Business Context and Reporting Period
Mattel, Inc. is a global toy company with owned and licensed brands including Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, American Girl, Jurassic World, Masters of the Universe, MEGA, and UNO. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. The business is seasonal, with a large portion of annual sales occurring during the holiday season.
Financial Highlights
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1.762 billion | $1.636 billion | $3.663 billion | $2.963 billion |
| Gross profit | $842.5 million | $827.7 million | $1.742 billion | $1.407 billion |
| Gross margin | 47.8% | 50.6% | 47.6% | 47.5% |
| Operating income | $389.1 million | $379.5 million | $472.1 million | $186.7 million |
| Operating margin | 22.1% | 23.2% | 12.9% | 6.3% |
| Net income (loss) | $795.1 million | $311.3 million | $677.2 million | $(5.5) million |
| Diluted EPS | $2.24 | $0.89 | $1.91 | $(0.02) |
| Cash flow from operations | Not separately provided | Not separately provided | $(255.9) million | $(442.0) million |
- Q3 net sales increased 8%; nine-month net sales increased 24%. Gross billings increased 8% in Q3 and 24% for the first nine months.
- Q3 gross margin declined 280 basis points because of raw-material and freight-cost inflation, partly offset by pricing actions, fixed-cost absorption, and cost savings. Nine-month gross margin improved modestly by 10 basis points.
- Operating income increased 3% in Q3 and 153% for the first nine months, supported by higher sales, cost savings, and lower relative selling and administrative expenses.
- Net income benefited from a $456.8 million Q3 tax benefit and a $415.8 million nine-month tax benefit, primarily from releasing valuation allowances on U.S. and foreign deferred tax assets. The tax benefit was not representative of the underlying operating tax rate.
- Q3 gross billings growth was led by Action Figures, Building Sets, Games, and Other, up 26%; Vehicles, up 6%; and Dolls, up 4%. Infant, Toddler, and Preschool billings were approximately flat.
- For the first nine months, North America net sales rose 26%, International rose 21%, and American Girl rose 18%. Segment income increased 45% in North America and 53% internationally; American Girl’s loss narrowed to $25.8 million from $40.3 million.
Balance Sheet, Debt, and Liquidity
- Cash and equivalents were $148.5 million at September 30, 2021, down from $762.2 million at December 31, 2020 and $452.2 million at September 30, 2020. Approximately $141.2 million was held by foreign subsidiaries.
- Accounts receivable were $1.438 billion and inventories were $854.5 million, reflecting seasonal working-capital requirements, higher sales, cost inflation, and increased inventory production.
- Total debt, including short-term borrowings, was $2.698 billion, compared with $2.856 billion at December 31, 2020 and $3.253 billion at September 30, 2020. Stockholders’ equity was $1.314 billion.
- 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 the remaining 2025 notes. Debt extinguishment losses totaled $101.7 million for the first nine months, including $18.5 million in Q3.
- The senior secured revolving credit facilities have aggregate commitments of up to $1.40 billion and mature March 19, 2024. Mattel had $128 million drawn and approximately $10 million of letters of credit outstanding at September 30, 2021. The company was in compliance with its covenants.
- Management expects existing cash, operating cash flows, revolver availability, and capital-market access to be sufficient for the next twelve months, although seasonal working-capital needs and market conditions remain important liquidity considerations.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated across all reportable segments and product categories, partly reflecting strong consumer demand and the comparison with COVID-19-affected first-half 2020 results.
- Q3 profitability was pressured by input-cost inflation: gross margin fell to 47.8% from 50.6%, while operating income still increased because of sales growth and expense controls.
- Interest expense increased to $220.7 million for the first nine months from $149.0 million, primarily because of debt-extinguishment losses associated with refinancing and redeeming the 2025 notes.
- Operating cash use improved to $255.9 million from $442.0 million, but remained negative because of increases in receivables and inventories.
- Mattel revised previously issued financial statements for immaterial misstatements involving inventory tooling, capital-expenditure cash-flow classification, and other balance-sheet and out-of-period items. The filing states that the misstatements were not material individually or in aggregate.
Guidance, Outlook, Risks, and Unusual Items
- Mattel did not provide a clear full-year revenue or earnings guidance figure in the filing.
- The Optimizing for Growth program targets $325 million of cumulative annual gross cost savings by 2023, including prior Capital Light actions. Expected total cash expenditures are approximately $140 million to $165 million, with expected non-cash charges of $40 million to $45 million. Cumulative restructuring charges recorded through September 30, 2021 were approximately $79 million.
- Management expects input-cost inflation to continue adversely affecting gross margin in Q4 2021. Risks include raw-material, labor, freight, and transportation costs; supply-chain, manufacturing, and port disruptions; COVID-19 developments; foreign-exchange volatility; retailer concentration and inventory practices; and seasonal demand concentration.
- Pending Fisher-Price Rock ’n Play Sleeper class actions, personal-injury claims, and derivative litigation remain unresolved. Mattel states that a reasonable loss estimate cannot currently be made.
- A securities class-action settlement related to a prior whistleblower investigation was reached in principle after September 30, 2021. Mattel recorded an $86 million settlement liability and corresponding insurer receivable as of September 30, with no net income or cash-flow impact; court approval was pending.
- Mattel is responding to SEC subpoenas and requests from the U.S. Attorney’s Office for the Southern District of New York related to the whistleblower matter. The eventual scope and outcome cannot be predicted.
- Goodwill was not impaired based on the third-quarter 2021 qualitative assessment. Disclosure controls and procedures were deemed effective as of September 30, 2021.
Investor Verification Checklist
- Verify the sustainability of sales momentum and whether Q4 holiday demand offsets ongoing supply-chain and cost inflation pressures.
- Separate recurring operating performance from the $445.8 million nine-month discrete tax benefit and other unusual items, including debt-extinguishment losses and the Mexico plant-sale gain.
- Monitor cash conversion, inventory levels, receivables, seasonal borrowing, and revolver availability through the holiday season.
- Assess progress toward the $325 million 2023 cost-savings target against restructuring charges and required cash investments.
- Track developments in the Rock ’n Play Sleeper litigation, the $86 million insurer-funded securities settlement, and related SEC and SDNY inquiries.
- Review the revised prior-period financial statements and confirm the effects of the immaterial misstatement corrections on comparability.