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| RSH > SEC Filings for RSH > Form 10-K on 24-Feb-2009 | All Recent SEC Filings |
24-Feb-2009
Annual Report
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.
OVERVIEW
Highlights related to the year ended December 31, 2008, include:
· Net sales and operating revenues decreased $27.2 million, or 0.6%, to $4,224.5 million when compared with last year. Comparable store sales decreased 0.6% as well. This decrease was driven by lower sales in the fourth quarter primarily due to the global credit crisis and economic downturn, but was substantially offset by sales gains during the first nine months of the year. We recorded sales of approximately $200 million in digital-to-analog television converter boxes and significant sales increases in AT&T postpaid wireless handsets, video gaming products and accessories, laptop computers, and prepaid wireless handsets. We recorded sales declines in Sprint Nextel postpaid wireless handsets, digital music players and toys.
· Gross margin decreased 210 basis points to 45.5% from last year. This decrease was primarily driven by increased sales of lower margin products such as digital-to-analog television converter boxes, video gaming products and accessories, and laptop computers, as well as a continued shift away from higher-rate new activations to lower-rate existing customer upgrades in our postpaid wireless business.
· Selling, general and administrative ("SG&A") expense decreased $28.7 million to $1,509.8 million when compared with last year. This decrease was driven in part by lower compensation expense. Other factors included decreased rent expense for our corporate headquarters for the last half of the year and an $8.2 million sales and use tax benefit from the settlement of a sales tax issue. Additionally, SG&A expense for 2007 included an $8.5 million charge for employee separation packages. As a percentage of net sales and operating revenues, SG&A declined 50 basis points to 35.7%.
· As a result of the factors above, operating income decreased $59.9 million, or 15.7%, to $322.0 million when compared with last year.
· Net income decreased $44.4 million to $192.4 million when compared with last year. Net income per diluted share was $1.49 compared with $1.74 last year.
RESULTS OF OPERATIONS
NET SALES AND OPERATING REVENUES
Consolidated net sales decreased 0.6% or $27.2 million to $4,224.5 million for the year ended December 31, 2008, compared with $4,251.7 million in 2007. This decrease was primarily due to a comparable store sales decline of 0.6% in 2008. The decrease in comparable store sales was primarily caused by decreased sales in our personal electronics and modern home platforms, but was offset by increased sales in our accessory platform.
Consolidated net sales and operating revenues for our two reportable segments and other sales are as follows:
Year Ended December 31,
(In millions) 2008 2007 2006
U.S. RadioShack company-operated stores $ 3,611.1 $ 3,637.7 $ 4,079.8
Kiosks 283.5 297.0 340.5
Other sales 329.9 317.0 357.2
Consolidated net sales and operating revenues $ 4,224.5 $ 4,251.7 $ 4,777.5
Consolidated net sales and operating
revenues decrease 0.6 % 11.0 % 6.0 %
Comparable store sales decrease (1) 0.6 % 8.2 % 5.6 %
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(1) Comparable store sales include the sales of U.S. 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 U.S. RadioShack company-operated stores and kiosks, as well as other sales.
Consolidated Net Sales and Operating Revenues
Year Ended December 31,
(In millions) 2008 2007 2006
Wireless $ 1,393.8 33.0 % $ 1,416.5 33.3 % $ 1,654.8 34.6 %
Accessory 1,183.9 28.0 1,029.7 24.2 1,087.6 22.8
Personal electronics 545.7 12.9 650.7 15.3 751.8 15.7
Modern home 527.1 12.5 556.2 13.1 612.1 12.8
Power 242.4 5.7 251.3 5.9 271.4 5.7
Technical 183.7 4.4 184.4 4.3 198.5 4.2
Service 95.8 2.3 100.5 2.4 106.3 2.2
Service centers and other
sales (1) 52.1 1.2 62.4 1.5 95.0 2.0
Consolidated net sales and
operating revenues $ 4,224.5 100.0 % $ 4,251.7 100.0 % $ 4,777.5 100.0 %
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(1) Service centers and other sales include outside sales from our service centers, in addition to U.S. RadioShack company-operated store repair revenue, and outside sales of our global sourcing operations and domestic and overseas manufacturing facilities.
2008 COMPARED WITH 2007
U.S. 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) 2008 2007 2006
Wireless $ 1,075.7 29.8 % $ 1,085.6 29.8 % $ 1,288.1 31.6 %
Accessory 1,091.8 30.2 949.3 26.1 1,006.6 24.7
Personal electronics 486.7 13.5 589.8 16.2 683.1 16.8
Modern home 457.7 12.7 494.5 13.6 539.5 13.2
Power 227.3 6.3 235.8 6.5 258.1 6.3
Technical 169.9 4.7 171.9 4.7 184.6 4.5
Service 93.2 2.6 97.3 2.7 102.3 2.5
Other revenue 8.8 0.2 13.5 0.4 17.5 0.4
Net sales and operating
revenues $ 3,611.1 100.0 % $ 3,637.7 100.0 % $ 4,079.8 100.0 %
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Sales in our wireless platform (includes postpaid and prepaid wireless handsets, commissions, residual income and communication devices such as scanners and GPS) decreased 0.9% in 2008. While we have recorded sales gains related to our AT&T postpaid wireless business and prepaid wireless handsets, these gains were substantially offset by declines in the Sprint Nextel postpaid wireless business and, to a lesser extent, sales of GPS devices.
Sales in our accessory platform (includes home entertainment, wireless, music, computer, video game and GPS accessories; media storage; power adapters; digital imaging products and headphones) increased 15.0% in 2008. This increase was driven by sales of digital-to-analog television converter boxes. The sales of the converter boxes are a result of the pending transition of full-power television broadcast signals in the United States from broadcasting in analog format to broadcasting only in digital format. This transition is scheduled to take place in the second quarter of 2009 and we expect a decrease in the sales of these units in the second half of the year. We also experienced sales gains in video game accessories in 2008. This increase was partially offset by decreases in wireless, music, and imaging accessories sales.
Sales in our personal electronics platform (includes digital cameras, digital music players, toys, satellite radios, video gaming hardware, camcorders, general radios, and wellness products) decreased 17.5% in 2008. This decrease was driven primarily by sales declines in digital music players, toys, and satellite radios, but was partially offset by increased sales of video game consoles.
Sales in our modern home platform (includes residential telephones, home audio and video end-products, direct-to-home ("DTH") satellite systems, and computers) decreased 7.4% in 2008. This decrease was primarily the result of declines in sales of DVD players and recorders, cordless telephones, and flat panel televisions, but was partially offset by increased sales of laptop computers.
Sales in our power platform (includes general and special purpose batteries and battery chargers) decreased 3.6% in 2008. This decrease was primarily the result of decreased sales of certain special purpose and general purpose batteries.
Sales in our technical platform (includes wire and cable, connectivity products, components and tools, as well as hobby and robotic products) decreased 1.2% in 2008.
Sales in our service platform (includes prepaid wireless airtime, extended service plans and bill payment revenue) decreased 4.2% in 2008. This decrease was driven primarily by declines in bill payment revenue and sales of extended service plans, but was partially offset by increased sales of prepaid wireless airtime.
Kiosks
Kiosk sales consist primarily of handset sales, postpaid and prepaid commission revenue and related wireless accessory sales. Kiosk sales decreased 4.5% or $13.5 million in 2008. This sales decrease was driven primarily by a decline in the number of our Sprint Nextel branded kiosks, but was partially offset by sales gains at our Sam's Club kiosks. Our contract to operate Sprint Nextel kiosks expires in June of 2009. We are currently in discussion with Sprint Nextel to renew this contract, but the ultimate resolution is unknown at this time. The possible outcomes include renewing the contract under the same terms and conditions, modifying the contract, or ceasing operations.
In February 2009, we signed a contract extension through March 31, 2011, with a transition period ending June 30, 2011, with Sam's Club to continue operating kiosks in certain Sam's Club locations. As part of the terms of the contract extension, we will assign the operation of 66 kiosk locations to Sam's Club by July 2009. Upon the execution of this agreement, Sam's Club had the right to assume the operation of approximately 25 kiosk locations. Based on certain performance metrics, Sam's Club could acquire the right to assume approximately 25 additional kiosk locations in 2010. The total number of locations assumed by Sam's Club, for any reason, may not exceed 51 kiosk locations during term of the contract.
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 and our Mexican subsidiary, sales to commercial customers, and outside sales of our global sourcing operations and manufacturing. Other sales increased $12.9 million or 4.1% in 2008. This sales increase was driven primarily by increased sales at our RadioShack.com Web site and the recognition of 100% of the sales for RadioShack de Mexico in the month of December. If we had owned 100% of RadioShack de Mexico for all of 2008, we would have recognized a total of approximately $120 million in net sales and operating revenues for the year. Sales to independent dealers did not significantly change from 2007.
GROSS PROFIT
Consolidated gross profit and gross margin are as follows:
Year Ended December 31,
(In millions) 2008 2007 2006
Gross profit $ 1,922.7 $ 2,025.8 $ 2,129.4
Gross profit decrease 5.1 % 4.9 % 6.1 %
Gross margin 45.5 % 47.6 % 44.6 %
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Consolidated gross profit and gross margin for 2008 were $1,922.7 million and 45.5%, respectively, compared with $2,025.8 million and 47.6% in 2007, resulting in a 5.1% decrease in gross profit dollars and a 210 basis point decrease in our gross margin.
This decrease was primarily driven by increased sales of lower margin products such as digital-to-analog television converter boxes, video gaming products and accessories, and laptop computers, as well as a product shift away from higher-rate new activations to lower-rate existing customer upgrades in our postpaid wireless business. Gross margin was also negatively impacted by lower average selling prices in GPS and media storage and by aggressive pricing required in our wireless platform in the first quarter to respond to a more competitive market environment.
Additionally, the 2007 gross margin was favorably impacted by refunds for federal telecommunications excise taxes we recorded in 2007. 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 13 - "Federal Excise Tax" in Notes to Consolidated Financial Statements 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 1.9% or $28.7 million in 2008. This
represents a 50 basis point decrease as a percentage of net sales and operating
revenues compared to 2007.
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,
2008 2007 2006
% of % of % of
Sales & Sales & Sales &
(In millions) Dollars Revenues Dollars Revenues Dollars Revenues
Payroll and commissions $ 617.5 14.6 % $ 638.6 15.0 % $ 798.2 16.7 %
Rent 300.9 7.1 304.7 7.2 312.1 6.5
Advertising 214.5 5.1 208.8 4.9 216.3 4.5
Other taxes (excludes
income taxes) 87.9 2.1 103.0 2.4 121.2 2.5
Utilities and telephone 58.7 1.4 61.4 1.4 64.7 1.4
Insurance 55.0 1.3 58.1 1.4 62.8 1.3
Credit card fees 37.7 0.9 37.8 0.9 40.1 0.8
Professional fees 26.3 0.6 19.1 0.4 49.2 1.0
Licenses 12.4 0.3 12.7 0.3 13.2 0.3
Repairs and maintenance 11.2 0.3 10.9 0.3 11.7 0.3
Printing, postage and office
supplies 8.1 0.2 9.6 0.2 11.7 0.3
Recruiting, training &
employee relations 6.9 0.2 6.8 0.2 12.3 0.3
Stock purchase and
savings plans 6.5 0.2 7.2 0.2 11.1 0.2
Travel 5.4 0.1 5.2 0.1 8.3 0.2
Warranty and product repair 4.2 0.1 5.1 0.1 7.1 0.1
Other 56.6 1.2 49.5 1.2 70.7 1.5
$ 1,509.8 35.7 % $ 1,538.5 36.2 % $ 1,810.7 37.9 %
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Payroll and commissions expense decreased in dollars and as a percentage of net sales and operating revenues. This decrease was partially driven by lower incentive compensation paid to store and corporate personnel and fewer employees in our kiosk operation, distribution centers, and at our corporate headquarters. Additionally, in 2007 we reduced our accrued vacation liability by $14.3 million in connection with the modification of our employee vacation policy and recorded an $8.5 million charge for employee separation charges.
Rent expense decreased primarily due to lower rent expense associated with our corporate headquarters for the second half of 2008. See below for further discussion.
The decrease in other taxes was partially driven by reduced payroll taxes associated with the decreased compensation expense. Additionally, we recorded an $8.2 million sales and use tax benefit from the settlement of a sales tax issue.
The increase in other SG&A was primarily due to a $12.1 million non-cash charge recorded in connection with our amended headquarters lease. See below for further discussion.
Corporate Headquarters' Amended Lease: In June 2008, Tarrant County College District ("TCC") announced that it had purchased from Kan Am Grund Kapitalanlagegesellschaft mbH ("Kan Am") the buildings and real property comprising our corporate headquarters in Fort Worth, Texas, which we had previously sold to Kan Am and then leased for a period of 20 years in a sale and lease-back transaction in December 2005.
In connection with the above sale to TCC, we entered into an agreement with TCC to convey certain personal property located in the corporate headquarters and certain real property located in close proximity to the corporate headquarters in exchange for an amended and restated lease to occupy a reduced portion of the corporate headquarters for a shorter time period. The amended and restated lease agreement provides for us to occupy approximately 40% of the corporate headquarters complex for a primary term of three years with no rental payments required during the term. The agreement also provides for a renewal option on approximately half of this space for an additional two years at market rents.
This agreement resulted in a non-cash net charge to other SG&A of $12.1 million for the second quarter of 2008. This net amount consisted of a net loss of $2.8 million related to the assets conveyed to TCC and a $9.3 million charge to reduce a receivable for economic development incentives associated with the corporate headquarters to its net realizable value.
DEPRECIATION AND AMORTIZATION
The table below gives a summary of our total depreciation and amortization by
segment.
Year Ended December 31,
(In millions) 2008 2007 2006
U.S. RadioShack company-operated stores $ 52.9 $ 53.4 $ 58.2
Kiosks 5.8 6.3 10.2
Other 1.8 1.7 2.3
Unallocated 38.8 51.3 57.5
Total depreciation and amortization $ 99.3 $ 112.7 $ 128.2
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The table below provides an analysis of total depreciation and amortization.
Year Ended December 31,
(In millions) 2008 2007 2006
Depreciation and amortization expense $ 88.1 $ 102.7 $ 117.5
Depreciation and amortization included in
cost of products sold 11.2 10.0 10.7
Total depreciation and amortization $ 99.3 $ 112.7 $ 128.2
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Total depreciation and amortization for 2008 declined $13.4 million or 11.9%. This decrease was primarily due to reduced capital expenditures in 2006 and 2007 when compared with prior years.
IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER CHARGES
Impairment of long-lived assets and other charges was $2.8 million and $2.7 million for 2008 and 2007, respectively. These amounts were related primarily to our Sprint Nextel kiosk operations and underperforming U.S. RadioShack company-operated stores. 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.
NET INTEREST EXPENSE
Consolidated interest expense, net of interest income, was $15.3 million for 2008 versus $16.2 million for 2007, a decrease of $0.9 million or 5.6%.
Interest expense decreased $8.9 million to $29.9 million in 2008 from $38.8 million in 2007. This decrease was primarily attributable to lower interest rates on our floating rate debt exposure resulting from our interest rate swaps. Due to the implementation of FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion," for our convertible notes, we will recognize additional non-cash interest expense of $14 million for the year ended December 31, 2009.
Interest income decreased $8.0 million to $14.6 million in 2008 from $22.6 million in 2007. This decrease was primarily due to a lower interest rate environment. Additionally, we recorded interest income related to the federal telecommunications excise tax refund of $0.5 million in the first quarter of 2008 and $1.4 million in the first nine months of 2007.
OTHER (LOSS) INCOME
During 2008 we recorded a loss of $2.4 million compared with income of $0.9 million in 2007. These amounts represent unrealized losses and gains related to our derivative exposure to Sirius XM Radio, Inc. warrants as a result of our fair value measurements of these warrants. At December 31, 2008, the fair value of these warrants was zero.
INCOME TAX PROVISION
Our effective tax rate for 2008 was 36.8% compared to 35.4% for 2007. The 2008 effective tax rate was impacted by the execution of a closing agreement with respect to a Puerto Rico income tax issue during the year, which resulted in a credit to income tax expense. This discrete item lowered the effective tax rate for 2008 by 95 basis points. In addition, the 2008 effective tax rate was impacted by the net reversal of approximately $4.1 million in unrecognized tax benefits, deferred tax assets and accrued interest related to the settlement of various state income tax issues and the expiration of the statute of limitations with respect to our 2002 taxable year. This net reversal lowered the effective tax rate for 2008 by 137 basis points. 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 9 - "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.
Acquisition of RadioShack de Mexico
In December 2008, we acquired the remaining interest (slightly more than 50%) of our Mexican joint venture - RadioShack de Mexico, S.A. de C.V. - with Grupo Gigante, S.A.B. de C.V. We now own 100% of this subsidiary which consists of 200 RadioShack-branded stores and 14 dealers throughout Mexico. The purchase price was $44.7 million which consisted of $42.0 million in cash paid and transaction costs, net of cash acquired, plus $2.7 million in assumed debt. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." The purchase price allocation resulted in an excess of purchase price over net tangible assets acquired of $35.2 million, all of which was attributed to goodwill. The goodwill will not be subject to amortization for book purposes but rather an annual test for impairment. The premium we paid in excess of the fair value of the net assets acquired was based on the established business in Mexico and our ability to expand our business in Mexico and possibly other countries. The goodwill will not be deductible for tax purposes. Results of the acquired business have been included in our operations from December 1, 2008, and were immaterial. If we had owned 100% of RadioShack de Mexico for all of 2008, we would have recognized approximately $100 million in additional net sales and operating revenues.
2007 COMPARED WITH 2006
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 U.S. RadioShack company-operated stores, while closing 400 to 700 U.S. RadioShack company-operated stores, and aggressively relocate other U.S. 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 . . .
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