Circuit City 2003 Annual Report Download - page 15

We had income from operations of $12.5 million in 2003, a loss from operations of $7.8 million in 2002 and
income from operations for the year ended December 31, 2001 of $2.5 million. Results in 2003 include restructuring and
other charges of $1.7 million and a goodwill impairment charge of $2.6 million. The loss from operations in 2002
includes $17.3 million of restructuring and other charges. Income from operations in 2001 includes the elimination of a
liability of $3 million recorded in a prior year which we determined was no longer required and expense of $2.8 million
for restructuring and other charges. We had a loss from operations in Europe in 2003 of $2.0 million, compared to
income from operations of $7.8 million in 2002 and $18.2 million in 2001. European results declined as a result of
decreased gross profit, increased selling, general and administrative expenses and $4.8 million of restructuring and other
charges.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE
Interest expense was $2.3 million in 2003, $1.7 million in 2002 and $1.8 million in 2001. The increased expense
in 2003 resulted from increased short-term borrowings under our United Kingdom facility and a full year of interest
expense on long-term obligations incurred in 2002. We had decreased borrowings under our United States and United
Kingdom short-term credit facilities in 2002, the effect of which was partially offset by interest expense on new long-
term borrowings entered into during the year. Interest and other income was $0.8 million in 2003, $0.4 million in 2002
and $0.3 million in 2001.
INCOME TAXES
We recorded an income tax provision of $5.3 million in 2003, an income tax benefit of $1.0 million in 2002 and
an income tax provision of $389,000 in 2001. The effective rates were 48.7% in 2003, 11.5% in 2002 and 37.3% in
2001. The effective tax rate in 2003 was adversely affected by the goodwill impairment write-off, which is not tax
deducible. The mix in taxable income and losses between our U. S. and foreign operations and the expected utilization of
our deferred tax assets significantly impacted the recording of the 2002 tax benefit. In 2002, we also incurred additional
tax expense in connection with audit assessments in two of our foreign subsidiaries. For the years ended December 31,
2003 and 2002, we have not recognized certain foreign tax credits, certain state tax benefits on losses in the United
States and certain benefits on losses in foreign tax jurisdictions due to our inability to carry such credits and losses back
to prior years. Accordingly, valuation allowances were recorded against the deferred tax assets associated with those tax
credits and net operating loss carryforwards.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first half of 2002, we completed the transitional review for goodwill impairment required by SFAS
142. The review indicated that the entire carrying value of the goodwill recorded on our balance sheet was impaired as
of January 1, 2002. Accordingly, we recorded a transitional impairment loss of $68 million ($51 million net of tax or a
net loss per share of $1.50) as a cumulative effect of change in accounting principle in our statements of operations for
the year ended December 31, 2002.
NET INCOME (LOSS)
As a result of the above, net income for 2003 was $5.6 million, or $.16 per basic and diluted share, the net loss for
2002 was $58.9 million, or $1.73 per basic and diluted share, and net income for 2001 was $653,000, or $.02 per basic
and diluted share.
Seasonality
Net sales have historically been modestly weaker during the second and third quarter as a result of lower business
activity during those months. The following table sets forth the net sales, gross profit and income (loss) from operations
for each of the quarters since January 1, 2002 (amounts in millions) .
2003 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Net sales........................................ $426 $389 $405 $438
Percentage of year's net sales .................. 25.7% 23.5% 24.4% 26.4%
Gross profit..................................... $72 $64 $67 $65
Income (loss) from operations.................... $9 $(1) $4 $1