SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
----------------------------------
MATTEL, INC.
------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
------------------------------------------------------------------------
(Address of principal executive offices (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
---------------
(Former name, former address and former fiscal year,
if changed since last report) None
-------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Number of shares outstanding of registrant's common stock, $1.00 par
value, (including 1,946,957 common shares issuable upon exchange of
outstanding exchangeable shares of Softkey Software Products Inc.) as
of November 8, 2000:
426,751,540 shares
<PAGE>
<TABLE>
PART I -- FINANCIAL INFORMATION
-------------------------------
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 95,815 $ 61,192 $ 247,354
Marketable securities 40,933 - -
Accounts receivable, net 1,456,314 1,684,066 1,001,972
Inventories 655,706 640,939 436,316
Prepaid expenses and other current assets 209,473 258,483 166,217
------------------------------------------------------------------------------
Total current assets 2,458,241 2,644,680 1,851,859
------------------------------------------------------------------------------
PROPERTY, PLANT and EQUIPMENT
Land 32,993 34,532 34,882
Buildings 257,670 267,633 270,185
Machinery and equipment 560,875 544,781 552,625
Capitalized leases 23,271 23,271 23,271
Leasehold improvements 71,831 54,973 74,812
------------------------------------------------------------------------------
946,640 925,190 955,775
Less: accumulated depreciation 456,651 412,655 422,142
------------------------------------------------------------------------------
489,989 512,535 533,633
Tools, dies and molds, net 172,202 190,387 191,158
------------------------------------------------------------------------------
Property, plant and equipment, net 662,191 702,922 724,791
------------------------------------------------------------------------------
OTHER NONCURRENT ASSETS
Intangible assets, net 1,149,548 1,218,367 1,200,622
Net investment in discontinued operations 24,944 504,094 461,986
Other assets 548,972 236,830 434,706
------------------------------------------------------------------------------
$4,843,896 $5,306,893 $4,673,964
==============================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
2
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
2000 1999 1999
(In thousands, except share data)
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES
Short-term borrowings $ 737,459 $ 945,447 $ 369,549
Current portion of long-term liabilities 2,582 133,285 3,173
Accounts payable 373,994 349,198 293,277
Accrued liabilities 703,599 700,206 714,633
Liabilities of discontinued operations 230,076 - -
Income taxes payable 47,792 131,627 184,789
-----------------------------------------------------------------------------
Total current liabilities 2,095,502 2,259,763 1,565,421
-----------------------------------------------------------------------------
LONG-TERM LIABILITIES
Senior notes 300,000 300,000 400,000
Medium-term notes 540,500 540,500 540,500
Long-term debt 432,576 42,542 42,380
Other 167,240 158,926 162,976
-----------------------------------------------------------------------------
Total long-term liabilities 1,440,316 1,041,968 1,145,856
-----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Special voting preferred stock $1.00
par value, $10.00 liquidation preference
per share, one share authorized, issued
and outstanding, representing the voting
rights of 2.2 million, 3.9 million,and
3.2 million outstanding exchangeable
shares, respectively - - -
Common stock $1.00 par value, 1.0 billion
shares authorized; 435.2 million shares
shares, 432.8 million shares, and 433.6
million shares issued, respectively 435,232 432,766 433,563
Additional paid-in capital 1,711,813 1,739,226 1,728,954
Treasury stock at cost; 10.9 million shares,
11.8 million shares and 12.0 million
shares, respectively (327,670) (389,551) (361,825)
(Accumulated deficit) retained earnings (215,545) 458,524 401,642
Accumulated other comprehensive loss (295,752) (235,803) (239,647)
-----------------------------------------------------------------------------
Total stockholders' equity 1,308,078 2,005,162 1,962,687
------------------------------------------------------------------------------
$4,843,896 $5,306,893 $4,673,964
==============================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
<TABLE>
Mattel, Inc. and Subsidiaries
Consolidated Statements of Operations
For the For the
Three Months Nine Months
Ended Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands,except per share amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $1,583,763 $1,587,703 $3,094,821 $3,078,289
Cost of sales 917,145 805,881 1,749,967 1,621,434
----------------------------------------------------------------------------------
GROSS PROFIT 666,618 781,822 1,344,854 1,456,855
Advertising and promotion expenses 225,209 222,597 415,082 410,633
Other selling and administrative
expenses 224,695 204,722 697,605 604,752
Amortization of intangibles 13,275 13,123 39,180 39,095
Restructuring and other charges 17,900 - 15,900 293,100
Interest expense 42,625 36,019 102,926 88,491
Other expense (income), net 7,656 (1,469) (7,743) 1,760
----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 135,258 306,830 81,904 19,024
Provision for income taxes 31,564 84,685 16,835 20,490
-----------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 103,694 222,145 65,069 (1,466)
DISCONTINUED OPERATIONS (See Note 2)
Loss from discontinued operations,
net of taxes (440,560) (86,812) (567,166) (62,486)
-----------------------------------------------------------------------------------
NET INCOME (LOSS) (336,866) 135,333 (502,097) (63,952)
Less: preferred stock dividend
requirements - - - 3,980
-----------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHARES $ (336,866) $ 135,333 $(502,097) $ (67,932)
===================================================================================
INCOME (LOSS) PER COMMON
SHARE - BASIC
Income (loss) from continuing
operations $ 0.24 $ 0.52 $ 0.15 $ (0.01)
Loss from discontinued operations (1.03) (0.20) (1.33) (0.16)
-----------------------------------------------------------------------------------
Net income (loss) $ (0.79) $ 0.32 $ (1.18) $ (0.17)
===================================================================================
Weighted average number of common
shares 426,394 425,148 425,903 410,316
===================================================================================
INCOME (LOSS) PER COMMON
SHARE - DILUTED
Income (loss) from continuing
operations $ 0.24 $ 0.52 $ 0.15 $ (0.01)
Loss from discontinued operations (1.03) (0.20) (1.33) (0.16)
-----------------------------------------------------------------------------------
Net income (loss) $ (0.79) $ 0.32 $ (1.18) $ (0.17)
===================================================================================
Weighted average number of common
and common equivalent shares 426,945 429,455 426,712 410,316
===================================================================================
Dividends Declared Per Common Share $ 0.09 $ 0.09 $ 0.27 $ 0.26
===================================================================================
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the
Nine Months Ended
-----------------------------
Sept. 30, Sept. 30,
(In thousands) 2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(502,097) $ (63,952)
Deduct: loss from discontinued operations (567,166) (62,486)
----------------------------------------------------------------------------
Income (loss) from continuing operations 65,069 (1,466)
Adjustments to reconcile income (loss) from
continuing operations to net cash flows
from operating activities:
Noncash restructuring and one-time charges 25,581 48,094
Depreciation 144,318 138,913
Amortization 45,694 41,676
Increase (decrease) from changes
in assets and liabilities:
Accounts receivable (481,922) (758,656)
Inventories (248,687) (74,345)
Prepaid expenses and other
current assets (16,889) (25,385)
Accounts payable, accrued
liabilities and income taxes payable 64,957 49,080
Other, net 6,630 2,473
----------------------------------------------------------------------------
Net cash flows used for operating
activities of continuing operations (395,249) (579,616)
----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tools, dies and molds (61,557) (81,491)
Purchases of other property, plant
and equipment (53,081) (64,613)
Proceeds from sale of other
property, plant and equipment 5,444 2,303
Other, net (20) (14,740)
----------------------------------------------------------------------------
Net cash flows used for investing
activities of continuing operations (109,214) (158,541)
----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 370,286 825,751
Proceeds from issuance of long-term debt 390,710 -
Payment of senior note (100,000) -
Exercise of stock options including
related tax benefit 12,512 56,897
Purchase of treasury stock - (51,047)
Payment of dividends on common and
preferred stock (115,155) (87,791)
Other, net (555) (597)
----------------------------------------------------------------------------
Net cash flows from financing activities
of continuing operations 557,798 743,213
----------------------------------------------------------------------------
NET CASH USED FOR DISCONTINUED OPERATIONS (201,824) (154,599)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,050) (1,719)
----------------------------------------------------------------------------
DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (151,539) (151,262)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD 247,354 212,454
----------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 95,815 $ 61,192
============================================================================
<FN>
The accompanying notes are an integral part of these statements.
</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' ("Mattel") financial position and interim results as of
and for the periods presented have been included. Certain amounts in
the financial statements for prior periods have been reclassified to
conform to the current period's presentation. Because Mattel's
business is seasonal, results for interim periods are not necessarily
indicative of those that may be expected for a full year.
The financial information included herein should be read in
conjunction with Mattel's consolidated financial statements and
related notes in its 1999 Annual Report to Stockholders filed on
Form 10-K and its restated consolidated financial statements and
related notes for the years ended December 31, 1999, 1998 and 1997
which reflect the reclassification of the Consumer Software business
as a discontinued operation filed on its Current Report on Form 8-K
dated July 6, 2000.
2. On March 31, 2000, Mattel's board of directors resolved to sell its
Consumer Software segment, which was comprised primarily of the
assets of The Learning Company, Inc. ("Learning Company") As a result of
this decision, the Consumer Software segment is being reported as a
discontinued operation effective March 31, 2000, and the consolidated
financial statements have been reclassified to segregate the net
investment in, and the liabilities and operating results of the Consumer
Software segment.
6
<PAGE>
On October 18, 2000, Mattel sold Learning Company to an affiliate of Gores
Technology Group in return for a contractual right to receive future
consideration based on income generated from its business operations and/or
the net proceeds derived by the new company upon the sale of its assets
or other liquidating events, or its enterprise value at the end of five
years. As a result of the sale, a loss from discontinued operations has
been recorded in the consolidated statements of operations as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
---------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss before income taxes $ - $(130.8) $(179.6) $(94.7)
Benefit for income taxes - 44.0 53.0 32.2
--------------------------------------------------------------------------
Net loss - (86.8) (126.6) (62.5)
--------------------------------------------------------------------------
Loss on disposal (398.9) - (398.9) -
Actual and estimated losses
during phase-out period (195.8) - (195.8) -
--------------------------------------------------------------------------
(594.7) - (594.7) -
Benefit for income taxes 154.1 - 154.1 -
--------------------------------------------------------------------------
Net loss on disposal (440.6) - (440.6) -
--------------------------------------------------------------------------
Total loss from discontinued
operations $(440.6) $ (86.8) $(567.2) $(62.5)
==========================================================================
</TABLE>
The net sales of the Consumer Software segment for the quarters ended
September 30, 2000 and 1999 were $111.2 million and $237.5 million,
respectively, and the year-to-date net sales as of September 30, 2000
and 1999 were $287.2 million and $666.1 million, respectively.
Actual losses of the Consumer Software segment from the measurement date
of March 31, 2000 as well as estimated losses through the date of disposal
have been recorded as part of the loss from discontinued operations for
the three months ended September 30, 2000.
The net investment in discontinued operations as of September 30, 2000
represents the net assets of Mattel Media (the remaining portion of
Mattel's Consumer Software segment) as of that date, reduced for
estimated net losses during the phase-out period. Mattel is in discussion
with potential partners with respect to the licensing of Mattel's brands
for use in media-related products to be sold by the potential partners.
Liabilities of Learning Company retained by Mattel as of September 30,
2000 totaled approximately $230 million, including principal and interest
of approximately $206 million related to Learning Company's 5-1/2% Senior
Convertible Notes maturing on November 1, 2000, and are included in
liabilities of discontinued operations in the consolidated balance sheets.
Transaction costs of approximately $24 million, primarily consisting of
severance, and professional and legal fees, have also been accrued as of
September 30, 2000.
7
<PAGE>
3. Accounts receivable are shown net of allowances of $24.6 million
(Sept. 30, 2000), $32.9 million (Sept. 30, 1999), and $29.5 million
(Dec. 31, 1999).
4. Inventories are comprised of the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
-------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and work in progress $ 57,418 $ 62,346 $ 41,452
Finished goods 598,288 578,593 394,864
-------------------------------------------------------------------------
$ 655,706 $ 640,939 $ 436,316
=========================================================================
</TABLE>
5. Intangibles, net include the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
--------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $1,141,486 $1,208,626 $1,191,227
Other 8,062 9,741 9,395
--------------------------------------------------------------------------
$1,149,548 $1,218,367 $1,200,622
===========================================================================
</TABLE>
6. Short-term borrowings include the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
---------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable $119,959 $337,447 $121,805
Commercial paper 617,500 608,000 247,744
---------------------------------------------------------------------------
$737,459 $945,447 $369,549
===========================================================================
</TABLE>
7. Senior notes include the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
--------------------------------------------------------------------------
<S> <C> <C> <C>
6% due 2003 $ 150,000 $ 150,000 $ 150,000
6-1/8% due 2005 150,000 150,000 150,000
6-3/4% due 2000 - - 100,000
--------------------------------------------------------------------------
$ 300,000 $ 300,000 $ 400,000
==========================================================================
</TABLE>
8. Long-term debt includes the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 2000 1999 1999
-------------------------------------------------------------------------
<S> <C> <C> <C>
Euro notes due 2002 $ 190,710 $ - $ -
Term loan due 2003 200,000 - -
Mortgage note due 2005 41,866 42,542 42,380
-------------------------------------------------------------------------
$ 432,576 $ 42,542 $ 42,380
=========================================================================
</TABLE>
8
<PAGE>
9. Comprehensive loss is as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------
Sept. 30, Sept. 30,
(In thousands) 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from continuing operations $ 65,069 $ (1,466)
Loss from discontinued operations (567,166) (62,486)
-------------------------------------------------------------------------
Net loss (502,097) (63,952)
Unrealized (loss) gain on securities:
Unrealized holding (losses) gains arising
during the period (2,712) 2,800
Less: reclassification adjustment
for realized gains included in net loss - (11,143)
Currency translation adjustments (53,393) (29,562)
-------------------------------------------------------------------------
Comprehensive loss $(558,202) $(101,857)
==========================================================================
</TABLE>
10.Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
(In thousands) 2000 1999
-----------------------------------------------------------------------
<S> <C> <C>
Cash payments during the period:
Interest $120,117 $ 83,418
Income taxes 27,270 61,153
Noncash investing and financing
activities during the period:
Receipt of marketable securities from
sale of business $ 42,167 $ -
Issuance of common stock warrant 5,789 -
Common stock issued for acquisitions:
Settlement of earn-out agreements - 5,547
-----------------------------------------------------------------------
</TABLE>
11. The board of directors declared cash dividends of $0.09 per common
share in both the third quarter of 2000 and 1999.
12. Basic income (loss) per common share is computed by dividing
earnings available to common stockholders by the weighted average
number of common shares and common shares obtainable upon the exchange
of the exchangeable shares of Mattel's Canadian subsidiary, Softkey
Software Products Inc. ("Softkey"), outstanding during each period.
Earnings available to common stockholders represent reported net income
(loss) less preferred stock dividend requirements.
9
<PAGE>
Diluted income (loss) per common share is computed by dividing
diluted earnings available to common stockholders by the weighted
average number of common shares, common shares obtainable upon the
exchange of the exchangeable shares of Softkey, and other common
equivalent shares outstanding during each period. The calculation
of common equivalent shares assumes the exercise of dilutive stock
options and warrants, net of assumed treasury share repurchases at
average market prices, and conversion of dilutive preferred stock
and convertible debt, as applicable. Diluted earnings available to
common stockholders represent earnings available to common
stockholders less preferred stock dividend requirements. Dilutive
securities are included in the calculation of weighted average
shares outstanding for those periods in which Mattel recorded income
from continuing operations. For the quarter and year to date periods
ended September 30, 2000, premium price stock options totaling 18.8
million, convertible debt and warrants were excluded from the
calculation of diluted earnings per share because they were
anti-dilutive. For the quarter and year to date periods ended September
30, 2000, other nonqualified stock options totaling 32.7 million and
29.7 million, respectively, were excluded from the calculation of
diluted earnings per share because they were anti-dilutive. Premium
price stock options totaling 18.6 million, other nonqualified stock
options totaling 19.2 million, convertible debt and warrants were
excluded from the calculation of diluted earnings per share in the
1999 third quarter because they were anti-dilutive.
13. On July 5, 2000, Mattel completed an offering in Europe of Euro
200 million aggregate principal amount of Notes due July 2002.
Interest is payable annually in July at the rate of Euro 6.625%. Cash
proceeds of approximately $191 million were received by Mattel and were
used for general corporate purposes. Mattel entered into a hedge
transaction to convert the interest rate and principl amount from
Euro to US dollars.
14. On July 17, 2000, Mattel entered into a $200.0 million senior
unsecured term loan that matures in July 2003. Interest is charged at
various rates selected by Mattel, ranging from a LIBOR-based rate to
the bank reference rate. This term loan requires Mattel to meet
financial covenants for consolidated debt-to-capital and interest
coverage consistent with those required under Mattel's unsecured
revolving credit agreement.
10
<PAGE>
15. The table below presents information about segment revenues,
operating profit and assets. Mattel's reportable segments are
separately managed business units and include toy marketing and toy
manufacturing. The Toy Marketing segment is divided on a geographic
basis between domestic and international. The domestic Toy Marketing
segment is further divided into US Girls, US Boys-Entertainment, US
Infant & Preschool, and Other. The US Girls segment includes brands
such as Barbie(R), Polly Pocket(R) and Cabbage Patch Kids(R). The US
Boys-Entertainment segment includes products in the Wheels and
Entertainment categories. The US Infant & Preschool segment includes
Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame
Street(R) and other preschool products. The Other segment principally
sells specialty girls products, including American Girl(R), which are
sold through the direct marketing distribution channel. The
International Toy Marketing segment sells products in all toy categories.
The Toy Manufacturing segment manufactures toy products, which are sold
to the Toy Marketing segments based on intercompany transfer prices.
Such prices are based on manufacturing costs plus a profit margin.
Segment revenues do not include sales adjustments such as trade discounts
and other allowances. However, such adjustments are included in the
determination of segment profit from operations. Segment profit from
operations represents income before restructuring and other special
charges, interest expense and taxes. The consolidated total profit
from operations presented in the following table represents income
before income taxes as reported in the consolidated statements of
operations. The segment assets are comprised of accounts receivable
and inventories, net of applicable reserves and allowances.
11
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Toy Marketing:
US Girls $ 422,136 $ 393,914 $ 794,701 $ 725,178
US Boys-Entertainment 257,932 274,873 503,660 520,095
US Infant & Preschool 423,285 413,259 840,290 806,168
Other 58,366 58,609 150,913 157,776
International 515,942 545,533 998,770 1,069,394
Toy Manufacturing 622,424 546,910 1,352,050 1,034,291
------------------------------------------------------------------------------
Segment total 2,300,085 2,233,098 4,640,384 4,312,902
Elimination of
intersegment sales (622,424) (546,910) (1,352,050) (1,034,291)
Sales adjustments (93,898) (98,485) (193,513) (200,322)
-------------------------------------------------------------------------------
Net sales from continuing
operations $1,583,763 $1,587,703 $3,094,821 $3,078,289
===============================================================================
OPERATING PROFIT (LOSS)
Toy Marketing:
US Girls $ 120,807 $ 120,917 $ 208,646 $ 189,040
US Boys-Entertainment 29,270 39,447 23,492 40,806
US Infant & Preschool 69,682 63,231 90,545 79,746
Other (10,621) (12,294) (43,859) (31,584)
International 57,323 93,663 37,691 87,968
Toy Manufacturing 44,781 65,242 102,679 105,676
-------------------------------------------------------------------------------
Segment total 311,242 370,206 419,194 471,652
Restructuring and
other charges (a) (17,900) - (15,900) (293,100)
Interest expense (42,625) (36,019) (102,926) (88,491)
Corporate and other (b) (115,459) (27,357) (218,464) (71,037)
-------------------------------------------------------------------------------
Income from continuing
operations before income
taxes $ 135,258 $ 306,830 $ 81,904 $ 19,024
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
ASSETS
Sept. 30, Sept. 30,
(In thousands) 2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Toy Marketing:
US Girls and US Boys-Entertainment (c) $ 786,381 $ 786,580
US Infant & Preschool 349,512 469,089
Other 118,872 127,424
International 776,674 886,985
Toy Manufacturing 100,588 82,002
------------------------------------------------------------------------------
Segment total 2,132,027 2,352,080
Corporate and other (20,007) (27,075)
------------------------------------------------------------------------------
Accounts receivable and inventories from
continuing operations $2,112,020 $2,325,005
==============================================================================
<FN>
(a) For the three months and nine months ended September 30, 2000,
restructuring and other charges represents $22.9 million in charges
related to the 2000 financial realignment plan (see Note 18), offset by
$5.0 million and $7.0 million, respectively, of adjustments related to
the 1999 restructuring plan (see Note 19).
(b) For the three months and nine months ended September 30, 2000, corporate
and other includes $87.4 million of charges related to the first phase of
the financial realignment plan (see Note 18). The nine months ended also
includes a $53.1 million charge related to the departure of certain
senior executives.
(c) Asset information is not maintained by individual segment.
</TABLE>
12
<PAGE>
16. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities. This statement requires companies
-----------------------------------
to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. It also requires that gains or losses resulting
from changes in the values of those derivatives be accounted for
depending upon the use of the derivative and whether it qualifies for
hedge accounting. Mattel is required to adopt this statement for its
fiscal year beginning January 1, 2001. Management believes the
adoption of this statement will not have a material impact on Mattel's
consolidated financial position or results of operations.
17. In January 2000, Mattel and Warner Bros. Worldwide Consumer Products
signed a licensing agreement making Mattel the worldwide master toy
licensee for the literary characters from the Harry Potter books
authored by J.K. Rowling as well as for feature film and television
properties developed by Warner Bros. Pictures featuring the Harry
Potter characters. Mattel's worldwide toy licensing agreement
involves the first two Harry Potter books and theatrical films.
This agreement contains minimum royalty guarantees and has a term of
four years, provided that the second theatrical film is released
prior to January 1, 2003. If the second theatrical film is released
subsequent to January 1, 2003, the agreement will be extended to a
date twelve months after the release of the second theatrical film.
Pursuant to the agreement, Mattel issued Warner Bros. Consumer
Products a stock warrant, valued at $5.8 million, to purchase 3.0
million shares of Mattel's common stock at an exercise price of
$10.875 per share. This warrant became fully vested and exercisable
upon signing of the licensing agreement and expires on December 31,
2003.
18. During the third quarter of 2000, Mattel initiated a financial
realignment plan designed to improve gross margin, selling general
and administrative expenses, operating profit and cash flow. The
plan will require a total pre-tax charge estimated at approximately
$250 million or $170 million on an after-tax basis. In the third
quarter, Mattel recorded a pre-tax charge of $110.3 million,
approximately $74 million after-tax or $0.18 per diluted share related to
the initial phase of the financial realignment plan. In accordance
with generally accepted accounting principles, future pre-tax
implementation costs of approximately $140 million could not be accrued
in the third quarter of 2000. These costs will be recorded over the next
two and a half years.
13
<PAGE>
The following are the major initiatives included in the financial
realignment plan:
o Reduce excess manufacturing capacity;
o Terminate a variety of licensing and other contractual arrangements
that do not deliver an adequate level of profitability;
o Eliminate product lines that do not meet required levels of
profitability;
o Improve supply chain performance and economics;
o Eliminate approximately 10% of total worldwide headcount or 350
positions at US-based headquarters locations in El Segundo,
Fisher-Price and Pleasant Company through a combination of layoffs,
elimination of open requisitions, attrition and retirements; and
o Close and consolidate certain international offices.
Of the total third quarter pre-tax charge of $110.3 million, approximately
$23 million is classified as a restructuring charge, which relates to
the elimination of positions at headquarters locations in El Segundo,
Fisher-Price and Pleasant Company, closure of certain international
offices and consolidation of facilities. Total headcount reduction
as a result of the restructuring is approximately 600 employees. The
components of the restructuring costs are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Severance and other compensation $ 19
Asset writedowns 2
Lease termination costs 1
Other 1
---------------------------------------------------------
Total restructuring costs and asset writedowns $ 23
=========================================================
</TABLE>
19. During the second quarter of 1999, Mattel initiated a restructuring plan
for its continuing business and incurred certain other nonrecurring
charges totaling $293.1 million, approximately $227 million after-tax
or $0.56 per diluted share for the quarter. The restructuring plan was
aimed at leveraging global resources in the areas of manufacturing,
marketing and distribution, eliminating duplicative functions worldwide
and achieving improved operating efficiencies. The following are the
major restructuring initiatives:
o Consolidation of the Infant and Preschool businesses;
o Consolidation of the domestic and international back-office functions;
o Consolidation of direct marketing operations;
o Realignment of the North American sales force;
o Termination of various international distributor contracts; and
o Closure of three higher cost manufacturing facilities.
14
<PAGE>
Severance and other compensation costs associated with the restructuring
relate to the termination of approximately 3,000 employees around the
world, of which approximately 300 were terminated during 2000. Through
September 30, 2000, approximately $59 million as been incurred related
to employee terminations.
Components of the accrued restructuring and other nonrecurring
costs, including adjustments, related to continuing operations are
as follows:
<TABLE>
<CAPTION>
Balance Balance
Dec. 31, Amounts Sept. 30,
(In millions) 1999 Adjustments Incurred 2000
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and other
compensation $ 54 $(11) $(35) $ 8
Distributor, license
and other contract
terminations 10 (4) (6) -
Lease termination costs 15 3 (9) 9
-----------------------------------------------------------------------
Total restructuring costs 79 (12) (50) 17
Merger-related transaction
and other costs 4 (1) - 3
Other nonrecurring charges 19 6 (5) 20
-----------------------------------------------------------------------
Total restructuring and
other charges $102 $ (7) $(55) $40
=======================================================================
</TABLE>
The adjustments made in 2000 largely reflect the reversal of excess
restructuring reserves as a result of lower than anticipated costs
to complete certain actions compared to previous estimates, partially
offset by an increase in the reserve related to the Power Wheels(R)
vehicle recall.
The restructuring actions are substantially complete; however, future
cash outlays will extend beyond this date largely due to severance
payment options available to affected employees and future lease payments
on vacated spaces. The other nonrecurring charges principally relate to
the October 1998 recall of Mattel's Power Wheels(R) vehicles and
environmental remediation costs related to a manufacturing facility on
a leased property in Beaverton, Oregon. Total cash outlays are funded
from existing cash balances and internally generated cash from continuing
operations.
15
<PAGE>
Mattel, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Certain written and oral statements made or incorporated by reference
from time to time by Mattel or its representatives in this Quarterly
Report on Form 10-Q, other filings or reports filed with the Securities
and Exchange Commission, press releases, conferences, or otherwise, are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Mattel is including this
cautionary statement to make applicable and take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995 for any such forward-looking statements. Forward-looking
statements include any statement that may predict, forecast, indicate,
or imply future results, performance, or achievements, and forward-
looking statements can be identified by the use of terminology such as
"believe," "anticipate," "expect," "estimate," "may," "will," "should,"
"project," "continue," "plans," "aims," "intends," "likely," or other
words or phrases of similar terminology. Management cautions you that
forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from the forward-looking
statements. In addition to the risk factors listed in Mattel's 1999
Annual Report on Form 10-K and Mattel's Current Report on Form 8-K
dated July 6, 2000 and other important factors detailed herein and from
time to time in other reports filed by Mattel with the Securities and
Exchange Commission, including Forms 8-K, 10-Q and 10-K, the following
important factors could cause actual results to differ materially from
those suggested by any forward-looking statements.
Marketplace Risks
-----------------
- Increased competitive pressure, both domestically and
internationally, which may negatively affect the sales of Mattel's
products
- Changes in public and consumer preferences, which may negatively
affect Mattel's toy business
- Significant changes in the play patterns of children, whereby they
are increasingly attracted to more developmentally advanced products
at younger ages, which may affect brand loyalty and the perceived
value of and demand for Mattel's products
- Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of Mattel's
products and the costs associated with manufacturing and distributing
these products
- Significant changes in the buying patterns of major customers
- Shortages of raw materials or components, which may inhibit the
timely manufacturing of Mattel's products
Financial Considerations
------------------------
- Foreign currency exchange rate fluctuations, which may affect
Mattel's reportable income
- Significant increases in interest rates, both domestically and
internationally, which may negatively affect Mattel's cost of
financing both its operations and investments
- Reductions in Mattel's credit ratings, which may negatively
impact the cost of satisfying its financing requirements
16
<PAGE>
Other Risks
-----------
- Mattel's inability to successfully implement all phases of the
financial realignment plan and realize the anticipated cost savings
and improved cash flows
- Development of new technologies, including digital media and the Internet,
which may create new risks to Mattel's ability to protect its intellectual
property rights or affect the development, marketing and sales of
Mattel's products
- Changes in laws or regulations, both domestically and
internationally, including those affecting the Internet, consumer
products, environmental activities, import and export laws or trade
restrictions, which may lead to increased costs or interruption in
normal business operations of Mattel
- Current and future litigation, governmental proceedings or
environmental matters, which may lead to increased costs or
interruption in the normal business operations of Mattel
- Labor disputes, which may lead to increased costs or disruption of
any of Mattel's operations
The risks included herein are not exhaustive. Other sections of this
Quarterly Report on Form 10-Q may include additional factors which
could materially and adversely impact Mattel's business, financial
condition and results of operations. Moreover, Mattel operates in a
very competitive and rapidly changing environment. New risk factors
emerge from time to time and it is not possible for management to
predict the impact of all such risk factors on Mattel's business,
financial condition or results of operations or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given
these risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
SUMMARY
-------
Mattel designs, manufactures, and markets a broad variety of family
products on a worldwide basis through both sales to retailers and
direct to consumers. Mattel's business is dependent in great part on
its ability each year to redesign, restyle and extend existing core
products and product lines, to design and develop innovative new
products and product lines, and to successfully market those products
and product lines. Mattel plans to continue to focus on its portfolio
of traditional brands that have historically had worldwide sustainable
appeal. Mattel also intends to expand its core brands through the
Internet, and licensing and entertainment partnerships.
17
<PAGE>
Mattel's portfolio of brands can be grouped in the following worldwide
categories:
Girls - including Barbie(R) fashion dolls and accessories, collector
dolls, Fashion Magic(R), Cabbage Patch Kids(R) and Polly Pocket(R)
Boys-Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric
Racing and Tyco(R) Radio Control (collectively "Wheels"), Disney,
Nickelodeon(R), and games and puzzles
Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame
Street(R), Disney preschool and plush, Winnie the Pooh(R), See `N Say(R),
Magna Doodle(R), View-Master(R) and Blue's Clues(R)
Direct Marketing - American Girl(R), Barbie(R), Wheels and Fisher-Price(R)
Mattel's business is seasonal, and, therefore, results of continuing
operations are comparable only with corresponding periods.
RESTRUCTURING AND OTHER CHARGES FROM CONTINUING OPERATIONS
----------------------------------------------------------
2000 Financial Realignment Plan
-------------------------------
During the third quartr of 2000, Mattel initiated a financial realignment
plan designed to improve gross margin, selling, general and administrative
expenses, operating profit and cash flow. The plan will require a total
pre-tax charge estimated at approximately $250 million or $170 million on
an after-tax basis. In the third quarter, Mattel recorded a pre-tax charge
of $110.3 million, approximately $74 million after-tax or $0.18 per diluted
share related to the initial phase of the financial realignment plan. In
accordance with generally accepted accounting principles, future pre-tax
implementation costs of approximately $140 million could not be accrued in
the third quarter of 2000. These costs will be recorded over the next two and
a half years. Under the plan, Mattel expects to generate approximately
$200 million of savings over the next three years.
The following are the major initiatives included in the financial realignment
plan:
o Reduce excess manufacturing capacity;
o Terminate a variety of licensing and other contractual arrangements that
do not deliver an adequate level of profitability;
o Eliminate product lines that do not meet required levels of profitability;
o Improve supply chain performance and economics;
o Eliminate approximately 10% of total worldwide headcount or 350 positions
at US-based headquarters locations in El Segundo, Fisher-Price and Pleasant
Company through a combination of layoffs, elimination of open requisitions,
attrition and retirements; and
o Close and consolidate certain international offices.
18
<PAGE>
Of the total third quarter charge of $110.3 million, approximately $23 million
is classified as a restructuring charge, which relates to the elimination of
positions at headquarters locations in El Segundo, Fisher-Price and Pleasant
Company, closure of certain international offices and consolidation of
facilities. Total headcount reduction as a result of the restructuring is
approximately 600 employees. The components of the restructuring costs
are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Severance and other compensation $ 19
Asset writedowns 2
Lease termination costs 1
Other 1
-------------------------------------------------------
Total restructuring costs and asset writedowns $23
=======================================================
</TABLE>
As part of its financial realignment plan, Mattel also announced during the
third quarter of 2000 a reduction in the annual cash dividend from $0.36
per share to $0.05 per share. The quarterly dividend of $0.09 per share
for the fourth quarter of 2000 has been eliminated and the $0.05 per share
annual dividend rate will become effective in December 2001. The reduction
of the dividend will result in annual cash savings of approximately
$130 million.
1999 Restructuring and Nonrecurring Charge
------------------------------------------
During the second quarter of 1999, Mattel initiated a restructuring plan for
its continuing business and incurred certain other nonrecurring charges
totalling $293.1 million, approximately $227 million after-tax or $0.56
per diluted share. The restructuring plan was aimed at leveraging global
resources in the areas of manufacturing, marketing and distribution,
eliminating duplicative functions worldwide and achieving improved operating
efficiencies. The plan, which was designed to reduce product costs and
overhead spending, resulted in actual cost savings of approximately $35
million in 1999. Mattel expects savings of approximately $90 million in 2000.
The following are the major restructuring initiatives:
o Consolidation of the Infant and Preschool businesses;
o Consolidation of the domestic and international back-office functions;
o Consolidation of direct marketing operations;
o Realignment of the North American sales force;
o Termination of various international distributor contracts; and
o Closure of three higher cost manufacturing facilities.
Severance and other compensation costs associated with the restructuring
relate to the termination of approximately 3,000 employees around the world,
of which approximately 300 were terminated during 2000. Through September
30, 2000, approximately $59 million has been incurred related to employee
terminations.
19
<PAGE>
Components of the accrued restructuring and other nonrecurring costs,
including adjustments, related to the continuing operations are as follows:
<TABLE>
<CAPTION>
Balance Balance
Dec. 31, Amounts Sept. 30,
(In millions) 1999 Adjustments Incurred 2000
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and other
compensation $ 54 $(11) $(35) $ 8
Distributor, license and
other contract terminations 10 (4) (6) -
Lease termination costs 15 3 (9) 9
----------------------------------------------------------------------------
Total restructuring costs 79 (12) (50) 17
Merger-related transaction
and other costs 4 (1) - 3
Other nonrecurring charges 19 6 (5) 20
----------------------------------------------------------------------------
Total restructuring and
other charges $102 $ (7) $(55) $40
============================================================================
</TABLE>
The adjustments made in 2000 largely reflect the reversal of excess
restructuring reserves as a result of lower than anticipated costs to
complete certain actions compared to previous estimates, partially offset
by an increase in the reserve related to the Power Wheels(R) vehicle recall.
The restructuring actions are substantially complete; however, future cash
outlays will extend beyond this date largely due to severance payment options
available to affected employees and future lease payments on vacated spaces.
The other nonrecurring charges principally relate to the October 1998 recall
of Mattel's Power Wheels(R) vehicles and environmental remediation costs
related to a manufacturing facility on a leased property in Beaverton, Oregon.
Total cash outlays are funded from existing cash balances and internally
generated cash from continuing operations.
RESULTS OF CONTINUING OPERATIONS - THIRD QUARTER
------------------------------------------------
Consolidated Results
--------------------
Net income from continuing operations for the third quarter of 2000 was
$103.7 million or $0.24 per diluted share as compared to net income of $222.1
million or $0.52 per diluted share in the third quarter of 1999. Profitability
in the third quarter of 2000 was negatively impacted by a $110.3 million
pre-tax charge related to the first phase of the 2000 financial realignment
plan, partially offset by a $5.0 million reversal of the 1999 restructuring
charge. The combined effect resulted in a pre-tax net charge of $105.3
million, approximatgely $71 million after-tax or $0.17 per diluted share.
20
<PAGE>
The following table provides a comparison of the reported results and the
results excluding special charges for the third quarter 2000 versus 1999:
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------------------
Sept. 30, 2000
----------------------------------
Reported Special Results Excl. Sept. 30,
(In millions) Results Charges Special Chgs. 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,583.8 $ - $1,583.8 $1,587.7
==============================================================================
Gross profit $ 666.6 $ (72.0) $ 738.6 $ 781.8
Advertising and promotion
expenses 225.2 3.8 221.4 222.6
Other selling and
administrative expenses 224.7 2.1 222.6 204.7
Amortization of intangibles 13.2 0.4 12.8 13.1
Restructuring and other charges 17.9 17.9 - -
Other expense (income), net 7.7 9.1 (1.4) (1.4)
------------------------------------------------------------------------------
Operating income 177.9 (105.3) 283.2 342.8
Interest expense 42.6 - 42.6 36.0
------------------------------------------------------------------------------
Income from continuing
operations before income taxes $ 135.3 $(105.3) $ 240.6 $ 306.8
==============================================================================
</TABLE>
Net sales from continuing operations in the third quarter of 2000 were $1,583.8
million, essentially flat compared with last year. In local currency, sales
were up 2% compared to a year ago. Sales to customers within the US increased
2% and accounted for 69% of consolidated sales in the third quarter of 2000
compared to 68% in 1999. Sales to customers outside the US decreased 5% from
the year ago quarter. However, before the unfavorable exchange impact,
international sales increased by 2% compared to 1999.
Sales in the worldwide Girls category increased 2% due to a 6% worldwide
increase in Barbie(R) products, partially offset by decreases in sales of other
girls products, including large and small dolls. Barbie(R) sales were up 9%
in the US and 1% in the international markets. Excluding the unfavorable
exchange impact, Barbie(R) sales were up 9% in international markets. Sales in
the Infant and Preschool category were down 2% worldwide, or flat with last
year before the unfavorable impact of foreign exchange. Worldwide sales of
core Fisher-Price(R) product grew 29%, up 42% in the US and flat in the
international markets. Consistent with the performance in domestic markets,
Fisher-Price(R) product sales are showing improvement in international markets.
Excluding the unfavorable exchange impact, core Fisher-Price(R) products were
up 10% in international markets. Declines in worldwide sales for Sesame
Street(R), Disney preschool and Winnie the Pooh(R) offset domestic growth in
core Fisher-Price(R) products, partially due to the current worldwide shortage
of electronic chips. Sales of Boys-Entertainment decreased 3% worldwide, or
flat before the unfavorable impact of foreign exchange. Worldwide Wheels sales
decreased 9% partially due to electronic chip shortages and product
availability issues. Recently, Mattel has seen a slow improvement in
electronic chip availability and pricing; however, since the majority of the
product line for 2000 has already been manufactured, the worldwide shortage
of electronic chips had an adverse effect on current year sales of products
that incorporate such components. Mattel believes it will have access to
adequate supplies of electronic chips for the manufacture of products in
2001, but that prices may increase if overall supply of such electronic
chips continues to fall short of overall demand. Sales of Entertainment
products increased 11% worldwide, up 28% internationally, largely due to
the strength of Max Steel(TM) products. Direct marketing sales, which
include Pleasant Company, Barbie(R) Collector and Fisher-Price(R) catalogs
increased 15% compared to last year.
21
<PAGE>
Gross profit, as a percentage of net sales, was 42.1% in the third quarter
of 2000 compared 49.2% last year. Cost of sales as reported includes a
$72.0 million special charge related to the termination of a variety of
licenses, other contractual arrangements and elimination of product lines
that do not deliver an adequate level of profitability. Excluding the special
charge, gross profit was 46.6% in the third quarter of 2000 compared to
49.2% a year ago. The margin was negatively impacted by unfavorable product
mix and foreign exchange rates. Excluding the $3.8 million special charge
related to the termination of a contractual arrangement, advertising as a
percentage of net sales was 14.0%, consistent with the prior year, and tracking
to the full year target of 15%. Excluding the $2.1 million special charge
related to settlement of certain litigation matters, other selling,
general and administrative expenses were 14.0% of net sales in 2000
compared to 12.9% in 1999. The increase is largely due to compensation
costs for the recruiting and retention of senior executives. Other expense,
net includes a $9.1 million special charge related to the writeoff of certain
noncurrent assets. Interest expense was $42.6 million in 2000 compared
with $36.0 million in the 1999 quarter largely due to higher borrowings
necessitated by the previous funding of Mattel's Consumer Software business.
In addition, Mattel's overall interest rate is higher due to increased market
rates and debt refinancing that occurred during the quarter. Mattel's third
quarter tax rate before special charges was 27.6%, consistent with full year
expectations.
Business Segment Results
------------------------
Mattel's reportable segments are separately managed business units and
include toy marketing and toy manufacturing. The Toy Marketing segment
is divided on a geographic basis between domestic and international.
The domestic Toy Marketing segment is further divided into US Girls, US
Boys-Entertainment, US Infant & Preschool and Other. The US Girls
segment includes products such as Barbie(R), Polly Pocket(R) and Cabbage
Patch Kids(R). The US Boys-Entertainment segment includes products in the
Wheels and Entertainment categories. The US Infant & Preschool segment
includes Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame
Street(R) and other preschool products. The Other segment principally
sells girls specialty products, including American Girl(R), which are sold
through the direct marketing distribution channel. The International
Toy Marketing segment sells products in all toy categories.
The US Girls segment sales increased by 7% in 2000 compared to 1999
due to a 9% increase in sales of Barbie(R) products. Within the Barbie(R)
product line, Mattel has employed strategies including targeting
products for specific age groups, creating a new logo and package
design, and supporting retailer demand for products in terms of earlier
shipments and product offerings. The US Boys-Entertainment segment
sales decreased 6% due to a 9% decrease in sales of Wheels products
partially due to the worldwide electronic chip shortage and product
availability issues. Sales of Entertainment products remained flat, as
growth from Max Steel(R) and Mattel games were offset by lower sales of
movie-related toy products since the third quarter of 1999 included strong
sales of Toy Story 2 products. The US Infant & Preschool segment sales
increased 2% largely due to increased sales of core Fisher-Price(R) and
Power Wheels(R) products, partially offset by declines in sales of Sesame
Street(R), Disney preschool and Winnie the Pooh(R) products.
22
<PAGE>
Sales in the Other segment remained relatively flat with last year, as
a 15% increase in Direct Marketing sales was offset by a decrease in
sales of other non-core products. The International Toy Marketing
segment sales decreased by 5% compared to last year. Excluding the
unfavorable foreign exchange impact, sales grew by 2% due to increased
sales of Barbie(R), Fisher-Price(R) and Entertainment products. Sales in the
Toy Manufacturing segment grew 14% largely due to increased orders by
the Toy Marketing segments for all products.
Operating profit in the US Girls segment remained relatively flat on
increased volume largely due to change in product mix and increased
freight costs resulting from higher oil prices. The US Boys-
Entertainment segment experienced a 26% decline in operating profit, largely
due to lower volume, unfavorable product mix and increased freight costs.
Operating profit in the US Infant & Preschool segment increased 10% due
to increased sales of relatively higher margin core Fisher-Price(R) products.
The Other segment experienced an operating loss of $10.6 million in 2000
compared to a loss of $12.3 million in 1999 of which nearly half the loss
in each period was due to goodwill amortization charges. Within this
segment, improvement in the direct marketing margin is partially offset
by increased operating costs to support the expansion of the direct
marketing business and broader catalog distribution. The International
Toy Marketing segment operating profit declined 39% largely due to
unfavorable product mix and exchange. The Toy Manufacturing segment profit
decreased 32% largely due to increased product costs. Recent increases in
worldwide oil prices have increased certain costs for Mattel, including
transportation costs and the cost of resin, which is a component of
many of Mattel's products. Mattel believes it will continue to have
access to adequate supplies of resin; however, if oil prices continue
to increase, then the cost of resin will likely increase.
RESULTS OF CONTINUING OPERATIONS - NINE MONTHS
----------------------------------------------
Consolidated Results
--------------------
Net loss from continuing operations for the first nine months of 2000
was $65.1 million or $0.15 per diluted share compared to a net loss of $1.5
million or $0.01 per diluted share in the first nine months of 1999.
Profitability in the first nine months of 2000 was negatively impacted
by a $110.3 million charge for the initial phase of the financial
realignment plan and a $53.1 million charge for the departure of
certain senior executives in the first quarter. These charges were
partially offset by a $7.0 million reversal of the 1999 reserve related
to restructuring and other charges. The combined effect resulted in a
pre-tax charge totaling $156.4 million, approximately $108 million after
taxes or $0.25 per diluted share. Profitability in the first nine months of
1999 was negatively impacted by a $227.4 million or $0.55 per diluted share
after-tax charge related to restructuring and other nonrecurring charges.
23
<PAGE>
The following table provides a comparison of the reported results and the
results excluding special charges for the first nine months of 2000 versus
1999:
<TABLE>
<CAPTION>
For the Nine Months Ended
-----------------------------------------------------------
Sept. 30, 2000 Sept. 30, 1999
-----------------------------------------------------------
Results Results
Excl. Excl.
Reported Special Special Reported Special Special
(In millions) Results Chgs. Chgs. Results Chgs. Chgs.
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $3,094.8 $ - $3,094.8 $3,078.3 $ - $3,078.3
===============================================================================
Gross profit $1,344.9 $ (72.0) $1,416.9 $1,456.9 $ - $1,456.9
Advertising and
promotion expenses 415.1 3.8 411.3 410.6 - 410.6
Other selling and
administrative
expenses 697.6 55.2 642.4 604.8 - 604.8
Amortization of
intangibles 39.2 0.4 38.8 39.1 - 39.1
Restructuring
and other charges 15.9 15.9 - 293.1 293.1 -
Other (income)
expense, net (7.7) 9.1 (16.8) 1.8 - 1.8
-------------------------------------------------------------------------------
Operating income 184.8 156.4 341.2 107.5 293.1 400.6
Interest expense 102.9 - 102.9 88.5 - 88.5
-------------------------------------------------------------------------------
Income from
continuing
operations before
income taxes $ 81.9 $156.4 $ 238.3 $ 19.0 $ 293.1 $ 312.1
===============================================================================
</TABLE>
Net sales from continuing operations in the first nine months of 2000
increased 1% to $3,094.8 million, from $3,078.3 million in 1999. In
local currency, sales were up 3% compared to a year ago. Sales to
customers within the US increased 4% and accounted for 70% of
consolidated sales in the first nine months of 2000 compared to 67% in
1999. Sales to customers outside the US decreased 7% from a year ago.
However, before the unfavorable exchange impact, international sales
were flat compared to 1999. During the nine months, certain European markets
were adversely impacted by retailer adjustments to just-in-time inventory
practices coupled with delayed shipments from the newly expanded Northern
European distribution center. Mattel expects improvement in the
international markets as shipments more closely match the just-in-time
inventory management by its retailers.
Sales in the worldwide Girls category increased 2% due to a 6%
worldwide increase in Barbie(R) products, partially offset by decreases in
sales of other girls products, including large and small dolls. Barbie(R)
sales were up 13% in the US, but were down 5% internationally.
Excluding the unfavorable exchange impact, Barbie(R) sales were up 2% in
international markets. Sales in the Infant and Preschool category
were relatively flat, up 1% before the unfavorable exchange impact. Worldwide
sales of core Fisher-Price(R) products increased 24%, offset by declines in
sales of Sesame Street(R), Disney preshool and Winnie the Pooh(R). Sales of
Boys-Entertainment were relatively flat worldwide. Worldwide Wheels sales
decreased 6% partially due to electronic chip and product availability issues,
and just-in-time inventory practices at certain international retailers.
Sales of Entertainment products increased 10% worldwide, largely driven
by the strength of Max Steel(TM) and Mattel games products. Direct
marketing sales increased 8% compared to last year.
24
<PAGE>
Gross profit, as a percentage of net sales, was 43.5% in the first nine
months of 2000 compared to 47.3% last year. Excluding the $72.0 million
special charge, gross profit was 45.8% in 2000 compared to 47.3% a year ago.
The positive impact of the product mix was offset by the unfavorable effect
of exchange translations and higher shipping costs. Excluding the special
charge, advertising and promotion, as a percentage of net sales, was 13.3%
in 2000, consistent with 1999. Excluding the special charge, other selling,
general and administrative expenses were 20.8% of net sales in 2000 compared
to 19.6% in 1999, largely due to compensation costs for the recruiting and
retention of senior executives. Excluding the special charge, other
income, net, increased by approximately $19 million due to favorable foreign
exchange and investment gains. However, overall foreign exchange
negatively impacted Mattel in the first nine months, after considering the
impact on cost of sales and the translation of foreign sales and earnings.
Interest expense was $102.9 million in 2000 compared with $88.5 million in
1999 largely due to higher short-term borrowing necessitated by the funding
of Mattel's Consumer Software business. In addition, Mattel's overall
interest rate is higher due to increased market rates and debt refinancing
that occurred in the first half. Mattel's tax rate before special charges
for the first nine months was 27.6%, consistent with full year expectations.
Business Segment Results
------------------------
The US Girls segment sales increased by 10% in 2000 compared to 1999
due to a 13% increase in sales of Barbie(R) products. Within the Barbie(R)
product line, Mattel has employed strategies including targeting
products for specific age groups, creating a new logo and package
design, and supporting retailer demand for products in terms of earlier
shipments and product offerings. The US Boys-Entertainment segment
sales declined by 3% due to a 6% decrease in sales of Wheels products
partially due to the worldwide electronic chip shortage and product
availability issues, and just-in-time inventory practices at certain
international retailers. Sales in the Entertainment category increased 3%
largely due to introduction of Max Steel(TM) and growth of Mattel games
products, partially offset by lower sales of movie-related products since
the first nine months of 1999 included strong sales of Toy Story 2 products.
The US Infant & Preschool segment sales increased 4% largely due to increased
sales of core Fisher-Price(R) and Power Wheels(R) products, partially offset by
declines in sales of Sesame Street(R), Disney preschool and Winnie the Pooh(R)
products.
Sales in the Other segment decreased 4%, as an 8% increase in Direct Marketing
sales was offset by a decrease in sales of other non-core products. The
International Toy Marketing segment sales decreased by 7% compared to last
year, or flat before the unfavorable foreign exchange impact. In local
currency, Entertainment sales increased by 26% largely due to the strength
of Max Steel(TM), Barbie(R) sales were up 2%, Wheels sales remained flat,
and Infant & Preschool sales declined 7%. Sales in the Toy Manufacturing
segment grew 31% largely due to increased orders by the Toy Marketing
segments for all products.
25
<PAGE>
Operating profit in the US Girls segment increased by 10%, largely due to
increased sales of higher margin Barbie(R) products. The US Boys-Entertainment
segment experienced a 42% decrease in operating profit, largely due to
lower volume and unfavorable product mix. Operating profit in the US
Infant & Preschool segment increased 14% due to greater sales of relatively
higher margin core Fisher-Price(R) products. Operating profit in the Other
segment decreased by 39% largely due to increased operating costs to support
the expansion of the direct marketing business and broader catalog
distribution. The International Toy Marketing segment operating profit
decreased 57% largely due to unfavorable product mix and exchange. The Toy
Manufacturing segment profit decreased 3% largely due to increased sales to
the marketing units, offset by higher material costs.
DISCONTINUED OPERATIONS
-----------------------
On March 31, 2000, Mattel's board of directors resolved to sell its
Consumer Software segment, which was comprised primarily of the assets
of Learning Company. As a result of this decision, the Consumer
Software segment is being reported as a discontinued operation
effective March 31, 2000, and the consolidated financial statements
have been reclassified to segregate the net investment in, liabilities and
operating results of the Consumer Software segment.
On October 18, 2000, Mattel sold Learning Company to an affiliate of Gores
Technology Group in return a contractual right to receive future
consideration based on income generated from its business operations and/or the
net proceeds derived by the new company upon the sale of its assets or other
liquidating events, or its enterprise value at the end of five years.
FINANCIAL POSITION
------------------
Mattel's cash position as of September 30, 2000 was $95.8 million,
higher than the $61.2 million reported in the third quarter of 1999 but
lower than the $247.3 million as of year end 1999. The $151.5 million
decline compared to year end 1999 was principally due to the repayment
of $100.0 million 6-3/4% Senior Notes that matured in May 2000 and the
funding of the Consumer Software business, partially offset by the
issuance of commercial paper, proceeds received from the issuance of the
Euro Notes and the term loan, and sales of receivables. In the third
quarter of 2000, Mattel received marketable securities as part of the sale of
the CyberPatrol business unit, which were valued at $40.2 million as of
the balance sheet date. Accounts receivable, net decreased to $1,456.3
million compared to the balance of $1,684.1 million in September 1999 due to
sales of receivables and increased collection activity. Since year end 1999,
inventory increased $219.4 million as a result of routine inventory buildup
to support fourth quarter sales. Other assets increased $312.1 million
from the third quarter of 1999 and $114.3 million compared to year end
1999 primarily due to higher deferred income taxes. Net investment in
discontinued operations decreased $479.2 million compared to third
quarter 1999 and $437.0 million since year end 1999 primarily due to the
sale of Learning Company during the quarter.
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<PAGE>
Short-term borrowings increased $367.9 million compared to 1999 year
end reflecting increased commercial paper issuances and other short-term
borrowings to fund Mattel's seasonal financing needs and to support the
Consumer Software business. Current portion of long-term liabilities
decreased $130.7 million since third quarter 1999 primarily due to the
repayment of $100.0 million of 6-3/4% Senior Notes and $30.0 million of
Medium-Term notes at maturity. Seasonal financing needs for the next twelve
months for continuing operations are expected to be satisfied through
internally generated cash, issuance of commercial paper, and use of Mattel's
various short-term bank lines of credit. Liabilities of discontinued
operations of $230.1 million represents the liabilities of Learning Company
assumed at the time of sale and accrued transaction costs. Income taxes
payable decreased $83.8 million compared to third quarter 1999 and
$137.0 million compared to year end 1999 as a result of tax benefits
recorded related to the loss from discontinued operations.
A summary of Mattel's capitalization is as follows:
<TABLE>
<CAPTION>
(In millions, except percentage Sept. 30, Sept. 30, Dec. 31,
information) 2000 1999 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medium-Term notes $ 540.5 19% $ 540.5 18% $ 540.5 17%
Senior notes 300.0 11 300.0 10 400.0 13
Other long-term debt obligations 432.6 16 42.5 1 42.4 2
-------------------------------------------------------------------------------
Total long-term debt 1,273.1 46 883.0 29 982.9 32
Other long-term liabilities 167.2 6 158.9 5 163.0 5
Stockholders' equity 1,308.1 48 2,005.2 66 1,962.6 63
-------------------------------------------------------------------------------
$2,748.4 100% $3,047.1 100% $3,108.5 100%
===============================================================================
</TABLE>
Total long-term debt increased during the quarter due to issuance of Euro
200 million Notes ($197.1 million) and a $200.0 million term loan,
partially offset by the repayment of $100.0 million of senior notes upon
maturity when compared to year end 1999. Mattel expects to satisfy its future
long-term capital needs through the retention of corporate earnings and the
issuance of long-term debt instruments. Stockholders' equity decreased $697.1
million since September 30, 1999, primarily as a result of cumulative losses
from discontinued operations, common dividends declared, treasury
stock purchases, and the unfavorable effect of foreign currency translation,
partially offset by income from continuing operations and the reissuance of
treasury stock for the exercise of nonqualified stock options by Mattel's
employees. Stockholders' equity declined $654.6 million from year end 1999 as
a result of cumulative losses from discontinued operations, common dividends
declared, and the unfavorable effect of foreign currency translation, partially
offset by income from continuing operations.
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<PAGE>
FOREIGN CURRENCY RISK
---------------------
Mattel's results of operations and cash flows can be impacted by
exchange rate fluctuations. To limit the exposure associated with
exchange rate movements, Mattel enters into foreign currency forward
exchange option and swap contracts primarily to hedge its third-party
debt, purchase of inventory, sales and other intercompany transactions
denominated in foreign currencies. Mattel's results of operations can
also be affected by the translation of foreign revenues and earnings
into US dollars.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations
cannot be predicted with certainty. Mattel seeks to mitigate its
exposure to market risk by monitoring its currency exchange exposure
for the year and partially or fully hedging such exposure. In
addition, Mattel manages its exposure through the selection of
currencies used for foreign borrowings and intercompany invoicing.
Mattel does not trade in financial instruments for speculative
purposes.
28
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------
Litigation Related to Learning Company Earnings Shortfall
---------------------------------------------------------
Following Mattel's announcement on October 4, 1999 that it expected
an earnings shortfall at its Learning Company division in the third
quarter of 1999, several of Mattel's stockholders filed purported class
action complaints naming Mattel and certain of its present and former
officers and directors as defendants. The complaints generally allege,
among other things, that the defendants made false or misleading statements
that artificially inflated the price of Mattel's common stock by overstating
the revenues and net income of Mattel, and its Learning Company division,
and by falsely representing that the May 1999 Learning Company acquisition
would be immediately accretive to Mattel's 1999 and 2000 financial results.
On March 3, 2000, the Judicial Panel on Multidistrict Litigation granted
Mattel's motion, pursuant to 28 U.S.C.Section 1407, for coordinated or
consolidated pretrial proceedings in the United States District Court for
the Central District of California of all pending Section 10(b) and
Section 14(a) federal securities litigation cases.
On July 6, 2000, plaintiffs filed a Consolidated Amended Complaint in the
Section 10(b) actions. On that same day, plaintiffs also filed a Consolidated
Amended Complaint in the Section 14(a) actions. Mattel, along with the other
named defendants, filed motions to dismiss the actions relating to plaintiffs'
Section 10(b) and 14(a) claims. The motions are scheduled to be heard in
December 2000.
Two additional purported class action complaints have been brought against
Mattel as successor to Learning Company and the former directors of Learning
Company on behalf of former stockholders of Broderbund Software, Inc.
("Broderbund") who acquired shares of Learning Company in exchange for their
Broderbund common stock in connection with the Learning Company-Broderbund
merger on August 31, 1998. The complaints in those actions generally allege
that Learning Company misstated its financial results prior to the time it
was acquired by Mattel. The purported class actions brought on behalf of
Mattel and Broderbund stockholders are currently pending in the United States
District Court for the Central District of California.
On July 14, 2000, plaintiffs filed a Consolidated Amended Complaint in the
Broderbund cases. Mattel, along with the other named defendants, filed a
motion to dismiss this action on August 28, 2000. The motion is scheduled
to be heard in December 2000.
On October 25, 1999, a Mattel stockholder filed a derivative complaint on
behalf and for the benefit of Mattel in the Superior Court of the State of
California, County of Los Angeles. The complaint alleges that Mattel's
directors breached their fiduciary duties, wasted corporate assets and grossly
mismanaged Mattel in connection with Mattel's acquisition of Learning Company
and seeks both monetary and injunctive relief. On February 10, 2000, the Court
29
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dismissed the complaint with leave to amend. In March 2000, Mattel and the
other defendants entered into a stipulation with the plaintiff staying the
action.
On March 17, 2000, a Mattel stockholder filed a second derivative complaint
on behalf and for the benefit of Mattel in the Superior Court of the State
of California, County of Los Angeles. On August 18, 2000, the plaintiff in
this action filed an amended complaint to include allegations surrounding
the severance packages offered to Mattel's former chief executive officer
and president. On March 27, 2000, a Mattel stockholder filed a third
derivative complaint on behalf and for the benefit of Mattel in the Court
of Chancery of the State of Delaware in and for New Castle County. Both
complaints generally allege that Mattel's directors breached their fiduciary
duties and grossly mismanaged Mattel in connection with Mattel's
acquisition of Learning Company. The complaints seek both monetary and
injunctive relief. On May 5, 2000, the parties entered into a stipulation
staying the Delaware derivative action.
On May 15, 2000, a Mattel stockholder filed a fourth derivative complaint on
behalf of and for the benefit of Mattel in the Superior Court of the State
of California, County of Los Angeles. The complaint generally alleges that
Mattel's directors breached their fiduciary duties and wasted Mattel's assets
by approving severance packages for Mattel's former chief executive officer
and president. The complaint seeks monetary relief. On September 18, 2000,
Mattel, along with the other named defendants, filed a demurrer seeking to
dismiss this action. The demurrer was withdrawn when the plaintiff in this
action agreed to abide by the terms of the prior stipulation staying the
other California derivative actions.
On October 30, 2000, the Superior Court granted a motion consolidating the
three California derivative actions for all purposes and appointing the
plaintiffs' lead counsel.
Mattel believes the purported class actions and derivative suits are without
merit and intends to defend them vigorously.
Greenwald Litigation and Related Matters
----------------------------------------
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025 008)
against Mattel in Superior Court of the State of California, County of
Los Angeles. Ms Greenwald is a former employee whom Mattel terminated in
July 1995. Her complaint sought $50 million in general and special damages,
plus punitive damages, for breach of oral, written and implied contract,
wrongful termination in violation of public policy and violation of California
Labor Code Section 970. Ms Greenwald claimed that her termination resulted
from complaints she made to management concerning general allegations that
Mattel did not account properly for sales and certain costs associated with
sales and more specific allegations that Mattel failed to account properly for
certain royalty obligations to The Walt Disney Company.
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<PAGE>
On December 5 1996, Mattel's motion for summary adjudication of Ms. Greenwald's
public policy claim was granted. On December 9, 1997, Mattel's motion for
summary judgment of Ms. Greenwald's remaining claims was granted. On
February 4, 1998, Ms. Greenwald appealed from the dismissal of her suit.
On March 27, 2000, the California Court of Appeal filed an opinion
which affirmed in part and reversed in part the judgment in favor of
Mattel. The Court of Appeal ruled that disputed factual issues exist
which preclude summary adjudication of certain claims and that such
factual issues must be resolved by a jury at trial. As a consequence,
Ms. Greenwald's claims for termination in violation of public policy,
termination in breach of an implied agreement, and violation of Labor
Code Section 970 were ordered remanded to the trial court for further
proceedings. The Court of Appeal did not rule on whether Ms.
Greenwald's claims have substantive merit; it merely held that the
claims should be presented to a jury.
Mattel filed a petition requesting the California Supreme Court to
review the decision of the Court of Appeal. The petition was denied on
June 14, 2000. On July 13, 2000, jurisdiction was restored to the trial
court for further proceedings. Mattel intends to continue to defend the action
vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
-------------
11.0 Computation of Income (Loss) per Common and Common Equivalent Share
12.0 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
27.0 Financial Data Schedule (EDGAR filing only)
99.0 Warrant Purchase Agreement dated July 26, 2000 between Mattel and
Warner Bros., a division of Time Warner Entertainment Company, L.P.
99.1 Sale and Purchase Agreement between Mattel and Alec E. Gores,
Trustee of the Revocable Living Trust Agreement of Alec E. Gores,
and GTG/Wizard, LLC
99.2 Consent and Sixth Amendment to Second Amended and Restated Credit
Agreement among Mattel, the Banks (as defined) and Bank of
America, N.A., as agent
99.3 Consent and First Amendment to Credit Agreement (364-Day Facility)
among Mattel, the Banks (as defined) and Bank of America, N.A.,
as agent
99.4 Second Amendment to Term Loan Agreement among Mattel, the Lenders
(as defined) and The Industrial Bank of Japan, as agent
(b) Reports on Form 8-K
------------------------
Mattel, Inc. filed the following Current Reports on Form 8-K during
the quarterly period ended September 30, 2000:
Date of Report Items Reported Financial Statements Filed
--------------------------------------------------------------------
July 6, 2000 5, 7 None
July 26, 2000 5, 7 None
31
<PAGE>
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 13, 2000 By: /s/ Kevin M. Farr
----------------------- ----------------------------
Kevin M. Farr
Chief Financial Officer
32
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