Mattel, Inc. 2011 First-Quarter 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 unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to the three months ended March 31, 2010. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $951.9 million | $880.1 million | Up 8% |
| Gross profit | $473.1 million | $431.9 million | Up 10% |
| Gross margin | 49.7% | 49.1% | Up 60 basis points |
| Operating income | $36.8 million | $45.2 million | Down 19% |
| Operating margin | 3.9% | 5.1% | Down 120 basis points |
| Income before taxes | $21.3 million | $33.3 million | Down 36% |
| Net income | $16.6 million | $24.8 million | Down 33% |
| Diluted EPS | $0.05 | $0.07 | Down $0.02 |
| Cash flow from operations | $(41.8) million | $(244.6) million | Improved by $202.8 million |
Advertising and promotion expense was $101.8 million, or 10.7% of sales, unchanged as a percentage of sales. Other selling and administrative expense increased 14% to $334.5 million, or 35.1% of sales, primarily because of higher legal, settlement, employee-related, and compensation costs. Interest expense increased 38% to $18.8 million, principally following the issuance of $500 million of senior notes in September 2010.
Cash and equivalents were $1.05 billion at March 31, 2011, compared with $871.9 million at March 31, 2010 and $1.28 billion at December 31, 2010. Total long-term debt, including the current portion, was $1.20 billion, compared with $750 million a year earlier. The debt-to-total-capital ratio was 32.3%, versus 22.4% at March 31, 2010.
Mattel had a $1.4 billion unsecured committed revolving credit facility, with an accordion feature allowing availability to increase to $1.6 billion under specified conditions. The facility was extended to March 8, 2015. Mattel reported compliance with its covenants; debt-to-EBITDA was 1.1 to 1 versus a 3.0 maximum, and interest coverage was 15.3 to 1 versus a 3.50 minimum.
Material Changes Versus the Prior Comparable Period
- Worldwide gross sales increased 8% on higher core-brand, entertainment, Monster High, and international sales. Girls & Boys Brands gross sales increased 15%, while Fisher-Price Brands decreased 2% and American Girl increased 4%.
- International gross sales increased 10%, including favorable currency effects of 2 percentage points. Domestic gross sales increased 7%.
- Girls & Boys Brands US segment income increased 50% to $61.3 million, and International segment income increased 32% to $52.6 million.
- Fisher-Price Brands US segment income declined to $2.3 million from $12.3 million, driven by lower sales, unfavorable product mix, and lower gross margin.
- Gross margin improved primarily from pricing, partly offset by higher product costs. Operating margin declined because overhead and legal costs grew faster than sales.
- Operating cash usage improved largely because Mattel collected approximately $300 million of domestic receivables that had not been factored in the prior-year period.
- Mattel repurchased $100.1 million of shares and paid $80.1 million of dividends in the quarter. The company repurchased 3.97 million shares under its program at an average price of $25.24 per share.
- The company recognized a $7.5 million contingent loss reserve for a proposed Gunther-Wahl settlement; no changes were made to the 2007 product-recall reserves.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management did not provide a specific full-year revenue or earnings forecast in the filing. Its stated priorities are continued growth in core brands, entertainment partnerships, new franchises, 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, including approximately $75 million in legal-cost reductions and $75 million of structural savings. The program generated approximately $5 million of gross savings in the first quarter, with most targeted savings expected in 2012.
Mattel expects cash on hand, operating cash flow, the revolving facility, commercial paper access, and foreign credit lines to fund 2011 seasonal requirements. The company targets year-end cash of approximately $800 million to $1 billion, a year-end debt-to-capital ratio of approximately 25%, and annual capital expenditures of approximately $180 million to $200 million.
- The MGA/Bratz litigation produced an April 2011 jury verdict against Mattel involving alleged trade-secret misappropriation, with $88.5 million of compensatory damages. Potential exemplary damages could be up to twice that amount, and attorneys' fees may also be awarded. Mattel had not accrued a liability because it did not believe the damages were probable of being sustained.
- Gunther-Wahl litigation had a proposed $7.5 million settlement reserve; if unresolved, trial was anticipated in the third quarter of 2011.
- Key risks include seasonal demand, consumer preferences, product development and licensing, raw-material and manufacturing costs, foreign exchange, customer credit, pension obligations, litigation, product safety, debt covenant compliance, credit ratings, and access to commercial paper and other financing.
- Foreign-currency forward contracts had approximately $1.4 billion of notional value at March 31, 2011. Management estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect net sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- A major credit rating agency upgraded Mattel's long-term rating from BBB to BBB+ in April 2011 and maintained a stable outlook.
- The Board approved a second-quarter dividend of $0.23 per share, payable June 17, 2011.
Investor Verification Checklist
- Verify whether the MGA verdict, exemplary-damages exposure, attorneys' fees, and appeals ultimately produce a material liability or cash payment.
- Assess whether Fisher-Price weakness persists and whether Monster High, Barbie, Wheels, and entertainment products can sustain growth.
- Reconcile the effect of the $500 million senior-note issuance, scheduled maturities, interest expense, and the 32.3% debt-to-capital ratio with the company's year-end capital targets.
- Track operating cash conversion, inventory growth, seasonal working-capital needs, and continued access to commercial paper and the revolving facility.
- Evaluate execution of the $150 million Operational Excellence 2.0 savings target and the extent to which savings offset legal, labor, product, and freight-cost inflation.
- Review currency movements, derivative exposures, product-safety developments, pension contributions, and other litigation reserves in subsequent filings.