JAKKS Pacific, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. JAKKS designs, markets, and distributes toys and consumer products, including costumes. Results are seasonal and the company cautions that a quarter may not indicate full-year performance.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $107.5 million | $120.9 million |
| Gross profit / margin | $31.4 million / 29.2% | $29.9 million / 24.7% |
| Operating loss | $4.4 million | $0.7 million |
| Net loss | $5.3 million | $3.9 million |
| Loss per common share, diluted | $0.58 | $0.43 |
| Operating cash flow | $(4.1) million | $(2.7) million |
Gross margin improved as a share of sales, principally due to lower freight costs in Toys/Consumer Products and lower product costs in Costumes. SG&A rose to $35.8 million from $30.7 million, driven primarily by higher warehouse and storage costs; it equaled 33.3% of sales versus 25.4%. Interest expense increased to $3.0 million from $2.2 million. The Q1 2023 income tax benefit was $1.4 million, compared with $0.4 million of tax expense in Q1 2022.
Liquidity, cash flow, and debt
Cash, cash equivalents, and restricted cash were $38.3 million at March 31, down from $85.5 million at December 31, 2022. Working capital was $77.8 million, down $19.6 million quarter over quarter. The cash decrease included $39.9 million of financing outflows, principally $38.7 million of term-loan repayments, and $3.5 million of investing outflows, mainly tooling purchases. Operating activities used $4.1 million.
Term-loan principal was $30.2 million at quarter-end (carrying amount, net of discount and issuance costs, was $29.4 million). The company had no borrowings under its $67.5 million JPMorgan revolving facility and reported $41.4 million of excess borrowing availability; $17.2 million of letters of credit were outstanding. JAKKS said it was in compliance with financial covenants under both facilities. The term loan matures in June 2027; the revolving facility matures in June 2026. Both facilities transitioned from LIBOR to SOFR under 2023 amendments.
Changes, outlook, and risks
- Sales declined 11.1% year over year. Toys/Consumer Products sales fell 11.9% to $97.9 million, primarily on lower North American sales; Costumes sales decreased 2.0% to $9.6 million.
- Sales to Target and Walmart were 27.4% and 21.7% of total sales, respectively; Amazon contributed 6.1%. The three together represented 55.2% of sales, versus 60.1% a year earlier.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It reiterated that toy and costume sales are seasonally concentrated in the third and fourth quarters, orders are generally cancelable until shipment, and backlog may not reliably predict sales.
- Future minimum royalty guarantees were $67.8 million, including $38.9 million due within 12 months; this excludes $5.8 million of advances already paid. The company also identified exposure to demand-forecast errors, customer cancellations, vendor health, competition, customer concentration, and changes in vendor or licensor support.
- Ordinary-course claims and proceedings are pending; the filing describes no material change in previously disclosed risk factors. No liabilities were recorded for indemnifications or other commitments apart from ordinary-course royalty liabilities.
Important facts for investors to verify
- Whether sales trends, especially in North America, and higher warehouse and storage costs improve in subsequent quarters.
- Cash generation and liquidity through seasonal working-capital needs, including the impact of royalty guarantees and inventory demand.
- Debt repayment, interest costs, covenant compliance, and availability under the revolving facility.
- Customer concentration and the effect of any changes in orders, cancellations, or customer credit conditions.
- Terms and potential economic impact of the Series A preferred stock, including its 6% accrued dividend and change-of-control redemption provision.