Radio Shack 2010 Annual Report Download - page 31

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RESULTS OF OPERATIONS
2010 Summary
Net sales and operating revenues increased $196.7 million,
or 4.6%, to $4,472.7 million when compared with last year.
Comparable store sales increased 4.4%. This increase was
driven by increased sales in our Sprint and AT&T postpaid
wireless business, increased sales of prepaid wireless
handsets and airtime, and increased sales of wireless
accessories. These increases were partially offset by sales
declines in digital-to-analog converter boxes, GPS
products, netbooks, digital televisions and digital cameras.
The inclusion of T-Mobile as a postpaid wireless carrier
increased sales for the first nine months of 2010; however,
T-Mobile sales decreased in the fourth quarter, when
compared to the same period last year.
Gross margin decreased by 90 basis points from last year
to 45.0%. Gross margin declined primarily due to a higher
sales mix of lower margin wireless handsets and
incremental promotional and clearance markdowns
associated with seasonal sell-through and product
transitions in non-wireless platforms.
Selling, general and administrative (“SG&A”) expense
increased $46.8 million when compared with last year. This
increase was driven by incentive compensation paid on
increased wireless sales, additional employees to support
our Target kiosk locations, and incremental advertising
expense related to brand building in the second quarter of
2010. As a percentage of net sales and operating
revenues, SG&A decreased by 50 basis points to 34.8%.
As a result of the factors above, operating income
increased $6.0 million, or 1.6%, to $375.4 million when
compared with last year.
Net income increased $1.1 million to $206.1 million when
compared with last year. Net income per diluted share was
$1.68 compared with $1.63 last year.
Adjusted EBITDA decreased $2.7 million, or 0.6%, to
$459.6 million when compared with last year.
2010 COMPARED WITH 2009
Wireless Service Provider Settlement Agreement
The business terms of our relationships with our wireless
service providers are governed by our wireless reseller
agreements. These contracts are complex and include
provisions determining our upfront commission revenue,
net of chargebacks for wireless service deactivations; our
acquisition and return of wireless handsets; and, in some
cases, future residual revenue, performance targets and
marketing development funds. Disputes occasionally arise
between the parties regarding the interpretation of these
contract provisions.
Certain disputes arose with one of the Company’s wireless
service providers pertaining to upfront commission revenue
for activations prior to July 1, 2010, and related
chargebacks for wireless service deactivations.
Negotiations regarding resolution of these disputes
culminated in the signing of a settlement agreement in July
2010. In connection with the decision to settle these
disputes, the Company considered the following: the timing
of cash outflows and inflows in connection with the disputed
upfront commission revenue and related chargebacks, and
the estimated future residual revenue; the benefits of
settling the disputes and agreeing to enter into good faith
negotiations with the wireless service provider in the third
quarter of 2010 to modify the commission and chargeback
provisions of our wireless reseller agreement; and the risks
associated with the ultimate realization of the estimated
future residual revenue.
Key elements of the settlement agreement include the
following:
• All disputes relating to upfront commission revenue
for activations prior to July 1, 2010, and related
chargebacks were settled.
• The wireless service provider agreed to pay $141
million to the Company on or before July 30, 2010.
• The Company and the wireless service provider
agreed to enter into good faith negotiations in the
third quarter of 2010 to modify the commission and
chargeback provisions of our wireless reseller
agreement.
• Beginning on July 1, 2010, the wireless service
provider was no longer obligated to pay future
residual revenue amounts to the Company for a
period of time for customers activated on or before
June 30, 2010. For the first six months of 2010,
these residual revenue amounts averaged
approximately $9 million per quarter. Based on this
average, we would receive no residual revenue
payments from this wireless service provider for
eight quarters beginning with the third quarter of
2010 under the terms of the settlement agreement.
The effects of the settlement agreement have been
reflected in net sales and operating revenues in the
consolidated financial statements for 2010.
In the third quarter, we reached an agreement with this
wireless service provider to modify the commission and
chargeback provisions of our wireless reseller agreement.
Based on the terms of the settlement agreement, the terms
of the amended wireless reseller agreement, and the
performance of our business with this wireless service