SANTA MONICA, Calif.--(BUSINESS WIRE)--November 2, 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® 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®, Disney Frozen®, Electronic Arts® APEX Legends™, SEGA® Sonic the Hedgehog™ and Nintendo® Super Mario™. In addition, we’re continuing to see strong support from our internal brands and products like Kitten Catfe™, Xtreme Power Dump Truck™, ReDo™ Skateboard Co. and our re-launch of Eyeclops™.

“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™, Kitten Catfe™, Perfectly Cute™, ReDo™ Skateboard Co, X-Power™, Disguise®, Moose Mountain®, 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).

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 Subsidiaries
Condensed 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 stockholders' equity		$	407,591			$	365,222

JAKKS Pacific, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
			Three Months Ended September 30,								Nine Months Ended September 30,
				2020				2019				2020				2019
			(In thousands, except per share data)								(In thousands, except 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 molds			3,926				5,384				6,748				9,541
	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 administrative expenses				22,876				24,979				65,827				74,456
Depreciation and amortization				605				1,614				2,244				4,930
Restructuring charge				-				24				1,631				294
Pandemic related charges				145				-				366				-
Acquisition related and other				-				587				-				5,957
		Income (loss) from operations		37,513				35,662				11,781				(7,028	)
Other income (expense):
	Income from joint ventures			-				-				2				-
	Other income (expense), net			112				36				166				(123	)
	Change in fair value of convertible senior notes			2,809				(463	)			2,757				(2,992	)
	Change in fair value of preferred stock derivative liability			(2,707	)			-				(624	)			-
	Loss on extinguishment of debt			-				(13,205	)			-				(13,205	)
	Interest income			3				17				20				64
	Interest expense			(5,566	)			(4,617	)			(16,656	)			(10,554	)
Income (loss) before provision for (benefit from) income taxes				32,164				17,430				(2,554	)			(33,838	)
Provision for (benefit from) income taxes				(267	)			1,016				281				1,360
Net income (loss)				32,431				16,414				(2,835	)			(35,198	)
Net income (loss) attributable to non-controlling interests				49				(31	)			97				57
Net income (loss) attributable to JAKKS Pacific, Inc.			$	32,382			$	16,445			$	(2,932	)		$	(35,255	)
Net income (loss) attributable to common stockholders			$	32,066			$	16,265			$	(3,867	)		$	(35,435	)
	Income (loss) per share - basic		$	8.39			$	6.00			$	(1.17	)		$	(14.32	)
	Shares used in income (loss) per share - basic			3,824				2,709				3,307				2,475
	Income (loss) per share - diluted		$	4.27			$	5.08			$	(1.17	)		$	(14.32	)
	Shares used in income (loss) per share - diluted			6,960				6,035				3,307				2,475

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 September 30,									Nine Months Ended September 30,
			2020				2019					2020				2019
		(In thousands)									(In thousands)
Net income (loss)		$	32,431			$	16,414				$	(2,835	)		$	(35,198	)
Income from joint ventures			-				-					(2	)			-
Other income (expense), net			(112	)			(36	)				(166	)			123
Interest income			(3	)			(17	)				(20	)			(64	)
Interest expense			5,566				4,617					16,656				10,554
Provision for income taxes			(267	)			1,016					281				1,360
Depreciation and amortization			4,531				6,998					8,992				14,471
Acquisition related and other			-				587					-				5,957
Restricted stock compensation expense			540				857					1,506				1,872
Change in fair value of convertible senior notes			(2,809	)			463					(2,757	)			2,992
Change in fair value of preferred stock derivative liability			2,707				-					624				-
Loss on extinguishment of debt			-				13,205					-				13,205
Restructuring charge			-				24					1,631				294
Pandemic related charges			145				-					366				-
Adjusted EBITDA		$	42,729			$	44,128				$	24,276			$	15,566
		Three Months Ended September 30,									Nine Months Ended September 30,
			2020				2019					2020				2019
		(In thousands, except per share data)									(In thousands, except per share data)
Net income (loss) attributable to common stockholders		$	32,066			$	16,265				$	(3,867	)		$	(35,435	)
Restricted stock compensation expense			540				857					1,506				1,872
Acquisition related and other			-				587					-				5,957
Change in fair value of convertible senior notes			(2,809	)			463					(2,757	)			2,992
Change in fair value of preferred stock derivative liability			2,707				-					624				-
Loss on extinguishment of debt			-				13,205					-				13,205
Restructuring charge			-				24					1,631				294
Pandemic related charges			145				-					366				-
Tax impact of additional charges			(12	)			(5	)				(129	)			(20	)
Adjusted net income (loss) attributable to common stockholders		$	32,637			$	31,396				$	(2,626	)		$	(11,135	)
Adjusted income (loss) per share - basic		$	8.53			$	11.59				$	(0.79	)		$	(4.50	)
Shares used in adjusted income (loss) per share - basic			3,824				2,709					3,307				2,475
Adjusted income (loss) per share - diluted		$	4.76			$	5.38				$	(0.79	)		$	(4.50	)
Shares used in adjusted income (loss) per share - diluted			6,960				6,035					3,307				2,475