contingent liabilities related to retail leases of locations that were
assigned to other businesses. The majority of these contingent liabilities
relates to various lease obligations arising from leases assigned to CompUSA,
Inc. (“CompUSA”) as part of the sale of our Computer City, Inc. subsidiary to
CompUSA in August 1998. In the event CompUSA or the other assignees, as
applicable, are unable to fulfill their obligations, the lessors of such
locations may seek to recover the unpaid rent from us.
On
February 27, 2007, CompUSA announced a comprehensive realignment strategy to
improve its financial status. According to their press release, the realignment
included a $440 million cash infusion, closure of 126 stores, major expense
reductions and a corporate restructuring. A portion of the 126 store closures
represents locations where we may be liable for the rent payments on the
underlying lease. During the third and fourth quarters of 2007, we received
notices from two lessors seeking payment from us as a result of CompUSA being in
default for non-payment of rent. CompUSA has also informed us that there are an
additional 17 leases on which CompUSA has ceased making rent payments. CompUSA
reported on December 7, 2007, that they were acquired by the Gordon Brothers
Group. CompUSA stores ceased operations in January 2008. DJM Realty, a division
of Gordon Brothers Group, is currently in discussions with its lessors in an
effort to negotiate a satisfactory fulfillment of their legal obligation under
these leases.
Based on all
available information pertaining to the status of these leases, and after
applying the provisions set forth within SFAS No. 5, “Accounting for
Contingencies,” and FIN 14, “Reasonable Estimation of a Loss, An Interpretation
of SFAS No. 5,” during the fourth quarter of 2007, we established an accrual of
$7.5 million, recorded in current liabilities. It is reasonably possible that a
change in our estimate of our probable liability could occur in the near term.
We are continuing to monitor this situation and will update as necessary as more
information becomes available.
FINANCIAL
IMPACT OF RESTRUCTURING PROGRAM
As
discussed previously, our 2006 restructuring program, as originally stated in
February 2006, contained four key components:
|
·
|
Update
our inventory
|
|
·
|
Focus on our
top-performing RadioShack company-operated stores, while closing 400 to
700 RadioShack company-operated stores and aggressively relocate other
RadioShack company-operated stores
|
|
·
|
Consolidate
our distribution centers
|
|
·
|
Reduce our
overhead costs
|
Store Closures:
As of December 31, 2006, we had closed 481 stores as a result of our
restructuring program. Our decision to close these stores was made on a
store-by-store basis, and there was no geographic concentration of closings for
these stores. For these closed stores, we recognized a charge in 2006 of $9.1
million to SG&A for future lease obligations and negotiated buy-outs with
landlords. A lease obligation reserve is not recognized until a store has been
closed or when a buy-out agreement has been reached with the landlord. Regarding
the 481 stores we closed as a result of the restructuring program during the
year ended December 31, 2006, we recorded an impairment charge of $9.2 million
related to the long-lived assets associated with certain of these stores. It was
determined that the net book value of several of the stores' long-lived assets
was not recoverable based on the remaining estimated future cash flows related
to these specific stores. We also recognized $2.1 million in accelerated
depreciation associated with closed store assets for which the useful lives had
been changed due to the store closures.
In
connection with these store closures, we identified 601 retail employees whose
positions were terminated by December 31, 2006. These employees were paid
severance, and some earned retention bonuses if they remained employed until
certain agreed-upon dates. The development of a reserve for these costs began on
the date that the terms of severance benefits were established and communicated
to the employees, and the reserve was recognized over the minimum retention
period. As of December 31, 2006, $3.8 million had been recognized in SG&A as
retention and severance benefits for store employees, with $3.6 million in
benefits paid to date. Additionally, as part of our store closure activities, we
incurred and recognized in SG&A $6.1 million in expenses in 2006 primarily
in connection with fees paid to outside liquidators and for close-out
promotional activities for the 481 stores.
All stores
identified for closure under the restructuring program were closed as of July
31, 2006. Additionally, we continue to negotiate buy-out agreements with our
landlords; however, remaining lease obligations of $2.2 million still existed at
December 31, 2007. There is uncertainty as to when, and at what cost, we will
fully settle all remaining lease obligations.
Distribution
Center Consolidations: We closed a distribution center located in
Southaven, Mississippi, and sold a distribution center in Charleston, South
Carolina, in 2006. During the year ended December 31, 2006, we recognized a
lease obligation charge in SG&A in the amount of $2.0 million on the lease
of the Southaven distribution center and a gain of $2.7 million on the sale of
the Charleston distribution center. We also incurred a $0.5 million charge
related to severance for approximately 100 employees. Additionally,
there were $0.4 million in other expenses.
Service Center
Operations: We closed or sold five service center locations during the
year ended December 31, 2006, resulting in the elimination of approximately 350
positions. We recognized charges to SG&A of $1.2 million and $0.9 million
related to lease obligations and severance, respectively. This severance
obligation was paid as of December 31, 2006. Additionally, there were $0.1
million in other expenses.
Overhead Cost
Reductions: Management conducted a review of our cost structure to
identify potential sources of cost reductions. In connection with this review,
we made decisions to lower these costs, including reducing our advertising spend
rate in connection with adjustments to our media mix. During the year ended
December 31, 2006, we reduced our workforce by approximately 514 positions,
primarily within our corporate headquarters. We recorded charges to SG&A for
termination benefits and related costs of $11.9 million, of which $6.4 million
had been paid as of December 31, 2006. During 2007, severance payments totaling
$5.0 million were paid, leaving an accrued severance balance of $0.7 million as
of December 31, 2007.
Inventory Update:
We have been replacing underperforming merchandise with new,
faster-moving merchandise. We recorded a pre-tax charge to cost of products sold
of approximately $62 million during the fourth quarter of 2005, as a result of
both our normal inventory review process and the inventory update aspect of our
restructuring program.
The following table
summarizes the activity related to the 2006 restructuring program from February
17, 2006, through December 31, 2007:
|
Asset
|
Accelerated
|
|||||||||||||||||||||||
|
(In
millions)
|
Severance
|
Leases
|
Impairments
|
Depreciation
|
Other
|
Total
|
||||||||||||||||||
|
Total charges
for 2006
|
$ | 16.1 | $ | 12.3 | $ | 9.2 | $ | 2.1 | $ | 4.9 | $ | 44.6 | ||||||||||||
|
Total
spending for 2006, net of
amounts realized from sale of
fixed assets
|
(10.4 | ) | (8.5 | ) | -- | -- | (4.6 | ) | (23.5 | ) | ||||||||||||||
|
Total
non-cash items
|
-- | 0.9 | (9.2 | ) | (2.1 | ) | (0.2 | ) | (10.6 | ) | ||||||||||||||
|
Accrual at
December 31, 2006
|
5.7 | 4.7 | -- | -- | 0.1 | 10.5 | ||||||||||||||||||
|
Total
spending for 2007
|
(5.0 | ) | (3.9 | ) | -- | -- | (0.1 | ) | (9.0 | ) | ||||||||||||||
|
Additions for
2007
|
1.4 | -- | -- | -- | 1.4 | |||||||||||||||||||
|
Accrual at
December 31, 2007
|
$ | 0.7 | $ | 2.2 | $ | -- | $ | -- | $ | -- | $ | 2.9 | ||||||||||||
See the allocation
of our restructuring charges within our segments in Note 28
– “Segment Reporting” in the Notes to Consolidated Financial
Statements.
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
With the exception
of recent increases in energy costs, 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 principles (“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 change. 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; valuation of long-lived assets and intangibles, including
goodwill; and stock-based compensation.
We
consider an accounting policy or estimate to be critical if it requires
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 telephone handsets, 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, while
the residual revenue is recognized on a monthly basis.
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 $2.2 million for the fiscal year ended
December 31, 2007.
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 (which approximates FIFO) or market. The
cost components recorded within inventory are the vendor invoice cost and
certain allocated external and internal freight, distribution, warehousing and
other costs relating to merchandise acquisition required to bring the
merchandise from the vendor to the point-of-sale.
Typically, the
market value of our inventory is higher than its aggregate 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, technological obsolescence, and estimated costs to sell
or dispose of merchandise such as sales commissions.
If
the estimated market value, calculated as the amount we expect to realize, net
of estimated selling costs, from the ultimate sale or disposal of the inventory,
is determined to be less than the recorded cost, we record a provision to reduce
the carrying amount of the inventory item to its net realizable value.
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 history and experience, as well as other specific circumstances surrounding
these claims, in evaluating the amount of liability 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 $1.0 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 historical claims experience, demographic
factors, severity factors, and other factors we deem relevant. A 10% change in
our insurance reserves at December 31, 2007, would have affected net income by
approximately $5.7 million for the fiscal year ended December 31, 2007. As of
December 31, 2007, actual losses had not exceeded our expectations.
Additionally, for claims that exceed our deductible amount, we record a gross
liability and corresponding receivable
representing expected recoveries, since we are not legally relieved of our
obligation to the claimant.
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 taxation. 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. Effective January 1, 2007, we began recognizing uncertain income tax
positions based on our assessment of whether the tax position was more likely
than not to be sustained on audit, as set forth within FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109.” Depending on the nature of the tax issue, we 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 legal 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 flows 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 amount may not be
recoverable, such as historical operating losses or plans to dispose of or sell
long-lived assets before the end of their previously estimated useful lives. The
carrying amount is considered not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset. If the carrying amount is not recoverable, we recognize an
impairment loss equal to the amount by which the carrying amount exceeds fair
value. Fair value is determined by discounting expected future cash flows using
our risk-free rate of interest.
Impairment losses,
if any, are recorded in the period in which 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 future cash
flows, strategic plans, useful lives 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 intangible assets
related to business acquisitions that have occurred during prior years. The
original valuation of these intangible assets is based on estimates for future
profitability, cash flows and other judgmental factors. We review our goodwill
and other intangible asset balances on an annual basis, during the fourth
quarter, and whenever events or changes in circumstances indicate the carrying
value of goodwill or an intangible asset 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 other 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
intangible assets. The total value of our goodwill and intangible assets at
December 31, 2007, was $7.9 million.
Stock-Based
Compensation: We have historically granted certain stock-based awards to
employees and directors in the form of non-qualified stock options, incentive
stock options, restricted stock and deferred stock
units. See Note 2 - “Summary of Significant Accounting
Policies” and Note 16 - “Stock-Based Incentive Plans” for
a more complete discussion of our stock-based compensation
programs.
At
the date that an award is granted, we determine the fair value of the award and
recognize the compensation expense over the requisite service period, which
typically is the period over which the award vests. The restricted stock and
deferred stock units are valued at the fair market value of our stock on the
date of grant. The fair value of stock options with only service conditions is
estimated using the Black-Scholes-Merton option-pricing model. The fair value of
stock options with service and market conditions is valued utilizing the Monte
Carlo simulation model. The Black-Scholes-Merton and Monte Carlo simulation
models require management to apply judgment and use highly subjective
assumptions, including expected option life, expected volatility, and expected
employee forfeiture rate. We use historical data and judgment to estimate the
expected option life and the employee forfeiture rate, and use historical and
implied volatility when estimating the stock price volatility.
While the
assumptions that we develop are based on our best expectations, they involve
inherent uncertainties based on market conditions and employee behavior that are
outside of our control. If actual results are not consistent with the
assumptions used, the stock-based compensation expense reported in our financial
statements may not be representative of the actual economic cost of the
stock-based compensation. Additionally, if actual employee forfeitures
significantly differ from our estimated forfeitures, we may have an adjustment
to our financial statements in future periods. A 10% change in our stock-based
compensation expense for the year ended December 31, 2007, would have affected
our net income by approximately $1.0 million.
Prior to calendar
year 2006, we followed the guidance under Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
interpretations.
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, including Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are
statements that are not historical and may be identified by the use of words
such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “potential” or
similar words. 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
assumptions, risks and uncertainties, including the risk factors described in
Item 1A, “Risk Factors,” of this Annual Report on Form 10-K. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
At
December 31, 2007, our derivative instruments that materially increased our
exposure to market risks for interest rates, foreign currency rates, commodity
prices or other market price risks were primarily the interest rate swaps noted
in our MD&A and warrants we earned to acquire common stock of Sirius. We do
not use derivatives for speculative purposes.
Our exposure to
interest rate risk results from changes in short-term interest rates. Interest
rate risk exists with respect to our net investment position at December 31,
2007, of $333.9 million, consisting of fluctuating short-term investments of
$483.9 million and offset by $150 million of indebtedness which, because of our
interest rate swaps, effectively bears interest at short-term floating rates. A
hypothetical increase of 100 basis points in the interest rate applicable to
this floating-rate net exposure would result in a decrease in annual net
interest expense of $3.3 million. This hypothesis assumes no change in the
principal or investment balance.
Our exposure to
market risk, specifically the equity markets, relates to warrants we earned as
of December 31, 2006 and 2005, to purchase 2 million and 4 million shares,
respectively, of Sirius stock at an exercise price of $5.00 per share. We have
recorded these as assets using a Black-Scholes-Merton valuation method. Our
maximum exposure is equal to the carrying value at December 31, 2007, of $2.4
million.
We
manage our portfolio of fixed rate exposures, compared to floating rate
exposure, to reduce our exposure to interest rate changes. The fair value of our
fixed rate long-term debt is sensitive to long-term interest rate changes.
Interest rate changes would result in increases or decreases in the fair value
of our debt due to differences between market interest rates and rates at the
inception of the debt obligation. Based on a hypothetical immediate 100 basis
point increase in interest rates at December 31, 2007 and 2006, the fair value
of our fixed rate long-term debt would decrease $11.7 million and $12.9 million,
respectively. Based on a hypothetical immediate 100 basis point decrease in
interest rates at December 31, 2007 and 2006, the fair value of our fixed rate
long-term debt would increase by $12.1 million and $13.4 million, respectively.
Regarding the fair value of our fixed rate debt, changes in interest rates have
no impact on our consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Index to our
Consolidated Financial Statements is found on page 45. Our Consolidated
Financial Statements and Notes to Consolidated Financial Statements follow the
index.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
We
have established a system of disclosure controls and procedures that are
designed to ensure that material information relating to the Company, which is
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 (“Exchange Act”), is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and
forms, and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, in a timely
fashion. An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) was performed as of the end of the period covered by this annual
report. This evaluation was performed under the supervision and with the
participation of management, including our CEO and CFO.
Based upon that
evaluation, our CEO and CFO have concluded that these disclosure controls and
procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in “Internal Control – Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in “Internal Control – Integrated
Framework,” our
management concluded that our internal control over financial reporting was
effective as of December 31, 2007. The effectiveness of our internal control
over financial reporting as of December 31, 2007, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Changes
in Internal Controls
There were no
changes in our internal control over financial reporting that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
We
will file a definitive proxy statement with the Securities and Exchange
Commission on or about April 10, 2008. The information called for by this Item
with respect to directors and the Audit and Compliance Committee of the Board of
Directors is incorporated by reference from the Proxy Statement for the 2008
Annual Meeting under the headings “Item 1 - Election of Directors” and “Meetings
and Committees of the Board.” For information relating to our Executive
Officers, see Part I of this report. The Section 16(a) reporting information is
incorporated by reference from the Proxy Statement for the 2008 Annual Meeting
under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information regarding our Financial Code of Ethics is incorporated by reference
from the Proxy Statement for the 2008 Annual Meeting under the heading
“Corporate Governance – Code of Conduct and Financial Code of
Ethics.”
ITEM 11. EXECUTIVE COMPENSATION.
The information
called for by this Item with respect to executive compensation is incorporated
by reference from the Proxy Statement for the 2008 Annual Meeting under the
headings “Compensation Discussion and Analysis,” “Executive Compensation,”
“Non-Employee Director Compensation,” “Other Matters Involving Executive
Officers,” “Compensation Committee Interlocks and Insider Participation” and
“Report of the Management Development and Compensation Committee on Executive
Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information
called for by this Item with respect to security ownership of certain beneficial
owners and management is incorporated by reference from the Proxy Statement for
the 2008 Annual Meeting under the heading “Ownership of
Securities.”
EQUITY
COMPENSATION PLANS
The following table
provides a summary of information as of December 31, 2007, relating to our
equity compensation plans in which our common stock is authorized for
issuance.
Equity
Compensation Plan Information
| (a) | (b) | (c) | ||||||||||
|
(Share amounts in
thousands)
|
Number of
shares to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise
price of outstanding options, warrants and rights
|
Number of
shares remaining available for future issuance under equity compensation
plans (excluding shares reflected in column (a))
|
|||||||||
|
Equity
compensation plans approved by shareholders (1)
|
7,665 | $ | 30.91 | 6,209 | ||||||||
|
Equity
compensation plans not approved by shareholders (2)
|
7,999 | $ | 27.61 | 2,373 | ||||||||
|
Total
|
15,664 | $ | 29.22 | 8,582 | ||||||||
|
(1)
|
Includes the
1993 Incentive Stock Plan, the 1997 Incentive Stock Plan (the “1997 ISP”),
the 2001 Incentive Stock Plan, the 2004 Deferred Stock Unit Plan for
Non-Employee Directors, and the 2007 Restricted Stock Plan. Refer to Note
16 - “Stock-Based Incentive Plans” of our Notes to Consolidated Financial
Statements for further information. The 1997 ISP expired on February 27,
2007, and no further grants may be made under this
plan.
|
|
(2)
|
Includes the
1999 Incentive Stock Plan (the “1999 ISP”) and options granted as an
inducement grant in connection with our chief executive officer’s
employment with RadioShack in the third quarter of 2006. Refer to Note 16
for more information concerning the 1999 ISP and the third quarter 2006
inducement grant.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information
called for by this Item with respect to certain relationships and transactions
with management and others is incorporated by reference from the Proxy Statement
for the 2008 Annual Meeting under the heading “Review and Approval of
Transactions with Related Persons” and “Corporate Governance - Director
Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.
The information
called for by this Item with respect to principal accounting fees and services
is incorporated by reference from the Proxy Statement for the 2008 Annual
Meeting under the headings “Fees and Services of the Independent Auditors” and
“Policy for Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors.”
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.
Documents filed as
part of this report.
|
1)
|
The financial
statements filed as a part of this report are listed in the "Index to
Consolidated Financial Statements" on page
45.
|
| 2) | None |
| 3) | A list of the exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the Index to Exhibits beginning on page 85, which immediately precedes such exhibits. |
Certain instruments
defining the rights of holders of our long-term debt are not filed as exhibits
to this report because the total amount of securities authorized thereunder does
not exceed ten percent of our total assets on a consolidated basis. We will
furnish the Securities and Exchange Commission copies of such instruments upon
request.
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
RadioShack Corporation has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
RADIOSHACK
CORPORATION
|
||
|
February 26,
2008
|
/s/ Julian C.
Day
|
|
|
Julian C.
Day
|
||
|
Chairman of
the Board and Chief Executive
Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of RadioShack Corporation and in the
capacities indicated on this 26th day of February, 2008.
|
Signature
|
Title
|
|||
|
/s/ Julian C.
Day
|
Chairman of
the Board and Chief Executive Officer
|
|||
|
Julian C.
Day
|
(Principal
Executive Officer)
|
|||
|
/s/ James F.
Gooch
|
Executive
Vice President and Chief Financial Officer
|
|||
|
James F.
Gooch
|
(Principal
Financial Officer)
|
|||
|
/s/ Martin O.
Moad
|
Vice
President and Controller
|
|||
|
Martin O.
Moad
|
(Principal
Accounting Officer)
|
|||
|
/s/ Frank J.
Belatti
|
Director
|
/s/ Jack L.
Messman
|
Director
|
|
|
Frank J.
Belatti
|
Jack L.
Messman
|
|||
|
/s/ Robert S.
Falcone
|
Director
|
/s/ William
G. Morton, Jr.
|
Director
|
|
|
Robert S.
Falcone
|
William G.
Morton, Jr.
|
|||
|
/s/ Daniel R.
Feehan
|
Director
|
/s/ Thomas G.
Plaskett
|
Director
|
|
|
Daniel R.
Feehan
|
Thomas G.
Plaskett
|
|||
|
/s/ Richard
J. Hernandez
|
Director
|
/s/ Edwina D.
Woodbury
|
Director
|
|
|
Richard J.
Hernandez
|
Edwina D.
Woodbury
|
|||
|
/s/ H. Eugene
Lockhart
|
Director
|
|||
|
H. Eugene
Lockhart
|
||||
RADIOSHACK
CORPORATION
|
Page(s)
|
|
|
Report of
Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Statements of Income for each of the three years in the period
ended
December
31, 2007
|
47
|
|
Consolidated
Balance Sheets at December 31, 2007 and December 31, 2006
|
48
|
|
Consolidated
Statements of Cash Flows for each of the three years in the
period
ended
December 31, 2007
|
49
|
|
Consolidated
Statements of Stockholders' Equity and Comprehensive Income
for
each
of the three years in the period ended December 31, 2007
|
50
|
|
Notes to
Consolidated Financial Statements
|
51 –
84
|
All financial
statement schedules have been omitted because they are not applicable, not
required or the information is included in the consolidated financial statements
or notes thereto.
To the Board of Directors and Stockholders of
RadioShack Corporation:
In
our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
RadioShack Corporation and its subsidiaries ("the Company") at December 31, 2007
and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 11 and Note 2 to the consolidated financial statements, the
Company changed the manner in which it accounts for income taxes in 2007 and
changed the manner in which it accounted for share-based compensation in
2006.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Fort Worth,
Texas
February 26,
2008
RadioShack
Corporation and Subsidiaries
|
Year
Ended December 31,
|
|||||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
|||||||||||||||||||
|
(In
millions, except per share amounts)
|
Dollars
|
Revenues
|
Dollars
|
Revenues
|
Dollars
|
Revenues
|
|||||||||||||||
|
Net
sales and operating revenues
|
$ | 4,251.7 | 100.0 | % | $ | 4,777.5 | 100.0 | % | $ | 5,081.7 | 100.0 | % | |||||||||
|
Cost of
products sold (includes depreciation amounts of
$10.0 million, $10.7 million and $10.3
million, respectively)
|
2,225.9 | 52.4 | 2,648.1 | 55.4 | 2,815.0 | 55.4 | |||||||||||||||
|
Gross
profit
|
2,025.8 | 47.6 | 2,129.4 | 44.6 | 2,266.7 | 44.6 | |||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||||
|
Selling,
general and administrative
|
1,538.5 | 36.2 | 1,810.7 | 37.9 | 1,803.3 | 35.5 | |||||||||||||||
|
Depreciation
and amortization
|
102.7 | 2.4 | 117.5 | 2.5 | 113.5 | 2.2 | |||||||||||||||
|
Impairment
of long-lived assets and other charges
|
2.7 | -- | 44.3 | 0.9 | -- | -- | |||||||||||||||
|
Total
operating expenses
|
1,643.9 | 38.6 | 1,972.5 | 41.3 | 1,916.8 | 37.7 | |||||||||||||||
|
Operating
income
|
381.9 | 9.0 | 156.9 | 3.3 | 349.9 | 6.9 | |||||||||||||||
|
Interest
income
|
22.6 | 0.5 | 7.4 | 0.1 | 5.9 | 0.1 | |||||||||||||||
|
Interest
expense
|
(38.8 | ) | (0.9 | ) | (44.3 | ) | (0.9 | ) | (44.5 | ) | (0.8 |
)
|
|||||||||
|
Other income
(loss)
|
0.9 | -- | (8.6 | ) | (0.2 | ) | 10.2 | 0.2 | |||||||||||||
|
Income
before income taxes
|
366.6 | 8.6 | 111.4 | 2.3 | 321.5 | 6.4 | |||||||||||||||
|
Income tax
provision
|
129.8 | 3.0 | 38.0 | 0.8 | 51.6 | 1.0 | |||||||||||||||
|
Income
before cumulative effect of change
in accounting principle
|
236.8 | 5.6 | 73.4 | 1.5 | 269.9 | 5.4 | |||||||||||||||
|
Cumulative
effect of change in accounting principle,
net of $1.8 million tax benefit in 2005
|
-- | -- | -- | -- | (2.9 | ) | (0.1 |
)
|
|||||||||||||
|
Net
income
|
$ | 236.8 | 5.6 | % | $ | 73.4 | 1.5 | % | $ | 267.0 | 5.3%3 | ||||||||||
|
Net
income per share (see Note 2):
|
|||||||||||||||||||||
|
Basic:
|
|||||||||||||||||||||
|
Income before
cumulative effect of change in
accounting principle
|
$ | 1.76 | $ | 0.54 | $ | 1.82 | |||||||||||||||
|
Cumulative
effect of change in accounting principle,
net of taxes
|
-- | -- | (0.02 | ) | |||||||||||||||||
|
Basic income
per share
|
$ | 1.76 | $ | 0.54 | $ | 1.80 | |||||||||||||||
|
Assuming
dilution:
|
|||||||||||||||||||||
|
Income before
cumulative effect of change in
accounting principle
|
$ | 1.74 | $ | 0.54 | $ | 1.81 | |||||||||||||||
|
Cumulative
effect of change in accounting principle,
net of taxes
|
-- | -- | (0.02 | ) | |||||||||||||||||
|
Diluted
income per share
|
$ | 1.74 | $ | 0.54 | $ | 1.79 | |||||||||||||||
|
Shares used
in computing income per share:
|
|||||||||||||||||||||
|
Basic
|
134.6 | 136.2 | 148.1 | ||||||||||||||||||
|
Diluted
|
135.9 | 136.2 | 148.8 | ||||||||||||||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
RadioShack
Corporation and Subsidiaries
|
December
31,
|
||||||||
|
(In
millions, except for share amounts)
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 509.7 | $ | 472.0 | ||||
|
Accounts
and notes receivable, net
|
256.0 | 247.9 | ||||||
|
Inventories
|
705.4 | 752.1 | ||||||
|
Other
current assets
|
95.7 | 127.6 | ||||||
|
Total
current assets
|
1,566.8 | 1,599.6 | ||||||
|
Property,
plant and equipment, net
|
317.1 | 386.3 | ||||||
|
Other assets,
net
|
105.7 | 84.1 | ||||||
|
Total
assets
|
$ | 1,989.6 | $ | 2,070.0 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Short-term
debt, including current maturities of long-term debt
|
$ | 61.2 | $ | 194.9 | ||||
|
Accounts
payable
|
257.6 | 254.5 | ||||||
|
Accrued
expenses and other current liabilities
|
393.5 | 442.2 | ||||||
|
Income
taxes payable
|
35.7 | 92.6 | ||||||
|
Total
current liabilities
|
748.0 | 984.2 | ||||||
|
Long-term
debt, excluding current maturities
|
348.2 | 345.8 | ||||||
|
Other
non-current liabilities
|
123.7 | 86.2 | ||||||
|
Total
liabilities
|
1,219.9 | 1,416.2 | ||||||
|
Commitments
and contingent liabilities (see Notes 13 and 14)
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, no par value, 1,000,000 shares authorized:
|
||||||||
|
Series
A junior participating, 300,000 shares designated and none
issued
|
-- | -- | ||||||
|
Common
stock, $1 par value, 650,000,000 shares authorized; 191,033,000 shares
issued
|
191.0 | 191.0 | ||||||
|
Additional
paid-in capital
|
108.4 | 92.6 | ||||||
|
Retained
earnings
|
1,992.1 | 1,780.9 | ||||||
|
Treasury
stock, at cost; 59,940,000 and 55,196,000 shares,
respectively
|
(1,516.5 | ) | (1,409.1 | ) | ||||
|
Accumulated
other comprehensive loss
|
(5.3 | ) | (1.6 | ) | ||||
|
Total
stockholders’ equity
|
769.7 | 653.8 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 1,989.6 | $ | 2,070.0 | ||||
The accompanying
notes are an integral part of these consolidated financial
statements.
RadioShack
Corporation and Subsidiaries
|
Year
Ended December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 236.8 | $ | 73.4 | $ | 267.0 | ||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
112.7 | 128.2 | 123.8 | |||||||||
|
Cumulative
effect of change in accounting principle
|
-- | -- | 4.7 | |||||||||
|
Impairment
of long-lived assets and other charges
|
2.7 | 44.3 | -- | |||||||||
|
Stock
option compensation
|
10.7 | 12.0 | -- | |||||||||
|
Reversal
of unrecognized tax benefits
|
(11.9 | ) | -- | -- | ||||||||
|
Deferred
income taxes
|
16.5 | (32.7 | ) | (74.0 | ) | |||||||
|
Other
non-cash items
|
(9.0 | ) | 5.1 | (2.9 | ) | |||||||
|
Provision
for credit losses and bad debts
|
0.4 | 0.4 | 0.1 | |||||||||
|
Changes in
operating assets and liabilities:
|
||||||||||||
|
Accounts
and notes receivable
|
(0.7 | ) | 61.8 | (68.2 | ) | |||||||
|
Inventories
|
46.8 | 212.8 | 38.8 | |||||||||
|
Other
current assets
|
5.3 | 2.5 | 28.5 | |||||||||
|
Accounts
payable, accrued expenses, income taxes payable and
other
|
(31.3 | ) | (193.0 | ) | 45.1 | |||||||
|
Net cash
provided by operating activities
|
379.0 | 314.8 | 362.9 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Additions
to property, plant and equipment
|
(45.3 | ) | (91.0 | ) | (170.7 | ) | ||||||
|
Proceeds
from sale of property, plant and equipment
|
1.5 | 11.1 | 226.0 | |||||||||
|
Other
investing activities
|
1.8 | 0.6 | (16.0 | ) | ||||||||
|
Net cash
(used in) provided by investing activities
|
(42.0 | ) | (79.3 | ) | 39.3 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Purchases
of treasury stock
|
(208.5 | ) | -- | (625.8 | ) | |||||||
|
Sale
of treasury stock to employee benefit plans
|
-- | 10.5 | 30.1 | |||||||||
|
Proceeds
from exercise of stock options
|
81.3 | 1.7 | 17.4 | |||||||||
|
Payments
of dividends
|
(32.8 | ) | (33.9 | ) | (33.7 | ) | ||||||
|
Changes in short-term borrowings and oustanding checks in excess of cash
balances, net
|
10.7 | 42.2 | (4.0 | ) | ||||||||
|
Reductions
of long-term borrowings
|
(150.0 | ) | (8.0 | ) | (0.1 | ) | ||||||
|
Net cash
(used in) provided by financing activities
|
(299.3 | ) | 12.5 | (616.1 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
37.7 | 248.0 | (213.9 | ) | ||||||||
|
Cash and cash
equivalents, beginning of period
|
472.0 | 224.0 | 437.9 | |||||||||
|
Cash and cash
equivalents, end of period
|
$ | 509.7 | $ | 472.0 | $ | 224.0 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Interest
paid
|
$ | 42.6 | $ | 44.0 | $ | 43.4 | ||||||
|
Income taxes
paid
|
112.2 | 52.9 | 158.5 | |||||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
RadioShack
Corporation and Subsidiaries
|
Shares at
December 31,
|
Dollars at
December 31,
|
|||||||||||||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Common
stock
|
||||||||||||||||||||||||
|
Beginning and
end of year
|
191.0 | 191.0 | 191.0 | $ | 191.0 | $ | 191.0 | $ | 191.0 | |||||||||||||||
|
Treasury
stock
|
||||||||||||||||||||||||
|
Beginning of
year
|
(55.2 | ) | (56.0 | ) | (32.8 | ) | $ | (1,409.1 | ) | $ | (1,431.6 | ) | $ | (859.4 | ) | |||||||||
|
Purchase
of treasury stock
|
(8.7 | ) | -- | (25.3 | ) | (208.5 | ) | -- | (625.8 | ) | ||||||||||||||
|
Issuance
of common stock
|
0.5 | 0.6 | 1.2 | 12.8 | 18.6 | 31.8 | ||||||||||||||||||
|
Exercise of stock options and grant of stock awards
|
3.5 | 0.2 | 0.9 | 88.3 | 3.9 | 21.8 | ||||||||||||||||||
|
End of
year
|
(59.9 | ) | (55.2 | ) | (56.0 | ) | $ | (1,516.5 | ) | $ | (1,409.1 | ) | $ | (1,431.6 | ) | |||||||||
|
Additional
paid-in capital
|
||||||||||||||||||||||||
|
Beginning of
year
|
$ | 92.6 | $ | 87.7 | $ | 82.7 | ||||||||||||||||||
|
Issuance
of common stock
|
6.2 | (5.7 | ) | 3.5 | ||||||||||||||||||||
|
Excercise of stock options and grant of stock awards
|
(8.4 | ) | (1.7 | ) | (5.0 | ) | ||||||||||||||||||
|
Stock
option compensation
|
10.7 | 12.0 | -- | |||||||||||||||||||||
|
Net
stock-based compensation income tax benefits
|
7.3 | 0.3 | 6.5 | |||||||||||||||||||||
|
End of
year
|
$ | 108.4 | $ | 92.6 | $ | 87.7 | ||||||||||||||||||
|
Retained
earnings
|
||||||||||||||||||||||||
|
Beginning of
year
|
$ | 1,780.9 | $ | 1,741.4 | $ | 1,508.1 | ||||||||||||||||||
|
Net
income
|
236.8 | 73.4 | 267.0 | |||||||||||||||||||||
|
Implementation
of FIN 48
|
7.2 | -- | -- | |||||||||||||||||||||
|
Common
stock cash dividends declared
|
(32.8 | ) | (33.9 | ) | (33.7 | ) | ||||||||||||||||||
|
End of
year
|
$ | 1,992.1 | $ | 1,780.9 | $ | 1,741.4 | ||||||||||||||||||
|
Accumulated
other comprehensive (loss)
income
|
||||||||||||||||||||||||
|
Beginning of
year
|
$ | (1.6 | ) | $ | 0.3 | $ | (0.3 | ) | ||||||||||||||||
|
Pension
adjustments, net of tax
|
0.4 | (1.0 | ) | -- | ||||||||||||||||||||
|
Other
comprehensive (loss) income
|
(4.1 | ) | (0.9 | ) | 0.6 | |||||||||||||||||||
|
End of
year
|
$ | (5.3 | ) | $ | (1.6 | ) | $ | 0.3 | ||||||||||||||||
|
Total
stockholders' equity
|
$ | 769.7 | $ | 653.8 | $ | 588.8 | ||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||
|
Net
income
|
$ | 236.8 | $ | 73.4 | $ | 267.0 | ||||||||||||||||||
|
Other
comprehensive (loss) income, net of
tax:
|
||||||||||||||||||||||||
|
Foreign
currency translation adjustments
|
(4.0 | ) | 0.3 | (0.4 | ) | |||||||||||||||||||
|
Amortization
of gain on cash flow hedge
|
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||||||||||||||
|
Unrealized
(loss) gain on securities
|
-- | (1.1 | ) | 1.1 | ||||||||||||||||||||
|
Other
comprehensive (loss) income
|
(4.1 | ) | (0.9 | ) | 0.6 | |||||||||||||||||||
|
Comprehensive
income
|
$ | 232.7 | $ | 72.5 | $ | 267.6 | ||||||||||||||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
RadioShack
Corporation and Subsidiaries
The Notes to our
Consolidated Financial Statements are important and should be read in
conjunction with your review of the Consolidated Financial Statements. Below is
a list of the notes.
|
Description
of Business
|
|
|
Summary of
Significant Accounting Policies
|
|
|
Accounts and
Notes Receivable, Net
|
|
|
Other Current
Assets, Net
|
|
|
Property,
Plant and Equipment (“PP&E”), Net
|
|
|
Other Assets,
Net
|
|
|
Indebtedness
and Borrowing Facilities
|
|
|
Cumulative
Effect of Change in Accounting Principle
|
|
|
Accrued
Expenses and Other Current Liabilities
|
|
|
Other
Non-Current Liabilities
|
|
|
Income
Taxes
|
|
|
Federal
Excise Tax
|
|
|
Litigation
|
|
|
Commitments
and Contingent Liabilities
|
|
|
Corporate and
Field Headcount Reduction
|
|
|
Stock-Based
Incentive Plans
|
|
|
Deferred
Compensation Plans
|
|
|
Termination
Protection Plans
|
|
|
RadioShack
Investment Plan
|
|
|
RadioShack
401(k) Plan
|
|
|
Stock
Repurchase Program
|
|
|
Preferred
Share Purchase Rights
|
|
|
Supplemental
Executive Retirement Plan
|
|
|
Dividends
Declared
|
|
|
Product Sales
Information
|
|
|
Restructuring
Program
|
|
|
Quarterly
Data (Unaudited)
|
|
|
Segment
Reporting
|
NOTE 1 - DESCRIPTION OF BUSINESS
RadioShack
Corporation was incorporated in Delaware in 1967. We primarily engage in the
retail sale of consumer electronics goods and services through our RadioShack
store chain. We seek to differentiate ourselves from our various competitors by
providing cost-effective solutions to meet the routine electronics needs and
distinct electronics wants of our customers. Throughout this report, the terms
“our,” “we,” “us” and “RadioShack” refer to RadioShack Corporation,
including its subsidiaries.
RADIOSHACK
COMPANY-OPERATED STORES
At
December 31, 2007, we operated 4,447 company-operated stores under the
RadioShack brand located throughout the United States, as well as in Puerto Rico
and the U.S. Virgin Islands. These stores are located in major shopping 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 telephones and
communication devices such as scanners and two-way radios; flat panel
televisions, 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 and memory players. We also provide consumers access to third-party
services such as wireless telephone and DTH satellite activation, satellite
radio service, prepaid wireless airtime and extended service plans.
KIOSKS
At
December 31, 2007, we operated 739 kiosks located throughout the United States.
These kiosks are primarily inside SAM’S CLUB locations, as well as stand-alone
Sprint Nextel kiosks in shopping malls. These locations, which are not
RadioShack-branded, offer primarily wireless handsets, their associated
accessories, and DTH satellite systems. We also provide consumers access to
third-party wireless telephone services.
OTHER
In
addition to the reportable segments discussed above, we have other sales
channels and support operations described as follows:
Dealer
Outlets: At December 31, 2007, we had a network of 1,484 RadioShack
dealer outlets, including 36 located outside of North America. These outlets
provide private label and third-party branded products and services, typically
to smaller communities. These independent dealers are often engaged in other
retail operations and augment their businesses with our products and service
offerings. Our dealer sales derived outside of the United States are not
material.
RadioShack.com:
Products and information are available through our commercial Web site www.radioshack.com.
Online customers can purchase, return or exchange various products available
through this Web site. Additionally, certain products ordered online may be
picked up, exchanged or returned at RadioShack 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. We are a
vendor-authorized service provider for many top tier manufacturers, such as
Hewlett-Packard, LG Electronics, Motorola, Nokia, RCA/Thomson, and Sony, among
others. In addition, we perform repairs for third-party extended service plan
providers. At December 31, 2007, we had eight RadioShack service centers in the
U.S. and one in Puerto Rico that repair certain name-brand and private label
products sold through our various sales channels.
International
Operations: As of January 31, 2007, we had closed all of our locations in
Canada. As of December 31, 2007, there were 176 RadioShack-branded stores and
17 dealers in Mexico. These RadioShack-branded stores and dealer outlets
are overseen by a joint venture in which we are a minority owner with Grupo
Gigante, S.A. de C.V. Our revenues from foreign customers are not material, and
we do not have a material amount of long-lived assets located outside of the
United States. We do not consolidate the operations of the Mexican joint venture
in our consolidated financial statements.
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.
Distribution
Centers - At December 31, 2007, we had five distribution centers
shipping over 800 thousand cartons each month, on average, to our retail stores
and dealer outlets. One of these distribution centers also serves as a
fulfillment center for our online customers. Additionally, we have a
distribution center that ships fixtures to our company-operated stores. During
the first half of 2008, we will close our distribution center in Columbus,
Ohio.
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-operated stores communicate through a
broadband network, which provides efficient access to customer support data.
This design also allows store management to track sales and inventory at the
product or sales associate level. RSTS provides the majority of our programming
and systems analysis needs.
RadioShack Global
Sourcing (“RSGS”) - RSGS serves our wide-ranging international
import/export, sourcing, evaluation, logistics and quality control needs. RSGS’s
activities support our branded and private label business.
Consumer
Electronics Manufacturing - We operate two manufacturing facilities in
the United States and one overseas manufacturing operation in China. These three
manufacturing facilities employed approximately 1,900 employees as of December
31, 2007. We manufacture a variety of products, primarily sold through our
retail outlets, including telephony, antennas, wire and cable products, and a
variety of “hard-to-find” parts and accessories for consumer electronics
products.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation: The Consolidated Financial Statements include our accounts
and our majority-owned subsidiaries. Investments in 20% to 50% owned companies
are accounted for using the equity method. Significant intercompany transactions
and accounts are eliminated in consolidation.
Segments: We
consider RadioShack company-operated stores and kiosks to be our reportable
segments based on the criteria of Statement of Financial Accounting Standards
(“SFAS”) No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The accounting policies of the reportable operating segments are
the same as those described in the remainder of this note.
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 telephone handsets, require the customer to use the services of
a third-party service provider. In most cases, the third-party service provider
pays us an upfront 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. Our sale of an activated wireless telephone handset
is the single event required to meet the delivery criterion for both the upfront
commission and the residual revenue. Upfront commission revenue, net of
estimated service deactivations, is recognized at the time an activated wireless
telephone handset is sold to the customer at the point-of-sale. Based on our
extensive history in selling activated wireless telephone handsets, we have been
able to establish reliable deactivation estimates. Recurring residual income is
recognized as earned under the terms of each contract with the service provider,
which is typically as the service provider bills its customer, generally on a
monthly basis.
Cost of Products
Sold: Cost of products sold primarily includes the total cost of
merchandise inventory sold; direct costs relating to merchandise acquisition and
distribution (including depreciation and excise taxes); costs of services
provided; in-bound freight expenses to our distribution centers; out-bound
freight expenses to our retail outlets; physical inventory valuation adjustments
and losses; customer shipping and handling charges; and certain vendor
allowances (see “Vendor Allowances” below).
Vendor
Allowances: We receive allowances from third-party service providers and
product vendors through a variety of promotional programs and arrangements as a
result of purchasing and promoting their products and services in the normal
course of business. We consider vendor allowances received to be a reduction in
the price of a vendor's products or services and record them as a component of
inventory until the product is sold, at which point we record them as a
component of cost of products sold unless the allowances represent reimbursement
of specific, incremental and identifiable costs incurred to promote a vendor's
products and services. In this case, we record the vendor reimbursement when
earned as an offset to the associated expense incurred to promote the applicable
products and/or services.
Advertising
Costs: Our advertising costs are expensed the first time the advertising
takes place. We receive allowances from certain third-party service providers
and product vendors that we record when earned as an offset to advertising
expense incurred to promote the applicable products and/or services only if the
allowances represent reimbursement of specific, incremental and identifiable
costs (see our previous “Vendor Allowances” discussion). Advertising expense was
$208.8 million, $216.3 million and $263.1 million for the years ended December
31, 2007, 2006 and 2005, respectively, net of vendor allowances of $13.1
million, $34.7 million and $44.1 million, respectively.
Revision of Expense Classification:
Subsequent to the end of 2007, we determined that we should revise the
classification of certain expenses relating to merchandise acquisition and the
operation of our distribution centers, including depreciation, in our
Consolidated Statements of Income. This revision had no impact on previously
reported operating income, net income, financial position, stockholders’ equity,
comprehensive income, or cash flows from operating activities. Our policy is,
and historically has been, to capitalize such amounts into inventory. However,
historically upon capitalization of these expenses, we increased inventory and
previously decreased cost of products sold, rather than decreasing selling,
general and administrative (“SG&A”) expense where these expenses were
originally recorded. As a result, we had understated cost of products sold
and overstated SG&A expense and, to a lesser extent, depreciation. We
believe the revised presentation provides consistency between our consolidated
balance sheets and statements of income by aligning the classification of our
distribution costs within our statements of income in the manner in which these
costs are included in our inventory balance.
We have concluded that the effect of these
misstatements did not materially impact any previously issued financial
statements, however we have revised prior period comparative information
presented herein in order to present such information on a consistent basis. The
effects of this revision are summarized in the table below. A reconciliation of
these changes are also shown on a quarterly basis within Note 27 –
“Quarterly Data (Unaudited)” in the Notes to Consolidated
Financial Statements.
|
As Previously
Reported
|
Revision
|
As
Adjusted
|
As Previously
Reported
|
Revision
|
As
Adjusted
|
|||||||||||||||||||
|
(In
millions)
|
Twelve
Months Ended December 31,
|
|||||||||||||||||||||||
|
2006
|
2005
|
|||||||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 4,777.5 | $ | -- | $ | 4,777.5 | $ | 5,081.7 | $ | -- | $ | 5,081.7 | ||||||||||||
|
Cost of
products sold
|
2,544.4 | 103.7 | 2,648.1 | 2,706.3 | 108.7 | 2,815.0 | ||||||||||||||||||
|
Gross
profit
|
2,233.1 | (103.7 | ) | 2,129.4 | 2,375.4 | (108.7 | ) | 2,266.7 | ||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling,
general and administrative
|
1,903.7 | (93.0 | ) | 1,810.7 | 1,901.7 | (98.4 | ) | 1,803.3 | ||||||||||||||||
|
Depreciation
and amortization
|
128.2 | (10.7 | ) | 117.5 | 123.8 | (10.3 | ) | 113.5 | ||||||||||||||||
|
Impairment
of long-lived assets and other
charges
|
44.3 | -- | 44.3 | -- | -- | -- | ||||||||||||||||||
|
Total
operating expenses
|
2,076.2 | (103.7 | ) | 1,972.5 | 2,025.5 | (108.7 | ) | 1,916.8 | ||||||||||||||||
|
Operating
income
|
$ | 156.9 | $ | -- | $ | 156.9 | $ | 349.9 | $ | -- | $ | 349.9 | ||||||||||||
Reclassifications:
Certain amounts in the December 31, 2006 and 2005, financial statements have
been reclassified to conform with the December 31, 2007, presentation. These
reclassifications had no effect on net income or total stockholders’ equity as
previously reported.
Pervasiveness of
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, related
revenues and expenses, and the disclosure of gain and loss contingencies at the
date of the financial statements and during the periods presented. Our most
significant estimates and assumptions include the determination of estimates for
third-party service deactivations in connection with revenue recognition and
receivables, inventory valuation, depreciable lives of property, plant and
equipment, insurance reserves, intangible assets, contingency and litigation
reserves, and stock-based compensation. Actual results could differ materially
from those estimates.
Income Taxes:
Income taxes are accounted for using the asset and liability method.
Deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. In addition, we recognize future tax benefits to the extent that such
benefits are more likely than not to be realized. See Note 11
- “Income Taxes” for a discussion of FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”
(“FIN 48”), and its effect on income taxes.
Stock-Based
Compensation: In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
No. 123R”), which requires companies to measure all employee stock-based
compensation awards using a fair value method and record this expense in their
consolidated financial statements. In addition, the adoption of SFAS
No. 123R requires additional accounting and disclosures related to income
tax and cash flow effects resulting from stock-based
compensation.
We
adopted SFAS No. 123R on January 1, 2006, under the modified prospective
application method. Under this method, we record stock-based compensation
expense for all awards granted on or after the date of adoption and for the
portion of previously granted awards that remained unvested at the date of
adoption. Accordingly, prior period amounts have not been restated. Currently,
our stock-based compensation relates to stock options, restricted stock awards,
and other equity-based awards issued to our employees and directors. All of our
equity awards, with the exception of our stock options, are measured at the fair
value of our common stock on the grant date and recognized as compensation
expense over the applicable vesting period.
Prior to January 1,
2006, we accounted for stock-based compensation using the intrinsic value
method. Accordingly, we recognized compensation expense for restricted stock and
other equity awards over the service period, but did not recognize compensation
expense for stock option awards, because the options were granted at market
value on the date of grant.
The following table
details the effect of stock-based compensation on net income and net income per
share for the years ended December 31, 2007, 2006, and 2005, respectively,
illustrating the effect of applying the fair value recognition provisions of
SFAS No. 123R for the year ended December 31, 2005.
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions, except per share amounts)
|
2007
|
2006
|
Pro
Forma
2005
|
|||||||||
|
Income before
cumulative effect of change in accounting principle
|
$ | 236.8 | $ | 73.4 | $ | 269.9 | ||||||
|
Cumulative
effect of change in accounting principle, net of taxes
|
-- | -- | (2.9 | ) | ||||||||
|
Net income,
as reported
|
236.8 | 73.4 | 267.0 | |||||||||
|
Stock-based
employee compensation expense included in reported net
income, net of related tax effects
|
10.1 | 13.8 | 7.8 | |||||||||
|
Total
stock-based compensation expense determined under fair value method
for all awards, net of related tax effects
|
(10.1 | ) | (13.8 | ) | (20.4 | ) | ||||||
|
Net
income
|
$ | 236.8 | $ | 73.4 | $ | 254.4 | ||||||
|
Net income
per share:
|
||||||||||||
|
Basic
– as reported
|
$ | 1.76 | $ | 0.54 | $ | 1.80 | ||||||
|
Basic
– pro forma
|
$ | 1.72 | ||||||||||
|
Diluted
– as reported
|
$ | 1.74 | $ | 0.54 | $ | 1.79 | ||||||
|
Diluted
– pro forma
|
$ | 1.71 | ||||||||||
The compensation
cost that has been charged against income for stock-based compensation plans was
$12.7 million, $20.2 million and $12.2 million for the years ended December 31,
2007, 2006 and 2005, respectively. The total income tax benefit recognized for
these stock-based compensation plans was $2.6 million, $6.4 million and $4.4
million for years ended December 31, 2007, 2006 and 2005,
respectively.
The fair value of
the stock options granted during the years ended December 31, 2007, 2006 and
2005, was estimated using the Black-Scholes-Merton option-pricing model, except
for the fair market value of the two million performance options granted to our
chief executive officer during the third quarter of 2006, which were valued
utilizing the Monte Carlo simulation model. The Black-Scholes-Merton and Monte
Carlo simulation models require the use of highly subjective assumptions,
including expected option life, expected volatility, and expected employee
termination rate. We use historical data and management judgment to estimate the
option life and employee termination rate, and use historical and implied
volatility when estimating the stock price volatility.
The fair market
value of the stock options granted during the years ended December 31, 2007,
2006 and 2005, respectively, was estimated using the following
assumptions:
|
Year Ended
December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Option life
(in years)
|
4.6 | 4.9 | 4.0 | |||||||||
|
Stock price
volatility
|
32.7 | % | 33.1 | % | 38.3 | % | ||||||
|
Dividend
yield
|
1.00 | % | 1.19 | % | 0.88 | % | ||||||
|
Risk free
interest rate
|
4.2 | % | 5.0 | % | 3.8 | % | ||||||
|
Fair
value
|
$ | 6.99 | $ | 4.92 | $ | 9.39 | ||||||
We
periodically grant options to purchase RadioShack common stock to certain of our
employees under various stock option plans at exercise prices equal to the fair
market value of our common stock at the date of grant. Our current stock option
grants have terms of seven years from the grant date. Previously, we granted
options with ten-year terms. Typically, the options vest ratably over three
years from the date of grant. However, during the third quarter of 2006, we
granted 4.2 million stock options to our chief executive officer and chief
financial officer that primarily vest over four years from the date of grant
(includes 2.0 million options which met the market condition in 2007 that
restricted the ability to exercise until certain stock price hurdles were
achieved). Once employment is terminated, the option holder has 90 days in which
to exercise all vested options; however, under certain circumstances, some
retirees may have three years in which to exercise all vested options. The fair
market value of each option is generally recognized as compensation expense on a
straight-line basis between the grant date and the date at which the option
becomes fully vested. As of December 31, 2007, unrecognized compensation expense
related to the unvested portion of our stock options was $16.2 million, which is
expected to be recognized over a weighted average period of 1.4
years.
The following table
summarizes activity under our stock option plans for the year ended December 31,
2007:
|
Year Ended
December 31, 2007
|
||||||||||||||||
|
Shares
(In
thousands)
|
Weighted
Average Exercise Price
|
Remaining
Contractual
Life
(in
years)
|
Aggregate
Intrinsic
Value
(in
millions)
|
|||||||||||||
|
Outstanding
at beginning of period
|
21,404 | $ | 29.38 | |||||||||||||
|
Grants
|
601 | 22.34 | ||||||||||||||
|
Exercised
|
(3,462 | ) | 23.08 | |||||||||||||
|
Forfeited
|
(3,141 | ) | 35.32 | |||||||||||||
|
Outstanding
at end of period
|
15,402 | $ | 29.31 | 3.4 | $ | 12.2 | ||||||||||
|
Exercisable
at end of period
|
11,394 | $ | 34.00 | 2.7 | $ | 3.3 | ||||||||||
The aggregate
intrinsic value is calculated as the difference between the exercise price of
the underlying awards and the quoted price of our common stock for those awards
that have an exercise price currently below the closing price. As of December
31, 2007, we had options outstanding to purchase an aggregate of 4.0 million
shares with an exercise price below the quoted price of our stock, resulting in
an aggregate intrinsic value of $12.2 million. During the year ended December
31, 2007, 2006 and 2005, the aggregate intrinsic value of options exercised
under our stock option plans was $22.9 million, $0.9 million and $6.2 million
respectively, determined as of the date of exercise. The total fair value
of stock options vested was $14.1 million, $19.3 million and $21.8 million
for the years ended December 31, 2007, 2006 and 2005, respectively.
Income per Share:
Basic income per share is computed based only on the weighted average
number of common shares outstanding for each period presented. Diluted income
per share reflects the potential dilution that would have occurred if securities
or other contracts to issue common stock were exercised, converted, or resulted
in the issuance of common stock that would have then shared in the earnings of
the entity. The following table reconciles the numerator and denominator used in
the basic and diluted earnings per share calculations.
|
Year Ended
December 31,
|
|||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(In millions,
except
|
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
||||||||
|
per share
amounts)
|
(Numerator)
|
(Denominator)
|
Amount
|
(Numerator)
|
(Denominator)
|
Amount
|
(Numerator)
|
(Denominator)
|
Amount
|
||||||||
|
Income before
cumulative
effect of change in
accounting principle
|
$236.8
|
$73.4
|
$269.9
|
||||||||||||||
|
Cumulative
effect of change in
accounting principle,
net of taxes
|
--
|
--
|
(2.9)
|
||||||||||||||
|
Basic:
|
|||||||||||||||||
|
Net
income
|
236.8
|
134.6
|
$1.76
|
73.4
|
136.2
|
$0.54
|
267.0
|
148.1
|
$1.80
|
||||||||
|
Effect of
dilutive securities:
|
|||||||||||||||||
|
Stock
options
|
--
|
1.3
|
--
|
--
|
--
|
0.7
|
|||||||||||
|
Diluted:
|
|||||||||||||||||
|
Net income
plus assumed
conversions
|
$236.8
|
135.9
|
$1.74
|
$73.4
|
136.2
|
$0.54
|
$267.0
|
148.8
|
$1.79
|
||||||||
Options to purchase
9.5 million, 17.1 million and 15.8 million shares of common stock in 2007, 2006
and 2005, respectively, were not included in the computation of diluted income
per share because the option exercise price was greater than the average market
price of the common stock during the year, and the effect of their inclusion
would be antidilutive.
Cash and Cash
Equivalents: Cash on hand in stores, deposits in banks and all highly
liquid investments with an original or remaining maturity of three months or
less at the time of purchase are considered cash and cash equivalents. We carry
our cash equivalents at cost, which approximates fair value because of the short
maturity of the instruments. The weighted average interest rates were 3.3% and
5.3% at December 31, 2007 and 2006, respectively, for cash equivalents totaling
$483.9 million and $397.2 million, respectively.
Accounts
Receivable and Allowance for Doubtful Accounts: Concentrations of credit
risk with respect to customer and dealer receivables are limited due to the
large number of customers, dealers and their location in many different
geographic areas of the country. However, we do have some concentration of
credit risk from service providers in the wireless telephone industry, due to
sales of their products and services. We establish an allowance for doubtful
accounts based on factors surrounding the credit risk of specific customers,
historical trends and other information. Historically, such losses, in the
aggregate, have not exceeded our expectations. Account balances are charged
against the allowance when we believe it is probable that the receivable will
not be recovered.
Inventories:
Our inventories are stated at the lower of cost (principally based on average
cost, which approximates FIFO) or market value and are comprised primarily of
finished goods. Included in the cost of the inventories are in-bound freight
expenses to our distribution centers, out-bound freight expenses to our retail
outlets, and other direct costs relating to merchandise acquisition and
distribution. If the calculated net realizable value of the inventory is
determined to be less than the recorded cost, a provision is made to reduce the
carrying amount of the inventory.
Property, Plant
and Equipment: We state our property, plant and equipment at cost, less
accumulated depreciation. For financial reporting purposes, depreciation is
primarily calculated using the straight-line method over the estimated useful
life. When we sell or retire depreciable assets, we remove the related cost and
accumulated depreciation from our accounts, and we recognize gains and losses.
Major additions and betterments are capitalized. Maintenance and repairs that do
not materially improve or extend the lives of the respective assets are charged
to operations as we incur these expenses.
Capitalized
Software Costs: We capitalize qualifying costs related to the acquisition
or development of internal-use software. Capitalization of costs begins after
the conceptual formulation stage has been completed. Capitalized costs are
amortized over the estimated useful life of the software, which ranges between
three and five years. Capitalized software costs at December 31, 2007, 2006 and
2005, totaled $50.4 million, $46.0 million and $55.1 million, net of accumulated
amortization of $100.1 million, $98.7 million and $79.2 million,
respectively.
Impairment of
Long-Lived Assets: We review long-lived assets (primarily property, plant
and equipment) held and used or to be disposed of for impairment whenever events
or changes in circumstances indicate that the net book value of the asset may
not be recoverable. Recoverability is assessed based on estimated undiscounted
cash flows from the useful asset, pursuant to the provisions of SFAS No. 144,
“Accounting for the Impairment of Long-Lived Assets.” If the carrying amount of
an asset is not recoverable, we recognize an impairment loss equal to the amount
by which the carrying amount exceeds fair value.
Goodwill and
Intangible Assets: Goodwill represents the excess of the purchase price
over the fair value of net assets acquired. At December 31, 2007, our goodwill
balance totaled $2.9 million. Additionally, as of December 31, 2007, we had $5.0
million in intangible assets arising from the SAM’S CLUB kiosk business
acquisition. Pursuant to the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill and intangibles with indefinite useful lives are
not amortized but are reviewed annually during the fourth quarter for impairment
(and in interim periods if certain events occur indicating that the carrying
value of goodwill and intangible assets may be impaired). We primarily estimate
fair values utilizing valuation methods such as discounted cash
flows.
Fair Value of
Financial Instruments: The fair value of our cash and cash equivalents,
accounts receivable, and accounts payable approximate their recorded values.
Derivative financial instruments are recorded at fair value.
Derivatives:
We use our interest rate swap agreements to effectively convert a portion
of our long-term fixed rate debt to a variable rate. Under these agreements, we
pay a variable rate of LIBOR plus a markup and receive a fixed rate of 7.375%.
We have designated these agreements as fair value hedging instruments. The
accounting for changes in the fair value of an interest rate swap is dependent
on the use of the swap. To the extent that a derivative is effective as a hedge
of an exposure to future changes in fair value, the change in the derivative's
fair value is recorded in earnings, as is the change in fair value of the item
being hedged. To the extent that a swap is effective as a cash flow hedge of an
exposure to future changes in cash flows, the change in fair value of the swap
is deferred in accumulated other comprehensive income. Any portion we consider
to be ineffective is immediately reported in our earnings. The differentials to
be received or paid under interest rate swap contracts designated as hedges are
recognized in income over the life of the contracts as adjustments to interest
expense. Gains and losses on terminations of interest rate contracts designated
as hedges are deferred and amortized into interest expense over the remaining
life of the original contracts or until repayment of the hedged indebtedness.
Through the use of interest rate swap agreements, our net interest expense
increased by $2.7 million and $1.8 million for the years ended December 31, 2007
and 2006, respectively, but decreased by $2.8 million for the year ended
December 31, 2005.
Our
exposure to market risk, specifically the equity markets, relates to warrants we
earned as of December 31, 2006 and 2005, to purchase 2 million and 4 million
shares, respectively, of Sirius Satellite Radio Inc. (“Sirius”) stock at an exercise price of $5.00
per share. We have recorded these as assets using a Black-Scholes-Merton
valuation method. Our maximum exposure is equal to the carrying value at
December 31, 2007, of $2.4 million. For the years ended December 31, 2007
and 2006, we recognized a net unrealized gain of $0.9 million and an unrealized
loss of $5.9 million, respectively, related to our derivative exposure to Sirius
warrants, as a result of our mark to market of these warrants. During the third
quarter 2007, we modified the expected date at which we would settle the
warrants, resulting in a gain of $2.4 million, which was offset by
mark-to-market losses of $1.5 million during the year.
We
maintain strict internal controls over our hedging activities, which include
policies and procedures for risk assessment and the approval, reporting and
monitoring of all derivative financial instrument activities. We monitor our
hedging positions and credit worthiness of our counter-parties and do not
anticipate losses due to our counter-parties’ nonperformance. We do not hold or
issue derivative financial instruments for trading or speculative purposes. To
qualify for hedge accounting, derivatives must meet defined correlation and
effectiveness criteria, be designated as a hedge and result in cash flows and
financial statement effects that substantially offset those of the position
being hedged.
Foreign Currency
Translation: The functional currency of substantially all operations
outside the U.S. is the applicable local currency. Translation gains or losses
related to net assets located outside the United States are included as a
component of accumulated other comprehensive (loss) income and are classified in
the stockholders’ equity section of the accompanying Consolidated Balance
Sheets.
Comprehensive
Income: Comprehensive income is defined as the change in equity (net
assets) of a business enterprise during a period, except for those changes
resulting from investments by owners and distributions to owners. Comprehensive
income is composed of net income, foreign currency translation adjustments, and
amortization of gains and losses on an interest rate swap used as a cash flow
hedge, which are all shown net of tax in the accompanying Consolidated
Statements of Stockholders' Equity and Comprehensive Income.
Recently Issued Accounting
Pronouncements: In September 2006, the FASB issued Statement of
Financial Accounting Standards (“SFAS”) No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. This statement does not
require any new fair value measurements; rather, it applies to other accounting
pronouncements that require or permit fair value measurements. The provisions of
this statement are to be applied prospectively as of the beginning of the fiscal
year in which this statement is initially applied, with any transition
adjustment recognized as a cumulative-effect adjustment to the opening balance
of retained earnings. The provisions of SFAS 157 are effective for fiscal years
beginning after November 15, 2007, except for a one year deferral for
non-financial assets and liabilities of a non-recurring nature. We will adopt
SFAS 157 effective January 1, 2008, and plan to adopt the non-financial assets
and liabilities aspects one year later. We do not expect it to have a material
effect on our results of operations or financial condition.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure certain financial instruments and other eligible
items at fair value when the items are not otherwise currently required to be
measured at fair value. Under SFAS 159, the decision to measure items at fair
value is made at specified election dates on an irrevocable
instrument-by-instrument basis. Entities electing the fair value option would be
required to recognize changes in fair value in earnings and to expense up-front
cost and fees associated with the item for which the fair value option is
elected. Entities electing the fair value option are required to distinguish, on
the face of the statement of financial position, the fair value of assets and
liabilities for which the fair value option has been elected and similar assets
and liabilities measured using another measurement attribute. SFAS 159 will be
effective for fiscal years beginning after November 15, 2007. We will adopt SFAS
159 effective January 1, 2008, and do not expect it to have a material effect on
our results of operations or financial condition.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements on how the acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the entity acquired. In
addition, SFAS 141R provides guidance on the recognition and measurement of
goodwill acquired in the business combination or a gain from a bargain purchase
as well as what information to disclose to enable users of the financial
statements to evaluate the nature and financial impact of the business
combination. The provisions of SFAS 141R apply prospectively to business
combinations for which the acquisition date is after the end of our fiscal year
2008 and may not be applied before that time. The provisions of SFAS No. 141R are
effective for the fiscal years beginning after the end of our 2008 fiscal year;
therefore, we anticipate adopting this standard as of January 1, 2009. We have
not determined the effect, if any, the adoption of this statement will have on
our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements - an Amendment of
ARB No. 51” (“SFAS 160”). SFAS 160 establishes principles and requirements on
how to treat the portion of equity in a subsidiary that is not attributable
directly or indirectly to a parent. This is commonly known as a minority
interest. The objective of SFAS 160 is to improve relevance, comparability, and
transparency concerning ownership interests in subsidiaries held by parties
other than the parent by providing disclosures that clearly identify between
interests of the parent and interest of the noncontrolling owners and the
related impacts on the consolidated statement of income and the consolidated
statement of financial position. SFAS 160 also provides guidance on disclosures
related to changes in the parent’s ownership interest and deconsolidation of a
subsidiary. The provisions of SFAS 160 apply prospectively as of the beginning
of our fiscal year 2009 with presentation and disclosure requirements applied
retrospectively to all periods presented. Early adoption is prohibited. The provisions of SFAS No. 160 are
effective for the fiscal years beginning with our 2009 fiscal year; therefore,
we anticipate adopting this standard as of January 1, 2009. We have not
determined the effect, if any, the adoption of this statement will have on our
financial condition or results of operations.
In
July 2006, the FASB issued FIN 48. FIN 48 provides guidance on the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 requires that we recognize in the financial
statements the impact of a tax position if that position more likely than not
will be sustained on an audit, based on the technical merits of the position.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition
provisions. The transition adjustment recognized on the date of adoption is
recorded as an adjustment to retained earnings as of the beginning of the
adoption period. We adopted FIN 48 on January 1, 2007. See Note 11 – “Income Taxes” for a discussion of the impact of
FIN 48.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE, NET
As
of December 31, 2007 and 2006, we had the following accounts and notes
receivable outstanding in the accompanying Consolidated Balance
Sheets:
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Receivables
from vendors and service providers
|
$ | 156.9 | $ | 167.0 | ||||
|
Trade
accounts receivable
|
62.1 | 67.7 | ||||||
|
Other
receivables
|
39.5 | 15.7 | ||||||
|
Allowance for
doubtful accounts
|
(2.5 | ) | (2.5 | ) | ||||
|
Accounts and
notes receivable, net
|
$ | 256.0 | $ | 247.9 | ||||
Receivables from
vendors and service providers relate to earned marketing development funds,
customer acquisition fees, residual income, promotions and other rebates from
our third-party service providers and product vendors, after taking into account
estimates for service providers’ customer deactivations and non-activations,
which are factors in determining the amount of customer acquisition fees and
residual income earned.
Allowance
for Doubtful Accounts
|
December
31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance at
the beginning of the year
|
$ | 2.5 | $ | 0.9 | $ | 1.4 | ||||||
|
Provision for
bad debts included in selling, general and administrative
expense
|
0.4 | 0.4 | 0.1 | |||||||||
|
Uncollected
receivables (written off) recovered, net
|
(0.4 | ) | 1.2 | (0.6 | ) | |||||||
|
Balance at
the end of the year
|
$ | 2.5 | $ | 2.5 | $ | 0.9 | ||||||
NOTE 4 - OTHER CURRENT ASSETS, NET
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Deferred
income taxes
|
$ | 75.4 | $ | 93.5 | ||||
|
Other
|
20.3 | 34.1 | ||||||
|
Total other
current assets, net
|
$ | 95.7 | $ | 127.6 | ||||
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT (“PP&E”),
NET
The following table
outlines the ranges of estimated useful lives and balances of each major fixed
asset category:
|
Range
of
|
December
31,
|
|||||||||||
|
(In
millions)
|
Estimated Useful
Life
|
2007
|
2006
|
|||||||||
|
Land
|
--
|
$ | 10.6 | $ | 10.6 | |||||||
|
Buildings
|
10 - 40
years
|
55.0 | 55.0 | |||||||||
|
Furniture,
fixtures, equipment and software
|
2 - 15
years
|
682.4 | 751.7 | |||||||||
|
Leasehold
improvements
|
The shorter
of the useful life of the improvements or the term of the related lease
and certain renewal periods
|
367.7 | 369.5 | |||||||||
|
Total
PP&E
|
1,115.7 | 1,186.8 | ||||||||||
|
Less
accumulated depreciation and
amortization
|
(798.6 | ) | (800.5 | ) | ||||||||
|
PP&E,
net
|
$ | 317.1 | $ | 386.3 | ||||||||
NOTE 6 - OTHER ASSETS, NET
| December 31, | ||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Notes
receivable
|
$ |
14.1
|
$ | 13.5 | ||||
|
Goodwill
|
2.9 | 2.5 | ||||||
|
Deferred
income taxes
|
59.7 | 36.3 | ||||||
|
Intangibles
|
2.2 | 5.0 | ||||||
|
Other
|
26.8 | 26.8 | ||||||
|
Total other
assets, net
|
$ | 105.7 | $ | 84.1 | ||||
The change in the carrying amount of goodwill is as follows:
| December 31, | ||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Beginning
balance
|
$ | 2.5 | $ | 22.3 | ||||
|
Goodwill
impairments
|
-- | (19.8 | ) | |||||
|
Dealer
conversions
|
0.4 | -- | ||||||
|
Ending
balance
|
$ | 2.9 | $ | 2.5 | ||||
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 acquisition
was accounted for using the purchase method of accounting as prescribed in SFAS
No. 141, “Business Combinations” (“SFAS No. 141”). In accordance with SFAS No.
141, the purchase price was allocated to the assets acquired and liabilities
assumed based on estimates of their respective fair values at the date of
acquisition. Fair values were determined principally by third-party valuations
and supported by internal studies. The total purchase price of $59.6 million was
allocated primarily to fixed assets, goodwill and a separately identifiable
intangible asset, which is our contract with SAM’S CLUB. The final purchase
price allocation to goodwill and to intangibles was $18.6 million and $32.1
million, respectively.
The intangible
asset associated with our contract with SAM’S CLUB is being amortized over five
years and the estimated amortization expense for years ending December 31, 2008
and 2009, is $2.9 million, and $2.1 million, respectively.
As
a result of continued company and wireless industry growth challenges, together
with changes in our senior leadership team during the third quarter of 2006 that
resulted in a refocus on allocation of capital and resources towards other areas
of our business, we determined that our long-lived assets, including goodwill
associated with our kiosk operations, were impaired. We performed impairment
tests on both the long-lived assets associated with our SAM'S CLUB agreement,
including the intangible asset relating to the five-year agreement, and the
accompanying goodwill.
With respect to the
long-lived tangible and intangible assets, we compared their carrying values
with their estimated fair values using a discounted cash flow model, which
reflected our lowered expectations of wireless revenue growth and the ceased
expansion of our kiosk business, and determined that the intangible asset
relating to the five-year agreement was impaired. This assessment resulted in a
$10.7 million impairment charge to the intangible asset related to our kiosk
segment in 2006. The remaining intangible balance will be amortized over the
remaining life of the SAM'S CLUB agreement, which is scheduled to expire in
September 2009. The balance at December 31, 2007, was $5.0 million.
With respect to the
goodwill of $18.6 million, we estimated the fair value of the SAM'S CLUB
reporting unit using a discounted cash flow model similar to that used in the
long-lived asset impairment test. We compared it with the carrying value of the
reporting unit and determined that the goodwill was impaired. As the
carrying value of the reporting unit exceeded its estimated fair value, we then
compared the implied fair value of the reporting unit's goodwill with the
carrying amount of goodwill. This resulted in an $18.6 million impairment of
goodwill related to our kiosk segment in the third quarter of 2006.
NOTE 7 - INDEBTEDNESS AND BORROWING FACILITIES
Short-Term
Debt, Including Current Maturities of Long-Term Debt
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Current
portion of long-term notes payable
|
$ | -- | $ | 150.0 | ||||
|
Current
portion of unamortized debt discount and other costs
|
-- | (0.6 | ) | |||||
|
Short-term
debt
|
56.2 | 45.5 | ||||||
|
Current
portion of medium-term notes payable
|
5.0 | -- | ||||||
|
Total
short-term debt, including current maturities of
long-term debt
|
$ | 61.2 | $ | 194.9 | ||||
The increase in
short-term debt is due to an increase in checks issued and not
cleared.
Long-Term
Debt, Excluding Current Maturities
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Ten-year
7.375% unsecured note payable due in 2011
|
$ | 350.0 | $ | 350.0 | ||||
|
Ten-year
6.95% unsecured note payable due in 2007
|
-- | 150.0 | ||||||
|
Medium-term
unsecured notes payable with an interest rate of 6.42% due in
2008
|
5.0 | 5.0 | ||||||
|
Notes payable
with interest rates at December 31, 2007 and 2006,
of 4.35% and 4.95%, respectively, due in 2014
|
1.0 | 1.0 | ||||||
|
Unamortized
debt discount and other costs
|
(1.3 | ) | (2.3 | ) | ||||
|
Fair value of
interest rate swaps
|
(1.5 | ) | (8.5 | ) | ||||
| 353.2 | 495.2 | |||||||
|
Less current
portion of:
|
||||||||
|
Notes
payable
|
5.0 | 150.0 | ||||||
|
Unamortized
debt discount and other costs
|
-- | (0.6 | ) | |||||
| 5.0 | 149.4 | |||||||
|
Total
long-term debt, excluding current maturities
|
$ | 348.2 | $ | 345.8 | ||||
Long-term
borrowings outstanding at December 31, 2007, mature as follows:
|
Long-Term
|
||||
|
(In
millions)
|
Borrowings
|
|||
|
2008
|
$ | 5.0 | ||
|
2009
|
-- | |||
|
2010
|
-- | |||
|
2011
|
350.0 | |||
|
2012
|
-- | |||
|
2013 and
thereafter
|
1.0 | |||
|
Total
|
$ | 356.0 | ||
The fair value of
our long-term debt of $356.0 million and $506.0 million (including current
portion) at December 31, 2007 and 2006, was approximately $358.8 million and
$519.4 million, respectively. The fair values were computed using interest rates
which were in effect at the balance sheet dates for similar debt
instruments.
Our senior
unsecured debt primarily consists of a 10-year long-term note issuance and an
issuance of medium-term notes.
Long-Term
Notes: We have a $300 million debt shelf registration statement which
became effective in August 1997. In August 1997, we issued $150 million of
10-year unsecured long-term notes under this shelf registration. The interest
rate on the notes was 6.95% per annum with interest payable on September 1 and
March 1 of each year. These notes contained customary non-financial covenants.
In September 2007, our $150 million ten-year unsecured note payable came due.
Upon maturity, we paid off the $150 million note payable utilizing our available
cash and cash equivalents.
On
May 11, 2001, we issued $350 million of 10-year 7.375% 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 contain certain non-financial covenants and 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. The exchange resulted in substantially all of the
notes becoming registered with the SEC and did not result in additional debt
being issued.
During the third
quarter of 2001, we entered into an interest rate swap agreement with an
underlying notional amount of $110.5 million and a maturity in September 2007.
This interest rate swap agreement expired in conjunction with the maturity of
the note payable. In June and August 2003, we entered into interest rate swap
agreements with underlying notional amounts of debt of $100 million and $50
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. We recorded an amount in other
non-current liabilities, net, of $1.5 million and $8.5 million (their fair
value) at December 31, 2007 and 2006, respectively, for the swap agreements and
adjusted the fair value of the related debt by the same amount. Fair value was
computed based on the market’s current anticipation of quarterly LIBOR rate
levels from the present until the swaps’ maturities.
Medium-Term
Notes: We also issued, in various amounts and on various dates from
December 1997 through September 1999, medium-term notes totaling $150 million
under the shelf registration described above. At December 31, 2007, $5 million
of these notes remained outstanding. The interest rate at December 31, 2007, for
the outstanding $5 million in medium-term notes was 6.42%. These notes contain
customary non-financial covenants and mature in January 2008. As of December 31,
2007, there was no availability under this shelf
registration.
Short-Term
Borrowing Facilities
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Domestic
seasonal bank credit lines and
|
||||||||||||
|
bank
money market lines:
|
||||||||||||
|
Lines
available at year end
|
$ | 625.0 | $ | 675.0 | $ | 780.0 | ||||||
|
Loans
outstanding at year end
|
-- | -- | -- | |||||||||
|
Weighted
average interest rate at year end
|
-- | -- | -- | |||||||||
|
Weighted
average loans outstanding
|
$ | -- | $ | -- | $ | -- | ||||||
|
Weighted
average interest rate during year
|
-- | -- | -- | |||||||||
|
Short-term
foreign credit lines:
|
||||||||||||
|
Lines
available at year end
|
$ | 8.0 | $ | 8.0 | $ | 9.4 | ||||||
|
Loans
outstanding at year end
|
$ | -- | $ | -- | $ | 1.1 | ||||||
|
Weighted
average interest rate at year end
|
-- | -- | 4.82 | % | ||||||||
|
Weighted
average loans outstanding
|
$ | 0.9 | $ | 0.2 | $ | -- | ||||||
|
Weighted
average interest rate during year
|
4.88 | % | 5.02 | % | 4.80 | % | ||||||
|
Letters of
credit and banker’s acceptance lines
|
||||||||||||
|
of
credit:
|
||||||||||||
|
Lines
available at year end
|
$ | 57.0 | $ | 92.0 | $ | 173.4 | ||||||
| Acceptances outstanding at year end | 0.3 | 4.8 | -- | |||||||||
|
Letters
of credit open against outstanding
purchase
orders at year end
|
$ | 2.0 | $ | 15.6 | $ | 10.2 | ||||||
|
Commercial
paper credit facilities:
|
||||||||||||
|
Commercial
paper outstanding at year end
|
N/A | $ | -- | $ | -- | |||||||
| Weighted average interest rate at year end | N/A | -- | -- | |||||||||
|
Weighted
average commercial paper outstanding
|
N/A | $ | 35.2 | $ | 138.0 | |||||||
|
Weighted
average interest rate during year
|
-- | 5.50 | % | 3.98 | % | |||||||
Our short-term
credit facilities, including revolving credit lines, are summarized in the
accompanying short-term borrowing facilities table above. The method used to
compute averages in the short-term borrowing facilities table is based on a
daily weighted average computation that takes into consideration the time period
such debt was outstanding, as well as the amount outstanding. Our financing,
primarily short-term debt, if utilized, would consist primarily of borrowings
under our credit facilities, which is described in more detail
below.
Credit
Facilities: At December 31, 2007, we had an aggregate of $625 million
borrowing capacity available under our existing credit facilities. These
facilities consist of the following:
|
Amount
of Facility
|
Expiration
Date
|
|
$300
million
|
June
2009
|
|
$325
million
|
May
2011
|
These credit
facilities provide us a source of liquidity. As of December 31, 2007, there were
no outstanding borrowings under these credit facilities, nor were these
facilities utilized during 2007. Interest charges under these facilities are
derived using a base LIBOR rate plus a margin which changes based on our credit
ratings. Our bank syndicated credit facilities have customary terms and
covenants, and we were in compliance with these covenants at December 31,
2007.
In
June 2006, we replaced our existing $300 million five-year credit facility,
which was to expire in June 2007, with a $325 million five-year credit agreement
expiring May 2011. The new facility has a more favorable fixed charge coverage
ratio and provides for the exclusion of cash restructuring expenses from the
covenant calculation. We also amended the $300 million facility expiring in June
2009 to include the similar covenants and terminated our $130 million 364-day
revolving credit facility.
NOTE 8 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE
During the fourth
quarter of 2005, we adopted FASB Interpretation (“FIN”) No. 47, “Accounting for
Conditional Asset Retirement Obligations” (“FIN 47”), which is an interpretation
of SFAS No. 143, “Accounting for Asset Retirement Obligations” (”SFAS No. 143”).
This interpretation clarified terminology within SFAS No. 143 and requires an
entity to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability’s fair value can be
reasonably estimated. A conditional asset retirement obligation is a legal
obligation to perform an asset retirement activity in which the timing or method
of settlement are conditional on a future event that may or may not be within
the control of the entity. We are often legally obligated to remove leasehold
improvements and fixtures whenever we vacate a leased premise, although the date
or method of settlement may not be known. We recognized a one-time after-tax,
non-cash charge of $2.9 million, which is reflected in the Consolidated
Statements of Income for the year ended December 31, 2005, as a cumulative
effect of change in accounting principle. This charge represents the difference
between the asset retirement obligation and capitalized asset retirement costs
recognized in our December 31, 2005, Consolidated Balance Sheet.
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Payroll and
bonuses
|
$ | 72.9 | $ | 99.5 | ||||
|
Insurance
|
83.4 | 100.4 | ||||||
|
Sales and
payroll taxes
|
51.0 | 44.3 | ||||||
|
Rent
|
41.6 | 38.5 | ||||||
|
Advertising
|
38.0 | 36.9 | ||||||
|
Gift card
deferred revenue
|
23.2 | 22.5 | ||||||
|
Other
|
83.4 | 100.1 | ||||||
|
Total accrued
expenses and other current liabilities
|
$ | 393.5 | $ | 442.2 | ||||
NOTE 10 - OTHER NON-CURRENT LIABILITIES
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Deferred
compensation
|
$ | 39.2 | $ | 43.5 | ||||
|
Deferred
revenue
|
6.9 | 16.0 | ||||||
|
FIN 48 tax
reserve
|
58.1 | -- | ||||||
|
Other
|
19.5 | 26.7 | ||||||
|
Total other
non-current liabilities
|
$ | 123.7 | $ | 86.2 | ||||
Deferred revenue
resulted from funds we received from wireless vendors in conjunction with the
acquisition of the SAM’S CLUB kiosk business and it is being recognized ratably
over the term of the agreement.
NOTE 11 - INCOME TAXES
Deferred tax assets
and liabilities as of December 31, 2007 and 2006, were composed of the
following:
|
December
31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Deferred tax
assets:
|
||||||||
|
Insurance
reserves
|
$ | 21.0 | $ | 23.7 | ||||
|
Deferred
compensation
|
15.4 | 24.9 | ||||||
|
Inventory
adjustments, net
|
9.3 | 11.8 | ||||||
|
Restructuring
reserves
|
4.6 | 7.7 | ||||||
|
Deferred
revenue
|
10.9 | 14.2 | ||||||
|
Accrued
average rent
|
11.7 | 11.4 | ||||||
|
Depreciation
and amortization
|
28.1 | 16.6 | ||||||
|
Indirect
effect of unrecognized tax benefits
|
18.7 | -- | ||||||
|
Other
|
30.5 | 36.8 | ||||||
|
Total
deferred tax assets
|
150.2 | 147.1 | ||||||
|
Deferred tax
liabilities:
|
||||||||
|
Deferred
taxes on foreign operations
|
4.3 | 2.5 | ||||||
|
Other
|
10.8 | 14.8 | ||||||
|
Total
deferred tax liabilities
|
15.1 | 17.3 | ||||||
|
Net deferred
tax assets
|
$ | 135.1 | $ | 129.8 | ||||
|
Deferred tax
assets and liabilities were included in the balance
sheets as follows:
|
||||||||
|
Other
current assets
|
$ | 75.4 | $ | 93.5 | ||||
|
Other
non-current assets
|
59.7 | 36.3 | ||||||
|
Net deferred
tax assets
|
$ | 135.1 | $ | 129.8 | ||||
The components of
the provision for income taxes and a reconciliation of the U.S. statutory tax
rate to our effective income tax rate are shown in the following two
accompanying tables.
Provision
for Income Taxes
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 99.3 | $ | 60.6 | $ | 96.4 | ||||||
|
State
|
13.0 | 7.2 | 22.9 | |||||||||
|
Foreign
|
1.0 | 2.5 | 4.6 | |||||||||
| 113.3 | 70.3 | 123.9 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
12.4 | (29.6 | ) | (55.4 | ) | |||||||
|
State
|
4.1 | (2.7 | ) | (16.9 | ) | |||||||
| 16.5 | (32.3 | ) | (72.3 | ) | ||||||||
|
Provision for
income taxes
|
$ | 129.8 | $ | 38.0 | $ | 51.6 | ||||||
Statutory
vs. Effective Tax Rate
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Components of
income from continuing operations:
|
||||||||||||
|
United States
|
$ | 357.4 | $ | 115.5 | $ | 303.7 | ||||||
|
Foreign
|
9.2 | (4.1 | ) | 17.8 | ||||||||
|
Income before
income taxes
|
366.6 | 111.4 | 321.5 | |||||||||
|
Statutory tax
rate
|
x 35.0 | % | x 35.0 | % | x 35.0 | % | ||||||
|
Federal
income tax expense at statutory rate
|
128.3 | 39.0 | 112.5 | |||||||||
|
State income
taxes, net of federal benefit
|
9.2 | 2.9 | 3.9 | |||||||||
|
Unrecognized
tax benefits
|
(2.5 | ) | -- | -- | ||||||||
|
Contingency
reserve release
|
-- | -- | (56.5 | ) | ||||||||
|
Foreign
repatriation benefit
|
-- | -- | (8.9 | ) | ||||||||
|
Other,
net
|
(5.2 | ) | (3.9 | ) | 0.6 | |||||||
|
Total income
tax expense
|
$ | 129.8 | $ | 38.0 | $ | 51.6 | ||||||
|
Effective tax
rate
|
35.4 | % | 34.1 | % | 16.0 | % | ||||||
We
anticipate that we will generate sufficient pre-tax income in the future to
realize the full benefit of U.S. deferred tax assets related to future
deductible amounts. Accordingly, a valuation allowance was not required at
December 31, 2007 or 2006.
We
adopted the provisions of FIN 48 effective January 1, 2007. As a result of the
implementation of FIN 48, we recognized a $7.2 million net decrease in
unrecognized tax benefits with a corresponding increase in retained earnings.
The total effect at the time of adoption was a $19.8 million increase in our
non-current deferred tax assets, a $53.0 million decrease in income tax payable
to reclassify unrecognized tax benefits to non-current liabilities, a $65.6
million increase in our non-current liabilities representing the liability for
unrecognized tax benefits and accrued interest, and the previously mentioned
$7.2 million increase to retained earnings. As of January 1, 2007, after the
implementation of FIN 48, our unrecognized tax benefits, exclusive of accrued
interest, were $49.0 million.
On
June 30, 2007, the statute of limitations expired for the taxable years ended in
1998 through 2001, resulting in the recognition of approximately $10.0 million
in tax benefits, which consisted of $7.7 million of previously unrecognized tax
benefits and $4.0 million of accrued interest, net of $1.7 million of deferred
tax assets.
A
reconciliation of the beginning and ending amount of the consolidated liability
for gross unrecognized income tax benefits (excluding interest) from
January 1, 2007, to December 31, 2007, is as follows:
|
(In
millions)
|
2007
|
|||
|
Balance at
beginning of year
|
$ | 49.0 | ||
|
Increases
related to current period tax positions
|
3.9 | |||
|
Increases
related to prior period tax positions
|
3.8 | |||
|
Settlements
|
(1.7 | ) | ||
|
Expiration of
the statute of limitations for the assessment of taxes
|
(9.4 | ) | ||
|
Balance at
end of year
|
$ | 45.6 | ||
As
of December 31, 2007, our liability for unrecognized tax benefits was $45.6
million. The amount, if recognized, that would affect the effective tax rate is
$32.8 million. Approximately $1.3 million of the unrecognized tax benefit
liabilities are expected to be paid within the next 12 months and are classified
in other current liabilities on the Consolidated Balance Sheets as of December
31, 2007. The remaining amount of our unrecognized tax benefit liabilities are
now classified in other non-current liabilities.
We
recognize accrued interest and penalties associated with uncertain tax positions
as part of the tax provision. As of the date of adoption at January 1, 2007, and
at December 31, 2007, we had $16.6 million and $14.8 million of accrued
interest expense associated with uncertain tax positions, respectively. Income
tax expense for the period ended December 31, 2007, included interest of $4.2
million associated with uncertain tax positions.
RadioShack
Corporation and its U.S. subsidiaries join in the filing of a U.S. federal
consolidated income tax return. The U.S. federal statute of limitations is
closed for all years prior to 2002. Foreign and U.S. state jurisdictions have
statutes of limitations generally ranging from 3 to 5 years. Our tax returns are
currently under examination in various federal, state and foreign jurisdictions.
While one or more of these examinations may be concluded within the next twelve
months, we do not expect this to have a significant impact on our results of
operations or financial position. Our effective tax rate for future periods may
be affected by the settlement of tax controversies or by the expiration of the
statute of limitations for periods for which a liability has been established in
accordance with FIN 48.
NOTE 12 – FEDERAL EXCISE TAX
In May 2006, the IRS established refund procedures
for federal telecommunications excise tax (“excise tax”) paid by taxpayers in
prior years. In December 2006, the IRS provided clarification regarding which
taxpayers were eligible to request refunds of excise taxes. For the year ended
December 31, 2007, we determined we were entitled to refunds of $14.0 million and $5.2
million for federal telecommunications excise taxes recorded in the first and
fourth quarters of 2007, respectively. We recorded $18.8 million of the
refunds as a reduction to cost of products sold and the remaining $0.4 million
as a reduction in SG&A, where they were originally recorded. In addition, we
recorded $2.6 million in interest income. We claimed $15.4 million of this
refund and interest in the form of a tax credit on our 2006 federal income tax
return filed in September 2007. We filed a claim for the additional
excise tax refund due us, which has been approved by the IRS. The
additional amount claimed plus interest will be received in the form of a refund
rather than as a credit against income taxes.
NOTE 13 - LITIGATION
A
California State Court wage and hour class action, Brookler v.
RadioShack Corporation, has been certified with a class of approximately
23,000 members. The action involves allegations that RadioShack violated
California's wage order and labor code relating to the providing of meal
periods. The class was certified in February of 2006. RadioShack moved to
decertify the class in July 2007, based upon recent case authority dealing with
the standard of liability for meal and rest period
actions. RadioShack's motion to decertify was denied by the trial
court, and RadioShack's petition for review to the California Supreme Court was
denied on January 3, 2008. However, because of the unsettled nature of the
standard of liability for meal period violations currently being litigated in
California, it appears likely the California Supreme Court will review and add
clarity to the standard of liability applicable in these types of matters. As a
result, we cannot reasonably estimate the likelihood or magnitude of a loss that
may arise from this lawsuit.
Two securities
law-based putative class actions, Damore v.
RadioShack et al. and Hawana v.
RadioShack et al., brought against us and several of our current and
former officers and directors, were dismissed without prejudice on May 23, 2007,
and May 22, 2007, respectively, from the United States District Court for the
Northern District of Texas, Fort Worth Division.
In
2007, we concluded a global settlement of various class action lawsuits alleging
we misclassified certain RadioShack store managers as exempt from overtime in
violation of the Fair Labor Standards Act or similar state laws, including a
lawsuit styled Alphonse L.
Perez, et al. v. RadioShack Corporation, filed on October 31, 2002, in
the United States District Court for the Northern District of Illinois. This
global settlement provided for a maximum payment by us of approximately $8.8
million, in the aggregate, to resolve all of these pending lawsuits, for which
we recorded a reserve in the second and third quarters of 2006. The respective
courts have granted final approval of the settlement and dismissed the lawsuits.
Settlement payments were mailed to the class members in December of 2007. We
anticipate that the balance of the settlement proceeds will be paid in early
2008.
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.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
Lease
Commitments: We lease rather than own most of our facilities. Our lease
agreements expire at various dates through January 2026. Some of these leases
are subject to renewal options and provide for the payment of taxes, insurance
and maintenance. Our retail locations comprise the largest portion of our leased
facilities. These locations are primarily in major shopping malls and shopping
centers owned by other companies. Some leases are based on a minimum rental plus
a percentage of the store's sales in excess of a stipulated base figure
(contingent rent). Certain leases contain escalation clauses. We also lease
distribution centers and our corporate campus. Additionally, we lease
automobiles and information systems equipment.
Future minimum rent
commitments at December 31, 2007, under non-cancelable operating leases (net of
immaterial amounts of sublease rent income), as well as the minimum lease
payments required by the campus lease over the initial 20-year lease term, are
included in the following table.
|
(In
millions)
|
Campus
Lease
|
Other
Operating
Leases
|
Total
|
|||||||||
|
2008
|
$ | 14.5 | $ | 181.5 | $ | 196.0 | ||||||
|
2009
|
14.6 | 156.1 | 170.7 | |||||||||
|
2010
|
14.8 | 120.4 | 135.2 | |||||||||
|
2011
|
15.0 | 80.2 | 95.2 | |||||||||
|
2012
|
15.2 | 43.3 | 58.5 | |||||||||
|
2013 and
thereafter
|
215.6 | 51.4 | 267.0 | |||||||||
|
Total minimum
lease payments
|
$ | 289.7 | $ | 632.9 | $ | 922.6 | ||||||
Rent
Expense:
|
Year Ended
December 31,
|
||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
Minimum
rents
|
$ | 237.1 | $ | 243.1 | $ | 223.1 | ||||||
|
Occupancy
cost
|
46.5 | 47.8 | 47.4 | |||||||||
|
Contingent
rents
|
24.2 | 24.9 | 25.5 | |||||||||
|
Total rent
expense
|
$ | 307.8 | $ | 315.8 | $ | 296.0 | ||||||
From time to time,
we enter into store operating leases that provide for free or reduced rental
periods, usually during the finish-out of our retail locations before the store
opens for business. These periods are commonly referred to as “rent holidays”
and average 60 days. Prior to January 2005, we did not recognize straight-line
rent expense during the pre-opening rent holiday period but rather began
recording rent expense from the day the store opened. Beginning January 1, 2005,
we began including the rent holiday period in our straight-line rent
calculation. This change did not have a material impact on our results of
operations or financial position.
Contingent
Liabilities: We have contingent liabilities related to retail leases of
locations that were assigned to other businesses. The majority of these
contingent liabilities relates to various lease obligations arising from leases
assigned to CompUSA, Inc. (“CompUSA”) as part of the sale of our Computer City,
Inc. subsidiary to CompUSA in August 1998. In the event CompUSA or the other
assignees, as applicable, are unable to fulfill their obligations, the lessors
of such locations may seek to recover the unpaid rent from
us.
On
February 27, 2007, CompUSA announced a comprehensive realignment strategy to
improve its financial status. According to their press release, the realignment
included a $440 million cash infusion, closure of 126 stores, major expense
reductions and a corporate restructuring. A portion of the 126 store closures
represents locations where we may be liable for the rent payments on the
underlying lease. During the third and fourth quarters of 2007, we received
notices from two lessors seeking payment from us as a result of CompUSA being in
default for non-payment of rent. CompUSA has also informed us that there are an
additional 17 leases on which CompUSA has ceased making rent payments. CompUSA
reported on December 7, 2007, that they were acquired by the Gordon Brothers
Group. CompUSA stores ceased operations in January 2008. DJM Realty, a division
of Gordon Brothers Group, is currently in discussions with its lessors in an
effort to negotiate a satisfactory fulfillment of their legal obligation under
these leases.
Based on all
available information pertaining to the status of these leases, and after
applying the provisions set forth within SFAS No. 5, “Accounting for
Contingencies,” and FIN 14, “Reasonable Estimation of a Loss, An Interpretation
of SFAS No. 5,” during the fourth quarter of 2007, we established an accrual of
$7.5 million, recorded in current liabilities. It is reasonably possible that a
change in our estimate of our probable liability could occur in the near term.
We are continuing to monitor this situation and will update as necessary as more
information becomes available.
Purchase
Obligations: We have purchase obligations of $334.3 million at December
31, 2007, which include our product commitments, marketing agreements and
freight commitments. Of this amount, $310.8 million relates to
2008.
NOTE 15 – CORPORATE AND FIELD HEADCOUNT REDUCTION
During the first
quarter ended March 31, 2007, we recorded $8.5 million of pre-tax employee
separation charges in SG&A expense in connection with the reduction of
approximately 280 of our corporate support staff. We made cash payments during
2007 in the amount of $6.6 million, resulting in a reserve balance for these
separation charges of $1.9 million at December 31, 2007.
NOTE 16 – STOCK-BASED INCENTIVE PLANS
We
have implemented several plans to award employees stock-based compensation,
which are described below. Under the Incentive Stock Plans (“ISPs”) described
below, the exercise price of options must be equal to or greater than the fair
market value of a share of our common stock on the date of grant. The 1999 and
2001 ISPs each terminate after ten years; no option or award may be granted
under the ISPs after the ISP termination date. The Management Development and
Compensation Committee (“MD&C”) of our Board of Directors specifies the
terms for grants of options under these ISPs; terms of these options may not
exceed ten years. Grants of options generally vest over three years and grants
typically have a term of seven or ten years. However, during the third quarter
of 2006, we granted 1.7 million options under these ISPs to our chief executive
officer and chief financial officer which vest over four years from the date of
grant with a term of seven years. Option agreements issued under the ISPs
generally provide that, in the event of a change in control, all options become
immediately and fully exercisable. Repricing or exchanging options for lower
priced options is not permitted under the ISPs without shareholder
approval.
On
July 6, 2006, we granted 2.5 million non-plan options to our chief executive
officer as part of an inducement grant related to the terms of his employment.
These options vest over four years from the date of grant with a term of seven
years. A market condition is attached to 2.0 million of these non-plan options
that restricts exercise until certain stock price hurdles are achieved. The
market condition was met in 2007, and all stock price hurdles were achieved.
This grant was in addition to the 1.5 million options granted to the chief
executive officer under the 1997, 1999 and 2001 ISPs.
In
2004, the stockholders approved the RadioShack 2004 Deferred Stock Unit Plan for
Non-Employee Directors (“Deferred Plan”). The Deferred Plan replaced the
one-time and annual stock option grants to non-employee directors (“Directors”)
as specified in the 1997, 1999 and 2001 ISPs. New Directors receive a one-time
grant of 5,000 deferred stock units (“Units”) on the date they attend their
first Board meeting. The Deferred Plan also specifies that each Director who has
served one year or more as of June 1 of any year will automatically be granted
3,500 Units on the first business day of June of each year in which he or she
serves as a Director. Under the Deferred Plan, one-third of the Units vest
annually over three years from the date of grant. Vesting may be accelerated
under certain circumstances. At termination of service, death, disability or
change in control of RadioShack, Directors will receive shares of common stock
equal to the number of vested Units. Directors may receive these shares in a
lump sum or they may defer receipt of these shares in equal installments over a
period of up to ten years. On February 22,
2007, the board of directors amended the Deferred Stock Unit Plan to provide
that, in lieu of the new director one-time grant of 5,000 and the annual grant
of 3,500 units, each non-employee director will receive a one-time initial grant
of units equal to the number of shares of RadioShack common stock with a fair
market value of $150,000 on the grant date, and an annual grant of units equal
to the number of shares of RadioShack common stock with a fair market value of
$105,000 on the grant date. There were 127,203
Units outstanding and 846,334 Units available for grant at December 31,
2007.
We
may also grant restricted stock to compensate certain of our employees under the
2007 Restricted Stock Plan described below. As of December 31, 2007, 135,123
shares of restricted stock were outstanding. Compensation expense related to
restricted shares is recognized ratably over the requisite service period. This
expense totaled $0.9 million, $0.2 million and $0.7 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
A
brief description of each of our incentive stock plans and new restricted stock
plan follows:
1993 Incentive
Stock Plan (“1993 ISP”): The 1993 ISP permitted the grant of up to 12.0
million shares in the form of incentive stock options (“ISOs”), non-qualified
stock options (options which are not ISOs) (“NQs”) and restricted stock. The
1993 ISP expired March 28, 2003, and no further grants may be made under this
plan.
1994 Stock
Incentive Plan (“1994 SIP”): As part of our purchase of RadioShack
Installation Services (“AmeriLink”) in 1999, we assumed the existing AmeriLink
1994 Stock Incentive Plan and certain related agreements and agreed to convert
AmeriLink’s stock options to stock options to purchase our stock, subject to an
agreed upon exchange ratio and conversion price. Thus, the AmeriLink 1994 SIP
was assumed and adopted by us in 1999. All options in the 1994 SIP were fully
vested on the date of transition and management determined that no further
grants would be made under this plan. There were also certain restricted stock
agreements that were assumed by us at the time of acquisition. On September 10,
2003, we sold AmeriLink. The 1994 SIP expired on December 31, 2004, and no
further grants may be made under this plan.
1997 Incentive Stock
Plan (“1997 ISP”): The 1997 ISP permits the grant of up to 11.0 million
shares in the form of ISOs, NQs and restricted stock. The 1997 ISP provides that
the maximum number of shares of our common stock that an eligible employee may
receive in any calendar year with respect to options may not exceed 1.0 million
shares. The 1997 ISP expired on February 27, 2007, and no further grants may be
made under this plan.
1999 Incentive
Stock Plan (“1999 ISP”): The 1999 ISP permits the grant of up to 9.5
million shares in the form of NQs. Grants of restricted stock, performance
awards and options intended to qualify as ISO’s under the Internal Revenue Code
are not authorized under the 1999 ISP. The 1999 ISP provides that the maximum
number of shares of our common stock that an eligible employee may receive in
any calendar year with respect to options may not exceed 1.0 million shares.
There were 2,372,852 shares available on December 31, 2007, for grants under the
1999 ISP.
2001 Incentive
Stock Plan (“2001 ISP”): The 2001 ISP permits the grant of up to 9.2
million shares in the form of ISOs and NQs. The 2001 ISP provides that the
maximum number of shares of our common stock that an eligible employee may
receive in any calendar year with respect to options may not exceed 0.5 million
shares. There were 4,890,810 shares available on December 31, 2007, for grants
under the 2001 ISP.
2007 Restricted
Stock Plan (“2007 RSP”): The 2007 RSP permits the grant of up to 0.5
million shares of restricted stock to selected officers of the company, as
determined by the MD&C. The 2007 RSP has a five-year term and will expire on
May 31, 2012. There were 472,000 shares of restricted stock available on
December 31, 2007, for grants under the 2007 RSP.
Stock Option
Activity: See tables below for a summary of stock option transactions
under our stock option plans and information about fixed price stock
options.
Summary
of Stock Option Transactions
|
(Share amounts in
thousands)
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
21,404 | $ |
29.38
|
20,411 | $ | 33.82 | 20,903 | $ |
33.79
|
|||||||||||||||
|
Grants
|
601 | 22.34 | 5,611 | 15.33 | 1,568 |
28.56
|
||||||||||||||||||
|
Exercised
|
(3,462 | ) | 23.08 | (158 | ) | 11.60 | (843 | ) | 20.80 | |||||||||||||||
|
Forfeited
|
(3,141 | ) | 35.32 | (4,460 | ) | 32.62 | (1,217 | ) | 35.57 | |||||||||||||||
|
Outstanding
at end of year
|
15,402 | $ | 29.31 | 21,404 | $ | 29.38 | 20,411 | $ | 33.82 | |||||||||||||||
|
Exercisable
at end of year
|
11,394 | $ | 34.00 | 15,881 | $ | 33.84 | 17,430 | $ | 34.79 | |||||||||||||||
Fixed
Price Stock Options
|
(Share
amounts in
thousands)
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||||
|
Range of
Exercise Prices
|
Shares
Outstanding
at Dec. 31, 2007
|
Weighted
Average Remaining Contractual Life (in
years)
|
Weighted
Average
Exercise Price
|
Shares
Exercisable
at Dec. 31, 2007
|
Weighted
Average Exercise
Price
|
|||||||||||||||||
|
$
13.82 - 13.82
|
4,000
|
5.51
|
$ |
13.82
|
1,100
|
$ |
13.82
|
|||||||||||||||
|
17.07 - 27.45
|
2,132
|
4.31
|
21.25
|
1,161
|
21.78
|
|||||||||||||||||
|
27.50 - 30.03
|
2,933
|
1.70
|
28.97
|
2,796
|
28.95
|
|||||||||||||||||
|
30.99 - 38.35
|
3,314
|
3.18
|
37.19
|
3,314
|
37.19
|
|||||||||||||||||
|
39.03 - 60.16
|
3,023
|
2.01
|
47.20
|
3,023
|
47.20
|
|||||||||||||||||
|
$
13.82 - 60.16
|
15,402
|
3.43
|
$ |
29.31
|
11,394
|
$ |
34.00
|
|||||||||||||||
NOTE 17 - DEFERRED COMPENSATION PLANS
The Executive
Deferred Compensation Plan (“EDCP”) and the Executive Deferred Stock Plan
(“EDSP”) became effective on April 1, 1998. These plans permit employees who are
corporate or division officers to defer up to 80% of their base salary and/or
bonuses. Certain executive officers may defer up to 100% of their base salary
and/or bonuses. In addition, officers are permitted to defer under the EDSP
delivery of any restricted stock or stock acquired under an NQ exercise that
would otherwise vest. Cash deferrals under the EDCP may be made in mutual
funds. We match 12% of salary and bonus deferrals in the form of our
common stock under the EDCP and EDSP. Under the EDSP, participants receive only
our common stock. Under the EDSP, we match an additional 25% of salary and bonus
deferrals if the deferral period exceeds five years and the deferrals are
invested in our common stock.
We
contributed $0.6 million and $0.7 million in total to the combined EDCP and EDSP
for the years ended December 31, 2006 and 2005, respectively. These expenses
were included in SG&A. Employee deferrals and employer contributions to the
EDCP and EDSP were discontinued effective January 1, 2007, and any unvested
matching company contributions remaining as of December 31, 2006, were
immediately vested. All account balances, including matching company
contributions, under these plans were distributed in the first quarter of 2007.
Accruals related to these plans were recorded as a current liability in our
Consolidated Balance Sheets, totaling $27.8 million at December 31, 2006, and
were eliminated upon distribution during the first half of 2007.
NOTE 18 - TERMINATION PROTECTION PLANS
On
May 18, 2006, our Board of Directors approved amendments to RadioShack’s
Termination Protection Plan (Level I) (the “Level I Plan”). The Level I Plan
applies to our officers (other than officers that are parties to a Termination
Protection Agreement with RadioShack). The amendments to the Level I Plan
include a modification that requires us to pay a comparable benefit amount equal
to a specified percentage of a participant’s base salary rather than requiring
us to provide certain named employee benefits for one year. The Board of
Directors also approved the adoption of an Officers’ Severance Program, a
uniform severance program to apply to officers in the event of non-cause
terminations.
Our Board of
Directors also approved the termination of the Termination Protection Plan
(Level II) (the “Level II Plan”). The Level II Plan provided for defined
termination benefits to be paid to certain of our eligible, non-officer
employees who have been terminated, without cause, in connection with a change
in control of RadioShack. In lieu of the Level II Plan, the Board of Directors
approved a severance program for eligible, non-officer employees who are
terminated under certain circumstances.
There have been no
payments under the Level I Plan or Level II Plan for the years
shown.
NOTE 19 - RADIOSHACK INVESTMENT PLAN
On April 30, 2004, we amended our employee stock
purchase plan and renamed it the RadioShack Investment Plan (the “Investment
Plan”). Only employees participating in the former plan as of April 29, 2004,
could participate in the Investment Plan. New employees were not eligible to
participate in the Investment Plan. Effective June 30, 2006, the Investment Plan
was suspended and distributions of all shares held by the Investment Plan took
place in August 2006. As of December 31, 2007, the Investment Plan did not hold
any assets nor have any employee participants. Our contributions to the Investment
Plan amounted to $5.6 million and $10.9 million for the years ended December 31,
2006 and 2005, respectively.
NOTE 20 - RADIOSHACK 401(k) PLAN
The RadioShack 401(k) Plan (“401(k) Plan”), a defined
contribution plan, was amended on July 1, 2006, and, as amended, allows a
participant to defer, via payroll deductions, from 1% to 75% of their annual
compensation, limited to certain annual maximums set by the Internal Revenue
Code. The amended 401(k) Plan also presently provides that our contribution to
each participant’s account maintained under the 401(k) Plan be an amount equal
to 100% of the participant’s contributions up to 4% of their annual
compensation. This percentage contribution made by us is discretionary and may
change in the future. Our
contributions go directly to the 401(k) Plan and are made in cash and invested
in an age appropriate retirement fund for each participant; however,
participants may immediately reinvest our contribution into other investment
alternatives provided by the 401(k) Plan.
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||
|
401(k)
company contribution
|
$ |
8.0
|
$ | 6.3 | $ | 4.7 | ||||||
NOTE 21 - STOCK REPURCHASE PROGRAM
On
February 25, 2005, our Board of Directors approved a share repurchase program
with no expiration date authorizing management to repurchase up to $250 million
in open market purchases. On August 5, 2005, we suspended purchases under
the $250 million share repurchase program during the period in which a financial
institution purchased shares pursuant to an overnight share repurchase program.
During March 2007, management resumed share repurchases under the $250 million
program; however, no shares were repurchased during the second and fourth
quarters of 2007. For the twelve months ended December 31, 2007, we repurchased
8.7 million shares or $208.5 million of our common stock. As of December 31,
2007, there was $1.4 million available for share repurchases under the $250
million share repurchase program.
NOTE 22 - PREFERRED SHARE PURCHASE RIGHTS
In
July 1999, we amended and restated a stockholder rights plan which declared a
dividend of one right for each outstanding share of our common stock. The rights
plan, as amended and restated, was scheduled to expire on July 26, 2009;
however, as discussed below, the rights plan was amended to terminate the plan
effective January 31, 2006. The rights were represented by our common stock
certificates. If the rights became exercisable, they would have entitled each
holder to purchase 1/10,000th of a share of our Series A Junior Participating
Preferred Stock for an exercise price of $250 (subject to adjustment). The
rights would have become exercisable and traded separately from the common stock
only upon the date of public announcement that a person, entity or group
("Person") had acquired 15% or more of our outstanding common stock without the
consent or approval of the disinterested directors ("Acquiring Person") or ten
days after the commencement or public announcement of a tender or exchange offer
which would have resulted in any Person becoming an Acquiring Person. In the
event that any Person became an Acquiring Person, the rights would have been
exercisable for 60 days thereafter for our common stock with a market value (as
determined under the rights plan) equal to twice the exercise price. In the
event that, after any Person became an Acquiring Person, we engaged in certain
mergers, consolidations, or sales of assets representing 50% or more of our
assets or earning power with an Acquiring Person (or Persons acting on behalf of
or in concert with an Acquiring Person) or in which all holders of common stock
are not treated alike, the rights would have been exercisable for common stock
of the acquiring or surviving company with a market value (as determined under
the rights plan) equal to twice the exercise price. The rights would not have
been exercisable by any Acquiring Person. The rights were redeemable at a price
of $0.01 per right prior to any Person becoming an Acquiring Person or, under
certain circumstances, after a Person became an Acquiring Person.
On
January 13, 2006, the rights plan was amended to provide that the plan would
terminate effective January 31, 2006. As a result of this amendment, the rights
are no longer outstanding and were not exercisable after January 31,
2006.
NOTE 23 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Prior to January 1,
2006, certain officers of the Company were participants in RadioShack’s Salary
Continuation Plan (“SCP”) or its Deferred Compensation Plan (“DCP” and, together
with the SCP, the “Plans”), which provided a defined benefit to be paid out over
a ten-year period upon retirement between the ages of 55 and 70. Participation
in the Plans and the benefit payments were based solely on the MD&C’s
discretion and approval, and the benefit payments did not bear any relationship
to a participant’s present compensation, final compensation or years of service.
We accrued benefit payments earned based on the provisions set forth by the
MD&C for each individual person. Based on the method by which the Plans were
administered and because there was not a specific plan governing the benefit
payment calculation, the accounting and disclosure provisions of SFAS No. 87,
“Employers’ Accounting for Pensions,” were not previously required.
The Company adopted
an unfunded Supplemental Executive Retirement Plan (“SERP”) effective January 1,
2006, for selected officers of the Company. Upon retirement at age 55 years or
older, participants in the SERP are eligible to receive, for ten years, an
annual amount equal to a percentage of the average of their five highest
consecutive years of compensation (base salary and bonus), to be paid in 120
monthly installments. The amount of the percentage increases by 2 ½% for each
year of participation in the SERP, up to a maximum of 50%.
To
be a participant in the SERP, officers who were participants in the SCP or DCP
had to withdraw from the applicable plan and would then only receive benefits
under the SERP. These benefits are calculated under the SERP using a formula
that calculates the benefit under each plan (SERP, SCP or DCP) and pays the
participant the highest dollar benefit.
If
a SERP participant terminates employment due to retirement or disability between
the ages of 55 and 70, the participant is entitled to their normal vested SERP
benefit, paid in 120 equal monthly payments.
Based on the
effective date of the SERP of January 1, 2006, fiscal year 2006 was the initial
year in which an actuarial valuation was performed. The projected benefit
obligation at the beginning of 2006 represents the actuarial valuation that was
performed as of January 1, 2006, based on the information and assumptions
developed at that time. Participants in the SERP as of January 1, 2006, were
given credit for prior service as an officer. Therefore, this service credit
generated prior service costs that are not required to be immediately
recognized, but that are amortized for purposes of the net periodic benefit cost
calculation over the estimated average remaining service period for active
employee participants.
We
use the last day of the calendar year as the measurement date for determining
SERP obligations and conduct an actuarial valuation at that date. The following
table sets forth the SERP’s change in projected benefit obligation for the plan
for 2007 and 2006:
|
Year Ended
December 31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Projected
benefit obligation at beginning of year
|
$ | 34.4 | $ | 38.8 | ||||
|
Service
cost
|
0.7 | 1.3 | ||||||
|
Interest
cost
|
1.9 | 2.0 | ||||||
|
Actuarial
gain
|
0.5 | (0.9 | ) | |||||
|
Benefits
paid
|
(5.3 | ) | (4.5 | ) | ||||
|
Curtailments
|
(1.5 | ) | (2.3 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 30.7 | $ | 34.4 | ||||
As
a result of corporate and field cost reductions, several officers were
terminated during 2007 and in the latter part of 2006, resulting in curtailments
of $1.5 million and $2.3 million, respectively.
The long-term
portion of the accrued benefit cost of $25.6 million at December 31, 2007, and
$29.4 million at the end of 2006 are included in other non-current liabilities.
The short-term portions of $5.1 million and $5.0 million are included in accrued
expenses and other current liabilities for the same respective
periods.
The projected
benefit obligation (“PBO”) and accumulated benefit obligation for the plan at
December 31, 2007, were $30.7 million and $29.8 million, respectively, compared
to $34.4 million and $33.5 million at the end of 2006.
The components of
net periodic benefit cost were as follows:
|
Year Ended
December 31,
|
||||||||
|
(In
millions)
|
2007
|
2006
|
||||||
|
Service
cost
|
$ |
0.7
|
$ | 1.3 | ||||
|
Interest
cost
|
1.9 | 2.0 | ||||||
|
Net prior
service cost amortization
|
0.2 | 0.3 | ||||||
|
Charge due to
curtailment
|
(0.7 | ) | 0.2 | |||||
|
Net periodic
benefit cost
|
$ | 2.1 | $ | 3.8 | ||||
The PBO is
determined using assumptions at the end of the calendar year. The following
table presents the key assumptions used in the measurement of the benefit
obligation:
|
2007
|
2006
|
|||||||
|
Discount
rate
|
5.7 | % | 5.9 | % | ||||
|
Rate of
compensation increase
|
3.5 | % | 3.5 | % | ||||
The net periodic
benefit cost is determined using assumptions at the beginning of the calendar
year. The following table presents the key assumptions used in the measurement
of net periodic benefit cost:
|
2007
|
2006
|
|||||||
|
Discount
rate
|
5.9 | % | 5.5 | % | ||||
|
Rate of
compensation increase
|
3.5 | % | 3.5 | % | ||||
We
base our discount rate on the rates of return available on high-quality bonds
with maturities approximating the expected period over which the pension
benefits will be paid. The rate of compensation increase is based on historical
and expected increases.
As
the SERP is an unfunded plan, benefit payments are made from the general assets
of RadioShack. The expected benefit payments of the SERP for the next ten years
are as follows:
|
(In
millions)
|
||||
|
2008
|
$ | 5.3 | ||
|
2009
|
5.2 | |||
|
2010
|
4.8 | |||
|
2011
|
4.0 | |||
|
2012
|
3.4 | |||
|
2013 through
2016
|
11.6 | |||
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires employers to
recognize a net liability or asset and an offsetting adjustment to accumulated
other comprehensive loss to report the funded status of defined benefit pension
and other postretirement plans. SFAS No. 158 was effective December 31,
2006.
The following
schedules present the changes in the components of the net prior service cost
that compose the accumulated other comprehensive loss for the years ended
December 31, 2007 and 2006 which offset the additional liability required to
reflect the funded status of the defined benefit pension plan.
|
Year Ended
December 31, 2007
|
||||||||||||
|
(In
millions)
|
Before-Tax
Amounts
|
Tax (Expense)
or Benefit
|
Net-of-Tax
Amount
|
|||||||||
|
Net prior
service cost at beginning of year
|
$ | (1.6 | ) | $ | 0.6 | $ | (1.0 | ) | ||||
|
Amortization
of prior service cost included in periodic
pension cost
|
0.2 | (0.1 | ) | 0.1 | ||||||||
|
Effects of
curtailment
|
0.3 | (0.1 | ) | 0.2 | ||||||||
|
Net prior
service cost at end of year
|
$ | (1.1 | ) | $ | 0.4 | $ | (0.7 | ) | ||||
|
Year Ended
December 31, 2006
|
||||||||||||
|
(In
millions)
|
Before-Tax
Amounts
|
Tax (Expense)
or Benefit
|
Net-of-Tax
Amount
|
|||||||||
|
Net prior
service cost at beginning of year
|
$ | (2.6 | ) | $ | 1.0 | $ | (1.6 | ) | ||||
|
Amortization
of prior service cost included in periodic
pension cost
|
0.3 | (0.1 | ) | 0.2 | ||||||||
|
Effects of
curtailment
|
0.7 | (0.3 | ) | 0.4 | ||||||||
|
Net prior
service cost at end of year
|
$ | (1.6 | ) | $ | 0.6 | $ | (1.0 | ) | ||||
The net tax
benefits at December 31, 2007 and 2006, of $0.4 million and $0.6 million,
respectively, are reflected as a deferred tax asset included in other assets,
net on the Consolidated Balance Sheets.
The amount of
accumulated other comprehensive loss consisting of net prior service cost that
is expected to be recognized as net periodic benefit cost in 2008 is $0.1
million.
NOTE 24 - DIVIDENDS DECLARED
We
declared dividends of $0.25 for each of the years 2007, 2006 and 2005,
respectively, which were paid annually in December.
NOTE 25 - PRODUCT SALES INFORMATION
Our consolidated
net sales and operating revenues are summarized by groups of similar products
and services, as follows:
|
Consolidated
Net Sales and Operating Revenues
|
||||||||||||||||||||||||
|
Year Ended
December 31,
|
||||||||||||||||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||||||||||||||||
|
Wireless
|
$ | 1,416.4 | 33.3 | % | $ | 1,654.8 | 34.6 | % | $ | 1,746.0 | 34.4 | % | ||||||||||||
|
Accessory
|
1,029.7 | 24.2 | 1,087.6 | 22.8 | 1,040.1 | 20.5 | ||||||||||||||||||
|
Personal
electronics
|
650.7 | 15.3 | 751.8 | 15.7 | 746.7 | 14.7 | ||||||||||||||||||
|
Modern
home
|
556.1 | 13.1 | 611.9 | 12.8 | 672.6 | 13.2 | ||||||||||||||||||
|
Power
|
251.3 | 5.9 | 271.4 | 5.7 | 302.3 | 5.9 | ||||||||||||||||||
|
Technical
|
184.4 | 4.3 | 198.4 | 4.2 | 205.2 | 4.0 | ||||||||||||||||||
|
Service
|
100.5 | 2.4 | 106.3 | 2.2 | 262.5 | 5.2 | ||||||||||||||||||
|
Service
centers and other sales
|
62.6 | 1.5 | 95.3 | 2.0 | 106.3 | 2.1 | ||||||||||||||||||
|
Consolidated
net sales and operating
revenues
|
$ | 4,251.7 | 100.0 | % | $ | 4,777.5 | 100.0 | % | $ | 5,081.7 | 100.0 | % | ||||||||||||
NOTE 26 - RESTRUCTURING PROGRAM
On
February 17, 2006, as a result of unfavorable profitability experienced within
our RadioShack company-operated stores during 2005, we announced the
commencement of a restructuring program. The restructuring program was developed
to identify opportunities to rationalize our cost structure and increase average
unit volume and profitable square footage in our RadioShack company-operated
stores. The original terms of the restructuring program consisted of the closing
of 400-700 company-operated stores, consolidating certain of our distribution
centers, streamlining our overhead infrastructure, and updating our merchandise
inventory.
The actual charges
for initiatives under the restructuring program were recorded in the period in
which we committed to formalized restructuring plans or executed the specific
actions contemplated by the program and all criteria for restructuring charge
recognition under the applicable accounting guidance had been met. Charges
incurred as part of the restructuring program are recorded in cost of products
sold; selling, general and administrative expense; and depreciation and
amortization with the exception of the asset impairment charges, which are
disclosed in a separate caption within our Consolidated Statements of
Income.
Store Closures:
As of December 31, 2006, we had closed 481 stores as a result of our
restructuring program. Our decision to close these stores was made on a
store-by-store basis, and there was no geographic concentration of closings for
these stores. For these closed stores, we recognized a charge in 2006 of $9.1
million to SG&A for future lease obligations and negotiated buy-outs with
landlords. A lease obligation reserve is not recognized until a store has been
closed or when a buy-out agreement has been reached with the landlord. Regarding
the 481 stores we closed as a result of the restructuring program during the
year ended December 31, 2006, we recorded an impairment charge of $9.2 million
related to the long-lived assets associated with certain of these stores. It was
determined that the net book value of several of the stores' long-lived assets
was not recoverable based on the remaining estimated future cash flows related
to these specific stores. We also recognized $2.1 million in accelerated
depreciation associated with closed store assets for which the useful lives had
been changed due to the store closures.
In
connection with these store closures, we identified 601 retail employees whose
positions were terminated by December 31, 2006. These employees were paid
severance, and some earned retention bonuses if they remained employed until
certain agreed-upon dates. The development of a reserve for these costs began on
the date that the terms of severance benefits were established and communicated
to the employees, and the reserve was recognized over the minimum retention
period. As of December 31, 2006, $3.8 million had been recognized in SG&A as
retention and severance benefits for store employees, with $3.6 million in
benefits paid to date. Additionally, as part of our store closure activities, we
incurred and recognized in SG&A $6.1 million in expenses in 2006 primarily
in connection with fees paid to outside liquidators and for close-out
promotional activities for the 481 stores.
All stores
identified for closure under the restructuring program were closed as of July
31, 2006. Additionally, we continue to negotiate buy-out agreements with our
landlords; however, remaining lease obligations of $2.2 million still existed at
December 31, 2007. There is uncertainty as to when, and at what cost, we will
fully settle all remaining lease obligations.
Distribution
Center Consolidations: We closed a distribution center located in
Southaven, Mississippi, and sold a distribution center in Charleston, South
Carolina, in 2006. During the year ended December 31, 2006, we recognized a
lease obligation charge in SG&A in the amount of $2.0 million on the lease
of the Southaven distribution center and a gain of $2.7 million on the sale of
the Charleston distribution center. We also incurred a $0.5 million charge
related to severance for approximately 100 employees. Additionally,
there were $0.4 million in other expenses.
Service Center
Operations: We closed or sold five service center locations during the
year ended December 31, 2006, resulting in the elimination of approximately 350
positions. We recognized charges to SG&A of $1.2 million and $0.9 million
related to lease obligations and severance, respectively. This severance
obligation was paid as of December 31, 2006. Additionally, there were $0.1
million in other expenses.
Overhead Cost
Reductions: Management conducted a review of our cost structure to
identify potential sources of cost reductions. In connection with this review,
we made decisions to lower these costs, including reducing our advertising spend
rate in connection with adjustments to our media mix. During the year ended
December 31, 2006, we reduced our workforce by approximately 514 positions,
primarily within our corporate headquarters. We recorded charges to SG&A for
termination benefits and related costs of $11.9 million, of which $6.4 million
had been paid as of December 31, 2006. During 2007, severance payments totaling
$5.0 million were paid, leaving an accrued severance balance of $0.7 million as
of December 31, 2007.
Inventory Update:
We have been replacing underperforming merchandise with new,
faster-moving merchandise. We recorded a pre-tax charge to cost of products sold
of approximately $62 million during the fourth quarter of 2005, as a result of
both our normal inventory review process and the inventory update aspect of our
restructuring program.
The following table
summarizes the activity related to the 2006 restructuring program from February
17, 2006, through December 31, 2007:
|
Asset
|
Accelerated
|
|||||||||||||||||||||||
|
(In
millions)
|
Severance
|
Leases
|
Impairments
|
Depreciation
|
Other
|
Total
|
||||||||||||||||||
|
Total charges
for 2006
|
$ | 16.1 | $ | 12.3 | $ | 9.2 | $ | 2.1 | $ | 4.9 | $ | 44.6 | ||||||||||||
|
Total spending for 2006, net
of amounts
realized from sale of fixed assets
|
(10.4 | ) | (8.5 | ) | -- | -- | (4.6 | ) | (23.5 | ) | ||||||||||||||
|
Total
non-cash items
|
-- | 0.9 | (9.2 | ) | (2.1 | ) | (0.2 | ) | (10.6 | ) | ||||||||||||||
|
Accrual at
December 31, 2006
|
5.7 | 4.7 | -- | -- | 0.1 | 10.5 | ||||||||||||||||||
|
Total
spending for 2007
|
(5.0 | ) | (3.9 | ) | -- | -- | (0.1 | ) | (9.0 | ) | ||||||||||||||
|
Additions for
2007
|
1.4 | -- | -- | -- | 1.4 | |||||||||||||||||||
|
Accrual at
December 31, 2007
|
$ | 0.7 | $ | 2.2 | $ | -- | $ | -- | $ | -- | $ | 2.9 | ||||||||||||
See the allocation
of our restructuring charges within our segments in Note 28 – “Segment
Reporting.”
NOTE 27 - QUARTERLY DATA (UNAUDITED)
As
our operations are predominantly retail oriented, our business is subject to
seasonal fluctuations, with the fourth quarter generally being the most
significant in terms of sales and profits because of the winter holiday selling
season.
|
Three Months
Ended
|
||||||||||||||||
|
(In
millions, except per share amounts)
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
||||||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||
|
Net
sales and operating revenues
|
$ | 992.3 | $ | 934.8 | $ | 960.3 | $ | 1,364.3 | ||||||||
|
Cost of products sold (1)
|
497.0 | (2) | 483.2 | 492.6 | 753.1 | (2) | ||||||||||
|
Gross
profit
|
495.3 | 451.6 | 467.7 | 611.2 | ||||||||||||
|
SG&A expense (1)
|
393.6 | (3) | 359.8 | (3) | 363.9 | (3) | 421.2 | (3) | ||||||||
|
Depreciation and amortization (1)
|
26.5 | 26.4 | 25.6 | 24.2 | ||||||||||||
|
Impairment of
long-lived assets and other charges
|
0.6 | 0.5 | 1.0 | 0.6 | ||||||||||||
|
Total
operating expenses
|
420.7 | 386.7 | 390.5 | 446.0 | ||||||||||||
|
Operating
income
|
74.6 | 64.9 | 77.2 | 165.2 | ||||||||||||
|
Interest
income
|
6.5 | (2) | 6.0 | 5.3 | 4.8 | (2) | ||||||||||
|
Interest
expense
|
(10.6 | ) | (10.7 | ) | (9.7 | ) | (7.8 | ) | ||||||||
|
Other (loss)
income
|
(1.0 | ) | (0.1 | ) | 2.4 | (0.4 | ) | |||||||||
|
Income
before taxes
|
69.5 | 60.1 | 75.2 | 161.8 | ||||||||||||
|
Provision for
income taxes
|
27.0 | 13.1 | (4) | 28.9 | 60.8 | |||||||||||
|
Net
income
|
$ | 42.5 | $ | 47.0 | $ | 46.3 | $ | 101.0 | ||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.31 | $ | 0.34 | $ | 0.34 | $ | 0.77 | ||||||||
|
Diluted
|
$ | 0.31 | $ | 0.34 | $ | 0.34 | $ | 0.77 | ||||||||
|
Shares
used in computing income per share:
|
||||||||||||||||
|
Basic
|
136.2 | 136.7 | 134.5 | 131.2 | ||||||||||||
|
Diluted
|
137.1 | 139.0 | 135.9 | 131.8 | ||||||||||||
|
(1)
|
Amounts have
been revised. Refer to Note 2 –
“Summary of Significant Accounting Policies” under the section titled
“Revision of Expense Classification” in the Notes to Consolidated
Financial Statements for a complete discussion.
|
|
(2)
|
In the first
and the fourth quarters of 2007, we recorded refunds of excise tax as a
reduction to cost of products sold, where the excise taxes were originally
recorded as $14.0 million and $4.8 million, respectively. Additionally, we
recorded $1.4 million and $1.2 million in interest income related to these
refunds in the first and fourth quarters, respectively.
|
|
(3)
|
During 2007,
vacation accrual adjustments in connection with the modification of our
employee vacation policy included in SG&A expense totaled $2.0
million, $3.2 million, $5.9 million and $3.2 million for the first,
second, third and fourth quarters, respectively.
|
|
(4)
|
In the second
quarter of 2007, the effective tax rate was impacted by the net reversal
in June 2007 of approximately $10.0 million in unrecognized tax benefits,
deferred tax assets and accrued
interest.
|
|
Three Months
Ended
|
|||||||||||||||||||
|
(In
millions, except per share amounts)
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
|||||||||||||||
|
Year
ended December 31, 2006:
|
|||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 1,160.0 | $ | 1,099.9 | $ | 1,059.5 | $ | 1,458.1 | |||||||||||
|
Cost of products sold (1)
|
629.4 | 604.2 | 597.1 | 817.4 | |||||||||||||||
|
Gross
profit
|
530.6 | 495.7 | 462.4 | 640.7 | |||||||||||||||
|
SG&A expense (1)
|
468.3 | 462.6 | (2)(3) | 418.8 | (2)(3) | 461.0 | (2) | ||||||||||||
|
Depreciation and amortization (1)
|
29.4 | 30.8 | (2) | 29.2 | (2) | 28.1 | (2) | ||||||||||||
|
Impairment of
long-lived assets and other charges
|
8.9 | (2) | 0.3 | (2) | 29.3 | (4) | 5.8 | (5) | |||||||||||
|
Total
operating expenses
|
506.6 | 493.7 | 477.3 | 494.9 | |||||||||||||||
|
Operating
income (loss)
|
24.0 | 2.0 | (14.9 | ) | 145.8 | ||||||||||||||
|
Interest
income
|
0.8 | 0.6 | 2.5 | 3.5 | |||||||||||||||
|
Interest
expense
|
(10.6 | (11.5 | (11.2 | ) | (11.0 | ) | |||||||||||||
|
Other
loss
|
(0.6 | (1.2 | (2.5 | ) | (4.3 | ) | |||||||||||||
|
Income
(loss) before taxes
|
13.6 | (10.1 | (26.1 | ) | 134.0 | ||||||||||||||
|
Provision for
(benefit from) income taxes
|
5.2 | (6.9 | (9.8 | ) | 49.5 | ||||||||||||||
|
Net
income (loss)
|
$ | 8.4 | $ | (3.2 | $ | (16.3 | ) | $ | 84.5 | ||||||||||
|
Net
income (loss) per share:
|
|||||||||||||||||||
|
Basic
|
$ | 0.06 | $ | (0.02 | $ | (0.12 | ) | $ | 0.62 | ||||||||||
|
Diluted
|
$ | 0.06 | $ | (0.02 | $ | (0.12 | ) | $ | 0.62 | ||||||||||
|
Shares
used in computing income (loss) per
share:
|
|||||||||||||||||||
|
Basic
|
135.8 | 136.2 | 136.5 | 136.5 | |||||||||||||||
|
Diluted
|
135.8 | 136.2 | 136.5 | 136.5 | |||||||||||||||
|
(1)
|
Amounts have
been revised. Refer to Note 2 –
“Summary of Significant Accounting Policies” under the section titled
“Revision of Expense Classification” in the Notes to Consolidated
Financial Statements for a complete discussion.
|
|
(2)
|
During 2006,
costs related to the restructuring program included in SG&A expense
totaled $14.1 million, $17.4 million and $1.8 million for the second,
third and fourth quarters, respectively. Accelerated depreciation for the
same periods was $1.2 million, $0.6 million and $0.3 million,
respectively. In addition, impairment charges totaled $8.9 million in the
first quarter and $0.3 million in the second quarter. The total of all
these costs for 2006 was $44.6 million.
|
|
(3)
|
In the second
and third quarters of 2006, $8.5 million and $0.3 million, respectively,
were recognized for the tentative settlement of certain wage-hour
lawsuits. These amounts were included in SG&A
expense.
|
|
(4)
|
In the third
quarter of 2006, impairment charges related to our kiosk operations were
recorded for goodwill and intangible assets in the amount of $18.6 million
and $10.7 million, respectively.
|
|
(5)
|
Impairment
charges for goodwill of $1.2 million and $4.6 million for other long-lived
assets were recorded during the fourth quarter of
2006.
|
The sum of the
quarterly income (loss) per share amounts may not total to each full year amount
because these computations are made independently for each quarter and for the
full year and take into account the weighted average number of common stock
equivalent shares outstanding for each period, including the effect of dilutive
securities for that period.
We
have concluded that the effect of the revision discussed in Note 2 – “Summary of Significant Accounting
Policies” under the section titled “Revision of Expense
Classification” in the Notes to
Consolidated Financial Statements did not materially impact any
previously issued financial statements, however we have revised prior quarterly
periods comparative information presented herein in order to present such
information on a consistent basis. The effects of this revision are summarized
in the table below.
|
As Previously
Reported
|
Revision
|
As
Adjusted
|
As Previously
Reported
|
Revision
|
As
Adjusted
|
|
||||||||||||||||||
|
(In
millions)
|
Three
Months Ended March 31,
|
|||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 992.3 | $ | -- | $ | 992.3 | $ | 1,160.0 | $ | -- | $ | 1,160.0 | ||||||||||||
|
Cost of
products sold
|
475.9 | 21.1 | 497.0 | 599.4 | 30.0 | 629.4 | ||||||||||||||||||
|
Gross
profit
|
516.4 | (21.1 | ) | 495.3 | 560.6 | (30.0 | ) | 530.6 | ||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling,
general and administrative
|
412.0 | (18.4 | ) | 393.6 | 495.7 | (27.4 | ) | 468.3 | ||||||||||||||||
|
Depreciation
and amortization
|
29.2 | (2.7 | ) | 26.5 | 32.0 | (2.6 | ) | 29.4 | ||||||||||||||||
|
Impairment
of long-lived assets and other
charges
|
0.6 | -- | 0.6 | 8.9 | -- | 8.9 | ||||||||||||||||||
|
Total
operating expenses
|
441.8 | (21.1 | ) | 420.7 | 536.6 | (30.0 | ) | 506.6 | ||||||||||||||||
|
Operating
income
|
$ | 74.6 | $ | -- | $ | 74.6 | $ | 24.0 | $ | -- | $ | 24.0 | ||||||||||||
|
Three
Months Ended June 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 934.8 | $ | -- | $ | 934.8 | $ | 1,099.9 | $ | -- | $ | 1,099.9 | ||||||||||||
|
Cost of
products sold
|
462.3 | 20.9 | 483.2 | 580.4 | 23.8 | 604.2 | ||||||||||||||||||
|
Gross
profit
|
472.5 | (20.9 | ) | 451.6 | 519.5 | (23.8 | ) | 495.7 | ||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling,
general and administrative
|
378.0 | (18.2 | ) | 359.8 | 483.6 | (21.0 | ) | 462.6 | ||||||||||||||||
|
Depreciation
and amortization
|
29.1 | (2.7 | ) | 26.4 | 33.6 | (2.8 | ) | 30.8 | ||||||||||||||||
|
Impairment
of long-lived assets and other
charges
|
0.5 | -- | 0.5 | 0.3 | -- | 0.3 | ||||||||||||||||||
|
Total
operating expenses
|
407.6 | (20.9 | ) | 386.7 | 517.5 | (23.8 | ) | 493.7 | ||||||||||||||||
|
Operating
income
|
$ | 64.9 | $ | -- | $ | 64.9 | $ | 2.0 | $ | -- | $ | 2.0 | ||||||||||||
|
Three
Months Ended September 30,
|
||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 960.3 | $ | -- | $ | 960.3 | $ | 1,059.5 | $ | -- | $ | 1,059.5 | ||||||||||||
|
Cost of
products sold
|
470.1 | 22.5 | 492.6 | 571.6 | 25.5 | 597.1 | ||||||||||||||||||
|
Gross
profit
|
490.2 | (22.5 | ) | 467.7 | 487.9 | (25.5 | ) | 462.4 | ||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling,
general and administrative
|
384.2 | (20.3 | ) | 363.9 | 441.6 | (22.8 | ) | 418.8 | ||||||||||||||||
|
Depreciation
and amortization
|
27.8 | (2.2 | ) | 25.6 | 31.9 | (2.7 | ) | 29.2 | ||||||||||||||||
|
Impairment
of long-lived assets and other
charges
|
1.0 | -- | 1.0 | 29.3 | -- | 29.3 | ||||||||||||||||||
|
Total
operating expenses
|
413.0 | (22.5 | ) | 390.5 | 502.8 | (25.5 | ) | 477.3 | ||||||||||||||||
|
Operating
income
|
$ | 77.2 | $ | -- | $ | 77.2 | $ | (14.9 | ) | $ | -- | $ | (14.9 | ) | ||||||||||
|
Three
Months Ended December 31,
|
||||||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||
|
Net
sales and operating revenues
|
$ | 1,458.1 | $ | -- | $ | 1,458.1 | ||||||||||||||||||
|
Cost of
products sold
|
793.0 | 24.4 | 817.4 | |||||||||||||||||||||
|
Gross
profit
|
665.1 | (24.4 | ) | 640.7 | ||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling,
general and administrative
|
482.8 | (21.8 | ) | 461.0 | ||||||||||||||||||||
|
Depreciation
and amortization
|
30.7 | (2.6 | ) | 28.1 | ||||||||||||||||||||
|
Impairment
of long-lived assets and other
charges
|
5.8 | -- | 5.8 | |||||||||||||||||||||
|
Total
operating expenses
|
519.3 | (24.4 | ) | 494.9 | ||||||||||||||||||||
|
Operating
income
|
$ | 145.8 | $ | -- | $ | 145.8 | ||||||||||||||||||
NOTE 28 - SEGMENT REPORTING
We
have two reportable segments, RadioShack company-operated stores (excluding
Canadian company-operated stores) and kiosks. RadioShack consists solely of our
4,447 company-operated retail stores, all operating under the RadioShack brand
name. Kiosks consist of our network of 739 kiosks, primarily located in major
shopping malls and SAM’S CLUB locations. Both of our reportable segments engage
in the sale of consumer electronics products; however, our kiosks primarily
offer wireless products and associated accessories. These reportable segments
are managed separately due to our kiosks’ narrow product offerings and
performance relative to size.
We
evaluate the performance of each reportable segment based on operating income,
which is defined as sales less cost of products sold and certain direct
operating expenses, including labor and occupancy costs. Asset balances by
reportable segment have not been included in the segment table below, as these
are managed on a company-wide level and are not allocated to each segment for
management reporting purposes.
The table below
shows our 2006 restructuring program costs and impairments allocated by
reportable segments.
|
(In
millions)
|
RadioShack
Company-
Owned
Stores
|
Kiosks
|
Other
|
Unallocated
|
Total
|
|||||||||||||||
|
Restructuring
program:
|
||||||||||||||||||||
|
Impairment of
property, plant & equipment
|
$ | 9.2 | $ | - | $ | - | $ | - | $ | 9.2 | ||||||||||
|
Severance
|
3.8 | - | 0.9 | 11.4 | 16.1 | |||||||||||||||
|
Lease
costs
|
9.1 | - | 1.2 | 2.0 | 12.3 | |||||||||||||||
|
Gain on
distribution center sale
|
- | - | - | (2.7 | ) | (2.7 | ) | |||||||||||||
|
Other
|
6.1 | - | 0.1 | 1.4 | 7.6 | |||||||||||||||
|
Accelerated
depreciation
|
2.1 | - | - | - | 2.1 | |||||||||||||||
| 30.3 | - | 2.2 | 12.1 | 44.6 | ||||||||||||||||
|
Impairments:
|
||||||||||||||||||||
|
Goodwill
|
- | 18.6 | 1.2 | - | 19.8 | |||||||||||||||
|
Intangibles
|
- | 10.7 | - | - | 10.7 | |||||||||||||||
|
Property,
plant & equipment
|
1.0 | 1.8 | 1.8 | - | 4.6 | |||||||||||||||
| 1.0 | 31.1 | 3.0 | - | 35.1 | ||||||||||||||||
| $ | 31.3 | $ | 31.1 | $ | 5.2 | $ | 12.1 | $ | 79.7 | |||||||||||
The costs in the
restructuring table above are included in the 2006 segment table
below.
Amounts in the
other category below include our business activities that are not separately
reportable and our dealer network, e-commerce, third-party service centers,
manufacturing, foreign operations and commercial sales.
|
(In
millions)
|
Year Ended
December 31,
|
|||||||||||
|
2007
|
2006 (1)
|
2005 (1)
|
||||||||||
|
Net
sales and operating revenues:
|
||||||||||||
|
RadioShack
company-operated stores
|
$ | 3,637.7 | $ | 4,079.8 | $ | 4,480.8 | ||||||
|
Kiosks
|
297.0 | 340.5 | 262.7 | |||||||||
|
Other
|
317.0 | 357.2 | 338.2 | |||||||||
| $ | 4,251.7 | $ | 4,777.5 | $ | 5,081.7 | |||||||
|
Operating
income:
|
||||||||||||
|
RadioShack company-operated stores (2)
|
$ | 752.7 | $ | 707.4 | $ | 880.7 | ||||||
|
Kiosks (3)
|
15.8 | (25.1 | ) | (12.4 | ) | |||||||
|
Other (4)
|
52.8 | (0.1 | ) | 34.2 | ||||||||
| 821.3 | 682.2 | 902.5 | ||||||||||
|
Unallocated (5)
|
(439.4 | ) | (525.3 | ) | (552.6 | ) | ||||||
|
Operating
income
|
381.9 | 156.9 | 349.9 | |||||||||
|
Interest
income
|
22.6 | 7.4 | 5.9 | |||||||||
|
Interest
expense
|
(38.8 | ) | (44.3 | ) | (44.5 | ) | ||||||
|
Other
income
|
0.9 | (8.6 | ) | 10.2 | ||||||||
|
Income before
income taxes
|
$ | 366.6 | $ | 111.4 | $ | 321.5 | ||||||
|
Depreciation
and amortization:
|
||||||||||||
|
RadioShack
company-operated stores
|
$ | 53.4 | $ | 58.2 | $ | 52.1 | ||||||
|
Kiosks
|
6.3 | 10.2 | 9.0 | |||||||||
|
Other
|
1.7 | 2.3 | 2.3 | |||||||||
| 61.4 | 70.7 | 63.4 | ||||||||||
|
Unallocated (6)
|
51.3 | 57.5 | 60.4 | |||||||||
| $ | 112.7 | $ | 128.2 | $ | 123.8 | |||||||
|
(1)
|
Amounts have
been retrospectively adjusted to conform to current year presentations.
Certain prior year inter-company amounts have been reallocated among the
segments and other business activities and unallocated
category.
|
|
(2)
|
Operating
income for the year ended December 31, 2007, includes $1.5 million in
long-lived asset impairment charges, an $18.8 million federal excise tax
refund, and an accrued vacation reduction of $11.0 million in connection
with the modification of our employee vacation policy.
|
|
(3)
|
Operating
income for the year ended December 31, 2007, includes $1.0 million in
long-lived asset impairment charges and an accrued vacation reduction of
$1.1 million in connection with the modification of our employee vacation
policy.
|
|
(4)
|
Operating
income for the year ended December 31, 2007, includes $0.2 million in
long-lived asset impairment charges and an accrued vacation reduction of
$1.3 million in connection with the modification of our employee vacation
policy.
|
|
(5)
|
The
unallocated category included in operating income relates to our overhead
and corporate expenses that are not allocated to the separate reportable
segments for management reporting purposes. Unallocated costs include
corporate departmental expenses such as labor and benefits, as well as
advertising, insurance, distribution and information technology
costs.
|
|
(6)
|
Depreciation
and amortization included in the unallocated category primarily relate to
our corporate headquarters and information technology
assets.
|
84
RADIOSHACK
CORPORATION
| INDEX TO EXHIBITS | ||
|
Exhibit
Number
|
Description
|
|
|
3.1
|
Certificate
of Amendment of Restated Certificate of Incorporation dated May 18, 2000
(filed as Exhibit 3a to RadioShack’s Form 10-Q filed on August 11, 2000,
for the fiscal quarter ended June 30, 2000, and incorporated herein by
reference).
|
|
|
3.2
|
Restated
Certificate of Incorporation of RadioShack Corporation dated July 26, 1999
(filed as Exhibit 3a(i) to RadioShack’s Form 10-Q filed on August 11,
1999, for the fiscal quarter ended June 30, 1999, and incorporated herein
by reference).
|
|
|
3.3
|
Certificate
of Elimination of Series C Conversion Preferred Stock of RadioShack
Corporation dated July 26, 1999 (filed as Exhibit 3a(ii) to
RadioShack’s Form 10-Q filed on August 11, 1999, for the fiscal
quarter ended June 30, 1999, and incorporated herein by
reference).
|
|
|
3.4
|
Amended
Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of RadioShack Corporation dated July 26,
1999 (filed as Exhibit 3a(iii) to RadioShack’s Form 10-Q filed on August
11, 1999, for the fiscal quarter ended June 30, 1999, and incorporated
herein by reference).
|
|
|
3.5
|
Certificate
of Designations of Series B TESOP Convertible Preferred Stock dated June
29, 1990 (filed as Exhibit 4A to RadioShack's 1993, Form S-8 for the
RadioShack Corporation Incentive Stock Plan, Reg. No. 33-51603, filed on
November 12, 1993, and incorporated herein by reference).
|
|
|
3.6
|
RadioShack
Corporation Bylaws, amended and restated as of September 29, 2005 (filed
as Exhibit 3.1 to RadioShack’s Form 8-K filed on September 30, 2005, and
incorporated herein by reference).
|
|
|
4.1
|
Amended and
Restated Rights Agreement dated as of July 26, 1999 (filed as Exhibit 4a
to RadioShack’s Form 10-Q filed on August 11, 1999, for the fiscal quarter
ended June 30, 1999, and incorporated herein by reference).
|
|
|
4.2
|
First
Amendment to Amended and Restated Rights Agreement, dated as of February
20, 2004, between RadioShack Corporation and Equiserve Trust Company, N.A.
(filed as Exhibit 4a to RadioShack’s Form 10-Q filed on May 6, 2005, for
the fiscal quarter ended March 31, 2005, and incorporated herein by
reference).
|
|
|
4.3
|
Second
Amendment to Amended and Restated Rights Agreement, dated effective
January 31, 2006, by and between RadioShack Corporation and Computershare
Trust Company, N.A. (filed as Exhibit 4.1 to RadioShack's Form 8-K filed
on January 17,2006, and incorporated herein by reference).
|
|
|
10.1
|
Death Benefit
Agreement effective December 27, 2001, among Leonard H. Roberts, Laurie
Roberts and RadioShack Corporation (filed as Exhibit 10a to RadioShack’s
Form 10-Q filed on May 13, 2002, for the fiscal quarter ended March 31,
2002, and incorporated herein by reference).
|
|
|
10.2
|
Salary
Continuation Plan for Executive Employees of RadioShack Corporation and
Subsidiaries including amendment dated June 14, 1984, with respect to
participation by certain executive employees, as restated October 4, 1990
(filed as Exhibit 10a to RadioShack’s Form 10-K filed on March 30, 1994,
for the fiscal year ended December 31, 1993, and incorporated herein by
reference).
|
|
85
|
10.3
|
RadioShack
Corporation Officers Deferred Compensation Plan as restated July 10, 1992
(filed as Exhibit 10d to RadioShack’s Form 10-K filed on March 30, 1994,
for the fiscal year ended December 31, 1993, and incorporated herein by
reference).
|
|
|
10.4
|
RadioShack
Corporation Officers Life Insurance Plan as amended and restated effective
August 22, 1990 (filed as Exhibit 10k to RadioShack’s Form 10-K filed on
March 30, 1994, for the fiscal year ended December 31, 1993, and
incorporated herein by reference).
|
|
|
10.5
|
Third
Restated Trust Agreement RadioShack Employees Supplemental Stock Program
through Amendment No. VI dated August 31, 1999 (filed as Exhibit 10h to
RadioShack’s Form 10-Q filed on November 12, 1999, for the fiscal quarter
ended September 30, 1999, and incorporated herein by
reference).
|
|
|
10.6
|
Forms of
Termination Protection Agreements for (i) Corporate Executives, (ii)
Division Executives and (iii) Subsidiary Executives (filed as Exhibit 10m
to RadioShack’s Form 10-Q filed on August 14, 1995, for the fiscal quarter
ended June 30, 1995, and incorporated herein by reference).
|
|
|
10.7
|
RadioShack
Corporation Amended and Restated Termination Protection Plan (Level I)
(filed as Exhibit 10.10 to RadioShack’s Form 10-Q filed on October 25,
2006, for the fiscal quarter ended September 30, 2006, and incorporated
herein by reference).
|
|
|
10.8
|
*
|
RadioShack
Corporation Officers' Severance Program.
|
|
10.9
|
Form of
AmeriLink Corporation Stock Incentive Plan, as amended (filed as Exhibit
10.1 to AmeriLink Corporation’s registration statement on Form S-1 file
No. 33-69832 and filed as Exhibit A to the AmeriLink Corporation’s 1998
Proxy Statement dated July 6, 1998, which was filed on July 7, 1998, and
incorporated herein by reference).
|
|
|
10.10
|
RadioShack
Corporation Executive Deferred Compensation Plan, effective April 1, 1998
(filed as Exhibit 10s to RadioShack’s Form 10-K filed on March 26, 1998,
for the fiscal year ended December 31, 1997, and incorporated herein by
reference).
|
|
|
10.11
|
Amendment No.
1 to RadioShack Corporation Executive Deferred Compensation Plan,
effective December 12, 2001 (filed as Exhibit 10.12 to RadioShack’s Form
10-K filed on March 15, 2006, for the fiscal year ended December 31, 2005,
and incorporated herein by reference).
|
|
|
10.12
|
Amendment No.
2 to RadioShack Corporation Executive Deferred Compensation Plan,
effective December 31, 2005 (filed as Exhibit 10.13 to RadioShack’s Form
10-K filed on March 15, 2006, for the fiscal year ended December 31, 2005,
and incorporated herein by reference).
|
|
|
10.13
|
Amendment No.
3 to RadioShack Corporation Executive Deferred Compensation Plan, dated
December 21, 2006 (filed as Exhibit 10.1 to RadioShack’s
Form 8-K filed on December 27, 2006, and incorporated herein by
reference).
|
|
|
10.14
|
RadioShack
Corporation Executive Deferred Stock Plan, effective April 1, 1998 (filed
as Exhibit 10x to RadioShack’s Form 10-K filed on March 26, 1998, for the
fiscal year ended December 31, 1997, and incorporated herein by
reference).
|
|
|
10.15
|
Amendment No.
1 to RadioShack Corporation Executive Deferred Stock Plan, effective
December 12, 2001 (filed as Exhibit 10.15 to RadioShack’s Form 10-K filed
on March 15, 2006, for the fiscal year ended December 31, 2005, and
incorporated herein by reference).
|
|
|
10.16
|
Amendment No.
2 to RadioShack Corporation Executive Deferred Stock Plan, effective
December 31, 2005 (filed as Exhibit 10.16 to RadioShack’s Form 10-K filed
on March 15, 2006, for the fiscal year ended December 31, 2005, and
incorporated herein by
reference).
|
86
|
10.17
|
Third
Amendment to the RadioShack Corporation Executive Deferred Stock Plan,
dated December 21, 2006 (filed as Exhibit 10.2 to RadioShack’s
Form 8-K filed on December 27, 2006, and incorporated herein by
reference).
|
|
|
10.18
|
RadioShack
Corporation Unfunded Deferred Compensation Plan for Directors as amended
and restated July 22, 2000 (filed as Exhibit 10x to RadioShack’s Form 10-K
filed on March 28, 2003, for the fiscal year ended December 31, 2002, and
incorporated herein by reference).
|
|
|
10.19
|
Form of
September 30, 1997, Deferred Compensation Agreement between RadioShack
Corporation and Leonard H. Roberts (filed as Exhibit 10aa to RadioShack’s
Form 10-Q filed on May 13, 1998, for the fiscal quarter ended March 31,
1998, and incorporated herein by reference).
|
|
|
10.20
|
RadioShack
Corporation 1993 Incentive Stock Plan as amended (filed as Exhibit 10a to
RadioShack's Form 10-Q filed on November 14, 2001, for the fiscal quarter
ended September 30, 2001, and incorporated herein by
reference).
|
|
|
10.21
|
Amended and
Restated RadioShack Corporation 1997 Incentive Stock Plan (filed as
Exhibit 10.1 to RadioShack’s Form 8-K filed on May 24,
2005, and incorporated herein by reference).
|
|
|
10.22
|
Amended and
Restated RadioShack Corporation 1999 Incentive Stock Plan (filed as
Exhibit 10.2 to RadioShack’s Form 8-K filed on May 24,
2005, and incorporated herein by reference).
|
|
|
10.23
|
Amended and
Restated RadioShack Corporation 2001 Incentive Stock Plan (filed as
Exhibit 10.3 to RadioShack’s Form 8-K filed on May 24,
2005, and incorporated herein by reference).
|
|
|
10.24
|
Five Year
Credit Agreement dated as of June 16, 2004, among RadioShack Corporation,
Citibank, N.A., as Administrative Agent, Paying Agent and Lender, Bank of
America, N.A. as Administrative Agent, Initial Issuing Bank and Lender,
Wachovia Bank, National Association as Co-Syndication Agent, Initial
Issuing Bank and Lender, Keybank National Association and Suntrust Bank,
as Co-Syndication Agents and Lenders, Citigroup Global Markets Inc. and
Bank of America Securities, LLC as Joint Lead Arrangers and Bookrunners
(filed as Exhibit 10a to RadioShack’s Form 10-Q filed on August 5, 2004,
for the fiscal quarter ended June 30, 2004, and incorporated herein by
reference).
|
|
|
10.25
|
Amendment
No. 1 to the Five Year Credit Agreement dated as of April 29,
2005, among RadioShack Corporation, the Banks, Financial Institutions and
Other Institutional Lenders Parties to the Credit Agreement, and Citibank,
N.A., as Agent for the Lenders (filed as Exhibit 10h to RadioShack’s Form
10-Q filed on August 8, 2005, for the fiscal quarter ended June 30, 2005,
and incorporated herein by reference).
|
|
|
10.26
|
Amendment No.
2, dated as of June 12, 2006, to the Five Year Credit Agreement, among
RadioShack Corporation, the banks, financial institutions and other
institutional lenders, Bank of America, N.A., as Administrative Agent,
Wachovia Bank, National Association, Keybank National Association and
Suntrust Bank, as Co-Syndication Agents, Citigroup Global Markets Inc. and
Banc of America Securities LLC, as Joint Lead Arrangers and Bookrunners,
and Citibank, N.A., as Administrative Agent and as Paying Agent (filed as
Exhibit 10.2 to RadioShack’s Form 8-K filed on June 16, 2006, and
incorporated herein by
reference).
|
87
|
10.27
|
Five Year
Credit Agreement, dated as of June 12, 2006, among RadioShack Corporation,
the Initial Lenders named therein, Citibank, N.A., as Administrative Agent
and Paying Agent, Bank of America, N.A., as Administrative Agent and
Initial Issuing Bank, Wachovia Bank, National Association, as
Co-Syndication Agent and Initial Issuing Bank, Wells Fargo, National
Association, as Co-Syndication Agent, Citigroup Global Markets Inc. and
Banc of America Securities LLC, as Joint Lead Arrangers and Bookrunners
(filed as Exhibit 10.1 to RadioShack’s Form 8-K filed on June 16, 2006,
and incorporated herein by reference).
|
|
|
10.28
|
Amended and
Restated RadioShack Corporation 2004 Deferred Stock Unit Plan for
Non-Employee Directors (filed as Exhibit 10.4 to RadioShack’s
Form 8-K filed on May 24, 2005, and incorporated herein by
reference).
|
|
|
10.29
|
RadioShack
2004 Annual and Long-Term Incentive Compensation Plan (the written
description of which is contained on pages 26 through 29 of RadioShack's
Proxy Statement filed on April 8, 2004, for the 2004 Annual Meeting of
Stockholders and is incorporated herein by reference).
|
|
|
10.30
|
RadioShack
Investment Plan (filed as Exhibit 10d to RadioShack’s Form 10-Q filed on
August 5, 2004, for the fiscal quarter ended June 30, 2004, and
incorporated herein by reference).
|
|
|
10.31
|
Form of
Incentive Stock Plan(s) Stock Option Agreement for Officers (filed as
Exhibit 10a to RadioShack’s Form 10-Q filed on November 11, 2004, for the
fiscal quarter ended September 30, 2004, and incorporated herein by
reference).
|
|
|
10.32
|
Transition
Agreement, dated January 12, 2005, between RadioShack Corporation and
Leonard H. Roberts (filed as Exhibit 10.1 to RadioShack’s Form 8-K filed
on January 13, 2005, and incorporated herein by reference).
|
|
|
10.33
|
Consulting
Agreement, dated May 18, 2006, between RadioShack Corporation and Leonard
H. Roberts (filed as Exhibit 10.1 to RadioShack’s Form 8-K filed on May
23, 2006, and incorporated herein by reference).
|
|
|
10.34
|
RadioShack
Corporation Bonus Plan for Executive Officers (filed as Exhibit 10.1 to
RadioShack’s Form 8-K filed on February 28, 2005, and incorporated herein
by reference).
|
|
|
10.35
|
RadioShack
Corporation 2006 Annual Incentive Bonus Plan (filed as Exhibit 10.1 to
RadioShack's Form 8-K filed on March 30, 2006, and incorporated herein by
reference).
|
|
|
10.36
|
Description
of 2006 Annual Incentive Bonus Performance Measures for Executive Officers
(filed as Exhibit 10.2 to RadioShack's Form 8-K filed on March 30, 2006,
and incorporated herein by reference).
|
|
|
10.37
|
RadioShack
Corporation Long-Term Incentive Plan (filed as Exhibit 10.4 to
RadioShack’s Form 8-K filed on February 28, 2005, and incorporated herein
by reference).
|
|
|
10.38
|
Description
of Long-Term Incentive Performance Measures for Executive Officers for the
2004 through 2006 Performance Cycle (filed as Exhibit 10.5 to RadioShack’s
Form 8-K filed on February 28, 2005, and incorporated herein by
reference).
|
|
|
10.39
|
Description
of Long-Term Incentive Performance Measures for Executive Officers for the
2005 through 2007 Performance Cycle (filed as Exhibit 10.6 to RadioShack’s
Form 8-K filed on February 28, 2005, and incorporated herein by
reference).
|
|
|
10.40
|
Description
of Long-Term Incentive Performance Measures for Executive Officers for the
March 27, 2006 through March 26, 2009 Performance Cycle (filed as Exhibit
10.3 to RadioShack's Form 8-K filed on March 30, 2006, and incorporated
herein by reference).
|
88
|
10.41
|
Form of
Restricted Stock Agreement under RadioShack Corporation 1997 Incentive
Stock Plan (filed as Exhibit 10a to RadioShack’s Form 10-Q filed on May 6,
2005, for the fiscal quarter ended March 31, 2005, and incorporated herein
by reference).
|
|
|
10.42
|
Form of
Indemnification Agreement (filed as Exhibit 10.1 to RadioShack’s
Form 8-K filed on June 6, 2005, and incorporated herein by
reference).
|
|
|
10.43
|
Form of
Notice of Grant of Deferred Stock Units and Deferred Stock Unit Agreement
under the RadioShack 2004 Deferred Stock Unit Plan for Non-Employee
Directors (filed as Exhibit 10.2 to RadioShack’s Form 8-K filed
on June 6, 2005, and incorporated herein by reference).
|
|
|
10.44
|
Overnight
Share Repurchase Agreement, dated August 5, 2005, between RadioShack
Corporation and Bank of America, N.A. (filed as Exhibit 10.1 to
RadioShack’s Form 8-K filed on August 8, 2005, and incorporated herein by
reference).
|
|
|
10.45
|
Purchase and
Sale Agreement, dated December 12, 2005, between RadioShack
Corporation and Kan Am Grund Kapitalanlagegesellschaft mbH (filed as
Exhibit 10.1 to RadioShack’s Form 8-K filed on December 16,
2005).
|
|
|
10.46
|
Lease, dated
December 20, 2005, between Kan Am Riverfront Campus, LP, as Landlord,
and RadioShack Corporation, as Tenant (filed as Exhibit 10.2 to
RadioShack’s Form 8-K filed on December 21, 2005).
|
|
|
10.47
|
RadioShack
Corporation Officer’s Supplemental Executive Retirement Plan (filed as
Exhibit 10.52 to RadioShack’s Form 10-K filed on March 15, 2006, for the
fiscal year ended December 31, 2005, and incorporated herein by
reference).
|
|
|
10.48
|
Form of
RadioShack Corporation Officer’s Supplemental Executive Retirement Plan
Agreement (filed as Exhibit 10.53 to RadioShack’s Form 10-K filed on March
15, 2006, for the fiscal year ended December 31, 2005, and incorporated
herein by reference).
|
|
|
10.49
|
Form of
RadioShack Corporation Officer’s Supplemental Executive Retirement Plan
Agreement for Existing Participants in the Salary Continuation Plan (filed
as Exhibit 10.54 to RadioShack’s Form 10-K filed on March 15, 2006, for
the fiscal year ended December 31, 2005, and incorporated herein by
reference).
|
|
|
10.50
|
Resignation
Agreement and Release, dated February 20, 2006, between RadioShack
Corporation and David J. Edmondson (filed as Exhibit 10.1 to RadioShack's
Form 8-K filed on February 21, 2006, and incorporated herein by
reference).
|
|
|
10.51
|
Separation
Agreement, effective March 31, 2006, between RadioShack Corporation and
Mark C. Hill (filed as Exhibit 10.1 to RadioShack's Form 8-K filed on
April 7, 2006, and incorporated herein by reference).
|
|
|
10.52
|
Letter
Agreement, dated July 6, 2006, between RadioShack Corporation and Julian
C. Day (filed as Exhibit 10.1 to RadioShack’s Form 8-K filed on July 7,
2006, and incorporated herein by reference).
|
|
|
10.53
|
Incentive
Stock Plan Non-Qualified Stock Option Agreement under the 1997 Incentive
Stock Plan, dated July 6, 2006, between RadioShack Corporation and
Julian C. Day (filed as Exhibit 10.2 to RadioShack’s Form 8-K filed on
July 7, 2006, and incorporated herein by reference).
|
|
|
10.54
|
Incentive
Stock Plan Non-Qualified Stock Option Agreement under the 1999 Incentive
Stock Plan, dated July 6, 2006, between RadioShack Corporation and
Julian C. Day (filed as Exhibit 10.3 to RadioShack’s Form 8-K filed on
July 7, 2006, and incorporated herein by
reference).
|
89
|
10.55
|
Incentive
Stock Plan Non-Qualified Stock Option Agreement under the 2001 Incentive
Stock Plan, dated July 6, 2006, between RadioShack Corporation and
Julian C. Day (filed as Exhibit 10.4 to RadioShack’s Form 8-K filed on
July 7, 2006, and incorporated herein by reference).
|
|
|
10.56
|
Incentive
Stock Plan Non-Qualified Stock Option Agreement, dated July 6, 2006,
between RadioShack Corporation and Julian C. Day (filed as Exhibit 10.5 to
RadioShack’s Form 8-K filed on July 7, 2006, and incorporated herein by
reference).
|
|
|
10.57
|
Incentive
Stock Plan Non-Qualified Stock Option Agreement, dated July 6, 2006,
between RadioShack Corporation and Julian C. Day (filed as Exhibit 10.6 to
RadioShack’s Form 8-K filed on July 7, 2006, and incorporated herein by
reference).
|
|
|
10.58
|
Agreement on
Nonsolicitation, Confidentiality, Noncompetition and Intellectual
Property, dated July 6, 2006, between RadioShack Corporation and
Julian C. Day (filed as Exhibit 10.7 to RadioShack’s Form 8-K filed on
July 7, 2006, and incorporated herein by reference).
|
|
|
10.59
|
Employment
Offer Letter to James F. Gooch from RadioShack Corporation, dated July 27,
2006 (filed as Exhibit 10.8 to RadioShack’s Form 10-Q filed on October 25,
2006, for the fiscal quarter ended September 30, 2006, and incorporated
herein by reference).
|
|
|
10.60
|
Description
of 2007 Annual Incentive Bonus Performance Measures for Executive Officers
(filed as Exhibit 10.1 to RadioShack s Form 8-K filed on February 28,
2007, and incorporated herein by reference).
|
|
|
10.61
|
Description
of Long-Term Incentive Performance Measures for Executive Officers for the
2007 through 2008 Performance Cycle (filed as Exhibit 10.2 to RadioShack s
Form 8-K filed on February 28, 2007, and incorporated herein by
reference).
|
|
|
10.62
|
RadioShack
Corporation 2007 Restricted Stock Plan (included as Appendix A to the
Company's Proxy Statement filed with the Securities and Exchange
Commission on April 12, 2007 and incorporated herein by
reference).
|
|
|
10.63
|
Amendment to
RadioShack 2004 Annual and Long-Term Incentive Compensation Plan (the
written description of which is contained on pages 32 and 33 of the
Company's Proxy Statement filed with the Securities and Exchange
Commission on April 12, 2007 and incorporated herein by
reference).
|
|
|
10.64
|
Second
Amended and Restated RadioShack 2004 Deferred Stock Unit Plan for
Non-Employee Directors (filed as Exhibit 10.3 to RadioShack’s Form 10-Q
filed on April 30, 2007, and incorporated herein by
reference).
|
|
|
10.65
|
Form of
Restricted Stock Agreement under the RadioShack Corporation 2007
Restricted Stock Plan (filed as Exhibit 10.2 to RadioShack's Form 8-K
filed on May 18, 2007, and incorporated herein by reference).
|
|
|
10.66
|
*
|
Employment
Offer Letter to Peter J. Whitsett from RadioShack Corporation, dated
November 12, 2007.
|
|
10.67
|
*
|
Employment
Offer Letter to Bryan Bevin from RadioShack Corporation, dated December
11, 2008.
|
|
21
|
*
|
RadioShack
Significant Subsidiaries.
|
|
23
|
*
|
Consent of
PricewaterhouseCoopers LLP.
|
90
|
31(a)
|
*
|
Rule
13a-14(a) Certification of the Chief Executive Officer of RadioShack
Corporation.
|
|
31(b)
|
*
|
Rule
13a-14(a) Certification of the Chief Financial Officer of RadioShack
Corporation.
|
|
32
|
*
|
Section 1350
Certifications.**
|
|
_______________________
|
|
*
|
Filed with
this report.
|
|
**
|
These
Certifications shall not be deemed "filed" for purposes of Section 18 of
the Exchange Act, as amended, or otherwise subject to the liability of
that section. These Certifications shall not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent that the Company specifically
incorporates it by reference.
|
91