JAKKS Pacific, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results; comparisons are with Q1 2014 unless otherwise noted. JAKKS designs, markets and distributes children’s toys and consumer products through Traditional Toys and Electronics, and Role Play, Novelty and Seasonal Toys.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $114.2 million | $82.5 million |
| Gross profit / margin | $35.4 million / 31.0% | $23.6 million / 28.5% |
| Operating loss | $4.2 million | $14.9 million |
| Net loss | $7.6 million | $16.3 million |
| Loss per diluted share | $0.40 | $0.74 |
| Cash from operating activities | $38.8 million | Cash used: $11.1 million |
Sales grew 38.4%. Traditional Toys and Electronics sales rose 82.6% to $65.0 million, led by Disney Princess, Frozen, Cinderella and Fairies products, alongside Nintendo and Star Wars items. Role Play, Novelty and Seasonal sales increased 4.9% to $49.2 million; order timing in Kids Only and Moose Mountain partially offset growth. Gross margin improved 2.5 percentage points, reflecting product-cost savings, partly offset by higher royalties from product mix. SG&A rose $1.1 million to $39.6 million, but declined as a share of sales to 34.7% from 46.6%. Higher convertible-note interest contributed to interest expense increasing to $3.0 million from $2.2 million.
Liquidity, cash flow and debt
At March 31, 2015, cash and cash equivalents were $105.1 million, working capital was $234.2 million, and total assets were $470.3 million. Operating cash flow benefited primarily from a $130.2 million reduction in accounts receivable, partly offset by lower accounts payable and accrued expenses. Accounts-receivable days outstanding increased to 82 from 71 a year earlier. Investing activities used $5.5 million, including $3.1 million for property, molds and tooling.
Long-term debt was $215.0 million, comprising $100.0 million of 4.25% convertible notes due 2018 and $115.0 million of 4.875% convertible notes due 2020. No balance was outstanding on the GE revolving facility at quarter-end; reported borrowing capacity was approximately $21.4 million. The company said it was in compliance with facility covenants and expected cash, operating cash flow and available credit to meet anticipated needs for at least 12 months.
Material changes, outlook and risks
- Sales growth and narrower losses materially improved year over year, though the company remained loss-making. Q1 results may not indicate full-year performance: toy sales and working-capital needs are seasonal, typically strongest in the third and fourth quarters, and customer orders are generally cancelable before shipment.
- Future minimum guarantees under product and character licenses totaled $43.8 million, excluding $18.7 million in advances already paid; $29.0 million was due within 12 months. Royalties generally ranged from 1% to 16% of net sales.
- Wal-Mart, Target and Toys “R” Us together represented 45.0% of Q1 sales; the three largest customers represented 31.1% of net receivables at quarter-end. Customer concentration, order cancellations and retailer credit risk are notable exposures.
- A securities class action had proceeded to a third amended complaint; the company disputed the claims and said an adverse outcome could materially affect it. A related derivative action had reached a settlement in principle, subject to court approval.
- Other stated risks include reliance on licensed characters and minimum royalties, changing consumer preferences, competition, third-party manufacturing and international operations, currency exposure, product safety and intellectual-property claims. The company reported no off-balance-sheet arrangements and effective disclosure controls. It was evaluating the impact and adoption method for the new revenue-recognition standard, effective for it in 2017.
Important facts for investors to verify
- Whether sales growth and margin improvement persist beyond the seasonal first quarter, and whether the company can return to profitability.
- Cash conversion and receivables quality, given the large quarter-to-quarter working-capital movements and higher receivable days.
- Funding and profitability implications of $43.8 million in remaining license minimums, including $29.0 million due within 12 months.
- Convertible-note terms, potential dilution and cash repurchase obligations after a fundamental change; confirm facility availability and covenant compliance.
- Developments and any financial consequences in the securities class action and derivative settlement, as well as continued reliance on major customers and licensed products.