Mattel, Inc. 2013 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and related entertainment products worldwide, including Mattel Girls & Boys, Fisher-Price, and American Girl brands. The filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $2.207 billion | $2.078 billion | $4.372 billion | $4.165 billion |
| Gross profit | $1.188 billion | $1.115 billion | $2.328 billion | $2.183 billion |
| Gross margin | 53.8% | 53.7% | 53.3% | 52.4% |
| Operating income | $528.2 million | $487.4 million | $688.8 million | $647.5 million |
| Operating margin | 23.9% | 23.5% | 15.8% | 15.5% |
| Net income | $422.8 million | $365.9 million | $534.7 million | $470.0 million |
| Diluted EPS | $1.21 | $1.04 | $1.52 | $1.35 |
| Dividends declared per share | $0.36 | $0.31 | $1.08 | $0.93 |
For the nine months, operating cash flow was negative $321.3 million versus negative $101.1 million in 2012, primarily reflecting seasonal increases in accounts receivable and inventory. Investing cash flow was negative $175.9 million versus negative $833.3 million, as the prior-year period included the HIT Entertainment acquisition. Financing cash flow was negative $421.3 million versus negative $153.8 million, driven by increased share repurchases, dividends, and debt repayment.
- Cash and equivalents were $406.5 million at September 30, 2013, compared with $1.336 billion at December 31, 2012 and $282.1 million at September 30, 2012.
- Accounts receivable were $1.885 billion and inventories were $807.2 million at September 30, 2013, reflecting seasonal working-capital requirements.
- Total long-term debt, including the current portion, was $1.650 billion; estimated fair value was $1.69 billion.
- Mattel issued $500 million of 2013 Senior Notes in March 2013 and repaid $350 million of 2008 Senior Notes at maturity.
- Mattel had $1.60 billion of available capacity under its revolving credit facility and was in compliance with its covenants. Reported debt-to-EBITDA was 1.35x versus a 3.00x maximum, and interest coverage was 15.72x versus a 3.50x minimum.
Material Changes Versus the Prior Comparable Period
- Q3 net sales increased 6%, operating income increased 8%, and net income increased 16%; diluted EPS rose from $1.04 to $1.21.
- Nine-month net sales increased 5%, operating income increased 6%, and net income increased 14%; diluted EPS rose from $1.35 to $1.52.
- Gross margin improved by 10 basis points in Q3 and 90 basis points for the nine months, supported by favorable product mix, price increases, and Operational Excellence 3.0 savings, partly offset by input costs and foreign-exchange effects.
- Q3 worldwide gross sales increased 8% for Mattel Girls & Boys, were approximately flat for Fisher-Price, and increased 20% for American Girl. Key contributors included Other Girls, especially Monster High; Fisher-Price Friends; Disney Planes; and American Girl products.
- For the nine months, Other Girls gross sales increased 32%, American Girl increased 22%, and Fisher-Price Friends increased 14%, while Barbie declined 2%, Wheels declined 7%, and Core Fisher-Price declined 6%.
- Q3 North America gross sales increased 2%, International increased 9% despite a 2-percentage-point currency headwind, and American Girl increased 18%. Segment income increased 7%, 11%, and 57%, respectively.
- Advertising and promotion remained 11.3% of Q3 sales and 10.7% of nine-month sales. Other selling and administrative expenses increased, including employee-related costs and strategic investments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s stated objectives are continued brand and international growth, near-term gross margins in the low-to-mid 50% range, long-term margins above 50%, and disciplined cash deployment. The filing does not provide specific full-year revenue or earnings guidance.
- Operational Excellence 3.0 targets approximately $50 million of gross cost savings in 2013 and approximately $150 million cumulatively by the end of 2014. Mattel reported approximately $15 million of gross savings in Q3 and $29 million for the first nine months.
- Mattel recorded a $14 million Polly Pocket trade-name impairment in the second quarter and reclassified the remaining asset from nonamortizable to amortizable. No goodwill impairment was identified in the third quarter.
- Q3 and nine-month results included discrete tax benefits of $17.0 million and $32.2 million, respectively. An August 2013 IRS settlement reduced unrecognized tax benefits by $190 million, primarily relating to a capital loss with no recognized financial-statement benefit.
- Mattel accrued $137.8 million for litigation-related attorney fees and costs associated with the MGA/Bratz matter. MGA’s separate trade-secret damages and fee award of approximately $172.5 million was vacated by the Ninth Circuit, although copyright-related fees remained awarded.
- In the Yellowstone do Brasil litigation, a Brazilian appeals court awarded approximately $19 million to Yellowstone and approximately $8 million on Mattel’s counterclaim. Mattel is appealing, believes a loss is not probable, and recorded no liability; the estimated possible loss range was $0 to approximately $19 million.
- Foreign-exchange exposure remains material. Mattel held forward contracts with approximately $1.46 billion of notional value at September 30, 2013. Management estimated that a 1% change in the U.S. dollar Trade-Weighted Index would affect net sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Primary liquidity risks include seasonal working-capital needs, weaker product demand, higher manufacturing or distribution costs, customer credit issues, currency movements, debt-market access, covenant compliance, and pension funding requirements.
Most Important Facts for Investors to Verify
- Whether growth in Monster High, American Girl, Fisher-Price Friends, Disney Planes, and other newer franchises offsets declines in Wheels, Core Fisher-Price, and certain mature brands.
- Whether Operational Excellence 3.0 achieves its targeted savings without impairing product development, marketing effectiveness, or brand health.
- Whether negative operating cash flow reverses as seasonal receivables and inventories convert to cash.
- The sustainability of the improved gross margin and the effect of input costs, royalties, freight, and foreign-exchange movements.
- The outcome and potential cash impact of the Yellowstone appeal, the MGA/Bratz proceedings, and pending IRS examinations.
- Debt maturities, seasonal borrowing needs, covenant compliance, and the effect of dividends and share repurchases on liquidity.
- The filing states that no material changes occurred to previously disclosed risk factors and that disclosure controls were effective as of September 30, 2013.