JAKKS Pacific, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone Q4 filing. JAKKS designs, markets and distributes toys, costumes and related consumer products, many under licensed brands. Its segments are U.S. and Canada, International, and Halloween.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $567.8 million | $613.1 million |
| Gross profit / margin | $155.7 million / 27.4% | $155.7 million / 25.4% |
| Operating income (loss) | $(32.2) million | $(64.2) million |
| Net income (loss) attributable to JAKKS | $(42.4) million | $(83.1) million |
| Diluted loss per share | $(1.83) | $(3.89) |
| Cash from (used in) operating activities | $(0.6) million | $11.4 million |
- Q4 2018 sales were $132.3 million, gross profit $40.5 million, operating loss $4.4 million and net loss $3.3 million; diluted loss per share was $0.14.
- At year-end, cash and cash equivalents were $53.3 million, plus $4.9 million restricted cash. Working capital was $106.0 million, down from $146.9 million.
- Year-end debt included $27.5 million of credit-facility and term-loan principal and $142.5 million principal of convertible notes, principally due in 2020. The $20 million GACP term loan bore LIBOR plus 9%; its reported 2018 weighted-average rate was 11.1%.
- Investing activities used $11.6 million and financing activities provided $8.0 million in 2018. Cash, cash equivalents and restricted cash totaled $58.2 million at year-end, versus $65.0 million a year earlier.
Changes and notable items
- Sales fell 7.4% year over year. U.S. and Canada sales declined 10.4%, mainly reflecting Toys “R” Us liquidation; International sales declined 4.9%; Halloween sales increased 2.1%.
- Gross margin improved to 27.4% from 25.4%, primarily as 2017 had higher minimum-guarantee shortfalls and inventory impairment charges. SG&A fell to $185.1 million from $205.2 million, partly because of lower bad-debt, payroll and marketing costs.
- JAKKS reported $8.7 million of net bad-debt write-offs related to Toys “R” Us in 2018; 2017 included $13.5 million of goodwill and intangible impairment and an $8.9 million Toys “R” Us-related bad-debt write-off.
- Other 2018 items included a $1.1 million restructuring charge, $1.6 million of acquisition-related and other charges associated with Meisheng’s expression of interest, and a $2.9 million non-cash gain from fair-value changes in Oasis convertible notes. The company also recorded a $0.5 million loss on a note exchange.
- Adoption of ASC 606 in 2018 did not materially change revenue timing or measurement, according to the filing.
Outlook, risks and contingencies
- Management expected the October 2018 global restructuring to produce annualized savings of $10 million to $15 million. It stated cash, projected operating cash flow and credit availability should meet working-capital and capital-expenditure needs for the next 12 months, subject to mitigation plans and successful financing actions.
- In February 2019, Wells Fargo’s revolving facility maturity was extended to September 27, 2019; the company said it was in early discussions for a longer-term extension. The $7.5 million revolver balance at year-end was repaid in Q1 2019. The filing warns that inability to extend or refinance could adversely affect operations and debt repayment.
- Proposed transactions were still under negotiation and no binding agreements had been reached: a contemplated $50 million Meisheng equity investment for 51% ownership, alongside potential note extensions. Discussed terms included new secured notes due 2024 at 8% cash interest plus 2.5% payment-in-kind interest, warrants and potential anti-dilution dilution; Oasis notes could also be extended with additional PIK interest. Closing depended on approvals, consents and financing arrangements, and was not assured.
- Key exposures include reliance on Wal-Mart and Target, which together represented 46.8% of 2018 sales; dependence on licensed properties, with one licensor accounting for more than half of sales; seasonal demand (65% of annual sales in Q3 and Q4); competition, product acceptance, overseas manufacturing and tariffs, and the financing of inventory and receivables.
- Future minimum royalty guarantees totaled $71.7 million, including $33.1 million due within 12 months. The filing also reported $12.8 million in letters of credit at year-end. No specific material litigation loss estimate is provided in the text supplied.
Investor verification priorities
- Confirm progress and final terms, approvals, dilution and closing status of the proposed Meisheng investment and convertible-debt restructuring.
- Verify longer-term refinancing or extension of the Wells Fargo facility and the company’s ability to meet 2020 convertible-note maturities and loan covenants.
- Track operating cash flow, working capital, seasonal inventory needs, customer credit exposure and the realization of restructuring savings.
- Assess whether sales and margins can stabilize, particularly in U.S. and Canada, and whether customer and licensor concentration remains manageable.
- Review potential equity dilution, including conversion features, proposed warrants, anti-dilution provisions and restricted awards awaiting sufficient plan shares.