JAKKS Pacific, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; the fourth-quarter figures below are unaudited. JAKKS designs, markets and distributes toys and other consumer products, substantially relying on licensed characters and brands and third-party manufacturers, principally in China.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $677.8 million | $747.3 million | Down 9.3% |
| Gross profit / margin | $194.0 million / 28.6% | $245.0 million / 32.8% | Margin down 4.2 percentage points |
| SG&A | $192.7 million | $194.8 million | Down $2.1 million; 28.4% of sales versus 26.1% |
| Operating income | $1.3 million | $50.2 million | Operating margin 0.2% versus 6.7% |
| Net income / diluted EPS | $8.5 million / $0.32 | $47.0 million / $1.52 | Net income down 82% |
| Cash from operations | $44.3 million | $67.5 million | Down $23.2 million |
| Cash and working capital at year-end | $257.3 million / $374.7 million | $278.3 million / $387.3 million | Both decreased |
| Convertible notes | $100.0 million principal; $92.2 million carrying value | $100.0 million principal; $89.5 million carrying value | Due November 2014 |
Fourth-quarter 2011 sales were $141.1 million, compared with $198.0 million in Q4 2010. Gross profit was about $19.0 million, operating loss was $36.0 million, and net loss was $20.0 million (diluted loss per share $0.77). The filing attributes the year’s lower results to weaker product-line sales and, in part, $18.1 million of 2011 write-downs of license advances and minimum guarantees.
By segment, Traditional Toys and Electronics sales declined 2.7% to $348.9 million, with a $4.0 million operating loss. Role Play, Novelty and Seasonal sales fell 15.4% to $328.9 million, with $5.3 million operating income. The latter segment’s sales decline principally reflected lower costume and role-play/dress-up sales.
Liquidity, capital and material changes
- Operating activities provided $44.3 million; investing activities used $36.3 million and financing activities used $29.1 million. Cash declined $21.1 million during the year.
- Management said cash, operating cash flows and cash equivalents should cover anticipated operating needs for at least 12 months. Receivables collection slowed: days sales outstanding rose from about 56 to 67 days.
- 2011 investing included $16.0 million cash consideration for the Moose Mountain acquisition, earn-out payments and $12.5 million of property, equipment, molds and tooling purchases. Moose Mountain’s initial total consideration was $31.5 million, including assumed liabilities, with an earn-out of up to $5.3 million.
- The company repurchased shares under a $30.0 million authorization, fully used by year-end; 2011 financing cash outflow for repurchases was $24.4 million. It also began a quarterly dividend program with a stated annualized rate of $0.40 per share.
- Working capital remained substantial, but customer sales concentration was high: Wal-Mart, Target and Toys “R” Us together generated 56.6% of 2011 sales. The return-and-allowance reserve increased from $28.4 million to $43.4 million.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management expected international initiatives to contribute to growth in 2012, anticipated continued sales from role-play and dress-up lines, and described planned product launches including Monsuno. These expectations are forward-looking and uncertain.
- License minimum guarantees totaled $58.1 million at year-end, including $40.3 million due within 12 months; the company had also paid $46.5 million in advances. License failure, nonrenewal or weak product demand could result in further charges.
- The business is seasonal: 69.9% of 2011 sales occurred in Q3 and Q4. Quarterly performance can vary significantly, and customer orders may be canceled.
- Other key exposures include reliance on a small number of major retailers, third-party manufacturers in China, product acceptance and safety, competition, and foreign-currency and supply-chain risks. The company reported no use of derivatives to hedge market risk.
- The 2011 tax benefit was $9.0 million despite a pretax loss of only $0.5 million, producing a reported effective tax rate of about 1,671%; discrete tax items and earnings mix make the rate unusually high and not a straightforward measure of ongoing tax burden. Net deferred tax assets were $81.6 million.
- THQ settlement payments contributed $6.0 million of income in 2011; additional fixed payments of $4.0 million were scheduled for each of 2012 and 2013, recognized as income when received.
- After year-end, the board adopted a shareholder rights plan in response to Oaktree Capital Management’s unsolicited, conditional indication of interest and potential share accumulation. The plan generally has a 10% ownership trigger and is scheduled to expire March 4, 2013 unless earlier terminated.
Important facts for investors to verify
- Whether sales and margins stabilize, particularly in costumes, role-play products, action figures and electronics, and whether Q4’s sharp operating loss reflects charges that are nonrecurring.
- The adequacy of sales-return and allowance reserves, given the significant increase and the concentration of sales among three retailers.
- Cash conversion and receivables collection, plus the capacity to meet $40.3 million of near-term license guarantees alongside operating and acquisition commitments.
- The economics and integration progress of Moose Mountain, including its earn-out and contribution to results.
- The tax-asset realizability, uncertain tax positions and unusually volatile effective tax rate; also confirm future THQ payments are received as scheduled.
- The terms and implications of the $100 million convertible notes, including their 2014 maturity, cash repurchase provisions upon a defined fundamental change and effective interest cost reported at about 7.9%.