Funko Reports Record Third Quarter 2022 Sales of $365.6 million, Up 36.6%
Sustained Growth Driven by Broad-Based Strength Across Reported Brand Categories, Channels, and Geographies
Everett, WA — Funko, Inc. reported its consolidated financial results for the third quarter ended September 30, 2022.
“We delivered another quarter of record net sales growth, with robust demand across our brand portfolio. Our sustained success is a testament to our employees, our partners, and our loyal and highly engaged fan base,” said Andrew Perlmutter, Chief Executive Officer. “As we continue to support our rapid growth, we are making needed short-term investments to upgrade our infrastructure to help provide the capability and capacity to support our future growth.”
Third Quarter 2022 Financial Summary Versus Prior Year
- Net sales increased 36.6% to $365.6 million
- Gross profit increased 32.6% to $127.9 million
- Gross margin1 contracted 100 basis points to 35.0%
- Net income decreased 39.3% to $11.1 million
- Net income margin1 contracted 390 basis points to 3.0%
- Adjusted EBITDA2 decreased 11.2% to $35.7 million
- Adjusted EBITDA margin2 contracted 520 basis points to 9.8%
- Cash flow used in operations of $64.7 million for the nine months ended September 30, 2022
- Total liquidity3 of $150.1 million compared to $193.2 million
Third Quarter 2022 Operating Highlights
- Double-digit net sales growth across all brand categories
- Strong international growth as Europe net sales grew 32.9% y/y while Other International grew 42.6%
- Direct-to-consumer (DTC) net sales increased 36.5% y/y, driven by strong growth in average order value and e-commerce site traffic
- More than doubled Digital Pop! NFT net sales, with multiple top-tier drops, increasing drop frequency and average revenue per drop
- Began integration of high-end collectibles company Mondo under Core Collectible Brands
- Introduced “countdown to anything” with expanded countdown calendars to include multiple holidays, driving more than 8x net sales growth in only 4 years
Third Quarter 2022 Financial Results
The tables below show the breakdown of net sales on a brand category and geographical basis (in thousands):
|
Three Months Ended September 30, |
Period Over Period Change |
|||
|
2022 |
2021 |
Dollar |
Percentage |
|
| Net sales by geography: | ||||
| United States |
$ 262,316 |
$ 191,289 |
$ 71,027 |
37.1 % |
| Europe |
78,239 |
58,873 |
19,366 |
32.9 % |
| Other International |
25,052 |
17,571 |
7,481 |
42.6 % |
| Total net sales |
$ 365,607 |
$ 267,733 |
$ 97,874 |
36.6 % |
|
Three Months Ended September 30, |
Period Over Period Change |
|||
|
2022 |
2021 |
Dollar |
Percentage |
|
| Core Collectible Brands |
$ 281,536 |
$ 210,645 |
$ 70,891 |
33.7 % |
| Loungefly Brand |
62,246 |
39,575 |
22,671 |
57.3 % |
| Other Brands |
21,825 |
17,513 |
4,312 |
24.6 % |
| Total net sales |
$ 365,607 |
$ 267,733 |
$ 97,874 |
36.6 % |
Gross margin1 in the third quarter of 2022 decreased 100 basis points to 35.0% compared to 36.0% in the third quarter of 2021, reflecting a change in product costs outpacing previous price increases on certain products.
SG&A expenses increased 63.5% to $97.9 million or 26.8% of net sales in the third quarter of 2022 compared to $59.9 million or 22.4% of net sales in the third quarter of 2021. SG&A expenses for the third quarter of 2022 were higher than expected due to increased infrastructure investment to accommodate recent rapid growth and provide capacity for sustained future growth.
Net income in the third quarter of 2022 was $11.1 million and net income margin1 was 3.0%, compared to net income of $18.4 million and net income margin1 of 6.9% in the third quarter of 2021. Adjusted Net Income2 (non-GAAP) was $15.1 million in the third quarter of 2022 versus Adjusted Net Income2 of $21.1 million in the third quarter of 2021. Adjusted EBITDA2 in the third quarter of 2022 was $35.7 million and Adjusted EBITDA margin2 was 9.8%, compared to $40.2 million and 15.0%, respectively, in the third quarter of 2021. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measures is provided below.
Balance Sheet Highlights
Total liquidity3 as of September 30, 2022 totaled $150.1 million, a decrease of 22.4% compared to September 30, 2021. Total liquidity was comprised of cash and cash equivalents of $25.1 million and total revolver availability of $125.0 million.
As of September 30, 2022, total debt was $250.2 million, an increase of 40.9% compared to a year ago, as we accessed our revolver to maintain appropriate liquidity as working capital needs have increased in recent quarters. Total debt includes the amount outstanding under the Company’s term loan facility, net of unamortized discounts.
Inventories at the end of the third quarter of 2022 totaled $265.8 million, up 88.7% compared to a year ago. We expect to make sequential progress in inventory levels in the fourth quarter of 2022.
Outlook
In 2022, the Company expects the following full-year results:
- Net sales of $1.29 billion to $1.33 billion;
- Sequential decline in gross margin due to margin seasonality and ongoing inventory management;
- Adjusted EBITDA margin2 of high single digits;
- Adjusted Net Income2 of $47 million to $49 million, based on a blended tax rate of 25%; and
- Adjusted Earnings per Diluted Share2 of $0.85 to $0.95, based on estimated adjusted average diluted shares outstanding of 55.2 million for the full year.
1Gross margin is calculated as net sales less cost of sales (exclusive of depreciation and amortization) as a percentage of net sales. Net Income margin is calculated as net income as a percentage of net sales.
2Adjusted Net Income, Adjusted Earnings per Diluted Share, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For a reconciliation of historical 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. A reconciliation of Adjusted Net Income, Adjusted Earnings per Diluted Share and Adjusted EBITDA margin outlook to the corresponding GAAP measure on a forward-looking basis cannot be provided without unreasonable efforts, as we are unable to provide reconciling information with respect to certain items. However, in 2022 the Company expects equity-based compensation of approximately $15.7 million, depreciation and amortization of approximately $46.5 million, interest expense of approximately $8.9 million, severance and restructuring expenses of approximately $10.1 million and foreign currency transaction loss of $1.8 million, each of which is a reconciling item to Net Income. See “Non-GAAP Financial Measures” for more information.
|
Funko, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) |
||||||||||
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||
|
|
2022 |
|
2021 |
|
|
2022 |
|
|
2021 |
|
| (In thousands, except per share data) | ||||||||||
| Net sales |
$ |
365,607 |
$ |
267,733 |
|
$ |
989,666 |
|
$ |
693,020 |
| Cost of sales (exclusive of depreciation and amortization shown separately below) |
|
237,728 |
|
171,320 |
|
|
649,974 |
|
|
425,929 |
| Selling, general, and administrative expenses |
|
97,930 |
|
59,890 |
|
|
259,043 |
|
|
166,032 |
| Depreciation and amortization |
|
12,555 |
|
10,328 |
|
|
34,509 |
|
|
30,778 |
| Total operating expenses |
|
348,213 |
|
241,538 |
|
|
943,526 |
|
|
622,739 |
| Income from operations |
|
17,394 |
|
26,195 |
|
|
46,140 |
|
|
70,281 |
| Interest expense, net |
|
2,977 |
|
1,711 |
|
|
5,854 |
|
|
5,921 |
| Loss on debt extinguishment |
|
— |
|
675 |
|
|
— |
|
|
675 |
| Other expense (income), net |
|
926 |
|
(505 |
) |
|
1,758 |
|
|
466 |
| Income before income taxes |
|
13,491 |
|
24,314 |
|
|
38,528 |
|
|
63,219 |
| Income tax expense (benefit) |
|
2,342 |
|
5,939 |
|
|
(2,932 |
) |
|
12,814 |
| Net income |
|
11,149 |
|
18,375 |
|
|
41,460 |
|
|
50,405 |
| Less: net income attributable to non-controlling interests |
|
1,519 |
|
6,474 |
|
|
7,276 |
|
|
18,177 |
| Net income attributable to Funko, Inc. |
$ |
9,630 |
$ |
11,901 |
|
$ |
34,184 |
|
$ |
32,228 |
| Earnings per share of Class A common stock: | ||||||||||
| Basic |
$ |
0.21 |
$ |
0.30 |
|
$ |
0.78 |
|
$ |
0.85 |
| Diluted |
$ |
0.19 |
$ |
0.28 |
|
$ |
0.73 |
|
$ |
0.80 |
| Weighted average shares of Class A common stock outstanding: | ||||||||||
| Basic |
|
46,874 |
|
39,448 |
|
|
43,670 |
|
|
37,856 |
| Diluted |
|
49,686 |
|
41,796 |
|
|
53,991 |
|
|
40,079 |
|
Funko, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) |
|||||
|
September 30, |
December 31, |
||||
|
(In thousands, except per share amounts) |
|||||
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents |
$ |
25,050 |
|
$ |
83,557 |
| Accounts receivable, net |
|
189,917 |
|
|
187,688 |
| Inventory |
|
265,799 |
|
|
166,428 |
| Prepaid expenses and other current assets |
|
38,480 |
|
|
14,925 |
| Total current assets |
|
519,246 |
|
|
452,598 |
| Property and equipment, net |
|
98,574 |
|
|
58,828 |
| Operating lease right-of-use assets |
|
68,236 |
|
|
53,466 |
| Goodwill |
|
131,297 |
|
|
126,651 |
| Intangible assets, net |
|
180,186 |
|
|
189,619 |
| Deferred tax asset |
|
117,602 |
|
|
74,412 |
| Other assets |
|
21,743 |
|
|
11,929 |
| Total assets |
$ |
1,136,884 |
|
$ |
967,503 |
| Liabilities and Stockholders’ Equity | |||||
| Current liabilities: | |||||
| Line of credit |
$ |
90,000 |
|
$ |
— |
| Current portion of long-term debt, net of unamortized discount |
|
17,443 |
|
|
17,395 |
| Current portion of operating lease liabilities |
|
17,807 |
|
|
14,959 |
| Accounts payable |
|
88,101 |
|
|
57,238 |
| Income taxes payable |
|
2,537 |
|
|
15,994 |
| Accrued royalties |
|
70,715 |
|
|
58,158 |
| Accrued expenses and other current liabilities |
|
90,875 |
|
|
121,267 |
| Total current liabilities |
|
377,478 |
|
|
285,011 |
| Long-term debt, net of unamortized discount |
|
142,729 |
|
|
155,818 |
| Operating lease liabilities, net of current portion |
|
79,871 |
|
|
50,459 |
| Deferred tax liability |
|
533 |
|
|
648 |
| Liabilities under tax receivable agreement, net of current portion |
|
100,886 |
|
|
75,523 |
| Other long-term liabilities |
|
2,902 |
|
|
3,486 |
| Commitments and Contingencies | |||||
| Stockholders’ equity: | |||||
| Class A common stock, par value $0.0001 per share, 200,000 shares authorized; 47,095 and 40,088 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively |
|
5 |
|
|
4 |
| Class B common stock, par value $0.0001 per share, 50,000 shares authorized; 3,293 and 10,691 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively |
|
— |
|
|
1 |
| Additional paid-in-capital |
|
309,609 |
|
|
252,505 |
| Accumulated other comprehensive (loss) income |
|
(5,851 |
) |
|
1,078 |
| Retained earnings |
|
102,234 |
|
|
68,050 |
| Total stockholders’ equity attributable to Funko, Inc. |
|
405,997 |
|
|
321,638 |
| Non-controlling interests |
|
26,488 |
|
|
74,920 |
| Total stockholders’ equity |
|
432,485 |
|
|
396,558 |
| Total liabilities and stockholders’ equity |
$ |
1,136,884 |
|
$ |
967,503 |
|
Funko, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) |
||||||
|
Nine Months Ended September 30, |
||||||
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
||||||
| Operating Activities | ||||||
| Net income |
$ |
41,460 |
|
$ |
50,405 |
|
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||
| Depreciation, amortization and other |
|
34,390 |
|
|
30,356 |
|
| Equity-based compensation |
|
11,999 |
|
|
9,869 |
|
| Amortization of debt issuance costs and debt discounts |
|
670 |
|
|
893 |
|
| Loss on debt extinguishment |
|
0 |
|
|
675 |
|
| Deferred tax expense |
|
0 |
|
|
994 |
|
| Other |
|
7,539 |
|
|
(93 |
) |
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable, net |
|
(10,198 |
) |
|
(22,223 |
) |
| Inventory |
|
(106,061 |
) |
|
(81,770 |
) |
| Prepaid expenses and other assets |
|
(32,310 |
) |
|
(1,582 |
) |
| Accounts payable |
|
32,349 |
|
|
33,933 |
|
| Income taxes payable |
|
(13,303 |
) |
|
10,135 |
|
| Accrued royalties |
|
10,942 |
|
|
7,086 |
|
| Accrued expenses and other liabilities |
|
(42,159 |
) |
|
40,114 |
|
| Net cash (used in) provided by operating activities |
|
(64,682 |
) |
|
78,792 |
|
| Investing Activities | ||||||
| Purchases of property and equipment |
|
(46,908 |
) |
|
(17,434 |
) |
| Acquisitions of businesses and related intangible assets, net of cash |
|
(13,967 |
) |
|
199 |
|
| Other |
|
778 |
|
|
84 |
|
| Net cash used in investing activities |
|
(60,097 |
) |
|
(17,151 |
) |
| Financing Activities | ||||||
| Borrowings on line of credit |
|
90,000 |
|
|
— |
|
| Payments on line of credit |
|
— |
|
|
— |
|
| Debt issuance costs |
|
(405 |
) |
|
(1,055 |
) |
| Issuance of long-term debt |
|
— |
|
|
180,000 |
|
| Payments of long-term debt |
|
(13,500 |
) |
|
(193,875 |
) |
| Contributions from continuing equity owners |
|
— |
|
|||
| Distributions to continuing equity owners |
|
(10,507 |
) |
|
(9,284 |
) |
| Payments under tax receivable agreement |
|
— |
|
|
(6 |
) |
| Proceeds from exercise of equity-based options |
|
1,209 |
|
|
3,726 |
|
| Net cash provided by (used in) financing activities |
|
66,797 |
|
|
(20,494 |
) |
| Effect of exchange rates on cash and cash equivalents |
|
(525 |
) |
|
(157 |
) |
| Net change in cash and cash equivalents |
|
(58,507 |
) |
|
40,990 |
|
| Cash and cash equivalents at beginning of period |
|
83,557 |
|
|
52,255 |
|
| Cash and cash equivalents at end of period |
$ |
25,050 |
|
$ |
93,245 |
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
| (In thousands, except per share data) | ||||||||||||
| Net income (loss) attributable to Funko, Inc. |
$ |
9,630 |
|
$ |
11,901 |
|
$ |
34,184 |
|
$ |
32,228 |
|
| 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) |
|
1,519 |
|
|
6,474 |
|
|
7,276 |
|
|
18,177 |
|
| Equity-based compensation (2) |
|
4,677 |
|
|
3,658 |
|
|
11,999 |
|
|
9,869 |
|
| Acquisition transaction costs and other expenses (3) |
|
— |
|
|
— |
|
|
2,850 |
|
|
— |
|
| Certain severance, relocation and related costs (4) |
|
1,070 |
|
|
— |
|
|
8,203 |
|
|
81 |
|
| Loss on debt extinguishment (5) |
|
— |
|
|
675 |
|
|
— |
|
|
675 |
|
| Foreign currency transaction (gain) loss (6) |
|
927 |
|
|
(505 |
) |
|
1,758 |
|
|
466 |
|
| Income tax (expense) benefit (7) |
|
(2,699 |
) |
|
(1,097 |
) |
|
(18,767 |
) |
|
(5,764 |
) |
| Adjusted net income (loss) |
$ |
15,124 |
|
$ |
21,106 |
|
$ |
47,503 |
|
$ |
55,732 |
|
| Adjusted net income margin (8) |
|
4.1 |
% |
|
7.9 |
% |
|
4.8 |
% |
|
8.0 |
% |
| Weighted-average shares of Class A common stock outstanding-basic |
|
46,874 |
|
|
39,448 |
|
|
43,670 |
|
|
37,856 |
|
| Equity-based compensation awards and common units of FAH, LLC that are convertible into Class A common stock |
|
7,150 |
|
|
14,634 |
|
|
10,321 |
|
|
15,882 |
|
| Adjusted weighted-average shares of Class A stock outstanding – diluted |
|
54,024 |
|
|
54,082 |
|
|
53,991 |
|
|
53,738 |
|
| Adjusted earnings (loss) per diluted share |
$ |
0.28 |
|
$ |
0.39 |
|
$ |
0.88 |
|
$ |
1.04 |
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
| (amounts in thousands) | ||||||||||||
| Net income |
$ |
11,149 |
|
$ |
18,375 |
|
$ |
41,460 |
|
$ |
50,405 |
|
| Interest expense, net |
|
2,977 |
|
|
1,711 |
|
|
5,854 |
|
|
5,921 |
|
| Income tax expense (benefit) |
|
2,342 |
|
|
5,939 |
|
|
(2,932 |
) |
|
12,814 |
|
| Depreciation and amortization |
|
12,555 |
|
|
10,328 |
|
|
34,509 |
|
|
30,778 |
|
| EBITDA |
$ |
29,023 |
|
$ |
36,353 |
|
$ |
78,891 |
|
$ |
99,918 |
|
| Adjustments: | ||||||||||||
| Equity-based compensation (2) |
|
4,677 |
|
|
3,658 |
|
|
11,999 |
|
|
9,869 |
|
| Acquisition transaction costs and other expenses (3) |
|
— |
|
|
— |
|
|
2,850 |
|
|
— |
|
| Certain severance, relocation and related costs (4) |
|
1,070 |
|
|
— |
|
|
8,203 |
|
|
81 |
|
| Loss on debt extinguishment (5) |
|
— |
|
|
675 |
|
|
— |
|
|
675 |
|
| Foreign currency transaction (gain) loss (6) |
|
927 |
|
|
(505 |
) |
|
1,758 |
|
|
466 |
|
| Adjusted EBITDA |
$ |
35,697 |
|
$ |
40,181 |
|
$ |
103,701 |
|
$ |
111,009 |
|
| Adjusted EBITDA margin (9) |
|
9.8 |
% |
|
15.0 |
% |
|
10.5 |
% |
|
16.0 |
% |
|
(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 the timing of awards. |
|
(3) |
For the nine months ended September 30, 2022 includes acquisition-related costs related to investment banking and due diligence fees. |
|
(4) |
For the three and nine months ended September 30, 2022, includes charges related to one-time relocation costs for U.S. warehouse personnel and inventory in connection with the new opening of a warehouse and distribution facility in Buckeye, Arizona. For the nine months ended September 30, 2021, represents severance, relocation and related costs associated with residual payment of global workforce reduction implemented in response to the COVID-19 pandemic. |
|
(5) |
Represents write-off of unamortized debt financing fees for the three and nine months ended September 30, 2021. |
|
(6) |
Represents both unrealized and realized foreign currency gains and losses on transactions denominated other than in U.S. dollars, including derivative gains and losses on foreign currency forward exchange contracts. |
|
(7) |
Represents the income tax expense effect of the above adjustments. This adjustment uses an effective tax rate of 25% for all periods presented. |
|
(8) |
Adjusted net income margin is calculated as Adjusted net income as a percentage of net sales. |
|
(9) |
Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net sales. |
