Mattel, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Mattel designs, manufactures, and markets toys and entertainment products worldwide, including Barbie, Hot Wheels, Fisher-Price, American Girl, UNO, MEGA, and licensed properties. This unaudited filing covers the three months ended March 31, 2022, with comparison to the revised prior-year period ended March 31, 2021. Mattel’s business is seasonal, with a significant portion of annual purchases occurring during the holiday period.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1.041 billion | $874.2 million | Up 19% |
| Gross profit | $482.9 million | $411.8 million | Up 17% |
| Gross margin | 46.4% | 47.1% | Down 70 basis points |
| Operating income | $80.1 million | $33.9 million | Up 136% |
| Operating margin | 7.7% | 3.9% | Up 380 basis points |
| Net income (loss) | $21.5 million | $(112.4) million | Improved |
| Diluted EPS | $0.06 | $(0.32) | Improved |
| Operating cash flow | $(143.8) million | $(35.7) million | Higher use of cash |
Gross billings increased 19% to $1.164 billion. Reported growth was broad-based: Action Figures, Building Sets, Games, and Other increased 41%; Vehicles increased 31%; Infant, Toddler, and Preschool increased 12%; and Dolls increased 4%. Barbie gross billings rose 8%, Hot Wheels rose 31%, and Fisher-Price and Thomas & Friends rose 10%.
North America net sales increased 26% to $602.1 million and segment operating income increased to $171.4 million from $124.9 million. International net sales increased 16% to $403.8 million and segment operating income increased to $46.8 million from $36.3 million. American Girl net sales declined 22% to $35.3 million, and its operating loss widened to $17.2 million from $9.6 million.
Gross margin declined primarily because of input cost inflation, partly offset by favorable foreign exchange, pricing actions, fixed-cost absorption, and cost savings. Advertising and promotion expense declined to 7.1% of sales from 8.5%, while other selling and administrative expense declined to 31.6% of sales from 34.8%.
Cash and equivalents were $536.6 million at March 31, 2022, compared with $731.4 million at December 31, 2021 and $615.2 million at March 31, 2021. Inventory was $969.2 million, up from $777.2 million at year-end 2021 and $626.5 million a year earlier, reflecting seasonal inventory build and input cost inflation.
Total debt was $2.572 billion at March 31, 2022, compared with $2.571 billion at December 31, 2021 and $2.838 billion at March 31, 2021. The company had no borrowings under its $1.40 billion senior secured revolving credit facilities and approximately $10 million of outstanding letters of credit. Mattel was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales and operating income improved substantially, supported by higher demand across North America and International markets.
- Net income turned positive from a prior-year loss. The comparison benefited from the absence of the $83.2 million loss on extinguishment of debt recorded in Q1 2021.
- Interest expense fell to $33.0 million from $130.5 million, reflecting the 2021 debt refinancing and absence of the prior-year debt extinguishment charge.
- Operating cash flow deteriorated to a $143.8 million use, primarily because of greater working-capital usage, including inventory investment.
- Gross margin contracted 70 basis points because of inflationary pressure despite mitigation from pricing, foreign exchange, absorption, and savings initiatives.
- Mattel revised the March 31, 2021 comparative financial statements for immaterial accounting misstatements, including inventory tooling and cash-flow classification items. The revised Q1 2021 net loss improved by $2.8 million.
Outlook, Commentary, Risks, and Unusual Items
Management expects input cost inflation to be more significant in 2022 than in 2021, with anticipated partial offsets from pricing, fixed-cost absorption, and additional cost savings. Mattel expects existing cash, operating cash flow, revolving-credit availability, and capital-market access to be sufficient for the next twelve months based on its current business plan and known conditions.
The Optimizing for Growth program targets $250 million of annual gross cost savings from actions expected to be completed from 2021 through 2023. Including prior Capital Light actions, cumulative targeted annual gross savings are $325 million by 2023. Mattel had recorded approximately $95 million of cumulative program restructuring charges through March 31, 2022 and realized approximately $189 million of cumulative savings before restructuring costs and input-cost inflation.
Mattel paused shipments into Russia because of the Russia-Ukraine war and expects 2022 sales in Russia and Ukraine to decline. Those countries represented less than 3% of 2021 total sales. COVID-19 continues to pose risks to manufacturing, distribution, retail demand, and supply chains. Other principal risks include inflation, commodity, labor and transportation costs, foreign exchange, customer concentration, seasonal inventory requirements, tariffs and trade restrictions, cyberattacks, product liability, competition, licensing, and geopolitical disruption.
Litigation related to the Fisher-Price Rock ’n Play Sleeper remains pending, and the company cannot reasonably estimate a possible loss or range of loss. An $86 million whistleblower-related securities litigation settlement was paid in February 2022 and funded fully by insurers. SEC and U.S. Attorney’s Office inquiries related to that matter remain ongoing, and their eventual scope and outcome cannot be predicted. Mattel also announced plans to consolidate American Girl offices and its distribution center; related land and buildings with a net book value of $9.4 million were held for sale.
Effective April 1, 2022, Mattel began treating Turkey as a highly inflationary economy and designated the U.S. dollar as its subsidiary’s functional currency. Turkey represented less than 2% of Q1 2022 consolidated sales.
Investor Verification Points
- Verify whether cost inflation and supply-chain pressures continue to erode gross margin despite pricing and productivity actions.
- Monitor inventory growth, operating cash flow, and working-capital requirements as the company builds seasonal inventory.
- Assess progress toward the $250 million and cumulative $325 million cost-savings targets, including required restructuring and investment spending.
- Review debt maturities, refinancing needs, interest-rate exposure, and continued compliance with revolving-credit covenants.
- Track American Girl’s declining sales and operating losses relative to performance in North America and International segments.
- Evaluate the financial and reputational exposure from Rock ’n Play Sleeper litigation and unresolved SEC or SDNY inquiries.
- Assess the effects of the Russia-Ukraine war, COVID-19, tariffs, foreign exchange, and Turkey’s hyperinflationary accounting treatment.
- Confirm the impact of the revised prior-period financial statements when comparing historical trends.