LeapFrog 2004 Annual Report Download - page 36

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personal learning tools. In addition, our SchoolHouse division experienced strong sales of our interactive content
library resulting from successful direct marketing promotions, an overall expansion of a dedicated sales force,
and increased product offerings and brand awareness.
Gross Profit
The gross profit in dollars for each segment and the related gross profit percentage of segment net sales
were as follows:
Year Ended December 31,
2004 2003 Change
Segment $(1)
%of
Segment’s
Net Sales $(1)
%of
Segment’s
Net Sales $(1) %
U.S. Consumer ................... $158.4 36.7% $266.1 48.7% $(107.7) (40)%
International ..................... 65.6 42.8% 51.4 53.2% 14.2 28%
Education and Training ............ 35.1 63.5% 22.7 60.5% 12.4 55%
Total Company ................. $259.0 40.5% $340.1 50.0% $ (81.1) (24)%
(1) In millions.
U.S. Consumer. The 12.0 percentage point decrease in our U.S. Consumer segment’s gross profit percentage
year-over-year was primarily the result of the following:
• Lower sales of products that carry a relatively high margin, such as LeapPad software and hardware,
offset by growing sales in new, lower margin products, such as the Leapster product line. We are
seeking to build a large base of installed Leapster platform users that will lead to the sale of higher
margin Leapster software. We estimate that the impact of this unfavorable product mix contributed to a
five percentage point decline in the gross profit percentage in 2004 versus 2003.
• Higher charges for excess and obsolete inventory of $14.6 million over 2003. Inventory reserves were
increased due to obsolete and defective inventory comprised of raw materials and discontinued finished
goods. The increase in reserves was due, at least in part, to significantly lower sales in the fourth quarter
versus expectation for products to be discontinued in 2005. The increase in excess and obsolete inventories
resulted in three percentage points of the decline in gross profit percentage in 2004 versus 2003.
• Higher fixed expenses, in dollars and as a percentage of net sales, including higher warehousing and
freight resulting from higher inventory levels, and higher depreciation of capitalized tooling expenses
resulting from tooling write-offs associated with discontinued products. Increased expenses were
primarily attributed to operating inefficiencies incurred at our new distribution facility in Fontana,
California. We estimate that these expenses contributed two percentage points of the decline in gross
profit percentage in 2004 versus 2003.
• Price reductions on our established platforms, primarily our Classic LeapPad, which was implemented
to drive future sales of these platforms and their related software products. We estimate that these price
reductions resulted in one percentage point of the decline in gross profit percentage in 2004.
• Higher sales allowances granted to customers due to operational issues encountered during the start up
of our new distribution facility. We estimate that these allowances resulted in one percentage point of
the decline in gross profit percentage in 2004.
International. The 10.4 percentage point decrease in our International segment’s gross profit percentage
year-over-year was primarily due to:
• A higher percentage of sales derived from lower margin platforms;
29