Jakks Pacific Inc: Form 10-Q for the period ended Mar 31, 2026

The following discussion and analysis of financial condition and results of operations should be read together with our condensed consolidated financial statements and notes thereto, which appear elsewhere herein.

Disclosure Regarding Forward-Looking Statements

This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this Report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like “intend,” “anticipate,” “believe,” “estimate,” “plan” or “expect,” or other words of a similar import, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based upon information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors (e.g., see “Risk Factors”) that could cause our actual results to differ materially from our current expectations elsewhere in this Report. You should understand that forward-looking statements made in this Report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.

Critical Accounting Estimates

Our critical accounting policies and estimates are included in the 2025 Annual Report on Form 10-K and did not materially change during the first three months of 2026.

New Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

Results of Operations

The following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales:

(Unaudited)

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The following unaudited table sets forth, for the periods indicated, certain statements of operations data by segment (in thousands):

(Unaudited)

Comparison of the Three Months Ended March 31, 2026 and 2025

Net Sales

Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $100.1 million for the three months ended March 31, 2026 compared to $107.4 million for the prior year period, representing a decrease of $7.3 million, or 6.8%. The decrease was driven by lower sales from North American customers despite higher sales from our International regions. Dolls, Role-Play/Dress-up sales were down 32.4% versus a year ago due to lower sales related to the Moana 2 Movie product as well Disney Princess products. Net sales from the Action Play & Collectibles division were up 28.9% due to higher net sales from the Super Mario Movie 2 products.

Costumes. Net sales of our Costumes segment were $6.6 million for the three months ended March 31, 2026 compared to $5.8 million for the prior year period, representing an increase of $0.8 million, or 13.8%. The increase was primarily due to increased sales related to Nintendo costumes.

Cost of Sales

Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $66.1 million, or 66.0% of related net sales for the three months ended March 31, 2026 compared to $69.2 million, or 64.4% of related net sales for the prior year period, representing a decrease of $3.1 million, or 4.5%. The increase as a percentage of net sales was due to a higher cost of product and tolling amortization compared with prior year.

Costumes. Cost of sales of our Costumes segment was $5.0 million, or 75.8% of related net sales for the three months ended March 31, 2026, compared to $5.0 million, or 86.2% of related net sales for the prior year period. The decrease as a percentage of net sales was due to lower royalty expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $41.2 million for the three months ended March 31, 2026 compared to $42.8 million for the prior year period constituting 38.6% and 37.7% of net sales, respectively. Selling, general and administrative expenses were slightly lower year over year, led by decreases in temp help and media spend.

Benefit From Income Taxes

Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $0.8 million, or an effective tax rate of 16.6%, for the three months ended March 31, 2026. During the comparable period in 2025, our income tax benefit was $1.2 million, or an effective tax rate of 32.8%. The decrease in the effective tax rate is primarily attributable to a decrease in discrete tax benefits and an increase in pre-tax book loss for the current period.

Seasonality and Backlog

The retail toy industry is inherently seasonal. Generally, our sales have been highest during the second and third quarters, and collections for those sales have been highest during the succeeding fourth and first quarters. Our working capital needs have been highest during the second and third quarters as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer payment terms.

While we have taken steps to level sales over the entire year, sales are expected to remain heavily influenced by the seasonality of our toy and costume products. The result of these seasonal patterns is that operating results and the demand for working capital may vary significantly by quarter. Orders placed with us are generally cancelable until the date of shipment. The combination of seasonal demand and the potential for order cancellation makes accurate forecasting of future sales difficult and causes us to believe that backlog may not be an accurate indicator of our future sales. Similarly, financial results for a particular quarter may not be indicative of results for the entire year.

Liquidity and Capital Resources

As of March 31, 2026, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $111.8 million, compared to $121.0 million as of December 31, 2025, representing a decrease in working capital of $9.2 million during the three-month period ended March 31, 2026. The decrease in working capital is mainly attributable to changes in receivables, inventory and payables, coupled with cash used in financing activities.

Operating activities provided net cash of $21.8 million during the three months ended March 31, 2026, as compared to net cash used of $1.7 million in the prior year period. The increase in net cash provided by operating activities year-over-year is primarily due to higher receivable collections, lower inventory purchases, less capital tied in prepaids and other assets, a lower cash out-flow for payables and a net refund of cash taxes paid in prior years. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As of March 31, 2026, these agreements required future aggregate minimum royalty guarantees of $193.4 million exclusive of $4.5 million in advances already paid. Of this $193.4 million future minimum royalty guarantee, $66.8 million is due over the next twelve months.

Investing activities used net cash of $5.8 million and $3.1 million for the three months ended March 31, 2026 and 2025, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products and purchases of investments to fund our obligation to our employees stemming from our non-qualified deferred compensation plan.

Financing activities used net cash of $4.3 million and $6.6 million for the three months ended March 31, 2026 and 2025, respectively. The cash used in financing activities during the three months ended March 31, 2026, mainly consists of $1.3 million used for the repurchase of our common stock for employee tax withholding and $2.9 million used to pay dividends. The cash used in financing activities during the three months ended March 31, 2025, consists of $3.8 million used for the repurchase of our common stock for employee tax withholding and $2.8 million used to pay dividends.

In June 2025, we terminated our existing $67.5 million JPMorgan ABL revolving credit facility in connection with entering into a new senior secured facility with BMO Bank N.A. The prior facility had no outstanding borrowings at the time of termination. We recorded a non-cash charge of $0.3 million for the write-off of previously deferred financing costs associated with the JPMorgan facility.

On June 24, 2025, we entered into a new $70.0 million senior secured revolving credit facility with a maturity date of June 24, 2030. This facility replaces our prior facility and is expected to provide improved pricing and enhanced liquidity flexibility. Interest is payable at either SOFR plus a leverage-based margin or a Base Rate alternative and includes a commitment fee on unused amounts. The facility includes financial covenants requiring a minimum interest coverage ratio of 3.00 to 1.00 and a maximum total net leverage ratio of 2.00 to 1.00. As of March 31, 2026, we were in compliance with all financial covenants.

Availability under the revolving facility as of March 31, 2026, was $68.3 million. The facility provides the Company with flexibility to fund working capital, capital expenditures, acquisitions, and general corporate purposes.

See Note 5 – Credit Facilities for additional information pertaining to our Credit Facilities.

As of March 31, 2026 and December 31, 2025, we held cash and cash equivalents, including restricted cash, of $64.0 million and $54.1 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $20.0 million and $16.9 million as of March 31, 2026 and December 31, 2025, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. As such, foreign withholding taxes on future repatriations are not expected to be significant.

Our primary sources of working capital are cash flows from operations and borrowings under our credit facility (see Note 5 – Credit Facilities).

Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity.

As of March 31, 2026 off-balance sheet arrangements include letters of credit issued by JPMorgan of $0.9 million, temporarily secured with cash as collateral, and letters of credit issued by BMO of $1.7 million.

Interest Rate Risk

Our exposure to market risk includes interest rate fluctuations in connection with our Revolving Facility (see Note 5 – Credit Facilities). As detailed in the BMO Credit Agreement, borrowings under the Revolving Facility bear interest, at the Company’s election, at either (i) the Adjusted Term SOFR plus an applicable margin or (ii) the Base Rate plus an applicable margin. The applicable margin varies based on the Company’s Total Net Leverage Ratio and ranges from 1.50% to 2.00% for SOFR loans and from 0.50% to 1.00% for Base Rate loans. Borrowings under the Revolving Facility are therefore subject to risk based upon prevailing market interest rates. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

Foreign Currency Risk

We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, the Netherlands, Italy, Canada and Mexico. Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, the Netherlands, Italy, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the U.S. dollar exchange rates may positively or negatively affect our results of operations. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that as of that date, our disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Risk factors with respect to us and our business are contained in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no material changes from the risk factors previously disclosed in such filing. The disclosures made in this Quarterly Report should be reviewed together with the risk factors contained therein.