Mattel, Inc. 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and children’s entertainment products, including Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, American Girl, UNO, and MEGA. The filing covers the unaudited three months ended March 31, 2020. Results are seasonal and were materially affected by the COVID-19 pandemic, including retail closures, reduced traffic, supply-chain disruption, and changes in consumer demand.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $594.1 million | $689.2 million | Down 14% |
| Gross profit | $255.2 million | $239.8 million | Up 6% |
| Gross margin | 43.0% | 34.8% | Up 820 basis points |
| Operating loss | $149.8 million | $127.0 million | Loss increased |
| Net loss | $210.7 million | $176.3 million | Loss increased |
| Loss per diluted share | $0.61 | $0.51 | Loss increased |
| Operating cash flow | $(174.5) million | $(192.8) million | Improved |
- Gross sales declined 14% to $670.0 million, with a two-percentage-point unfavorable currency impact. Vehicles increased 1%, while Dolls declined 11%, Infant, Toddler, and Preschool declined 28%, and Action Figures, Building Sets, and Games declined 21%.
- Net sales declined across all segments: North America decreased 16% to $287.6 million, International decreased 11% to $269.4 million, and American Girl decreased 16% to $37.2 million.
- Gross margin benefited from cost-savings programs and the absence of approximately $27 million of inclined-sleeper recall costs recorded in Q1 2019.
- Advertising and promotion expense increased 10% to $76.3 million, while other selling and administrative expense increased 11% to $328.7 million.
- Interest expense increased to $49.0 million from $47.0 million, primarily because of the refinancing of senior notes.
- Cash and equivalents were $499.4 million at March 31, 2020, compared with $630.0 million at December 31, 2019 and $380.1 million at March 31, 2019. Approximately $335 million was held by foreign subsidiaries.
- Total debt was approximately $3.00 billion, including $150.0 million of short-term borrowings, compared with $2.85 billion at December 31, 2019. Stockholders’ equity fell to $157.9 million from $491.7 million at year-end, primarily because of the quarterly loss.
- Investing cash flow used $81.2 million, including $35.3 million of capital expenditures and $46.6 million of net payments for foreign-currency forward contracts. Financing cash flow provided $149.3 million, principally from short-term borrowings.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused a significant decline in sales, particularly through non-essential brick-and-mortar channels, and management expected a more significant revenue decline in Q2 2020.
- International segment loss worsened to $34.1 million from $24.3 million, while American Girl loss worsened to $17.4 million from $14.1 million. North America improved to $8.0 million of segment income from a $19.7 million loss, primarily because Q1 2019 included inclined-sleeper recall costs.
- Currency translation adjustments produced a $145.6 million loss in Q1 2020 versus a $14.1 million gain in Q1 2019, primarily due to weakening of the Mexican peso, Russian ruble, Brazilian real, and British pound.
- Mattel recorded $5.8 million of Capital Light restructuring charges and $4.8 million of other restructuring charges in Q1 2020.
- Mattel adopted the current expected credit loss standard and other accounting updates on January 1, 2020; adoption did not materially affect the financial statements.
Guidance, Outlook, Risks, and Unusual Items
- Mattel did not provide a quantified full-year revenue or earnings outlook. Management stated that the ultimate COVID-19 impact on third- and fourth-quarter sales could not be estimated.
- Management expected COVID-19 to adversely affect Q2 revenue, profitability, and working capital. Prolonged disruption to customers, manufacturing, distribution, or suppliers could materially affect results and liquidity.
- Mattel drew an additional $250.0 million under its revolving facilities in April 2020, bringing total outstanding borrowings to $400.0 million as of April 30, 2020, to address seasonal working-capital needs and pandemic uncertainty.
- Management expected available cash, operating cash flow, revolving-credit availability, and capital-market access to meet requirements for the next twelve months and expected compliance with debt covenants through May 5, 2021. These expectations depend on the evolution of the pandemic and operating performance.
- Mattel committed on May 4, 2020 to reduce its non-manufacturing workforce by 4%. It expected approximately $13 million of cash severance and restructuring charges from Q2 through year-end 2020 and approximately $40 million of run-rate savings exiting 2020.
- The Capital Light program had generated approximately $23 million of run-rate savings by March 31, 2020. Mattel expected cumulative run-rate savings of approximately $65 million in 2020 and $72 million by 2021 from actions taken to date.
- Material risks include COVID-19, retail and customer concentration, supply-chain disruption, foreign exchange, debt and covenant requirements, product liability and recalls, competition, retailer liquidity, litigation, and potential impairment of goodwill. Management stated that prolonged disruption could increase goodwill impairment risk for the American Girl and International reporting units.
- Mattel faced ongoing litigation related to the Fisher-Price Rock ’n Play Sleeper and whistleblower-related securities and derivative actions. The company could not reasonably estimate potential losses for these matters. Mattel was also responding to an SEC subpoena and requests from the U.S. Attorney’s Office for the Southern District of New York.
Most Important Facts for Investors to Verify
- Whether COVID-19-related retail closures and demand changes produced the expected sharper Q2 decline and how quickly sales recovered thereafter.
- Cash burn, borrowing levels, available revolving-credit capacity, and compliance with debt covenants as seasonal working-capital needs increased.
- Progress toward the stated Capital Light and workforce-reduction savings, including remaining restructuring costs.
- Gross-margin sustainability after the benefit from cost savings and the absence of the 2019 inclined-sleeper recall costs.
- Potential goodwill impairment, tax adjustments, and the eventual scope and outcome of SEC, SDNY, product-liability, and securities-related matters.