LeapFrog 2015 Annual Report Download - page 32

Years Ended December 31, 2013 and 2012
R&D expenses for 2013 decreased 2% as compared to 2012, and remained flat as a percentage of net sales.
The decrease was primarily due to a decrease in the provision for incentive compensation expense, partially
offset by higher expenses due to an increase in headcount to support our strategic initiatives.
Advertising Expenses
Advertising expense consists of costs associated with marketing, advertising and promoting our products,
including customer-related discounts and promotional allowances.
Year Ended March 31, Year Ended December 31,
% Change
2015 vs. 2014
% Change
2013 vs. 20122015
2014
(unaudited) 2013 2012
(Dollars in millions)
Advertising expenses ......... $42.9 $47.4 $48.3 $43.0 (9)% 12%
As a percent of net sales ...... 13% 9% 9% 7% 4* 2*
* Percentage point change
Years Ended March 31, 2015 and 2014
Advertising expenses for the year ended March 31, 2015 decreased 9% as compared to the year ended
March 31, 2014, but increased as a percentage of net sales by four percentage points. The decrease was
primarily due to less spending on cooperative advertising and online advertising, partially offset by higher
spending on in-store displays and TV advertising during the current year.
Years Ended December 31, 2013 and 2012
Advertising expense for 2013 increased 12% as compared to 2012, and increased as a percentage of net sales
by two percentage points. The increase was primarily due to an increase in cooperative print advertising to
drive higher retail sales, and increases in marketing materials, and social and search advertising spending. The
increases were partially offset by a planned reduction in television commercial spending, lower online
advertising, and a one-time settlement of a dispute with a supplier of our point-of-purchase displays.
Goodwill Impairment
As of December 31, 2014, based on various qualitative factors, we determined that sufficient indicators existed
to warrant a review to determine if the fair value of our U.S. reporting unit had been reduced to below its
carrying value. These qualitative factors included, among others, our performance during the 2014 holiday
season being significantly lower than anticipated which included the underperformance of products and
product lines newly introduced to the market, the continuing decrease in trading values of our Class A
common stock and the corresponding decline in our market capitalization. As a result, we performed a
two-step quantitative goodwill impairment test. Based on the result of the two-step analysis, we concluded that
our goodwill was fully impaired as of December 31, 2014. Accordingly, we recorded a permanent non-cash
pretax impairment charge of $19.5 million for fiscal 2015 in our U.S. segment. The tax benefit associated with
this charge was $3.8 million. Refer to Note 7 — ‘‘Goodwill’’ in our Consolidated Financial Statements
included in this Annual Report on Form 10-K for additional information on our goodwill impairment testing.
Impairment of Long-lived Assets
As of March 31, 2015, based on various qualitative factors, we determined that testing for recoverability of
our long-lived assets was required. These factors included, among others, the continued underperformance of
products and product lines newly introduced to the market, and the continued significant decline in trading
values of our Class A common stock and the corresponding decline in our market capitalization. As a result,
we performed a two-step impairment test for our long-lived assets. Based on the result of the test, we
recorded a permanent non-cash impairment charge of $36.5 million for fiscal 2015 in our U.S. segment. This
impairment charge significantly reduced the carrying value of our property and equipment to $1.7 million as
of March 31, 2015, which would result in decreases in associated depreciation expenses in future periods.
Meanwhile, we will continue to review the recoverability of our remaining long-lived assets on a quarterly
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