Mattel, Inc. 2010 Q3 SEC Filing Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys worldwide, including Mattel Girls & Boys Brands, Fisher-Price Brands, and American Girl Brands. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, with comparisons to the corresponding 2009 periods. Results are seasonal and interim results may not represent full-year performance.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $1.833 billion | $1.792 billion | $3.732 billion | $3.476 billion |
| Gross profit | $937.5 million | $918.6 million | $1.859 billion | $1.671 billion |
| Gross margin | 51.1% | 51.3% | 49.8% | 48.1% |
| Operating income | $358.6 million | $336.5 million | $473.3 million | $313.8 million |
| Operating margin | 19.6% | 18.8% | 12.7% | 9.0% |
| Net income | $283.3 million | $229.8 million | $359.7 million | $200.3 million |
| Diluted EPS | $0.77 | $0.63 | $0.97 | $0.55 |
| Operating cash flow | Not separately reported | Not separately reported | $(427.6) million | $(318.8) million |
Q3 net margin was approximately 15.4%, compared with approximately 12.8% in the prior-year quarter. Nine-month net margin was approximately 9.6%, compared with approximately 5.8% in 2009.
- Cash and equivalents were $960.5 million at September 30, 2010, compared with $323.7 million at September 30, 2009 and $1.117 billion at December 31, 2009.
- Total long-term debt, including the current portion, was $1.210 billion, compared with $760.0 million at September 30, 2009 and $750.0 million at December 31, 2009. Short-term borrowings were $5.5 million.
- Mattel issued $500 million of senior notes in September 2010: $250 million of 4.35% notes due 2020 and $250 million of 6.20% notes due 2040.
- Available capacity under the domestic unsecured committed revolving credit facility was $1.08 billion. Mattel was in compliance with its covenants; debt-to-EBITDA was 1.1x versus a 3.0x maximum, and interest coverage was 17.8x versus a 3.5x minimum.
- Accounts receivable were $1.550 billion and inventories were $741.4 million at September 30, 2010, up from $1.450 billion and $606.0 million, respectively, a year earlier.
- Capital expenditures for tools, dies, molds, and other property, plant, and equipment totaled $95.1 million through nine months.
Material Changes Versus the Prior Comparable Period
- Q3 net sales increased 2%; nine-month net sales increased 7%. Currency movements reduced Q3 reported sales growth by approximately 3 percentage points and nine-month growth by approximately 1 percentage point.
- Girls & Boys Brands were the principal growth driver, with worldwide gross sales up 8% in Q3 and 13% for nine months. Entertainment products, including Toy Story 3 and WWE Wrestling, were particularly strong.
- Worldwide Fisher-Price gross sales declined 5% in Q3 and were flat for nine months. Core Fisher-Price sales weakened because of product-line retooling toward lower price points and delayed fall marketing programs.
- Q3 gross margin declined 20 basis points because of higher royalty expense and product costs. Nine-month gross margin improved 170 basis points, primarily from lower product costs, pricing, and cost savings.
- Operating income increased 7% in Q3 and 51% for nine months. Lower selling and administrative expenses, cost savings, higher sales, and lower interest expense were partly offset by higher advertising, product recall costs, and impairment charges.
- Interest expense declined to $13.8 million in Q3 and $40.9 million for nine months, compared with $19.3 million and $52.7 million, respectively, in 2009.
- Operating cash flow became more negative because of seasonal working-capital needs, higher receivables and inventories, and the absence of domestic receivables sales at quarter-end.
- Mattel repurchased $152.6 million of shares during the first nine months and repurchased approximately 1.93 million shares during Q3 under its announced program.
Guidance, Outlook, Commentary, and Risks
- Management expects the full-year 2010 effective tax rate to be approximately 23% to 24%, excluding discrete tax items.
- The Global Cost Leadership program generated approximately $14 million of gross year-over-year savings in Q3 and approximately $43 million for the first nine months, net of severance charges of approximately $2 million and $13 million, respectively. Cumulative annual net savings reached approximately $194 million, and management expected to slightly exceed its 2010 goal of $180 million to $200 million.
- Q3 net income benefited from $16.8 million of discrete tax benefits. Nine-month net discrete tax benefits were $21.1 million; these benefits are not necessarily indicative of recurring earnings.
- Q3 results included $7.6 million of Fisher-Price recall charges and approximately $7.9 million of long-lived asset impairment charges related to House of Barbie. The company also reduced prior product-liability settlement estimates by $8.7 million for the first nine months and recognized $4.8 million of insurance recoveries.
- Mattel completed its annual third-quarter goodwill impairment testing and found no impairment.
- Foreign exchange remains a material risk. Mattel held approximately $1.17 billion of foreign-currency forward contracts at September 30, 2010 and estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect full-year EPS by approximately $0.01 to $0.02, assuming other factors remain constant.
- Venezuela was treated as a highly inflationary economy beginning January 1, 2010. Its sales represented less than 1% of consolidated sales, but exchange controls, the SITME system, and local regulatory conditions remain risks.
- Material contingencies include ongoing MGA/Bratz litigation, product-recall litigation and appeals, Canadian and Brazilian product-related proceedings, and proposed Canadian class actions involving licensed drop-side cribs. Management states that possible liabilities for certain claims cannot reasonably be determined and that an unfavorable resolution could materially affect financial condition and results.
- Mattel states that disclosure controls were effective as of September 30, 2010 and that there were no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most Important Facts for Investors to Verify
- Whether seasonal working-capital investment, especially receivables and inventory, converts into positive operating cash flow during the fourth quarter.
- The sustainability of earnings excluding the $16.8 million Q3 tax benefit, other discrete tax items, recall recoveries, settlement adjustments, and impairment charges.
- Whether Fisher-Price sales and margins recover after the product-line retooling and delayed marketing programs.
- Progress and ultimate exposure in the MGA/Bratz litigation and remaining product-recall and crib-related claims.
- Execution of the Global Cost Leadership program and whether targeted annual savings are maintained without impairing product development or brand investment.
- The effect of currency movements, Venezuelan exchange controls, royalty costs, product costs, and licensed-property mix on future margins.
- Debt maturities, refinancing requirements, covenant compliance, and the effect of the increased debt balance on the company’s approximately 25% year-end debt-to-capital objective.