Summer Infant, Inc. (SUMR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Summer Infant's third quarter 2012 financial results conference call. Today's call will be recorded. At this time, all participants have been placed in a listen-only mode.

There will be an opportunity for questions and comments after the prepared remarks.

I'll now turn the call over to Mr. David Calusdian from Sharon Merrill for opening remarks and introductions. Please, go ahead, sir.

Welcome to the Summer Infant third quarter fiscal 2012 earnings conference call. On the call for the Company are Mr. Jason Macari, Chief Executive Officer; Mr. David Hemendinger, Chief Operating Officer; and Mr. Paul Francese, Chief Financial Officer.

By now, everyone should have access to the earnings release which went out today. If you have not received the release, it is available on the Investor Relations portion of Summer Infant's website at www.summerinfant.com. This call is being recorded and webcasted and a replay will be available on the Company's website as well.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and that Management may make additional forward-looking statements in response to your questions. Forward-looking statements or information are based on a number of estimates and assumptions and are subject to a variety of risks and uncertainties which could cause actual results or events 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, or similar references to the future. Examples of forward-looking statements include, but are not limited to, statements Management makes regarding the Company's future financial performance, business prospects, and operating strategies. There are many factors that can result in actual performance differing from projections and forward-looking statements.

We refer 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, 2011, 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.

During the call, management will make reference to EBITDA and adjusted EBITDA. These metrics are non-GAAP financial measures which the Company believes helps investors to gain a meaningful understanding of changes in Summer Infant's operations. For more information on non-GAAP financial measures, please see the table for reconciliation of GAAP results to non-GAAP measures included in today's financial results release.

And, with that, I would like to turn the call over to Mr. Jason Macari. Please, go ahead.

Thank you, David, and thank you, everyone, for joining us today.

Looking at our performance in the third quarter, our sales were slightly higher than both the third quarter a year ago and the sequential second quarter. We're encouraged by this top-line growth, given the current softness in the market and the low birth rate trend.

On the bottom line, while we're disappointed in the loss for the quarter, we expect that the benefits of the cost reductions and operational efficiencies that we have been implementing during the past six months should begin to be realized during the current quarter and into 2013. We also expect to begin benefiting in Q4 from recent price increases. So, while we're clearly not satisfied with our third-quarter performance we expect that better results are in our near future.

During today's call, I'll be reviewing our progress on three of our key strategies -- innovation, brand building, and diversification -- which have enabled us to maintain our sales in a challenging market. Then I'll discuss how our fourth key strategy, operational excellence, will contribute to an improved bottom line going forward. First, I'd like to discuss the progress we've made relating to our liquidity, since that is most likely on the forefront of everyone's mind.

We recently announced that we had obtained an amendment to our loan agreement. Our next step is to refinance our revolving credit facility, which is expiring in December 2013. We have begun discussions with a number of banks that have shown strong interest in restructuring our debt. Paul will provide more detail about the refinance and the amendment, which is a very positive milestone for Summer Infant. With that said, let me talk through how we've used innovation, brand building, and diversification during the quarter to solidify our sales and position the Company for growth when the market rebounds.

Starting with innovation, we launched or re-launched key products across multiple product segments in the past quarter that demonstrate our technical strengths and our focus on superior user experiences. For example, in July we began shipping a redesigned monitor product line as well as several new monitor products. Retail customers and consumers continue to be enthusiastic about the products and our sales so far have been encouraging. The innovation we've demonstrated in this relaunch, as well as products in development, should help keep us strong in a competitive category such as baby monitors. We will continue to innovate and bring monitor products to market with more functionality, including greater Internet connectivity.

Within our BornFree business unit, which provides premium feeding products, we launch the Tru-Clean Sterilizing System in the quarter. The Tru-Clean all-in-one design includes a sterilizer, dishwasher basket, and drying rack. In the furniture category we recently launched Symphony, a full-size crib with an integrated removable bassinet and changing table providing real value to consumers.

Beginning in the first quarter, we are re-launching at higher end retailers our award-winning Prodigy Travel System with two completely redesigned European-inspired stroller platforms with new styling and fashion. Prodigy is one of only a few child restraint systems for infants to receive five stars across the board by the National Highway Traffic Safety Administration.

In addition to innovation, we've taken aggressive steps to strengthen our brand recognition. We've had a significant increase in public relations activity during the past few quarters. We are driving the swaddling category and our SwaddleMe was showcased on NBC's Today Show in September. That appearance resulted in 136% increase in total PR impressions for the month. Our award-winning BabyTouch color video monitor and Peek Plus monitor were featured on a number of local television stations throughout the country during the summer. And our BornFree baby bottles were on the Today Show earlier this year.

Diversification is another important strategy as we continue to broaden our penetration with existing customers as well as broaden our customer base. During the quarter, we began shipping furniture to several major retailers on a direct import basis. We also increased shelf space under the Child of Mine brand by adding two new bouncers and cribs.

In addition to our efforts to grow the top line, we've also become much more efficient as we've taken actions to reduce costs. After a comprehensive review of our operations, we implemented an approximate 10% reduction in worldwide headcount, a reduction in executive salaries and Board of Director comp for the back half of the year, cuts in overhead spending related to discontinuing various outside services, a reduction in planned consumer advertising, and negotiated lower outside service costs.

As a result, we've already begun to see a decrease in general and administrative spending and expect those savings to accelerate in the fourth quarter and beyond. For example, when you exclude a one-time charge of $0.5 million, our G&A declined by about $1.4 million year-over-year. As a percentage of sales, G&A has declined to 15% in Q3 2012 from 17.2% in Q3 of last year.

Our selling expenses continue to be higher than we would like, which is an overhang from spending commitments for retailer promotional programs in prior quarters. As we discussed on our last call, we put controls in place to reduce promotional spending where we do not see a resulting incremental sales benefit. These controls are working and we expect to see the savings in the fourth quarter, with the full impact in the first quarter of 2013. We continue to be diligent in taking action to reduce input costs, which primarily consists of raw materials such as plastic, wood, metal, and fabric. We also continue to make product improvements and upgrades that we expect will reduce input costs, improve quality, and improve margins.

Our distribution and logistics efficiencies continue to improve as we move inventories closer to our primary customers, reducing inventory and time to the shelf with large and small customers alike. We've also consolidated suppliers to gain economies of scale and continue to reduce the number of our active SKUs within our product portfolio.

Before I turn the call over to Paul, I'll summarize by saying that, while our third quarter performance was below our expectations, we made significant progress improving our business in the areas of product innovation, brand building, diversification, and operational excellence -- four elements of our strategy that will enable us to improve our financial performance in the quarters and years to come.

And, with that, I'd like to turn the call over to Paul, who will review our third quarter financial performance in more detail.

Thanks, Jason, and good afternoon, everyone.

Before I review our financial results, I'd like to provide some additional detail on the amendment to our credit facility with Bank of America. The new amendment under our loan agreement provides for an $80 million working capital credit facility that matures on December 31, 2013. It includes financial covenants relating to EBITDA, consolidated leverage ratio, and a fixed charge coverage ratio. The bank waived certain events of default that existed on September 30, 2012. The loan agreement allows the Company to borrow under the credit facility at LIBOR or a base rate. The covenants which govern the credit facility remain in place and have been reset to be in alignment with projected financial results. The credit facility margin pricing rates increased by 100 basis points and a 2% PIK interest provision was added.

While the bank group has demonstrated their support of Summer Infant by granting the waiver and amendment, we believe it would be best to refinance our line of credit to facilities more suitable to Summer Infant's long-term needs. As Jason mentioned, we have already made progress to restructure our line of credit to an asset-based loan supported by our inventory and receivable assets, and a term loan to fully satisfy our credit needs. Initial discussions with several commercial banks have been favorable, and we are optimistic new financing will be in place by the end of the first quarter 2013.

Turning to our financial results for the third quarter, net revenues in Q3 2012 increased to $64 million, a 1% improvement from the prior year quarter. Third quarter sales growth was primarily attributable to increases in our furniture, nursery, and play product categories, offset by lower sales in the gear category. Gross profit decreased to approximately $19.6 million in the third quarter of 2012, compared with approximately $22 million in Q3 2011. The gross profit declined year-over-year as a percentage of sales to 30.7% from 34.7%. The decline was due to a greater mix of sales in the lower-margin furniture category, decreased sales in the higher-margin gear category, and a one-time $530,000 charge to write off obsolete inventory relating to the 2011 BornFree acquisition. In addition, marked down and returned goods allowances were higher in the third quarter 2012 versus the year ago quarter.

Selling, general, and administrative expenses, excluding depreciation, amortization, and stock-based compensation increased approximately $16.6 million for the third quarter of 2011 to approximately $18 million for the third quarter of 2012. An increase in selling expense drove the overall increase in SG&A, and it was due to higher promotional costs related to customer cooperative advertising, higher outbound freight costs, and increased licensing costs. As Jason mentioned, we have taken actions to reduce promotional spending and expect to begin to see the benefits in Q4 with the full effect in 2013.

If you exclude the non-cash $530,000 charge from the BornFree acquisition, the G&A portion of SG&A decreased year-over-year by about $1.4 million. The non-cash charge results from finalizing the net asset adjustment in connection with the BornFree acquisition. There will be no future charges required for the net asset adjustment, nor will there be any earn out payments in connection with the BornFree acquisition.

We recorded an interest expense in Q3 2012 of $938,000 compared with $774,000 in the prior year. The increase was due to higher interest costs at increased borrowing levels to support working capital needs. Summer's adjusted EBITDA for Q3 2011 included approximately $1 million of add-back charges as committed under the terms of the Company's credit agreement. If similar add back charges of $1.4 million had been committed in Q3 of 2012, adjusted EBITDA would have been $3 million compared with $6.3 million for the three months ended September 30, 2011.

We reported a net loss of $65.4 million, or $3.65 per share, in the third quarter of 2012, which includes a goodwill and intangible impairment charge of $70.2 million compared with a net income of $2.1 million, or $0.11 per diluted share, in the third quarter of 2011. During the quarter we experienced a decline in market capitalization, triggering an impairment analysis of goodwill, intangible, and long-lived assets. Based on this triggering event, we engaged a third-party to help us conduct a valuation study. As a result, we concluded that some assets were impaired and recognized a goodwill impairment of $61.9 million in the quarter. A portion of the Company's intangible assets were also impaired, resulting in a write-down of $8.3 million. These charges have no impact on our day-to-day operations or liquidity and will not result in any future cash expenditures. The valuation studies are being finalized, but we do not expect a material change to the expenditures.

The Company recorded a tax benefit of $6.3 million in the third quarter of 2012 compared with a tax expense of $604,000 in the third quarter 2011. The effective tax rate in the quarter ended September 30, 2012, is not comparable with the prior year period due to the goodwill and intangible asset impairment. The effective tax rate in the prior year quarter ended September 30, 2011, was approximately 22%. The Company expects its effective tax rate for the year ended 2012 to be approximately 8% compared with the prior year effective tax rate of approximately 24%.

As of September 30, the Company had approximately $11.9 million in cash and $76.5 million of bank debt for a net bank debt balance of $64.6 million, compared with $60.8 million net bank debt balance as of December 31, 2011. The $3.8 million increase resulted from borrowings to support working capital needs. The net bank debt balance is a $2.6 million sequential improvement from $67.2 million at the end of the second quarter.

Improving our working capital position has been a primary focus. Through a series of negotiations with our supplier base we have been successful in extending payment terms with the majority of these accounts. We have also been able to shorten payment terms from some customers, increase product sales and direct import programs, and implement an integrated ordering process that allows us to identify and quickly react to slow moving items, thereby reducing inventory levels. In addition, we expect our cash position to improve from cost containment initiatives, price increases, tighter controls over customer promotional cost, and an improved sales mix supported by new product introductions.

With that, I would like to turn the call back to Jason.

Thank you, Paul.

Looking to the fourth quarter, we expect to see bottom-line improvement over the third quarter as we start to realize savings from our cost reduction initiatives, including our efforts to control promotional and advertising dollars. We made good progress on executing on our corporate strategy and advancing the key strategic drivers of our business including innovation, brand building, increasing the depth and breadth of sales, and operational excellence. We expect further improvement in these areas, which are the keys to long-term profitable growth for Summer Infant.

With that, Paul, Dave, and I would be happy to take your questions.

Thank you.

(Operator Instructions)

Sean McGowan, Needham and Company.

I have several. I'll ask a couple and then get back in the queue. Paul, what's the -- the 2% PIK as per the amendment, what is that measured against?

That actually becomes effective October 1. And, just to add some more color to that, Sean, is that half of that will be forgiven if our debt is refinanced by the ending of March. And, that will be applicable to the outstanding balances of the loan.

Okay. And, outstanding balances on an average basis or as of a particular date?

I believe it to be on an average basis.

Okay. And then, Jason, can you talk a little bit about what's happening at the point-of-sale, obviously, for your customers and your products? But, where are the customer shifts? What's happening to your product mix shift? What's driving that? Just a little bit more about what's happening at the retail level -- at the consumer level?

Sure. I think there's a variety of things happening.

First, we launched the Prodigy along with a number of other gear items last year and had pretty significant sales. And, those placements, for a number of reasons, have been -- were lost this year. And, we've made up for that with some other products, but in some cases, lower margin products such as furniture.

And, we also have had quite a bit of competition in the monitor category, as many of you know. And, just generally speaking, there is a shift going on. We're doing our best to try to deal with year-over-year declines, which I think is more attributable to the economy, as well as what, in our line, is selling the best. Monitors still continue to be a leading category, probably our leading category.

But, other categories that we had launched in a year ago, sales wise, were doing well, but the net results were not that good. So we've been having to really shift our emphasis to other product lines which I think we've done pretty successfully, but the economy hasn't really helped. We've definitely seen declines year-over-year.

And, generally speaking, competition in certain categories. And, a couple of product lines that came out last year that just didn't have the staying power to last another year. So, there is a bit of a shift, but we're maintaining the top-line. We're not happy with the bottom-line.

And, the customer shift, you talked earlier in the year about a number of those. Is that still going on?

Yes, there is some things going on for us. I'll speak to us, to our sales.

We are experiencing a decline in sales with our largest customer. And, other customers are doing -- are seeing increases. And, that's good and bad. I, obviously, am happy about expanding sales with other customers, but certainly don't want to see our sales go down with our largest customers.

And, we're working very hard to try to bring them products that we feel like will turn that around. It was -- there were definitely certain categories, and gear was a big one, and there were a couple of others that we simply were not able to convert over to new programs in 2012 -- in the back half of 2012.

Okay. I'll get back in the line. Thank you.

(Operator Instructions)

Liz Pierce, Roth Capital.

I'm sorry, but I don't have great cell reception, but I just wanted to tag onto Sean's question. Jason, did you say that the customers -- is it your top three customers or is it one customer? I just didn't hear it adequately.

Really, just one customer.

Okay, just one customer. So, is this because they think that these categories aren't the right categories? Or is it because they are increasing their sales from the competition, private label?

Well, I think I'll speak to gear first, because that's probably the biggest negative in the quarter year-over-year. Is -- gear we had come out with a line of Carter's gear. It actually sold pretty well last year. And, for whatever strategic reasons, Babies 'R' Us decided to move away from that line. And, we're working hard to bring new products in those categories to them that we just -- there is a gap and we have to deal with that.

There's -- we have new products that we've presented to them. But, for whatever reason, strategically they were moving away from the Carter's brand in that particular category. Of course, Carter's is very strong in many other categories, but in the gear category, for whatever reasons, they had, they're moving away.

So, for us, it was a net loss in that category. And, other categories rose to offset it, but not enough to -- at a lower margin.

Okay. And then, in terms of your plans for advertising and -- I want to make sure I understand it. So, are you backing away -- I guess, I see a disconnect if you're talking about a brand awareness but yet you are cutting back on advertising. Are those dollars shifting to other forms of advertising?

Last -- end of last year, we started to increase our advertising, specifically trade advertising -- I'm sorry, consumer advertising within trade magazines. Fit Pregnancy and those types of magazines that moms would be reading and using. So, that advertising is quite a bit more expensive than other forms of advertising.

And, although I still think it's effective, I think there are other forms of advertising that are probably less costly and more effective such as the social media area, we've done a lot more work there. We have stepped up our PR. I think as you know, Dr. Green and Dr. Levine both represent Summer -- BornFree and Summer.

And, the advocacy side of it has been a big piece of it, bloggers, et cetera. We went to the BlogHer event this year and had a good turnout. We've been to Big City Moms and had a really good turnout.

I think it's more the expensive advertising of print. And, we're actually doing quite a bit on the Internet with digital advertising. But, we were trying to step it up at the same time.

We were seeing -- we saw positive things happening and it went negative towards -- in fourth quarter, if you recall. And, this year we just had, quite frankly, rising costs through some strategic initiatives that we had taken on. And, at the same time, lowering income. And, we got caught being too aggressive on the advertising and promotional front.

And, we've stemmed -- cut back a lot of that. While we're still doing it, and we're still engaged in those efforts, we've definitely cut back quite a bit. And, trying to regroup on those additional types of spendings, rather than things that I think you get more bang for your buck with the digital stuff.

Okay. Like Sean, I have other questions but I will get back into the queue. Thanks.

Sure.

Sean McGowan, Needham and Company.

Jason, can you talk a little bit about what you think the outlook is at this point for Prodigy and for Peek? Where they stand competitively, how do you think they stack up for the next launch period for -- relaunch period for Prodigy? How does it look going into next year for Peek?

Sure, let me talk about monitors in general. Peek, obviously was one of the -- one of our monitors. It's a very small percentage of our overall monitor sales, but it was a flagship items.

It's done actually well, I wouldn't say great, but it hasn't done poorly either. It's a premium priced product at $349.00 at retail. It's sold, I think, fairly well.

We'd like to see greater sales on it, so we continue to monitor customer feedback. And we have improvements that are underway as we speak. And, probably sometime mid-year, we would be coming out with what we would internally refer to as Peek 2.0.

But, at the same time, we are also improving the rest of our monitor line. We continue to add features and improvements to those products that are moderately priced between $100.00 and, say, $200.00, as well as the $200.00 or $300.00 which are more the premium product lines. And, bringing Peek or Internet connectivity down in price would be our goal. And, we believe that we would start realizing greater volume if we did that. So, we're actively technically solving those problems and our intent is to bring more highly functional product at shopper price points to market in the next 12 months.

With respect to Prodigy, we went back to the drawing board, as I've said a number of times now, and basically had to redesign. We found a couple of stroller platforms. We've redesigned probably one-third of those. In other words, they were an existing product at a factory, we redesigned it for the US market. And, changed some things to past standards and testing and also to the tastes of the American consumer.

But, also -- but, they had a European flair, so that's what we really were after. That's what our customers were telling us. That's what consumers were telling us.

Also, fashion wise, we were -- we came out with fashion that just didn't hit the mark in the last stroller with the Prodigy, our release. This set of fashion is significantly better. It's more in line with the European design. Things that the top competitors in the market might have on their product. Sharp, black-based fabrics with sharper colors and more fashion trend, trend forward stuff. So, I'm very confident that the new stroller platform will be well received by the consumer.

However, it is a higher price point product. So, the two platforms are sitting at somewhere around $379.00 to $399.00 and the second platform is somewhere around $499.00. So, they are going out to, what I would term, higher-end retailers versus the mass merchant class of trade. And, we're going to have to watch it build a little bit rather than expect huge amount of sales day one.

So, the good news is we have multiple platforms coming out. I think at those price points, the modest sales will generate a good amount of sales dollars and profit. And, I think that they are the right products for the market today.

So, that addresses those two. There are obviously other categories where we're aggressively pursuing but I'll hold those remarks unless someone wants me to elaborate.

Yes, I was just going to say, what other categories are you looking at?

Well, we have product coming out in the new gate category -- new gates in the gate category. We have improved bath products coming out. We continue to develop -- we have infant health coming out. We have safety products coming out.

So, we're very active development wise. We have higher-end feeding products coming out.

So, really, in almost every category that we participate in, what I would call our seven business units, we have new products in monitors, safety, nursery, we have new products in furniture and gear, and as well as feeding. I think the challenge for us has been that, and I think why we have been -- have seen eroding profitability and things heading -- profitability not dropping to the bottom-line while our costs have been rising is because we came out with products within the last year or two that just haven't had the staying power.

For one reason or another, some really good sellers but strategically customers dropped them and others that were just the wrong product in the market. I think we've made those adjustments. I think that the new products that are going to come out in the next 12 months will be well received. But we're going to have to build, it's not going to be an overnight change.

Consequently, that's the reason why we've been so aggressively going after SG&A costs. Because those were escalating at a faster rate than they should have. And, we're working hard to get our run rates down to where our current sales run rate will support that kind of overhead.

Okay. And then, the last area I wanted to touch on, a little bit on the future without getting terribly specific, but it seems like in your commentary about the tax rate implication for the fourth quarter is that you expect to be profitable. I was wondering if you could make that statement, that you expect to be profitable in the fourth quarter?

And, is there any -- for next year, I know it is way early to start getting into guidance for the year but is there any structural reason, given if you've taken the right steps and you -- sounds like you're excited about some of your new product categories, is there any structural reason that you could not get back to the levels of profitability that you saw in 2010, for example?

Yes. I would say, and I've said this right along, the reason we suspend guidance last quarter was because we were having to re-engineer our overhead structure. But, our goal next year is, in a simple manner to -- we should be -- we feel like we should be a $5 million per quarter EBITDA company.

And, we should be being able to meet that. And, that's our first goal, is to get there. And, we certainly have a plan for next year that would get us there. But, we've just been cautious, because of the things that we're going through as restructuring the SG&A and shoring up the sales with new products.

Great. Thank you, very much.

Arnold Brief, Goldsmith and Harris.

I've got three general questions. I'll do them one at a time.

One, you mentioned your debt went up because of the working capital requirements. I haven't had a chance to see your balance sheet or your inventory so I don't know if the question is pertinent, but your sales are flat. Why is working capital going up and debt going up if the sales are flat?

We had in the quarter, we did see an increase in inventory and receivables. And -- however, we have been extremely focused, as our results have shown, that -- of generating cash in the fourth quarter. So, if you look at the balance sheet, which has been released now, you will see an increase in those working capital items.

What I would say is that our net debt at the end of last year was a little over $60 million, and our net debt rose through the year. And, in fact we've been able to cut it back quarter-over-quarter -- sequentially quarter-over-quarter by roughly $2.5 million. So, our focus is clearly to rein in the -- personally, I think inventory is under control. I think receivables are actually under control, and I think we will continue to see improvements in our management of that working capital. So, our goal certainly is to bring net debt down.

One other thing I think is worth mentioning on the debt side of things, I think towards the end of last year, we had stretched our suppliers. So, I think on the AP side, we've actually brought all our suppliers into terms as of just recently. And -- which has allowed us to go out and negotiate better terms with most of those suppliers, certainly our key suppliers.

So, over the next few months, as we try to refinance, which we believe we'll succeed in, obviously, we felt it important to work all aspects of our capital management. So, by bringing all of our suppliers into terms, I think that good-faith allowed us to negotiate better terms going forward for 2013.

Let me just try to sum it up. So, between better supplier terms, getting rid of slow movers, you're looking for inventory reductions in the fourth quarter which will permit you to generate cash in the fourth quarter?

That's our intent. And the only caveat to that is as we go into Chinese new year, which occurs this year in, I think, late January. We do build a little inventory for that, so net of that seasonal spike that we have to accommodate for, that three or four week shutdown with the factories. Aside from that, yes, I absolutely agree with that.

I would also say that one other thing I think is worth noting, is that in our inventory numbers, we've cut in half the level of dropped inventory to roughly $1.5 million. That's inventory that we've discontinued SKUs, but now we need to go sell it. So, that's been cut down dramatically, both quarter-over-quarter and year-over-year. So, our inventory is, I believe, cleaner than it's ever been.

Could you tell us what percent of your sales were BRU this year versus last year?

Yes. I think last year it was in the mid-40%s and I think this year it's in the mid-30%s.

Okay. Just to pursue this just a little bit, going through the store, it's obvious that BRU is making a major commitment to private-label. They've got it in every area, be it monitors, cribs, soft goods, whatever. I don't know how far they're going to go with this, when it stops.

Can you tell from looking at your orders and placements and SKU on the shelf, without looking for sales, I'm not looking for sales estimates, but just in terms of placements, as you go into the spring season, are you starting to stabilize with BRU? Or is it still -- are they still displacing suppliers for their own private label as you go into the spring?

That's an excellent point. BRU has been an awesome customer, a very good customer to us over the years. I think this year it was a very difficult relationship for us. Not because we don't have a close relationship, we really do. I think the challenge has been that margin pressures and we made a lot of commitments at the beginning of the year and towards the end of last year that we had to honor.

And, it has hurt us in our selling costs. And, our intent is to fix that and still support them and all our customers, but do it in a way that is mutually beneficial. So, that we see sales increases with spending of promotional dollars.

The private-label situation, we support their private-label situation. We have several -- it's not a big part of our business but we do develop and sell them some private-label goods. And, we would support that if they, obviously, in certain categories that we are strong in, we would support that for them.

I guess what I'm trying to get at is, it seems to me, I'm probably wrong, it seems to me that the model for this industry has changed. And, what's happening is that people like Amazon are changing it. A shopper is going into a BRU store, looking at the goods and then buying them on Amazon at a lower price.

And, as a result of that, BRU, which, as you know, part of Toys 'R' Us who wants to become public and hasn't been able to, has made -- it seems to me they've made a huge commitment to, in their merchandising strategy, to either have -- to protect their pricing and their margins. By either doing a licensed product that has a strong consumer following, or by doing a private-label or by doing exclusive products that can't be found in another channel, which is hurting their pricing.

And, they're trying to restore their margins by that combination of merchandising strategies, which in essence gives them control over the pricing of their product because they're not found in other stores or other distribution channels. And, the extent that they're doing that, I don't know where it stops. But, if it continues, 35% of that you and Kid Brands and whoever have as a percent of BRU sales is going to go down, whether it stops at 20% or 29% or 15%, I have no idea. But that strategy, as it's being implemented, has got to impact you further, I think. I don't know.

Well, it could, but, I would say that, again, our relationship is strong with them. Many of our products that we have selling at Babies 'R' Us are in fact exclusive versions of a product. We have developed items for them under the private label. There's no reason why the business has to go down with them.

I think it's on us to really bring more innovation and bring things that they want to buy or have to buy because of how -- the competitive nature of the business. So, they're in a very competitive place themselves. And, I know that they're doing everything they can to compete and, to your point, maintain sales and margins.

Because the whole concept of being a showroom for the Internet definitely -- they have to combat. It's a reality for every retailer, every bricks and mortar retailer. What I would say is I think the responsibility falls on us to bring them innovative product.

Last question, could you quantify the extent of the expense cuts that you are trying to implement? And, how much is falling in third and fourth quarter, how much will remain for 2013?

Sure, the tail is trailing off on many of the commitments that we've had from a selling standpoint. So, I think by first quarter it will be clean. On the G&A side, we were at a run rate of approximately $3.5 million to $3.8 million per month. Our goal internally has been to bring that down to roughly $3 million run rate, which we have been -- almost there. We're nearly successful.

I think in the third quarter, I think the last month, September, we were down in the $3.2 million range. Correct me if I'm wrong, Paul, but I think it's about that. And, we continue to bring that down.

We're still working through some severance. We are working through some tails on different commitments that we've made. But, I think we're on track to bring it down to $3 million run rate per month. Which is, on a percentage basis, is probably 15% plus lower than last year. Or lower than even the first couple of quarters of this year.

How about the selling end of it? You mentioned advertising and promotions (multiple speakers) --.

Our run rate -- Yes, again, I would comment that we were probably at a run rate of $2.5 million per month. Our goal is to take that run rate down to roughly $2 million per month.

And again, those run rates are -- some of it is in our control, some of it is not. But, we believe that we can do that. And by doing -- making those -- getting those two large elements of our P&L in line, then it really comes down to attacking the margins.

Right. So, by year end, as you go into 2013, your SG&A line should be normalized?

I believe it will, yes. Everybody is nodding their heads here, yes.

So, from there, we've got to look for the new products to achieve some success?

Absolutely.

Impact on the sales line and hopefully new products have better gross margins et cetera?

Absolutely, yes.

Okay. Thank you.

Kurt Frederick, Wedbush.

I just had a question, really, on the tax in the quarter, the $6.2 million benefit. Can you just break that down? How much was related to the goodwill impairment and the other, what was it, $0.5 million charge?

Just give us one second. Did you have a second question?

That's really the main one.

Okay. Paul is just digging out that information. Give us one second.

Okay. I can ask another one, just on, when you were talking about the new product launches for 2013, timing wise, is it weighted first half, second half?

Yes. I think it's going to be weighted toward the second half. But, there are new product launches as of -- that are -- some are shipping as early as December and January. And, hopefully towards the mid-year, it builds a little bit.

On the tax question, if you can give us a minute, we'll come back to that. Paul just ran to get some data for it to answer that.

Okay. No problem.

If you don't have any questions, we'll come back to that. And, if we can go to the next question, that would be great.

Yes, that sounds fine. Thanks.

Liz Pierce, Roth Capital Partners.

Just a couple quick ones. I think in the beginning, Jason, you mentioned that you had some price increases. I was curious on what?

And then, also, on SKU count you said there had been a reduction. If you could quantify and then give us some insight input, what categories? Or is that what you meant in terms of the obsolete inventory? Thanks.

Right, the question on price increases, we raise prices -- we started talking with retailers roughly late second quarter. And, most of those price increases kick in either in fourth quarter or January 1. The reason for the delay is because most retailers -- we either have commitments through sets or they have policies that have a two or three month lead time to increase pricing. So, the pricing is going into effect and should start positively affecting us as early as the fourth quarter, but fully in the first quarter.

Percentage-wise, maybe a couple points net. More significant on certain categories like furniture, less significant on categories like feeding and monitors. So, net-net, I think it's probably a couple of percentage points on our overall sales.

The second question, on -- I'm sorry, Liz, what was --.

SKU rationalization.

Yes, thank you, SKU rationalization was -- we've been -- I think our business growing from zero to $250 million or $260 million in 10 years, we -- the business has gotten relatively complicated and I think it was time for a housecleaning. And so, we've been aggressively looking at reducing SKUs.

And that's not always reducing, eliminating a product. Oftentimes it's eliminating versions of a product. So, we may have -- we just went through gates, for instance.

And, we limited roughly 25% of the product of the SKUs and probably only one or two products. So, it was -- we might have eliminated 10 SKUs, but only a couple of actual items were reduced. And, the reason for that is they're either old models or we just had too many versions of the same model.

Okay. And then, just quickly on the feeding, on BornFree, there's no earnout that's going to be paid? But, you talked about some kind of adjustment, I just want to clarify what that was?

The net asset adjustment, is that what you're referring to?

Again, pardon my phone coverage, cell coverage, but maybe that was it was? There was a valuation balance on BornFree?

That's correct. The original purchase price was approximately $25 million. And, there were earnout features to that.

The earnout features were not achieved, so there was no earnout. And, the net asset adjustment netted the purchase price down to roughly $23.5 million.

Okay. And, what is the thought process? Can you give us an update on what's happening? Within BRU, I do see that you're creeping your way to a little bit more shelf space but it's --.

Sure, well, (multiple speakers) -- Babies 'R' Us hadn't reset that category in some time. And, in fairness to them, BornFree was a little ragged when we acquired it. We redid the packaging and redid the merchandising. We also, obviously, redid quite a bit of the product. Some as simple as colors and just the way the product presented and others were full overhauls with new designs.

So, when they reset mid-year, roughly mid-year, I think it was in August sometime, that would be their mid-year, they reset our 4-foot space. And, it cleaned up considerably. We also invested, as you know, in a display --.

Hello?

Can you hear me, Liz? So, we also invested in a display for the BornFree line in that -- in Babies 'R' Us in the line. The presentation is much better than it has been in the past.

I think we might have lost Liz. Can we go to the next question please?

Sean McGowan, Needham and Company.

I wanted to circle back to one of my earlier questions. I don't know if you addressed this. Is the implication baked into the tax rate commentary that you would be profitable in the fourth quarter? Is that the right way to read it?

Yes. Tell you what, since you came back to the tax question, Paul, why don't you address it?

Why don't we address the earlier questions pertaining to tax and the impact on the impairment charge that was made. When we look at the tax provision, before impairment, we would have recorded a provision, or benefit, before impairment of $289,000. With the impairment charge, that provision benefit increased to $6.31 million. The best way of answering that question is to look at what was the provisioning prior to the impairment and what was the provision after the impairment.

As far as fourth quarter goes? He's asking will we show a profit or not?

Operating income will be profitable in the fourth quarter.

Yes. So, I guess the answer is yes. It will be profitable.

Good. Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Mr. Macari for closing remarks.

Thank you, everybody, for attending the call. And, we look forward to speaking with you next quarter. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.