Mattel, Inc. 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys worldwide across Mattel Girls & Boys Brands, Fisher-Price Brands, and American Girl Brands. This report covers the quarter and six months ended June 30, 2011. The business is seasonal, so interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Year-over-Year Change | Six Months Ended June 30, 2011 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $1.162 billion | +14% | $2.114 billion | +11% |
| Gross profit | $556.2 million | +14% | $1.029 billion | +12% |
| Gross margin | 47.9% | Down 20 bps | 48.7% | Up 20 bps |
| Operating income | $109.3 million | +57% | $146.0 million | +27% |
| Operating margin | 9.4% | Up 260 bps | 6.9% | Up 90 bps |
| Net income | $80.5 million | +56% | $97.1 million | +27% |
| Diluted EPS | $0.23 | Up from $0.14 | $0.27 | Up from $0.21 |
- Advertising and promotion expense was $116.2 million in the second quarter and $218.0 million for the first half, representing 10.0% and 10.3% of sales, respectively.
- Other selling and administrative expense was $330.8 million in the second quarter and $665.4 million for the first half. As a percentage of sales, it declined to 28.5% and 31.5%, respectively, from 31.3% and 32.2%.
- Six-month cash flow used in operations was $226.8 million, versus $372.1 million used in the prior-year period. Investing cash flow used was $44.4 million, compared with $97.3 million.
- Financing cash flow used was $600.8 million, primarily reflecting $251.9 million of share repurchases, $159.9 million of dividends, and $240.0 million of long-term debt repayments.
- Cash and equivalents were $418.5 million at June 30, 2011, down from $1.281 billion at December 31, 2010 and $544.9 million at June 30, 2010.
- Total debt was $960.0 million, consisting of $950.0 million of noncurrent debt and $10.0 million of current maturities. Estimated fair value of debt was $997.3 million.
- Accounts receivable were $1.012 billion and inventories were $783.5 million at June 30, 2011, increases of $206.9 million and $185.9 million, respectively, from June 30, 2010.
- Dividends declared were $0.23 per common share for the second quarter and $0.46 per share for the first half.
Material Changes Versus the Prior Comparable Period
- Second-quarter growth was broad-based, with domestic gross sales up 7% and international gross sales up 23%; currency movements contributed 5 percentage points to consolidated net-sales growth.
- Worldwide Mattel Girls & Boys Brands gross sales increased 22% in the second quarter, led by Other Girls products, including Monster High and Disney Princess, and Entertainment products, including CARS and Green Lantern.
- Fisher-Price gross sales increased 4% in the second quarter but declined 3% domestically in the first half. Fisher-Price Friends sales were pressured by discontinuation of the Sesame Street license.
- American Girl gross sales increased 13% in the second quarter and 8% in the first half, supported by the Kanani Girl of the Year product and new stores.
- Second-quarter gross margin declined because higher product and royalty costs more than offset price increases. First-half gross margin improved because of price increases and favorable product mix.
- Interest expense increased to $17.6 million in the second quarter and $36.5 million for the first half, primarily due to the $500 million of senior notes issued in September 2010.
- Mattel repaid the remaining $200 million of 2006 Senior Notes and $40 million of medium-term notes during the first half. The debt-to-total-capital ratio was 28.0% at June 30, 2011, compared with 22.1% a year earlier.
- Currency translation produced an $88.4 million gain in the first half of 2011, compared with a $106.6 million loss in the prior-year period.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management did not provide a specific full-year revenue or earnings guidance figure in the filing. Its stated priorities are core-brand growth, international expansion, margin improvement, cost savings, and disciplined capital deployment.
- Operational Excellence 2.0 targets approximately $150 million of cumulative savings by the end of 2012. Gross savings were approximately $9 million in the second quarter and $14 million in the first half; most of the targeted savings are expected in 2012.
- Mattel amended its revolving credit facility in March 2011, extending maturity to March 2015 and increasing commitments to $1.4 billion, with an accordion feature to $1.6 billion. The company reported full compliance with its covenants; debt-to-EBITDA was 0.9 to 1 versus a 3.0 to 1 maximum, and interest coverage was 14.9 to 1 versus a 3.50 to 1 minimum.
- Management stated that cash, the revolving facility, commercial paper access, and foreign credit lines should be adequate for 2011 seasonal financing needs. The company targets year-end cash of approximately $800 million to $1 billion and a year-end debt-to-capital ratio of approximately 25%.
- Key operating risks include seasonality, consumer demand, product and raw-material costs, freight and logistics costs, foreign currency fluctuations, customer credit and collection risk, pension funding requirements, and dependence on successful new products and licenses.
- Foreign currency forward contracts had approximately $1.4 billion of notional value at June 30, 2011. Management estimates 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 MGA/Bratz litigation remained unresolved. A jury awarded MGA $88.5 million for alleged trade-secret misappropriation and found the conduct willful and malicious; potential exemplary damages could be up to twice the compensatory award, and MGA sought approximately $172.8 million in fees and costs. Mattel had not accrued a liability because it did not believe the award was probable to be sustained.
- Mattel accrued a $7.5 million settlement with Gunther-Wahl Productions; payment was due in July 2011 and dismissal was expected in the third quarter.
- There were no changes to the 2007 product-recall reserve during the period. Management was not aware of additional quality or safety issues likely to result in material recalls, but provided no assurance that future issues would not arise.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether international and new-product growth continues after adjusting for favorable currency effects.
- Whether higher product, royalty, freight, and licensing costs pressure gross margin in subsequent quarters.
- Progress toward the $150 million Operational Excellence 2.0 savings target and the related implementation costs.
- Seasonal cash generation, inventory and receivables normalization, and the ability to rebuild cash balances after dividends, repurchases, and debt repayments.
- The eventual resolution and financial impact of the MGA litigation, including possible exemplary damages and legal fees.
- Compliance with revolving-credit covenants and continued access to commercial paper and seasonal financing.
- The effect of the Sesame Street license discontinuation and other licensing changes on Fisher-Price performance.
- The company’s future dividend and share-repurchase activity relative to its liquidity and capital targets.