Mattel, Inc. — 2016 Form 10-K Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys worldwide through North America, International, and American Girl segments. Key brands include Barbie, Hot Wheels, Fisher-Price, American Girl, MEGA, and licensed entertainment properties. This filing covers the fiscal year ended December 31, 2016, including fourth-quarter results.
The business is highly seasonal, with a substantial portion of sales occurring in the third and fourth quarters. International customers represented 41% of consolidated net sales, and the three largest customers—Wal-Mart, Toys “R” Us, and Target—accounted for approximately 39% of 2016 net sales.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $5.457 billion | $5.703 billion | Down 4% |
| Gross sales | $6.074 billion | $6.284 billion | Down 3% |
| Gross profit | $2.554 billion | $2.806 billion | Down 9% |
| Gross margin | 46.8% | 49.2% | Down 240 basis points |
| Operating income | $519.2 million | $540.9 million | Down 4% |
| Operating margin | 9.5% | 9.5% | Flat |
| Net income | $318.0 million | $369.4 million | Down 14% |
| Diluted EPS | $0.92 | $1.08 | Down 15% |
| Cash flow from operations | $594.5 million | $734.6 million | Down 19% |
Fourth-quarter 2016 net sales were $1.834 billion, compared with $1. vai?9997 billion in the fourth quarter of 2015; fourth-quarter net income was $173.8 million, or $0.50 diluted EPS, compared with $215.2 million, or $0.63 diluted EPS.
Cash and equivalents totaled $869.5 million at year-end, including approximately $683 million held by foreign subsidiaries. Inventory increased to $613.8 million from $587.5 million, while accounts receivable decreased to $1.115 billion from $1.145 billion.
Long-term debt was $2.134 billion, compared with $1.785 billion at year-end 2015. Short-term borrowings were $192.2 million, versus $16.9 million. Debt-to-total-capital increased to 49.1% from 44.4%. Mattel had $1.46 billion of available incremental borrowing capacity under its $1.60 billion revolving credit facility and was in compliance with its debt covenants.
Mattel paid $518.5 million in dividends during 2016, or $1.52 per share. No shares were repurchased during 2016, and $203.0 million remained authorized for future repurchases.
Material Changes Versus the Prior Comparable Period
- Net sales declined primarily because of lower Other Girls sales, including the loss of Disney Princess products. Disney Princess gross sales were $455.6 million in 2015.
- Barbie gross sales increased 7%, Wheels increased 6%, Entertainment increased 13%, Fisher-Price increased 2%, and Construction and Arts & Crafts increased 7%. Other Girls declined 52%.
- International net sales declined 8%, with Europe down 9% and Latin America down 12%; Asia Pacific was approximately flat. North America net sales declined 2% and American Girl declined 1%.
- Gross margin contracted because of unfavorable foreign exchange, higher sales adjustments, higher input costs, and increased retail promotional activity.
- Advertising and promotion expense decreased 12% to $634.9 million, and other selling and administrative expense decreased 10% to $1.400 billion.
- Cost-reduction initiatives generated approximately $142 million of gross savings, or $123 million of net savings, in 2016. Cumulative Funding Our Future savings reached approximately $295 million, at the high end of the targeted range.
- North America segment income increased 5% to $564.4 million; International segment income decreased 9% to $291.2 million; American Girl segment income increased 52% to $106.4 million.
- Operating cash flow decreased because of higher working-capital usage and lower net income. Investing cash usage increased partly because of the acquisitions of Fuhu and Sproutling.
- Mattel issued $350 million of 2.35% senior unsecured notes due 2021 and repaid $300 million of maturing senior notes.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that it remained optimistic about 2017 and beyond, citing a strong licensed-entertainment slate, momentum in core brands, emerging-market investments, content partnerships, and innovation. The filing does not provide clear quantified revenue, earnings, or margin guidance.
Mattel acquired Sproutling for $9.9 million plus potential contingent consideration and substantially all of Fuhu’s assets for $23.3 million. The acquisitions were intended to strengthen digital and smart-technology capabilities and were not material individually or collectively to 2016 results.
Other unusual or material items included an approximately $26 million unrealized foreign-exchange loss from changing the Venezuelan remeasurement rate, $16.8 million of net tax benefits, and $2 million of acquisition and integration costs. Mattel stated that future deterioration in Venezuela could result in a pre-tax charge of up to $71 million.
Material risks include volatile consumer preferences, intense competition, dependence on holiday-season sales, customer concentration, foreign-exchange exposure, retailer inventory management, commodity and freight costs, supply-chain disruption, product safety and recall liabilities, licensing dependence, cybersecurity and privacy risks, pension assumptions, goodwill impairment, regulatory changes, and access to seasonal financing.
Contractual commitments totaled approximately $4.958 billion, including $2.150 billion of long-term debt principal, $934.6 million of interest on long-term debt, $620.3 million of operating leases, $392.5 million of licensing minimums, and $444.5 million of purchase obligations.
Mattel disclosed ongoing litigation involving MGA Entertainment and Yellowstone do Brasil. The MGA matter was considered reasonably possible but not probable, with a potential damages range of approximately $0 to $12.5 million plus potential prejudgment interest of up to approximately $12.0 million. The Yellowstone matter had a potential loss range of $0 to approximately $16.5 million, subject to an offset of approximately $7.5 million; no liability was accrued for either matter.
Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2016. The assessment excluded the recently acquired Fuhu and Sproutling businesses, each collectively representing less than 1% of consolidated assets and sales.
Most Important Facts for Investors to Verify
- Whether the decline in Other Girls sales and the loss of Disney Princess licensing have stabilized.
- Whether gross-margin pressure from foreign exchange, promotions, sales adjustments, and input costs reverses.
- Progress toward revenue growth and improved profitability under the stated 2017 strategy.
- Liquidity after dividends, seasonal working-capital needs, debt maturities, and the increased debt-to-capital ratio.
- Compliance with revolving-credit-facility covenants and the effect of credit-rating outlook changes on financing costs.
- Customer concentration and the collectibility of receivables, particularly during the holiday selling cycle.
- Potential Venezuelan, MGA, Yellowstone, tax, product-recall, licensing, and other contingent liabilities.
- Whether Fuhu and Sproutling generate commercially successful digital and smart-technology products.