Business Wire | Nov 2, 2020 04:00PM EST

JAKKS Pacific Reports Third Quarter 2020 Financial Results

Nov. 02, 2020

SANTA MONICA, Calif.--(BUSINESS WIRE)--Nov. 02, 2020--JAKKS Pacific, Inc. (NASDAQ: JAKK) today reported financial results for the third quarter ended September 30, 2020.

Highlights

* Third quarter 2020 net sales were $242.3 million compared to $280.1 million last year Excluding declines in Frozen and Disguise Halloween costumes, Q3 net sales were up 13% year-over-year Retail POS at top three accounts up 28% year-to-date * Gross margin of 30.8%, up from 28.9%, an improvement of 190 basis points year-over-year driven by disciplined cost control and improved inventory JAKKS' inventories down 16% year-over-year, both at top three retailers and on JAKKS' balance sheet * Strong liquidity of $112 million with unrestricted cash of $75 million and revolver availability of $37 million * Third quarter 2020 net income attributable to common stockholders of $32.1 million * Year-to-date Adjusted EBITDA of $24.3 million up 56% vs. $15.6 million in 2019 * Subsequent to the quarter-end, the Company reached an agreement with term loan holders that provided covenant relief through March 2022 and a related $15 million early pay-down that will save $1.6 million in annual interest expense

Management Commentary

"Our third quarter results exceeded our expectations for sales, gross margin, operating income and adjusted EBITDA," said Stephen Berman, JAKKS Pacific's Chairman and CEO. "We faced significant challenges in the quarter, including difficult comparisons against the successful launch of Disney Frozen 2 last year and reduced retailer commitments to Halloween products. Excluding declines in Disney Frozen(r) merchandise and Disguise Halloween costumes, our net sales rose thirteen percent compared to the third quarter of last year. Our disciplined cost controls and improved inventory management resulted in higher gross margins, lower SG&A expenses and higher operating income. Retail sales of our products continued to accelerate during the quarter. Our top three US customers in aggregate reported an increase in year-to-date sell-through of 28% through the first nine months, compared to an increase of 14% through the first half.

"We expect the balance of this year to show continued progress on profitability despite difficult revenue comparisons, and to end the year poised for growth in sales and profitability in 2021. We expect to close out the year on a strong note, and carry momentum into 2021. We remain committed to containing costs and managing our balance sheet prudently. We expect good performances over the holiday season from new introductions from Disney Princess(r), Disney Frozen(r), Electronic Arts(r) APEX Legends(tm), SEGA(r) Sonic the Hedgehog(tm) and Nintendo(r) Super Mario(tm). In addition, we're continuing to see strong support from our internal brands and products like Kitten Catfe(tm), Xtreme Power Dump Truck(tm), ReDo(tm) Skateboard Co. and our re-launch of Eyeclops(tm).

"Looking ahead to next year, we believe sales will be buoyed by a more robust entertainment slate by our licensing partners compared to 2020, and what we hope will be a return to more normal consumer shopping patterns and gift giving, as well as a return to more normal Halloween activities. We believe our continued emphasis on margin improvement and cash preservation will lead to improved results in 2021."

Net sales for the third quarter 2020 were $242.3 million down 14% versus $280.1 million last year. The decline was driven by lower sales of products related to Disney's Frozen and Frozen 2, which were strong contributors to sales in the third quarter 2019, and by sharp declines in sales of Disguise Halloween costumes, demand for which was curtailed by COVID-19. Net sales in the Toys/Consumer Products segment were down 8% globally. Net sales of Disguise Halloween costumes declined 27%.

Despite the sales decline, net income attributable to common stockholders rose to $32.1 million, or $4.27 per diluted share, compared to $16.3 million, or $5.08 per diluted share last year. Last year's third quarter net income included significant charges related to the extinguishment of convertible senior notes. Excluding similar charges and gains in both years, adjusted net income attributable to common stockholders (a non-GAAP measure) was $32.6 million, or $4.76 per diluted share in the third quarter of 2020 versus $31.4 million or $5.38 per diluted share in the third quarter of 2019. See note below on "Use of Non-GAAP Financial Information."

Cash and Cash Equivalents

The Company's cash and cash equivalents (including restricted cash) totaled $79.8 million as of September 30, 2020 compared to $66.3 million as of December 31, 2019 and $75.9 million as of September 30, 2019.

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." "Total liquidity" is calculated as cash and cash equivalents, plus availability under the Company's $60.0 million revolving credit facility.

Conference Call Live Webcast

JAKKS Pacific will webcast its third quarter earnings call at 5:00 p.m. Eastern Time/2:00 p.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 20 minutes prior to register, download and install any necessary audio software.

A replay of the call will be available on JAKKS' website approximately two hours following completion of the call through November 9, 2020 ending at 10:00 p.m. Eastern Time/7:00 p.m. Pacific Time. The playback can be accessed by calling (888) 859-2056 or (404) 537-3406 for international callers, with passcode "8283204#" for both playback numbers.

About JAKKS Pacific, Inc.

JAKKS Pacific, Inc. 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; Fly Wheels(tm), Kitten Catfe(tm), Perfectly Cute(tm), ReDo(tm) Skateboard Co, X-Power(tm), Disguise(r), Moose Mountain(r), Maui(r), Kids Only!(r); a wide range of entertainment-inspired products featuring premier licensed properties; and C'est Moi(tm), 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).

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, or that the Recapitalization transaction or any 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 SubsidiariesCondensed Consolidated Balance Sheets (Unaudited) September 30, December 31, 2020 2019

(In thousands)ASSETS Current assets: Cash and cash equivalents $ 75,189 $ 61,613

Restricted cash 4,631 4,673

Accounts receivable, net 166,789 117,942

Inventory 54,583 54,259

Prepaid expenses and other assets 22,125 21,898

Total current assets 323,317 260,385

Property and equipment 114,457 121,821

Less accumulated depreciation and amortization 100,238 106,562

Property and equipment, net 14,219 15,259

Operating lease right-of-use assets, net 25,473 32,081

Goodwill 35,083 35,083

Intangibles and other assets, net 9,499 22,414

Total assets $ 407,591 $ 365,222

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 139,414 $ 100,711

Reserve for sales returns and allowances 44,217 38,365

Income taxes payable 1,625 2,492

Short term operating lease liabilities 9,661 9,451

Short term debt, net 22,544 1,905

Total current liabilities 217,461 152,924

Long term operating lease liabilities 18,392 25,632

Debt, non-current portion, net 151,379 174,962

Other liabilities 5,871 5,409

Income taxes payable 947 1,565

Deferred tax liability, net 226 226

Total liabilities 394,276 360,718

Preferred stock 1,418 483

Stockholders' equity: Common stock, $.001 par value 5 4

Additional paid-in capital 211,636 200,507

Accumulated deficit (186,081 ) (183,149 )

Accumulated other comprehensive loss (14,841 ) (14,422 )

Total JAKKS Pacific, Inc. stockholders' equity 10,719 2,940

Non-controlling interests 1,178 1,081

Total stockholders' equity 11,897 4,021

Total liabilities, preferred stock and $ 407,591 $ 365,222 stockholders' equityJAKKS Pacific, Inc. and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019

(In thousands, except (In thousands, except per share data) per share data) Net sales $ 242,290 $ 280,130 $ 387,605 $ 446,138

Less cost of sales Cost of goods 122,577 148,735 206,590 254,534

Royalty expense 41,171 45,152 66,531 69,118

Amortization of tools and 3,926 5,384 6,748 9,541 molds Cost of sales 167,674 199,271 279,869 333,193

Gross profit 74,616 80,859 107,736 112,945

Direct selling expenses 13,477 17,993 25,887 34,336

Selling, general and 22,876 24,979 65,827 74,456 administrative expensesDepreciation and 605 1,614 2,244 4,930 amortizationRestructuring charge - 24 1,631 294

Pandemic related charges 145 - 366 -

Acquisition related and - 587 - 5,957 other Income (loss) from 37,513 35,662 11,781 (7,028 ) operationsOther income (expense): Income from joint ventures - - 2 -

Other income (expense), net 112 36 166 (123 )

Change in fair value of 2,809 (463 ) 2,757 (2,992 ) convertible senior notes Change in fair value of (2,707 ) - (624 ) - preferred stock derivative liability Loss on extinguishment of - (13,205 ) - (13,205 ) debt Interest income 3 17 20 64

Interest expense (5,566 ) (4,617 ) (16,656 ) (10,554 )

Income (loss) before 32,164 17,430 (2,554 ) (33,838 )provision for (benefit from)income taxesProvision for (benefit from) (267 ) 1,016 281 1,360 income taxesNet income (loss) 32,431 16,414 (2,835 ) (35,198 )

Net income (loss) 49 (31 ) 97 57 attributable tonon-controlling interestsNet income (loss) $ 32,382 $ 16,445 $ (2,932 ) $ (35,255 )attributable to JAKKSPacific, Inc.Net income (loss) $ 32,066 $ 16,265 $ (3,867 ) $ (35,435 )attributable to commonstockholders Income (loss) per share - $ 8.39 $ 6.00 $ (1.17 ) $ (14.32 ) basic Shares used in income 3,824 2,709 3,307 2,475 (loss) per share - basic Income (loss) per share - $ 4.27 $ 5.08 $ (1.17 ) $ (14.32 ) diluted Shares used in income 6,960 6,035 3,307 2,475 (loss) per share - diluted JAKKS Pacific, Inc. and SubsidiariesReconciliation of Non-GAAP Financial Information (Unaudited)

Reconciliation of GAAP to Non-GAAP measures:



This press release and accompanying schedules provide certain informationregarding Adjusted EBITDA and Adjusted Net Income (Loss), which may beconsidered non-GAAP financial measures under the rules of the Securities andExchange Commission. The non-GAAP financial measures included in the pressrelease are reconciled to the corresponding GAAP financial measures below, asrequired under the rules of the Securities and Exchange Commission regardingthe use of non-GAAP financial measures. We define Adjusted EBITDA as income(loss) from operations before depreciation, amortization and adjusted forcertain non-recurring and non-cash charges, such as reorganization expenses andrestricted stock compensation expense. Net income (loss) is similarly adjustedand tax-effected to arrive at Adjusted Net Income (Loss). Adjusted EBITDA andAdjusted Net Income (Loss) are not recognized financial measures under GAAP,but we believe that they are useful in measuring our operating performance. Webelieve that the use of the non-GAAP financial measures enhances an overallunderstanding of the Company's past financial performance, and provides usefulinformation to the investor by comparing our performance across reportingperiods on a consistent basis.



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

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019

(In thousands) (In thousands) Net income (loss) $ 32,431 $ 16,414 $ (2,835 ) $ (35,198 )

Income from joint - - (2 ) - venturesOther income (expense), (112 ) (36 ) (166 ) 123 netInterest income (3 ) (17 ) (20 ) (64 )

Interest expense 5,566 4,617 16,656 10,554

Provision for income (267 ) 1,016 281 1,360 taxesDepreciation and 4,531 6,998 8,992 14,471 amortizationAcquisition related and - 587 - 5,957 otherRestricted stock 540 857 1,506 1,872 compensation expenseChange in fair value of (2,809 ) 463 (2,757 ) 2,992 convertible seniornotesChange in fair value of 2,707 - 624 - preferred stockderivative liabilityLoss on extinguishment - 13,205 - 13,205 of debtRestructuring charge - 24 1,631 294

Pandemic related 145 - 366 - charges Adjusted EBITDA $ 42,729 $ 44,128 $ 24,276 $ 15,566

Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019

(In thousands, except (In thousands, except per per share data) share data) Net income (loss) $ 32,066 $ 16,265 $ (3,867 ) $ (35,435 )attributable to commonstockholdersRestricted stock 540 857 1,506 1,872 compensation expenseAcquisition related and - 587 - 5,957 otherChange in fair value of (2,809 ) 463 (2,757 ) 2,992 convertible seniornotesChange in fair value of 2,707 - 624 - preferred stockderivative liabilityLoss on extinguishment - 13,205 - 13,205 of debtRestructuring charge - 24 1,631 294

Pandemic related 145 - 366 - chargesTax impact of (12 ) (5 ) (129 ) (20 )additional charges Adjusted net income $ 32,637 $ 31,396 $ (2,626 ) $ (11,135 )(loss) attributable tocommon stockholders Adjusted income (loss) $ 8.53 $ 11.59 $ (0.79 ) $ (4.50 )per share - basicShares used in adjusted 3,824 2,709 3,307 2,475 income (loss) per share- basicAdjusted income (loss) $ 4.76 $ 5.38 $ (0.79 ) $ (4.50 )per share - dilutedShares used in adjusted 6,960 6,035 3,307 2,475 income (loss) per share- diluted View source version on businesswire.com: https://www.businesswire.com/news/home/20201102005938/en/

CONTACT: Gateway Investor Relations Sean McGowan, (949) 574-3860 Managing Director smcgowan@gatewayir.com JAKKS Pacific Jared Wolfson (424) 268-9330 jwolfson@jakks.net