Business Context and Reporting Period
Mattel, Inc. is a global toy company with owned and licensed brands including Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, American Girl, Jurassic World, Lightyear, UNO, and MEGA. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods. Results are seasonal, with a significant proportion of toy purchases occurring during the holiday season.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net sales | $1.236 billion | $1.026 billion | $2.277 billion | $1.901 billion |
| Gross profit | $548.9 million | $488.0 million | $1.032 billion | $899.8 million |
| Gross margin | 44.4% | 47.5% | 45.3% | 47.3% |
| Operating income | $125.1 million | $49.1 million | $205.1 million | $83.0 million |
| Operating margin | 10.1% | 4.8% | 9.0% | 4.4% |
| Net income (loss) | $66.4 million | $(5.5) million | $87.9 million | $(117.9) million |
| Diluted EPS | $0.18 | $(0.02) | $0.24 | $(0.34) |
| Operating cash flow | Not separately presented for the quarter | $(425.0) million | $(241.4) million |
- Gross billings increased 20% to $1.376 billion in Q2 and 19% to $2.541 billion in the first half. Reported first-half growth included an unfavorable 4-percentage-point currency impact.
- Q2 net sales increased 30% in North America and 12% internationally, while American Girl declined 19%. First-half net sales increased 28% in North America and 14% internationally, while American Girl declined 21%.
- Q2 segment operating income was $198.9 million in North America, $58.4 million internationally, and $5.8 million for American Girl. First-half segment operating income was $370.3 million, $105.2 million, and $(11.5) million, respectively.
- Cash and equivalents were $274.5 million at June 30, 2022, compared with $384.7 million at June 30, 2021 and $731.4 million at December 31, 2021.
- Inventories were $1.178 billion, up from $818.0 million at June 30, 2021 and $777.2 million at December 31, 2021, reflecting seasonal inventory build and cost inflation.
- Total debt, including short-term borrowings, was $2.576 billion, or approximately 60% of total capitalization. The company had $250.0 million of current debt due in March 2023 and $2.323 billion of noncurrent debt.
- Mattel had no borrowings under its $1.40 billion senior secured revolving credit facilities, approximately $3.0 million of other short-term borrowings, and approximately $9 million of outstanding letters of credit. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth was broad-based. Q2 gross billings increased 2% in Dolls, 20% in Infant, Toddler, and Preschool, 23% in Vehicles, and 44% in Action Figures, Building Sets, Games, and Other.
- Hot Wheels, Fisher-Price and Thomas & Friends, Jurassic World, and initial Lightyear shipments were notable growth drivers. Barbie gross billings increased 3% in Q2 and 6% in the first half.
- Gross margin contracted 310 basis points in Q2 and 200 basis points in the first half, primarily due to raw-material, ocean-freight, supply-chain, and royalty-cost inflation.
- Operating margin improved despite lower gross margin because of revenue growth, favorable fixed-cost absorption, cost savings, lower advertising expense as a percentage of sales, and a gain on the sale of American Girl facilities.
- Interest expense declined substantially, mainly because the first half of 2021 included an $83.2 million loss on extinguishment of debt and because of the 2021 refinancing and repayment of the 2025 Notes.
- Operating cash flow deteriorated to a $425.0 million use, primarily due to higher working-capital requirements, including a $447.2 million increase in inventory-related cash usage.
- Stockholders’ equity increased to $1.728 billion from $527.7 million at June 30, 2021, primarily reflecting improved trailing-twelve-month profitability and share-based compensation.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide clear consolidated revenue or earnings guidance. Management expects cost inflation to be more significant in 2022 than in 2021, with additional pricing actions expected to partially offset the impact in the second half.
- The Optimizing for Growth program targets $325 million of annual gross cost savings by 2023, including prior Capital Light actions. Mattel reported approximately $211 million of cumulative realized savings as of June 30, 2022, and had recorded approximately $106 million of cumulative program charges.
- Management expects existing cash, operating cash flows, revolving-credit availability, and capital-market access to be sufficient to meet operating and working-capital requirements for the next twelve months, based on its current plan and known conditions.
- COVID-19 continues to create manufacturing, distribution, demand, and supply-chain uncertainty. Inflation, transportation costs, labor costs, foreign exchange, customer inventory policies, and weaker consumer spending could adversely affect results.
- Mattel paused shipments into Russia because of the Russia-Ukraine war. Approximately $60.9 million of cash was held in Russia at June 30, 2022, and its movement out of the country was limited. Sales in Russia and Ukraine represented less than 3% of 2021 consolidated sales.
- The sale of the American Girl corporate office and distribution center generated $23.8 million of proceeds and a $15.2 million pretax gain in Q2 2022. Restructuring charges totaled $20.6 million in the first half.
- Fisher-Price Rock ’n Play Sleeper litigation remains outstanding. Mattel states that a reasonable estimate of any possible loss or range of loss cannot currently be made.
- The company paid an $86 million whistleblower-related securities litigation settlement in February 2022, funded in full by insurers. A proposed derivative-action settlement would provide Mattel $7 million, less attorneys’ fees, subject to court approval. SEC and U.S. Attorney inquiries remain unresolved; the company has recorded a reserve that is not material.
- Turkey was treated as a highly inflationary economy beginning April 1, 2022, with the U.S. dollar designated as its functional currency.
Important Facts for Investors to Verify
- Whether pricing actions and cost-savings initiatives offset inflation, freight, labor, royalty, and other supply-chain pressures in the second half of 2022.
- Whether the significant inventory build converts into holiday-season sales without elevated markdowns, returns, or obsolescence charges.
- The company’s ability to manage the $250 million debt maturity due in March 2023 while maintaining adequate seasonal liquidity.
- Progress toward the $325 million 2023 annual gross cost-savings target and the remaining cash and noncash restructuring costs.
- Developments in the Rock ’n Play Sleeper litigation, SEC inquiry, derivative actions, and related insurance recoveries or reserves.
- The availability and transferability of foreign cash, particularly the $60.9 million held in Russia, and the effects of currency movements on reported results.
- American Girl’s continued sales weakness and whether the segment returns to profitability without relying on asset-sale gains.