Funko, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Funko designs and sells licensed pop-culture products, primarily figures and Pop!-branded products. It reports one operating segment.
Financial performance and position
- Q2 revenue: $236.1 million, up 140.7% from $98.1 million. First-half revenue: $425.3 million, up 81.1% from $234.8 million.
- Profitability: Q2 operating income was $27.3 million versus an operating loss of $14.3 million a year earlier; consolidated net income was $20.9 million versus a $15.0 million loss. Net income attributable to Funko was $13.8 million, or $0.36 basic and $0.34 diluted per share. For the first half, consolidated net income was $32.0 million versus a $20.7 million loss; income attributable to Funko was $20.3 million, or $0.55 basic and $0.52 diluted per share.
- Margins: Gross margin, excluding depreciation and amortization, was 39.1% in Q2 versus 36.6%; first-half gross margin was 40.1% versus 38.8%. Operating margin was 11.6% for Q2 and 10.4% for the first half, calculated from reported operating income and sales.
- Non-GAAP measures: Adjusted EBITDA was $41.1 million for Q2 versus $0.2 million, and $70.8 million for the first half versus $10.8 million. The company cautions that these measures are supplemental and not comparable across all companies.
- Cash flow: First-half operating cash flow was $71.4 million versus $32.2 million. Investing used $11.1 million, primarily for tooling and molds; financing used $17.1 million, including $13.9 million of term-loan payments and $6.9 million of distributions to continuing equity owners. Cash increased $43.2 million to $95.5 million.
- Liquidity and debt: Working capital was $144.3 million, compared with $120.7 million at year-end 2020. Term-loan principal was $180.0 million ($177.4 million carrying value, net of discount); $75.0 million remained available on the revolving facility, with no revolver borrowings. The term loan matures September 2024. Funko reported covenant compliance.
- Other balance-sheet items: Inventory was $86.4 million, up from $59.8 million at year-end; the current portion of debt was $19.9 million. The Tax Receivable Agreement liability was $80.5 million, up from $62.3 million.
Changes and drivers versus comparable periods
Sales growth reflected increased shipments to specialty retailers, distributors and direct-to-consumer customers, more active licensed properties, and comparison with Q2 2020, which Funko identified as the quarter most affected by COVID-19 closures and reduced orders. Active properties rose 23.4% in Q2 and 15.1% in the first half; average sales per active property rose 95.0% and 57.4%, respectively. Growth was broad-based geographically, with especially strong reported increases in Europe. Pop! products remained concentrated at about 79% of first-half sales.
Gross margin improved on stronger global product margins, partly offset by higher freight costs. SG&A rose in dollars as personnel, marketing and related costs increased, but declined as a share of sales due to revenue growth. Interest expense fell with lower average debt balances.
Outlook, risks and unusual items
- Funko gave no specific revenue or earnings guidance in the supplied filing text. Management stated it expected available liquidity and capital to fund operations, growth plans, planned capital expenditures and public-company costs for at least the next 12 months, and expected covenant compliance for at least a year based on current forecasts.
- Management expected shipping-container costs to remain above historical levels for the rest of 2021 amid pandemic-related supply-chain constraints. A renewed COVID-19 surge, supplier disruption, freight costs, retail demand, inventory management and seasonality could affect results. Historically, more than half of annual sales occurred in the third and fourth quarters.
- Key business risks include dependence on third-party licenses and content trends, retailer and licensor concentration, third-party manufacturing, changing consumer preferences, international operations and foreign exchange, and debt and covenant obligations. The top ten licensors represented about 74% of first-half sales; Disney-affiliated Disney, Lucasfilm and Marvel properties represented about 43%.
- Funko acquired a majority interest in TokenWave, an NFT-related app developer, in March 2021; the acquisition’s financial impact was not material. The filing describes digital collectibles as a new and uncertain market.
- Pending litigation includes an amended securities class-action complaint with a dismissal decision pending, plus derivative actions. Management said some legal matters could not yet be estimated. A $0.5 million liability was recorded for potential customs penalties related to previously disclosed duty underpayments; the company had paid $7.8 million to U.S. Customs in 2019.
- Leadership changes were expected January 3, 2022: President Andrew Perlmutter was expected to become CEO and CEO Brian Mariotti was expected to become chief creative officer.
Investor verification points
- Separate the substantial year-over-year rebound from underlying growth, given the unusually weak Q2 2020 comparison; monitor subsequent sales, orders and active-property performance.
- Track freight and container costs, gross-margin durability, inventory growth and seasonal working-capital needs.
- Review debt repayment, covenant headroom and the effect of the $80.5 million Tax Receivable Agreement obligation and future unit exchanges.
- Assess continuing reliance on Pop! products, major licensors, key customers and third-party manufacturers.
- Follow the securities and derivative litigation, potential customs penalties, and the commercial and regulatory outcomes of the NFT initiative.