Mattel, Inc. Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys worldwide, including Barbie, Hot Wheels, Fisher-Price, American Girl, Thomas & Friends, MEGA BLOKS, and related entertainment products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Results are seasonal, with a significant portion of toy purchases occurring during the holiday period.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $974.5 million | $957.3 million | $1.710 billion | $1.827 billion |
| Gross profit | $399.8 million | $433.6 million | $678.5 million | $822.2 million |
| Gross margin | 41.0% | 45.3% | 39.7% | 45.0% |
| Operating loss | $48.7 million | $11.7 million | $175.7 million | $60.8 million |
| Net loss | $56.1 million | $19.1 million | $169.3 million | $92.1 million |
| Diluted loss per share | $0.16 | $0.06 | $0.49 | $0.27 |
| Operating cash flow | Not separately provided | Not separately provided | $(549.1) million | $(240.6) million |
- Q2 gross sales increased 1% to $1.07 billion; net sales increased 2%. First-half gross sales declined 7% to $1.883 billion.
- Q2 cost of sales rose 10% while net sales rose 2%, reducing gross margin by 430 basis points. Management cited higher royalty expense, unfavorable product mix, lower licensing income, and higher product-related costs.
- First-half cash used in investing activities was $106.2 million, including $148.8 million of purchases of tools, dies, molds, and other property and equipment.
- Cash used in financing activities was offset by $686.8 million of net short-term borrowing proceeds, resulting in $51.5 million of net financing cash inflow. Dividends paid were $260.4 million.
- Cash and equivalents were $275.4 million at June 30, 2017, including approximately $210 million held by foreign subsidiaries.
- Inventory was $935.9 million, up from $613.8 million at December 31, 2016, primarily due to lower-than-expected first-half sales and inventory built for expected future demand.
- Total debt included approximately $507 million of commercial paper, $250 million of current long-term debt, and $1.886 billion of noncurrent long-term debt. Debt-to-total-capital increased to 56.1% from 48.2% at June 30, 2016.
Material Changes Versus Prior Comparable Period
- Q2 net sales increased modestly, but operating loss widened to $48.7 million from $11.7 million and net loss increased to $56.1 million from $19.1 million.
- First-half net sales declined 6%, operating loss increased by $114.9 million, and net loss increased by $77.2 million.
- Q2 Entertainment gross sales increased 58%, driven primarily by CARS, while Other Girls declined 28% and Construction and Arts & Crafts declined 27%. First-half Entertainment gross sales increased 13%, but Construction and Arts & Crafts declined 32% and Other Girls declined 31%.
- North America Q2 gross sales declined 2% and segment income declined to $42.7 million from $64.4 million. First-half gross sales declined 14% and segment income declined to $23.4 million from $105.5 million.
- International Q2 gross sales increased 6%, but the segment moved to an $8.3 million loss from $23.1 million of income. First-half gross sales increased 2%, while the segment moved to a $33.2 million loss from $5.7 million of income.
- American Girl Q2 gross sales declined 6% and segment loss widened to $18.2 million from $9.6 million. First-half gross sales declined 9% and segment loss widened to $24.0 million from $6.2 million.
- Other non-operating expense declined to $4.6 million for the first half from $22.4 million, primarily because 2016 included an approximately $26 million Venezuelan currency remeasurement loss.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s stated strategy emphasizes strengthening power brands, emerging-market growth, innovation, operational restructuring, and cultural change. The filing does not provide formal full-year sales or earnings guidance.
- Mattel’s capital framework targets $800 million to $1 billion of year-end cash, a year-end debt-to-capital ratio of approximately 35%, and annual capital expenditures of $180 million to $200 million.
- The Board declared a third-quarter dividend of $0.15 per share, down from $0.38 per share, to facilitate strategic investment, improve financial flexibility, and strengthen the balance sheet.
- The $1.60 billion revolving credit facility was amended to increase the permitted debt-to-Consolidated EBITDA ratio to 3.75:1 from 3.50:1 for four quarters beginning in Q2. Mattel was compliant at June 30, with a reported ratio of 3.67:1 versus the 3.75:1 maximum and interest coverage of 7.72:1 versus a 3.50:1 minimum.
- Management projected that it may not comply with the current debt covenant by the end of Q3 2017 and intended to seek another amendment. Management expressed high confidence it could complete the amendment before quarter-end.
- As of June 30, no amounts were outstanding under the revolving credit facility, while approximately $507 million was outstanding under the commercial paper program. A July 2017 credit-rating action lowered one agency’s long-term rating to BBB- and assigned a negative outlook; another agency rated the company BBB.
- Mattel faces securities class actions filed in June and July 2017 alleging misleading statements regarding retail inventory, point-of-sale data, shipping data, and financial condition. The potential loss cannot currently be estimated.
- MGA-related litigation remains reasonably possible but not probable, with a potential loss range of $0 to approximately $12.5 million plus up to approximately $12.0 million of prejudgment interest; no liability was accrued. A Brazilian litigation matter has a possible loss of up to approximately $18.5 million, subject to a potential offset of approximately $7.5 million; no liability was accrued.
- Mattel’s Venezuelan operations were less than 0.01% of first-half consolidated sales but could produce a pre-tax charge of up to $71 million if operations were discontinued. Brexit, foreign-exchange volatility, customer liquidity, pension obligations, and commodity, freight, royalty, and inventory risks remain relevant.
- New revenue and lease accounting standards are scheduled for adoption beginning January 1, 2018. Mattel does not expect the revenue standard to have a material impact based on its assessment to date, while the effects of other standards remain under evaluation.
Most Important Facts for Investors to Verify
- Whether Mattel completes the anticipated credit-facility amendment before the end of Q3 2017 and remains within revised debt covenants.
- Whether inventory levels normalize and operating cash flow improves after the $549.1 million first-half use of cash.
- Whether gross-margin pressure from royalties, product mix, licensing income, freight, obsolescence, and product costs persists into the holiday season.
- Whether the dividend reduction, cost initiatives, and operational restructuring materially improve liquidity and leverage.
- The progression and potential financial exposure of the securities, MGA, and Brazilian litigation matters.
- Whether Entertainment growth, particularly CARS, offsets continued weakness in Other Girls, Fisher-Price, American Girl, and Construction and Arts & Crafts brands.