Racing Champions Ertl Reports Record Third Quarter Earnings
GLEN ELLYN, Ill.--Oct. 17, 2002--Racing Champions Ertl Corporation today announced record earnings for the third quarter and nine months ended September 30, 2002. The Company's net income for the 2002 third quarter was $9.9 million or $0.58 per diluted share as compared with $7.3 million or $0.48 per diluted share in the year ago third quarter. Prior year third quarter net income adjusted for the elimination of the after tax impact of goodwill amortization was $7.9 million or $0.52 per diluted share. For the first nine months of 2002, the Company's net income was $17.7 million or $1.06 per diluted share as compared with net income of $10.2 million or $0.67 per diluted share during the first nine months of 2001. For the nine months ended September 30, 2001, net income adjusted for the elimination of the after tax impact of goodwill amortization, was $12.0 million or $0.80 per diluted share.Third Quarter Operating Results
Net sales for the third quarter increased by 7.8% to $70.9 million compared with $65.8 million for the third quarter a year ago. Sales increases occurred in all five of the Company's product categories, with the largest dollar increases in the sports trading cards/racing apparel and souvenirs category; the automotive, high performance and racing vehicle replicas category; and the collectible figures category. Gross margin as a percentage of net sales decreased slightly to 52.9% from 53.1%, primarily due to increased FAS China shipments and product sales mix. Selling, general and administrative expenses increased by approximately $400,000 due primarily to TV advertising launched in support of the Company's new JoyRide Studios(TM) products. As a percentage of net sales, these expenses declined to 29.4% in the 2002 third quarter compared with 31.0% in the 2001 third quarter. Operating income, excluding amortization of goodwill, increased 14.5% to $16.7 million or 23.5% of net sales compared with $14.5 million or 22.1% of net sales in the prior year third quarter. EBITDA increased 12.0% to $18.8 million.
Year-To-Date Operating Results
Net sales for the nine months ended September 30, 2002, increased 9.7% to $159.5 million compared with $145.4 million for the comparable period in 2001, reflecting strength in the Company's core products, product line extensions, and new product lines introduced during the first nine months of 2002. Year-to-date sales from product lines introduced in 2002 totaled approximately $4.7 million. During the first nine months of 2002, the Company experienced sales increases in four of its product categories--automotive, high performance and racing vehicle replicas; sports trading cards/racing apparel and souvenirs; pre-teen vehicle and activity toys; and collectible figures, while the agricultural construction/outdoor sports vehicle category was down less than 1% compared with the prior year-to-date period. Gross profit margin increased to 52.3% from 51.8% in the previous year due to improved product margins and product sales mix. Operating income, excluding amortization of goodwill, increased 20.5% to $30.8 million compared with $25.6 million in the year ago period. EBITDA was $37.5 million for the first nine months of 2002, compared with $32.4 million in the same period a year ago.
Balance Sheet
The Company has significantly strengthened its balance sheet during 2002. Through the end of the third quarter, the Company has reduced its debt by $35.0 million and currently has $27.0 million outstanding under a new three-year $50.0 million revolving credit facility. The Company's outstanding debt, net of cash, as of September 30, 2002 is less than $9.0 million.
Commentary
Bob Dods, Chairman and CEO said, "A strong operating performance produced record earnings for Racing Champions Ertl in the third quarter. We are pleased by this performance given the challenging retail sales environment and the overall sluggish economy. Sales in all channels during the third quarter continued to be consistent with our year-to-date trends with specialty and hobby retailers, OEM dealer networks, and direct to consumer sales recording double digit increases. Year-to-date sales to the mass retail channel show a small increase, while the corporate promotional sales are down 13.3%."
Dods continued, "We have been pleased with customers' reception to new products introduced during 2002. These include the 50th Anniversary Corvette, JoyRide Studios(TM) video game figures and vehicles, Hometown Roadway(TM) licensed wooden vehicles and play sets, Stackers(TM) building block systems and Dr. Seuss products. Our Harley-Davidson products will ship in the current fourth quarter as planned. We also recently announced a new vehicle-based master toy and collectibles license for The Fast and the Furious. Our first The Fast and the Furious product, 1:64 scale die-cast cars, will begin shipping in the current fourth quarter along with Mechwarrior(TM) collectible figures, a new product in the Company's recently introduced JoyRide Studios product line."
Dods added, "Looking forward, in the fourth quarter we expect continued growth in our earnings per share compared to the prior year. Our earnings growth and increased earnings per share outlook for 2002 anticipates that the Company's sales growth in the fourth quarter could be slightly moderated because of the effect of work stoppages, slow downs and congestion at ports on the U.S. West Coast and because of overall economic conditions."
Dods concluded, "Building on our positive momentum in 2002, our core product lines and our new product introductions, we believe that Racing Champions Ertl is well positioned for growth in 2003."
Updated Financial Outlook
As an upward refinement to the financial outlook previously given, the Company expects 2002 EPS to increase 18-25% over 2001 as adjusted EPS of $1.16. This as adjusted EPS amount reflects the elimination of goodwill amortization, which resulted in an after-tax increase in EPS of $0.16 during 2001. Net sales for 2002 are now expected to grow in a range of 7-12%, driven primarily by the performance of the Company's core products, product extensions and the introductions of new product lines. Fourth quarter net sales may also be impacted by disruptions in product supply due to the effect of work stoppages, slow downs and congestion at key U.S. West Coast ports, reorder timing and patterns established by the Company's customers and consumer demand during the quarter. As previously announced, during the fourth quarter of 2002 the Company plans to continue to support its new product lines with advertising and promotional expenditures estimated between $1.0 million and $1.5 million. For 2003, the Company plans to increase operating profit by leveraging fixed operating expenses over higher sales volumes, which could allow EPS to grow faster than net sales. The Company has targeted potential net sales increases for 2003 at 10% to 15%. Sales increases are dependent on a number of factors including continued success and expansion of existing product lines and successful introductions of new products and product lines.
Earnings Conference Call Information
The Company's quarterly earnings conference call will be held at 4:45 p.m. EST on Thursday, October 17, and is available live and in replay to all analysts/investors through a webcast service. To listen to the live call, go to www.companyboardroom.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 CCBN and VCALL.
Fourth Quarter and 2002 Year-end Earnings Release
The Company plans to report its fourth quarter and annual 2002 financial results on Wednesday, February 26, 2003 with a conference call held that day at 4:45 p.m. EST.
Company Description
Racing Champions Ertl Corporation (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, Harley-Davidson, 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.
Forward-looking Statements
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; the Company is dependant upon timely shipping of product and unloading of product through West Coast ports as well as timely rail/truck delivery to the Company's warehouse and/or customer's warehouse; 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
EBITDA is defined as earnings before interest, taxes, depreciation and amortization and represents operating profit. 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 Ertl's profitability of liquidity as more fully discussed in the Company's financial statements and securities filings.
- Table to follow -
Racing Champions Ertl Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)(Unaudited)(Unaudited)(Unaudited)
Net sales $ 70,944 $ 65,819 $ 159,466 $ 145,352
Cost of sales 33,450 30,837 76,010 70,080
---------- ---------- ---------- ----------
Gross profit 37,494 34,982 83,456 75,272
Selling, general and
administrative expenses 20,831 20,434 52,642 49,704
Amortization of goodwill - 830 - 2,532
---------- ---------- ---------- ----------
Operating income 16,663 13,718 30,814 23,036
Interest expense, net 194 1,571 1,849 5,491
Other income (53) (486) (562) (20)
---------- ---------- ---------- ----------
Income before income taxes 16,522 12,633 29,527 17,565
Income tax expense 6,609 5,306 11,811 7,377
---------- ---------- ---------- ----------
Net income $ 9,913 $ 7,327 $ 17,716 $ 10,188
========== ========== ========== ==========
EBITDA $ 18,840 $ 16,814 $ 37,527 $ 32,374
EPS:
Net income per share
Basic $ 0.60 $ 0.50 $ 1.12 $ 0.69
Diluted $ 0.58 $ 0.48 $ 1.06 $ 0.67
Weighted average shares
outstanding
Basic 16,460 14,682 15,818 14,679
Diluted 17,234 15,216 16,734 15,133
Selected Consolidated Balance Sheet Data
September 30, June 30, September 30,
2002 2002 2001
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
Cash and cash equivalents $ 18,757 $ 14,852 $ 10,038
Trade accounts receivable, net 45,806 26,062 47,074
Inventory, net 25,703 27,711 26,061
Accounts payable
and accrued expenses 46,536 38,015 41,657
Revolving line of credit 27,000 23,000 -
Notes payable - - 76,925
Stockholders' equity $ 164,861 $ 154,634 $ 114,661