LeapFrog 2004 Annual Report Download - page 45

International. Our International segment’s income from operations increased by $18.7 million, or 243%,
from $7.7 million in 2002 to $26.4 million in 2003. As a percentage of net sales, income from operations
increased from 14.4% in 2002 to 27.4% in 2003. The operating income increase was largely due to strong sales
growth, primarily in the United Kingdom and Canada, increased gross profit percentage, and operating expense
leverage. Foreign currency exchange rates favorably impacted our International segment’s operating income by
9.6% in 2003. The favorable currency impact was due to the strengthening of the Canadian Dollar and the British
Pound, and to a lesser extent, the Euro.
Education and Training. Our Education and Training segment’s loss from operations improved from a loss
of $9.0 million in 2002 to a loss of $0.2 million in 2003. This improvement in operating results was largely due
to strong sales growth, increased gross profit percentage and operating expense leverage.
Other
Net Interest Income (Expense). Net interest income (expense) increased by $1.3 million, from an expense of
$0.1 million in 2002 to income of $1.2 million in 2003. This increase resulted from our higher balance of
invested average cash and short-term investment balances and the elimination of our debt in July 2002.
Other income. Other income increased by $3.6 million, or 343%, from $1.1 million in 2002 to $4.7 million
in 2003. This increase was primarily due to foreign exchange gains resulting from the strengthening of the
Canadian Dollar and the British Pound, and the one-time payment received from Benesse Corporation. The
payment received from Benesse Corporation was in connection with the early cancellation of a Quantum
LeapPad sales contract related to a discontinued direct-to-home program from Benesse’s middle school
subscribers.
Tax rate. Our effective tax rate was 37.0% in 2003 and was 39.9% in 2002. The 2003 effective tax rate was
impacted by the research and development tax credits accumulated from current and prior years.
Net Income
Net income increased by $29.3 million, or 67%, from $43.4 million in 2002 to $72.7 million in 2003 due to
the above-described factors. As a percentage of net sales, net income increased from 8.2% in 2002 to 10.7% in
2003.
Seasonality and Quarterly Results of Operations
Our business is subject to significant seasonal fluctuations. The majority of our net sales and all of our net
income generally are realized during the third and fourth calendar quarters. In addition, our quarterly results of
operations have fluctuated significantly in the past, and can be expected to continue to fluctuate significantly in
the future, as a result of many factors, including:
• seasonal influences on our sales, such as the holiday shopping season and back-to-school purchasing;
• unpredictable consumer preferences and spending trends;
• the need to increase inventories in advance of our primary selling season; and
• the timing of introductions of new products.
For a discussion of these and other factors affecting seasonality, see “Risk Factors That May Affect Our Results
and Stock Price—Our business is seasonal, and therefore our annual operating results will depend, in large part,
on sales relating to the brief holiday season” and “—Our quarterly operating results are susceptible to
fluctuations that could cause our stock price to decline.”
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