EMERYVILLE, Calif.--(BUSINESS WIRE)--November 4, 2013--LeapFrog Enterprises, Inc. (NYSE:LF) today announced financial results for the third quarter ended September 30, 2013.

Highlights of third quarter 2013 results compared to third quarter 2012 results:

“Despite a tough retail climate in most of the markets in which we operate, the LeapFrog team delivered another solid quarterly financial performance,” said John Barbour, Chief Executive Officer. “We head into the all-important holiday season with the best product offering we have ever had. We have hundreds of new pieces of life-changing educational entertainment content; an expanded learning tablet line with LeapPad^TM Ultra, LeapPad2^TM Power, LeapPad2^TM and our LeapPad^TM exclusive holiday bundles; a new learn-to-read-and-write line with LeapReader^TM; and new learning toys such as Read With Me Scout & Violet. Our LeapPad tablets have been featured on most of the top toy lists for the holidays, and our great learning products continue to be recognized with many consumer and independent expert awards.

“We are well-positioned for the holidays with improved in-stocks, stronger retail promotions and greater marketing investment during the highest-volume shopping weeks. At the same time, we see a weak retail climate and growing concern surrounding this holiday season, especially in the U.S.”

Financial Overview for the Third Quarter 2013 Compared to the Third Quarter 2012

Third quarter 2013 net sales were $201.0 million, up 4% compared to $193.1 million last year, and included a 1% negative impact from changes in currency exchange rates. Net sales growth was largely driven by shipments of multimedia learning platforms, including LeapPad Ultra, LeapPad2 Power, LeapPad 2 holiday bundles and LeapReader, which launched in the summer of 2013. In the U.S. segment, net sales were $146.8 million, up 1% compared to $145.7 million last year. In the International segment, net sales were $54.2 million, up 14% compared to $47.4 million last year, and included a 3% negative impact from changes in currency exchange rates.

Income from operations for the third quarter was $42.9 million, an improvement of 16% compared to $36.9 million a year ago. Income from operations as a percentage of net sales was 21.3%, an improvement of 2.2 percentage points compared to 19.1% a year ago.

Net income (GAAP) for the third quarter was $26.4 million compared to $41.7 million a year ago. Net income for the third quarter of 2013 reflects a $16.6 million provision for income taxes, including $15.6 million of tax expense attributable to our U.S. operations, which were excluded in the prior year period due to the full valuation allowance recorded against our domestic deferred tax assets. In addition, net income for the third quarter of 2012 reflects a $5.8 million benefit from income taxes, including non-recurring tax benefits of $6.4 million due to the expiration of statutes of limitations in our foreign jurisdictions. Net income per diluted share (GAAP) was $0.37 compared to $0.60 a year ago.

Normalized net income² (non-GAAP) for the third quarter, which reflects an effective 37.5% tax rate, was $26.8 million, up 19% compared to $22.5 million a year ago. Normalized net income per diluted share² (non-GAAP) was $0.38, up 19%, compared to $0.32 a year ago. We provide normalized net income² measures, which are non-GAAP measures, to help investors review our performance and performance trends excluding discrete tax items which have historically been significant.

Adjusted EBITDA² for the third quarter was $50.9 million, up 14% compared to a year ago.

“We delivered strong net sales and income from operations growth in the first nine months of the year,” said Ray Arthur, Chief Financial Officer. “Year-to-date, net sales grew 9% and income from operations grew 60%, driven by sales of our innovative product line and good expense management. While our financial performance to date has met our expectations, we are concerned about the fourth quarter given economic headwinds and a weak retail environment. Additionally, the holiday season will be more challenged and trend later in the U.S. this year compared to last year with six fewer shopping days between Thanksgiving and Christmas, and two fewer weekend shopping days. We are, therefore, adjusting our outlook for the full year 2013.”

LeapFrog will hold a conference call to discuss third quarter 2013 financial results on November 4, 2013, at 2:00 p.m. Pacific Standard Time (5:00 p.m. Eastern Standard Time). The conference call will be webcast live and can be accessed at LeapFrog's investor relations web site at www.leapfroginvestor.com. An archive of the webcast will be available on the web site approximately three hours after completion of the call. In addition, more information about LeapFrog, including this press release and other financial and investor information, is also available on the investor relations web site.

To participate in the call, please dial (706) 634-0183 and request conference ID 81128641. A replay of the call will be available for one month. To access the replay, please dial (404) 537-3406 and use conference ID 81128641.

LeapFrog Enterprises, Inc. is the leader in educational entertainment for children. LeapFrog’s award-winning product portfolio helps millions of children achieve their potential by delivering best-in-class curriculum through engaging content, fun multimedia learning platforms and toys. The Learning Path, LeapFrog’s proprietary online destination for parents, provides personalized feedback on a child’s learning progress and offers recommendations to enhance each child’s learning experience. Through the power of play, LeapFrog’s products and curriculum help children of all ages prepare for school and life success. LeapFrog’s products are available in more than 45 countries and have been used by teachers in more than 100,000 U.S. classrooms. LeapFrog is based in Emeryville, California, and was founded in 1995 by a father who revolutionized technology-based learning solutions to help his child learn how to read. Come see the learning at www.leapfrog.com.

This press release includes non-GAAP financial measures, specifically normalized net income, normalized net income per basic or diluted share, and adjusted EBITDA.

Normalized net income is calculated as net income adjusted to reflect an effective 37.5% tax rate. Normalized net income per basic or diluted share is calculated as normalized net income divided by weighted-average basic or diluted shares outstanding, as applicable. As required by SEC rules, we have provided a schedule with a reconciliation of normalized net income and normalized net income per basic and diluted share to the most directly comparable GAAP measures, net income and net income per basic and diluted share.

Management believes that normalized net income and normalized net income per basic or diluted share are some of the appropriate measures for evaluating the operating performance of the Company because of the significant swing in net income and net income per share as a result of the deferred tax valuation allowance release and other discrete tax items, and therefore, provides a more comparable measure of year-over-year operating results.

Adjusted EBITDA is defined as earnings (or net income) before interest, income taxes, depreciation and amortization, other expenses (income), and stock-based compensation. As required by SEC rules, we have provided an attached schedule with a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, net income.

Management believes adjusted EBITDA is one of the appropriate measures for evaluating the operating performance of the Company because it reflects the resources available for strategic opportunities including, among others, to invest in the business, strengthen the balance sheet, and make strategic acquisitions.

However, these non-GAAP measures should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP as more fully discussed in the Company's financial statements and filings with the SEC. As used herein, "GAAP" refers to accounting principles generally accepted in the United States of America.

This news release contains forward-looking statements that involve risks and uncertainties, including statements regarding anticipated financial results. Our actual results may differ materially from those expressed or implied by such forward-looking statements. The risks that could cause our results to differ include, without limitation, deterioration of global economic conditions, our ability to correctly predict highly changeable consumer preferences and product trends, our ability to continue to develop new products and services, our reliance on a small group of retailers for the majority of our gross sales, our ability to compete effectively with competitors, the seasonality of our business, our growing focus on online products and services and privacy concerns about our Internet-connected products, consumer acceptance of downloadable content and data collection, system failures in our online services or web store, our dependence on our suppliers for our components and raw materials, our reliance on a limited number of manufacturers, our ability to maintain sufficient inventory levels, our ability to maintain or acquire licenses, third parties who claim we are infringing on their intellectual property rights, errors or defects in our products, the sufficiency of our liquidity, the risk associated with international operations, costs or changes associated with compliance with laws and regulations, negative political developments, natural disasters, armed hostilities, terrorism, labor strikes or public health issues, the loss of members of our executive management team, continued ownership by a few stockholders of a significant percentage of voting the power in the company, and the volatility of our stock price. These risks and others are discussed under “Risk Factors” in our filings with the U.S. Securities and Exchange Commission, including our 2012 annual report on Form 10-K filed on March 11, 2013. All information provided in this release is as of the date hereof, and we undertake no obligation to update this information.

¹ Normalized net income per diluted share and adjusted EBITDA are non-GAAP financial measures. They are described below and reconciled to their comparable GAAP measures in the accompanying financial tables.

² Normalized net income, normalized net income per diluted share, and adjusted EBITDA are non-GAAP financial measures. They are described below and reconciled to their comparable GAAP measures in the accompanying financial tables.


LEAPFROG ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Net sales	$	200,985		$	193,072		$	366,908		$	336,562
Cost of sales		121,607			115,771			223,316			200,974
Gross profit		79,378			77,301			143,592			135,588

Operating expenses:
Selling, general and administrative		18,893			21,257			62,612			65,158
Research and development		7,543			9,164			25,250			26,902
Advertising		7,411			7,179			14,253			13,932
Depreciation and amortization		2,631			2,838			8,041			8,751
Total operating expenses		36,478			40,438			110,156			114,743
Income from operations		42,900			36,863			33,436			20,845

Other income (expense):
Interest income		12			37			54			226
Interest expense		(9	)		(49	)		(9	)		(49	)
Other, net		37			(898	)		12			(2,014	)
Total other income (expense), net		40			(910	)		57			(1,837	)
Income before income taxes		42,940			35,953			33,493			19,008
Provision for (benefit from) income taxes		16,567			(5,785	)		13,421			(5,163	)
Net Income	$	26,373		$	41,738		$	20,072		$	24,171

Net income per share:
Class A and B - basic	$	0.38		$	0.62		$	0.29		$	0.36
Class A and B - diluted	$	0.37		$	0.60		$	0.28		$	0.35

Weighted average shares used to calculate net income per share:
Class A and B - basic		68,552			67,400			68,200			66,912
Class A and B - diluted		71,051			69,512			70,744			69,071


LEAPFROG ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

	September 30,						December 31,
	2013			2012			2012
ASSETS
Current assets:
Cash and cash equivalents	$	78,373		$	49,427		$	120,000
Accounts receivable, net of allowances for doubtful accounts of $106, $3,893 and $292, respectively		184,798			170,106			180,043
Inventories		121,738			115,083			40,311
Prepaid expenses and other current assets		8,727			9,522			8,353
Deferred income taxes		4,248			1,035			9,315
Total current assets		397,884			345,173			358,022
Deferred income taxes		6,181			1,309			13,269
Property and equipment, net		32,233			20,411			23,723
Capitalized product costs, net		15,825			10,935			12,109
Goodwill		19,549			19,549			19,549
Other intangible assets, net		200			1,550			950
Other assets		1,161			1,534			1,283
Total assets	$	473,033		$	400,461		$	428,905

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	59,086		$	82,128		$	31,617
Accrued liabilities		35,348			37,546			51,353
Deferred revenue		12,696			8,176			8,516
Income taxes payable		712			414			493
Total current liabilities		107,842			128,264			91,979
Long-term deferred income taxes		3,759			3,798			3,759
Other long-term liabilities		1,824			2,723			3,224
Total liabilities		113,425			134,785			98,962
Stockholders' equity:
Class A Common Stock, par value $0.0001;
Authorized - 139,500 shares; Outstanding: 64,524, 61,905 and 61,970, respectively		6			6			6
Class B Common Stock, par value $0.0001;
Authorized - 40,500 shares; Outstanding: 4,395, 5,715 and 5,715, respectively		1			1			1
Treasury stock		(185	)		(185	)		(185	)
Additional paid-in capital		415,618			403,187			405,078
Accumulated other comprehensive (loss) income		124			976			1,071
Accumulated deficit		(55,956	)		(138,309	)		(76,028	)
Total stockholders’ equity		359,608			265,676			329,943
Total liabilities and stockholders’ equity	$	473,033		$	400,461		$	428,905


LEAPFROG ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Operating activities:
Net income	$	26,373		$	41,738		$	20,072		$	24,171
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		5,352			5,749			15,241			16,871
Deferred income taxes		15,602			26			12,140			238
Stock-based compensation expense		2,623			2,027			7,166			5,066
Loss on sale of long-term investments, net of tax		-			-			-			91
Loss on disposal of long-term assets		-			-			-			2
Allowance for doubtful accounts		(142	)		119			(101	)		3,371
Other changes in operating assets and liabilities:
Accounts receivable, net		(122,833	)		(118,335	)		(5,117	)		(15,493	)
Inventories		(54,980	)		(61,856	)		(81,848	)		(80,149	)
Prepaid expenses and other current assets		1,579			(133	)		(424	)		(1,367	)
Other assets		17			58			122			(414	)
Accounts payable		13,539			49,889			27,509			47,454
Accrued liabilities and deferred revenue		15,534			14,117			(11,712	)		(4,805	)
Other long-term liabilities		(120	)		(6,266	)		(1,400	)		(6,638	)
Income taxes payable		18			35			224			37
Net cash used in operating activities		(97,438	)		(72,832	)		(18,128	)		(11,565	)
Investing activities:
Purchases of property and equipment		(5,161	)		(4,004	)		(17,127	)		(10,396	)
Capitalization of product costs		(2,874	)		(1,731	)		(9,605	)		(5,623	)
Sale of investments		-			-			-			2,500
Net cash used in investing activities		(8,035	)		(5,735	)		(26,732	)		(13,519	)
Financing activities:
Proceeds from stock option exercises and employee stock purchase plan		2,236			1,268			4,499			4,007
Net cash paid for payroll taxes on restricted stock unit releases		(259	)		(301	)		(1,126	)		(1,513	)
Net cash provided by financing activities		1,977			967			3,373			2,494
Effect of exchange rate changes on cash		451			101			(140	)		154
Net change in cash and cash equivalents		(103,045	)		(77,499	)		(41,627	)		(22,436	)
Cash and cash equivalents, beginning of period		181,418			126,926			120,000			71,863
Cash and cash equivalents, end of period	$	78,373		$	49,427		$	78,373		$	49,427


LEAPFROG ENTERPRISES, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
(In thousands)
(Unaudited)

					Three Months Ended September 30,						Nine Months Ended September 30,
					2013			2012			2013			2012

Net sales					$	200,985		$	193,072		$	366,908		$	336,562
		Cost of sales (1)				121,607			115,771			223,316			200,974
			Gross profit			79,378			77,301			143,592			135,588

Operating expenses: (2)
		Selling, general and administrative				18,893			21,257			62,612			65,158
		Research and development				7,543			9,164			25,250			26,902
		Advertising				7,411			7,179			14,253			13,932
		Depreciation and amortization				2,631			2,838			8,041			8,751
			Total operating expenses			36,478			40,438			110,156			114,743
				Income from operations		42,900			36,863			33,436			20,845

Other income (expense):
		Interest income				12			37			54			226
		Interest expense				(9	)		(49	)		(9	)		(49	)
		Other, net				37			(898	)		12			(2,014	)
			Total other income (expense), net			40			(910	)		57			(1,837	)
				Income before income taxes		42,940			35,953			33,493			19,008
Provision for (benefit from) income taxes						16,567			(5,785	)		13,421			(5,163	)
			Net income		$	26,373		$	41,738		$	20,072		$	24,171

(1	)Includes depreciation and amortization					2,721			2,911			7,200			8,120

(2	)Includes stock-based compensation as follows:
		Selling, general and administrative				2,293			1,794			6,334			4,438
		Research and development				330			233			832			628

Segment data:
Net sales:
		U.S. segment				146,831			145,691			263,286			247,050
		International segment				54,154			47,381			103,622			89,512

Income from operations*:
		U.S. segment				29,652			24,781			10,186			2,059
		International segment				13,248			12,082			23,250			18,786

*		Certain corporate-level operating expenses associated with sales and marketing, product support, human resources, legal, finance, information technology, corporate development, procurement activities, research and development, legal settlements and other corporate costs are charged entirely to our U.S. segment, rather than being allocated between the U.S. and International segments.


LEAPFROG ENTERPRISES, INC.
SUPPLEMENTAL DISCLOSURE REGARDING NON-GAAP FINANCIAL INFORMATION
RECONCILIATION OF GAAP NET INCOME TO NORMALIZED NET INCOME,
GAAP NET INCOME PER SHARE TO NORMALIZED NET INCOME PER SHARE,
AND GAAP NET INCOME TO ADJUSTED EBITDA
(In thousands)
(Unaudited)

The following table presents a reconciliation of net income, a GAAP measure, to normalized net income, a non-GAAP measure, where available. Normalized net income is defined as net income adjusted to reflect an effective 37.5% tax rate. Normalized net income per share is calculated as normalized net income divided by weighted-average basic or diluted shares outstanding, as applicable.

	Three Months Ended September 30,					Nine Months Ended September 30,						Twelve Months Ended December 31,
	2013		2012			2013			2012			2012

Net income - GAAP	$	26,373	$	41,738		$	20,072		$	24,171		$	86,452
Provision for (benefit from) income taxes		16,567		(5,785	)		13,421			(5,163	)		(24,504	)
Income before income taxes		42,940		35,953			33,493			19,008			61,948
Effective tax expense at 37.5% rate		16,103		13,482			12,560			7,128			23,231
Normalized net income - Non-GAAP	$	26,837	$	22,471		$	20,933		$	11,880		$	38,717

Net income per share - GAAP:
Class A and B - basic	$	0.38	$	0.62		$	0.29		$	0.36		$	1.29
Class A and B - diluted	$	0.37	$	0.60		$	0.28		$	0.35		$	1.24

Normalized net income per share - Non-GAAP:
Class A and B - basic	$	0.39	$	0.33		$	0.31		$	0.18		$	0.58
Class A and B - diluted	$	0.38	$	0.32		$	0.30		$	0.17		$	0.56

Weighted-average shares used to calculate
net income per share:
Class A and B - basic		68,552		67,400			68,200			66,912			67,100
Class A and B - diluted		71,051		69,512			70,744			69,071			69,720


The following table presents a reconciliation of net income, a GAAP measure, to adjusted EBITDA, a non-GAAP measure. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, other expenses (income), and stock-based compensation.


			Three Months Ended September 30,						Nine Months Ended September 30,
			2013			2012			2013			2012

Net income - GAAP			$	26,373		$	41,738		$	20,072		$	24,171
(Less) add:
Interest income				(12	)		(37	)		(54	)		(226	)
Interest expense				9			49			9			49
Provision for (benefit from) income taxes				16,567			(5,785	)		13,421			(5,163	)
Depreciation and amortization				5,352			5,749			15,241			16,871
Other, net				(37	)		898			(12	)		2,014
Stock-based compensation				2,623			2,027			7,166			5,066

Adjusted EBITDA - Non-GAAP			$	50,875		$	44,639		$	55,843		$	42,782

CONTACT:
LeapFrog Enterprises, Inc.
Investors:
Karen Sansot, CFA, Investor Relations, 510-420-4803
ksansot@leapfrog.com
or
Media:
Monica Ma, Media Relations, 510-596-3437
mma@leapfrog.com