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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q/A
(AMENDMENT NO. 1)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 001-05647
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MATTEL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-1567322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
333 Continental Boulevard,
El Segundo, California 90245-5012
(Address of principal executive offices) (Zip Code)
</TABLE>
(310) 252-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
None
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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 Nov. 6,
1998:
Common Stock--$1 par value--287,634,595 shares
The undersigned registrant hereby amends Part I, Item 2 of its Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, as set forth
below, in order to provide additional disclosure in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section regarding cost savings estimated and realized as of September 30, 1998
related to the Company's 1997 restructuring plan.
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PART I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is deleted in its entirety and is replaced with the
following text. A paragraph discussing the cost savings estimated and realized
as of September 30, 1998 related to the Company's 1997 restructuring plan has
been added to the end of the "Acquisitions and Nonrecurring Items" section.
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, SALES LEVELS, THE MATTEL AND TYCO RESTRUCTURING CHARGE,
SPECIAL CHARGES, OTHER NON-RECURRING CHARGES, COST SAVINGS, PROFITABILITY,
AND THE YEAR 2000, 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; SIGNIFICANT CHANGES IN BUYING PATTERNS OF MAJOR CUSTOMERS;
POSSIBLE WEAKNESSES OF INTERNATIONAL MARKETS; THE IMPACT OF COMPETITION ON
REVENUES AND MARGINS; THE EFFECT OF CURRENCY FLUCTUATIONS ON REPORTABLE
INCOME; UNANTICIPATED NEGATIVE RESULTS OF LITIGATION, GOVERNMENTAL
PROCEEDINGS OR ENVIRONMENTAL MATTERS; TIMELY RESOLUTION OF THE YEAR 2000
ISSUE BY THE COMPANY AND ITS CUSTOMERS AND SUPPLIERS; 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.
The Company plans to continue to focus on core brands that have fundamental
play patterns and worldwide appeal, are sustainable, and have delivered
consistent profitability and stable growth. The Company's core brands can be
grouped in the following five categories: Fashion Dolls (BARBIE fashion dolls
and accessories, collector dolls, and FASHION MAGIC); Infant and Preschool
(FISHER-PRICE, Disney Preschool and Plush, POWER WHEELS, SESAME STREET, SEE 'N
SAY, MAGNA DOODLE, and VIEW-MASTER); Entertainment (Disney, Nickelodeon, games
and puzzles); Wheels (HOT WHEELS, MATCHBOX, Tyco Electric Racing and Tyco
Radio Control); and Large and Small Dolls (AMERICAN GIRL, CABBAGE PATCH KIDS,
POLLY POCKET and Tyco large dolls and Plush).
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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,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.......................... 100% 100% 100% 100%
=== === === ===
Gross profit....................... 51% 52% 49% 49%
Advertising and promotion
expenses.......................... 15 16 14 15
Other selling and administrative
expenses.......................... 13 13 19 18
Integration and restructuring
costs............................. -- -- -- 8
Special charge..................... 2 -- 1 --
Other expense, net................. 2 1 1 1
--- --- --- ---
Operating profit................... 19 22 14 7
Interest expense................... 2 2 2 2
--- --- --- ---
Income before income taxes......... 17% 20% 12% 5%
=== === === ===
</TABLE>
Third Quarter 1998 Compared to 1997
Net sales in the third quarter of 1998 were $1.67 billion, an increase of
8% in both US dollars and local currencies from $1.56 billion in the third
quarter of 1997. Sales were negatively impacted in the quarter by a change in
buying practices by Toys 'R' Us, the Company's largest customer. Sales in the
Company's Wheels category increased 48%, reflecting growth in both HOT WHEELS
and MATCHBOX vehicles and playsets, as well as strength in Tyco Radio Control.
Sales in the Entertainment category increased by 20%, largely due to this
year's introduction of toys associated with the Disney and Pixar movie "A Bugs
Life" and higher sales of Nickelodeon products. Sales in the Infant and
Preschool category increased 2%, primarily due to higher sales in Disney's
WINNIE THE POOH products. Sales of BARBIE and BARBIE-related products,
including FASHION MAGIC, remained flat with last year. The acquisition of
Pleasant Company in the third quarter of 1998 contributed approximately $36
million of net sales.
Sales to customers within the United States increased 9% and accounted for
nearly 67% of consolidated gross sales as compared to 66% in the year-ago
quarter. Sales to customers outside the United States grew 5% compared to
1997. At comparable foreign currency exchange rates, sales internationally
grew 7%, reflecting a $6 million negative impact from foreign exchange rates.
Gross margin of 51% fell slightly from 52% in 1997. The decline was
attributable to the significant increase in the lower margin Wheels business
and higher sales of licensed Disney and Nickelodeon products, partially offset
by improvement in the Infant & Preschool margins and favorable foreign
currency impact. Advertising and promotion expenses, as a percentage of net
sales, decreased one percentage point to 15%. As a percentage of net sales,
other selling and administrative expenses remained consistent with last year.
Interest expense increased by $13.0 million in the third quarter of 1998,
primarily due to financing of the Pleasant Company and Bluebird acquisitions.
Other expense, net increased by $10.2 million, largely attributable to
increased goodwill amortization resulting from the Pleasant Company and
Bluebird acquisitions and certain foreign currency losses.
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Nine Months 1998 Compared to 1997
Net sales in the first nine months of 1998 were $3.24 billion, an increase
of 1% from $3.22 billion in the first nine months of 1997. This increase
includes a net $35.2 million negative effect from the generally stronger US
dollar relative to 1997. At comparable foreign exchange rates, sales improved
by 2%. Sales in the Company's Wheels category increased 28%, reflecting growth
in both HOT WHEELS and MATCHBOX vehicle and playsets, partially offset by a
decline in Tyco Radio Control. Sales in the Infant and Preschool category
increased 6%, led by strength in Disney's WINNIE THE POOH and in SESAME STREET
products. Sales in the Entertainment category increased by 14%, largely due to
higher sales of Nickelodeon products. Sales of BARBIE and BARBIE-related
products, including FASHION MAGIC, decreased by 9% primarily due to the change
in buying practices by Toys 'R' Us and high retail inventory levels of certain
BARBIE dolls entering the year. The acquisition of Pleasant Company in the
third quarter of 1998 contributed approximately $36 million of net sales.
Sales to customers within the United States increased 1%. Sales to
customers outside the United States grew 1%, including the negative effect
from the generally stronger US dollar relative to 1997. At comparable foreign
currency exchange rates, sales internationally increased 5%.
Gross profit and selling and administrative expenses, as a percentage of
net sales, remained virtually constant. Advertising and promotion expenses, as
a percentage of net sales, decreased one percentage point to 14%.
Interest expense increased by $6.9 million, primarily due to financing of
the Pleasant Company and Bluebird acquisitions, partially offset by savings
from refinancing of Tyco debt. Other expense, net increased by $6.2 million,
largely attributable to increased goodwill amortization resulting from the
Pleasant Company and Bluebird acquisitions and certain foreign currency
losses, partially offset by higher interest income.
ACQUISITIONS AND NONRECURRING ITEMS
In September 1998, the Company recognized a $38.0 million pre-tax ($27.0
million after-tax) charge related to a voluntary recall of certain POWER
WHEELS ride-on vehicles. The recall has not resulted from any serious injury,
but involves the replacement of electronic components that may overheat,
particularly when consumers make alterations to the product.
On July 9, 1998, the Company completed its acquisition of Pleasant Company,
a Wisconsin-based direct marketer of books, dolls, clothing, accessories and
activity products included under the AMERICAN GIRL brand name. The purchase
price, including costs directly related to the acquisition, was approximately
$715 million. The acquisition has been accounted for using the purchase method
of accounting and, accordingly, the results of operations of Pleasant Company
have been included in the Company's consolidated financial statements from the
date of acquisition. The excess of cost over the estimated fair market value
of tangible net assets acquired was approximately $680 million. Total excess
has been allocated to customer lists, covenant not-to-compete, and magazine
subscription lists which are being amortized on a straight-line basis over a 3
to 15 year period, with the remaining excess being amortized on a straight-
line basis over 40 years.
On June 19, 1998, the Company acquired Bluebird, a company organized in the
United Kingdom, from which Mattel licensed the product designs for its POLLY
POCKET and Disney Tiny Collections
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brands, as well as the POLLY POCKET trademarks. The aggregate purchase price,
including investment advisor and other directly related expenses was
approximately $80 million. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of operations of
Bluebird have been included in the Company's consolidated financial statements
since the date of acquisition. Intercompany accounts and transactions between
Bluebird and the Company have been eliminated. The excess of cost over the
estimated fair market value of tangible net assets acquired was approximately
$60 million, which is being amortized on a straight-line basis over 40 years.
On January 8, 1998, the Company acquired PrintPaks, a Portland, Oregon-
based publisher of multimedia craft products. The purchase price included net
cash consideration of approximately $11 million. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of PrintPaks have been included in the Company's consolidated
financial statements since the date of the acquisition. The agreement and plan
of merger also provides for future contingent consideration in the event that
net sales of PrintPaks product lines reach or exceed certain levels in
calendar years 1998, 1999, and 2000.
In connection with the Tyco merger, the Company commenced an integration
and restructuring plan and recorded a $275 million pre-tax charge against
operations in March 1997. After related tax effects, the net $210 million
charge impacted 1997 year-to-date earnings by $0.70 per diluted share. The
plan consisted of consolidating certain manufacturing and distribution
operations, eliminating duplicative marketing and administrative offices,
terminating various distributor and licensing arrangements and abandoning
certain product lines. Included in the charge was approximately $86 million
for estimated severance costs related to the elimination of 2,700 positions
principally associated with facilities to be closed. The remainder of the
charge consisted of transaction costs related to the merger, asset write-downs
and contract termination expenses. Of the total pre-tax charge, approximately
$90 million represents non-cash asset write-downs. As of September 30, 1998,
the total integration and restructuring expenditures and write-offs were
approximately $223 million. The plan is expected to be substantially complete
in the fourth quarter of 1998. Mattel's cost savings realized for the nine-
month period ended September 30, 1998 relating to the 1997 restructuring plan
was approximately $110 million. Savings realized were mainly attributed to
cost of production, advertising, selling and administrative expenses, and
financing costs. In connection with this plan, revenues for the nine months
ended September 30, 1998 decreased by approximately $80 million due to
discontinued products. The cost savings realized were not reduced by cost
increases, other than expenditures related to our expansion of on-going
business activities.
FINANCIAL POSITION
The Company's cash position as of September 30, 1998 was $142.6 million as
compared to $68.2 million as of September 30, 1997. Cash decreased by $552.4
million since December 31, 1997, primarily due to funding of operating
activities and cash consideration paid in connection with the acquisitions of
Pleasant Company and Bluebird.
Inventory balances increased $211.4 million over the 1997 quarter end and
$335.2 million since the 1997 year end, primarily as a result of the Company's
production in support of future sales volume and inventory obtained as part of
the Pleasant Company acquisition. Prepaid expenses and other current assets
increased $100.4 million over the 1997 quarter end, mainly due to a
reclassification of deferred income tax benefits related to the Tyco
integration and Mattel restructuring charge from other long-term assets.
Property, plant and equipment, net increased $104.6 million and $112.7 million
as
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compared to September 30, 1997 and December 31, 1997, respectively, due to
assets acquired from Pleasant Company and investments in or expansion of
manufacturing facilities located in Mexico and Asia. Intangible assets, net
increased $684.8 million and $724.4 million since quarter end and year end
1997, respectively, due to the Company's acquisitions of Pleasant Company,
Bluebird and PrintPaks, partially offset by amortization.
Short-term borrowings increased $499.4 million compared to the 1997 quarter
end and $834.8 million relative to 1997 year end due to commercial paper
issuances and other short-term loans used to finance seasonal needs. Accrued
liabilities increased $87.5 million compared to December 31, 1997, mainly due
to an accrual for the POWER WHEELS voluntary recall and transaction costs
related to the Pleasant Company and Bluebird acquisitions, partially offset by
the completion of certain activities related to the Tyco integration and
Mattel restructuring. Seasonal financing needs for the next twelve months are
expected to be satisfied through internally generated cash, issuance of
commercial paper, issuance of long-term debt, and use of the Company's various
short-term bank lines of credit.
Details of the Company's capitalization are as follows:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
1998 1997 1997
(In millions) ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Medium-Term Notes.................... $ 520.5 17% $ 460.5 18% $ 520.5 20%
Senior Notes......................... 400.0 13 100.0 4 100.0 4
Other long-term debt obligations..... 43.2 1 55.8 3 55.0 2
-------- --- -------- --- -------- ---
Total long-term debt................. 963.7 31 616.3 25 675.5 26
Other long-term liabilities.......... 139.2 5 124.1 5 132.8 5
Shareholders' equity................. 1,921.0 64 1,764.3 70 1,822.1 69
-------- --- -------- --- -------- ---
$3,023.9 100% $2,504.7 100% $2,630.4 100%
======== === ======== === ======== ===
</TABLE>
Total long-term debt increased as a percentage of total capitalization
compared to both the 1997 quarter end and year end, primarily due to the
issuance of $300 million in Senior Notes to fund the acquisition of Pleasant
Company. Future long-term capital needs are expected to be satisfied through
the retention of corporate earnings and the issuance of long-term debt
instruments. Shareholders' equity increased $156.7 million since September 30,
1997, primarily due to the cumulative earnings and issuance of treasury stock
for the exercise of employee stock options, partially offset by treasury stock
repurchases, dividends declared to common and preferred shareholders, and
unfavorable foreign currency translation adjustments. Shareholders' equity
increased $98.9 million since December 31, 1997, primarily due to cumulative
earnings and issuance of treasury stock for the exercise of employee stock
options, partially offset by treasury stock repurchases and dividends declared
to common and preferred shareholders.
FOREIGN CURRENCY RISK
The Company enters into foreign currency forward exchange and option
contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies, to limit the
effect of exchange rate fluctuations on the Company's results of operations
and cash flows.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company's primary market risk exposures are in
Europe, Latin America and Asia. The Company seeks to mitigate its exposure to
market risk by monitoring its currency exchange exposure for the year and
partially or
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fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for international borrowings and
intercompany invoicing. The Company does not trade in financial instruments
for speculative purposes.
YEAR 2000 UPDATE
Many currently installed computer systems and software products, including
several used by the Company, are coded to accept only two-digit (rather than
four-digit) entries in the date code field used to define the applicable year.
In such instances, the first two characters are assumed to be "19". Beginning
in the year 2000 or perhaps earlier if referencing a date in the year 2000,
such computer systems and software products may recognize a date using "00" as
the year 1900, rather than the year 2000, which could result in
miscalculations or system failures (the "Year 2000 Issue"). To address the
Year 2000 Issue, in early 1998 the Company established a project team and
initiated a comprehensive program that is designed to assess, remediate and
test the Company's internal systems, hardware and processes, including key
operational, manufacturing and financial systems (the "Plan"). The progress of
the Plan is continually monitored and regularly reported to management of the
Company. In addition, the Board of Directors of the Company is regularly
informed about the Year 2000 Issue both generally and as it may affect the
Company's business.
The Company's internal year 2000 project team oversees all aspects of
implementing the Plan. The team is comprised of staff members from the
information systems department having the requisite knowledge of the Company's
computer systems, including all the technical aspects of the systems. Key user
group designees from business areas are included on each system team, which is
guided by a central project team. The Company does not plan on engaging
outside consultants, technicians or other external resources to assist in
formulating and implementing the Plan.
The Company's Plan adheres to a multi-step process that includes five
distinct phases of activity: (1) awareness; (2) inventory and risk assessment;
(3) code and system modification; (4) testing; and (5) contingency planning.
Under the first two phases of the Plan, all operational, manufacturing and
financial systems were inventoried and evaluated. This inventory included all
software systems, computer hardware, facilities, and production equipment
containing or depending upon a computer chip. As a result of such evaluation,
the Company established detailed plans and action steps required to address
all aspects of the Year 2000 Issue, including all code and system
modifications (phase 3). The Company expects the awareness, inventory and code
change phases of the Plan to be completed by December 1998 and all critical
system verification and testing (phase 4) to be completed by July 1999.
The Company initiated formal communications with each of its significant
suppliers and customers to determine the extent to which they are addressing
the Year 2000 Issue and the effect on the Company's business should those
parties fail to address the issue. The Company is in the initial phase of
receiving such responses and evaluating the impact, if any, on the Company's
business.
Due to the general uncertainty inherent in the Year 2000 Issue, largely
resulting from uncertainty of the year 2000 readiness of third-party suppliers
and customers, the Company is currently unable to assess the impact on the
Company's business. However, the risk of third-party suppliers and customers
not correcting a material year 2000 problem could result in an interruption
in, or a failure of, certain normal business activities or operations of such
suppliers, customers and/or the Company. Such failures could materially and
adversely affect the Company's results of operations, liquidity and
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financial position. As a result, during the first half of 1999 the Company
will be developing contingency plans (phase 5), which it expects to be
completed by July 1999. Contingency planning will be done on a worldwide basis
by all business units of the Company. Each unit will concentrate on factors
external to the Company which may adversely impact their ability to conduct
operations. Specifically, for those locations where a high likelihood of a
material failure exists, the Company will establish revised procedures for
managing operations, including identification of alternate suppliers and
vendors whose systems are year 2000 compliant.
While there is no guarantee, the Company believes that its year 2000 Plan
should greatly reduce the Company's level of uncertainty about the Year 2000
Issue and mitigate the possibility of significant interruptions of ongoing
operations. Additionally, the Company's global presence and broad-based
manufacturing capability should provide the Company with numerous options to
further mitigate the risk of year 2000 non-compliance.
As of September 30, 1998, the Company has incurred expenditures of
approximately $5 million and expects to incur a total of approximately $8
million in connection with addressing the Year 2000 Issue. These costs are
largely due to the use of internal resources dedicated to achieving year 2000
compliance. Costs are charged to expense as they are incurred. Work on the
Year 2000 Issue has not delayed any internal Company projects that would have
a material adverse effect on the Company's consolidated financial position or
results of operation. All costs of addressing the Year 2000 Issue will be
funded from internally generated cash.
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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)
/s/ Kevin M. Farr
Date: As of February 22, 1999 By: _________________________________
Kevin M. Farr
Senior Vice President and
Corporate Controller
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