RC2 Reports Lower than Expected 2006 Fourth Quarter and Year-End Preliminary Net Sales; Margins Continue to be Impacted by Increased Die-Cast Product Costs; Company to Focus on Higher Growth Categories; Automotive Collectibles Business DiscontinuedOak Brook, IL – January 11, 2007 – RC2 Corporation (NASDAQ:RCRC) today announced lower than expected preliminary net sales. Net sales from continuing operations for the fourth quarter of 2006, which excludes the trading card and sports collectibles business which was sold on November 1, 2006, were flat to slightly down versus the prior year fourth quarter net sales from continuing operations of approximately $154 million. Net sales from continuing operations for the 2006 year increased approximately 5% compared with the prior year net sales from continuing operations of approximately $493 million.
As previously announced, the increased cost of zinc, which is a key component in diecast products, is expected to result in lower profit margins during the fourth quarter of 2006 compared with the fourth quarter of 2005. Increased zinc costs will likely continue to negatively impact margins in the first half of 2007. The Company intends to partially offset these increases with selective price increases in 2007 and continued product design and supply chain cost management efforts.
During December 2006, the Company made the decision to discontinue its Racing Champions®, JoyRide®, Ertl® and AMT® die-cast and model kit automotive collectible product lines that on a combined basis generated approximately $36 million in net sales in 2006 and approximately $60 million in net sales in 2005. Discontinuing the automotive collectible product lines is consistent with the Company’s strategy to focus on sustainable, organic growth and on allocating resources to its higher growth infant products and children’s toys categories. Excluding these discontinued collectible product lines, preliminary net sales from continuing operations increased approximately 12% for the full year of 2006 compared with the 2005 year. As a result of discontinuing certain of these product lines, the Company expects to record in the fourth quarter a non-cash impairment charge in the range of $6 million to $9 million, net of estimated income tax benefits, to write-off undepreciated tooling costs and unamortized intangible assets and to provide inventory and royalty reserves. The Company plans to continue its agricultural collectibles business, which has been a relatively solid performer and has not been as impacted by the overall declining collectibles market. The Company will continue to invest in its strategic long-term relationship with John Deere. In addition, the Company plans to continue with its strategy to reposition its Johnny Lightning® brand targeting younger consumers.
The lower than expected sales and profit margins in the fourth quarter have negatively impacted the full year 2006 diluted earnings per share from continuing operations. Current estimates of 2006 diluted earnings per share from continuing operations, excluding the loss on the sale of the sports trading card and die-cast collectibles business of approximately $0.48 per diluted share and the charges related to the discontinued automotive collectibles product lines estimated at $0.30 to $0.45 per diluted share, are now expected to be below the Company’s previously announced range of $2.52 to $2.62. The Company currently plans to report its 2006 fourth quarter and full year financial results on Tuesday, February 13, 2007 and plans to provide a preliminary 2007 financial outlook at that time.
During the fourth quarter, the Company has continued to generate strong cash flow and has reduced its debt by approximately $37 million since September 30, 2006. At December 31, 2006, the Company’s outstanding debt balance was approximately $22 million compared with $59 million at September 30, 2006 and its year end cash balances exceeded $20 million.
Curt Stoelting, CEO of RC2 commented, “As expected, fourth quarter margins were negatively impacted by the cost increases in zinc. In addition, we experienced lower than expected levels of reorders across all product categories in November and December and are disappointed with the current year fourth quarter sales results. Our year end retail sell-through was positive across all product categories. “For the full year 2006, despite significant declines in our collectible products category, we did achieve overall organic sales growth. Sales growth excluding sold businesses and discontinued product lines was approximately 12%, driven by increases in both our higher growth infant products and children's toys categories. Unfortunately, the impact of cost increases in zinc throughout the year reduced profit margins. For the year, we reduced debt by over $60 million and expect to repay the remaining outstanding debt in the first quarter of 2007.”
Stoelting concluded, “As we begin 2007, we have an improved and increased focus on growing our infant and children's toy product categories and are much less dependent on our collectible products category. We have made some tough decisions in the short term but we believe we are now better positioned for growth in 2007 and beyond.”
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