JAKKS Pacific, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited results. JAKKS designs, markets and distributes toys and consumer products, and costumes. Its two segments are Toys/Consumer Products and Costumes. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $309.7 | $323.0 | $584.2 | $664.3 |
| Gross profit / margin | $107.0 / 34.5% | $91.9 / 28.5% | $189.6 / 32.5% | $182.7 / 27.5% |
| Operating income / margin | $62.4 / 20.1% | $53.7 / 16.7% | $74.4 / 12.7% | $76.7 / 11.6% |
| Net income | $48.1 | $30.7 | $49.0 | $53.0 |
| Net income attributable to common stockholders | $47.8 | $30.3 | $48.2 | $52.4 |
| Diluted EPS | $4.53 | $2.96 | $4.58 | $5.18 |
| Cash from operations | $87.7 | $75.3 |
Cash from operations is reported for the nine-month period only. Nine-month investing cash flow was $(5.7) million and financing cash flow was $(71.7) million, primarily reflecting $69.2 million of term-loan repayments. Capital expenditures were $5.7 million.
Material changes and segment trends
- Q3 sales declined 4.1% year over year, while nine-month sales fell 12.1%. Q3 net income increased; nine-month net income declined.
- Q3 Toys/Consumer Products sales decreased 8.8% to $246.0 million, primarily due to weaker North American sales and retailers reducing inventories. Nine-month segment sales declined 12.8% to $461.8 million, reflecting toy-product lifecycle declines and inventory reductions.
- Q3 Costumes sales rose 19.3% to $63.7 million as customer ordering returned to a more typical seasonal pattern. Nine-month sales decreased 9.2% to $122.3 million, partly because customers reduced orders after Halloween 2022 sell-through.
- Lower freight costs improved gross margin in both segments. Q3 SG&A increased to $44.6 million from $38.2 million, attributed primarily to higher media spending and headcount; nine-month SG&A rose to $115.2 million from $105.8 million, with higher professional-services and employee-related costs.
Liquidity, debt and other key items
- At September 30, cash, cash equivalents and restricted cash totaled $96.4 million, versus $85.5 million at December 31, 2022. Working capital was $123.4 million, up $26.0 million from year-end.
- The $69.2 million 2021 BSP Term Loan was fully repaid in June 2023. No term-loan or JPMorgan ABL borrowings were outstanding at quarter-end. The ABL had $53.7 million of excess borrowing availability and $9.3 million of letters of credit; the facility matures in June 2026. The company reported compliance with its ABL financial covenants.
- Accounts receivable increased to $206.8 million from $102.8 million at December 31, 2022; inventory declined to $68.8 million from $80.6 million. The filing notes that toy sales and working-capital needs are seasonal.
- Q3 interest expense was $1.4 million versus $4.4 million; nine-month expense was $5.7 million versus $8.9 million, reflecting debt repayment. Nine-month results included a $1.0 million loss on debt extinguishment.
- The Series A Preferred Stock accrues dividends at 6% annually; no cash dividends have been paid. Its redemption-related derivative liability was $28.6 million at quarter-end, up from $21.9 million at year-end. Changes in its fair value reduced reported earnings by $6.7 million for the first nine months of 2023.
Outlook, commentary and risks
The filing provides no numerical revenue or earnings guidance. Management cautions that results are seasonal and quarterly performance may not indicate full-year results. Orders are generally cancelable until shipment, making backlog an unreliable sales indicator. Future minimum royalty guarantees were $65.3 million, including $44.0 million due within 12 months.
Key disclosed exposures include reliance on a limited number of customers, vendors and licensors; demand and forecasting uncertainty; retail inventory reductions; competition and licensed-product performance; and interest-rate and foreign-currency movements. Target, Walmart and Amazon together represented 64.5% of Q3 sales and 60.7% of nine-month sales. Amounts payable to related-party manufacturer Meisheng were $28.0 million at September 30, compared with $9.8 million at year-end. Routine legal proceedings are disclosed, but the filing does not provide a clear aggregate estimate of potential losses. Management reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the sharp year-over-year increase in receivables is collected on schedule and how customer inventory reductions affect orders and cash flow.
- Whether improved gross margins, supported in part by lower freight costs, persist as costs and product mix change.
- Whether sales recover after the nine-month decline, particularly in Toys/Consumer Products, and how costume demand develops after the reported ordering reset.
- The terms and future economic impact of the preferred stock, its accrued dividends and the Level 3 redemption derivative valuation.
- Near-term funding needs, including $44.0 million of minimum royalty guarantees due within 12 months, and continued ABL availability and covenant compliance.