Full Year Net Sales Increased 16% to $795
Million Provides 2020 Outlook
Funko, Inc. ("Funko,” or the “Company”) (Nasdaq: FNKO), a
leading pop culture consumer products company, today reported its
consolidated financial results for the fourth quarter and fiscal
year ended December 31, 2019.
Full Year 2019 Financial Highlights
- Net sales increased 16% to $795.1 million
- Gross profit1 increased 11% to $282.5 million, and gross profit
excluding a one-time charge of $16.8 million related to the
write-down of inventory2 increased 17% to $299.3 million
- Gross margin1 of 35.5% and gross margin excluding the inventory
write-down referenced above2 of 37.6%
- Net income of $27.8 million
- Adjusted EBITDA3 of $123.0 million and Adjusted EBITDA Margin3
of 15.5%
- Cash flow from operations of $90.8 million
Full Year 2019 Operating Highlights
- Completed the strategic acquisition of world-class game design
studio Forrest-Pruzan, creating Funko Games, and successfully
entered the board game category
- Grew sales in the European region approximately 32% on a
year-over-year basis
- Successfully grew sales of Loungefly products more than 60% on
a year-over-year basis
- Unveiled an enhanced mobile app with robust new features and
rolled out a fan loyalty program
- Opened Funko’s second flagship store in Hollywood, CA
- Reinforced Funko’s bench with new hires across the Company in
operations, planning, supply chain and finance
- Strengthened the Company’s balance sheet through the successful
refinancing of Funko’s credit facilities
Brian Mariotti, Chief Executive Officer, stated, “Full year top
line growth of 16% was driven by the underlying strength of Pop!
Vinyl, growth in key geographic markets and the introduction of new
products and categories. Although we closed the year with a
difficult fourth quarter, we remain confident in the underlying
strength of our business model and have a number of initiatives
underway to drive growth in 2020. We have an exceptional line-up of
games, toys and figures coming to market in the second half, unique
evergreen retail programs and new products and partnerships in
underpenetrated genres, including anime, sports and music.”
“Funko’s deep roots and expertise in all things pop culture
provide us with a strong foundation for growth and expansion. As
the proliferation of content continues to occur across pop culture,
we believe Funko will be at the forefront. We are focused on
building for scale – ensuring we have the tools and talent in place
to drive a high level of execution, support our growth and deliver
long-term shareholder value.”
Full Year 2019 Financial Results
Net sales grew 16% to $795.1 million in 2019 compared to $686.1
million in 2018. The year-over-year improvement was primarily
driven by an increase in the number of active properties and
strength in the U.S. and international markets.
In 2019, the number of active properties increased 20% to 804
from 672 in 2018 and net sales per active property decreased 3%. On
a geographical basis, net sales in the United States increased 12%
to $523.9 million and net sales internationally increased 23% to
$271.2 million driven by strong growth in Europe. On a product
category basis, net sales of figures increased 15% to $642.5
million. Net sales of other products increased 21% to $152.6
million, which reflects strong growth in our Loungefly
products.
The tables below show the breakdown of net sales on a
geographical and product category basis (in thousands):
Twelve Months Ended December
31,
Period Over Period
Change
2019
2018
Dollar
Percentage
Net sales by geography: United States
$
523,897
$
466,044
$
57,853
12.4
%
International
271,225
220,029
51,196
23.3
%
Total net sales
$
795,122
$
686,073
$
109,049
15.9
%
Twelve Months Ended December
31,
Period Over Period
Change
2019
2018
Dollar
Percentage
Net sales by product: Figures
$
642,531
$
560,100
$
82,431
14.7
%
Other
152,591
125,973
26,618
21.1
%
Total net sales
$
795,122
$
686,073
$
109,049
15.9
%
Gross margin1 in 2019 decreased 170 basis points to 35.5%
compared to 37.2% in 2018, primarily due to a one-time charge of
$16.8 million related to the write-down of inventory in the fourth
quarter of 2019. Gross margin excluding the one-time inventory
write down2 was 37.6%, an increase of 40 basis points compared to
2018. The year-over-year increase is primarily attributable to
lower product costs as a percentage of net sales due to a mix shift
toward higher margin products as well as a decrease in shipping and
freight costs as a percentage of net sales, which was partially
offset by higher duties as a percentage of net sales related to our
Loungefly products.
SG&A expenses increased 25% to $193.8 million in 2019
compared to $155.3 million in 2018, primarily reflecting increased
headcount, warehouse costs and marketing to support new product
launches as well as new office, retail and warehouse
facilities.
Net income in 2019 was $27.8 million compared to net income of
$25.1 million in 2018 and Adjusted Net Income3 (non-GAAP) was $49.9
million in 2019 versus $39.5 million in 2018. Adjusted EBITDA3 in
2019 was $123.0 million and Adjusted EBITDA margin3 was 15.5%,
compared to $113.5 million and 16.5%, respectively, in 2018. A
reconciliation of these non-GAAP measures to GAAP is provided
below.
Fourth Quarter 2019 Financial Results
Net sales decreased 8% to $213.6 million in the fourth quarter
of 2019 compared to $233.2 million in the fourth quarter of 2018.
The year-over-year decline was primarily driven by underperformance
in more mature markets, including the U.S., Australia and Canada,
and reflects three primary factors: softness at retail during the
holiday season which led to a decrease in orders, underperformance
in key tentpole properties, and difficult comparisons from the year
ago period due to the strength of Fortnite which generated 12% of
sales in the fourth quarter of 2018.
In the fourth quarter of 2019, the number of active properties
increased 14% to 667 from 583 in the fourth quarter of 2018 and net
sales per active property decreased 20%. On a geographical basis,
net sales in the United States decreased 9% to $144.9 million and
net sales internationally decreased 8% to $68.6 million due to
declines in Australia and Canada, partially offset by strong growth
in Europe. On a product category basis, net sales of figures
decreased 10% to $170.2 million reflecting the overall softness at
retail in the quarter. Net sales of other products decreased 3% to
$43.3 million versus the fourth quarter of 2018, which reflects
decreased sales in plush and accessories, partially offset by
double digit growth in our Loungefly brand.
The tables below show the breakdown of net sales on a
geographical and product category basis (in thousands):
Three Months Ended December
31,
Period Over Period
Change
2019
2018
Dollar
Percentage
Net sales by geography: United States
$
144,932
$
158,770
$
(13,838
)
-8.7
%
International
68,619
74,454
(5,835
)
-7.8
%
Total net sales
$
213,551
$
233,224
$
(19,673
)
-8.4
%
Three Months Ended December
31,
Period Over Period
Change
2019
2018
Dollar
Percentage
Net sales by product: Figures
$
170,204
$
188,261
$
(18,057
)
-9.6
%
Other
43,347
44,963
(1,616
)
-3.6
%
Total net sales
$
213,551
$
233,224
$
(19,673
)
-8.4
%
Gross margin1 in the fourth quarter of 2019 decreased 680 basis
points to 29.2% compared to 36.0% in the fourth quarter of 2018,
primarily due to a one-time charge of $16.8 million related to the
write-down of inventory in the 2019 quarter. Gross margin excluding
the one-time inventory write down2 was 37.1%, an increase of 110
basis points compared to the fourth quarter of 2018. The
year-over-year increase is primarily attributable to lower product
costs as a percentage of net sales due to a mix shift toward higher
margin products, which was partially offset by higher duties as a
percentage of net sales related to our Loungefly products.
SG&A expenses increased 27% to $57.3 million in the fourth
quarter of 2019 compared to $45.0 million in the fourth quarter of
2018, primarily reflecting increased headcount, marketing spend to
support new product launches, and the addition of new office,
retail and warehouse facilities.
Net loss in the fourth quarter of 2019 was $6.3 million compared
to net income of $15.5 million in the fourth quarter of 2018 and
Adjusted Net Income3 (non-GAAP) was $8.9 million in the fourth
quarter of 2019 versus $21.3 million in the fourth quarter of 2018.
Adjusted EBITDA3 in the fourth quarter of 2019 was $25.7 million
and Adjusted EBITDA margin3 was 12.0%, compared to $43.1 million
and 18.5%, respectively, in the fourth quarter of 2018. A
reconciliation of these non-GAAP measures to GAAP is provided
below.
Balance Sheet Highlights
As of December 31, 2019, the Company had cash and cash
equivalents of $25 million and total debt of $242 million.
Inventories at year-end totaled $62 million, a decrease of 28%
compared to a year ago, primarily reflecting an inventory
write-down in the fourth quarter of 2019.
Jennifer Fall Jung, Chief Financial Officer, stated, “In 2019,
we generated strong operating cash flow and strengthened our
balance sheet, providing us with the financial flexibility to
invest in our infrastructure and strategic growth opportunities.
Looking at 2020, we expect to achieve top line growth in the range
of 6% to 9%, and adjusted EBITDA margins of approximately 14%,
which includes our current assumptions regarding the impact of the
coronavirus crisis. Our adjusted EBITDA outlook reflects strong
gross margin performance, offset by the investments we’re making to
enhance our operations, drive efficiency and build scale in our
model.”
2020 Outlook
In 2020, the Company expects the following:
- Net sales of $840.0 million to $865.0 million, representing 6%
to 9% growth compared to 2019, including approximately 2 points of
anticipated impact from the coronavirus;
- Adjusted EBITDA3 of $115.0 million to $125.0 million,
representing Adjusted EBITDA margin of 13.7% to 14.5%;
- Adjusted Net Income3 of $43.3 million to $50.8 million, based
on a blended tax rate of 25%; and
- Adjusted Earnings per Diluted Share3 of $0.85 per share to
$1.00 per share, based on estimated adjusted average diluted shares
outstanding of 51.0 million for the full year.
The Company’s 2020 outlook reflects its current assumptions
regarding any potential effect of the novel coronavirus due to
manufacturing disruptions and delayed shipments resulting from the
crisis. Compared to 2019, the Company anticipates that net sales in
the first quarter of 2020 will decline in the mid-teens and the
first half of the year will decline mid-single digits, which
includes the anticipated impact of manufacturing disruptions and
delayed shipments.
Adjusted EBITDA and Adjusted EPS are non-GAAP measures. A table
at the end of this release reconciles Funko’s outlook for the full
year 2020 Adjusted EBITDA and Adjusted Earnings per Diluted Share
guidance to the most directly comparable U.S. GAAP financial
measures. Please refer to the “Non-GAAP Financial Measures” section
of this press release.
1 Gross profit is calculated as net sales
less cost of sales (exclusive of depreciation and amortization).
Gross margin is calculated as net sales less cost of sales
(exclusive of depreciation and amortization) as a percentage of net
sales.
2 Gross profit excluding the one-time
inventory write-down and gross margin excluding the one-time
inventory write-down are non-GAAP financial measures. Please see
the “Non-GAAP Financial Measures” section for a reconciliation to
the most directly comparable U.S. GAAP measure.
3 Adjusted Net Income, Adjusted Earnings
per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin are
non-GAAP financial measures. For a reconciliation of Adjusted Net
Income, Adjusted Earnings per Diluted Share and Adjusted EBITDA to
the most directly comparable U.S. GAAP financial measures, please
refer to the “Non-GAAP Financial Measures” section of this press
release.
Conference Call and Webcast
The Company will host a conference call at 4:30 p.m. Eastern
Time (1:30 p.m. Pacific Time) today, March 5, 2020, to further
discuss its fourth quarter results. Investors and analysts can
participate on the conference call by dialing (833) 227-5847 or
(647) 689-4074 and referencing passcode 6565388. Interested parties
can also listen to a live webcast or replay of the conference call
by logging on to the Investor Relations section on the Company’s
website at https://investor.funko.com/. The replay of the webcast
will be available for one year.
About Funko
Headquartered in Everett, Washington, Funko is a leading pop
culture consumer products company. Funko designs, sources and
distributes licensed pop culture products across multiple
categories, including vinyl figures, action toys, plush, apparel,
housewares and accessories for consumers who seek tangible ways to
connect with their favorite pop culture brands and characters.
Learn more at https://funko.com/, and follow us on Twitter
(@OriginalFunko) and Instagram (@OriginalFunko).
Forward Looking Statements
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. All statements contained in this press release that do not
relate to matters of historical fact should be considered
forward-looking statements, including statements regarding our
anticipated financial results, the underlying trends in our
business, the anticipated impact of the novel coronavirus outbreak
on our business, growing demand for our products, our potential for
growth, plans for investments in our business and expected
enhancements to operations. These forward-looking statements are
based on management’s current expectations. These statements are
neither promises nor guarantees, but involve known and unknown
risks, uncertainties and other important factors that may cause our
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by the forward-looking statements, including,
but not limited to, the following: our ability to execute our
business strategy; our ability to maintain and realize the full
value of our license agreements; the ongoing level of popularity of
our products with consumers; changes in the retail industry and
markets for our consumer products; our ability to maintain our
relationships with retail customers and distributors; our ability
to compete effectively; fluctuations in our gross margin; our
dependence on content development and creation by third parties;
our ability to manage our inventories; our ability to develop and
introduce products in a timely and cost-effective manner; our
ability to obtain, maintain and protect our intellectual property
rights or those of our licensors; potential violations of the
intellectual property rights of others; risks associated with
counterfeit versions of our products; our ability to attract and
retain qualified employees and maintain our corporate culture; our
use of third-party manufacturing; risks associated with our
international operations; changes in effective tax rates or tax
law; foreign currency exchange rate exposure; the possibility or
existence of global and regional economic downturns; our dependence
on vendors and outsourcers; risks relating to government
regulation; risks relating to litigation, including products
liability claims and securities class action litigation; any
failure to successfully integrate or realize the anticipated
benefits of acquisitions or investments; reputational risk
resulting from our e-commerce business and social media presence;
risks relating to our indebtedness and our ability to secure
additional financing; the potential for our electronic data or the
electronic data of our customers to be compromised; the influence
of our significant stockholder, ACON, and the possibility that
ACON’s interests may conflict with the interests of our other
stockholders; risks relating to our organizational structure;
volatility in the price of our Class A common stock; and risks
associated with our internal control over financial reporting.
These and other important factors discussed under the caption “Risk
Factors” in our annual report on Form 10-K for the year ended
December 31, 2019 and our other filings with the Securities and
Exchange Commission could cause actual results to differ materially
from those indicated by the forward-looking statements made in this
press release. Any such forward-looking statements represent
management’s estimates as of the date of this press release. While
we may elect to update such forward-looking statements at some
point in the future, we disclaim any obligation to do so, even if
subsequent events cause our views to change. These forward-looking
statements should not be relied upon as representing our views as
of any date subsequent to the date of this press release.
Funko, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Operations
(Unaudited)
Three Months Ended December
31,
Twelve Months Ended December
31,
2019
2018
2019
2018
(In thousands, except per
share data)
Net sales
$
213,551
$
233,224
$
795,122
$
686,073
Cost of sales (exclusive of depreciation and amortization shown
separately below)
151,125
149,172
512,580
430,746
Selling, general, and administrative expenses
57,264
45,015
193,803
155,321
Acquisition transaction costs
—
—
—
28
Depreciation and amortization
10,999
10,204
42,126
39,116
Total operating expenses
219,388
204,391
748,509
625,211
Income (loss) from operations
(5,837
)
28,833
46,613
60,862
Interest expense, net
2,887
4,509
14,342
21,739
Loss on extinguishment of debt
—
4,547
—
4,547
Other (income) expense, net
(448
)
1,488
(25
)
4,082
Income (loss) before income taxes
(8,276
)
18,289
32,296
30,494
Income tax (benefit) expense
(1,988
)
2,770
4,476
5,432
Net income (loss)
(6,288
)
15,519
27,820
25,062
Less: net income (loss) attributable to non-controlling interests
(2,047
)
10,292
16,095
17,599
Net income (loss) attributable to Funko, Inc.
$
(4,241
)
$
5,227
$
11,725
$
7,463
Earnings (loss) per share of Class A common stock: Basic
$
(0.12
)
$
0.21
$
0.38
$
0.31
Diluted
$
(0.12
)
$
0.20
$
0.36
$
0.29
Weighted average shares of Class A common stock outstanding: Basic
34,883
24,821
30,898
23,821
Diluted
34,883
26,607
32,926
25,560
Funko, Inc. and
Subsidiaries
Condensed Consolidated Balance
Sheets
December 31,
December 31,
2019
2018
(In thousands, except per
share amounts)
Assets Current assets: Cash and cash equivalents
$
25,229
$
13,486
Accounts receivable, net
151,564
148,627
Inventory
62,124
86,622
Prepaid expenses and other current assets
20,280
11,904
Total current assets
259,197
260,639
Property and equipment, net
65,712
44,296
Operating lease right-of-use assets
62,901
—
Goodwill
124,835
116,078
Intangible assets, net
221,492
233,645
Deferred tax asset
57,547
7,407
Other assets
4,783
4,275
Total assets
$
796,467
$
666,340
Liabilities and Stockholders' Equity Current
liabilities: Line of credit
$
25,822
$
20,000
Current portion long-term debt, net of unamortized discount
13,685
10,593
Current portion of operating lease liability
11,314
—
Accounts payable
42,531
36,130
Income taxes payable
637
4,492
Accrued royalties
34,625
39,020
Accrued expenses and other current liabilities
28,955
33,015
Total current liabilities
157,569
143,250
Long-term debt, net of unamortized discount
202,816
216,704
Operating lease liabilities, net of current portion
61,622
—
Deferred tax liability
341
5
Liabilities under tax receivable agreement, net of current portion
61,554
6,504
Deferred rent and other long-term liabilities
7,421
6,623
Commitments and contingencies
Stockholders'
equity: Class A common stock, par value $0.0001 per share,
200,000 shares authorized; 34,918 shares and 24,960 shares issued
and outstanding as of December 31, 2019 and 2018, respectively
3
2
Class B common stock, par value $0.0001 per share, 50,000 shares
authorized; 14,515 shares and 23,584 shares issued and outstanding
as of December 31, 2019 and 2018, respectively
1
2
Additional paid-in-capital
204,174
146,154
Accumulated other comprehensive loss
791
(167
)
Retained earnings
20,442
8,717
Total stockholders' equity attributable to Funko, Inc.
225,411
154,708
Non-controlling interests
79,733
138,546
Total stockholders' equity
305,144
293,254
Total liabilities and stockholders' equity
$
796,467
$
666,340
Funko, Inc. and
Subsidiaries
Condensed Consolidated
Statements of Cash Flows
Twelve Months Ended December
31,
2019
2018
(In thousands) Operating Activities Net income
$
27,820
$
25,062
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation, amortization and other
44,518
39,116
Equity-based compensation
13,044
9,140
Accretion of discount on long-term debt
952
1,414
Amortization of debt issuance costs
258
709
Loss on debt extinguishment
—
4,547
Deferred tax benefit
(2,293
)
(964
)
Other
635
4,288
Changes in operating assets and liabilities: Accounts receivable,
net
(3,969
)
(36,139
)
Inventory
25,372
(8,886
)
Prepaid expenses and other assets
(5,824
)
8,736
Accounts payable
4,629
(16,375
)
Income taxes payable
(3,618
)
2,177
Accrued royalties
(4,403
)
13,495
Accrued expenses and other liabilities
(6,356
)
3,671
Net cash provided by operating activities
90,765
49,991
Investing Activities Purchase of property and
equipment
(42,264
)
(26,866
)
Acquisitions of businesses and related intangible assets, net of
cash
(6,369
)
(635
)
Net cash used in investing activities
(48,633
)
(27,501
)
Financing Activities Borrowings on line of credit
42,083
316,390
Payments on line of credit
(36,383
)
(307,191
)
Debt issuance costs
(411
)
—
Proceeds from long-term debt
—
230,011
Payment of long-term debt
(11,750
)
(231,338
)
Contingent consideration
—
(2,500
)
Distribution to continuing equity owners
(23,923
)
(20,441
)
Payments under tax receivable agreement
(173
)
—
Proceeds from exercise of equity-based options
2,217
23
Net cash used in financing activities
(28,340
)
(15,046
)
Effect of exchange rates on cash and cash equivalents
(2,049
)
(1,686
)
Net increase in cash and cash equivalents
11,743
5,758
Cash and cash equivalents at beginning of period
13,486
7,728
Cash and cash equivalents at end of period
$
25,229
$
13,486
Funko, Inc. and Subsidiaries Non-GAAP
Financial Measures
Adjusted Net Income, Adjusted Earnings per Diluted Share,
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are supplemental
measures of our performance that are not required by, or presented
in accordance with, U.S. GAAP. Adjusted Net Income, Adjusted
Earnings per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted
EBITDA margin are not measurements of our financial performance
under U.S. GAAP and should not be considered as an alternative to
net income (loss), earnings per share or any other performance
measure derived in accordance with U.S. GAAP. We define Adjusted
Net Income as net income attributable to Funko, Inc. adjusted for
the reallocation of income attributable to non-controlling
interests from the assumed exchange of all outstanding common units
and options in FAH, LLC for newly issued-shares of Class A common
stock of Funko, Inc. and further adjusted for the impact of certain
non-cash charges and other items that we do not consider in our
evaluation of ongoing operating performance. These items include,
among other things, non-cash charges related to equity-based
compensation programs, loss on extinguishment of debt, acquisition
transaction costs and other expenses, foreign currency transaction
gains and losses, the Loungefly customs investigation and related
costs, certain severance, relocation and related costs, tax
receivable agreement liability adjustments, and other unusual or
one-time items, and the income tax expense (benefit) effect of
these adjustments. We define Adjusted Earnings per Diluted Share as
Adjusted Net Income divided by the weighted-average shares of Class
A common stock outstanding, assuming (1) the full exchange of all
outstanding common units and options in FAH, LLC for newly
issued-shares of Class A common stock of Funko, Inc. and (2) the
dilutive effect of stock options and unvested common units, if any.
We define EBITDA as net income (loss) before interest expense, net,
income tax expense (benefit), depreciation and amortization. We
define Adjusted EBITDA as EBITDA further adjusted for non-cash
charges related to equity-based compensation programs, loss on
extinguishment of debt, acquisition transaction costs and other
expenses, the Loungefly customs investigation and related costs,
certain severance, relocation and related costs, foreign currency
transaction gains and losses, tax receivable agreement liability
adjustments and other unusual or one-time items. Adjusted EBITDA
margin is calculated as Adjusted EBITDA as a percentage of net
sales We caution investors that amounts presented in accordance
with our definitions of Adjusted Net Income, Adjusted Earnings per
Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
may not be comparable to similar measures disclosed by our
competitors, because not all companies and analysts calculate these
measures in the same manner. We present Adjusted Net Income,
Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and
Adjusted EBITDA margin because we consider them to be important
supplemental measures of our performance and believe they are
frequently used by securities analysts, investors, and other
interested parties in the evaluation of companies in our industry.
Management believes that investors’ understanding of our
performance is enhanced by including these non-GAAP financial
measures as a reasonable basis for comparing our ongoing results of
operations. Management uses Adjusted Net Income, Adjusted Earnings
per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA
margin as a measurement of operating performance because they
assist us in comparing the operating performance of our business on
a consistent basis, as they remove the impact of items not directly
resulting from our core operations; for planning purposes,
including the preparation of our internal annual operating budget
and financial projections; as a consideration to assess incentive
compensation for our employees; to evaluate the performance and
effectiveness of our operational strategies; and to evaluate our
capacity to expand our business.
By providing these non-GAAP financial measures, together with
reconciliations, we believe we are enhancing investors’
understanding of our business and our results of operations, as
well as assisting investors in evaluating how well we are executing
our strategic initiatives. In addition, our senior secured credit
facilities use Adjusted EBITDA to measure our compliance with
covenants such as senior leverage ratio. Adjusted Net Income,
Adjusted Earnings per Diluted Share, EBITDA, Adjusted EBITDA and
Adjusted EBITDA margin have limitations as analytical tools, and
should not be considered in isolation, or as an alternative to, or
a substitute for net income (loss) or other financial statement
data presented in this press release as indicators of financial
performance. Some of the limitations are:
- such measures do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual
commitments;
- such measures do not reflect changes in, or cash requirements
for, our working capital needs;
- such measures do not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments on
our debt;
- although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to be
replaced in the future and such measures do not reflect any cash
requirements for such replacements; and
- other companies in our industry may calculate such measures
differently than we do, limiting their usefulness as comparative
measures.
Due to these limitations, Adjusted Net Income, Adjusted Earnings
per Diluted Share, EBITDA, Adjusted EBITDA and Adjusted EBITDA
margin should not be considered as measures of discretionary cash
available to us to invest in the growth of our business. We
compensate for these limitations by relying primarily on our GAAP
results and using these non-GAAP measures only supplementally. As
noted in the table below, Adjusted Net Income, Adjusted Earnings
per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin
include adjustments for non-cash charges related to equity-based
compensation programs, loss on extinguishment of debt, acquisition
transaction costs and other expenses, the Loungefly customs
investigation and related costs, certain severance, relocation and
related costs, foreign currency transaction gains and losses, tax
receivable agreement liability adjustments and other unusual or
one-time items. It is reasonable to expect that these items will
occur in future periods. However, we believe these adjustments are
appropriate because the amounts recognized can vary significantly
from period to period, do not directly relate to the ongoing
operations of our business and complicate comparisons of our
internal operating results and operating results of other companies
over time. Each of the normal recurring adjustments and other
adjustments described herein and in the reconciliation table below
help management with a measure of our core operating performance
over time by removing items that are not related to day-to-day
operations.
In addition, this press release refers to the non-GAAP financial
measures gross profit excluding the one-time inventory write-down
and gross margin excluding the one-time inventory write-down. Gross
profit excluding the one-time inventory write-down is calculated as
net sales less cost of goods sold (exclusive of depreciation and
amortization) less the $16.8 million charge related to the one-time
inventory write-down in the fourth quarter of 2019. Gross margin
excluding the one-time inventory write-down is calculated as net
sales less cost of goods sold (exclusive of depreciation and
amortization) less the $16.8 million charge related to the one-time
inventory write-down as a percentage of net sales. Management
believes that gross profit excluding the one-time inventory
write-down and gross margin excluding the one-time inventory
write-down provides useful information to investors because it
assists investors in comparing our ongoing operating performance
between periods.
The following table reconciles gross profit excluding the
one-time inventory write-down and gross margin excluding the
one-time inventory write-down to the most directly comparable U.S.
GAAP financial performance measure:
Three Months Ended December
31,
Twelve Months Ended December
31,
2019
2018
2019
2018
(amounts in thousands) Net sales
$
213,551
$
233,224
$
795,122
$
686,073
Cost of sales (exclusive of depreciation and amortization)
151,125
149,172
512,580
430,746
Gross profit (1)
$
62,426
$
84,052
$
282,542
$
255,327
Gross margin (1)
29.2
%
36.0
%
35.5
%
37.2
%
Adjustments: One-time inventory write-down (2)
16,775
—
16,775
—
Gross profit excluding the one-time inventory write-down
$
79,201
$
84,052
$
299,317
$
255,327
Gross margin excluding the one-time inventory write-down
37.1
%
36.0
%
37.6
%
37.2
%
(1)
Gross profit is calculated as net sales
less cost of sales (exclusive of depreciation and amortization).
Gross margin is calculated as net sales less cost of sales
(exclusive of depreciation and amortization) as a percentage of net
sales.
(2)
Represents a one-time $16.8 million charge
for the three and twelve months ended December 31, 2019 to cost of
goods sold for additional inventory reserves to dispose of certain
inventory items. This charge is incremental to normal course
inventory reserves and was recorded as a result of the Company’s
decision to dispose of slower moving inventory to increase
operational capacity.
The following tables reconcile Adjusted Net Income, Adjusted
Earnings per Diluted Share, EBITDA and Adjusted EBITDA to the most
directly comparable U.S. GAAP financial performance measure:
Three Months Ended December
31,
Twelve Months Ended December
31,
2019
2018
2019
2018
(In thousands, except per
share data)
Net income (loss) attributable to Funko, Inc.
$
(4,241
)
$
5,227
$
11,725
$
7,463
Reallocation of net income (loss) attributable to non-controlling
interests from the assumed exchange of common units of FAH, LLC for
Class A common stock (1)
(2,047
)
10,292
16,095
17,599
Equity-based compensation (2)
3,214
3,390
13,044
9,140
Loss on extinguishment of debt
—
4,547
—
4,547
Acquisition transaction costs and other expenses (3)
—
700
383
3,391
Customs investigation and related costs (4)
—
—
3,357
—
Certain severance, relocation and related costs (5)
559
—
739
1,031
Foreign currency transaction (gain) loss (6)
(600
)
1,488
(177
)
4,082
Tax receivable agreement liability adjustments
152
—
152
—
One-time inventory write-down (7)
16,775
—
16,775
—
Income tax expense (benefit) (8)
(4,944
)
(4,334
)
(12,166
)
(7,739
)
Adjusted net income
8,868
21,310
49,927
39,514
Adjusted net income margin (9)
4.2
%
9.1
%
6.3
%
5.8
%
Weighted-average shares of Class A common stock outstanding
- basic
34,883
24,821
30,898
23,821
Equity-based compensation awards and common units of FAH, LLC that
are convertible into Class A common stock
15,403
26,054
21,167
26,858
Adjusted weighted-average shares of Class A stock outstanding -
diluted
50,286
50,875
52,065
50,679
Adjusted earnings per diluted share
$
0.18
$
0.42
$
0.96
$
0.78
Three Months Ended December
31,
Twelve Months Ended December
31,
2019
2018
2019
2018
(amounts in thousands)
Net income (loss)
$
(6,288
)
$
15,519
$
27,820
$
25,062
Interest expense, net
2,887
4,509
14,342
21,739
Income tax (benefit) expense
(1,988
)
2,770
4,476
5,432
Depreciation and amortization
10,999
10,204
42,126
39,116
EBITDA
$
5,610
$
33,002
$
88,764
$
91,349
Adjustments: Equity-based compensation (2)
3,214
3,390
13,044
9,140
Loss on extinguishment of debt
—
4,547
—
4,547
Acquisition transaction costs and other expenses (3)
—
700
383
3,391
Customs investigation and related costs (4)
—
—
3,357
—
Certain severance, relocation and related costs (5)
559
—
739
1,031
Foreign currency transaction (gain) loss (6)
(600
)
1,488
(177
)
4,082
One-time inventory write-down (7)
16,775
—
16,775
—
Tax receivable agreement liability adjustments
152
—
152
—
Adjusted EBITDA
$
25,710
$
43,127
$
123,037
$
113,540
Adjusted EBITDA margin (10)
12.0
%
18.5
%
15.5
%
16.5
%
(1)
Represents the reallocation of net income
attributable to non-controlling interests from the assumed exchange
of common units of FAH, LLC for Class A common stock in periods in
which income was attributable to non-controlling interests.
(2)
Represents non-cash charges related to
equity-based compensation programs, which vary from period to
period depending on timing of awards.
(3)
Represents legal, accounting, and other
related costs incurred in connection with acquisitions and other
potential transactions. Included for the twelve months ended
December 31, 2018 is a one-time $2.0 million consent fee related to
certain existing license agreements and $0.7 million for the
recognition of a pre-acquisition contingency related to our
Loungefly acquisition.
(4)
Represents legal, accounting and other
related costs incurred in connection with the Company's
investigation of the underpayment of customs duties at Loungefly.
For the twelve months ended December 31, 2019, includes the accrual
of a contingent liability of $0.5 million related to potential
penalties that may be assessed by U.S. Customs in connection with
the underpayment of customs duties at Loungefly.
(5)
Represents certain severance, relocation
and related costs. For the three months and twelve months ended
December 31, 2019, includes $0.4 million of severance costs
incurred in connection with the departure of our former Chief
Financial Officer as well as severance, relocation and related
costs associated with the consolidation of our warehouse facilities
in the United Kingdom. For the twelve months ended December 31,
2018, includes severance costs incurred in connection with the
departure of certain members of senior management, including the
founders of Loungefly.
(6)
Represents both unrealized and realized
foreign currency losses on transactions other than in U.S.
dollars.
(7)
Represents a one-time $16.8 million charge
for the three and twelve months ended December 31, 2019 to cost of
goods sold for additional inventory reserves to dispose of certain
inventory items. This charge is incremental to normal course
inventory reserves and was recorded as a result of the Company’s
decision to dispose of slower moving inventory to increase
operational capacity.
(8)
Represents the income tax expense effect
of the above adjustments. This adjustment uses an effective tax
rate of 25% for all periods presented.
(9)
Adjusted net income margin is calculated
as Adjusted net income as a percentage of net sales.
(10)
Adjusted EBITDA margin is calculated as
Adjusted EBITDA as a percentage of net sales.
Guidance Reconciliation of Net
Income to EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted
Net Income and Adjusted Earnings per Diluted Share
Estimated Range for the Year EndingDecember 31, 2020
(In millions, except per share amounts) Net Sales
$
840.0
$
865.0
Net income
$
34.1
$
41.9
Interest expense, net
11.5
11.5
Income tax expense
9.6
11.8
Depreciation and amortization
45.8
45.8
EBITDA
$
101.0
$
111.0
Adjustments: Equity-based compensation (1)
13.3
13.3
Certain severance, relocation and related costs (2)
0.7
0.7
Adjusted EBITDA
$
115.0
$
125.0
Adjusted EBITDA Margin(3)
13.7
%
14.5
%
Net income
$
34.1
$
41.9
Equity-based compensation (1)
13.3
13.3
Certain severance, relocation and related costs (2)
0.7
0.7
Income tax expense (4)
(4.8
)
(5.1
)
Adjusted net income
$
43.3
$
50.8
Weighted-average shares of Class A common stock outstanding
35.6
35.6
Equity-based compensation awards and common units of FAH, LLC that
are convertible into Class A common stock
15.4
15.4
Adjusted weighted-average shares of Class A stock outstanding -
diluted
51.0
51.0
Adjusted earnings per diluted share
$
0.85
$
1.00
(1)
Represents non-cash charges related to
equity-based compensation programs, which vary from period to
period depending on timing of awards.
(2)
Represents severance, relocation and
related costs associated with the consolidation of our new
warehouse facilities in the United Kingdom.
(3)
Adjusted EBITDA Margin is calculated as
Adjusted EBITDA as a percentage of net sales.
(4)
Represents the income tax expense effect
of the above adjustments. This adjustment uses an effective tax
rate of 25% for the year ending December 31, 2020.
Note: The Company is not able to provide the expected impact of
unrealized and realized foreign currency gains and losses for the
year ending December 31, 2020 on transactions without unreasonable
efforts because the calculation for that change is primarily driven
by changes in foreign currency exchange rates, principally British
pounds and euros. Additionally, the impacts are also driven by
fluctuations in product sales and operating expenses in each of
those local currencies, which can fluctuate month to month.
Therefore, the Company’s Adjusted EBITDA, Adjusted Net Income and
Adjusted Earnings per Diluted Share for the year ending December
31, 2020, including the above adjustments, may differ materially
from that forecasted in the table above.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200305005837/en/
Investor Relations: Andrew Harless Funko Investor
Relations investorrelations@funko.com
Media: Jessica Piha-Grafstein Funko Public Relations
jessicap@funko.com
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