Mattel, Inc. Form 10-Q Summary
Business Context and Reporting Period
Mattel is a global toy and children’s entertainment company with North America, International, and American Girl operating segments. This unaudited filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The business is seasonal, with a significant portion of sales typically occurring during the holiday season.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $732.1 million | $860.1 million | $1.326 billion | $1.549 billion |
| Net sales change | -15% | — | -14% | — |
| Gross profit | $320.8 million | $341.4 million | $576.0 million | $581.2 million |
| Gross margin | 43.8% | 39.7% | 43.4% | 37.5% |
| Operating loss | $46.1 million | $51.4 million | $196.0 million | $178.4 million |
| Net loss | $109.2 million | $108.0 million | $319.9 million | $284.3 million |
| Diluted loss per share | $0.31 | $0.31 | $0.92 | $0.82 |
| Operating cash flow | Not separately provided | Not separately provided | $(463.0) million | $(400.5) million |
Q2 operating margin was negative 6.3%, compared with negative 6.0% in the prior-year quarter. Q2 net margin was negative 14.9%, compared with negative 12.6%. First-half operating margin was negative 14.8%, compared with negative 11.5%, and first-half net margin was negative 24.1%, compared with negative 18.3%.
- Segment performance: Q2 North America gross sales increased 3% to $461.5 million, while International gross sales declined 33% to $323.9 million and American Girl gross sales declined 16% to $29.1 million.
- Brand and category trends: Q2 Barbie gross sales increased 7%, while Hot Wheels declined 22% and Fisher-Price and Thomas & Friends declined 21%. Dolls declined 5%, Infant, Toddler, and Preschool declined 21%, Vehicles declined 26%, and Action Figures, Building Sets, Games, and Other declined 12%.
- Cash and liquidity: Cash and equivalents were $461.6 million at June 30, 2020, compared with $630.0 million at December 31, 2019 and $194.1 million at June 30, 2019. Approximately $311 million of cash was held by foreign subsidiaries.
- Debt: Total debt was $3.251 billion, including $400 million of short-term borrowings and $2.851 billion of long-term debt. The company had $400 million outstanding under its $1.60 billion senior secured revolving credit facilities and approximately $13 million of letters of credit.
- Capital structure: Stockholders’ equity declined to $86.1 million from $491.7 million at December 31, 2019, primarily due to first-half net losses and unfavorable currency translation adjustments.
- Investing and financing: Investing cash outflow was $80.9 million, including capital expenditures and foreign-currency hedge payments. Financing cash inflow was $399.3 million, primarily from short-term borrowings.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused retail closures, lower International and American Girl sales, supply-chain disruption, and reduced profitability. North America benefited from strong consumer demand, e-commerce, omnichannel retail, and Barbie performance.
- Gross margin improved by 410 basis points in Q2 and 590 basis points in the first half, driven by cost-savings initiatives, lower royalty expense, and the absence of the prior-year inclined sleeper recall costs. Fixed-cost under-absorption partially offset these benefits.
- Advertising and promotion expense declined 29% in Q2 because of reductions and deferrals related to COVID-19. Other selling and administrative expenses were broadly flat in Q2 but increased 5% in the first half, primarily due to incentive compensation and employee-related costs.
- Interest expense increased to $49.6 million in Q2 and $98.6 million in the first half, due to higher-cost refinancing and increased short-term borrowings.
- Mattel recorded $8.6 million of Capital Light restructuring charges in the first half and approximately $14.5 million of severance charges related to other cost-saving actions. The company planned a 4% reduction in its non-manufacturing workforce.
- First-half currency translation adjustments produced a $118.8 million loss, compared with a $13.0 million gain in the prior-year period.
Guidance, Outlook, Risks, and Unusual Items
- Management expected COVID-19 to continue adversely affecting sales, profitability, and working capital in the near term, although the second-half impact was expected to be less severe than in the first half. The filing states that the ultimate impact could not be reliably estimated.
- Based on its business plan and currently known COVID-19 effects, Mattel expected cash, operating cash flow, available revolving credit, and capital-markets access to be sufficient for the next 12 months. Management also expected compliance with debt covenants through August 10, 2021; the company was in compliance as of June 30, 2020.
- Mattel expected approximately $65 million of cumulative 2020 run-rate savings and $72 million by 2021 from the Capital Light program, based on actions taken through June 30, 2020. It also expected approximately $40 million of run-rate savings exiting 2020 from the 2020 workforce reductions.
- Management identified risks from renewed retail or manufacturing closures, supply-chain disruptions, customer liquidity and credit losses, seasonal inventory requirements, foreign exchange, high leverage, covenant compliance, and weaker consumer demand.
- Goodwill was not impaired during the quarter, but prolonged disruption or downward revisions to International and American Girl forecasts could result in future impairment.
- On July 28, 2020, after quarter-end, Mattel discovered a ransomware attack that encrypted data on certain systems. The company stated that it contained the attack, restored critical operations, and had no evidence at that time of sensitive-data exfiltration or a material financial impact. The forensic investigation remained ongoing.
- Litigation and investigations include Fisher-Price Rock ’n Play Sleeper claims, whistleblower-related shareholder litigation and SEC and U.S. Attorney inquiries, and other matters. For several matters, Mattel stated that a reasonable loss estimate could not be made; the Yellowstone matter had a reserve that was not material.
Most Important Facts to Verify
- Whether COVID-19 disruptions, retail conditions, and e-commerce trends support the expected second-half improvement.
- Mattel’s ability to generate positive operating cash flow while funding seasonal inventory and meeting debt-service obligations.
- Availability under the revolving credit facilities, covenant headroom, and refinancing or repayment requirements for outstanding debt.
- Realization of projected Capital Light and workforce-reduction savings and the amount of remaining restructuring costs.
- Potential goodwill impairment in the International and American Girl reporting units.
- Ultimate costs or regulatory consequences from the ransomware incident, SEC and SDNY inquiries, and product-liability litigation.