LeapFrog 2004 Annual Report Download - page 48

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highest in the last two months of the fourth quarter, and payments are not due until the first quarter of the
following year. Cash used to build inventory is typically the highest in the third quarter as we increase inventory
to meet the holiday season demand. However, in 2004 we began increasing our inventory build earlier than in
past years in order to be in a better position to fulfill third and fourth quarter demand, and to facilitate the
implementation of our supply chain initiatives. We also ended the year with higher than desired inventory
balances due to lower than expected sales. As a result of the seasonality of our business, cash flow from
operating activities is generally strongest in the first and fourth quarters of the year, as illustrated in the table
below:
Quarterly cash flow from operating activities were as follows:
Cash Flow From Operating
Activities
2004 (1) 2003 (1) 2002 (1)
1st Quarter ........................................ $108.3 $ 50.1 $ 40.7
2nd Quarter ........................................ (31.8) (1.4) (1.5)
3rd Quarter ........................................ (48.5) (34.0) (34.0)
4th Quarter ........................................ (27.9) 12.1 17.3
Total ............................................. $ 0.1 $ 26.8 $ 22.5
(1) In millions.
Operating activities
Net cash provided by operating activities was $0.1 million in 2004 compared to $26.8 million for 2003 and
$22.5 million in 2002.
The $26.7 million decrease in net cash provided by operating activities from 2003 to 2004 was primarily
due to the following factors:
• Net loss in 2004 of $6.5 million compared to net income of $72.7 million in 2003;
• Increase in inventory levels;
• Timing of accounts payable payments; and
• Offset by lower income tax payments resulting from tax benefits related to employee exercise of stock
options.
Working Capital—Major Components
Accounts receivable
Gross accounts receivable declined to $230.7 million at December 31, 2004 from $281.7 million at
December 31, 2003. Allowances for doubtful accounts increased to $2.5 million at December 31, 2004 from $1.6
million at December 31, 2003. As a percentage of gross accounts receivable, allowances for doubtful accounts
increased to 1.1% at December 31, 2004 from 0.6% at December 31, 2003. The increase in the reserve for
doubtful accounts was primarily due to initial and additional provisions made for one retailer and one distributor
in financial distress. Our days-sales-outstanding, or DSO, at December 31, 2004 was 80.0 days compared to 76.1
days at December 31, 2003.
The decreases in our accounts receivable was primarily due to the $74.6 million decrease in net sales in the
fourth quarter of 2004 as compared to the fourth quarter of 2003. The increase in our DSO was primarily due to
delayed payments from our customers due to operational issues encountered with our new distribution facility
located in Fontana, California.
41