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 30th, 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. Stephen Berman will first provide an overview of the quarter. Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Stephen 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. Your line will be placed on mute for the first portion of the call. If you would like to be placed into a queue to ask a question, please press *1 on your telephone keypad.
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 securities 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. Stephen Berman.
Good morning, and thank you, everyone, for joining us today. We are pleased with our third-quarter results and believe we are 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 boys role-play, and our preschool 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, licensors, 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 Brands catalog dropped into 1.5 million homes this month and features our DreamPlay enhanced The 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, The 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 risk on new product launches. For JAKKS, we believe with our strong basic categories where we are leaders in and/or 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 preschool 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.
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 nine months ending September 30th, 2013, were $495.2 million compared to $533.3 million in 2012. The net loss for the nine-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 nine 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 pre-tax, financial, and legal advisory fees and expenses related to the 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. Sales for Traditional Toys were $243.9 million for the first nine months of 2013 versus $286.6 million for the first nine 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, though 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. Sales for Role Play, Novelty, and Seasonal Toys were $251.3 million for the first nine months of 2013 versus $246.6 million for the first nine 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 nine months of 2013 and 2012 were $95.5 million and $109.5 million, respectively. The 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. Gross margin for the first nine months of 2013 was 23.6% of net sales compared to 31.3% of net sales in the first nine months of last year. The decrease as a percentage of net sales in 2013 for the nine-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 nine 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 startup 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 30th, 2013, the company's working capital was $195.2 million, including cash 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. For the nine-month periods, 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 30th, 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 five days from 2012.
Inventory as of September 30th, 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 amounts of 4.25% senior convertible notes due in 2018 and repurchased $61 million of our 4.5% 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 repurchased 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 net loss of approximately $56.1 million , or $2.56 per diluted share.
With that, I will return the call back to Stephen 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 at 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 Kmart'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 shipping in spring 2014, 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, 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 Toys for Holidays. Products for the new Disney animated feature film, “Frozen,” began shipping this quarter, 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 Fairies 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 MiWorld line of mini play environments based on top girl brands like Claire's, Sprinkles, and OPI, just to name a few. This will also feature the compatibility with our MiWorld 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, 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. Our Black & Decker Junior Play Workbench was included on Kohl's 15 Dream Toy list.
Moving on to preschool, our full range of Daniel Tiger preschool toys is off to a very strong start at one of our top retailers in the U.S. Daniel Tiger's Neighborhood has been a top 10 preschool program since September 2012 launch on PBS, which has seeded us for high product demand. In addition, Daniel Tiger gets 40 million streams per month on pbskids.org. The next highest property gets 16 million per month by comparison. We will further expand our Daniel Tiger offerings with role-play, dress-up, and costumes for 2014. We have the master toy rights for Daniel Tiger, we plan to have a complete line going into 2014 and beyond.
Our Moose Mountain division, which is the leader in great evergreen preschool products such as foot-to-floor ride-ons, inflatable ball pits, and arcade games, is having a great year with continued year-over-year growth for the third quarter and year-to-date. Our Kid O 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 will continue to be a steady and 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 Super Heroes, 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 "Guardians of the Galaxy," and "The Amazing Spider-Man 2," which are all expected to be available at retailers nationwide for 2014 Halloween season. Despite challenging spring weather, our innovative Maui Toys seasonal products did solid business at 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, then gear up for spring-summer shipments 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, financial weakness of one of our major international customers, which we discussed on our last earnings call. We have 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. As I mentioned earlier, we have 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. We will distribute even more of our Disney licensed merchandise in China and the Latin America region beginning fourth quarter this year. These two 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 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 The 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 gameplay 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. 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 targeted at both boys and girls and range in ages from 2 to 14 with a mix of JAKKS' own IP and licenses. Our line will capitalize on various relevant 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 units that commenced during the second half of this year. The right sizing of our business, the staff, office space, and other expenses has allowed us to gain strong financial savings going into 2014. These savings also have turned to strong efficiencies, align our business units to work more closely together and achieve benefits by sharing the resources from all areas such as design, R&D, sales, merchandising, just to name a few.
We have been able to achieve better-focused product 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 bigger strides in cohesive R&D that can be spread across different areas of business units versus having talent and staff being spread out and offices and staff being underutilized due to being located in various cities and states. Throughout this past month of October, we again previewed our 2014 previews to U.S. and international customers and licensors. We could not be more proud and more excited of the broad range of evergreen categories 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 they have seen from JAKKS and its divisions in over the past four years.
We could not be more right on track with today's kids play patterns and categories of focus. The broad range of evergreen product, in addition with our DreamPlay and technology initiatives, we are ready and excited to 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. With that, we will wrap up the prepared portion of the call and open it up to Q&A.
Thank you, sir. We will now begin the question-and-answer session. If you have a question, please press star one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, please pick up your handset first before pressing the numbers. Once again, if you have a question, please press star one on your telephone keypad. On the line, we have Scott Hamman from KeyBanc. Please go ahead.
Hey, good morning, guys. 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?
Sure. We actually commenced them that third week in July after we had announced earnings and the financings. It includes a headcount of 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 any of the operations. We expect to have a full-year impact in 2014.
Okay. You alluded to having what you called normal margins in the fourth quarter. Can you help us understand what you mean by normal margins? As we move into 2014, and you guys have talked about a return to profitability, what we should expect as kind of an ongoing margin structure for this business?
North of 30%. Basically, that eliminates or significantly reduces inventory impairments 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. We will be establishing the retail price points and the value, and within that construct, we'll be able to enhance our gross margins.
What about on an operating margin basis?
In the short term, we're shooting for north of 5%. It's still well early in the process. We just completed Toy Fair. Once we get all the line listings and the 2014 product solidified, we'll be able to give more color on that. In that range is our short-term goal.
Okay, great. Thanks for the detail.
All right. Thank you.
From Piper Jaffray, we have Steph Wissink online. Please go ahead.
Hi. Good morning, everyone. Just a couple of questions for us. First, guys, it sounds like the third quarter came in a bit ahead of how you had planned it, yet you maintained the full-year guidance. How should we think about that? Is that conservatism on the fourth quarter? Is that a shift in the flow of the business from this year versus last year? A second question, just a follow-up to the earlier question related to DreamPlay. Can you talk a little bit about the relative size of that business potential in 2014 and the product margin versus the company average? Thank you.
For the third quarter and the remaining part of the year, we're comfortable with our estimate that we gave out during the second quarter and reaffirmed during the 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. We are just taking an approach looking forward and ensuring that we have a good holiday season. Our goal is we had a rough path, and we want to be conservative and ensure that we have a steady business going forward. That's the approach we are taking. 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 Tiger's Neighborhood. Excuse me for that cough. 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 an outlook for 2014 at a later date.
Okay. Appreciate the color, guys. Best of luck.
Thank you.
From BMO Capital Markets, we have Gerrick Johnson online. Please go ahead.
Hey, good morning. A couple product questions for you.
Excuse me.
DreamPlay retail. Can you tell us where that is? We were out in stores just a couple of days ago, didn't see it anywhere. What retailers, what aisle should I be looking in to find that?
You could look at both Toys R Us, Target, and Walmart were the initial launches. You would look under the girls category where Little Mermaid is. It's been set. The sell-throughs that we're getting currently are going beyond our expectations. It is out there, and it is set. If you're not seeing it is either sold through and not pulled back from either the back room of a retailer or back at the DCs. It is out at retail at those three major retailers. The MiWorld DreamPlay product launches at Walmart 12/1, with the app launching 12/1 at the same time.
Okay, we'll go with the assumption that it's sold through. That's why we didn't see it. How about Daniel? Will you expand that retail beyond Toys R Us next year?
Yes, Gerrick. Actually, we just had all of our major retailers, not just major retailers, all of our retailers from the drug trades to the big box stores. Our line has expanded dramatically on an SKU basis. As we've had such amazing results with Daniel the Tiger as Sofia the First is outpacing everyone's expectation, at the same time, Daniel the Tiger's sell-through is equal or more to Sofia the First. Retailers are backing it very strongly, and we expect that to be a nice part of our business for next year.
Yeah, it looks like a good license. Last question, what's your number one selling Halloween costume this year?
Great. I can't tell you that because I don't know what it is. Because the sell-in is different than sell-through, Gerrick Johnson, and right now, this is the biggest sell-through period for Halloween. It's the last two 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.
All right, very good. Thank you.
Okay. Thank you.
From Stifel Nicolaus, we have Drew Crum online. Please go ahead.
Okay, thanks. Good morning, everyone.
Morning, Drew.
Guys, you seem to have an increased focus on international. Can you talk about how you're thinking about what this could comprise as a % of the total- maybe intermediate to longer term? Then you've also mentioned increased usage or utilization of the Disney properties. What is the margin profile on that business?
On the international business, we've had an undertaking for over a year, or a year and a half, of true expansion. In fact, we're showing at Kids India 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 Chinese, are one of the fastest-growing markets internationally. 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. In fact, in Nordic and Russia, we've seen extremely strong growth in our international segmentation. 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.
Okay, got it. I understand there was some change to the relationship with Disney under DreamPlay. Can you talk about what the pipeline of content looks like for DreamPlay with Disney going forward?
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 have occurred. Our relationship with Disney is very broad, but what we're focusing on is the technology in appropriate areas, so for both boy and girl, and with our launches with Disney for DreamPlay next year are under wraps while we're working with them. 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.
Okay. Stephen, just to confirm, there will be new Disney properties associated with DreamPlay in 2014?
Yes.
Okay. Last question, just some accounting questions. Joel, can you quantify what the impact of the tax deferral was in the quarter? Then also, you mentioned that the days sales outstanding were higher due to greater sales domestically, and I guess I would've thought it would've been higher with international sales being greater. Just wanted to get some clarification around that.
Actually, it's domestic versus FOB shipping. The proportion to international accounts didn't change much.
Okay.
The FOB sales are done on letter of credit, and they're generally collected within two or three weeks versus 60 days plus extended dating on a lot of the Disguise accounts because of the high seasonality of that business.
Okay. That makes sense.
What was the first part? Oh, the tax. What were you referring to, actually, on the tax?
There was a tax benefit. Just wanted to know if you could quantify the impact on the quarter.
Actually, there are no tax benefits. What the provision is, we recently completed our transfer pricing, which allocates the taxable income between Hong Kong and the U.S. It's more reflective of the loss in the U.S., which has no benefit or provision. It's essentially the income tax on the Hong Kong earnings for what they'll keep through the transfer pricing analysis.
Okay. Thanks, guys.
Thank you.
From Ascendiant Capital, we have Edward Wu online. Please go ahead.
Yeah, good morning.
Good morning, Ed.
About the retail environment, 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?
I could give you a better understanding as we just got through listening to a lot of our customers, both U.S. and abroad. They are, I would say, more optimistic in the sense of it's back to the basics and products that are more evergreen. I think retailers are staying away from hit-driven properties. They're not taking big inventory positions on items. They're 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 preschool division. It's so diverse in the different segmentations at retail. We sell to over 15 different buyers at one retailer. We're seeing really nice traction. Again, that's just currently what we see as of today, and very similar abroad.
We had a problem, but 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. 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 there's just nothing 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 four or five months at a retailer, and the numbers have grown well outside of our expectation. It's a long build. I think retail looks solid for the remaining part of this year.
Great. Well, thank you and good luck.
Thank you.
From B. Riley, we have Linda Bolton Weiser on the line. Please go ahead.
Hi, thanks.
Good morning.
Hi. In terms of the cash flow performance in the quarter, it was kind of negative, more negative than I would have expected, maybe with the operating cash flow, and I know it'll be stronger in the fourth quarter. Is there anything unusual in that number? Also, can you tell us what your peak working capital need will be in the first half of 2014? I'm guessing it's around $90 million-$100 million, but I don't know. In what months does that peak working capital occur?
The cash flow for this quarter definitely met our expectations. The biggest draw on the cash was the growth in receivables. 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, it's somewhere south of the $90 million. We don't have much working capital needs. Most of the sales of the business are still on an FOB basis, we're able to grow without much use of capital.
Okay. 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? Do you think you actually don't need that in order to get through 2014? Can you give some color on that?
Yeah, we actually don't need it, but certainly Q3 was an inflection point for us. One, 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 line for a couple of reasons. One, dry powder for acquisitions. Also, we have $39 million of our 4.5% convert due in November. To the extent that the-
November.
November of 2014, 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. We'll evaluate that, but we do have that liquidity event coming up. We believe that the cash on hand and cash flow would 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.
Great, can you just give me the year-to-date depreciation and amortization number? I just missed that for the nine months.
Oh, sure. $9.3 million for the third quarter and $16.9 million for the year to date.
Thanks. Just 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 % of your total sales? I'm still thinking even with really good growth, it'll still be a relatively small % of your sales next year. Can you put some numbers around it?
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 2014. There'll be well over 20 SKUs in that area, licensed and unlicensed. Also, it'll also be launched internationally in 2014.
Great. Thanks a lot.
Thank you.
From Needham & Company, we have Sean McGowan online. Please go ahead.
Hi, guys. 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?
No, actually, because in periods of loss, you use the basic, so you don't show the converts as converted. There are also some quarters where there's modest income, but we have to run that calculation each quarter. In the fourth quarter, we would use basic for both the quarter and the year to date because of the loss.
Okay. In terms of Maui, can you just comment on whether Maui was a contributor to growth in the quarter and what's the year? I know you didn't have it for the full year last year. For the nine months, how much of the sales in the nine-month period were Maui?
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. Their business is between $20 million and $30 million. They're on track to achieve that.
That's for the full year, you mean?
Yes.
Okay. It's much more of a first-half business because of the nature of the product?
Correct. Yeah. It's seasonal and outdoor.
Okay. In your prepared remarks, you commented on why the gross margin was lower. I think you were commenting on the first nine months. While it's not down a lot in the third quarter, why is it down at all in the third quarter?
Actually, accounting 101. We capitalize a certain amount of our warehousing costs, and it's a function of how much inventory we purchase. With the carryover inventory from 2012 and the lower inventory purchases in general, a higher % of our other direct selling was allocated to cost of goods. Overall, other direct selling was down. It's just a higher amount was allocated to cost of goods through that mechanism.
Just so I understand that, you mean that because the inventory is lower, the allocation of expenses is higher or something like?
Because inventory purchases were lower, it changes the percentage allocated to cost of goods. If we had purchased a lot more, you would actually see margin expansion.
Okay. I guess we'll just go with the 30%-ish plus is what you would consider normal, not this quarter.
Correct.
Okay. Remind us, has there been any major change in what % of your cash is U.S. versus outside the U.S.?
With the issuance of the new convert, it added $35 million of liquidity to the U.S. Right now, it's $20 million here and the balance in Hong Kong.
Okay. I didn't know if there was any transfers back and forth.
No. We have ongoing transactions between the companies. We buy inventory from Hong Kong. We charge them a management fee. There's a continuous flow of activity between the entities in the ordinary course. No borrowings per se. These are just trade receivables between the companies.
Okay. What do you expect to be the effective tax rate for the whole year?
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.
Right.
It'll be aberrational in that respect. We expect to be fully taxed for financial reporting next year in the 18%-20% range.
Okay. That was going to be my next question, so that helps. All right. Thank you very much.
All right. Thank you.
Thank you. This concludes our question and answer session. I will now turn it back over to Mr. Stephen Berman for closing remarks.
Thank you, everyone, for the call. We had a lot of people attending this call, and we've 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. Thank you very much. Bye-bye.
This concludes today's conference. Thank you for joining. You may now disconnect.