JAKKS Pacific Inc. (JAKK, Financial) filed Quarterly Report for the period ended 2009-03-31.
Jakks Pacific Inc. is a multi-line multi-brand toy company that designs develops produces and markets toys and related products. Principal products are action figures and accessories featuring licensedcharacters Flying Colors molded plastic activity sets clay compound playsets and lunch boxes Wheels division products Child Guidance infant and pre-school electronic toys toy foam puzzle mats and blocks activity sets and outdoor products and fashion and mini dolls and relatedaccessories. JAKKS Pacific Inc. has a market cap of $363.1 million; its shares were traded at around $13 with a P/E ratio of 7.3 and P/S ratio of 0.4. JAKKS Pacific Inc. had an annual average earning growth of 42.1% over the past 5 years.
Traditional Toys. Cost of sales of our Traditional Toys segment was $63.2 million, or 64.8% of related net sales, in 2009, compared to $75.5 million, or 63.2% of related net sales, in 2008, representing a decrease of $12.3 million, or 16.3%. The decrease primarily consisted of a decrease in product costs of $9.4 million, which is in line with the lower volume of sales. Product costs as a percentage of sales increased primarily due to the mix of the product sold with higher product cost. Furthermore, royalty expense for our Traditional Toys segment decreased by $2.2 million and as a percentage of net sales due to lower volume of sales and to changes in the product mix. Our depreciation of molds and tools decreased by $0.7 million primarily due to depreciation now being expensed to correlate with production of goods, instead of it being straight-lined evenly across quarters throughout the year.
Craft/Activity/Writing Products. Cost of sales of our Craft/Activity/Writing Products segment was $5.2 million, or 68.9% of related net sales, in 2009, compared to $4.7 million, or 76.9% of related net sales, in 2008, representing an increase of $0.5 million, or 10.6%. Product costs decreased by $0.7 million and as a percentage of net sales primarily due to the mix of the product sold and lower sales of closeout product. Royalty expense increased by $1.2 million and as a percentage of net sales due to changes in the product mix to more products with higher royalty rates from products with lower royalty rates or proprietary products with no royalty rates. Our depreciation of molds and tools is comparable year over year.
Selling, general and administrative expenses were $54.6 million in 2009 and $48.3 million in 2008, constituting 50.2% and 36.9% of net sales, respectively. The overall increase of $6.3 million in such costs was primarily due to the addition of overhead related to the operations of Tollytots, Kids Only and Disguise ($8.3 million) and increases in product development ($1.8 million), and, offset in part by decreases in direct selling expenses ($0.2 million), general and administrative expenses ($3.1 million) and amortization expense related to intangible assets other than goodwill ($0.5 million). The increase in the acquired companies overhead is mainly due to the fixed overhead and high seasonality of the Disguise acquisition, with the majority of its sales projected in the third quarter of 2009. Product development expenses increased as a result of continued product testing expenses and development of new product. The decrease in direct selling expenses is primarily due to a decrease in advertising and promotional expenses of $0.9 million in 2009 in support of several of our product lines and sales commissions ($0.1 million), offset in part by an increase in other direct selling expenses of $0.8 million to support the increase in domestic sales. From time to time, we may increase or decrease our advertising efforts, if we deem it appropriate for particular products. The decrease in general and administrative expenses is primarily due to decreases in legal expense ($1.9 million), net of insurance reimbursements, bad debt expense ($0.6 million), bonus expense which is based on EPS growth ($0.5 million) and other office cost savings ($0.5 million) implemented at the end of 2008, offset in part by an increase in rent expense ($0.7 million) as a result of additional office rent for new space.
Interest expense was $1.3 million in 2009, as compared to $1.6 million in 2008. In 2009, we booked interest expense of $1.1 million related to our convertible senior notes payable and net interest expense of $0.2 million related to FIN 48 pursuant to our January 1, 2007 adoption of the provisions of FIN 48. In 2008, we booked interest expense of $1.1 million related to our convertible senior notes payable and net interest expense $0.5 million related to FIN 48 pursuant to our January 1, 2007 adoption of the provisions of FIN 48.
Our investing activities used net cash of $15.5 million in 2009, as compared to $17.7 million in 2008, consisting primarily of cash paid for the Creative Designs earn-out of $5.7 million, the working capital adjustment for Tollytots of $1.7 million, the working capital adjustment for Kid Only of $3.4 million, the working capital adjustment for Disguise of $0.9 million, and the purchase of office furniture and equipment and molds and tooling of $4.2 million used in the manufacture of our products, offset in part by the change in other assets of $0.3 million. In 2008, our investing activities consisted primarily of cash paid for the Creative Designs earn-out of $6.7 million, the Play Along earn-out of $6.7 million and the purchase of office furniture and equipment and molds and tooling of $3.5 million used in the manufacture of our products and other assets. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties generally ranging from 1% to 14% payable on net sales of such products. As of March 31, 2009, these agreements required future aggregate minimum guarantees of $112.8 million, exclusive of $49.5 million in advances already paid. Of this $112.8 million future minimum guarantee, $46.3 million is due over the next twelve months.
Read the The complete ReportJAKK is in the portfolios of Third Avenue Management.
Jakks Pacific Inc. is a multi-line multi-brand toy company that designs develops produces and markets toys and related products. Principal products are action figures and accessories featuring licensedcharacters Flying Colors molded plastic activity sets clay compound playsets and lunch boxes Wheels division products Child Guidance infant and pre-school electronic toys toy foam puzzle mats and blocks activity sets and outdoor products and fashion and mini dolls and relatedaccessories. JAKKS Pacific Inc. has a market cap of $363.1 million; its shares were traded at around $13 with a P/E ratio of 7.3 and P/S ratio of 0.4. JAKKS Pacific Inc. had an annual average earning growth of 42.1% over the past 5 years.
Highlight of Business Operations:
In October 2008, we acquired substantially all of the assets of Tollytots Limited. The total initial consideration of $25.5 million consisted of $11.8 million in cash and the assumption of liabilities in the amount of $13.7 million, and resulted in goodwill of $3.0 million. In addition, we agreed to pay an earn-out of up to an aggregate amount of $5.0 million in cash over the three calendar years following the acquisition based on the achievement of certain financial performance criteria, which will be recorded as goodwill when and if earned. Tollytots is a leading designer and producer of licensed baby dolls and baby doll pretend play accessories based on well-known brands and was included in our results of operations from the date of acquisition.Traditional Toys. Cost of sales of our Traditional Toys segment was $63.2 million, or 64.8% of related net sales, in 2009, compared to $75.5 million, or 63.2% of related net sales, in 2008, representing a decrease of $12.3 million, or 16.3%. The decrease primarily consisted of a decrease in product costs of $9.4 million, which is in line with the lower volume of sales. Product costs as a percentage of sales increased primarily due to the mix of the product sold with higher product cost. Furthermore, royalty expense for our Traditional Toys segment decreased by $2.2 million and as a percentage of net sales due to lower volume of sales and to changes in the product mix. Our depreciation of molds and tools decreased by $0.7 million primarily due to depreciation now being expensed to correlate with production of goods, instead of it being straight-lined evenly across quarters throughout the year.
Craft/Activity/Writing Products. Cost of sales of our Craft/Activity/Writing Products segment was $5.2 million, or 68.9% of related net sales, in 2009, compared to $4.7 million, or 76.9% of related net sales, in 2008, representing an increase of $0.5 million, or 10.6%. Product costs decreased by $0.7 million and as a percentage of net sales primarily due to the mix of the product sold and lower sales of closeout product. Royalty expense increased by $1.2 million and as a percentage of net sales due to changes in the product mix to more products with higher royalty rates from products with lower royalty rates or proprietary products with no royalty rates. Our depreciation of molds and tools is comparable year over year.
Selling, general and administrative expenses were $54.6 million in 2009 and $48.3 million in 2008, constituting 50.2% and 36.9% of net sales, respectively. The overall increase of $6.3 million in such costs was primarily due to the addition of overhead related to the operations of Tollytots, Kids Only and Disguise ($8.3 million) and increases in product development ($1.8 million), and, offset in part by decreases in direct selling expenses ($0.2 million), general and administrative expenses ($3.1 million) and amortization expense related to intangible assets other than goodwill ($0.5 million). The increase in the acquired companies overhead is mainly due to the fixed overhead and high seasonality of the Disguise acquisition, with the majority of its sales projected in the third quarter of 2009. Product development expenses increased as a result of continued product testing expenses and development of new product. The decrease in direct selling expenses is primarily due to a decrease in advertising and promotional expenses of $0.9 million in 2009 in support of several of our product lines and sales commissions ($0.1 million), offset in part by an increase in other direct selling expenses of $0.8 million to support the increase in domestic sales. From time to time, we may increase or decrease our advertising efforts, if we deem it appropriate for particular products. The decrease in general and administrative expenses is primarily due to decreases in legal expense ($1.9 million), net of insurance reimbursements, bad debt expense ($0.6 million), bonus expense which is based on EPS growth ($0.5 million) and other office cost savings ($0.5 million) implemented at the end of 2008, offset in part by an increase in rent expense ($0.7 million) as a result of additional office rent for new space.
Interest expense was $1.3 million in 2009, as compared to $1.6 million in 2008. In 2009, we booked interest expense of $1.1 million related to our convertible senior notes payable and net interest expense of $0.2 million related to FIN 48 pursuant to our January 1, 2007 adoption of the provisions of FIN 48. In 2008, we booked interest expense of $1.1 million related to our convertible senior notes payable and net interest expense $0.5 million related to FIN 48 pursuant to our January 1, 2007 adoption of the provisions of FIN 48.
Our investing activities used net cash of $15.5 million in 2009, as compared to $17.7 million in 2008, consisting primarily of cash paid for the Creative Designs earn-out of $5.7 million, the working capital adjustment for Tollytots of $1.7 million, the working capital adjustment for Kid Only of $3.4 million, the working capital adjustment for Disguise of $0.9 million, and the purchase of office furniture and equipment and molds and tooling of $4.2 million used in the manufacture of our products, offset in part by the change in other assets of $0.3 million. In 2008, our investing activities consisted primarily of cash paid for the Creative Designs earn-out of $6.7 million, the Play Along earn-out of $6.7 million and the purchase of office furniture and equipment and molds and tooling of $3.5 million used in the manufacture of our products and other assets. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties generally ranging from 1% to 14% payable on net sales of such products. As of March 31, 2009, these agreements required future aggregate minimum guarantees of $112.8 million, exclusive of $49.5 million in advances already paid. Of this $112.8 million future minimum guarantee, $46.3 million is due over the next twelve months.
Read the The complete ReportJAKK is in the portfolios of Third Avenue Management.
