XNYS:RSH RadioShack Corp Quarterly Report 10-Q Filing - 7/10/2012

Effective Date 7/10/2012

XNYS:RSH (RadioShack Corp): Fair Value Estimate
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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
________________________
 
FORM 10-Q
 
(Mark One)
 
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 
Commission File Number: 1-5571
 
 
 
RADIOSHACK CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
75-1047710
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
Mail Stop CF3-201, 300 RadioShack Circle, Fort Worth, Texas
76102
(Address of principal executive offices)
(Zip Code)
 
(Registrant's telephone number, including area code) (817) 415-3011
________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X No __
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X No __
 
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes __ No X
 
The number of shares outstanding of the issuer's Common Stock, $1 par value, on July 16, 2012, was 99,441,841.

 
1

 
 

TABLE OF CONTENTS
     
Page
PART I – FINANCIAL INFORMATION
 
       
 
Condensed Consolidated Financial Statements (Unaudited)
3
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
 
Quantitative and Qualitative Disclosures about Market Risk
26
 
Controls and Procedures
27
     
PART II – OTHER INFORMATION
 
       
 
Legal Proceedings
27
  Item 1A. Risk Factors   27
 
Unregistered Sales of Equity Securities and Use of Proceeds
28
 
Exhibits
28
   
29
   
30
 
 
 
2

 


PART I – FINANCIAL INFORMATION
 
 
RADIOSHACK CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Statements of Comprehensive Income (unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In millions, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Net sales and operating revenues
  $ 953.2     $ 941.9     $ 1,961.5     $ 1,959.3  
Cost of products sold (includes depreciation amounts of $2.1 million,
 $1.9 million, $4.1 million and $3.6 million, respectively)
    592.9       509.8       1,206.7       1,072.8  
Gross profit
    360.3       432.1       754.8       886.5  
                                 
Operating expenses:
                               
Selling, general and administrative
    362.5       364.3       735.8       734.9  
Depreciation and amortization
    18.0       18.3       36.9       36.6  
Impairment of long-lived assets
    1.0       0.6       1.5       1.0  
Total operating expenses
    381.5       383.2       774.2       772.5  
                                 
Operating (loss) income
    (21.2 )     48.9       (19.4 )     114.0  
                                 
Interest income
    0.3       0.5       0.8       0.8  
Interest expense
    (12.9 )     (10.9 )     (26.0 )     (20.6 )
Other loss
    --       --       --       (4.1 )
                                 
(Loss) income from continuing operations before income taxes
    (33.8 )     38.5       (44.6 )     90.1  
Income tax (benefit) expense
    (12.8 )     15.0       (15.6 )     35.2  
                                 
(Loss) income from continuing operations
    (21.0 )     23.5       (29.0 )     54.9  
Discontinued operations, net of income taxes
    --       1.4       --       5.1  
                                 
Net (loss) income
  $ (21.0 )   $ 24.9     $ (29.0 )   $ 60.0  
                                 
Basic and diluted net (loss) income per share:
                               
(Loss) income per share from continuing operations
  $ (0.21 )   $ 0.23     $ (0.29 )   $ 0.52  
Income per share from discontinued operations
    --       0.01       --       0.05  
Net (loss) income per share
  $ (0.21 )   $ 0.24     $ (0.29 )   $ 0.57  
                                 
Comprehensive (loss) income
  $ (23.9 )   $ 26.3     $ (26.3 )   $ 63.4  
                                 
Shares used in computing net (loss) income
per share:
                               
                                 
Basic
    100.1       103.7       100.0       104.9  
                                 
Diluted
    100.1       104.6       100.0       105.9  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
3

 


RADIOSHACK CORPORATION AND SUBSIDIARIES
 
Consolidated Balance Sheets (unaudited)

(In millions, except share amounts)
 
June 30,
2012
   
December 31,
2011
   
June 30,
2011
 
Assets
                 
Current assets:
                 
Cash and cash equivalents
  $ 517.7     $ 591.7     $ 552.2  
Accounts and notes receivable, net
    250.0       360.6       278.4  
Inventories
    828.7       744.4       727.2  
Other current assets (See Note 4)
    144.8       116.1       104.4  
Total current assets
    1,741.2       1,812.8       1,662.2  
                         
Property, plant and equipment, net
    256.5       270.2       274.5  
Goodwill
    38.4       37.0       43.3  
Other assets, net
    51.6       55.1       84.3  
Total assets
  $ 2,087.7     $ 2,175.1     $ 2,064.3  
                         
Liabilities and Stockholders’ Equity
                       
Current liabilities:
                       
Current maturities of long-term debt (See Note 5)
  $ 355.4     $ --     $ --  
Accounts payable
    352.3       348.2       225.4  
Accrued expenses and other current liabilities
    267.5       315.4       274.8  
Total current liabilities
    975.2       663.6       500.2  
                         
Long-term debt, excluding current maturities
    323.9       670.6       662.2  
Other non-current liabilities
    84.0       87.6       93.9  
Total liabilities
    1,383.1       1,421.8       1,256.3  
                         
Commitments and contingencies
                       
                         
Stockholders’ equity:
                       
Preferred stock, no par value, 1,000,000
shares authorized:
                       
Series A junior participating, 300,000 shares designated and none issued
    --       --       --  
Common stock, $1 par value, 650,000,000 shares authorized;
146,033,000 shares issued
    146.0       146.0       146.0  
Additional paid-in capital
    135.5       137.1       142.0  
Retained earnings
    1,471.2       1,525.1       1,562.5  
Treasury stock, at cost; 46,591,000, 46,715,000,
and 46,254,000 shares, respectively
    (1,038.9 )     (1,043.0 )     (1,041.6 )
Accumulated other comprehensive loss
    (9.2 )     (11.9 )     (0.9 )
Total stockholders’ equity
    704.6       753.3       808.0  
Total liabilities and stockholders’ equity
  $ 2,087.7     $ 2,175.1     $ 2,064.3  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
4

 


RADIOSHACK CORPORATION AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows (unaudited)

   
Six Months Ended
 
   
June 30,
 
(In millions)
 
2012
   
2011
 
Cash flows from operating activities:
           
Net (loss) income
  $ (29.0 )   $ 60.0  
Adjustments to reconcile net (loss) income to net cash
               
provided by operating activities:
               
Depreciation and amortization
    41.0       40.6  
Amortization of discounts on long-term debt
    8.7       7.9  
Impairment of long-lived assets
    1.5       1.0  
Stock-based compensation
    3.7       2.9  
Other non-cash items
    4.4       5.7  
Changes in operating assets and liabilities:
               
Accounts and notes receivable
    110.1       99.5  
Inventories
    (83.2 )     (2.1 )
Other current assets
    (3.0 )     6.3  
Accounts payable
    20.5       (60.4 )
Accrued expenses and other
    (51.8 )     (59.9 )
Net cash provided by operating activities
    22.9       101.5  
                 
Cash flows from investing activities:
               
Additions to property, plant and equipment
    (27.7 )     (41.5 )
Changes in restricted cash (See Note 4)
    (26.5 )     --  
Other investing activities
    0.1       --  
Net cash used in investing activities
    (54.1 )     (41.5 )
                 
Cash flows from financing activities:
               
Payments of dividends
    (24.9 )     --  
Changes in cash overdrafts
    (17.9 )     12.6  
Issuance of long-term notes
    --       322.5  
Long-term notes issuance costs
    --       (6.2 )
Repayments of borrowings
    --       (306.8 )
Purchases of treasury stock
    --       (101.4 )
Proceeds from exercise of stock options
    --       2.1  
Net cash used in financing activities
    (42.8 )     (77.2 )
                 
Net decrease in cash and cash equivalents
    (74.0 )     (17.2 )
Cash and cash equivalents, beginning of period
    591.7       569.4  
Cash and cash equivalents, end of period
  $ 517.7     $ 552.2  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
5

 


RADIOSHACK CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements (Unaudited)


NOTE 1 – BASIS OF PRESENTATION
 
Throughout this report, the terms “our,” “we,” “us,” “Company,” and “RadioShack” refer to RadioShack Corporation, including its subsidiaries. We prepared the accompanying unaudited condensed consolidated financial statements, which include the accounts of RadioShack Corporation and all majority-owned domestic and foreign subsidiaries, in accordance with the rules of the Securities and Exchange Commission (“SEC”). Accordingly, we did not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In management’s opinion, all adjustments of a normal recurring nature considered necessary for a fair statement are included. However, our operating results for the three and six month periods ended June 30, 2012 and 2011, do not necessarily indicate the results you might expect for the full year. For further information, refer to our consolidated financial statements and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.
 
NOTE 2 – NEW ACCOUNTING STANDARDS
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance to update the presentation of comprehensive income in consolidated financial statements. Under this new guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements in its annual financial statements. This guidance is effective for fiscal years beginning after December 15, 2011. We adopted this guidance effective January 1, 2012. Please refer to our condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2012 and 2011, for the required interim period disclosure. In addition to net income, the other component of our comprehensive income was foreign currency translation adjustments.
 
NOTE 3 – DISCONTINUED OPERATIONS
 
We account for closed stores or kiosks as discontinued operations when the operations and cash flows of a store or kiosk being disposed of are eliminated from ongoing operations and we do not have any significant continuing involvement in its operations. In reaching the determination as to whether the cash flows of a store or kiosk will be eliminated from our ongoing operations, we consider whether it is likely that customers will migrate to our other retail locations in the same geographic market.
 
All of our remaining kiosks located in Sam’s Club stores were transitioned to Sam’s Club by June 30, 2011. We determined that the cash flows from these kiosks were eliminated from our ongoing operations. Therefore, these operations were reclassified from the kiosks segment to discontinued operations in the second quarter of 2011. The operating results of these kiosks are presented in the condensed consolidated statements of comprehensive income as discontinued operations, net of income taxes, for all periods presented.
 
We incurred no significant gain or loss associated with the transition of these kiosks to Sam’s Club. We redeployed substantially all of our Sam’s Club kiosk employees to nearby RadioShack stores or Target Mobile centers, and we redistributed our Sam’s Club kiosk inventory to our remaining retail channels. Net sales and operating revenues related to these discontinued operations were zero for the second quarter of 2012 and the first six months of 2012, compared with $17.0 million and $62.9 million, respectively, for the same periods last year. Income before income taxes for these discontinued operations was zero for the second quarter of 2012 and the first six months of 2012, compared with $2.4 million and $8.4 million, respectively, for the same periods last year.
 
NOTE 4 – RESTRICTED CASH
 
Restricted cash totaled $26.5 million at June 30, 2012, and is included in other current assets in our consolidated balance sheets. This cash is pledged as collateral for a standby letter of credit issued to our general liability insurance provider. We have the ability to withdraw this cash at any time and instead provide a letter of credit issued under our $450 million asset-based revolving credit facility that expires in January 2016 (“2016 Credit Facility”) similar to the letter of credit that was issued under our 2016 Credit Facility at December 31, 2011. We have elected to pledge this cash as collateral to reduce our costs associated with our general liability insurance.
 
 
 
6

 
 
 
 
NOTE 5 – INDEBTEDNESS AND BORROWING FACILITIES
 
2013 Convertible Notes: In August 2008, we sold $375 million aggregate principal amount of 2.50% convertible senior notes due August 1, 2013, (the “2013 Convertible Notes”) in a private offering to qualified institutional buyers. The 2013 Convertible Notes were issued at par and interest is payable semiannually, in arrears, on February 1 and August 1.
 
Each $1,000 of principal of the 2013 Convertible Notes is currently convertible, under certain circumstances, into 42.0746 shares of our common stock (or a total of approximately 15.8 million shares), which is the equivalent of $23.77 per share, subject to adjustment upon the occurrence of specified events set forth under terms of the 2013 Convertible Notes. Upon conversion, we would pay the holder the cash value of the applicable number of shares of our common stock, up to the principal amount of the note. Amounts in excess of the principal amount, if any (the “excess conversion value”), may be paid in cash or in stock, at our option. Holders may convert their 2013 Convertible Notes into common stock on the net settlement basis described above at any time from May 1, 2013, until the close of business on July 29, 2013.
 
We classified the 2013 Convertible Notes as a current liability at June 30, 2012. While we are not obligated to repay the principal amount of the notes until August 1, 2013, a holder of the notes may elect to convert the notes beginning on May 1, 2013, which is within one year of our balance sheet date. Based on the $3.84 per share closing market price of our common stock at June 29, 2012, a holder who elects to convert their notes before the maturity date would receive a conversion value of $161.57 per $1,000 principal note.
 
2019 Notes: On May 3, 2011, we sold $325 million aggregate principal amount of 6.75% senior unsecured notes due May 15, 2019, in a private offering to qualified institutional buyers. These notes were exchanged for substantially identical notes that were registered with the SEC in December 2011 (“2019 Notes”). The obligation to pay principal and interest on the 2019 Notes is jointly and severally guaranteed on a full and unconditional basis by all of the guarantors under the 2016 Credit Facility, which currently includes all of our wholly-owned domestic subsidiaries except Tandy Life Insurance Company. The 2019 Notes pay interest at a fixed rate of 6.75% per year. Interest is payable semiannually, in arrears, on May 15 and November 15.
 
The 2019 Notes contain covenants that could, in certain circumstances, limit our ability to issue additional debt, repurchase shares of our common stock, make certain other restricted payments, make investments, or enter into certain other transactions. At June 30, 2012, we were in compliance with these covenants.
 
Refer to our Annual Report on Form 10-K for the year ended December 31, 2011, for additional information regarding the 2019 Notes.
 
NOTE 6 – STOCKHOLDERS' EQUITY
 
We paid a $0.125 per share dividend in the first and second quarters of 2012, which totaled $12.5 million in the second quarter and $24.9 million for the first six months of 2012.  On July 25, 2012, we announced that we suspended our dividend.  During the second quarter of 2011, we paid $101.4 million to purchase 6.3 million shares of our common stock in open market purchases.
 
NOTE 7 – PLANT CLOSURE
 
During the second quarter of 2011 we ceased production operations in our Chinese manufacturing plant. Since production operations ceased, we have continued to acquire inventory similar to that previously produced by this facility from alternative product sourcing channels. In conjunction with the plant closing, we incurred total costs of $10.2 million for the first six months of 2011. We incurred $7.1 million in compensation expense for severance packages for the termination of approximately 1,500 employees. We recorded a foreign currency exchange loss of $1.5 million related to the reversal of our foreign currency cumulative translation adjustment, which is classified as a selling, general and administrative expense. We also recorded an inventory valuation loss of $1.2 million, which is classified as additional cost of products sold, and accelerated depreciation of $0.4 million.
 
NOTE 8 – NET (LOSS) INCOME PER SHARE
 
Basic net (loss) income per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net (loss) income per share reflects the potential dilution that would have occurred if securities or other contracts to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.
 
 
 
7

 
 

The following table reconciles the numerator and denominator used in the basic and diluted net (loss) income per share calculations for the periods presented:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In millions)
 
2012
   
2011
   
2012
   
2011
 
                         
Numerator:
                       
(Loss) income from continuing operations
  $ (21.0 )   $ 23.5     $ (29.0 )   $ 54.9  
Discontinued operations, net of taxes
    --       1.4       --       5.1  
Net (loss) income
  $ (21.0 )   $ 24.9     $ (29.0 )   $ 60.0  
                                 
Denominator:
                               
Weighted-average common shares outstanding
    100.1       103.7       100.0       104.9  
Dilutive effect of stock-based awards
    --       0.9       --       1.0  
Weighted average shares for diluted net (loss) income per share
    100.1       104.6       100.0       105.9  

 
The following table includes common stock equivalents that were not included in the calculation of diluted net (loss) income per share for the periods presented. These securities could be dilutive in future periods.
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In millions)
 
2012
   
2011
   
2012
   
2011
 
                         
Employee stock options (1) (2)
    7.4       2.3       7.4       2.3  
Warrants to purchase common stock (3)
    15.8       15.5       15.8       15.5  
Convertible debt instruments (4)
    15.8       15.5       15.8       15.5  
 
(1)
For the second quarter of 2012 and the first six months of 2012, these common stock equivalents were excluded because the effect of their inclusion would reduce our net loss per share in these periods and would be antidilutive. In addition, the exercise prices of these common stock equivalents exceeded the average market price of our common stock during these periods.
(2)
For the second quarter of 2011 and the first six months of 2011, these common stock equivalents were excluded because their exercise prices exceeded the average market price of our common stock during this period, and the effect of their inclusion would be antidilutive.
(3)
These common stock equivalents were excluded because their exercise prices ($35.88 per share, $36.60 per share, $35.88 per share and $36.60 per share for each period, respectively) exceeded the average market prices of our common stock during these periods, and the effect of their inclusion would be antidilutive.
(4)
These common stock equivalents were excluded because their conversion prices ($23.77 per share, $24.25 per share, $23.77 per share and $24.25 per share for each period, respectively) exceeded the average market prices of our common stock during these periods, and the effect of their inclusion would be antidilutive.

 
NOTE 9 – FAIR VALUE MEASUREMENTS
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
     
Basis of Fair Value Measurements
 
 
 
Fair Value
of Assets
(Liabilities)
 
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
 
Significant
Unobservable
Inputs
(Level 3)
       
       
       
(In millions)
     
               
Three Months Ended June 30, 2012
             
Long-lived assets held and used
$0.4
 
--
 
--
 
$0.4
               

 
The FASB’s accounting guidance utilizes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels:
 
·  
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities
 
·  
Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active
 
·  
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions
 
 
 
8

 
 
 
 
For the three months ended June 30, 2012, long-lived assets held and used in certain locations of our U.S. RadioShack company-operated stores segment with a total carrying value of $1.4 million were written down to their fair value of $0.4 million, resulting in an impairment charge of $1.0 million that was included in earnings for the period. The inputs used to calculate the fair value of these long-lived assets included the projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets. The projected cash flows for a particular store are based on average historical cash flows for that store and are projected through the remainder of its lease. The risk-adjusted rate of return used to discount these cash flows ranges from 15% to 20%.
 
Fair Value of Financial Instruments
 
Financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term debt. With the exception of long-term debt, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for long-term debt have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the FASB’s fair value hierarchy.
 
Carrying amounts and the related estimated fair value of our debt financial instruments are as follows:
 
   
June 30, 2012
   
December 31, 2011
 
 
(In millions)
 
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
                         
Total debt
  $ 679.3     $ 598.4     $ 670.6     $ 641.0  

The fair value of our 2.5% convertible notes due in 2013 was $352.8 million at June 30, 2012, compared with $358.6 million at December 31, 2011. The fair value of the 2019 Notes was $244.6 million at June 30, 2012, compared with $281.4 million at December 31, 2011.
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES
 
Loss Contingencies:  FASB Accounting Standards Codification Topic 450 - Contingencies (“ASC 450”) governs our disclosure and recognition of loss contingencies, including pending claims, lawsuits, disputes with third parties, investigations and other actions that are incidental to the operation of our business. ASC 450 uses the following defined terms to describe the likelihood of a future loss:  probable – the future event or events are likely to occur, remote – the chance of the future event or events is slight, and reasonably possible – the chance of the future event or events occurring is more than remote but less than likely. ASC 450 also contains certain requirements with respect to how we accrue for and disclose information concerning our loss contingencies. We accrue for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, and no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a loss has been incurred. No accrual or disclosure is required for losses that are remote.
 
Brookler v. RadioShack Corporation:  On April 6, 2004, plaintiffs filed a putative class action in Los Angeles Superior Court, Brookler v. RadioShack Corporation, claiming that we violated California's wage and hour laws relating to meal and rest periods. The meal period portion of the case was originally certified as a class action in February 2006. Our first Motion for Decertification of the class was denied in August 2007. After a favorable decision at the California Court of Appeals in the similar case of Brinker Restaurant Corporation v. Superior Court, we filed a second motion for decertification, and in October 2008 the trial court granted our motion. The plaintiffs in Brookler appealed this ruling. Due to the unsettled nature of California law regarding the obligations of employers in respect of meal periods, we and the Brookler plaintiffs requested that the California Court of Appeals stay its ruling on the plaintiffs’ appeal of the class decertification ruling pending the California Supreme Court’s decision in Brinker. The appellate court denied this joint motion and then heard oral arguments in the case on August 5, 2010. On August 26, 2010, the California Court of Appeals reversed the trial court’s decertification of the class, and our Petition for Rehearing was denied on September 14, 2010. On September 28, 2010, we filed a Petition for Review with the California Supreme Court, which granted review and placed the case on hold pending its decision in Brinker. On April 12, 2012, the California Supreme Court issued its decision in Brinker. On June 20, 2012, the California Supreme Court remanded the Brookler case to the California Court of Appeals instructing it to vacate its prior order and reconsider its ruling in light of its ruling in Brinker. The outcome of this case is uncertain and the ultimate resolution of it could have a material adverse effect on our consolidated financial statements in the period in which the resolution is recorded.
 
 
 
9

 
 
 
 
Ordonez v. RadioShack Corporation:  In May 2010, Daniel Ordonez, on behalf of himself and all other similarly situated current and former employees, filed a Complaint against the Company in the Los Angeles Superior Court. In July 2010, Mr. Ordonez filed an Amended Complaint alleging, among other things, that we failed to provide required meal periods, provide required rest breaks, pay overtime compensation, pay minimum wages, and maintain required records. In September 2010 we removed the case to the United States District Court for the Central District of California. The proposed putative class in Ordonez consists of all current and former non-exempt employees for a period within the four (4) years preceding the filing of the case. The meal period claims raised in Ordonez are similar to the claims raised in Brookler as discussed above. Pursuant to a motion filed by the Ordonez parties, the court recently granted a Stipulation and Order to Stay Proceedings pending the decision of the California Supreme Court in Brinker. On April 12, 2012, the California Supreme Court issued its decision in Brinker. We are still evaluating the potential effect of this decision on Ordonez. The outcome of this case is uncertain and the ultimate resolution of it could have a material adverse effect on our consolidated financial statements in the period in which the resolution is recorded.
 
Song-Beverly Credit Card Act:  In November 2010, RadioShack received service of process with respect to the first of four putative class action lawsuits filed in California (Sosinov v. RadioShack, Los Angeles Superior Court; Bitter v. RadioShack, Federal District Court, Central District of California; Moreno v. RadioShack, Federal District Court, Southern District of California; and Grant v. RadioShack, San Francisco Superior Court). The plaintiffs in all of these cases seek damages under California’s Song-Beverly Credit Card Act (the “Act”). Plaintiffs claim that under one section of the Act, retailers are prohibited from recording certain personal identification information regarding their customers while processing credit card transactions unless certain statutory exceptions are applicable. The Act provides that any person who violates this section is subject to a civil penalty not to exceed $250 for the first violation and $1,000 for each subsequent violation. In each of the cases, plaintiffs allege that we violated the Act by asking them for personal identification information while processing a credit card transaction and then recording it. The outcomes of these cases are uncertain and the ultimate resolution of these cases could have a material adverse effect on our consolidated financial statements in the period in which the resolution is recorded.
 
Redman v. RadioShack Corporation:  On September 26, 2011, Scott D.H. Redman filed a putative class action lawsuit against the Company in the United States District Court for the Northern District of Illinois. Mr. Redman claims that we violated certain provisions of the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”), which amended the Fair Credit Reporting Act, by displaying the expiration dates of our customers’ credit or debit cards on electronically printed transaction receipts. Mr. Redman filed a motion seeking to certify a class that includes all persons to whom the Company provided an electronically printed transaction receipt, in transactions occurring after June 3, 2008, that displayed the expiration date of the person’s credit or debit card. On November 3, 2011, Mario Aliano and Vitoria Radavicuite filed a similar putative class action lawsuit against the Company, also in the United States District Court for the Northern District of Illinois, alleging similar violations of FACTA. Mr. Aliano and Ms. Radavicuite initially filed a motion seeking to certify a class that includes all persons to whom the Company provided an electronically printed transaction receipt, in transactions occurring in Illinois after June 3, 2008, that displayed the expiration date of the person's credit or debit card. On December 28, 2011, Mr. Aliano and Ms. Radavicuite filed an amended complaint and an amended motion seeking to certify a class that was not limited to transactions occurring in Illinois. On January 11, 2012, the Aliano lawsuit was reassigned to the judge presiding over the Redman lawsuit on the basis of relatedness, and the two cases were consolidated for all purposes. On January 25, 2012, the presiding judge referred the matter to the magistrate judge assigned to the consolidated cases for mediation, extending the time by which the Company must respond to the pending complaints to such time as the magistrate judge shall order, and is holding the motions for class certification in abeyance. Mediation sessions were held in March and June of 2012. Neither resulted in a settlement, and we continue to vigorously defend these cases. The outcome of these cases is uncertain and the ultimate resolution of them could have a material adverse effect on our consolidated financial statements in the period in which the resolutions are recorded.
 
Additional Disclosure:  For certain loss contingencies, we are currently able to estimate the reasonably possible loss or range of loss, including reasonably possible loss amounts in excess of our accruals, and we estimated that the aggregate of these amounts could be up to $12 million. This amount reflects recent developments in case law that pertain to certain claims currently pending against the Company. Probable and reasonably possible losses that we are currently unable to estimate are not included in this amount. In future periods, we may recognize a loss for all, part, or none of this amount.
 
We are currently unable to estimate the reasonably possible loss or range of loss in respect of certain loss contingencies. Some cases remain in an early stage, with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potential damages. In addition, in some cases we are not able to estimate the amount of the loss, due to a significant unresolved question of law that is expected to have a significant impact on the probability or amount of loss when resolved. As these matters develop and we receive additional information, we may be able to estimate reasonably possible losses or range of loss for these matters.
 
 
 
10

 
 
 
 
Our evaluation of our loss contingencies involves subjective assessments, assumptions, and judgments, and actual losses incurred in future periods may differ significantly from our estimates. Accordingly, although occasional adverse resolutions may occur and negatively affect our consolidated financial statements in the period of the resolution, we believe that the ultimate resolution of our loss contingencies for which we have not accrued losses will not materially adversely affect our financial condition.
 
NOTE 11 – SEGMENT REPORTING
 
The U.S. RadioShack company-operated stores segment consists solely of our 4,423 U.S. company-operated retail stores, all operating under the RadioShack brand name. We evaluate the performance of our segments based on operating income, which is defined as sales less cost of products sold and certain direct operating expenses, including labor, rent, and occupancy costs. Asset balances by segment have not been included in the table below, as these are managed on a company-wide level and are not fully allocated to segments for management reporting purposes. Amounts in the other category reflect our business activities that are not separately reportable, which include sales through our Target Mobile centers, sales to our independent dealers, sales generated by our www.radioshack.com website and our Mexican subsidiary, sales to commercial customers, and sales to other third parties through our global sourcing and manufacturing operations.
 
 
Revenue by reportable segment is as follows:
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(In millions)
 
2012
   
2011
   
2012
   
2011
 
U.S. RadioShack company-operated stores
  $ 772.4     $ 797.8     $ 1,606.0     $ 1,693.0  
Other
    180.8       144.1       355.5       266.3  
    $ 953.2     $ 941.9     $ 1,961.5     $ 1,959.3  

 
Operating income by reportable segment and the reconciliation to (loss) income from continuing operations before income taxes are as follows:
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
(In millions)
 
2012
   
2011
   
2012
   
2011
 
U.S. RadioShack company-operated stores
  $ 72.0     $ 137.1     $ 163.3     $ 289.1  
Other (1)
    (1.5 )     (6.1 )     1.5       (4.5 )
      70.5       131.0       164.8       284.6  
                                 
Unallocated (2) (3)
    (91.7 )     (82.1 )     (184.2 )     (170.6 )
Operating (loss) income
    (21.2 )     48.9       (19.4 )     114.0  
                                 
Interest income
    0.3       0.5       0.8       0.8  
Interest expense
    (12.9 )     (10.9 )     (26.0 )     (20.6 )
Other loss
    --       --       --       (4.1 )
(Loss) income from continuing operations before income taxes
  $ (33.8 )   $ 38.5     $ (44.6 )   $ 90.1  
 
(1)
Includes a net loss on the closing of our Chinese manufacturing plant of $8.7 million and $10.2 million for the three and six month periods ended June 30, 2011, respectively.
(2)
The unallocated category included in operating income relates to our overhead and corporate expenses that are not allocated to our operating segments for management reporting purposes. Unallocated costs include corporate departmental expenses such as labor and benefits, advertising, insurance, distribution, and information technology costs, plus certain unusual or infrequent gains or losses.
(3)
The operating loss for our unallocated category increased by $9.6 million and $13.6 million for the three and six month periods ended June 30, 2012, respectively. These increases were primarily due to decreased intercompany profits earned by our distribution operations due to the mix of products distributed.
 
 
 
11

 


NOTE 12 – SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
 
The following condensed consolidating financial information represents the financial information of RadioShack Corporation, its guarantor subsidiaries, and its non-guarantor subsidiaries prepared on the equity basis of accounting. Earnings of subsidiaries are, therefore, reflected in the parent company's investment accounts and earnings. The elimination entries primarily eliminate investments in subsidiaries and intercompany balances and transactions. The non-guarantor subsidiaries are comprised of the foreign subsidiaries of the Company and Tandy Life Insurance Company. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the guarantor or non-guarantor subsidiaries operated as independent entities.
 
Condensed Consolidating Statements of Comprehensive Income (unaudited)
 
For the Three Months Ended June 30, 2012

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net sales and operating revenues
  $ 933.0     $ 969.4     $ 27.9     $ (977.1 )   $ 953.2  
Cost of products sold
    646.9       905.7       17.4       (977.1 )     592.9  
Gross profit
    286.1       63.7       10.5       --       360.3  
                                         
Operating expenses:
                                       
Selling, general and administrative
    324.2       27.3       11.0       --       362.5  
Depreciation and amortization
    15.8       1.7       0.5       --       18.0  
Impairment of long-lived assets
    1.0       --       --       --       1.0  
Total operating expenses
    341.0       29.0       11.5       --       381.5  
                                         
Operating (loss) income
    (54.9 )     34.7       (1.0 )     --       (21.2 )
                                         
Interest income
    --       2.8       1.4       (3.9 )     0.3  
Interest expense
    (16.8 )     --       --       3.9       (12.9 )
                                         
(Loss) income from continuing operations
before income taxes
    (71.7 )     37.5       0.4       --       (33.8 )
Income tax (benefit) expense
    (29.0 )     16.8       (0.6 )     --       (12.8 )
Equity in earnings of subsidiaries, net of income taxes
    21.7       0.6       --       (22.3 )     --  
                                         
(Loss) income from continuing operations
    (21.0 )     21.3       1.0       (22.3 )     (21.0 )
Discontinued operations, net of income taxes
    --       --       --       --       --  
                                         
Net (loss) income
  $ (21.0 )   $ 21.3     $ 1.0     $ (22.3 )   $ (21.0 )
                                         
Comprehensive (loss) income
  $ (23.9 )   $ 18.2     $ (2.2 )   $ (16.0 )   $ (23.9 )

 
 
12

 
 
 
Condensed Consolidating Statements of Comprehensive Income (unaudited)
 
For the Three Months Ended June 30, 2011

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net sales and operating revenues
  $ 927.9     $ 802.1     $ 37.6     $ (825.7 )   $ 941.9  
Cost of products sold
    573.7       734.0       27.8       (825.7 )     509.8  
Gross profit
    354.2       68.1       9.8       --       432.1  
                                         
Operating expenses:
                                       
Selling, general and administrative
    320.7       25.7       17.9       --       364.3  
Depreciation and amortization
    16.6       0.8       0.9       --       18.3  
Impairment of long-lived assets
    0.6       --       --       --       0.6  
Total operating expenses
    337.9       26.5       18.8       --       383.2  
                                         
Operating income (loss)
    16.3       41.6       (9.0 )     --       48.9  
                                         
Interest income
    0.2       2.4       1.4       (3.5 )     0.5  
Interest expense
    (14.4 )     --       --       3.5       (10.9 )
                                         
Income (loss) from continuing operations
before income taxes
    2.1       44.0       (7.6 )     --       38.5  
Income tax (benefit) expense
    (2.2 )     16.6       0.6       --       15.0  
Equity in earnings of subsidiaries, net of income taxes
    20.6       (9.0 )     --       (11.6 )     --  
                                         
Income (loss) from continuing operations
    24.9       18.4       (8.2 )     (11.6 )     23.5  
Discontinued operations, net of income taxes
    --       1.4       --       --       1.4  
                                         
Net income (loss)
  $ 24.9     $ 19.8     $ (8.2 )   $ (11.6 )   $ 24.9  
                                         
Comprehensive income (loss)
  $ 26.3     $ 21.8     $ (6.3 )   $ (15.5 )   $ 26.3  
 
 
 
13

 


Condensed Consolidating Statements of Comprehensive Income (unaudited)
 
For the Six Months Ended June 30, 2012

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net sales and operating revenues
  $ 1,911.8     $ 1,822.0     $ 59.3     $ (1,831.6 )   $ 1,961.5  
Cost of products sold
    1,305.3       1,696.1       36.9       (1,831.6 )     1,206.7  
Gross profit
    606.5       125.9       22.4       --       754.8  
                                         
Operating expenses:
                                       
Selling, general and administrative
    657.6       57.3       20.9       --       735.8  
Depreciation and amortization
    32.5       3.4       1.0       --       36.9  
Impairment of long-lived assets
    1.5       --       --       --       1.5  
Total operating expenses
    691.6       60.7       21.9       --       774.2  
                                         
Operating (loss) income
    (85.1 )     65.2       0.5       --       (19.4 )
                                         
Interest income
    0.1       5.5       2.9       (7.7 )     0.8  
Interest expense
    (33.7 )     --       --       7.7       (26.0 )
                                         
(Loss) income from continuing operations
before income taxes
    (118.7 )     70.7       3.4       --       (44.6 )
Income tax (benefit) expense
    (45.8 )     29.8       0.4       --       (15.6 )
Equity in earnings of subsidiaries, net of income taxes
    43.9       2.1       --       (46.0 )     --  
                                         
(Loss) income from continuing operations
    (29.0 )     43.0       3.0       (46.0 )     (29.0 )
Discontinued operations, net of income taxes
    --       --       --       --       --  
                                         
Net (loss) income
  $ (29.0 )   $ 43.0     $ 3.0     $ (46.0 )   $ (29.0 )
                                         
Comprehensive (loss) income
  $ (26.3 )   $ 45.5     $ 5.4     $ (50.9 )   $ (26.3 )

 
 
14

 


Condensed Consolidating Statements of Comprehensive Income (unaudited)
 
For the Six Months Ended June 30, 2011

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net sales and operating revenues
  $ 1,955.5     $ 1,696.8     $ 73.8     $ (1,766.8 )   $ 1,959.3  
Cost of products sold
    1,224.4       1,562.3       52.9       (1,766.8 )     1,072.8  
Gross profit
    731.1       134.5       20.9       --       886.5  
                                         
Operating expenses:
                                       
Selling, general and administrative
    660.4       44.6       29.9       --       734.9  
Depreciation and amortization
    33.5       1.4       1.7       --       36.6  
Impairment of long-lived assets
    1.0       --       --       --       1.0  
Total operating expenses
    694.9       46.0       31.6       --       772.5  
                                         
Operating income (loss)
    36.2       88.5       (10.7 )     --       114.0  
                                         
Interest income
    0.3       5.2       2.8       (7.5 )     0.8  
Interest expense
    (28.1 )     --       --       7.5       (20.6 )
Other loss
    (4.1 )     --       --       --       (4.1 )
                                         
Income (loss) from continuing operations
before income taxes
    4.3       93.7       (7.9 )     --       90.1  
Income tax (benefit) expense
    (0.6 )     34.6       1.2       --       35.2  
Equity in earnings of subsidiaries, net of income taxes
    55.1       (10.1 )     --       (45.0 )     --  
                                         
Income (loss) from continuing operations
    60.0       49.0       (9.1 )     (45.0 )     54.9  
Discontinued operations, net of income taxes
    --       5.1       --       --       5.1  
                                         
Net income (loss)
  $ 60.0     $ 54.1     $ (9.1 )   $ (45.0 )   $ 60.0  
                                         
Comprehensive income (loss)
  $ 63.4     $ 58.1     $ (5.2 )   $ (52.9 )   $ 63.4  

 
 
15

 


Condensed Consolidating Balance Sheets (unaudited)
 
At June 30, 2012

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ 153.4     $ 344.0     $ 20.3     $ --     $ 517.7  
Accounts and notes receivable, net
    206.9       38.3       4.8       --       250.0  
Inventories
    718.0       76.4       34.3       --       828.7  
Other current assets
    138.8       0.9       5.1       --       144.8  
Intercompany receivables
    --       197.7       --       (197.7 )     --  
Intercompany notes receivable
    --       1,452.4       --       (1,452.4 )     --  
Total current assets
    1,217.1       2,109.7       64.5       (1,650.1 )     1,741.2  
                                         
Property, plant and equipment, net
    227.2       20.7       8.6       --       256.5  
Goodwill
    3.0       0.5       34.9       --       38.4  
Other assets, net
    39.6       1.5       10.5       --       51.6  
Investment in subsidiaries
    2,079.3       74.8       --       (2,154.1 )     --  
Total assets
  $ 3,566.2     $ 2,207.2     $ 118.5     $ (3,804.2 )   $ 2,087.7  
                                         
Liabilities and Stockholders’ Equity
                                       
Current liabilities:
                                       
Current maturities of long-term debt
  $ 355.4     $ --     $ --     $ --     $ 355.4  
Accounts payable
    263.6       68.6       20.1       --       352.3  
Accrued expenses and other current liabilities
    215.6       43.4       8.5       --       267.5  
Intercompany payables
    195.8       --       1.9       (197.7 )     --  
Intercompany notes payable
    1,452.4       --       --       (1,452.4 )     --  
Total current liabilities
    2,482.8       112.0       30.5       (1,650.1 )     975.2  
                                         
Long-term debt
    323.9       --       --       --       323.9  
Other non-current liabilities
    54.9       28.3       0.8       --       84.0  
Total liabilities
    2,861.6       140.3       31.3       (1,650.1 )     1,383.1  
                                         
Stockholders’ equity
    704.6       2,066.9       87.2       (2,154.1 )     704.6  
Total liabilities and stockholders’ equity
  $ 3,566.2     $ 2,207.2     $ 118.5     $ (3,804.2 )   $ 2,087.7  
 

 
16

 


Condensed Consolidating Balance Sheets (unaudited)
 
At December 31, 2011

 
(In millions)
 
RadioShack
Corporation
(Parent Co.)
   
Guarantor
Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ 154.6     $ 404.9     $ 32.2     $ --     $ 591.7  
Accounts and notes receivable, net
    294.1       60.1       6.4       --       360.6  
Inventories
    658.8       57.4       28.2       --       744.4  
Other current assets
    110.7       0.8       4.6       --       116.1  
Intercompany receivables
    --       179.8       --       (179.8 )     --  
Intercompany notes receivable
    --       1,320.7       --       (1,320.7 )     --  
Total current assets
    1,218.2       2,023.7       71.4       (1,500.5 )     1,812.8  
                                         
Property, plant and equipment, net
    238.9       22.7       8.6       --       270.2  
Goodwill
    3.0       0.5       33.5       --       37.0  
Other assets, net
    43.6       1.1       10.4       --       55.1  
Investment in subsidiaries
    2,033.0       70.1       --       (2,103.1 )     --  
Total assets
  $ 3,536.7     $ 2,118.1     $ 123.9     $ (3,603.6 )   $ 2,175.1  
                                         
Liabilities and Stockholders’ Equity
                                       
Current liabilities:
                                       
Accounts payable
  $ 292.9     $ 26.4     $ 28.9     $ --     $ 348.2  
Accrued expenses and other current liabilities
    264.3       43.3       7.8       --       315.4  
Intercompany payables
    175.4       --       4.4       (179.8 )     --  
Intercompany notes payable
    1,320.7       --       --       (1,320.7 )     --  
T