UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
-----------
MATTEL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
------------------------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
-----------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report) None
--------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of registrant's common stock, $1.00 par value,
(including 1,152,822 common shares issuable upon exchange of outstanding
exchangeable shares of Softkey Software Products Inc.) as of October 19, 2001:
431,629,602 shares
PART I -- FINANCIAL INFORMATION
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
Sept. 30, Sept. 30,
2001 2000 Dec. 31,
(In thousands) (Unaudited) (Unaudited) 2000
-----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and short-term investments $ 65,737 $ 95,815 $ 232,389
Accounts receivable, net 1,591,405 1,456,314 839,567
Inventories 739,724 655,706 489,742
Prepaid expenses and other current assets 181,446 250,406 189,799
------------------------------------------------------------------------------------------------------
Total current assets 2,578,312 2,458,241 1,751,497
------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 33,404 32,993 32,793
Buildings 262,619 257,670 257,430
Machinery and equipment 604,535 560,875 564,244
Capitalized leases 23,271 23,271 23,271
Leasehold improvements 75,615 71,831 74,988
------------------------------------------------------------------------------------------------------
999,444 946,640 952,726
Less: accumulated depreciation 538,242 456,651 472,986
------------------------------------------------------------------------------------------------------
461,202 489,989 479,740
Tools, dies and molds, net 152,625 172,202 168,092
------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 613,827 662,191 647,832
------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Intangible assets, net 1,123,264 1,149,548 1,136,857
Other assets 735,837 548,972 765,671
Net investment in discontinued operations - 24,944 11,540
------------------------------------------------------------------------------------------------------
$5,051,240 $4,843,896 $4,313,397
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
2
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Sept. 30, Sept. 30,
2001 2000 Dec. 31,
(In thousands, except share data) (Unaudited) (Unaudited) 2000
------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings $ 735,136 $ 737,459 $ 226,403
Current portion of long-term debt 244,946 2,582 32,723
Accounts payable 383,882 373,994 338,966
Accrued liabilities 687,552 933,675 703,382
Income taxes payable 196,968 47,792 200,933
------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,248,484 2,095,502 1,502,407
------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Long-term debt 1,021,118 1,273,076 1,242,396
Other 171,395 167,240 165,496
------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,192,513 1,440,316 1,407,892
------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Special voting preferred stock $1.00 par value, $10.00
liquidation preference per share, one share authorized,
issued and outstanding, representing the voting rights
of 1.2 million, 2.2 million and 1.6 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 436.2 million shares, 435.2 million shares,
and 435.6 million shares issued, respectively 436,195 435,232 435,560
Additional paid-in capital 1,648,765 1,711,813 1,706,614
Treasury stock at cost; 6.0 million shares, 10.9 million
shares, and 9.6 million shares, respectively (181,206) (327,670) (288,622)
Retained earnings (accumulated deficit) 16,524 (215,545) (144,417)
Accumulated other comprehensive loss (310,035) (295,752) (306,037)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,610,243 1,308,078 1,403,098
------------------------------------------------------------------------------------------------------------------
$ 5,051,240 $ 4,843,896 $ 4,313,397
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
3
Mattel, Inc. and Subsidiaries
Consolidated Statements of Operations
For the For the
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Unaudited; in thousands, except per share amounts) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------
Net Sales $ 1,612,767 $ 1,583,763 $ 3,198,981 $ 3,094,821
Cost of sales 839,488 917,145 1,719,569 1,749,967
-----------------------------------------------------------------------------------------------------------------------
Gross Profit 773,279 666,618 1,479,412 1,344,854
Advertising and promotion expenses 212,885 225,209 413,149 415,082
Other selling and administrative expenses 230,264 224,695 649,886 697,605
Amortization of intangibles 12,728 13,275 38,265 39,180
Restructuring and other charges - 17,900 13,000 15,900
Interest expense 39,553 42,625 114,065 102,926
Other expense (income), net 2,258 7,656 11,478 (7,743)
-----------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations Before
Income Taxes 275,591 135,258 239,569 81,904
Provision for income taxes 75,756 31,564 66,627 16,835
-----------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 199,835 103,694 172,942 65,069
Discontinued Operations
Loss from discontinued operations, net of taxes of
($154.1) million and ($207.1) million, respectively - (440,560) - (567,166)
-----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effect of Change in
Accounting Principles 199,835 (336,866) 172,942 (502,097)
Cumulative effect of change in accounting principles,
net of tax - - (12,001) -
-----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Shares $ 199,835 $ (336,866) $ 160,941 $ (502,097)
=======================================================================================================================
Income Per Common Share - Basic
Income from continuing operations $ 0.46 $ 0.24 $ 0.40 $ 0.15
Loss from discontinued operations - (1.03) - (1.33)
Cumulative effect of change in accounting principles - - (0.03) -
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.46 $ (0.79) $ 0.37 $ (1.18)
=======================================================================================================================
Weighted average number of common shares 431,250 426,394 430,703 425,903
=======================================================================================================================
Income Per Common Share - Diluted
Income from continuing operations $ 0.46 $ 0.24 $ 0.40 $ 0.15
Loss from discontinued operations - (1.03) - (1.33)
Cumulative effect of change in accounting principles - - (0.03) -
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.46 $ (0.79) $ 0.37 $ (1.18)
=======================================================================================================================
Weighted average number of common and common
equivalent shares 436,316 426,945 435,336 426,712
=======================================================================================================================
Dividends Declared Per Common Share $ - $ 0.09 $ - $ 0.27
=======================================================================================================================
The accompanying notes are an integral part of these financial statements.
4
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the
Nine Months Ended
-------------------------------
Sept. 30, Sept. 30
(Unaudited; in thousands) 2001 2000
---------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ 160,941 $ (502,097)
Deduct: loss from discontinued operations - (567,166)
---------------------------------------------------------------------------------------------------------------
Income from continuing operations 160,941 65,069
Adjustments to reconcile income from continuing operations to net cash flows
from operating activities:
Cumulative effect of change in accounting principles, net of tax 12,001 -
Noncash derivative loss 5,532 -
Noncash restructuring and other charges - 25,581
Depreciation 153,403 144,318
Amortization 46,095 45,694
Increase (decrease) from changes in assets and liabilities:
Accounts receivable (766,755) (481,922)
Inventories (261,446) (248,687)
Prepaid expenses and other current assets (12,499) (16,889)
Accounts payable, accrued liabilities and income taxes payable 50,510 65,883
Deferred income taxes 30,468 1,184
Other, net (5,477) 5,446
---------------------------------------------------------------------------------------------------------------
Net cash flows used for operating activities of continuing operations (587,227) (394,323)
---------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (66,932) (61,557)
Purchases of other property, plant and equipment (64,218) (53,081)
Proceeds from sale of other property, plant and equipment 6,007 5,444
Payment for business acquired (20,347) -
Other, net 2,769 (20)
---------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities of continuing operations (142,721) (109,214)
---------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Short-term borrowings, net 521,445 370,286
Proceeds from issuance of long-term debt - 390,710
Payment of long-term debt - (100,000)
Exercise of stock options 45,515 11,586
Payment of dividends on common stock - (115,155)
Other, net (581) (555)
---------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities of continuing operations 566,379 556,872
---------------------------------------------------------------------------------------------------------------
Net Cash Used for Discontinued Operations - (201,824)
Effect of Exchange Rate Changes on Cash (3,083) (3,050)
---------------------------------------------------------------------------------------------------------------
Decrease in Cash and Short-term Investments (166,652) (151,539)
Cash and Short-term Investments at Beginning of Period 232,389 247,354
---------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments at End of Period $ 65,737 $ 95,815
===============================================================================================================
The accompanying notes are an integral part of these statements.
5
Mattel, Inc. and Subsidiaries
Notes to Consolidated Financial Information
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial
position and interim results as of and for the periods presented have been
included. Certain amounts in the financial statements for prior periods have
been reclassified to conform to the current period's presentation. Because
Mattel's business is seasonal, results for interim periods are not
necessarily indicative of those that may be expected for a full year.
The financial information included herein should be read in conjunction with
Mattel's consolidated financial statements and related notes in its 2000
Annual Report to Stockholders filed on Form 10-K.
2. Accounts receivable are shown net of allowances for doubtful accounts of
$32.5 million (September 30, 2001), $24.6 million (September 30, 2000), and
$24.6 million (December 31, 2000).
3. Inventories are comprised of the following:
(In thousands) Sept. 30, 2001 Sept. 30, 2000 Dec. 31, 2000
------------------------------------------------------------------------------------------------
Raw materials and work in progress $ 48,705 $ 57,418 $ 34,357
Finished goods 691,019 598,288 455,385
------------------------------------------------------------------------------------------------
$ 739,724 $ 655,706 $ 489,742
================================================================================================
4. Intangibles, net include the following:
(In thousands) Sept. 30, 2001 Sept. 30, 2000 Dec. 31, 2000
------------------------------------------------------------------------------------------------
Goodwill $ 1,112,059 $ 1,141,486 $ 1,124,318
Other 11,205 8,062 12,539
------------------------------------------------------------------------------------------------
$ 1,123,264 $ 1,149,548 $ 1,136,857
================================================================================================
5. Short-term borrowings include the following:
(In thousands) Sept. 30, 2001 Sept. 30, 2000 Dec. 31, 2000
------------------------------------------------------------------------------------------------
Notes payable $270,496 $119,959 $ 68,386
Commercial paper 464,640 617,500 158,017
------------------------------------------------------------------------------------------------
$735,136 $737,459 $ 226,403
================================================================================================
6. Long-term debt includes the following:
(In thousands) Sept. 30, 2001 Sept. 30, 2000 Dec. 31, 2000
------------------------------------------------------------------------------------------------
Euro notes due 2002 $ - $ 190,710 $ 190,710
Unsecured term loan due 2003 200,000 200,000 200,000
6% senior notes due 2003 150,000 150,000 150,000
6-1/8% senior notes due 2005 150,000 150,000 150,000
Medium-term notes 480,000 540,500 510,000
10.15% mortgage note due 2005 41,118 41,866 41,686
------------------------------------------------------------------------------------------------
$ 1,021,118 $ 1,273,076 $ 1,242,396
================================================================================================
6
7. Comprehensive income (loss) is as follows:
For the Nine Months Ended
-----------------------------------
(In thousands) Sept. 30, 2001 Sept. 30, 2000
---------------------------------------------------------------------------------------------
Income from continuing operations $ 172,942 $ 65,069
Loss from discontinued operations - (567,166)
Cumulative effect of change in accounting principles (12,001) -
---------------------------------------------------------------------------------------------
Net income (loss) 160,941 (502,097)
Unrealized holding losses arising during the period (186) (2,712)
Transition adjustment related to FAS 133 14,127 -
Net loss on derivative instruments (2,672) -
Currency translation adjustments (15,267) (53,393)
---------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 156,943 $ (558,202)
=============================================================================================
8. Supplemental disclosure of cash flow information is as follows:
For the Nine Months Ended
-------------------------------------
(In thousands) Sept. 30, 2001 Sept. 30, 2000
------------------------------------------------------------------------------------------------------
Cash payments during the period:
Interest $ 115,715 $ 120,117
Income taxes 25,642 27,270
Noncash investing and financing activities during the period:
Receipt of marketable securities from sale of business $ - $ 42,167
Issuance of stock warrant - 5,789
------------------------------------------------------------------------------------------------------
9. Effective on January 1, 2001, Mattel adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
-----------------------------------------
Hedging Activities. This statement requires companies to record derivatives
-------------------
on the balance sheet as assets or liabilities, measured at fair value. It
also requires that gains or losses resulting from changes in the values of
those derivatives be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting.
Mattel's results of operations and cash flows may be impacted by exchange
rate fluctuations. Mattel seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, Mattel manages its exposure through the
selection of currencies used for international borrowings and intercompany
invoicing. Mattel's results of operations can also be affected by the
translation of foreign revenues and earnings into US dollars. Mattel does not
trade in financial instruments for speculative purposes.
At the inception of the contracts, Mattel designates its derivatives as
either cash flow or fair value hedges and documents the relationship of the
hedge to the underlying forecasted transaction, for cash flow hedges, or the
recognized asset or liability, for fair value hedges. Hedge effectiveness is
assessed at inception and throughout the life of the hedge to ensure the
hedge qualifies for hedge accounting treatment. Changes in fair value
associated with hedge ineffectiveness, if any, are recorded in Mattel's
results of operations currently.
7
Mattel uses foreign currency forward exchange and option contracts as cash
flow hedges, which generally have maturity dates of up to 18 months, to
hedge its forecasted purchases and sales of inventory denominated in foreign
currencies. Changes in fair value of Mattel's cash flow derivatives are
deferred and recorded as part of other comprehensive income (loss) in
stockholders' equity until the underlying transaction is settled. Upon
settlement, any gain or loss resulting from the derivative is recorded in
Mattel's results of operations.
Mattel entered into a cross currency interest rate swap to convert the
interest rate and principal amount from Euros to US dollars on its 200
million Euro Notes due 2002. The debt and related interest payable are
marked-to-market as of each balance sheet date with the change in fair value
of the derivative recorded in other comprehensive income (loss) within
stockholders' equity until the loan and related interest are paid. Mattel
also entered into a fair value hedge to minimize the impact of changes in
market value on its results of operations from the securities received as
part of the sale of CyberPatrol in 2000.
Mattel uses fair value hedges to hedge intercompany loans and management
fees denominated in foreign currencies. Due to the short-term nature of the
contracts involved, Mattel does not use hedge accounting for these
contracts. Changes in fair value of these derivatives are recorded in
Mattel's results of operations currently.
As a result of adopting FAS 133, Mattel recorded a one-time transition
adjustment of $12.0 million, net of tax, (or $0.03 per share) as the
cumulative effect of change in accounting principle related to unrealized
losses on the CyberPatrol securities that had been previously deferred in
other comprehensive income (loss). During the first quarter of 2001, Mattel
recorded an additional pre-tax loss of $5.5 million in other expense, net
related to the decrease in fair value of the derivative. Mattel also
recorded a one-time transition adjustment of $2.1 million in other
comprehensive income (loss) related to unrealized gains on derivative
instruments. As of September 30, 2001, $2.7 million of unrealized losses
related to derivative instruments have been recorded in other comprehensive
income (loss). Mattel expects to reclassify these unrealized losses from
other comprehensive income (loss) to its results of operations over the life
of the contracts, generally 18 months or less.
10. As part of its financial realignment plan, Mattel announced during the third
quarter of 2000 a change in its dividend policy consisting of a reduction in
the annual cash dividend from $0.36 per share to $0.05 per share, when and
as declared by the board of directors. No quarterly dividend for the third
quarter of 2001 was declared. The $0.05 per share annual dividend rate under
the new dividend policy is expected to become effective in December 2001.
The board of directors declared a dividend of $0.09 per share in third
quarter 2000.
11. Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares and common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc.,
outstanding during each period.
8
Diluted income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares, common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc., and
other common equivalent shares outstanding during each period. The
calculation of common equivalent shares assumes the exercise of dilutive
stock options and warrants, net of assumed treasury share repurchases at
average market prices, and conversion of dilutive convertible debt, as
applicable. For the quarter and year to date periods ended September 30,
2001, premium price stock options totaling 15.2 million were excluded from
the calculation of diluted earnings per share because they were
anti-dilutive. For the quarter and year to date periods ended September 30,
2001, other nonqualified stock options totaling 13.9 million and 14.3
million, respectively, were excluded from the calculation of diluted
earnings per share because they were anti-dilutive. For the quarter and year
to date periods ended September 30, 2000, premium price stock options
totaling 18.8 million, convertible debt and warrants were excluded from the
calculation of diluted earnings per share because they were anti-dilutive.
For the quarter and year to date periods ended September 30, 2000, other
nonqualified stock options totaling 32.7 million and 29.7 million,
respectively, were excluded from the calculation of diluted earnings per
share because they were anti-dilutive.
12. The table below presents information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed
business units and are divided on a geographic basis between domestic and
international. The domestic segment is further divided into US Girls, US
Boys-Entertainment, and US Infant & Preschool. The US Girls segment includes
brands such as Barbie(R), Polly Pocket!(R) and American Girl(R). The US
Boys-Entertainment segment includes Hot Wheels(R), Matchbox(R), Tyco(R)
Electric Racing and Tyco(R) Radio Control (collectively "Wheels"), and
Disney, Nickelodeon(R), Harry Potter(TM), Max Steel(TM) and games and
puzzles (collectively "Entertainment") products. The US Infant & Preschool
segment includes Fisher-Price(R), Disney preschool and plush, Power
Wheels(R), Sesame Street(R) and other preschool products. The International
segment sells products in all toy categories. Segment revenues do not
include sales adjustments such as trade discounts and other allowances.
However, such adjustments are included in the determination of segment
income from operations. Segment income from operations represents income
from continuing operations before interest expense and income taxes, while
consolidated income from operations represents income from continuing
operations before income taxes as reported in the consolidated statements of
operations. The segment assets are comprised of accounts receivable and
inventories, net of applicable reserves and allowances.
Certain information presented in the tables below has been restated to
conform to the current management structure as of January 2001.
Specifically, the results and assets of Pleasant Company, which had been
reported as part of Other, are now being reported as part of US Girls, which
is consistent with management responsibility for this business.
Additionally, Mattel's toy manufacturing unit is now being managed as a cost
center instead of as a profit center; therefore, toy manufacturing is no
longer being reported as a separate segment. Lastly, certain overhead costs
incurred at the headquarters' level in El Segundo, including facilities,
9
information technology, and other administration support costs, are now
being allocated to the US Girls and US Boys-Entertainment segments, to more
accurately reflect the costs associated with operating these businesses.
These types of overhead costs were already being reported as part of the US
Infant & Preschool and International segments since these businesses
maintain their own headquarters locations.
For the Three Months Ended For the Nine Months Ended
---------------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------
Revenues
Domestic:
US Girls $ 453,817 $ 478,672 $ 912,868 $ 938,799
US Boys-Entertainment 275,160 257,938 542,966 503,644
US Infant & Preschool 456,121 424,777 886,685 843,623
Other 1,317 357 3,903 3,598
---------------------------------------------------------------------------------------------------------------------------
Total Domestic 1,186,415 1,161,744 2,346,422 2,289,664
International 527,043 515,917 1,067,006 998,745
---------------------------------------------------------------------------------------------------------------------------
1,713,458 1,677,661 3,413,428 3,288,409
Sales adjustments (100,691) (93,898) (214,447) (193,588)
---------------------------------------------------------------------------------------------------------------------------
Net sales from continuing operations $1,612,767 $1,583,763 $3,198,981 $3,094,821
===========================================================================================================================
Operating Profit
Domestic:
US Girls $ 135,581 $ 134,684 $ 218,404 $ 207,115
US Boys-Entertainment 43,174 30,241 45,232 17,295
US Infant & Preschool 81,424 67,804 92,566 81,083
---------------------------------------------------------------------------------------------------------------------------
Total Domestic 260,179 232,729 356,202 305,493
International 77,722 68,461 65,642 60,021
---------------------------------------------------------------------------------------------------------------------------
337,901 301,190 421,844 365,514
Interest expense (39,553) (42,625) (114,065) (102,926)
Corporate and other (a) (22,757) (123,307) (68,210) (180,684)
---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 275,591 $ 135,258 $ 239,569 $ 81,904
===========================================================================================================================
Assets
Sept. 30, Sept. 30,
(In thousands) 2001 2000
--------------------------------------------------------------------------------------
Domestic:
US Girls (b) $ 545,598
US Boys-Entertainment (b) 329,666
--------------------------------------------------------------------------------------
875,264 $ 883,253
US Infant & Preschool 554,282 349,512
--------------------------------------------------------------------------------------
Total Domestic 1,429,546 1,232,765
International 819,179 759,674
--------------------------------------------------------------------------------------
2,248,725 1,992,439
Corporate and other 82,404 119,581
--------------------------------------------------------------------------------------
Accounts receivable and inventories from
continuing operations $2,331,129 $2,112,020
=====================================================================================
(a) For the quarter ended September 30, 2001, corporate and other includes
$11.2 million of charges related to the financial realignment plan (see
Note 13). For the quarter ended September 30, 2000, corporate and other
includes $110.3 million of charges related to the financial realignment
plan, and a $5.0 million reversal of prior year restructuring charges. For
the nine months ended September 30, 2001, corporate and other includes
$39.0 million of charges related to the financial realignment plan and a
$5.5 million loss on derivative instruments. For the nine months ended
September 30, 2000, corporate and other includes $110.3 million of charges
related to the financial realignment plan, a $53.1 million charge related
to the departure of certain senior executives, and a $7.0 million reversal
of prior year restructuring charges.
(b) Asset information was not maintained by individual segment as of September
30, 2000.
10
Mattel sells a broad variety of toy products, which are grouped into three
major categories: Girls, Boys-Entertainment and Infant & Preschool. The
table below presents worldwide revenues by category:
For the Three Months Ended For the Nine Months Ended
------------------------------------------------------------------------
(In thousands) Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
--------------------------------------------------------------------------------------------------------------------------
Girls $ 710,399 $ 702,645 $1,427,874 $1,375,263
Boys-Entertainment 423,235 404,363 838,607 786,521
Infant & Preschool 578,875 561,982 1,138,724 1,111,110
Other 949 8,671 8,223 15,515
--------------------------------------------------------------------------------------------------------------------------
1,713,458 1,677,661 3,413,428 3,288,409
Sales adjustments (100,691) (93,898) (214,447) (193,588)
--------------------------------------------------------------------------------------------------------------------------
Net sales from continuing operations $1,612,767 $1,583,763 $3,198,981 $3,094,821
==========================================================================================================================
13. During the third quarter of 2000, Mattel initiated a financial realignment
plan designed to improve gross margin; selling, general and administrative
expenses; operating profit; and cash flow. The plan will require a total
pre-tax charge estimated at $250 million, or $170 million on an after-tax
basis. To date, Mattel has recorded pre-tax charges totaling $164.2
million, or approximately $112 million on an after-tax basis, related to
this plan. Of the total charge, $125.2 million (approximately $84 million
after-tax) was recorded in 2000 and $39.0 million (approximately $28
million after-tax) was recorded in the first nine months of 2001. In
accordance with generally accepted accounting principles, future pre-tax
implementation costs of approximately $86 million have not been accrued as
of September 30, 2001. Mattel expects that these costs will be recorded
over approximately the next two years.
The following are the major initiatives included in the financial
realignment plan:
. Reduce excess manufacturing capacity;
. Terminate a variety of licensing and other contractual arrangements
that do not deliver an adequate level of profitability;
. Eliminate product lines that do not meet required levels of
profitability;
. Improve supply chain performance and economics;
. Eliminate approximately 350 positions at US-based headquarters
locations in El Segundo, Fisher-Price and Pleasant Company through a
combination of layoffs, elimination of open requisitions, attrition
and retirements; and
. Close and consolidate certain international offices.
In April 2001, as part of the financial realignment plan, Mattel announced
the closure of one of its North American distribution and manufacturing
facilities (the "North American Strategy"). Production from the Murray,
Kentucky, facility will be consolidated into existing Mattel-owned and
operated facilities in North America with the final shutdown of Murray
operations expected in 2002. This action is one of the realignment measures
taken to lower costs. Mattel believes this action was necessary in order to
maintain a competitive cost structure in today's global marketplace.
11
In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million as
part of the initial phase of the financial realignment plan, of which
approximately $18 million was not incurred as of December 31, 2000. This
charge related to elimination of positions at headquarters locations in El
Segundo, Fisher-Price and Pleasant Company, closure of certain
international offices, and consolidation of facilities. During the second
quarter of 2001, Mattel recorded a $13.0 million pre-tax restructuring
charge as part of the financial realignment plan, largely related to the
North American Strategy. Total worldwide headcount reduction as a result of
the restructuring is approximately 1,700 employees, of which approximately
1,100 are related to the North American Strategy. From inception through
September 30, 2001, a total of approximately $15 million has been incurred
related to the termination of nearly 640 employees, of which approximately
120 were terminated during the third quarter of 2001.
The components of the restructuring charges are as follows:
Balance Amounts Balance
(In millions) Dec. 31, 2000 Accruals Incurred Sept. 30, 2001
----------------------------------------------------------------------------------------------------------------------
Severance and other compensation $16 $11 $(12) $15
Lease termination costs 1 2 - 3
Other 1 - (1) -
----------------------------------------------------------------------------------------------------------------------
Total restructuring charge $18 $13 $(13) $18
======================================================================================================================
14. In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141, Business Combinations, and 142,
---------------------
Goodwill and Other Intangible Assets. FAS 141 requires that the purchase
------------------------------------
method of accounting be used for all business combinations initiated after
June 30, 2001, and establishes specific criteria for the recognition of
goodwill separate from other intangible assets. FAS 142 eliminates the
amortization of, and requires impairment testing at least annually for,
goodwill and indefinite-lived intangibles. Mattel is required to adopt
these statements for its fiscal year beginning January 1, 2002. Management
is currently evaluating the impact of FAS 142 on Mattel's consolidated
financial position and results of operations.
12
Mattel, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement
Certain written and oral statements made or incorporated by reference from time
to time by Mattel or its representatives in this Quarterly Report on Form 10-Q,
other filings or reports filed with the Securities and Exchange Commission,
press releases, conferences, or otherwise, are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Mattel is including this Cautionary Statement to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any such forward-looking statements. Forward-looking
statements include any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements. Forward-looking statements can be
identified by the use of terminology such as "believe," "anticipate," "expect,"
"estimate," "may," "will," "should," "project," "continue," "plans," "aims,"
"intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. In addition to the risk factors listed in Mattel's
2000 Annual Report on Form 10-K and other important factors detailed herein and
from time to time in other reports filed by Mattel with the Securities and
Exchange Commission, including Forms 8-K, 10-Q and 10-K, the following important
factors could cause actual results to differ materially from those suggested by
any forward-looking statements.
Marketplace Risks
- Increased competitive pressure, both domestically and internationally, which
may negatively affect the sales of Mattel's products
- Changes in public and consumer preferences, which may negatively affect
Mattel's toy business
- Significant changes in the play patterns of children, whereby they are
increasingly attracted to more developmentally advanced products at younger
ages, which may affect brand loyalty and the perceived value of, and demand
for, Mattel's products
- Adverse changes in general economic conditions in the US and internationally,
including adverse changes in the retail environment, which may negatively
affect the sales of Mattel's products or increase costs associated with
manufacturing and distributing these products
- Concentration of Mattel's business with a small group of major customers
- Significant buying patterns and inventory management practices of major
customers
- Shortages of raw materials or components, which may affect Mattel's ability
to produce product in time to meet customer demand
- Mattel's inability to accurately predict future consumer demand, including
during the peak holiday season
13
Financing Considerations
- Foreign currency exchange fluctuations, which may affect Mattel's reportable
income
- Significant increases in interest rates, both domestically and
internationally, which may negatively affect Mattel's cost of financing both
its operations and investments
- Reductions in Mattel's credit ratings, which may negatively impact the cost
of satisfying its financing requirements
Other Risks
- Mattel's ability to ensure successful implementation of all phases of its
financial realignment plan and realization of the anticipated cost savings
and improved cash flows
- Mattel's ability to successfully implement initiatives regarding its core
business, including supply chain management, customer service, international
operations and employee development
- Development of new technologies, including digital media and the Internet,
which may create new risks to Mattel's ability to protect its intellectual
property rights or affect the development, marketing and sales of Mattel's
products
- Changes in laws or regulations, both domestically and internationally,
including those affecting the Internet, consumer products, environmental
activities, import and export laws or trade restrictions, which may lead to
increased costs or interruption in normal business operations of Mattel
- Deterioration of political or trade relations between the US and foreign
countries in which Mattel has significant manufacturing facilities or other
operations and possible economic or political instability in such foreign
countries
- Possible terrorist activity, the threat of such activity, and responses to
and results of such activity, including but not limited to effects,
domestically and/or internationally, on Mattel, its personnel and facilities,
its customers and suppliers, financial markets and general economic
conditions
- Current and future litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption of normal business
operations of Mattel
- Labor disputes, which may lead to increased costs or disruption of any of
Mattel's operations
- Acquisitions, mergers or dispositions, which may affect profit, revenues,
profit margins, debt-to-equity ratios, capital expenditures or other aspects
of Mattel's business
The risks included herein are not exhaustive. Other sections of this Quarterly
Report on Form 10-Q may include additional factors, which could materially and
adversely impact Mattel's business, financial condition and results of
operations. Moreover, Mattel operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict the impact of all such risk factors on Mattel's
business, financial condition or results of operations or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. Mattel expressly
disclaims any obligation to update or revise any forward-looking statements,
whether as a result of new developments or otherwise.
14
Summary
The following discussion should be read in conjunction with the consolidated
financial statements and related notes that appear in Part I of this Quarterly
Report. Mattel's consolidated financial statements for all periods present the
Consumer Software segment as a discontinued operation. Unless otherwise
indicated, the following discussion relates only to Mattel's continuing
operations. Additionally, the segment and brand category information was
restated from prior period presentation to conform to the current management
structure.
Mattel designs, manufactures, and markets a broad variety of toy products on a
worldwide basis through both sales to retailers (i.e., "customers") and direct
to consumers. Mattel's business is dependent in great part on its ability each
year to redesign, restyle and extend existing core products and product lines;
to design and develop innovative new products and product lines; and to
successfully market those products and product lines. Mattel plans to continue
to focus on its portfolio of traditional brands that have historically had
worldwide sustainable appeal, to create new brands utilizing its knowledge of
children's play patterns and to target customer and consumer preferences around
the world. Mattel also intends to expand its core brands through the Internet,
and licensing and entertainment partnerships.
Mattel's portfolio of brands and products are grouped in the following
categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
Polly Pocket!(R), Diva Starz(TM), and American Girl(R)
Boys-Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric
Racing and Tyco(R) Radio Control (collectively "Wheels"), and Disney,
Nickelodeon(R), Harry Potter(TM), Max Steel(TM), and games and puzzles
(collectively "Entertainment")
Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame
Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's
Clues(R), See `N Say(R), Magna Doodle(R), and View-Master(R)
Mattel's business is highly seasonal, with consumers making a large percentage
of all toy purchases around the traditional holiday season in the fourth
quarter. A significant portion of Mattel's customers' purchasing occurs in the
third and fourth quarters in anticipation of such holiday buying. As a result of
the seasonal purchasing patterns and production lead times, Mattel's business is
subject to risks associated with the underproduction of popular toys and the
overproduction of toys that do not match consumer demand. Retailers are also
attempting to manage their inventories better, requiring Mattel to ship products
closer to the time its customers expect to sell the products to consumers. These
factors increase the risk that Mattel may not be able to meet demand for certain
products at peak demand times, or that Mattel's own inventory levels may be
adversely impacted by the need to pre-build products before orders are placed.
Additionally, as retailers manage their inventories, Mattel experiences cyclical
ordering patterns for products and product lines that may cause its sales to
vary significantly from period to period.
15
Financial Realignment Plan
During the third quarter of 2000, Mattel initiated a financial realignment plan
designed to improve gross margin; selling, general and administrative expenses;
operating profit; and cash flow. The financial realignment plan, together with
the disposition of Learning Company, was part of management's strategic plan to
focus on growing Mattel's core brands and lowering operating costs and interest
expense. The plan will require a total pre-tax charge estimated at approximately
$250 million, or $170 million on an after-tax basis, of which approximately $100
million represents cash expenditures and $70 million represents noncash
writedowns. Total cash outlay will be funded from existing cash balances and
internally generated cash flows from operations. To date, Mattel has recorded
pre-tax charges totaling $164.2 million, or approximately $112 million on an
after-tax basis, related to this plan. Of the total charge, $125.2 million
(approximately $84 million after-tax) was recorded in 2000 and $39.0 million
(approximately $28 million after-tax) was recorded in the first nine months of
2001. In accordance with generally accepted accounting principles, future
pre-tax implementation costs of approximately $86 million have not been accrued
as of September 30, 2001. Mattel expects that these costs will be recorded over
approximately the next two years.
The following are the major initiatives included in the financial realignment
plan:
. Reduce excess manufacturing capacity;
. Terminate a variety of licensing and other contractual arrangements
that do not deliver an adequate level of profitability;
. Eliminate product lines that do not meet required levels of
profitability;
. Improve supply chain performance and economics;
. Eliminate approximately 350 positions at US-based headquarters
locations in El Segundo, Fisher-Price and Pleasant Company through a
combination of layoffs, elimination of open requisitions, attrition
and retirements; and
. Close and consolidate certain international offices.
In April 2001, as part of the financial realignment plan, Mattel announced the
closure of one of its North American distribution and manufacturing facilities.
Production from the Murray, Kentucky, facility will be consolidated into
existing Mattel-owned and operated facilities in North America with the final
shutdown of Murray operations expected in 2002. This action is one of the
realignment measures taken to lower costs. Mattel believes this action was
necessary in order to maintain a competitive cost structure in today's global
marketplace.
In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million as part
of the initial phase of the financial realignment plan, of which approximately
$18 million was not incurred as of December 31, 2000. This charge related to
elimination of positions at headquarters locations in El Segundo, Fisher-Price
and Pleasant Company, closure of certain international offices, and
consolidation of facilities. During the second quarter of 2001, Mattel recorded
a $13.0 million pre-tax restructuring charge as part of the financial
realignment plan, largely related to the North American Strategy. Total
worldwide headcount reduction as a result of the restructuring is approximately
16
1,700 employees, of which approximately 1,100 are related to the North American
Strategy. From inception through September 30, 2001, a total of approximately
$15 million has been incurred related to the termination of nearly 640
employees, of which approximately 120 were terminated during the third quarter
of 2001.
The components of the restructuring charges are as follows:
Balance Amounts Balance
(In millions) Dec. 31, 2000 Accruals Incurred Sept. 30, 2001
---------------------------------------------------------------------------------------------------------------------
Severance and other compensation $16 $11 $(12) $15
Lease termination costs 1 2 - 3
Other 1 - (1) -
---------------------------------------------------------------------------------------------------------------------
Total restructuring charge $18 $13 $(13) $18
=====================================================================================================================
Under the plan, Mattel expects to generate approximately $200 million of
cumulative pre-tax cost savings over the next three years. Mattel has completed
all of the activities needed in order to recognize approximately $55 million in
savings targeted for 2001. However, there is no assurance that Mattel will be
able to successfully implement all phases of its financial realignment plan or
that it will realize the anticipated cost savings and improved cash flows.
Results of Continuing Operations - Third Quarter
Consolidated Results
Net income from continuing operations for the third quarter of 2001 was $199.8
million or $0.46 per diluted share as compared to net income of $103.7 million
or $0.24 per diluted share in the third quarter of 2000. Profitability in the
third quarter of 2001 was negatively impacted by an $11.2 million pre-tax
charge, approximately $8 million after-tax or $0.02 per diluted share, related
to the financial realignment plan. A $110.3 million pre-tax charge related to
the financial realignment plan, partially offset by a $5.0 million reversal of
the 1999 restructuring charge, negatively impacted profitability in the third
quarter of 2000. The combined effect resulted in a pre-tax net charge totaling
$105.3 million, approximately $71 million after-tax or $0.17 per diluted share.
Consumer confidence may have been impacted by the events of September 11, 2001,
and therefore, may lead to a more challenging retail environment during the all
important holiday season. Mattel believes that the possibility of lower sales
due to a challenging retail environment, combined with the impact of a stronger
US dollar, will likely be offset by the benefit of lower interest rates, and
savings from cost reduction programs, such as the financial realignment plan and
supply chain initiatives.
17
The following table provides a comparison of the reported results and the
results excluding charges:
For the Three Months Ended Sept. 30,
---------------------------------------------------------------------------
2001 2000
------------------------------------ --------------------------------------
Reported Results Reported Results
(In millions) Results Charges Ex. Chgs Results Charges Ex. Chgs
-----------------------------------------------------------------------------------------------------------------------
Net sales $1,612.8 $ - $1,612.8 $1,583.7 $ - $1,583.7
=======================================================================================================================
Gross profit $ 773.3 $ (10.2) $ 783.5 $ 666.6 $ (72.0) $ 738.6
Advertising and promotion
expenses 212.9 - 212.9 225.2 3.8 221.4
Other selling and administrative
expenses 230.3 - 230.3 224.7 2.1 222.6
Amortization of intangibles 12.7 - 12.7 13.3 0.5 12.8
Restructuring and other charges - - - 17.9 17.9 -
Other expense (income), net 2.3 1.0 1.3 7.6 9.0 (1.4)
-----------------------------------------------------------------------------------------------------------------------
Operating income 315.1 (11.2) 326.3 177.9 (105.3) 283.2
Interest expense 39.5 - 39.5 42.6 - 42.6
-----------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before income taxes $ 275.6 $ (11.2) $ 286.8 $ 135.3 $(105.3) $ 240.6
=======================================================================================================================
Net sales from continuing operations in the third quarter of 2001 increased 2%
to $1.61 billion, from $1.58 billion in 2000. In local currency, net sales were
up 3% compared to a year ago. Sales within the US increased 2% and accounted for
69% of consolidated sales in both the third quarter of 2001 and 2000. Sales
outside the US increased 2% from the year ago quarter. Excluding the unfavorable
foreign currency exchange impact, international sales increased by 5% compared
to 2000.
Worldwide sales in the Girls category increased 1%, or 2% in local currency, to
$710.4 million. Domestic sales declined by 5% while international sales
increased 14%, or 17% in local currency. The performance of Polly Pocket!(R),
Diva Starz(TM) and What's Her Face!(TM) drove growth in the Girls category.
Worldwide Barbie(R) sales decreased 9%, or 8% in local currency. Barbie(R) sales
in the US declined 17% as compared to the year ago quarter, when sales increased
9%. The decline in US Barbie(R) sales was due to continuing inventory management
by retailers, lower shipments of Holiday Celebration(TM) Barbie(R) in response
to lower demand at retail, and lower sales of adult-targeted collector dolls
resulting from a weakening retail climate for higher-priced collectible items.
International sales for Barbie(R) increased 7%, or 9% in local currency,
reflecting the benefit of early product availability and stronger alignment of
worldwide sales and marketing plans.
Worldwide sales in the Boys-Entertainment category grew 5%, or 6% in local
currency, to $423.2 million in 2001. Domestic sales grew by 7% while
international sales increased 1%, or 5% in local currency. While sales of the
Hot Wheels(R) brand increased by 9%, sales in the Wheels category experienced a
3% decline due to lower shipments of the Tyco(R) Radio Control and Matchbox(R)
brands. Sales increased 18% in the Entertainment category, led by the
introduction of Harry Potter(TM) products.
Worldwide sales in the Infant & Preschool category increased 3% in both US
dollars and local currency, to $578.9 million in 2001. Domestic sales were up
7%, while international sales were down 11%, or 9% in local currency.
18
Worldwide sales of core Fisher-Price(R) products were up 8%. Strong growth in
core Fisher-Price(R) and Power Wheels(R) products was partially offset by a
decline in licensed character brands. In the US, sales of licensed character
brands were flat versus year ago levels, reversing a trend of decline over the
previous six quarters. Licensed character brand sales internationally continued
to decline. Mattel believes international markets for licensed character brands
tend to lag behind the US by about one year.
Gross profit, as a percentage of net sales, was 47.9% in 2001 compared to 42.1%
last year. Reported cost of sales for third quarter 2001 includes a $10.2
million charge, primarily related to the termination of licensing arrangements
as part of the financial realignment plan. Cost of sales reported in third
quarter 2000 includes a $72.0 million charge, incurred as part of the financial
realignment plan, related to the termination of a variety of licenses and other
contractual arrangements, and the elimination of product lines that did not
deliver an adequate level of profitability. Excluding the financial realignment
plan charges, gross profit, as a percentage of net sales, was 48.6% in the third
quarter of 2001 compared to 46.6% in 2000. Gross profit was positively impacted
by savings realized from the financial realignment plan and lower product costs
achieved through the supply chain initiative, partially offset by the negative
impact of foreign exchange.
Advertising and promotion expense was 13.2% of net sales in third quarter 2001,
compared to 14.2% last year. Excluding the $3.8 million charge taken in the
third quarter of 2000 related to the termination of a contractual arrangement,
advertising as a percentage of net sales was 14.0%. Advertising and promotion
expense during third quarter 2001 was positively impacted by softness in media
pricing. Mattel's 2001 media plan is actually stronger than last year's in terms
of gross rating points. Other selling and administrative expenses of $230.3
million for the quarter represented 14.3% of net sales compared to 14.2% in
2000. Excluding the $2.1 million charge taken in the third quarter of 2000 for
settlement of certain litigation matters, other selling and administrative
expenses were 14.1% of net sales. During third quarter of 2001, savings realized
from the financial realignment plan were offset by an incremental charge for bad
debt expense of approximately $9 million, primarily related to the bankruptcy
declared by a US retailer during the quarter.
Other expense, net in 2001 includes a $1.0 million charge for asset writedowns
associated with implementing the North American Strategy, while other expense,
net in 2000 includes a $9.0 million charge for the writeoff of certain
noncurrent assets. Excluding these charges, other expense (income), net
decreased from income of $1.4 million in 2000 to expense of $1.3 million in
2001. Interest expense was $39.5 million in 2001 compared to $42.6 million in
2000. This year's interest expense includes a significant benefit from lower
short-term interest rates. Mattel's third quarter tax rate, excluding charges,
was 27.6%, consistent with the expected rate for the year.
19
Business Segment Results
Mattel's reportable segments are separately managed business units and are
divided on a geographic basis between domestic and international. The domestic
segment is further divided into US Girls, US Boys-Entertainment, and US Infant &
Preschool. The International segment sells products in all toy categories.
Mattel's segments were revised in January 2001 to conform to the current
management structure. Specifically, the results of Pleasant Company, which had
been reported as part of Other, are now being reported as part of US Girls,
which is consistent with management responsibility for this business.
Additionally, Mattel's toy manufacturing unit is now being managed as a cost
center instead of as a profit center; therefore, toy manufacturing is no longer
being reported as a separate segment. Lastly, certain overhead costs incurred at
the headquarters' level in El Segundo, including facilities, information
technology, and other administration support costs, are now being allocated to
the US Girls and US Boys-Entertainment segments, to more accurately reflect the
costs associated with operating these businesses. These types of overhead costs
were already being reported as part of the US Infant & Preschool and
International segments since these businesses maintain their own headquarters
locations.
US Girls segment sales decreased by 5% in third quarter 2001 compared to third
quarter 2000. The decline was largely due to a decrease in Barbie(R) sales,
partially offset by increased sales of Polly Pocket!(R), Diva Starz(TM) and
What's Her Face!(TM) . Barbie(R) sales declined by 17%, as compared to the year
ago quarter when Barbie(R) experienced a 9% increase in sales. The decline in
Barbie(R) sales was due to continuing inventory management by retailers, lower
shipments of Holiday Celebration(TM) Barbie(R) in response to weakening demand
at retail, and lower sales of adult-targeted collector dolls resulting from a
weakening retail climate for higher-priced collectible items. US
Boys-Entertainment segment sales increased 7% compared to 2000. The US
Entertainment business experienced double-digit growth, largely due to the
introduction of Harry Potter(TM) products, while the US Wheels business remained
flat with last year. The US Infant & Preschool segment sales increased 7% due to
increased sales of core Fisher-Price(R) and Power Wheels(R) products. Sales of
licensed character brand products were flat versus year ago levels, reversing a
trend of decline over the previous six quarters. International segment sales
increased by 2% compared to last year. Excluding the unfavorable foreign
exchange impact, sales grew by 5%, largely due to growth in Barbie(R), Polly
Pocket!(R), core Fisher-Price(R) and Hot Wheels(R) products combined with the
introduction of Harry Potter(TM) and Diva Starz(TM) products.
Operating profit in the US Girls segment increased by 1% despite the sales
decline, largely due to improved margins and softness in media pricing.
Operating profit in the US Boys-Entertainment segment improved by 43% due to
increased sales, improved margins, reduced selling and administrative expenses,
and softness in media pricing. Operating profit in the US Infant & Preschool
segment improved 20%, largely due to increased volume and improved margin. The
International segment operating profit increased 14% due to increased volume and
lower product costs, partially offset by unfavorable foreign exchange and lower
operating profit in certain Latin American countries.
20
Results of Continuing Operations - First Nine Months
Consolidated Results
Net income from continuing operations for the first nine months of 2001 was
$172.9 million or $0.40 per diluted share as compared to net income of $65.1
million or $0.15 per diluted share in the first nine months of 2000.
Profitability in the first nine months of 2001 was negatively impacted by $39.0
million of charges related to the financial realignment plan and a $5.5 million
charge related to a pre-tax loss on derivative instruments. The combined effect
of these items resulted in pre-tax charges totaling $44.5 million, approximately
$33 million after-tax or $0.07 per diluted share. Profitability in the first
nine months of 2000 was negatively impacted by a $110.3 million pre-tax charge
related to the financial realignment plan and a $53.1 million pre-tax charge
related to the departure of certain senior executives, partially offset by a
$7.0 million pre-tax credit related to adjustments to the 1999 restructuring and
other charges. The combined effect of these items resulted in net pre-tax
charges totaling $156.4 million, approximately $108 million after-tax or $0.25
per diluted share.
The following table provides a comparison of the reported results and the
results excluding charges:
For the Nine Months Ended Sept. 30,
---------------------------------------------------------------------------
2001 2000
------------------------------------ --------------------------------------
Reported Results Reported Results
(In millions) Results Charges Ex. Chgs Results Charges Ex. Chgs
-----------------------------------------------------------------------------------------------------------------------
Net sales $3,199.0 $ - $3,199.0 $3,094.8 $ - $3,094.8
=======================================================================================================================
Gross profit $1,479.4 $ (24.0) $1,503.4 $1,344.9 $ (72.0) $1,416.9
Advertising and promotion
expenses 413.2 0.3 412.9 415.1 3.8 411.3
Other selling and administrative
expenses 649.9 0.1 649.8 697.6 55.2 642.4
Amortization of intangibles 38.2 - 38.2 39.2 0.5 38.7
Restructuring and other charges 13.0 13.0 - 15.9 15.9 -
Other expense (income), net 11.5 7.1 4.4 (7.8) 9.0 (16.8)
-----------------------------------------------------------------------------------------------------------------------
Operating income 353.6 (44.5) 398.1 184.9 (156.4) 341.3
Interest expense 114.0 - 114.0 102.9 - 102.9
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 239.6 $ (44.5) $ 284.1 $ 82.0 $ (156.4) $ 238.4
=======================================================================================================================
Net sales from continuing operations in the first nine months of 2001 increased
3% from last year to $3.20 billion. In local currency, net sales were up 5%
compared to a year ago. Sales within the US increased 2% and accounted for 69%
of consolidated sales in the first nine months of 2001 compared to 70% in 2000.
Sales outside the US increased 7% from a year ago. Excluding the unfavorable
foreign currency exchange impact, international sales increased by 11% compared
to 2000.
Worldwide sales in the Girls category, which now includes American Girl(R),
increased 4%, or 5% in local currency, to $1.43 billion. Domestic sales declined
by 3%, while international sales increased 18%, or 22% in local currency.
The performance of Polly Pocket!(R), Diva Starz(TM), What's Her Face!(TM) and
American Girl(R) drove growth in the Girls category. Worldwide Barbie(R) sales
decreased 4%, or 3% in local currency. Barbie(R) sales in the US declined 13%
21
as compared to the strong year ago period, when sales increased 13% year over
year. The decline in US Barbie(R) sales was due to continuing inventory
management by retailers, lower shipments of Holiday Celebration(TM) Barbie(R) in
response to lower demand at retail, and lower sales of adult-targeted collector
dolls resulting from a weakening retail climate for higher-priced collectible
items. International sales for Barbie(R) were up 14%, or 18% in local currency,
reflecting relatively softer comparisons in the first nine months of 2000, the
benefit of early product availability, and stronger alignment of worldwide sales
and marketing plans.
Worldwide sales in the Boys-Entertainment category grew 7%, or 8% in local
currency, to $838.6 million in 2001. Domestic sales grew by 8% while
international sales increased 5%, or 9% in local currency. The worldwide Wheels
business increased 2%, driven by double-digit growth in Hot Wheels(R), partially
offset by a decline in Matchbox(R) and Tyco(R) Radio Control. The Entertainment
business had double-digit growth in sales with strength in Harry Potter(TM) and
Max Steel(TM) products.
Worldwide sales in the Infant & Preschool category increased 2%, or 3% in local
currency, to $1.14 billion in 2001. Domestic sales were up 5% and international
sales were down 6%, or down 3% in local currency. Worldwide sales of core
Fisher-Price(R) products were up 8%, including double-digit growth
internationally in local currency. The growth in core Fisher-Price(R) and Power
Wheels(R) products was partially offset by weakness in licensed character
brands.
Gross profit, as a percentage of net sales, was 46.2% in 2001, compared to 43.5%
last year. Reported cost of sales for 2001 includes a $24.0 million charge,
largely related to accelerated depreciation resulting from the planned closure
of the Murray, Kentucky plant and termination of a licensing arrangement as part
of the financial realignment plan. Cost of sales reported in 2000 includes a
$72.0 million charge, incurred as part of the financial realignment plan,
related to the termination of a variety of licenses and other contractual
arrangements, and elimination of product lines that did not deliver an adequate
level of profitability. Excluding the financial realignment plan charges, gross
profit, as a percentage of net sales, was 47.0% in the first nine months of 2001
compared to 45.8% in 2000. Gross profit was positively impacted by savings
realized from the financial realignment plan and lower product costs achieved
through the supply chain initiative, partially offset by the negative impact of
foreign exchange.
Advertising and promotion expense was 12.9% of net sales in 2001, compared to
13.4% last year. Reported advertising and promotion expense for 2001 and 2000
include $0.3 million and $3.8 million of charges, respectively, related to
exiting certain product lines. Excluding these charges, advertising and
promotion expense declined from 13.3% in 2000 to 12.9%, largely due to softness
in media pricing. Mattel's 2001 media plan is actually stronger than last year's
in terms of gross rating points. In the first nine months of 2000, other selling
and administrative expenses included a $53.1 million charge related to the
departure of certain senior executives and a $2.1 million charge for settlement
of certain litigation matters. Excluding these charges, other selling and
administrative expenses declined from 20.8% of net sales in 2000 to 20.3% in
2001. Savings realized from the financial realignment plan were offset by bad
debt expense of approximately $9 million, primarily related to the
bankruptcy
22
declared by a US retailer during the third quarter of 2001.
Other expense, net in 2001 includes a $5.5 million loss on derivative
instruments and a $1.6 million expense for asset writedowns and other costs
associated with implementing the North American Strategy. Other expense, net in
2000 includes a $9.0 million charge for the writeoff of certain noncurrent
assets. Excluding these charges, other expense (income), net decreased from
income of $16.8 million in 2000 to expense of $4.4 million in 2001. In 2000,
other income, net included favorable foreign exchange and investment gains.
Interest expense was $114.0 million in 2001 compared to $102.9 million last
year. The increase is due to the allocation in the first nine months of last
year of $31.0 million in interest to discontinued operations. In the first nine
months of 2001, all interest expense was allocated to continuing operations.
Partially offsetting the increase is a benefit in 2001 from lower short-term
interest rates and lower average short-term seasonal borrowings. Interest
expense for full year 2001 is expected to be lower than last year's $189 million
of total interest expense incurred for continuing and discontinued operations
combined. However, management also believes that the impact of a stronger US
dollar versus year ago levels and the possibility of lower sales due to the
challenging retail sales environment will likely offset any interest rate
benefit to the overall consolidated statement of operations. Mattel's first nine
month's tax rate, excluding charges, was 27.6%, consistent with the expected
rate for the year.
Business Segment Results
US Girls segment sales decreased by 3% in 2001 compared to 2000. A 13% decline
in Barbie(R) sales was partially offset by increased sales of American Girl(R),
Polly Pocket!(R), Diva Starz(TM) and What's Her Face!(TM) . The decrease in
Barbie(R) sales compared to first nine months of 2000 was primarily due to
changes in retailer buying patterns and stronger comparable results a year ago.
US Boys-Entertainment segment sales increased 8% compared to 2000. The US Wheels
business increased 3% due to growth in Hot Wheels(R). The US Entertainment
business experienced double-digit growth, largely due to the introduction of
Harry Potter(TM) products. US Infant & Preschool segment sales increased 5%,
largely due to increased sales of core Fisher-Price(R) and Power Wheels(R)
products, partially offset by a decline in sales of licensed character brand
products. International segment sales increased by 7% compared to last year.
Excluding the unfavorable foreign exchange impact, sales grew by 11% due to
double-digit growth in Barbie(R), Polly Pocket!(R), core Fisher-Price(R) and Hot
Wheels(R) products combined with the introduction of Diva Starz(TM) and Harry
Potter(TM) products.
Operating profit in the US Girls segment increased by 5% despite the sales
decline, largely due to improved margins, reduced selling and administrative
expenses, and softness in media pricing. Operating profit in the US
Boys-Entertainment segment more than doubled, due to increased sales, improved
margins, reduced selling and administrative expenses and softness in media
pricing. Operating profit in the US Infant & Preschool segment increased by 14%
as increased sales were partially offset by higher selling and administrative
expenses to support certain new product lines. International segment operating
profit improved by 9% as higher volume was partially offset by lower operating
profit in certain Latin American countries.
23
Financial Position
Mattel's cash and short-term investments decreased $30.1 million to $65.7
million at September 30, 2001 compared to $95.8 million at September 30, 2000.
Compared to year end 2000, cash and short-term investments decreased $166.7
million, primarily due to funding of continuing operations, partially offset by
short-term borrowings. Accounts receivable, net increased $135.1 million
compared to third quarter 2000 as a result of a decrease in the level of
receivables that were sold under Mattel's unsecured committed revolving credit
agreement. Inventory balances increased $84.0 million from third quarter 2000,
primarily as a result of improved availability of products during 2001 compared
to year ago levels, when supplies were affected by the electronic chip shortage,
and 2001 pre-build initiatives to prepare for the closing of the Murray,
Kentucky manufacturing facility as part of the financial realignment plan. Since
year end 2000, inventories increased $250.0 million as a result of seasonal
inventory buildup to support sales later in the year and the pre-build
initiative related to the Murray closure. Prepaid expenses and other current
assets decreased $69.0 million compared to third quarter 2000, largely due to
the disposal of marketable securities received in connection with the sale of
CyberPatrol and lower prepaid income taxes. Other assets increased $186.9
million from the third quarter of 2000, principally due to increased noncurrent
deferred tax assets resulting from operating losses. Net investment in
discontinued operations decreased $24.9 million from third quarter 2000, due to
the closure of Mattel Media.
Short-term borrowings increased $508.7 million compared to year end 2000 to
support seasonal working capital financing needs. Current portion of long-term
debt increased $242.4 million over the 2000 quarter end and $212.2 million over
year end 2000, primarily due to the reclassification of 200 million of Euro
Notes and medium-term notes maturing during the next twelve months from
long-term debt. Accrued liabilities decreased $246.1 million compared to the
2000 third quarter, primarily due to the repayment of $201.0 million of senior
notes in November 2000 in connection with the disposition of Learning Company.
Income taxes payable increased $149.2 million compared to 2000 quarter end due
to cumulative income from continuing operations during the last twelve months.
A summary of Mattel's capitalization is as follows:
(In millions, except percentage
information) Sept. 30, 2001 Sept. 30, 2000 Dec. 31, 2000
----------------------------------------------------------------------------------------------------------------------
Medium-term notes $ 480.0 17% $ 540.5 19% $ 510.0 18%
Senior notes 500.0 18 690.7 25 690.7 25
Other long-term debt obligations 41.1 1 41.9 2 41.7 1
----------------------------------------------------------------------------------------------------------------------
Total long-term debt 1,021.1 36 1,273.1 46 1,242.4 44
Other long-term liabilities 171.4 6 167.2 6 165.5 6
Stockholders' equity 1,610.2 58 1,308.1 48 1,403.1 50
----------------------------------------------------------------------------------------------------------------------
$2,802.7 100% $2,748.4 100% $2,811.0 100%
======================================================================================================================
Total long-term debt decreased by $252.0 million compared to third quarter 2000
due to the reclassification of 200 million of Euro Notes and $60.5 million of
medium-term notes maturing in the next twelve months to current portion of
long-term debt. Mattel expects to satisfy its future long-term capital needs
through the retention of corporate earnings and the issuance of long-term debt
instruments. As of September 30, 2001, Mattel has up to $400.0 million of debt
and equity securities available for issuance under its current shelf
registration statement.
24
Stockholders' equity increased $302.1 million since September 30, 2000,
primarily as a result of income from continuing operations and cash received
from exercise of employee stock options, partially offset by cumulative losses
from discontinued operations and the unfavorable effect of foreign currency
translation.
Liquidity
Cash flows used for continuing operations increased $192.9 million compared to
third quarter 2000, largely due to a decrease in the level of accounts
receivable sold under Mattel's unsecured committed revolving credit agreement.
During the first nine months of 2001, Mattel invested cash flows totaling $131.2
million for additions to tooling in support of new products and to expand the
capacity of existing North American manufacturing facilities in anticipation of
the closure of the Murray, Kentucky facility. Cash flows from financing
activities increased $9.5 million.
During 2001, Mattel expects cash flows to increase due to cash generated by
operations, the change in dividend policy and the disposition of Learning
Company since Mattel is no longer required to fund this business. Mattel
currently intends to use the cash savings generated by these actions to reduce
debt.
Seasonal Financing
Mattel's financing of seasonal working capital typically grows throughout the
first half of the year and peaks in the third or fourth quarter, when accounts
receivable are at their highest level due to increased sales volume, and when
inventories are at their highest in anticipation of expected second half sales
volume. Mattel expects to finance its seasonal working capital requirements for
the next twelve months by using existing and internally generated cash, issuing
commercial paper, selling certain trade receivables and using various short-term
bank lines of credit. In addition, Mattel avails itself of individual short-term
foreign credit lines with a number of banks, which will be used as needed to
finance seasonal working capital requirements of certain foreign subsidiaries.
Mattel believes the amounts available under its unsecured committed revolving
credit facilities, its uncommitted money market facility and its foreign credit
lines will be adequate to meet its seasonal financing requirements.
Risk Management
Foreign Currency
Mattel's results of operations and cash flows may be impacted by exchange rate
fluctuations. Mattel seeks to mitigate its exposure to market risk by monitoring
its currency exchange exposure for the year and partially or fully hedging such
exposure using foreign currency forward exchange and option contracts primarily
to hedge its purchase and sale of inventory, and other intercompany transactions
denominated in foreign currencies. These contracts generally have maturity dates
of up to 18 months. In addition, Mattel manages its exposure through the
selection of currencies used for international borrowings and intercompany
invoicing. Mattel's results of operations can also be affected by the
translation of foreign revenues and earnings into US dollars. Mattel does not
trade in financial instruments for speculative purposes.
Mattel has also entered into a cross currency interest rate swap to convert the
interest and principal amount from Euros to US dollars on its 200 million Euro
Notes due 2002.
25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Litigation Related to Learning Company
Following Mattel's announcement in October 1999 of the expected results of its
Learning Company division for the third quarter of 1999, several of Mattel's
stockholders filed purported class action complaints naming Mattel and certain
of its present and former officers and directors as defendants. The complaints
generally allege, among other things, that the defendants made false or
misleading statements, in the joint proxy statement for the merger of Mattel and
Learning Company and elsewhere, that artificially inflated the price of Mattel's
common stock.
In March 2000, these shareholder complaints were consolidated into two lead
cases: Thurber v. Mattel, Inc. et al. (containing claims under (S)10(b) of the
------------------------------
1934 Securities Exchange Act ("Act")) and Dusek v. Mattel, Inc. et al.
----------------------------
(containing claims under (S)14(a) of the Act). Mattel and the other defendants
filed motions to dismiss both lawsuits for failure to state a claim. In January
2001, the Court granted defendants' motions to dismiss both Thurber and Dusek,
------- ------
and gave plaintiffs leave to amend. Plaintiffs filed amended consolidated
complaints in March 2001 in both actions. In June 2001, Mattel and the other
defendants filed motions to dismiss the amended consolidated complaints. The
Court has not yet ruled on those motions. Both Thurber and Dusek are currently
------- -----
pending in the United States District Court for the Central District of
California.
Other purported class action litigation was brought in the United States
District Court for the Central District of California against Mattel as
successor to Learning Company and the former directors of Learning Company on
behalf of former stockholders of Broderbund Software, Inc. who acquired shares
of Learning Company in exchange for their Broderbund common stock in connection
with the Learning Company-Broderbund merger on August 31, 1998. The consolidated
complaint in In re Broderbund generally alleges that Learning Company misstated
----------------
its financial results prior to the time it was acquired by Mattel. Mattel and
the other defendants filed a motion to dismiss the complaint in In re
-----
Broderbund, and in late May 2001, the Court granted the defendants' motion and
----------
dismissed the case. The In re Broderbund plaintiffs have appealed the Court's
----------------
ruling to the Ninth Circuit Court of Appeals.
Several stockholders have filed derivative complaints on behalf and for the
benefit of Mattel, alleging, among other things, that Mattel's directors
breached their fiduciary duties, wasted corporate assets, and grossly mismanaged
Mattel in connection with Mattel's acquisition of Learning Company and its
approval of severance packages to certain former executives. All of these
derivative actions, one of which was filed in the Court of Chancery in Delaware
and the remainder in Los Angeles Superior Court in California, have been stayed
pending the outcome of motions to dismiss in the federal securities actions.
Mattel believes the purported class actions and derivative suits are without
merit and intends to defend them vigorously.
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.0 By-laws of Mattel, as amended
11.0 Computation of Income (Loss) per Common and Common
Equivalent Share
12.0 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
99.0 Second Amendment to Receivables Purchase Agreement dated
as of September 5, 2001
99.1 Amendment No. 5 to Amended and Restated Mattel 1996 Stock
Option Plan
(b) Reports on Form 8-K
-------------------
Mattel, Inc. filed the following Current Report on Form 8-K during
the quarterly period ended September 30, 2001:
Date of Report Items Reported Financial Statements Filed
-------------------------------- ------------------------- ------------------------------------
July 24, 2001 5, 7 None
27
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTEL, INC.
---------------------------------------
(Registrant)
Date: As of October 26, 2001 By: /s/ Douglas E. Kerner
----------------------
---------------------------------------
Douglas E. Kerner
Senior Vice President and Corporate
Controller (Duly authorized officer and
chief accounting officer)
28