Business Context and Reporting Period
Mattel, Inc. is a global toy company with operating segments consisting of North America, International, and American Girl. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020. Results are seasonal, with a significant portion of toy purchases occurring during the holiday period, so interim results are most comparable with the corresponding prior-year periods.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $1.632 billion | $1.482 billion | $2.958 billion | $3.031 billion |
| Gross profit | $832.4 million | $686.4 million | $1.408 billion | $1.268 billion |
| Gross margin | 51.0% | 46.3% | 47.6% | 41.8% |
| Operating income (loss) | $384.2 million | $150.1 million | $188.2 million | $(28.3) million |
| Net income (loss) | $316.0 million | $70.6 million | $(3.9) million | $(213.7) million |
| Diluted EPS | $0.91 | $0.20 | $(0.01) | $(0.62) |
| Operating cash flow | Not separately provided | Not separately provided | $(434.0) million | $(513.7) million |
Q3 net sales increased 10%, while nine-month net sales declined 2%. Q3 gross sales increased 10% to $1.818 billion; nine-month gross sales declined 3% to $3.303 billion. Currency movements reduced reported gross sales growth by approximately 1 percentage point in Q3 and 2 percentage points for the nine-month period.
Q3 profitability benefited from higher gross profit, cost savings, favorable product mix, lower royalty expense, and lower advertising and promotion spending. Advertising and promotion expense declined to $102.5 million from $170.4 million, partly because spending was deferred to the fourth quarter. Interest expense increased to $50.4 million in Q3 and $149.0 million for the nine months, primarily due to the refinancing of prior senior notes with the 2019 Senior Notes.
At September 30, 2020, cash and equivalents were $452.2 million, accounts receivable were $1.326 billion, and inventories were $663.6 million. Cash declined $177.9 million from December 31, 2019 but increased $233.9 million from September 30, 2019. Approximately $128 million of cash was held by foreign subsidiaries.
Total debt was $3.253 billion, including $400.0 million of short-term borrowings and $2.853 billion of long-term debt. Stockholders’ equity was $404.5 million, down from $491.7 million at December 31, 2019, primarily due to adverse currency translation adjustments. The estimated fair value of long-term debt was approximately $2.98 billion.
Material Changes Versus the Prior Comparable Period
- Q3 North America net sales increased 13% and segment income increased 77% to $344.4 million. International net sales increased 8% and segment income increased 105% to $183.2 million. American Girl net sales declined 1%, with a segment loss of $10.3 million.
- Q3 worldwide gross sales rose 22% for Dolls, 6% for Vehicles, and 14% for Action Figures, Building Sets, Games, and Other, while Infant, Toddler, and Preschool declined 6%. Barbie gross sales increased 29%; Fisher-Price and Thomas & Friends declined 2%.
- For the first nine months, Dolls gross sales increased 8%, while Infant, Toddler, and Preschool declined 15%, Vehicles declined 4%, and Action Figures, Building Sets, Games, and Other declined 2%. Barbie increased 15%, while Fisher-Price and Thomas & Friends declined 12%.
- Gross margin improved 470 basis points in Q3 and 580 basis points for the nine-month period. Management attributed the improvement primarily to cost savings programs, lower royalty expense, favorable product mix in Q3, and the absence of approximately $27 million of inclined sleeper recall costs in the nine-month period.
- Operating cash flow remained negative but improved by $79.7 million year over year, mainly because of the lower net loss and non-cash items, partially offset by seasonal working-capital usage.
- Mattel drew $400.0 million under its seasonal revolving facilities during the first nine months. In October 2020, it repaid $323.7 million, reducing outstanding borrowings to $76.3 million as of October 21, 2020.
Outlook, Commentary, Risks, and Unusual Items
- Management expected mid-single-digit fourth-quarter gross sales growth year over year but cautioned that strong demand could create challenges in meeting product demand, particularly during the seasonally important holiday period.
- Substantially all retail outlets selling Mattel products were open exiting Q3, and the manufacturing and distribution network was fully operational at September 30. A worsening pandemic or renewed retail, customer, manufacturing, or distribution disruptions could materially affect sales, profitability, working capital, and liquidity.
- Mattel realized approximately $37 million of cost savings in the first nine months and reported approximately $52 million of Capital Light run-rate savings. It expected cumulative run-rate savings of approximately $65 million in 2020 and $72 million by 2021 from actions taken through September 30.
- Mattel recorded $11.2 million of Capital Light restructuring charges and approximately $18 million of severance charges for other cost-saving actions during the first nine months. Additional charges of approximately $2 million were expected through year-end 2020.
- Mattel stated that existing cash, operating cash flows, revolving-facility availability, and capital-market access should be sufficient for the next twelve months and expected to remain in compliance with debt covenants through November 3, 2021. The seasonal credit facilities mature November 18, 2022.
- In July 2020, Mattel experienced a ransomware attack. The company contained the attack, restored operations, and reported that its forensic investigation identified no exfiltration of sensitive business, customer, supplier, consumer, or employee data and no material financial impact.
- Litigation remains pending concerning the Fisher-Price Rock ’n Play Sleeper, including consumer class actions, injury and fatality claims, and a derivative action. Mattel stated that a reasonable estimate of any loss or range of loss could not be made.
- Mattel is responding to an SEC subpoena and requests from the U.S. Attorney’s Office for the Southern District of New York related to a whistleblower investigation and securities litigation. The company cannot predict the scope, duration, or outcome of potential government action.
- Mattel assessed its probable loss in the Yellowstone do Brasil matter and maintained a reserve that was not material. It also disclosed potential tax-benefit reductions of approximately $11.2 million over the following twelve months from audit settlements or statute expirations.
Important Facts for Investors to Verify
- Whether fourth-quarter demand can be fulfilled despite supply-chain, freight, labor, retail, and COVID-19-related disruptions.
- The sustainability of the improved gross margin and the timing and cash cost of remaining restructuring actions.
- Seasonal cash generation, working-capital requirements, and the level of revolving borrowings following the October repayment.
- Future performance of Barbie and other power brands relative to continued weakness in Infant, Toddler, and Preschool products and the International segment.
- Potential financial, regulatory, and reputational effects from the Rock ’n Play Sleeper litigation and the SEC and SDNY inquiries.
- Currency exposure, interest expense, debt maturities, covenant compliance, and the effect of foreign subsidiaries holding a portion of the company’s cash.
- Management’s reported expectation that liquidity will be sufficient for the next twelve months, given the company’s negative nine-month operating cash flow and highly seasonal business.