MATTEL, INC. 
In the discussion that follows, "Mattel" refers toMattel, Inc. and/or one or more of its family of companies. The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. Mattel's business is seasonal with consumers making a large percentage of all toy purchases during the traditional holiday season; therefore, results of operations are comparable only with corresponding periods. The following discussion also includes gross sales and currency exchange rate impact, non-GAAP financial measures within the meaning of Regulation G promulgated by theSecurities and Exchange Commission ("Regulation G"), to supplement the financial results as reported in accordance with generally accepted accounting principles ("GAAP"). Gross sales represent sales to customers, excluding the impact of sales adjustments, such as trade discounts and other allowances. The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of non-GAAP financial measures provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. These measures are not, and should not be viewed as, a substitute for GAAP financial measures. Refer to "Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q for a more detailed discussion, including a reconciliation of gross sales, a non-GAAP financial measure, to net sales, its most directly comparable GAAP financial measure. Note that amounts within this Item 2 shown in millions may not foot due to rounding. Overview Mattel is a leading global children's entertainment company that specializes in the design and production of quality toys and consumer products. Mattel's products are among the most widely recognized toy products in the world. Mattel's mission is to "create innovative products and experiences that inspire, entertain, and develop children through play." In order to deliver on this mission, Mattel is focused on the following two-part strategy to transform Mattel from a toy manufacturing company into an intellectual property ("IP") driven, high-performing toy company: •In the short- to mid-term, restore profitability by reshaping operations and regain topline growth by growing Mattel's Power Brands (Barbie, Hot Wheels, Fisher-Price and Thomas & Friends, and American Girl) and expanding Mattel's brand portfolio. •In the mid- to long-term, capture the full value of Mattel's IP through franchise management and the development of Mattel's online retail and e-commerce capabilities. Mattel is the owner of a portfolio of global brands with vast intellectual property potential. Mattel's portfolio of owned and licensed brands and products are organized into the following categories: Dolls-including brands such as Barbie, American Girl, Enchantimals, and Polly Pocket. Empowering girls since 1959, Barbie has inspired the limitless potential of every girl by showing them that they can be anything. With an extensive portfolio of dolls and accessories, content, gaming, and lifestyle products, Barbie is the premier fashion doll for children around the world. American Girl is best known for imparting valuable life lessons through its inspiring dolls and books, featuring diverse characters from past and present. Its products are sold directly to consumers via its catalog, website, and proprietary retail stores. Infant, Toddler, and Preschool-including brands such as Fisher-Price and Thomas & Friends, Power Wheels, Fireman Sam, and Shimmer and Shine (Nickelodeon). As a leader in play and child development, Fisher-Price's mission is to provide meaningful solutions for parents and enrich children's lives from birth to school readiness, helping families get the best possible start. Thomas & Friends is an award-winning preschool train brand franchise that brings meaningful life lessons of friendship and teamwork to kids through content, toys, live events, and other lifestyle categories. Vehicles-including brands such as Hot Wheels, Matchbox, CARS (Disney Pixar), andJurassic World (NBCUniversal). In production for over 50 years, Hot Wheels continues to push the limits of performance and design and ignites the challenger spirit of kids, adults, and collectors. From diecast cars, to tracks, playsets, and advanced play products, the Hot Wheels portfolio has broad appeal that engages and excites kids.
31
--------------------------------------------------------------------------------
Action Figures,Building Sets , Games, and Other-including brands such as MEGA, UNO, Toy Story (Disney Pixar),Jurassic World (NBCUniversal), WWE, and Star Wars (Disney ). From big blocks to small bricks, first builders to advanced collectors, MEGA creates products that spark purposeful play and encourage kids and adults to "build beyond." America's number one game, UNO is the classic matching card game that is easy to pick up and fast fun for everyone. Mattel's operating segments are: (i)North America , which consists of theU.S. andCanada ; (ii) International; and (iii) American Girl. TheNorth America and International segments sell products across categories, although some products are developed and adapted for particular international markets. COVID-19 Update A novel strain of coronavirus disease ("COVID-19") was reported inDecember 2019 and characterized as a pandemic by theWorld Health Organization inMarch 2020 . The impact of COVID-19 and the actions taken by governments, businesses, and individuals in response to it have resulted in significant global economic disruption, including, but not limited to, temporary business closures, reduced retail traffic, volatility in financial markets, and restrictions on travel. COVID-19 has continued to significantly impact Mattel's results of operations, financial position, and cash flows, primarily due to net sales declines in the International and American Girl segments during the second quarter of 2020, as compared to the second quarter of 2019. However, strong consumer toy demand inNorth America resulted in slightly higher net sales in theNorth America segment during the second quarter of 2020, as compared to the second quarter of 2019, primarily driven by strong point of sale demand ("POS") in the Dolls and Games categories and increased sales through e-commerce and omnichannel retailers. Net sales declined in the International segment during the second quarter of 2020, as compared to the second quarter of 2019, primarily due to retail store closures and local restrictions as a result of COVID-19. Exiting the second quarter of 2020, substantially all retail stores in the EMEA andAsia Pacific regions were open, while a great majority of retail stores in theLatin America region were open. Net sales declined in the American Girl segment during the second quarter of 2020, as compared to the second quarter of 2019, primarily due to retail store closures as a result of COVID-19, partially offset by higher direct-to-consumer channel sales. In the near term, COVID-19 is expected to continue to have adverse effects on net sales, with resulting impacts to profitability and working capital, though net sales, profitability, and working capital are expected to be less adversely impacted by COVID-19 in the second half of 2020 as compared to the year-over-year impact in the first half of 2020. Due to the uncertainty of the duration and severity of the pandemic and resulting effects, it is not possible to further estimate the ultimate impact to net sales, profitability, and working capital for the second half of 2020 and beyond. If the pandemic worsens, the actual adverse impact on net sales, profitability, and working capital may be materially greater than Mattel's current estimates. COVID-19 has caused manufacturing and distribution disruption for Mattel and the manufacturers and distribution network it relies upon, including the temporary disruption of manufacturing and distribution facilities during the second quarter of 2020. To date, the disruption has not and is not expected to materially impact Mattel's ability to meet demand for its products. Mattel's manufacturing and distribution network was operational as ofJune 30, 2020 . To the extent any of this disruption becomes prolonged or recurs, particularly during seasonally-high periods of production and/or distribution during the second half of 2020, Mattel's ability to meet demand may be materially impacted. Due to the uncertainty of the duration and severity of the pandemic and resulting effects, it is not possible to estimate the extent of such impact. Prolonged disruption to Mattel's customers, supply chain, or other critical operations would result in material adverse effects to Mattel's business and its liquidity. The ultimate impact of COVID-19 on Mattel's results of operations, financial position, and cash flows remains uncertain at this time due to rapidly evolving circumstances. Mattel is closely monitoring the situation and actively managing its business as developments occur. Refer to Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding potential impacts of COVID-19 on Mattel's business. The specific line items that have been materially affected by these impacts of COVID-19 are noted within "Results ofOperations-Second Quarter " and "Results of Operations-First Half" below. Additional discussion of the impact of COVID-19 on Mattel's liquidity and capital resources is discussed in "Liquidity and Capital Resources" and in "Cost Savings Programs" below. In addition to the impacts of COVID-19 discussed below, it is reasonably likely that the pandemic and its resulting effects could have other unforeseen consequences that affect Mattel's business. 32
--------------------------------------------------------------------------------
Cybersecurity Update OnJuly 28, 2020 , Mattel discovered that it was the victim of a ransomware attack on its information technology systems that caused data on a number of systems to be encrypted. Promptly upon detection of the attack, Mattel began enacting its response protocols and taking a series of measures to stop the attack and restore impacted systems. Mattel believes it has contained the attack and, although some business functions were temporarily impacted, Mattel was able to restore its critical operations. At this time, there is no evidence that any sensitive business data or retail customer, supplier, consumer ,or employee data was exfiltrated. Mattel carries cyber and business continuity insurance, commensurate with its size and the nature of its operations. At this time, Mattel believes there has been no material impact to its operations or financial condition as a result of the incident. However, a forensic investigation of the incident is being conducted, and until that investigation is completed, Mattel cannot be certain of the full impact of the incident. Results ofOperations-Second Quarter Consolidated Results Net sales for the second quarter of 2020 were$732.1 million , a 15% decrease, as compared to$860.1 million in the second quarter of 2019, with an unfavorable impact from changes in currency exchange rates of 2 percentage points. Net loss for the second quarter of 2020 was$109.2 million , or$0.31 per share, as compared to a net loss of$108.0 million , or$0.31 per share, in the second quarter of 2019, due to lower net sales in the International and American Girl segments, primarily due to the impact of COVID-19, partially offset by higher overall gross margin and higher net sales in theNorth America segment. The following table provides a summary of Mattel's consolidated results for the second quarter of 2020 and 2019: For the Three Months EndedJune 30, 2020 June 30, 2019 Year/Year Change Basis % of Net % of Net Points of Amount Sales Amount Sales % Net Sales (In millions, except percentage and basis point information) Net sales$ 732.1 100.0 %$ 860.1 100.0 % -15 % - Gross profit$ 320.8 43.8 %$ 341.4 39.7 % -6 % 410 Advertising and promotion expenses 60.2 8.2 % 84.5 9.8 % -29 % -160 Other selling and administrative expenses 306.8 41.9 % 308.3 35.8 % - % 610 Operating loss (46.1) -6.3 % (51.4) -6.0 % -10 % -30 Interest expense 49.6 6.8 % 46.2 5.4 % 7 % 140 Interest (income) (1.0) -0.1 % (1.5) -0.2 % -33 % 10 Other non-operating expense (income), net 1.6 (0.3) Loss before income taxes (96.3) -13.2 % (95.8) -11.1 % 1 % -210 Provision for income taxes 12.8 12.2 Net loss$ (109.2) -14.9 %$ (108.0) -12.6 % 1 % -230 33
--------------------------------------------------------------------------------
Sales
Net sales for the second quarter of 2020 were$732.1 million , a decrease of$128.0 million or 15%, as compared to$860.1 million in the second quarter of 2019, with an unfavorable impact from changes in currency exchange rates of 2 percentage points. The following table provides a summary of Mattel's consolidated gross sales by categories, along with supplemental information by brand, for the second quarter of 2020 and 2019: For the Three Months Ended Currency June 30, June 30, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Revenues by Categories Dolls$ 261.0 $ 273.4 -5 % -3 % Infant, Toddler, and Preschool 199.8 252.0 -21 % -2 % Vehicles 158.7 214.1 -26 % -3 % Action Figures,Building Sets , Games, and Other 195.0 222.7 -12 % -1 % Gross Sales$ 814.6 $ 962.3 -15 % -2 % Sales Adjustments (82.4) (102.2) Net Sales$ 732.1 $ 860.1 -15 % -2 %
Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands Barbie$ 199.3 $ 186.5 7 % -3 % Hot Wheels 136.5 175.2 -22 % -3 % Fisher-Price and Thomas & Friends 176.3 222.4 -21 % -2 % Other 302.5 378.1 -20 % -2 % Gross Sales$ 814.6 $ 962.3 -15 % -2 % Gross sales were$814.6 million in the second quarter of 2020, a decrease of$147.7 million or 15%, as compared to$962.3 million in the second quarter of 2019, with an unfavorable impact from changes in currency exchange rates of 2 percentage points. The decrease in second quarter of 2020 gross sales was primarily due to lower sales of Vehicles and Infant, Toddler, and Preschool, including the impact of COVID-19. Of the 5% decrease in Dolls gross sales, 3% was due to lower sales of Enchantimals products, 2% was due to lower sales of Polly Pocket products, and 2% was due to lower sales of American Girl products, partially offset by higher sales of Barbie products of 5%. Sales of Barbie products increased 7% driven by strong growth inNorth America segment sales, which increased 43%, partially offset by the decline in International segment sales of 19%, primarily due to the impact of COVID-19. Of the 21% decrease in Infant, Toddler, and Preschool gross sales, 19% was due to lower sales of Fisher-Price and Thomas & Friends products, due to lower sales of Imaginext Toy Story 4 products and the overall category decline, including the impact of COVID-19. Of the 26% decrease in Vehicles gross sales, 18% was due to lower sales of Hot Wheels products, primarily due to lower gross sales in the International segment of 34%, due to the impact of COVID-19, and 5% was due to lower sales of CARS products following its movie launch in a prior year. Of the 12% decrease in Action Figures,Building Sets , Games, and Other gross sales, 24% was due to lower sales of Toy Story 4 products following its 2019 theatrical release and 6% was due to lower sales of MEGA products. This was partially offset by higher sales of 9% from card game products including UNO, and initial sales of Star Wars: The Child plush products of 8%.
34
--------------------------------------------------------------------------------
Cost of Sales Cost of sales as a percentage of net sales was 56.2% in the second quarter of 2020, as compared to 60.3% in the second quarter of 2019. Cost of sales decreased by$107.4 million , or 21%, to$411.3 million in the second quarter of 2020 from$518.7 million in the second quarter of 2019, as compared to a 15% decrease in net sales. Within cost of sales, product and other costs decreased by$78.7 million , or 20%, to$320.4 million in the second quarter of 2020 from$399.1 million in the second quarter of 2019; freight and logistics expenses decreased by$6.1 million , or 9%, to$60.0 million in the second quarter of 2020 from$66.1 million in the second quarter of 2019; and royalty expense decreased by$22.6 million , or 42%, to$30.9 million in the second quarter of 2020 from$53.5 million in the second quarter of 2019. Gross Margin Gross margin increased to 43.8% in the second quarter of 2020 from 39.7% in the second quarter of 2019. The increase in gross margin was primarily driven by incremental realized savings from the Structural Simplification and Capital Light programs (the "cost savings programs") and a decrease in royalty expense resulting from lower sales of licensed products, partially offset by the unfavorable impact of fixed cost absorption. Advertising and Promotion Expenses Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements; (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs; (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers; and (iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as a percentage of net sales decreased to 8.2% in the second quarter of 2020 from 9.8% in the second quarter of 2019 as a result of a reduction and deferral of advertising and promotion spend due to the impact of COVID-19. Other Selling and Administrative Expenses Other selling and administrative expenses were$306.8 million , or 41.9% of net sales, in the second quarter of 2020, as compared to$308.3 million , or 35.8% of net sales, in the second quarter of 2019. The decrease in other selling and administrative expenses was primarily driven by incremental realized savings from the cost savings programs, partially offset by higher incentive compensation expense. Interest expense Interest expense was$49.6 million in the second quarter of 2020, as compared to$46.2 million in the second quarter of 2019. The increase in interest expense was due to the higher interest rate associated with the refinancing of both the 2010 Senior Notes dueOctober 2020 and the 2016 Senior Notes dueAugust 2021 with the 2019 Senior Notes and higher short-term borrowings. Provision for Income Taxes Mattel's provision for income taxes was$12.8 million and$12.2 million for the second quarter of 2020 and 2019, respectively. For the second quarter of 2020 and 2019, Mattel recognized a net discrete tax expense of$3.2 million and$0.8 million , respectively, primarily related to an expense for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. As a result of the establishment of a valuation allowance onU.S. deferred tax assets, there was noU.S. tax benefit provided forU.S. losses during the second quarter 2020 and 2019.
35
--------------------------------------------------------------------------------
Segment Results North America Segment The following table provides a summary of Mattel's gross sales for theNorth America segment by categories, along with supplemental information by brand, for the second quarter of 2020 and 2019: For the Three Months Ended Currency June 30, June 30, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Revenues by Categories Dolls$ 121.2 $ 93.3 30 % - % Infant, Toddler, and Preschool 132.4 142.6 -7 % - % Vehicles 77.8 88.6 -12 % - % Action Figures,Building Sets , Games, and Other 130.2 122.8 6 % - % Gross Sales$ 461.5 $ 447.4 3 % - % Sales Adjustments (28.7) (24.5) Net Sales$ 432.9 $ 422.9 2 % - %
Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands Barbie$ 112.3 $ 78.5 43 % - % Hot Wheels 66.2 68.6 -3 % - % Fisher-Price and Thomas & Friends 111.7 124.6 -10 % - % Other 171.4 175.7 -2 % - % Gross Sales$ 461.5 $ 447.4 3 % - % Gross sales for theNorth America segment were$461.5 million in the second quarter of 2020, an increase of$14.1 million , or 3%, as compared to$447.4 million in the second quarter of 2019. The increase in theNorth America segment gross sales was primarily due to higher sales of Dolls, partially offset by lower sales of Vehicles. Of the 30% increase in Dolls gross sales, 36% was due to higher sales of Barbie products, primarily driven by positive POS brand momentum, partially offset by lower sales of other owned brands products of 3%, and lower sales of partner brands products of 3%. Of the 7% decrease in Infant, Toddler, and Preschool gross sales, 9% was due to lower sales of Fisher-Price and Thomas & Friends products attributable to lower sales of Imaginext Toy Story 4 products and the overall category decline. This was partially offset by higher sales of Power Wheels products of 4%. Of the 12% decrease in Vehicles gross sales, 5% was due to lower sales of CARS products following its movie launch in a prior year, 4% was due to lower sales of Matchbox products, and 3% was due to lower sales of Hot Wheels products. Of the 6% increase in Action Figures,Building Sets , Games, and Other gross sales, 14% was due to initial sales of Star Wars: The Child plush products and 13% was due to higher sales of card game products, including UNO. This was partially offset by lower sales of Toy Story 4 products of 23% following its 2019 theatrical release. Cost of sales decreased 8% in the second quarter of 2020, as compared to a 2% increase in net sales, primarily due to lower product and other costs and royalty expense. Gross margin in the second quarter of 2020 increased primarily due to lower product costs due to incremental realized savings from the cost savings programs and lower royalty expense.North America segment income was$77.9 million in the second quarter of 2020, as compared to segment income of$28.3 million in the second quarter of 2019; the increase was primarily due to higher gross profit and lower advertising and promotion expenses.
36
--------------------------------------------------------------------------------
International Segment
The following table provides a summary of Mattel's gross sales for the
International segment by categories, along with supplemental brand information,
for the second quarter of 2020 and 2019:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange Rate
2020 2019 Reported Impact
(In millions, except percentage information)
Revenues by Categories
Dolls $ 110.8 $ 145.7 -24 % -5 %
Infant, Toddler, and Preschool 67.4 109.4 -38 % -3 %
Vehicles 80.9 125.5 -36 % -5 %
Action Figures, Building Sets ,
Games, and Other 64.8 99.9 -35 % -4 %
Gross Sales $ 323.9 $ 480.5 -33 % -5 %
Sales Adjustments (52.9) (76.9)
Net Sales $ 271.1 $ 403.6 -33 % -4 %
Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands Barbie$ 87.0 $ 108.1 -19 % -4 % Hot Wheels 70.3 106.6 -34 % -5 % Fisher-Price and Thomas & Friends 64.6 97.8 -34 % -4 % Other 102.1 168.1 -39 % -4 % Gross Sales$ 323.9 $ 480.5 -33 % -5 % Gross sales for the International segment were$323.9 million in the second quarter of 2020, a decrease of$156.6 million , or 33%, as compared to$480.5 million in the second quarter of 2019, with an unfavorable impact from changes in currency exchange rates of 5 percentage points. The decrease in the International segment gross sales was due to lower sales in all categories, primarily due to retail store closures and local restrictions resulting from COVID-19. Of the 24% decrease in Dolls gross sales, 14% was due to lower sales of Barbie products, 4% was due to lower sales of Enchantimals products, and 4% was due to lower sales of Polly Pocket products, primarily due to the impact of COVID-19. Of the 38% decrease in Infant, Toddler, and Preschool gross sales, 30% was due to lower sales of Fisher-Price and Thomas & Friends products, primarily due to the impacts of the overall category decline and the impact of COVID-19, and 7% was due to lower sales ofFisher-Price Friends products, primarily driven by the rationalization of licensing partnerships. Of the 36% decrease in Vehicles gross sales, 29% was due to lower sales of Hot Wheels products, primarily due to the impact of COVID-19, and 5% was due to lower sales of CARS products following its movie launch in a prior year. Of the 35% decrease in Action Figures,Building Sets , Games, and Other gross sales, 28% was due to lower sales of Toy Story 4 products following its 2019 theatrical release and 6% was due to lower sales of MEGA products. Cost of sales decreased 36% in the second quarter of 2020, as compared to a 33% decrease in net sales, primarily due to lower product and other costs and royalty expense. Gross margin in the second quarter of 2020 increased primarily as a result of lower product costs due to incremental realized savings from the cost savings programs and lower royalty expense. International segment loss was$9.8 million in the second quarter of 2020, as compared to segment loss of$3.5 million in the second quarter of 2019; the decline was primarily as a result of lower net sales due to the impact of COVID-19, partially offset by higher gross margin and lower advertising and promotion expenses.
37
--------------------------------------------------------------------------------
American Girl Segment
The following table provides a summary of Mattel's gross sales for the American
Girl segment for the second quarter of 2020 and 2019:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange Rate
2020 2019 Reported Impact
(In millions, except percentage information)
American Girl Segment
Gross Sales $ 29.1 $ 34.4 -16 % - %
Sales Adjustments (0.9) (0.9)
Net Sales $ 28.2 $ 33.5 -16 % - %
Gross sales for the American Girl segment were $29.1 million in the second
quarter of 2020, a decrease of $5.3 million , or 16%, as compared to $34.4
million in the second quarter of 2019. The decrease in American Girl gross sales
was primarily due to lower sales in proprietary retail channels, which were
impacted by retail store closures throughout the quarter due to the impact of
COVID-19. This was partially offset by higher direct-to-consumer channel sales,
which more than doubled during the second quarter of 2020.
Cost of sales decreased 13% in the second quarter of 2020, as compared to a 16%
decrease in net sales, primarily due to lower product and other costs, partially
offset by higher freight and logistics expenses. Gross margin in the second
quarter of 2020 decreased primarily due to increased freight and logistics
expenses due to higher direct-to-consumer channel sales, partially offset by
incremental realized savings from cost savings programs.
American Girl segment loss was $13.9 million in the second quarter of 2020, as
compared to a segment loss of $16.3 million in the second quarter of 2019. This
improvement was primarily driven by lower selling and administrative expense,
partially offset by lower net sales, including the impact of retail store
closures during the quarter due to the impact of COVID-19.
38
--------------------------------------------------------------------------------
Results of Operations-First Half Consolidated Results Net sales for the first half of 2020 were$1.33 billion , a 14% decrease, as compared to$1.55 billion for the first half of 2019, with an unfavorable impact from the changes in currency exchange rates of 1 percentage point. Net loss for the first half of 2020 was$319.9 million , or$0.92 per share, as compared to a net loss of$284.3 million , or$0.82 per share, in the first half of 2019. The higher net loss was due to lower net sales, primarily due to the impact of COVID-19, which was partially offset by higher gross margin, driven by incremental realized savings from the cost savings programs, and the absence of the impact of the inclined sleeper product recalls of approximately$30 million . The following table provides a summary of Mattel's consolidated results for the first half of 2020 and 2019: For the Six Months EndedJune 30, 2020 June 30, 2019 Year/Year Change % of Net % of Net Basis Points Amount Sales Amount Sales % of Net Sales (In millions, except percentage and basis point information) Net sales$ 1,326.2 100.0 %$ 1,549.3 100.0 % -14 % - Gross profit$ 576.0 43.4 %$ 581.2 37.5 % -1 % 590 Advertising and promotion expenses 136.5 10.3 % 154.0 9.9 % -11 % 40 Other selling and administrative expenses 635.5 47.9 % 605.7 39.1 % 5 % 880 Operating loss (196.0) -14.8 % (178.5) -11.5 % 10 % -330 Interest expense 98.6 7.4 % 93.2 6.0 % 6 % 140 Interest (income) (3.1) -0.2 % (3.8) -0.2 % -18 % - Other non-operating expense, net 3.7 1.6 Loss before income taxes (295.2) -22.3 % (269.4) -17.4 % 10 % -490 Provision for income taxes 24.7 14.9 Net loss$ (319.9) -24.1 %$ (284.3) -18.3 % 13 % -580 39
--------------------------------------------------------------------------------
Sales
Net sales for the first half of 2020 were$1.33 billion , a 14% decrease, as compared to$1.55 billion for the first half of 2019. The following table provides a summary of Mattel's consolidated gross sales by categories, along with supplemental information by brand, for the first half of 2020 and 2019: For the Six Months Ended Currency June 30, June 30, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Revenues by Categories Dolls $ 486.9$ 526.3 -7 % -2 % Infant, Toddler, and Preschool 340.1 445.6 -24 % -2 % Vehicles 344.3 397.5 -13 % -2 % Action Figures,Building Sets , Games, and Other 313.2 373.0 -16 % -2 % Gross Sales$ 1,484.5 $ 1,742.4 -15 % -2 % Sales Adjustments (158.3) (193.1) Net Sales$ 1,326.2 $ 1,549.3 -14 % -1 % Supplemental Revenue Disclosure Revenues by Top 3 Power Brands Barbie $ 346.8$ 350.0 -1 % -3 % Hot Wheels 295.1 325.7 -9 % -3 % Fisher-Price and Thomas & Friends 305.0 394.8 -23 % -2 % Other 537.6 671.8 -20 % -2 % Gross Sales$ 1,484.5 $ 1,742.4 -15 % -2 % Gross sales were$1.48 billion in the first half of 2020, a decrease of$257.9 million or 15%, as compared to$1.74 billion in the first half of 2019, with an unfavorable impact from changes in currency exchange rates of 2 percentage points. The decrease in gross sales for the first half of 2020 was primarily due to lower sales of Infant, Toddler, and Preschool; Action Figures,Building Sets , Games, and Other; and Vehicles, primarily due to the impact of COVID-19. Of the 7% decrease in Dolls gross sales, 2% was due to lower sales of American Girl products, 2% was due to lower sales of Polly Pocket products, 1% was due to lower sales of Enchantimals products, and 1% was due to lower sales of Barbie products. Sales of Barbie products decreased 1% driven by the decline in International segment sales of 18%, primarily due to the impact of COVID-19, partially offset by strong growth inNorth America segment sales, which increased 22%. Of the 24% decrease in Infant, Toddler, and Preschool gross sales, 20% was due to lower sales of Fisher-Price and Thomas & Friends products, due to the overall category decline, including the impact of COVID-19. Of the 13% decrease in Vehicles gross sales, 7% was due to lower sales of Hot Wheels products, primarily in the International segment, which declined 19% year over year, primarily due to the impact of COVID-19; and 4% was due to lower sales of CARS products following its movie launch in a prior year. Of the 16% decrease in Action Figures,Building Sets , Games, and Other gross sales, 20% was due to lower sales of Toy Story 4 products following its 2019 theatrical release and 6% was due to lower sales of MEGA products, partially offset by higher sales of card games products, including UNO of 8%, and initial sales of Star Wars: The Child plush products of 5%.
40
--------------------------------------------------------------------------------
Cost of Sales Cost of sales as a percentage of net sales was 56.6% in the first half of 2020, as compared to 62.5% in the first half of 2019. Cost of sales decreased by$218.0 million , or 23%, to$750.2 million in the first half of 2020 from$968.1 million in the first half of 2019, as compared to a 14% decrease in net sales. Within cost of sales, product and other costs decreased by$169.5 million , or 23%, to$580.8 million in the first half of 2020 from$750.3 million in the first half of 2019; freight and logistics expenses decreased by$14.1 million , or 11%, to$115.0 million in the first half of 2020 from$129.1 million in the first half of 2019; and royalty expense decreased by$34.4 million , or 39%, to$54.4 million in the first half of 2020 from$88.7 million in the first half of 2019. Gross Margin Gross margin increased to 43.4% in the first half of 2020 from 37.5% in the first half of 2019. The increase in gross margin was primarily driven by incremental realized savings from the cost savings programs, a decrease in royalty expense resulting from lower sales of licensed products, and the absence of the inclined sleeper product recalls of approximately$26 million , partially offset by the unfavorable impact of fixed cost absorption. Advertising and Promotion Expenses Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements; (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs; (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers; and (iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as a percentage of net sales increased to 10.3% in the first half of 2020 from 9.9% in the first half of 2019, due to lower net sales, partially offset by a reduction and deferral of advertising and promotion spend, both primarily due to the impact of COVID-19. Other Selling and Administrative Expenses Other selling and administrative expenses were$635.5 million , or 47.9% of net sales, in the first half of 2020, as compared to$605.7 million , or 39.1% of net sales, in the first half of 2019. The increase in other selling and administrative expenses were primarily driven by higher incentive compensation expense and employee-related costs, partially offset by incremental realized savings from the cost savings programs. Interest Expense Interest expense was$98.6 million in the first half of 2020, as compared to$93.2 million in the first half of 2019. The increase in interest expense was due to the higher interest rate associated with the refinancing of both the 2010 Senior Notes dueOctober 2020 and the 2016 Senior Notes dueAugust 2021 with the 2019 Senior Notes and higher short-term borrowings. Provision for Income Taxes Mattel's provision for income taxes was$24.7 million and$14.9 million for the first half of 2020 and 2019, respectively. For the first half of 2020, Mattel recognized a net discrete tax expense of$9.6 million primarily related to an expense for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. During the first half of 2019, Mattel recognized a net discrete benefit of$1.1 million , primarily related to reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. As a result of the establishment of a valuation allowance onU.S. deferred tax assets, there was noU.S. tax benefit provided forU.S. losses during the first half of 2020 and 2019.
41
--------------------------------------------------------------------------------
Segment Results North America Segment The following table provides a summary of Mattel's gross sales for theNorth America segment by categories, along with supplemental information by brand, for the first half of 2020 and 2019: For the Six Months Ended Currency June 30, June 30, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Revenues by Categories Dolls$ 195.1 $ 173.6 12 % - % Infant, Toddler, and Preschool 208.9 250.6 -17 % - % Vehicles 166.5 173.6 -4 % - % Action Figures,Building Sets , Games, and Other 196.7 219.0 -10 % - % Gross Sales$ 767.3 $ 816.7 -6 % - % Sales Adjustments (46.9) (52.5) Net Sales$ 720.4 $ 764.3 -6 % - % Supplemental Revenue Disclosure Revenues by Top 3 Power Brands Barbie$ 180.1 $ 147.8 22 % - % Hot Wheels 140.3 135.6 3 % -1 % Fisher-Price and Thomas & Friends 181.6 221.2 -18 % - % Other 265.3 312.2 -15 % - % Gross Sales$ 767.3 $ 816.7 -6 % - % Gross sales for theNorth America segment were$767.3 million in the first half of 2020, a decrease of$49.4 million , or 6%, as compared to$816.7 million in the first half of 2019. The decrease in theNorth America segment gross sales was primarily due to lower sales of Infant, Toddler, and Preschool; and Action Figures,Building Sets , Games, and Other; partially offset by higher sales of Dolls. Of the 12% increase in Dolls gross sales, 18% was due to higher sales of Barbie products, primarily driven by positive POS brand momentum, partially offset by lower sales of other owned brands products of 4%. Of the 17% decrease in Infant, Toddler, and Preschool gross sales, 16% was due to lower sales of Fisher-Price and Thomas & Friends products, including the impacts of lower sales of Imaginext Toy Story 4 products and the overall category decline. Of the 4% decrease in Vehicles gross sales, 4% was due to lower sales of CARS products following its movie launch in a prior year and 2% was due to lower sales of Matchbox products, partially offset by higher sales of Hot Wheels products of 3%. Of the 10% decrease in Action Figures,Building Sets , Games, and Other gross sales, 21% was due to lower sales of Toy Story 4 products following its 2019 theatrical release and 6% was due to lower sales of MEGA products, partially offset by 10% higher sales of card games products, including UNO, and 8% due to initial sales of Star Wars: The Child plush products. Cost of sales decreased 19% during the first half of 2020, as compared to a 6% decrease in net sales, primarily driven by lower product and other costs and royalty expense. Gross margin in the first half of 2020 increased primarily due to lower product costs due to incremental realized savings from the cost savings programs, lower royalty expense, and the absence of the inclined sleeper product recall expense of approximately$25 million in 2019.North America segment income was$86.0 million in the first half of 2020, as compared to segment income of$8.6 million in the first half of 2019; the improvement was primarily due to higher gross profit and lower advertising and promotion expenses.
42
--------------------------------------------------------------------------------
International Segment
The following table provides a summary of Mattel's gross sales for the
International segment by categories, along with supplemental brand information,
for the first half of 2020 and 2019:
For the Six Months Ended Currency
June 30, June 30, % Change as Exchange Rate
2020 2019 Reported Impact
(In millions, except percentage information)
Revenues by Categories
Dolls $ 224.7 $ 272.8 -18 % -5 %
Infant, Toddler, and Preschool 131.2 195.0 -33 % -4 %
Vehicles 177.8 223.9 -21 % -5 %
Action Figures, Building Sets , Games, and
Other 116.4 154.0 -24 % -3 %
Gross Sales $ 650.1 $ 845.7 -23 % -4 %
Sales Adjustments (109.6) (138.6)
Net Sales $ 540.4 $ 707.1 -24 % -4 %
Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands
Barbie $ 166.7 $ 202.3 -18 % -5 %
Hot Wheels 154.8 190.1 -19 % -5 %
Fisher-Price and Thomas & Friends 123.4 173.6 -29 % -4 %
Other 205.2 279.7 -27 % -4 %
Gross Sales $ 650.1 $ 845.7 -23 % -4 %
Gross sales for the International segment were $650.1 million in the first half
of 2020, a decrease of $195.6 million , or 23%, as compared to $845.7 million in
the first half of 2019, with an unfavorable impact from changes in currency
exchange rates of 4 percentage points. The decrease in the International segment
gross sales was due to lower sales in all categories, primarily due to the
impact of COVID-19.
Of the 18% decrease in Dolls gross sales, 13% was due to lower sales of Barbie
products and 3% was due to lower sales of Polly Pocket products, both primarily
due to the impact of COVID-19.
Of the 33% decrease in Infant, Toddler, and Preschool gross sales, 26% was due
to lower sales of Fisher-Price and Thomas & Friends products, including the
impacts of the overall category decline and the impact of COVID-19, and 6% was
due to lower sales of Fisher-Price Friends products primarily driven by the
rationalization of licensing partnerships.
Of the 21% decrease in Vehicles gross sales, 16% was due to lower sales of Hot
Wheels products, primarily due to the impact of COVID-19, and 4% was due to
lower sales of CARS products following its movie launch in a prior year.
Of the 24% decrease in Action Figures, Building Sets , Games, and Other gross
sales, 18% was due to lower sales of Toy Story 4 products following its 2019
theatrical release and 4% was due to lower sales of MEGA products.
Cost of sales decreased 28% in the first half of 2020, as compared to a 24%
decrease in net sales, primarily due to lower product and other costs and
royalty expense. Gross margin in the first half of 2020 increased primarily due
to lower product costs driven by incremental realized savings from the cost
savings programs and lower royalty expense.
International segment loss was $43.8 million in the first half of 2020, as
compared to a segment loss of $27.8 million in the first half of 2019. The
decline was primarily due to lower net sales, mainly due to the impact of
COVID-19, partially offset by lower advertising and promotion expenses and
higher gross margin.
43
--------------------------------------------------------------------------------
American Girl Segment
The following table provides a summary of Mattel's gross sales for the American
Girl segment for the first half of 2020 and 2019:
For the Six Months Ended Currency
June 30, June 30, % Change as Exchange Rate
2020 2019 Reported Impact
(In millions, except percentage information)
American Girl Segment
Total Gross Sales $ 67.2 $ 80.0 -16 % - %
Sales Adjustments (1.8) (2.0)
Total Net Sales $ 65.3 $ 78.0 -16 % - %
Gross sales for the American Girl segment was $67.2 million in the first half of
2020, a decrease of $12.8 million , or 16%, as compared to $80.0 million in the
first half of 2019. The decrease in American Girl gross sales was primarily due
to lower sales in proprietary retail channels, which were negatively impacted by
retail store closures late in the first quarter and throughout the second
quarter of 2020, primarily due to the impact of COVID-19, partially offset by
higher direct-to-consumer channel sales.
Cost of sales decreased 9% in the first half of 2020, as compared to a 16%
decrease in net sales, primarily driven by lower product and other costs. Gross
margin in the first half of 2020 decreased primarily due to higher freight and
logistics expenses due to higher direct-to-consumer channel sales, partially
offset by lower product costs driven by the incremental realized savings from
cost savings programs.
American Girl segment loss was $31.3 million in the first half of 2020, as
compared to segment loss of $30.4 million in the first half of 2019. The decline
was driven primarily by lower net sales, partially offset by lower other selling
and administrative expenses.
Cost Savings Programs
Capital Light Program
During the first quarter of 2019, Mattel announced the commencement of its
Capital Light program to optimize Mattel's manufacturing footprint (including
the sale or consolidation of manufacturing facilities), increase the
productivity of its plant infrastructure, and achieve additional efficiencies
across its entire supply chain. In conjunction with the Capital Light program,
Mattel discontinued production in 2019 at certain plants located in China ,
Indonesia , and Mexico . In addition to the discontinued production at the three
plants, Mattel will discontinue production at its plant located in Canada in
2021. Mattel recorded severance and other restructuring charges of $8.6 million
for the first half of 2020. Of the total charges recorded for the first half of
2020, $4.1 million was recorded within other selling and administrative expenses
and $4.5 million was recorded within cost of sales in the consolidated
statements of operations.
As of June 30, 2020 , Mattel has recorded cumulative severance and other
restructuring charges related to the Capital Light program of $46.2 million ,
which include approximately $14 million of non-cash charges. Mattel expects to
incur total severance and other restructuring charges, excluding non-cash
charges, of approximately $38 million related to the Capital Light program.
Mattel is currently evaluating other cost saving measures, including the
optimization of owned and operated manufacturing facilities and the geographical
footprint of co-manufacturing facilities, which may result in incremental cost
savings. Mattel realized cost savings (before severance, restructuring costs,
and cost inflation) of approximately $26 million , primarily within gross profit,
for the first half of 2020 and has achieved approximately $41 million of
run-rate savings in connection with the program. Mattel expects to realize
cumulative run-rate cost savings of approximately $65 million in 2020 and $72
million by 2021 related to the Capital Light program actions taken through June
30, 2020 .
Other Cost Savings Actions
During the first half of 2020, Mattel recorded severance charges of
approximately $15 million , primarily related to actions taken to further
streamline its organizational structure.
44
--------------------------------------------------------------------------------
In connection with Mattel's continued efforts to streamline its organizational structure and restore profitability, onMay 4, 2020 , Mattel committed to a planned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the impact of COVID-19. Mattel expects to incur additional severance and restructuring charges of approximately$5 million , consisting solely of cash expenditures for employee termination and severance costs, through the end of 2020. As a result of the reduction in force actions initiated in 2020, Mattel expects to realize approximately$40 million of run-rate cost savings exiting 2020. During the first half of 2020, Mattel recorded additional severance and other restructuring charges of approximately$5 million , related to actions initiated in the prior year associated with the Structural Simplification cost savings program. Liquidity and Capital Resources Mattel's primary sources of liquidity are its domestic and foreign cash and equivalents balances, short-term borrowing facilities, including its$1.60 billion senior secured revolving credit facilities, and access to capital markets to fund its operations and obligations. Such obligations may include investing and financing activities such as capital expenditures and debt service. Of Mattel's$461.6 million in cash and equivalents atJune 30, 2020 , approximately$311 million was held by foreign subsidiaries. Cash flows from operating activities could be negatively impacted by decreased demand for Mattel's products, which could result from factors such as, but not limited to, adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel's ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as, but not limited to, global economic crises and tight credit environments, an inability to meet its debt covenant requirements and its senior secured revolving credit facility covenants, or further deterioration of Mattel's credit ratings. As discussed above under Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations-COVID-19 Update" of this Quarterly Report on Form 10-Q, many of the aforementioned factors have been, and are expected to continue to be, adversely affected by COVID-19. However, based on Mattel's current business plan and factors known to date, including the currently known impacts of COVID-19, it is expected that existing cash and equivalents, cash flows from operations, availability under the senior secured credit revolving facility, and access to capital markets, will be sufficient to meet working capital and operating expenditure requirements for the next twelve months. Additionally, Mattel expects to remain in compliance with all of its debt covenants throughAugust 10, 2021 . Refer to Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding potential impacts of COVID-19 on Mattel's business. Current Market Conditions Mattel is exposed to financial market risk resulting from changes in interest and foreign currency exchange rates. Consistent with prior periods, Mattel intends to utilize its senior secured revolving credit facilities to meet its short-term liquidity needs. AtJune 30, 2020 , Mattel had$400.0 million in outstanding borrowings under the senior secured revolving credit facilities and approximately$13 million in outstanding letters of credit under the senior secured revolving credit facilities. During the first half of 2020, Mattel drew down$400.0 million under the senior secured revolving credit facilities as Mattel accelerated the timing of its borrowings under the senior secured revolving credit facilities in anticipation of its projected seasonal working capital requirements and in light of uncertainties surrounding the impact of COVID-19. Market conditions could affect certain terms of other debt instruments that Mattel enters into from time to time. Mattel monitors the third-party depository institutions that hold Mattel's cash and equivalents. Mattel's emphasis is primarily on safety and liquidity of principal, and secondarily on maximizing the yield on those funds. Mattel diversifies its cash and equivalents among counterparties and securities to minimize risks. Mattel is subject to credit risks relating to the ability of its counterparties in hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered in the fair value measurements of Mattel's foreign currency forward exchange contracts. Mattel closely monitors its counterparties and takes action, as necessary, to manage its counterparty credit risk. Mattel expects that some of its customers and vendors may experience difficulty in obtaining the liquidity required to buy inventory or raw materials, especially in light of the global economic uncertainty caused by COVID-19. Mattel monitors its customers' financial condition and their liquidity in order to mitigate Mattel's accounts receivable collectibility risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
45
--------------------------------------------------------------------------------
Mattel sponsors defined benefit pension plans and postretirement benefit plans for its employees. Actual returns below the expected rate of return, including as a result of the market disruptions caused by COVID-19, along with changes in interest rates that affect the measurement of the liability, would impact the amount and timing of Mattel's future contributions to these plans. Mattel's business has been adversely impacted by COVID-19. Refer to Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations-COVID-19 Update" and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding the impact and potential impacts of COVID-19 on Mattel's business. Cash Flow Activities Cash flows used for operating activities were$463.0 million in the first half of 2020, as compared to$400.5 million in the first half of 2019. The increase in cash flows used for operating activities was primarily due to higher net loss, excluding the impact of non-cash charges. Cash flows used for investing activities were$80.9 million in the first half of 2020, as compared to$43.7 million in the first half of 2019. The increase in cash flows used for investing activities was primarily driven by payments for foreign currency forward exchange contracts and higher capital spending in the first half of 2020. Cash flows provided by financing activities were$399.3 million in the first half of 2020, as compared to$40.7 million in the first half of 2019. The increase in cash flows from financing activities was primarily driven by net proceeds from short-term borrowings of$400.0 million in the first half of 2020. Seasonal Financing See Part I, Item 1 "Financial Statements-Note 8 to the Consolidated Financial Statements-Seasonal Financing" of this Quarterly Report on Form 10-Q. Financial Position Mattel's cash and equivalents decreased$168.5 million to$461.6 million atJune 30, 2020 , as compared to$630.0 million atDecember 31, 2019 , primarily due to seasonal working capital usage and capital expenditures, partially offset by net proceeds from short-term borrowings during the first half of 2020. Mattel's cash and equivalents increased$267.4 million to$461.6 million atJune 30, 2020 , as compared to$194.1 million atJune 30, 2019 , primarily due to net proceeds from short-term borrowings during the first half of 2020 and cash flows provided by operating activities for the trailing twelve months, partially offset by capital expenditures. Accounts receivable decreased$285.9 million to$650.5 million atJune 30, 2020 , as compared to$936.4 million atDecember 31, 2019 , primarily due to seasonal declines as year-end receivables are collected and the impact of foreign exchange, due to the strengthening of theU.S. dollar. Accounts receivable decreased$105.2 million to$650.5 million atJune 30, 2020 , as compared to$755.7 million atJune 30, 2019 , primarily due to lower sales during the first half of 2020, as a result of the continued impact of COVID-19. Inventory increased$207.1 million to$702.6 million atJune 30, 2020 , as compared to$495.5 million atDecember 31, 2019 , primarily due to seasonal inventory build, partially offset by the temporary closure of production facilities in regions affected by COVID-19 and the impact of foreign exchange, due to the strengthening of theU.S. dollar. Inventory decreased$19.8 million to$702.6 million atJune 30, 2020 , as compared to$722.4 million atJune 30, 2019 , primarily due to the temporary closure of production facilities, partially offset by lower sales during the first half of 2020, as a result of the continued impact of COVID-19 and the impact of foreign exchange, due to the strengthening of theU.S. dollar. Accounts payable and accrued liabilities decreased$263.0 million to$965.9 million atJune 30, 2020 , as compared to$1.23 billion atDecember 31, 2019 , primarily due to seasonal declines in expenditure levels. Accounts payable and accrued liabilities decreased$36.3 million to$965.9 million atJune 30, 2020 , as compared to$1.0 billion atJune 30, 2019 , primarily due to the timing of interest payments. Mattel had$400.0 million and$45.0 million of short-term borrowings outstanding atJune 30, 2020 , andJune 30, 2019 , respectively. AtDecember 31, 2019 , Mattel had no short-term borrowings outstanding.
46
--------------------------------------------------------------------------------
A summary of Mattel's capitalization is as follows:
June 30, 2020 June 30, 2019 December 31, 2019
(In millions, except percentage information)
Cash and equivalents $ 461.6 $ 194.1 $ 630.0
Short-term borrowings 400.0 45.0 -
2010 Senior Notes due October 2020 - 250.0 -
2010 Senior Notes due October 2040 250.0 250.0 250.0
2011 Senior Notes due November 2041 300.0 300.0 300.0
2013 Senior Notes due March 2023 250.0 250.0 250.0
2016 Senior Notes due August 2021 - 350.0 -
2017/2018 Senior Notes due December 2025 1,500.0 1,500.0 1,500.0
2019 Senior Notes due December 2027 600.0 - 600.0
Debt issuance costs and debt discount (49.2) (44.8) (53.2)
Total debt $ 3,250.8 97 % $ 2,900.2 87 % $ 2,846.8 85 %
Stockholders' equity 86.1 3 426.2 13 491.7 15
Total capitalization (debt plus equity)$ 3,336.9 100 %$ 3,326.4 100 %$ 3,338.5
100 %
Total debt was$3.25 billion atJune 30, 2020 , as compared to$2.85 billion atDecember 31, 2019 . There were no borrowings or repayments on long-term debt during the first half of 2020. Short-term borrowings were$400.0 million during the first half of 2020. Total debt was$3.25 billion atJune 30, 2020 , as compared to$2.90 billion atJune 30, 2019 . The increase is primarily due to the short-term borrowings of$400.0 million during the first half of 2020. InNovember 2019 , Mattel used the proceeds from the$600.0 million aggregate principal issuance of the 2019 Senior Notes to redeem and retire its$250.0 million of 2010 Senior Notes dueOctober 2020 and$350.0 million of 2016 Senior Notes dueAugust 2021 . Stockholders' equity decreased$405.6 million to$86.1 million atJune 30, 2020 , as compared to$491.7 million atDecember 31, 2019 , primarily due to the net loss for the first half of 2020 and a decrease in currency translation adjustments within accumulated other comprehensive loss due to the strengthening of theU.S. dollar. Stockholders' equity decreased$340.0 million to$86.1 million atJune 30, 2020 , as compared to$426.2 million atJune 30, 2019 , primarily due to the higher net loss for the first half of 2020 and a decrease in currency translation adjustments within accumulated other comprehensive loss due to the strengthening of theU.S. dollar. Litigation See Part I, Item 1 "Financial Statements-Note 21 to the Consolidated Financial Statements-Contingencies" of this Quarterly Report on Form 10-Q. Application of Critical Accounting Policies and Estimates Mattel considered the impacts of the COVID-19 pandemic on significant estimates and judgments used in applying its accounting policies for the first half of 2020. However, in light of the pandemic, there is a greater degree of uncertainty in applying these judgments and depending on the duration and severity of the pandemic, changes to its estimates and judgments could result in meaningful impacts to its financial statements in future periods.
47
--------------------------------------------------------------------------------
Mattel concluded that the impact of COVID-19 did not result in a triggering event for goodwill during the second quarter of 2020. Mattel expects the performance of the American Girl and International reporting units to be less adversely affected by COVID-19 in the second half of 2020 than they were in the first half of 2020. The American Girl reporting unit demonstrated strong growth in its direct-to-consumer channel during the first half of 2020 and is further expected to benefit from the re-opening of retail stores in the second half of 2020. The substantial re-opening of retail in most international regions exiting the second quarter is expected to benefit the International reporting unit as compared to the first half of 2020. For the second half of 2020 and beyond, Mattel expects to continue to execute on its short-to-mid-term strategy to restore profitability and revenue growth. Given the current impact to Mattel's business, there is a higher degree of uncertainty as to the long-term impact to its discount rates and forecasts used for determining the recoverability of goodwill. Prolonged disruption to Mattel's customers, supply chain, or other critical operations would materially impact Mattel's results of operations and future period assumptions used in the determination of the estimated fair value for determining the recoverability of goodwill of Mattel's reporting units. While 2020 financial results represent a small portion of the estimated fair value of the American Girl and International reporting units, material downward revisions to expected growth in net sales or profitability for future periods may result in the impairment of goodwill for the American Girl and International reporting units. Refer to Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations-COVID-19 Update" and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding the potential impact of COVID-19 on Mattel's business. Mattel's critical accounting policies and estimates are included in the 2019 Annual Report on Form 10-K and did not materially change during the first half of 2020. New Accounting Pronouncements See Part I, Item 1 "Financial Statements-Note 23 to the Consolidated Financial Statements-New Accounting Pronouncements" of this Quarterly Report on Form 10-Q. Non-GAAP Financial Measures To supplement the financial results presented in accordance withU.S. GAAP, Mattel presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by theSecurities and Exchange Commission . The non-GAAP financial measures that Mattel presents include currency exchange rate impact and gross sales. Mattel uses these measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance, and each is discussed below. Mattel believes that the disclosure of non-GAAP financial measures provides useful supplemental information to investors to be able to better evaluate ongoing business performance and certain components of Mattel's results. These measures are not, and should not be viewed as, substitutes for GAAP financial measures and may not be comparable to similarly-titled measures used by other companies. Currency Exchange Rate Impact The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. For entities reporting in currencies other than theU.S. dollar, Mattel calculates the percentage change of period-over-period results at constant currency exchange rates (established as described below) by translating current period and prior period results using these rates. Mattel then determines the currency exchange rate impact percentage by calculating the difference between the percentage change at such constant currency exchange rates and the percentage change at actual exchange rates. The constant currency exchange rates are determined by Mattel at the beginning of each year and are applied consistently during the year. They are generally different from the actual exchange rates in effect during the current or prior period due to volatility in actual foreign exchange rates. Mattel considers whether any changes to the constant currency rates are appropriate at the beginning of each year. The exchange rates used for these constant currency calculations are generally based on prior year actual exchange rates. Mattel believes that the disclosure of the percentage impact of foreign currency changes is useful supplemental information for investors to be able to gauge Mattel's current business performance and the longer-term strength of its overall business since foreign currency changes could potentially mask underlying sales trends. The disclosure of the percentage impact of foreign exchange allows investors to calculate the impact on a constant currency basis and also enhances their ability to compare financial results from one period to another.
48
--------------------------------------------------------------------------------
Gross Sales
Gross sales represent sales to customers at invoice, excluding the impact of
sales adjustments. Net sales, as reported, include the impact of sales
adjustments, such as trade discounts and other allowances. Mattel presents
changes in gross sales as a measure for comparing its aggregate, categorical,
brand, and geographic results to highlight significant trends in Mattel's
business. Changes in gross sales are discussed because, while Mattel records the
details of sales adjustments in its financial accounting systems at the time of
sale, such sales adjustments are generally not associated with categories,
brands, and individual products, making net sales less meaningful. Because sales
adjustments are not allocated to individual products, net sales are only
presented on a consolidated and segment basis and not on a categories or brand
level.
Since sales adjustments are determined by customer rather than at the categories
or brand level, Mattel believes that the disclosure of gross sales by categories
and brand is useful supplemental information for investors to be able to assess
the performance of its underlying categories and brands (e.g., Dolls, Barbie)
and also enhances their ability to compare sales trends over time. Refer to
Mattel's critical accounting policies and estimates included in the 2019 Annual
Report on Form 10-K for further detail regarding sales adjustments.
A reconciliation from Mattel's consolidated net sales to its consolidated gross
sales is as follows:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange
2020 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 732.1 $ 860.1 -15 % -2 %
Sales adjustments 82.4 102.2
Gross sales $ 814.6 $ 962.3 -15 % -2 %
For the Six Months Ended Currency
% Change as Exchange
June 30, 2020 June 30, 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 1,326.2 $ 1,549.3 -14 % -1 %
Sales adjustments 158.3 193.1
Gross sales $ 1,484.5 $ 1,742.4 -15 % -2 %
A reconciliation from net sales to gross sales for the North America segment is
as follows:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange
2020 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 432.9 $ 422.9 2 % - %
Sales adjustments 28.7 24.5
Gross sales $ 461.5 $ 447.4 3 % - %
49--------------------------------------------------------------------------------
For the Six Months Ended Currency
% Change as Exchange
June 30, 2020 June 30, 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 720.4 $ 764.3 -6 % - %
Sales adjustments 46.9 52.5
Gross sales $ 767.3 $ 816.7 -6 % - %
A reconciliation from net sales to gross sales for the International segment is
as follows:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange
2020 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 271.1 $ 403.6 -33 % -4 %
Sales adjustments 52.9 76.9
Gross sales $ 323.9 $ 480.5 -33 % -5 %
For the Six Months Ended Currency
% Change as Exchange
June 30, 2020 June 30, 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 540.4 $ 707.1 -24 % -4 %
Sales adjustments 109.6 138.6
Gross sales $ 650.1 $ 845.7 -23 % -4 %
A reconciliation from net sales to gross sales for the American Girl segment is
as follows:
For the Three Months Ended Currency
June 30, June 30, % Change as Exchange
2020 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 28.2 $ 33.5 -16 % - %
Sales adjustments 0.9 0.9
Gross sales $ 29.1 $ 34.4 -16 % - %
For the Six Months Ended Currency
% Change as Exchange
June 30, 2020 June 30, 2019 Reported Rate Impact
(In millions, except percentage information)
Net sales $ 65.3 $ 78.0 -16 % - %
Sales adjustments 1.8 2.0
Gross sales $ 67.2 $ 80.0 -16 % - %
50--------------------------------------------------------------------------------
© Edgar Online, source
