-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZ20jgwzZqg3V+UJLYp7npRn4miukDspYQYi4l6OTjvR94jhCT6ossrc/WmzpJj+ OvwhcLyjS4gVp6CankW2gQ== 0000063276-97-000043.txt : 19971110 0000063276-97-000043.hdr.sgml : 19971110 ACCESSION NUMBER: 0000063276-97-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTEL INC /DE/ CENTRAL INDEX KEY: 0000063276 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 951567322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05647 FILM NUMBER: 97710140 BUSINESS ADDRESS: STREET 1: 333 CONTINENTAL BLVD CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3102522000 10-Q 1 3RD QUARTER 1997 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-05647 ---------------------------------- MATTEL, INC. ------------ (Exact name of registrant as specified in its charter) Delaware 95-1567322 - ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Continental Boulevard, El Segundo, California 90245-5012 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (310) 252-2000 -------------- (Former name, former address and former fiscal year, None if changed since last report) -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares outstanding of registrant's common stock as of October 31, 1997: Common Stock - $1 par value -- 290,717,595 shares PART I -- FINANCIAL INFORMATION ------------------------------- MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Sept. 30, Sept. 30, Dec. 31, (In thousands) 1997 1996 1996 - -------------- ----------- ----------- ----------- ASSETS Current Assets Cash $ 68,171 $ 126,924 $ 550,271 Accounts receivable, net 1,846,994 1,572,481 948,940 Inventories 552,661 566,625 444,178 Prepaid expenses and other current assets 183,522 240,621 195,673 ----------- ----------- ----------- Total current assets 2,651,348 2,506,651 2,139,062 ----------- ----------- ----------- Property, Plant and Equipment Land 32,268 28,387 30,864 Buildings 204,582 210,778 216,523 Machinery and equipment 457,217 428,420 438,969 Capitalized leases 25,362 26,604 26,512 Leasehold improvements 69,524 67,754 69,732 ----------- ----------- ----------- 788,953 761,943 782,600 Less: accumulated depreciation 338,048 321,781 323,096 ----------- ----------- ----------- 450,905 440,162 459,504 Tools, dies and molds, net 158,743 154,116 156,777 ----------- ----------- ----------- Property, plant and equipment, net 609,648 594,278 616,281 ----------- ----------- ----------- Other Noncurrent Assets Intangible assets, net 582,302 605,758 611,410 Sundry assets 231,320 192,613 214,389 ----------- ----------- ----------- $ 4,074,618 $ 3,899,300 $ 3,581,142 =========== =========== =========== See accompanying notes to consolidated financial information. Consolidated results for September 30, 1996 and December 31, 1996 have been restated retroactively for the effects of the March 1997 merger with Tyco Toys, Inc. ("Tyco"), accounted for as a pooling of interests. See Note 9.
2 MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued)
Sept. 30, Sept. 30, Dec. 31, (In thousands, except share data) 1997 1996 1996 - --------------------------------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term borrowings $ 352,833 $ 423,525 $ 28,924 Current portion of long-term liabilities 13,522 105,989 106,596 Accounts payable 303,549 264,901 312,378 Accrued liabilities 737,860 548,776 510,691 Income taxes payable 162,142 209,338 183,288 ----------- ----------- ----------- Total current liabilities 1,569,906 1,552,529 1,141,877 ----------- ----------- ----------- Long-Term Liabilities 6-3/4% Senior Notes due 2000 100,000 100,000 100,000 Medium-Term Notes 460,500 220,000 220,000 Senior Subordinated Notes - 126,500 126,500 Convertible Subordinated Notes - 16,034 16,034 Mortgage notes 43,706 47,938 47,600 Other 136,247 119,387 123,208 ----------- ----------- ----------- Total long-term liabilities 740,453 629,859 633,342 ----------- ----------- ----------- Shareholders' Equity Preferred stock, Series B $1.00 par value, $1,050.00 liquidation preference per share, 53.6 thousand shares authorized, issued and outstanding 54 54 54 Preferred stock, Series C $1.00 par value, $125.00 liquidation preference per share, 772.8 thousand shares authorized, issued and outstanding 773 773 773 Common stock $1.00 par value, 600.0 million shares authorized; 297.6 million shares issued at Sept. 30, 1997 and 296.1 million shares issued at Sept. 30, 1996 and December 31, 1996 297,626 296,091 296,091 Additional paid-in capital 516,940 538,560 518,296 Treasury stock at cost; 7.1 million shares, 8.8 million shares and 8.1 million shares, respectively (208,465) (228,039) (215,999) Retained earnings 1,318,196 1,205,856 1,293,653 Currency translation adjustments (160,865) (96,383) (86,945) ----------- ----------- ----------- Total shareholders' equity 1,764,259 1,716,912 1,805,923 ----------- ----------- ----------- $ 4,074,618 $ 3,899,300 $ 3,581,142 =========== =========== =========== See accompanying notes to consolidated financial information. Consolidated results for September 30, 1996 and December 31, 1996 have been restated retroactively for the effects of the March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 9.
3 MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
For the For the Three Months Ended Nine Months Ended ---------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands, except per share amounts) 1997 1996 1997 1996 - ---------------------------------------- ---------- ---------- ---------- ---------- Net Sales $1,555,347 $1,497,916 $3,221,523 $3,103,498 Cost of sales 755,070 747,143 1,639,598 1,593,827 ---------- ---------- ---------- ---------- Gross Profit 800,277 750,773 1,581,925 1,509,671 Advertising and promotion expenses 244,231 240,303 478,570 469,931 Other selling and administrative expenses 198,767 204,584 576,760 557,381 Integration/restructuring costs - - 275,000 - Interest expense 24,632 28,251 62,782 70,134 Other expense, net 14,892 9,459 30,733 22,662 ---------- ---------- ---------- ---------- Income Before Income Taxes 317,755 268,176 158,080 389,563 Provision for income taxes 94,100 86,801 63,415 124,284 ---------- ---------- ---------- ---------- Income Before Extraordinary Item 223,655 181,375 94,665 265,279 Extraordinary item - loss on early retirement of debt (4,610) - (4,610) - ---------- ---------- ---------- ---------- Net Income 219,045 181,375 90,055 265,279 Less: preferred stock dividend requirements 2,838 2,838 8,515 4,554 ---------- ---------- ---------- ---------- Net Income Applicable to Common Shares $ 216,207 $ 178,537 $ 81,540 $ 260,725 ========== ========== ========== ========== Primary Income Per Common And Common Equivalent Share - ------------------------------------ Income before extraordinary item $ 0.75 $ 0.61 $ 0.30 $ 0.88 Extraordinary item - loss on early retirement of debt (0.02) - (0.02) - ---------- ---------- ---------- ---------- Net income $ 0.73 $ 0.61 $ 0.28 $ 0.88 ========== ========== ========== ========== Average number of common and common equivalent shares 295,688 293,961 294,437 296,417 ========== ========== ========== ========== Dividends Declared Per Common Share $ 0.07 $ 0.06 $ 0.20 $ 0.18 ========== ========== ========== ========== See accompanying notes to consolidated financial information. Consolidated results for all periods, except for the three months ended September 30, 1997, have been restated retroactively for the effects of the March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 9.
4 MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended ----------------------- Sept. 30, Sept. 30, (In thousands) 1997 1996 - -------------- ---------- ---------- Cash Flows From Operating Activities: - ------------------------------------- Net income $ 90,055 $ 265,279 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 130,089 105,147 Amortization 26,205 28,428 Increase (decrease) from changes in net assets and liabilities: Accounts receivable (936,098) (697,182) Inventories (131,260) (161,036) Prepaid expenses and other current assets 9,426 (4,899) Accounts payable, accrued liabilities and income taxes payable 232,461 84,319 Deferred compensation and other retirement plans 8,205 5,117 Deferred income taxes (847) (5,798) Other, net (628) 2,083 ---------- ---------- Net cash used in operating activities (572,392) (378,542) ---------- ---------- Cash Flows From Investing Activities: - ------------------------------------- Purchases of tools, dies and molds (71,190) (84,017) Purchases of other property, plant and equipment (86,739) (87,249) Purchases of marketable securities - (8,000) Purchase of other long-term investments (7,506) (25,050) Proceeds from sales of property, plant and equipment 7,741 2,371 Proceeds from sales of marketable securities - 25,315 Contingent consideration - investment in acquired business (8,625) (8,625) Other, net 1,813 (91) ---------- ---------- Net cash used in investing activities (164,506) (185,346) ---------- ---------- Cash Flows From Financing Activities: - ------------------------------------- Short-term borrowings, net 326,889 348,276 Issuance of Medium-Term Notes 250,000 - Payment of Senior Subordinated Notes (126,500) - Payment of 6 7/8% Senior Notes (100,000) - Payment of Medium-Term Notes - (30,000) Long-term foreign borrowings (3,521) (3,610) Proceeds from issuance of preferred stock - 92,703 Tax benefit of employee stock options exercised 11,950 18,128 Exercise of stock options and warrants 29,853 43,407 Sale of treasury stock 71,276 - Purchase of treasury stock (128,064) (222,273) Dividends paid on common and preferred stock (64,127) (47,223) Other, net (2,109) (987) ---------- ---------- Net cash provided by financing activities 265,647 198,421 Effect of Exchange Rate Changes on Cash (10,849) (1,295) ---------- ---------- Decrease in Cash (482,100) (366,762) Cash at Beginning of Period 550,271 493,686 ---------- ---------- Cash at End of Period $ 68,171 $ 126,924 ========== ========== See accompanying notes to consolidated financial information. Consolidated results for all periods have been restated retroactively for the effects of the March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 9.
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 ("the Company") financial position and interim results as of and for the periods presented have been included. Certain amounts in the financial statements for prior periods have been reclassified to conform with the current year presentation. Because the Company's business is seasonal, results for interim periods are not necessarily indicative of those which may be expected for a full year. The financial information included herein should be read in conjunction with the Company's consolidated financial statements and related notes in its 1996 Annual Report to Shareholders, and the restated, combined financial statements filed in the Company's Current Report on Form 8-K dated July 30, 1997. 2. Accounts receivable are shown net of allowances for doubtful accounts of $26.8 million (September 30, 1997), $20.8 million (September 30, 1996) and $21.0 million (December 31, 1996). 3. Inventories are comprised of the following:
Sept. 30, Sept. 30, Dec. 31, (In thousands) 1997 1996 1996 - -------------- --------- --------- --------- Raw materials and work in progress $ 82,407 $ 87,927 $ 70,121 Finished goods 470,254 478,698 374,057 --------- --------- --------- $ 552,661 $ 566,625 $ 444,178 ========= ========= =========
4. Supplemental disclosure of cash flow information:
For the Nine Months Ended ------------------------- Sept. 30, Sept. 30, (In thousands) 1997 1996 - -------------- ---------- ----------- Cash paid during the period for: Income taxes $ 65,837 $ 54,362 Interest 56,159 59,515 Noncash investing and financing activities: Conversion of 7% Convertible Subordinated Notes 16,034 - Issuance of stock warrant - 26,444 - ---------------------------------------------------------------------
6 5. In February 1996, the Company filed a universal shelf registration statement allowing the issuance of up to $350.0 million of debt and equity securities. This registration statement was amended in May 1997 to allow the issuance of an additional $39.5 million of debt and equity securities. In the first three quarters of 1997, the Company issued an aggregate of $250.0 million principal amount of Series B Medium-Term Notes maturing on various dates from September 2006 to July 2012. Interest is payable semiannually at fixed rates ranging from 6.72% to 7.49% per annum on the fifteenth day of May and November. In October and November 1997, the Company issued an additional $40.0 million principal amount of Series B Medium-Term Notes maturing on various dates from November 2008 to October 2011, and bearing interest at fixed rates ranging from 6.70% to 6.80% per annum. In addition, the Company issued 3.0 million common shares valued at $72.8 million in March 1997. In October 1997, the Company filed a new universal shelf registration statement allowing the issuance of up to $350.0 million of debt and equity securities. All remaining availability under the February 1996 shelf registration statement, if any, will be incorporated into the October 1997 shelf registration statement at the time of effectiveness. 6. On July 10, 1997, the Company issued its Notice of Redemption to holders of the 10-1/8% Senior Subordinated Notes. The notes were redeemed on August 15, 1997 at 103.797% of par together with accrued interest. In the third quarter of 1997, the Company recognized a pretax extraordinary loss of $7.3 million, and a related income tax benefit of $2.7 million, as a result of the redemption. 7. The Company's $100.0 million 6 7/8% Senior Notes were repaid upon maturity on August 1, 1997. 8. On September 10, 1997, the holder tendered all of the $16.0 million 7% Convertible Subordinated Notes for conversion into 892.7 thousand shares of Mattel common stock. 9. Pursuant to an Agreement and Plan of Merger ("the Tyco Merger Agreement") dated November 17, 1996, as amended by an Amendment to Agreement and Plan of Merger dated November 22, 1996, a merger was consummated between the Company and Tyco on March 27, 1997. The stock- for-stock transaction was approved by the shareholders of Tyco, after which Tyco was merged with and into Mattel, with Mattel continuing as the surviving corporation in the merger. As a result of the merger, the separate existence of Tyco ceased. Under the merger agreement, each outstanding share of Tyco common stock was converted into the right to receive 0.48876 Mattel common shares and resulted in the issuance of approximately 17 million shares. Tyco restricted stock units and stock options outstanding as of the merger date were exchanged for approximately 0.6 million Mattel common shares. In addition, each share of Tyco Series B and Series C Preferred Stock was converted into like Mattel preferred stock. This transaction has been accounted for as a pooling of interests, and accordingly, financial information for periods prior to the merger reflect retroactive restatement of the 7 companies' combined financial position and operating results. For periods preceding the merger, there were no intercompany transactions which required elimination from the combined consolidated results of operations and there were no adjustments necessary to conform the accounting practices of the two companies. Selected financial information for the combining entities included in the consolidated statements of income are as follows:
Net Income/ (In thousands) Net Sales (Loss) - -------------- ----------- ----------- FOR THE THREE MONTHS ENDED MARCH 31, 1997 Mattel (a) $ 568,528 $ 13,123 Tyco 124,992 (7,747) Integration/restructuring charge (b) - (210,000) ----------- ----------- Combined $ 693,520 $ (204,624) =========== =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Mattel, as previously reported $ 2,595,413 $ 264,185 Tyco (c) 508,085 1,094 ----------- ----------- Combined $ 3,103,498 $ 265,279 =========== =========== (a) For the three months ended March 1997, primary earnings per share before the effects of the merger was $0.05 per share. (b) The integration and restructuring charge of $275.0 million, after related income tax effects, reduced earnings of the combined company by $210.0 million. (c) Certain amounts for Tyco net sales have been classified differently than previously published amounts in order to conform the accounting presentation of the two entities. The provision for income taxes has been adjusted by $2.5 million in September 1996 to reflect the adjustment of valuation allowances established in the historical financial statements of Tyco, resulting in the recognition of benefits of losses incurred by certain foreign affiliates.
The Company recognized a $275.0 million pre-tax charge against continuing operations in March 1997 in connection with the Tyco integration and Mattel restructuring. Of the total pre-tax charge, approximately $85 million represented non-cash asset writedowns. Through September 30, 1997, the total integration and restructuring expenditures and write-offs were approximately $115 million. These costs related primarily to transaction costs of the merger, the elimination of approximately 1,700 positions worldwide, the consolidation of manufacturing facilities, the closure of duplicate marketing and administrative offices, and the abandonment of certain product lines. The remaining accrual of $160 million includes the following: i) approximately $48 million for severance costs for the elimination of approximately 1,000 positions worldwide; ii) approximately $35 million primarily for the writedown of fixed assets and lease termination costs in connection with the continuing consolidation of manufacturing facilities; iii) approximately $50 million for lease and contract terminations and asset writedowns resulting from the continuing elimination of duplicate marketing offices, administrative functions and distribution facilities; and iv) approximately $27 million in charges primarily for the write-off of tooling and other costs related to abandonment of certain product lines. It is anticipated that substantially all actions related to the integration and restructuring activity will be taken within one year. Management believes that the remaining accrual will approximate all future charges. 8 10. In the current quarter, the Board of Directors declared cash dividends of $0.07 per common share, compared to $0.06 per common share in the third quarter of 1996. 11. All share and per share data presented in these financial statements reflect the retroactive effects of the Tyco merger. 12. Income per common share is computed by dividing earnings available to common shareholders by the average number of common and common equivalent shares outstanding during each period. Weighted average share computations assume the exercise of dilutive stock options and warrants, reduced by the number of shares which could be repurchased at average market prices with proceeds from exercise. Earnings available to common shareholders represent reported net income less preferred stock dividend requirements. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share, which is effective for financial statements issued after December 15, 1997. This statement requires entities to report "basic" and "diluted" earnings per share in place of primary and fully diluted earnings per share. Adoption of this statement is not expected to have a material impact on the Company's calculation of income per share. 13. In January 1997, the SEC issued Financial Reporting Release 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments". The release requires specific qualitative disclosures regarding the Company's accounting policies for derivative financial instruments. The Company enters into foreign currency forward exchange contracts and swap agreements primarily as hedges of inventory purchases, sales and other intercompany transactions denominated in foreign currencies to limit the effect of exchange rate fluctuations on its results of operations and cash flows. The Company does not enter into derivatives for trading purposes. Gains and losses related to firm commitments, which qualify for hedge accounting, are deferred and are recognized in the results of operations, balance sheet, and statement of cash flows as part of the underlying transaction. Contracts that do not qualify for hedge accounting are marked to market with gains and losses recognized in the results of operations currently. If a derivative previously designated as a hedge of a foreign currency commitment is terminated prior to the transaction date of the related commitment, the resultant gain or loss is recognized at the time of maturity of the original contract as a component of other expense, net. 9 MATTEL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, WHICH INCLUDE, BUT ARE NOT LIMITED TO, THE RESTRUCTURING CHARGE, COST SAVINGS, AND PROFITABILITY, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS. THESE INCLUDE WITHOUT LIMITATION: THE COMPANY'S DEPENDENCE ON THE TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF NEW PRODUCTS; POSSIBLE WEAKNESSES OF INTERNATIONAL MARKETS; THE IMPACT OF COMPETITION ON REVENUES AND MARGINS; THE EFFECT OF CURRENCY FLUCTUATIONS ON REPORTABLE INCOME; AND OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S PUBLIC ANNOUNCEMENTS AND SEC FILINGS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS," "INTENDS," OR OTHER SIMILAR TERMINOLOGY. Mattel, Inc. designs, manufactures, markets and distributes a broad variety of toy products on a worldwide basis. The Company's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines and to design and develop innovative new toys and product lines. New products have limited lives, ranging from one to three years, and generally must be updated and refreshed each year. Core brands have historically provided the Company with relatively stable growth. Among the Company's major core brands are BARBIE fashion dolls and doll clothing and accessories; the Company's Disney-licensed toys; FISHER- PRICE toys and juvenile products; SESAME STREET characters; HOT WHEELS vehicles and playsets; MATCHBOX; CABBAGE PATCH KIDS; Tyco Electric Racing and Tyco Radio Control; the UNO and SKIP-BO card games; and the SCRABBLE game, which the Company markets outside of the United States and Canada. 10 RESULTS OF OPERATIONS The Company's business is seasonal, and, therefore, results of operations are comparable only with corresponding periods. Following is a percentage analysis of operating results:
For the For the Three Months Ended Nine Months Ended ------------------------ ------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Net sales 100% 100% 100% 100% =========== =========== =========== =========== Gross profit 52 50 49 49 Advertising and promotion expenses 16 16 15 15 Other selling and administrative expenses 13 14 18 18 Restructuring and integration charge - - 8 - Other expense, net 1 - 1 1 ----------- ----------- ----------- ----------- Operating profit 22 20 7 15 Interest expense 2 2 2 2 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item 20% 18% 5% 13% =========== =========== =========== ===========
THIRD QUARTER - ------------- The strength of the Company's core brands resulted in a 4% increase in net sales in the third quarter of 1997 over the 1996 third quarter, including a net $51.0 million unfavorable effect from the generally stronger US dollar relative to the year ago quarter. Sales of BARBIE and BARBIE-related products increased 2%. The Wheels category increased 10%, reflecting strength in HOT WHEELS, partially offset by a decrease in Tyco Radio Control product. The Company's Infant and Preschool brand sales increased 16% in the third quarter of 1997 over the year-ago quarter. This increase was led by strength in SESAME STREET and WINNIE THE POOH, partially offset by a 10% decline in the FISHER-PRICE products. High levels of Fisher-Price inventory at retail continued to negatively impact Fisher-Price sales in the quarter. Sales to customers within the United States grew 9% over the year-ago quarter. Sales to customers outside the United States decreased 5%. At comparable foreign currency exchange rates, sales internationally grew 5%. In the third quarter of 1997, the US dollar continued to strengthen against many major foreign currencies. Although the Company hedges a portion of its anticipated currency exposures, the remaining unhedged portion may be adversely impacted by unfavorable translation effects on foreign revenues and earnings (see the Cautionary Statement above). Gross profit as a percentage of net sales increased two percentage points to 52% over the year-ago quarter, principally as a result of improved product mix. 11 Advertising and promotion expenses as a percentage of net sales remained virtually constant compared to the year-ago quarter. As a percentage of net sales, other selling and administrative expenses decreased one percentage point reflecting the Company's effort to manage expense growth relative to increasing revenue growth combined with the savings recognized as a result of the integration and restructuring activity. Other expense, net, increased $5.4 million, partially due to the unfavorable impact of foreign currency. Interest expense decreased $3.7 million as a result of lower beginning net debt position, improved cash flow, and savings from the redemption of the Tyco Senior Subordinated Notes. NINE MONTHS - ----------- Net sales increased $118.0 million or 4% over 1996, including a net $85.0 million unfavorable effect from the generally stronger US dollar relative to the year-ago period, reflecting continued worldwide demand for the Company's core brands. Worldwide core product sales increased mainly due to greater demand for BARBIE and BARBIE-related products, which increased 8%. The Wheels category increased 15%, reflecting strength in HOT WHEELS, partially offset by a decline in Tyco Radio Control product. The increase in core brand sales also reflects higher sales of certain of the Company's Preschool brands, including SESAME STREET and WINNIE THE POOH, partially offset by a 17% decline in FISHER-PRICE products. High levels of Fisher-Price inventory at retail negatively impacted sales for the nine months. Sales to customers within the United States increased 9% compared to the year-ago period. Sales to customers outside the United States decreased 5%. At comparable foreign currency exchange rates, sales internationally increased 3%. Gross profit, advertising and promotion, other selling and administrative expenses, and interest expense as a percentage of net sales remained virtually constant compared to the year-ago period. The Company recognized a $275.0 million pre-tax charge against continuing operations in March 1997 in connection with the Tyco integration and Mattel restructuring. Of the total pre-tax charge, approximately $85 million represented non-cash asset writedowns. Through September 30, 1997, the total integration and restructuring expenditures and write-offs were approximately $115 million. These costs related primarily to transaction costs of the merger, the elimination of approximately 1,700 positions worldwide, the consolidation of manufacturing facilities, the closure of duplicate marketing and administrative offices, and the abandonment of certain product lines. The remaining accrual of $160 million includes the following: i) approximately $48 million for severance costs for the elimination of approximately 1,000 positions worldwide; ii) approximately $35 million primarily for the writedown of fixed assets and lease termination costs in connection with the continuing consolidation of manufacturing facilities; iii) approximately $50 million for lease and contract terminations and asset writedowns resulting from the continuing elimination of duplicate marketing offices, administrative functions and distribution facilities; and iv) approximately $27 million in charges primarily for the write-off of tooling and other costs related to abandonment of certain product lines. It is anticipated that substantially all actions related to the integration and restructuring activity will be taken within one year. Management believes that the remaining accrual will approximate all future charges. 12 Pre-tax cost savings resulting from the restructuring for the nine months ended September 30, 1997 were over $30 million. Management continues to believe that the integration and restructuring charge will provide pre-tax cost savings of approximately $60 million during 1997 and approximately $160 million or more annually beginning in 1998. These cost savings will result primarily from reduced overhead, elimination of duplicate marketing and administrative offices and distribution facilities, and more efficient manufacturing and logistics operations. Available cash reserves and cash flows generated from normal business operations will fund the costs of the restructuring, with no adverse impact expected on the Company's future liquidity, revenues or financial position. The statements set forth herein are forwardlooking, and actual results may differ materially (see the Cautionary Statement above). FINANCIAL CONDITION The Company's financial position remained strong as of September 30, 1997. The Company's cash position as of September 30, 1997 was $68.2 million, compared to $126.9 million as of the third quarter 1996. Cash decreased $482.1 million since December 31, 1996 primarily due to funding of operating activities. Accounts receivable increased $274.5 million over the year-ago quarter, reflecting lower sales of certain trade receivables in 1997. Since year end, accounts receivable increased $898.1 million mainly due to seasonal customer payment patterns. Inventory balances increased $108.5 million since year end, primarily as a result of the Company's production in support of future sales volume. Accrued liabilities increased $189.1 million compared to the year-ago quarter and $227.2 million since December 31, 1996, mainly due to the accrual for the Tyco integration and Mattel restructuring charge. Short- term borrowings decreased $70.7 million compared to the 1996 quarter end primarily due to issuance of $90.0 million in Medium-Term Notes in the third quarter of the current year. Since year end, short-term borrowings increased $323.9 million mainly to finance the Company's seasonal working capital requirements. Current portion of long-term liabilities decreased approximately $93 million from September and December 1996 primarily due to the repayment of the $100.0 million 6 7/8% Senior Notes which matured on August 1, 1997. Seasonal financing needs for the next twelve months are expected to be satisfied through internally generated cash, issuance of commercial paper, sale of certain trade receivables, and use of the Company's various short-term bank lines of credit. 13 Details of the Company's capitalization are as follows:
(In millions) Sept. 30, 1997 Sept. 30, 1996 Dec. 31, 1996 - ------------- ---------------------------------------------- Medium-Term Notes $ 460.5 18% $ 220.0 9% $ 220.0 9% 6-3/4% Senior Notes 100.0 4 100.0 4 100.0 4 Senior Subordinated Notes - - 126.5 5 126.5 5 Convertible Subordinated Notes - - 16.0 1 16.0 1 Other long-term debt obligations 55.8 3 58.9 3 57.3 2 ----------------------------------------------- Total long-term debt 616.3 25 521.4 22 519.8 21 Other long-term liabilities 124.1 5 108.5 5 113.5 5 Shareholders' equity 1,764.3 70 1,716.9 73 1,805.9 74 ---------------------------------------------- $2,504.7 100% $2,346.8 100% $2,439.2 100% ==============================================
Total long-term debt increased as a percentage of total capitalization compared to the year-ago quarter, primarily due to the issuance of $250.0 million in Medium-Term Notes, partially offset by the redemption of the Senior Subordinated Notes, conversion of the Convertible Subordinated Notes into Mattel common stock, and increase in shareholders' equity. Future long-term capital needs are expected to be satisfied through retention of corporate earnings and the issuance of long-term debt instruments. In February 1996, the Company filed a universal shelf registration statement which allowed for the issuance of up to $350.0 million of debt and equity securities, including Medium-Term Notes. This registration was amended in May 1997 to allow the issuance of an additional $39.5 million of debt and equity securities. Of the total amended amount of $389.5 million, $26.7 million remains to be issued. Additionally, in October 1997, the Company filed a universal shelf registration statement allowing the issuance of up to $350.0 million of debt and equity securities. All remaining availability under the February 1996 shelf registration statement, if any, will be incorporated into the October 1997 shelf registration statement at the time of effectiveness. Shareholders' equity decreased $41.6 million since December 31, 1996 primarily due to dividends declared to common shareholders and purchases of treasury stock, partially offset by profitable operating results and exercises of employee stock options. Shareholders' equity increased $47.4 million since September 30, 1996 primarily due to profitable operating results and exercises of employee stock options, partially offset by dividends declared to common shareholders and purchases of treasury shares. 14 PART II -- OTHER INFORMATION ---------------------------- ITEM 1. Legal Proceedings - -------------------------- The Greenwald Litigation ------------------------ On October 13, 1995, Michelle Greenwald filed a complaint against the Company in Superior Court of the State of California, County of Los Angeles. The plaintiff was a former Mattel employee who was terminated by the Company in July 1995. The complaint sought $50 million in general and special damages, plus punitive damages, for (i) breach of oral, written and implied contract, (ii) wrongful termination in violation of public policy, and (iii) violation of California Labor Code Section 970. The plaintiff claimed that her termination resulted from complaints made by her to management concerning (i) general allegations that Mattel did not account properly for sales and certain costs associated with sales; and (ii) more specific allegations that Mattel failed to account properly for certain royalty obligations to The Walt Disney Company. On December 5, 1996, the Company's motion for summary adjudication of the plaintiff's public policy claim was granted. On February 10, 1997, Ms. Greenwald filed a writ seeking appeal of the court's order granting the motion. On February 10, 1997, the writ was denied. On October 23, 1997, the Company's motion for summary judgment of the plaintiff's remaining claims was granted. Toys "R" Us and Related Matters ------------------------------- On September 25, 1997, an administrative law judge of the Federal Trade Commission issued his initial decision in the matter In re Toys ---------- "R" Us, Inc. (FTC Docket No. 9278). The administrative law judge made ------------ findings of fact and conclusions of law that the toy retailer Toys "R" Us, Inc. had violated federal antitrust laws and entered into vertical and horizontal arrangements with various toy manufacturers, including the Company, whereby the manufacturers would refuse to do business with warehouse clubs, or would do business with warehouse clubs only on terms acceptable to Toys "R" Us. Toys "R" Us has announced its intention to appeal the decision to the full Commission. Following announcement of the administrative law judge's decision, the Company and certain other toy manufacturers have been named as defendants in a number of antitrust actions in various states. On October 2, 1997, the Attorney General of the State of New York filed in the United States District Court, Eastern District of New York, an action against Toys "R" Us and certain toy manufacturers, including the Company, seeking treble damages, expenses and attorneys' fees, on behalf of all persons in the State of New York who purchased toy products from retailers from 1989 to the present. The complaint alleges that Toys "R" Us orchestrated an illegal conspiracy with various toy manufacturers, including the Company, to cut off supplies of popular toys to warehouse clubs and low margin retailers that compete with Toys "R" Us. 15 Following the filing of the New York action, a series of private treble damage class actions under the federal antitrust laws have been filed in various federal district courts. The Company is aware of six actions in the United States District Court, District of New Jersey, one action in the United States District Court, Northern District of California, one action in the United States District Court, Northern District of Illinois, three actions in the United States District Court, Eastern District of New York and two actions in the United States District Court, Eastern District of Pennsylvania. While the allegations and relief sought are substantially the same as those in the New York action, the defendants differ from action to action, as does the alleged conspiracy period. Mattel is not currently a named defendant in the actions in the Eastern District of Pennsylvania. The Company is also aware of three class action complaints filed in state court in California naming Toys "R" Us as a defendant and the Company and various other toy manufacturers as nondefendant co- conspirators. These actions have been coordinated in Superior Court of the State of California, County of Alameda, and allege violations of state antitrust laws, seek unspecified damages and are based on substantially similar allegations to those in the FTC administrative proceeding. The Company intends to vigorously defend the litigation in which it is named involving the Toys "R" Us matter. Due to the preliminary nature of the various actions and proceedings against the Company, the ultimate outcome and materiality of these matters cannot presently be determined. 16 ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits -------- 3.0 By-laws of the Company, as amended to date (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on September 26, 1997) 4.0 Certificate of Designations of Series B Preferred Stock dated March 26, 1997 (incorporated by reference to the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 21, 1997) 4.1 Certificate of Designations of Series C Preferred Stock dated March 26, 1997 (incorporated by reference to the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on August 21, 1997) 4.2 Deposit Agreement dated June 24, 1996 among Tyco Toys, Inc., Midlantic Bank, N.A., as Depositary, and all holders from time to time of depositary receipts issued thereunder (incorporated by reference to Exhibit 4.2 to Tyco Toys, Inc.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on June 20, 1996) 4.3 Amendment to Deposit Agreement dated as of March 27, 1997 between the Company as successor to Tyco Toys, Inc. and The First National Bank of Boston (incorporated by reference to Exhibit 4.9 to the Company's Registration Statement on Form S- 3 filed with the Securities and Exchange Commission on September 26, 1997) 4.4 Registration Rights Agreement dated April 15, 1994 among Tyco Toys, Inc., Corporate Partners, L.P., Corporate Offshore Partners. L.P., the State Board of Administration of Florida and Corporate Advisors, L.P. (incorporated by reference to Tyco Toys, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 4.5 Amendment to Registration Rights Agreement dated as of March 27, 1997 among Tyco Toys, Inc., Corporate Partners, L.P., Corporate Offshore Partners, L.P. and the State Board of Administration of Florida (incorporated by reference to Exhibit 4.11 to the Company's Registration Statement on Form S-3 filed with the Securities and Exchange Commission on September 26, 1997) 11.0 Computation of Income per Common and Common Equivalent Share 27.0 Financial Data Schedule (EDGAR filing only) 17 (b) Reports on Form 8-K ------------------- Mattel, Inc. filed the following Current Reports on Form 8-K during the quarterly period ended September 30, 1997: Financial Date of Report Items Reported Statements Filed --------------- -------------- ---------------- July 25, 1997 5, 7 None July 30, 1997 5, 7 Yes SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTEL, INC. ------------ (Registrant) Date: As of November 7, 1997 By: /s/ Kevin M. Farr ---------------------- ----------------------- Kevin M. Farr Senior Vice President and Controller 18 EX-11.0 2 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE MATTEL, INC. AND SUBSIDIARIES EXHIBIT 11.0 (Page 1 of 2) COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE ------------------------------------------------------------ (In thousands, except per share amounts)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, PRIMARY 1997 1996 1997 1996 - ------- --------- --------- --------- --------- Income before extraordinary item $ 223,655 $ 181,375 $ 94,665 $ 265,279 Deduct: Dividends on convertible preferred stock (2,838) (2,838) (8,515) (4,554) --------- --------- --------- --------- Income before extraordinary item for computation of income per share 220,817 178,537 86,150 260,725 Extraordinary item - loss on early retirement of debt (4,610) - (4,610) - --------- --------- --------- --------- Net income applicable to common shares $ 216,207 $ 178,537 $ 81,540 $ 260,725 ========= ========= ========= ========= Applicable Shares for Computation of Income per Share: - ------------------------------------------------------ Weighted average common shares outstanding 290,650 289,182 290,278 291,351 Weighted average common equivalent shares arising from: Dilutive stock options 4,391 3,203 3,528 3,488 Fisher-Price warrants 647 983 631 985 Nonvested stock - 593 - 593 --------- --------- --------- --------- Weighted average number of common and common equivalent shares 295,688 293,961 294,437 296,417 ========= ========= ========= ========= Income Per Common Share: - ------------------------ Income before extraordinary item $ 0.75 $ 0.61 $ 0.30 $ 0.88 Extraordinary item - loss on early retirement of debt (0.02) - (0.02) - --------- --------- --------- --------- Net income per common share $ 0.73 $ 0.61 $ 0.28 $ 0.88 ========= ========= ========= =========
MATTEL, INC. AND SUBSIDIARIES EXHIBIT 11.0 (Page 2 of 2) COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE ------------------------------------------------------------ (In thousands, except per share amounts)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ---------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, FULLY DILUTED 1997 (a) 1996 (a) 1997 (b) 1996 (a) - ------------- --------- --------- --------- --------- Income before extraordinary item $ 223,655 $ 181,375 $ 94,665 $ 265,279 Add: Interest savings, net of tax, applicable to: Assumed conversion of 7% convertible subordinated notes 115 182 479 546 --------- --------- --------- --------- Income before extraordinary item for computation of income per share 223,770 181,557 95,144 265,825 Extraordinary item - loss on early retirement of debt (4,610) - (4,610) - --------- --------- --------- --------- Net income applicable to common shares $ 219,160 $ 181,557 $ 90,534 $ 265,825 ========= ========= ========= ========= Applicable Shares for Computation of Income per Share: - ------------------------------------------------------ Weighted average common shares outstanding 290,650 289,182 290,278 291,351 Weighted average common equivalent shares arising from: Dilutive stock options 4,390 3,210 4,279 3,504 Assumed conversion of convertible preferred stock 10,493 10,963 10,493 5,491 Fisher-Price warrants 647 983 643 985 Assumed conversion of 7% convertible subordinated notes 689 783 788 783 Nonvested stock - 627 - 708 --------- --------- --------- --------- Weighted average number of common and common equivalent shares 306,869 305,748 306,481 302,822 ========= ========= ========= ========= Income Per Common Share: - ------------------------ Income before extraordinary item $ 0.73 $ 0.59 $ 0.31 $ 0.88 Extraordinary item - loss on early retirement of debt (0.02) - (0.01) - --------- --------- --------- --------- Net income per common share $ 0.71 $ 0.59 $ 0.30 $ 0.88 ========= ========= ========= ========= (a) - This calculation is submitted in accordance with Regulation S-K, Item 601 (b)(11), although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. (b) - This calculation is submitted in accordance with Regulation S-K, Item 601 (b)(11), although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result.
EX-27.0 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MATTEL INC.'S BALANCE SHEETS AND INCOME STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 68,171 0 1,873,786 26,792 552,661 2,651,348 947,696 338,048 4,074,618 1,569,906 616,287 297,626 0 827 1,465,806 4,074,618 3,221,523 3,221,523 1,639,598 1,639,598 1,361,063 0 62,782 158,080 63,415 94,665 0 4,610 0 90,055 0.28 0.30 Notes - Fully diluted earnings per share for the nine months ended Sept. 30, 1997 has been submitted in accordance with Regulation S-K, Item 601 (b)(11), although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result.
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