Mattel, Inc. Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and related entertainment products worldwide, including Barbie, Hot Wheels, Fisher-Price, American Girl, and Thomas & Friends. This unaudited filing covers the quarter and six months ended June 30, 2012. The business is seasonal, so interim results are not necessarily indicative of full-year performance.
Effective January 1, 2012, Mattel reorganized its operating segments into North America, International, and American Girl. Prior-period segment information was reclassified for comparability.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Year-over-Year Change | Six Months Ended June 30, 2012 |
|---|---|---|---|
| Net sales | $1.159 billion | Flat versus $1.162 billion | $2.087 billion, down 1% |
| Gross profit | $594.5 million | Up 7%; margin 51.3% versus 47.9% | $1.068 billion; margin 51.2% versus 48.7% |
| Operating income | $131.4 million | Up 20%; margin 11.3% versus 9.4% | $160.2 million, up 10% |
| Net income | $96.2 million | Up 20% from $80.5 million | $104.0 million, up 7% |
| Diluted EPS | $0.28 | Up from $0.23 | $0.30, up from $0.27 |
| Cash flow from operations | Not separately provided | Not separately provided | $(61.1) million used, versus $(226.8) million |
| Capital expenditures and tools, dies, and molds | Not separately provided | Not separately provided | $106.6 million |
| Cash and equivalents | $372.3 million at June 30, 2012 | $1.369 billion at December 31, 2011 | |
| Total debt, including current portion | $1.592 billion at June 30, 2012 | $1.558 billion at December 31, 2011 |
Gross margin benefited from product mix, lower royalty-related entertainment sales, price increases, Operational Excellence 2.0 savings, and the HIT Entertainment acquisition. Higher input costs partly offset these benefits. Advertising and promotion expense declined to 9.7% of second-quarter sales from 10.0%; other selling and administrative expense increased to 30.3% from 28.5%.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales were essentially unchanged despite currency headwinds of approximately four percentage points and lower CARS 2 sales following the prior-year movie release.
- Core brands, including Barbie, Monster High, American Girl, and Hot Wheels, generated higher sales. Second-quarter North America gross sales rose 1%, while International gross sales declined 1% as reported but were affected by approximately ten percentage points of unfavorable currency impact.
- First-half North America gross sales declined 5%, primarily because of lower CARS 2 sales. First-half International gross sales increased 2% as reported, and American Girl gross sales increased 3%.
- Mattel acquired HIT Entertainment on February 1, 2012, for total cash consideration of approximately $714.3 million, including acquired cash and customary adjustments. The acquisition added approximately $510.7 million of identifiable intangible assets and $242.5 million of goodwill.
- Cash used in investing activities increased to $815.5 million from $44.4 million, primarily because of the HIT acquisition and foreign-currency forward-contract settlements.
- Cash used in financing activities declined to $119.6 million from $600.8 million, mainly because of lower share repurchases and the absence of the prior-year long-term debt repayments, partially offset by higher dividends.
- Interest expense increased to $42.6 million for the first half from $36.5 million, primarily because of higher average borrowings following the issuance of $600 million of 2011 senior notes.
- Current maturities of long-term debt increased to $400 million because $350 million of 2008 Senior Notes due March 2013 was reclassified to current.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management targets sustainable gross margins of approximately 50% and continues to expect approximately $175 million of cumulative Operational Excellence 2.0 savings by the end of 2012. Cumulative gross savings reached approximately $153 million through June 30, 2012.
- Mattel expects approximately $25 million to $30 million of HIT-related transaction and integration costs during 2012; approximately $17 million was recognized in the first half.
- Management stated that cash, the commercial paper program, foreign credit lines, and the $1.40 billion revolving credit facility should be adequate for 2012 seasonal financing needs. The company was in compliance with its debt covenants; debt-to-EBITDA was 1.3 times versus a 3.0-times maximum, and interest coverage was 15.0 times versus a 3.50-times minimum.
- Key risks include seasonal working-capital needs, consumer demand and retailer liquidity, input and distribution costs, foreign-exchange movements, interest rates, pension funding requirements, credit-market access, and covenant or credit-rating deterioration. Mattel estimates that a 1% change in the U.S. dollar Trade-Weighted Index could affect full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Currency translation produced an $18.4 million loss in other comprehensive income during the first half of 2012, compared with an $88.4 million gain in the prior-year period.
- Mattel faces continuing MGA Entertainment litigation. A judgment of approximately $310 million was entered in favor of MGA, and Mattel appealed. Mattel had not accrued a liability because management did not believe it was probable that the damages would be sustained; an unfavorable resolution could materially affect financial condition and results.
- The IRS examination of 2008 and 2009 federal returns remains under appeal. Mattel indicated that state and foreign audit settlements or statute expirations could produce a benefit of up to approximately $8 million in the next twelve months, while ultimate tax settlements could materially affect results.
- Mattel declared a third-quarter dividend of $0.31 per share on July 17, 2012, payable September 21, 2012.
Important Facts for Investors to Verify
- Whether the improved gross margin and Operational Excellence 2.0 savings are sustainable after accounting for input costs, mix, and HIT-related expenses.
- The timing and funding of the $400 million current debt maturity and the effect of the HIT acquisition on leverage and cash generation.
- HIT Entertainment’s contribution to revenue, licensing economics, integration progress, and final purchase-price allocation, which remained subject to completion.
- Progress and outcome of the MGA appeal and any potential cash or accounting effects of the litigation.
- Foreign-exchange exposure, particularly to the euro and Brazilian real, and the effectiveness and settlement timing of Mattel’s hedging program.
- Seasonal working-capital requirements, year-end cash levels, and continued compliance with revolving-credit-facility covenants.
- The filing states that disclosure controls were effective, but HIT Entertainment was excluded from the internal-control assessment under applicable SEC guidance for recently acquired businesses.