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| RUS > SEC Filings for RUS > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Continuing Operations
Our infant and juvenile segment - which currently consists of Kids Line, LaJobi,
Sassy and CoCaLo - designs, manufactures through third parties, imports and
sells products in a number of complementary categories including, among others:
infant bedding and related nursery accessories (Kids Line and CoCaLo); infant
furniture and related products (LaJobi); and developmental toys and feeding,
bath and baby care items with features that address the various stages of an
infant's early years (Sassy). Our products are sold primarily to retailers in
North America, the UK and Australia, including large, national retail accounts
and independent retailers (including toy, specialty, food, drug, apparel and
other retailers). We maintain a direct sales force and distribution network to
serve our customers in the United States, the UK and Australia, and sell through
independent manufacturers' representatives and distributors in certain other
countries. International sales from continuing operations, defined as sales
outside of the United States, including export sales, constituted 7.4% and 10.5%
of our net sales for the three months ended March 31, 2009 and 2008,
respectively. One of our strategies is to increase our international sales, both
in absolute terms and as a percentage of total sales, as we seek to expand our
presence outside of the U.S.
Aside from funds supplied by senior lenders to consummate acquisitions, revenues
from the sale of products have historically been the major source of cash for
the Company, and cost of goods sold and payroll expenses have been the largest
uses of cash. As a result, operating cash flows primarily depend on the amount
of revenue generated and the timing of collections, as well as the quality of
customer accounts receivable. The timing and level of the payments to suppliers
and other vendors also significantly affect operating cash flows. Management
views operating cash flows as a good indicator of financial strength. Strong
operating cash flows provide opportunities for growth both internally and
through acquisitions, and also enable us to pay down debt incurred in connection
with our acquisitions.
We do not ordinarily sell our products on consignment, and we ordinarily accept
returns only for defective merchandise. In certain instances, where retailers
are unable to resell the quantity of products that they have purchased from us,
we may, in accordance with industry practice, assist retailers in selling such
excess inventory by offering credits and other price concessions. Such amounts,
together with discounts, are deducted from gross sales in determining net sales.
Our products are manufactured by third parties, principally located in the PRC
and other Eastern Asian countries. Our purchases of finished products from these
manufacturers are primarily denominated in U.S. dollars. Expenses for these
manufacturers are primarily denominated in Chinese Yuan. As a result, any
material increase in the value of the Yuan relative to the U.S. dollar, as
occurred in 2008, and continues in 2009, would increase our expenses, and
therefore, adversely affects our profitability. Conversely, a small portion of
our revenues is generated by our subsidiaries in Australia and the U.K. and are
denominated primarily in those local currencies. Any material increase in the
value of the U.S. dollar relative to the value of the Australian dollar or
British pound would result in a decrease in the amount of these revenues upon
their translation into U.S. dollars for reporting purposes.
Additionally, if our suppliers experience increased raw materials, labor or
other costs, and pass along such cost increases to us through higher prices for
finished goods, our cost of sales would increase. To the extent we are unable to
pass such price increases along to our customers, our gross margins would
decrease. For example, increased costs in the PRC, primarily for raw materials,
labor, taxes and currency lead our factories to raise our prices, resulting in
increased cost of goods sold and reduced gross margins in 2008.
In addition, our gross profit margins have declined in recent periods as a
result of (i) a shift in product mix toward lower margin products, including
increased sales of licensed products, which typically generate lower margins as
a result of required royalty payments (which are recorded in cost of goods sold)
and (ii) our acquisition of LaJobi, which has experienced significant sales
growth but which also typically generates lower gross margins, on average, than
our other business units.
We continue to seek to mitigate this pressure, including through the development
of new products that can command higher pricing, the identification of
alternative, lower-cost sources of supply and, where possible, price increases.
Particularly in the mass market, our ability to increase prices is limited by
market and competitive factors, and, while we have implemented selective price
increases, we have generally focused on maintaining (or increasing) shelf space
at retailers and, as a result our market share.
The Company's revenues are primarily derived from sales of its products.
The principal elements of our global business strategy include:
• focusing on design-led and branded product development at each of our
subsidiaries to enable us to continue to introduce compelling new
products;
• pursuing organic growth opportunities to capture additional market share, including:
(i) expanding our product offerings into related categories; and
(ii) increasing our existing product penetration (selling more products to existing customer locations);
(iii) increasing our existing store penetration (selling to more store locations within each large, national retail customer); and
(iv) expanding and diversifying of our distribution channels, with particular emphasis on sales into into international markets;
• growing through licensing, distribution or other strategic alliances, including pursuing acquisition opportunities in businesses complementary to ours;
• implementing strategies to further capture synergies within and between our confederation of businesses, through cross-marketing opportunities, consolidation of certain operational activities and other collaborative activities; and
• continuing efforts to manage costs within each of our businesses.
We believe that we have made substantial progress in successfully implementing
this strategy. As noted above, we acquired each of LaJobi and CoCaLo on April 2,
2008, which enabled us to significantly expand our infant and juvenile business
and offer a more complete range of products for the baby nursery. We also sold
our Gift Business on December 23, 2008, enabling us to focus our efforts and
resources on our infant and juvenile business. In addition, during 2008, we
expanded our product line to offer products at a broader variety of price points
and also added several environmentally friendly products. For example, Kids Line
significantly increased its sales of Carter's ® brand bedding separates, while
Kids Line and CoCaLo each introduced new organic, eco-friendly brands. CoCaLo
also expanded and refined its CoCaLo Couture brand, which targets higher price
points. LaJobi also developed a new brand - Nursery 101® - for introduction in
2009, which will represent products at a lower price point than the rest of its
line.
Effective December 2008, Sassy terminated its distribution agreement with MAM
Babyartikel GmbH, which accounted for approximately $22 million of sales in 2008
that will not recur in 2009, and also terminated its license agreement with Leap
Frog during 2008 due to unacceptable levels of sales and profitability
associated with this agreement. During the fourth quarter of 2008, Sassy
right-sized its operations in light of the termination of the MAM distribution
agreement. Under this plan, in addition to reducing approximately 30% of its
full-time workforce, Sassy repositioned its operations around its core strength
as a developmental product company and developed new products and packaging to
support this effort.
General Economic Conditions as they Impact Our Business
Economic conditions have recently deteriorated significantly in the United
States and many of the other regions in which we do business and may remain
depressed for the foreseeable future. Global economic conditions have been
challenged by slowing growth and the sub-prime debt devaluation crisis, causing
worldwide liquidity and credit concerns. Continuing adverse global economic
conditions in our markets may result in, among other things, (i) reduced demand
for our products, (ii) increased price competition for our products, and/or
(iii) increased risk in the collectibility of cash from our customers. See
Item 1A, "Risk Factors-The state of the economy may impact our business" of the
2008 10-K. In addition, our operations and performance depend significantly on
levels of consumer spending, which have recently deteriorated significantly in
many countries and regions as a result of increases in energy costs, conditions
in the residential real estate and mortgage markets, stock market conditions,
labor and healthcare costs, access to credit, consumer confidence and other
macroeconomic factors affecting consumer spending behavior.
In addition, if internal funds are not available from our operations, we may be
required to rely on the banking and credit markets to meet our financial
commitments and short-term liquidity needs. Disruptions in the capital and
credit markets, as were experienced during 2008, could adversely affect our
ability to draw on our bank revolving credit facility. Our access to funds under
that credit facility is dependent on the ability of the banks that are parties
to the facility to meet their funding commitments. Those banks may not be able
to meet their funding commitments to us if they experience shortages of capital
and liquidity or if they experience excessive volumes of borrowing requests from
us and other borrowers within a short period of time. Such disruptions could
require us to take measures to conserve cash until the markets stabilize or
until alternative credit arrangements or other funding for our business needs
can be arranged. See Item 1A, "Risk Factors-If the national and world-wide
financial crisis intensifies, potential disruptions in the credit markets may
adversely affect the availability and cost of short-term funds for liquidity
requirements and our ability to meet long-term commitments, which could
adversely affect our results of operations, cash flows, and financial condition"
of the 2008 10-K.
SEGMENTS
The Company currently operates one segment, the infant and juvenile segment.
BASIS OF PRESENTATION
As discussed above, as a result of the Gift Sale, the Consolidated Statement of
Operations has been restated to show the Gift Business as discontinued
operations for the three months ended March 31, 2008. The discussion below
conforms to such presentation. In addition, as each of LaJobi and CoCaLo was
acquired on April 2, 2008, the results of operations of each such entity are not
included in the consolidated results of operations for the first quarter of
2008.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Net sales for the three months ended March 31, 2009 increased by 35.2% to
$56.3 million, compared to $41.6 million for the three months ended March 31,
2008. This increase was attributable to the inclusion of sales generated by
LaJobi and CoCaLo in the first quarter of 2009, partially offset by an
approximately $12.0 million aggregate decline in net sales for Kids Line and
Sassy. The decline in Kids Line and Sassy sales resulted primarily from the
termination of sales of MAM products due to the termination of the MAM Agreement
effective December 2008 ($5.5 million) and conservative retailer ordering that
affected both Kids Line and Sassy.
Gross profit was $16.9 million, or 30.0% of net sales, for the three months
ended March 31, 2009, as compared to $15.2 million, or 36.4% of net sales, for
the three months ended March 31, 2008. Gross profit margin was negatively
impacted in the first quarter of 2009 primarily by: (i) sales mix changes
resulting in higher sales of lower margin products, including higher sales of
licensed products; (ii) increases in mark downs and advertising allowances
provided to assist retailers in clearing existing inventory and to secure
product placements for the balance of the year; and (iii) the inclusion in the
first quarter of 2009 of sales from LaJobi, which typically carry lower gross
profit margins, on average, than our other business units.
Selling, general and administrative expense was $12.5 million, or 22.2% of net
sales, for the three months ended March 31, 2009, compared to $9.0 million, or
21.6% of net sales, for the three months ended March 31, 2008. Selling, general
and administrative expense increased in absolute terms due to: (i) the inclusion
in the first quarter of 2009 of approximately $4.5 million of SG&A expenses from
LaJobi and CoCalo, which costs were not included in SG&A for the first quarter
of 2008; (ii) severance costs recorded in the first quarter of 2009 of
approximately $400,000 associated with a former executive; and (iii) stock-based
compensation costs of approximately $536,000, which were approximately $100,000
greater than similar costs in the first quarter of 2008. These additional SG&A
expenses were partially offset by lower SG&A expenses at both Kids Line and
Sassy due to lower sales volume and cost containment programs.
Other expense was $2.2 million for the three months ended March 31, 2009 as
compared to $1.0 million for the three months ended March 31, 2008. This
increase of approximately $1.2 million was primarily attributable to increased
interest and interest-related charges incurred in connection with the
acquisitions of LaJobi and CoCaLo ($0.9 million) and the related write-off of
deferred financing and other costs incurred in connection with the Second
Amendment to Credit Agreement ($0.5 million), partially offset by a favorable
change ($0.2 million) in the fair value of an interest rate swap agreement
entered into in connection with the credit facility.
Income from continuing operations before income tax provision was $2.2 million
for the three months ended March 31, 2009 as compared to $5.2 million for the
three months ended March 31, 2008.
The income tax provision on continuing operations for the three months ended
March 31, 2009 was $0.9 million as compared to an income tax provision on
continuing operations of $2.0 million in 2008. The Company recorded a tax
provision of approximately 39% for the three months ended March 31, 2009 and
2008.
As a result of the foregoing, income from continuing operations for the three
months ended March 31, 2009 was $1.3 million, compared to income from continuing
operations of $3.2 million, for the three months ended March 31, 2008.
Loss from discontinued operations, net of tax, was $1.2 million in the three
months ended March 31, 2008. Net sales for the Gift Business were $34.3 million
for the three months ended March 31, 2008. The income tax benefit from
discontinued operations was a benefit of $1.0 million in the first quarter of
2008.
As a result of the foregoing, net income for the three months ended March 31,
2009 was $1.3 million, or $0.06 per diluted share, compared to net income of
$2.0 million, or $0.09 per diluted share, for the three months ended March 31,
2008.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, funds from
operations, and availability under our bank facility. Our operating activities
generally provide sufficient cash to fund our working capital requirements and,
together with borrowings under our bank facility, are expected to be sufficient
to fund our operating needs and capital requirements for at least the next
12 months. Any significant future business or product acquisitions may require
additional debt or equity financing.
As of March 31, 2009, the Company had cash and cash equivalents of $1.8 million
compared to $3.7 million at December 31, 2008. Cash and cash equivalents
decreased by $1.9 million during the three months ending March 31, 2009 compared
to a decrease of $4.6 million during the three months ending March 31, 2008. The
decrease in cash and cash equivalents during both periods primarily reflects the
use of existing cash flows from operations to reduce debt. As of March 31, 2009
and December 31, 2008, working capital was $15.7 million and $25.0 million,
respectively. The reduction in working capital primarily results from the
repayment of long term debt.
Net cash provided by operating activities was $2.4 million during the three
months ended March 31, 2009 compared to net cash used in operating activities of
$1.4 million during the three months ended March 31, 2008. The increase in cash
provided by operating activities for the three months ended March 31, 2009 as
compared to 2008 was primarily the result of the acquisitions of LaJobi and
CoCaLo.
Net cash used in investing activities was $0.2 million for the three months
ended March 31, 2009 compared to net cash used of $4.2 million for the three
months ended March 31, 2008. The cash used for the three months ended March 31,
2009 was used to fund capital expenditures The cash used for the three months
ended March 31, 2008 was for the payment of the Kids Line Earnout consideration
of $3.6 million and capital expenditures.
Net cash used in financing activities was $4.1 million for the three months
ended March 31, 2009 as compared to net cash provided by financing activities of
$0.9 million for the three months ended March 31, 2008. The cash used in the
three months ended March 31, 2009 was primarily used to pay down debt under the
infant and juvenile credit facility.
Recent Acquisitions
LaJobi
As of April 2, 2008, LaJobi, Inc. a newly-formed and indirect, wholly-owned
Delaware subsidiary of RB ("LaJobi") consummated the transactions contemplated
by an Asset Purchase Agreement (the "Asset Agreement") with LaJobi Industries,
Inc., a New Jersey corporation ("Seller"), and each of Lawrence Bivona and
Joseph Bivona (collectively, the "Stockholders"), for the purchase of
substantially all of the assets and specified obligations of the business of the
Seller ("the Business"). The aggregate purchase price for the Business was equal
to $50.0 million, of which $2.5 million was deposited in escrow at the closing
in respect of potential indemnification claims.
In addition, provided that the EBITDA of the Business has grown at a compound
annual growth rate ("CAGR") of not less than 4% during the three years ending
December 31, 2010 ("the Measurement Date"), determined in accordance with the
Asset Agreement, LaJobi will pay to the Stockholders an amount (the "LaJobi
Earnout Consideration") equal to a percentage of of the Agreed Enterprise Value
of LaJobi as of the Measurement date (subject to acceleration under certain
limited circumstances), with the Agreed Enterprise Value defined as the product
of (i) the Business's EBITDA during the twelve (12) months ending on the
Measurement Date, multiplied by (ii) an applicable multiple (ranging from 5 to
9) depending on the specified levels of CAGR achieved. The LaJobi Earnout
Consideration can range between $0 and a maximum of $15 million. In addition, we
have agreed to pay 1% of the Agreed Enterprise Value to a financial institution
(which has been previously paid a finder's fee in connection with the Asset
Agreement), payable in the same manner and at the same time as the LaJobi
Earnout Consideration is paid to the Stockholders.
CoCaLo
On April 2, 2008, a newly-formed, wholly-owned Delaware subsidiary of RB, I&J
Holdco, Inc. (the "CoCaLo Buyer"), consummated the transactions contemplated by
the Stock Purchase Agreement (the "Stock Agreement") with each of Renee Pepys
Lowe and Stanley Lowe (collectively, the "Sellers"), for the purchase of all of
the issued and outstanding capital stock of CoCaLo, Inc., a California
corporation ("CoCaLo"). The aggregate base purchase price payable for CoCaLo was
equal to: (i) $16.0 million; minus (ii) the aggregate debt of CoCaLo outstanding
at the closing of the acquisition (including accrued interest) of $4.0 million;
minus (iii) specified transaction expenses ($0.3 million); plus (iv) a working
capital adjustment of $1.5 million paid by the CoCaLo Buyer. A portion of the
purchase price ($1.6 million, which was discounted to $1.4 million for financial
statement purposes) was evidenced by a non-interest bearing promissory note and
will be paid as additional consideration in equal annual installments over a
three-year period from the closing date.
In addition, the CoCaLo Buyer will pay to the Sellers the following earnout
consideration amounts (the "CoCaLo Earnout Consideration") with respect to
CoCaLo's performance for the aggregate three year period ending December 31,
2010; (i) $666,667 will be paid for the achievement of specified initial
performance targets with respect to each of net sales, gross profit and EBITDA
(the latter combined with EBITDA of Kids Line) (the "Initial Targets"), for a
maximum payment of $2.0 million in the event of achievement of the Initial
Targets in all three categories; and (ii) up to an additional $666,667 will be
paid, on a sliding scale basis, for achievement in excess of the Initial Targets
up to specified maximum performance targets in each category, for a potential
additional payment of $2.0 million in the event of achievement of the maximum
targets in all three categories. The CoCaLo Earnout Consideration can range
between $0 up to an aggregate maximum of $4.0 million.
Any LaJobi Earnout Consideration and/or CoCaLo Earnout Consideration will be
recorded as additional goodwill when and if paid.
The results of operations of LaJobi and CoCaLo and the fair value of assets
acquired and liabilities assumed are included in our consolidated financial
statements beginning on the acquisition date.
Detailed descriptions of the LaJobi and CoCaLo acquisitions can be found in the
Company's Current Report on Form 8-K filed on April 8, 2008.
Recent Disposition
On December 23, 2008, we entered into, and consummated the transactions
contemplated by, the Purchase Agreement dated as of December 23, 2008 (the
"Purchase Agreement") with The Russ Companies, Inc., a Delaware corporation
("Buyer"), for the sale of the capital stock of all of our subsidiaries actively
engaged in the Gift Business, and substantially all of our assets used in the
Gift Business, including, among other things, specified contracts, governmental
authorizations, data and records, intangible and other rights pertaining to the
Gift Business, and specified obligations (including all liabilities of the
Company with respect to the purchased assets, all liabilities of the Company or
any direct or indirect subsidiary of the Company with respect to the operation
of the Gift Business in each case prior to and after the closing of the sale
other than specified consolidated group taxes and liabilities resulting from
. . .
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