Mattel, Inc. 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 quarterly report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $988.2 million | $1,062.3 million | $1,910.9 million | $2,008.4 million |
| Gross profit | $472.9 million | $492.6 million | $923.3 million | $974.1 million |
| Gross margin | 47.9% | 46.4% | 48.3% | 48.5% |
| Operating income (loss) | $0.6 million | $1.0 million | $(53.9) million | $7.2 million |
| Net income (loss) | $(11.4) million | $28.3 million | $(69.5) million | $17.1 million |
| Diluted EPS | $(0.03) | $0.08 | $(0.21) | $0.05 |
| Cash flow from operations | Not separately provided | Not separately provided | $(240.8) million | $(79.2) million |
- Q2 gross sales declined 6% as reported but increased 1% in constant currency; net sales declined 7% as reported and were flat in constant currency.
- First-half gross sales declined 4% as reported but increased 3% in constant currency; net sales declined 5% as reported and increased 2% in constant currency.
- Q2 advertising and promotion expense increased 5% to $104.7 million, or 10.6% of sales. First-half expense increased 9% to $207.2 million, or 10.8% of sales.
- Q2 other selling and administrative expense declined 6% to $367.6 million, while first-half expense declined 1% to $770.0 million. Severance expense was $15.6 million in Q2 and $43.6 million in the first half.
- Cash and equivalents were $300.5 million at June 30, 2015, down from $971.7 million at December 31, 2014. Approximately $261 million was held by foreign subsidiaries.
- Inventory increased to $853.8 million from $561.8 million at year-end 2014, while accounts receivable declined to $803.1 million from $1.09 billion, reflecting seasonal working-capital movements.
- Long-term debt remained $2.10 billion. The estimated fair value of long-term debt was $2.14 billion. Debt-to-total-capital increased to 45.0% from 41.6% at December 31, 2014.
- Dividends declared were $0.38 per share in Q2 and $0.76 per share for the first half.
Material changes versus the prior comparable period
- Profitability deteriorated: Q2 moved from $28.3 million of net income to an $11.4 million net loss; the first-half result moved from $17.1 million of net income to a $69.5 million net loss.
- First-half operating results were pressured by lower gross profit, increased advertising investment, higher royalty expense, unfavorable product mix, and higher interest expense.
- Mattel Girls & Boys gross sales declined 13% in Q2 and 10% in the first half as reported. Barbie, Other Girls, and Entertainment weakened, while Wheels grew 15% in Q2 and 8% in the first half as reported.
- Fisher-Price gross sales increased 2% in Q2 and were flat in the first half as reported. American Girl was broadly stable, but segment income declined to a loss of $7.1 million in Q2 and $1.5 million in the first half.
- International gross sales declined 10% in Q2 and 12% in the first half as reported, although constant-currency sales increased 5% and 4%, respectively. Currency translation, particularly the weaker euro, Brazilian real, and Mexican peso, materially reduced reported results.
- Accumulated other comprehensive loss increased to $710.9 million from $622.1 million at December 31, 2014, primarily due to an $89.3 million currency translation loss.
- Operating cash use increased to $240.8 million from $79.2 million, while investing cash use declined because the prior-year period included the MEGA Brands acquisition.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that Q2 results were generally in line with expectations and described the business as being in the early stages of a turnaround focused on brand building, innovation, supply chain improvement, inventory productivity, and cost reduction.
- The Funding Our Future program targets cumulative gross cost savings of approximately $250 million to $300 million by the end of 2016. Gross savings were approximately $29 million in Q2 and $48 million in the first half, but net savings after severance and investments were approximately $17 million and $9 million, respectively.
- Mattel amended its $1.60 billion revolving credit facility on June 8, 2015, extending maturity to June 9, 2020 and increasing the maximum permitted debt-to-Consolidated EBITDA ratio to 3.50-to-1. The company was compliant at June 30, with a reported debt-to-EBITDA ratio of 2.27-to-1 and interest coverage of 11.01-to-1. An accordion feature may increase commitments to $1.85 billion.
- Management expects cash on hand, the credit facility, and foreign credit lines to fund 2015 seasonal requirements. The company’s capital framework targets year-end cash of approximately $800 million to $1 billion and a year-end debt-to-capital ratio of about 35%.
- Foreign currency remains a significant risk. Mattel held approximately $1.21 billion of foreign-currency forward contracts and a $30 million cross-currency swap at June 30, 2015.
- Venezuelan operations represented less than 0.1% of first-half consolidated sales but had approximately $22 million of net monetary assets denominated in bolivars. Use of alternative exchange rates could have produced estimated pretax charges of approximately $11 million or $21 million; cessation of operations could result in a charge of up to $95 million.
- Mattel disclosed a reasonably possible loss range of $0 to approximately $12.5 million, plus up to approximately $10 million of prejudgment interest, for a renewed MGA trade-secret case; no liability was accrued because loss was not considered probable.
- For the Yellowstone Brazil litigation, Mattel disclosed a reasonably possible loss range of $0 to approximately $15 million, subject to an offset of approximately $7 million. No liability was accrued.
- The company expects approximately $28 million of additional 2015 pension and postretirement contributions, including approximately $22 million of expected lump-sum payments.
- On July 16, 2015, the board declared a third-quarter dividend of $0.38 per share, payable September 18, 2015.
Most important facts for investors to verify
- Whether the turnaround restores growth in Barbie, Other Girls, and Entertainment while sustaining momentum in Wheels and Fisher-Price.
- Whether Funding Our Future delivers the targeted $250 million to $300 million of cumulative gross savings without impairing product development, brand investment, or sales.
- Whether seasonal inventory levels convert into cash and whether operating cash flow improves before the holiday selling season.
- Liquidity and covenant headroom, particularly in light of $2.10 billion of long-term debt, reduced cash, and the company’s seasonal financing needs.
- Exposure to foreign exchange volatility, Venezuela-related charges, and the impact of currency movements on reported sales and earnings.
- Potential outcomes and required accruals for the MGA and Yellowstone proceedings, including possible offsets and interest.
- The sustainability of the dividend while the company is generating negative first-half operating cash flow and reporting a net loss.