Mattel, Inc. 2009 Q2 Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys globally, including Mattel Girls & Boys Brands, Fisher-Price, and American Girl. This unaudited filing covers the three and six months ended June 30, 2009. The business is seasonal, so interim results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | H1 2009 | H1 2008 |
|---|---|---|---|---|
| Net sales | $898.2 million | $1,112.4 million | $1,683.8 million | $2,031.7 million |
| Gross profit | $406.1 million | $495.3 million | $751.9 million | $892.2 million |
| Gross margin | 45.2% | 44.5% | 44.7% | 43.9% |
| Operating income (loss) | $32.5 million | $30.6 million | $(22.7) million | $(5.9) million |
| Net income (loss) | $21.5 million | $11.8 million | $(29.5) million | $(34.9) million |
| Diluted EPS | $0.06 | $0.03 | $(0.08) | $(0.10) |
| Cash flow from operations | Not separately provided | Not separately provided | $(349.8) million | $(529.7) million |
Q2 operating margin improved to 3.6% from 2.8%. Advertising and promotion expense declined to $89.8 million from $116.8 million, while other selling and administrative expense declined to $283.7 million from $347.9 million.
At June 30, 2009, cash and equivalents were $422.7 million, compared with $617.7 million at December 31, 2008 and $384.4 million at June 30, 2008. Total debt, including short-term borrowings and current long-term debt, was approximately $1.054 billion. Long-term debt was $710.0 million and short-term borrowings were $294.2 million.
Mattel used $349.8 million in operating cash flow during the first half, generated $8.7 million from investing activities, and generated $143.3 million from financing activities. Capital expenditures were $61.8 million, compared with $80.1 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Q2 net sales decreased 19%, with approximately five percentage points of the decline attributable to unfavorable foreign exchange. First-half net sales decreased 17%, including a six-percentage-point currency impact.
- Domestic gross sales decreased 12% in Q2, while international gross sales decreased 26%, including a ten-percentage-point currency impact.
- Worldwide Girls & Boys Brands gross sales decreased 25% in Q2, Fisher-Price decreased 14%, and American Girl was approximately flat. Weakness reflected cautious retailer inventory management, fewer summer entertainment-related products than in 2008, and currency effects.
- Gross margin expanded by 70 basis points in Q2 and 80 basis points for the first half, helped by January 2009 price increases, lower royalty expense, and cost savings.
- Q2 operating income increased despite lower sales. First-half operating loss widened because of the seasonal sales decline and $22.0 million of product-liability litigation settlement charges recorded during the period.
- Operating cash use improved by $179.9 million year over year, primarily because of lower seasonal working-capital requirements.
- Mattel repaid $100.0 million of 2006 Senior Notes and $40.0 million of medium-term notes during the first half.
Guidance, Outlook, Commentary, and Risks
Management expected continued pressure on second-half sales from weak retail conditions, cautious customer inventories, foreign exchange, and an entertainment-light 2009 product calendar. Priorities were improving profitability, generating cash flow, strengthening the balance sheet, protecting the dividend, limiting acquisitions and share repurchases, and tightly managing capital expenditures.
- The Global Cost Leadership program was expected to produce $90 million to $100 million of net cost savings in 2009 and $180 million to $200 million cumulatively by the end of 2010. Management reported approximately $32 million of savings in Q2 and $50 million in the first half.
- Management expected a 2009 effective tax rate of approximately 22% to 23%.
- Advertising expense was expected to be at the low end of the historical 11% to 13% of net sales range.
- The revolving credit facility had aggregate commitments of $940 million at June 30, 2009 and was increased to $1.035 billion on July 9, 2009. Approximately $569 million was available at June 30. The facility matures March 23, 2012.
- Mattel was in compliance with debt covenants at June 30, including a debt-to-EBITDA ratio of 1.5:1 versus a 3.0:1 maximum and interest coverage of 9.0:1 versus a 3.5:1 minimum.
- Material risks include consumer and retailer demand, seasonal working-capital needs, foreign exchange, interest rates, credit-market and counterparty risk, customer collectibility, pension funding requirements, product safety claims, litigation, and debt-covenant compliance.
Unusual items included $22.0 million of product-liability litigation settlement charges for the first half, a $6.0 million Q2 insurance recovery, a $2.5 million discrete tax benefit, restructuring charges of $7.2 million for the first half, and foreign-exchange gains related in part to Venezuelan currency revaluation.
The Bratz litigation remained material. A jury award of approximately $100 million in favor of Mattel was upheld by the district court, while MGA filed an interlocutory appeal on July 10, 2009. Other recall-related litigation and regulatory matters remained outstanding; management stated that potential liabilities for many claims could not reasonably be quantified.
Investor Verification Checklist
- Verify whether the sales decline, especially internationally, reflects temporary currency and entertainment comparisons or persistent demand weakness.
- Assess the sustainability of gross-margin improvement and the timing and realization of the Global Cost Leadership savings.
- Monitor seasonal cash generation, inventory levels, receivables, receivables sales, and debt repayment during the second half.
- Review liquidity headroom, credit-facility availability, interest-rate margins, and compliance with debt covenants.
- Evaluate the potential financial impact and timing of the Bratz appeal, product-recall litigation, and related indemnification obligations.
- Consider foreign-exchange sensitivity: management estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect annual net sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02.
- Confirm the status of the IRS audit of the 2006 and 2007 federal tax returns and other tax audits, for which the filing states that potential changes could not yet be quantified.