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 June 30, 2001 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 1,241,142 common shares issuable upon exchange of outstanding exchangeable shares of Softkey Software Products Inc.) as of August 3, 2001: 429,939,430 shares
PART I -- FINANCIAL INFORMATION Mattel, Inc. and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> June 30, June 30, 2001 2000 Dec. 31, (In thousands) (Unaudited) (Unaudited) 2000 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Current Assets Cash and short-term investments $ 40,720 $ 129,693 $ 232,389 Accounts receivable, net 947,817 1,057,388 839,567 Inventories 692,769 633,513 489,742 Prepaid expenses and other current assets 181,974 206,743 189,799 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 1,863,280 2,027,337 1,751,497 - ---------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment Land 33,086 32,862 32,793 Buildings 258,348 258,777 257,430 Machinery and equipment 587,697 558,286 564,244 Capitalized leases 23,271 23,271 23,271 Leasehold improvements 73,935 70,972 74,988 - ---------------------------------------------------------------------------------------------------------------------- 976,337 944,168 952,726 Less: accumulated depreciation 513,536 445,121 472,986 - ---------------------------------------------------------------------------------------------------------------------- 462,801 499,047 479,740 Tools, dies and molds, net 155,601 179,596 168,092 - ---------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 618,402 678,643 647,832 - ---------------------------------------------------------------------------------------------------------------------- Other Noncurrent Assets Intangible assets, net 1,131,098 1,165,459 1,136,857 Other assets 783,415 550,733 765,671 Net investment in discontinued operations - 378,571 11,540 - ---------------------------------------------------------------------------------------------------------------------- $4,396,195 $4,800,743 $4,313,397 ====================================================================================================================== </TABLE> The accompanying notes are an integral part of these financial statements. 2
Mattel, Inc. and Subsidiaries Consolidated Balance Sheets (Continued) <TABLE> <CAPTION> June 30, June 30, 2001 2000 Dec. 31, (In thousands, except share data) (Unaudited) (Unaudited) 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 620,095 $1,220,185 $ 226,403 Current portion of long-term debt 62,649 2,708 32,723 Accounts payable 298,454 256,153 338,966 Accrued liabilities 445,250 397,265 703,382 Income taxes payable 182,464 163,397 200,933 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,608,912 2,039,708 1,502,407 - ------------------------------------------------------------------------------------------------------------------------- Long-Term Liabilities Long-term debt 1,191,112 882,542 1,242,396 Other 189,298 182,660 165,496 - ------------------------------------------------------------------------------------------------------------------------- Total long-term liabilities 1,380,410 1,065,202 1,407,892 - ------------------------------------------------------------------------------------------------------------------------- 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 1.3 million, 2.2 million and 1.6 million outstanding exchangeable shares, respectively - - - Common stock $1.00 par value, 1.0 billion shares authorized; 435.8 million shares, 434.7 million shares, and 435.6 million shares issued, respectively 435,823 434,744 435,560 Additional paid-in capital 1,654,268 1,718,491 1,706,614 Treasury stock at cost; 6.3 million shares, 11.2 million shares, and 9.6 million shares, respectively (190,907) (337,437) (288,622) (Accumulated deficit) retained earnings (183,311) 159,695 (144,417) Accumulated other comprehensive loss (309,000) (279,660) (306,037) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,406,873 1,695,833 1,403,098 - ------------------------------------------------------------------------------------------------------------------------- $4,396,195 $4,800,743 $4,313,397 ========================================================================================================================= </TABLE> The accompanying notes are an integral part of these financial statements. 3
Mattel, Inc. and Subsidiaries Consolidated Statements of Operations <TABLE> <CAPTION> For the For the Three Months Ended Six Months Ended ------------------------------------------------- June 30, June 30, June 30, June 30, (Unaudited; in thousands, except per share amounts) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NET SALES $854,266 $817,797 $1,586,214 $1,511,058 Cost of sales 475,357 453,918 880,081 832,822 - ---------------------------------------------------------------------------------------------------------------- GROSS PROFIT 378,909 363,879 706,133 678,236 Advertising and promotion expenses 103,366 98,586 200,264 189,873 Other selling and administrative expenses 214,303 218,711 419,622 472,910 Amortization of intangibles 12,727 13,373 25,537 25,905 Restructuring and other charges 13,000 (2,000) 13,000 (2,000) Interest expense 39,568 35,945 74,512 60,301 Other expense (income), net 2,737 (9,026) 9,220 (15,399) - ---------------------------------------------------------------------------------------------------------------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (6,792) 8,290 (36,022) (53,354) (Benefit) provision for income taxes (1,937) 2,285 (9,129) (14,729) - ---------------------------------------------------------------------------------------------------------------- (LOSS) INCOME FROM CONTINUING OPERATIONS (4,855) 6,005 (26,893) (38,625) DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes of $(53.0) million - - - (126,606) - ---------------------------------------------------------------------------------------------------------------- (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES (4,855) 6,005 (26,893) (165,231) Cumulative effect of change in accounting principles, net of tax - - (12,001) - - ---------------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME APPLICABLE TO COMMON SHARES $ (4,855) $ 6,005 $ (38,894) $ (165,231) ================================================================================================================ (LOSS) INCOME PER COMMON SHARE - BASIC (Loss) income from continuing operations $ (0.01) $ 0.01 $ (0.06) $ (0.09) Loss from discontinued operations - - - (0.30) Cumulative effect of change in accounting principles - - (0.03) - - ---------------------------------------------------------------------------------------------------------------- Net (loss) income $ (0.01) $ 0.01 $ (0.09) $ (0.39) ================================================================================================================ Weighted average number of common shares 430,909 425,818 430,425 425,655 ================================================================================================================ (LOSS) INCOME PER COMMON SHARE - DILUTED (Loss) income from continuing operations $ (0.01) $ 0.01 $ (0.06) $ (0.09) Loss from discontinued operations - - - (0.30) Cumulative effect of change in accounting principles - - (0.03) - - ---------------------------------------------------------------------------------------------------------------- Net (loss) income $ (0.01) $ 0.01 $ (0.09) $ (0.39) ================================================================================================================ Weighted average number of common and common equivalent shares 430,909 427,782 430,425 425,655 ================================================================================================================ DIVIDENDS DECLARED PER COMMON SHARE $ - $ 0.09 $ - $ 0.18 ================================================================================================================ </TABLE> The accompanying notes are an integral part of these financial statements. 4
Mattel, Inc. and Subsidiaries Consolidated Statements of Cash Flows <TABLE> <CAPTION> For the Six Months Ended ------------------------------ June 30, June 30, (Unaudited; in thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (38,894) $(165,231) Deduct: loss from discontinued operations - (126,606) - -------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (38,894) (38,625) Adjustments to reconcile loss from continuing operations to net cash flows from operating activities: Cumulative effect of change in accounting principles, net of tax 12,001 - Noncash derivative loss 5,532 - Depreciation 105,895 96,561 Amortization 30,852 29,235 Increase (decrease) from changes in assets and liabilities: Accounts receivable (126,569) (69,396) Inventories (216,466) (203,588) Prepaid expenses and other current assets (2,331) (15,306) Accounts payable, accrued liabilities and income taxes payable (292,781) (397,580) Deferred income taxes (20,771) 662 Other, net (4,681) 6,323 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows used for operating activities of continuing operations (548,213) (591,714) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of tools, dies and molds (41,955) (43,343) Purchases of other property, plant and equipment (45,892) (33,904) Proceeds from sale of other property, plant and equipment 2,577 4,254 Other, net (458) 1,820 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows used for investing activities of continuing operations (85,728) (71,173) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net 404,754 851,523 Payment of senior note - (100,000) Exercise of stock options 41,697 8,189 Payment of dividends on common stock - (76,825) Other, net (261) (307) - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities of continuing operations 446,190 682,580 - -------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR DISCONTINUED OPERATIONS - (135,733) EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,918) (1,621) - -------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND SHORT-TERM INVESTMENTS (191,669) (117,661) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 232,389 247,354 - -------------------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 40,720 $ 129,693 ========================================================================================================================== </TABLE> The accompanying notes are an integral part of these statements. 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 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 2000 Annual Report to Stockholders filed on Form 10-K. 2. Accounts receivable are shown net of allowances for doubtful accounts of $27.9 million (June 30, 2001), $25.1 million (June 30, 2000), and $24.6 million (December 31, 2000). 3. Inventories are comprised of the following: <TABLE> <CAPTION> (In thousands) June 30, 2001 June 30, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Raw materials and work in progress $ 51,490 $ 67,416 $ 34,357 Finished goods 641,279 566,097 455,385 ------------------------------------------------------------------------------------------------------------------ $692,769 $633,513 $489,742 ================================================================================================================== </TABLE> 4. Intangibles, net include the following: <TABLE> <CAPTION> (In thousands) June 30, 2001 June 30, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Goodwill $1,119,452 $1,156,988 $1,124,318 Other 11,646 8,471 12,539 ------------------------------------------------------------------------------------------------------------------ $1,131,098 $1,165,459 $1,136,857 ================================================================================================================== </TABLE> 5. Long-term debt includes the following: <TABLE> <CAPTION> (In thousands) June 30, 2001 June 30, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Euro notes due 2002 $ 169,800 $ - $ 190,710 Unsecured term loan due 2003 200,000 - 200,000 6% senior notes due 2003 150,000 150,000 150,000 6-1/8% senior notes due 2005 150,000 150,000 150,000 Medium-term notes 480,000 540,500 510,000 10.15% mortgage note due 2005 41,312 42,042 41,686 ------------------------------------------------------------------------------------------------------------------ $1,191,112 $882,542 $1,242,396 ================================================================================================================== </TABLE> 6
6. Comprehensive loss is as follows: <TABLE> <CAPTION> For the Six Months Ended -------------------------------------- (In thousands) June 30, 2001 June 30, 2000 ---------------------------------------------------------------------------------------------------- <S> <C> <C> Loss from continuing operations $(26,893) $ (38,625) Loss from discontinued operations - (126,606) Cumulative effect of change in accounting principles (12,001) - ---------------------------------------------------------------------------------------------------- Net loss (38,894) (165,231) Unrealized holding gains arising during the period (101) 560 Transition adjustment related to FAS 133 14,127 - Net gain on derivative instruments 4,100 - Currency translation adjustments (21,089) (40,573) ---------------------------------------------------------------------------------------------------- Comprehensive loss $(41,857) $(205,244) ==================================================================================================== </TABLE> 7. Supplemental disclosure of cash flow information is as follows: <TABLE> <CAPTION> For the Six Months Ended -------------------------------------- (In thousands) June 30, 2001 June 30, 2000 ---------------------------------------------------------------------------------------------------- <S> <C> <C> Cash payments during the period: Interest $80,769 $79,579 Income taxes 21,300 29,417 Noncash investing and financing activities during the period: Issuance of stock warrant $ - $ 5,789 ---------------------------------------------------------------------------------------------------- </TABLE> 8. Effective on January 1, 2001, Mattel adopted 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 on the use of the derivative and whether it qualifies for hedge accounting. Mattel's results of operations and cash flows may be impacted by exchange rate fluctuations. 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 international borrowings and intercompany invoicing. Mattel's results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does not trade in financial instruments for speculative purposes. At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges and documents the relationship of the hedge to the underlying forecasted transaction, for cash flow hedges, or the recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value associated with hedge ineffectiveness, if any, are recorded in Mattel's results of operations currently. 7
Mattel uses foreign currency forward exchange and option contracts as cash flow hedges, which generally have maturity dates of up to 18 months, to hedge its forecasted purchases and sales of inventory denominated in foreign currencies. Changes in fair value of Mattel's cash flow derivatives are deferred and recorded as part of other comprehensive income (loss) in stockholders' equity until the underlying transaction is settled. Upon settlement, any gain or loss resulting from the derivative is recorded in Mattel's results of operations. Mattel entered into a cross currency interest rate swap to convert the interest rate and principal amount from Euros to US dollars on its 200 million Euro Notes due 2002. The debt and related interest payable are marked-to-market as of each balance sheet date with the change in fair value of the derivative recorded in other comprehensive income (loss) within stockholders' equity until the loan and related interest are paid. Mattel also entered into a fair value hedge to minimize the impact of changes in market value on its results of operations from the securities received as part of the sale of CyberPatrol in 2000. Mattel uses fair value hedges to hedge intercompany loans and management fees denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts. Changes in fair value of these derivatives are recorded in Mattel's results of operations currently. As a result of adopting FAS 133, Mattel recorded a one-time transition adjustment of $12.0 million, net of tax, (or $0.03 per share) as the cumulative effect of change in accounting principle related to unrealized losses on the CyberPatrol securities that had been previously deferred in other comprehensive income (loss). During the first quarter of 2001, Mattel recorded an additional pre-tax loss of $5.5 million in other expense, net related to the decrease in fair value of the derivative. Mattel also recorded a one-time transition adjustment of $2.1 million in other comprehensive income (loss) related to unrealized gains on derivative instruments. As of June 30, 2001, $4.1 million of unrealized gains related to derivative instruments have been recorded in other comprehensive income (loss). Mattel expects to reclassify these unrealized gains from other comprehensive income (loss) to its results of operations over the life of the contracts, generally 18 months or less. 9. As part of its financial realignment plan, Mattel announced during the third quarter of 2000 a change in its dividend policy consisting of a reduction in the annual cash dividend from $0.36 per share to $0.05 per share. No quarterly dividend for the second quarter of 2001 was declared. The $0.05 per share annual dividend rate under the new dividend policy is expected to become effective in December 2001, when and as declared by the board of directors. The board of directors declared a dividend of $0.09 per share in second quarter 2000. 10. Basic 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., outstanding during each period. 8
Diluted 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 Mattel's Canadian subsidiary, Softkey Software Products Inc., 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, as applicable. Dilutive securities are included in the calculation of weighted average shares outstanding for those periods in which Mattel recorded income from continuing operations. 11. The table below presents information about segment revenues, operating profit and assets. Mattel's reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The domestic segment is further divided into US Girls, US Boys-Entertainment, and US Infant & Preschool. The US Girls segment includes brands such as Barbie(R), Polly Pocket(R), Cabbage Patch Kids(R) and American Girl(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 International segment sells products in all toy categories. Segment revenues do not include sales adjustments such as trade discounts and other allowances. However, such adjustments are included in the determination of segment income from operations. Segment income from operations represents income from continuing operations before interest expense and income taxes, while consolidated income from operations represents income from continuing operations 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. Certain information presented in the tables below has been restated to conform to the current management structure as of January 2001. Specifically, the results and assets of Pleasant Company, which had been reported as part of Other, are now being reported as part of US Girls, which is consistent with management responsibility for this business. Additionally, Mattel's toy manufacturing unit is now being managed as a cost center instead of as a profit center; therefore, toy manufacturing is no longer being reported as a separate segment. Lastly, certain overhead costs incurred at the headquarters' level in El Segundo, including facilities, information technology, and other administration support costs, are now being allocated to the US Girls and US Boys-Entertainment segments, to more accurately reflect the costs associated with operating these businesses. These types of overhead costs were already being reported as part of the US Infant & Preschool and International segments since these businesses maintain their own headquarters locations. 9
<TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended ------------------------------------------------------ June 30, June 30, June 30, June 30, (In thousands) 2001 2000 2001 2000 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES Domestic: US Girls $235,498 $242,867 $ 459,051 $ 460,127 US Boys-Entertainment 133,142 128,026 267,806 245,706 US Infant & Preschool 244,375 235,114 430,564 418,846 Other 1,150 2,097 2,586 3,241 - --------------------------------------------------------------------------------------------------------- Total Domestic 614,165 608,104 1,160,007 1,127,920 International 305,380 262,594 539,963 482,828 - --------------------------------------------------------------------------------------------------------- 919,545 870,698 1,699,970 1,610,748 Sales adjustments (65,279) (52,901) (113,756) (99,690) - --------------------------------------------------------------------------------------------------------- Net sales from continuing operations $854,266 $817,797 $1,586,214 $1,511,058 ========================================================================================================= OPERATING PROFIT (LOSS) Domestic: US Girls $ 48,749 $ 42,839 $ 82,823 $ 72,431 US Boys-Entertainment 1,001 (7,253) 2,058 (12,946) US Infant & Preschool 11,187 11,220 11,142 13,279 - --------------------------------------------------------------------------------------------------------- Total Domestic 60,937 46,806 96,023 72,764 International 2,019 6,157 (12,080) (8,440) - --------------------------------------------------------------------------------------------------------- 62,956 52,963 83,943 64,324 Interest expense (39,568) (35,945) (74,512) (60,301) Corporate and other (a) (30,180) (8,728) (45,453) (57,377) - --------------------------------------------------------------------------------------------------------- Loss (income) from continuing operations before income taxes $ (6,792) $ 8,290 $ (36,022) $ (53,354) ========================================================================================================= </TABLE> <TABLE> <CAPTION> ASSETS June 30, June 30, (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------ <S> <C> <C> Domestic: US Girls (b) $ 380,953 US Boys-Entertainment (b) 212,630 - ------------------------------------------------------------------------------------------ 593,583 $ 675,345 US Infant & Preschool 376,568 341,394 - ------------------------------------------------------------------------------------------ Total Domestic 970,151 1,016,739 International 585,010 557,650 - ------------------------------------------------------------------------------------------ 1,555,161 1,574,389 Corporate and other 85,425 116,512 - ------------------------------------------------------------------------------------------ Accounts receivable and inventories from continuing operations $1,640,586 $1,690,901 ========================================================================================== </TABLE> (a) For the quarter ended June 30, 2001, corporate and other includes $20.8 million of charges related to the financial realignment plan (see Note 12). For the quarter ended June 30, 2000, corporate and other includes a $2.0 million reversal of prior year restructuring charges. For the six months ended June 30, 2001, corporate and other includes $27.8 million of charges related to the financial realignment plan and a $5.5 million loss on derivative instruments. For the six months ended June 30, 2000, corporate and other includes a $53.1 million charge related to the departure of certain senior executives and a $2.0 million reversal of prior year restructuring charges. (b) Asset information was not maintained by individual segment as of June 30, 2000. 10
Mattel sells a broad variety of toy products, which are grouped into three major categories: Girls, Boys-Entertainment and Infant & Preschool. The table below presents worldwide revenues by category: <TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended --------------------------------------------------------------- (In thousands) June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Girls $379,457 $355,654 $ 717,475 $ 672,618 Boys-Entertainment 219,843 202,100 415,372 382,158 Infant & Preschool 316,783 306,100 559,849 549,128 Other 3,462 6,844 7,274 6,844 - --------------------------------------------------------------------------------------------------------------- 919,545 870,698 1,699,970 1,610,748 Sales adjustments (65,279) (52,901) (113,756) (99,690) - --------------------------------------------------------------------------------------------------------------- Net sales from continuing operations $854,266 $817,797 $1,586,214 $1,511,058 =============================================================================================================== </TABLE> 12. 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 $250 million, or $170 million on an after-tax basis. To date, Mattel has recorded pre-tax charges totaling $153.0 million, or approximately $104 million on an after-tax basis, related to this plan. Of the total charge, $125.2 million (approximately $84 million after-tax) was recorded in 2000 and $27.8 million (approximately $20 million after-tax) was recorded in the first half of 2001. In accordance with generally accepted accounting principles, future pre-tax implementation costs of approximately $97 million have not been accrued as of June 30, 2001. Mattel expects that these costs will be recorded over approximately the next two years. The following are the major initiatives included in the financial realignment plan: . Reduce excess manufacturing capacity; . Terminate a variety of licensing and other contractual arrangements that do not deliver an adequate level of profitability; . Eliminate product lines that do not meet required levels of profitability; . Improve supply chain performance and economics; . Eliminate approximately 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 . Close and consolidate certain international offices. In April 2001, as part of the financial realignment plan, Mattel announced the closure of one of its North American distribution and manufacturing facilities (the "North American Strategy"). Production from the Murray, Kentucky, facility will be consolidated into existing Mattel-owned and operated facilities in North America with the final shutdown of Murray expected in 2002. This action is one of the realignment measures taken to lower costs. Mattel believes this action was necessary in order to maintain a competitive cost structure in today's global marketplace. 11
In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million as part of the initial phase of the financial realignment plan, of which approximately $18 million was not yet incurred as of December 31, 2000. This charge related to elimination of positions at headquarters locations in El Segundo, Fisher-Price and Pleasant Company, closure of certain international offices, and consolidation of facilities. During the second quarter of 2001, Mattel recorded a $13.0 million pre-tax restructuring charge as part of the financial realignment plan, largely related to the North American Strategy. Total worldwide headcount reduction as a result of the restructuring is approximately 1,700 employees, of which approximately 1,100 are related to the North American Strategy. From inception through June 30, 2001, a total of approximately $12 million has been incurred related to the termination of nearly 520 employees, of which approximately 140 were terminated during the second quarter of 2001. The components of the restructuring charges are as follows: <TABLE> <CAPTION> Balance Amounts Balance (In millions) Dec. 31, 2000 Adjustments Incurred June 30, 2001 ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Severance and other compensation $16 $12 $ (9) $19 Lease termination costs 1 1 - 2 Other 1 - (1) - ----------------------------------------------------------------------------------------------------------------------------- Total restructuring charge $18 $13 $(10) $21 ============================================================================================================================= </TABLE> 13. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141, Business Combinations, and 142, --------------------- Goodwill and Other Intangible Assets. FAS 141 requires that the purchase ------------------------------------ method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of goodwill separate from other intangible assets. FAS 142 eliminates the amortization of, and requires impairment testing at least annually for, goodwill and indefinite-lived intangibles. Mattel is required to adopt these statements for its fiscal year beginning January 1, 2002. Management is currently evaluating the impact of FAS 142 on Mattel's consolidated financial position and results of operations. 12
Mattel, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT 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. 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 2000 Annual Report on Form 10-K 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 - - Concentration of Mattel's business with a small group of major customers - - Significant buying patterns and inventory management practices of major customers - - Shortages of raw materials or components, which may affect Mattel's ability to produce product in time to meet customer demand - - Mattel's inability to accurately predict future consumer demand, including during the peak holiday season 13
Financing Considerations - - Foreign currency exchange 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 Other Risks - - Mattel's ability to ensure successful implementation of all phases of its financial realignment plan and realization of the anticipated cost savings and improved cash flows - - Mattel's ability to successfully implement initiatives regarding its core business, including supply chain management, customer service, international operations and employee development - - 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 - - Deterioration of trade relations between the US and foreign countries in which Mattel has significant manufacturing facilities or other operations - - Current and future litigation, governmental proceedings or environmental matters, which may lead to increased costs or interruption of 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. Mattel expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise. SUMMARY The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear in Part I of this Quarterly Report. Mattel's consolidated financial statements for all periods present the Consumer Software segment as a discontinued operation. Unless otherwise indicated, the following discussion relates only to Mattel's continuing operations. Additionally, the segment and brand category information was restated from prior period presentation to conform to the current management structure. Mattel designs, manufactures, and markets a broad variety of toy products on a worldwide basis through both sales to retailers (i.e., "customers") 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 14
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, to create new brands utilizing its knowledge of children's play patterns and to target customer and consumer preferences around the world. Mattel also intends to expand its core brands through the Internet, and licensing and entertainment partnerships. Mattel's portfolio of brands and products are grouped in the following categories: Girls - including Barbie(R) fashion dolls and accessories, collector dolls, Cabbage Patch Kids(R), Polly Pocket(R), Diva Starz(TM), and American Girl(R) Boys-Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing and Tyco(R) Radio Control (collectively "Wheels"), and Disney, Nickelodeon(R), Harry Potter(TM), Max Steel(TM), and games and puzzles (collectively "Entertainment") Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's Clues(R), See `N Say(R), Magna Doodle(R), and View-Master(R) Mattel's business is highly seasonal, with consumers making a large percentage of all toy purchases around the traditional holiday season in the fourth quarter. A significant portion of Mattel's customer's purchasing occurs in the third and fourth quarters in anticipation of such holiday buying. As a result of the seasonal purchasing patterns and production lead times, Mattel's business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories better, requiring Mattel to ship products closer to the time its customers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times, or that Mattel's own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period. FINANCIAL REALIGNMENT PLAN 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 financial realignment plan, together with the disposition of Learning Company, was part of management's strategic plan to focus on growing Mattel's core brands and lowering operating costs and interest expense. The plan will require a total pre-tax charge estimated at approximately $250 million, or $170 million on an after-tax basis, of which approximately $100 million represents cash expenditures and $70 million represents noncash writedowns. Total cash outlay will be funded from existing cash balances and internally generated cash flows from operations. To date, Mattel has recorded pre-tax charges totaling $153.0 million, or approximately $104 million on an after-tax basis, related to this plan. Of the total charge, $125.2 million (approximately $84 million after-tax) was recorded in 2000 and $27.8 million (approximately $20 million after-tax) was recorded in the first half of 2001. In accordance with generally accepted 15
accounting principles, future pre-tax implementation costs of approximately $97 million have not been accrued as of June 30, 2001. Mattel expects that these costs will be recorded over approximately the next two years. The following are the major initiatives included in the financial realignment plan: . Reduce excess manufacturing capacity; . Terminate a variety of licensing and other contractual arrangements that do not deliver an adequate level of profitability; . Eliminate product lines that do not meet required levels of profitability; . Improve supply chain performance and economics; . Eliminate approximately 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 . Close and consolidate certain international offices. In April 2001, as part of the financial realignment plan, Mattel announced the closure of one of its North American distribution and manufacturing facilities. Production from the Murray, Kentucky, facility will be consolidated into existing Mattel-owned and operated facilities in North America with the final shutdown of Murray expected in 2002. This action is one of the realignment measures taken to lower costs. Mattel believes this action was necessary in order to maintain a competitive cost structure in today's global marketplace. In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million as part of the initial phase of the financial realignment plan, of which approximately $18 million was not yet incurred as of December 31, 2000. This charge related to elimination of positions at headquarters locations in El Segundo, Fisher- Price and Pleasant Company, closure of certain international offices, and consolidation of facilities. During the second quarter of 2001, Mattel recorded a $13.0 million pre-tax restructuring charge as part of the financial realignment plan, largely related to the North American Strategy. Total worldwide headcount reduction as a result of the restructuring is approximately 1,700 employees, of which approximately 1,100 are related to the North American Strategy. From inception through June 30, 2001, a total of approximately $12 million has been incurred related to the termination of nearly 520 employees, of which approximately 140 were terminated during the second quarter of 2001. The components of the restructuring charges are as follows: <TABLE> <CAPTION> Balance Amounts Balance (In millions) Dec. 31, 2000 Adjustments Incurred June 30, 2001 ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Severance and other compensation $16 $12 $ (9) $19 Lease termination costs 1 1 - 2 Other 1 - (1) - ----------------------------------------------------------------------------------------------------------------------------- Total restructuring charge $18 $13 $(10) $21 ============================================================================================================================= </TABLE> 16
Under the plan, Mattel expects to generate approximately $200 million of cumulative pre-tax cost savings over the next three years. Mattel has completed nearly all of the activities needed in order to recognize approximately $55 million in savings targeted for 2001. However, there is no assurance that Mattel will be able to successfully implement all phases of its financial realignment plan or that it will realize the anticipated cost savings and improved cash flows. RESULTS OF CONTINUING OPERATIONS - SECOND QUARTER Consolidated Results Net loss from continuing operations for the second quarter of 2001 was $4.9 million or $0.01 per share as compared to net income of $6.0 million or $0.01 per share in the second quarter of 2000. Profitability in the second quarter of 2001 was negatively impacted by a $20.8 million pre-tax charge, approximately $15 million after-tax or $0.03 per diluted share, related to the financial realignment plan. Profitability in the second quarter of 2000 was impacted by a $2.0 million pre-tax credit related to adjustments to the 1999 restructuring and other charges. The following table provides a comparison of the reported results and the results excluding charges: <TABLE> <CAPTION> For the Three Months Ended June 30, -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- Reported Results Reported Results (In millions) Results Charges Ex. Chgs Results Charges Ex. Chgs - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales $854.3 $ - $854.3 $817.8 $ - $817.8 ============================================================================================================================= Gross profit $378.9 $ (7.2) $386.1 $363.9 $ - $363.9 Advertising and promotion expenses 103.4 - 103.4 98.6 - 98.6 Other selling and administrative expenses 214.3 - 214.3 218.7 - 218.7 Amortization of intangibles 12.7 - 12.7 13.4 - 13.4 Restructuring and other charges 13.0 13.0 - (2.0) (2.0) - Other expense (income), net 2.7 0.6 2.1 (9.0) - (9.0) - ----------------------------------------------------------------------------------------------------------------------------- Operating income 32.8 (20.8) 53.6 44.2 2.0 42.2 Interest expense 39.6 - 39.6 35.9 - 35.9 - ----------------------------------------------------------------------------------------------------------------------------- Loss (income) from continuing operations before income taxes $ (6.8) $(20.8) $ 14.0 $ 8.3 $ 2.0 $ 6.3 ============================================================================================================================= </TABLE> Net sales from continuing operations in the second quarter of 2001 increased 4% to $854.3 million, from $817.8 million in 2000. In local currency sales were up 6% compared to a year ago. Sales within the US increased 1% and accounted for 67% of consolidated sales in the second quarter of 2001 compared to 70% in 2000. Sales outside the US increased 16% from the year ago quarter. Excluding the unfavorable foreign currency exchange impact, international sales increased by 22% compared to 2000. Worldwide sales in the Girls category, which now includes American Girl(R), increased 7%, or 8% in local currency, to $379.5 million. Domestic sales declined by 3% while international sales increased 28%, or 33% in local currency. Worldwide Barbie(R) sales increased 2%, or 4% in local currency. Barbie(R) sales in the U.S. declined 9% as 17
compared to the strong quarter a year ago, when sales increased 19%. Consumer demand for the brand continued to be strong as evidenced by growth in over-the- counter sales in the fashion doll market this year. International sales for Barbie(R) increased 25%, or 31% in local currency, reflecting softer comparisons in the 2000 quarter and the benefit of early product availability and stronger alignment of worldwide sales and marketing plans. The performance of Polly Pocket(R), Diva Starz(TM) and American Girl(R) also drove growth in the Girls category. Worldwide sales in the Boys-Entertainment category grew 9%, or 10% in local currency, to $219.8 million in 2001. Domestic sales grew by 4% while international sales increased 17%, or 22% in local currency. The worldwide Wheels business increased 2%, driven by Hot Wheels(R) and Tyco(R) Radio Control, partially offset by a decline in Matchbox(R). The Entertainment business had double-digit growth in sales with strength in Max Steel(TM) and games and puzzles. In second quarter 2001, Mattel expanded its games business through the acquisition of Pictionary(R). Beginning in January 2002, Mattel will manufacture, market and distribute Pictionary(R) to international markets. In the US and Canada, Mattel will be the licensor of the property through an independent contractor. Worldwide sales in the Infant & Preschool category increased 4%, or 5% in local currency, to $316.8 million in 2001. Domestic sales were up 4% and international sales were up 2%, or 6% in local currency. Worldwide sales of core Fisher-Price(R) products were up 9%, including double-digit growth internationally. The growth in core Fisher-Price(R) and Power Wheels(R) products was offset by continued weakness in licensed character brands. Gross profit, as a percentage of net sales, was 44.4% in 2001 compared to 44.5% last year. Reported cost of sales includes a $7.2 million charge, largely related to accelerated depreciation resulting from the planned closure of the Murray, Kentucky plant as part of the financial realignment plan. Mattel will incur an accelerated depreciation charge each quarter until the second quarter of 2002 related to this closure. Excluding the charge for accelerated depreciation, gross profit, as a percentage of net sales, was 45.2% in the second quarter of 2001 compared to 44.5% in 2000. Product mix and lower distribution costs, partially offset by the negative impact of the weaker Euro, positively affected the margin. Advertising and promotion was 12.1% of net sales, consistent with last year. Other selling and administrative expenses of $214.3 million for the quarter represented 25.1% of net sales compared to 26.7% in 2000. Last year Mattel incurred overhead costs related to executive recruitment and retention, while this year Mattel benefited from savings related to the financial realignment plan. Other expense, net in 2001 includes a $0.6 million charge for asset writedowns and other costs associated with implementing the North American Strategy. Excluding these charges, other expense (income), net decreased from income of $9.0 million in 2000 to expense of $2.1 million in 2001. In 2000, other income, net included favorable foreign exchange and investment gains. Interest expense was $39.6 million in 2001 compared to $35.9 million in 2000. The increase is primarily due to the allocation of $9.9 million in interest to discontinued operations in 2000. In second quarter 2001, interest expense was allocated entirely to continuing operations. In addition, 2001 interest expense includes a benefit from lower short-term rates and lower short-term borrowings, due in part to the timing of collections. Short-term borrowings in the second half of 2001 are expected to be higher than in the prior year second half to support the seasonal growth in the business. Interest expense for full year 2001 is expected to be 18
lower than last year's $189 million of total interest expense incurred for continuing and discontinued operations combined. However, the benefit from lower interest expense will likely be offset by the impact of a stronger dollar, primarily against the Euro. Mattel's second quarter tax rate, excluding charges, was 27.6%, consistent with the expected rate for the year. Business Segment Results Mattel's reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The domestic segment is further divided into US Girls, US Boys-Entertainment, and US Infant & Preschool. The International segment sells products in all toy categories. Mattel's segments were revised in January 2001 to conform to the current management structure. Specifically, the results of Pleasant Company, which had been reported as part of Other, are now being reported as part of US Girls, which is consistent with management responsibility for this business. Additionally, Mattel's toy manufacturing unit is now being managed as a cost center instead of as a profit center; therefore, toy manufacturing is no longer being reported as a separate segment. Lastly, certain overhead costs incurred at the headquarters' level in El Segundo, including facilities, information technology, and other administration support costs, are now being allocated to the US Girls and US Boys-Entertainment segments, to more accurately reflect the costs associated with operating these businesses. These types of overhead costs were already being reported as part of the US Infant & Preschool and International segments since these businesses maintain their own headquarters locations. US Girls segment sales decreased by 3% in 2001 compared to 2000, largely due to a 9% decline in Barbie(R) sales. The decline was due primarily to the strong year ago quarter when Barbie(R) experienced a 19% increase. Consumer demand for the Barbie(R) brand continued to be strong as evidenced by growth in over-the- counter sales in the fashion doll market this year. American Girl(R) sales increased by 6% compared to a year ago. US Boys-Entertainment segment sales increased 4% compared to 2000. The US Entertainment business experienced double- digit growth, partially offset by a 3% decline in the US Wheels business. The US Infant & Preschool segment sales increased 4%, due to increased sales of core Fisher-Price(R) and Power Wheels(R) products, partially offset by a decline in sales of licensed character brand products. International segment sales increased by 16% compared to last year. Excluding the unfavorable foreign exchange impact, sales grew by 22%, due to double-digit growth in Barbie(R), core Fisher-Price(R) and the Wheels and Entertainment categories. Operating profit in the US Girls segment increased by 14%, largely due to reduced advertising and lower overhead spending. Operating (loss) profit in the US Boys-Entertainment segment improved from a loss of $7.3 million in 2000 to profit of $1.0 million in 2001 due to increased sales, improved product mix and lower overhead spending. Operating profit in the US Infant & Preschool segment remained relatively unchanged at $11.2 million as increased sales were offset by unfavorable product mix and higher overhead spending to support certain new product lines. The International segment operating profit decreased from $6.2 million in 2000 to $2.0 million in 2001, as higher volume was offset by lower operating margins in certain Latin American countries. 19
RESULTS OF CONTINUING OPERATIONS - FIRST HALF CONSOLIDATED RESULTS Net loss from continuing operations for the first half of 2001 was $26.9 million or $0.06 per share as compared to a net loss of $38.6 million or $0.09 per share in the first half of 2000. Profitability in the first half of 2001 was negatively impacted by $27.8 million of charges related to the financial realignment plan and a $5.5 million charge related to a pre-tax loss on derivative instruments. The combined effect of these items resulted in pre-tax charges of $33.3 million, approximately $25 million after-tax or $0.06 per diluted share. Profitability in the first half of 2000 was negatively impacted by a $53.1 million pre-tax charge related to the departure of certain senior executives, partially offset by a $2.0 million pre-tax credit related to adjustments to the 1999 restructuring and other charges. The combined effect of these items resulted in net pre-tax charges of $51.1 million, approximately $37 million after-tax or $0.09 per diluted share. The following table provides a comparison of the reported results and the results excluding charges: <TABLE> <CAPTION> For the Six Months Ended June 30, ------------------------------------------------------------- 2001 2000 ------------------------------------------------------------- Reported Results Reported Results (In millions) Results Charges Ex. Chgs Results Charges Ex. Chgs - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net sales $1,586.2 $ - $1,586.2 $1,511.1 $ - $1,511.1 ====================================================================================================== Gross profit $ 706.1 $(13.8) $ 719.9 $ 678.3 $ - $ 678.3 Advertising and promotion expenses 200.3 0.3 200.0 189.9 - 189.9 Other selling and administrative expenses 419.6 0.1 419.5 472.9 53.1 419.8 Amortization of intangibles 25.5 - 25.5 25.9 - 25.9 Restructuring and other charges 13.0 13.0 - (2.0) (2.0) - Other expense (income), net 9.2 6.1 3.1 (15.4) - (15.4) - ------------------------------------------------------------------------------------------------------ Operating income 38.5 (33.3) 71.8 7.0 (51.1) 58.1 Interest expense 74.5 - 74.5 60.3 - 60.3 - ------------------------------------------------------------------------------------------------------ Loss from continuing operations before income taxes $ (36.0) $(33.3) $ (2.7) $ (53.3) $(51.1) $ (2.2) ====================================================================================================== </TABLE> Net sales from continuing operations in the first half of 2001 increased 5% from last year to $1,586.2 million. In local currency, sales were up 6% compared to a year ago. Sales within the US increased 3% and accounted for 68% of consolidated sales in the first half of 2001 compared to 70% in 2000. Sales outside the US increased 12% from a year ago. Excluding the unfavorable foreign currency exchange impact, international sales increased by 18% compared to 2000. Worldwide sales in the Girls category, which now includes American Girl(R), increased 7%, or 9% in local currency, to $717.5 million. Domestic sales remained relatively flat while international sales increased 22%, or 28% in local currency. Worldwide Barbie(R) sales increased 1%, or 3% in local currency. Barbie(R) sales in the U.S. declined 9% as compared to the strong year ago period, when sales increased 17% year over year. Consumer demand for the brand continued to be strong as evidenced by growth in over-the-counter sales in the fashion doll market this year. International sales for Barbie(R) were up 21%, or 28% in local currency, reflecting softer comparisons in the 2000 20
first half and the benefit of early product availability and stronger alignment of worldwide sales and marketing plans. The performance of Polly Pocket(R), Diva Starz(TM) and American Girl(R) also drove growth in the Girls category. Worldwide sales in the Boys-Entertainment category grew 9%, or 11% in local currency, to $415.4 million in 2001. Domestic sales grew by 9% while international sales increased 8%, or 14% in local currency. The worldwide Wheels business increased 8%, driven by double-digit growth in Hot Wheels(R) and Tyco(R) Radio Control, partially offset by a decline in Matchbox(R). The Entertainment business had double-digit growth in sales with strength in Max Steel(TM) and games and puzzles. Worldwide sales in the Infant & Preschool category increased 2%, or 3% in local currency, to $559.8 million in 2001. Domestic sales were up 3% and international sales were down 1%, or up 5% in local currency. Worldwide sales of core Fisher-Price(R) products were up 8%, including double-digit growth internationally. The growth in core Fisher-Price(R) and Power Wheels(R) products was offset by continued weakness in licensed character brands. Gross profit, as a percentage of net sales, was 44.5% in 2001 compared to 44.9% last year. Reported cost of sales for 2001 includes a $13.8 million charge, largely related to accelerated depreciation resulting from the planned closure of the Murray, Kentucky plant as part of the financial realignment plan. Mattel will incur an accelerated depreciation charge each quarter until the second quarter of 2002 related to this closure. Excluding the charge for accelerated depreciation, gross profit, as a percentage of net sales, was 45.4% in the first half of 2001 compared to 44.9% in 2000. Product mix and lower distribution costs positively affected the margin. Excluding the $0.3 million charge related to exiting certain product lines, advertising and promotion was 12.6% of net sales, consistent with last year. In the first half of 2000, other selling and administrative expenses included a $53.1 million charge related to termination costs for the departure of certain senior executives. Excluding this charge, other selling and administrative expenses declined from 27.8% of net sales in 2000 to 26.4% in 2001. Last year Mattel incurred overhead costs related to executive recruitment and retention, while this year Mattel benefited from savings related to the financial realignment plan. Other expense, net in 2001 includes a $5.5 million loss on derivative instruments and a $0.6 million expense for asset writedowns and other costs associated with implementing the North American Strategy. Excluding these charges, other expense (income), net decreased from income of $15.4 million in 2000 to expense of $3.1 million in 2001. In 2000, other income, net included favorable foreign exchange and investment gains. Interest expense was $74.5 million in 2001 compared to $60.3 million last year. However, the increase is primarily due to the allocation in the first half of last year of $18.1 million in interest to discontinued operations. In the first half of 2001, interest expense was allocated entirely to continuing operations. Compared to last year, interest expense includes a benefit from lower short-term rates and lower short- term borrowings due in part to the timing of collections. Short-term borrowings in the second half of 2001 are expected to be higher than the prior year second half to support the seasonal growth in the business. Interest expense for full year 2001 is expected to be lower than last year's $189 million of total interest expense incurred for continuing and discontinued operations combined. However, the benefit from 21
lower interest expense will likely be offset by the impact of a stronger dollar, primarily against the Euro. Mattel's first half tax rate, excluding charges, was 27.6%, consistent with the expected rate for the year. Business Segment Results US Girls segment sales remained relatively flat in 2001 compared to 2000. A 9% decline in Barbie(R) sales was offset by increased sales of American Girl(R), Polly Pocket(R) and Diva Starz(TM). The decrease in Barbie(R) sales compared to first half 2000 was primarily due to changes in retailer buying patterns and a stronger half a year ago. US Boys-Entertainment segment sales increased 9% compared to 2000. The US Wheels business increased 7% due to growth in both Hot Wheels(R) and Tyco(R) Radio Control. The US Entertainment business experienced double-digit growth due to strength in Max Steel(TM) and games and puzzles. US Infant & Preschool segment sales increased 3%, largely due to the increased sales of core Fisher-Price(R) and Power Wheels(R) products, partially offset by a decline in sales of character brand products. International segment sales increased by 12% compared to last year. Excluding the unfavorable foreign exchange impact, sales grew by 18% due to double-digit growth in the Barbie(R), core Fisher-Price(R) and Wheels and Entertainment categories. Operating profit in the US Girls segment increased by 14%, largely due to improved product mix, reduced advertising and lower overhead spending. Operating (loss) profit in the US Boys-Entertainment segment improved from a loss of $12.9 million in 2000 to profit of $2.1 million in 2001, largely due to increased sales and improved product mix. Operating profit in the US Infant & Preschool segment declined by 16% as increased sales were offset by unfavorable product mix and higher overhead spending to support certain new product lines. The International segment operating loss increased from a loss of $8.4 million in 2000 to $12.1 million in 2001 as higher volume was offset by lower operating margins in certain Latin American countries. FINANCIAL POSITION Mattel's cash and short-term investments decreased $89.0 million to $40.7 million at June 30, 2001 compared to $129.7 million at June 30, 2000. The repayment of short-term borrowings and long-term debt, the funding of continuing operations, and payments made under the financial realignment plan, partially offset by the issuance of 200 million Euro Notes and a $200.0 million term loan, contributed to the decrease. Compared to year end 2000, cash and short-term investments decreased $191.7 million, primarily due to funding of continuing operations, partially offset by short-term borrowings. Accounts receivable, net decreased $109.6 million compared to second quarter 2000 due to earlier cash collections and better working capital management. Inventory balances increased $59.3 million from second quarter 2000, primarily as a result of pre-build initiatives to prepare for the closing of the Murray, Kentucky manufacturing facility as part of the financial realignment plan. Since year end 2000, inventories increased $203.0 million as a result of seasonal inventory buildup to support sales later in the year and the pre-build initiative related to the Murray closure. Property, plant and equipment, net decreased $60.2 million from second quarter 2000, mainly due to depreciation, partially offset by additions. Other assets increased $232.7 million from the second quarter of 2000, principally due to increased noncurrent deferred tax assets resulting from operating losses. Net investment in discontinued operations decreased $378.6 million from second quarter 2000, primarily due to the disposition of Learning Company. 22
Short-term borrowings decreased $600.1 million compared to second quarter 2000 due to increases in long-term debt and higher cash collections. Compared to the 2000 year end, short-term borrowings increased $393.7 million to support seasonal working capital financing needs. Current portion of long-term debt increased $59.9 million over the 2000 quarter end and $29.9 million over year end 2000, primarily due to the reclassification of medium-term notes maturing during the next twelve months from long-term debt. A summary of Mattel's capitalization is as follows: <TABLE> <CAPTION> (In millions, except percentage information) June 30, 2001 June 30, 2000 Dec. 31, 2000 -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Medium-term notes $ 480.0 17% $ 540.5 19% $ 510.0 18% Senior notes 669.8 24 300.0 11 690.7 25 Other long-term debt obligations 41.3 1 42.0 2 41.7 1 -------------------------------------------------------------------------------------------------------- Total long-term debt 1,191.1 42 882.5 32 1,242.4 44 Other long-term liabilities 189.3 7 182.7 7 165.5 6 Stockholders' equity 1,406.9 51 1,695.8 61 1,403.1 50 -------------------------------------------------------------------------------------------------------- $2,787.3 100% $2,761.0 100% $2,811.0 100% ======================================================================================================== </TABLE> Total long-term debt increased by $308.6 million compared to second quarter 2000 due to the issuance of 200 million of Euro Notes and a $200.0 million term loan during the third quarter of 2000, partially offset by the reclassification of $60.5 million of medium-term notes maturing in the next twelve months to current portion of long-term debt. Mattel expects to satisfy its future long-term capital needs through the retention of corporate earnings and the issuance of long-term debt instruments. As of June 30, 2001, Mattel has up to $400.0 million of debt and equity securities available for issuance under its current shelf registration statement. Stockholders' equity decreased $288.9 million since June 30, 2000, primarily 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 and cash received from exercise of employee stock options. LIQUIDITY Cash flows used for continuing operations decreased $43.5 million compared to second quarter 2000, largely due to changes in working capital. During the first half of 2001, Mattel invested cash flows totaling $87.8 million for additions to tooling in support of new products and to expand the capacity of existing North American manufacturing facilities in anticipation of the closure of the Murray, Kentucky facility. Cash flows from financing activities decreased $236.4 million due to lower short-term borrowings, partially offset by cash received from employee stock option exercises and no dividend payments during the first six months of 2001. During 2001, Mattel expects cash flows to increase due to the change in its dividend policy and the disposition of Learning Company since Mattel is no longer required to fund this business. Mattel currently intends to use the cash savings generated by these actions to reduce debt. 23
SEASONAL FINANCING Mattel's financing of seasonal working capital typically grows throughout the first half of the year and peaks in the third or fourth quarter, when accounts receivable are at their highest due to increased sales volume, and when inventories are at their highest in anticipation of expected second half sales volume. Mattel expects to finance its seasonal working capital requirements for the next twelve months by using existing and internally generated cash, issuing commercial paper, selling certain trade receivables and using various short-term bank lines of credit. In addition, Mattel avails itself of individual short- term foreign credit lines with a number of banks, which will be used as needed to finance seasonal working capital requirements of certain foreign subsidiaries. Mattel believes the amounts available under its unsecured committed revolving credit facilities, its uncommitted money market facility and its foreign credit lines will be adequate to meet its seasonal financing requirements. RISK MANAGEMENT FOREIGN CURRENCY Mattel's results of operations and cash flows may be impacted by exchange rate fluctuations. 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 using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure through the selection of currencies used for international borrowings and intercompany invoicing. Mattel's results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does not trade in financial instruments for speculative purposes. Mattel has also entered into a cross currency interest rate swap to convert the interest and principal amount from Euros to US dollars on its 200 million Euro Notes due 2002. 24
PART II -- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Litigation Related to Learning Company Following Mattel's announcement in October 1999 of the expected results of its Learning Company division for 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, in the joint proxy statement for the merger of Mattel and Learning Company and elsewhere, that artificially inflated the price of Mattel's common stock. In March 2000, these shareholder complaints were consolidated into two lead cases: Thurber v. Mattel, Inc. et al. (containing claims under (S) 10(b) of the ------------------------------ 1934 Securities Exchange Act ("Act")) and Dusek v. Mattel, Inc. et al. ---------------------------- (containing claims under (S) 14(a) of the Act). Mattel and the other defendants filed motions to dismiss both lawsuits for failure to state a claim. In January 2001, the Court granted defendants' motions to dismiss both Thurber and Dusek, ------- ----- and gave plaintiffs leave to amend. Plaintiffs filed amended consolidated complaints in March 2001 in both actions. In June 2001, Mattel filed motions to dismiss the amended consolidated complaints. Both Thurber and Dusek are ------- ----- currently pending in the United States District Court for the Central District of California. Other purported class action litigation was brought in the United States District Court for the Central District of California against Mattel as successor to Learning Company and the former directors of Learning Company on behalf of former stockholders of Broderbund Software, Inc. 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 consolidated complaint in In re Broderbund generally alleges that Learning ---------------- Company misstated its financial results prior to the time it was acquired by Mattel. Mattel and the other defendants have filed a motion to dismiss the complaint in In re Broderbund, and in late May 2001, the Court granted the ---------------- defendants' motion and dismissed the case. The In re Broderbund plaintiffs have ---------------- appealed the Court's ruling to the Ninth Circuit Court of Appeals. Several stockholders have filed derivative complaints on behalf and for the benefit of Mattel, alleging, among other things, 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 its approval of severance packages to certain former executives. All of these derivative actions, one of which was filed in the Court of Chancery in Delaware and the remainder in Los Angeles Superior Court in California, have been stayed pending the outcome of motions to dismiss in the federal securities actions. Mattel believes the purported class actions and derivative suits are without merit and intends to defend them vigorously. 25
Power Wheels(R) Recall On October 22, 1998, Mattel announced that Fisher-Price, in cooperation with the Consumer Product Safety Commission ("CPSC"), would conduct a voluntary recall involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles. The recall involves the replacement of electronic components that may overheat, particularly when consumers make alterations to the product, and covers vehicles sold nationwide since 1984 under nearly 100 model names. Additionally, Fisher- Price was notified by the CPSC that it was subject to civil penalties for delayed reporting of the facts underlying the recall. Fisher-Price denied that it violated reporting requirements. On June 7, 2001, the CPSC accepted provisions of a settlement agreement whereby Fisher-Price agreed, without admitting any wrongdoing, to pay $1.1 million in civil penalty. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Mattel was held on May 9, 2001. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was no solicitation in opposition to that of management. All of management's nominees for directors as listed in the proxy statement were elected with the number of votes cast for each nominee as follows: <TABLE> <CAPTION> Shares Voted Votes "FOR" Withheld -------------------------------------------------------------------------------- <S> <C> <C> Eugene P. Beard 362,183,355 7,679,597 Harold Brown 362,130,135 7,679,597 Robert A. Eckert 360,242,836 7,679,597 Tully M. Friedman 362,130,135 7,679,597 Ronald M. Loeb 361,971,027 7,679,597 Andrea L. Rich 362,140,223 7,679,597 William D. Rollnick 362,123,537 7,679,597 Christopher A. Sinclair 362,163,168 7,679,597 G. Craig Sullivan 362,183,355 7,679,597 John L. Vogelstein 362,133,277 7,679,597 Ralph V. Whitworth 362,152,660 7,679,597 </TABLE> The proposal to appoint PricewaterhouseCoopers LLP as independent accountants for Mattel for the year ending December 31, 2001, was ratified by the following vote: <TABLE> <CAPTION> Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------------------------------------------------------------------------- <S> <C> <C> <C> 363,153,408 2,916,799 1,522,719 - </TABLE> A stockholder proposal regarding certain reports by the board of directors related to the working conditions in Mattel's manufacturing facilities was included in the proxy statement dated April 9, 2001. The proposal was rejected by the following vote: <TABLE> <CAPTION> Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------------------------------------------------------------------------- <S> <C> <C> <C> 22,083,768 250,745,141 20,127,419 74,636,598 </TABLE> 26
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 (b) Reports on Form 8-K ------------------- Mattel, Inc. filed the following Current Report on Form 8-K during the quarterly period ended June 30, 2001: <TABLE> <CAPTION> Date of Report Items Reported Financial Statements Filed ------------------------------------------------------------------------------------------- <S> <C> <C> April 20, 2001 5, 7 None </TABLE> 27
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 August 14, 2001 By: /s/ Douglas E. Kerner --------------------- ------------------------------------- Douglas E. Kerner Senior Vice President and Corporate Controller (Duly authorized officer and chief accounting officer) 28