Mattel, Inc. 2013 Form 10-K Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys worldwide, including Barbie, Monster High, Hot Wheels, Fisher-Price, Thomas & Friends, and American Girl. The filing covers the fiscal year ended December 31, 2013; the filing is an annual Form 10-K rather than a standalone fourth-quarter filing. Mattel reports North America, International, and American Girl segments.
Operations are highly seasonal, with a substantial portion of sales occurring in the third and fourth quarters. International customers represented 47% of consolidated net sales, and the three largest customers—Wal-Mart, Toys “R” Us, and Target—represented approximately 36% of net sales.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $6.485 billion | $6.421 billion | Up 1% |
| Gross profit | $3.479 billion | $3.409 billion | Up 2% |
| Gross margin | 53.6% | 53.1% | Up 50 bps |
| Operating income | $1.168 billion | $1.021 billion | Up 14% |
| Operating margin | 18.0% | 15.9% | Up 210 bps |
| Net income | $903.9 million | $776.5 million | Up 16% |
| Diluted EPS | $2.58 | $2.22 | Up 16% |
| Cash flow from operations | $698.4 million | $1.276 billion | Down $577.2 million |
| Cash and equivalents | $1.039 billion | $1.336 billion | Down $296.5 million |
| Long-term debt | $1.600 billion | $1.100 billion | Up $500 million |
Fourth-quarter 2013 net sales were $2.113 billion versus $2.256 billion in the fourth quarter of 2012. Fourth-quarter operating income was $479.3 million versus $373.5 million, and net income was $369.2 million versus $306.5 million. The 2012 fourth quarter included a $137.8 million pre-tax litigation charge related to MGA Entertainment.
Advertising and promotion expense increased to $750.2 million, or 11.6% of net sales, from $717.8 million, or 11.2%, in 2012. Interest expense declined to $78.5 million from $88.8 million.
Segment and brand performance
- North America: Gross sales declined 4% to $3.181 billion; segment income declined 11% to $723.8 million. Weakness affected Core Fisher-Price, Barbie, and Wheels, partly offset by Other Girls.
- International: Gross sales increased 5% to $3.278 billion; segment income increased 9% to $622.9 million. Other Girls, particularly Monster High, was the principal growth driver. Currency movements reduced reported growth by approximately one percentage point.
- American Girl: Gross sales increased 10% to $658.8 million; segment income increased 13% to $138.0 million, supported by the Saige Girl of the Year and My American Girl products.
- Worldwide brands: Other Girls increased 25%, while Barbie declined 6%, Wheels declined 8%, Core Fisher-Price declined 9%, and American Girl Brands increased 11%.
Material changes versus the prior comparable period
- Management stated that 2013 did not meet its growth expectations, primarily because of weakness in the U.S. market and product and marketing execution that did not sufficiently resonate with consumers.
- Gross margin improved through Operational Excellence 3.0 savings, favorable product mix, and price increases, partly offset by higher input costs and unfavorable foreign exchange.
- Operating income benefited from the absence of the $137.8 million MGA litigation charge recorded in 2012, lower incentive compensation, and improved gross margin. The 2013 results included an approximately $14 million Polly Pocket trade-name impairment charge.
- Operating cash flow fell substantially because of higher working-capital usage, including the approximately $138 million payment of the MGA-related litigation judgment, higher inventories, and lower accounts-payable and accrued-liability balances.
- Mattel issued $500 million of 2013 senior notes and repaid $400 million of maturing debt. The year-end debt-to-capital ratio remained 33.0%.
- Share repurchases increased to 11.0 million shares costing $469.2 million, compared with 2.3 million shares costing $77.9 million in 2012. Dividends increased to $1.44 per share from $1.24.
Liquidity, debt, and commitments
Mattel reported $1.039 billion of cash and equivalents at year-end, of which approximately $895 million was held by foreign subsidiaries. It had no borrowings under its $1.60 billion domestic unsecured revolving credit facility and had approximately $349 million of foreign credit lines. Management stated that available cash, credit facilities, and foreign credit lines should be adequate for 2014 seasonal financing needs.
Long-term debt consisted of $500 million of 2010 senior notes, $600 million of 2011 senior notes, and $500 million of 2013 senior notes. The credit agreement required a maximum debt-to-EBITDA ratio of 3.00 to 1 and a minimum interest-coverage ratio of 3.50 to 1; Mattel reported ratios of 1.16 to 1 and 17.69 to 1, respectively, at December 31, 2013.
Total contractual commitments were approximately $4.224 billion, including $1.600 billion of principal debt, $1.055 billion of interest on long-term debt, $544.5 million of operating leases, $208.8 million of licensing minimums, $430.4 million for benefit plans, and $383.3 million of purchase obligations.
Guidance, outlook, commentary, and risks
Management did not provide a quantified 2014 earnings or revenue forecast in the supplied filing text. Its 2014 priorities were product and brand innovation, improved advertising and promotional execution, expansion of Ever After High and the active-play category, investment in emerging markets, and improved e-commerce and retail execution. Operational Excellence 3.0 targeted cumulative gross cost savings of approximately $175 million by the end of 2014; 2013 gross savings were approximately $60 million, or approximately $39 million net of severance and investments.
- Key risks include changing consumer preferences, intense competition, short product life cycles, dependence on entertainment licenses, and execution risk associated with new products.
- Seasonality, retailer inventory management, excess inventory, product shortages, transportation disruptions, and holiday-season demand volatility may materially affect results.
- Customer concentration and unsecured credit exposure create risks if major retailers reduce purchases, experience liquidity problems, or expand private-label offerings.
- International operations expose Mattel to foreign-exchange, inflation, political, regulatory, and capital-transfer risks. The filing estimates that a 1% change in the U.S. dollar Trade-Weighted Index could affect annual EPS by approximately $0.01 to $0.02.
- Mattel disclosed a potential pre-tax charge of up to $95 million if it were to cease Venezuelan operations. Venezuela represented less than 0.1% of 2013 consolidated net sales.
- MGA filed a new trade-secrets claim in January 2014 seeking damages exceeding $1 billion. Mattel stated that it believes the claim is legally barred and did not accrue a liability because a loss was not considered probable.
- A Brazilian commercial dispute could result in a reasonably possible loss ranging from zero to approximately $20 million, although Mattel did not consider a loss probable and recorded no liability.
Most important facts for an investor to verify
- Whether U.S. weakness in Barbie, Fisher-Price, and Wheels has stabilized and whether new franchises can offset declines in mature brands.
- Whether international and American Girl growth can continue despite currency volatility and macroeconomic conditions.
- Whether Operational Excellence 3.0 savings are recurring and sufficient to offset advertising, labor, commodity, freight, and royalty costs.
- Cash conversion and working-capital trends, particularly inventories, receivables, and accrued liabilities following the 2013 decline in operating cash flow.
- Future debt maturities, refinancing conditions, covenant compliance, and the effect of dividends and repurchases on liquidity.
- Potential outcomes and timing of the MGA and Brazilian litigation matters, as well as product recall, licensing, tax, and impairment exposures.
- The filing states that management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective as of December 31, 2013.