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Last updated on April 16, 2014 at 21:24 EDT

LeapFrog Reports 2012 Income From Operations Increased 170%

February 6, 2013

EMERYVILLE, Calif., Feb. 6, 2013 /PRNewswire/ — LeapFrog Enterprises, Inc. (NYSE:LF) today announced financial results for the fourth quarter and full year ended December 31, 2012.

(Logo: http://photos.prnewswire.com/prnh/20090219/LFLOGO)

Highlights of full year 2012 results compared to full year 2011 results:

  • Consolidated net sales were up 28%.
  • U.S. segment net sales were up 24%, and international segment net sales were up 38%.
  • Income from operations was up 170%.
  • Income from operations as a percentage of net sales was 11.0%, more than double the prior year.
  • Net income was $86.5 million, up 334%.
  • Net income per diluted share was $1.24, up $0.94.
  • Adjusted EBITDA was $93.1 million, up 89%.(1)
  • Cash and cash equivalents were $120.0 million as of December 31, 2012, up 67% compared to the balance as of December 31, 2011.

“The quality of execution from the LeapFrog team was exceptional this past year. Despite a tough global economy and a declining U.S. toy industry,(2) we achieved a third straight year of sales growth and nearly tripled our income from operations, continuing to drive shareholder value,” said John Barbour, Chief Executive Officer.

“Our focus on creating the best children’s educational entertainment platforms and content resulted in our award-winning line of cartridge content becoming the #1 top-selling toy in the U.S. and a Top 10 selling toy in the U.K. in 2012 based on sales according to NPD data.(2) In addition, net sales of digital download content from our curated selection of over 475 titles, including LeapFrog-developed content and content from 30 media partners, were nearly four times the prior year as families took advantage of our 24×7 online App Center.

“We had more products in NPD’s list of U.S. 2012 Top 10 selling toys than any other manufacturer, with three of the top four and four of the Top 10.(2) In the U.K., we also had two of the Top 10 selling toys.(2) We also achieved significant market share growth in all the major markets in which we operate and built solid foundations for more growth in 2013.”

“LeapFrog is in a very exciting position and I am optimistic about our continued growth in 2013,” continued Mr. Barbour. “More and more parents around the world are searching for effective learning solutions to supplement their children’s education. We have 18 years of experience creating the best learning solutions in the market and are uniquely positioned to take advantage of this opportunity.

“I am very excited about the quality of the team we have assembled and developed at LeapFrog over the last two years. I believe our market-leading performance in 2012 is a direct result of our world-class talent, our wonderful brand that is loved by millions of families, and the fun and engaging entertainment experiences we create that provide children with life-changing learning.”

Financial Overview for the Fourth Quarter 2012 Compared to the Fourth Quarter 2011

Fourth quarter 2012 net sales were $244.7 million, up 16% compared to $210.2 million last year, and were not materially impacted by changes in currency exchange rates. Net sales growth was primarily driven by strong content sales, high consumer demand for the LeapPad learning tablets and accessories, and the introduction of the LeapsterGS game system. In the U.S. segment, net sales were $177.8 million, up 11% compared to $160.6 million last year. In the International segment, net sales were $67.0 million, up 35% compared to $49.6 million last year, and included a 2% positive impact from changes in currency exchange rates.

Income from operations for the fourth quarter was $43.2 million, up 28% compared to $33.7 million reported a year ago. Income from operations as a percentage of net sales was 17.7%, up 170 basis points compared to 16.0% a year ago.

Net income for the fourth quarter was $62.3 million, up 90% compared to $32.8 million a year ago. Net income per diluted share was $0.89, up 82% compared to $0.49 a year ago. Net income in the fourth quarter of 2012 included a tax benefit of $20.3 million, or $0.29 per diluted share, as a result of recording the expected tax benefit of a portion of the company’s past accumulated net operating losses due to improved historical results and future prospects.

Adjusted EBITDA for the fourth quarter was $50.4 million, up 24% compared to $40.7 million a year ago.

Financial Overview for the Full Year 2012 Compared to the Full Year 2011

Full year 2012 net sales were $581.3 million, up 28% compared to $455.1 million last year, and were not materially impacted by changes in currency exchange rates. Net sales growth was primarily driven by strong content sales, high consumer demand for the LeapPad learning tablets and accessories, and the introduction of the LeapsterGS game system. In the U.S. segment, net sales were $424.8 million, up 24% compared to $342.0 million last year. In the International segment, net sales were $156.5 million, up 38% compared to $113.1 million last year, and included a 1% negative impact from changes in currency exchange rates.

Income from operations was $64.1 million in 2012, up $40.4 million or 170% compared to 2011. Income from operations as a percentage of net sales was 11.0%, up 112%, or 580 basis points, compared to 5.2% a year ago.

Net income was $86.5 million in 2012, more than four times the net income of $19.9 million in 2011. Net income per diluted share was $1.24, more than four times the net income per share of $0.30 in 2011. Net income in 2012 included a tax benefit of $20.3 million, or $0.29 per diluted share, as a result of recording the expected tax benefit of a portion of the company’s past accumulated net operating losses due to improved historical results and future prospects. Net income in 2012 also included a $6.4 million, or $0.09 per diluted share, tax benefit due to expiring statute of limitations.

Adjusted EBITDA for the full year was $93.1 million, up 89% compared to $49.3 million a year ago.

“We delivered a terrific performance in 2012 with strong sales, earnings, and cash growth,” said Ray Arthur, Chief Financial Officer. “Consumer demand for our educational entertainment was robust, resulting in good consumer sell-through and healthy year-end retail inventory levels. Our balance sheet also improved with inventory and receivables balances growing at a lower rate than our net sales growth, and our accounts payable balance actually declining. Working capital improved by 42%, allowing us to self-fund our operations without accessing our asset-based credit line.”

Guidance

“We are excited about our market-leading portfolio and new product launches for 2013, including a new learn-to-read system, new iPhone and iPad app activity products and new LeapPad tablets,” stated Mr. Arthur. “As a result, despite a global economy that remains sluggish and a U.S. toy industry that declined in 2012,(2) we plan to continue to grow our business at a pace significantly ahead of the market and expect net sales to increase at a high single-digit percentage growth rate. Like 2012, we will be prepared to chase upside whenever possible.

“To support our market-leading growth and our ongoing business transformation, we plan to make long-term investments in content, international expansion, online communities, systems and new platforms. Even with this investment for the future, we expect our operating margin as a percentage of net sales to remain consistent with 2012.

“Additional guidance will be provided at a later date when we have more clarity regarding our book tax accounting position. The ultimate outcome of our book tax accounting position will have no impact on cash taxes paid. We do not expect to pay any significant amount of U.S. federal taxes in the next several years.”(3 )

First quarter 2013 guidance is as follows:

We expect:

  • Net sales to increase by about 10% compared to the first quarter of 2012.
  • Net loss per share to be in the range of $0.07 to $0.09, which includes a tax benefit at a 37.5% effective tax rate, compared to a net loss per share of $0.14 in the first quarter of 2012. First quarter 2012 results did not include a net tax benefit related to the period operating loss.

Conference Call and Webcast

LeapFrog will hold a conference call to discuss fourth quarter and full year 2012 financial results on February 6, 2013, at 2:00 p.m. Pacific Standard Time (5:00 p.m. Eastern Standard Time). The conference call will be webcast live and can be accessed at LeapFrog’s investor relations web site at www.leapfroginvestor.com. An archive of the webcast will be available on the web site approximately three hours after completion of the call. In addition, more information about LeapFrog, including this press release and other financial and investor information, is also available on the investor relations web site.

To participate in the call, please dial (706) 634-0183 and request conference ID 88607415. A telephonic replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 88607415.

About LeapFrog

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. LeapFrog’s award-winning product portfolio helps millions of children achieve their potential by delivering best-in-class curriculum through engaging content, fun multimedia learning platforms and toys. The Learning Path, LeapFrog’s proprietary online destination for parents and extended family, provides personalized feedback on a child’s learning progress and offers recommendations to enhance each child’s learning experience. Through the power of play, LeapFrog’s products and curriculum help children of all ages prepare for school and life success. LeapFrog’s products are available in more than 45 countries and have been used by teachers in more than 100,000 U.S. classrooms. LeapFrog is based in Emeryville, California, and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read. Come see the learning at www.leapfrog.com.

TM & © 2013 LeapFrog Enterprises, Inc. All rights reserved.

Use of Non-GAAP Financial Information

This press release includes a non-GAAP financial measure, specifically adjusted EBITDA which is defined as earnings (or net income) before interest, income taxes, depreciation and amortization, other expenses (income), and stock-based compensation. As required by SEC rules, we have provided an attached schedule with a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income.

Management believes that adjusted EBITDA is one of the appropriate measures for evaluating the operating performance of the Company because it reflects the resources available for strategic opportunities including, among others, to invest in the business, strengthen the balance sheet, and make strategic acquisitions. However, this measure should be considered in addition to, not as a substitute for, or superior to, net income or other measures of financial performance prepared in accordance with GAAP as more fully discussed in the Company’s financial statements and filings with the SEC. As used herein, “GAAP” refers to accounting principles generally accepted in the United States of America.

Forward-Looking Statements

This news release contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated financial results. Our actual results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, deterioration of global economic conditions, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our reliance on a small group of retailers for the majority of our gross sales, our dependence on our suppliers for our components and raw materials, the seasonality of our business, our growing focus on online products and services, system failures in our online services or web store, our reliance on a limited number of manufacturers, our ability to maintain sufficient inventory levels, our ability to compete effectively with competitors, our ability to maintain or acquire licenses, third parties who claim we are infringing on their intellectual property rights, errors or defects in our products, privacy concerns about our Internet-connected products, the sufficiency of our liquidity, the risk associated with international operations, continued compliance and associated costs with and/or changes in laws and regulations, negative political developments, natural disasters, armed hostilities, terrorism, labor strikes or public health issues, the loss of members of our executive management team, continued ownership by a few stockholders of a significant percentage of voting power in us, and the volatility of our stock price. These risks and others are discussed under “Risk Factors” in our filings with the U.S. Securities and Exchange Commission, including our 2011 annual report on Form 10-K filed on February 29, 2012. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information.

(1 )This non-GAAP financial measure is described below and reconciled to its comparable GAAP measure in the accompanying tables.

(2) Source: The NPD Group / Retail Tracking Service.

(3) Tax Note: In 2006 and subsequent years, the company recorded reserves against its deferred tax assets (DTA). In 2012, a portion, $20.3 million, or $0.29 per diluted share, of these reserves was released. As a result, in 2013, the company will report (for book purposes) tax expense or benefit at an effective tax rate of 37.5%. In addition, the company has reserves against its DTA of approximately $70 million at year-end 2012. The company will reevaluate the need for these remaining reserves during the second half of 2013.

    Contact Information

    Investors:                                            Media:

    Karen Sansot, CFA                                     Monica Ma
    Investor Relations                                    Media Relations
    (510) 420-4803                                        (510) 596-3437
    ksansot@leapfrog.com                                  mma@leapfrog.com

                                                                             LEAPFROG ENTERPRISES, INC.
                                                                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                        (In thousands, except per share data)
                                                                                     (Unaudited)

                                                                                                                             Three Months Ended                Twelve Months Ended
                                                                                                                                December 31,                       December 31,
                                                                                                                            -------------------               --------------------
                                                                                                                                 2012                 2011                 2012                 2011
                                                                                                                                 ----                 ----                 ----                 ----

    Net sales                                                                                                                $244,726             $210,210             $581,288             $455,140
                                                                     Cost of sales                                135,370              116,603              336,344              268,988
                                                                     Gross profit                                 109,356               93,607              244,944              186,152

    Operating expenses:
                                                                      Selling, general
                                                                      and administrative                           24,441               21,972               89,599               77,984
                                                                      Research and
                                                                      development                                   9,725                9,136               36,627               33,784
                                                                     Advertising                                   29,091               25,909               43,023               39,526
                                                                      Depreciation and
                                                                      amortization                                  2,878                2,900               11,629               11,161
                                                                      Total operating
                                                                      expenses                                     66,135               59,917              180,878              162,455
                                                                                          Income from operations               43,221               33,690               64,066               23,697

    Other income (expense):
                                                                     Interest income                                   15                   32                  241                  136
                                                                     Interest expense                                  (1)                (157)                 (50)                (259)
                                                                     Other, net                                      (295)                (334)             (2,309)              (4,809)
                                                                      Total other
                                                                      expense, net                                   (281)                (459)             (2,118)              (4,932)
                                                                                          Income before income taxes           42,940               33,231               61,948               18,765
    (Benefit from) provision for income taxes                                                                                 (19,341)                 421              (24,504)              (1,137)
                                                                     Net income                                   $62,281              $32,810              $86,452              $19,902
                                                                                                                  =======              =======              =======              =======

    Net income per share:
                                                                      Class A and B -
                                                                      basic                                         $0.92                $0.50                $1.29                $0.30
                                                                      Class A and B -
                                                                      diluted                                       $0.89                $0.49                $1.24                $0.30

    Weighted-average shares used to calculate net income per share:
                                                                      Class A and B -
                                                                      basic                                        67,656               65,888               67,100               65,406
                                                                      Class A and B -
                                                                      diluted                                      69,831               66,711               69,720               66,332

                                        LEAPFROG ENTERPRISES, INC.
                                       CONSOLIDATED BALANCE SHEETS
                                  (In thousands, except per share data)
                                               (Unaudited)
                                                                                December 31,
                                                                                ------------
                                                                                 2012              2011
                                                                                 ----              ----
    ASSETS
    Current assets:
                                   Cash and cash equivalents                 $120,000           $71,863
                                    Accounts receivable, net of allowances
                                    for doubtful accounts of                  180,043           157,418
                                               $292 and $659, respectively
                                   Inventories                                 40,311            34,288
                                    Prepaid expenses and other current
                                    assets                                      8,353             8,078
                                   Deferred income taxes                        9,315               983
                                   Total current assets                       358,022           272,630
    Long-term investments                                                  -             2,681
    Deferred income taxes                                                      13,269             1,311
    Property and equipment, net                                                23,723            17,881
    Capitalized product costs, net                                             12,109            12,511
    Goodwill                                                                   19,549            19,549
    Other intangible assets, net                                                  950             3,350
    Other assets                                                                1,283             1,119
                                   Total assets                              $428,905          $331,032

    LIABILITIES AND STOCKHOLDERS'
     EQUITY
    Current liabilities:
                                   Accounts payable                           $31,617           $34,629
                                   Accrued liabilities                         51,353            42,544
                                   Deferred revenue                             8,516             7,836
                                   Income taxes payable                           493               377
                                   Total current liabilities                   91,979            85,386
    Long-term deferred income taxes                                             3,759             3,542
    Other long-term liabilities                                                 3,224             9,360
                                                                                -----             -----
                                   Total liabilities                           98,962            98,288
    Commitments and contingencies
    Stockholders' equity:
                                    Class A Common Stock, par value
                                    $0.0001;
                                    Authorized -139,500 shares;
                                    Outstanding: 61,970 and                         6                 6
                                   54,923, respectively
                                    Class B Common Stock, par value
                                    $0.0001;
                                    Authorized -40,500 shares;
                                    Outstanding: 5,715 and                          1                 1
                                   11,113, respectively
                                   Treasury stock                                (185)             (185)
                                   Additional paid-in capital                 405,078           395,627
                                    Accumulated other comprehensive income
                                    (loss)                                      1,071              (225)
                                   Accumulated deficit                        (76,028)         (162,480)

                                   Total stockholders' equity                 329,943           232,744

                                    Total liabilities and stockholders'
                                    equity                                   $428,905          $331,032
                                                                                  LEAPFROG ENTERPRISES, INC.
                                                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                        (In thousands)
                                                                                          (Unaudited)

                                                        Three Months Ended                 Twelve Months Ended
                                                           December 31,                        December 31,
                                                       -------------------                --------------------
                                                                         2012                               2011                                 2012                               2011
                                                                         ----                               ----                                 ----                               ----
    Operating activities:
                     Net income                                       $62,281                            $32,810                              $86,452                            $19,902
    Adjustments to reconcile net income to net
     cash provided by operating activities:
                      Depreciation
                      and
                      amortization                                      5,211                              5,485                               22,082                             19,995
                      Deferred
                      income taxes                                    (20,285)                               260                              (20,047)                               716
                      Stock-based
                      compensation
                      expense                                           1,925                              1,498                                6,991                              5,562
                      Loss on sale
                      of long-term
                      investments,
                      net of tax                                            -                                  -                                   91                                  -
                      Loss on
                      disposal of
                      long-term
                      assets                                                -                                  6                                    2                                 14
                      Allowance for
                      doubtful
                      accounts                                           (331)                               245                                3,040                                417
    Other changes in operating assets and
     liabilities:
                      Accounts
                      receivable,
                      net                                              (9,346)                           (21,612)                             (24,839)                              (481)
                     Inventories                                       74,422                             36,012                               (5,727)                            13,006
                      Prepaid
                      expenses and
                      other current
                      assets                                            1,170                                 (5)                                (197)                               214
                     Other assets                                         249                                722                                 (165)                               667
                      Accounts
                      payable                                         (50,573)                           (23,175)                              (3,119)                             3,293
                      Accrued
                      liabilities
                      and deferred
                      revenue                                          14,116                             17,453                                9,311                              9,043
                      Other long-
                      term
                      liabilities                                         503                               (106)                              (6,135)                            (2,396)
                      Income taxes
                      payable                                              79                                  4                                  116                                210
                      Net cash provided by
                      operating activities                             79,421                             49,597                               67,856                             70,162
                                                                       ------                             ------                               ------                             ------
    Investing activities:
                      Purchases of
                      property and
                      equipment                                        (5,925)                            (2,363)                             (16,321)                           (11,732)
                      Capitalization
                      of product
                      costs                                            (3,170)                            (1,803)                              (8,793)                            (8,122)
                      Disposal of
                      property and
                      equipment                                             -                                  -                                    -                                 67
                      Sale of
                      investments                                           -                                  -                                2,500                                  -
                     Other                                                  -                                  -                                    -                                (65)
                      Net cash used in investing
                      activities                                       (9,095)                            (4,166)                             (22,614)                           (19,852)
                                                                       ------                             ------                              -------                            -------
    Financing activities:
                      Proceeds from
                      stock option
                      exercises and
                      employee
                      stock
                      purchase plan                                       215                                980                                4,222                              3,029
                      Net cash paid
                      for payroll
                      taxes on
                      restricted
                      stock unit
                      releases                                           (249)                               (80)                              (1,762)                              (797)
                      Borrowing on
                      line of
                      credit                                                -                             35,000                                    -                             35,000
                      Payment on
                      line of
                      credit                                                -                            (35,000)                                   -                            (35,000)
                      Net cash (used in) provided
                      by financing activities                             (34)                               900                                2,460                              2,232
                                                                          ---                                ---                                -----                              -----
    Effect of exchange rate changes on cash                               281                               (131)                                 435                               (158)
    Net change in cash and cash equivalents                            70,573                             46,200                               48,137                             52,384
    Cash and cash equivalents, beginning of
     period                                                            49,427                             25,663                               71,863                             19,479
    Cash and cash equivalents, end of period                         $120,000                            $71,863                             $120,000                            $71,863
                                                                     ========                            =======                             ========                            =======

    Supplemental disclosure of cash flow
     information:
    Cash paid for income taxes, net                                     $(250)                             $(137)                             $(1,221)                             $(412)

                                                                                           LEAPFROG ENTERPRISES, INC.
                                                                                       SUPPLEMENTAL FINANCIAL INFORMATION
                                                                                                 (In thousands)
                                                                                                  (Unaudited)

                                                                                     Three Months Ended                Twelve Months Ended
                                                                                        December 31,                       December 31,
                                                                                    -------------------               --------------------
                                                                                                     2012                               2011                                2012                               2011
                                                                                                     ----                               ----                                ----                               ----

    Net sales                                                                                    $244,726                           $210,210                            $581,288                           $455,140
                          Cost of sales (1)                             135,370                            116,603                             336,344                            268,988
                          Gross profit                                  109,356                             93,607                             244,944                            186,152

    Operating expenses: (2) (3)
                           Selling, general
                           and administrative                            24,441                             21,972                              89,599                             77,984
                           Research and
                           development                                    9,725                              9,136                              36,627                             33,784
                          Advertising                                    29,091                             25,909                              43,023                             39,526
                           Depreciation and
                           amortization                                   2,878                              2,900                              11,629                             11,161
                           Total operating
                           expenses                                      66,135                             59,917                             180,878                            162,455
                                                Income from operations                             43,221                             33,690                              64,066                             23,697

    Other income (expense):
                          Interest income                                    15                                 32                                 241                                136
                          Interest expense                                   (1)                              (157)                                (50)                              (259)
                          Other, net                                       (295)                              (334)                             (2,309)                           (4,809)
                           Total other
                           expense, net                                    (281)                              (459)                             (2,118)                           (4,932)
                                                Income before income taxes                         42,940                             33,231                              61,948                             18,765
    (Benefit from) provision for income taxes (4)                                                 (19,341)                               421                             (24,504)                            (1,137)
                          Net income                                    $62,281                            $32,810                             $86,452                            $19,902
                                                                        =======                            =======                             =======                            =======

                     (1)   Includes
                           depreciation and
                           amortization                                   2,335                              2,585                              10,455                              8,834

                     (2)   Includes stock-
                           based compensation
                           as follows:
                           Selling, general
                           and administrative                             1,732                              1,392                               6,170                              4,877
                           Research and
                           development                                      193                                106                                 821                                685

                     (3)   Includes severance
                           costs as follows:
                           Selling, general
                           and administrative                               570                                  7                                 836                              2,429
                           Research and
                           development                                        -                                  -                                 208                                 22

                     (4)   Includes release of
                           valuation
                           allowances                                   (20,340)                                 -                            (20,340)                                  -

    Segment data:
    Net sales:
                          U.S. segment                                  177,766                            160,601                             424,816                            342,050
                           International
                           segment                                       66,960                             49,609                             156,472                            113,090

    Income from operations*:
                          U.S. segment                                   26,017                             23,313                              28,076                              5,553
                           International
                           segment                                       17,204                             10,377                              35,990                             18,144

    *          Certain corporate-level
               operating expenses
               associated with sales and
               marketing, product
               support, human resources,
               legal, finance,
               information technology,
               corporate development,
               procurement activities,
               research and development,
               legal settlements and
               other corporate costs are
               charged entirely to our
               U.S. segment, rather than
               being allocated between
               the U.S. and
               International segments.
                                                     LEAPFROG ENTERPRISES, INC.
                                  SUPPLEMENTAL DISCLOSURE REGARDING NON-GAAP FINANCIAL INFORMATION
                                        RECONCILIATION OF GAAP NET INCOME TO ADJUSTED EBITDA
                                                           (In thousands)
                                                             (Unaudited)

    The following table presents a reconciliation of net income, a GAAP measure, to adjusted EBITDA, a non-GAAP measure. Adjusted EBITDA, a non-GAAP measure, is defined as earnings (or net income) before
                interest, taxes, depreciation and amortization, other expenses (income), and stock-based compensation.

                                        Three Months Ended December 31,                       Twelve Months Ended December 31,
                                        -------------------------------                       --------------------------------
                                                   2012                           2011                      2012                           2011
                                                   ----                           ----                      ----                           ----

    Net income - GAAP                           $62,281                        $32,810                   $86,452                        $19,902

    Interest income                                 (15)                           (32)                     (241)                          (136)
    Interest expense                                  1                            157                        50                            259
    (Benefit from)
     provision for
     income taxes                               (19,341)                           421                   (24,504)                        (1,137)
    Depreciation and
     amortization                                 5,213                          5,485                    22,084                         19,995
    Other, net                                      295                            334                     2,309                          4,809
    Stock-based
     compensation                                 1,925                          1,498                     6,991                          5,562
                                                  -----                          -----                     -----                          -----

    Adjusted EBITDA -
     Non-GAAP                                   $50,359                        $40,673                   $93,141                        $49,254
                                                =======                        =======                   =======                        =======

SOURCE LeapFrog Enterprises, Inc.


Source: PR Newswire