LeapFrog 2012 Annual Report Download - page 28

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations
(‘‘MD&A’’) is intended to help the reader understand the results of operations and financial condition of
LeapFrog Enterprises, Inc. and its consolidated subsidiaries (collectively, ‘‘LeapFrog,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’).
This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated
Financial Statements and the accompanying Notes in Part II, Item 8 of this report.
OVERVIEW
LeapFrog is a leading developer of educational entertainment for children. Our product portfolio consists of
multimedia learning platforms and related content and learning toys. We have developed a number of learning
platforms, including the LeapPad family of learning tablets, the Leapster family of handheld learning game
systems and the Tag and Tag Junior reading systems, which support a broad library of content titles. We have
created hundreds of interactive content titles for our platforms, covering subjects such as phonics, reading,
writing and math. In addition, we have a broad line of stand-alone learning toys. Many of our products
connect to our proprietary online LeapFrog Learning Path, which provides personalized feedback on a child’s
learning progress and offers product recommendations to enhance each child’s learning experience. Our
products are available in four languages and are sold globally through retailers, distributors and directly to
consumers via the leapfrog.com online store and LeapFrog App Center.
During 2012, we delivered strong financial results including: 28% net sales growth, reduced operating
expenses as a percentage of net sales, near triple operating profit, and more than triple income before taxes. In
addition, we maintained strong operating cash flow, improved working capital by $78.8 million, and increased
our cash balance by 67%.
Our results for the current and prior years include certain significant non-recurring items and trends that
impacted our year-over-year and quarter-over-quarter comparisons, most notably in our tax line. In the fourth
quarter of 2012, we released $20.3 million of an allowance against our deferred tax assets that was initially
established in 2006. In addition, our results included $6.4 million and $2.9 million in 2012 and 2011,
respectively, of previously unrecognized tax benefits due to the expiration of statutes of limitation in certain of
our foreign jurisdictions. Also notable is that the LeapPad tablet family of products was sold for the full year
in 2012 as compared to less than half of a year in 2011. Higher than planned inventory levels at the end of
2010, resulting from weaker than expected demand late in that year, negatively impacted sales for the first
quarter of 2011, which also added to the favorable 2012-over-2011 comparison.
2013 Outlook
We are excited about our market-leading portfolio and new product launches for 2013, which include a new
learn-to-read system, new iPhone and iPad app activity products and a new version of our LeapPad tablet. As
a result, despite a global economy that remains sluggish and a U.S. toy industry that declined in 2012, we
anticipate continued business growth at a pace ahead of the market with net sales expected to increase at a
high single-digit percentage growth rate. Similar to 2012, we will prepare to fulfill orders above our plans
whenever possible.
To support our market-leading growth and ongoing business transformation, we plan to make long-term
investments in content, international expansion, online communities, systems, and new platforms. Even with
this investment in our future, we expect our operating margin as a percentage of net sales to remain consistent
with 2012.
Our expectations for 2013 are subject to many uncertainties, including the timing and strength of any
economic recovery and many factors described in ‘‘Risk Factors’’ under Part I, Item 1A of this Form 10-K.
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