Business Context and Reporting Period
Mattel, Inc. is a global toy company with operating segments comprising North America, International, and American Girl. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods. Results are seasonal, with a significant portion of toy purchases occurring during the holiday season.
Financial Highlights
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $1.756 billion | $1.762 billion | $4.033 billion | $3.663 billion |
| Gross profit | $846.9 million | $842.5 million | $1.879 billion | $1.742 billion |
| Gross margin | 48.2% | 47.8% | 46.6% | 47.6% |
| Operating income | $391.4 million | $389.1 million | $596.5 million | $472.1 million |
| Operating margin | 22.3% | 22.1% | 14.8% | 12.9% |
| Net income | $289.9 million | $795.1 million | $377.8 million | $677.2 million |
| Diluted EPS | $0.80 | $2.24 | $1.05 | $1.91 |
| Operating cash flow | Not separately provided | Not separately provided | $(274.8) million | $(255.9) million |
- Q3 gross billings were $1.948 billion, down 1% reported and down 4% excluding the impact of currency exchange rates. Nine-month gross billings were $4.489 billion, up 10% reported and approximately 13% on a constant-currency basis.
- Q3 earnings benefited from lower interest expense, primarily because 2021 included an $18.5 million loss on extinguishment of debt. Nine-month 2021 interest expense also included a $101.7 million debt-extinguishment loss.
- Q3 net income declined sharply because Q3 2021 included a $465.3 million discrete tax benefit, primarily from releasing valuation allowances on deferred tax assets. Q3 2022 included a $19.4 million discrete tax benefit.
- At September 30, 2022, cash and equivalents were $349.0 million, accounts receivable were $1.382 billion, and inventories were $1.084 billion.
- Total debt was $2.574 billion, including $250.0 million classified as current debt due in March 2023. Stockholders’ equity was $1.967 billion.
- Mattel generated no operating cash flow in the first nine months; seasonal working-capital investment was the primary driver. Cash used for investing activities was $97.5 million, including $127.3 million of capital expenditures, and cash used for financing activities was $9.5 million.
Material Changes Versus the Prior Comparable Period
- For the first nine months, net sales increased 10%, led by North America sales growth of 12% and International sales growth of 9%. American Girl sales declined 15%.
- Nine-month gross billings increased 20% for Vehicles and 21% for Action Figures, Building Sets, Games, and Other, while Dolls were flat and Infant, Toddler, and Preschool increased 4%.
- Q3 net sales were essentially flat. Vehicles gross billings increased 12%, but Dolls declined 3% and Infant, Toddler, and Preschool declined 9%.
- Nine-month gross margin declined 100 basis points to 46.6% because of higher raw-material, ocean-freight, supply-chain, and royalty costs. Pricing actions, cost savings, and favorable fixed-cost absorption partly offset these pressures.
- Nine-month operating income increased 26% despite lower gross margin, aided by sales growth, lower relative selling and administrative costs, and cost-savings initiatives.
- North America nine-month segment operating income rose to $707.6 million from $646.5 million; International rose to $268.0 million from $237.6 million; American Girl’s operating loss improved to $20.4 million from $25.8 million.
- Inventory increased 27% year over year to $1.084 billion, reflecting accelerated production, seasonal buildup, and cost inflation. Management also reported higher retail inventories ahead of the holiday season.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing cash, operating cash flows, availability under the revolving facility, and capital-market access are expected to be sufficient for the next 12 months, based on the current business plan and known conditions. The filing does not provide a clear quantitative full-year revenue or earnings forecast.
- Mattel’s $1.40 billion senior secured revolving credit facility was entered into on September 15, 2022 and matures in September 2025. There were no borrowings outstanding at September 30, 2022, and approximately $9 million of letters of credit were outstanding. Mattel was in compliance with its covenants.
- The facility requires a minimum interest-coverage ratio of 2.75 to 1.00 and a maximum total-leverage ratio of 4.50 to 1.00 for the quarter ended September 30, 2022, with subsequent step-downs.
- Mattel expects continued exposure to inflation, foreign-exchange volatility, supply-chain disruption, transportation and labor costs, consumer spending, retailer inventory policies, customer concentration, product demand, and competition.
- Mattel paused shipments to Russia. Cash held in Russia was $70.8 million at September 30, 2022 and was subject to limitations on movement outside the country. Sales in Russia and Ukraine represented less than 3% of 2021 total sales.
- The Turkey subsidiary was treated as operating in a highly inflationary economy beginning April 1, 2022. Argentina liquidation-related accumulated translation adjustments of approximately $45 million were expected to be recognized as a loss upon substantial liquidation, which management expected in Q4 2022.
- The Optimizing for Growth program targets cumulative annual gross savings of $325 million by 2023, including prior Capital Light actions. Cumulative recorded restructuring charges were approximately $112 million at September 30, 2022, and cumulative realized savings were approximately $240 million before severance, restructuring costs, and inflation.
- Mattel recorded a $15.2 million pretax gain on the sale of the American Girl corporate office and distribution center. It also recorded $26.4 million of restructuring charges during the first nine months and expects additional pension and postretirement contributions of approximately $3 million during the remainder of 2022.
- Pending litigation includes Fisher-Price Rock ’n Play Sleeper claims. Mattel stated that a reasonable estimate of any possible loss or range of loss could not be made. A separate securities class-action settlement was funded by insurers, and Mattel agreed to pay a $3.5 million SEC civil penalty in October 2022 related to the whistleblower investigation.
Most Important Facts for Investors to Verify
- Whether holiday-season demand and elevated retailer and company inventories convert into sales without increased markdowns, returns, or obsolescence.
- Whether pricing and the Optimizing for Growth program continue to offset inflation, freight, royalty, labor, and foreign-exchange pressures.
- The company’s ability to manage the $250 million senior-note maturity due in March 2023 while maintaining seasonal liquidity.
- The magnitude and timing of cash flows from operations as seasonal receivables and inventories normalize.
- Potential financial and reputational exposure from Rock ’n Play Sleeper litigation, other contingencies, and the Argentina liquidation-related currency loss.
- The effect of the Russia-Ukraine war, restricted Russian cash, highly inflationary Turkey operations, and continued currency weakness on reported results.
- The filing states that disclosure controls were effective as of September 30, 2022 and that no material changes in internal control over financial reporting occurred during the quarter.