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Kid Brands Inc Reports Operating Results (10-Q/A)
Posted by: gurufocus (IP Logged)
Date: August 16, 2011 06:40AM

Kid Brands Inc (KID) filed Amended Quarterly Report for the period ended 2011-06-30. Kid Brands has a market cap of $92.88 million; its shares were traded at around $4.16 with a P/E ratio of 6.4 and P/S ratio of 0.34.



Highlight of Business Operations:

KID and specified domestic subsidiaries executed a Second Amended and Restated Credit Agreement as of August 8, 2011, with certain financial institutions, including Bank of America, N.A., among other things, as Administrative Agent. This amendment and restatement represents a refinancing of the Company’s senior secured debt under the Existing Credit Agreement, and provides for an aggregate $175.0 million revolving credit facility (without borrowing base limitations), with a $25.0 million sub-facility for letters of credit, and a $5.0 million sub-facility for swing-line loans. KID is entitled to increase the amount of this new revolver by up to an additional $35.0 million, provided that, among other things, no defaults have occurred and are continuing and commitments are received for such increase (from existing lenders or certain third party financial institutions). The refinancing, among other things, increases borrowing capacity previously available under the Existing Credit Agreement (which provided for a $50.0 million revolver based on eligible receivables and inventory, with a $5.0 million sub-facility for letters of credit, and an $80.0 million term loan), lowers minimum and maximum interest rate margins and is described in detail under “Liquidity and Capital Resources” below under the section captioned “Debt Financings.”

The Settlement. The Settlement, among other things: (i) includes a release of KID by and on behalf of the Debtors’ estates (without the requirement of any cash payment) from all claims, including fraudulent conveyance and preference claims under the Code, and claims pertaining to KID’s sale of the gift business to TRC; (ii) confirms that the Seller Note and KID’s security interests therein are valid, and are junior only to TRC’s senior lender; (iii) allows KID to retain ownership of the Retained IP, provided, that the trustee in the bankruptcy may include such intellectual property as part of a global sale of TRC’s business as long as KID receives at least $6.0 million therefor; (iv) includes a set-off against the Seller Note of all amounts owed by KID and its subsidiaries to TRC and its subsidiaries, for which KID had accrued an aggregate of approximately $2.0 million, without the requirement of any cash payment; (v) establishes distribution priorities for any proceeds obtained from the sale of TRC’s assets under which KID is generally entitled to receive, to the extent proceeds are available therefor after the payment of amounts owed to TRC’s senior lender and approximately $1.4 million in specified expenses have been funded, approximately $1.0 million, and to the extent further proceeds are available subsequent to the payment of approximately $1.0 million to the Debtors’ estates for additional specified expenses, 60% of any remaining proceeds (40% of any such remaining proceeds will go to the Debtors’ estates for the benefit of general unsecured creditors, and KID may participate therein as an unsecured creditor to the extent of 50% of any deficiency claims, including for unpaid royalties). As it is not possible to determine the amount, if any, that the trustee in the bankruptcy will obtain through the sale of TRC’s assets, KID may obtain only limited recovery on its claims, or may obtain no recovery at all. In addition, the Settlement provides that the Trustee will cooperate, at KID’s expense, with KID’s efforts to resolve the claim asserted by the landlord under the TRC Lease described above (however, the Settlement does not impact amounts potentially owed to such landlord under the TRC Lease). The Debtors’ estates’ rights with respect to the Retained IP will terminate at the earlier of 6 months from the date of the entry of the Bankruptcy Court’s sale order and the date of liquidation of TRC’s operations in the United States, Canada, the United Kingdom and Australia. Pursuant to the Settlement, KID waives its claims to Royalties as a result of the liquidation, except that it will be entitled to a 5% royalty on any inventory sold by a third party liquidator retained by the Trustee as part of the liquidation process. In addition, any bidder for the stock of the Debtors’ U.K., Australia or Canada subsidiaries may include a request to use KID’s Retained IP on a non-exclusive basis in the U.K., Australia or Canada, respectively, for a five percent (5%) royalty for a period of up to two (2) years. The Trustee has also agreed to cooperate in the removal of any persons designated by TRC to the board of directors of the Licensor, and shall waive the right to designate any additional members to such board. Further details of the Settlement are described in the Current Report on Form 8-K filed by the Company on June 22, 2011. The Company has recorded income of approximately $2.0 million during the three and six months ended June 30, 2011 related to the set-off against the Seller Note discussed above. See “Results of Operations” below immediately following the discussion of “Selling, general and administrative expense”.

Gross profit was $14.3 million, or 23.8% of net sales, for the three months ended June 30, 2011, as compared to $20.7 million, or 30.5% of net sales, for the three months ended June 30, 2010. Gross profit decreased primarily as a result of: (i) a $2.2 million accrual for anticipated customs duty payment requirements resulting from the Customs Review; (ii) an accrual aggregating $0.7 million for remediation activities to bring certain LaJobi cribs into compliance with new federal crib safety standards that went into effect on June 28, 2011; (iii) additional inventory reserves related to certain underperforming product lines (approximately $0.8 million primarily related to a discontinued product program at Kids Line); (iv) $0.2 million of additional warehouse expense as a result of higher inventory levels; and (v) on an absolute basis, lower net sales, all of which was partially offset by a reduction in customer allowances (which was partially due to a lower net sales base).

Selling, general and administrative expense was $14.8 million, or 24.5% of net sales, for the three months ended June 30, 2011 compared to $12.8 million, or 18.9% of net sales, for the three months ended June 30, 2010. Selling, general and administrative expense increased as a percentage of sales primarily as a result of: (i) an accrual for a contingent liability in connection with the TRC Lease in the amount of $1.1 million; (ii) costs incurred in the aggregate amount of approximately $0.7 million in connection with the Company’s internal investigation of LaJobi’s import, business and staffing practices in Asia (the “LaJobi Investigation”) and related litigation and other costs (collectively, the “LaJobi Matters”); and (iii) a lower sales base. In absolute terms, the increase in SG&A costs was primarily a function of: (i) the $1.1 million TRC Lease accrual described above; (ii) costs related to the LaJobi Matters; and (iii) increased warehouse, outbound handling and outbound shipping costs of $0.1 million.

Other expense was $1.1 million for the three months ended June 30, 2011 as compared to $0.8 million for the three months ended June 30, 2010. This increase of approximately $0.3 million was primarily due to: (i) a favorable change of $0.2 million in the fair market value of an interest rate swap agreement in the second quarter of 2010, which was not a factor in the second quarter of 2011; and (ii) an additional $0.2 million of interest recorded in the second quarter of 2011 associated with anticipated customs duty payment requirements in connection with the LaJobi Investigation and the Customs Review, all of which was offset by a reduction ($0.1 million) in interest expense due to lower borrowings and lower borrowing costs in such period compared to the same period in 2010.

Gross profit was $30.6 million, or 25.5% of net sales, for the six months ended June 30, 2011, as compared to $39.4 million, or 30.4% of net sales, for the six months ended June 30, 2010. Gross profit decreased primarily as a result of: (i) a $2.2 million accrual for anticipated customs duty payment requirements resulting from the Customs Review; (ii) an accrual aggregating $0.7 million for remediation activities to bring certain LaJobi cribs into compliance with new federal crib safety standards that went into effect on June 28, 2011; (iii) additional inventory reserves related to certain underperforming product lines (approximately $1.2 million primarily related to a discontinued product program at Kids Line); (iv) $0.3 million in increased warehouse expense as a result of higher inventory levels; and (v) on an absolute basis, lower net sales, all of which was partially offset by a reduction in customer allowances (which was partially due to a lower net sales base).

Read the The complete Report



Stocks Discussed: KID,
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