JAKKS Pacific, Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
JAKKS designs, markets and distributes toys, consumer products and costumes, primarily using licensed entertainment properties and its own brands. Its segments are Toys/Consumer Products and Costumes. Most products are made by third-party manufacturers, principally in China. Sales are highly seasonal: 57.1% of 2022 sales occurred in the third and fourth quarters.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $796.2 | $621.1 |
| Gross profit / gross margin | $211.3 / 26.5% | $183.0 / 29.5% |
| Operating income / margin | $61.0 / 7.7% | $38.8 / 6.3% |
| Income (loss) before taxes | $50.1 | $(5.7) |
| Net income (loss) | $91.1 | $(5.9) |
| Net income (loss) attributable to common stockholders | $90.0 | $(7.3) |
| Diluted earnings (loss) per share | $8.86 | $(0.98) |
| Cash provided by (used in) operating activities | $86.1 | $(5.9) |
Sales increased 28.2%. Toys/Consumer Products sales rose 26.1% to $647.3 million, primarily on Disney Encanto and video-game properties Sonic the Hedgehog and Nintendo. Costumes sales rose 38.4% to $148.9 million, driven by Disney and Microsoft lines and expanded retail distribution. Segment operating income was $62.7 million for Toys/Consumer Products and a $1.7 million loss for Costumes.
Gross margin declined as cost of goods and royalty expense took a larger share of sales; management cited higher average royalty rates and freight costs. SG&A rose to $150.0 million from $144.2 million, but fell to 18.8% of sales from 23.2%, reflecting lower direct selling expense as a proportion of sales. Interest expense declined to $11.2 million from $14.1 million.
Reported 2022 net income includes a $41.0 million income tax benefit, largely from a $49.8 million discrete benefit associated primarily with releasing the deferred-tax valuation allowance. Excluding discrete tax items, the reported effective tax rate was 17.6%. This tax benefit materially increased reported earnings and is not equivalent to operating cash generation.
Fourth-quarter context
Fourth-quarter sales were $131.9 million, down from $188.0 million in fourth-quarter 2021. Gross profit was $28.6 million versus $50.0 million, and operating loss was $15.7 million versus operating income of $2.9 million. Net income was $38.1 million, compared with a $3.2 million loss; the annual filing’s quarterly presentation does not clearly isolate the drivers of the fourth-quarter net result.
Liquidity, cash flow and debt
At year-end, cash and cash equivalents were $85.3 million, plus $0.2 million restricted cash; working capital was $101.9 million, down from $114.5 million. Operating activities generated $86.1 million, investing activities used $10.4 million, and financing activities used $31.0 million. Operating cash flow benefited in part from collections of receivables and lower working-capital use.
Outstanding principal on the first-lien BSP term loan was $68.9 million at December 31, 2022; the revolving ABL facility had no borrowings and $46.6 million of excess availability, with $17.2 million in letters of credit. The company reported compliance with financial covenants at year-end. The term loan matures in June 2027; the ABL facility matures in June 2026. The filing reports $25.5 million of term-loan principal as current at year-end. After year-end, JAKKS prepaid $15.0 million on January 3, 2023 and $23.1 million on March 3, 2023 under the loan’s cash-sweep provision.
Future minimum royalty guarantees totaled $74.7 million, including $38.1 million due in 2023. Total contractual cash obligations were $201.4 million. The company had $57.8 million of net deferred tax assets at year-end. It does not anticipate paying common-stock dividends in the foreseeable future.
Material changes, outlook and risks
- Sales growth was strong, but gross margin contracted by 3.0 percentage points amid higher freight costs and royalty rates. Inventory obsolescence reserves increased to $9.0 million from $4.6 million.
- The company reported no numerical 2023 revenue or earnings guidance in the supplied filing text. Management describes international expansion, product-line development and operating efficiencies as strategic priorities, while noting that results depend on demand, licenses, customers and supply-chain execution.
- Customer concentration is significant: Walmart and Target together generated 53.9% of 2022 sales. One licensor accounted for more than 61% of sales; the filing text provided here does not clearly identify that licensor.
- JAKKS relies heavily on China-based contract manufacturers and faces exposure to freight, labor, raw-material, currency, trade and delivery disruptions. Retail inventory imbalances and slower product sell-through could pressure sales, margins and cash conversion.
- A ransomware attack in December 2022 temporarily disrupted IT systems; the company said it did not materially affect results, but disclosed potential future cyber, data and litigation risks.
- Related-party manufacturing payments to Meisheng were approximately $120.5 million in 2022. Meisheng owned 5.4% of common stock at year-end, and a company director is an executive director of Meisheng.
- The Series A preferred stock accrues a 6% annual dividend and has a change-of-control liquidation preference. Its associated derivative liability was $21.9 million at year-end. Preferred shareholders’ ability to elect directors was eliminated under a 2022 agreement.
- The company settled two California wage-and-hour matters in 2022; the filing says the settlements had no material impact. The financial statements received an unqualified audit opinion. The auditor identified royalty accounting and deferred-tax-asset realizability as critical audit matters.
Important facts for investors to verify
- How much of the $90.0 million common-stockholder profit reflects the one-time tax valuation-allowance release, and what earnings and cash-flow measures look like excluding it.
- Whether gross margins recover as freight costs, royalty rates and inventory levels change, particularly in the Costumes segment.
- Current debt balances, covenant headroom and liquidity after the January and March 2023 term-loan prepayments, including remaining revolver availability and cash-sweep requirements.
- The identity and renewal terms of the licensor representing more than 61% of sales, and the performance or sell-through of the key licensed products.
- Exposure to Walmart and Target, retailer inventory and order patterns, and the recoverability of the $74.7 million in minimum royalty commitments.
- Developments related to the ransomware incident, including remediation, any data exposure, and potential claims or costs.