Mattel, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys globally, including Mattel Girls & Boys, Fisher-Price, American Girl, and Construction and Arts & Crafts brands. The filing covers the unaudited three months ended March 31, 2015. Results are seasonal and are not necessarily indicative of full-year performance. The MEGA Brands acquisition added the Construction and Arts & Crafts category and was completed on April 30, 2014.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $922.7 million | $946.2 million | Down 2% reported; up 5% constant currency |
| Gross profit | $450.4 million | $481.5 million | Down 6% |
| Gross margin | 48.8% | 50.9% | Down 210 basis points |
| Operating income (loss) | $(54.5) million | $6.2 million | Declined $60.7 million |
| Adjusted operating income (loss) | $(14.6) million | $27.7 million | Declined $42.3 million |
| Net income (loss) | $(58.2) million | $(11.2) million | Loss increased $47.0 million |
| Diluted loss per share | $(0.17) | $(0.03) | Worsened $0.14 |
| Adjusted loss/earnings per share | $(0.08) | $0.03 | Declined $0.11 |
| Operating cash flow | $(53.1) million | $60.6 million | Declined $113.7 million |
Advertising and promotion expense increased 13% to $102.4 million, or 11.1% of sales. Other selling and administrative expense increased 5% to $402.5 million, or 43.6% of sales. Cost of sales increased 2% to $472.3 million, or 51.2% of sales. The income tax benefit was $15.0 million, compared with a $1.8 million provision in the prior-year quarter.
- Cash and equivalents were $682.9 million at March 31, 2015, compared with $971.7 million at December 31, 2014 and $897.3 million at March 31, 2014.
- Long-term debt was $2.10 billion, up from $1.60 billion at March 31, 2014. Estimated fair value was $2.19 billion.
- Mattel had $1.60 billion of availability under its revolving credit facility and was compliant with its covenants. Debt-to-EBITDA was 2.42x versus a 3.00x maximum; interest coverage was 10.53x versus a 3.50x minimum.
- Dividends paid were $128.5 million; the declared dividend remained $0.38 per common share. No shares were repurchased under the public repurchase program during the quarter.
Material Changes Versus the Prior Comparable Period
- Reported sales declined primarily because of unfavorable currency translation; gross sales increased 6% in constant currency but declined 2% as reported.
- North America gross sales increased 11% to $488.2 million, helped by Entertainment, initial MEGA Brands sales, and Minecraft products. Segment income fell 49% to $25.0 million.
- International gross sales declined 14% as reported but increased 2% in constant currency to $422.1 million. The segment moved to a $4.4 million loss from $31.5 million of income, driven by lower gross profit and higher advertising expense.
- American Girl gross sales were essentially flat at $109.9 million, while segment income declined 40% to $5.5 million.
- Worldwide gross sales for Mattel Girls & Boys Brands declined 8% as reported, while Fisher-Price declined 3%. Construction and Arts & Crafts contributed $38.3 million of gross sales in its first comparable period following the MEGA Brands acquisition.
- Gross margin contracted because of unfavorable product mix, including MEGA Brands, higher royalty expense, and higher product-related costs.
- Operating results included $28.0 million of severance expense, $7.7 million of MEGA Brands integration and acquisition costs, and $4.2 million of MEGA Brands intangible-asset amortization. Excluding these items, adjusted operating loss was $14.6 million.
- Other comprehensive loss was $165.1 million, including a $126.7 million currency translation loss, primarily from the weakening euro and Brazilian real.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide specific full-year revenue or earnings guidance in the filing. Management stated that it was pursuing a turnaround focused on brand building, toy leadership, supply-chain improvement, commercial execution, emerging markets, and cost reduction. The Funding Our Future program targets cumulative gross cost savings of approximately $250 million to $300 million by the end of 2016. Q1 gross savings were approximately $19 million before severance and investments, or approximately $8 million net of those items.
- Management cited positive trends in global consumer takeaway and constant-currency revenue, but acknowledged significant foreign-exchange pressure and lower reported profitability.
- Foreign-currency exposure remains material. Mattel held forward contracts with approximately $1.21 billion of notional value at March 31, 2015. A 1% change in the U.S. dollar Trade-Weighted Index was estimated to affect annual sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Mattel’s Venezuelan subsidiary represented less than 0.1% of consolidated sales but had approximately $22 million of bolivar-denominated net monetary assets. A significant deterioration could result in a pre-tax charge of up to $95 million.
- MGA Entertainment litigation was considered reasonably possible but not probable. Estimated potential damages were approximately $0 to $12.5 million, plus possible prejudgment interest of up to approximately $10 million; no liability was accrued.
- In a separate Brazilian matter, potential loss was estimated at up to approximately $14 million, partially offset by a counterclaim of approximately $7.5 million. No liability was accrued because a loss was not considered probable.
- Mattel expects approximately $29 million of additional 2015 cash contributions to pension and postretirement plans, including approximately $22 million of expected lump-sum payments for unfunded plans.
- Liquidity depends on seasonal cash generation, commercial paper and revolving-credit access, customer demand, credit markets, foreign-exchange conditions, and compliance with debt covenants.
Investor Verification Checklist
- Verify whether constant-currency growth translates into reported growth as foreign-exchange pressure changes.
- Track gross-margin recovery, particularly product mix, MEGA Brands integration, royalties, freight, and product costs.
- Assess whether Funding Our Future savings offset severance, integration costs, and higher advertising investment.
- Monitor International segment profitability and the performance of Barbie, Other Girls, Fisher-Price, Wheels, and Construction and Arts & Crafts brands.
- Review cash conversion, inventory levels, dividend funding, and the effect of seasonal working-capital requirements.
- Monitor debt leverage, covenant headroom, refinancing requirements, and the May 2019 maturity of the $500 million 2014 Senior Notes.
- Follow MGA and Brazilian litigation developments, Venezuelan currency restrictions, and potential unrecognized tax-benefit settlements.