JAKKS Pacific, Inc. — 2020 Form 10-K Summary
Business context and reporting period
JAKKS designs, licenses, markets and distributes toys, consumer products and Halloween costumes. Its report covers the fiscal year ended December 31, 2020; quarterly figures are unaudited. The two reporting segments are Toys/Consumer Products and Halloween.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $515.9 million | $598.6 million |
| Gross profit / margin | $149.8 million / 29.0% | $159.3 million / 26.6% |
| Operating income (loss) / margin | $12.9 million / 2.5% | $(17.8) million / (3.0)% |
| Net loss | $(14.1) million | $(55.4) million |
| Net loss attributable to common stockholders / diluted EPS | $(15.5) million / $(4.27) | $(56.0) million / $(21.57) |
| Cash provided by operating activities | $43.6 million | $21.8 million |
| Cash and cash equivalents | $88.0 million | $61.6 million |
| Working capital | $112.6 million | $107.5 million |
| Debt, balance-sheet carrying amounts | $156.4 million | $176.9 million |
Investing activities used $8.2 million, primarily for molds and tooling; financing activities used $10.9 million. Including $4.7 million restricted cash, year-end cash and restricted cash totaled $92.7 million. The company reported $12.9 million of total stockholders’ equity.
Material changes versus 2019
- Sales fell 13.8%. Toys/Consumer Products sales declined 10.8% to $427.1 million, mainly due to lower Frozen 2 sales and reduced seasonal sales. Halloween sales fell 25.8% to $88.8 million, primarily due to COVID-19 restrictions on traditional celebrations.
- Gross margin increased to 29.0%, reflecting improved toy product margins and lower obsolescence and tooling costs; Halloween margin declined slightly, to 19.7% from 20.7%.
- SG&A decreased to $134.9 million from $161.2 million, reflecting lower compensation, travel and direct selling costs. Operating results also benefited from no repeat of 2019’s $9.4 million intangible impairment and $6.2 million of acquisition-related and other charges.
- Interest expense rose to $21.6 million from $15.9 million. The company reported $2.3 million of convertible-note fair-value losses and a $2.8 million preferred-stock derivative loss in 2020.
- Operating cash flow increased, supported in part by reductions in accounts receivable, inventory and prepaid expenses; the company also repaid $15.1 million of term-loan principal.
Outlook, risks and unusual items
- Management said it could not quantify COVID-19’s effects on 2021 or 2022 results. It described the pandemic’s continuing effects on consumer demand, retail operations, supply chains and its workforce as uncertain. No numerical revenue or earnings guidance is provided in the filing.
- Management stated that cash, projected operating cash flows and available credit should fund operations and obligations for at least one year from the financial-statement issuance date. The auditor identified management’s going-concern assessment as a critical audit matter; the audit opinion on the financial statements was unqualified.
- The amended term-loan covenant defers the EBITDA test until no earlier than March 31, 2022 and lowers the required trailing-12-month EBITDA to $25 million. The company reported covenant compliance at year-end. Its $60 million asset-based revolver had no borrowings and $37.3 million of excess availability, with $10.8 million of standby letters of credit outstanding.
- Year-end debt included $124.5 million outstanding under the secured term loan, $22.9 million principal on convertible notes due 2023 and a $6.2 million PPP loan. The term loan carries a 10.5% stated rate, including payment-in-kind interest; its maturity is February 2023. The PPP loan’s forgiveness was uncertain, and the company said an adverse review could require repayment.
- Minimum guaranteed license royalties totaled $35.2 million, including $32.1 million due in 2021. The two largest customers, Walmart and Target, represented 54.8% of 2020 sales; one licensor represented over 62% of sales. These concentrations heighten exposure to customer, licensing and demand changes.
- Other risks include dependence on China-based manufacturers, seasonal sales (71.8% of annual sales occurred in Q3 and Q4), and the substantial preferred-stock and debt obligations. Series A preferred dividends accrue at 6%; no common dividend was anticipated. A putative class action challenges the 2020 reverse stock split; the company intends to defend it and sought shareholder ratification.
Important facts for investors to verify
- Whether operating cash generation and revolver availability remain adequate through the seasonal working-capital cycle, and whether the company meets future debt covenants and repayment requirements.
- Whether post-year-end convertible-note conversions alter debt balances and share count materially; the filing reports 5.7 million common shares outstanding at year-end and 6.1 million as of March 16, 2021.
- Whether the PPP loan qualifies for forgiveness and whether the reverse-split lawsuit or shareholder ratification results in material cost or other consequences.
- Whether customer and licensor concentration, royalty guarantees and COVID-related demand and supply-chain effects change materially in subsequent periods.