JAKKS Pacific, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company designs, markets and distributes toys and consumer products and costumes. Figures below are in millions of dollars, except per-share data and percentages. Interim results are subject to significant seasonality.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $166.9 | $220.4 | $274.4 | $341.3 |
| Gross profit / margin | $51.2 / 30.7% | $60.9 / 27.6% | $82.6 / 30.1% | $90.8 / 26.6% |
| Operating income / margin | $16.4 / 9.9% | $23.7 / 10.7% | $12.0 / 4.4% | $22.9 / 6.7% |
| Net income | $6.2 | $26.2 | $0.9 | $22.3 |
| Net income attributable to JAKKS | $6.5 | $26.6 | $1.1 | $22.8 |
| EPS attributable to common stockholders, diluted | $0.58 | $2.61 | $0.04 | $2.21 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $20.8 | $36.5 |
- Q2 sales fell 24.3% year over year; first-half sales fell 19.6%. Q2 diluted EPS declined from $2.61 to $0.58.
- Gross margin improved in both comparisons. Management attributed the improvement primarily to lower freight costs in Toys/Consumer Products; costumes faced a higher average royalty rate.
- First-half operating cash flow was lower year over year, which management attributed mainly to lower sales and higher working-capital usage. Capital expenditures were $4.9 million.
Segments and material changes
- Toys/Consumer Products: Q2 sales were $117.9 million, down 20.8%; first-half sales were $215.8 million, down 17.0%. Q2 segment operating income was $15.7 million versus $18.4 million.
- Costumes: Q2 sales were $49.0 million, down 31.6%; first-half sales were $58.6 million, down 27.9%. Q2 segment operating income was $0.8 million versus $5.2 million; the first-half segment reported an operating loss of $2.5 million versus income of $2.5 million.
- Management said prior-year customer orders and shipments were pulled forward to get ahead of supply-chain disruption. With supply patterns returning to normal, customers have reverted toward pre-pandemic ordering, contributing to lower 2023 comparisons.
- SG&A was $34.8 million in Q2 and $70.6 million for the first half. First-half SG&A rose from $67.6 million, primarily due to higher professional-services and employee-related expenses.
Liquidity, debt and other balance-sheet matters
- Cash, cash equivalents and restricted cash were $32.4 million at June 30, 2023, down from $85.5 million at year-end. Working capital was $65.5 million, compared with $97.4 million at December 31, 2022; management attributed much of the decrease to debt repayment.
- The company paid off its 2021 BSP Term Loan in June, including a $30.2 million final principal payment. It reported no outstanding term-loan or ABL borrowings at quarter-end. ABL excess borrowing availability was $54.9 million; letters of credit were $9.3 million. The company said it was in compliance with ABL financial covenants.
- First-half financing cash outflow was $70.4 million, primarily reflecting $69.2 million of term-loan repayments. Q2 included a $1.0 million loss on debt extinguishment. Interest expense was $1.3 million in Q2 and $4.3 million for the first half.
- Current assets were $241.2 million and current liabilities $175.7 million. Accounts receivable was $132.5 million; inventory was $65.1 million, down from $80.6 million at year-end.
- Minimum future royalty guarantees totaled $70.8 million, excluding $3.9 million of advances already paid; $41.5 million was due within twelve months. The company had $18.6 million payable to related-party manufacturer Meisheng for inventory received.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management emphasizes that sales are generally highest in the third and fourth quarters, while working-capital needs are highest in the second and third quarters. Orders are generally cancelable until shipment, making backlog a potentially unreliable sales indicator.
- Customer concentration is significant: Target and Walmart together represented 50.8% of Q2 sales and 50.1% of first-half sales. Management notes that financial difficulty at a major customer could adversely affect the business.
- The Series A preferred-stock derivative liability increased to $27.8 million from $21.9 million at year-end. Its fair-value change resulted in a $6.0 million Q2 expense and $5.9 million first-half expense; the valuation uses Level 3 assumptions about the probability and timing of a change-in-control event.
- The 200,000 Series A preferred shares accrue a 6% annual dividend; no cash dividends have been paid. At June 30, preferred stock had a $25.2 million carrying value and $37.8 million liquidation value.
- The company cites exposure to demand and forecasting uncertainty, customer and vendor concentration, product and licensing competition, interest-rate movements on future ABL borrowings, and foreign-currency changes. It reported no material changes to previously disclosed risk factors and described ordinary-course legal claims; no additional quantified litigation exposure is provided.
Investor verification priorities
- Check whether the second-half seasonal sales rebound materializes and how the shifted order timing affects comparisons.
- Track cash generation, receivables, inventory and working capital after the large term-loan repayment; confirm continuing ABL availability and covenant compliance.
- Assess the concentration of sales with Target and Walmart and the related-party manufacturing relationship with Meisheng.
- Review the $70.8 million royalty guarantee schedule, including the $41.5 million due within twelve months.
- Monitor the preferred-stock derivative valuation, accrued dividends and potential change-in-control redemption exposure.