JAKKS Pacific, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are against December 31, 2015. Financial statements are unaudited. JAKKS designs, markets, and distributes toys and consumer products, organized into U.S. and Canada, International, and Halloween segments. Amounts below are in U.S. dollars; financial-statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $141.0 | $131.1 | $236.8 | $245.3 |
| Gross profit / margin | $44.8 / 31.8% | $39.3 / 30.0% | $76.0 / 32.1% | $74.7 / 30.4% |
| SG&A | $45.9 | $42.3 | $90.9 | $81.9 |
| Operating loss | $(1.1) | $(3.0) | $(14.9) | $(7.2) |
| Net loss attributable to JAKKS | $(4.4) | $(5.7) | $(21.8) | $(13.3) |
| Loss per share, basic and diluted | $(0.27) | $(0.30) | $(1.30) | $(0.69) |
| Operating cash flow | Not provided separately | Not provided separately | $22.4 | $50.3 |
- Q2: Sales increased 7.5%; gross margin improved 1.8 percentage points, while the operating loss narrowed. Net loss attributable to JAKKS also narrowed despite higher SG&A.
- First half: Sales declined 3.5%. Gross profit rose slightly, but SG&A increased by $9.0 million, widening the operating loss and increasing net loss. Higher marketing, product development, and general and administrative costs drove the SG&A increase.
- Q2 sales growth was concentrated in U.S. and Canada, up 25.6% to $89.7 million. International sales fell 14.9% to $20.0 million, and Halloween sales fell 13.3% to $31.3 million, with Halloween weakness attributed primarily to shipment timing.
- For the first half, U.S. and Canada sales rose 9.2% to $161.9 million; International sales declined 32.9% to $40.1 million; Halloween sales declined 6.7% to $34.7 million. Traditional Toys and Electronics sales decreased to $104.7 million from $128.4 million, while Role Play, Novelty and Seasonal Toys increased to $132.1 million from $116.9 million.
Financial position, liquidity, and debt
- At June 30, cash and cash equivalents were $86.7 million, with an additional $9.9 million in restricted cash. Total assets were $469.9 million and working capital was $216.5 million, down from $255.0 million at year-end 2015.
- Operating activities provided $22.4 million in first-half cash, compared with $50.3 million a year earlier. Investing activities used $9.8 million, principally for property, molds, and tooling. Financing activities used $25.3 million, including $11.9 million for share repurchases and note repurchases.
- Convertible senior notes had $212.3 million principal outstanding ($207.5 million net of issuance costs): $99.3 million due 2018 at 4.25% and $113.0 million due 2020 at 4.875%. First-half interest expense was $6.4 million.
- The $75 million Wells Fargo revolving facility had no borrowings outstanding, but $28.2 million of standby letters of credit and no excess borrowing capacity at quarter-end. Because letters of credit exceeded borrowing-base availability by $9.9 million, that amount was funded as restricted cash. The company reported compliance with the facility’s financial covenants.
- Future minimum license guarantees totaled $97.6 million, excluding $23.3 million of advances already paid; $43.3 million was due within twelve months.
Changes, outlook, and risks
- Management said cash on hand, operating cash flows, and credit-facility availability should be sufficient for working capital and capital expenditure needs for at least the next 12 months. It cautioned that growth and seasonal working-capital demands may require additional financing, which may not be available on acceptable terms. No specific revenue or earnings guidance is provided in the filing.
- Toy sales and working-capital needs are seasonal, generally strongest in the third and fourth quarters. Orders are generally cancelable until shipment, making backlog an unreliable indicator of future sales.
- Sales concentration increased: Wal-Mart represented 27.7% of Q2 sales and 28.2% of first-half sales. The three largest customers represented 47.4% of first-half sales and 48.9% of net receivables at June 30, 2016.
- Key risks include dependence on licensed characters and minimum royalty commitments, product and consumer-demand uncertainty, customer concentration, third-party manufacturing and international sourcing, currency exposure, and the ability to service or repurchase convertible notes following a fundamental change.
- A securities class action remained pending; the court had taken the motion to dismiss the third amended complaint under submission, with no decision reported. A derivative-action settlement had received preliminary approval; the judge indicated intent to approve it formally, while attorneys’ fees remained under advisement. JAKKS said it believed the class-action claims were without merit and would defend vigorously.
- Management reported no goodwill impairment in the first half. It also disclosed a $127,000 discrete tax expense related to a Hong Kong tax assessment. Foreign-currency translation reduced first-half comprehensive results by $3.7 million.
Important facts for investors to verify
- Whether the Q2 improvement in sales and gross margin can persist, particularly given first-half revenue weakness in International and higher SG&A.
- Whether seasonal third- and fourth-quarter sales and collections support cash generation and restore borrowing availability; assess the $9.9 million restricted-cash position and the facility’s letter-of-credit capacity.
- Ability to fund the $43.3 million of license minimum guarantees due within twelve months while managing working capital and the 2018 and 2020 convertible-note obligations.
- Exposure to major customers and licensors, including the effect of any order reductions, returns, license nonrenewals, or customer credit deterioration.
- Developments in the pending class action and final approval of the derivative-action settlement.