JAKKS Pacific, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. JAKKS designs, licenses, markets, and distributes toys and related consumer products in two segments: Traditional Toys and Electronics, and Role Play, Novelty and Seasonal Toys.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $810.1 million | $632.9 million |
| Gross profit / margin | $235.8 million / 29.1% | $155.8 million / 24.6% |
| Operating income (loss) | $31.3 million | $(44.5) million |
| Net income (loss) | $21.5 million | $(53.9) million |
| Diluted earnings (loss) per share | $0.70 | $(2.43) |
| Cash from (used in) operating activities | $(79.1) million | $(22.4) million |
- Fourth-quarter net sales were $254.0 million, versus $137.7 million in Q4 2013; net income was $2.8 million, versus a $16.1 million loss. Fourth-quarter diluted EPS was $0.11.
- Both segments grew strongly: Traditional Toys and Electronics sales rose 27.4% to $408.4 million; Role Play, Novelty and Seasonal sales rose 28.6% to $401.6 million. Sales gains were linked to Disney Frozen products, Nintendo products, Star Wars figures, and licensed costumes and role-play products.
- Gross margin improved as management cited better product costing and pricing and fewer license shortfalls. SG&A was $204.5 million, up from $200.3 million, but fell as a share of sales to 25.2% from 31.6%, reflecting higher sales and operating efficiencies.
- Cash and cash equivalents were $71.5 million, down from $117.1 million. Working capital increased to $246.2 million from $136.3 million. Operating cash use primarily reflected increases in accounts receivable and inventory; year-end receivables were $234.5 million and inventory was $78.8 million.
- Long-term convertible notes totaled $215 million: $100 million due 2018 at 4.25% and $115 million due 2020 at 4.875%. The $39 million of 2014 notes was repaid at maturity. No borrowings were outstanding under the $75 million secured revolving facility at year-end; stated borrowing availability was approximately $67.1 million.
Material changes, outlook and risks
- The return to profitability followed two loss years. FY 2013 included substantial inventory and license-advance write-downs, as well as $5.0 million of restructuring charges. In 2014, JAKKS recorded $1.2 million of restructuring charges and $5.9 million of income from reversing part of the Maui acquisition earn-out after targets were not met.
- Management said cash, cash flows, and cash equivalents should meet working-capital and capital-expenditure needs for at least the next 12 months. Planned 2015 capital expenditures were approximately $12 million. The filing gives no specific sales or earnings guidance; it expects international initiatives to contribute to growth, but provides no quantified forecast.
- The business is highly seasonal: 74.5% of 2014 sales occurred in the third and fourth quarters. Wal-Mart, Target, and Toys “R” Us together represented 47.4% of annual sales. License dependence, customer concentration, product acceptance, competition, and reliance on third-party manufacturers—principally in China—are significant risks.
- Future minimum license guarantees were $57.9 million, including $40.3 million due within one year. The company had a full valuation allowance against U.S. deferred tax assets; the reported allowance was $106.8 million. It also reported approximately $240 million of undistributed foreign-subsidiary earnings intended to remain invested abroad.
- A securities class action had been dismissed without prejudice, with leave for an amended complaint; the filing said an amended pleading could still be filed. A shareholder derivative matter had a settlement in principle, subject to court approval. Management stated ordinary-course proceedings were not expected to have a material effect.
Important facts for investors to verify
- How much of the 2014 sales and earnings rebound is sustainable, given the seasonal sales pattern, licensed-product concentration, and contribution from acquired businesses?
- Whether receivables and inventory convert to cash as expected, especially after operating cash use of $79.1 million and the rise in year-end receivables.
- The terms, conversion dilution, and cash requirements associated with the $215 million of convertible notes, alongside the secured credit facility’s covenants and availability.
- Whether minimum license guarantees, earn-out obligations, and product performance create additional costs or write-downs.
- The status and potential consequences of the pending litigation, tax audits, and court approval of the derivative-action settlement.