Radio Shack 2003 Annual Report Download - page 49

The termination of this agreement took effect at the start
of the fourth quarter of 2002, upon satisfaction of several
contractual obligations.The net financial result was an
$18.5 million gain (principally cash received), driven prima-
rily by the settlement of a multi-year obligation Microsoft
had to connect our stores with broadband capabilities.
Note 13 Internet-Related Investment
During the second quarter of 2000, we made a $30.0 million
cash investment in Digital:Convergence Corporation
(“DC”), a privately-held Internet technology company. In the
first quarter of 2001, we believed that our investment had
experienced a decline in value that, in our opinion, was
other than temporary. This belief was due to DC’s inability
to secure financing at that time, as well as its commence-
ment of restructuring activities involving the termination of
much of its workforce and the curtailing of its business
activities. As such, we recorded a loss provision equal to our
initial investment. DC subsequently filed for bankruptcy on
March 22, 2002.
Note 14 Income Taxes
Deferred tax assets and liabilities as of December 31, 2003
and 2002, were comprised of the following:
December 31,
(In millions) 2003 2002
Deferred tax assets
Insurance reserves $22.4 $ 22.8
Depreciation and amortization —12.5
Deferred compensation 23.8 18.7
Inventory adjustments, net 6.5 0.3
Restructuring reserves 6.5 6.2
Bad debt reserve 1.6 2.8
Other 29.0 44.9
Total deferred tax assets 89.8 108.2
Deferred tax liabilities
Deferred taxes on foreign operations 14.5 11.0
Depreciation and amortization 10.3 —
Other 3.1 3.7
Total deferred tax liabilities 27.9 14.7
Net deferred tax asset $61.9 $ 93.5
The net deferred tax asset is classified as follows:
Other current assets $39.7 $ 41.3
Non-current assets 22.2 52.2
Net deferred tax asset $61.9 $ 93.5
The components of the provision for income taxes and a
reconciliation of the U.S. statutory tax rate to our effective
income tax rate are given in the two accompanying tables.
INCOME TAX EXPENSE
Year Ended December 31,
(In millions) 2003 2002 2001
Current
Federal $117.5 $127.3 $137.3
State 21.9 13.3 18.2
Foreign 3.3 3.3 2.9
142.7 143.9 158.4
Deferred
Federal 33.5 17.5 (26.0)
State (1.9) 0.1 (7.6)
31.6 17.6 (33.6)
Provision for income taxes $174.3 $161.5 $124.8
STATUTORY VS. EFFECTIVE TAX RATE
Year Ended December 31,
(In millions) 2003 2002 2001
Components of income from
continuing operations:
United States $456.5 $408.8 $272.1
Foreign 16.3 16.1 19.4
Income before income taxes 472.8 424.9 291.5
Statutory tax rate x35.0% x35.0% x35.0%
Federal income tax expense at
statutory rate 165.5 148.7 102.0
State income taxes, net of federal benefit 13.0 8.7 6.9
Non-deductible goodwill —2.8 13.8
Other, net (4.2) 1.3 2.1
Total income tax expense $174.3 $161.5 $124.8
Effective tax rate 36.9% 38.0% 42.8%
We anticipate that we will generate sufficient pre-tax income
in the future to realize the full benefit of U.S.deferred tax
assets related to future deductible amounts.Accordingly, a
valuation allowance was not required at December 31, 2003
or 2002. Our tax returns are subject to examination by taxing
authorities in various jurisdictions.The Internal Revenue
Service is currently in the process of concluding its examina-
tion of our federal income tax returns for the taxable years
from 1993 through 2001. Several states are also currently in
the process of examining our state income tax returns.We
record tax reserves based on our best estimate of current tax
exposures in the relevant jurisdictions. While we believe
that the reserves recorded in the consolidated financial
statements accurately reflect our tax exposures, our actual
RADIOSHACK 2003 Annual Report 47
Provision for Loss on