Mattel, Inc. Form 10-Q Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys and children’s entertainment products globally across Dolls, Infant/Toddler/Preschool, Vehicles, and Action Figures/Building Sets/Games. Operating segments are North America, International, and American Girl. This filing covers the quarter and six months ended June 30, 2019. Results are seasonal, with a significant portion of annual sales typically occurring during the holiday season.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $860.1 million | $840.7 million | $1.549 billion | $1.549 billion |
| Gross profit | $341.4 million | $253.2 million | $581.2 million | $472.1 million |
| Gross margin | 39.7% | 30.1% | 37.5% | 30.5% |
| Operating loss | $51.4 million | $189.2 million | $182.4 million | $465.8 million |
| Net loss | $108.0 million | $240.9 million | $291.7 million | $552.2 million |
| Loss per diluted share | $0.31 | $0.70 | $0.84 | $1.60 |
| Operating cash flow | Not separately provided | Not separately provided | $(400.5) million | $(556.6) million |
Q2 net sales increased 2% despite a 3-percentage-point unfavorable currency impact. Gross profit increased 35%, while other selling and administrative expenses declined 14%. Interest expense increased 6% to $46.2 million in Q2, reflecting higher interest rates on refinanced debt.
At June 30, 2019, cash and equivalents were $194.1 million, including approximately $165 million held by foreign subsidiaries. Total debt was approximately $2.90 billion, consisting primarily of senior notes, and short-term borrowings were $45.0 million. Mattel had $1.60 billion of senior secured revolving credit facilities, approximately $70 million of outstanding letters of credit, and was in compliance with its covenants.
Cash declined $400.4 million from December 31, 2018, primarily due to seasonal working-capital use and the net loss. Inventories increased to $722.4 million from $542.9 million at year-end, while accounts receivable declined to $755.7 million from $970.1 million. Stockholders’ equity declined to $421.3 million from $669.5 million.
Material changes versus the prior comparable period
- Q2 gross margin expanded 960 basis points to 39.7%; management attributed the improvement to Structural Simplification savings, favorable product mix, and lower obsolescence expense.
- Q2 operating loss narrowed by $137.8 million, and net loss narrowed by $133.0 million.
- Six-month net sales were essentially flat, but gross profit increased $109.1 million and operating loss improved $283.4 million.
- Gross sales in Q2 increased 1% to $962.3 million. Action Figures, Building Sets, and Games increased 21%, Dolls increased 3%, Vehicles were flat, and Infant/Toddler/Preschool declined 13%.
- Barbie gross sales increased 9% in Q2 and Hot Wheels increased 5%; Fisher-Price and Thomas & Friends declined 6%. American Girl gross sales declined 23% in Q2 and 29% for the first half.
- North America reported Q2 segment income of $28.3 million versus a $25.9 million loss in the prior year. International’s segment loss improved to $3.5 million from $49.7 million. American Girl’s segment loss was broadly unchanged.
- First-half 2019 included approximately $30 million of costs related to Fisher-Price Rock ’n Play Sleeper recalls. First-half 2018 included approximately $30 million of Toys “R” Us sales reversals and approximately $50 million of related net bad-debt expense.
- Mattel adopted the new lease standard on January 1, 2019, recognizing $317.1 million of right-of-use assets and $360.0 million of lease liabilities at June 30, 2019. The adoption did not materially affect operating results or cash flows.
Guidance, outlook, commentary, and risks
- Mattel reported $754 million of run-rate savings achieved under the Structural Simplification program as of June 30, exceeding its two-year $650 million target. Management expects an additional $100 million of run-rate savings in the second half of 2019, with most expected to be realized in 2020.
- The company expects approximately $185 million of cumulative severance and restructuring charges under Structural Simplification, compared with $170.1 million recorded through June 30, 2019.
- Under the Capital Light initiative, management expects approximately $24 million of 2019 severance and restructuring charges, excluding non-cash charges, and approximately $30 million of run-rate savings exiting 2019.
- Mattel expects approximately $3 million of additional pension and postretirement plan contributions during the remainder of 2019.
- Key risks include weak discretionary consumer spending, retail customer concentration and retailer liquidity, seasonal inventory requirements, foreign-exchange volatility, tariffs and trade policy, commodity, labor and freight costs, product recalls and liability claims, competition, licensing, execution of cost-saving initiatives, and access to financing.
- Pending contingencies include litigation involving MGA, Yellowstone do Brasil, securities claims, and Fisher-Price Rock ’n Play Sleeper lawsuits. The filing states that a reasonable estimate of potential losses cannot currently be made for several matters; no liability was accrued for the MGA appeal because damages were not considered reasonably possible.
- The U.K. represented less than 5% of consolidated first-half net sales; Brexit-related tariff, regulatory, and currency uncertainty could affect costs and profitability.
Important facts for investors to verify
- Whether the additional Structural Simplification and Capital Light savings are achieved without materially higher restructuring costs or operational disruption.
- Whether gross-margin improvement is sustainable after adjusting for product mix, cost savings, recall costs, and other unusual items.
- Cash generation, seasonal working-capital requirements, inventory levels, and availability under the revolving credit facilities.
- Debt maturities, interest-rate exposure, covenant headroom, and the company’s ability to refinance or repay obligations.
- Trends in American Girl and Infant/Toddler/Preschool, versus continued strength in Barbie, Hot Wheels, and Toy Story-related products.
- Developments in the Rock ’n Play Sleeper litigation, securities lawsuits, Yellowstone matter, and MGA appeal, including any potential financial exposure.
- The effect of foreign-exchange movements, tariffs, retailer credit conditions, and holiday-season demand on full-year results.