Mattel, Inc. 2010 Form 10-K Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys worldwide, including Mattel Girls & Boys Brands, Fisher-Price, and American Girl. The filing covers the fiscal year ended December 31, 2010. The business is highly seasonal, with a substantial portion of sales occurring in the third and fourth quarters. International operations represented approximately 46% of worldwide gross sales.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $5.856 billion | $5.431 billion | 8% increase |
| Gross profit | $2.955 billion | $2.715 billion | 9% increase |
| Gross margin | 50.5% | 50.0% | Up 50 basis points |
| Operating income | $901.9 million | $731.2 million | 23% increase |
| Operating margin | 15.4% | 13.5% | Up 190 basis points |
| Net income | $684.9 million | $528.7 million | 30% increase |
| Diluted EPS | $1.86 | $1.45 | 28% increase |
| Cash flow from operations | $528.0 million | $945.0 million | 44% decrease |
| Capital expenditures | $136.7 million | Not clearly provided in the filing text | Not determinable |
Fourth-quarter 2010 net sales were $2.125 billion, operating income was $428.6 million, and net income was $325.2 million, or $0.89 diluted EPS, compared with fourth-quarter 2009 net sales of $1.955 billion, operating income of $417.4 million, and net income of $328.4 million, or $0.89 diluted EPS.
- Cash and equivalents were $1.281 billion at December 31, 2010, up from $1.117 billion.
- Accounts receivable increased to $1.146 billion from $749.3 million, primarily because Mattel did not factor $300 million of domestic receivables in 2010.
- Inventories increased to $463.8 million from $355.7 million as Mattel rebuilt inventory to support demand and customer service.
- Total debt was $1.200 billion, comprising $250.0 million of current debt and $950.0 million of noncurrent debt, compared with $750.0 million at year-end 2009.
- Debt-to-capital increased to 31.3% from 22.9%, above management’s stated target of approximately 25%.
- Mattel issued $500 million of senior notes in September 2010: $250 million due 2020 at 4.35% and $250 million due 2040 at 6.20%.
- The company had no short-term borrowings at year-end and reported $1.08 billion of availability under its domestic committed revolving credit facility.
- Dividends increased to $0.83 per share from $0.75, and Mattel repurchased 18.6 million shares for $446.7 million.
Material changes versus the prior comparable period
- Growth was led by Mattel Girls & Boys Brands, whose worldwide gross sales increased 11%, including strong performance from Other Girls Brands and Entertainment products.
- Fisher-Price worldwide gross sales increased 2%; Fisher-Price Friends rose 24%, while Core Fisher-Price declined 3%.
- American Girl gross sales increased 5% to $486.6 million.
- International gross sales increased 6% to $2.921 billion, but unfavorable currency movements reduced reported growth by approximately four percentage points.
- Operating margin reached management’s long-term target range of 15% to 20%, supported by pricing and Global Cost Leadership savings.
- The Global Cost Leadership program produced approximately $61 million of incremental gross savings before $13 million of 2010 severance costs, bringing cumulative gross savings to approximately $225 million.
- Operating cash flow declined primarily because Mattel discontinued the factoring of $300 million of domestic receivables and increased receivables and inventory.
- Royalty expense increased 30% to $245.9 million, reflecting higher sales of licensed products.
- Advertising and promotion expense increased in dollars but declined to 11.1% of sales from 11.2%.
Guidance, outlook, commentary, risks, and unusual items
Management’s 2011-and-beyond priorities are continued core-brand growth, expansion of entertainment partnerships and international operations, maintenance of gross margins of at least 50%, additional cost reductions, and significant cash-flow generation. Mattel targeted approximately $150 million of additional cumulative cost savings by the end of 2012, including approximately $75 million of legal-cost savings and $75 million from the next phase of the Global Cost Leadership program. The filing does not provide specific 2011 revenue or EPS guidance.
- Key risks include changing consumer preferences, short product life cycles, competition, dependence on entertainment licenses, retailer concentration, seasonality, excess or insufficient inventory, commodity and freight costs, foreign exchange, global economic conditions, and supply-chain disruptions.
- Wal-Mart, Toys “R” Us, and Target accounted for approximately 41% of 2010 net sales; the ten largest customers accounted for approximately 51%.
- Mattel’s 2010 tax rate was 19.1%, including net tax benefits of $16.8 million. The filing also reports $252.6 million of unrecognized tax benefits and ongoing tax examinations.
- Fisher-Price product recalls in September 2010 reduced operating income by $7.6 million. The reserve for earlier 2007 recalls and the 2008 product withdrawal was fully utilized by year-end.
- The Bratz litigation with MGA remained active, with a retrial beginning in early 2011 after the Ninth Circuit vacated significant portions of the prior verdict. Management could not reasonably estimate potential liabilities for several other pending matters.
- Venezuela was treated as highly inflationary beginning January 1, 2010. Venezuelan sales fell to approximately 1% of consolidated sales from approximately 3% in 2009.
- Goodwill and nonamortizable intangible assets were tested and were not impaired at year-end.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2010.
Important facts for investors to verify
- Whether the increased receivables and inventory levels convert into cash without elevated bad-debt or obsolescence charges.
- Progress toward the additional $150 million cost-savings target and the sustainability of the 50% gross-margin objective.
- Debt maturities, particularly $250 million due in 2011 and $400 million due in 2013, and the effect of the higher debt-to-capital ratio.
- Customer concentration and retailer purchasing behavior during the peak holiday season.
- Developments in the MGA/Bratz litigation and other product-liability, recall, and intellectual-property matters.
- The recurring versus nonrecurring nature of the $16.8 million tax benefit and the potential impact of unresolved tax positions.
- Foreign-exchange exposure, especially in Europe, Latin America, and Venezuela.