(Source: Business Wire)RC2 Corporation (NASDAQ:RCRC), today announced solid results for the third quarter and nine months ended September 30, 2009 and an increase to its 2009 full year net income outlook. Net income for the third quarter 2009 was $13.6 million, or $0.66 per diluted share, as compared with $11.1 million, or $0.64 per diluted share, for the third quarter 2008. Excluding recall-related and non-recurring items, net income was $11.5 million, or $0.66 per diluted share, for the third quarter 2008. Net income for the nine months ended September 30, 2009 was $18.7 million, or $1.01 per diluted share, as compared with $6.7 million, or $0.38 per diluted share, for the nine months ended September 30, 2008. Excluding recall-related and non-recurring items, net income for the nine months ended September 30, 2009 was $19.1 million, or $1.03 per diluted share, as compared with $18.3 million, or $1.03 per diluted share, for the prior year nine month period.

Net sales for the third quarter 2009 decreased by 4.8% to $126.5 million compared with net sales of $132.9 million for the third quarter a year ago. Net sales for the nine months ended September 30, 2009 decreased by 4.9% to $299.8 million compared with net sales of $315.3 million for the nine months ended September 30, 2008. Unfavorable fluctuations in foreign currency exchange rates reduced the 2009 third quarter and nine months consolidated net sales by approximately 3% and 5%, respectively.

Third Quarter Operating Results

The 2009 third quarter gross margin decreased slightly to 46.4% as compared with 46.7% in the prior year third quarter. Selling, general and administrative expenses decreased to $36.9million, or 29.1% of net sales, in the third quarter 2009 as compared with $41.0million, or 30.9% of net sales, in the third quarter 2008, primarily due to the impact of the Company's previously announced operating cost reduction plan, lower variable costs and foreign currency rate fluctuations. The Company reported operating income of $21.8 million and Adjusted EBITDA of $26.1 million in the third quarter of 2009 as compared with operating income of $20.9 million and Adjusted EBITDA of $24.2 million in the third quarter of 2008.

Year-to-date Operating Results

Gross margin for the nine months ended September 30, 2009 decreased to 43.4% as compared with 46.0% in the nine months ended September 30, 2008, primarily due to less favorable product mix, higher product costs and unfavorable foreign exchange rates, which more than offset cost reduction initiatives and price increases. Selling, general and administrative expenses decreased to $96.2million, or 32.1% of net sales, in the nine months ended September 30, 2009, as compared with $112.4million, or 35.6% of net sales, in the nine months ended September 30, 2008, primarily due to the impact of the Company's operating cost reduction plan, and to a lesser extent, lower variable costs and foreign currency rate fluctuations. The Company reported operating income of $33.0 million and Adjusted EBITDA of $45.7 million in the nine months ended September 30, 2009 as compared with operating income of $15.5 million ($30.8 million excluding recall-related and non-recurring items) and Adjusted EBITDA of $46.1 million in the nine months ended September 30, 2008.

Cash and Outstanding Debt

As of September 30, 2009, the Company had cash and cash equivalent balances, as well as unrestricted certificates of deposit, of $91.4 million, outstanding term debt of $60.0 million, and no borrowings outstanding under its $70.0 million line of credit. Included in the cash and cash equivalent balance at September 30, 2009, was $57.1 million related to net proceeds from the Company's stock offering completed during the third quarter of 2009. As of September 30, 2009, excluding the offering proceeds, the Company's debt, net of cash, improved by $50.5 million as compared with its debt, net of cash, at September 30, 2008.

Commentary

Curt Stoelting, CEO of RC2 commented, "As expected, third quarter sales comparisons were challenging with North American sales showing a small increase which was offset by softness in International sales. Foreign currency exchange rates had a negative impact on International sales as reported in U.S. dollars of approximately 8% in the third quarter and 16% in the nine months ended September 30, 2009. We also continued to see sales declines of over 20% in our Specialty retailers, Wholesalers, OEM dealers and Other channel, which has been impacted by both the economic downturn and challenging credit markets. Despite conservative ordering and tight inventory management, sales in our Chain retailers channel increased nearly 3% in the third quarter and 2% in the nine months ended September 30, 2009.

"Net sales in our mother, infant and toddler products category decreased by 5% in the third quarter primarily due to lower sales in our health / safety and infant toy product lines. Sales in this category are up 2% in the nine months ended September 30, 2009. We continue to believe that in 2009 our mother, infant and toddler products category will continue to perform well relative to other consumer product categories, and we expect growth in this category in 2010.

"Net sales trends in our preschool, youth and adult products category improved in the third quarter compared with the first half of 2009, declining 5% in the 2009 third quarter compared with the prior year third quarter versus a decline of 15% in the first half of 2009 compared with the first half of 2008. We continue to see sales declines across most product lines with the exception of Thomas & Friends Wooden Railway, which has achieved positive sales comparisons both quarterly and year to date. Sales of our new Super WHY! product line continue to increase. We have significant new product launches planned in 2010 for new preschool properties including Chuggington® and Dinosaur Train as well as launching a number of new products across our existing product lines.

"We are encouraged by the increase in our third quarter net income. Gross margins improved in the third quarter as compared with the first half of 2009 due to benefits from both lower product and freight costs, seasonal mix shift to play products, improved operating leverage and improved international margins due to favorable currency fluctuations. Operating costs were over $4 million lower than in the prior year third quarter primarily due to our operating cost reduction plan and lower variable costs. In addition to cost reductions, we have benefited from working capital improvements, which when coupled with our increased net income, have generated over $40 million of cash from operations in the first nine months of 2009.

Stoelting concluded, "We continue to anticipate a challenging holiday season in 2009 and remain concerned about the economic environment for 2010. However, we are encouraged by recent trends and remain focused on our long-term strategic goals, which include both organic growth and growth through acquisition. Our strong financial position and our experienced, proven management team provide us with an excellent opportunity to continue to deliver solid results in these tough economic times while building toward higher levels of sustainable growth in the future."

Financial Outlook

Sales and profits are dependent on a number of factors including the ongoing success and expansion of our product lines, successful introductions of new products and product lines and retention of key licenses. Other key factors include the impact of foreign currency, seasonality, overall economic conditions, including consumer retail spending and shifts in the timing of that spending and the timing and level of retailer orders, especially reorders in the holiday season. The Company now expects that full year 2009 net income will be higher than the $23.5 million reflected in its previous diluted earnings per share guidance and will range from approximately $25 to $27 million or $1.30 to $1.40 per fully diluted share. Fully diluted shares now take into account the 4.0 million shares issued in the Company's stock offering completed in August of 2009 and are estimated at 19.3 million shares for the 2009 full year and 21.9 million shares for the fourth quarter of 2009.

Use of Non-GAAP Financial Information

In addition to the results reported in accordance with U.S. generally accepted accounting principles ("GAAP") included in this release, the Company has provided certain non-GAAP financial information, including reconciliations of operating income, net income, diluted earnings per common share and Adjusted EBITDA (as described in more detail in the next section). Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because this information may allow investors to better evaluate ongoing business performance and certain components of the Company's results. In addition, because the recall-related and non-recurring items were lower in the nine months ended September 30, 2009, as compared with the nine months ended September 30, 2008, the Company believes that the presentation of these non-GAAP financial measures enhances an investor's ability to make period-to-period comparisons of the Company's operating results. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measure. See the "Calculation of Adjusted EBITDA," "Reconciliation of Net Income," "Reconciliation of Diluted Earnings Per Common Share," and "Reconciliation of Operating Income" tables attached.

Adjusted EBITDA

Adjusted EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization and represents operating profit plus other charges set forth in the attached Calculation of Adjusted EBITDA. Adjusted EBITDA is not adjusted for all non-cash expenses or for working capital, capital expenditures or other investment requirements and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. Thus, Adjusted EBITDA should not be considered in isolation or as a substitute for net income or cash provided by operating activities, each prepared in accordance with GAAP, when measuring RC2's profitability or liquidity as more fully discussed in the Company's financial statements and filings with the Securities and Exchange Commission.

Earnings Conference Call Information

The Company's quarterly earnings conference call will be held at 4:45 p.m. EDT on Tuesday, October 20, and is available live and in replay to all analysts/investors through a webcast service. To listen to the live call, go to www.earnings.com at least fifteen minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, replays will be available shortly after the call on Thomson Reuters.

Company Description

RC2 Corporation (www.rc2.com) is a leading designer, producer and marketer of innovative, high-quality toys, collectibles, and infant and toddler products. RC2's infant, toddler and preschool products are marketed under its Learning Curve® (www.learningcurve.com) family of brands which includes The First Years® and Lamaze brands as well as popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere and Sesame Street. RC2 markets its youth and adult products under the Johnny Lightning® (www.johnnylightning.com) and Ertl® (www.ertl.com) brands. RC2 reaches its target consumers through multiple channels of distribution supporting more than 25,000 retail outlets throughout North America, Europe, Australia, and Asia Pacific.

Forward Looking Statements

Certain statements contained in this release are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "anticipate,'' "estimate,'' "believe,'' "could,'' "expect,'' "intend,'' "may,'' "planned,'' "potential,'' "should,'' "will,'' "would'' or the negative of those terms or other words of similar meaning. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual results and future developments could differ materially from the results or developments expressed in, or implied by, these forward-looking statements.