JAKKS Pacific, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. JAKKS designs, markets, and distributes toys and consumer products, reporting U.S. and Canada, International, and Halloween segments. Results are seasonal, with sales generally highest in the third and fourth quarters.
Financial performance
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $236.7 | $262.4 | $435.5 | $476.5 |
| Gross profit / margin | $64.3 / 27.2% | $61.8 / 23.5% | $115.2 / 26.5% | $125.5 / 26.3% |
| Operating income (loss) | $20.0 | $(7.7) | $(27.8) | $(37.6) |
| Net income (loss) | $15.7 | $(17.6) | $(39.1) | $(52.5) |
| EPS, basic | $0.68 | $(0.77) | $(1.69) | $(2.53) |
| Cash from (used in) operating activities | Not separately reported | Not separately reported | $2.6 | $(6.2) |
- Sales and segments: Q3 sales fell 9.8%; nine-month sales fell 8.6%. Q3 U.S. and Canada sales declined 13.3%, mainly reflecting Toys “R” Us’ U.S. liquidation; International sales declined 24.4%, while Halloween sales increased 12.2%. For nine months, U.S. and Canada sales fell 10.7%, International fell 11.9%, and Halloween increased 1.1%.
- Profitability: Q3 gross margin improved to 27.2%, and operating results turned positive. Management cited lower average royalty costs, partly because of minimum-guarantee shortfalls in 2017, and lower SG&A. The prior-year quarter included $13.5 million of goodwill and intangible impairment and a $7.0 million DreamPlay investment write-off. Nine-month results remained loss-making; SG&A was $143.0 million, down from $149.6 million, but rose to 32.9% of sales from 31.4%.
- Cash, working capital, and liquidity: Cash and restricted cash totaled $57.1 million at September 30, versus $65.0 million at December 31, 2017. Working capital was $112.7 million, down from $146.9 million. Nine-month operating cash flow was $2.6 million, with cash generation supported by higher accounts payable and sales-return reserves, partly offset by increased receivables and prepaid/other assets. Investing used $9.4 million, primarily for molds and tooling.
- Debt: The company had $20.0 million outstanding under its GACP term loan, bearing interest at LIBOR plus 9% (weighted average 11.1% during the period). The balance sheet reported $19.4 million of short-term debt, net. Convertible notes included $113.0 million principal due June 2020 and $29.5 million principal of 3.25% notes due November 2020. There were no Wells Fargo revolver borrowings at quarter-end; excess availability was $34.7 million, with $12.8 million of letters of credit outstanding. JAKKS borrowed $7.5 million on the revolver in October.
- Receivables and reserves: Accounts receivable, net, was $205.4 million; the doubtful-account allowance was $22.4 million. The $20.7 million Toys “R” Us receivable was fully reserved. Sales-return and allowance reserves were $30.3 million, versus $17.6 million at year-end.
Outlook, risks, and unusual items
- Management said available cash, projected operating cash flow, and revolver capacity should cover working-capital and capital-expenditure needs for the next 12 months, subject to mitigating plans. It was negotiating to amend and extend the Wells Fargo facility, which otherwise matured March 27, 2019; the GACP loan’s maturity is linked to that facility and other conditions. The filing cautions that refinancing or a Meisheng transaction may not be completed and that failure to secure capital could require further cost reductions or changes to inventory purchases and supplier payment terms.
- In October 2018, JAKKS began a global restructuring, including a planned 12–15% workforce reduction, facility consolidation, and lower discretionary spending. It estimated approximately $2.0 million of restructuring charges and annualized savings of $10–15 million.
- Meisheng, which held approximately 18% of JAKKS at September 30, reiterated a nonbinding proposal to acquire newly issued shares at $2.95 per share to reach 51% ownership. Discussions continued, including possible debt restructuring or refinancing; closing and terms were not assured.
- JAKKS exchanged $8.0 million principal of 2018 notes for 3.25% notes due November 2020 in July and redeemed the remaining $13.2 million of 2018 notes at maturity in August. Changes in the fair value of the Oasis-held 3.25% notes produced a $0.9 million gain in Q3 but a $2.5 million loss for the nine months. The conversion price reset to $2.54 per share on November 1, 2018.
- Customer concentration, toy-industry competition, licensed-product demand, seasonal forecasting, vendor support, and major-customer credit exposure are key risks. The filing says the three largest customers represented about 46.0% of gross receivables at quarter-end. Ordinary-course litigation was not expected to have a material effect; management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress and final terms, if any, for the Wells Fargo facility extension and the proposed Meisheng transaction; also confirm liquidity and covenant compliance after the October revolver draw.
- Whether the restructuring achieves its projected $10–15 million annualized savings and how actual severance and implementation costs compare with the estimated $2.0 million.
- Collections and reserve adequacy for receivables, particularly given the fully reserved Toys “R” Us balance, customer concentration, and the rise in sales-return reserves.
- Performance of U.S. and Canada and International products, and whether Halloween’s seasonal sales and the improved Q3 margin are sustainable.
- Debt maturity, conversion, and dilution implications, including the 2020 notes and the $2.54 conversion-price reset. Q3 diluted EPS was $0.38, below basic EPS of $0.68, due to the diluted share calculation.