Business context and reporting period
JAKKS Pacific, Inc. designs, licenses, markets and distributes toys and related consumer products. This is its Form 10-K for the fiscal year ended December 31, 2015; it is an annual filing, not a standalone fourth-quarter filing. The business reports two segments: Traditional Toys and Electronics, and Role Play, Novelty and Seasonal Toys.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $745.7 million | $810.1 million |
| Gross profit / margin | $228.6 million / 30.6% | $235.8 million / 29.1% |
| Operating income / margin | $30.5 million / 4.1% | $31.3 million / 3.9% |
| Net income attributable to JAKKS | $23.3 million | $21.5 million |
| Diluted EPS | $0.71 | $0.70 |
| Cash from operating activities | $66.3 million | $(79.1) million |
| Cash and cash equivalents at year-end | $102.5 million | $71.5 million |
| Working capital at year-end | $252.2 million | $246.2 million |
Sales declined 7.9% year over year. Traditional Toys and Electronics sales rose 7.2% to $437.7 million; Role Play, Novelty and Seasonal sales fell 23.3% to $308.1 million. The latter segment faced a difficult comparison with strong Frozen and Marvel sales in 2014. Gross margin improved, reflecting product-cost improvements and better margins on new products. Operating income was nearly flat, while net income attributable to JAKKS increased modestly.
Seasonality was pronounced: approximately 67.1% of 2015 sales occurred in the third and fourth quarters. Fourth-quarter 2015 sales were $163.4 million versus $254.0 million in fourth-quarter 2014; JAKKS reported a fourth-quarter net loss of $9.4 million versus net income of $2.8 million a year earlier.
Debt, liquidity and capital allocation
Year-end debt consisted of $100 million of 4.25% convertible notes due 2018 and $115 million of 4.875% convertible notes due 2020. No borrowings were outstanding under the $75 million revolving credit facility at year-end; reported borrowing capacity was approximately $55.5 million, subject to availability and covenants. The company reported compliance with its financial covenants. It repurchased $13.2 million of common stock during 2015 under a $30 million authorization; no dividends were declared or paid. In January 2016, it repurchased $2 million of the 2020 notes.
Management stated that cash, cash flows and available resources should meet operating and capital expenditure needs for at least 12 months. It expected 2016 capital expenditures of approximately $13 million. Contractual cash obligations totaled $399.4 million, including $215 million principal, $35.7 million interest, $56.4 million operating leases, and $78.8 million in future minimum license and royalty guarantees; $32.4 million of those guarantees were due within 12 months.
Outlook, risks and unusual items
- No specific 2016 revenue or earnings guidance is provided. Management expected international expansion efforts to contribute to growth in 2016.
- 2015 operating cash flow improved substantially, supported mainly by lower receivables and inventory, partly offset by reductions in payables and accrued expenses. Receivables days outstanding increased to 90 from 83.
- Results included $5.6 million of income from reversal of part of the Maui acquisition earn-out and $2.7 million of profit related to the former video-game joint venture. These items contributed to reported earnings and should be distinguished from recurring operating performance.
- Risks include reliance on licensed properties and minimum royalties, product and character popularity, concentrated retail customers (the three largest represented 44.4% of sales), competition, China-based third-party manufacturing, seasonality, and foreign currency exposure. U.S. deferred tax assets remain subject to a full valuation allowance of $100.9 million.
- A securities class action remained pending, with a motion to dismiss the latest complaint awaiting a decision. A shareholder derivative action had reached a settlement in principle and received preliminary court approval; final approval and attorneys’ fees remained subject to court action.
- The company and its auditor reported effective internal controls over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the decline in Role Play, Novelty and Seasonal sales persists, and whether international growth offsets it.
- How much of earnings depends on the Maui earn-out reversal and joint-venture profit, rather than ongoing operations.
- Whether operating cash generation remains strong, given increased receivables days and seasonal working-capital needs.
- The company’s capacity to meet note maturities, license guarantees and other obligations while preserving liquidity and covenant compliance.
- Developments in the pending securities litigation and final approval of the derivative-action settlement.