JAKKS Pacific, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim statements are unaudited.
Business context and results
JAKKS designs, markets and distributes toys and consumer products and costumes through its Toys/Consumer Products and Costumes segments. Results are seasonal, with sales generally highest in the third and fourth quarters.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $323.0 | $237.0 | $664.3 | $433.2 |
| Gross profit | $91.9 | $74.9 | $182.7 | $132.9 |
| Gross margin | 28.5% | 31.6% | 27.5% | 30.7% |
| Operating income | $53.7 | $36.7 | $76.7 | $35.8 |
| Operating margin | 16.7% | 15.5% | 11.6% | 8.3% |
| Net income (loss) | $30.7 | $36.4 | $53.0 | $(2.7) |
| Net income (loss) attributable to JAKKS | $30.7 | $36.3 | $53.4 | $(2.8) |
| Diluted earnings (loss) per share | $2.96 | $3.97 | $5.18 | $(0.56) |
Q3 sales increased 36.3% year over year, led by Toys/Consumer Products, up 55.8% to $269.6 million. Costumes sales declined 16.6% to $53.4 million, which the company attributed to customers ordering earlier in Q2 to mitigate prior-year supply-chain concerns. For the nine months, Toys/Consumer Products sales rose 58.4% to $529.6 million and Costumes sales rose 36.3% to $134.7 million. Management cited Disney Encanto and Sonic the Hedgehog-related products among toy growth drivers, and broader distribution for nine-month costume growth.
Financial position, cash flow and debt
- Liquidity: At September 30, cash and cash equivalents were $76.4 million, plus $0.2 million of restricted cash; working capital, including cash and restricted cash, was $135.8 million. Current assets were $401.7 million and current liabilities were $265.4 million.
- Cash flow: Operating activities provided $75.3 million in the first nine months, versus $26.9 million used in the prior-year period. Investing activities used $8.1 million, primarily for molds and tooling; financing activities used $30.3 million. Capital expenditures were $8.1 million.
- Debt and facilities: Balance-sheet debt was approximately $67.7 million net of discounts and issuance costs ($2.5 million current and $65.2 million non-current). The term loan’s principal was $69.5 million, matures in June 2027 and has variable-rate interest. The company made voluntary term-loan principal prepayments of $10.0 million in June and $17.5 million in September; the September payment incurred a $0.5 million penalty.
- Available borrowing: There were no JPMorgan revolving-credit borrowings at quarter-end; reported excess availability was $46.5 million, with $17.2 million in letters of credit. The company reported compliance with both debt facilities’ financial covenants.
- Other balance-sheet items: Accounts receivable was $204.9 million and inventory was $109.2 million, up from $147.4 million and $84.0 million, respectively, at December 31, 2021. The inventory obsolescence reserve increased to $7.7 million from $4.6 million.
Changes, commentary and risks
- Q3 sales grew, but lower gross margin and higher interest and income-tax expense contributed to lower net income and diluted EPS versus Q3 2021. Management attributed higher product-segment cost ratios to higher average royalty rates and freight costs; costume cost ratios also reflected higher product costs and royalties.
- Nine-month operating income improved substantially, while the prior-year comparison included a $6.2 million PPP loan-forgiveness gain, a $7.4 million debt-extinguishment loss and a $16.5 million fair-value loss on convertible notes. The convertible notes were fully extinguished through conversions in 2021. In 2022, the preferred-stock derivative fair-value liability increased by $2.1 million over the nine months; the Q3 change was a $7.4 million expense.
- The filing provides no numeric full-year revenue or earnings guidance. Management cautions that seasonal demand, cancelable orders and working-capital swings make forecasts difficult and that quarterly results may not indicate full-year results.
- The company identifies COVID-related uncertainty, inflation, the war in Ukraine, supply-chain disruption, freight and input costs, customer inventory fluctuations, vendor health, and demand forecasting as risks. Wal-Mart and Target together represented 54.8% of Q3 sales and 54.0% of nine-month sales; the three largest customers represented 61.5% of nine-month sales.
- Future minimum royalty guarantees were $71.4 million, excluding $1.1 million in advances already paid; $25.4 million was due over the next twelve months. Meisheng, a related party and significant manufacturer, received $109.3 million in inventory-related payments during the first nine months; $28.3 million was payable for inventory received at quarter-end.
- After quarter-end, JAKKS entered into an at-the-market sales agreement allowing up to $75 million of common-stock sales. The company reported that no shares had been sold under it as of November 14, 2022. Sales, if made, may dilute existing shareholders.
- The filing reports ordinary-course legal proceedings and indemnification commitments, but no material change to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether toy demand and the company’s holiday-season shipments translate into collections, and whether receivables and inventory levels normalize.
- Whether gross-margin pressure from royalties, freight and product costs persists, particularly in the Costumes segment.
- Term-loan interest-rate exposure, covenant and minimum-cash requirements, and the effect of further debt repayments on liquidity.
- Potential sales under the $75 million at-the-market agreement and the resulting dilution, if any.
- Customer and supplier concentration, related-party transactions, and the timing and fulfillment of minimum royalty commitments.
- The estimates underlying sales-return reserves, inventory obsolescence reserves and the Level 3 preferred-stock derivative valuation.