Mattel, Inc. 2011 Q3 Form 10-Q Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys globally, including Mattel Girls & Boys Brands, Fisher-Price Brands, and American Girl Brands. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods. Results are seasonal and the third quarter is not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $1,998.8m | $1,833.1m | $4,112.3m | $3,731.6m |
| Gross profit | $956.1m | $937.5m | $1,985.5m | $1,859.0m |
| Gross margin | 47.8% | 51.1% | 48.3% | 49.8% |
| Operating income | $397.6m | $358.6m | $543.6m | $473.3m |
| Operating margin | 19.9% | 19.6% | 13.2% | 12.7% |
| Net income | $300.8m | $283.3m | $397.9m | $359.7m |
| Diluted EPS | $0.86 | $0.77 | $1.12 | $0.97 |
Q3 net sales increased 9%, while nine-month sales increased 10%. Worldwide gross sales growth was led by Girls & Boys Brands, including Barbie, Monster High, Disney Princess, and CARS 2. International gross sales rose 13% in Q3 and 15% for the first nine months, compared with 6% and 7% domestic growth, respectively.
Gross margin declined 330 basis points in Q3 and 150 basis points for the nine months. Management cited unfavorable foreign exchange, higher product costs, freight and distribution costs, and higher royalties on licensed products. Operating income nevertheless increased because of higher sales, cost savings, lower other selling and administrative expenses, and the absence of 2010 impairment charges.
Cash flow used in operations was $322.1m in the first nine months of 2011, an improvement from $427.6m used in the prior-year period. Investing cash use was $118.9m, including $144.8m for tools, dies, molds, and other property, plant, and equipment. Financing cash use was $586.8m, including $407.4m of share repurchases, $238.6m of dividends, and $240.0m of long-term debt repayments.
Cash and equivalents were $254.5m at September 30, 2011, down from $1.281bn at December 31, 2010. Accounts receivable were $1.651bn and inventories were $764.0m. Short-term borrowings were $236.8m, current long-term debt was $60.0m, and noncurrent long-term debt was $900.0m. Total debt was approximately $1.197bn, implying cash less debt of approximately negative $942m.
Mattel had approximately $1.2bn of incremental borrowing capacity under its $1.4bn revolving credit facility, which matures in March 2015. It complied with its covenants; debt-to-EBITDA was 1.0x versus a 3.0x maximum, and interest coverage was 15.1x versus a 3.5x minimum.
Material changes versus the prior comparable period
- Q3 net income increased $17.5m, or approximately 6%, and diluted EPS increased from $0.77 to $0.86, aided by higher sales and lower selling and administrative expenses.
- Q3 gross margin fell from 51.1% to 47.8%, primarily because of currency effects and cost inflation.
- Q3 other selling and administrative expenses declined 10% to $338.6m; the ratio to sales improved from 20.6% to 16.9%.
- Fisher-Price US segment income declined from $94.0m to $82.4m in Q3 and from $127.0m to $99.6m for the first nine months, despite modest sales growth.
- International segment income increased from $200.9m to $218.2m in Q3 and from $308.1m to $369.8m for the first nine months.
- Debt declined versus September 2010 after repayment of the $200m 2006 Senior Notes and $40m of medium-term notes, although short-term borrowings increased.
- Mattel began paying regular dividends in 2011 and repurchased $407.4m of shares during the first nine months.
- Currency translation produced a $54.6m loss in accumulated other comprehensive income for the first nine months, compared with a $1.9m loss in the prior-year period.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no quantified full-year revenue or earnings guidance in the filing. It expects continued momentum in the fourth quarter, supported by core brands, international expansion, entertainment partnerships, and new franchises, while acknowledging a challenging retail environment.
Operational Excellence 2.0 targets approximately $150m of cumulative savings by the end of 2012, including approximately $75m of legal savings and $75m of structural savings. The program generated approximately $16m of gross savings excluding legal savings in Q3 and $30m in the first nine months; management expects most of the targeted savings in 2012.
Mattel identified significant exposure to foreign exchange, product costs, freight, royalties, consumer demand, retailer liquidity, credit markets, pension funding, and seasonal working-capital needs. A 1% change in the U.S. dollar Trade-Weighted Index was estimated to affect net sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
In the MGA litigation, a judgment totaling approximately $310m was entered against Mattel, including $85m of damages, $85m of punitive damages, and approximately $140m of attorneys' fees and costs. Mattel appealed and did not accrue a liability because management did not believe payment was probable. The company stated that an unfavorable resolution could materially affect financial condition and results.
Mattel paid $7.5m to settle the Gunther-Wahl litigation in July 2011. No changes were made to reserves for the 2007 product recalls, and no 2011 impairment was recorded for goodwill or amortizable intangible assets. One nonamortizable intangible asset with a carrying value of approximately $113m had limited fair-value cushion and could require a future impairment charge.
Subsequent to quarter-end, the board authorized a $500m increase to the share repurchase program and approved a $0.23 per-share fourth-quarter dividend. Mattel also agreed to acquire HiT Entertainment for $680m in cash, subject to customary conditions, with closing expected in the first quarter of 2012 and financing from cash and debt.
Most important facts for investors to verify
- Whether fourth-quarter demand and holiday sell-through support management's positive outlook amid retail and consumer-spending risks.
- Whether foreign exchange, product costs, freight, and royalty pressures continue to suppress gross margins.
- The eventual outcome and cash impact of the approximately $310m MGA judgment and appeal.
- Mattel's ability to restore positive operating cash flow after substantial seasonal working-capital use.
- The funding, closing conditions, leverage impact, and integration risks associated with the $680m HiT Entertainment acquisition.
- Progress toward the $150m Operational Excellence 2.0 savings target and the associated implementation costs.
- Future share repurchases, dividends, and debt repayments relative to the stated goal of maintaining approximately 25% year-end debt-to-capital.