Mattel, Inc. 2015 Q3 Form 10-Q Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys globally across Mattel Girls & Boys, Fisher-Price, American Girl, and Construction and Arts & Crafts brands. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015. Results are seasonal and are most comparable with the corresponding 2014 periods.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $1.792 billion | $2.021 billion | $3.703 billion | $4.030 billion |
| Gross profit | $879.6 million | $1.021 billion | $1.803 billion | $1.995 billion |
| Gross margin | 49.1% | 50.5% | 48.7% | 49.5% |
| Operating income | $300.8 million | $409.5 million | $246.9 million | $416.7 million |
| Net income | $223.8 million | $331.8 million | $154.3 million | $348.9 million |
| Diluted EPS | $0.66 | $0.97 | $0.45 | $1.02 |
| Operating cash flow | Not separately provided | Not separately provided | $(222.3) million | $(144.3) million |
Q3 adjusted operating income was $321.6 million versus $434.5 million, and adjusted EPS was $0.71 versus $0.98. For the first nine months, adjusted operating income was $329.9 million versus $500.4 million, and adjusted EPS was $0.63 versus $1.06. These are non-GAAP measures.
- Cash and equivalents were $289.7 million at September 30, 2015, including approximately $210 million held by foreign subsidiaries.
- Accounts receivable were $1.451 billion and inventories were $870.8 million, reflecting seasonal increases from December 31, 2014.
- Long-term debt was $2.100 billion, with additional short-term borrowings of $161.0 million.
- Mattel had $1.44 billion of remaining borrowing capacity under its $1.60 billion revolving credit facility and was in compliance with its covenants. Reported debt-to-EBITDA was 2.76 to 1 versus a 3.50 maximum; interest coverage was 9.70 to 1 versus a 3.50 minimum.
- Dividends declared were $0.38 per share in Q3 and $1.14 per share for the first nine months. A fourth-quarter dividend of $0.38 per share was declared on October 15, 2015.
Material changes versus the prior comparable period
- Q3 net sales declined 11% as reported and 4% in constant currency; gross sales declined 11% as reported and 3% in constant currency.
- First-nine-month net sales declined 8% as reported and 1% in constant currency; gross sales declined 8% as reported and were flat in constant currency.
- Q3 operating income fell 27%, and first-nine-month operating income fell 41%. Net income declined 33% in Q3 and 56% for the first nine months.
- Margin pressure reflected unfavorable foreign exchange, higher royalty and product-related costs, and product mix. Price increases and cost savings partially offset these pressures.
- Mattel Girls & Boys gross sales declined 15% in Q3 and 13% for the first nine months as reported, driven principally by Other Girls, including Monster High. Wheels increased 6% in Q3 and 7% for the first nine months as reported, with Hot Wheels the principal contributor.
- International gross sales declined 19% in Q3 and 15% for the first nine months as reported, but increased 1% in constant currency for the first nine months. North America gross sales declined 5% in Q3 and 1% for the first nine months.
- Advertising and promotion expense increased to 11.9% of Q3 sales from 10.8% and to 11.4% of first-nine-month sales from 10.2%, reflecting investments in core brands.
- Cash used in operations increased to $222.3 million from $144.3 million. Cash used in investing declined to $206.0 million from $604.4 million because 2014 included the MEGA Brands acquisition. Cash used in financing increased to $230.0 million from $20.1 million.
- Stockholders’ equity decreased to $2.573 billion from $3.068 billion at September 30, 2014, while accumulated other comprehensive loss increased to $804.9 million, primarily because of currency translation losses.
Guidance, outlook, management commentary, risks, and unusual items
- Management described Q3 results as mixed but generally in line with expectations excluding foreign currency. It cited improved consumer takeaway for most core brands, better marketing and retail execution, and progress on its turnaround and cost-saving initiatives.
- Management continues to address foreign-exchange headwinds, declines in Monster High, softness in certain entertainment properties, and shelf-space losses. Strategic priorities include strengthening core franchises, restoring toy leadership, improving the global supply chain, expanding emerging markets, and reducing costs.
- The Funding Our Future program targets cumulative gross savings of approximately $250 million to $300 million by the end of 2016. Gross savings were approximately $45 million in Q3 and $93 million for the first nine months; net savings after severance and investments were approximately $33 million and $43 million, respectively.
- Mattel completed annual third-quarter impairment testing and reported no goodwill or nonamortizable intangible-asset impairment.
- Q3 included $13.3 million of severance expense, $3.3 million of MEGA integration and acquisition costs, and $4.2 million of MEGA-related intangible amortization. The nine-month amounts were $56.9 million, $13.6 million, and $12.5 million, respectively.
- Foreign currency exposure remains material. The company held forward contracts with notional amounts of approximately $972 million and a cross-currency swap with a $30 million notional amount at September 30, 2015.
- Mattel estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect net sales by approximately 0.5% and full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Venezuelan operations represented less than 0.01% of consolidated sales but had approximately $22 million of net monetary assets. Use of specified alternative exchange rates could have produced pre-tax charges of approximately $12 million or $22 million; ceasing operations could result in a charge of up to $95 million.
- The company disclosed reasonably possible but unaccrued litigation exposure related to MGA of up to approximately $12.5 million in damages plus up to approximately $10 million of prejudgment interest. A Brazilian litigation matter had an estimated possible loss range up to approximately $11.2 million, subject to an offset of approximately $5 million; no liability was accrued.
- Mattel stated that there were no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls and procedures were effective as of September 30, 2015.
Important facts for investors to verify
- Whether the Funding Our Future savings program can offset continuing sales, margin, currency, and shelf-space pressures.
- The trajectory of Monster High, Other Girls, entertainment brands, and the continued strength of Hot Wheels and other core franchises.
- Seasonal liquidity needs, cash generation, short-term borrowing, and compliance with credit-facility covenants.
- The effect of foreign exchange on reported sales, margins, earnings, equity, and the Venezuelan remeasurement decision.
- Potential outcomes and cash requirements from the MGA and Yellowstone litigation matters, which were not accrued because losses were not considered probable.
- Progress in restoring operating margins while maintaining elevated advertising and strategic investment spending.