Mattel, Inc. 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys worldwide, including Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, American Girl, owned brands, and licensed partner brands. This unaudited Form 10-Q covers the three months ended March 31, 2018. Results are seasonal and are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $708.4 million | $735.6 million | Down 4% |
| Gross profit | $218.9 million | $278.8 million | Down 21% |
| Gross margin | 30.9% | 37.9% | Down 700 basis points |
| Operating loss | $(276.6) million | $(125.6) million | Loss increased |
| Net loss | $(311.3) million | $(113.2) million | Loss increased |
| Diluted loss per share | $(0.90) | $(0.33) | Loss increased |
| Cash flow from operations | $(273.7) million | $(310.0) million | Use decreased |
| Cash flow from investing | $(30.9) million | $(44.7) million | Use decreased |
| Cash flow from financing | $(251.5) million | $(142.6) million | Use increased |
Cash and equivalents were $526.7 million at March 31, 2018, compared with $1.08 billion at December 31, 2017 and $381.9 million at March 31, 2017. Total debt was $2.87 billion, including $2.87 billion of long-term debt and no short-term borrowings. Stockholders’ equity was $982.5 million, and debt represented approximately 74.5% of total capitalization.
Mattel had $1.60 billion of senior secured revolving credit facilities maturing in December 2020. No amounts were outstanding under these facilities at March 31, 2018, and Mattel was in compliance with all covenants. Approximately $313 million of cash was held by foreign subsidiaries.
Material Changes Versus the Prior Comparable Period
- Gross sales declined 2% to $800.0 million, while net sales declined 4%, partly reflecting a $30 million reversal of first-quarter sales associated with the Toys “R” Us liquidation.
- Power Brands gross sales increased 2%; Barbie increased 24% and Hot Wheels increased 15%. Fisher-Price and Thomas & Friends declined 8%, and American Girl declined 21%.
- Toy Box gross sales declined 10%, primarily because of lower partner-brand sales.
- Mattel recorded approximately $57 million of bad debt expense and wrote off approximately $87 million of Toys “R” Us receivables. Total segment charges related to the liquidation were approximately $86.8 million.
- Cost of sales increased 7% despite lower sales, driven by higher product costs, freight and logistics costs, and royalties. Operating expenses increased 28%, primarily because of the Toys “R” Us bad debt charge and restructuring costs.
- Mattel recorded $24.9 million of severance and restructuring charges under its Structural Simplification Cost Savings program and reported approximately $13 million of cost savings before severance and investments.
- Mattel repaid $250 million of 2013 Senior Notes at maturity in March 2018. The quarterly dividend remained suspended; Q1 2017 included $130.1 million of dividend payments.
- Accounts receivable decreased to $676.1 million from $1.13 billion at year-end 2017, while inventories increased to $677.7 million from $600.7 million, reflecting seasonality and working-capital actions.
Outlook, Commentary, Risks, and Unusual Items
Mattel’s Structural Simplification Cost Savings program targets at least $650 million of net cost savings by 2020. The company expects approximately $160 million of related charges during 2018 and 2019. Management’s stated strategy includes strengthening Power Brands, expanding emerging-market and digital-first offerings, improving innovation, and transforming operations and the supply chain.
Key risks include continued retailer weakness or insolvencies, customer concentration, seasonal demand, inventory and shipping execution, competition, licensing relationships, foreign-exchange movements, commodity, labor and transportation costs, product liability and recalls, litigation, financing-market access, and the ability to realize planned cost savings.
The filing identifies the Toys “R” Us liquidation as a significant unusual item affecting sales, receivables, gross margin, and operating results. Mattel also adopted new revenue and income-tax accounting standards in 2018, including a $29 million reduction to opening retained earnings related to certain licensing contracts and an approximately $9 million increase to opening retained earnings related to intra-entity asset transfers.
Mattel expects approximately $17 million of additional pension and postretirement contributions during the remainder of 2018. It estimated that unrecognized tax benefits could decrease by approximately $28 million within the next twelve months, although settlements could materially affect results. A Brazilian litigation matter was settled for 5.0 million Brazilian real, subject to court approval; Mattel had accrued approximately $1.5 million at March 31, 2018.
Subsequent to quarter-end, Margaret H. Georgiadis resigned as CEO and director effective April 26, 2018, and Ynon Kreiz became CEO. MGA filed a notice of appeal related to a judgment in Mattel’s favor; Mattel stated that damages were not reasonably possible and had accrued no liability. The securities litigation disclosed in the filing has unspecified potential damages that cannot currently be estimated.
Important Facts for Investors to Verify
- Whether the Toys “R” Us liquidation produces additional receivable recoveries, sales reversals, bad debt, or inventory effects.
- Progress toward the $650 million cost-savings target, the timing of savings, and the approximately $160 million expected restructuring charges.
- Mattel’s ability to fund seasonal working-capital needs while operating with high leverage, negative operating cash flow, and suspended dividends.
- Performance of Barbie and Hot Wheels relative to declines in American Girl, Fisher-Price and Thomas & Friends, and Toy Box brands.
- Compliance with the senior secured revolving-credit facilities and future fixed-charge coverage requirements.
- Potential outcomes and financial exposure from the MGA appeal, securities litigation, Brazilian litigation, tax audits, and other contingencies.
- Impact of foreign-exchange movements, retailer inventory policies, licensing costs, freight costs, and the company’s seasonal concentration of sales in the second half of the year.