UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number: 1-5571
________________________
RADIOSHACK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1047710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Throckmorton Street, Suite 1800, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 415-3700
________________________
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
The number of shares outstanding of the issuer's Common Stock, $1 par value, on
April 19, 2004 was 160,834,561.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIOSHACK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended
March 31,
(In millions, except per share amounts) 2004 2003
--------------------------------------- -------- --------
Net sales and operating revenues $1,092.6 $1,070.3
Cost of products sold 539.6 542.9
-------- --------
Gross profit 553.0 527.4
-------- --------
Operating expenses:
Selling, general and administrative 412.9 407.8
Depreciation and amortization 24.1 22.6
-------- --------
Total operating expenses 437.0 430.4
-------- --------
Operating income 116.0 97.0
Interest income 1.5 1.5
Interest expense (7.4) (9.6)
Other income -- 2.4
-------- --------
Income before income taxes 110.1 91.3
Provision for income taxes 41.8 34.7
-------- --------
Net income $ 68.3 $ 56.6
======== ========
Net income per share:
Basic $ 0.42 $ 0.33
======== ========
Diluted $ 0.41 $ 0.33
======== ========
Weighted average shares used in computing earnings per
share:
Basic 163.0 171.4
======== ========
Diluted 165.1 171.8
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
RADIOSHACK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, December 31, March 31,
(In millions, except for share amounts) 2004 2003 2003
--------------------------------------- ---------- ------------ ----------
Assets
Current assets:
Cash and cash equivalents $ 577.0 $ 634.7 $ 456.7
Accounts and notes receivable, net 142.1 182.4 164.6
Inventories, net 769.9 766.5 844.3
Other current assets 87.7 83.0 84.2
---------- ------------ ----------
Total current assets 1,576.7 1,666.6 1,549.8
Property, plant and equipment, net 528.5 513.1 419.3
Other assets, net 71.4 64.2 98.1
---------- ------------ ----------
Total assets $2,176.6 $2,243.9 $2,067.2
========== ============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt, including current maturities of
long-term debt $ 119.1 $ 77.4 $ 16.0
Accounts payable 271.4 300.2 216.6
Accrued expenses 259.2 343.0 277.0
Income taxes payable 128.8 137.5 155.5
---------- ------------ ----------
Total current liabilities 778.5 858.1 665.1
Long-term debt, excluding current maturities 515.3 541.3 590.7
Other non-current liabilities 75.0 75.2 78.4
---------- ------------ ----------
Total liabilities 1,368.8 1,474.6 1,334.2
---------- ------------ ----------
Commitments and contingent liabilities (see Note 8)
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, 191,033,000,
236,033,000 shares issued, respectively 191.0 191.0 236.0
Additional paid-in capital 80.5 75.2 68.4
Retained earnings 1,278.9 1,210.6 2,059.1
Treasury stock, at cost; 29,116,000, 28,481,000
and 66,883,000 shares, respectively (742.3) (707.2) (1,630.0)
Accumulated other comprehensive loss (0.3) (0.3) (0.5)
---------- ------------ ----------
Total stockholders' equity 807.8 769.3 733.0
---------- ------------ ----------
Total liabilities and stockholders' equity $2,176.6 $2,243.9 $2,067.2
========== ============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
RADIOSHACK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
--------------------
(In millions) 2004 2003
------------- -------- --------
Cash flows from operating activities:
Net income $ 68.3 $ 56.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 24.1 22.6
Provision for uncollectible accounts 0.3 (0.1)
Other items 5.8 3.3
Changes in operating assets and liabilities:
Receivables 40.5 41.6
Inventories (3.4) 126.9
Other current assets (5.1) (1.1)
Accounts payable, accrued expenses and income taxes payable (114.2) (146.5)
-------- --------
Net cash provided by operating activities 16.3 103.3
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (41.3) (21.4)
Proceeds from sale of property, plant and equipment 0.2 0.1
Other investing activities (3.5) (0.1)
-------- --------
Net cash used in investing activities (44.6) (21.4)
-------- --------
Cash flows from financing activities:
Purchases of treasury stock (81.1) (62.5)
Sale of treasury stock to employee benefit plans 11.1 10.5
Proceeds from exercise of stock options 30.9 0.3
Changes in short-term borrowings, net 9.8 --
Repayments of long-term borrowings (0.1) (20.0)
-------- --------
Net cash used in financing activities (29.4) (71.7)
-------- --------
Net (decrease) increase in cash and cash equivalents (57.7) 10.2
Cash and cash equivalents, beginning of period 634.7 446.5
-------- --------
Cash and cash equivalents, end of period $ 577.0 $ 456.7
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
We prepared the accompanying unaudited consolidated financial statements, which
include the accounts of RadioShack Corporation and all majority-owned domestic
and foreign subsidiaries, in accordance with the rules of the Securities and
Exchange Commission ("SEC"). Accordingly, we did not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In management's opinion, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair statement are included. However, our operating results for the three months
ended March 31, 2004 and 2003, do not necessarily indicate the results you might
expect for the full year. If you desire further information, you should refer to
our consolidated financial statements and management's discussion and analysis
of financial condition and results of operations included in our Annual Report
on Form 10-K for the year ended December 31, 2003.
NOTE 2 - STOCK-BASED COMPENSATION
We account for our stock-based employee compensation plans under the intrinsic
value method. Accordingly, no compensation expense has been recognized for our
fixed price stock option plans, as the exercise price of options must be equal
to or greater than the average of the high and low stock prices on the date of
grant under our incentive stock plans. The table below illustrates the effect on
net income and net income per share as if we had accounted for our stock-based
employee compensation under the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Three Months Ended March 31,
----------------------------
(In millions, except per share amounts) 2004 2003
--------------------------------------- ------------ ------------
Net income, as reported $ 68.3 $ 56.6
Stock-based employee compensation expense included in reported
net income, net of related tax effects 3.1 2.6
Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax
effects (10.3) (12.7)
------------ ------------
Pro forma net income $ 61.1 $ 46.5
============ ============
Net income per share:
Basic - as reported $ 0.42 $ 0.33
Basic - pro forma $ 0.37 $ 0.27
Diluted - as reported $ 0.41 $ 0.33
Diluted - pro forma $ 0.37 $ 0.27
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is computed based only on the weighted average number
of common shares outstanding for each period presented. Diluted earnings 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.
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
--------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(In millions, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- ----------- ------------- ----------- ----------- ------------- -----------
Basic EPS
Net income $ 68.3 163.0 $ 0.42 $ 56.6 171.4 $ 0.33
=========== ===========
Effect of dilutive securities:
Plus: Assumed exercise of stock options 2.1 0.4
----------- ------------- ----------- -------------
Diluted EPS
Net income plus assumed conversions $ 68.3 165.1 $ 0.41 $ 56.6 171.8 $ 0.33
=========== ============= =========== =========== ============= ===========
Options to purchase 11.7 million and 24.0 million shares of common stock for the
three months ended March 31, 2004 and 2003, respectively, were not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price of the common stock during the period
reported.
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2004 and 2003, was
$68.3 million and $56.6 million, respectively. Excluding net income, there were
no other components of comprehensive income.
NOTE 5 - BUSINESS RESTRUCTURINGS
At March 31, 2004, the balance in the restructuring reserve relating to the
closure of various McDuff, Computer City and Incredible Universe retail stores
in 1996 and 1997 was $7.2 million. This reserve represents the expected costs to
be paid in connection with the remaining real estate lease obligations. If these
facilities' sublease income declines in their respective markets or if it takes
longer than expected to sublease or dispose of these facilities, the actual
losses could exceed this reserve estimate. Costs will continue to be incurred
over the remaining terms of the related leases. During the three months ended
March 31, 2004, costs of $9.8 million were charged against this reserve,
principally relating to the settlement of one location in Miami, Florida.
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51." FIN 46 is intended to clarify the application of
ARB No. 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. For those
entities, a controlling financial interest cannot be identified based on an
evaluation of voting interests and may be achieved through arrangements that do
not involve voting interests. The consolidation requirement of FIN 46 is
effective immediately to variable interests in variable interest entities
("VIEs") created or obtained after January 31, 2003. FIN 46 also sets forth
certain disclosures regarding interests in VIEs that are deemed significant,
even if consolidation is not required. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities" (FIN
46R), which delayed the effective date of the application to us of FIN 46 to
non-special purpose VIEs acquired or created before February 1, 2003, to the
interim period ending on March 31, 2004, and provided additional technical
clarifications to implementation issues. We have determined that FIN 46 does not
apply to our dealer/franchise outlets, and we did not make any adjustments to
our consolidated financial statements as a result of the adoption of this
interpretation.
NOTE 7 - LITIGATION
We are currently a party to a class action lawsuit, styled Alphonse L. Perez, et
al. v. RadioShack Corporation, filed in the United States District Court for the
Northern District of Illinois, alleging that we misclassified certain RadioShack
store managers as exempt from overtime in violation of the Fair Labor Standards
Act. While the alleged damages in this lawsuit are undetermined, they could be
substantial. We believe that we have meritorious defenses, and we are vigorously
defending this case. Furthermore, we fully expect this case to be favorably
determined as a matter of federal law. If, however, an adverse resolution of the
litigation occurs, we believe it could have a material adverse effect on our
results of operations for the year in which resolution occurs. However, we do
not believe that such an adverse resolution would have a material impact on our
financial condition or liquidity. The liability, if any, associated with this
matter was not determinable at March 31, 2004.
We have various other pending claims, lawsuits, disputes with third parties,
investigations and actions incidental to the operation of our business. Although
occasional adverse settlements or resolutions may occur and negatively impact
earnings in the year of settlement, it is our opinion that their ultimate
resolution will not have a material adverse effect on our financial condition or
liquidity.
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
We have contingent liabilities related to retail leases of locations which were
assigned to other businesses. The majority of these contingent liabilities
relate to various lease obligations arising from leases that were assigned to
CompUSA, Inc. as part of the sale of our Computer City, Inc. subsidiary to
CompUSA, Inc. in August 1998. In the event CompUSA or the other assignees, as
applicable, are unable to fulfill these obligations, we would be responsible for
rent due under the leases. Our rent exposure from the remaining undiscounted
lease commitments with no projected sublease income is approximately $178
million. However, we have no reason to believe that CompUSA or the other
assignees will not fulfill their obligations under these leases or that we would
be unable to sublet the properties; consequently, we do not believe there will
be a material impact on our consolidated financial statements as a result of the
eventual resolution of these lease obligations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION ("MD&A")
RadioShack is primarily a retailer of consumer electronics and services. We seek
to differentiate ourselves from our various competitors by focusing on
dominating cost-effective solutions to meet everyone's routine electronics needs
and families' distinct electronics wants. This strategy allows us to take
advantage of the unique opportunities provided by our extensive retail presence,
specially-trained sales staff and relationships with reputable vendors. We
believe this strategy will provide us with the opportunity to increase our
market share in the highly competitive consumer electronics area. In addition,
we continue to focus on methods to reduce the costs of products sold and
selling, general and administrative expense. Furthermore, we believe that, by
focusing on opportunities such as innovative products, new markets, licensing
opportunities and creative distribution channels, we can ultimately generate
increased financial returns for our shareholders over the long term.
This section of our Quarterly Report on Form 10-Q discusses certain factors that
may affect our future results (including economic and industry-wide factors),
the results of our operations, our liquidity and financial condition, and our
risk management practices.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Matters discussed in MD&A and in other parts of this document include
forward-looking statements within the meaning of the federal securities laws.
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 document, including any forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future events and, therefore, involve a number of risks and
uncertainties. Management cautions that forward-looking statements are not
guarantees, and our actual results could differ materially from those expressed
or implied in the forward-looking statements. Important factors that could cause
our actual results of operations or financial condition to differ include, but
are not necessarily limited to, the following factors.
General Business Factors
o Changes in national or regional U.S. economic conditions, including, but
not limited to, recessionary or inflationary trends, level of the equity
markets, consumer credit availability, interest rates, consumers'
disposable income and spending levels, job security and unemployment, and
overall consumer confidence;
o changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail stores
and alternative methods or channels of distribution, such as e-commerce,
telephone shopping services and mail order;
o the inability to attract, retain and grow an effective management team in a
dynamic environment or changes in the cost or availability of a suitable
workforce to manage and support our service-driven operating strategies;
o any potential tariffs imposed on products that we import from China, as
well as the potential strengthening of China's currency against the U.S.
dollar;
o continuing terrorist activities in the U.S., as well as the international
war on terrorism;
o the disruption of international, national or regional transportation
systems;
o the lack of availability or access to sources of inventory;
o changes in the financial markets that would reduce or eliminate access to
longer term capital or short-term credit availability;
o the imposition of new restrictions or regulations regarding the products
and/or services we sell or changes in tax rules and regulations applicable
to us; and
o the occurrence of severe weather events or natural disasters which could
significantly damage or destroy outlets or prohibit consumers from
traveling to our retail locations, especially during the peak winter
holiday season.
RadioShack Specific Factors
o The inability to successfully execute our strategy to dominate
cost-effective solutions to meet everyone's routine electronics needs and
families' distinct electronics wants;
o the failure to differentiate ourselves as an electronics specialty retailer
in the U.S. marketplace;
o the inability to create, maintain or renew profitable contracts or execute
business plans with providers of third-party branded products and with
service providers relating to cellular and PCS telephones;
o the presence or absence of new services or products and product features in
the merchandise categories we sell and unexpected changes in our actual
merchandise sales mix;
o the inability to collect the level of anticipated residual income,
subscriber acquisition fees, and rebates for products and third-party
services offered by us;
o the existence of contingent lease obligations related to our discontinued
retail operations arising from an assignee's or a sub-lessee's failure to
fulfill its lease commitments, or from our inability to identify suitable
sub-lessees for vacant facilities;
o the inability to successfully identify and analyze emerging growth
opportunities in the areas of strategic business alliances, licensing
opportunities, new markets, non-store sales channels, and innovative
products;
o the 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; and
o any reductions or changes in the growth rate of the wireless industry and
changes in the wireless communications industry dynamics, including both
consolidation and the effects of number portability.
OVERVIEW OF QUARTERLY FINANCIAL PERFORMANCE
Management reviews a number of key indicators to evaluate our financial
performance, including:
o net sales and operating revenues,
o gross margin,
o selling, general and administrative ("SG&A") expense, and
o operating margin.
RadioShack's net sales and operating revenues increased 2.1%, and our gross
margin improved to 50.6%, for the quarter ended March 31, 2004. Our SG&A expense
decreased to 37.8% of net sales, contributing to the increase in our operating
margin to 10.6%.
In managing our business, management uses various metrics for company-operated
stores, including average tickets per store and average sales per ticket. See
the table below for a summary of these statistics for the periods indicated.
Three Months Ended March 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
Average tickets per store per day 68 74 72
Average sales per ticket $31.30 $28.31 26.74
For a more detailed discussion of our financial performance, please continue
reading our MD&A, as well as our Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
RadioShack Retail Outlets
The table below shows RadioShack's retail locations broken down between
company-operated stores and dealer/franchise outlets. While the dealer outlets
represent approximately 27% of the RadioShack locations, our sales to
dealer/franchisees are less than 10% of our net sales and operating revenues.
March 31, December 31, September 30, June 30, March 31,
2004 2003 2003 2003 2003
------------ ------------ ------------ ------------ ------------
Company-operated stores 5,095 5,121 5,132 5,142 5,146
Dealer/franchise outlets 1,884 1,921 1,935 1,956 1,988
------------ ------------ ------------ ------------ ------------
Total number of retail locations 6,979 7,042 7,067 7,098 7,134
============ ============ ============ ============ ============
In addition to our company-operated stores and dealer/franchise outlets, our
existing sales channels include our www.radioshack.com Web site and catalog
operations, as well as our sophisticated outbound and inbound telephone call
centers.
RESULTS OF OPERATIONS
Net sales and operating revenues by channel of distribution are as follows:
Three Months Ended March 31,
----------------------------
(In millions) 2004 2003
------------ ------------
Company-operated store sales $ 1,032.7 $ 1,006.3
Dealer/franchise and other sales 59.9 64.0
------------ ------------
Net sales and operating revenues $ 1,092.6 $ 1,070.3
============ ============
Net Sales and Operating Revenues
Sales increased 2.1% to $1,092.6 million for the three months ended March 31,
2004, from $1,070.3 million in the corresponding prior year period. We had a 3%
increase in comparable company store sales. These increases were primarily the
result of a 28% increase in wireless department sales, partially offset by a
decline in sales within the home entertainment department, as well as the
personal electronics, toys and music department. The overall sales increase was
also a result of an increase in average store volume, despite a net decrease
since the first quarter of 2003 of 51 company stores. We expect a sales gain for
2004 as discussed in further detail below.
Dealer/franchise and other sales were down $4.1 million for the three months
ended March 31, 2004, when compared to the corresponding prior year period. This
decrease was primarily the result of the sale of RadioShack Installation
Services ("RSIS") in September 2003. Sales to our dealer/franchise outlets
remain substantially less than 10% of our total sales. Other sales include
retail support operation sales, which are generated primarily from outside sales
by our repair centers and domestic and overseas manufacturing. We expect the
dealer/franchise and other sales performance to be lower than the sales
performance of the Company for 2004.
Sales in the wireless communication department, which consists of wireless
handsets (including related services), accessories, and wireless services such
as prepaid airtime and bill payments, increased approximately 28% for the
quarter, when compared to the first quarter of last year. This sales increase
was due primarily to higher sales per handset, as well as an increase in the
number of handsets sold over the prior year. In addition, wireless accessories
sales increased over the prior year. We believe our plans featuring new
technologies, sales promotions, and carrier compensation models will result in
wireless sales increases for 2004.
Sales in the wired communication department, which includes residential
telephones, answering machines and other related telephony products, decreased
approximately 11% for the quarter, when compared to the first quarter last year.
The decrease in this department was the result of a decline in sales of
wire-line telephones and accessories. We anticipate that sales in this
department will be down for 2004, compared to 2003, as customers continue to
migrate to more advanced wireless and internet technologies.
Sales in the radio communication department decreased approximately 10% for the
quarter, when compared to the first quarter of last year. The decrease in this
department was primarily the result of a decrease in sales of Family Radio
Service ("FRS") and other two-way radios. We believe sales in this department
will be down for 2004, compared to 2003.
Sales in the home entertainment department, which consists of all home audio and
video end-products and accessories, including DTH hardware and installation,
decreased approximately 24% for the quarter, when compared to the first quarter
of last year. This decrease was primarily attributable to a decline in sales of
DirecTV satellite dishes and their related installation services, home audio,
and home entertainment accessories. We anticipate that sales in the home
entertainment department will be down for 2004, compared to 2003.
Sales in the computer department, which includes desktop, laptop, handheld
computers and related accessories, in addition to digital cameras and home
networking products, decreased less than 1% for the quarter, when compared to
the first quarter of last year. This decrease was primarily the result of a
decrease in sales of desktop CPUs, monitors and laptop computers. This decrease
was substantially offset by increased sales of digital cameras, camcorders and
related accessories, as well as home networking products and computer
accessories. We expect that sales in the computer department will increase in
2004, compared to 2003.
Sales for the power and technical department decreased approximately 3% for the
quarter, when compared to the first quarter of last year. This decrease was
primarily due to decreased sales in the technical product category. In addition,
sales of general purpose batteries were lower as a result of lower sales of
end-products requiring batteries. We anticipate that sales will increase in this
department in 2004, compared to 2003.
Sales in the personal electronics, toys and music department decreased
approximately 17% for the quarter, when compared to the first quarter of last
year. The decrease in this department was due primarily to decreased sales of
toys, which were heavily discounted in the first quarter of 2003, and sales of
radios, which were positively impacted by increases in national security threats
and the conflict in Iraq during the first quarter of 2003. Sales were partially
offset by wellness products sold under our LifeWise(tm) brand. We believe sales
in this department will be approximately the same for 2004, compared to 2003.
Gross Profit
For the three months ended March 31, 2004, gross profit dollars increased $25.6
million and gross margin improved 1.3 percentage points to 50.6% from 49.3% in
the corresponding 2003 period. These increases over the prior period were
primarily due to items described in the following paragraphs.
We continue to experience a benefit from our supply chain vendor and strategic
pricing initiatives; these benefits have been realized since the beginning in
2003. In connection with these initiatives, we utilized online reverse auctions,
realized more favorable terms from vendors, improved the impact of markdowns,
priced our products more effectively, and utilized other techniques and
incentives to optimize gross profit.
We also improved our merchandise mix within departments by increasing the sales
mix for many of our higher margin products, while managing the mix down for many
lower margin products.
We anticipate that our gross margin rate during 2004 will continue to be above
our 2003 gross margin rate, due primarily to the continued enhancement of our
sales mix towards higher margin products such as computer accessories,
batteries, wellness and digital products. Also, the impact of additional supply
chain management initiatives, particularly in vendor relations and end-of-life
inventory management, should provide a positive impact.
Selling, General and Administrative Expense
Our selling, general and administrative ("SG&A") expense increased 1.3% or $5.1
million for the three months ended March 31, 2004, when compared to the first
quarter of 2003. However SG&A expense as a percentage of net sales and operating
revenues decreased to 37.8% for the quarter ended March 31, 2004, when compared
to 38.1% for the same prior year period, due to higher overall sales in the
current year quarter. The dollar increase was primarily due to an increase in
property taxes and state unemployment tax rates. Advertising expense also
increased in both dollars and as a percentage of net sales and operating
revenues, as spending levels were not lowered, even though we did not receive
the same level of vendor contributions in the first quarter of 2004, when
compared to the corresponding prior year period. Insurance expense decreased in
both dollars and as a percentage of net sales and operating revenues as a result
of fewer health related claims. The Company has managed SG&A expense growth by,
among other items, improving productivity, reducing employee headcount, lowering
our absorption of increased health insurance costs, and consolidating and
outsourcing certain functions and operations. Management will continue to review
additional opportunities to reduce SG&A expense in the future. In 2004, we
expect SG&A expense to increase slightly in dollars, but decrease slightly as a
percentage of net sales and operating revenues, due to increased sales volume
and a continued focus on leveraging our fixed expense base.
Net Interest Expense
Interest expense, net of interest income, for the three months ended March 31,
2004, was $5.9 million versus $8.1 million for the first three months in 2003.
Interest expense decreased $2.2 million for the quarter ended March 31, 2004.
The decrease in interest expense was primarily due to the favorable impact of
our interest rate swaps, as well as the capitalization of interest expense
related to the construction of our new corporate campus.
Interest income remained flat for the three months ended March 31, 2004,
compared to the prior year period, as market interest rates have remained low.
Interest expense, net of interest income, is expected to decrease slightly in
2004, when compared to 2003. We anticipate that interest expense will increase
beginning in 2005, when compared to 2004, primarily due to the elimination of
capitalized interest as a result of the scheduled completion of our new
corporate headquarters.
Other Income
During the quarter ended March 31, 2004, we did not receive a payment under our
tax sharing agreement with O'Sullivan Industries Holdings, Inc. ("O'Sullivan").
However, we did receive and record $2.4 million in the corresponding prior year
period. Future payments under the tax sharing agreement will vary based on the
level of O'Sullivan's future earnings and are also dependent on O'Sullivan's
overall financial condition and ability to pay. We cannot give any assurances as
to the amount, or frequency of payment that may be received each quarter.
Provision for Income Taxes
Provision for income taxes for each quarterly period is based on our current
estimate of the annual effective tax rate for the full year. Our effective tax
rate for the first quarters of both 2004 and 2003 was approximately 38.0%.
Recently-Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51." FIN 46 is intended to clarify the application of
ARB No. 51, "Consolidated Financial Statements," to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. For those
entities, a controlling financial interest cannot be identified based on an
evaluation of voting interests and may be achieved through arrangements that do
not involve voting interests. The consolidation requirement of FIN 46 is
effective immediately to variable interests in variable interest entities
("VIEs") created or obtained after January 31, 2003. FIN 46 also sets forth
certain disclosures regarding interests in VIEs that are deemed significant,
even if consolidation is not required. In December 2003, the FASB issued FIN 46
(revised December 2003), "Consolidation of Variable Interest Entities" (FIN
46R), which delayed the effective date of the application to us of FIN 46 to
non-special purpose VIEs acquired or created before February 1, 2003, to the
interim period ending on March 31, 2004, and provided additional technical
clarifications to implementation issues. We have determined that FIN 46 does not
apply to our dealer/franchise outlets, and we did not make any adjustments to
our consolidated financial statements as a result of the adoption of this
interpretation.
FINANCIAL CONDITION
Cash flow provided by operating activities approximated $16.3 million for the
quarter ended March 31, 2004, compared to $103.3 million in the prior year first
quarter.
At March 31, 2004, changes in accounts receivable provided $40.5 million in cash
since December 31, 2003, compared to $41.6 million in cash provided for the
quarter ended March 31, 2003. Cash provided by accounts receivable for the first
quarter of 2004 was due primarily to reductions in both vendor and service
provider receivables, as well as trade receivables, as a result of improved
collection efforts.
An increase in inventory used $3.4 million in cash for the quarter ended March
31, 2004, compared to $126.9 million in cash provided by inventory conversion
for the quarter ended March 31, 2003. A lower inventory position at December 31,
2003, when compared to target levels, prompted the inventory increase in 2004.
In addition, during the first quarter of 2004, $70.3 million more in cash was
provided by accounts payable due to enhanced vendor terms. This increase in cash
provided was partially offset by $38.6 million less in cash used in accrued
expenses as a result of higher accrued bonuses at year end 2003.
We had $577.0 million in cash and cash equivalents at March 31, 2004, as a
resource for our funding needs. Additionally, borrowings are available under our
$600.0 million dollar commercial paper program, which is supported by a bank
credit facility and could be utilized in the event the commercial paper market
is unavailable to us. However, we currently do not expect that the commercial
paper market would be unavailable to us, thus causing us to utilize the credit
facility. As of March 31, 2004, we had no commercial paper outstanding and had
not utilized our credit facility. In June 2004, $300.0 million of our bank
credit facility will expire. We currently plan to renew this facility with
substantially similar terms as either a single or multi-year facility, depending
on market conditions.
Cash used in investing activities for the quarter ended March 31, 2004, was
$44.6 million, compared to $21.4 million in the previous year. Investing
activities for the quarter ended March 31, 2004, included capital expenditures
totaling $41.3 million compared to $21.4 million in 2003, primarily for our new
corporate campus and information systems upgrades. We anticipate that our
capital expenditure requirements for 2004 will be approximately $285.0 million.
The $95.0 million increase over 2003 primarily relates to our new corporate
headquarters. Store remodels and relocations and updated information systems
account for almost half of the balance of our anticipated 2004 capital
expenditures, which we plan to finance through cash from operations and, if
needed, existing cash and cash equivalents.
Cash used in financing activities for the quarter ended March 31, 2004, was
$29.4 million, compared to a $71.7 million cash usage in the previous year. We
repurchased $81.1 million shares of our common stock during the quarter ended
March 31, 2004, compared to $62.5 million during the same period of 2003, under
our employee and board approved repurchase programs. These repurchases were
partially funded by $42.0 million and $10.8 million received, respectively, from
the sale of treasury stock to stock plans and from stock option exercises during
the same corresponding periods. Additionally, changes in short-term borrowings
provided $9.8 million more in cash, while we used $19.9 million less cash for
the repayment of our long-term borrowings in the three months ended March 31,
2004, when compared to the corresponding prior year period.
At March 31, 2004, total capitalization was $1,442.2 million, which consisted of
$634.4 million of debt and $807.8 million of stockholders' equity, resulting in
a total debt to capitalization ratio of 44.0%. The debt to capitalization ratio
was 44.6% at December 31, 2003, and 45.3% at March 31, 2003. These ratio
decreases were primarily the result of an increase in stockholders' equity of
$36.3 million and $74.8 million for the periods ended December 31, 2003, and
March 31, 2003, respectively. Long-term debt as a percentage of capitalization
was 35.7% at March 31, 2004, 39.0% at December 31, 2003, and 44.1% at March 31,
2003. The ratio decreases since March 31, 2003, and December 31, 2003, were both
due to the repayment of long term debt and an increase in stockholders' equity.
We intend to execute share repurchases from time to time in order to take
advantage of attractive share price levels, as determined by management. The
timing and terms of the transactions depend on market conditions, our liquidity
and other considerations. On February 20, 2003, our Board of Directors
authorized a new repurchase program for 15.0 million shares, which was in
addition to our then existing 25.0 million share repurchase program that was
completed during the second quarter of 2003. We anticipate that we will
repurchase, under our authorized repurchase program, between $200.0 million and
$250.0 million of our common stock during 2004. The funding required for this
share repurchase program will come from cash generated from net sales and
operating revenues and cash and cash equivalents. In addition to the program
described above, we will also repurchase shares in the open market to offset the
sales of shares to our employee benefit plans.
Our free cash flow, defined as cash flow from operating activities less
dividends paid and capital expenditures for property, plant and equipment, was a
cash usage of $25.0 million for the three months ended March 31, 2004, compared
to $81.9 million provided by the corresponding period in 2003. This change in
free cash flow primarily resulted from a cash usage within our working capital
components in 2004, compared to cash provided from working capital in the
corresponding prior year period. Inventory, the largest component of working
capital, began 2004 lower than the prior year and its increase resulted in a
cash usage of $3.4 million, when compared to $126.9 million in cash provided by
inventory in the corresponding prior year period. Additionally, free cash flow
was impacted by an increase in capital expenditures, when compared to the
corresponding prior year period. We expect free cash flow to be approximately
$70.0 million in 2004. The decrease in free cash flow, when compared to our 2003
year-end amount, is based primarily on the timing of capital expenditures for
our new corporate headquarters, the majority of which we originally thought
would have been included in our 2003 capital expenditures. The major portions of
our new corporate campus expenditures are now part of our 2004 capital
expenditures. After 2004, we anticipate a return to a more historical annual
free cash flow level of approximately $200.0 million to $250.0 million.
We believe free cash flow provides useful information to investors regarding our
financial condition and operating results because it is an appropriate
indication of our ability to fund share repurchases, repay maturing debt, change
dividend payments or fund other uses of capital that management believes will
enhance shareholder value. The comparable financial measure to free cash flow
under generally accepted accounting principles is cash flow from operating
activities, which was $16.3 million and $103.3 million for the three months
ended March 31, 2004 and 2003, respectively. We do not intend the presentation
of free cash flow, a non-GAAP financial measure, to be considered in isolation
or as a substitute for measures prepared in accordance with GAAP.
The following table is a reconciliation of cash provided by operating activities
to free cash flow.
Three Months Ended March 31, Year Ended December 31,
---------------------------- -----------------------
(In millions) 2004 2003 2003
------------- ------------- ------------- -------------
Net cash provided by operating activities $ 16.3 $103.3 $651.9
Less:
Additions to property, plant and equipment 41.3 21.4 189.6
Dividends paid -- -- 40.8
------------- ------------- -------------
Free cash flow $(25.0) $ 81.9 $421.5
============= ============= =============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk principally from fluctuations in interest rates
which could affect our cash flows and consolidated financial statements. We
manage our exposure to interest rate risk, which results from changes in
short-term interest rates, by managing our portfolio of fixed rate debt and,
when we consider it appropriate, through the use of interest rate swaps to
convert a portion of our long-term debt from fixed to variable rates to reduce
our overall borrowing costs. At March 31, 2004, we did not have any derivative
instruments that materially increased our exposure to market risks for interest
rates, foreign currency rates, commodity prices or other market price risks,
other than the interest rate swaps noted in Management's Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form
10-K for the year ended December 31, 2003. We do not use derivatives for
speculative purposes. We may continue to utilize interest rate swaps in the
future as market conditions permit.
The fair value of our fixed rate long-term debt is sensitive to interest rate
changes. Interest rate changes would result in increases or decreases in the
fair value of our debt, due to differences between market interest rates and
rates in effect at the inception of our debt obligation. Changes in the fair
value of our fixed rate debt have no impact on our current cash flows or
consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES.
a) 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 timely disclosed, is accumulated and
communicated to management 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 Securities
Exchange Act of 1934 ("Exchange Act")) was performed as of the end of
the period covered by this report. This evaluation was performed
under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, our CEO and CFO have concluded that these
disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the
SEC's rules and forms.
b) 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently a party to a class action lawsuit, styled Alphonse L. Perez, et
al. v. RadioShack Corporation, filed in the United States District Court for the
Northern District of Illinois, alleging that we misclassified certain RadioShack
store managers as exempt from overtime in violation of the Fair Labor Standards
Act. While the alleged damages in this lawsuit are undetermined, they could be
substantial. We believe that we have meritorious defenses and we are vigorously
defending this case. Furthermore, we fully expect this case to be favorably
determined as a matter of federal law. If, however, an adverse resolution of the
litigation occurs, we believe it could have a material adverse effect on our
results of operations for the year in which resolution occurs. However, we do
not believe that such an adverse resolution would have a material impact on our
financial condition or liquidity. The liability, if any, associated with this
matter was not determinable at March 31, 2004.
We have various other pending claims, lawsuits, disputes with third parties,
investigations and actions incident to the operation of our business. Although
occasional adverse settlements or resolutions may occur and negatively impact
earnings in the year of settlement, it is our opinion that their ultimate
resolution will not have a material adverse effect on our financial condition or
liquidity.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
The following table sets forth information concerning purchases made by or on
behalf of RadioShack or any affiliated purchaser (as defined in the SEC's rules)
of RadioShack common stock for the periods indicated.
PURCHASES OF EQUITY SECURITIES BY RADIOSHACK
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Purchased (1) per Share Programs (2) Programs (2)
----------------- -------------- ---------------- ----------------
January 1 - 31, 2004 700,000 $ 31.61 650,000 9,371,400
February 1 - 29, 2004 705,000 $ 33.78 630,000 8,741,400
March 1 - 31, 2004 805,000 $ 33.13 730,000 8,011,400
----------------- -------------- ----------------
Total 2,210,000 $ 32.86 2,010,000
================= ============== ================
(1) The total number of shares purchased includes all repurchases made during
the periods indicated. In January, February and March, 2004, 50,000, 75,000
and 75,000 shares, respectively, were repurchased through other than a
publicly announced plan or program in open-market transactions. These
repurchases were used to satisfy our obligations under our employee benefit
programs.
(2) These publicly announced plans or programs consist of RadioShack's 15
million share repurchase program. This program was announced on
February 20, 2003, and has no expiration date. During the period covered
by the table, no publicly announced plan or program expired or was
terminated, and no determination was made by the Company to suspend or
cancel purchases under our program.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits Required by Item 601 of Regulation S-K.
A list of the exhibits required by Item 601 of Regulation S-K and
filed as part of this report is set forth in the Index to Exhibits
` on page 16, which immediately precede such exhibits.
b) Reports on Form 8-K.
We furnished a Form 8-K with the SEC on January 14, 2004, in which
we revised our earnings per share guidance for the quarter ended
December 31, 2003.
We furnished a Form 8-K with the SEC on February 19, 2004, in which
we disclosed an earnings release reporting our results of
operations for both the quarter and year ended December 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RadioShack Corporation
(Registrant)
Date: May 7, 2004 By /s/ David P. Johnson
------------------------------------
David P. Johnson
Senior Vice President and Controller
(Authorized Officer)
Date: May 7, 2004 /s/ Michael D. Newman
-------------------------------------
Michael D. Newman
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
RADIOSHACK CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description
3a 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).
3a(i) 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).
3b RadioShack Corporation Bylaws, amended and restated as of
October 17, 2003 (filed as Exhibit 3b to RadioShack's Form
10-Q filed on November 12, 2003 for the fiscal quarter ended
September 30, 2003).
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 them by reference.
Exhibit 31(a)
CERTIFICATIONS
I, Leonard H. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RadioShack
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004 By /s/ Leonard H. Roberts
------------------------------------
Leonard H. Roberts
Chief Executive Officer
Exhibit 31(b)
CERTIFICATIONS
I, Michael D. Newman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RadioShack
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004 By /s/ Michael D. Newman
------------------------------------
Michael D. Newman
Chief Financial Officer
Exhibit 32
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of RadioShack Corporation (the
"Company") on Form 10-Q for the period ended March 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we,
Leonard H. Roberts, Chief Executive Officer of the Company, and Michael D.
Newman, Chief Financial Officer of the Company, certify to our knowledge,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Leonard H. Roberts
Leonard H. Roberts
Chief Executive Officer
May 7, 2004
/s/ Michael D. Newman
Michael D. Newman
Chief Financial Officer
May 7, 2004
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.