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JAKKS Pacific Reports Second Quarter 2019 Financial Results

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JAKKS Pacific, Inc. (NASDAQ:JAKK) today reported preliminary financial results for the second quarter ended June 30, 2019.

Second Quarter 2019 Overview vs. Same Period Last Year

  • Net sales for the second quarter were $95.2 million compared to $105.8 million reported in the comparable period in 2018. Sales in the 2019 second quarter were negatively impacted primarily by a decline in sales of Incredibles 2 which more than offset strong growth in Disguise costumes and the introduction of several new toy lines tied to entertainment content.
  • Gross margin was 18.6%, compared to 26.4% in the second quarter of 2018.
  • Net loss attributable to JAKKS Pacific was $22.5 million, or $0.96 per diluted share. This compares to a net loss attributable to JAKKS Pacific of $18.6 million, or $0.80 per diluted share, reported in the second quarter of 2018.
  • Adjusted EBITDA was negative $11.5 million, compared to Adjusted EBITDA of negative $8.5 million in the 2018 second quarter. See note below on "Use of Non-GAAP Financial Information."

Management Commentary

"As expected, our results for the second quarter showed the effect of declines in products that contributed strongly to results in the second quarter of last year," said Stephen Berman, CEO of JAKKS Pacific. "We saw strong growth in our Disguise, Halloween costume business, and strong contributions from toys tied to several new theatrical releases, including Aladdin, Godzilla and Toy Story 4, but these were more than offset by the declines in toys tied to Incredibles 2 and our Squish Dee Lish products. As we have noted before, our sales this year have been shifted to the second half as a result of the timing of several films and television shows, notably Frozen 2, as well as Toy Story 4, the 30th Anniversary of the release of Disney's The Little Mermaid, and Disney Jr.'s Gigantosaurus animated TV series.

We remain confident that our second half sales will show renewed strength, as the disruptions caused by Toys R Us' liquidation in the United States no longer weigh down the industry. This coupled with the recently announced Recapitalization transaction to strengthen our balance sheet provides a clearer pathway to the future here at JAKKS."

Cash and Cash Equivalents

The Company's cash and cash equivalents (including restricted cash) totaled $37.0 million as of June 30, 2019 compared to $47.4 million as of March 31, 2019 and $63.0 million as of June 30, 2018.

2019 Outlook

Our goal for 2019 is to grow sales by approximately 5% on a year-over-year basis with improved levels of Adjusted EBITDA compared to 2018.

Recapitalization Transaction

As discussed in the Current Report on Form 8-K dated August 9, 2019, the Company entered into multiple, binding definitive agreements (collectively, the "Recapitalization") among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 to recapitalize the Company's balance sheet, including the extension to the Company of incremental liquidity and three-year extensions of substantially all of the Company's outstanding convertible debt obligations and revolving credit facility. The Company's term loan agreement entered into with Great American Capital Partners will be paid in full in connection with the Recapitalization transaction.

Use of Non-GAAP Financial Information

In addition to the preliminary results reported in accordance with U.S. GAAP included in this release, the Company has provided certain non-GAAP financial information including Adjusted EBITDA which is a non-GAAP metric that excludes various items that are detailed in the financial tables and accompanying footnotes reconciling GAAP to non-GAAP results contained in this release. Management believes that the presentation of these non-GAAP financial measures provides useful information to investors because the information may allow investors to better evaluate ongoing business performance and certain components of the Company's results. In addition, the Company believes that the presentation of these financial measures enhances an investor's ability to make period-to-period comparisons of the Company's operating results. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measures. See the attached "Reconciliation of Non-GAAP Financial Information."

Conference Call Live Webcast

JAKKS Pacific will webcast its second quarter earnings call at 9:00 a.m. Eastern Time/ 6:00 a.m. Pacific Time today. To listen to the live webcast and access the accompanying presentation slides, go to www.jakks.com/investors and click on the earnings website link under the Presentations tab at least 10 minutes prior to register, download and install any necessary audio software.

A replay of the call will be available on JAKKS' website approximately one hour following completion of the call through August 16, 2019 ending at 11:59 p.m. Eastern Time/8:59 p.m. Pacific Time. The playback can be accessed by calling (888) 843-7419 or (630) 652-3042 for international callers, with passcode "48922294#" for both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. (NASDAQ:JAKK) is a leading designer, manufacturer and marketer of toys and consumer products sold throughout the world, with its headquarters in Santa Monica, California. JAKKS Pacific's popular proprietary brands include Perfectly Cute™, Real Workin' Buddies™, Squish-Dee-Lish™, XPV®, Disguise®, Moose Mountain®, Funnoodle®, Maui®, Kids Only!®; a wide range of entertainment-inspired products featuring premier licensed properties; and C'est Moi™, a new generation of clean beauty. Through JAKKS Cares, the company's commitment to philanthropy, JAKKS is helping to make a positive impact on the lives of children. Visit us at www.jakks.com and follow us on Instagram (@jakkstoys), Twitter (@jakkstoys) and Facebook (JAKKS Pacific).

©2019 JAKKS Pacific, Inc. All rights reserved.

Forward Looking Statements

This press release may contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations, estimates and projections about JAKKS Pacific's business based partly on assumptions made by its management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such statements due to numerous factors, including, but not limited to, those described above, changes in demand for JAKKS Pacific's products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing, and difficulties with integrating acquired businesses, or that the Recapitalization transaction or any other future transactions will result in future growth or success of JAKKS. The "forward-looking statements" contained herein speak only as of the date on which they are made, and JAKKS undertakes no obligation to update any of them to reflect events or circumstances after the date of this release.

    JAKKS Pacific, Inc. and Subsidiaries
    Condensed Consolidated Balance Sheets (Unaudited)
         
     

June 30,

 

December 31,

     

2019

 

2018

     

(In thousands)

ASSETS

Current assets:    
  Cash and cash equivalents  

$

32,125

 

 

$

53,282

 

  Restricted cash  

 

4,923

 

 

 

4,923

 

  Accounts receivable, net  

 

85,119

 

 

 

122,278

 

  Inventory  

 

53,521

 

 

 

53,880

 

  Prepaid expenses and other assets  

 

28,523

 

 

 

15,780

 

    Total current assets  

 

204,211

 

 

 

250,143

 

         
Property and equipment  

 

127,346

 

 

 

128,049

 

Less accumulated depreciation and amortization  

 

106,239

 

 

 

107,147

 

  Property and equipment, net  

 

21,107

 

 

 

20,902

 

         
Operating lease right-of-use assets  

 

35,848

 

 

 

-

 

Goodwill  

 

35,083

 

 

 

35,083

 

Intangibles and other assets, net  

 

32,495

 

 

 

36,713

 

    Total assets  

$

328,744

 

 

$

342,841

 

         
         

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:    
  Accounts payable and accrued expenses  

$

98,016

 

 

$

87,488

 

  Reserve for sales returns and allowances  

 

24,498

 

 

 

29,403

 

  Short term operating lease liabilities  

 

9,182

 

 

 

-

 

  Short term debt, net  

 

1,892

 

 

 

27,211

 

    Total current liabilities  

 

133,588

 

 

 

144,102

 

         
Long term operating lease liabilities  

 

29,829

 

 

 

-

 

Long term debt, net  

 

160,656

 

 

 

139,792

 

Other liabilities  

 

137

 

 

 

4,409

 

Income taxes payable  

 

1,471

 

 

 

1,458

 

Deferred tax liability, net  

 

1,431

 

 

 

1,431

 

    Total liabilities  

 

327,112

 

 

 

291,192

 

         
Stockholders' equity:    
  Common stock, $.001 par value  

 

30

 

 

 

30

 

  Additional paid-in capital  

 

218,897

 

 

 

218,155

 

  Treasury stock  

 

(24,000

)

 

 

(24,000

)

  Accumulated deficit  

 

(179,301

)

 

 

(127,601

)

  Accumulated other comprehensive loss  

 

(14,994

)

 

 

(15,847

)

    Total JAKKS Pacific, Inc. stockholders' equity  

 

632

 

 

 

50,737

 

  Non-controlling interests  

 

1,000

 

 

 

912

 

    Total stockholders' equity  

 

1,632

 

 

 

51,649

 

    Total liabilities and stockholders' equity  

$

328,744

 

 

$

342,841

 

         
JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
         
 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

 

(In thousands, except per share data)

 

(In thousands, except per share data)

         
Net sales  

$

95,182

 

 

$

105,781

 

 

$

166,008

 

 

$

198,785

 

Less cost of sales        
Cost of goods  

 

60,691

 

 

 

61,059

 

 

 

105,799

 

 

 

114,317

 

Royalty expense  

 

14,125

 

 

 

14,344

 

 

 

23,966

 

 

 

29,635

 

Amortization of tools and molds  

 

2,620

 

 

 

2,437

 

 

 

4,157

 

 

 

3,933

 

Cost of sales  

 

77,436

 

 

 

77,840

 

 

 

133,922

 

 

 

147,885

 

Gross profit  

 

17,746

 

 

 

27,941

 

 

 

32,086

 

 

 

50,900

 

Direct selling expenses  

 

8,115

 

 

 

9,994

 

 

 

16,343

 

 

 

22,481

 

Selling, general and administrative expenses  

 

24,136

 

 

 

27,859

 

 

 

49,477

 

 

 

72,389

 

Depreciation and amortization  

 

1,619

 

 

 

1,895

 

 

 

3,316

 

 

 

3,495

 

Restructuring charge  

 

22

 

 

 

-

 

 

 

270

 

 

 

-

 

Acquisition related and other  

 

2,503

 

 

 

333

 

 

 

5,370

 

 

 

333

 

Loss from operations  

 

(18,649

)

 

 

(12,140

)

 

 

(42,690

)

 

 

(47,798

)

Other income (expense):        
Income from joint ventures  

 

-

 

 

 

205

 

 

 

-

 

 

 

227

 

Other income (expense), net  

 

(242

)

 

 

31

 

 

 

(159

)

 

 

81

 

Change in fair value of convertible senior notes  

 

(106

)

 

 

(2,410

)

 

 

(2,529

)

 

 

(3,431

)

Interest income  

 

20

 

 

 

14

 

 

 

47

 

 

 

28

 

Interest expense  

 

(2,919

)

 

 

(2,197

)

 

 

(5,937

)

 

 

(4,133

)

Loss before provision for (benefit from) income taxes  

 

(21,896

)

 

 

(16,497

)

 

 

(51,268

)

 

 

(55,026

)

Provision for (benefit from) income taxes  

 

589

 

 

 

2,091

 

 

 

344

 

 

 

(245

)

Net loss  

 

(22,485

)

 

 

(18,588

)

 

 

(51,612

)

 

 

(54,781

)

Net income (loss) attributable to non-controlling interests  

 

57

 

 

 

(29

)

 

 

88

 

 

 

22

 

Net loss attributable to JAKKS Pacific, Inc.  

$

(22,542

)

 

$

(18,559

)

 

$

(51,700

)

 

$

(54,803

)

Loss per share - basic and diluted  

$

(0.96

)

 

$

(0.80

)

 

$

(2.19

)

 

$

(2.37

)

Shares used in loss per share - basic and diluted  

 

23,600

 

 

 

23,106

 

 

 

23,578

 

 

 

23,103

 

         

JAKKS Pacific, Inc. and Subsidiaries

Reconciliation of Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:

This press release and accompanying schedules provide certain information regarding Adjusted EBITDA and Adjusted Net Income (Loss), which may be considered non-GAAP financial measures under the rules of the Securities and Exchange Commission. The non-GAAP financial measures included in the press release are reconciled to the corresponding GAAP financial measures below, as required under the rules of the Securities and Exchange Commission regarding the use of non-GAAP financial measures. We define Adjusted EBITDA as income (loss) from operations before depreciation, amortization and adjusted for certain non-recurring and non-cash charges, such as reorganization expenses and restricted stock compensation expense. Net income (loss) is similarly adjusted and tax-effected to arrive at Adjusted Net Income (Loss). Adjusted EBITDA and Adjusted Net Income (Loss) are not recognized financial measures under GAAP, but we believe that they are useful in measuring our operating performance. We believe that the use of the non-GAAP financial measures enhances an overall understanding of the Company's past financial performance, and provides useful information to the investor by comparing our performance across reporting periods on a consistent basis.

Investors should not consider these measures in isolation or as a substitute for net income, operating income, or any other measure for determining the Company's operating performance that is calculated in accordance with GAAP. In addition, because these measures are not calculated in accordance with GAAP, they may not necessarily be comparable to similarly titled measures employed by other companies.

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

 

(In thousands)

 

(In thousands)

         
Net loss  

$

(22,485

)

 

$

(18,588

)

 

$

(51,612

)

 

$

(54,781

)

Income from joint ventures  

 

-

 

 

 

(205

)

 

 

-

 

 

 

(227

)

Other income (expense), net  

 

242

 

 

 

(31

)

 

 

159

 

 

 

(81

)

Interest income  

 

(20

)

 

 

(14

)

 

 

(47

)

 

 

(28

)

Interest expense  

 

2,919

 

 

 

2,197

 

 

 

5,937

 

 

 

4,133

 

Provision for (benefit from) income taxes  

 

589

 

 

 

2,091

 

 

 

344

 

 

 

(245

)

Depreciation and amortization  

 

4,239

 

 

 

4,332

 

 

 

7,473

 

 

 

7,428

 

Acquisition related and other  

 

2,503

 

 

 

333

 

 

 

5,370

 

 

 

333

 

Restricted stock compensation expense  

 

397

 

 

 

311

 

 

 

1,015

 

 

 

987

 

Bad debt write-offs (recoveries)  

 

-

 

 

 

(1,326

)

 

 

-

 

 

 

12,468

 

Change in fair value of convertible senior notes  

 

106

 

 

 

2,410

 

 

 

2,529

 

 

 

3,431

 

Restructuring charge  

 

22

 

 

 

-

 

 

 

270

 

 

 

-

 

Minimum guarantee shortfalls  

 

-

 

 

 

-

 

 

 

-

 

 

 

3,468

 

         
Adjusted EBITDA  

$

(11,488

)

 

$

(8,490

)

 

$

(28,562

)

 

$

(23,114

)

         
         
 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2019

 

2018

 

2019

 

2018

 

(In thousands, except per share data)

 

(In thousands, except per share data)

         
Net loss attributable to JAKKS Pacific, Inc.  

$

(22,542

)

 

$

(18,559

)

 

$

(51,700

)

 

$

(54,803

)

Restricted stock compensation expense  

 

397

 

 

 

311

 

 

 

1,015

 

 

 

987

 

Bad debt write-offs (recoveries)  

 

-

 

 

 

(1,326

)

 

 

-

 

 

 

12,468

 

Acquisition related and other  

 

2,503

 

 

 

333

 

 

 

5,370

 

 

 

333

 

Change in fair value of convertible senior notes  

 

106

 

 

 

2,410

 

 

 

2,529

 

 

 

3,431

 

Restructuring charge  

 

22

 

 

 

-

 

 

 

270

 

 

 

-

 

Minimum guarantee shortfalls  

 

-

 

 

 

-

 

 

 

-

 

 

 

3,468

 

Tax impact of additional charges  

 

-

 

 

 

162

 

 

 

(15

)

 

 

(2,185

)

         
Adjusted net loss attributable to JAKKS Pacific, Inc.  

$

(19,514

)

 

$

(16,669

)

 

$

(42,531

)

 

$

(36,301

)

         
Adjusted loss per share - basic and diluted  

$

(0.83

)

 

$

(0.72

)

 

$

(1.80

)

 

$

(1.57

)

Shares used in adjusted loss per share - basic and diluted  

 

23,600

 

 

 

23,106

 

 

 

23,578

 

 

 

23,103

 

 

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