JAKKS Pacific, Inc. — FY 2012 Form 10-K
Business context and period. JAKKS designs, markets and distributes toys and related consumer products, primarily under licensed and proprietary brands. This filing covers the fiscal year ended December 31, 2012; quarterly figures below identify the fourth quarter where relevant.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $666.8 million | $677.8 million |
| Gross profit / margin | $197.9 million / 29.7% | $194.0 million / 28.6% |
| Operating income (loss) / margin | $(13.2) million / (2.0)% | $1.3 million / 0.2% |
| Net income (loss) | $(104.8) million | $8.5 million |
| Diluted EPS | $(4.37) | $0.32 |
| Cash from operations | $24.2 million | $44.3 million |
| Cash and cash equivalents at year-end | $189.3 million | $257.3 million |
| Working capital at year-end | $186.6 million | $374.7 million |
- Sales declined 1.6%. Traditional Toys and Electronics sales increased 4.2% to $363.7 million; Role Play, Novelty and Seasonal sales fell 7.8% to $303.1 million.
- SG&A rose to $211.2 million, or 31.7% of sales, from $192.7 million, or 28.4%. Operating results shifted to a loss despite a higher consolidated gross margin.
- Fourth-quarter sales were $133.5 million versus $141.1 million a year earlier; the quarter’s net loss was $119.5 million. The fourth-quarter loss included a non-cash $91.7 million charge establishing a full valuation allowance against U.S. deferred tax assets.
- Year-end short-term debt included $70.7 million outstanding under a secured revolving facility, due in full April 30, 2013. The company also had $100 million principal amount of 4.50% convertible notes due November 2014; their year-end carrying amount was $94.9 million.
Material changes, outlook and risks
- Credit-facility covenants: At year-end, JAKKS was out of compliance with two of three financial covenants, including the net-profit and leverage tests; it reported a 17.66 leverage ratio against a 3.00 maximum. It obtained lender waivers for the December 2012 test period and warned it might fail the net-profit covenant for the March 2013 period. A default could permit acceleration or termination of credit availability. The filing reports approximately $53.2 million of borrowing capacity based on eligible receivables and inventory, despite the facility’s $75 million commitment.
- Cash and funding: Cash from operations fell to $24.2 million. Investing used $72.7 million, including acquisition and DreamPlay-related spending; financing included an $80 million share repurchase, $9.5 million of dividends and $70.7 million of revolver borrowings. The company said cash, cash equivalents and operating cash flows should cover anticipated needs for at least 12 months, while noting financing needs could rise with growth. Planned 2013 capital expenditures were approximately $14 million.
- Tax and unusual items: The $91.7 million valuation allowance followed U.S. cumulative pre-tax losses over three years and drove the reported net loss. Excluding discrete tax items, management reported a 34.2% effective tax rate for 2012. The company reported $4.8 million of uncertain tax positions and approximately $190 million of undistributed foreign earnings intended to remain permanently reinvested abroad.
- Fourth-quarter operating pressures: Management cited weak performance in some products, advertising commitments, license royalty shortfalls and retailer markdowns tied to lower-than-expected sales and sell-through. Results are highly seasonal; 67.2% of 2012 sales occurred in the third and fourth quarters.
- Acquisitions and initiatives: JAKKS acquired Maui in July 2012 and augmented-reality developer JKID in September. It also formed DreamPlay ventures involving recognition technology, with product sales expected to begin in the third quarter of 2013. Management discussed planned product launches and expected international initiatives to contribute to growth, but gave no quantified revenue or earnings guidance.
- Other notable items: JAKKS reserved a $1 million THQ payment received in October 2012 pending resolution of THQ’s bankruptcy proceedings; future settlement payments were also exposed to collection risk. The annual dividend was reduced from $0.40 to $0.28 per share effective February 20, 2013. Litigation in the ordinary course was not expected by management to have a material effect.
- Principal risks: Customer concentration (Wal-Mart, Target and Toys “R” Us represented 46.8% of sales), dependence on character and product licenses, intense competition, reliance on third-party manufacturers largely in China, product safety and intellectual-property claims, acquisition integration, and seasonal demand. The independent auditor issued unqualified opinions on the financial statements and internal control; acquired entities were excluded from management’s internal-control assessment because of acquisition timing.
Investor facts to verify
- Whether the lender granted continuing waivers or amended the revolver covenants, and how the April 30, 2013 maturity was addressed.
- Actual borrowing availability under the asset-based facility and the company’s covenant compliance and liquidity after year-end.
- Whether 2013 operating cash flow and product performance improved enough to support debt service, planned investment and dividend payments.
- The realization prospects for U.S. deferred tax assets and the status of the $4.8 million of uncertain tax positions.
- Recovery of the reserved THQ payment and collection of any remaining settlement installments.
- Performance and integration of Maui and JKID, contingent acquisition payments, and commercial progress of DreamPlay products.