JAKKS Pacific, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing also reports fourth-quarter results. JAKKS designs and sells toys, consumer products, and costumes, primarily using licensed and proprietary brands. Amounts below are in U.S. dollars; annual comparisons are with FY 2022 unless noted.
Financial performance
| Metric | FY 2023 | FY 2022 | Change / context |
|---|---|---|---|
| Net sales | $711.6 million | $796.2 million | Down 10.6% |
| Gross profit / margin | $223.4 million / 31.4% | $211.3 million / 26.5% | Margin improved 4.9 percentage points, primarily due to lower inbound freight costs |
| Operating income / margin | $59.1 million / 8.3% | $61.0 million / 7.7% | Income declined despite higher margin |
| Net income | $38.1 million | $91.1 million | FY 2022 included a $41.0 million income tax benefit, mainly from a valuation-allowance release |
| Net income attributable to common stockholders | $36.9 million | $90.0 million | Diluted EPS was $3.48 versus $8.86 |
| Operating cash flow | $66.4 million | $86.1 million | Lower net income and higher working-capital use were cited |
- Toys/Consumer Products sales were $580.7 million, down 10.3%; lower Dolls, Role Play and Dress Up sales were partly offset by growth in Action Play & Collectibles. Segment operating income was $60.9 million versus $62.7 million.
- Costumes sales were $130.9 million, down 12.1%, as U.S. customers reduced orders following Halloween 2022 sell-through. The segment recorded an operating loss of $1.8 million, compared with a $1.7 million loss.
- SG&A increased to $164.2 million from $150.0 million, or 23.1% of sales versus 18.8%, reflecting higher outbound freight, warehouse and compensation costs, among other factors.
- Fourth-quarter sales were $127.4 million versus $131.9 million. The company reported a $15.3 million operating loss and a $10.9 million net loss, compared with a $15.7 million operating loss and $38.1 million net income in Q4 2022. The prior-year quarter benefited from the unusually large tax benefit for FY 2022.
Liquidity, debt and commitments
- Year-end cash, cash equivalents and restricted cash totaled $72.6 million, down from $85.5 million. Working capital was $106.1 million, compared with $101.9 million.
- JAKKS paid off its $69.2 million 2021 BSP term loan during 2023 and recorded a $1.0 million extinguishment loss. At year-end it had no revolver borrowings, $53.3 million of excess ABL availability and $9.4 million of letters of credit outstanding. The $67.5 million revolving facility matures in June 2026; the company reported covenant compliance.
- Future minimum royalty guarantees totaled $53.1 million, including $45.1 million due within 12 months. Total disclosed contractual cash obligations were $99.3 million, including leases, royalties and employment agreements.
- Series A preferred stock had a $29.9 million derivative liability and $6.0 million of accrued dividends at year-end. On March 11, 2024, JAKKS redeemed all preferred shares for $20.0 million cash and 571,295 common shares, stated as valued at $15.0 million.
Outlook, risks and unusual items
- The filing provides no specific financial guidance for FY 2024. Management describes international expansion, product-line development and operating efficiencies as strategic priorities, but cautions that growth is not assured.
- Sales are highly seasonal: 61.4% of FY 2023 sales occurred in the third and fourth quarters. Demand forecasting, holiday-season execution and inventory exposure are material factors.
- Customer concentration is significant: Target, Walmart and Amazon represented 61.6% of FY 2023 sales. Substantially all products are sourced from third-party manufacturers, principally in China; Meisheng, a shareholder whose executive director sits on JAKKS’s board, received $75.7 million in inventory, molds and tooling-related payments during 2023.
- Other principal risks include competition and changing consumer preferences; dependence on licensed IP and minimum royalty obligations; supplier, shipping, tariff and geopolitical disruptions; product safety and regulatory claims; foreign-exchange exposure; and cybersecurity risk. A December 2022 cyber incident involved extraction of certain data, including employee information; the company reported no material damage from that incident.
- BDO issued unqualified opinions on the financial statements and internal control over financial reporting. The audit’s critical audit matter was royalty expense and related liabilities, involving significant license-level data and estimates about utilization of minimum guarantees.
- FY 2023 tax expense was $6.8 million (15.2% effective rate); excluding discrete tax benefits, the company reported a 21.3% rate. FY 2022’s tax benefit materially elevates the prior-year net-income comparison.
Investor facts to verify
- Whether improved gross margin can persist while sales remain lower and SG&A as a share of revenue remains elevated.
- Current sell-through, retailer order trends and the outlook for the Toys/Consumer Products and Costumes segments.
- Cash generation and working-capital needs, including collections from major customers and the ability to meet near-term royalty guarantees.
- The post-redemption treatment and ongoing financial impact of the preferred stock settlement, including its cash and share components.
- Exposure to major customers, China-centered sourcing, related-party manufacturing arrangements and license renewals or minimum guarantees.