RC2 Corp. (RCRC) has agreed to pay $1.25 million civil penalty for violation of the federal lead paint ban, as announced by the U.S. Consumer Product Safety Commission (CPSC) recently.
 
The CPSC had alleged that RC2 Corp. and one of its wholly owned subsidiaries, Learning Curve Brands Inc, imported and sold Thomas & Friends Wooden Railway toys that had lead levels exceeding the legal limits. However, RC2 Corp. denied of any deliberate violation.
 
High levels of lead in paints or surface coatings of toys and other articles for children result in lead poisoning and affect their health. According to the 1978 federal lead paint ban, toys and other children’s articles are prohibited from having more than 0.06% of lead (by weight) in paints or surface coatings. However, the regulatory limit was reduced to 0.009% on Aug 14, 2009, as a result of the Consumer Product Safety Improvement Act of 2008.
 
RC2 Corp. had imported up to 1.5 million units of these non-compliant Thomas & Friends Wooden Railway toys between January 2005 and June 2007, which had then been distributed to retail customers. The toys were recalled in Jun 2007. The company also imported up to 200,000 units of five more non-compliant toy models from this product line between March 2003 and April 2007. These units were also recalled in September 2007.
 
We have an Underperform recommendation on RC2 Corp. Though the company’s third quarter results were ahead of the Zacks Consensus Estimate, primarily due to the benefits of the cost containment initiatives, it has reported a drop in sales in the quarter. The company experienced declines across most of its product lines. The economic downturn and challenging credit markets have also impacted the company’s distribution channels.
 
Lower domestic consumer spending is a primary reason for its disappointing results in the recent quarters. The lower level of spending caused many retailers to limit their reorders, and we anticipate this trend to continue at least through the first half of 2010. Additionally, such negative news may result in a fluctuation of the share price.
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