JAKKS Pacific, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 17, 2014. JAKKS designs, markets and distributes toys and related products, including licensed and proprietary toys, electronics, pet products, costumes and seasonal goods. Its reportable segments are Traditional Toys and Electronics, and Role Play, Novelty and Seasonal Toys.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $632.9 million | $666.8 million |
| Gross profit / margin | $155.8 million / 24.6% | $197.9 million / 29.7% |
| Operating loss | $44.5 million | $13.2 million |
| Net loss | $53.9 million; $2.43 per diluted share | $104.8 million; $4.37 per diluted share |
| Cash from (used in) operations | $(22.5) million | $24.2 million |
| Cash and cash equivalents at year-end | $117.1 million | $189.3 million |
| Working capital at year-end | $136.3 million | $186.6 million |
Net sales fell 5.1%. Traditional Toys and Electronics sales declined 11.9% to $320.6 million, while Role Play, Novelty and Seasonal sales rose 3.1% to $312.4 million, helped by Maui Toys. Gross margin contracted 5.1 percentage points. Segment operating losses were $25.3 million and $19.2 million, respectively.
At year-end, the balance sheet reported $38.1 million of short-term debt and $100.0 million of long-term convertible notes, or $138.1 million carrying value combined; principal outstanding was $139.0 million. The short-term amount included $39.0 million principal of 4.50% notes due November 2014. The $100.0 million 4.25% notes mature in August 2018. JAKKS had repaid its Wells Fargo revolving facility in April 2013 and was seeking a replacement facility.
Material changes and unusual items
- SG&A was $200.3 million, down from $211.2 million; as a share of sales it was essentially flat at 31.6% versus 31.7%.
- Cost of sales included $14.9 million of inventory write-downs and $14.4 million of write-downs of license advances and minimum guarantees.
- The company recorded $5.0 million of restructuring charges related to office consolidation and other streamlining, and $6.0 million of income from reversing part of the Maui earn-out.
- Equity-method losses from a joint venture were $3.1 million. The Pacific Animation Partners venture ceased producing its television show in December 2013.
- The 2012 net loss included a $91.7 million non-cash tax charge establishing a full valuation allowance against U.S. deferred tax assets. At year-end 2013, the U.S. valuation allowance was $108.3 million.
Outlook, management commentary and risks
Management gave no specific 2014 revenue or earnings guidance. It expected 2014 capital expenditures of approximately $12.0 million and stated that cash and expected operating cash flows should cover anticipated needs for at least 12 months. Management also described plans to expand international sales and launch new products, including Hero Portal games and extensions of Power Trains and DreamPlay. These are plans, not quantified forecasts.
Approximately 70.9% of 2013 sales occurred in the third and fourth quarters. Wal-Mart, Target and Toys “R” Us represented 47.8% of sales combined; international sales were $108.7 million, or 17.2% of total, down from $132.0 million, or 19.8%, in 2012. Material risks include product and license popularity, minimum royalty commitments, concentrated retail customers, intense competition, reliance on third-party manufacturers principally in China, seasonal demand, and the need to secure replacement borrowing capacity. Future license minimum guarantees totaled $59.2 million, including $34.2 million due within one year.
Two purported securities class actions alleged misleading statements concerning product demand and financial reporting; the company moved to dismiss and said it would defend the claims. Two shareholder derivative actions filed in 2014 made related and additional governance allegations. Outcomes and potential financial exposure were not clear in the filing. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
The quarterly dividend was reduced in February 2013 and suspended in July 2013. The company reported no off-balance-sheet arrangements at year-end.
Investor verification priorities
- Track sales recovery, gross margins and operating performance by segment, particularly after the 2013 product and license-related write-downs.
- Confirm operating cash-flow trends and liquidity, including whether a replacement credit facility was obtained and how near-term debt maturities are funded.
- Assess execution against the $59.2 million of future license guarantees and the risk of further inventory or license-advance impairments.
- Monitor customer concentration, retailer inventory and sell-through, and performance of key licenses and new product launches.
- Review developments and any quantified exposure from the securities and derivative litigation.
- Check the recoverability of U.S. deferred tax assets and the effects of the full valuation allowance, as well as any material tax-audit outcomes.