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LeapFrog Reports Third Quarter 2013 Results

Financial Overview for the Third Quarter 2013 Compared to the Third Quarter 2012

Third quarter 2013 net sales were $201.0 million, up 4% compared to $193.1 million last year, and included a 1% negative impact from changes in currency exchange rates. Net sales growth was largely driven by shipments of multimedia learning platforms, including LeapPad Ultra, LeapPad2 Power, LeapPad 2 holiday bundles and LeapReader, which launched in the summer of 2013. In the U.S. segment, net sales were $146.8 million, up 1% compared to $145.7 million last year. In the International segment, net sales were $54.2 million, up 14% compared to $47.4 million last year, and included a 3% negative impact from changes in currency exchange rates.

Income from operations for the third quarter was $42.9 million, an improvement of 16% compared to $36.9 million a year ago. Income from operations as a percentage of net sales was 21.3%, an improvement of 2.2 percentage points compared to 19.1% a year ago.

Net income (GAAP) for the third quarter was $26.4 million compared to $41.7 million a year ago. Net income for the third quarter of 2013 reflects a $16.6 million provision for income taxes, including $15.6 million of tax expense attributable to our U.S. operations, which were excluded in the prior year period due to the full valuation allowance recorded against our domestic deferred tax assets. In addition, net income for the third quarter of 2012 reflects a $5.8 million benefit from income taxes, including non-recurring tax benefits of $6.4 million due to the expiration of statutes of limitations in our foreign jurisdictions. Net income per diluted share (GAAP) was $0.37 compared to $0.60 a year ago.

Normalized net income 2 (non-GAAP) for the third quarter, which reflects an effective 37.5% tax rate, was $26.8 million, up 19% compared to $22.5 million a year ago. Normalized net income per diluted share 2 (non-GAAP) was $0.38, up 19%, compared to $0.32 a year ago. We provide normalized net income 2 measures, which are non-GAAP measures, to help investors review our performance and performance trends excluding discrete tax items which have historically been significant.

Adjusted EBITDA 2 for the third quarter was $50.9 million, up 14% compared to a year ago.

“We delivered strong net sales and income from operations growth in the first nine months of the year,” said Ray Arthur, Chief Financial Officer. “Year-to-date, net sales grew 9% and income from operations grew 60%, driven by sales of our innovative product line and good expense management. While our financial performance to date has met our expectations, we are concerned about the fourth quarter given economic headwinds and a weak retail environment. Additionally, the holiday season will be more challenged and trend later in the U.S. this year compared to last year with six fewer shopping days between Thanksgiving and Christmas, and two fewer weekend shopping days. We are, therefore, adjusting our outlook for the full year 2013.”

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