RC2 lowers operating costs to profit in 3Q
-- Kids Today, 10/22/2009 7:50:00 AM
OAK BROOK, Ill.—RC2 said that profits jumped in the third quarter as lower operating costs allowed the children’s products maker to overcome shaky sales, particularly in international markets.
Net income for the third quarter ended on Sept. 30, 2009, rose 22.5% to $13.6 million, or $0.66 per diluted share. Excluding recall-related and non-recurring items, net income rose 3.5% to $11.5 million, or $0.66 per diluted share.
Net income for the nine months ended September 30, 2009 was $18.7 million, or $1.01 per diluted share, up from $6.7 million, or $0.38 per diluted share, for the first nine months of 2008. Excluding recall-related and non-recurring items, net income for this year’s first nine months was $19.1 million, or $1.03 per diluted share, up from $18.3 million, or $1.03 per diluted share, for the prior year’s nine month period.
“We are encouraged by the increase in our third quarter net income,” said CEO Curt Stoelting of RC2’s results. “Gross margins improved in the third quarter as compared with the first half of 2009 due to benefits from both lower product and freight costs, seasonal mix shift to play products, improved operating leverage and improved international margins due to favorable currency fluctuations. Operating costs were over $4 million lower than in the prior year third quarter primarily due to our operating cost reduction plan and lower variable costs. In addition to cost reductions, we have benefited from working capital improvements, which when coupled with our increased net income, have generated over $40 million of cash from operations in the first nine months of 2009.
The moves helped offset slower sales for most of RC2’s product segments.
Net sales for 2009’s third quarter decreased 4.8% to $126.5 million. Net sales for the first nine months dipped 4.9% to $299.8 million. Both were impacted by unfavorable fluctuations in foreign currency exchange rates, which reduced 2009 third quarter and nine months consolidated net sales by approximately 3% and 5%, respectively.
“As expected, third quarter sales comparisons were challenging with North American sales showing a small increase, which was offset by softness in International sales. Foreign currency exchange rates had a negative impact on international sales as reported in U.S. dollars of approximately 8% in the third quarter and 16% in the nine months ended September 30, 2009,” said Stoelting.
“We also continued to see sales declines of over 20% in our specialty retailers, wholesalers, OEM dealers and other channel, which has been impacted by both the economic downturn and challenging credit markets. Despite conservative ordering and tight inventory management, sales in our chain retailers channel increased nearly 3% in the third quarter and 2% in the nine months ended September 30, 2009.”
Stoelting added that net sales for the company’s mother, infant and toddler products category decreased 5 percent in the third quarter, primarily due to lower sales for the company’s health/safety and infant toy product lines, but were still running 2 percent ahead for the nine month timeframe.
“We continue to believe that in 2009 our mother, infant and toddler products category will continue to perform well relative to other consumer product categories, and we expect growth in this category in 2010,” he said.
The negative net sales trend for RC2’s preschool, youth and adult products category slowed in the third quarter, with that business down 5%.
“We continue to see sales declines across most product lines with the exception of Thomas & Friends Wooden Railway, which has achieved positive sales comparisons both quarterly and year to date,” said Stoelting. “Sales of our new Super Why! product line continue to increase. We have significant new product launches planned in 2010 for new preschool properties including Chuggington and Dinosaur Train, as well as launching a number of new products across our existing product lines.”
Gross margin for the nine months ended on Sept. 30 decreased to 43.4% from 46.0% in the nine months ended Sept. 30, 2008, primarily due to less favorable product mix, higher product costs and unfavorable foreign exchange rates, which more than offset cost reduction initiatives and price increases. Selling, general and administrative expenses decreased to $96.2 million from $112.4 million, primarily due to the impact of the company’s operating cost reduction plan, and to a lesser extent, lower variable costs and foreign currency rate fluctuations.
Operating income rose to $33.0 million, up from $15.5 million ($30.8 million if excluding recall-related and non-recurring items) while Adjusted EBITDA topped out at $45.7 million in this year's nine month period, down from $46.1 million in 2008’s first nine months.
Looking ahead, Stoelting said: “We continue to anticipate a challenging holiday season in 2009 and remain concerned about the economic environment for 2010. However, we are encouraged by recent trends and remain focused on our long-term strategic goals, which include both organic growth and growth through acquisition.”
The company now expects that full year 2009 net income will be higher than the $23.5 million reflected in its previous diluted earnings per share guidance. It's now estimated to range from approximately $25 to $27 million or $1.30 to $1.40 per fully diluted share.
RC2’s infant, toddler and preschool products are marketed under its Learning Curve family of brands which includes The First Years and Lamaze brands as well as popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere and Sesame Street. RC2 markets its youth and adult products under the Johnny Lightning and Ertl brands. RC2 reaches its target consumers through multiple channels of distribution supporting more than 25,000 retail outlets throughout North America, Europe, Australia, and Asia Pacific.
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