Racing Champions Reports Record 2001 Fourth Quarter and Year-End Results; Net Income More Than Doubles for the Quarter and Year
GLEN ELLYN, Ill.--Feb. 20, 2002--Racing Champions today announced record results for the fourth quarter and the year ended December 31, 2001. Net income was $4.9 million or $0.32 per diluted share in the 2001 fourth quarter as compared with $847,000 or $0.06 per share in the year ago fourth quarter. For the 2001 year, net income was $15.1 million or $1.00 per diluted share as compared with $5.9 million or $0.39 per diluted share for 2000.
Fourth Quarter Operating Results
Net sales for the fourth quarter increased by 8.2% to $57.9 million compared with $53.5 million for the fourth quarter a year ago, in line with the sales outlook announced on January 8, 2002. This sales increase was primarily attributable to higher sales of our automotive, high performance and racing die-cast vehicles, racing trading cards and John Deere licensed pre-teen toys. Gross margin increased to 49.2% from 47.1%, primarily due to product mix and fewer sales of lower margin products. Selling, general and administrative expenses as a percentage of sales were 31.3% versus 31.6% a year ago, reflecting focused efforts to control operating costs and reduce discretionary expenses. Operating income was $9.5 million compared with $4.9 million in the year ago quarter. Included in operating income in the fourth quarter of 2000 was a $2.5 million, or $0.09 per diluted share, special charge related to minimum guaranteed royalty payments from NASCAR-related licensing agreements that exceeded royalties earned on product sales. EBITDA was $12.7 million in the current quarter versus $10.6 million, excluding the special charge, in the year ago quarter.
2001 Operating Results
For the year ended December 31, 2001 net sales were $203.2 million compared with $214.8 million in the prior year. This decrease was primarily attributable to lower sales of die-cast vehicles and fewer sales from low margin inventory liquidation in 2001 as compared to 2000. Gross margin increased to 51.1% for the year, compared with 45.8% a year ago. This improvement reflects realization of a full year's benefit from integration efforts with Ertl, including improved product sourcing, consolidated manufacturing in China and streamlined product development efforts. The gross margin also was positively impacted by the reduction of low margin product sales in 2001. Operating income was $32.5 million compared with $23.0 million in the year ago period. EBITDA was $45.1 million in 2001 compared with $38.9 million, excluding the special charge, in the prior year.
Interest Expense and Debt Update
Interest expense for the fourth quarter was $1.0 million compared with $2.8 million in the year ago quarter and $6.5 million for the 2001 year compared with $11.4 million for the 2000 year. Debt was reduced by $14.9 million in the quarter, as a result of scheduled and voluntary payments on the Company's term loan, bringing 2001 year-to-date term debt payments to $35.0 million and the outstanding bank debt to $62.0 million as of December 31, 2001. There have been no amounts outstanding during 2001 on the Company's $15.0 million revolving line of credit. As of December 31, 2001 the Company had $16.5 million in cash, had a debt to EBITDA ratio of 1.37 and was in compliance with all financial covenants under its credit facility.
Other Events
In January 2002, Kmart filed for Chapter 11 protection from its creditors. In 2001, approximately 3% of the Company's sales were to Kmart. As of the date of Kmart's Chapter 11 filing, the Company had a total outstanding balance of approximately $1.1 million and credit insurance totaling approximately $500,000. The remainder of the outstanding balance had been included in the Company's accrued allowances or reserves for doubtful accounts throughout the 2001 year as part of the Company's ongoing credit assessment of its customers.
In January 2002, the Company also announced the settlement of the securities class action lawsuit that was brought against the Company in 2000. The United States District Court approved the terms of the $1.8 million settlement and dismissed all the claims with prejudice against all defendants. The Company maintained insurance coverage adequate to cover the settlement amount.
Commentary
Bob Dods, Chairman and Chief Executive Officer said, "We were pleased by our strong fourth quarter results. Sales were higher than in the prior year quarter, which when combined with our successful efforts to improve gross margins, resulted in a fourth quarter performance that capped off a very successful year for Racing Champions. Our results are particularly gratifying, when one considers the difficult economic and retail environment in 2001."
Dods continued, "Our ability to diversify Racing Champions' product lines and distribution channels provides a solid foundation for future growth. New products and an expanding group of new licenses will strengthen and broaden our product offerings and distribution channels. We had a positive reaction last week when we presented a number of new products at the 2002 American International Toy Fair in New York."
New products presented include:
| -- | 50th Anniversary Corvette products, which include a series of collectible American Muscle die-cast replicas and AMT model kits, commemorating the history of this renowned American car. |
| -- | Harley-Davidson collectible die-cast motorcycle replicas, a line of Harley-Davidson pre-teen toys and replicas of the first-ever Harley-Davidson drag racing bike. |
| -- | Hometown Roadway(TM) interlocking wooden track vehicle and building systems based on hometown themes from license partners such as John Deere, Texaco, Ford, General Motors and DaimlerChrysler. |
| -- | JoyRide Studios(TM) video game figures and highly detailed vehicles based on license agreements with top video game publishers such as Nintendo, Sega and Electronic Arts. |
| -- | Stackers(TM) interactive building block and track system that serves as play environments and display cases for 1:64th scale die-cast vehicles replicas. |
| -- | Dr. Seuss line of highly featured figures and vehicles based on the world famous book series. |
Dods added, "These new product offerings have been well received by our growing base of existing customers and we will be expanding our customer base to include electronic, video game and specialty toy retailers and additional dealer networks. We plan to begin shipping these products beginning in the second half of 2002. Based on consumer sell-through, we would expect additional sales and product extensions in 2003." Dods concluded, "We are a consumer focused company, intent on being first to market with an array of innovative collectibles and toys. We believe we have strong momentum and are well-positioned in the market place."
Financial Outlook
During 2002, net sales are expected to grow by 6% to 9% driven primarily by introductions of new products. Gross margin and operating profit margin in 2002 are anticipated to remain comparable with 2001 margins before amortization. The combination of anticipated increases in net sales, comparable profit margins, elimination of goodwill amortization and lower interest expense combined with the anticipated 2002 increase in the weighted average shares outstanding is expected to result in an increase in 2002 EPS ranging from 8% to 12% over 2001 as adjusted EPS of $1.16. This as adjusted EPS amount reflects the elimination of amortization, which resulted in an after-tax impact on net income of $0.16 per share during 2001.
Seasonality is expected to increase in 2002, based on current trends in the marketplace and due to the timing of several new product releases in the second half of the year. We do not expect significant increases in sales in the first half of 2002 as compared to the first half of 2001. We anticipate a higher level of new product development and launch costs in the first half of 2002 versus the first half of 2001, which could result in lower EPS in the first half of 2002 as compared to first half 2001 as adjusted EPS of $0.27. This as adjusted EPS amount reflects the elimination of amortization, which resulted in an after-tax impact on net income of $0.08 per share during the first half of 2001.
Racing Champions (www.rcertl.com) is a leading producer and marketer of innovative collectibles and toys targeted at males of all ages. The Company's diverse product offering includes scaled die-cast replicas of John Deere agricultural equipment and NASCAR stock cars, other licensed vehicle replicas, pre-teen toys, sports trading cards, racing apparel and souvenirs, and collectible figures. These products are sold under the Company's market-focused brand names, including Racing Champions(R), Ertl(R), Ertl Collectibles(R), American Muscle(TM), AMT(R), W. Britain(R), Press Pass(R) and JoyRide Studios(TM). The Company reinforces its brands and enhances the authenticity of our products by linking them with highly recognized licensed properties including NASCAR, NHRA, John Deere, Case IH, Polaris, Honda, Caterpillar, Ford, GM, Chrysler, Texaco, Warner Brothers, Gullane Entertainment, Nintendo, Sega and Electronic Arts. The Company's products are marketed through multiple channels of distribution, including mass retailers and specialty and hobby wholesalers and retailers, OEM dealers and to corporate accounts for promotional purposes. The Company sells through more than 20,000 retail outlets located in North America, Europe and Asia Pacific.
The Company's quarterly earnings conference call will be held at 4:45 p.m. EST on Wednesday, February 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.streetevents.com or www.vcall.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 Streetevents and VCALL.
Certain statements contained in this release contain "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," "believe," "could," "expect," "intend," "may," "planned," "potential," "should," "will" and "would." 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. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following: the Company may not be able to manufacture, source and ship new and continuing products on a timely basis and customers and consumers may not accept those products at prices sufficient for the Company to profitably recover development, manufacturing, marketing, royalty and other costs; the inventory policies of retailers, together with increased reliance by retailers on quick response inventory management techniques, may increase the risk of underproduction of popular items, overproduction of less popular items and failure to achieve tight shipping schedules; competition in the markets for the Company's products may increase significantly; the Company is dependent upon continuing licensing arrangements with vehicle manufacturers, agricultural equipment manufacturers, major race sanctioning bodies, race team owners, drivers, sponsors, agents and other licensors; the Company may experience unanticipated negative results of litigation; the Company relies upon a limited number of independently owned factories located in China to manufacture a significant portion of its vehicle replicas and certain other products; the Company is dependent upon the continuing willingness of leading retailers to purchase and provide shelf space for the Company's products; and general economic conditions in the Company's markets. Such uncertainties and other operational matters are discussed further in the Company's quarterly and annual filings with the Securities and Exchange Commission. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this release or to update them to reflect events or circumstances occurring after the date of this release.
EBITDA (earnings before interest, taxes, depreciation and amortization) represents operating profit plus non-recurring and other charges. 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, EBITDA should not be considered in isolation or as a substitute for net earnings or cash provided by operating activities, each prepared in accordance with generally accepted accounting principles, when measuring Racing Champions' profitability of liquidity as more fully discussed in the Company's financial statements and securities filings.
Table to follow
Racing Champions Corporation and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Three Months ended Year ended
December 31, December 31,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 57,896 $ 53,470 $ 203,248 $ 214,806
Cost of sales 29,402 28,264 99,481 116,328
----------- ----------- ----------- -----------
Gross profit 28,494 25,206 103,767 98,478
Selling, general and
administrative
expenses 18,149 16,909 67,853 69,136
Amortization of
intangible assets 844 947 3,376 3,795
Special charge - 2,500 - 2,500
----------- ----------- ----------- -----------
Operating income 9,501 4,850 32,538 23,047
Interest expense 979 2,813 6,470 11,375
Other expense 297 453 277 662
----------- ----------- ----------- -----------
Income before
income taxes 8,225 1,584 25,791 11,010
Income tax expense 3,290 737 10,668 5,120
----------- ----------- ----------- -----------
Net income $ 4,935 $ 847 $ 15,123 $ 5,890
=========== =========== =========== ===========
EBITDA, excluding
non-recurring items $ 12,728 $ 10,603 $ 45,102 $ 38,945
EPS:
Net income per share
Basic $ 0.34 $ 0.06 $ 1.03 $ 0.40
Diluted $ 0.32 $ 0.06 $ 1.00 $ 0.39
Weighted average
shares outstanding
Basic 14,615 14,662 14,663 14,827
Diluted 15,265 14,875 15,159 15,085
Selected Consolidated Balance Sheet Data
December 31, September 30, December 31,
2001 2001 2000
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
Cash and cash equivalents $16,510 $10,038 $12,581
Accounts receivable, net 36,972 47,074 41,488
Inventory, net 17,545 26,061 18,651
Accounts payable and
accrued expenses 36,297 41,657 35,306
Line of credit - - -
Notes payable 62,000 76,925 97,000
Stockholders' equity $117,761 $114,661 $104,565