Mattel, Inc. 2018 Form 10-K Summary
Business context and reporting period
Mattel is a global children’s entertainment and toy company operating through North America, International, and American Girl segments. Its principal brands include Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, American Girl, and Toy Box brands. This Form 10-K covers the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter information; it is not a standalone Form 10-Q for “2018 Q4.”
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $4.511 billion | $4.882 billion | Down 8% |
| Gross profit / margin | $1.795 billion / 39.8% | $1.821 billion / 37.3% | Margin up 250 bps |
| Operating loss / margin | $236.5 million / (5.2%) | $339.4 million / (7.0%) | Loss improved 30% |
| Loss before taxes | $419.3 million | $505.0 million | Improved 17% |
| Net loss / diluted loss per share | $531.0 million / $1.54 | $1.054 billion / $3.07 | Loss improved |
| Cash flow from operations | $(27.3) million | $(27.6) million | Essentially unchanged |
| Cash flow from investing | $(160.8) million | $(235.7) million | Use decreased |
| Cash flow from financing | $(285.2) million | $458.5 million | Shifted to use of cash |
| Cash and equivalents | $594.5 million | $1.079 billion | Down $484.7 million |
| Total debt | $2.856 billion | $3.123 billion | Down approximately $267 million |
| Stockholders’ equity | $669.5 million | $1.257 billion | Down $588.0 million |
Fourth-quarter 2018 net sales were $1.524 billion, operating income was $107.4 million, and net income was $14.9 million, or $0.04 per diluted share. Full-year advertising and promotion expense declined to $526.4 million, or 11.7% of sales, from $642.3 million, or 13.2%, in 2017.
Material changes versus the prior comparable period
- Net sales declined 8%, primarily reflecting a 6% negative impact from the liquidation of Toys “R” Us, lower Toy Box sales, and weaker Fisher-Price, Thomas & Friends, and American Girl results.
- Gross margin improved to 39.8% from 37.3%, principally due to Structural Simplification savings and lower obsolescence expense, partly offset by raw-material and plant-labor inflation.
- Barbie gross sales increased 14% and Hot Wheels increased 7%, while Fisher-Price and Thomas & Friends declined 13%, American Girl declined 28%, and Toy Box declined 16%.
- North America segment income increased to $221.3 million from $98.5 million. International segment income improved to $9.1 million from a $5.9 million loss. American Girl’s segment loss narrowed to $17.5 million from $73.0 million.
- Interest expense increased to $181.9 million from $105.2 million because of higher interest rates and higher average borrowings.
- The net loss improved largely because 2017 included a $454.4 million net tax expense, primarily related to a valuation allowance on U.S. deferred tax assets and the U.S. Tax Act. The 2018 tax provision was $111.7 million.
- Mattel repaid $250 million of 2013 Senior Notes and redeemed $500 million of 2014 Senior Notes, issuing $500 million of 6.75% Senior Notes due 2025. No common-stock dividends were paid in 2018, compared with $312.0 million in 2017.
Guidance, outlook, risks, contingencies, and unusual items
Management’s strategy is to restore profitability through operational restructuring, grow Power Brands, expand the brand portfolio, and capture additional value from intellectual property, franchise management, online retail, and e-commerce. The Structural Simplification program targets more than $650 million of savings by 2020. Mattel reported approximately $372 million of savings in 2018, incurred $109.8 million of restructuring charges during the year, and expects total program charges of approximately $200 million. The filing does not provide clear consolidated 2019 revenue or earnings guidance.
- Liquidity consisted of $594.5 million of cash, approximately $1.60 billion of unused senior secured revolving credit commitments subject to borrowing-base capacity, and approximately $20 million of foreign credit lines. No revolving-facility borrowings were outstanding at year-end, and Mattel reported compliance with debt covenants.
- Debt service and refinancing remain significant risks. Contractual commitments totaled approximately $6.02 billion, including $2.90 billion of long-term debt principal, $1.50 billion of interest on long-term debt, $516.0 million of operating leases, $282.3 million of licensing minimums, and $448.3 million of purchase obligations.
- Walmart and Target represented approximately 34% of 2018 net sales; the ten largest customers represented approximately 49%. Toys “R” Us-related bad debt expense was approximately $32 million, and the company reversed approximately $30 million of first-quarter 2018 sales and receivables associated with the liquidation.
- Mattel faces risks from seasonality, retailer inventory policies, competition, consumer preferences, product recalls, licensing renewals, foreign exchange, tariffs and trade policy, commodity and labor costs, supply-chain disruptions, cybersecurity and privacy regulation, and economic weakness.
- The Warner Bros. license for global DC Comics action figures expires in March 2020 and will not be renewed.
- Goodwill was not impaired in 2018, but the International reporting unit was identified as at risk, with estimated fair value approximately 1.24 times carrying value.
- Pending matters include an appeal in the MGA litigation, a Brazilian commercial dispute for which the amount payable had not been determined, and securities and derivative litigation. Mattel stated that a reasonable estimate of possible loss could not be made for the securities and derivative matters and that no liability had been accrued for the MGA matter.
- PricewaterhouseCoopers LLP issued an unqualified opinion on the financial statements and internal control over financial reporting. Management concluded that internal controls were effective as of December 31, 2018.
Facts investors should verify
- Whether revenue stabilizes after the Toys “R” Us liquidation and whether Barbie and Hot Wheels momentum offsets weakness in Fisher-Price, Thomas & Friends, American Girl, and Toy Box.
- Whether the Structural Simplification program delivers the targeted savings without causing further revenue loss, restructuring costs, or supply-chain disruption.
- Cash generation, seasonal borrowing needs, debt maturities beginning in 2020, interest expense, credit ratings, and continued compliance with revolving-credit covenants.
- Customer concentration and collectibility of receivables, particularly exposure to Walmart, Target, and other major retailers.
- International reporting-unit performance, including the risk of future goodwill impairment and sensitivity to foreign-exchange movements.
- The outcome and potential financial exposure from the MGA appeal, Brazilian litigation, securities litigation, tax audits, and other contingencies.