SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
----------------------------------
MATTEL, INC.
------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
--------------
(Former name, former address and former fiscal year, None
if changed since last report) --------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of registrant's common stock
as of October 31, 1997:
Common Stock - $1 par value -- 290,717,595 shares
<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
-------------------------------
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1997 1996 1996
- -------------- ----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash $ 68,171 $ 126,924 $ 550,271
Accounts receivable, net 1,846,994 1,572,481 948,940
Inventories 552,661 566,625 444,178
Prepaid expenses and other current assets 183,522 240,621 195,673
----------- ----------- -----------
Total current assets 2,651,348 2,506,651 2,139,062
----------- ----------- -----------
Property, Plant and Equipment
Land 32,268 28,387 30,864
Buildings 204,582 210,778 216,523
Machinery and equipment 457,217 428,420 438,969
Capitalized leases 25,362 26,604 26,512
Leasehold improvements 69,524 67,754 69,732
----------- ----------- -----------
788,953 761,943 782,600
Less: accumulated depreciation 338,048 321,781 323,096
----------- ----------- -----------
450,905 440,162 459,504
Tools, dies and molds, net 158,743 154,116 156,777
----------- ----------- -----------
Property, plant and equipment, net 609,648 594,278 616,281
----------- ----------- -----------
Other Noncurrent Assets
Intangible assets, net 582,302 605,758 611,410
Sundry assets 231,320 192,613 214,389
----------- ----------- -----------
$ 4,074,618 $ 3,899,300 $ 3,581,142
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for September 30, 1996 and December 31, 1996 have been restated
retroactively for the effects of the March 1997 merger with Tyco Toys, Inc. ("Tyco"),
accounted for as a pooling of interests. See Note 9.
</TABLE>
2
<PAGE>
<TABLE>
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands, except share data) 1997 1996 1996
- --------------------------------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities
Short-term borrowings $ 352,833 $ 423,525 $ 28,924
Current portion of long-term liabilities 13,522 105,989 106,596
Accounts payable 303,549 264,901 312,378
Accrued liabilities 737,860 548,776 510,691
Income taxes payable 162,142 209,338 183,288
----------- ----------- -----------
Total current liabilities 1,569,906 1,552,529 1,141,877
----------- ----------- -----------
Long-Term Liabilities
6-3/4% Senior Notes due 2000 100,000 100,000 100,000
Medium-Term Notes 460,500 220,000 220,000
Senior Subordinated Notes - 126,500 126,500
Convertible Subordinated Notes - 16,034 16,034
Mortgage notes 43,706 47,938 47,600
Other 136,247 119,387 123,208
----------- ----------- -----------
Total long-term liabilities 740,453 629,859 633,342
----------- ----------- -----------
Shareholders' Equity
Preferred stock, Series B $1.00 par value,
$1,050.00 liquidation preference per share,
53.6 thousand shares authorized, issued and
outstanding 54 54 54
Preferred stock, Series C $1.00 par value,
$125.00 liquidation preference per share,
772.8 thousand shares authorized, issued and
outstanding 773 773 773
Common stock $1.00 par value, 600.0 million
shares authorized; 297.6 million
shares issued at Sept. 30, 1997 and
296.1 million shares issued at Sept. 30,
1996 and December 31, 1996 297,626 296,091 296,091
Additional paid-in capital 516,940 538,560 518,296
Treasury stock at cost; 7.1 million shares,
8.8 million shares and 8.1 million shares,
respectively (208,465) (228,039) (215,999)
Retained earnings 1,318,196 1,205,856 1,293,653
Currency translation adjustments (160,865) (96,383) (86,945)
----------- ----------- -----------
Total shareholders' equity 1,764,259 1,716,912 1,805,923
----------- ----------- -----------
$ 4,074,618 $ 3,899,300 $ 3,581,142
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for September 30, 1996 and December 31, 1996 have been
restated retroactively for the effects of the March 1997 merger with Tyco,
accounted for as a pooling of interests. See Note 9.
</TABLE>
3
<PAGE>
<TABLE>
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
- ---------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $1,555,347 $1,497,916 $3,221,523 $3,103,498
Cost of sales 755,070 747,143 1,639,598 1,593,827
---------- ---------- ---------- ----------
Gross Profit 800,277 750,773 1,581,925 1,509,671
Advertising and promotion expenses 244,231 240,303 478,570 469,931
Other selling and administrative expenses 198,767 204,584 576,760 557,381
Integration/restructuring costs - - 275,000 -
Interest expense 24,632 28,251 62,782 70,134
Other expense, net 14,892 9,459 30,733 22,662
---------- ---------- ---------- ----------
Income Before Income Taxes 317,755 268,176 158,080 389,563
Provision for income taxes 94,100 86,801 63,415 124,284
---------- ---------- ---------- ----------
Income Before Extraordinary Item 223,655 181,375 94,665 265,279
Extraordinary item - loss on early
retirement of debt (4,610) - (4,610) -
---------- ---------- ---------- ----------
Net Income 219,045 181,375 90,055 265,279
Less: preferred stock dividend requirements 2,838 2,838 8,515 4,554
---------- ---------- ---------- ----------
Net Income Applicable to Common Shares $ 216,207 $ 178,537 $ 81,540 $ 260,725
========== ========== ========== ==========
Primary Income Per Common And Common
Equivalent Share
- ------------------------------------
Income before extraordinary item $ 0.75 $ 0.61 $ 0.30 $ 0.88
Extraordinary item - loss on early
retirement of debt (0.02) - (0.02) -
---------- ---------- ---------- ----------
Net income $ 0.73 $ 0.61 $ 0.28 $ 0.88
========== ========== ========== ==========
Average number of common and common
equivalent shares 295,688 293,961 294,437 296,417
========== ========== ========== ==========
Dividends Declared Per Common Share $ 0.07 $ 0.06 $ 0.20 $ 0.18
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods, except for the three months ended
September 30, 1997, have been restated retroactively for the effects of the
March 1997 merger with Tyco, accounted for as a pooling of interests. See
Note 9.
</TABLE>
4
<PAGE>
<TABLE>
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the
Nine Months Ended
-----------------------
Sept. 30, Sept. 30,
(In thousands) 1997 1996
- -------------- ---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net income $ 90,055 $ 265,279
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation 130,089 105,147
Amortization 26,205 28,428
Increase (decrease) from changes in net assets and liabilities:
Accounts receivable (936,098) (697,182)
Inventories (131,260) (161,036)
Prepaid expenses and other current assets 9,426 (4,899)
Accounts payable, accrued liabilities and
income taxes payable 232,461 84,319
Deferred compensation and other retirement plans 8,205 5,117
Deferred income taxes (847) (5,798)
Other, net (628) 2,083
---------- ----------
Net cash used in operating activities (572,392) (378,542)
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Purchases of tools, dies and molds (71,190) (84,017)
Purchases of other property, plant and equipment (86,739) (87,249)
Purchases of marketable securities - (8,000)
Purchase of other long-term investments (7,506) (25,050)
Proceeds from sales of property, plant and equipment 7,741 2,371
Proceeds from sales of marketable securities - 25,315
Contingent consideration - investment in acquired business (8,625) (8,625)
Other, net 1,813 (91)
---------- ----------
Net cash used in investing activities (164,506) (185,346)
---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
Short-term borrowings, net 326,889 348,276
Issuance of Medium-Term Notes 250,000 -
Payment of Senior Subordinated Notes (126,500) -
Payment of 6 7/8% Senior Notes (100,000) -
Payment of Medium-Term Notes - (30,000)
Long-term foreign borrowings (3,521) (3,610)
Proceeds from issuance of preferred stock - 92,703
Tax benefit of employee stock options exercised 11,950 18,128
Exercise of stock options and warrants 29,853 43,407
Sale of treasury stock 71,276 -
Purchase of treasury stock (128,064) (222,273)
Dividends paid on common and preferred stock (64,127) (47,223)
Other, net (2,109) (987)
---------- ----------
Net cash provided by financing activities 265,647 198,421
Effect of Exchange Rate Changes on Cash (10,849) (1,295)
---------- ----------
Decrease in Cash (482,100) (366,762)
Cash at Beginning of Period 550,271 493,686
---------- ----------
Cash at End of Period $ 68,171 $ 126,924
========== ==========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 9.
</TABLE>
5
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary for a
fair presentation of Mattel, Inc. and its subsidiaries ("the Company")
financial position and interim results as of and for the periods
presented have been included. Certain amounts in the financial
statements for prior periods have been reclassified to conform with the
current year presentation. Because the Company's business is seasonal,
results for interim periods are not necessarily indicative of those
which may be expected for a full year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes
in its 1996 Annual Report to Shareholders, and the restated, combined
financial statements filed in the Company's Current Report on Form 8-K
dated July 30, 1997.
2. Accounts receivable are shown net of allowances for doubtful accounts of
$26.8 million (September 30, 1997), $20.8 million (September 30, 1996)
and $21.0 million (December 31, 1996).
3. Inventories are comprised of the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1997 1996 1996
- -------------- --------- --------- ---------
<S> <C> <C> <C>
Raw materials and work in progress $ 82,407 $ 87,927 $ 70,121
Finished goods 470,254 478,698 374,057
--------- --------- ---------
$ 552,661 $ 566,625 $ 444,178
========= ========= =========
</TABLE>
4. Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
Sept. 30, Sept. 30,
(In thousands) 1997 1996
- -------------- ---------- -----------
<S> <C> <C>
Cash paid during the period for:
Income taxes $ 65,837 $ 54,362
Interest 56,159 59,515
Noncash investing and financing
activities:
Conversion of 7% Convertible
Subordinated Notes 16,034 -
Issuance of stock warrant - 26,444
- ---------------------------------------------------------------------
</TABLE>
6
5. In February 1996, the Company filed a universal shelf registration
statement allowing the issuance of up to $350.0 million of debt and
equity securities. This registration statement was amended in May 1997
to allow the issuance of an additional $39.5 million of debt and equity
securities. In the first three quarters of 1997, the Company issued an
aggregate of $250.0 million principal amount of Series B Medium-Term
Notes maturing on various dates from September 2006 to July 2012.
Interest is payable semiannually at fixed rates ranging from 6.72% to
7.49% per annum on the fifteenth day of May and November. In October
and November 1997, the Company issued an additional $40.0 million
principal amount of Series B Medium-Term Notes maturing on various dates
from November 2008 to October 2011, and bearing interest at fixed rates
ranging from 6.70% to 6.80% per annum. In addition, the Company issued
3.0 million common shares valued at $72.8 million in March 1997. In
October 1997, the Company filed a new universal shelf registration
statement allowing the issuance of up to $350.0 million of debt and
equity securities. All remaining availability under the February 1996
shelf registration statement, if any, will be incorporated into the
October 1997 shelf registration statement at the time of effectiveness.
6. On July 10, 1997, the Company issued its Notice of Redemption to holders
of the 10-1/8% Senior Subordinated Notes. The notes were redeemed on
August 15, 1997 at 103.797% of par together with accrued interest. In
the third quarter of 1997, the Company recognized a pretax extraordinary
loss of $7.3 million, and a related income tax benefit of $2.7 million,
as a result of the redemption.
7. The Company's $100.0 million 6 7/8% Senior Notes were repaid upon
maturity on August 1, 1997.
8. On September 10, 1997, the holder tendered all of the $16.0 million 7%
Convertible Subordinated Notes for conversion into 892.7 thousand shares
of Mattel common stock.
9. Pursuant to an Agreement and Plan of Merger ("the Tyco Merger
Agreement") dated November 17, 1996, as amended by an Amendment to
Agreement and Plan of Merger dated November 22, 1996, a merger was
consummated between the Company and Tyco on March 27, 1997. The stock-
for-stock transaction was approved by the shareholders of Tyco, after
which Tyco was merged with and into Mattel, with Mattel continuing as
the surviving corporation in the merger. As a result of the merger, the
separate existence of Tyco ceased. Under the merger agreement, each
outstanding share of Tyco common stock was converted into the right to
receive 0.48876 Mattel common shares and resulted in the issuance of
approximately 17 million shares. Tyco restricted stock units and stock
options outstanding as of the merger date were exchanged for
approximately 0.6 million Mattel common shares. In addition, each share
of Tyco Series B and Series C Preferred Stock was converted into like
Mattel preferred stock. This transaction has been accounted for as a
pooling of interests, and accordingly, financial information for periods
prior to the merger reflect retroactive restatement of the
7
companies' combined financial position and operating results. For periods
preceding the merger, there were no intercompany transactions which
required elimination from the combined consolidated results of operations
and there were no adjustments necessary to conform the accounting practices
of the two companies.
Selected financial information for the combining entities included in
the consolidated statements of income are as follows:
<TABLE>
<CAPTION>
Net Income/
(In thousands) Net Sales (Loss)
- -------------- ----------- -----------
<S> <C> <C>
FOR THE THREE MONTHS ENDED
MARCH 31, 1997
Mattel (a) $ 568,528 $ 13,123
Tyco 124,992 (7,747)
Integration/restructuring charge (b) - (210,000)
----------- -----------
Combined $ 693,520 $ (204,624)
=========== ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Mattel, as previously reported $ 2,595,413 $ 264,185
Tyco (c) 508,085 1,094
----------- -----------
Combined $ 3,103,498 $ 265,279
=========== ===========
<FN>
(a) For the three months ended March 1997, primary earnings per share
before the effects of the merger was $0.05 per share.
(b) The integration and restructuring charge of $275.0 million, after
related income tax effects, reduced earnings of the combined company by
$210.0 million.
(c) Certain amounts for Tyco net sales have been classified differently
than previously published amounts in order to conform the accounting
presentation of the two entities. The provision for income taxes has
been adjusted by $2.5 million in September 1996 to reflect the adjustment
of valuation allowances established in the historical financial
statements of Tyco, resulting in the recognition of benefits of losses
incurred by certain foreign affiliates.
</TABLE>
The Company recognized a $275.0 million pre-tax charge against continuing
operations in March 1997 in connection with the Tyco integration and Mattel
restructuring. Of the total pre-tax charge, approximately $85 million
represented non-cash asset writedowns. Through September 30, 1997, the
total integration and restructuring expenditures and write-offs were
approximately $115 million. These costs related primarily to transaction
costs of the merger, the elimination of approximately 1,700 positions
worldwide, the consolidation of manufacturing facilities, the closure of
duplicate marketing and administrative offices, and the abandonment of
certain product lines. The remaining accrual of $160 million includes the
following: i) approximately $48 million for severance costs for the
elimination of approximately 1,000 positions worldwide; ii) approximately
$35 million primarily for the writedown of fixed assets and lease
termination costs in connection with the continuing consolidation of
manufacturing facilities; iii) approximately $50 million for lease and
contract terminations and asset writedowns resulting from the continuing
elimination of duplicate marketing offices, administrative functions and
distribution facilities; and iv) approximately $27 million in charges
primarily for the write-off of tooling and other costs related to
abandonment of certain product lines. It is anticipated that substantially
all actions related to the integration and restructuring activity will be
taken within one year. Management believes that the remaining accrual will
approximate all future charges.
8
10. In the current quarter, the Board of Directors declared cash dividends
of $0.07 per common share, compared to $0.06 per common share in the
third quarter of 1996.
11. All share and per share data presented in these financial statements
reflect the retroactive effects of the Tyco merger.
12. Income per common share is computed by dividing earnings available to
common shareholders by the average number of common and common
equivalent shares outstanding during each period. Weighted average
share computations assume the exercise of dilutive stock options and
warrants, reduced by the number of shares which could be repurchased at
average market prices with proceeds from exercise. Earnings available
to common shareholders represent reported net income less preferred
stock dividend requirements. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
128, Earnings per Share, which is effective for financial statements
issued after December 15, 1997. This statement requires entities to
report "basic" and "diluted" earnings per share in place of primary and
fully diluted earnings per share. Adoption of this statement is not
expected to have a material impact on the Company's calculation of
income per share.
13. In January 1997, the SEC issued Financial Reporting Release 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative
Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments". The release requires specific qualitative
disclosures regarding the Company's accounting policies for derivative
financial instruments. The Company enters into foreign currency forward
exchange contracts and swap agreements primarily as hedges of inventory
purchases, sales and other intercompany transactions denominated in
foreign currencies to limit the effect of exchange rate fluctuations on
its results of operations and cash flows. The Company does not enter
into derivatives for trading purposes. Gains and losses related to firm
commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of
cash flows as part of the underlying transaction. Contracts that do not
qualify for hedge accounting are marked to market with gains and losses
recognized in the results of operations currently. If a derivative
previously designated as a hedge of a foreign currency commitment is
terminated prior to the transaction date of the related commitment, the
resultant gain or loss is recognized at the time of maturity of the
original contract as a component of other expense, net.
9
MATTEL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, WHICH INCLUDE, BUT
ARE NOT LIMITED TO, THE RESTRUCTURING CHARGE, COST SAVINGS, AND
PROFITABILITY, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN
SUCH STATEMENTS. THESE INCLUDE WITHOUT LIMITATION: THE COMPANY'S
DEPENDENCE ON THE TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER
ACCEPTANCE OF NEW PRODUCTS; POSSIBLE WEAKNESSES OF INTERNATIONAL
MARKETS; THE IMPACT OF COMPETITION ON REVENUES AND MARGINS; THE EFFECT
OF CURRENCY FLUCTUATIONS ON REPORTABLE INCOME; AND OTHER RISKS AND
UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S
PUBLIC ANNOUNCEMENTS AND SEC FILINGS. FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE,"
"PLANS," "INTENDS," OR OTHER SIMILAR TERMINOLOGY.
Mattel, Inc. designs, manufactures, markets and distributes a broad variety
of toy products on a worldwide basis. The Company's business is dependent
in great part on its ability each year to redesign, restyle and extend
existing core products and product lines and to design and develop
innovative new toys and product lines. New products have limited lives,
ranging from one to three years, and generally must be updated and
refreshed each year.
Core brands have historically provided the Company with relatively stable
growth. Among the Company's major core brands are BARBIE fashion dolls and
doll clothing and accessories; the Company's Disney-licensed toys; FISHER-
PRICE toys and juvenile products; SESAME STREET characters; HOT WHEELS
vehicles and playsets; MATCHBOX; CABBAGE PATCH KIDS; Tyco Electric Racing
and Tyco Radio Control; the UNO and SKIP-BO card games; and the SCRABBLE
game, which the Company markets outside of the United States and Canada.
10
RESULTS OF OPERATIONS
The Company's business is seasonal, and, therefore, results of operations
are comparable only with corresponding periods. Following is a percentage
analysis of operating results:
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
=========== =========== =========== ===========
Gross profit 52 50 49 49
Advertising and promotion expenses 16 16 15 15
Other selling and administrative expenses 13 14 18 18
Restructuring and integration charge - - 8 -
Other expense, net 1 - 1 1
----------- ----------- ----------- -----------
Operating profit 22 20 7 15
Interest expense 2 2 2 2
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item 20% 18% 5% 13%
=========== =========== =========== ===========
</TABLE>
THIRD QUARTER
- -------------
The strength of the Company's core brands resulted in a 4% increase in net
sales in the third quarter of 1997 over the 1996 third quarter, including a
net $51.0 million unfavorable effect from the generally stronger US dollar
relative to the year ago quarter. Sales of BARBIE and BARBIE-related
products increased 2%. The Wheels category increased 10%, reflecting
strength in HOT WHEELS, partially offset by a decrease in Tyco Radio
Control product. The Company's Infant and Preschool brand sales increased
16% in the third quarter of 1997 over the year-ago quarter. This increase
was led by strength in SESAME STREET and WINNIE THE POOH, partially offset
by a 10% decline in the FISHER-PRICE products. High levels of Fisher-Price
inventory at retail continued to negatively impact Fisher-Price sales in
the quarter.
Sales to customers within the United States grew 9% over the year-ago
quarter. Sales to customers outside the United States decreased 5%. At
comparable foreign currency exchange rates, sales internationally grew 5%.
In the third quarter of 1997, the US dollar continued to strengthen against
many major foreign currencies. Although the Company hedges a portion of
its anticipated currency exposures, the remaining unhedged portion may be
adversely impacted by unfavorable translation effects on foreign revenues
and earnings (see the Cautionary Statement above).
Gross profit as a percentage of net sales increased two percentage points
to 52% over the year-ago quarter, principally as a result of improved
product mix.
11
Advertising and promotion expenses as a percentage of net sales remained
virtually constant compared to the year-ago quarter. As a percentage of
net sales, other selling and administrative expenses decreased one
percentage point reflecting the Company's effort to manage expense growth
relative to increasing revenue growth combined with the savings recognized
as a result of the integration and restructuring activity. Other expense,
net, increased $5.4 million, partially due to the unfavorable impact of
foreign currency.
Interest expense decreased $3.7 million as a result of lower beginning net
debt position, improved cash flow, and savings from the redemption of the
Tyco Senior Subordinated Notes.
NINE MONTHS
- -----------
Net sales increased $118.0 million or 4% over 1996, including a net $85.0
million unfavorable effect from the generally stronger US dollar relative
to the year-ago period, reflecting continued worldwide demand for the
Company's core brands. Worldwide core product sales increased mainly due
to greater demand for BARBIE and BARBIE-related products, which increased
8%. The Wheels category increased 15%, reflecting strength in HOT WHEELS,
partially offset by a decline in Tyco Radio Control product. The increase
in core brand sales also reflects higher sales of certain of the Company's
Preschool brands, including SESAME STREET and WINNIE THE POOH, partially
offset by a 17% decline in FISHER-PRICE products. High levels of Fisher-Price
inventory at retail negatively impacted sales for the nine months. Sales
to customers within the United States increased 9% compared to the year-ago
period. Sales to customers outside the United States decreased 5%. At
comparable foreign currency exchange rates, sales internationally increased
3%.
Gross profit, advertising and promotion, other selling and administrative
expenses, and interest expense as a percentage of net sales remained
virtually constant compared to the year-ago period.
The Company recognized a $275.0 million pre-tax charge against continuing
operations in March 1997 in connection with the Tyco integration and Mattel
restructuring. Of the total pre-tax charge, approximately $85 million
represented non-cash asset writedowns. Through September 30, 1997, the
total integration and restructuring expenditures and write-offs were
approximately $115 million. These costs related primarily to transaction
costs of the merger, the elimination of approximately 1,700 positions
worldwide, the consolidation of manufacturing facilities, the closure of
duplicate marketing and administrative offices, and the abandonment of
certain product lines. The remaining accrual of $160 million includes the
following: i) approximately $48 million for severance costs for the
elimination of approximately 1,000 positions worldwide; ii) approximately
$35 million primarily for the writedown of fixed assets and lease
termination costs in connection with the continuing consolidation of
manufacturing facilities; iii) approximately $50 million for lease and
contract terminations and asset writedowns resulting from the continuing
elimination of duplicate marketing offices, administrative functions and
distribution facilities; and iv) approximately $27 million in charges
primarily for the write-off of tooling and other costs related to
abandonment of certain product lines. It is anticipated that substantially
all actions related to the integration and restructuring activity will be
taken within one year. Management believes that the remaining accrual will
approximate all future charges.
12
Pre-tax cost savings resulting from the restructuring for the nine months
ended September 30, 1997 were over $30 million. Management continues to
believe that the integration and restructuring charge will provide pre-tax
cost savings of approximately $60 million during 1997 and approximately
$160 million or more annually beginning in 1998. These cost savings will
result primarily from reduced overhead, elimination of duplicate marketing
and administrative offices and distribution facilities, and more efficient
manufacturing and logistics operations. Available cash reserves and cash
flows generated from normal business operations will fund the costs of the
restructuring, with no adverse impact expected on the Company's future
liquidity, revenues or financial position. The statements set forth herein
are forwardlooking, and actual results may differ materially (see the
Cautionary Statement above).
FINANCIAL CONDITION
The Company's financial position remained strong as of September 30, 1997.
The Company's cash position as of September 30, 1997 was $68.2 million,
compared to $126.9 million as of the third quarter 1996. Cash decreased
$482.1 million since December 31, 1996 primarily due to funding of
operating activities. Accounts receivable increased $274.5 million over
the year-ago quarter, reflecting lower sales of certain trade receivables in
1997. Since year end, accounts receivable increased $898.1 million mainly
due to seasonal customer payment patterns. Inventory balances increased
$108.5 million since year end, primarily as a result of the Company's
production in support of future sales volume.
Accrued liabilities increased $189.1 million compared to the year-ago
quarter and $227.2 million since December 31, 1996, mainly due to the
accrual for the Tyco integration and Mattel restructuring charge. Short-
term borrowings decreased $70.7 million compared to the 1996 quarter end
primarily due to issuance of $90.0 million in Medium-Term Notes in the third
quarter of the current year. Since year end, short-term borrowings
increased $323.9 million mainly to finance the Company's seasonal working
capital requirements. Current portion of long-term liabilities decreased
approximately $93 million from September and December 1996 primarily due to the
repayment of the $100.0 million 6 7/8% Senior Notes which matured on August 1,
1997. Seasonal financing needs for the next twelve months are expected to be
satisfied through internally generated cash, issuance of commercial paper, sale
of certain trade receivables, and use of the Company's various short-term bank
lines of credit.
13
Details of the Company's capitalization are as follows:
<TABLE>
<CAPTION>
(In millions) Sept. 30, 1997 Sept. 30, 1996 Dec. 31, 1996
- ------------- ----------------------------------------------
<S> <C> <C> <C>
Medium-Term Notes $ 460.5 18% $ 220.0 9% $ 220.0 9%
6-3/4% Senior Notes 100.0 4 100.0 4 100.0 4
Senior Subordinated Notes - - 126.5 5 126.5 5
Convertible Subordinated
Notes - - 16.0 1 16.0 1
Other long-term debt
obligations 55.8 3 58.9 3 57.3 2
-----------------------------------------------
Total long-term debt 616.3 25 521.4 22 519.8 21
Other long-term liabilities 124.1 5 108.5 5 113.5 5
Shareholders' equity 1,764.3 70 1,716.9 73 1,805.9 74
----------------------------------------------
$2,504.7 100% $2,346.8 100% $2,439.2 100%
==============================================
</TABLE>
Total long-term debt increased as a percentage of total capitalization
compared to the year-ago quarter, primarily due to the issuance of $250.0
million in Medium-Term Notes, partially offset by the redemption of the
Senior Subordinated Notes, conversion of the Convertible Subordinated Notes
into Mattel common stock, and increase in shareholders' equity. Future
long-term capital needs are expected to be satisfied through retention of
corporate earnings and the issuance of long-term debt instruments. In
February 1996, the Company filed a universal shelf registration statement
which allowed for the issuance of up to $350.0 million of debt and equity
securities, including Medium-Term Notes. This registration was amended in
May 1997 to allow the issuance of an additional $39.5 million of debt and
equity securities. Of the total amended amount of $389.5 million, $26.7
million remains to be issued. Additionally, in October 1997, the Company
filed a universal shelf registration statement allowing the issuance of up
to $350.0 million of debt and equity securities. All remaining
availability under the February 1996 shelf registration statement, if any,
will be incorporated into the October 1997 shelf registration statement at
the time of effectiveness. Shareholders' equity decreased $41.6 million
since December 31, 1996 primarily due to dividends declared to common
shareholders and purchases of treasury stock, partially offset by
profitable operating results and exercises of employee stock options.
Shareholders' equity increased $47.4 million since September 30, 1996
primarily due to profitable operating results and exercises of employee
stock options, partially offset by dividends declared to common
shareholders and purchases of treasury shares.
14
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
ITEM 1. Legal Proceedings
- --------------------------
The Greenwald Litigation
------------------------
On October 13, 1995, Michelle Greenwald filed a complaint against the
Company in Superior Court of the State of California, County of Los
Angeles. The plaintiff was a former Mattel employee who was
terminated by the Company in July 1995. The complaint sought $50
million in general and special damages, plus punitive damages, for (i)
breach of oral, written and implied contract, (ii) wrongful
termination in violation of public policy, and (iii) violation of
California Labor Code Section 970. The plaintiff claimed that her
termination resulted from complaints made by her to management
concerning (i) general allegations that Mattel did not account
properly for sales and certain costs associated with sales; and (ii)
more specific allegations that Mattel failed to account properly for
certain royalty obligations to The Walt Disney Company. On December
5, 1996, the Company's motion for summary adjudication of the
plaintiff's public policy claim was granted. On February 10, 1997,
Ms. Greenwald filed a writ seeking appeal of the court's order
granting the motion. On February 10, 1997, the writ was denied. On
October 23, 1997, the Company's motion for summary judgment of the
plaintiff's remaining claims was granted.
Toys "R" Us and Related Matters
-------------------------------
On September 25, 1997, an administrative law judge of the Federal
Trade Commission issued his initial decision in the matter In re Toys
----------
"R" Us, Inc. (FTC Docket No. 9278). The administrative law judge made
------------
findings of fact and conclusions of law that the toy retailer Toys "R"
Us, Inc. had violated federal antitrust laws and entered into vertical
and horizontal arrangements with various toy manufacturers, including
the Company, whereby the manufacturers would refuse to do business
with warehouse clubs, or would do business with warehouse clubs only
on terms acceptable to Toys "R" Us. Toys "R" Us has announced its
intention to appeal the decision to the full Commission.
Following announcement of the administrative law judge's decision, the
Company and certain other toy manufacturers have been named as
defendants in a number of antitrust actions in various states. On
October 2, 1997, the Attorney General of the State of New York filed
in the United States District Court, Eastern District of New York, an
action against Toys "R" Us and certain toy manufacturers, including
the Company, seeking treble damages, expenses and attorneys' fees, on
behalf of all persons in the State of New York who purchased toy
products from retailers from 1989 to the present. The complaint
alleges that Toys "R" Us orchestrated an illegal conspiracy with
various toy manufacturers, including the Company, to cut off supplies
of popular toys to warehouse clubs and low margin retailers that
compete with Toys "R" Us.
15
Following the filing of the New York action, a series of private
treble damage class actions under the federal antitrust laws have been
filed in various federal district courts. The Company is aware of six
actions in the United States District Court, District of New Jersey,
one action in the United States District Court, Northern District of
California, one action in the United States District Court, Northern
District of Illinois, three actions in the United States District
Court, Eastern District of New York and two actions in the United
States District Court, Eastern District of Pennsylvania. While the
allegations and relief sought are substantially the same as those in
the New York action, the defendants differ from action to action, as
does the alleged conspiracy period. Mattel is not currently a named
defendant in the actions in the Eastern District of Pennsylvania.
The Company is also aware of three class action complaints filed in
state court in California naming Toys "R" Us as a defendant and the
Company and various other toy manufacturers as nondefendant co-
conspirators. These actions have been coordinated in Superior Court
of the State of California, County of Alameda, and allege violations
of state antitrust laws, seek unspecified damages and are based on
substantially similar allegations to those in the FTC administrative
proceeding.
The Company intends to vigorously defend the litigation in which it is
named involving the Toys "R" Us matter. Due to the preliminary nature
of the various actions and proceedings against the Company, the
ultimate outcome and materiality of these matters cannot presently be
determined.
16
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
3.0 By-laws of the Company, as amended to date (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on September 26, 1997)
4.0 Certificate of Designations of Series B Preferred Stock dated
March 26, 1997 (incorporated by reference to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on August 21, 1997)
4.1 Certificate of Designations of Series C Preferred Stock dated
March 26, 1997 (incorporated by reference to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on August 21, 1997)
4.2 Deposit Agreement dated June 24, 1996 among Tyco Toys, Inc.,
Midlantic Bank, N.A., as Depositary, and all holders from time
to time of depositary receipts issued thereunder (incorporated
by reference to Exhibit 4.2 to Tyco Toys, Inc.'s Registration
Statement on Form S-3 filed with the Securities and Exchange
Commission on June 20, 1996)
4.3 Amendment to Deposit Agreement dated as of March 27, 1997
between the Company as successor to Tyco Toys, Inc. and The
First National Bank of Boston (incorporated by reference to
Exhibit 4.9 to the Company's Registration Statement on Form S-
3 filed with the Securities and Exchange Commission on
September 26, 1997)
4.4 Registration Rights Agreement dated April 15, 1994 among Tyco
Toys, Inc., Corporate Partners, L.P., Corporate Offshore
Partners. L.P., the State Board of Administration of Florida
and Corporate Advisors, L.P. (incorporated by reference to
Tyco Toys, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1994)
4.5 Amendment to Registration Rights Agreement dated as of March
27, 1997 among Tyco Toys, Inc., Corporate Partners, L.P.,
Corporate Offshore Partners, L.P. and the State Board of
Administration of Florida (incorporated by reference to
Exhibit 4.11 to the Company's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on
September 26, 1997)
11.0 Computation of Income per Common and Common Equivalent Share
27.0 Financial Data Schedule (EDGAR filing only)
17
(b) Reports on Form 8-K
-------------------
Mattel, Inc. filed the following Current Reports on Form 8-K during
the quarterly period ended September 30, 1997:
Financial
Date of Report Items Reported Statements Filed
--------------- -------------- ----------------
July 25, 1997 5, 7 None
July 30, 1997 5, 7 Yes
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MATTEL, INC.
------------
(Registrant)
Date: As of November 7, 1997 By: /s/ Kevin M. Farr
---------------------- -----------------------
Kevin M. Farr
Senior Vice President
and Controller
18
<PAGE>
<TABLE>
MATTEL, INC. AND SUBSIDIARIES EXHIBIT 11.0
(Page 1 of 2)
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE
------------------------------------------------------------
(In thousands, except per share amounts)
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
PRIMARY 1997 1996 1997 1996
- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 223,655 $ 181,375 $ 94,665 $ 265,279
Deduct: Dividends on convertible preferred stock (2,838) (2,838) (8,515) (4,554)
--------- --------- --------- ---------
Income before extraordinary item for computation
of income per share 220,817 178,537 86,150 260,725
Extraordinary item - loss on early retirement of debt (4,610) - (4,610) -
--------- --------- --------- ---------
Net income applicable to common shares $ 216,207 $ 178,537 $ 81,540 $ 260,725
========= ========= ========= =========
Applicable Shares for Computation of Income per Share:
- ------------------------------------------------------
Weighted average common shares outstanding 290,650 289,182 290,278 291,351
Weighted average common equivalent shares arising from:
Dilutive stock options 4,391 3,203 3,528 3,488
Fisher-Price warrants 647 983 631 985
Nonvested stock - 593 - 593
--------- --------- --------- ---------
Weighted average number of common and common
equivalent shares 295,688 293,961 294,437 296,417
========= ========= ========= =========
Income Per Common Share:
- ------------------------
Income before extraordinary item $ 0.75 $ 0.61 $ 0.30 $ 0.88
Extraordinary item - loss on early retirement of debt (0.02) - (0.02) -
--------- --------- --------- ---------
Net income per common share $ 0.73 $ 0.61 $ 0.28 $ 0.88
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
MATTEL, INC. AND SUBSIDIARIES EXHIBIT 11.0
(Page 2 of 2)
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE
------------------------------------------------------------
(In thousands, except per share amounts)
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
FULLY DILUTED 1997 (a) 1996 (a) 1997 (b) 1996 (a)
- ------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 223,655 $ 181,375 $ 94,665 $ 265,279
Add: Interest savings, net of tax, applicable to:
Assumed conversion of 7% convertible subordinated
notes 115 182 479 546
--------- --------- --------- ---------
Income before extraordinary item for computation
of income per share 223,770 181,557 95,144 265,825
Extraordinary item - loss on early retirement of debt (4,610) - (4,610) -
--------- --------- --------- ---------
Net income applicable to common shares $ 219,160 $ 181,557 $ 90,534 $ 265,825
========= ========= ========= =========
Applicable Shares for Computation of Income per Share:
- ------------------------------------------------------
Weighted average common shares outstanding 290,650 289,182 290,278 291,351
Weighted average common equivalent shares arising from:
Dilutive stock options 4,390 3,210 4,279 3,504
Assumed conversion of convertible preferred stock 10,493 10,963 10,493 5,491
Fisher-Price warrants 647 983 643 985
Assumed conversion of 7% convertible subordinated
notes 689 783 788 783
Nonvested stock - 627 - 708
--------- --------- --------- ---------
Weighted average number of common and common
equivalent shares 306,869 305,748 306,481 302,822
========= ========= ========= =========
Income Per Common Share:
- ------------------------
Income before extraordinary item $ 0.73 $ 0.59 $ 0.31 $ 0.88
Extraordinary item - loss on early retirement of debt (0.02) - (0.01) -
--------- --------- --------- ---------
Net income per common share $ 0.71 $ 0.59 $ 0.30 $ 0.88
========= ========= ========= =========
<FN>
(a) - This calculation is submitted in accordance with Regulation S-K, Item 601 (b)(11), although not required
by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
(b) - This calculation is submitted in accordance with Regulation S-K, Item 601 (b)(11), although it is
contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MATTEL INC.'S BALANCE SHEETS AND INCOME STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 68,171
<SECURITIES> 0
<RECEIVABLES> 1,873,786
<ALLOWANCES> 26,792
<INVENTORY> 552,661
<CURRENT-ASSETS> 2,651,348
<PP&E> 947,696
<DEPRECIATION> 338,048
<TOTAL-ASSETS> 4,074,618
<CURRENT-LIABILITIES> 1,569,906
<BONDS> 616,287
<COMMON> 297,626
0
827
<OTHER-SE> 1,465,806
<TOTAL-LIABILITY-AND-EQUITY> 4,074,618
<SALES> 3,221,523
<TOTAL-REVENUES> 3,221,523
<CGS> 1,639,598
<TOTAL-COSTS> 1,639,598
<OTHER-EXPENSES> 1,361,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,782
<INCOME-PRETAX> 158,080
<INCOME-TAX> 63,415
<INCOME-CONTINUING> 94,665
<DISCONTINUED> 0
<EXTRAORDINARY> 4,610
<CHANGES> 0
<NET-INCOME> 90,055
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.30
<FN>
Notes -
Fully diluted earnings per share for the nine months ended Sept. 30, 1997
has been submitted in accordance with Regulation S-K, Item 601 (b)(11),
although it is contrary to paragraph 40 of APB Opinion No. 15 because it
produces an anti-dilutive result.
</TABLE>
