Mattel, Inc. — FY2009 Form 10-K Summary
Business context and reporting period
Mattel designs, manufactures, markets, and sells toys worldwide, including Barbie, Hot Wheels, Fisher-Price, American Girl, and licensed entertainment products. Reportable operations comprise Domestic brands and an International segment. The filing covers the fiscal year ended December 31, 2009; fourth-quarter information is included where disclosed.
The business is highly seasonal, with a substantial share of sales occurring in the third and fourth quarters. International operations represented approximately 46% of worldwide gross sales in 2009, and the three largest customers accounted for approximately 40% of consolidated net sales.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $5.431 billion | $5.918 billion | Down 8% |
| Gross profit | $2.715 billion | $2.684 billion | Up 1% |
| Gross margin | 50.0% | 45.4% | Up 460 basis points |
| Operating income | $731.2 million | $541.8 million | Up 35% |
| Operating margin | 13.5% | 9.2% | Up 430 basis points |
| Net income | $528.7 million | $379.6 million | Up 39% |
| Diluted EPS | $1.45 | $1.04 | Up $0.41 |
| Operating cash flow | $945.0 million | $436.3 million | Up $508.7 million |
| Capital expenditures | $120.5 million | $198.8 million | Down $78.3 million |
Fourth-quarter 2009 net sales were $1.955 billion, operating income was $417.4 million, and net income was $328.4 million, or $0.90 diluted EPS. Fourth-quarter net income included $28.5 million of income-tax benefits related to prior-year tax matters and settlements.
Gross sales declined 8% overall. Domestic gross sales declined 4%, while International gross sales declined 13%, including a four-percentage-point unfavorable currency impact. Worldwide gross sales declined 10% for Mattel Girls & Boys Brands and 8% for Fisher-Price Brands; American Girl gross sales were approximately flat.
Cash and equivalents increased to $1.117 billion from $617.7 million. Accounts receivable declined to $749.3 million, and inventories declined to $355.7 million. Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $752.0 million, versus $900.0 million of long-term debt at December 31, 2008. The debt-to-capital ratio declined to 22.9% from 29.8%.
Mattel paid $271.4 million of dividends in 2009, maintaining a $0.75 per-share dividend. No open-market share repurchases were made during 2009; $410.3 million remained authorized for future repurchases.
Material changes versus the prior comparable period
- Sales weakened because of difficult economic conditions, lower international demand, unfavorable currency movements, and declines in several entertainment-driven and licensed product lines.
- Profitability improved substantially despite lower sales. Price increases, lower input costs, supply-chain improvements, and the Global Cost Leadership program increased gross margin.
- Global Cost Leadership generated approximately $164 million of gross savings before approximately $32 million of severance charges, or approximately $132 million net savings, in 2009.
- Advertising and promotion expense declined 15% to $609.8 million, or 11.2% of net sales, from 12.2% in 2008.
- Operating cash flow more than doubled, primarily because of higher profitability and lower accounts receivable and inventory levels.
- Mattel repaid $150 million of long-term debt, including $100 million of floating-rate senior notes that matured in June 2009 and $50 million of medium-term notes.
- Domestic segment income increased to $628.7 million from $405.8 million, while International segment income increased to $422.5 million from $357.6 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expected 2010 to remain economically and cost challenging but expressed greater optimism about revenue based on core-brand momentum and planned launches associated with Toy Story 3, WWE Wrestling, Thomas and Friends, and other licensed properties. Long-term targets included gross margin of approximately 50%, advertising expense of 11% to 13% of sales, other selling and administrative expense of approximately 20% of sales, and operating margins of approximately 15% to 20%.
Management expected cumulative net savings from the Global Cost Leadership program of approximately $180 million to $200 million by the end of 2010 and expected to continue pricing and efficiency initiatives to offset commodity and China labor-cost pressures.
- Liquidity included approximately $1.117 billion of cash and approximately $780 million of incremental borrowing availability under a $1.08 billion revolving credit facility. The facility matures March 23, 2012.
- Mattel was in compliance with its debt covenants at year-end. Debt-to-EBITDA was 1.2 to 1 versus a 3.0 maximum, and interest coverage was 12.6 to 1 versus a 3.50 minimum.
- Contractual commitments totaled approximately $2.251 billion, including $750 million of long-term debt, $522 million of operating leases, $267 million of purchases, and $241 million of licensing minimum guarantees.
- Mattel recorded approximately $10 million of intangible-asset impairment charges and $31.5 million of severance and other termination charges related to restructuring.
- The 2007 product-recall and 2008 product-withdrawal reserve balance was $1.7 million at December 31, 2009. Mattel recorded $27.4 million of product-liability litigation charges and a $6.0 million insurance recovery during 2009.
- Significant litigation remained, including MGA/Bratz-related matters, product-recall litigation, Canadian and Brazilian claims, and proposed Canadian class actions involving licensed drop-side cribs. The filing states that potential liabilities for certain matters could be material but could not be reasonably estimated; no reserves were established for those claims.
- Mattel had $230.0 million of unrecognized tax benefits at year-end, of which $223.0 million would affect the effective tax rate if recognized, subject to potential valuation allowances and audit outcomes.
- Effective January 1, 2010, Venezuela was to be treated as highly inflationary, and Mattel changed its Venezuelan translation rate to the parallel exchange rate. The filing states that the subsequent Venezuelan devaluation was not expected to materially affect 2010 consolidated results.
- Key ongoing risks include consumer discretionary spending, retailer concentration and creditworthiness, seasonality, product acceptance, licensing dependence, recalls and product liability, commodity and labor costs, foreign exchange, manufacturing and supply-chain disruption, debt-market access, regulatory changes, and intellectual-property disputes.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2009. PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and international demand recovered after the 2009 decline, particularly in Europe and Latin America.
- Whether the approximately 50% gross-margin level and the 2010 cost-savings target were sustained without excessive price-related volume losses.
- Cash conversion, inventory discipline, customer receivables, and reliance on receivables factoring or sales facilities.
- Debt maturities beginning with $50 million in 2010, $250 million in 2011, and $400 million in 2013, together with compliance with revolving-credit covenants.
- Progress and financial exposure in the MGA/Bratz litigation, product-recall claims, Canadian crib litigation, and other contingencies.
- Potential cash-tax effects from the $230.0 million of unrecognized tax benefits, ongoing audits, and approximately $3.5 billion of indefinitely reinvested foreign earnings.
- Impact of Venezuelan currency controls, devaluation, and highly inflationary accounting on future revenue and earnings.
- Whether customer concentration remains near 40% for the three largest customers and approximately 50% for the ten largest customers.