Mattel, Inc. 2012 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and entertainment products worldwide, including Mattel Girls & Boys Brands, Fisher-Price Brands, and American Girl Brands. This unaudited Form 10-Q covers the three months ended March 31, 2012. Because the business is seasonal, first-quarter 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 amounts were reclassified to conform to the new presentation.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $928.4 million | $951.9 million | Down 2% |
| Gross profit | $473.4 million | $473.1 million | Flat |
| Gross margin | 51.0% | 49.7% | Up 130 basis points |
| Operating income | $28.7 million | $36.8 million | Down 22% |
| Operating margin | 3.1% | 3.9% | Down 80 basis points |
| Income before taxes | $10.2 million | $21.3 million | Down 52% |
| Net income | $7.8 million | $16.6 million | Down 53% |
| Diluted EPS | $0.02 | $0.05 | Down $0.03 |
| Operating cash flow | $171.5 million | $(41.8) million | Improved $213.4 million |
Gross sales were $1.017 billion, compared with $1.041 billion in the prior-year quarter. Sales adjustments were $88.8 million in 2012 and $89.3 million in 2011.
Advertising and promotion expense declined 4% to $97.9 million. Other selling and administrative expense increased 4% to $346.8 million, or 37.4% of net sales, from 35.1% in the prior-year quarter. The increase included approximately $16 million of HIT Entertainment acquisition and integration costs.
Cash and equivalents were $784.6 million at March 31, 2012, down from $1.369 billion at December 31, 2011 and $1.049 billion at March 31, 2011. Total debt was $1.55 billion, including $400 million classified as current. The debt-to-total-capital ratio was 37.0%, versus 32.3% at March 31, 2011.
Mattel had $1.40 billion available under its domestic unsecured committed revolving credit facility and was in compliance with its covenants. The debt-to-EBITDA ratio was 1.3 to 1 versus a maximum of 3.0 to 1, and the interest coverage ratio was 15.5 to 1 versus a minimum of 3.50 to 1.
Material Changes Versus the Prior Comparable Period
- North America gross sales declined 11% to $451.6 million, primarily because of lower CARS 2 product sales and cautious retailer ordering. Segment income declined 24% to $64.0 million.
- International gross sales increased 7% to $484.0 million, despite a 4-percentage-point unfavorable currency impact. Segment income increased 6% to $39.3 million.
- American Girl gross sales increased 4% to $81.6 million, while segment income declined to $1.4 million from $3.0 million because of higher expenses related to retail expansion.
- Mattel acquired HIT Entertainment on February 1, 2012, for total cash consideration of approximately $714.3 million, including acquired cash. The acquisition added approximately $242.5 million of goodwill and $510.7 million of identifiable intangible assets, primarily intellectual property.
- Cash used in investing activities increased to $703.4 million from $9.2 million, primarily because of the HIT acquisition. Cash used in financing activities decreased to $58.5 million from $186.3 million, reflecting lower share repurchases and higher proceeds from stock-option exercises, partly offset by higher dividends.
- Operational Excellence 2.0 generated approximately $36 million of gross savings, or approximately $31 million net of severance and investments, in the quarter. Mattel reported approximately $130 million of cumulative gross savings since program inception and remained on track for approximately $175 million of sustainable cumulative savings by year-end 2012.
- The first-quarter dividend was $0.31 per share, compared with $0.23 per share in the prior-year quarter. Mattel paid $105.2 million in dividends and repurchased $32.2 million of common stock during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that first-quarter results were as anticipated and continued to target gross margins of approximately 50%. The filing does not provide formal full-year revenue or EPS guidance.
- Mattel expected total HIT acquisition and integration costs of approximately $25 million to $30 million during 2012.
- Key operating risks include seasonal demand, retailer ordering patterns, consumer preferences, economic conditions, product and raw-material costs, foreign currency movements, credit-market conditions, customer liquidity, and pension funding requirements.
- Mattel partially hedges foreign-currency exposure with forward contracts. As of March 31, 2012, these contracts had notional amounts of approximately $1.39 billion. Management estimated that, holding other factors constant, 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.
- The IRS was auditing Mattel’s 2008 and 2009 federal tax returns. Mattel believed the audit was unlikely to cause significant changes to unrecognized tax benefits during the following 12 months, although tax settlements could materially affect the financial statements. Potential benefits of up to approximately $10 million from state and foreign audits were also noted.
- Mattel had not accrued a liability for the MGA litigation judgment, which totaled approximately $310 million in favor of MGA, because management believed it was not probable that the damages would be sustained. Mattel had appealed the judgment. The filing states that an unfavorable resolution could materially affect financial condition and results.
- Disclosure controls and procedures were considered effective as of March 31, 2012. HIT Entertainment was excluded from the internal-control assessment under SEC guidance for recently acquired businesses.
Important Facts for Investors to Verify
- Whether HIT Entertainment delivers the expected revenue, licensing, synergy, and cash-flow benefits, and whether acquisition and integration costs remain within the $25 million to $30 million estimate.
- Whether North American demand and retailer ordering recover after the CARS 2 comparison and cautious ordering noted in the quarter.
- Whether the 51.0% gross margin is sustainable while product costs, currency rates, and promotional spending change.
- Mattel’s ability to maintain liquidity while funding seasonal working capital, the $400 million current debt portion, dividends, share repurchases, and strategic investments.
- The outcome and potential financial exposure from the MGA appeal and the IRS examination.
- Progress toward the $175 million Operational Excellence 2.0 savings target and the extent to which savings are recurring rather than offset by severance, integration, or strategic investment costs.