SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 ------------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-05647 ---------------------------------- MATTEL, INC. ------------ (Exact name of registrant as specified in its charter) Delaware 95-1567322 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Continental Boulevard, El Segundo, California 90245-5012 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (310) 252-2000 -------------- (Former name, former address and former fiscal year, None if changed since last report) -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares outstanding of registrant's common stock as of October 27, 1995: Common Stock - $1 par value -- 220,848,875 shares
<TABLE> PART I -- FINANCIAL INFORMATION ------------------------------- MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <CAPTION> Sept. 30, Sept. 30, Dec. 31, (In thousands) 1995 1994 1994 - -------------- ----------- ----------- ----------- ASSETS <S> <C> <C> <C> Current Assets Cash $ 84,221 $ 86,225 $ 239,100 Marketable securities 16,596 20,417 20,581 Accounts receivable, net 1,313,760 1,251,738 762,024 Inventories 463,037 360,741 339,143 Prepaid expenses and other current assets 201,380 159,235 182,675 ----------- ----------- ----------- Total current assets 2,078,994 1,878,356 1,543,523 ----------- ----------- ----------- Property, Plant and Equipment Land 25,997 20,843 22,577 Buildings 192,293 170,479 172,310 Machinery and equipment 348,943 281,675 289,796 Capitalized leases 24,271 38,209 38,468 Leasehold improvements 50,978 44,287 46,512 ----------- ----------- ----------- 642,482 555,493 569,663 Less: accumulated depreciation 269,936 246,037 248,666 ----------- ----------- ----------- 372,546 309,456 320,997 Tools, dies and molds, net 114,030 89,434 94,924 ----------- ----------- ----------- Property, plant and equipment, net 486,576 398,890 415,921 ----------- ----------- ----------- Other Noncurrent Assets Intangible assets, net 424,654 437,411 432,232 Sundry assets 72,260 70,973 67,350 ----------- ----------- ----------- $ 3,062,484 $ 2,785,630 $ 2,459,026 =========== =========== =========== <FN> See accompanying notes to consolidated financial information. </TABLE> 2
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) <CAPTION> Sept. 30, Sept. 30, Dec. 31, (In thousands, except share data) 1995 1994 1994 - --------------------------------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> Current Liabilities Notes payable $ 243,390 $ 477,567 $ - Current portion of long-term liabilities 31,939 2,700 3,095 Accounts payable 233,863 220,250 295,246 Accrued liabilities 470,058 444,514 453,146 Income taxes payable 229,752 163,959 164,394 ----------- ----------- ----------- Total current liabilities 1,209,002 1,308,990 915,881 ----------- ----------- ----------- Long-Term Liabilities 6-7/8% Senior notes due 1997 99,713 99,569 99,604 6-3/4% Senior notes due 2000 100,000 100,000 100,000 Medium-Term notes 220,000 - 110,500 Mortgage note 44,693 45,000 45,000 Other 105,746 102,077 102,351 ----------- ----------- ----------- Total long-term liabilities 570,152 346,646 457,455 ----------- ----------- ----------- Shareholders' Equity Preference stock 9 9 9 Common stock $1.00 par value, 300.0 million shares authorized; 223.3 million shares, 223.3 million shares and 223.3 million shares issued, respectively (a) 223,254 178,611 223,264 Additional paid-in capital 233,750 283,156 234,913 Treasury stock at cost; 2.1 million shares, 0.2 million shares and 2.4 million shares, respectively (a) (53,489) (4,114) (53,812) Retained earnings (b) 939,992 709,359 737,528 Deferred compensation - (12,079) - Currency translation adjustments (b) (60,186) (24,948) (56,212) ----------- ----------- ----------- Total shareholders' equity 1,283,330 1,129,994 1,085,690 ----------- ----------- ----------- $ 3,062,484 $ 2,785,630 $ 2,459,026 =========== =========== =========== <FN> (a) Share data for September 1994 have been restated for the effects of the five-for-four stock split distributed in January 1995. (b) Since December 26, 1987. See accompanying notes to consolidated financial information. </TABLE> 3
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <CAPTION> For the For the Three Months Ended Nine Months Ended ---------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands, except per share amounts) 1995 1994 1995 1994 - ---------------------------------------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net Sales $1,176,484 $1,037,082 $2,483,528 $2,174,616 Cost of sales 593,535 508,122 1,274,865 1,093,047 ---------- ---------- ---------- ---------- Gross Profit 582,949 528,960 1,208,663 1,081,569 Advertising and promotion expenses 182,355 161,298 367,673 326,938 Other selling and administrative expenses 159,359 140,601 432,775 376,006 Interest expense 22,734 18,274 51,804 37,887 Other (income) expense, net (9,025) 5,967 (13,169) 10,567 ---------- ---------- ---------- ---------- Income Before Income Taxes 227,526 202,820 369,580 330,171 Provision for income taxes 76,200 71,000 123,800 117,200 ---------- ---------- ---------- ---------- Net Income 151,326 131,820 245,780 212,971 Preference stock dividend requirements 1,099 1,152 3,297 3,598 ---------- ---------- ---------- ---------- Net Income Applicable to Common Shares $ 150,227 $ 130,668 $ 242,483 $ 209,373 ========== ========== ========== ========== Primary Income Per Common And Common Equivalent Share - ------------------------------------ Net income $ 0.67 $ 0.58 $ 1.08 $ 0.94 ========== ========== ========== ========== Average number of common and common equivalent shares 225,523 225,930 224,771 223,666 ========== ========== ========== ========== Dividends Declared per Common Share $ 0.06 $ 0.05 $ 0.18 $ 0.14 ========== ========== ========== ========== <FN> See accompanying notes to consolidated financial information. </TABLE> 4
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> For the Nine Months Ended ----------------------- Sept. 30, Sept. 30, (In thousands) 1995 1994 - -------------- ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: - ------------------------------------- Net income $ 245,780 $ 212,971 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 93,290 82,933 Gain on sale of business (9,142) - Provision for deferred compensation 6,918 2,543 (Increase) in accounts receivable (557,433) (599,392) (Increase) in inventories (123,383) (90,362) (Increase) in prepaid expenses and other current assets (20,825) (9,866) Increase in accounts payable, accrued liabilities and income taxes payable 13,637 100,491 Other, net (8,491) (951) ---------- ---------- Net cash flows used for operating activities (359,649) (301,633) ---------- ---------- Cash Flows From Investing Activities: - ------------------------------------- Purchases of tools, dies and molds (69,893) (51,718) Purchases of other property, plant and equipment (83,478) (50,708) Purchases of marketable securities (28,014) (20,591) Proceeds from sales of marketable securities 31,588 18,270 Proceeds from sale of business 21,129 - Proceeds from sales of other property, plant and equipment 3,179 7,897 Investments in acquired businesses - (367,321) Contingent consideration - Kransco acquisition (8,625) - Other, net 730 (1,053) ---------- ---------- Net cash flows used for investing activities (133,384) (465,224) ---------- ---------- Cash Flows From Financing Activities: - ------------------------------------- Notes payable 245,258 470,855 Issuance of Medium-Term notes 139,500 - Redemption of Fisher-Price term loan - (120,629) Long-term foreign borrowing (923) (5,110) Collection of ESOP note receivable - 3,500 Payment of ESOP notes payable - (3,500) Tax benefit of employee stock options exercised 7,713 25,538 Exercise of stock options 24,521 36,542 Purchase of treasury stock (40,002) (26,249) Dividends paid on common stock (37,336) (29,441) Dividends paid on preference stock (3,297) (3,598) Payment for tendered Fisher-Price warrants - (4,891) Other, net (216) (574) ---------- ---------- Net cash flows from financing activities 335,218 342,443 Effect of Exchange Rate Changes on Cash 2,936 4,526 ---------- ---------- (Decrease) in Cash (154,879) (419,888) Cash at Beginning of Period 239,100 506,113 ---------- ---------- Cash at End of Period $ 84,221 $ 86,225 ========== ========== <FN> See accompanying notes to consolidated financial information. </TABLE> 5
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 the Company's financial position and interim results as of and for the periods presented have been included. Certain amounts in the financial statements for prior periods have been reclassified to conform with the current period's presentation. Because the Company's business is seasonal, results for interim periods are not necessarily indicative of those which may be expected for a full year. The financial information included herein should be read in conjunction with the Company's consolidated financial statements and related notes in its 1994 Annual Report to Shareholders. 2. Accounts receivable are shown net of allowances for doubtful accounts of $14.8 million (September 30, 1995), $22.7 million (September 30, 1994) and $16.1 million (December 31, 1994). In addition, the Company has reduced its accounts receivable by $24.0 million (September 30, 1995), $13.8 million (September 30, 1994), and $17.2 million (December 31, 1994) to reflect the write-down of certain uncollectible receivables to their net realizable value. 3. Inventories are comprised of the following: <TABLE> <CAPTION> Sept. 30, Sept. 30, Dec. 31, (In thousands) 1995 1994 1994 - -------------- --------- --------- --------- <S> <C> <C> <C> Raw materials and work in progress $ 72,748 $ 71,017 $ 50,334 Finished goods 390,289 289,724 288,809 --------- --------- --------- $ 463,037 $ 360,741 $ 339,143 ========= ========= ========= </TABLE> 4. Net cash flows from operating activities include cash payments for the following: <TABLE> <CAPTION> For the Nine Months Ended -------------------------- Sept. 30, Sept. 30, (In thousands) 1995 1994 - -------------- ----------- ----------- <S> <C> <C> Interest $ 43,187 $ 32,427 Income taxes 54,807 36,995 </TABLE> 6 5. In April, May and June 1995, the Company issued an aggregate of $139.5 million principal amount of fixed rate notes under its Medium-Term Note program. The notes mature on various dates from June 1998 to May 2007 and bear interest at rates ranging from 5.93% to 7.65%. The proceeds of these issuances will be used for general corporate purposes. 6. In the current quarter, the Board of Directors declared cash dividends of $0.06 per common share, compared to $0.05 per common share in the third quarter of 1994. Additionally, cash dividends of $1.2717 per Series F Convertible Preference Stock were declared, which includes participating common dividends of $0.06 per share. 7. Share and per share data presented in these financial statements reflect the retroactive effects of the five-for-four stock split distributed in January 1995. Income per common share is computed by dividing earnings available to common shareholders by the average number of common and common equivalent shares outstanding during each period. Weighted average share computations assume the exercise of dilutive stock options and warrants, reduced by the number of shares which could be repurchased at average market prices with proceeds from exercise. 8. In connection with the IGI merger in February 1992, 864.3 thousand shares of $0.01 par value preference stock were designated as 12.5% Convertible Preference Stock, Series F, and issued to the IGI Employee Stock Ownership Plan ("ESOP"). On October 20 1995, the Company purchased all shares of its preference stock from the IGI ESOP for $73.9 million. 7 MATTEL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Mattel, Inc. (the "Company") designs, manufactures, markets and distributes a broad variety of toy products on a worldwide basis. The Company's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines and to design and develop innovative new toys and product lines. New products have limited lives, ranging from one to three years, and generally must be updated and refreshed each year. Core brands have historically provided the Company with relatively stable growth. The Company's four principal core brands are BARBIE fashion dolls and doll clothing and accessories; FISHER-PRICE toys and juvenile products, including the Power Wheels line of battery-powered, ride-on vehicles; the Company's Disney-licensed toys; and die-cast HOT WHEELS vehicles and playsets, each of which has broad worldwide appeal. Additional core product lines consist of large dolls; preschool toys, including SEE 'N SAY talking toys; the UNO and SKIP-BO card games; and the SCRABBLE game, which the Company owns in markets outside of the United States and Canada. 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, 1995 1994 1995 1994 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales 100% 100% 100% 100% =========== =========== =========== =========== Gross profit 50% 51% 49% 50% Advertising and promotion expenses 16 16 15 15 Other selling and administrative expenses 13 14 17 18 ----------- ----------- ----------- ----------- Operating profit 21 21 17 17 Interest expense 2 1 2 2 ----------- ----------- ----------- ----------- Income before income taxes 19% 20% 15% 15% =========== =========== =========== =========== </TABLE> 8 THIRD QUARTER - ------------- Net sales in the third quarter of 1995 increased $139.4 million or 13% over the 1994 third quarter. The current quarter's performance reflects the continuing strong demand for the Company's core products such as BARBIE doll products; FISHER-PRICE toys and juvenile products, including the Power Wheels line; the UNO and SKIP-BO card games; and the SCRABBLE game, as well as Disney-licensed toys introduced in connection with the release of the "Pocahontas" motion picture. Worldwide sales of core products represented 85% of the Company's third quarter gross revenues, compared to 84% in 1994. Sales to customers within the United States increased 15% and accounted for 62% of consolidated sales for the third quarter of 1995 compared to 60% in the third quarter of 1994. Sales to customers outside the United States increased 10%, including a net $2.1 million favorable effect of the generally weaker U.S. dollar relative to the year-ago quarter. At comparable foreign currency exchange rates, sales internationally also grew 10%. Gross profit as a percentage of net sales decreased one percentage point to 50%, primarily due to increased raw material prices and other product costs. Advertising and promotion expenses remained virtually constant as a percentage of net sales; however, spending increased $21.1 million in support of increased sales volume. Other selling and administrative expenses increased $18.8 million due to higher design and development expenses in support of new product lines, as well as an increase in bad debt expense, including direct write-offs of uncollectible accounts of financially troubled customers. Other income, net, increased $15.0 million principally due to the gain recognized on the sale of the non-toy business and trademark rights related to Corgi, and foreign currency transaction gains. Interest expense increased 24% compared to the third quarter of 1994. The increase reflects higher average levels of domestic borrowings and higher interest rates. NINE MONTHS - ----------- Net sales increased $308.9 million or 14% over 1994, reflecting continued worldwide demand for the Company's core products. Worldwide core product sales accounted for 85% of total sales compared to 84% during 1994, largely due to increased sales of BARBIE doll products; FISHER-PRICE toys and juvenile products, including the Power Wheels line; and Disney-licensed toys introduced in connection with the release of the "Pocahontas" motion picture. Sales to customers within the United States increased 16% and accounted for 61% of consolidated sales compared to 60% in 1994. Sales to customers outside the United States increased 11%, including a net $38.0 million favorable effect from the generally weaker U.S. dollar relative to the year-ago period. At comparable foreign currency exchange rates, sales internationally grew 7%. Gross profit, as a percentage of net sales, decreased one percentage point to 49% compared to the same period for 1994, primarily due to increased raw material prices and other product costs. 9 Advertising and promotion expenses, as a percentage of net sales, remained virtually constant at 15%. However, spending increased $40.7 million in support of the growth in sales volume. Other selling and administrative expenses increased $56.8 million mainly due to expenditures for new product development, and an increase in bad debt expense, including direct write- offs of uncollectible accounts of financially troubled customers. Other income, net, increased $23.7 million as a result of the gain recognized on the sale of the non-toy business and trademark rights related to Corgi, a gain associated with a Mexican insurance claim, and foreign currency transaction gains, partially offset by an increase in goodwill amortization arising from the Kransco and J.W. Spear acquisitions in 1994. Interest expense increased $13.9 million or 37% from 1994, which reflects higher average levels of domestic borrowings at higher interest rates. FINANCIAL CONDITION ------------------- The Company's financial position remained strong as of September 30, 1995 as a result of profitable operating results. Cash balances, including marketable securities, as of September 30, 1995 were $158.9 million lower than year end mainly due to funding of seasonal working capital needs. Accounts receivable increased $551.7 million since year end, primarily due to current year sales volume and the seasonal customer payment terms. The $62.0 million increase in accounts receivable over the year-ago quarter, reflects increased sales volume, partially offset by the sale of certain trade receivables. Inventory balances increased $123.9 million since year end and $102.3 million over the 1994 quarter end, primarily due to a continuing trend toward just-in-time ordering by retailers, and level loading of the Company's factories in order to maximize production efficiency. Short-term bank borrowing decreased $234.2 million compared to the 1994 quarter end primarily due to the issuance of Medium-Term notes. Short-term borrowings increased $243.4 million since year end in order to fund the Company's seasonal working capital requirements. Seasonal financing needs are expected to be satisfied through internally generated cash, issuances of commercial paper and the sale of receivables under the domestic Revolving Credit Agreement, and use of the Company's various foreign short- term bank lines of credit. 10 Details of the Company's capitalization are as follows: <TABLE> <CAPTION> (In millions) Sept. 30, 1995 Sept. 30, 1994 Dec. 31, 1994 - ------------- ---------------------------------------------- <S> <C> <C> <C> 6-7/8% Senior notes $ 99.7 5% $ 99.5 7% $ 99.6 7% 6-3/4% Senior notes 100.0 6 100.0 7 100.0 7 Medium-Term notes 220.0 12 - - 110.5 7 Other long-term debt obligations 63.6 3 59.0 4 64.9 4 ----------------------------------------------- Total long-term debt 483.3 26 258.5 18 375.0 25 Other long-term liabilities 86.9 5 88.1 6 82.5 5 Shareholders' equity 1,283.3 69 1,130.0 76 1,085.7 70 ---------------------------------------------- $1,853.5 100% $1,476.6 100% $1,543.2 100% ============================================== </TABLE> Total long-term debt increased as a percentage of total capitalization compared to the year-ago quarter, primarily due to the issuance of Medium- Term notes. 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 $197.6 million since December 31, 1994 and $153.3 million over the 1994 third quarter principally as a result of the Company's profitable operating results and exercises of employee stock options, partially offset by treasury share purchases and dividends declared to common and preference shareholders. 11
PART II -- OTHER INFORMATION ---------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits -------- 10.1 First Amendment to Second Amended and Restated Transfer and Administration Agreement dated as of March 10, 1995 among the Company, Mattel Sales Corp., Fisher-Price, Inc., the Banks named therein and NationsBank of Texas, N.A., as Agent 10.2 Receivables Purchase Agreement dated as of August 29, 1995 among the Company, Mattel Sales Corp., Fisher-Price, Inc., and Bank of America N.T.S.A. 10.3 Stock Purchase Agreement dated October 20, 1995 by and between Mattel, Inc. and Marine Midland Bank, as sub-trustee of the International Games, Inc. Employee Stock Ownership Trust 10.4 Fourth Amendment to the Mattel, Inc. Personal Investment Plan 11.0 Computation of Income Per Common and Common Equivalent Share 27.0 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K ------------------- Mattel, Inc. filed the following Current Report on Form 8-K during the quarterly period ended September 30, 1995: Financial Date of Report Items Reported Statements Filed --------------- -------------- ---------------- July 18, 1995 5,7 None August 11, 1995 5,7 None August 29, 1995 5,7 None 12
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 1, 1995 By: /s/ Gary P. Rolfes ---------------------- --------------------- Gary P. Rolfes Senior Vice President and Controller 13