JAKKS Pacific, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Comparisons are with Q1 2012 unless otherwise noted. The company designs, markets and distributes toys and consumer products through Traditional Toys and Electronics and Role Play, Novelty and Seasonal Toys segments.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Net sales | $78.1 million | $73.4 million; up 6.4% |
| Gross profit / margin | $23.4 million / 29.9% | $23.6 million / 32.1% |
| SG&A | $47.2 million; 60.5% of sales | $43.0 million; 58.5% of sales |
| Operating loss | $23.8 million | $19.4 million |
| Net loss / loss per share | $27.6 million / $1.26 | $16.0 million / $0.62 |
| Cash from operations | $(5.7) million | $6.1 million provided |
| Cash and cash equivalents | $165.4 million at March 31 | $189.3 million at December 31, 2012 |
| Working capital | $158.3 million at March 31 | $186.6 million at December 31, 2012 |
| Debt | $57.9 million short-term credit-facility borrowings; $95.6 million convertible notes, net | At March 31, 2013 |
Gross margin contracted by 2.2 percentage points, while SG&A rose by $4.2 million. Management attributed the SG&A increase principally to higher legal, bad-debt, product-development, amortization, direct-selling and temporary-employee costs, as well as acquired Maui overhead. Interest expense increased to $2.8 million from $2.0 million. The Q1 2013 tax provision was $0.3 million, compared with a $5.2 million tax benefit a year earlier.
Role Play, Novelty and Seasonal Toys sales increased 25.5% to $40.0 million, primarily reflecting Maui sales and higher Halloween costume and accessory sales. Traditional Toys and Electronics sales fell 8.3% to $38.1 million, mainly as Monsuno and Winx Club sales tapered; Fly Wheels partially offset the decline. Sales to customers outside the United States were 21.4% of sales, versus 12.9% in Q1 2012.
Liquidity, debt and cash flow
Cash declined $24.0 million during the quarter. Investing activities used $3.9 million, including $2.0 million for property and equipment and $2.2 million contributed to the Pacific Animation Partners joint venture. Financing activities used $14.3 million, primarily reflecting a $12.8 million credit-facility repayment and $1.5 million of dividends.
The $75 million secured revolving facility was subject to financial covenants. At March 31, JAKKS was out of compliance with two of three: covenant-defined net profit was negative $34.4 million against a minimum of $1, and leverage was 35.02:1 against a maximum of 3.00:1. It met the liquidity covenant, reporting $165.6 million against a $100 million minimum. The lender amended the facility and advanced $29 million on March 29; the maturity was moved to April 2, 2013, when JAKKS paid the facility in full. The company said it was seeking replacement financing. Cash and short-term investments held by foreign subsidiaries totaled $153.4 million; the filing notes a 25% tax on repatriation.
The $100 million principal amount of 4.50% convertible senior notes remains due November 1, 2014. The company stated that cash and operating cash flows were expected to cover anticipated needs for at least 12 months, while also warning that growth could require additional financing and that replacement financing was not assured.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management emphasizes toy and Halloween seasonality: sales are generally strongest in the third and fourth quarters, and quarterly results may not indicate full-year performance. Orders are cancelable until shipment.
- Future minimum guarantees under character and product licenses totaled $68.6 million, including $40.3 million due within 12 months. The company also has acquisition earn-outs and deferred acquisition payments.
- Three customers generated 44.5% of Q1 sales; the three largest accounted for approximately 46.2% of accounts receivable at March 31. Customer concentration, credit exposure and potential order reductions are material risks.
- THQ, a former joint-venture partner, filed for bankruptcy. JAKKS reserved a $1 million payment received from THQ in October 2012 pending bankruptcy proceedings and did not recognize it as revenue. The Pacific Animation Partners joint venture recorded a $0.6 million Q1 loss.
- DreamPlay product sales were expected to begin in Q3 2013. The filing flags the risk that the initiative may not succeed and could require significant investment write-downs.
- Other disclosed exposures include dependence on licensed characters, competition and changing consumer preferences, reliance on third-party manufacturers principally in China, foreign-exchange and supply-chain risks, product safety and litigation claims, and potential impairment of acquisition-related goodwill and intangibles. Ordinary-course litigation was not expected by management to have a material effect.
Most important facts for investors to verify
- Whether JAKKS obtained replacement credit financing after repaying the facility on April 2, and the new facility’s terms and covenants.
- How the company funded operations and seasonal working-capital needs after quarter-end, given negative operating cash flow, reduced cash and the substantial offshore cash balance.
- Whether margins and operating costs improved, and whether acquired Maui sales and seasonal product demand were sustained.
- Progress in resolving the reserved THQ payment and performance of the Pacific Animation Partners and DreamPlay initiatives.
- Customer concentration, receivable collections, sales-return and allowance estimates, and ability to meet license minimum guarantees and acquisition-related payments.