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Executives

Stephen G. Berman - Co-Founder, Chief Executive Officer, President, Secretary and Director

Joel M. Bennett - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Gerrick L. Johnson - BMO Capital Markets U.S.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

Linda Bolton-Weiser - B. Riley Caris, Research Division

Sean P. McGowan - Needham & Company, LLC, Research Division

JAKKS Pacific (JAKK) Q3 2013 Earnings Call October 23, 2013 9:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for joining today's JAKKS Pacific Third Quarter 2013 Earnings Call with management. Today, JAKKS will review the results for the third quarter ended September 30, 2013, which the company released earlier today.

On the call today are Stephen Berman, President and Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your questions. [Operator Instructions]

Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share for 2013, as well as any other forward-looking statements concerning 2013 and beyond are subject to Safe Harbor protection under federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

With that, I will turn the call over to Mr. Berman.

Stephen G. Berman

Good morning, and thank you, everyone, for joining us today. We are pleased with our third quarter results and believe we're on track to achieving our full year 2013 guidance. Highlights of our third quarter sales include Disney Princess dolls, dress-up and role play, Sofia the First dress-up and role play items, 31-inch Giant Action Figures, Disguise Halloween costumes, Black & Decker boy role play and our Pre-School Ride On and activity tables. These are great examples of our core evergreen brands and categories that are the foundation of our business. We recently completed our Fall Toy preview meetings and are excited about the enthusiastic response from retailers, license owners and other industry partners to our 2014 product line including our DreamPlay Toys and products and technologies. We launched the Ariel’s Musical Surprise app this month which we are promoting to our customers through TV commercials, call-outs on product packaging and PR and social media activities. The Toys"R"Us big brand catalog dropped into 1.5 million homes this month and features our DreamPlay enhanced Little Mermaid products with a call to action to download the app.

Third quarter was a strong quarter for JAKKS International driven by our 31-inch Action Figures, Spy Net, Smurfs and Sofia the First products. I will provide more highlights on our International business later in the call. We, along with our retailers, are focused on managing risks on new product launches, but for JAKKS, we believe with our strong basic categories, where we are leaders in and are a major competitor, we have an extremely strong core business now and going forward. It is a challenging retail environment but with our previously announced restructuring, our strong basic core business, our DreamPlay and technology initiatives, we believe we will lay groundwork for a more profitable 2014 and beyond. Looking ahead to 2014, we are optimistic about future opportunities including the launch of our licensed and non-licensed DreamPlay and technology kid products and the solid performance of our core category business lines which spans a wide spectrum that includes Action Figures, Dolls, Dress-up and Role Play, Halloween costumes from Disguise, kids furniture and seasonal products from Kids Only!, infant and pre-school products from Tollytots, ride-on vehicles and wagons from Moose Mountain and outdoor and junior sports products and Impulse Toys from Maui toys. In addition, we have an aggressive international plan of expansion and growth going forward in 2014 and beyond.

I would now like to turn the call over to Mr. Joel Bennett to review our financial results for the third quarter of 2013. And then I will give a further update of our business this year and beyond. Joel?

Joel M. Bennett

Thank you, Stephen, and good morning, everyone. Net sales for the third quarter of 2013 were $310.9 million compared to net sales of $314.5 million reported in the comparable period in 2012. Net income for the third quarter was $36.6 million or $1.11 per diluted share, which reflects the net dilutive impact of $0.21 per share associated with the common shares underlying the convertible senior notes recently issued and repurchased in July 2013. This compares to net income of $30.4 million, or $1.10 per diluted share reported in the comparable period in 2012. Net sales for the 9 months ending September 30, 2013 were $495.2 million compared to $533.3 million in 2012. The net loss for the 9-month period was $37.8 million or $1.73 per diluted share, which includes second quarter charges for license minimum guarantee shortfalls of $14.4 million and inventory impairments of $14.9 million. This compares to net income for the first 9 months of 2012 of $14.7 million, or $0.59 per diluted share, which included $4.1 million, or $0.10 per diluted share, of pretax financial and legal advisory fees and expenses related to that 2011 indication of interest. Worldwide sales of products in our Traditional Toys and Electronics segment, which includes dolls, action figures, vehicles, electronics, plush and pet products were $156.9 million for the third quarter of 2013 compared to $172.8 million for the third quarter of 2012. And sales for Traditional Toys were $243.9 million for the first 9 months of 2013 versus $286.6 million for the first 9 months of 2012. Sales this quarter in this segment were led by our Disney Princess Dolls, Disney Fairies, Cabbage Patch Kids, TV games and 31-inch Giant Action Figures. Those sales overall was down this quarter due to declines in Monsuno and Winx Club.

Worldwide sales from our Role Play, Novelty and Seasonal Toys segment, which includes Role Play products, Novelty toys, Halloween Costumes, Indoor and Outdoor Kids Furniture and Outdoor activity and pool toys were $154 million in the third quarter of 2013 compared to $141.7 million for the third quarter in 2012. And sales for Role Play, Novelty and Seasonal Toys were $251.3 million for the first 9 months of 2013 versus $246.6 million for the first 9 months of 2012. Disney Princess dress up and role play, Sofia the First and Disguise Halloween costumes dominated sales in this category, driving the category to an overall increase this quarter. Included in the category numbers are international sales of $57.9 million for the third quarter of 2013 compared to $70.5 million for the third quarter of 2012. International sales for the first 9 months of 2013 and 2012 were $95.5 million and $109.5 million, respectively. Smurfs, Disney Princess dolls and Spy Net drove third quarter sales in the international markets.

Gross margin for the third quarter of 2013 and 2012 was 29.4% and 30.8% of net sales, respectively. And gross margin for the first 9 months of 2013 was 23.6% of net sales compared to 31.3% of net sales in the first 9 months of last year. The decrease as a percentage of net sales in 2013 for the 9-month period is primarily due to charges taken in the second quarter for license minimum guarantee shortfalls and related inventory impairment. Normal margins are expected to be achieved in the fourth quarter.

SG&A expenses in the third quarter of 2013 were $51.7 million or 16.6% of net sales as compared to $59.4 million or 18.9% of net sales in 2012. SG&A for the first 9 months of 2013 was $145.5 million or 29.4% of net sales compared to $149.2 million or 28% of net sales. The increase as a percentage of net sales for the year-to-date is primarily attributable to lower net sales and the addition of incremental overhead and amortization related to our Maui acquisition, DreamPlay start-up and development expenses, though offset in part by the impact of previously announced headcount reductions.

Operations used cash of $59.9 million for the third quarter of 2013 compared to being cash flow neutral in 2012. As of September 30, 2013, the company's working capital was $195.2 million, including cash and equivalents and marketable securities of approximately $51.7 million. Depreciation and amortization was approximately $9.3 million in the third quarter of 2013 compared to $11.2 million for the third quarter of 2012. And for the 9-month period, D&A was $16.9 million and $18.1 million for 2013 and 2012, respectively.

Capital expenditures were $2 million for the third quarter of 2013 compared to $4.2 million for the third quarter of 2012, and in line with our expectations. For the full year, we now expect capital expenditures to amount to around $12 million. Accounts receivable, as of September 30, 2013, were $258 million, up from $242.6 million at the end of the third quarter of 2012, due to higher domestic sales in 2013, which carry longer payment terms. DSOs in 2013 increased modestly to 75 days, up 5 days from 2012. Inventory, as of September 30, 2013, was $59.1 million, down from the September 30, 2012 level of $73.2 million as we continue to manage inventory levels resulting in lower DSIs of 30 days in 2013, down from 38 days in 2012.

In July, we issued $100 million of principal amount of 4.25% senior convertible notes due in 2018 and repurchased $61 million of our 44.5% senior convertible notes due in 2014 resulting in additional liquidity of $35 million. Shares underlying the new notes is 11.4 million shares and shares underlying the repurchase notes was 4.2 million shares, resulting in a net increase in diluted shares outstanding of 7.2 million shares.

As for our guidance, we currently anticipate net sales for the full year of approximately $620 million, as previously announced, with a loss per share of approximately $56.1 million or $2.56 per diluted share. And with that, I will return the call back to Stephen Berman.

Stephen G. Berman

Thank you, Joel. We could not be more pleased with the performance of our Sofia the First products. The brand is building to be a powerhouse license with amazing products. We are currently chasing the upside of retail and have increased our forecast for our Dress-Up and Role Play lines. Our Sofia the First royal talking vanity was included on the Toys "R" Us hot list and our Sofia the First transforming dress and trunk on K-Mart's fabulous 15 list. We have secured rights in Latin America, Australia, China, Taiwan and Hong Kong for our Sofia large doll line under our Tollytots division. This will begin shifting in the spring 2014 and this has a potential to have significant growth of our doll business in 2014 and beyond.

The Little Mermaid Diamond Edition Blu-ray DVD launched this month and the sell-through of our light-up dress and Under the Sea! Ariel feature doll is doing exceptionally well. Our Under the Sea! Ariel was featured recently by Disney on their Disney Dozen top choice for holidays. Products for the new Disney animated feature film, Frozen, began shipping this quarter and we have promotional plans in place at each key retailer. We are looking forward to a solid performance of our Frozen dolls, dress-up and role play products for the holidays with a strong spike expected around spring 2014 during the DVD release. Our Disney Fairy products are starting to pick up momentum at retail. Sales for Cabbage Patch Kids continue to be a solid contributor. Looking ahead, we are extremely excited about the anticipated launch in December of our My World line of mini play environments, based on top growth brands like Claire's, Sprinkles and LPI, just to name a few. This will also feature the compatibility with our My World DreamPlay app.

For our Boys business, our 31-inch Giant Action Figures featuring many top licenses has extremely strong sell-throughs at retail. We launched the Darth Vader this year which is doing extremely well and our Clone Troopers are hitting shelves later this year. Our Man of Steel, Batman and Power Rangers are also strong contributors to the success of this line. Our Black & Decker line is outpacing our expectations due to the expanded distribution and increased retail promotions. And our Black & Decker junior play work bench was included on Kohl's 15 Dream Toy list.

Moving onto Pre-School. Our full range of Daniel the Tiger pre-school toys is off to a very strong start at one of our top retailers in the U.S. Daniel the Tiger's Neighborhood has been a top 10 pre-school programs since September 2012 launch on PBS, which has ceded us for a high product demand. In addition, Daniel the Tiger gets 40 million streams per month on pbskids.com. The next highest property gets 16 million per month by comparison. We will further stand our Daniel the Tiger outrange with Role Play, Dress-Up and costumes for 2014. We have the master toy rights for Daniel the Tiger and we plan to have the complete line going into 2014 and beyond. Our Moose Mountain division, which is the leader in great evergreen pre-school products such as foot to floor ride-ons, inflatable ball pits and our K games, this having a great year with continued year-over-year growth for the third quarter and year-to-date.

Our Kids Only! division also had a solid third quarter with performance of their co-branded Big Wheels featuring Disney Princess and Cars licenses, along with their licensed activity tables, which continue to be a steady in evergreen business at all of our major retailers. For seasonal, we are very pleased with our Disguise Halloween business with top licenses including Doc McStuffins, Sofia the First, Monsters University, Marvel Superheroes and Disney Princesses. With Halloween falling on a Thursday this year, we are expecting strong retail sell-through of our costumes with customers buying multiple costumes for the entire family to wear for Halloween and through that weekend. We recently announced an expanded offering of Halloween costumes and accessories based on many Marvel superhero characters and iconic comic book properties. Disguise continues to build its Marvel costume portfolio with new theatrical properties including Marvel's Captain America, The Winter Soldier, Marvel's Guardian of Galaxy and The Amazing Spiderman 2, which are all expected to be available at retailers nationwide for 2014 Halloween season. Despite challenging spring weather, our innovative Maui toys digital products did solid business and retail in the spring and summer with Wave Hoops and Sky Balls as the highlights of their 2013 offerings. Third quarter is traditionally a lower volume quarter for Maui as they finish their peak season and they gear up for spring, summer shipment in the latter part of fourth quarter 2013 and the early part of first quarter 2014.

Now, I'd like to turn our attention to JAKKS' International business, which we delivered a strong performance outside of the decline of our Monsuno products and financial weakness of one of our major international customers, which we discussed on our last earnings call. We had strong U.K. sales at many key retailers in the United Kingdom and top products leading the way included our 31-inch Giant Action Figures, Spy Net and Smurfs. Sofia the First was exceptionally strong for us internationally as it was in the U.S. And as I mentioned earlier, we've secured the rights for Latin America, Australia, China, Taiwan and Hong Kong for our Sofia large dolls which we will begin shipping in spring 2014. Sofia the First headlines the expansion of our Disney business internationally and we'll distribute even more of our Disney licensed merchandise in China and the Latin America region beginning fourth quarter this year. These 2 territories are part of the roster of territories that currently offer JAKKS' Disney products which also includes Europe. The international expansion of our Disney licensed portfolio and in particular, our Disney Princess large dolls, which is doing stellar business in countries including the U.K., France, Russia and the Nordic is significant for JAKKS to continue to grow our international business beyond traditional North American markets. These regions, as well as others, represent a robust consumer base for the enthusiasm we are experiencing of our product lines, driven by our quality toy innovation and strong global distribution efficiencies. We are also very excited that we completed the license agreements to offer our new Nintendo products in all key countries worldwide in 2014. We are extremely excited for the launch of our DreamPlay's Disney's Ariel’s Musical Surprise app this month. The app, which is now available on the iTunes App Store, enhances the at-home toy experience on our select Little Mermaid toys and role play items on shelf now at retailers nationwide, including Ariel's Musical Light-up Dress, Musical Instrument Set, Magical Mermaid Kitchen and the Ariel keyboard vanity. The launch of the app was well timed to the release of the Little Mermaid Diamond edition on Blu-ray DVD, which also launched this month. We are extremely excited for children to experience the magical underwater world of Ariel with 3D game-play rendering for a unique and truly magical experience never before available. Response from players of the Ariel’s Musical Surprise app has been nothing short of fantastic. The initial responses from consumers and children have been wonderful and proves to us that the combination of physical and digital play is part of children's play patterns for the future. We previewed our DreamPlay 2014 line to our retail partners this month and we're looking forward to launching more products and experiences that push the boundaries of technology based play patterns. Our 2014 offerings will include products targeting both boys and girls and ranged in ages for 2 to 14 with a mix of JAKKS' own IT and licenses. Our line will capitalize on various role of play patterns such as nurturing play, fashion play, humor and imaginative play.

We are committed and focused on achieving and are on track in achieving our restructuring and realignment of our business unit that commenced during the second half of this year. The rightsizing of our businesses staff, office space and other expenses has allowed us to gain strong financial savings going into 2014. These savings also has turned to strong efficiencies aligned our business unit to work more closely together and achieve benefits by sharing resources from all areas such as design, R&D, sales, merchandising, just to name a few. We have been able to achieve better focused products development by utilizing more talent located in a couple of locations allowing all staff to work closer with one another while gaining financial efficiencies and vigorous drive and cohesive R&D that can be spread across different areas of business units versus having talent and staff being spread out at offices and staff being underutilized due to being located at various cities and states. Throughout this past month of October, we again previewed our 2014 previews to U.S. and international customers and license owners. We could not be more proud and more excited at the broad range of every category and products presented. We have had many of our customers expressing that this show and the lineup of product they previewed has been some of the best products that they have seen from JAKKS and its divisions in over the past 4 years and we cannot be more right on track with today's kids play patterns and categories of focus. The broad range of evergreen products in addition with our DreamPlay and technology initiatives, we are ready and excited in completing this year and looking forward to 2014 and beyond to be a more profitable and more focused and more diversified JAKKS in the U.S. and abroad.

Thank you for your time, and with that, we will wrap up the prepared portion of the call and open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And on the line, we have Scott Hamann from KeyBanc.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Joel, could you help us quantify the impact of the restructuring actions that you've taken and maybe some of the timing associated with some of those decisions and how it's going to flow-through going forward?

Joel M. Bennett

Sure. We actually commenced them, that third week in July after we had announced earnings and the financing. It includes headcount approximately 100 people, or 12% of the workforce, which equates to about $8 million and other items, including leases, travel outside services and so forth, all of these actions are phased in over that period of time -- through the end of the year so as to not impact adversely into the operations. So, we expect to have a full year impact in '14.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

Okay. And you alluded to having what you call normal margins in the fourth quarter. Can you kind of help us understand what you mean by normal margins and as we move into '14 and you guys have talked about a return to profitability, what we should expect as kind of an ongoing margin structure for this business?

Joel M. Bennett

North of 30%. Basically, that eliminates or significantly reduces the inventory impairment as well as license guarantee shortfalls. Some of the new products from DreamPlay will actually expand our overall margins as we're developing products, essentially from the ground up with the technology. So we will be establishing the retail price points and the value and within that construct, we'll be able to enhance our gross margin.

Scott W. Hamann - KeyBanc Capital Markets Inc., Research Division

What about on an operating margin basis?

Joel M. Bennett

In the short term, we're shooting for north of 5%. It's still well early in the process. We just completed Toy Fair, but once we get all the line listings and the 2014 product solidified, we'll be able to give more color on that but in that range, is our short-term goal.

Operator

From Piper Jaffray, we have Steph Wissink online.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a couple of questions for us. First guys, it sounds like the third quarter came in a bit of ahead of how you have planned it. Yet you maintained the full year guidance so, how should we think about that? Is that conservatism on the fourth quarter? Is that a shift in the flow of business from -- or this year versus last year? And then second question, just a follow-up to the earlier question related to DreamPlay, can you talk a little bit about the relative side of that business potential in 2014 and the product margin versus the company average?

Joel M. Bennett

For the third quarter and the remaining part of the year, we're comfortable with our estimate that we gave out during second quarter and reaffirmed during third quarter. We are taking a cautious approach to ensure that the retail sell-throughs and buy-ins stay consistent. At the same time, the sell-throughs that we have currently on our products throughout the segmentation from Halloween to our evergreen toy products are doing extremely well. So we are just taking a approach looking forward and ensuring that we have a good holiday season. Our goal is we had a rough past and we want to be conservative and ensure that we have a steady business going forward. And that's the approach we are taking. There's the business going forward is a lot of evergreen singles and doubles. We have some very strong products moving ahead, such as Sofia the First line, both in the U.S. and abroad. Daniel the Tiger, but we are looking at things and taking a cautious approach. On the DreamPlay initiatives and the technology initiatives, at this time we're not breaking out what those sales or segmentation of businesses will be for 2014 until we give a outlook for 2014 at a later date.

Operator

From BMO Capital Markets, we have Gerrick Johnson online.

Gerrick L. Johnson - BMO Capital Markets U.S.

Couple of product questions for you. DreamPlay retail, can you tell us where that is? We're out in stores just a couple of days ago, we didn't see it anywhere. So what retailers, what aisle should I be -- should I be looking in to find it?

Joel M. Bennett

You could look at both Toys"R"Us, Target and Walmart were the initial launches. And you would look under the girls category where Little Mermaid is. It's been set in the sell-throughs that we're getting currently are going beyond our expectations, but it is out there and it is set, so if you're not seeing it, it is either sold through and not pulled back from either the back room of a retailer or back at the DCs. So, it is out at retail, at those 3 major retailers. The My World DreamPlay product launches at Walmart, 12/1, with the app launching 12/1 at the same time.

Gerrick L. Johnson - BMO Capital Markets U.S.

Okay. We'll go with the assumption that it sold-through and I'm sorry, we didn't see it. So how about that Daniel, will you expand that retail beyond Toys"R"Us next year?

Joel M. Bennett

Yes. Actually, we just had all of our major retailers and -- not just major retailers, all of our retailers from the drug trades to the big-box stores and our line has expanded dramatically on an SKU basis. And as we've had such amazing results with Daniel the Tiger as Sofia the First is outpacing everyone's expectation and at the same time, Daniel the Tiger's sell-through is equal or more to Sofia the First, so retailers are backing it very strongly and we expect that to be a nice part of our business for next year.

Gerrick L. Johnson - BMO Capital Markets U.S.

Yes, it looks like a good license. Last question, what's your #1 selling Halloween costume this year?

Joel M. Bennett

I can't tell you that because I don't know what it is. Our sell -- because the sell-in is different than sell-through, Gerrick, and we don't -- right now, this is the biggest sell-through period at -- for Halloween, it's the last 2 weeks. I don't have the answer so I don't want to give you a guess but you could call back and I can get the answer within the next day from our President of that division.

Operator

From Stifel, Nicolaus, we have Drew Crum online.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Guys, you seem to have an increased focus on international. Can you talk about how you're thinking about what this could comprise of the percent of the total, is it intermediate to longer-term? And then you also mentioned, increased usage or utilization of the Disney properties. What is the margin profile on that business?

Stephen G. Berman

On the International business, we've had it undertaken for over a year or a year and a half of true expansion. In fact, we're showing, and at Mumbai Toy Fair in India and we're in the process of making a strong distribution deal in India. I think, even the Toy Association expressed that the Indian market as well as the Chinese, are one of the fastest-growing markets internationally. But we have been majorly focused in China, Latin America, Eastern Europe, and now that we have more of our own content as well as a lot of our licenses now we have international territories, that gives us a very strong boost to really penetrate these markets and in fact, the Nordic and Russia, we've seen extremely strong growth in our international segmentation. So, we believe the business should get to 40% of our business going forward in the next couple of years. It's a very fast-growing business. We have a great team and in addition to the great team, we have the great product that's necessary to go abroad outside of North America.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, got it. And then, I understand there was some change to the relationship with Disney under DreamPlay. Can you talk about what the pipeline of products or content looks like for DreamPlay with Disney going forward?

Stephen G. Berman

Well, we work very closely with Disney. In fact, the app is doing excessively well for Disney. They gave us a quick update, we're not allowed to give stats on it, but they are well more pleased than expected of how many downloads has occurred. And our relationship with Disney has been -- is very broad but what we're focusing on is the technology and appropriate areas. So for both boy and girl, with our launches with Disney for DreamPlay next year are under wraps while we are working with them, and then when the time comes, when we do the announcement of our categories under DreamPlay, we will certainly talk about what we're doing with Disney.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So Stephen, just to confirm, there will be new Disney properties associated with DreamPlay in 2014?

Stephen G. Berman

Yes.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Last question, just some accounting questions. Joel, can you quantify what the impact of the tax deferral was in the quarter? And then also, you mentioned that the day sales outstanding were higher due to greater sales domestically and I guess, I would have thought it would have been higher with internationals sales being greater, just wanted to get some qualification on that?

Joel M. Bennett

Actually, it's domestic versus FOB shipping. The proportion to international accounts didn't change much. The FOB sales are done on a letter of credit and they are generally collected within 2 or 3 weeks versus 60 days plus extended dating on a lot of the Disguise accounts because of the high seasonality of that business.

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that makes sense.

Joel M. Bennett

What was the first part? Oh, the tax. What were you referring to actually on the tax?

Andrew E. Crum - Stifel, Nicolaus & Co., Inc., Research Division

There was a tax benefit, I just wanted to know if you could quantify the impact on the quarter?

Joel M. Bennett

Actually, there are no tax benefits. What the provision is that we recently completed our transfer pricing which allocates the taxable income between Hong Kong and the U.S. So it's more reflective of the loss in the U.S. which has no benefit or provision and so it's essentially the income tax on the Hong Kong earnings for what they'll keep through the transfer pricing analysis.

Operator

From Ascendiant Capital, we have Edward Woo online.

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

About the retail environment. As -- how do you characterize it as we're about a month away from the beginning of Black Friday? And has it changed much since last quarter?

Stephen G. Berman

So, I could give you a better understanding as we just got through listening to a lot of our customers, both the U.S. and abroad. They are, I would say, more optimistic in the sense of its back to the basics and products that are more evergreen. I think, retailers are staying away from hit driven properties and not taking big inventory positions on items. They are taking good inventory positions online. What we've seen in our own personal sell-through has been really across the board because we're in so many different segments from -- Halloween is currently now, our spring summer shipments are over. Our Moose Mountain to our girls division to our Pre-School division, it's so diverse in the different segmentations at retail. I mean, we sell to over 15 different buyers at 1 retailer. So we're seeing really nice traction. Again, that's just currently what we see as of today. And very similar abroad, there's -- we had a problem what we discussed second quarter with one of our international customers and that customer, we believe, will be back to a somewhat stronger strength for next year and outside of the areas of businesses that we were highly driven in the sense of marketing and advertising called Winx and Monsuno, that were really based off of being placed on strong TV strip and daily which didn't occur on the network that we were working with. Everything else in our line is really streamlined and selling well and we're not hearing anything truly negative at retail, we're hearing that this is just nothing really, really, really amazing. Our Sofia the First line is probably the hottest property in our toy industry right now. The ratings, we only launched it for, I think, the last 4 or 5 months at a retailer and the numbers have grown well outside of our expectation. But, it's a long build, I think retail looks solid for the remaining part of this year.

Operator

From B. Riley, we have Linda Bolton-Weiser online.

Linda Bolton-Weiser - B. Riley Caris, Research Division

So, in terms of a cash flow performance in the quarter, I mean, it was kind of negative, more negative than I would have expected maybe with the operating cash flow and I know it will be stronger in the fourth quarter, but is there anything unusual in that number? And also, can you tell us what your peak working capital need will be in the first half of 2014? Like I'm guessing it's around $90 million to $100 million but I don't know. And in what months does that peak working capital occur?

Joel M. Bennett

The cash flow for this quarter, definitely met our expectations. The biggest draw in the cash was the growth in receivables. And as you said, we go into a heavy collection period and in fact, throw off most of our cash over the next couple of months. In terms of peak needs, it would probably be mid-second quarter but it's somewhere south of the $90 million, we -- we don't have much working capital needs. Most of the sales of the business still on an FOB basis, so we're able to grow without much use of capital.

Linda Bolton-Weiser - B. Riley Caris, Research Division

Okay. And then in the near-term, you had referred to trying to get a bank revolving credit facility. Do you think that these results being on target here in the third quarter are going to help that process? Or do you think you actually don't need that in order to get through 2014? Or can you give some color on that?

Joel M. Bennett

Yes, we actually don't need it but certainly, Q3 was an inflection point for us. One is it's showing the world at large that we still have a substantial business that can be very profitable. What we would look to do is implement the lines for a couple of reasons. One, dry powder for acquisitions. Also, we have a $39 million of our 4.5% convert due in November. So to the extent that the...

Stephen G. Berman

November.

Joel M. Bennett

November of 2014 and to the extent that we can opportunistically buy some of that back at a discount, I know it's been trading a little bit all over the place. So, we'll evaluate that but we do have that liquidity event coming up. We believe that the cash on hand and cash flow we'd be equipped to take that out but we'd certainly like to have a little backstop with a revolving line of credit. We think it's a good non-dilutive layer to our capital structure.

Linda Bolton-Weiser - B. Riley Caris, Research Division

Great. And then, can you just give me the year-to-date depreciation and amortization number? I just missed that, for the 9 months.

Joel M. Bennett

Oh, sure. $9.3 million for the third quarter and $16.9 million for the year-to-date.

Linda Bolton-Weiser - B. Riley Caris, Research Division

And a question on the DreamPlay. You sound really optimistic about it for 2014? Do you have any sense for how many items or SKUs there will be in the line? Or what percentage of your total sales -- I'm still thinking even with really good growth it will still be relatively small percentage of your sales next year? Can you put some numbers around it?

Stephen G. Berman

We cannot give numbers in the sense of what it equates to for 2014. It's too early for us to give guidance or information for '14. But there'll be well over 20 SKUs in that area. Licensed and unlicensed and also -- it will also -- be launched internationally in 2014.

Operator

From Needham & Company, we have Sean McGowan online.

Sean P. McGowan - Needham & Company, LLC, Research Division

Most of my questions are housekeeping nature. Joel, can you just confirm that the share calculation for the fourth quarter is essentially whatever your basic number is, plus the 11.4 minus 4.2?

Joel M. Bennett

No. Actually, because in periods of loss, you use the basic, so you don't show the converts as converted. There's also some quarters where there is modest income but we have to run that calculation each quarter. So, in the fourth quarter, we would use basic for both the quarter and the year-to-date because of the loss.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. And in terms of Maui, can you just comment on whether Maui was a contributor to growth in the quarter and like what's the year -- I know you didn't have it for the full year last year, so for the 9 months, how much of the sales in the 9-month period were Maui?

Joel M. Bennett

Maui was actually up in the third. We acquired them in the third quarter of last year and they were actually up year-over-year and their business is in the $20 million -- between $20 million and $30 million and they're on track to achieve that.

Sean P. McGowan - Needham & Company, LLC, Research Division

That's for the full year, you mean?

Joel M. Bennett

Yes.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. And it's -- but it's much more of the first half business because of the nature of the product?

Joel M. Bennett

Correct, yes. Seasonal and Outdoor.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. And why -- you commented on why the gross margin -- in your prepared remarks, you commented on why the gross margin was lower. I think, you were commenting on the first 9 months and while it's not down a lot, in the third quarter, why is it down at all in the third quarter?

Joel M. Bennett

Actually, Accounting 101. We capitalized a certain amount of our warehousing cost and it's a function of how much inventory we purchased. With a carryover inventory from 2012 and the lower inventory purchases in general, a higher percentage of our -- of the direct selling was allocated to cost of goods, so we had -- but overall other direct selling was down. It's just a higher amount was allocated to cost of goods through that mechanism.

Sean P. McGowan - Needham & Company, LLC, Research Division

Just so I understand it, you mean that because the inventory is lower, the allocation of expenses is higher or something like?

Joel M. Bennett

Because inventory purchases were lower, the allocation -- it changes the percentage allocated to cost of goods. So, if we had purchased a lot more, you would actually see margin expansion.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. So just go with the 30%-ish plus, is what you consider normal, not this quarter?

Joel M. Bennett

Correct.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. Can you remind us of, has there been any major change and what percentage of the cash is U.S. versus outside the U.S.?

Joel M. Bennett

With the issuance of the new convert, it added the $35 million of liquidity to the U.S. Right now, it's $20 million here and the balance in Hong Kong.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay, I didn't know if there was any transfers back and forth.

Joel M. Bennett

No, we have ongoing transactions between the companies we buy inventory from Hong Kong, we charge them a management fee, so there's a continuous flow of activity between the entities in the ordinary course. But no borrowings per say. These are just trade receivables between the companies.

Sean P. McGowan - Needham & Company, LLC, Research Division

Okay. And what do you expect to be the effect of tax rate for the whole year?

Joel M. Bennett

We're looking at about 3% which basically reflects the tax on the Hong Kong income since we don't have any income in the U.S. So, it will be aberrational in that respect but we expect to be fully taxed for financial reporting next year in the 18% to 20% range.

Operator

Thank you. This concludes our question-and-answer session. I will now turn it back over to Mr. Stephen Berman for closing remarks.

Stephen G. Berman

Thank you, everyone for the call. We had a lot of people attending this call and we have actually had a good chance to meet with investors and analysts throughout the few weeks and we're excited to complete this year and move forward into 2014. So thank you very much. Bye-bye.

Operator

And this concludes today's conference. Thank you for joining. You may now disconnect.

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