JAKKS Pacific, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. JAKKS designs, develops, markets, and distributes toys and consumer products, and costumes. The filing compares results with Q1 2021.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $120.9 million | $83.8 million |
| Gross profit / margin | $29.9 million / 24.7% | $26.1 million / 31.1% |
| Operating loss | $0.7 million | $2.7 million |
| Net loss | $3.9 million | $24.1 million |
| Net loss attributable to common stockholders / diluted loss per share | $4.2 million / $0.43 | $24.4 million / $4.54 |
| Cash used in operating activities | $2.7 million | $7.0 million |
Sales increased 44.2% year over year. Toys/Consumer Products revenue rose 39.0% to $111.1 million; Costumes revenue rose 145% to $9.8 million, partly reflecting delayed Q4 2021 shipments. Gross margin fell 6.4 percentage points, principally as freight costs increased; management also cited higher payroll costs contributing to increased SG&A.
Cash and cash equivalents were $39.2 million at quarter-end, down from $44.5 million at December 31, 2021; working capital was $109.1 million. Total assets were $315.8 million and total liabilities were $259.1 million. Debt principal under the BSP term loan was $98.3 million; there were no quarter-end ABL borrowings, $49.4 million of excess borrowing availability, and $17.2 million of letters of credit. The company reported covenant compliance. Investing activities used $1.8 million, primarily for molds and tooling; financing activities used $0.9 million.
Changes, outlook, and risks
- The smaller net loss versus Q1 2021 reflected improved operating results and lower interest expense, as well as the absence of the prior-year $9.0 million convertible-note fair-value loss. The preferred-stock derivative fair-value loss was $0.6 million in Q1 2022 versus $7.4 million in Q1 2021.
- Management stated that cash, projected operating cash flow, and facility borrowings should be sufficient for working capital and capital expenditures for the next 12 months. No specific revenue or earnings guidance was provided. Results are seasonal and Q1 may not indicate full-year performance.
- COVID-19, supply-chain disruption, product availability, freight costs, and unpredictable consumer demand remain uncertainties. The company also cited dependence on a limited number of large customers and vendors; Target, Walmart, and Amazon together represented 60.1% of sales.
- Variable-rate debt creates interest-rate exposure. Minimum royalty guarantees totaled $61.4 million, with $26.6 million due within 12 months. Inventory obsolescence reserves increased to $6.4 million from $4.6 million at year-end.
- After quarter-end, an April 26, 2022 amendment changed minimum-cash requirements under the BSP term loan: $15 million through June 30 and generally $17.5 million from July 1 through September 30, potentially $20 million depending on leverage. The agreement also permits reductions tied to principal repayments, subject to a $15 million floor.
- Two California wage-and-hour matters had settlement terms agreed, with paperwork pending; management expected only a nominal company settlement cost and was seeking indemnification from staffing providers.
Investor verification points
- Assess whether revenue growth can be sustained and whether freight and other cost pressures continue to compress gross margins.
- Review cash generation, the post-quarter minimum-cash amendment, ABL availability, and compliance with debt covenants and leverage tests.
- Check customer and supplier concentration, royalty commitments, inventory reserves, and the timing of seasonal sales and collections.
- Monitor COVID-19 and supply-chain effects, variable-rate borrowing costs, and completion and costs of the disclosed legal settlements.