JAKKS Pacific, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing was signed August 9, 2019. Dollar amounts are in millions unless stated otherwise.
Business context and results
JAKKS designs, markets and distributes toys and consumer products, including licensed toys and Halloween costumes. Its segments are U.S. and Canada, International, and Halloween. Results are seasonal, with sales generally concentrated in the third and fourth quarters.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $95.2 | $105.8 | $166.0 | $198.8 |
| Gross profit / margin | $17.7 / 18.6% | $27.9 / 26.4% | $32.1 / 19.3% | $50.9 / 25.6% |
| Operating loss | $(18.6) | $(12.1) | $(42.7) | $(47.8) |
| Net loss attributable to JAKKS | $(22.5) | $(18.6) | $(51.7) | $(54.8) |
| Basic and diluted loss per share | $(0.96) | $(0.80) | $(2.19) | $(2.37) |
| Cash used in operating activities | Not separately stated for quarter | $(8.9) | $(8.7) |
Financial position and liquidity
- At June 30, cash, cash equivalents and restricted cash totaled $37.0, down from $58.2 at year-end 2018. Current assets were $204.2 and current liabilities $133.6, for working capital of $70.6.
- Total debt was approximately $162.5 net of debt issuance costs: $142.7 in convertible notes and $19.8 in GACP term debt. The Wells Fargo revolver had no borrowings at June 30, with $19.3 of excess borrowing capacity and $9.5 of outstanding letters of credit. The company borrowed $5.0 on the revolver in July.
- Total liabilities were $327.1 against assets of $328.7; total stockholders’ equity was just $1.6. Cash used in investing activities was $5.2, mainly for molds and tooling; financing activities used $7.9.
- Management said available cash, expected operating cash flow, revolver access and the August recapitalization should cover working capital and capital expenditure needs for the next 12 months.
Material changes and management commentary
- Q2 sales fell 10.0% year over year. U.S. and Canada sales declined 18.4% and International sales fell 53.2%; Halloween sales rose 49.2%. For the first half, sales declined 16.5% overall, including a $9.5 decline in U.S. and Canada sales associated with Toys “R” Us liquidation in the prior-year comparison.
- Gross margin weakened materially in Q2 and the first half. Management cited less favorable product mix, close-out sales and higher royalty rates; first-half U.S. and International cost of sales also included higher excess and obsolescence charges.
- SG&A fell to $33.9 in Q2 and $69.1 for the first half, partly reflecting lower payroll, marketing and product-development spending and restructuring. However, acquisition-related and other charges rose to $2.5 in Q2 and $5.4 for the first half, tied to evaluation and negotiation of strategic and refinancing transactions. Interest expense increased to $2.9 in Q2 and $5.9 for the first half.
- In August 2019, after quarter-end, JAKKS completed a recapitalization. It extended substantially all convertible debt and the revolving facility by approximately three years, amended the revolver to a $60 facility maturing in August 2022, repaid the GACP term loan, and issued approximately $30 of new secured term debt maturing in February 2023. It also refinanced or exchanged substantial portions of the 2020 notes. The filing additionally reports issuance of $20 of senior preferred stock carrying a 6% annual dividend rate, potentially payable in cash, and a liquidation preference.
- JAKKS recorded operating lease right-of-use assets of $35.8 and lease liabilities of $39.0 at June 30 after adopting the new lease standard. It reported no goodwill impairment for the period.
Risks, contingencies and outlook
- No numerical full-year sales or earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year performance because of seasonality, cancelable orders and forecasting uncertainty.
- Customer concentration is significant: Walmart and Target accounted for 45.9% of Q2 sales and 47.0% of first-half sales. The three largest customers represented 68.1% of gross receivables at June 30. The filing also identifies dependence on licenses, suppliers and accurate demand forecasts as material risks.
- Future minimum royalty guarantees were $72.9, excluding $36.8 of advances already paid; $38.8 was due within 12 months. Failure to sell enough licensed products could leave the company with these payment obligations.
- The company disclosed routine legal claims and contingencies but no specific material litigation loss estimate. It was in compliance with its credit-facility and term-loan covenants at June 30.
- NASDAQ notified JAKKS in June that its share price had remained below the $1 minimum bid requirement; the company had until December 23, 2019 to regain compliance. The filing also highlights financing, debt repayment, dilution/preferred-stock rights, seasonal working-capital, product, licensing, and international sourcing risks.
Important facts for investors to verify
- Final terms and execution of the August recapitalization, including note maturities, secured debt, preferred-stock rights and cash obligations.
- Liquidity, borrowing availability and covenant compliance after seasonal working-capital demands and the July revolver borrowing.
- Whether sales and gross margins recover, particularly in International and U.S. and Canada, and how product mix and inventory reserves evolve.
- Exposure to Walmart, Target, major licensors and manufacturers, and the implications of the royalty guarantees.
- Progress in regaining NASDAQ’s minimum bid-price compliance and any effect on the stock’s listing or liquidity.