Summer Infant, Inc. (SUMR) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Summer Infant fourth quarter and fiscal 2010 year-end earnings conference call. On the call from the Company are Mr. Jason Macari, Chief Executive Officer, and Mr. Joe Driscoll, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out today at approximately 4 PM Eastern Standard Time.If you have not received the release, it is available on the Investors Relations portion of the Summer Infant website at www.summerinfant.com. This call is being recorded and webcasted, and the replay will be available on the Company's website as well.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them. Forward-looking statements or information are based a number of estimates and assumptions and are subject to a variety of risks and uncertainties, which could cause actual events or results to differ from those reflected in the forward-looking statements or information. Forward-looking statements can be identified by words such as anticipates, intends, plans, believes, estimates, expects and similar references to the future. Examples of forward-looking statements include, but are not limited to, statements we make regarding our guidance for 2011. There are many factors that can result in actual performance differing from projections and forward-looking statements. We refer to all of you to the risk factors detailed in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009, as well on March 10, 2010, and subsequent filings with the Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize or should underlying estimates and assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements or information. Accordingly, undue reliance should not be placed on forward-looking statements or information. We do not expect to update forward-looking statements or information continually as conditions change, except as may be required by law and you're referred to the full discussion of Summer's business contained in Summer's reports filed with the Securities and Exchange Commission. Additionally, Summer Infant assumes no obligation to revise any forward-looking projections that may be made in today's release or call. And, with that, I would like to turn the call over to Mr. Jason Macari. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thanks for joining us. On the call today, I would like to discuss our fourth quarter operating performance and review some of the highlights from 2010 and our key growth strategies for 2011. Joe will then walk you through the financials for last year and update our 2011 outlook. Our strategy of product diversification, innovation, and development is continuing to pay off. In the fourth quarter, sales increased 30% to $51 million from $39 million in the year-ago period, and we remain encouraged by the response to our efforts to increase shelf space and diversify our products, categories, and distribution channels. In 2011, we plan on continuing to diversify our revenue base by growing internationally in addition to growing with most of our major US accounts, which, in turn, could reduce or top customer concentration in 2011 by approximately four to five percentage points.

We undertook a number of initiatives from the fourth quarter which we believe streamlines many critical aspects of our business, and will enable us to generate increased profitability going forward. These initiatives created a series of charges and gains, which resulted in approximately $1.5 million pre-tax charge in the fourth quarter. One of the major areas of restructuring involved our product development efforts. We have created a new structure of five business units, each focused on managing existing business segments and categories, and developing new products within these categories. These five teams include safety, gear, nursery, furniture and flight. Each team is led by a very experienced product development executive and these individuals report directly to me. We have given each teams specific target in terms of sales and profitability and all of the teams are working very hard to not just create new products, but also manage the existing line of products to ensure that the product line is performing to new profitability standards.

As part of the new focused effort, we determined that fashion bedding was not an area that we wanted to continue to develop. So, we made the decision to discontinue products in this category and close our South Carolina office. The ongoing bedding efforts are now combined into the nursery team, which focuses on items such as our award-winning SwaddleMe line of swaddling blankets. I am pleased with the early results of the new team structure and believe that this will lead to improved performance going forward.

Another major effort in the fourth quarter was the start-up of our new California warehouse. We believe that this warehouse will significantly streamline our current warehousing operations. We have implemented the first phase of a warehouse management system, which will improve the logistics of running the facility. We've closed two smaller DCs in California during Q4 and moved all activities to the new warehouse. Another item that we recently cleaned-up was the earn-out liability related to the Butterfly acquisition from 2009. The earn-out was originally scheduled to be paid out over a four-year period. We recently settled this earn-out for less than the book value of the liability, which generated a gain in fourth quarter.

As discussed in our third quarter release, we incurred a charge in the fourth quarter related to the returns of sleep positioners. In addition, a few weeks ago, we announced a voluntary consumer recall, safety alert and awareness campaign in cooperation with the Consumer Product Safety Commission aimed at educating consumers of potential safety issues associated with electric cords in the nursery. As part of this process, we provided a safe installation guide and cord warning label free of charge. Additionally, we collaborated with our retailers to ensure the relevant products were reworked to ensure 100% compliance. While it impacted our fourth quarter bottom line, we feel that the safety message to parents and caregivers require that we be proactive in educating our consumers and enhancing warnings of potential safety issues. I am pleased to say that after a minor reduction of sales at retail, our monitor sales have rebounded back to normal levels.We believe that we have clean the slate in a number of areas and are now ready to move forward in a more focused and profitable manner.

In terms of ongoing issues that we are addressing, sourcing costs are increasing across the board, and we are not immune to this trend. While we were able to partially offset the impact through product reengineering and other sourcing initiatives, gross margin, excluding the impact of charges related to sleep positioner returns, discontinuance of the fashion bedding line, and the video monitor relabeling project, decreased 320 basis points to 35.2%. Gross margin during the quarter was also affected by higher levels of closeout sales than in the prior-year period. We have an enhanced focus on keeping our inventory clean, and by identifying potential excess inventory issues earlier in the process, we believe our excess inventory will continue to decline over the next 12 months.

One fact to note going forward is that as we generate more sales of certain categories, product mix will start playing a larger role in our overall gross margin percentage. For example, we have secured significant new placements this year in cribs, which has relatively lower gross margin as compared to our other categories. However, the higher sales price of cribs will help level SG&A as a percentage of sales. Also, we will be passing through price increase on certain items that were most impacted by cost increases during the past six months.

SG&A, excluding the charges related to the closing of the fashion bedding office, severance costs related to executives, and distribution center closings, increased year-over-year to $13.6 million, or 26.6% of sales. The 26% -- 26.6% reflects solid improvement over the year-to-date nine-month percentage of 27.5%. We are continuing to focus on ways to make our business more efficient so that we can deliver outstanding bottom line results.

In terms of new product development, we are currently in the final stages of testing the Prodigy, our first-ever car seat and travel system. Car-seat testing is more involved than most other product testing because the car seats are meant to withstand the impact of highs-peed car accidents. There is a normal process involved where certain aspects of the car seat require minor redesign based on the test results. We believe the features offered including our priority SmartScreen installation technology, SafeGuard 1Adjust harness system and belt-tightening system significantly differentiate it from other products currently on the market. We remain hopeful that the success of this product over time will also help drive further increases in the sales of our other gear products, such as high chairs, baby swings, and play yards.

2010 was a transformative year for Summer Infant. We worked diligently and believe made significant progress in gaining market share in new product categories while also growing share in our core competencies. We expect this growth to continue in 2011 and beyond and remain very encouraged by the fact that many retailers have significantly increased shelf space for our products, both in the US and international. We are very excited about the upcoming year and the opportunities that come with it. We believe we have made the right investment that will allow us to capitalize on these opportunities in a way that further increase market share and profitability. I will now turn the call over to Joe to review the financials.

Thanks, Jason. Net revenues in the fourth quarter of 2010 increased 30% year-over-year to $51.1 million, driven by a more diversified by product offering, increased retail shelf space, and continued growth in our core product sales. Sales also benefited from innovation within our product development efforts and deeper relationships with retailers, who look to form strategic partnership with strong companies that can offer a broad assortment of products. The retailers have continued to consolidate the number of vendors in the juvenile sector, and Summer has been well-positioned to pick up shelf space as a result of this consolidation. Our growth came from multiple areas, including a variety of product categories, as well as increased placement at existing customers.

Gross profit on a GAAP basis totaled $16.1 million in Q4. Excluding the impact of charges related to sleep positioner returns, discontinuance of the fashion bedding line, and cost related to the relabeling of video monitors, gross profit increased 19% year-over-year to $18 million, or 35.2% of net revenues from $15.1 million, or 38.4% of net revenues in the prior-year period. As Jason mentioned, we were impacted by increased sourcing costs, and we have more sales of close-out items in the current year as we continue to clean-up our inventory.

Selling, general and administrative expenses on a GAAP basis for $15 million in Q4. Excluding the charges detailed by Jason, SG&A expenses were $13.6 million, or 26.6% of net revenues, compared to $11.1 million, or 28.2% of net revenues in the prior year. The increase in SG&A dollars was due to increased sales, which increased our variable SG&A, and increased investment in new product development, IT, and warehousing capabilities. Adjusted EBITDA, which excludes the items we have noted in the gross profit and the SG&A discussion, increased 11% to $4.4 million in the fourth quarter of 2010 from approximately $4 million in the prior-year period.

The tax provision for the full year totaled 23.8% of pre-tax income. The decrease in the rate was primarily due to more income being generated in lower tax jurisdictions. The Q4 tax benefit is the difference between the full-year provision in the year-to-date provision as of the end of Q3. For 2011 we project the tax rate to be approximately 28% of pre-tax income. This percentage will be updated as the year progresses.

On a GAAP basis, we reported net income of $0.6 million, or $0.03 per diluted share, compared to $1.8 million, or $0.11 per diluted share in the fourth quarter of 2009. Excluding the specific items called out in the press release, we reported non-GAAP profit of $1.7 million, or $0.10 per diluted share in the fourth quarter of 2010. In terms of our full-year results, net revenues for fiscal 2010 were $194.5 million, a 26.7% increase compared to fiscal 2009. The growth in 2010 was all organically generated, there were no acquisitions in 2010. This increase included over 33% growth in our international sales. Gross margin, excluding the specified charges, improved 70 basis points to 36.7% from 36% in the prior year. Margins for the year were aided by very strong performance in the first half of 2010. Commodity prices increased over the last half of 2010, which brought margins down as the year progressed.

The SG&A margin before the impact of the specified charges for the year increased 90 basis points to 27.3% of revenue from 26.4% of revenue in 2009. Adjusted EBITDA, which excludes the specified charges, was $18.3 million in 2010, a 24% increase from $14.7 million in 2009. GAAP net income was $6.6 million, or $0.40 per share, compared to $5.7 million, or $0.36 per share, in 2009. Non-GAAP net income, excluding charges, was $7.7 million, or $0.47 per share, compared to $5.8 million, or $0.37 per share, in 2009. Looking at the balance sheet as of December 31, 2010, net debt totaled $50.8 million. Our net-debt-to-EBITDA ratio was approximately 2.8 times based on the full-year adjusted EBITDA of $18.3 million. We currently have in place a $70 million credit facility, which matures in June 2012.

Moving on to guidance, we are reiterating our expectation that full-year 2011 revenue will reach $220 million and full-year diluted EPS will be roughly $0.60. In the early part of 2011 we project a mix shift to relatively lower margin items, such a cribs, which will have some impact on gross margin in the near-term. As we continue to grow, we hope to further leverage our cost structure and grow net income faster than revenue on a percentage basis. I would like to turn the call back to Jason.

Thanks, Joe. To summarize, we believe that our market share gains over the last several years have made is a significant fire within the juvenile industry. Consumers and our retail customers have responded favorably to our innovative product development and we have been able to penetrate new categories, in addition to expanding within our core categories. Our new team structure within the product development organization is designed to give us even greater focus on our opportunities. Thank you all for dialing in today. Operator, we are now ready to take questions.

(Operator Instructions). Our first question comes from the line of Scott Van Winkle with Canaccord Genuity. Please, go ahead.

Thanks, congratulations on the results. Jason, the realignment of the product development staff completely makes sense. Does it have any impact on efficiency or does it create duplication of effort or anything of that nature?

I don't think so. It is not dissimilar to what -- the way we were running. The difference really was that we had a centralized team structure, which I felt was really burdening the process. I am a big believer in running things a little bit more entrepreneurial and being faster on your feet and being able to react to opportunities. The teams that we have in place are -- definitely has been restructured, but not dissimilar to what -- the way that we were organized from a categories standpoint. What we have done is actually put our top people in roles of responsibility, it is not be responsible for say engineering or R&D or marketing, but to actually take that segment of the business and really grow it and holistically manage it, which is really already starting to provide -- to give dividends.

We are tidying up our product lines. I see we are eliminating duplication of SKUs, we are very focused on product development, meaning the categories that we have been strong in, that we are growing in, and we are not all over the place, if you will. We have a tendency to really be aggressive, so what this has done is hopefully not stem the aggression, but really focus it and channel it into categories that we are either are successful in or we research well enough to know that we have a good chance of success in. So it is really is all about focus to me, and having smaller teams that are more nimble and quick and working directly with our sales force. Getting -- actually meeting with the retailer -- retailers, I should say, and being part of the process. There's a little bit of growing pains, but I am really excited about the results so far.

Got you. You mentioned the close-out the fourth quarter and more efforts to reduce inventory. Is there an acceleration occurring on the trimming of the SKUs, is that a function of maybe of the cost environment out there or more a function of stepped-up development?

If we look at our history as a Company, I would say the last two or three years, we diversified our line, we added teams, we broadened out our product line and we added a significant amount of new customers, which, when you are principally designing for one or two customers, it's -- you have one thought process, but when you are designing for a broader base of retailers, it requires a different solution. So I'd say over the last two or three years, we overdeveloped. I guess that is the best way to say it. We probably were developing too many products faster than the market could absorb, and there were winners and losers in that.

What I have found over the last year, we really, about a year ago -- maybe even a little over a year ago, maybe even a year-and-a-half ago, really starting getting serious about managing our line categorically and with our operations team. Part of that, quite honestly, was inventories starting to get higher than what we felt was a reasonable amount for our business. So we started -- we actually build a new process around that and initiated it, again, about a year-and-half ago, and it's really started to pay dividends. It has taken us that much time I only get the process in place and working, but also sell-through a lot of the excess goods and goods that we decided not to continue in the line. Even though they were good product, it was more of either of a, either it was too similar to another product we were doing or we felt like there was some type of strategic reason why we did not need that in the line.

So we have trimmed quite a bit and I think we've gotten much more efficient. And one of our Board members likes to say, it is kind of a pig through a python. Well the pig's well through the python. In other words, we have been dealing with this inventory issue for a good solid year and selling off merchandise that we chose not to move forward with, and the worst is certainly behind us. Joe alluded to above average closeout sales, we kind of feel there is a proper level -- there is a life cycle to products, so you cannot expect everything in the line to be current in moving forward. There's some percentage that we feel is a reasonable percentage to constantly have moving out of the bucket and moving into phase-out mode, but we felt like ours was too big.

And we when we went through the process -- and it is a process that's going -- it's a continuous process at this point, so it is constantly scrubbing our product line for the right items and what to go forward with, and then there's also the process in place of within the operations team dealing with inventory in factories, and also within the sales team to bring those products to market and get the best price for them and get them through the system. It is really actually working quite well.

We have reduced our inventory probably by one-third in that bucket of products that are end-of-life cycle, which is pretty significant in our overall plan. So we are almost there. We feel like we have still a little bit more to go, but we feel like we're almost there and it is a continuous process now that will take care of itself. But we thought we had developed products so rapidly that we felt like we had gotten to the point where we really needed to stop, take account, get a process in place and cleaned it up. Which, being a 10 -year-old Company, that is not something you think about until somewhere when you start realizing your inventory is growing faster than it should be.

For us on the outside thinking about life cycles, can you estimate what percentage of your sales, say in 2010, were products developed and initially introduced in 2010?

Sometimes it's hard to tell sometimes because sometimes you come out with a product that is really just a new-and-improved version of something else. You're probably talking a pretty good slug of revenue dollars just from items that were -- that came out this year, $25 million or something like that.

I'd say a normal waterfall report for a company in our category is probably roughly maybe 15% or 20% per year, where you have a product flowing into the product line and another product flowing out of the product line. So it is probably a three- to five-year development cycle. Some, of course, last longer and some don't.

And your comments about Prodigy, were you -- and, if I missed it the comments I apologize, but where you indicating that you have gotten back some rework to do on the product? And --

Let me be real specific with it, Scott, so it will help you picture. We had the product tested back in December, and we were initially trying to launch it in the first quarter -- the product in first quarter.We have been through a couple of sets of tests and each time the results have been better and better, and quite frankly, we've passed all the testing right now. There is one test, which is an extreme-over test, that we are -- have one mode of operation where we are borderline. With the car seat, it is not something you want borderline, we feel like it has to be a clear-cut path with a margin of safety. We actually have testing going on in the next few weeks and our intent, our hope is, is that everything has been resolved and we will be passed and be shipping the product in the second quarter. But there are no guarantees with that testing. But that is our plan currently, we are that close. The product, actually, when used as instructed, is fantastic. The results have been very encouraging.

It sounded like, if you go back a quarter ago, you first talked about the $0.60 and $220 million in revenue. It sounded like Prodigy was fairly significant piece of that expectation for 2011. If we push back a little bit, does that lead us to believe that the rest of the business is maybe a little bit stronger than you anticipated three months ago?

Scott, it was never really that big of a number, to be honest with you, in the 2011 plan. It was several million dollars. A lot of that comes when you initially ship the product in for the first time, the pipeline orders. So I don't think we are going to -- frankly going to be missing too much in the Prodigy line in 2011. It was not that big of a number, I guess is the short story.

Yes.

Two last, probably for Joe. One, how meaningful of a price move should we expect in the second quarter; and then two, the at least $300,000 charge in the fourth quarter related to the monitors, is that just estimated accrual of what you are going to absorb in February and March of 2011, or was there something back in the December quarter?

Let me start with that one first, Steve. The charge that we took in the fourth quarter was really -- we looked at all the rework that needed to occur, and then you had to isolate -- or estimate as best you could how much that related to 2010 versus how much of it related to 2011. So we basically have accrued the vast majority I guess of the charge into 2010. There will be a little bit of spillover into 2011, but that was -- we just had to take all the estimated costs and divvy them up between the two years based on what we thought the product -- when the initial products were sold in the first place. And I'm sorry, could you say the other question, was it pricing?

How material of a price move are you expecting in the second quarter?

Are you talking about our sell prices?

I'm sorry, yes, your wholesale prices.

Yes, we are going to be -- we have already had agreements to push through price increases on very specific things in our product lines. So it is not a broad-based 5% across the board. We had to go after the categories, such as things made out of cotton, that really spiked from a cost perspective in 2010. So we have not quantified what the overall impact is going to be because the pricing phases in at a couple different points in time. But generally speaking, the cotton stuff we are all significantly impacted on the cost side, so we are going after those, as well as some other categories that had increases in 2010.

Thank you. I next question comes from the line of Sean McGowen with Needham & Company. Please, go ahead.

Thank you. Joe, can you help us quantify the magnitude of the closeout volume on this quarter versus the fourth quarter of 2009?

It was several million dollars in the fourth quarter of 2010 versus very little in the prior-year quarter. And our close-outs in the fourth quarter really took kind of two paths. One was pure closeout of inventory that we just wanted to get rid of. And also, and what we have been trying to do, is identified excess items early in the process and start reducing the price earlier so that it does not become a pure closeout for whatever we can get, it becomes more of a managed process. So there's several million dollars of close-outs in those two buckets.

So it would maybe too extreme to say that several million dollars of revenue occurred at $0 gross profit?

So there was probably between $2 million and $3 million at nominal gross profit, I guess would be the short story.

Okay. And, of course, that can always happen, but the expectation is that this is an anomalous level of close-outs as a percentage of total sales.

We are trying to keep that number as low as possible and that all comes back to the whole inventory management cycle. So we're -- I guess we would not expect $2 million to $3 million of close-outs every single quarter, but I think there will be some activity every quarter.

Sean, I would add also, I think in the last conference call, I mentioned there seemed to be a bit of churn going on in the marketplace. I think that is pretty much dried up. My expectation would be that there would be less closeout activity that would be of this nature, it would be in the normal process of things and would not be so sizable.

Okay. Kind of a related subject, then.You mentioned in the past that as you get into product categories might be new to Summer but not necessarily new to the retailer, but you are placing someone else's, you might have to help them clear out the old guy's stuff, where does that show up? Does that show up in the gross margin line and how much of that was going on in the fourth quarter?

That happened throughout 2010. That actually shows up in our net revenue line. So ultimately it does impact gross margin. So we start with gross sales then we back out various things like mark-downs of competitive products in order to get to net revenues. So ultimately it does flow through gross margin. It was a fairly sizable number throughout 2010. I mean, we took a lot of market share in 2010, and you don't pay mark-downs every single time, but in many cases, you do have to help the retailer clear out the existing product.

You've got to give them two bites of the same apple, because I'm sure they're getting it from the other guy, too. Everybody has their own IPO to manage. Oh, I'm sorry, I did not say that. Is this the -- you answered the question about the cord issue, so there might be some additional expense on that. Is that expected to be recognized in the first quarter?

Yes. It would not be a huge number, most of it would --

And that should be the end of that?

Yes.

Now have there been any lawsuits filed as a result of that?

Not that I - -no. What I would say about that is 100% of the product in the marketplace on retailer shelves in their warehouses and in our warehouses is compliant with the new labeling.

Oka.y And is the expense taken is the fourth quarter related to the sleep positioners, is that the end of that issue?

Yes, that should be it for that.

Okay. If you can help us out a little bit with -- especially given the somewhat of a pricing increases coming in the second quarter and some of the component cost issues going on, how do you expect trends to go throughout the year on gross margin? Sounds like there is going to be pressure, everybody -- every business is going to feel it. But will you see more -- will we see more of the gross margin pressure in the first half versus second half?

I would say yes, that the gross margin pressure would be more in the first half of the year because our price increases are going to start to kick in. They are staggered over a multi-month period, so I think that will take more and more of an impact as the year moves along. We alluded to this in our comments, but product mix is actually going to have more of an impact I think in the first part of the year where we are shipping in a lot of cribs, frankly, in the first part of the year and at relatively low margins. So product mix is going to have probably the greatest impact on gross margin percentage if you just look at that one line for the first half of the year.

If we adjusted last year's fourth quarter gross margin for the various adjustments, is there -- can we have any expectation that it might actually show an increase by the time we get the fourth quarter of 2011?

Given the current market, excluding any crazy events like oil going up significantly. If it stays more or less where it is, a little up, a little down, I think that margins will improve over the year, not go down.

Improve relative to -- sequentially, you mean, but could they actually show a year-over-year increase as we get deeper into the year?

Toward the end of the year.

Okay. Fair enough. I will let some others ask questions, I will get back on.

Sure.

Thank you. Our next question comes from the line of Liz Pierce with ROTH Capital Partners.

Thanks, good afternoon.

Hi.

Most of my questions have actually been asked. But I did want to just talk about international, and if you could maybe just give us a little more detail on what is happening internationally, new retailers, how is that growth going to play out?

Sure. Well, we have -- we experienced, I think as Joe mentioned, it was 33% year-over-year for 2010. The 2011 plan is also an aggressive plan, and we -- in simplified terms, we view it in three buckets. We basically think of it in terms of Canada, the UK, and all other, which is a mixture of distributors all around the globe with certain companies obviously playing a big part on that. But the UK is growing really nicely. Europe is really an opportunity, but not a huge opportunity. Canada is growing very, very well. I think that is a very good opportunity for us. But the other portion of it, the other market that we really haven't been in before actually tends to be the biggest opportunity, because it is a much larger market and if you can get 20 or even 15 important distributors stepping up their business and their game, it can be substantial. So I would expect a similar type of growth in international, and I think that it is being run by Dennis Horton over in the UK who I have a lot of confidence in. He's rallied it and he's shaped it in a different way that we have done in the past, so I honestly feel like we have a very strong strategy going forward.

So, Jason, it sounds like you -- when you speak about other opportunities, are you speaking of Europe through a distributorship, is that the model?

Our model basically we currently sell directly in the three countries, US, Canada, and the UK.

Right.

We felt through -- we are going to sell directly in France, but through the UK office. We are putting a corporation in place in France to sell-through though. But other parts of the market, I would say some of the most rapidly developing markets, are more emerging markets like Mexico, Russia, different countries in the Pacific rim, South America. We're -- it is quite an interesting mix of countries. but very solid growth last year and I think even better this year.

And that is going to be run by Dennis out of the UK, even for some of the emerging markets?

That is correct.

Are there things you have to do when you think about safety that make it more complicated? Or is it not regulated in some of these markets, and so you don't have to worry about things like that?

Yes and no. It depends on the market. Europe, for instance, has probably more stringent standards than the US, at least in some categories. There is one solution for that. And then other emerging markets such as South America, Mexico, it's not so much the standards that are in place, they tend to go with either international or US standards, it is more the duties and tariffs that are assessed with the product, so it becomes a different equation. Each area has its own key.

I would say that in our -- one of our core categories, monitors, standards have been unifying around the globe with digital and, because our line is going towards digital and is heavily digital, probably 80% of our line is digital at this point. We are finding it easier going in those markets to get the digital product approved in those countries.

Okay. And related to Prodigy, will or do you still have, I believe they were going to have a nine-month exclusive, so if you are not launching until the second quarter, does that still -- does that push that out?

We originally gave them exclusivity through the end of September. I am sure we will extend that, how much, I'm not sure, we have not really discussed it with them. Our focus and their focus has been to get the product to market.

Okay. And then in terms of input costs, what, besides cotton, what has been some of the other major pressure points?

Resin certainly has been going up. It has been more of the labor costs in China, the currency flux. And from a commodity standpoint -- I'm not sure if you have any comments on that, Joe. But I watch commodities pretty regularly, those seem to be there two biggies. The rest I think are revolting around labor and currency.

The resin thing, too, you see in the newspaper, the price of oil $4 a barrel, our price doesn't change the next day. I mean it's a very volatile market, so we are typically locked in for at least three months with our manufacturers in terms of resin purchases for a quarter. So even though it is up right now, it might be down next week and we will enter into a new negotiation for that next three months. So that is what is going on with resin.

Do you -- that's what I was getting at, do you anticipate those that they are going to try to add surcharges just to pad their own profits? Just like the airlines and everybody else.

Most of the contract manufacturers, they don't have tremendous pricing flexibility with us, so I think they're just going to pass through what they are getting from the resin distributors. I don't think there will be anything extra other than what is going on in the marketplace.

Are you concerned about goods being held hostage? In essence, pay us a surcharge or you are not going to get your goods.

No. I am not concerned about that. I think that, as a matter of fact, even through the crazy economic times we have been through over the last few years we never had that happen.

Okay. I am hearing it from some of the apparel guys, that was one of the reasons I asked.Joe, do you have CapEx and appreciation for this year, and what it was for the quarter, because in there I did not see it.

Depreciation should be in there, depreciation and amortization was $5.4 million for the year.

I just have not had a chance to go through everything.

That's okay.And for 2011? 2011, it will be slightly higher, it will probably be pushing high 5s.

For depreciation?

Depreciation and amortization.

Right, and then for CapEx?

For this year, it was about $7 million in 2010, and it will be less than that in 2011. We had a number of initiatives in 2010 which spike the number. I'm expecting it to be $5 million or something like that for 2011.

Okay. Great. Thanks, so much. Good luck.

Thank you. Our next question comes from the line of Lee Giordano with Imperial Capital. Please go ahead.

Thank you, good afternoon, everybody. Can you talk a little more about sales trends in the fourth quarter by category? Was there anything, was there anything -- was there any category that was down for the quarter?Looking ahead to 2011, which categories driving the sales gains? Thanks.

In Q4, we actually had pretty broad-based increases. I don't think there was anything that really stood out. We had nice increases in swaddling blankets, monitors, et cetera. So there's -- it was kind of a broad-based increase in the fourth quarter this year. In terms of next year, I would say the one big mix issue would be more cribs. We have a lot more placement in 2011 for cribs. So I think that would be the one category that would significantly change from 2010. And we have got some nice growth plans in virtually all of our categories, but I would say cribs is probably the one that has the biggest numbers for 2011.

Right. And then just following up, you had a great year organically in growing sales this year. As you look ahead, in terms of your acquisition strategy, what are you seeing out there in the environment today? Are you seeing opportunities come to you? And has your strategy shifted at all?

We are seeing opportunities, but I think we have been very tough on them, so to speak, and we have seen some go for pretty significant multiples. Two or three that sold in the last three months that went for very high multiples, and it's not something that we really want to chase. But we are open to acquisition. I think as the organic growth continues to drive our business, it is not always in our best interest to shift that to acquisition. We are still looking at acquisitions, but I would say it's not -- we're not -- we are simply being more disciplined.

I also think there's been a lot of large companies on the market for sale, and/or looking to do something strategic. So we are in that mode where we're, if we can take something in that is a reasonable size that can have an impact in our business, get us into an area that we are maybe not in, that would be great. However, we are probably a year away, maybe potentially from a more transformative kind of move. We have kind of weighing those two options.

Great. That is helpful. Thanks a lot.

Thank you.

Thank you. (Operator Instructions)We have a question from the line of Rommel Dionisio with Wedbush Morgan. Please go ahead.

Thank you. Good afternoon. You address the subject of input costs. Can I also ask about freight? What you're seeing inbound freight from China rise, freight cost of China as well as domestic freight cost as well?

Well, interestingly enough, our recent freight rates have actually gone down. Which I found kind of odd with the price of oil, but I think there are other factors going on in the freight business. So it is not going along the same curve as commodities. We did see it go up over the cost of 2010, but more recently within the last few months we've actually seen it go down.

And the number of containers we are bringing in is helping that cause because we are really bringing in a lot of containers, especially with these initial shipments of furniture, we are bringing in a lot of containers, which help our bargaining power basically in the ocean freight side.

Okay, great. Thanks very much.

We have a follow-up question from the line of Sean McGowen with Needham & Company. Please go ahead.

Thanks. Just a couple of balance sheet questions. Inventory at year-end, is that higher or lower than you expected it to be?I seem to recall earlier in the year there was a suggestion made that it would end at a lower level than this.

I think there's still work to do. I'd say overall I think it is a little higher than we would like it to be. We are going to make some good progress in the first quarter of this year. There's a little bit of a build-up in anticipation of Chinese New Year, which was in late January, early February. But I think by the end of the first quarter, we will have hopefully a reduction from the year-end number. We are going to -- the key for us is just keep working down the excess and keep that to a more manageable level going forward.

Okay, and a similar question on accounts resemble. It seemed like over the last couple years you have been able to work down DSOs at year-year, and it's not a huge spike, kind of went back to levels of a few years ago. Is that simply a function of when shipments occurred, timing in the quarter?

It actually is, Sean. Our receivables are actually really clean and customers pretty much pay like clockwork on the designated day. So we are really happy with the receivables, it's just a question of December being the biggest month of the quarter, to be honest with you, so there's a lot more in receivables than maybe you would expect.

Okay. Thanks a lot.

Sure.

Thank you. We have a question from the line of Robert Straus with Gilford Securities. Please go ahead.

Hi, how are you doing today?

Good.

Good. My first question is in regards to the crib market. I am just curious, the placements that you have so far, which sounds like you've had great momentum. Are those under the Summer Infants brand? Or are some of those under Carter's brand, which you have previously manufactured for.

The -- probably the majority are under the Carter's brand. We actually introduced the first Summer branded crib just a few months ago. I think we will start seeing more Summer-branded cribs in the market, but it's still a smaller percentage of the overall crib business. We were fortunate enough to receive placement in almost every major retailer on either the Child of Mine, Wal-Mart, Just One Year, Just One You at Target and Carter's at Babies R Us and other retailers.

Just remind me, how long have you been manufacturing cribs for the Carter's brand?

We acquired about the Butterfly Living in 2009, July of 2009. And the first year-and-a-half, we were -- it was a very small sales number, under roughly $10 million. And the product was positioned at a relatively high price point. We have repositioned the offering to be more in the sweet spot of the mass channel and Babies R Us, as a specialty channel. So we have repositioned it and we have actually positioned Summer has as a little bit higher-priced product in keeping with most of our lines and most of our categories. So it has been a little bit of a flip and we are seeing very good point-of sale results.

Great. On the close-outs, Joe, I know, at least so far, I don't think I've heard a specific number going forward per quarter. But if you were to think about, I think you said $2 million to $3 million number for the fourth quarter. Can you help us out and a specific number would be great per quarter going forward, but give us a sense of whether or not in the second quarter, or for that matter, the first quarter, we're going to see a large decline from that $2 million to $3 million level or if we should we expect sequentially to see a gradual decline throughout this year?

Yes, I would say that on a typical quarterly basis, $1 million in close-outs is probably a reasonable number to go with. There will be some periods of time where that might spike if we are able to push out a lot of stuff to one discounter all-out once, for example. That might spike a particular quarter. I think there will always be some activity. I'd say $1 million a quarter, I am just throwing that out there. So I guess that is the short answer.

That is not out of line with my thinking either. Our inventory should be around $40 million. We should have roughly $4 million of that to be honest-to-goodness closing out $1 million in the quarter, to Joe's point, to Joe's number. That is just rough-and-tough looking at the way that our inventory goes. I think that the reason it's been higher is we've just been very aggressive trying to clean the inventory up. But, as I said earlier, I do think we are in the backside of that.

When you think about the international expansion and growth, and in regards specifically to inventory, what -- how do you think about the managing of the SKUs? And when you think about that international growth, are you adding a lot of SKUs to get penetration in those international markets, or is really just geographic expansion within certain countries and that sort of thing?

It is mainly geographic expansion. What we have done -- what Dennis has done, is really focused in on our top 100, 120 or so SKUs and actually we inventoried them, we made a commitment to inventory, actually that is one of the reasons why our inventory went up a little bit in 2010, because we established warehouse in the Far East. We inventoried those goods that we thought were our best sellers and we defined the line to our international distributors. At first it felt like maybe we were leaving some opportunities on the table, but the reality is by focusing it, and by offering that line to all distributors, it really helped us get a little more efficient, build-up to the MOQs or the throughput of the velocity of any given item, and actually establishing a rhythm or a certain level of business on those items.

That our process that we've used to define our international business. An international distributor, unless they can order a container's worth from (inaudible) or an MOQs worth, they need to order from that common grouping of products, that best-selling grouping of products. So it has become pretty efficient. And it is still in its infancy, but it is really actually starting to develop into a program that you can get your arms very rapidly as a distributor and actually get behind.

Great. One last question regarding the acquisition marketplace. I am curious to know whether or not you are seeing a difference between the number of bidders in the marketplace for an asset, or whether the valuations are being driven by the acquisition target's management team?

I do not think we have seen any significant increase in the number of bidders. You don't always know that number for a fact, but it doesn't seem like there is all these new guys jumping into the fray here. So I think the -- really the issue is then one of evaluation over the last 12 to 15 months and sellers expectations of value, that has really been the hold-up on our end, to be honest with you. Where we have not been able to get to the number that they want.

All right. Thank you, and good luck.

Thanks.

Thanks.

Thank you. The last question comes from the line of James Fronda with Sidoti & Company.

Hi, how are you.

Good.

In terms of revenue, can you tell me basically I guess how much of that is due to gaining sales shelf space at the stores. Because I was at the Babies R Us in New York, and it seemed like the sell-through -- you pretty much had all of the coverage, more than half the shelf. So I was just wondering in terms of that revenue number, how much of that is due to gaining shelf space?

Well pretty much all of it is going to be new shelf space. We do have some items that have done better in 2010 versus 2009, items that are just carried over from year-to-year. But really, our growth comes from getting every single retailer to take more from us. Whether that is a brand-new category that they have never taken from us before or taking more SKUs within a certain category. But we had a lot of gains in 2010 at many, many retailers where if they took 10 items from us in 2009, they took 15 items from us in 2010, and go on down the line. Some retailers obviously take several hundreds of our items. But even if some of our largest accounts that are already taking several hundred SKUs, they took more in 2010 as maybe a category that they have never taken from us before. We have a broad-based shelf space gain in 2010.

I would add to that just a little bit though. There are some categories that are still increasing in same-store sales. So I would just make one qualification on that, that we do still have some categories that are growing within the category, meaning not because of additional shelf space, but the year-over-year increase.

Right, I know what you mean. In terms of the debt, do you plan on trying to pay that down as you go forward, or what is the story ? Are you just going to reinvested the product?

That is a really good question. I think 2011 for us is a year to instill a little more disciplined in that process. I think 2009 and 2010, we --our business is being taken in a new level.When you go from a $130 million Company to a $200 million Company or $200-million-plus, there are infrastructure challenges and changes, and also some the of the products that fueled that growth were capital-intensive. But our intent for 2011 is to stay very disciplined and conservative and not do a lot of capital investment, only where necessary. Mainly in the product area a little bit, maybe in IT and Ops, but -- and warehousing, specifically. But we are going to be pretty disciplined with that this year. I would really like to see us improve our cash flow, stay more on the positive side and pay down some debt.

Okay. Thanks.

Sure.

Thank you. And at this time I would like to turn the conference back to Management for closing comments.

Thank you, very much, everybody, for participating in the call today. Some great questions. I'd like to take the opportunity to thank everyone, all our employees, all our stakeholders for continuing to support us and to help the Company grow at the rate that it has. I look forward to speaking with everyone in our first quarter conference call. Talk to you again.

Thank you.

Ladies and gentlemen, this concludes our conference call for today. Thank you for your participation. You may now disconnect.