LeapFrog 2004 Annual Report Download - page 42

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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,
2003 2002 Change
Segment $(1)
%of
Segment’s
Net Sales $(1)
%of
Segment’s
Net Sales $(1) %
U.S. Consumer .................... $266.1 48.7% $236.4 51.6% $29.7 13%
International ...................... 51.4 53.2% 23.4 43.6% 28.0 120%
Education and Training ............. 22.7 60.5% 10.3 51.1% 12.4 121%
Total Company ................... $340.1 50.0% $270.0 50.8% $70.1 26%
(1) In millions.
U.S. Consumer. The 2.9 percentage points decrease in gross profit percent year-over-year was primarily due
to product mix and increased warehousing, freight and royalty expenses as follows:
• Unfavorable product mix was primarily due to sales of the new Leapster platform, which has a lower
gross margin percent than our other platforms. In addition, our LeapPad Plus Writing and LittleTouch
LeapPad platforms have lower margins than our existing mature platforms. Historically, as our
platforms mature, gross margins have benefited from engineering improvements and higher sales
volumes.
• Higher warehousing fees in 2003 were incurred due to increased sales volume and average inventory
levels in 2003 compared to 2002.
• Higher freight expenses were due to increased ocean freight rates and due to airfreight costs incurred to
expedite delivery of our new platforms, particularly the Leapster platform, from Asia in time for the
holiday shopping season.
• Higher royalty expenses were incurred due to increased sales from our expanded library of licensed
products for our existing and new platforms.
International. The 9.6 percentage point increase in gross profit percentage year over year was primarily due
to lower product cost, partially offset by higher royalty, warehousing and freight expenses. Foreign exchange
gains favorably impacted our International segment’s gross profit by 8.3% in 2003.
Education and Training. The 9.4 percentage point increase in gross profit percentage year-over-year was
primarily due to lower product cost and favorable product mix, offset by higher warehousing costs due to higher
inventory levels, and content amortization expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $10.7 million, or 13%, from $80.9 million in 2002
to $91.6 million in 2003. As a percentage of net sales, selling, general and administrative expenses decreased
from 15.2% in 2002 to 13.5% in 2003. All three of our business segments had reductions in selling, general and
administrative expenses as a percentage of net sales. This was due primarily to leverage achieved against the
strong growth in sales in all segments.
Selling, general and administrative expenses for our U.S. Consumer segment increased $4.3 million or 7%
from 2002 to 2003. As a percentage of net sales, this expense decreased from 13.1% in 2002 to 11.8% in 2003.
35