LeapFrog 2007 Annual Report Download - page 53

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U. S. Consumer
Our gross margin for 2006 decreased by 12.9 percentage points compared to 2005. The decline was
primarily due to the following factors:
• Higher allowances for excess and obsolete inventory, which increased by $10.5 million to 20.8 million
in 2006. The higher charges resulted from product sales declines combined with our new product
development strategies formalized in the third quarter of 2006. This increase unfavorably impacted
gross margin by approximately 3.0 percentage points.
• Closeout and promotional arrangements caused by weaker demand for our LeapPad line of products and
our planned replacement of FLY Pentop Computer in 2007 with the FLY Fusion Pentop Computer. This
increase negatively impacted gross margin by approximately 5.7 percentage points.
• Cancellation charges on purchase orders for inventory that we cancelled, which increased by $5.9 million
from $0.8 million in 2005. This increase impacted gross margin by approximately 1.7 percentage points.
International
Our gross margin for 2006 decreased by 19.2 percentage points compared to the same period in 2005. The
decline was primarily due to the following factors:
• Increased charges for inventory allowances by $6.5 million in 2006 compared to 2005. The increased
charges resulted from our product sales decline and our updated strategic direction. This increase
unfavorably impacted gross margin by approximately 5.7 percentage points.
• Promotions and discounts to assist retailers reduce their inventory, which impacted gross margin by
approximately 5.5 percentage points.
• Operational costs associated with our new Canadian warehouse, which reduced gross margin by
approximately 1.8 percentage points.
School
Our gross margin for 2006 decreased by 10.4 percentage points compared to 2005. The decrease was
primarily due to higher charges for allowance for excess and obsolete inventory, which increased by
approximately $3.5 million in 2006 compared to 2005. This increase unfavorably impacted gross margin by 9.5
percentage points.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of salaries and related employee benefits,
legal fees, marketing expenses, systems costs, rent, office equipment, supplies and professional fees. We record
all of our indirect expenses in our U.S. Consumer segment and do not allocate these expenses to our International
and School segments.
The selling, general and administrative expense in dollars for each segment and the related percentage of the
segment’s net sales were as follows:
Year Ended December 31,
2006 2005 Change
Segment $(1)
%of
Segment’s
Sales $(1)
%of
Segment’s
Sales $(1) %
U. S. Consumer ................................... $ 91.9 26.2% $ 90.0 18.8% $ 1.9 2%
International ..................................... 18.8 16.4% 14.7 11.2% 4.1 28%
School .......................................... 21.2 57.4% 21.5 53.4% (0.3) (1)%
Total Company .................................. $131.9 26.3% $126.2 19.4% $ 5.7 5%
(1) In millions
45