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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-Q
___________________________________________________________
(Mark One)
| | | | | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| | | | | | | | |
| For the quarterly period ended | September 30, 2020 |
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 001-05647
___________________________________________________________
MATTEL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________
| | | | | | | | |
| Delaware | | 95-1567322 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | | | | | | | | | |
| 333 Continental Blvd. | | 90245-5012 |
| El Segundo, | CA | |
| (Address of principal executive offices) | | (Zip Code) |
(310) 252-2000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report):
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common stock, $1.00 per share | | MAT | | The Nasdaq Global Select Market |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares outstanding of registrant's common stock, $1.00 par value, as of October 16, 2020: 348,040,304 shares
MATTEL, INC. AND SUBSIDIARIES
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)
Mattel is including this Cautionary Statement to caution investors and qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. The use of words such as "anticipates," "expects," "intends," "plans," "confident that" and "believes," among others, generally identify forward-looking statements. These forward-looking statements are based on currently available operating, financial, economic and other information and assumptions, and are subject to a number of significant risks and uncertainties. A variety of factors, many of which are beyond our control, could cause actual future results to differ materially from those projected in the forward-looking statements, and are currently, or in the future could be, amplified by the COVID-19 pandemic. Specific factors that might cause such a difference include, but are not limited to: (i) potential impacts of the COVID-19 pandemic on our business operations, financial results and financial position and on the global economy, including its impact on our sales; (ii) Mattel’s ability to design, develop, produce, manufacture, source and ship products on a timely and cost-effective basis, as well as interest in and purchase of those products by retail customers and consumers in quantities and at prices that will be sufficient to profitably recover Mattel’s costs; (iii) downturns in economic conditions affecting Mattel’s markets which can negatively impact retail customers and consumers, and which can result in lower employment levels, lower consumer disposable income and spending, including lower spending on purchases of Mattel’s products; (iv) other factors which can lower discretionary consumer spending, such as higher costs for fuel and food, drops in the value of homes or other consumer assets, and high levels of consumer debt; (v) potential difficulties or delays Mattel may experience in implementing cost savings and efficiency enhancing initiatives; (vi) other economic and public health conditions or regulatory changes in the markets in which Mattel and its customers and suppliers operate, which could create delays or increase Mattel’s costs, such as higher commodity prices, labor costs or transportation costs, or outbreaks of disease; (vii) currency fluctuations, including movements in foreign exchange rates, which can lower Mattel’s net revenues and earnings, and significantly impact Mattel’s costs; (viii) the concentration of Mattel’s customers, potentially increasing the negative impact to Mattel of difficulties experienced by any of Mattel’s customers, or changes in their purchasing or selling patterns; (ix) the future willingness of licensors of entertainment properties for which Mattel currently has licenses or would seek to have licenses in the future to license those products to Mattel; (x) the inventory policies of Mattel’s retail customers, including retailers’ potential decisions to lower their inventories, even if it results in lost sales, as well as the concentration of Mattel’s revenues in the second half of the year, which coupled with reliance by retailers on quick response inventory management techniques increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve compressed shipping schedules; (xi) legal, reputational, and financial risks related to security breaches or cyberattacks; (xii) the increased costs of developing more sophisticated digital and smart technology products, and the corresponding supply chain and design challenges associated with such products; (xiii) work disruptions, which may impact Mattel’s ability to manufacture or deliver product in a timely and cost-effective manner; (xiv) the bankruptcy and liquidation of Mattel’s significant retailers, or the general lack of success of one of Mattel’s significant retailers which could negatively impact Mattel’s revenues or bad debt exposure; (xv) the impact of competition on revenues, margins and other aspects of Mattel’s business, including the ability to offer products which consumers choose to buy instead of competitive products, the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees; (xvi) the risk of product recalls or product liability suits and costs associated with product safety regulations; (xvii) changes in laws or regulations in the United States and/or in other major markets, such as China, in which Mattel operates, including, without limitation, with respect to taxes, tariffs, trade policies, or product safety, which may increase Mattel’s product costs and other costs of doing business, and reduce Mattel’s earnings; (xviii) failure to realize the planned benefits from any investments or acquisitions made by Mattel; (xix) the impact of other market conditions, third party actions or approvals and competition which could reduce demand for Mattel’s products or delay or increase the cost of implementation of Mattel’s programs or alter Mattel’s actions and reduce actual results; (xx) changes in financing markets or the inability of Mattel to obtain financing on attractive terms; (xxi) the impact of litigation, arbitration, or regulatory decisions or settlement actions; (xxii) uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; and (xxiii) other risks and uncertainties detailed in Part 1, Item 1A "Risk Factors" in Mattel's 2019 Annual Report on Form 10-K, as amended (the "2019 Annual Report on Form 10-K") and in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (Unaudited; in thousands, except share data) |
| ASSETS | | | | | |
| Current Assets | | | | | |
| Cash and equivalents | $ | 452,167 | | | $ | 218,298 | | | $ | 630,028 | |
| Accounts receivable, net of allowances for credit losses of $18.5 million, $22.4 million, and $18.5 million, respectively | 1,326,128 | | | 1,291,255 | | | 936,359 | |
| Inventories | 663,639 | | | 701,567 | | | 495,504 | |
| Prepaid expenses and other current assets | 157,929 | | | 225,877 | | | 186,083 | |
| Total current assets | 2,599,863 | | | 2,436,997 | | | 2,247,974 | |
| Noncurrent Assets | | | | | |
| Property, plant, and equipment, net | 497,437 | | | 572,269 | | | 550,139 | |
| Right-of-use assets, net | 291,097 | | | 306,223 | | | 303,187 | |
| Goodwill | 1,387,260 | | | 1,382,588 | | | 1,390,714 | |
| Other noncurrent assets | 828,438 | | | 829,504 | | | 833,212 | |
| Total Assets | $ | 5,604,095 | | | $ | 5,527,581 | | | $ | 5,325,226 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| Current Liabilities | | | | | |
| Short-term borrowings | $ | 400,000 | | | $ | 230,000 | | | $ | — | |
| Accounts payable | 497,379 | | | 512,491 | | | 459,357 | |
| Accrued liabilities | 739,790 | | | 722,164 | | | 769,513 | |
| Income taxes payable | 21,252 | | | 48,795 | | | 48,037 | |
| Total current liabilities | 1,658,421 | | | 1,513,450 | | | 1,276,907 | |
| Noncurrent Liabilities | | | | | |
| Long-term debt | 2,852,751 | | | 2,856,773 | | | 2,846,751 | |
| Noncurrent lease liabilities | 251,957 | | | 273,906 | | | 270,853 | |
| Other noncurrent liabilities | 436,459 | | | 419,696 | | | 439,001 | |
| Total noncurrent liabilities | 3,541,167 | | | 3,550,375 | | | 3,556,605 | |
| Stockholders' Equity | | | | | |
| Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued | 441,369 | | | 441,369 | | | 441,369 | |
| Additional paid-in capital | 1,823,742 | | | 1,811,214 | | | 1,825,569 | |
| Treasury stock at cost: 93.3 million shares, 94.7 million shares, and 94.6 million shares, respectively | (2,283,992) | | | (2,321,012) | | | (2,318,921) | |
| Retained earnings | 1,409,262 | | | 1,413,006 | | | 1,413,181 | |
| Accumulated other comprehensive loss | (985,874) | | | (880,821) | | | (869,484) | |
| Total stockholders' equity | 404,507 | | | 463,756 | | | 491,714 | |
| Total Liabilities and Stockholders' Equity | $ | 5,604,095 | | | $ | 5,527,581 | | | $ | 5,325,226 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
September 30,
2020 | | September 30,
2019 | | September 30,
2020 | | September 30,
2019 |
| | (Unaudited; in thousands, except per share amounts) |
| Net Sales | $ | 1,631,691 | | | $ | 1,481,557 | | | $ | 2,957,897 | | | $ | 3,030,866 | |
| Cost of sales | 799,307 | | | 795,130 | | | 1,549,482 | | | 1,763,265 | |
| Gross Profit | 832,384 | | | 686,427 | | | 1,408,415 | | | 1,267,601 | |
| Advertising and promotion expenses | 102,527 | | | 170,379 | | | 238,981 | | | 324,333 | |
| Other selling and administrative expenses | 345,700 | | | 365,961 | | | 981,229 | | | 971,608 | |
| Operating Income (Loss) | 384,157 | | | 150,087 | | | 188,205 | | | (28,340) | |
| Interest expense | 50,415 | | | 47,689 | | | 149,010 | | | 140,881 | |
| Interest (income) | (455) | | | (821) | | | (3,564) | | | (4,625) | |
| Other non-operating (income) expense, net | (3,877) | | | 1,264 | | | (133) | | | 2,874 | |
| Income (Loss) Before Income Taxes | 338,074 | | | 101,955 | | | 42,892 | | | (167,470) | |
| Provision for income taxes | 22,080 | | | 31,359 | | | 46,811 | | | 46,217 | |
| Net Income (Loss) | $ | 315,994 | | | $ | 70,596 | | | $ | (3,919) | | | $ | (213,687) | |
| Net Income (Loss) Per Common Share - Basic | $ | 0.91 | | | $ | 0.20 | | | $ | (0.01) | | | $ | (0.62) | |
| Weighted-average number of common shares | 347,628 | | | 346,698 | | | 347,206 | | | 346,210 | |
| Net Income (Loss) Per Common Share - Diluted | $ | 0.91 | | | $ | 0.20 | | | $ | (0.01) | | | $ | (0.62) | |
| Weighted-average number of common and potential common shares | 348,714 | | | 348,487 | | | 347,206 | | | 346,210 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30,
2020 | | September 30,
2019 | | September 30,
2020 | | September 30,
2019 |
| | (Unaudited; in thousands) |
| Net Income (Loss) | $ | 315,994 | | | $ | 70,596 | | | $ | (3,919) | | | $ | (213,687) | |
| Other Comprehensive Loss, Net of Tax | | | | | | | |
| Currency translation adjustments | 13,032 | | | (46,722) | | | (105,759) | | | (33,759) | |
| Employee benefit plan adjustments | 1,291 | | | 883 | | | 4,869 | | | 1,730 | |
| Net unrealized gains (losses) on available-for-sale security | 178 | | | (1,922) | | | 293 | | | (1,989) | |
| Net unrealized (losses) gains on derivative instruments: | | | | | | | |
| Unrealized holding (losses) gains | (15,709) | | | 12,996 | | | (1,815) | | | 22,068 | |
| Amounts reclassified from accumulated other comprehensive loss | (7,069) | | | (6,394) | | | (13,978) | | | (9,645) | |
| (22,778) | | | 6,602 | | | (15,793) | | | 12,423 | |
| Other Comprehensive Loss, Net of Tax | (8,277) | | | (41,159) | | | (116,390) | | | (21,595) | |
| Comprehensive Income (Loss) | $ | 307,717 | | | $ | 29,437 | | | $ | (120,309) | | | $ | (235,282) | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| For the Nine Months Ended |
September 30,
2020 | | September 30,
2019 |
| | (Unaudited; in thousands) |
| Cash Flows From Operating Activities | | | |
| Net loss | $ | (3,919) | | | $ | (213,687) | |
| Adjustments to reconcile net loss to net cash flows used for operating activities: | | | |
| Depreciation | 120,073 | | | 156,252 | |
| Amortization | 29,465 | | | 30,162 | |
| Asset impairments | 8,550 | | | 9,344 | |
| | | |
| | | |
| | | |
| Share-based compensation | 39,946 | | | 39,140 | |
| Bad debt expense | 7,822 | | | 2,869 | |
| Inventory obsolescence | 31,068 | | | 56,913 | |
| | | |
| Deferred income taxes | 8,777 | | | (13,424) | |
| Changes in assets and liabilities: | | | |
| Accounts receivable | (429,584) | | | (337,530) | |
| Inventories | (211,149) | | | (229,524) | |
| Prepaid expenses and other current assets | 18,979 | | | 14,703 | |
| Accounts payable, accrued liabilities, and income taxes payable | (40,082) | | | (29,026) | |
| Other, net | (13,923) | | | 147 | |
| Net cash flows used for operating activities | (433,977) | | | (513,661) | |
| Cash Flows From Investing Activities | | | |
| Purchases of tools, dies, and molds | (41,447) | | | (36,715) | |
| Purchases of other property, plant, and equipment | (49,016) | | | (38,962) | |
| | | |
| Payments for foreign currency forward exchange contracts, net | (26,982) | | | (3,394) | |
| | | |
| Other, net | 2,283 | | | 702 | |
| Net cash flows used for investing activities | (115,162) | | | (78,369) | |
| Cash Flows From Financing Activities | | | |
| | | |
| Proceeds from short-term borrowings, net | 400,000 | | | 225,824 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other, net | (6,580) | | | (7,523) | |
| Net cash flows provided by financing activities | 393,420 | | | 218,301 | |
| Effect of Currency Exchange Rate Changes on Cash | (22,142) | | | (2,454) | |
| Decrease in Cash and Equivalents | (177,861) | | | (376,183) | |
| Cash and Equivalents at Beginning of Period | 630,028 | | | 594,481 | |
| Cash and Equivalents at End of Period | $ | 452,167 | | | $ | 218,298 | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-In
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Total
Stockholders'
Equity |
| | (Unaudited; in thousands) |
| Balance, December 31, 2019 | $ | 441,369 | | | $ | 1,825,569 | | | $ | (2,318,921) | | | $ | 1,413,181 | | | $ | (869,484) | | | $ | 491,714 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (210,741) | | | — | | | (210,741) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (136,399) | | | (136,399) | |
| | | | | | | | | | | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (3,777) | | | 2,811 | | | — | | | — | | | (966) | |
| | | | | | | | | | | |
| Share-based compensation | — | | | 14,275 | | | — | | | — | | | — | | | 14,275 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, March 31, 2020 | $ | 441,369 | | | $ | 1,836,067 | | | $ | (2,316,110) | | | $ | 1,202,440 | | | $ | (1,005,883) | | | $ | 157,883 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (109,172) | | | — | | | (109,172) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 28,286 | | | 28,286 | |
| | | | | | | | | | | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (944) | | | 833 | | | — | | | — | | | (111) | |
| Deferred compensation | — | | | (186) | | | 310 | | | — | | | — | | | 124 | |
| Share-based compensation | — | | | 9,138 | | | — | | | — | | | — | | | 9,138 | |
| Balance, June 30, 2020 | $ | 441,369 | | | $ | 1,844,075 | | | $ | (2,314,967) | | | $ | 1,093,268 | | | $ | (977,597) | | | $ | 86,148 | |
| Net income | — | | | — | | | — | | | 315,994 | | | — | | | 315,994 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (8,277) | | | (8,277) | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (36,865) | | | 30,975 | | | — | | | — | | | (5,890) | |
| | | | | | | | | | | |
| Share-based compensation | — | | | 16,532 | | | — | | | — | | | — | | | 16,532 | |
| | | | | | | | | | | |
| Balance, September 30, 2020 | $ | 441,369 | | | $ | 1,823,742 | | | $ | (2,283,992) | | | $ | 1,409,262 | | | $ | (985,874) | | | $ | 404,507 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Common
Stock | | Additional
Paid-In
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Total
Stockholders'
Equity |
| | (Unaudited; in thousands) |
| Balance, December 31, 2018 | $ | 441,369 | | | $ | 1,812,682 | | | $ | (2,354,617) | | | $ | 1,626,693 | | | $ | (859,226) | | | $ | 666,901 | |
| Net loss | — | | | — | | | — | | | (176,296) | | | — | | | (176,296) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 21,292 | | | 21,292 | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (1,829) | | | 1,442 | | | — | | | — | | | (387) | |
| Share-based compensation | — | | | 11,865 | | | — | | | — | | | — | | | 11,865 | |
| Balance, March 31, 2019 | $ | 441,369 | | | $ | 1,822,718 | | | $ | (2,353,175) | | | $ | 1,450,397 | | | $ | (837,934) | | | $ | 523,375 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (107,987) | | | — | | | (107,987) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (1,728) | | | (1,728) | |
| | | | | | | | | | | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (3,060) | | | 3,025 | | | — | | | — | | | (35) | |
| Deferred compensation | — | | | (151) | | | 276 | | | — | | | — | | | 125 | |
| Share-based compensation | — | | | 12,445 | | | — | | | — | | | — | | | 12,445 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, June 30, 2019 | $ | 441,369 | | | $ | 1,831,952 | | | $ | (2,349,874) | | | $ | 1,342,410 | | | $ | (839,662) | | | $ | 426,195 | |
| | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 70,596 | | | — | | | 70,596 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (41,159) | | | (41,159) | |
| | | | | | | | | | | |
| Issuance of treasury stock for restricted stock units vesting | — | | | (35,569) | | | 28,862 | | | — | | | — | | | (6,707) | |
| | | | | | | | | | | |
| Share-based compensation | — | | | 14,831 | | | — | | | — | | | — | | | 14,831 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, September 30, 2019 | $ | 441,369 | | | $ | 1,811,214 | | | $ | (2,321,012) | | | $ | 1,413,006 | | | $ | (880,821) | | | $ | 463,756 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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, consisting of only those of a normal recurring nature, considered necessary for a fair statement of the financial position and interim results of Mattel, Inc. and its subsidiaries ("Mattel") as of and for the periods presented have been included.
The December 31, 2019 balance sheet data was derived from audited financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all of the annual disclosures required by GAAP. As 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 the 2019 Annual Report on Form 10-K.
2. Accounts Receivable
Mattel estimates current expected credit losses based on collection history and management’s assessment of the current economic trends, business environment, customers’ financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. Accounts receivable are net of allowances for credit losses of $18.5 million, $22.4 million, and $18.5 million as of September 30, 2020, September 30, 2019, and December 31, 2019, respectively.
3. Inventories
Inventories include the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| Raw materials and work in process | $ | 113,248 | | | $ | 107,562 | | | $ | 103,123 | |
| Finished goods | 550,391 | | | 594,005 | | | 392,381 | |
| $ | 663,639 | | | $ | 701,567 | | | $ | 495,504 | |
4. Property, Plant, and Equipment
Property, plant, and equipment, net includes the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| Land | $ | 24,906 | | | $ | 25,086 | | | $ | 25,112 | |
| Buildings | 297,067 | | | 299,489 | | | 302,956 | |
| Machinery and equipment | 750,118 | | | 866,002 | | | 812,509 | |
| Software | 374,596 | | | 413,903 | | | 364,391 | |
| Tools, dies, and molds | 608,301 | | | 801,064 | | | 747,706 | |
| Leasehold improvements | 172,095 | | | 211,455 | | | 183,250 | |
| 2,227,083 | | | 2,616,999 | | | 2,435,924 | |
| Less: accumulated depreciation | (1,729,646) | | | (2,044,730) | | | (1,885,785) | |
| $ | 497,437 | | | $ | 572,269 | | | $ | 550,139 | |
During the three months ended December 31, 2019, in conjunction with the Capital Light program, as further discussed in "Note 19 to the Consolidated Financial Statements—Restructuring Charges," Mattel discontinued production at one of its plants based in Mexico and has committed to a plan to dispose of the land and building. These assets meet the held for sale criteria and are actively being marketed for sale. The estimated fair value of the land and building, less costs to dispose, was determined to exceed its net book value of $8.4 million and $12.1 million as of September 30, 2020 and December 31, 2019, respectively, and are included within property, plant and equipment, net in the consolidated balance sheets.
5. Goodwill
Goodwill is allocated to various reporting units, which are at the operating segment level, for the purpose of evaluating whether goodwill is impaired. Mattel's reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value.
In the third quarter of 2020, Mattel performed its annual impairment test and determined that goodwill was not impaired. The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2020 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America segment, thereby causing a foreign currency translation impact.
| | | | | | | | | | | | | | | | | | | |
| | December 31,
2019 | | | | Currency
Exchange Rate
Impact | | September 30,
2020 |
| (In thousands) |
| North America | $ | 732,430 | | | | | $ | (759) | | | $ | 731,671 | |
| International | 450,713 | | | | | (2,695) | | | 448,018 | |
| American Girl | 207,571 | | | | | — | | | 207,571 | |
| $ | 1,390,714 | | | | | $ | (3,454) | | | $ | 1,387,260 | |
6. Other Noncurrent Assets
Other noncurrent assets include the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| Identifiable intangible assets (net of accumulated amortization of $277.5 million, $238.1 million, and $248.0 million, respectively) | $ | 519,861 | | | $ | 552,332 | | | $ | 553,114 | |
| Deferred income taxes | 60,850 | | | 63,551 | | | 67,900 | |
| | | | | |
| | | | | |
Mattel's amortizable intangible assets primarily consist of trademarks. Mattel tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Mattel's amortizable intangible assets were not impaired during the three and nine months ended September 30, 2020 and 2019.
7. Accrued Liabilities
Accrued liabilities include the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| Incentive compensation | $ | 97,635 | | | $ | 65,220 | | | $ | 122,923 | |
| Current lease liabilities | 85,120 | | | 73,297 | | | 74,065 | |
| Advertising and promotion | 98,597 | | | 117,561 | | | 93,804 | |
| Royalties | 57,020 | | | 82,056 | | | 94,228 | |
| | | | | |
| | | | | |
8. Seasonal Financing
On December 20, 2017, Mattel entered into a syndicated facility agreement, which was subsequently amended in 2018 and 2019 (as amended, the "Credit Agreement"), as a borrower (in such capacity, the "Borrower") and guarantor thereunder, along with certain of the Borrower's domestic and foreign subsidiaries as additional borrowers and/or guarantors thereunder, Bank of America, N.A., as global administrative agent, collateral agent and Australian security trustee, and the other lenders and financial institutions from time to time party thereto, providing up to $1.60 billion in aggregate principal amount of senior secured revolving credit facilities (the "senior secured revolving credit facilities"). The senior secured revolving credit facilities consist of (i) an asset based lending facility with aggregate commitments up to $1.31 billion, subject to borrowing base capacity, secured by substantially all of the accounts receivable and inventory of the Borrower and certain of its subsidiaries who are borrowers and/or guarantors under the Credit Agreement, as well as (ii) a revolving credit facility with $294.0 million in aggregate commitments secured by certain fixed assets and intellectual property of the U.S. borrowers under the Credit Agreement, and certain equity interests in the borrower and guarantor subsidiaries under the Credit Agreement. The senior secured revolving credit facilities will mature on November 18, 2022.
Borrowings under the senior secured revolving credit facilities (i) are limited by jurisdiction-specific borrowing base calculations based on the sum of specified percentages of eligible accounts receivable, eligible inventory and certain fixed assets and intellectual property, as applicable, minus the amount of any applicable reserves, and (ii) bear interest at a floating rate, which can be either, at the Borrower's option, (a) an adjusted LIBOR rate plus an applicable margin ranging from 1.25% to 2.75% per annum or (b) an alternate base rate plus an applicable margin ranging from 0.25% to 1.75% per annum, in each case, such applicable margins to be determined based on the Borrower's average borrowing availability remaining under the senior secured revolving credit facilities.
In addition to paying interest on the outstanding principal under the senior secured revolving credit facilities, the Borrower is required to pay (i) an unused line fee per annum of the average daily unused portion of the senior secured revolving credit facilities, (ii) a letter of credit fronting fee based on a percentage of the aggregate face amount of outstanding letters of credit, and (iii) certain other customary fees and expenses of the lenders and agents.
Mattel had borrowings under the senior secured revolving credit facilities of $400 million and $230 million as of September 30, 2020 and September 30, 2019, respectively, and had no borrowings under the senior secured revolving credit facilities as of December 31, 2019. During October 2020, Mattel repaid $323.7 million under the senior secured revolving credit facilities, resulting in a total outstanding balance of $76.3 million as of October 21, 2020. Outstanding letters of credit under the senior secured revolving credit facilities totaled approximately $13 million, $65 million, and $55 million as of September 30, 2020, September 30, 2019, and December 31, 2019, respectively.
The Credit Agreement contains customary covenants, including, but not limited to, restrictions on the Borrower's and its subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances, or investments, pay dividends, sell or otherwise transfer assets outside of the ordinary course, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates, or change their line of business.
The Credit Agreement requires the maintenance of a fixed charge coverage ratio of 1.00 to 1.00 at the end of each fiscal quarter when excess availability under the senior secured revolving credit facilities is less than the greater of (x) $100 million and (y) 10% of the aggregate amount available thereunder (the "Availability Threshold") and on the last day of each subsequent fiscal quarter ending thereafter until no event of default exists and excess availability is greater than the Availability Threshold for at least 30 consecutive days.
Since the execution of the Credit Agreement, the fixed charge coverage ratio covenant has not been in effect, as no event of default has occurred and Mattel's excess availability has been greater than $100 million and the Availability Threshold. As of September 30, 2020, Mattel was in compliance with all covenants contained in the Credit Agreement. The Credit Agreement is a material agreement, and failure to comply with the covenants may result in an event of default under the terms of the senior secured revolving credit facilities. If Mattel were to default under the terms of the senior secured revolving credit facilities, its ability to meet its seasonal financing requirements could be adversely affected.
9. Long-Term Debt
Long-term debt includes the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| 2010 Senior Notes due October 2020 | $ | — | | | $ | 250,000 | | | $ | — | |
| 2010 Senior Notes due October 2040 | 250,000 | | | 250,000 | | | 250,000 | |
| 2011 Senior Notes due November 2041 | 300,000 | | | 300,000 | | | 300,000 | |
| 2013 Senior Notes due March 2023 | 250,000 | | | 250,000 | | | 250,000 | |
| | | | | |
| 2016 Senior Notes due August 2021 | — | | | 350,000 | | | — | |
| 2017/2018 Senior Notes due December 2025 | 1,500,000 | | | 1,500,000 | | | 1,500,000 | |
| 2019 Senior Notes due December 2027 | 600,000 | | | — | | | 600,000 | |
| Debt issuance costs and debt discount | (47,249) | | | (43,227) | | | (53,249) | |
| $ | 2,852,751 | | | $ | 2,856,773 | | | $ | 2,846,751 | |
| | | | | |
| | | | | |
10. Other Noncurrent Liabilities
Other noncurrent liabilities include the following:
| | | | | | | | | | | | | | | | | |
| September 30,
2020 | | September 30,
2019 | | December 31,
2019 |
| | (In thousands) |
| Benefit plan liabilities | $ | 203,295 | | | $ | 183,214 | | | $ | 212,280 | |
| Noncurrent income tax liabilities | 129,773 | | | 146,297 | | | 125,515 | |
| | | | | |
| | | | | |
11. Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss) for each period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, 2020 |
| | Derivative
Instruments | | Available-for-Sale Security | | Employee
Benefit Plans | | Currency
Translation
Adjustments | | Total |
| | (In thousands) |
| Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2020 | $ | 18,026 | | | $ | (8,145) | | | $ | (166,279) | | | $ | (821,199) | | | $ | (977,597) | |
| Other comprehensive (loss) income before reclassifications | (15,709) | | | 178 | | | (432) | | | 13,032 | | | (2,931) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (7,069) | | | — | | | 1,723 | | | — | | | (5,346) | |
| Net (decrease) increase in other comprehensive (loss) income | (22,778) | | | 178 | | | 1,291 | | | 13,032 | | | (8,277) | |
| Accumulated Other Comprehensive (Loss), Net of Tax, as of September 30, 2020 | $ | (4,752) | | | $ | (7,967) | | | $ | (164,988) | | | $ | (808,167) | | | $ | (985,874) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2020 |
| Derivative
Instruments | | Available-for-Sale Security | | Employee
Benefit Plans | | Currency
Translation
Adjustments | | Total |
| (In thousands) |
| Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2019 | $ | 11,041 | | | $ | (8,260) | | | $ | (169,857) | | | $ | (702,408) | | | $ | (869,484) | |
| Other comprehensive (loss) income before reclassifications | (1,815) | | | 293 | | | 67 | | | (105,759) | | | (107,214) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (13,978) | | | — | | | 4,802 | | | — | | | (9,176) | |
| Net (decrease) increase in other comprehensive (loss) income | (15,793) | | | 293 | | | 4,869 | | | (105,759) | | | (116,390) | |
| Accumulated Other Comprehensive (Loss), Net of Tax, as of September 30, 2020 | $ | (4,752) | | | $ | (7,967) | | | $ | (164,988) | | | $ | (808,167) | | | $ | (985,874) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 |
| | Derivative
Instruments | | Available-for-Sale Security | | Employee
Benefit Plans | | Currency
Translation
Adjustments | | Total |
| | (In thousands) |
| Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2019 | $ | 17,232 | | | $ | (6,614) | | | $ | (141,916) | | | $ | (708,364) | | | $ | (839,662) | |
| Other comprehensive income (loss) before reclassifications | 12,996 | | | (1,922) | | | (359) | | | (46,722) | | | (36,007) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | (6,394) | | | — | | | 1,242 | | | — | | | (5,152) | |
| Net increase (decrease) in other comprehensive income (loss) |
