Mattel, Inc. 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and entertainment products globally, including Barbie, Hot Wheels, Fisher-Price, American Girl, UNO, MEGA, and licensed brands. This report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Results are seasonal, with a significant proportion of toy purchases occurring during the holiday season.
Management stated that first-quarter 2021 demand was strong, while the prior-year quarter was significantly affected by COVID-19. Mattel's manufacturing and distribution network was fully operational as of March 31, 2021.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $874.2 million | $594.1 million | Up 47% |
| Gross profit | $409.0 million | $255.2 million | Up 60% |
| Gross margin | 46.8% | 43.0% | Up 380 basis points |
| Operating income (loss) | $31.0 million | $(149.8) million | Improved |
| Loss before income taxes | $(97.5) million | $(199.7) million | Improved 51% |
| Net loss | $(115.2) million | $(210.7) million | Improved 45% |
| Diluted loss per share | $(0.33) | $(0.61) | Improved |
| Cash flow from operations | $(41.2) million | $(174.5) million | Improved |
| Cash flow from investing | $6.3 million | $(81.2) million | Improved |
| Cash flow from financing | $(105.7) million | $149.3 million | Decreased |
Gross billings increased 46% to $979.0 million. Reported growth was led by Dolls and Action Figures, Building Sets, Games, and Other, each up 69%, while Infant, Toddler, and Preschool increased 31% and Vehicles increased 16%. Barbie gross billings increased 87%, Hot Wheels increased 16%, and Fisher-Price and Thomas & Friends increased 33%.
Advertising and promotion expense declined 3% to $74.1 million, or 8.5% of sales versus 12.8% in the prior-year quarter. Other selling and administrative expense declined 8% to $303.9 million, or 34.8% of sales versus 55.3%. Cost of sales increased 37%, less than the 47% sales increase, and gross margin benefited from fixed-cost absorption and cost savings, partly offset by higher raw material costs.
- North America net sales increased 67% to $479.7 million; segment income was $123.4 million versus $14.0 million.
- International net sales increased 30% to $349.4 million; segment income was $35.2 million versus a $28.9 million loss.
- American Girl net sales increased 22% to $45.2 million; segment loss narrowed to $9.8 million from $17.4 million.
Liquidity, Debt, and Capital Resources
- Cash and equivalents were $615.2 million at March 31, 2021, compared with $762.2 million at December 31, 2020 and $499.4 million at March 31, 2020. Approximately $588.3 million was held by foreign subsidiaries.
- Total debt was $2.84 billion, compared with $2.86 billion at December 31, 2020 and $3.00 billion at March 31, 2020. Stockholders' equity was $473.9 million.
- Mattel issued $600 million of 3.375% senior notes due 2026 and $600 million of 3.750% senior notes due 2029. Proceeds and cash on hand funded the redemption of $1.225 billion of 6.750% notes due 2025. The transaction generated an $83.2 million loss on extinguishment recorded in interest expense.
- The senior secured revolving credit commitments were reduced from $1.60 billion to $1.40 billion and maturity was extended to March 19, 2024. There were no borrowings under the facility at March 31, 2021 and approximately $11 million of outstanding letters of credit. Mattel was in compliance with all covenants.
- Management expects cash, operating cash flows, available revolving credit, and capital-market access to fund working capital and operating requirements for the next twelve months, based on its current plan and known COVID-19 impacts.
Material Changes Versus the Prior Comparable Period
- Net sales, gross billings, gross profit, and operating income improved substantially, reflecting stronger demand and the adverse COVID-19 comparison in Q1 2020.
- Operating performance improved across North America, International, and American Girl.
- Operating cash outflows narrowed to $41.2 million from $174.5 million, but cash declined $146.9 million during the quarter because of seasonal working-capital usage, debt refinancing and repayment, and capital expenditures.
- Inventory increased to $609.8 million from $560.6 million at March 31, 2020, reflecting production for anticipated second-quarter sales and foreign-exchange effects.
- Currency translation produced a $28.1 million after-tax loss in Q1 2021 versus a $145.6 million loss in Q1 2020.
Guidance, Outlook, Risks, and Unusual Items
Mattel announced the multi-year Optimizing for Growth program. Incremental actions expected to be completed from 2021 through 2023 are targeted to generate $250 million of annual gross cost savings. Including prior Capital Light actions, cumulative targeted annual gross savings are $325 million by 2023. Total expected cash expenditures are approximately $140 million to $165 million, with total non-cash charges of $40 million to $45 million. Cumulative program charges were approximately $58 million as of March 31, 2021, including approximately $17 million of non-cash charges.
Mattel recorded $7.6 million of restructuring charges during the quarter and recognized a $15.8 million pretax gain on the sale of a manufacturing plant in Mexico. The company also recognized an $83.2 million loss on debt extinguishment, which materially increased interest expense.
- COVID-19 remains a significant uncertainty affecting consumer demand, retail customers, manufacturing, distribution, supply chains, liquidity, and the global economy. The company cannot estimate the pandemic's ultimate impact.
- Risks include raw-material, labor, freight, and transportation inflation; foreign-exchange movements; customer concentration and retailer inventory practices; competition; product recalls and liability; cybersecurity; regulatory and trade changes; and potential supply-chain or vendor disruptions.
- Mattel is defending lawsuits related to the Fisher-Price Rock 'n Play Sleeper involving alleged false advertising, product defects, injuries, fatalities, and related derivative claims. A reasonable loss estimate cannot currently be made.
- Shareholder litigation and SEC and U.S. Attorney inquiries related to a whistleblower letter remain pending. Mattel cannot predict the scope, duration, outcome, or potential financial impact.
- Mattel maintains valuation allowances on certain deferred tax assets and recorded $20.3 million of income tax expense. A future release of some allowances is possible but uncertain.
- Mattel expects approximately $16 million of additional pension and postretirement contributions during the remainder of 2021.
Investor Verification Checklist
- Verify whether the strong year-over-year sales growth persists after the COVID-19-affected Q1 2020 comparison and through the seasonally important second half.
- Assess execution of the Optimizing for Growth program, including the $325 million cumulative savings target, expected charges, and cash expenditures.
- Monitor gross margin for the effects of raw-material, freight, labor, and other input-cost inflation.
- Review cash generation, inventory levels, seasonal working-capital requirements, and access to the $1.40 billion revolving credit facilities.
- Track refinancing benefits and the effect of the new notes, debt maturities, and interest expense on net income and liquidity.
- Follow developments in the Rock 'n Play Sleeper litigation and the SEC, U.S. Attorney, and shareholder matters, for which potential losses are not currently estimable.
- Evaluate COVID-19 developments, supply-chain continuity, retailer demand, foreign-exchange exposure, and the potential release or continued maintenance of deferred-tax valuation allowances.