Circuit City 2010 Annual Report Download - page 22

Since we conduct operations in numerous US states and internationally, our effective tax rate depends upon the geographic distribution of our
pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of our pre-tax results among various tax
jurisdictions changes, the effective tax rate may vary from period to period. We are also subject to periodic examination from domestic and
foreign tax authorities regarding the amount of taxes due. These examinations include questions regarding the timing and amount of deductions
and the allocation of income among various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve
on our consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While management believes that
we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under
the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved.
We recognize deferred tax assets and liabilities for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities and for tax loss carry forwards. The realization of net deferred tax assets is dependent upon our ability to generate sufficient future
taxable income. Where it is more likely than not that some portion or the entire deferred tax asset will not be realized, we have provided a
valuation allowance. If the realization of those deferred tax assets in the future is considered more likely than not, an adjustment to the deferred
tax assets would increase net income in the period such determination is made. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, an adjustment to the valuation allowance may be required, which could materially affect our
consolidated financial position and results of operations.
Reorganization and other charges.
We have taken restructuring actions in the past and could in the future commence further restructuring
activities which result in recognition of restructuring charges if events make it necessary. These actions require management to make judgments
and utilize significant estimates regarding the nature, timing and amounts of costs associated with the activity. When we incur a liability related
to a restructuring action, we estimate and record all appropriate expenses, including expenses for severance and other employee separation costs,
facility consolidation costs (including estimates of sublease income), lease cancellations, asset impairments and any other exit costs. Should the
actual amounts differ from our estimates, the amount of the restructuring charges could be impacted, which could materially affect our
consolidated financial position and results of operations.
Recently Adopted and Newly Issued Accounting Pronouncements
Public companies in the United States are subject to the accounting and reporting requirements of various authorities, including the Financial
Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”). These authorities issue numerous
pronouncements, most of which are not applicable to the Company’s current or reasonably foreseeable operating structure. Below are the new
authoritative pronouncements that management believes are relevant to the Company’s current operations.
In October 2009, the FASB issued revised guidance related to multiple-
element arrangements which requires an entity to allocate arrangement
consideration at the inception of an arrangement to all deliverables based on relative selling prices. This update eliminates the use of the residual
method of allocation and requires the relative-selling-
price method in all circumstances. This guidance is effective for fiscal years beginning on
or after September 15, 2010. Companies may use either prospective application for revenue arrangements entered into, or materially modified,
after the effective date or through retrospective application to all revenue arrangements for all periods presented. The Company does not believe
this amended guidance will have a material impact on its consolidated financial statements.
In October 2009, the FASB issued amended guidance that affects how entitie
s account for revenue arrangements that contain both hardware and
software elements. Products that rely on software will be accounted for under the revised multiple-
element arrangement revenue recognition
guidance mentioned above rather than software revenue recognition guidance. The revised guidance must be adopted no later than fiscal years
beginning on or after September 15, 2010. The transition method and period for the adoption of this guidance and the revisions to the multiple-
element arrangements guidance noted above must be the same. The Company does not believe that this guidance will have a material impact on
its consolidated financial statements.
Highlights from 2010
The discussion of our results of operations and financial condition that follows will provide information that will assist in understanding our
financial statements and information about how certain accounting principles and estimates affect the consolidated financial statements. This
discussion should be read in conjunction with the consolidated financial statements included herein.
•
Sales grew 13.4% to $3.6 billion in 2010 over 2009.
• Seven new retail stores were opened.
• One-
time charges were $4.3 million, approximately $0.07 per diluted share, after tax, for costs related primarily to the integration of the
WStore acquisitions.
•
Gross and operating margins negatively impacted by new warehouse costs and pricing pressures.
•
Diluted earnings per share declined to $1.13 from $1.24 in 2009.
•
Movements in exchange rates negatively impacted European sales by approximately $52.9 million yet positively impacted Canadian
sales by approximately $19.9 million.
•
2010 and 2009 both included 52 weeks while 2008 included 53 weeks.
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