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| RUS > SEC Filings for RUS > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
The financial and business analysis below provides information which we believe
is relevant to an assessment and understanding of our consolidated financial
condition, changes in financial condition and results of operations. This
financial and business analysis should be read in conjunction with our Unaudited
Consolidated Financial Statements and accompanying Notes to Unaudited
Consolidated Financial Statements set forth in Part I, Financial Information,
Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q, and our
Annual Report on Form 10-K for the year ended December 31, 2008, as amended (the
"2008 10-K"), including the consolidated financial statements and notes thereto,
and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (the
"March 10-Q").
OVERVIEW
We are a leading designer, importer, marketer and distributor of branded infant
and juvenile consumer products. We generated net sales from continuing
operations of $60.0 million and $116.2 million in the three and six month
periods ended June 30, 2009.
Shift to Infant and Juvenile Business
During 2008, we strategically refocused our business to further enhance our
position in the infant and juvenile business. In April 2008, we consummated the
acquisitions of each of the net assets of LaJobi Industries, Inc. ("LaJobi") and
the capital stock of CoCaLo, Inc. ("CoCaLo"). LaJobi designs, imports and sells
infant and juvenile furniture and related products, and CoCaLo designs, imports
and sells infant bedding and related accessories. In addition, on December 23,
2008, we sold our gift segment business (the "Gift Business").
Together with our 2004 acquisition of Kids Line, LLC ("Kids Line") - which
designs, imports and sells infant bedding and related accessories - and our 2002
acquisition of Sassy, Inc. ("Sassy") - which designs, imports and sells
developmental toys and feeding, bath and baby care items - these actions have
focused our operations on the infant and juvenile business, and have enabled us
to offer a more complete range of products for the baby nursery.
Prior to December 23, 2008, we had two reportable segments: (i) our infant and
juvenile segment; and (ii) our gift segment. As a result of the sale of the Gift
Business, we currently operate in one segment: our infant and juvenile segment.
Consistent with our strategy of building a confederation of complementary
businesses, each subsidiary in our infant and juvenile business is operated
substantially independently by a separate group of managers. Our senior
corporate management, together with senior management of our subsidiaries,
coordinates the operations of all of our businesses and seeks to identify
cross-marketing, procurement and other complementary business opportunities.
Prior to the Gift Sale, the gift segment designed, manufactured through third
parties and marketed a wide variety of gift products, primarily under the
trademarks Russ ®and Applause ®, to retail stores throughout the United States
and the world via wholly-owned subsidiaries and independent distributors. The
consideration received from the Gift Sale (the "Gift Sale Consideration") was
recorded at fair value as of December 23, 2008 at approximately $19.8 million,
and consisted of a Note Receivable of $15.3 million and an Investment of
$4.5 million on our consolidated balance sheet. The Gift Sale Consideration, as
well as a related license to the Buyer of the Russ ® and Applause ®trademarks
and tradenames, is discussed in more detail in "Liquidity and Capital Resources"
below under the section captioned " Recent Disposition ". During the quarter
ended June 30, 2009, in conjunction with the preparation of our financial
statements for such period, a series of impairment indicators emerged in
connection with the Buyer, which resulted in the Company recording in the
quarter ended June 30, 2009 certain non-cash impairment charges and a valuation
reserve aggregating $15.6 million against the Gift Sale Consideration and the
Applause®trade name (See Note 3 of Notes to Unaudited Consolidated Financial
Statements).
Prior to its divestiture, the Gift Business had revenues of approximately
$25.5 million and $59.8 million for the three and six months ended June 30,
2008, respectively. The loss from discontinued operations, net of tax, for the
three and six months ended June 30, 2008 was $14.8 million and $15.9 million,
respectively. The six month loss of $15.9 million included: (i) an impairment
charge of $7.0 million related to the write-down of fixed assets; (ii) a
$1.0 million charge in cost of goods sold related to the write-off of Shining
Stars website development; and (iii) a $1.6 million inventory charge in the
second quarter of 2008 in connection with the unfavorable results of a voluntary
quality test on certain gift products.
As a result of the Gift Sale, the Consolidated Statements of Operations have
been restated to show the Gift Business as discontinued operations for the three
and six months ended June 30, 2008. Neither the Consolidated balance sheet for
the year ended December 31, 2008 nor the quarter ended June 30, 2009 include the
Gift Business assets and liabilities, as a result of the consummation of the
Gift Sale as of December 23, 2008, but each include the fair value of the
consideration received from the Gift Sale, which was impaired during the quarter
ended June 30, 2009. The Consolidated Statement of Cash Flows for the six months
ended June 30, 2008 has not been restated. The accompanying Notes to Unaudited
Consolidated Financial Statements have been restated to reflect the discontinued
operations presentation described above for the basic financial statements where
applicable.
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% and 8% of
our net sales for the six months ended June 30, 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 provided by our senior credit facility, 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.
We do not ordinarily sell our products on consignment (although we may do so in
limited circumstances), 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, would increase our expenses, and therefore, adversely affects
our profitability. Conversely, a small portion of our revenues are 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 vendors 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 margin pressure, including 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 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;
(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 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 and the
first half of 2009, 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 ® -introduced in 2009, which represents 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 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 deteriorated significantly in many
countries and regions as a result of fluctuating 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. Continued disruptions in the capital
and credit markets, 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 in 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 and six months ended June 30, 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 JUNE 30, 2009 AND 2008
Net sales for the three months ended June 30, 2009 decreased by 3.6% to
$60.0 million, compared to $62.2 million for the three months ended June 30,
2008. This decrease was the result of the loss of $5.5 million in Sassy sales
generated by the MAM Agreement and an approximate 5% decline in Kids Line sales,
partially offset by strong sales growth at LaJobi and CoCalo as compared to the
prior year period.
Gross profit was $19.0 million, or 31.7% of net sales, for the three months
ended June 30, 2009, as compared to $20.0 million, or 32.1% of net sales, for
the three months ended June 30, 2008. Gross profit margins were negatively
impacted in the second quarter of 2009 primarily by: (i) sales mix changes
resulting in higher sales of lower margin products, including higher sales of
licensed products, including Carters® brand products; and (ii) increases in mark
downs and advertising allowances provided to assist retailers in clearing
existing inventory and to secure new product placements.
Selling, general and administrative expense was $11.4 million, or 19.0% of net
sales, for the three months ended June 30, 2009, compared to $13.4 million, or
21.6% of net sales, for the three months ended June 30, 2008. As a percentage of
sales, selling, general and administrative expense decreased at all four of the
Company's operating subsidiaries, primarily as a result of focused efforts to
control spending in the current economic climate, as well as workforce
reductions implemented by Sassy in late 2008. Only LaJobi experienced higher
selling, general and administrative expenses on an absolute basis, driven by
higher sales volume for the period.
The consideration received from the sale of the Gift Business is reviewed for
impairment indicators on a quarterly basis. In connection with the preparation
of the Company's financial statements for the second quarter of 2009, a series
of impairment indicators emerged in connection with The Russ Companies, the
buyer of the Gift Business. These indicators included the impact of current
macro-economic factors on the Buyer, the deterioration of conditions in the gift
market, and other Buyer specific factors, including declining financial
performance, operational and integration challenges and liquidity issues. As a
result of these impairment indicators, the Company tested for impairment its
19.9% investment in The Russ Companies and critically evaluated the
collectibility of its $15.3 million note receivable. As a result of this review,
the Company determined that its 19.9% investment in The Russ Companies as well
as the Applause trade name were other than temporarily impaired and recorded
non-cash charges of approximately $4.5 million and $0.8 million, respectively,
against these assets. The Company also recorded a $10.3 million charge, to
reserve against the difference between the note receivable and deferred revenue
liability. The aggregate impact of the actions resulted in a non-cash charge to
income/(loss) from continuing operations in an aggregate amount of
$15.6 million.
Other expense was $1.5 million for the three months ended June 30, 2009 as
compared to $2.3 million for the three months ended June 30, 2008. This decrease
of approximately $0.8 million was primarily attributable to higher deferred
financing costs incurred in the second quarter of 2008 in connection with the
acquisitions of LaJobi and CoCaLo, including a write-off previously amortized
deferred financing costs. Interest expense for the second quarter of 2009 was
partially offset by a net favorable change ($0.2 million) in the fair value of
an interest rate swap agreement entered into in connection with the credit
facility.
Loss from continuing operations before income tax provision was $9.5 million for
the three months ended June 30, 2009 as compared to income of $4.3 million for
the three months ended June 30, 2008, primarily as a result of the aggregate
$15.6 million of non-cash impairment charges and valuation reserves associated
with the Gift Sale consideration and related assets recorded in the second
quarter of 2009.
The income tax benefit from continuing operations for the three months ended
June 30, 2009 was $3.9 million as compared to an income tax provision from
continuing operations of $1.7 million in the same period 2008. The income tax
benefit is primarily the result of the impairment charge and valuation allowance
recorded in the June 2009 quarter. The Company's effective tax rate for the
three months ended June 30, 2009 was 40% compared to 39% for the three months
ended June 30, 2008.
As a result of the foregoing, loss from continuing operations for the three
months ended June 30, 2009 was $5.7 million, compared to income from continuing
operations of $2.6 million, for the three months ended June 30, 2008.
Loss from discontinued operations, net of tax, was $14.8 million for the three
months ended June 30, 2008. Net sales for the Gift Business were $25.5 million
for the three months ended June 30, 2008. The income tax provision from
discontinued operations was a provision of $0.3 million in the second quarter of
2008.
As a result of the foregoing, net loss for the three months ended June 30, 2009
was $5.7 million, or ($0.26) per diluted share, compared to a net loss of
$12.1 million, or ($0.57) per diluted share, for the three months ended June 30,
2008.
RESULTS OF OPERATIONS-SIX MONTHS ENDED JUNE 30, 2009 AND 2008
Net sales for the six months ended June 30, 2009 increased by 12% to
$116.2 million, compared to $103.8 million for the six months ended June 30,
2008. This increase was attributable to the inclusion of $26.7 million in sales
generated by LaJobi and CoCaLo in the first quarter of 2009 which were not
included in the comparable period in 2008, partially offset by a decline in net
sales for Kids Line and Sassy. The decline in Sassy sales resulted primarily
from the termination of the MAM Agreement effective December 2008, which
resulted in the loss of approximately $11.0 million of net sales generated in
the six months ended June 30, 2008. The decrease in Kids Line sales was the
result of conservative retailer ordering associated with the current economic
environment.
Gross profit was $35.6 million, or 30.6% of net sales, for the six months ended
June 30, 2009, as compared to $35.2 million, or 33.9% of net sales, for the six
months ended June 30, 2008. Gross profit margin was negatively impacted in the
first six months 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 $23.6 million, or 20.3% of net
sales, for the six months ended June 30, 2009, compared to $22.4 million, or
21.6% of net sales, for the six months ended June 30, 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; and (ii) severance costs recorded in the first quarter of 2009 of
approximately $400,000 associated with a former executive. 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.
The consideration received from the sale of the Gift Business is reviewed for
impairment indicators on a quarterly basis. In connection with the preparation
of the Company's financial statements for the second quarter of 2009, a series
of impairment indicators emerged in connection with The Russ Companies, the
buyer of the Gift Business. These indicators included the impact of current
macro-economic factors on the Buyer, the deterioration of conditions in the gift
market, and other Buyer- specific factors, including declining financial
performance, operational and integration challenges and liquidity issues. As a
result of these impairment indicators, the Company tested for impairment its
19.9% investment in the Russ Companies and critically evaluated the
collectibility of its $15.3 million note receivable. As a result of this review,
the Company determined that its 19.9% investment in The Russ Companies as well
as the Applause trade name were other than temporarily impaired and recorded
non-cash charges of approximately $4.5 million and $0.8 million, respectively,
against these assets. The Company also recorded a $10.3 million charge, to
reserve against the difference between the note receivable and deferred revenue
liability. The aggregate impact of the actions resulted in a non-cash charge to
income/(loss) from continuing operations in an aggregate amount of
$15.6 million.
Other expense was $3.7 million for the six months ended June 30, 2009 as
compared to $3.3 million for the six months ended June 30, 2008. This increase
of approximately $0.4 million was primarily attributable to increased interest
expense related to the LaJobi and CoCaLo acquisitions, partially offset by a net
favorable change of $0.4 million in the fair value of an interest rate swap
agreement entered into in connection with the credit facility.
Loss from continuing operations before income tax provision was $7.3 million for
the six months ended June 30, 2009 as compared to income of $9.5 million for the
six months ended June 30, 2008, primarily as a result of the aggregate
$15.6 million of non-cash impairment charges and valuation reserves associated
with the Gift Sale Consideration and related assets recorded in the second
quarter of 2009.
The income tax benefit from continuing operations for the six months ended June 30, 2009 was $3.0 million as compared to an income tax provision from continuing operations of $3.7 million in 2008, which was primarily the result of the impairment charges and valuation reserves associated with the Gift Sale Consideration. The Company's effective tax rate for the six months ended June 30, 2009 was 41% compared to 39% for the six months ended June 30, 2008. As a result of the foregoing, loss from continuing operations for the six months ended June 30, 2009 was $4.4 million, compared to income from continuing operations of $5.8 million, for the six months ended June 30, 2008. Loss from discontinued operations, net of tax, was $15.9 million in the six months ended June 30, 2008. Net sales for the Gift Business were $59.8 million for the six months ended June 30, 2008. The income tax benefit from discontinued operations was a benefit of $0.8 million for the six months ended June 30, 2008. As a result of the foregoing, the net loss for the six months ended June 30, . . .
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