JAKKS Pacific, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. JAKKS designs, markets and distributes toys, consumer products and Halloween costumes. The unaudited results are seasonal and should not be treated as a full-year forecast.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $242.3m | $280.1m | $387.6m | $446.1m |
| Gross profit / margin | $74.6m / 30.8% | $80.9m / 28.9% | $107.7m / 27.8% | $112.9m / 25.3% |
| Operating income (loss) | $37.5m | $35.7m | $11.8m | ($7.0m) |
| Net income (loss) | $32.4m | $16.4m | ($2.8m) | ($35.2m) |
| Net income (loss) attributable to common stockholders | $32.1m | $16.3m | ($3.9m) | ($35.4m) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $15.9m | $26.1m |
Q3 basic and diluted EPS were $8.39 and $3.19, respectively, compared with $6.00 and $5.08. Nine-month basic and diluted loss per share was $1.17, versus $14.32 in the prior-year period. Per-share figures reflect the July 2020 1-for-10 reverse split.
Liquidity and debt
- At September 30, cash, cash equivalents and restricted cash totaled $79.8m; working capital was $105.9m. Current assets were $323.3m and current liabilities were $217.5m.
- Balance-sheet debt, net, was $173.9m, including $22.5m current and $151.4m non-current. The company separately disclosed $138.8m outstanding under its first-lien term loan, $30.6m principal including PIK interest on convertible notes, and a $6.2m Paycheck Protection Program (PPP) loan.
- The Wells Fargo revolving facility had no borrowings, $10.4m of outstanding letters of credit and $36.6m of excess borrowing capacity. The company reported compliance with its financial covenants at September 30.
- After quarter-end, an October 16 amendment deferred the term-loan EBITDA covenant calculation until March 31, 2022 and reduced the required trailing-12-month EBITDA to $25m. It required a $15m immediate prepayment and could require up to another $5m by Q3 2021. JAKKS paid $15m plus related interest on October 20.
- Management stated that cash, projected operating cash flow and available credit were sufficient for working capital and capital expenditure needs over the next 12 months.
Changes versus the prior period
- Q3 sales fell 13.5%; nine-month sales fell 13.1%. Toys/Consumer Products sales declined 8.3% in Q3 and 7.3% year to date. Halloween sales declined 27.4% and 29.6%, respectively.
- Management attributed lower sales to COVID-related retail disruption and reduced Halloween orders, the discontinuation of the low-growth, low-margin Funnoodle business, and unusually strong prior-year sales associated with Frozen 2 and Toy Story 4.
- Despite lower sales, Q3 gross margin rose to 30.8%, with management citing lower manufacturing costs and product-margin initiatives. SG&A fell $7.6m in Q3 and $19.7m year to date, reflecting cost savings, pandemic-related mitigation and lower amortization.
- Higher interest expense—$16.7m versus $10.6m for the nine-month periods—partly offset operating improvement. Q3 net income also reflects noncash fair-value movements, including a $2.8m gain on convertible notes and a $2.7m loss on the preferred-stock derivative.
- Cash from operations declined to $15.9m from $26.1m, primarily due to higher working-capital use, partly offset by a lower net loss excluding noncash charges.
Outlook, risks and unusual items
- The company gave no numerical 2020 or 2021 outlook, stating it could not estimate the pandemic’s effects. COVID-19 risks include retail closures, changing demand, supply-chain and labor disruption, and volatility in liquidity and operations.
- Sales and working-capital needs are seasonal; orders are generally cancelable until shipment, making forecasting difficult. Walmart and Target together represented 56.0% of Q3 sales and 54.2% of nine-month sales.
- JAKKS had $44.2m in sales-return and allowance reserves at September 30. Future minimum royalty guarantees were $34.0m, of which $27.6m was due within 12 months.
- The $6.2m PPP loan was recorded as debt; the company intended to apply for forgiveness. It reported $8.3m in eligible forgivable expenses through September 17, but warned that forgiveness was not assured and an adverse SBA review could require repayment and potentially result in penalties.
- On September 11, Nasdaq notified the company it did not meet the $15m minimum market value of publicly held shares requirement; the company had until March 10, 2021 to cure the deficiency or meet alternative criteria.
- A purported class action filed November 10, 2020 alleges proxy-statement misstatements and improper broker-vote counting related to the reverse split. Damages are unspecified and the company said it could not estimate a potential award.
Important facts for investors to verify
- Confirm the term-loan prepayment, revised covenant terms, and remaining potential $5m prepayment obligation.
- Track operating cash flow, working capital, debt service and compliance with the amended credit agreements.
- Monitor the outcome of the PPP forgiveness application and any SBA review.
- Assess customer concentration, Halloween demand, sales-return reserves and royalty commitments.
- Check progress toward Nasdaq’s public-float market-value requirement and developments in the reverse-split lawsuit.