RC2 Corp.’s (RCRC) fourth quarter earnings of 43 cents per share were ahead of the Zacks Consensus Estimate of 41 cents. The better-than-expected results were driven by a favorable product mix and higher margins reflecting the cost-reduction initiatives. Results were flat compared to the prior-year period. However, the company’s outlook for 2010 is below our expectations. 

Including the non-cash impairment charge related to the Sesame Street infant and toddler products license, which is not being renewed after 2010, the company reported a net income of $8.3 million or 38 cents per share, compared with a year-ago loss of $212.4 million or $12.32. In the year-ago quarter, the company incurred significant charges including non-cash impairment and write-down charges, severance and other related costs. 

For full year 2009, RC2 reported net income of $27 million or $1.39 per share, compared with a loss of $205.8 million or $11.82 in 2008. Net sales were down 4% from the prior year to $421.1 million. 

Outlook 

For full year 2010, RC2 expects earnings of $1.35 to $1.45 per share compared to the Zacks Consensus Estimate of $1.45. The company expects overall net sales and profits in the first half of 2010 to be lower than in 2009 as a result of the transition in its preschool, youth and adult products category. 

RC2 will end sale of the Take Along Thomas & Friends die-cast product line as a result of non-renewal of the license while a number of new preschool product lines will be launched only in the second half of the year. 

Inside the Headline Numbers
 
For the quarter, net sales were almost flat at $121.3 million from $121.7 million in the prior-year period. Sales benefited by 3% due to favorable fluctuations in foreign currency exchange rates. While the company achieved a 13% growth in international sales, the North American sales were down 4% year-over-year. Foreign currency exchange rates had a positive impact on International sales. 

Sales in mother, infant and toddler products category increased 4% year-over-year. Sales in preschool, youth and adult products category decreased 3% year-over-year, primarily due to declines in its Take Along and agricultural product lines which offset growth in Super WHY! and Thomas & Friends Wooden Railway product lines. 

RC2 reported a gross margin of 45.4% compared to 38.4% in the prior-year quarter. The improvement was primarily driven by a more favorable product mix, cost cut initiatives and lower input costs. 

Selling, general and administrative expenses reported a decline of 6% year-over-year to $40.7 million. Results reflected the benefits of cost reduction initiatives though variable expenses were higher. Adjusted EBITDA increased to $19.6 million in the quarter from $16.3 million in the prior-year period. 

As of Dec 31, 2009, RC2 had $88.0 million in cash and cash equivalents on its balance sheet. The company prepaid its debt facility by $18.7 million during the quarter thereby, lowering its term loan to $41.3 million from $60 million as of Dec 31, 2009. It has no borrowings outstanding under its $70.0 million line of credit.
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