Mattel, Inc. 10-Q Summary
Business context and reporting period
Mattel is a global toy company with reportable segments consisting of North America, International, and American Girl. This unaudited Form 10-Q covers the three and six months ended June 30, 2021. Results are seasonal, with a significant portion of annual toy purchases occurring during the holiday season; interim results are therefore not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1.026 billion | $732.1 million | $1.901 billion | $1.326 billion |
| Gross profit | $488.0 million | $318.9 million | $899.8 million | $579.1 million |
| Gross margin | 47.5% | 43.6% | 47.3% | 43.7% |
| Operating income (loss) | $49.1 million | $(48.1) million | $83.0 million | $(192.9) million |
| Net loss | $(5.5) million | $(111.1) million | $(117.9) million | $(316.8) million |
| Diluted loss per share | $(0.02) | $(0.32) | $(0.34) | $(0.91) |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | $(241.4) million | $(469.3) million |
Q2 gross billings increased 41% to $1.149 billion, including a four-percentage-point favorable currency impact. First-half gross billings increased 43% to $2.128 billion, including a three-percentage-point currency benefit. Barbie, Hot Wheels, and Fisher-Price/Thomas & Friends were key contributors.
Q2 operating margin improved to 4.8% from negative 6.6%; first-half operating margin improved to 4.4% from negative 14.5%. Advertising and promotion expense was $88.3 million in Q2 and $162.4 million for the first half. Other selling and administrative expense was $350.5 million in Q2 and $654.4 million for the first half.
At June 30, 2021, cash and equivalents were $384.7 million, including approximately $215.3 million held by foreign subsidiaries. Accounts receivable were $784.1 million and inventories were $818.0 million. Total debt was approximately $2.84 billion, including $2.84 billion of long-term debt and approximately $0.2 million of short-term borrowings. Stockholders’ equity was $527.7 million.
Material changes versus the prior comparable period
- Net sales rose 40% in Q2 and 43% for the first half, reflecting strong consumer demand and recovery from COVID-19-affected 2020 comparisons.
- All reportable segments grew in Q2: North America net sales increased 30%, International increased 57%, and American Girl increased 44%. North America and International segment income improved substantially; American Girl remained loss-making but narrowed its loss.
- Gross margin expanded 390 basis points in Q2 and 360 basis points for the first half, primarily from fixed-cost absorption and cost savings, partly offset by raw-material and inbound-freight inflation.
- Interest expense increased for the first half to $168.6 million from $98.6 million, primarily because of an $83.2 million loss on extinguishment of debt. Q2 interest expense declined to $38.1 million from $49.6 million following refinancing.
- Mattel issued $600 million of 3.375% senior notes due 2026 and $600 million of 3.750% senior notes due 2029. Proceeds and cash on hand were used to redeem $1.225 billion of higher-cost 2025 notes. The remaining $275 million of those notes was fully redeemed on July 1, 2021 using cash and revolving-facility borrowings.
- Operating cash usage improved but remained negative. Seasonal inventory increased to $818.0 million from $528.5 million at December 31, 2020 and $727.9 million at June 30, 2020.
- Mattel identified immaterial prior-period misstatements involving inventory tooling, capital-expenditure cash-flow classification, and other items. Prior-period financial statements were revised, including a $25.1 million understatement of opening retained earnings as of January 1, 2018.
Guidance, outlook, commentary, and risks
Management expects existing cash, operating cash flows, availability under the $1.40 billion senior secured revolving facilities, and capital-market access to be sufficient for the next twelve months. Mattel was in compliance with its debt covenants at June 30, 2021 and had no borrowings under the revolving facilities at that date, although approximately $10 million of letters of credit was outstanding.
The Optimizing for Growth program targets $250 million of annual incremental gross cost savings from actions expected to be completed beginning in 2021 through 2023. Including prior Capital Light actions, cumulative targeted annual gross savings are $325 million by 2023. Cumulative cash expenditures are expected to be approximately $140 million to $165 million, with total expected non-cash charges of $40 million to $45 million. Mattel had recorded approximately $69 million of cumulative program charges through June 30, 2021.
Management expects input-cost inflation to have a greater adverse impact on gross margin in the second half of 2021 than in the first half and prior year, partially offset by cost savings and pricing actions. COVID-19-related manufacturing, port, distribution, and customer disruptions remain potential material risks, particularly during the seasonally important second half. Other material risks include supply-chain interruptions, commodity, labor and transportation costs, foreign-exchange movements, customer concentration, consumer demand, competition, product liability, litigation, cyberattacks, and access to financing.
Pending contingencies include Fisher-Price Rock ’n Play Sleeper litigation and securities-related litigation and governmental inquiries associated with a prior whistleblower investigation. Mattel states that the possible loss or range of loss for these matters cannot reasonably be estimated. The Yellowstone matter has a reserve that management assessed as immaterial.
Mattel recognized a $15.8 million pretax gain from the sale of a Mexico manufacturing plant during the first quarter. It also recorded discrete tax expenses and continues to maintain valuation allowances on certain deferred tax assets. A release of those allowances could reduce future tax expense, but the timing and amount are uncertain.
Important facts for investors to verify
- Whether strong first-half demand and brand momentum continue through the holiday-driven second half.
- The actual effect of inflation, freight costs, supply-chain disruptions, and pricing actions on gross margin.
- Progress toward the $325 million cumulative annual cost-savings target and the related restructuring cash requirements.
- Post-June 30 debt activity, including the July 1, 2021 redemption of the remaining 2025 notes and any resulting revolving-facility borrowings.
- Working-capital conversion, particularly elevated inventory, negative operating cash flow, and seasonal liquidity needs.
- Developments and potential financial exposure from Sleeper litigation, whistleblower-related shareholder actions, and SEC or SDNY requests.
- The impact of the disclosed financial-statement revisions and any further revisions in subsequent filings.