JAKKS Pacific, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 16, 2022. This annual report covers the full year, with fourth-quarter figures noted separately below.
Business context
JAKKS designs, markets and distributes toys and consumer products, including licensed and proprietary toys and costumes. Its two reporting segments are Toys/Consumer Products and Costumes. Most manufacturing is outsourced, principally to suppliers in China. Sales are highly seasonal: 68.4% of 2021 net sales occurred in the third and fourth quarters.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $621.1 million | $515.9 million |
| Gross profit / margin | $183.0 million / 29.5% | $149.8 million / 29.0% |
| SG&A expenses | $144.2 million | $134.9 million |
| Operating income / margin | $38.8 million / 6.3% | $12.9 million / 2.5% |
| Net loss attributable to JAKKS | $6.0 million | $14.3 million |
| Net loss attributable to common stockholders | $7.3 million; $0.98 loss per share | $15.5 million; $4.27 loss per share |
| Operating cash flow | $(5.9) million | $43.6 million |
| Cash, including restricted cash | $45.3 million | $92.7 million |
| Working capital | $114.5 million | $112.6 million |
Sales increased 20.4% year over year. Toys/Consumer Products revenue grew 20.2% to $513.5 million; Costumes revenue grew 21.2% to $107.6 million. Operating income improved, but JAKKS remained loss-making after interest, taxes and other items. The year’s results included a $6.2 million PPP loan-forgiveness gain, a $7.4 million debt-extinguishment loss, a $13.2 million noncash expense from the preferred-stock derivative revaluation and a $16.4 million noncash expense from the convertible-note fair-value change.
In Q4 2021, net sales were $188.0 million versus $128.3 million in Q4 2020; operating income was $2.9 million versus $1.1 million, while net loss was $3.2 million versus $11.3 million.
Debt, liquidity and cash flows
At year-end, principal outstanding under the first-lien BSP term loan was $98.5 million; the JPMorgan revolving facility had no borrowings, $56.7 million of excess availability and $9.8 million of letters of credit. The $67.5 million revolving facility matures in June 2026; the term loan matures in June 2027. The term loan carries variable-rate pricing, including LIBOR plus 6.50%–7.00%, subject to a 1.00% floor. JAKKS reported compliance with debt covenants at year-end.
Operating cash use reflected higher receivables from stronger fourth-quarter sales and increased inventory, including goods in transit. Investing activities used $8.2 million, primarily for molds and tooling; financing activities used $32.8 million, largely reflecting repayment of the prior term loan and refinancing. Management stated that cash, projected operating cash flow and available credit were sufficient for working capital and capital expenditures over the next 12 months. The term loan requires a minimum cash balance of $20 million, subject to specified reductions following principal repayments.
Changes, outlook and risks
- Sales growth was driven in part by Disney Style Collection, Disney Encanto, Nintendo and Sonic the Hedgehog products, and Disney and Microsoft costume lines. Gross margin improved slightly overall; freight costs pressured Toys/Consumer Products, while lower royalty rates and product-margin improvements supported Costumes.
- COVID-related shipping bottlenecks, higher ocean freight and trucking costs, port delays and less predictable arrivals increased costs and lengthened the cash-conversion cycle. The filing provides no numerical earnings or revenue guidance.
- Customer concentration is significant: Walmart and Target together represented 55.3% of 2021 net sales. One licensor accounted for more than 59% of sales; the filing does not identify that licensor in the cited disclosure.
- Future minimum royalty guarantees totaled $71.9 million, including $31.0 million due within 12 months. License renewals, minimum guarantees, customer order cancellations and product demand create financial and operating exposure.
- Other key risks include dependence on China-based third-party manufacturers, seasonality and holiday demand, competition, variable interest rates, and continuing uncertainty from COVID-19. Management also cited the Russia-Ukraine conflict as an uncertain potential risk.
- Two California warehouse-worker wage-and-hour cases were pending; management said it could not estimate potential damages. A separate reverse-stock-split class action was settled in December 2021 with payment of plaintiff legal fees.
- JAKKS reported an unqualified audit opinion and effective disclosure controls and internal control over financial reporting, based on management’s assessment.
Important facts for investors to verify
- Whether sales growth and improved operating income translate into positive net income and operating cash flow, particularly as working capital and freight conditions change.
- The amount, terms and covenant headroom of debt, cash availability, variable-rate exposure and compliance with the term loan’s minimum-cash and leverage requirements.
- The sustainability of demand for major licensed products, the renewal terms and concentration of licenses, and the recoverability of minimum royalty commitments.
- Exposure to Walmart and Target, the collection of receivables, inventory levels and the pace of sell-through after the holiday season.
- Potential outcomes or updated estimates for the pending wage-and-hour litigation and any other contingencies.
- The impact of common-share issuance from convertible-note conversions: outstanding shares rose from 5.7 million at year-end 2020 to 9.5 million at year-end 2021.