Mattel, Inc. 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys 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, 2010. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $880.1 million | $785.6 million | +12% |
| Gross profit | $431.9 million | $345.9 million | +25% |
| Gross margin | 49.1% | 44.0% | +510 basis points |
| Operating income (loss) | $45.2 million | $(55.2) million | Improved by $100.4 million |
| Net income (loss) | $24.8 million | $(51.0) million | Improved by $75.8 million |
| Diluted earnings (loss) per share | $0.07 | $(0.14) | Improved by $0.21 |
| Cash flow from operations | $(244.6) million | $(214.8) million | More cash used |
Revenue growth reflected stronger domestic and international performance and a favorable currency impact of approximately 3 percentage points. Worldwide gross sales increased 14% for Mattel Girls & Boys Brands, 11% for Fisher-Price Brands, and 6% for American Girl Brands.
- Cost of sales increased only 2% to $448.2 million despite the 12% sales increase. Product costs and freight declined, while royalty expense increased by $12.0 million.
- Advertising and promotion expense increased 12% in dollars but remained 10.7% of net sales.
- Other selling and administrative expense declined 8% to $292.5 million, primarily due to lower litigation-related costs and Global Cost Leadership savings.
- Interest expense declined to $13.6 million from $15.9 million, primarily because of lower average borrowings.
- The effective tax provision was $8.4 million, compared with a $14.5 million tax benefit in the prior-year quarter.
Liquidity, Debt, and Financial Position
- Cash and equivalents were $871.9 million at March 31, 2010, down from $1.117 billion at December 31, 2009 but more than double the March 31, 2009 balance of $404.9 million.
- Total debt was $750.0 million, consisting of $50.0 million of current maturities and $700.0 million of noncurrent debt. Debt declined from $900.0 million at March 31, 2009.
- Mattel had approximately $1.08 billion of available capacity under its domestic unsecured committed revolving credit facility, which matures March 23, 2012. The company was in compliance with its covenants.
- Debt-to-capital declined to 22.4% from 30.5% a year earlier. The company’s stated year-end objective is approximately 25%.
- Operating cash flow was negative because of seasonal working-capital needs, including inventory increases and payments of accounts payable and accrued liabilities. Mattel did not sell receivables during the quarter, compared with receivables sales in the prior periods.
- Investing cash flow used $35.0 million, including $24.2 million for tools, dies, molds, and other property, plant, and equipment. Financing cash flow provided $33.8 million, primarily from stock-option exercises.
Material Changes Versus the Prior Comparable Period
- Mattel moved from an operating loss and net loss in Q1 2009 to operating income and net income in Q1 2010.
- Gross margin expanded by 510 basis points because of lower product costs, Global Cost Leadership savings, and price increases.
- Corporate and other expense improved by approximately $21.0 million. Q1 2010 included a $7.5 million reduction in the product-liability litigation estimate, while Q1 2009 included a $20.9 million litigation reserve charge.
- Global Cost Leadership generated approximately $17 million of gross savings, or approximately $15 million after severance charges. Cumulative net savings reached approximately $179 million through March 31, 2010.
- Net sales increased across major brands, supported by Barbie, Hot Wheels, Fisher-Price, American Girl, WWE Wrestling, Toy Story, and Thomas & Friends.
- Stockholders’ equity increased to $2.596 billion from $2.046 billion a year earlier, primarily due to net income and favorable currency translation effects.
Guidance, Outlook, Commentary, and Risks
- Management expected to achieve approximately $180 million to $200 million of cumulative net cost savings from the Global Cost Leadership program during 2010.
- Management expected pressure on input costs, including commodity and labor costs, to affect gross margin beginning in the second half of 2010.
- Mattel stated that cash, available revolving-credit capacity, and foreign credit lines should be sufficient for 2010 seasonal financing needs.
- The company’s strategy emphasizes growth of core brands, new product development, licensing and strategic partnerships, supply-chain efficiency, and use of scale to reduce costs.
- Principal risks include seasonal demand, changing consumer preferences, economic conditions, raw-material and manufacturing costs, foreign exchange, customer credit risk, interest rates, pension funding, and access to seasonal financing.
- Mattel held foreign-currency forward contracts with approximately $1.12 billion of notional value. Management estimated that, holding other factors constant, a 1% change in the U.S. dollar Trade-Weighted Index could affect full-year earnings per share by approximately $0.01 to $0.02.
- Venezuela was treated as a highly inflationary economy beginning January 1, 2010. Venezuelan operations generated less than 1% of consolidated sales, and the January 2010 currency devaluation was not material to Q1 results.
- Material contingencies include MGA/Bratz litigation, product-recall litigation in the United States, Canada, and Brazil, and proposed Canadian class actions involving Fisher-Price licensed drop-side cribs. Management stated that certain potential liabilities could materially affect financial condition or results, although amounts could not be reasonably determined and no reserves had been established for certain claims.
- Mattel’s disclosure controls and procedures were effective as of March 31, 2010, and management reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether gross-margin improvement is sustainable as commodity and labor costs rise in the second half of 2010.
- Progress toward the stated $180 million to $200 million 2010 cumulative cost-savings target.
- Seasonal working-capital requirements, negative first-quarter operating cash flow, and the availability and covenant compliance of the revolving credit facility.
- Future developments and potential financial exposure from MGA/Bratz, product-recall, and drop-side crib litigation.
- The effect of foreign-exchange movements, particularly in Europe, Latin America, and Venezuela, on sales, margins, earnings, and accumulated other comprehensive loss.
- Whether brand momentum and licensed-product growth continue beyond the first quarter and offset declines in certain legacy or noncontinuing products.