Mattel, Inc. Form 10-Q Summary
Business Context and Reporting Period
Mattel is a global toy and entertainment company with reportable segments covering North America, International, and American Girl. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. Results are seasonal, with a substantial portion of toy purchases occurring during the holiday season.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net sales | $1.087 billion | $1.236 billion | $1.902 billion | $2.277 billion |
| Gross profit | $489.8 million | $548.9 million | $815.6 million | $1.032 billion |
| Gross margin | 45.1% | 44.4% | 42.9% | 45.3% |
| Operating income (loss) | $62.8 million | $125.1 million | $(52.3) million | $205.1 million |
| Net income (loss) | $27.2 million | $66.4 million | $(79.3) million | $87.9 million |
| Diluted EPS | $0.08 | $0.18 | $(0.22) | $0.24 |
| Operating cash flow | Not separately provided | Not separately provided | $(325.6) million | $(425.0) million |
Second-quarter gross billings declined 11% to $1.228 billion. Dolls billings increased 10% and Vehicles increased 11%, while Infant, Toddler, and Preschool declined 28% and Action Figures, Building Sets, Games, and Other declined 39%.
At June 30, 2023, cash and equivalents were $299.9 million, accounts receivable were $890.9 million, inventories were $971.6 million, and total assets were $5.898 billion. Total debt was $2.328 billion, with no short-term borrowings and no borrowings under the $1.40 billion revolving credit facility. Stockholders’ equity was $1.962 billion.
First-half investing cash outflow was $62.0 million, including $73.4 million of capital expenditures. Financing cash outflow was $71.4 million, including $49.9 million of share repurchases. Cash declined $461.3 million from December 31, 2022, primarily due to operating cash use, capital expenditures, and repurchases.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales decreased 12%, while first-half net sales decreased 16%, primarily reflecting retailer inventory management, industry softness, and difficult comparisons with 2022, when retailers built inventories earlier.
- Second-quarter operating income fell 50% and net income fell 59%. First-half results shifted from operating income and net income in 2022 to operating and net losses in 2023.
- Second-quarter gross margin improved 70 basis points to 45.1%, supported by pricing, cost savings, favorable foreign exchange, and lower restructuring costs. First-half gross margin declined 240 basis points to 42.9% because of inventory management actions, inflation, unfavorable fixed-cost absorption, and product mix.
- North America second-quarter sales declined 18% and segment operating income declined 30%. International sales declined 3% and segment operating income declined 26%. American Girl sales declined 16% and moved to a $7.7 million operating loss from $5.8 million of income.
- Inventories were 17% below June 30, 2022 levels, although they increased from year-end 2022 as part of the seasonal build.
- Mattel repaid $250 million of 2013 Senior Notes in December 2022, reducing total debt versus June 2022 and contributing to lower interest expense.
- Mattel resumed share repurchases, buying approximately $50 million of shares during the first half. Remaining authorization was $153.2 million at June 30, 2023.
Guidance, Outlook, Risks, and Unusual Items
Management stated that retailer inventory levels improved during the first half and were below prior-year levels at quarter-end. Mattel believes retail inventories are positioned for sales patterns to revert toward historical trends in the second half of 2023. The filing does not provide a clear consolidated full-year revenue or earnings guidance figure.
Mattel expanded its Optimizing for Growth program and increased its targeted annual gross cost savings to $300 million for the expanded program, or $375 million including prior Capital Light actions. Cumulative savings were approximately $330 million at June 30, 2023. The company recorded $27.3 million of program-related restructuring charges in the first half and $5.2 million of additional severance costs outside the program.
Management expects existing cash, operating cash flow, availability under the revolving facility, and capital-market access to be sufficient for the next twelve months and longer term. The company was in compliance with its credit agreement covenants at June 30, 2023. The facility requires a minimum interest coverage ratio of 2.75 to 1.00 and a maximum total leverage ratio of 3.75 to 1.00.
- Principal risks include weak discretionary consumer spending, retailer concentration and inventory policies, seasonal demand, inflation, commodity and labor costs, foreign exchange volatility, supply-chain disruption, competition, licensing dependence, cyberattacks, product recalls, regulatory changes, and financing-market conditions.
- Mattel paused shipments to Russia in early 2022. Cash held in Russia was approximately $56.2 million at June 30, 2023 and was subject to movement restrictions.
- Litigation and regulatory matters related to the Fisher-Price Rock ’n Play Sleeper remain outstanding. Mattel states that a reasonable loss estimate cannot currently be made; its accrued reserve was not material at June 30, 2023.
- The filing identifies ongoing tax audits and states that unrecognized tax benefits could decrease by approximately $17 million within the next twelve months, although settlements could materially affect results.
- Foreign currency transaction losses were $7.6 million for the first half, while currency translation adjustments produced a $30.3 million net gain in other comprehensive income.
Most Important Facts for Investors to Verify
- Whether second-half demand normalizes as management expects and whether retailer inventories remain controlled.
- Progress toward the $300 million expanded annual cost-savings target and the related restructuring cash expenditures.
- Cash conversion, seasonal borrowing needs, and compliance with the revolving facility’s leverage and interest-coverage covenants.
- Inventory levels, obsolescence and close-out activity, gross-margin recovery, and the effects of inflation and product mix.
- Performance of Barbie, Hot Wheels, Fisher-Price, and licensed entertainment products following significant category and brand changes in the first half.
- Developments in Rock ’n Play Sleeper litigation and CPSC discussions, including any change to the currently non-material reserve.
- Foreign exchange exposure, restricted cash in Russia, customer credit quality, and the effect of macroeconomic conditions on discretionary spending.