LeapFrog 2015 Annual Report Download - page 39

Gross margin for 2013 decreased by 0.7 percentage points as compared to 2012, primarily driven by changes
in sales mix with proportionally higher sales of lower-margin hardware, higher trade allowances and discounts
as a percentage of net sales, and higher royalty costs resulting from proportionally higher sales of licensed
content. The decreases were partially offset by lower inventory allowances and higher sales volume which
reduced the impact of fixed logistic costs.
Operating expenses for 2013 increased 10% as compared to 2012, primarily driven by higher advertising
spending and higher expenses due to an increase in headcount, partially offset by a decrease in our provision
for incentive compensation expense. Operating expenses as a percentage of net sales increased by
one percentage point to 18%.
Income from operations for 2013 improved by 1% as compared to 2012, primarily due to increased net sales,
offset by reduced gross margin and higher operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
Cash and cash equivalents totaled $127.2 million and $232.0 million at March 31, 2015 and 2014,
respectively. The decrease in cash balance was primarily due to a decrease in net cash generated by operating
activities as a result of reduced operating results, and increased inventory levels, as well as due to higher
capital expenditures during the year. In line with our investment policy, as of March 31, 2015, all cash
equivalents were invested in high-grade short-term money market funds and certificates of deposit with
maturities of less than three months. Included in the certificates of deposits as of March 31, 2015,
$20.0 million was collateral under our asset-based revolving credit facility (the ‘‘revolving credit facility’’)
arrangement.
Cash and cash equivalents held by our foreign subsidiaries totaled $16.1 million and $25.8 million at
March 31, 2015 and 2014, respectively. As of March 31, 2015, we no longer consider the undistributed
earnings of our foreign subsidiaries as permanently reinvested outside the U.S. Consequently, we recorded a
deferred tax liability of $3.1 million for U.S. income tax, which was offset by our domestic net operating
losses and therefore did not impact our effective tax rate due to the full valuation allowance established
against our domestic deferred tax assets. In addition, we recorded a tax provision of $0.3 million for non-U.S
withholding tax associated with the future repatriation of earnings from our foreign subsidiaries, which
impacted our effective tax rate for the fiscal 2015.
A change in business strategy for distributing product into Mexico will ultimately result in the liquidation of
our Mexican subsidiary as we outsource distribution to a third party. At the end of the liquidation process, we
intend to repatriate any residual cash to the U.S. We believe this cash repatriation will be considered a return
of capital and not a repatriation of earnings and therefore will not result in a U.S. tax liability. Accordingly we
have not recorded a tax provision for such return of capital.
We have a revolving credit facility with a potential borrowing availability of $75.0 million for the months of
September through December and $50.0 million for the remaining months. The borrowing availability varies
according to the levels of our accounts receivable and cash and investment securities deposited in secured
accounts with the lenders. As of March 31, 2015, borrowing availability under this revolving credit facility
was $27.4 million. As of March 31, 2015, we had an insignificant stand-by letter of credit issued under our
revolving credit facility as a security deposit for utility expenditures. There were no borrowings outstanding
on our revolving credit facility at March 31, 2015.
Capital expenditures were $39.9 million, $7.7 million, $32.2 million and $25.1 million for the year ended
March 31, 2015, the three months ended March 31, 2014 and the years ended December 31, 2013 and 2012,
respectively. Future capital expenditures are primarily planned for new product development and purchases
related to the upgrading of our information technology capabilities. We expect capital expenditures for the
year ending March 31, 2016, including those for capitalized content costs, to be in the range of $20 million to
$30 million.
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