JAKKS Pacific, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. JAKKS designs, markets and distributes toys and consumer products across U.S. and Canada, International, and Halloween segments. Results are seasonal, with sales generally highest in the third and fourth quarters.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $70.8 million | $93.0 million |
| Gross profit; margin | $14.3 million; 20.2% | $23.0 million; 24.7% |
| Operating loss | $24.0 million | $35.7 million |
| Net loss attributable to JAKKS | $29.2 million | $36.2 million |
| Loss per share, basic and diluted | $1.24 | $1.57 |
| Cash used in operations | $1.9 million | $11.4 million |
Revenue fell 23.8% year over year. Gross margin declined 4.5 percentage points, while the net loss narrowed; net loss as a share of sales nevertheless increased to 41.1% from 38.9%. Operating cash use improved, mainly reflecting lower receivables and inventory, partly offset by lower accounts payable.
Sales decreased in all segments: U.S. and Canada to $57.4 million from $70.5 million, International to $9.8 million from $17.3 million, and Halloween to $3.6 million from $5.2 million. Management cited the Toys “R” Us liquidation, lower sales of certain prior-year products, and product mix. Higher cost of goods, excess and obsolete inventory charges, and International royalty costs weighed on gross margin. SG&A fell to $35.3 million from $58.6 million, partly because the prior-year period included a $13.8 million Toys “R” Us-related bad-debt charge and because payroll and marketing costs declined.
Financial position and liquidity
- At March 31, cash and cash equivalents were $42.4 million and restricted cash was $5.0 million, or $47.4 million combined, down from $58.2 million at year-end. Working capital was $75.2 million, versus $106.0 million.
- Total assets were $312.0 million; total liabilities were $287.8 million and stockholders’ equity was $24.2 million.
- Debt included $20.0 million outstanding under the GACP term loan and $143.4 million of convertible senior notes, net of issuance costs. There were no Wells Fargo revolver borrowings at quarter-end. Notes mature in June and November 2020.
- The Wells Fargo facility had $26.4 million of excess borrowing capacity and $12.8 million of outstanding letters of credit. Its maturity was extended to September 27, 2019. The GACP term loan bears interest at LIBOR plus 9%; its reported weighted-average rate was approximately 11.5%.
- The company reported compliance with credit-facility and term-loan financial covenants at quarter-end. Operating lease adoption added $35.1 million of right-of-use assets and $38.4 million of lease liabilities to the March 31 balance sheet.
Outlook, risks and unusual items
- Management stated that cash, projected operating cash flow and available credit should cover working-capital and capital-expenditure needs for the next 12 months, subject to mitigating plans. It also warned that failure to extend or refinance debt or secure other capital could require further cost actions or changes to inventory purchases and supplier payment terms, with potential material adverse effects.
- The company was negotiating a proposed $50 million Meisheng investment that could give Meisheng 51% ownership, subject to approvals and other conditions. Separately, as of the filing date, management reported an agreement in principle with noteholders and Oasis for an alternative recapitalization involving extended or refinanced debt, incremental liquidity, and potentially significant preferred and common equity issuance. No binding agreements had been reached; completion and terms were uncertain.
- The Wells Fargo facility’s September 2019 maturity and the convertible notes’ 2020 maturities create refinancing risk. The company cited dependence on large customers, licensed brands, vendors, and accurate demand forecasts. Walmart and Target represented 48.4% of Q1 sales; the three largest customers represented 48.2% of gross receivables at quarter-end.
- Future minimum royalty guarantees were $80.6 million, including $41.9 million due within 12 months. Q1 included $2.9 million in acquisition-related and other costs tied to strategic-transaction evaluation and negotiations, $0.2 million in restructuring charges, and a $2.4 million loss from the fair-value change in the 3.25% convertible notes.
- The company expected its restructuring program to generate annualized savings of $10 million to $15 million. It recorded no goodwill impairment in the quarter. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether the company completed durable extensions or refinancing for its credit facility, term loan and 2020 notes, and the final cost and maturity terms.
- Whether a Meisheng proposal or alternative recapitalization closed, including approvals, liquidity raised, and resulting dilution and control changes.
- Whether projected restructuring savings materialized and whether operating cash flow improved beyond seasonal working-capital effects.
- How sales, margins, inventory reserves and royalty commitments developed, particularly given customer and vendor concentration.