Mattel, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, markets, and sells toys worldwide, including Mattel Girls & Boys Brands, Fisher-Price, and American Girl. This unaudited filing covers the quarter and nine months ended September 30, 2009, compared with the corresponding 2008 periods. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net sales | $1.792 billion | $1.946 billion | $3.476 billion | $3.978 billion |
| Gross profit | $918.6 million | $900.1 million | $1.671 billion | $1.792 billion |
| Gross margin | 51.3% | 46.2% | 48.1% | 45.1% |
| Operating income | $336.5 million | $315.3 million | $313.8 million | $309.4 million |
| Operating margin | 18.8% | 16.2% | 9.0% | 7.8% |
| Net income | $229.8 million | $238.1 million | $200.3 million | $203.2 million |
| Diluted EPS | $0.63 | $0.65 | $0.55 | $0.56 |
For the first nine months, operating cash flow was negative $318.8 million versus negative $666.6 million in 2008. Investing cash flow was negative $2.7 million versus negative $224.0 million, while financing cash flow was positive $21.0 million versus positive $442.0 million. Capital expenditures were $90.5 million versus $138.5 million.
At September 30, 2009, cash and equivalents were $323.7 million, accounts receivable were $1.450 billion, and inventories were $606.0 million. Short-term borrowings were $159.3 million, current long-term debt was $50.0 million, and noncurrent long-term debt was $710.0 million. The company reported approximately $763 million of incremental borrowing capacity under its $1.08 billion revolving credit facility. Debt-to-capital was 27.6%, compared with 37.3% at September 30, 2008.
Material Changes Versus the Prior Comparable Period
- Q3 net sales declined 8%; the nine-month decline was 13%. Foreign exchange reduced Q3 sales growth by approximately 3 percentage points and nine-month sales by approximately 4 percentage points.
- International gross sales declined 14% in Q3 and 20% for the nine months, with foreign exchange impacts of 5 and 9 percentage points, respectively. Domestic gross sales declined 2% in Q3 and 6% for the nine months.
- Worldwide Q3 gross sales declined 10% for Mattel Girls & Boys Brands and 6% for Fisher-Price, while American Girl increased 4%. Core Hot Wheels increased 9%, partially offsetting weakness in other entertainment and licensed products.
- Gross margin improved by 510 basis points in Q3 and 300 basis points for the nine months, primarily from price increases, lower input and royalty costs, and cost savings.
- Q3 operating income increased 7% despite lower sales. Nine-month operating income increased 1%, while net income declined modestly because of lower sales, lower interest income, and product-liability settlement charges.
- The Global Cost Leadership program generated approximately $23 million of net savings in Q3 and $73 million in the first nine months, partially offset by severance and termination costs.
- Cash used in operations improved by approximately $347.8 million year over year, primarily because of lower seasonal working-capital requirements.
Guidance, Outlook, Risks, and Unusual Items
- Management expects 2009 net savings from the Global Cost Leadership program of approximately $90 million to $100 million and cumulative savings of approximately $180 million to $200 million by the end of 2010.
- Management expects a 2009 effective tax rate of approximately 23% to 24%, advertising expense at the low end of its historical 11% to 13% range, and continued focus on profitability, cash conservation, and balance-sheet strengthening.
- Mattel is limiting strategic acquisitions and share repurchases in 2009, prioritizing protection of its dividend, and managing capital expenditures below its longer-term framework of approximately $180 million to $200 million annually.
- Product-recall and withdrawal litigation continued. Mattel recorded $27.4 million of product-liability litigation settlement charges in the first nine months and recognized a $6.0 million insurance recovery. A proposed class settlement received preliminary court approval in October 2009, with final approval expected to be sought in March 2010.
- The MGA/Bratz litigation included a jury award and court-confirmed damages of approximately $100 million in favor of Mattel; related proceedings, injunctions, and post-trial matters remained relevant contingencies.
- Mattel disclosed an unrecognized tax benefit of approximately $167 million related to a claimed Canadian capital loss. IRS audits of the 2006 and 2007 returns were ongoing, and potential changes could not be quantified.
- Key risks include weak consumer demand, retailer inventory controls, foreign exchange volatility, Venezuelan currency controls and possible devaluation, counterparty and customer credit risk, pension funding requirements, product safety claims, litigation, and compliance with debt covenants.
- As of September 30, 2009, Mattel was in compliance with its credit-facility covenants. The debt-to-EBITDA ratio was 1.4 to 1 versus a 3.0 maximum, and interest coverage was 9.1 to 1 versus a 3.5 minimum.
Important Facts for Investors to Verify
- Whether the preliminary product-liability class settlement receives final approval and the ultimate cash cost, including attorneys’ fees and individual injury claims.
- The final outcome and economic impact of the MGA/Bratz litigation and related enforcement proceedings.
- Whether sales trends, particularly internationally and in Girls & Boys and Fisher-Price brands, stabilize during the holiday season.
- Whether the company achieves its $90 million to $100 million 2009 cost-savings target without impairing brand investment or future revenue.
- The amount and timing of remaining short-term borrowings, seasonal working-capital needs, debt maturities, and use of the revolving credit and receivables facilities.
- The resolution of the approximately $167 million unrecognized tax benefit and ongoing federal, state, and foreign tax audits.
- Foreign exchange developments, especially Venezuela’s official versus parallel exchange rates and their potential effect on earnings and liquidity.