MAT

Business Context and Reporting Period

Company: Mattel, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Mattel designs, manufactures, and markets a broad variety of toy products worldwide, including Barbie, Hot Wheels, Fisher-Price, and American Girl brands. The company operates through Domestic and International segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 15% year-over-year, driven by a 23% decline in international gross sales (impacted by a 13 percentage point unfavorable currency impact) and a 6% decline in domestic gross sales. Retail softness and reduced inventory levels by retailers were cited as primary causes.
• Margin Expansion: Despite lower sales, gross margin improved to 44.0% from 43.2%, primarily due to price increases effective January 1, 2009, partially offset by input cost pressures and currency headwinds.
• Expense Management: Other selling and administrative expenses decreased 4% to $317.0 million, aided by the Global Cost Leadership program and foreign currency benefits. However, this was partially offset by a $20.9 million legal settlement reserve for product liability litigation.
• Segment Performance:
  • Domestic: Mattel Girls & Boys Brands US income improved significantly to $14.1 million (from $2.7 million) due to an 18% increase in Barbie sales. Fisher-Price US and American Girl Brands both reported losses.
  • International: Segment income dropped to $9.3 million from $23.9 million due to volume declines and currency impacts.

Guidance, Outlook, and Risks

• Outlook: Management expects unfavorable economic conditions to persist through 2009. Revenues are expected to remain under pressure due to retail softness, consumer pull-back, and currency weakness. The company plans to manage based on realistic revenue assumptions.
• Cost Initiatives: The Global Cost Leadership program is expected to generate $90 million to $100 million in net cost savings in 2009. Advertising expenses are expected to be at the low end of the historical range (11-13% of net sales).
• Capital Allocation: Mattel is prioritizing protecting its dividend and minimizing strategic acquisitions and share repurchases in 2009. Capital expenditures will be tightly managed.
• Liquidity: As of March 31, 2009, Mattel had approximately $777 million available under its domestic unsecured committed revolving credit facility. The company is in compliance with all financial covenants.
• Legal Contingencies:
  • Product Recalls: Ongoing litigation related to 2007 lead paint and magnet recalls. A $20.9 million reserve was recorded in Q1 2009 for settlement of product liability litigation.
  • MGA Entertainment: Mattel won a jury verdict in August 2008 awarding approximately $100 million in damages against MGA for copyright infringement and trade secret misappropriation regarding the Bratz brand. A temporary receiver was appointed by the court in April 2009 to manage Bratz assets.

Investor Verification Checklist

• Currency Impact: Verify the extent to which the 15% revenue decline is attributable to foreign exchange rates versus actual volume declines.
• Legal Reserves: Monitor the status of the $20.9 million product liability reserve and the $100 million MGA verdict collection process.
• Cost Savings Realization: Track the progress of the Global Cost Leadership program against the $90-$100 million 2009 savings target.
• Inventory Levels: Assess if the reduction in inventory ($487.9 million) aligns with the reduction in sales to avoid future write-downs.
• Debt Covenants: Confirm continued compliance with the debt-to-EBITDA ratio (currently 1.4 to 1) and interest coverage ratio (currently 9.0 to 1) under the amended credit facility.