Mattel, Inc. 10-Q Summary
Business context and reporting period
Mattel designs, manufactures, markets, and sells toys worldwide, including Mattel Girls & Boys Brands, Fisher-Price, and American Girl. This unaudited Form 10-Q covers the three and six months ended June 30, 2010. Mattel notes that its business is seasonal and interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,018.5 million | $898.2 million | $1,898.6 million | $1,683.8 million |
| Gross profit | $489.6 million | $406.1 million | $921.5 million | $751.9 million |
| Gross margin | 48.1% | 45.2% | 48.5% | 44.7% |
| Operating income | $69.4 million | $32.5 million | $114.7 million | $(22.7) million |
| Operating margin | 6.8% | 3.6% | 6.0% | (1.3)% |
| Net income (loss) | $51.6 million | $21.5 million | $76.4 million | $(29.5) million |
| Diluted EPS | $0.14 | $0.06 | $0.21 | $(0.08) |
| Operating cash flow | Not separately provided for the quarter | $(372.1) million | $(349.8) million |
- Q2 net sales increased 13%; management attributed growth to domestic and international performance, Toy Story 3, WWE Wrestling, Thomas and Friends, Barbie, and Hot Wheels.
- Worldwide gross sales increased 13% in Q2 and 13% for the first half. First-half gross sales increased 15% in the United States and 10% internationally.
- Q2 gross margin improved 290 basis points, primarily from lower product costs, price increases, and Global Cost Leadership savings, partly offset by higher royalties.
- Q2 advertising and promotion expense was $101.9 million, or 10.0% of sales. Other selling and administrative expense was $318.3 million, or 31.3% of sales.
- Interest expense declined to $13.4 million in Q2 and $27.1 million for the first half, reflecting lower average borrowings and interest rates.
- Cash and equivalents were $544.9 million at June 30, 2010, compared with $1.117 billion at December 31, 2009 and $422.7 million at June 30, 2009.
- Inventories were $597.6 million, compared with $355.7 million at December 31, 2009. Accounts receivable were $805.1 million.
- Total debt, including current and noncurrent long-term debt, was $710.0 million at June 30, 2010. The current portion increased to $250.0 million due primarily to debt maturities and reclassifications.
- Mattel had $1.08 billion available under its domestic unsecured committed revolving credit facility and was in compliance with its covenants. Debt-to-EBITDA was 0.7 to 1 versus a maximum of 3.0 to 1; interest coverage was 15.7 to 1 versus a minimum of 3.50 to 1.
Material changes versus the prior comparable period
- First-half operating results improved substantially, with operating income of $114.7 million versus an operating loss of $22.7 million in 2009; net income was $76.4 million versus a net loss of $29.5 million.
- Worldwide Girls & Boys gross sales rose 21% in Q2 and 17% for the first half. Entertainment sales increased 60% in Q2 and 49% for the first half, led by Toy Story 3 and other entertainment properties.
- Fisher-Price gross sales increased 4% in Q2 and 7% for the first half. American Girl sales declined 4% in Q2 but increased 1% for the first half.
- Q2 international gross sales increased 9%, including a 5-percentage-point unfavorable currency impact. Asia Pacific gross sales increased 28%.
- Operating cash use increased to $372.1 million from $349.8 million, primarily because of higher working-capital requirements and the absence of accounts receivable sales in 2010.
- Investing cash flow changed from $8.7 million provided in the first half of 2009 to $97.3 million used in 2010, partly because 2009 included approximately $67 million of investment-sale proceeds.
- Financing cash flow changed from $143.3 million provided to $99.1 million used, reflecting $111.2 million of share repurchases and lower net borrowings.
- The debt-to-capital ratio declined to 22.1% from 32.7% at June 30, 2009. Mattel repurchased approximately 5.0 million shares during Q2 for $111.2 million.
Guidance, outlook, commentary, risks, and unusual items
- Management expects a full-year 2010 effective tax rate of approximately 24% to 25%.
- Mattel expects to achieve its 2010 cumulative annual Global Cost Leadership savings target of approximately $180 million to $200 million. Cumulative annual net savings through June 30 were approximately $182 million.
- Management expects pressure on gross margin beginning in the second half of 2010 from commodity and labor costs.
- Mattel’s capital framework targets year-end cash of approximately $800 million to $1 billion, a debt-to-capital ratio of approximately 25%, annual capital expenditures of $180 million to $200 million, strategic acquisitions, dividends, and share repurchases.
- Product-recall litigation remained a contingency. Mattel paid approximately $11 million of attorneys’ fees and expenses during Q2 in connection with the U.S. recall settlement; appeals remained pending.
- The Ninth Circuit’s July 22, 2010 opinion vacated significant portions of the prior Bratz litigation verdict and damage award and indicated that the case would probably need to be retried. Management stated that potential liabilities from certain claims could materially affect financial condition and results, and no reserves were established where losses could not reasonably be estimated.
- Venezuela was treated as a highly inflationary economy beginning January 1, 2010. A second-quarter remeasurement gain increased pretax income by approximately $4 million. Venezuelan operations generated less than 1% of consolidated sales.
- Foreign currency remains a material risk. Mattel held forward contracts with approximately $1.10 billion of notional value at June 30, 2010. Management estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Mattel reported effective disclosure controls as of June 30, 2010 and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether seasonal second-half sales and new entertainment properties offset expected commodity, labor, royalty, and currency pressures.
- Inventory levels, receivables collections, and the timing of payables and accrued-liability payments, given the substantial first-half operating cash outflow.
- Debt maturities, refinancing plans, and continued compliance with revolving-credit covenants.
- The sustainability and cash impact of Global Cost Leadership savings, severance charges, and share repurchases.
- Developments and potential financial exposure in the retrial of the MGA/Bratz litigation, product-recall appeals, Canadian crib litigation, and other contingencies.
- Venezuelan exchange-control restrictions, SITME access limits, and future remeasurement effects.