JAKKS Pacific, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. JAKKS designs, markets, and distributes toys and consumer products, and costumes, through its Toys/Consumer Products and Costumes segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $220.4m | $112.4m | $341.3m | $196.2m |
| Gross profit / margin | $60.9m / 27.6% | $31.9m / 28.4% | $90.8m / 26.6% | $58.0m / 29.6% |
| Operating income (loss) | $23.7m | $1.8m | $22.9m | ($0.9m) |
| Net income (loss) | $26.2m | ($15.1m) | $22.3m | ($39.1m) |
| Net income (loss) attributable to common stockholders | $26.2m | ($15.4m) | $22.1m | ($39.8m) |
| Diluted earnings (loss) per share | $2.61 | ($2.48) | $2.21 | ($6.86) |
| Cash from operating activities | — | $36.5m | ($18.5m) |
Q2 sales rose 96% year over year. Toys/Consumer Products sales increased 82.7% to $148.9m, and Costumes sales increased 132.5% to $71.6m. For the first half, segment sales increased 61.1% and 133.6%, respectively. The United States generated $192.5m, or 87% of Q2 sales. Walmart and Target together represented 61.5% of Q2 sales.
Despite higher sales and operating income, gross margin declined 0.8 percentage points in Q2 and 3.0 points for the first half. Management cited higher freight costs and royalty rates in Toys/Consumer Products; Costumes margin improved with lower product costs and royalty rates. SG&A rose in dollars, mainly on higher payroll, but fell as a share of sales to 16.8% in Q2 from 26.8%.
Liquidity, balance sheet, and debt
- Cash and cash equivalents were $62.3m at June 30, versus $44.5m at year-end; working capital was $116.7m, compared with $114.5m.
- Operating cash flow of $36.5m reflected net income and increased payables and accrued expenses, partly offset by $39.7m of cash tied up in inventory and $16.8m in receivables. Investing used $5.3m; financing used $11.5m.
- Inventory rose to $123.7m from $84.0m, including a $10.2m obsolescence reserve versus $4.6m at year-end. Accounts payable to related-party manufacturer Meisheng rose to $42.3m from $15.9m.
- Outstanding BSP term-loan principal was $87.6m; JAKKS made a voluntary, fee-free $10.0m principal prepayment in June. The loan matures in June 2027 and has variable-rate pricing. The company reported no JPMorgan ABL borrowings, $49.0m of excess availability, and $17.2m of letters of credit. It reported compliance with debt covenants at quarter-end.
- Management said cash, projected operating cash flow, and credit-facility availability should be sufficient for working capital and capital expenditures over the next 12 months.
Changes, outlook, and risks
- Sales growth was partly attributed to customers placing orders earlier and using FOB shipments to get ahead of anticipated supply-chain issues. Management noted this timing shift; it may affect comparisons and later-period sales.
- Q2 net income included a $6.0m gain from a change in the fair value of the preferred-stock derivative liability, compared with a $1.5m loss in Q2 2021. This is a valuation item, not operating sales or cash generation. The company also recorded a $0.3m intangible-asset impairment in 2022. Prior-year results included debt-extinguishment and convertible-note fair-value losses.
- No specific revenue or earnings guidance is provided. Management emphasizes that toy and costume sales are seasonal, generally strongest in the third and fourth quarters; customer orders are generally cancelable until shipment, making backlog an unreliable indicator.
- Risks include continuing COVID-19 uncertainty, supply-chain and freight disruption, uncertain demand and inventory forecasting, customer concentration, reliance on vendors and licensed brands, variable interest rates and LIBOR transition, foreign-currency exposure, and the possibility of customer order cancellations. The filing reports ordinary-course legal proceedings and says there were no material changes to previously disclosed risk factors.
- Future minimum royalty guarantees totaled $86.4m, with $29.9m due within 12 months. The filing also reports a $17.2m letter-of-credit balance and customary indemnification commitments; no separate material litigation contingency amount is specified.
- After quarter-end, JAKKS registered a shelf offering for up to 2.0m common shares; the registration became effective August 1. On August 3, preferred holders agreed to terminate specified voting, board nomination, and committee rights.
Investor facts to verify
- Whether order pull-forward and early FOB shipments lead to weaker or differently timed sales in subsequent quarters.
- Whether inventory growth, the larger obsolescence reserve, and customer concentration translate into markdowns, returns, or collection risk.
- Cash generation and availability under the term-loan minimum-cash and leverage covenants, particularly after the $10.0m prepayment.
- How freight, royalties, and the seasonal mix affect gross margins in the second half.
- Any issuance under the effective shelf registration and the financial or governance effects of the preferred-stock rights changes.