Mattel, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. Mattel designs, manufactures, markets, and sells toys globally through North America, International, and American Girl segments. Results are seasonal and first-quarter performance is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $869.4 million | $922.7 million | Down 6%; down 2% in constant currency |
| Gross profit | $388.7 million | $450.4 million | Down 14% |
| Gross margin | 44.7% | 48.8% | Down 410 basis points |
| Operating loss | $49.1 million | $54.5 million | Improved 10% |
| Adjusted operating loss | $36.0 million | $14.6 million | Worsened |
| Net loss | $73.0 million | $58.2 million | Worsened 25% |
| Diluted loss per share | $0.21 | $0.17 | Worsened |
| Operating cash flow | $(89.3) million | $(53.1) million | Higher cash use |
- Advertising and promotion expense declined 15% to $86.9 million, while other selling and administrative expense declined 13% to $350.9 million.
- Cost of sales increased 2% to $480.7 million despite the sales decline, primarily reflecting unfavorable foreign exchange, product mix, and higher product-related costs.
- Cash and equivalents were $599.7 million at March 31, 2016, versus $892.8 million at December 31, 2015 and $682.9 million at March 31, 2015. Approximately $469 million was held by foreign subsidiaries.
- Total debt was approximately $2.10 billion, including $300 million of current maturities. Debt-to-total capital increased to 45.7% from 43.9% a year earlier.
- Mattel had $1.60 billion available under its committed revolving credit facility and was in compliance with its covenants. The credit agreement debt-to-Consolidated EBITDA ratio was 2.46 to 1 versus a 3.50 to 1 maximum; interest coverage was 9.79 to 1 versus a 3.50 to 1 minimum.
- Cash used in investing activities was $54.7 million, including $45.3 million of capital expenditures and $32.6 million for acquisitions. Cash used in financing activities was $134.4 million, including $129.2 million of dividends.
Material changes versus the prior comparable period
- Gross sales declined 6% as reported and 1% in constant currency. The decline primarily reflected lower Other Girls and American Girl sales, including the loss of Disney Princess products.
- Entertainment gross sales increased 30% as reported and 36% in constant currency; Construction and Arts & Crafts increased 62% as reported and 78% in constant currency; Fisher-Price increased 3% as reported and 9% in constant currency.
- North America gross sales were essentially flat as reported and increased 1% in constant currency; segment income rose to $41.1 million from $25.0 million.
- International gross sales declined 11% as reported and 1% in constant currency; segment loss increased to $17.4 million from $4.4 million.
- American Girl gross sales declined 12% as reported and 11% in constant currency; segment income declined to $3.4 million from $5.5 million.
- Currency transaction losses were $38.8 million versus gains of $11.0 million in the prior-year quarter. A change in Venezuela’s remeasurement rate generated an approximately $26 million unrealized foreign-exchange loss.
- Reported operating loss improved because of lower restructuring and related expenses, but adjusted operating loss and adjusted loss per share deteriorated after excluding acquisition, amortization, severance, restructuring, asset-sale, and Venezuela-related items.
- Mattel acquired Sproutling for $9.8 million and substantially all of Fuhu’s assets for $22.8 million. The acquisitions were intended to strengthen digital and smart-technology capabilities; purchase accounting remained subject to finalization.
Guidance, outlook, risks, and unusual items
- Management stated that it was making progress on its turnaround and strategic priorities, including brand building, toy leadership, supply-chain improvements, commercial execution, emerging-market expansion, 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. Q1 gross savings were approximately $46 million, or approximately $40 million net of severance and investments.
- Management’s capital framework targets year-end cash of approximately $800 million to $1.0 billion, a year-end debt-to-capital ratio of about 35%, annual capital expenditures of $180 million to $200 million, strategic acquisitions, and shareholder returns. The filing does not provide specific full-year revenue or earnings guidance.
- Key risks include foreign-exchange volatility, seasonal working-capital requirements, demand and consumer-preference changes, retailer and supplier liquidity, covenant compliance, credit-market access, product mix, inventory levels, and pension funding requirements.
- Mattel estimated that a 1% change in the U.S. dollar Trade-Weighted Index could affect net sales by approximately 0.5% and full-year earnings per share by approximately $0.01 to $0.02, assuming other factors remain constant.
- Mattel disclosed reasonably possible but unaccrued losses of up to approximately $12.5 million plus up to approximately $10 million of prejudgment interest in the MGA trade-secret litigation, subject to potential offsets. A separate Brazilian matter had a reasonably possible loss range up to approximately $14.0 million, with a potential counterclaim offset.
- If Venezuelan conditions deteriorate materially, Mattel could consider ceasing operations there, potentially resulting in a pre-tax charge of up to $71 million.
- Mattel adopted debt issuance-cost presentation and deferred-tax balance-sheet classification standards retrospectively. It was evaluating the effect of new revenue-recognition, inventory, lease, and share-based-payment standards.
- The board declared a second-quarter dividend of $0.38 per share, payable June 10, 2016.
Investor verification items
- Verify whether cost savings offset continuing gross-margin pressure, foreign-exchange effects, and product-mix challenges during subsequent quarters.
- Track recovery or further deterioration in Other Girls, American Girl, and International sales, particularly following the loss of Disney Princess products.
- Assess cash generation, inventory growth, dividend funding, debt maturities, and compliance with credit-facility covenants.
- Review the final purchase accounting and operating contribution from the Fuhu and Sproutling acquisitions.
- Monitor the MGA and Yellowstone litigation outcomes, potential offsets, and whether any previously unaccrued losses become probable or estimable.
- Evaluate Venezuela exposure and any future remeasurement, devaluation, or exit charges.
- Distinguish GAAP results from management’s non-GAAP measures when assessing operating trends.