UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2006

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
________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 
Name of each exchange
Title of each class
on which registered
   
Common Stock, par value $1 per share
New York Stock Exchange


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 No o




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As of June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,894,525,234 based on the closing sale price as reported on the New York Stock Exchange.

As of February 16, 2007, there were 136,199,708 shares of the registrant's Common Stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III.






TABLE OF CONTENTS


     
Page
PART I
 
Item 1.
Business
4
 
Item 1A.
Risk Factors
8
 
Item 1B.
Unresolved Staff Comments
11
 
Item 2.
Properties
12
 
Item 3.
Legal Proceedings
14
 
Item 4.
Submission of Matters to a Vote of Security Holders
14
   
Executive Officers of the Registrant
14
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Secuirities
16
 
Item 6.
Selected Financial Data
17
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
41
 
Item 8.
Financial Statements and Supplementary Data
41
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
41
 
Item 9A.
Controls and Procedures
42
 
Item 9B.
Other Information
42
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
42
 
Item 11.
Executive Compensation
43
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
43
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
43
 
Item 14.
Principal Accounting Fees and Services
44
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
44
   
Signatures
45
   
Index to Consolidated Financial Statements
46
   
Report of Independent Registered Public Accounting Firm
47
   
Index to Exhibits
84
 



PART I
ITEM 1. BUSINESS.

GENERAL
RadioShack Corporation was incorporated in Delaware in 1967. We primarily engage in the retail sale of consumer electronics goods and services through our RadioShack store chain and non-RadioShack branded kiosk operations. Our strategy is to provide cost-effective solutions to meet the routine electronics needs and distinct electronics wants of our customers. Throughout this report, the terms “our,” “we,” “us” and “RadioShack” refer to RadioShack Corporation, including its subsidiaries.

Our day-to-day focus is concentrated in four major areas:

·  
Provide our customers a positive in-store experience
·  
Grow gross profit dollars by increasing the overall value of each ticket
·  
Reduce costs continually throughout the organization
·  
Allocate the dollars generated from operations appropriately, investing only in projects that have an adequate return or are operationally necessary

Additional information regarding our business segments is presented below and in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) elsewhere in this Annual Report on Form 10-K. For information regarding the net sales and operating revenues and operating income for each of our business segments for fiscal years ended December 31, 2006, 2005 and 2004, please see Note 27 - “Segment Reporting” in the Notes to Consolidated Financial Statements.

RADIOSHACK COMPANY-OPERATED STORES
At December 31, 2006, we operated 4,467 company-operated stores under the RadioShack brand, located throughout the United States, as well as in Puerto Rico, and the U.S. Virgin Islands. These stores are located in major shopping malls and strip centers, as well as individual storefronts. Each location carries a broad assortment of both private label and third-party branded consumer electronics products. Our product lines include wireless telephones and communication devices such as scanners and two-way radios; flat panel televisions, residential telephones, DVD players, computers and direct-to-home (“DTH”) satellite systems; home entertainment, wireless, imaging and computer accessories; general and special purpose batteries; wire, cable and connectivity products; and digital cameras, radio-controlled cars and other toys, satellite radios and memory players. We also provide consumers access to third-party services such as wireless telephone and DTH satellite activation, satellite radio service, prepaid wireless airtime and extended service plans.

KIOSKS
At December 31, 2006, we operated 772 kiosks located throughout the United States. These kiosks are primarily inside SAM’S CLUB locations, as well as stand-alone Sprint Nextel kiosks in major shopping malls. These locations, which are not RadioShack-branded, offer primarily wireless handsets, their associated accessories, and DTH satellite systems. We also provide consumers access to third-party wireless telephone services.

OTHER
In addition to the reportable segments discussed above, we have other sales channels and support operations, described in more detail below.

Dealer Outlets: At December 31, 2006, we had a network of 1,587 RadioShack dealer outlets, including 36 located outside of North America and 14 in Canada. These outlets provide private label and third-party branded products and services to smaller communities. These independent dealers are often engaged in other retail operations and augment their businesses with our products and service offerings. Our dealer sales derived outside of the United States are not material.




RadioShack.com: Products and information are available through our commercial Web site www.radioshack.com. Online customers can purchase, return or exchange various products available through this Web site. Additionally, certain products ordered online may be picked up, exchanged or returned at neighborhood RadioShack locations.

RadioShack Service Centers: We maintain a service and support network to service the consumer electronics and personal computer retail industry in the U.S. We are a vendor-authorized service provider for many top tier manufacturers, such as Hewlett-Packard, LG Electronics, Motorola, Nokia, RCA/Thomson, and Sony, among others. In addition, we perform repairs for third-party extended service plan providers. At December 31, 2006, we had seven RadioShack service centers in the U.S. and one in Puerto Rico that repair certain name-brand and private label products sold through our various sales channels.

International Operations: At December 31, 2006, we had 9 company-operated stores located in major shopping malls and strip centers and 14 dealer outlets in Canada. As of January 31, 2007, we had closed all of our locations in Canada. Additionally, as of December 31, 2006, there were 146 RadioShack-branded stores and 25 dealers in Mexico. These RadioShack-branded stores and dealer outlets are overseen by a joint venture in which we are a minority owner with Grupo Gigante, S.A. de C.V. Our revenues from foreign customers are not material, and we do not have a material amount of long-lived assets located outside of the United States. We do not consolidate the operations of the Mexican joint venture in our consolidated financial statements.

Support Operations:
Our retail stores, along with our kiosks and dealer outlets, are supported by an established infrastructure. Below are the major components of this support structure.

Distribution Centers - At December 31, 2006, we had six distribution centers shipping over one million cartons each month, on average, to our retail stores and dealer outlets. One of these distribution centers also serves as a fulfillment center for our online customers. 

RadioShack Technology Services (“RSTS”) - Our management information system architecture is composed of a distributed, online network of computers that links all stores, customer channels, delivery locations, service centers, credit providers, distribution facilities and our home office into a fully integrated system. Each store has its own server to support the point-of-sale (“POS”) system. The majority of our company-operated stores communicate through a broadband network, which provides efficient access to customer support data. This design also allows store management to track sales and inventory at the product or sales associate level. RSTS provides the majority of our programming and systems analysis needs.

RadioShack Global Sourcing (“RSGS”) - RSGS serves our wide-ranging international import/export, sourcing, evaluation, logistics and quality control needs. RSGS’s activities support our branded and private label business.

RadioShack Customer Support - Using state-of-the-art telephone systems, Web self-help guides and data networks, RadioShack Customer Support responds to more than 1.3 million phone calls and e-mails annually. The responses include answers to customers’ unique requests for hard-to-find parts, batteries and accessories; customer service inquiries; and direct sales requests related to our retail stores. Additionally, in 2006, we outsourced calls regarding our service plans and direct sales requests related to our Web site.

Consumer Electronics Manufacturing - We operate two manufacturing facilities in the United States and one overseas manufacturing operation in China. These three manufacturing facilities employed approximately 1,600 employees as of December 31, 2006. We manufacture a variety of products, primarily sold through our retail outlets, including telephony, antennas, wire and cable products, and a variety of “hard-to-find” parts and accessories for consumer electronics products.
 



SEASONALITY
As with most other specialty retailers, our net sales and operating revenues, operating income and cash flows are greater during the winter holiday season than during other periods of the year. There is a corresponding pre-seasonal inventory build-up, which requires working capital related to the anticipated increased sales volume. This is described in “Cash Flow and Liquidity” under MD&A. Also, refer to Note 26 - “Quarterly Data (Unaudited)” in the Notes to Consolidated Financial Statements for our quarterly data, which shows seasonality trends. We expect this seasonality to continue.

PATENTS AND TRADEMARKS
We own or are licensed to use many trademarks and service marks related to our RadioShack stores in the United States and in foreign countries. We believe the RadioShack name and marks are well recognized by consumers and that the name and marks are associated with high-quality products and services. We also believe the loss of the RadioShack name and RadioShack marks would have a material adverse impact on our business. Our private label manufactured products are sold primarily under the RadioShack trademark and under the Accurian or Gigaware trademark. We also own various patents and patent applications relating to consumer electronic products.

We do not own any material patents or trademarks associated with our kiosk operations.

SUPPLIERS AND BRANDED RELATIONSHIPS
Our business strategy depends, in part, upon our ability to offer private label and third-party branded products, as well as to provide our customers access to third-party services. We utilize a large number of suppliers located in various parts of the world to obtain raw materials and private label merchandise. We do not expect a lack of availability of raw materials or any single private label product to have a material impact on our operations overall or on any of our operating segments. We have formed vendor and third-party service provider relationships with well-recognized companies such as Sprint Nextel, AT&T, Apple Computer, EchoStar Satellite Corporation (DISH Network), Hewlett-Packard Company and Sirius Satellite Radio. In the aggregate, these relationships have or are expected to have a significant impact on both our operations and financial strategy. Certain of these relationships are important to our business; the loss of or disruption in supply from these relationships could have a material adverse effect on our net sales and operating revenues until new relationships are formed. Additionally, we have been limited from time to time by various vendors and suppliers strictly on an economic basis where demand has exceeded supply.

ORDER BACKLOG
We have no material backlog of orders in any of our operating segments for the products or services that we sell.

COMPETITION
Due to consumer demand for wireless products and services, as well as rapid consumer acceptance of new digital technology products, the consumer electronics retail business continues to be highly competitive, primarily driven by technology and product cycles.

In the consumer electronics retailing business, competitive factors include price, product availability, quality and features, consumer services, manufacturing and distribution capability, brand reputation and the number of competitors. We compete in the sale of our products and services with several retail formats, including consumer electronics retailers such as Circuit City and Best Buy. Department and specialty retail stores, such as Sears and The Home Depot, compete on a more select product category scale. AT&T, Sprint Nextel, and other wireless providers compete directly with us in the wireless telephone category through their own retail and online presence. Mass merchandisers such as Wal-Mart and Target, and other alternative channels of distribution such as mail order and e-commerce retailers, compete with us on a more widespread basis. Numerous domestic and foreign companies also manufacture products similar to ours for other retailers, which are sold under nationally-recognized brand names or private labels.
 
Management believes we have two primary factors differentiating us from our competition. First, we have an extensive physical retail presence with convenient locations throughout the United States. Second, our specially trained sales staff is capable of providing cost-effective solutions for our customers’ routine electronics needs and distinct electronics wants, assisting with the selection of appropriate products and accessories and, when applicable, assisting customers with service activation.


While we believe we have an effective business strategy, we cannot give assurance that we will continue to compete successfully in the future, given the highly competitive nature of the consumer electronics retail business. Also, in light of the ever-changing nature of the consumer electronics retail industry, we would be adversely affected if our competitors were able to offer their products at significantly lower prices. Additionally, we would be adversely affected if our competitors were able to introduce innovative or technologically superior products not yet available to us, or if we were unable to obtain certain products in a timely manner or for an extended period of time. Furthermore, our business would be adversely affected if we failed to offer value-added solutions or if our competitors were to enhance their ability to provide these value-added solutions.

EMPLOYEES
As of December 31, 2006, we had approximately 40,000 employees, including temporary seasonal employees. Approximately 3,000 temporary employees, hired for the holiday selling season, remained at year end. Our employees are not covered by collective bargaining agreements, nor are they members of labor unions. We consider our relationship with our employees to be good.

AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports, proxy statements and other information can be inspected and copied at:

SEC Public Reference Room
100 F Street, N.E.
Room 1580
Washington, D.C. 20549-0213

You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of any material we have filed with the SEC by mail at prescribed rates from:

Public Reference Section
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-0213

You may obtain these materials electronically by accessing the SEC’s home page on the Internet at:

http://www.sec.gov

In addition, we make available, free of charge on our Internet Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as our proxy statements, as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review these documents, under the heading “Investor Relations,” by accessing our corporate Web site:

http://www.radioshackcorporation.com




ITEM 1A. RISK FACTORS.

One should carefully consider the following risks and uncertainties described below, as well as other information set forth in this Annual Report on Form 10-K. There may be additional risks that are not presently material or known, and the following list should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us.

We may be unable to successfully execute our strategy to provide cost-effective solutions to meet the routine electronics needs and distinct electronics wants of our customers.

To achieve our strategy, we have undertaken a variety of strategic initiatives. Our failure to successfully execute our strategy or the occurrence of any of the following events could have a material adverse effect on our business:

·  
Our inability to keep our extensive store distribution system updated and conveniently located near our target customers
·  
Our employees’ inability to provide solutions, answers, and information related to increasingly complex consumer electronics products
·  
Our inability to recognize evolving consumer electronics trends and offer products that customers need and want

Our inability to increase or maintain profitability in both our wireless and non-wireless platforms could adversely affect our results.

A critical component of our business strategy is to improve our overall profitability. Our ability to increase profitable sales in existing stores may also be affected by:

·  
Our success in attracting customers into our stores
·  
Our ability to choose the correct mix of products to sell
·  
Our ability to keep stores stocked with merchandise customers will purchase
·  
Our ability to maintain fully-staffed stores and trained employees

Any reductions or changes in the growth rate of the wireless industry or changes in the dynamics of the wireless communications industry could cause a material adverse effect on our gross profits and financial results.

Sales of wireless handsets and the related commissions and residual income constitute approximately one-third of our total revenue. Consequently, changes in the wireless industry, such as the ones discussed below, could have a material adverse effect on our results of operations and financial condition.

Lack of growth in the overall wireless industry tends to have a corresponding effect on our wireless sales. Because growth in the wireless industry is often driven by the adoption rate of new wireless handset technologies, the absence of these new technologies, or the lack of consumer interest in adopting these new technologies, could lead to slower growth or a decline in wireless industry profitability, as well as in our overall profitability.

Another change in the wireless industry that could materially and adversely affect our profitability is wireless industry consolidation. Consolidation in the wireless industry could lead to a concentration of competitive strength, particularly competition from wireless carriers’ retail stores, and could, therefore, adversely affect our business as competitive levels increase.

We may not be able to maintain our historical gross margin levels.

Historically, we have maintained gross margin levels ranging from 47% to 50%. We may not be able to maintain these margin levels in the future due to various factors, including increased higher sales of lower margin products such as personal electronics products and third-party branded products. If sales of these lower margin items continue to increase and replace sales of higher margin items, our gross margin and overall gross profit levels will be adversely affected.


Our competition is both intense and varied, and our failure to effectively compete could adversely affect our financial results.
 
In the retail consumer electronics marketplace, the level of competition is intense. We compete primarily with traditional consumer electronics retail stores and, to a lesser extent, with alternative channels of distribution such as e-commerce, telephone shopping services and mail order. We also compete with wireless carriers’ retail presence, as discussed above. Changes in the amount and degree of promotional intensity or merchandising strategy exerted by our current competitors and potential new competition could present us with difficulties in retaining existing customers, attracting new customers and maintaining our profit margins.

In addition, some of our competitors may use strategies such as lower pricing, wider selection of products, larger store size, higher advertising intensity, improved store design, and more efficient sales methods. While we attempt to differentiate ourselves from our competitors by focusing on the electronics specialty retail market, our business model may not enable us to compete successfully against existing and future competitors.

Adverse changes in national or regional U.S. economic conditions could negatively affect our financial results.
 
Adverse economic changes could have a significant negative impact on U.S. consumer spending, particularly discretionary spending for consumer electronics products, which, in turn, could directly affect our overall sales. Consumer confidence, recessionary and inflationary trends, equity market levels, consumer credit availability, interest rates, consumers’ disposable income and spending levels, energy prices, job growth and unemployment rates may impact the volume of customer traffic and level of sales in our locations. Negative trends of any of these economic conditions, whether national or regional in nature, could adversely affect our financial results, including our net sales and profitability.

Our inability to effectively manage our inventory levels, particularly excess or inadequate amounts of inventory, could adversely affect our financial results.
 
We source inventory both domestically and internationally, and our inventory levels are subject to a number of factors beyond our control. These factors, including technology advancements, reduced consumer spending and consumer disinterest in our product offerings, could lead to excess inventory levels. Additionally, we may not accurately assess appropriate product life cycles or end-of-life products, leaving us with excess inventory. To reduce these inventory levels, we may be required to lower our prices, adversely impacting our margin levels and our financial results.

Alternatively, we may have inadequate inventory levels for particular items, including popular selling merchandise, due to factors such as unavailability of products from our vendors, import delays, labor unrest, untimely deliveries or the disruption of international, national or regional transportation systems. The occurrence of any of these factors on our inventory supply could adversely impact our financial results.

Our inability to attract, retain and grow an effective management team or changes in the cost or availability of a suitable workforce to manage and support our operating strategies could cause our operating results to suffer.
 
Our success depends in large part upon our ability to attract, motivate and retain a qualified management team and employees. Qualified individuals needed to fill necessary positions could be in short supply. The inability to recruit and retain such individuals could continue to result in high employee turnover at our stores and in our company overall, which could have a material adverse effect on our business and financial results. Additionally, competition for qualified employees requires us to continually assess our compensation structure. Competition for qualified employees has required, and in the future could require, us to pay higher wages to attract a sufficient number of qualified employees, resulting in higher labor compensation expense. In addition, proposed changes in the federal minimum wage may adversely affect our compensation expense.
 

Our inability to successfully identify and enter into relationships with developers of new technologies or the failure of these new technologies to be adopted by the market could impact our ability to increase or maintain our sales and profitability. Additionally, the absence of new services or products and product features in the merchandise categories we sell could adversely affect our sales and profitability.

Our ability to maintain and increase revenues depends, to a large extent, on the periodic introduction and availability of new products and technologies. If we fail to identify these new products and technologies, or if we fail to enter into relationships with their developers prior to widespread distribution within the market, our sales and gross margins could be adversely affected. Furthermore, it is possible that these new products or technologies will never achieve widespread consumer acceptance, also adversely affecting our sales and profitability. Finally, the lack of innovative consumer electronics products, features or services that can be effectively featured in our store model could also impact our ability to increase or maintain our sales and profitability.

Failure to enter into, maintain and renew profitable relationships with providers of third-party branded products could adversely affect our sales and gross margins.

Our large selection of third-party branded products makes up a significant portion of our overall sales. If we are unable to create, maintain or renew our relationships with the suppliers of these products, our sales and our gross margins could be adversely impacted.

The occurrence of severe weather events or natural disasters could significantly damage or destroy outlets or prohibit consumers from traveling to our retail locations, especially during the peak winter holiday shopping season.

If severe weather or a catastrophic natural event, such as a hurricane or earthquake, occurs in a particular region and damages or destroys a significant number of our stores in that area, our overall sales would be reduced accordingly. In addition, if severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales would also be adversely affected. If severe weather occurs during the fourth quarter holiday season, the adverse impact to our sales and gross profit could be even greater than at other times during the year because we generate a significant portion of our sales and gross profit during this period.

We have contingent lease obligations related to our discontinued retail operations that, if realized, could materially and adversely affect our financial results.

We have contingent liabilities related to retail leases of locations which were assigned to other businesses. The majority of these contingent liabilities relate to various lease obligations arising from leases assigned to CompUSA, Inc. as part of the sale of our Computer City, Inc. subsidiary to CompUSA in August 1998. In the event CompUSA or the other assignees, as applicable, are unable to fulfill these obligations, we would be responsible for rent due under the leases, which could have a material adverse affect on our financial results.

Failure to comply with, or the additional implementation of, restrictions or regulations regarding the products and/or services we sell or changes in tax rules and regulations applicable to us, could adversely affect our business and our results of operations.

We are subject to various federal, state, and local laws and regulations including, but not limited to, the Fair Labor Standards Act and ERISA, each as amended, and regulations promulgated by the Internal Revenue Service, the United States Department of Labor, the Occupational Safety and Health Administration, and the Environmental Protection Agency. Failure to properly adhere to these and other applicable laws and regulations could result in the imposition of penalties or adverse legal judgments and could adversely affect our business and our results of operations. Similarly, the cost of complying with newly-implemented laws and regulations could adversely affect our business and our results of operations.


Any potential tariffs imposed on products that we import from China, as well as any significant strengthening of China’s currency against the U.S. dollar, could reduce our gross margins and our overall profitability.

We purchase a significant portion of our inventory from manufacturers located in China. Changes in trade regulations (including tariffs on imports) or the continued strengthening of the Chinese currency against the U.S. dollar could increase the cost of items we purchase, which in turn could have a material adverse effect on our gross margins.

Failure to protect the integrity and security of our customers’ information could expose us to litigation, as well as materially damage our standing with our customers.

Increasing costs associated with information security, including increased investments in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud could cause our business and results of operations to suffer materially. Additionally, if a significant compromise in the security of our customer information, including personal identification data, were to occur, it could have a material adverse effect on our reputation, business, operating results and financial condition, and could increase the costs we incur to protect against such security breaches.

Any terrorist activities in the U.S., as well as the international war on terror, could adversely affect our results of operations.

A terrorist attack or series of attacks on the United States could have a significant adverse impact on the United States’ economy. This downturn in the economy could, in turn, have a material adverse effect on our results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could cause greater uncertainty and cause the economy to suffer in ways that we currently cannot predict.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.
Information on our properties is located in MD&A and the financial statements included in this Annual Report on Form 10-K and is incorporated into this Item 2 by reference. The following items are discussed further on the referenced pages:
 
                  Page
Property, Plant and Equipment....................... 62
Commitments and Contingent Liabilities.......... 70
 
We lease, rather than own, virtually all of our retail facilities. Our stores are located in major shopping malls, stand-alone buildings and shopping centers owned by other entities. We lease one distribution center in the United States and five administrative offices and one manufacturing plant in China. We own the property on which the other five distribution centers and two manufacturing facilities are located within the United States. We sold and leased back the buildings and certain of the property at our corporate headquarters located in downtown Fort Worth, Texas. In connection with this transaction, we entered into a 20-year lease agreement, with four five-year options to renew.




RETAIL OUTLETS
The table below shows our retail locations at December 31, 2006, allocated among domestic RadioShack company-operated stores, kiosks and dealer and other outlets.
 

   
Average
Store Size
(Sq. Ft.)
     
 
At December 31,
 
       
2006
 
2005
 
2004
RadioShack company-operated stores (1)
   
2,496
         
4,467
         
4,972
         
5,046
 
Kiosks (2)
   
101
         
772
         
777
         
599
 
Dealer and other outlets (3)
   
N/A
         
1,596
         
1,711
         
1,788
 
Total number of retail locations
               
6,835
         
7,460
         
7,433
 
 
(1)    In 2006 we closed 505 RadioShack company-operated stores, net of new store openings and relocations. This decline resulted primarily from the implementation of our turnaround program, which included the closure of 481 company-operated stores, as well as our decision not to renew leases on other locations that failed to meet our financial return goals. See “Turnaround Program Overview” included in MD&A below. In 2005, we closed a total of 74 RadioShack company-operated stores, net of new store openings and relocations, due to our decision not to renew leases on locations that failed to meet our financial return goals.
(2)   As of December 31, 2006, SAM’S CLUB had the unconditional right to assume the operation of up to 66 additional kiosk locations. They assumed operation of 23 kiosk locations during the first quarter of 2005 and 21 in the fourth quarter of 2005 that were previously operated by us.
(3)   Dealer and other outlets included 9 company-operated stores and 14 dealer outlets in Canada at December 31, 2006. In 2005 and 2006, we closed 192 dealer outlets, net of new outlet openings or conversions to RadioShack company-operated stores. This decline was primarily due to the closure of smaller outlets that did not meet our financial return goals.

Real Estate Owned and Leased
   
Approximate Square Footage
At December 31,
 
   
2006
 
2005
 
(In thousands)
 
Owned
 
Leased
 
Total
 
Owned
 
Leased
 
Total
 
Retail
                                     
RadioShack company-
   operated stores
   
18
   
11,134
   
11,152
   
18
   
12,395
   
12,413
 
Kiosks
   
--
   
78
   
78
   
--
   
70
   
70
 
Canadian company-
   operated stores
   
--
   
23
   
23
   
--
   
22
   
22
 
                                       
Support Operations
                                     
Manufacturing
   
134
   
320
   
454
   
196
   
208
   
404
 
Distribution centers
   and office space
   
2,229
   
1,750
   
3,979
   
2,538
   
1,984
   
4,522
 
     
2,381
   
13,305
   
15,686
   
2,752
   
14,679
   
17,431
 




Below is a complete listing at December 31, 2006, of our top 40 dominant marketing areas for RadioShack company-operated stores, kiosks and dealers.
 

 
 
Dominant Marketing Area
 
Company Stores, Kiosks and Dealers
 
1
New York City
 
386
2
Los Angeles
 
306
3
Chicago
 
169
4
Philadelphia
 
164
5
Fort Worth-Dallas
 
163
6
Washington, DC
 
139
7
Houston
 
131
8
Boston
 
129
9
San Francisco-Oakland-San Jose
 
126
10
Atlanta
 
115
11
Denver
 
101
12
Seattle-Tacoma
 
100
13
Phoenix
 
96
14
Cleveland
 
95
15
Minneapolis-St. Paul
 
94
16
Tampa-St. Petersburg
 
88
17
Miami-Ft. Lauderdale
 
87
18
Detroit
 
85
19
St. Louis
 
78
20
Orlando-Daytona Beach-Melbourne
 
77
21
Sacramento-Stockton-Modesto
 
73
22
Pittsburgh
 
71
23
Portland, Oregon
 
66
24
Salt Lake City
 
65
25
Indianapolis
 
64
26
Raleigh-Durham
 
61
27
Baltimore
 
59
28
Charlotte
 
55
29
Hartford-New Haven
 
55
30
Norfolk-Portsmouth-Newport News
 
55
31
Cincinnati
 
54
32
Greenville-Spartanburg-Asheville
 
51
33
Kansas City
 
51
34
Nashville
 
50
35
San Antonio
 
50
36
Milwaukee
 
49
37
San Diego
 
48
38
Albuquerque-Santa Fe
 
46
39
Columbus
 
44
40
Grand Rapids-Kalamazoo-Battle Creek
 
43
 
TOTAL:
 
3,839




ITEM 3. LEGAL PROCEEDINGS.
We are currently a party to various class action lawsuits alleging that we misclassified certain RadioShack store managers as exempt from overtime in violation of the Fair Labor Standards Act or similar state laws, including a lawsuit styled Alphonse L. Perez, et al. v. RadioShack Corporation, filed on October 31, 2002, in the United States District Court for the Northern District of Illinois. We have reached a tentative settlement with counsel for the Perez plaintiffs and four other wage-hour lawsuits pending against us. This global settlement would result in a payment by us of approximately $8.8 million, in the aggregate, to resolve all five of the pending lawsuits. Of this amount, a charge of $8.5 million was recognized during the quarter ended June 30, 2006, with the balance recognized during the quarter ended September 30, 2006. The respective courts will need to approve the tentative settlement. We anticipate the settlement will ultimately be approved by each court. If, however, a final settlement is not approved, we nevertheless believe we have meritorious defenses, and in such event we would continue to vigorously defend these cases.

We have various other pending claims, lawsuits, disputes with third parties, investigations and actions incidental to the operation of our business. Although occasional adverse settlements or resolutions may occur and negatively impact earnings in the period or year of settlement, it is our belief that their ultimate resolution will not have a material adverse effect on our financial condition or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 2006.

EXECUTIVE OFFICERS OF THE REGISTRANT (SEE ITEM 10 OF PART III).
The following is a list, as of February 16, 2007, of our executive officers and their ages and positions.
 

Name
Position
(Date Appointed to Current Position)
Age
Julian C. Day (1)
Chief Executive Officer and Chairman of the Board (July 2006)
54
James F. Gooch (2)
Executive Vice President and Chief Financial Officer (August 2006)
39
David S. Goldberg (3)
Senior Vice President - General Counsel and Corporate Secretary (December 2005)
44
David P. Johnson (4)
Senior Vice President - Corporate Controller (May 2002)
54
Cara D. Kinzey (5)
Senior Vice President - Information Technology (March 2006)
40
Wesley V. Lowzinski (6)
Senior Vice President - General Merchandise Manager (May 2006)
54
John G. Ripperton (7)
Senior Vice President - Supply Chain (August 2006)
53
Gary M. Stone (8)
Senior Vice President - Real Estate (November 2005)
58




There are no family relationships among the executive officers listed, and there are no undisclosed arrangements or understandings under which any of them were appointed as executive officers. All executive officers of RadioShack Corporation are appointed by the Board of Directors to serve until their successors are appointed.

(1)
Mr. Day was appointed Chief Executive Officer and Chairman of the Board of RadioShack in July 2006. Prior to his appointment, Mr. Day was a private investor. Mr. Day became the President and Chief Operating Officer of Kmart Corporation (a mass merchandising company) in March 2002 and served as Chief Executive Officer of Kmart from January 2003 to October 2004. Following the merger of Kmart and Sears, Roebuck and Co. (a broadline retailer), Mr. Day served as a Director of Sears Holding Corporation (the parent company of Sears, Roebuck and Co. and Kmart Corporation) until April 2006. Mr. Day joined Sears as Executive Vice President and Chief Financial Officer in 1999, and was promoted to Chief Operating Officer and a member of the Office of the Chief Executive, where he served until 2002.

(2)
Mr. Gooch was appointed Executive Vice President and Chief Financial Officer in August 2006. Previously, Mr. Gooch served as Executive Vice President - Chief Financial Officer of Entertainment Publications (a company of InterActiveCorp) (a merchant promotions and consumer savings company) from May 2005 to August 2006. From 1996 to May 2005, Mr. Gooch served in various positions at Kmart Corporation (a mass merchandising company), including Vice President, Controller, Vice President, Treasurer and Vice President, Corporate Financial Planning and Analysis.

(3)
Mr. Goldberg has served as Senior Vice President, General Counsel and Corporate Secretary since December 2005. Previously, Mr. Goldberg served as Vice President - Law, Corporate Secretary and Acting General Counsel from May 2005 to December 2005, as Vice President - Law from December 2000 to December 2003, and as Assistant Corporate Secretary from December 2003 to May 2005.

(4)
Mr. Johnson has served as Senior Vice President - Corporate Controller since May 2006. Previously, Mr. Johnson served as Senior Vice President - Chief Accounting Officer from April 2005 to May 2006 and as Senior Vice President and Controller of RadioShack Corporation from May 2002 to April 2005. Mr. Johnson also served as Acting Chief Financial Officer from July 2004 through April 2005.

(5)
Ms. Kinzey has served as Senior Vice President - Information Technology since March 2006. Before joining RadioShack, Ms. Kinzey served as Vice President - Membership, Member Services and Credit from July 2003 to March 2006 for SAM’S CLUB (a warehouse club) and as Vice President - HR/Finance/Corporate Systems from 2002 to 2003 and Vice President of Store Systems from 2001 to 2002 for Wal-Mart Stores, Inc. (a discount retailer).

(6)
Mr. Lowzinski has served as Senior Vice President - General Merchandise Manager since May 2006. Mr. Lowzinski served as Division Vice President - Division Merchandising Manager from December 2005 to May 2006. Prior to joining RadioShack, Mr. Lowzinski was Global Product Merchant for The Home Depot, Inc. (a home improvement retailer) from 2004 to December 2005, and was a Senior Buyer: Audio for Circuit City Stores, Inc. (a consumer electronics retailer) from 1998 to 2004.

(7)
Mr. Ripperton has served as Senior Vice President - Supply Chain since August 2006. Previously, Mr. Ripperton served as Vice President - Distribution from 2002 to August 2006.

(8)
Mr. Stone has served as Senior Vice President - Real Estate since November 2005. From 2002 to November 2005, Mr. Stone was a consultant.




PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

PRICE RANGE OF COMMON STOCK
Our common stock is listed on the New York Stock Exchange and trades under the symbol "RSH." The following table presents the high and low trading prices for our common stock, as reported in the composite transaction quotations of consolidated trading for issues on the New York Stock Exchange, for each quarter in the two years ended December 31, 2006.

 
               
Dividends 
 
Quarter Ended
   
High
   
Low
   
Declared
 
December 31, 2006
 
$
20.40
 
$
16.49
 
$
0.25
 
September 30, 2006
   
19.71
   
13.76
   
--
 
June 30, 2006
   
18.83
   
14.00
   
--
 
March 31, 2006
   
22.90
   
18.74
   
--
 
                     
December 31, 2005
 
$
25.00
 
$
20.55
 
$
--
 
September 30, 2005
   
27.24
   
22.81
   
0.25
 
June 30, 2005
   
26.43
   
23.11
   
--
 
March 31, 2005
   
34.48
   
23.75
   
--
 

HOLDERS OF RECORD
At February 16, 2007, there were 21,316 holders of record of our common stock.

DIVIDENDS 
The Finance and Strategic Transactions Committee of the Board of Directors annually reviews our dividend policy. On November 6, 2006, our Board of Directors declared an annual dividend of $0.25 per share. The dividend was paid on December 20, 2006, to stockholders of record on December 1, 2006.

The following table sets forth information concerning purchases made by or on behalf of RadioShack or any affiliated purchaser (as defined in the SEC’s rules) of RadioShack common stock for the periods indicated.

PURCHASES OF EQUITY SECURITIES BY RADIOSHACK

 
 
 
 
   
Total Number
of Shares Purchased
(1)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
 
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(2)
 
October 1 - 31, 2006
   
---
 
$
---
   
---
 
$
209,909,275
 
November 1 - 30, 2006
   
---
 
$
---
   
---
 
$
209,909,275
 
December 1 - 31, 2006
   
---
 
$
---
   
---
 
$
209,909,275
 
Total
   
---
 
$
---
   
---
       

(1)    The total number of shares purchased would include all repurchases made during the periods indicated. In October, November and December of 2006, however, no shares were repurchased through a publicly announced plan or program in open-market transactions.
(2)   These publicly announced plans or programs consist of RadioShack’s $250 million share repurchase program, which was announced on March 16, 2005, and has no expiration date. On August 5, 2005, we suspended purchases under the $250 million share repurchase program during the period in which a financial institution purchased shares pursuant to an overnight share repurchase program. As of February 16, 2007, management had not determined if share repurchases under the $250 million program should be resumed.


ITEM 6. SELECTED FINANCIAL DATA.

SELECTED FINANCIAL DATA (UNAUDITED)
RADIOSHACK CORPORATION AND SUBSIDIARIES
 
Year Ended December 31, 
(Dollars and shares in millions, except per share amounts, ratios, locations and square footage)
   
2006
   
2005
   
2004
   
2003
   
2002
 
Statements of Income Data
                               
Net sales and operating revenues
 
$
4,777.5
 
$
5,081.7
 
$
4,841.2
 
$
4,649.3
 
$
4,577.2
 
Operating income
 
$
156.9
 
$
349.9
 
$
558.3
 
$
483.7
 
$
425.4
 
Net income
 
$
73.4
 
$
267.0
 
$
337.2
 
$
298.5
 
$
263.4
 
Earnings per share:
                               
Basic
 
$
0.54
 
$
1.80
 
$
2.09
 
$
1.78
 
$
1.50
 
Diluted
 
$
0.54
 
$
1.79
 
$
2.08
 
$
1.77
 
$
1.45
 
Shares used in computing earnings per share:
                               
Basic
   
136.2
   
148.1
   
161.0
   
167.7
   
173.0
 
Diluted
   
136.2
   
148.8
   
162.5
   
168.9
   
179.3
 
Gross profit as a percent of sales
   
46.7
%
 
46.7
%
 
50.3
%
 
49.8
%
 
48.9
%
SG&A expense as a percent of sales
   
39.8
%
 
37.4
%
 
36.7
%
 
37.4
%
 
37.8
%
Operating income as a percent of sales
   
3.3
%
 
6.9
%
 
11.5
%
 
10.4
%
 
9.3
%
Balance Sheet Data
                               
Inventories, net
 
$
752.1
 
$
964.9
 
$
1,003.7
 
$
766.5
 
$
971.2
 
Total assets
 
$
2,070.0
 
$
2,205.1
 
$
2,516.7
 
$
2,243.9
 
$
2,227.9
 
Working capital
 
$
615.4
 
$
641.0
 
$
817.7
 
$
808.5
 
$
878.7
 
Capital structure:
                               
Current debt
 
$
194.9
 
$
40.9
 
$
55.6
 
$
77.4
 
$
36.0
 
Long-term debt
 
$
345.8
 
$
494.9
 
$
506.9
 
$
541.3
 
$
591.3
 
Total debt
 
$
540.7
 
$
535.8
 
$
562.5
 
$
618.7
 
$
627.3
 
Total debt, net of cash and cash equivalents
 
$
68.7
 
$
311.8
 
$
124.6
 
$
(16.0
)
$
180.8
 
Stockholders' equity
 
$
653.8
 
$
588.8
 
$
922.1
 
$
769.3
 
$
728.1
 
Total capitalization (1)
 
$
1,194.5
 
$
1,124.6
 
$
1,484.6
 
$
1,388.0
 
$
1,355.4
 
Long-term debt as a % of total capitalization (1)
   
29.0
%
 
44.0
%
 
34.1
%
 
39.0
%
 
43.6
%
Total debt as a % of total capitalization (1)
   
45.3
%
 
47.6
%
 
37.9
%
 
44.6
%
 
46.3
%
Book value per share at year end
 
$
4.81
 
$
4.36
 
$
5.83
 
$
4.73
 
$
4.24
 
Financial Ratios
                               
Return on average stockholders' equity
   
11.8
%
 
35.3
%
 
39.9
%
 
39.9
%
 
35.0
%
Return on average assets
   
3.4
%
 
11.3
%
 
14.2
%
 
13.4
%
 
11.8
%
Annual inventory turnover
   
2.9
   
2.7
   
2.6
   
2.8
   
2.4
 
Other Data
                               
EBITDA (2)
 
$
285.1
 
$
473.7
 
$
659.7
 
$
575.7
 
$
520.1
 
Dividends declared per share
 
$
0.25
 
$
0.25
 
$
0.25
 
$
0.25
 
$
0.22
 
Capital expenditures
 
$
91.0
 
$
170.7
 
$
229.4
 
$
189.6
 
$
106.8
 
Number of retail locations at year end
   
6,835
   
7,460
   
7,433
   
7,051
   
7,213
 
Average square footage per RadioShack
company-operated store
   
2,496
   
2,489
   
2,529
   
2,450
   
2,400
 
Comparable store sales (decrease) increase
   
(5.6
%)
 
0.9
%
 
3.2
%
 
2.4
%
 
(1.1
%)
Shares outstanding
   
135.8
   
135.0
   
158.2
   
162.5
   
171.7
 

This table should be read in conjunction with MD&A and the Consolidated Financial Statements and related Notes.

(1)   Capitalization is defined as total debt plus total stockholders' equity.
(2)   EBITDA, a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation and amortization. The comparable financial measure to EBITDA under GAAP is net income. EBITDA is used by management to evaluate the operating performance of our business for comparable periods. EBITDA should not be used by investors or others as the sole basis for formulating investment decisions as it excludes a number of important items. We compensate for this limitation by using GAAP financial measures as well in managing our business. In the view of management, EBITDA is an important indicator of operating performance because EBITDA excludes the effects of financing and investing activities by eliminating the effects of interest and depreciation costs.




The following table is a reconciliation of EBITDA to net income.

 
 
Year Ended December 31, 
(In millions)
   
2006
   
2005
   
2004
   
2003
   
2002
 
Reconciliation of EBITDA to Net Income
                               
EBITDA
 
$
285.1
 
$
473.7
 
$
659.7
 
$
575.7
 
$
520.1
 
                                 
Interest expense, net of interest income
   
(36.9
)
 
(38.6
)
 
(18.2
)
 
(22.9
)
 
(34.4
)
Provision for income taxes
   
(38.0
)
 
(51.6
)
 
(204.9
)
 
(174.3
)
 
(161.5
)
Depreciation and amortization
   
(128.2
)
 
(123.8
)
 
(101.4
)
 
(92.0
)
 
(94.7
)
Other (loss) income, net
   
(8.6
)
 
10.2
   
2.0
   
12.0
   
33.9
 
Cumulative effect of change in accounting
principle, net of $1.8 million tax benefit in 2005
   
--
   
(2.9
)
 
--
   
--
   
--
 
Net income
 
$
73.4
 
$
267.0
 
$
337.2
 
$
298.5
 
$
263.4
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (“MD&A”).

This MD&A section discusses our results of operations, liquidity and financial condition, risk management practices, critical accounting policies, and estimates and certain factors that may affect our future results, including economic and industry-wide factors. Our MD&A should be read in conjunction with our consolidated financial statements and accompanying notes, included in this Annual Report on Form 10-K, as well as the Risk Factors set forth in Item 1A above.

OVERVIEW
RadioShack is primarily a specialty retailer of consumer electronics products and services. We seek to differentiate ourselves from our various competitors by providing cost-effective solutions to meet the routine electronics needs and distinct electronics wants of our customers. This strategy allows us to take advantage of the unique opportunities provided by our extensive retail presence, knowledgeable sales staff, and relationships with reputable vendors.

Overall, our day-to-day focus is concentrated in four major areas:

·  
Provide our customers a positive in-store experience
·  
Grow gross profit dollars by increasing the overall value of each ticket
·  
Reduce costs continually throughout the organization
·  
Allocate the dollars generated from operations appropriately, investing only in projects that have an adequate return or are operationally necessary
 
TURNAROUND PROGRAM REVIEW
Due to negative trends that developed in our business during calendar year 2005, we announced a turnaround program on February 17, 2006, that contained four key components:

·  
Update our inventory
·  
Focus on our top-performing RadioShack company-operated stores, while closing 400 to 700 RadioShack company-operated stores, and aggressively relocate other RadioShack company-operated stores
·  
Consolidate our distribution centers
·  
Reduce our overhead costs

Through December 31, 2006, we conducted a liquidation of certain inventory during the summer and fall of 2006 and replaced underperforming merchandise with new faster-moving merchandise. During the summer of 2006, we also focused on our top-performing stores and completed the closure of 481 underperforming stores, reducing the number of retail employees in connection with these closures. Additionally, we consolidated our distribution centers in the fall of 2006. Management has also reduced our cost structure, including our advertising spend rate and our workforce within our corporate headquarters. A number of other cost reductions have also been implemented. As of December 31, 2006, we considered our turnaround program to be substantially complete.
 


See “Financial Impact of Turnaround Program” below for a discussion of the financial impact of our turnaround program.

KEY INDICATORS OF FINANCIAL PERFORMANCE FOR MANAGEMENT
We use several key financial performance metrics, including metrics related to net sales and operating revenues, gross profit and gross margin, and operating income.

Net Sales and Operating Revenues Metrics

As a retailer, we consider profitable growth in revenue to be one of the key indicators of our overall financial performance. We examine our revenue by using several key metrics, including overall change in net sales and operating revenues and in comparable store sales performance, as well as the related gross profit derived from these sales.

The change in net sales and operating revenue, coupled with the review of gross profit dollars, provides us with an overall indication of the demand for our products and services. Comparable store sales include the sales of any domestic retail location where we have a physical presence, including RadioShack company-operated stores and kiosks, that has more than 12 full months of recorded sales.

The table below summarizes these revenue metrics for the periods indicated:

   
Year Ended December 31,
 
     
2006
   
2005
   
2004
 
Consolidated net sales and operating
revenues (decline) growth
   
(6.0
%)
 
5.0
%
 
4.1
%
Comparable store sales (decrease) increase
   
(5.6
%)
 
0.9
%
 
3.2
%

Consolidated net sales and operating revenues as well as comparable store sales declined in 2006, due in part to a sales decrease within our RadioShack company-operated stores segment’s wireless and modern home platforms. Additionally, these decreases were partially attributable to a change in the manner in which we recognize income associated with sales of prepaid wireless airtime. Beginning in 2006, principally as a result of changes in our agreements with wireless carriers, we no longer record the full value of airtime purchased by customers, but rather record only our markup on the sale as revenue. This change reduced our revenue by approximately $138.6 million for the year ended December 31, 2006, as compared to the corresponding prior year period. This change had no impact on our gross profit or operating income. Consolidated net sales and operating revenues were also impacted by the 481 company-operated stores closed in connection with our turnaround plan.

Gross Profit and Gross Margin Metrics

We view gross profit dollars and gross margin as key metrics of our financial performance, as they indicate the extent to which we are able to manage our product costs and sales volume.

The table below summarizes gross profit and gross margin for the periods indicated:
 
   
Year Ended December 31,
 
   
2006
 
2005
 
2004
 
Gross profit
 
$
2,233.1
 
$
2,375.4
 
$
2,434.5
 
Gross margin
   
46.7
%
 
46.7
%
 
50.3
%




Operating Income Metrics

Operating income from our two reportable segments, as well as the other and unallocated categories, is as follows:

   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
RadioShack company-operated stores (1)
 
$
525.8
 
$
697.6
 
$
873.5
 
Kiosks (2)
   
(25.1
)
 
(12.4
)
 
(5.8
)
Other (3)
   
(1.1
)
 
35.2
   
57.2
 
     
499.6
   
720.4
   
924.9
 
                     
Unallocated (4)
   
(342.7
)
 
(370.5
)
 
(366.6
)
Operating income
 
$
156.9
 
$
349.9
 
$
558.3
 

(1)    Included in the RadioShack company-operated stores segment is a charge of $10.2 million for property, plant and equipment impairment for the year ended December 31, 2006.
(2)    Included in the kiosks segment are impairment charges of $18.6 million to goodwill, $10.7 million to an intangible asset, and $1.8 million to property, plant and equipment for the year ended December 31, 2006.
(3)    The decline in the other category for the year ended December 31, 2006, was primarily driven by a decline in our service centers operating income. Additionally, this category includes charges of $1.8 million and $1.2 million for impairment of property, plant and equipment and for goodwill, respectively, for the year ended December 31, 2006, which contributed to the decline.
(4)    Included in the unallocated category are overhead and corporate expenses that are not allocated to the separate reportable segments for management reporting purposes. Unallocated costs include corporate departmental expenses such as payroll and benefits, as well as advertising, insurance, distribution and information technology costs.

For more information regarding our operating segments, see Note 27 - “Segment Reporting” in our Notes to Consolidated Financial Statements.

RETAIL OUTLETS
The table below shows our retail locations at December 31, 2006, allocated among domestic RadioShack company-operated stores, kiosks and dealer and other outlets.

   
Average
Store Size
(Sq. Ft.)
   
 At December 31,
 
       
 
 2006
   
 
 2005
   
 
 2004
RadioShack company-operated stores (1)
   
2,496
         
4,467
         
4,972
         
5,046
 
Kiosks (2)
   
101
         
772
         
777
         
599
 
Dealer and other outlets (3)
   
N/A
         
1,596
         
1,711
         
1,788
 
Total number of retail locations
               
6,835
         
7,460
         
7,433
 
 
(1)   In 2006 we closed 505 RadioShack company-operated stores, net of new store openings and relocations. This decline resulted primarily from the implementation of our turnaround program, which included the closure of 481 company-operated stores, as well as our decision not to renew leases on other locations that failed to meet our financial return goals. See “Turnaround Program Overview” included in MD&A below. In 2005, we closed a total of 74 RadioShack company-operated stores, net of new store openings and relocations, due to our decision not to renew leases on locations that failed to meet our financial return goals.
(2)    As of December 31, 2006, SAM’S CLUB had the unconditional right to assume the operation of up to 66 additional kiosk locations. They assumed operation of 23 kiosk locations during the first quarter of 2005 and 21 in the fourth quarter of 2005 that were previously operated by us.
(3)   Dealer and other outlets included 9 company-operated stores and 14 dealer outlets in Canada at December 31, 2006. In 2005 and 2006, we closed 192 dealer outlets, net of new outlet openings or conversions to RadioShack company-operated stores. This decline was primarily due to the closure of smaller outlets that did not meet our financial return goals.




RESULTS OF OPERATIONS

NET SALES AND OPERATING REVENUES

Sales decreased 6.0% to $4,777.5 million in 2006 from $5,081.7 million in 2005. We also had a 5.6% decrease in comparable store sales. These changes were primarily the result of a 58% decrease in our service platform sales due primarily to the manner in which we began recognizing sales of prepaid wireless airtime in 2006 and a 5% decrease in our wireless platform sales. In addition, all platforms were affected by the decline in the number of RadioShack company-operated stores as a result of our turnaround program.

Consolidated net sales and operating revenues for our two reportable segments and service centers and other sales are as follows:
   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
RadioShack company-operated stores
 
$
4,079.8
 
$
4,480.8
 
$
4,472.4
 
Kiosks
   
340.5
   
262.7
   
56.4
 
Other sales
   
357.2
   
338.2
   
312.4
 
Consolidated net sales and operating revenues
 
$
4,777.5
 
$
5,081.7
 
$
4,841.2
 

The following table provides a summary of our consolidated net sales and operating revenues by platform and as a percent of net sales and operating revenues. These consolidated platform sales include sales from our RadioShack company-operated stores and kiosks, as well as other sales.

   
Consolidated Net Sales and Operating Revenues
 
   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
Wireless
 
$
1,655.0
   
34.6
%
$
1,746.0
   
34.3
%
$
1,636.2
   
33.8
%
Accessory
   
1,087.7
   
22.8
   
1,040.2
   
20.5
   
1,014.1
   
20.9
 
Personal electronics
   
751.8
   
15.7
   
746.5
   
14.7
   
653.4
   
13.5
 
Modern home
   
612.0
   
12.8
   
672.6
   
13.2
   
695.4
   
14.4
 
Power
   
271.4
   
5.7
   
302.4
   
6.0
   
312.0
   
6.4
 
Technical
   
198.5
   
4.2
   
205.2
   
4.0
   
204.2
   
4.2
 
Service
   
109.6
   
2.3
   
258.1
   
5.1
   
210.7
   
4.4
 
Service centers and other
sales (1)
   
91.5
   
1.9
   
110.7
   
2.2
   
115.2
   
2.4
 
Consolidated net sales and
operating revenues
 
$
4,777.5
   
100.0
%
$
5,081.7
   
100.0
%
$
4,841.2
   
100.0
%
 
(1)
   Service centers and other sales include outside sales from our service centers, in addition to RadioShack company-operated store repair revenue and outside sales of our global sourcing operations and domestic and overseas manufacturing facilities.
 



2006 COMPARED WITH 2005

RadioShack Company-Operated Stores

   
Net Sales and Operating Revenues
 
   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
Wireless
 
$
1,288.0
   
31.6
%
$
1,453.3
   
32.4
%
$
1,553.9
   
34.7
%
Accessory
   
1,006.6
   
24.7
   
976.8
   
21.8
   
964.5
   
21.6
 
Personal electronics
   
683.2
   
16.7
   
680.1
   
15.2
   
596.6
   
13.3
 
Modern home
   
539.5
   
13.2
   
602.4
   
13.4
   
627.5
   
14.0
 
Power
   
258.1
   
6.3
   
289.1
   
6.5
   
298.6
   
6.7
 
Technical
   
184.6
   
4.5
   
192.1
   
4.3
   
191.7
   
4.3
 
Service
   
105.4
   
2.6
   
251.1
   
5.6
   
200.7
   
4.5
 
Other revenue
   
14.4
   
0.4
   
35.9
   
0.8
   
38.9
   
0.9
 
Net sales and operating
revenues
 
$
4,079.8
   
100.0
%
$
4,480.8
   
100.0
%
$
4,472.4
   
100.0
%

All sales in the platforms shown above were impacted by the closure of the RadioShack company-operated stores related to our turnaround program.

Sales in our wireless platform (includes wireless handsets and communication devices such as scanners, GPS units and two-way radios) decreased in dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These decreases were primarily driven by a decline in unit sales of wireless handsets. Factors contributing to this sales decline included an unfavorable mix shift to prepaid handsets from postpaid, a sluggish wireless industry environment, a sharp unit sales decline in the northeastern United States, and fewer RadioShack stores. These decreases were partially offset by the introduction of various GPS products.

Sales in our accessory platform (includes accessories for home entertainment products, wireless handsets, digital imaging products and computers) increased in dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These increases were primarily the result of higher sales of digital music accessories associated with higher sales of digital music players included in our personal electronics platform, in addition to higher Bluetooth wireless accessories and flash memory sales. These increases were partially offset by a decline in home entertainment accessory sales.

Sales in our personal electronics platform (includes digital cameras, camcorders, toys, wellness products, digital music players and satellite radios) increased in both dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These sales increases were driven primarily by increased sales of digital music players, offset by decreases in most of the remaining personal electronics categories.

Sales in our modern home platform (includes residential telephones, home audio and video end-products, direct-to-home (“DTH”) satellite systems, and computers) decreased in both dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These decreases were primarily due to lower sales of telephones, home computers, and DVD players, which were partially offset by increased sales of flat panel televisions.

Sales in our power platform (includes general and special purpose batteries and battery chargers) decreased in both dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These sales decreases were due primarily to a decrease in sales of both general and special purpose batteries caused by factors such as reduced sales of products requiring batteries and customer tendencies to simply replace older cordless phones rather than replacing their batteries.

Sales in our technical platform (includes wire and cable, connectivity products, components and tools, as well as hobby and robotic products) decreased in dollars, but increased slightly as a percentage of net sales and operating revenues in 2006, compared to 2005. The dollar decrease was primarily the result of a decrease in sales of specialty tools.




Sales in our service platform (includes prepaid wireless airtime, bill payment revenue and extended service plans) decreased in dollars and as a percentage of net sales and operating revenues in 2006, compared to 2005. These decreases were primarily attributable to a change in the manner in which we recognize income associated with sales of prepaid wireless airtime. Beginning in 2006, principally as a result of changes in our agreements with wireless carriers, we no longer record the full value of airtime purchased by customers, but rather record only our markup on the sale as revenue. This change reduced our total company-operated stores revenue by approximately $134.6 million for 2006, as compared to the corresponding prior year period, but had no impact on our gross profit or operating income.

Other revenue (includes RadioShack company-operated store repair revenue and other revenue) decreased slightly in both dollars and as a percentage of net sales and operating revenues.

Kiosks

Kiosk sales increased $77.8 million for the year ended December 31, 2006, when compared to the prior year period. This increase was primarily the result of an increase in the number of Sprint kiosks in late 2005 that operated for all of 2006. Kiosk sales consist primarily of wireless platform sales and related accessory platform sales.

Other Sales

Other sales include sales to our independent dealers, outside sales from our service centers, sales generated by our www.radioshack.com Web site, sales in our nine now closed Canadian company-operated stores, sales to commercial customers, and outside sales of our global sourcing operations and manufacturing facilities. These sales were up $19.0 million for 2006, or an increase of 5.6%, when compared to 2005. These sales increases were primarily due to an increase in sales to our network of independent dealers and an increase in Web site sales. These increases were partially offset by the negative impact of five service centers, which we sold or closed in 2006.

GROSS PROFIT

Consolidated gross profit for 2006 was $2,233.1 million or 46.7% of net sales and operating revenues, compared with $2,375.4 million or 46.7% of net sales and operating revenues in 2005, resulting in a 6.0% decrease in gross profit. The decrease in gross profit dollars was primarily the result of a decrease in net sales and operating revenues; the impact of inventory liquidation related to the store closures involved in the turnaround program; a mix change toward lower gross margin products, including higher relative sales of digital music players and lower margin accessories; and more aggressive promotional activity. The gross margin rate was positively affected by the change in the manner in which we began recognizing income associated with sales of prepaid wireless airtime in 2006, as discussed above.

SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) EXPENSE

Our consolidated SG&A expense increased slightly in dollars and increased as a percent of net sales and operating revenues to 39.8% for the year ended December 31, 2006, from 37.4% for the year ended December 31, 2005. The dollar increase for 2006 was primarily due to an increase in payroll and commissions, plus rent expense; this increase was substantially offset by a decrease in advertising expense. However, headcount reductions from store closures, service center closures and corporate headquarters reductions helped lower compensation expense (excluding the severance charges) in the third and fourth quarters of 2006. We expect SG&A to be lower in 2007 when compared to 2006, due to an ongoing scrutiny of costs, the impact of store closures and cost reductions commencing in the second half of 2006.



The table below summarizes the breakdown of various components of our consolidated SG&A expense and its related percentage of total net sales and operating revenues.
 
   
Year Ended December 31,
 
   
2006
 
2005
 
2004
 
(In millions)
   
Dollars
   
% of Sales & Revenues
   
Dollars
   
% of Sales & Revenues
   
Dollars
   
% of Sales & Revenues
 
Payroll and commissions
 
$
856.8
   
17.9
%
$
826.4
   
16.3
%
$
769.3
   
15.9
%
Rent
   
315.1
   
6.6
   
295.5
   
5.7
   
259.4
   
5.4
 
Advertising
   
216.3
   
4.5
   
263.1
   
5.2
   
271.5
   
5.6
 
Other taxes (excludes
income taxes)
   
127.5
   
2.7
   
126.5
   
2.5
   
105.9
   
2.2
 
Utilities and telephone
   
68.4
   
1.4
   
72.4
   
1.4
   
72.9
   
1.5
 
Insurance
   
66.2
   
1.4
   
66.7
   
1.3
   
80.8
   
1.7
 
Professional fees
   
52.2
   
1.1
   
46.3
   
0.9
   
29.0
   
0.6
 
Credit card fees
   
40.1
   
0.8
   
40.4
   
0.8
   
37.7
   
0.8
 
Licenses
   
15.0
   
0.3
   
15.1
   
0.3
   
12.3
   
0.3
 
Repairs and maintenance
   
13.4
   
0.3
   
13.1
   
0.3
   
12.4
   
0.3
 
Recruiting, training &
employee relations
   
12.5
   
0.3
   
14.7
   
0.3
   
11.5
   
0.2
 
Stock purchase and
savings plans
   
12.4
   
0.3
   
17.4
   
0.3
   
20.2
   
0.3
 
Printing, postage and office
supplies
   
12.1
   
0.3
   
10.8
   
0.2
   
9.6
   
0.2
 
Travel
   
9.8
   
0.2
   
12.1
   
0.2
   
9.6
   
0.2
 
Warranty and product repair
   
7.2
   
0.2
   
12.0
   
0.2
   
17.9
   
0.3
 
Other
   
78.7
   
1.5
   
69.2
   
1.5
   
54.8
   
1.2
 
                                       
   
$
1,903.7
   
39.8
%
$
1,901.7
   
37.4
%
$
1,774.8
   
36.7
%
 
Payroll and commissions expense increased in dollars and as a percentage of net sales and operating revenues. These increases were primarily the result of pay plan changes for RadioShack company-operated stores initiated in early 2006, severance related to our turnaround program, utilization of more labor hours in our company-operated stores during the first half of the year, and increased headcount in our kiosk operations. We also began the required expensing of stock options as of January 1, 2006, which increased compensation expense by $12.0 million, when compared to 2005.

Rent expense increased in both dollars and as a percent of net sales and operating revenues. The rent increase was primarily driven by a full year of rental payments on our corporate campus, as well as the addition of kiosk locations, which was partially offset by store closures.

Advertising expense decreased in both dollars and as a percent of net sales and operating revenues. This decrease was primarily due to a change in our media strategy, as we changed the mix of media used in our advertising program from television to more radio and newspaper usage, as well as reduced sponsorship programs.

Professional fees increased in both dollars and as a percent of net sales and operating revenues. The increase relates to the defense costs for certain class action lawsuits, including $5.1 million of the $8.8 million discussed under Note 12 - "Litigation" to our Notes to Consolidated Financial Statements, as well as the cost of consultants engaged in various projects.

Other SG&A expense includes lease buyouts associated with the turnaround program for the year ended December 31, 2006.



DEPRECIATION AND AMORTIZATION

The table below gives a summary of our depreciation and amortization expense by segment.

   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
RadioShack company-operated stores
 
$
58.2
 
$
52.0
 
$
49.7
 
Kiosks
   
10.2
   
9.0
   
2.2
 
Other
   
2.3
   
6.6
   
2.8
 
Unallocated
   
57.5
   
56.2
   
46.7
 
Consolidated depreciation and amortization
 
$
128.2
 
$
123.8
 
$
101.4
 

Due to the impairment of long-lived assets discussed below and the closing of 481 company-operated stores in 2006, we anticipate depreciation and amortization to be below the 2006 level.

IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER CHARGES

In February 2006, as part of our turnaround program, our board of directors approved the closure of 400 to 700 RadioShack company-operated stores. During the first half of 2006, we identified the stores for closure and subsequently performed the impairment test. Based on the remaining estimated future cash flows related to these specific stores, it was determined that the net book value of some of the stores' long-lived assets to be held for use was not recoverable. For the stores with insufficient estimated cash flows, we wrote down the associated long-lived assets to their estimated fair value, resulting in a $9.2 million impairment loss related to our RadioShack company-operated store segment. By July 31, 2006, we had closed 481 specific stores under the turnaround program; there were no additional closures under this program for the remainder of the year.

Also, we purchased certain assets from Wireless Retail, Inc. during the fourth quarter of 2004 for $59.6 million, which resulted in the recognition of $18.6 million of goodwill and a $32.1 million intangible asset related to a five-year agreement with SAM'S CLUB to operate wireless kiosks in approximately 540 SAM'S CLUB locations nationwide. These assets relate to our kiosk segment. As a result of continued company and wireless industry growth challenges, together with changes in our senior leadership team during the third quarter of 2006 that resulted in a refocus on allocation of capital and resources towards other areas of our business, we determined that our long-lived assets, including goodwill associated with our kiosk operations, were impaired. We performed impairment tests on both the long-lived assets associated with our SAM'S CLUB agreement, including the intangible asset relating to the five-year agreement, and the accompanying goodwill.
 
With respect to the long-lived tangible and intangible assets, we compared their carrying values with their estimated fair values using a discounted cash flow model, which reflected our lowered expectations of wireless revenue growth and the ceased expansion of our kiosk business, and determined that the intangible asset relating to the five-year agreement was impaired. This assessment resulted in a $10.7 million impairment charge to the intangible asset related to our kiosk segment. The remaining intangible balance will be amortized over the remaining life of the SAM'S CLUB agreement, which is scheduled to expire in September 2009. The balance at December 31, 2006, was $7.8 million.
 
With respect to the goodwill of $18.6 million, we estimated the fair value of the SAM'S CLUB reporting unit using a discounted cash flow model similar to that used in the long-lived asset impairment test. We compared it with the carrying value of the reporting unit and determined that the goodwill was impaired. As the carrying value of the reporting unit exceeded its estimated fair value, we then compared the implied fair value of the reporting unit's goodwill with the carrying amount of goodwill. This resulted in an $18.6 million impairment of goodwill, related to our kiosk segment.

Additionally, based on historical and expected cash flows for company-operated stores and kiosks, we recorded an impairment charge of $4.6 million related to property and equipment and an impairment charge of $1.2 million related to goodwill.


These impairment charges, aggregating $44.3 million, were recorded within impairment of long-lived assets and other charges in the accompanying 2006 Consolidated Statement of Income.

NET INTEREST EXPENSE

Consolidated interest expense, net of interest income, was $36.9 million for 2006 versus $38.6 million for 2005, a decrease of $1.7 million or 4%.

Interest expense decreased slightly to $44.3 million in 2006 from $44.5 million in 2005. This decrease in the interest expense during 2006 was attributable to lower average outstanding debt, which was partially offset by rising interest rates on our interest rate swap agreements.

Interest income increased 25% to $7.4 million in 2006 from $5.9 million in 2005. These changes were due to a higher average investment balance for 2006, as well as increases in investment rates.

We anticipate net interest expense for 2007 will be below the 2006 level, due to larger average cash balances when compared to the prior year.

OTHER (LOSS) INCOME

For the year ended December 31, 2006, we recognized a loss of $8.6 million in other (loss) income. This loss included $5.9 million relating to our derivative exposure to Sirius Satellite Radio Inc. (“Sirius”) warrants, which was a result of the required “mark to market” accounting treatment of these warrants. The additional $2.7 million related to an other than temporary impairment of other investments.

During the first quarter of 2005, we sold all rights, title and interest to the “Tandy” name within Australia and New Zealand to an affiliate of Dick Smith Electronics, an Australia-based consumer electronics retailer. This transaction resulted in the recognition of $10.2 million in other income in 2005.

INCOME TAX PROVISION

Our provision for income taxes reflects an effective income tax rate of 34.1% for 2006 and 16.0% for 2005. The fluctuation in the effective tax rate during 2006 was due primarily to the tax benefit associated with inventory donations occurring in the quarter ended June 30, 2006. During the second quarter of 2006, we donated approximately $20 million in inventory to charitable organizations in a manner that provided us with a tax deduction in excess of the inventory cost. The entire tax benefit attributable to this charitable donation deduction is reflected in the effective tax rate for the second quarter. The lower effective tax rates in 2005 were principally due to a favorable non-cash income tax benefit of $56.5 million relating to the release of a tax contingency reserve upon the expiration of the associated statute of limitations. This reserve related to losses sustained in connection with our European operations, which were fully dissolved by 1995. The release of the reserve occurred in the third quarter of 2005 because the statute of limitations governing these issues expired on September 30, 2005. We anticipate the effective tax rate will increase in 2007, primarily as a result of not repeating the 2006 donation activity previously discussed.

2005 COMPARED WITH 2004

RESULTS OF OPERATIONS

NET SALES AND OPERATING REVENUES

Sales increased 5.0% to $5,081.7 million in 2005 from $4,841.2 million in 2004. We had a 0.9% increase in comparable store sales. These increases were primarily the result of a 7% increase in our wireless platform sales and a 14% increase in our personal electronics platform sales. A net addition of 178 kiosk locations contributed to our overall sales increase. Kiosks were the primary driver of the wireless platform sales increase.




RadioShack Company-Operated Stores

Sales in our wireless platform decreased in dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. These decreases were primarily driven by our announced wireless carrier transition and a significant decline in the growth rate of industry gross subscriber additions.

Sales in our accessory platform increased in dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. These increases were primarily the result of higher sales of iGo power adapters, digital music accessories and media storage, which were partially offset by a decline in home entertainment and wireless accessory sales.

Sales in our personal electronics platform increased in both dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. These sales increases were driven primarily by increased sales of satellite radios (including income from Sirius warrants earned); digital music players; and digital imaging products.

Sales in our modern home platform decreased in both dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. These decreases were primarily due to sales decreases in DTH satellite systems, cordless telephones and desktop computers, which were partially offset by increased portable DVD player, video projector, and home network product sales. 

Sales in our power platform decreased in both dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. The sales decrease was primarily due to a decrease in special purpose battery sales.

Sales in our service platform increased in dollars and as a percentage of net sales and operating revenues in 2005, compared to 2004. These increases were primarily due to an increase in sales of prepaid wireless airtime.

Sales in our technical platform increased slightly in dollars and remained the same as a percentage of net sales and operating revenues in 2005, compared to 2004. The dollar increase was primarily due to higher sales of tools and robotic kits.

Other revenue decreased slightly in both dollars and as a percentage of net sales and operating revenues.

Kiosks

Kiosk sales increased $206.3 million for the year ended December 31, 2005, when compared to the prior year period. This increase was the result of an increased number of kiosk locations over 2004.

Other Sales

Other sales were up $25.8 million for 2005, or an increase of 8.3%, when compared to 2004. This sales increase was primarily due to increased sales to dealers over 2004, in addition to e-commerce and service center sales increases.

GROSS PROFIT

Consolidated gross profit for 2005 was $2,375.4 million or 46.7% of net sales and operating revenues, compared with $2,434.5 million or 50.3% of net sales and operating revenues in 2004, resulting in a 2.4% decrease in gross profit and a 3.6 percentage point decrease in our gross profit percentage. These decreases were partially the result of write-downs in the second half of 2005 as a result of our inventory obsolescence reviews, in which we identified a significant amount of slow-moving inventory to remove from our assortment. A mix change toward our lower gross margin kiosk channel also contributed to the overall decrease in our gross margin rate. Additionally, our merchandise mix among platforms shifted due to significant growth in the sale of digital music players and digital imaging products, as well as prepaid airtime refills, within the lower gross margin personal electronics platform and the service platform, respectively.




SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Our consolidated SG&A expense increased 7.2% in dollars and increased as a percent of net sales and operating revenues to 37.4% for the year ended December 31, 2005, from 36.7% for the year ended December 31, 2004. The dollar increase for 2005 was primarily due to an increase in payroll and commissions expense, plus rent expense.

Payroll and commissions expense increased in dollars and as a percentage of net sales and operating revenues. This dollar increase was due to the expansion of our kiosk business, as well as an increase in staffing in the RadioShack company-operated stores during the winter holiday selling season.

Rent expense increased in both dollars and as a percent of net sales and operating revenues. This increase was due primarily to the full year effect of the acquisition of the SAM’S CLUB kiosk business and the Sprint Nextel kiosk expansion.

Advertising expense decreased in both dollars and as a percent of net sales and operating revenues. This decrease was primarily due to an increase in contributions from our vendors. Additionally, the decrease related to a change in creative strategy.

Insurance expense decreased in both dollars and as a percent of net sales and operating revenues as a result of our mid-year change to a larger health claim provider, which allowed us greater discounts. Our insurance expense relates to losses, claims and insurance premiums, which are partially offset by contributions from health insurance participants.

Professional fees increased in both dollars and as a percent of net sales and operating revenues. These increases were primarily due to increases in information systems development, store operating procedure audits and legal fees.

DEPRECIATION AND AMORTIZATION

Consolidated depreciation and amortization expense increased $22.4 million to $123.8 million and increased to 2.4% of net sales and operating revenues, compared to 2.1% for 2004. The increase in depreciation was primarily attributable to our new corporate headquarters, increased spending for our store remodel program, information system projects, and the amortization of intangibles related to our SAM’S CLUB kiosk business.

NET INTEREST EXPENSE

Consolidated interest expense, net of interest income, was $38.6 million for 2005 versus $18.2 million for 2004, an increase of $20.4 million or 112%.

Interest expense increased approximately 50% to $44.5 million in 2005 from $29.6 million in 2004. This increase primarily resulted from the elimination of capitalized interest expense due to the completion of the construction of our new corporate headquarters. Additionally, interest expense increased due to interest rate swap agreements and an increase in the average debt outstanding in 2005.

Interest income decreased approximately 48% to $5.9 million in 2005 from $11.4 million in 2004, despite an increase in investment rates. This was primarily the result of a lower average investment balance.

OTHER INCOME

During the first quarter of 2005, we sold all rights, title and interest to the “Tandy” name within Australia and New Zealand to an affiliate of Dick Smith Electronics, an Australia-based consumer electronics retailer. This transaction resulted in the recognition of $10.2 million in other income.

During the year ended December 31, 2005, we received no payments and recorded no income under our tax sharing agreement with O’Sullivan Industries Holdings, Inc. (“O’Sullivan”), compared to $2.0 million received and recorded in 2004.




INCOME TAX PROVISION

Our income tax provision reflects an effective income tax rate of 16.0% for 2005 and 37.8% for 2004. The decrease in 2005 was primarily due to a favorable non-cash income tax benefit of $56.5 million related to the release of a tax contingency reserve. This reserve was related to losses sustained in connection with our European operations, which were fully dissolved by 1995. The release of the reserve occurred in the third quarter because the statute of limitations governing these issues expired on September 30, 2005.

The American Jobs Creation Act of 2004 ("the Act") provided a temporary elective incentive to repatriate foreign earnings by providing a deduction equal to 85% of the dividends received, which reduced the effective federal income tax rate on these earnings from 35% to 5.25%. We repatriated $49.4 million of foreign earnings during 2005. As we have not previously had any amounts reflected in our financial statements as earnings permanently invested outside the United States, a total tax benefit of $8.9 million was recognized in 2005 related to the repatriation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application to prior periods’ financial statements for a change in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Additionally, retrospective application is not required when explicit transition requirements specific to newly adopted accounting principles exist. Retrospective application requires the cumulative effect of the change on periods prior to those presented to be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented, and the offsetting adjustments to be recorded to opening retained earnings. SFAS No. 154 retains the guidance contained in APB Opinion No. 20 for reporting both the correction of an error in previously issued financial statements and a change in accounting estimate. We adopted the provisions of SFAS No. 154, as applicable, at the beginning of fiscal year 2006, and its adoption had no effect on our financial condition or results of operations.

Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. We adopted SFAS No. 123R utilizing the modified prospective transition method, which requires that we recognize compensation expense for all new and unvested share-based payment awards from the January 1, 2006, effective date. As required by SFAS No. 123R, we recognized the cost resulting from all share-based payment transactions, including shares issued under our stock option, stock deferral and stock purchase plans, in the financial statements. See Note 2 - “Summary of Significant Accounting Policies” in our Notes to Consolidated Financial Statements for further discussion on the impact of this adoption, as well as the valuation methodology and assumptions utilized.
  
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (“SFAS No. 151”). This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that these items be recognized as current period charges and requires allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. We adopted this statement effective January 1, 2006. The results of the adoption of this statement did not have a material impact on our financial condition or results of operations.




In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. We have not determined the effect, if any, the adoption of this statement will have on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for our fiscal year ended December 31, 2006. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for our fiscal year ending December 31, 2008. See Note 22 - “Supplemental Executive Retirement Plan” for further discussion on the impact of adopting SFAS No. 158.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary "correcting" adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The adoption of SAB 108 had no impact on our financial condition or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements the impact of a tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition provisions. Any transition adjustment recognized on the date of adoption will be recorded as an adjustment to retained earnings as of the beginning of the adoption period. FIN 48 is effective for fiscal years beginning after December 15, 2006, and we adopted FIN 48 as of January 1, 2007. Based on our current evaluation, we do not expect the adoption of this interpretation to have a material impact on our financial position or results of operations.

In June 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 requires disclosure of an entity’s accounting policy regarding the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes. Our policy is to exclude all such taxes from revenue on a net reporting basis.




CASH FLOW AND LIQUIDITY
A summary of cash flows from operating, investing and financing activities is outlined in the table below.
 
   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
Operating activities
 
$
314.8
 
$
362.9
 
$
352.5
 
Investing activities
   
(79.3
)
 
39.3
   
(290.2
)
Financing activities
   
12.5
   
(616.1
)
 
(259.1
)

Cash Flow - Operating Activities

Cash provided by operating activities in 2006 was $314.8 million, compared to $362.9 million and $352.5 million in 2005 and 2004, respectively. Cash provided by net income plus non-cash adjustments to net income was $230.7 million in 2006 compared to $318.7 million in 2005. The 2006 reduction was due to a decline in operating income in 2006, compared to the prior year. Cash provided by working capital components was $84.1 million and $44.2 million for years ended December 31, 2006 and 2005, respectively. This increase in cash provided by working capital components, as compared to the prior year, was primarily the result of decreases in inventory, accounts receivable, and accounts payable, net of increases in accrued expenses and income taxes.

Cash Flow - Investing Activities

Cash used in investing activities was $79.3 million and $290.2 million in 2006 and 2004, respectively, while $39.3 million in cash was provided in 2005. We received $220.4 million in net proceeds from the sale and leaseback of our corporate campus during the fourth quarter of 2005. Capital expenditures for these periods related primarily to retail stores and information systems projects. Additionally, 2004 included capital expenditures related to our new corporate campus. We anticipate that our capital expenditure requirements for 2007 will range from $60 million to $80 million. RadioShack company-operated store remodels and relocations and updated information systems will account for the majority of our anticipated 2007 capital expenditures. As of December 31, 2006, we had $472.0 million in cash and cash equivalents. These cash and cash equivalents, along with cash generated from our net sales and operating revenues and, when necessary, from our credit facilities, are available to fund future capital expenditure needs.

Cash Flow - Financing Activities

Cash provided by financing activities was $12.5 million in 2006, compared to a cash usage of $616.1 million and $259.1 million in 2005 and 2004, respectively. We did not repurchase any shares of our common stock during 2006, while we used $625.8 million to repurchase shares of our common stock in 2005 and $251.1 million in 2004. The 2005 repurchases include our overnight share repurchase program (“OSR”). See “Share Repurchases” below for a discussion of share repurchase programs and employee stock programs, as well as the OSR. The 2005 and 2004 stock repurchases were partially funded by $47.5 million and $85.8 million, respectively, received from the sale of treasury stock to employee benefit plans and from stock option exercises. The balance of capital to repurchase shares was obtained from cash generated from operations.

Additionally, our net borrowings increased $34.2 million in 2006, compared to a decrease of $4.1 million and $54.1 million in 2005 and 2004, respectively. Dividends paid in 2006, 2005 and 2004 were $33.9 million, $33.7 million and $39.7 million, respectively. The decrease in dividends paid from 2004 to 2005, was affected by the 2005 share repurchases, resulting in fewer shares outstanding.

Free Cash Flow

Our free cash flow, defined as cash flows from operating activities less dividends paid and additions to property, plant and equipment, was $189.9 million in 2006, $158.5 million in 2005 and $83.4 million in 2004. The consecutive increases in free cash flow over the last three years were the result of a decrease in cash used by working capital components, primarily inventory, as well as a decrease in capital expenditures relating to the construction of our new corporate campus.


We believe free cash flow is a relevant indicator of our ability to repay maturing debt, change dividend payments or fund other uses of capital that management believes will enhance shareholder value. The comparable financial measure to free cash flow under generally accepted accounting principles is cash flows from operating activities, which was $314.8 million in 2006, $362.9 million in 2005 and $352.5 million in 2004. We do not intend the presentation of free cash flow, a non-GAAP financial measure, to be considered in isolation or as a substitute for measures prepared in accordance with GAAP.

The following table is a reconciliation of cash flows from operating activities to free cash flow.

   
Year Ended December 31,
 
(In millions)
 
2006
 
2005
 
2004
 
Net cash provided by operating activities
 
$
314.8
 
$
362.9
 
$
352.5
 
Less:
                   
Additions to property, plant and equipment
   
91.0
   
170.7
   
229.4
 
Dividends paid
   
33.9
   
33.7
   
39.7
 
                     
Free cash flow
 
$
189.9
 
$
158.5
 
$
83.4
 

CAPITAL STRUCTURE AND FINANCIAL CONDITION

We consider our capital structure and financial condition to be sound. We had $472.0 million in cash and cash equivalents at December 31, 2006, as a resource for our funding needs. Additionally, we have available to us $625 million of bank credit facilities. As of December 31, 2006, we had no borrowings under these credit facilities. For a discussion of the expected effect of our turnaround program on capital structure and financial condition, see “Financial Impact of Turnaround Program” below.

Debt Obligations

Debt Ratings: Below are the agencies’ ratings by category, as well as their respective current outlook for the ratings, as of February 16, 2007.
 
 
Standard
   
Category
and Poor’s
Moody's
Fitch
Senior unsecured debt
BB
Baa3
BB+
Outlook
Negative
Negative
Negative
Commercial paper
B-1
P-3
B
 
On February 23, 2006, Fitch changed its long-term rating outlook to negative. In addition, on February 22, 2006, Moody’s placed our ratings under review for a possible downgrade. Both of these actions followed our announcement of calendar 2005 earnings, our turnaround program, and other factors. Moody’s concluded its review of our ratings on March 14, 2006, and reaffirmed our existing short-term rating of P-2, but lowered our long-term rating to Baa2 with a negative outlook. On April 21, 2006, Standard and Poor’s (“S&P”) changed our long-term rating to BBB- with a stable outlook and changed our short-term rating to A-3. On July 24, 2006, S&P lowered our outlook to negative after the release of our second quarter earnings on July 21, 2006. On August 22, 2006, Fitch changed our long-term rating to BB+ with a stable outlook and changed our short-term rating to B. Shortly after we released our results and filed our Form 10-Q for the period ended September 30, 2006, S&P and Moody’s reduced our ratings to their respective current ratings. Additionally, Fitch changed our outlook from neutral to its current negative level. Factors that could impact our future credit ratings include the effect of our turnaround program, free cash flow, cash levels, changes in our operating performance, the adoption of a more aggressive financial strategy, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. If further downgrades occur, they will adversely impact, among other things, our future borrowing costs, access to debt capital markets, vendor financing terms and future new store occupancy costs.

Our senior unsecured debt primarily consists of two issuances of 10-year long-term notes and an issuance of medium-term notes.


Long-Term Notes: We have a $300.0 million debt shelf registration statement which became effective in August 1997. In August 1997, we issued $150.0 million of 10-year unsecured long-term notes under this shelf registration. The interest rate on the notes is 6.95% per annum with interest payable on September 1 and March 1 of each year. These notes contain certain non-financial covenants and are due September 1, 2007. Currently, we anticipate paying these obligations from cash generated during the year and existing cash balances.

On May 11, 2001, we issued $350.0 million of 10-year 7.375% notes in a private offering to initial purchasers who in turn offered the notes to qualified institutional buyers under SEC Rule 144A. The annual interest rate on the notes is 7.375% per annum with interest payable on November 15 and May 15 of each year. The notes contain certain non-financial covenants and mature on May 15, 2011. In August 2001, under the terms of an exchange offering filed with the SEC, we exchanged substantially all of these notes for a similar amount of publicly registered notes. The exchange resulted in substantially all of the notes becoming registered with the SEC and did not result in additional debt being issued.

During the third quarter of 2001, we entered into an interest rate swap agreement with an underlying notional amount of $110.5 million and a maturity in September 2007. In June and August 2003, we entered into interest rate swap agreements with underlying notional amounts of debt of $100.0 million and $50.0 million, respectively, and both with maturities in May 2011. These swaps effectively convert a portion of our long-term fixed rate debt to a variable rate. We entered into these agreements to balance our fixed versus floating rate debt portfolio to continue to take advantage of lower short-term interest rates. Under these agreements, we have contracted to pay a variable rate of LIBOR plus a markup and to receive a fixed rate of 6.95% for the swap entered into in 2001 and 7.375% for the swaps entered into in 2003. We have designated these agreements as fair value hedging instruments. We recorded an amount in other non-current liabilities, net, of $8.5 million and $7.6 million (their fair value) at December 31, 2006 and 2005, respectively, for the swap agreements and adjusted the fair value of the related debt by the same amount. Fair value was computed based on the market’s current anticipation of quarterly LIBOR rate levels from the present until the swaps’ maturity.

Medium-Term Notes: We also issued, in various amounts and on various dates from December 1997 through September 1999, medium-term notes totaling $150.0 million under the shelf registration described above. At December 31, 2006, $5.0 million of these notes remained outstanding. The interest rate at December 31, 2006, for the outstanding $5.0 million in medium-term notes was 6.42%. These notes contain customary non-financial covenants and mature in January 2008. As of December 31, 2006, there was no availability under the debt shelf registration.

Available Financing

Credit Facilities: At December 31, 2006, we had an aggregate of $625 million borrowing capacity available under our existing credit facilities. These facilities consist of the following:

Amount of Facility
Expiration Date
$300 million
June 2009
$325 million
May 2011

These credit facilities support commercial paper issuance, as well as provide us a source of liquidity if the commercial paper market is unavailable to us. As of December 31, 2006, there were no outstanding borrowings under these credit facilities, nor were these facilities utilized during 2006. Interest charges under these facilities are derived using a base LIBOR rate plus a margin which changes based on our credit ratings. Our bank syndicated credit facilities have customary terms and covenants, and we were in compliance with these covenants at December 31, 2006.

In June 2006, we replaced our existing $300 million five-year credit facility, which was to expire in June 2007, with a $325 million five-year credit agreement expiring May 2011. The new facility has a more favorable fixed charge coverage ratio and provides for the exclusion of cash turnaround expenses from the covenant calculation. We also amended the $300 million facility expiring in June 2009 to include similar covenants and terminated our $130 million 364-day revolving credit facility.




We believe that our present ability to borrow is adequate for our business needs. However, if market conditions change, gross profit were to dramatically decline, or we could not control operating costs, our cash flows and liquidity could be reduced. Additionally, if a scenario as described above occurred, it could cause the rating agencies to lower our credit ratings further, thereby increasing our borrowing costs, or even causing a further reduction in or elimination of our access to debt and/or equity markets.

Capitalization

The following table sets forth information about our capitalization on the dates indicated.

   
December 31,
 
   
2006
 
2005
 
 
(In millions)
 
 
Dollars
 
% of Total Capitalization
 
 
Dollars
 
% of Total Capitalization
 
Current debt
 
$
194.9
   
16.3
%
$
40.9
   
3.6
%
Long-term debt
   
345.8
   
29.0
%
 
494.9
   
44.0
%
Total debt
   
540.7
   
45.3
%
 
535.8
   
47.6
%
Stockholders’ equity
   
653.8
   
54.7
%
 
588.8
   
52.4
%
Total capitalization
 
$
1,194.5
   
100.0
%
$
1,124.6
   
100.0
%

Our debt-to-total capitalization ratio decreased in 2006 from 2005, due primarily to a $65.0 million increase in stockholders’ equity. Long-term debt as a percentage of total capitalization decreased in 2006 due to $150 million of debt becoming current during 2006.

Dividends

We have paid common stock cash dividends for 20 consecutive years. On November 6, 2006, our Board of Directors declared an annual dividend of $0.25 per share. The dividend was paid on December 20, 2006, to shareholders of record on December 1, 2006. The dividend payment of $33.9 million was funded from cash on hand.

Operating Leases

We use operating leases, primarily for our retail locations, two distribution centers, and our corporate campus, to lower our capital requirements.

Share Repurchases

On February 25, 2005, our Board of Directors approved a share repurchase program with no expiration date authorizing management to repurchase up to $250 million in open market purchases. We repurchased 4.7 million shares of our common stock for $125.8 million in the year ended December 31, 2005, under our approved repurchase programs (but excluding the OSR). The funding required for these repurchases came from net cash generated from operating activities and cash and cash equivalents. We also repurchased shares in the open market in 2005 to offset the sales of shares to our employee benefit plans. As of February 16, 2007, there was $209.9 million available under the $250 million share repurchase program. Management suspended purchases under the $250 million share repurchase program while our OSR was completed as described below. As of February 16, 2007, management had not resumed share repurchases under the $250 million program.

On August 5, 2005, we entered into an agreement with a financial institution to purchase 20 million shares of our common stock from the financial institution under the OSR. The average share price upon completion of the transaction was $24.15. We funded this payment from available cash on hand and short-term borrowings in the commercial paper market.




Seasonal Inventory Buildup

Typically, our annual cash requirements for pre-seasonal inventory buildup range between $200 million and $400 million. The funding required for this buildup comes primarily from cash on hand and cash generated from net sales and operating revenues. We had $472.0 million in cash and cash equivalents as of December 31, 2006, as a resource for our funding needs. Additionally, borrowings may be utilized to fund the inventory buildup as described in “Available Financing” above.

Construction and Sale and Leaseback of Corporate Headquarters

We began construction of our new corporate headquarters in 2003, which we partially occupied during the fourth quarter of 2004. Our total campus construction and land costs were $226.8 million; we completed construction in the first quarter of 2005.

On December 20, 2005, we entered into a transaction in which we sold and leased back the buildings and certain of the property at our corporate headquarters, located in downtown Fort Worth, Texas. In connection with this transaction, we entered into a 20-year triple-net lease agreement (in which we pay all operating expenses), with four five-year options to renew. We have retained ownership of other real estate adjacent to our corporate headquarters. This transaction allowed us to repay approximately $220 million of short-term borrowings in the commercial paper market issued in conjunction with the OSR and, subsequently, to reduce our credit facilities to $625 million.

Contractual and Credit Commitments

The following tables, as well as the information contained in Note 7 - "Indebtedness and Borrowing Facilities" to our Notes to Consolidated Financial Statements, provide a summary of our various contractual commitments, debt and interest repayment requirements, and available credit lines.

The table below contains our known contractual commitments as of December 31, 2006.
 
(In millions)
 
Payments Due by Period
 
 
Contractual Obligations
 
Total Amounts Committed
 
Less Than 1 Year
 
 
1-3 Years
 
 
3-5 Years
 
Over 5 Years
 
Long-term debt obligations
 
$
506.0
 
$
150.0
 
$
5.0
 
$
350.0
 
$
1.0
 
Interest obligations
   
120.4
   
33.1
   
51.7
   
35.5
   
0.1
 
Operating lease obligations
   
1,001.8
   
211.0
   
422.7
   
174.5
   
193.6
 
Purchase obligations (1)
   
254.1
   
235.4
   
18.7
   
--
   
--
 
Other long-term liabilities
reflected on the balance sheet
   
86.2
   
3.9
   
41.0
   
17.5
   
23.8
 
Total
 
$
1,968.5
 
$
633.4
 
$
539.1
 
$
577.5
 
$
218.5
 

(1) Purchase obligations include our product commitments, marketing agreements and freight commitments.

For more information regarding long-term debt and lease commitments, refer to Notes 7 and 13, respectively, of our Notes to Consolidated Financial Statements.

The table below contains our credit commitments from various financial institutions.

(In millions)
 
Commitment Expiration per Period
 
 
Credit Commitments
 
Total Amounts Committed
 
Less Than 1 Year
 
 
1-3 Years
 
 
3-5 Years
 
Over 5 Years
 
Lines of credit
 
$
625.0
 
$
--
 
$
300.0
 
$
325.0
 
$
--
 
Standby letters of credit
   
41.4
   
41.4
   
--
   
--
   
--
 
Total commercial commitments
 
$
666.4
 
$
41.4
 
$
300.0
 
$
325.0
 
$
--
 




We have contingent liabilities related to retail leases of locations that were assigned to other businesses. The majority of these contingent liabilities relate to various lease obligations arising from leases that were assigned to CompUSA, Inc. (“CompUSA”) as part of the sale of our Computer City, Inc. subsidiary to CompUSA in August 1998. In the event CompUSA or the other assignees, as applicable, are unable to fulfill their obligations, we would be responsible for rent due under the leases. Our rent exposure from the remaining undiscounted lease commitments (assuming no projected sublease income) is approximately $92 million. However, we have no reason to believe that CompUSA or the other assignees will not fulfill their obligations under these leases or that we would be unable to sublet the properties; consequently, we do not believe there will be a material impact on our financial statements from any fulfillment of these contingencies.

FINANCIAL IMPACT OF TURNAROUND PROGRAM

As discussed previously, our turnaround program, as originally stated in February 2006, contained four key components:

·  
Update our inventory
·  
Focus on our top-performing RadioShack company-operated stores, while closing 400 to 700 RadioShack company-operated stores and aggressively relocate other RadioShack company-operated stores
·  
Consolidate our distribution centers
·  
Reduce our overhead costs

As of December 31, 2006, we considered our turnaround program substantially complete.

Store Closures: As of December 31, 2006, we had closed 481 stores as a result of our turnaround program. Our decision to close these stores was made on a store-by-store basis, and there was no geographic concentration of closings for these stores.

For these closed stores, we recognized a charge in 2006 of $9.1 million for future lease obligations and negotiated buy-outs with landlords. A lease obligation reserve is not recognized until a store has been closed or when a buy-out agreement has been reached with the landlord.

Regarding the 481 stores we closed as a result of the turnaround program during the year ended December 31, 2006, we recorded an impairment charge of $9.2 million related to the long-lived assets associated with certain of these stores. It was determined that the net book value of several of the stores' long-lived assets was not recoverable based on the remaining estimated future cash flows related to these specific stores. We also recognized $2.1 million in accelerated depreciation associated with closed store assets for which the useful life had been changed due to the store closures.

In connection with these store closures, we identified 601 retail employees whose positions were terminated by December 31, 2006. These employees were paid severance, and some earned retention bonuses if they remained employed to certain agreed-upon dates. The development of a reserve for these costs began on the date that the terms of severance benefits were established and communicated to the employees, and the reserve was recognized over the minimum retention period. As of December 31, 2006, $3.8 million has been recognized as retention and severance benefits for store employees, with $3.6 million in benefits paid to date.

Additionally, as part of our store closure activities, we incurred $6.1 million in expenses in 2006 primarily in connection with fees paid to outside liquidators and for close-out promotional activities for the 481 stores.

Distribution Center Consolidations: We closed a distribution center located in Southaven, Mississippi, and sold a distribution center in Charleston, South Carolina, in 2006. During the year ended December 31, 2006, we recognized a lease obligation charge in the amount of $2.0 million on the lease of the Southaven distribution center and a gain of $2.7 million on the sale of the Charleston distribution center. We also incurred a $0.5 million charge related to severance for approximately 100 employees. Additionally, there were $0.4 million in other expenses.



Service Center Operations: We closed or sold five service center locations during the year ended December 31, 2006, resulting in the elimination of approximately 350 positions. We recognized a charge of $1.2 million and $0.9 million related to lease obligations and severance, respectively. This severance obligation was paid as of December 31, 2006. Additionally, there were $0.1 million in other expenses.

Overhead Cost Reductions: Management conducted a review of our cost structure to identify potential sources of cost reductions. In connection with this review, we made decisions to lower these costs, including reducing our advertising spend rate in connection with adjustments to our media mix.

During the year ended December 31, 2006, we reduced our workforce by approximately 514 positions, primarily within our corporate headquarters. We recorded charges for termination benefits and related costs of $11.9 million, of which $6.4 million had been paid as of December 31, 2006.

Inventory Update: We have been replacing underperforming merchandise with new, faster-moving merchandise. We recorded a pre-tax charge of approximately $62 million during the fourth quarter of 2005, as a result of both our normal inventory review process and the inventory update aspect of our turnaround program.

The following table summarizes the activity related to the 2006 turnaround program from February 17, 2006, through December 31, 2006:

(In millions)
 
Severance
 
Leases
 
Asset
Impairments
 
Accelerated
Depreciation
 
Other
 
Total
 
Total charges for 2006
 
$
16.1
 
$
12.3
 
$
9.2
 
$
2.1
 
$
4.9
 
$
44.6