Radio Shack 2004 Annual Report Download - page 24

Advertising expense increased in both dollars and as a
percent of net sales and operating revenues. This increase
is primarily related to an increase in expenditures associated
with the holiday selling season. Additionally, we received
fewer contributions from our vendors. We expect our adver-
tising expense to increase in 2005 in dollars but decrease
as a percentage of net sales and operating revenues, as a
result of increased sales from our kiosk operations and an
improvement in operating efficiencies.
Rent expense increased in dollars, but decreased as a percent
of net sales and operating revenues. The dollar increase was
due primarily to lease renewals and relocations at higher rates,
as well as the acquisition of the SAM’S CLUB kiosk business
in October 2004. We expect an increase in 2005 rent expense,
primarily as a result of the full-year effect of the acquisition of
the SAM’S CLUB kiosk business and Sprint kiosk expansion.
Insurance expense decreased in both dollars and as a percent
of net sales and operating revenues, as a result of both fewer
claims and a decrease in the number of participants in our
insurance programs. Our insurance expense relates to losses,
claims and insurance premiums, which are partially offset by
contributions from health insurance participants.
In 2005, we expect SG&A expense to increase in dollars, due
to the full-year effect of our acquisition of the SAM’S CLUB
kiosk business and our planned Sprint kiosk expansion. We
anticipate a slight decrease as a percentage of net sales and
operating revenues, due to anticipated increased sales volume
and a continued focus on leveraging our fixed expense base.
Depreciation and Amortization
Depreciation and amortization expense increased $9.4 million
dollars to $101.4 million and increased to 2.1% of net sales
and operating revenues, compared to 2.0% for 2003. The
increase in depreciation was primarily attributable to new
store fixtures for existing company-operated stores, as well
as the hardware and software associated with information
systems upgrades. We expect depreciation and amortization
expense to increase by at least 10% in 2005 due to increases
associated with our new corporate headquarters, which is
now substantially complete and occupied, increased spend-
ing for our store remodel program, information system proj-
ects, and the amortization of intangibles related to our
SAM’S CLUB kiosk business acquisition.
Gain on Contract Termination
There was no gain on contract termination in 2004. For
information on the prior year gain on contract termination,
see the discussion below under the section titled “2003
Compared with 2002.”
Impairment of Long-Lived Assets
There was no significant impairment of long-lived assets in
2004. For information on the prior year impairment of long-
lived assets, see the discussion below under the section
titled “2003 Compared with 2002.”
Net Interest Expense
Interest expense, net of interest income, was $18.2 million
for 2004 versus $22.9 million for 2003, a decrease of $4.7
million or 20.5%.
Interest expense decreased to $29.6 million in 2004 from $35.7
million in 2003. This decrease was primarily the result of a
reduction in the average debt outstanding throughout 2004. In
addition, the capitalization of $6.6 million of interest expense
related to the construction of our new corporate campus also
lowered overall interest expense for the year ended December
31, 2004, when compared to the same prior year period.
Interest income decreased approximately 11% to $11.4
million in 2004 from $12.8 million in 2003, despite an
increase in investment rates. This was primarily the result
of a $1.3 million decrease in interest received from tax
settlements in 2004 compared to 2003, as well as a lower
average investment balance.
Interest expense, net of interest income, is expected to
increase by more than $6 million in 2005, when compared
to 2004, due to the elimination of capitalized interest expense
as a result of the substantial completion of the construction
of our corporate headquarters.
Other Income, Net
During the year ended December 31, 2004, we received pay-
ments and recorded income of $2.0 million under our tax
sharing agreement with O’Sullivan Industries Holdings, Inc.
(“O’Sullivan”), compared to $3.1 million received and record-
ed in the corresponding prior year period. Future payments
under the tax sharing agreement will vary based on the level
of O’Sullivan’s future earnings and are also dependent on
O’Sullivan’s overall financial condition and ability to pay. We
cannot give any assurances as to the amount or frequency
of payment, if any, that we may receive from O’Sullivan in
future periods.
Provision for Income Taxes
Our provision for income taxes reflects an effective income
tax rate of 37.8% for 2004 and 36.9% for 2003. The increase
in the effective tax rate for 2004, when compared to 2003,
was the result of a favorable tax settlement during 2003,
relating to prior year tax matters. We anticipate that the
effective tax rate for 2005 will be approximately 38.2%.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
RadioShack Corporation and Subsidiaries
22 AR2004