JAKKS Pacific, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The company designs, markets and distributes children’s toys and consumer products through Traditional Toys and Electronics, and Role Play, Novelty and Seasonal Toys. Financial statement amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $145.4 | $131.9 | $218.8 | $204.3 |
| Gross profit / margin | $46.9 / 32.3% | $45.1 / 34.2% | $70.5 / 32.2% | $69.4 / 34.0% |
| Operating income (loss) | $0.1 | $2.0 | $(19.3) | $(12.8) |
| Net income (loss) | $0.2 | $4.2 | $(15.8) | $(6.3) |
| Basic and diluted EPS | $0.01 | $0.16 | $(0.61) | $(0.23) |
- Q2 sales increased 10.2% year over year, but gross margin fell 1.9 percentage points and operating income nearly reached break-even. For the first half, sales rose 7.1%, while the operating and net losses widened.
- Q2 SG&A was $46.8 million, or 32.2% of sales, versus $43.1 million, or 32.7%, a year earlier. First-half SG&A rose to $89.8 million and 41.0% of sales from $82.2 million and 40.2%.
- Six-month operating cash flow was negative $19.2 million, compared with negative $12.8 million in 2011. Investing cash outflow was $11.2 million; financing cash outflow was $5.2 million, mainly dividends. Cash declined $35.6 million to $221.6 million.
- At June 30, working capital was $353.5 million, down from $374.7 million at December 31, 2011. Current assets were $496.1 million and current liabilities $142.5 million.
- Convertible senior notes had a $100 million principal amount, 4.50% coupon and November 2014 maturity; their reported net carrying value was $93.6 million. The notes are unsecured.
Material changes and business drivers
- Q2 Traditional Toys and Electronics sales rose 6.4%, led by Winx Club dolls and Moose Mountain; declines in several product lines partly offset growth. Role Play, Novelty and Seasonal sales rose 14.2%, mainly on higher Halloween costume and accessory sales.
- For the first half, Traditional Toys and Electronics sales increased 7.3%, supported by Monsuno, Winx Club, selected doll lines and Moose Mountain. Role Play, Novelty and Seasonal sales rose 6.9%, led by costumes and outdoor products.
- Management attributed Q2 SG&A growth mainly to foreign-exchange losses, product development and other costs, partly offset by lower salaries and benefits. First-half increases included launch advertising, product development, legal/advisory costs and foreign-exchange losses.
- THQ video-game settlement income declined to $2.0 million in Q2 2012 from $6.0 million in Q2 2011. The company received the $2.0 million scheduled payment in June; remaining payments are to be recognized as income when collected.
- After quarter-end, JAKKS completed an $80 million self-tender for 4 million shares at $20 per share on July 5; the shares were retired. Shares outstanding were 22,021,808 as of August 6, 2012.
- On July 26, the company acquired Maui Toys for $32 million cash at closing, with possible additional contingent payments of up to $33 million based on future performance.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash, cash flows and cash equivalents should be adequate for anticipated operating needs for at least 12 months, while noting growth could require additional financing.
- Toy sales and working-capital needs are seasonal, generally peaking in the third and fourth quarters. Orders are cancelable until shipment, making backlog an uncertain indicator of future sales.
- Future minimum license guarantees totaled $52.9 million, including $32.6 million due within 12 months; this excludes $33.4 million in advances already paid. Licensed products, royalty obligations and license renewal/approval risks are significant.
- Three largest customers generated 39.7% of first-half sales and represented 44.2% of receivables at June 30. The filing notes that customer concentration could expose the company to credit, order-reduction and returns risk.
- Management reported that a significant portion of cash was held offshore and subject to a 25% repatriation tax. Other cited exposures include reliance on manufacturers principally in China, foreign-currency movements, product demand and competition.
- The company reported ordinary-course legal claims that it did not believe would materially affect results. No goodwill impairment was recorded in the periods presented. The filing identifies a $0.4 million discrete tax benefit in first-half 2012.
Important facts for investors to verify
- Whether margins and operating performance improve after the first-half deterioration, and whether sales growth translates into earnings and operating cash flow.
- Collection of remaining THQ settlement payments and the impact of the $80 million tender offer and Maui Toys acquisition on cash, liquidity and share count.
- Execution against $52.9 million of future minimum license guarantees, particularly the $32.6 million due within 12 months, alongside seasonal inventory and working-capital needs.
- Customer concentration, receivable collectability, and the company’s ability to manage product demand, licensing, manufacturing and currency risks.