Mattel, Inc. (NASDAQ: MAT) (“Mattel” or the “Company”) announced
today that the Audit Committee of its Board of Directors has
completed an independent investigation into the allegations
contained in a whistleblower letter disclosed on August 8, 2019
(the “Letter”).
Overview
The Letter, which had been sent to Mattel’s outside auditors,
questioned whether there were accounting errors in historical
periods and whether Mattel’s outside auditor was independent.
The investigation determined that income tax expense was
understated by $109 million in the third quarter of 2017, and
overstated by $109 million in the fourth quarter of 2017, with no
impact for the full year. The errors were non-cash, did not affect
operating income or EBITDA, and had no impact on Mattel’s full year
financial results for 2017 or subsequent periods. The investigation
also determined that Mattel has certain material weaknesses in its
internal control over financial reporting.
The Audit Committee concluded that the objectivity and
impartiality of Mattel’s outside auditor has not been impaired, and
that Mattel’s outside auditor can continue as its independent
auditor. Mattel’s outside auditor agrees with that conclusion.
Mattel will undertake a series of remedial actions, including
the amendment of the Company’s 2018 Form 10-K to restate the last
two quarters of 2017, and certain related information, and the
strengthening of its internal control over financial reporting.
Background on the Letter and the Internal
Investigation
On August 2, 2019, Mattel’s outside auditor received the Letter.
On August 8, 2019, Mattel publicly announced that it had received
the Letter and would investigate its allegations. Thereafter, the
Board directed the Audit Committee, which consists of independent
directors, to investigate the Letter. Over the past two months, the
Audit Committee, together with independent counsel from O’Melveny
& Myers LLP and forensic accountants from FTI Consulting,
thoroughly investigated the Letter’s allegations. Mattel provided
all requested documents and made all requested witnesses available
to the Audit Committee. Mattel’s outside auditor conducted its own
investigation and informed the Audit Committee that it had shared
all relevant information with the Audit Committee.
Key Findings
The Audit Committee’s investigation found errors in
publicly-filed Mattel financial statements for the last two
quarters of 2017, failures to properly consider and disclose such
errors to the then-Chief Executive Officer (“CEO”), Margaret
Georgiadis, and the Audit Committee once they became known, and
violations of auditor independence rules. Other allegations in the
Letter were determined to be unfounded or immaterial.
Mattel’s 10-Q for the Quarter Ended
September 30, 2017 (“Q3 2017 10-Q”) and 10-K for the Year Ended
December 31, 2017 (“2017 10-K”) Contain Errors
- Mattel’s previously reported net loss of $603.3 million for the
third quarter ended September 30, 2017 was understated by $109
million due to an error in calculating its tax valuation allowance.
The correct reported net loss for the quarter ended September 30,
2017 should have been a net loss of $712.3 million.
- A change in accounting for an intangible asset in the fourth
quarter of 2017 resulted in an effective correction of the error
for the 2017 annual results. However, the tax expense remained
uncorrected in the Q3 2017 10-Q and was therefore overstated in the
quarter ended December 31, 2017. As a result, Mattel’s previously
reported loss of $281.3 million for the quarter ended December 31,
2017 should have been reported as a net loss of $172.3
million.
- These errors had no impact on Mattel’s gross profit, operating
income, EPS, adjusted EPS, EBITDA, Adjusted EBITDA, or cash flows
for the year ended December 31, 2017.
Failure to Properly Assess and Disclose
the Known Errors to the then-CEO and Audit Committee
- Mattel’s management identified the third quarter 2017
accounting error associated with its tax valuation allowance during
its year-end accounting closing procedures for the quarter ended
December 31, 2017. The error was not properly assessed nor were
findings and conclusions documented. The error was not reported to
Mattel’s then-CEO, Margaret Georgiadis, and the Audit Committee,
and was also not disclosed in the 2017 10-K. The investigation
revealed that a confluence of one-time events, management’s
reliance on the accounting advice sought and received on the error
from the lead audit engagement partner of Mattel’s outside auditor,
and lapses in judgment by management contributed to these failures.
The investigation did not find that management engaged in
fraud.
Material Weaknesses
- In light of the above findings of the investigation, Mattel
determined that there were material weaknesses in its internal
control over financial reporting at the time of the preparation of
its financial statements for the quarters ending on September 30,
2017 and December 31, 2017.
Additional Findings
- The Letter also contains allegations regarding the independence
of the lead audit partner of Mattel’s outside auditor. The Audit
Committee investigated these allegations, many of which were
unfounded. However, the Audit Committee’s investigation and a
separate investigation by Mattel’s outside auditor concluded that
certain actions in specific HR-related activities by the lead audit
partner of Mattel’s outside auditor, namely providing
recommendations on candidates for Mattel’s senior finance
positions, was in violation of the SEC’s auditor independence
rules. He also provided feedback on senior finance employees. Both
the Audit Committee and Mattel’s outside auditor separately
concluded after evaluating the nature and severity of these matters
that Mattel’s outside auditor remains capable of exercising
objective and impartial judgement on all issues with respect to
pending and relevant past audits. The Audit Committee determined
that Mattel’s outside auditor should remain as Mattel’s independent
registered public accounting firm.
Related Company Actions
Mattel has been and is continuing to work on addressing the
issues identified in the Audit Committee’s investigation.
First, Mattel, in consultation with the Audit Committee,
determined that it is appropriate to amend the Company’s 2018
Annual Report on Form 10-K to: (1) restate the Company’s financial
results for the third and fourth quarters of 2017 and certain
related information; and (2) identify material weaknesses in its
internal control over financial reporting for the third and fourth
quarters of 2017. Mattel has discussed the restatements with its
outside auditor and is working diligently to prepare and file the
amended report by November 12, 2019. Investors should no longer
rely upon Mattel’s previously released financial statements and
internal control conclusions for the third and fourth quarters of
2017. Similarly, related press releases, earnings releases, and
investor communications describing Mattel’s financial statements
for these periods should no longer be relied upon.
Second, Mattel’s outside auditor has replaced its lead audit
engagement partner and certain other members of its audit team for
its audit engagement with Mattel. The Audit Committee and Mattel’s
management support this decision.
Third, after Mattel filed its 2017 10-K but before receiving the
Letter, Mattel hired a new Controller and a new Senior Vice
President of Tax, and it outsourced Mattel’s internal audit
function to a third party service provider. Furthermore, Mattel
today announced a CFO transition plan and is conducting a search
for a new CFO, as reflected in a separate press release that can be
found on Mattel’s website www.mattel.com.
Fourth, Mattel is developing a policy and more robust procedures
relating to the assessment, documentation and disclosure of
accounting errors and is reviewing its disclosure committee
controls and procedures. Mattel is also supplementing its policy
and training with respect to auditor independence.
Commenting on the Audit Committee’s investigation, Mattel’s
Chairman and Chief Executive Officer Ynon Kreiz stated, “Mattel
agrees with the Audit Committee’s findings and conclusions. The
Audit Committee has identified issues and control weaknesses that
need to be addressed. To help ensure that the matters identified by
the investigation do not recur, I will work with the Audit
Committee and Board to implement remedial measures, which will
include enhanced accounting and independence policies, internal
controls and employee training. We will ensure these issues are
resolved thoroughly and quickly so that we can continue to execute
on our strategy with the highest level of internal control and
diligence.”
Other Immaterial Revisions
In addition to the restatement of financial statements referred
to above, Mattel has also elected to revise 2019 and prior periods
for certain other immaterial, out-of-period adjustments. These
revisions are unrelated to the Letter or issues investigated by the
Audit Committee.
Forward-Looking Statements
This press release contains a number of forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The use of words such as “anticipates,”
“expects,” “intends,” “plans,” “confident that” and “believes,”
among others, generally identify forward-looking statements. These
forward-looking statements are based on currently available
operating, financial, economic and other information, and are
subject to a number of significant risks and uncertainties.
Forward-looking statements, including statements regarding Mattel’s
intent to restate certain prior financial statements, the estimated
adjustments of the restated financials, the internal investigation
by the Audit Committee and the expected timing of filing the
restated financial reports, involve risks and uncertainties which
may cause actual results to differ materially from those stated
here. A variety of factors, many of which are beyond Mattel’s
control, could cause actual future results to differ materially
from those projected in the forward-looking statements. Specific
factors that might cause such a difference include, but are not
limited to: (i) the risk that additional information may be raised
to the Audit Committee after the completion of the investigation,
(ii) the risk that preparing the restated financial statements will
require Mattel to make additional adjustments, (iii) the time and
effort required to complete the restatements, the impact of
inquiries, if any, by the Securities and Exchange Commission and
any related or additional governmental investigative or enforcement
proceedings, (iv) the impact of litigation or arbitration decisions
or settlement actions, and (v) other risks and uncertainties as may
be described in Mattel’s periodic filings with the Securities and
Exchange Commission, including the “Risk Factors” section of
Mattel’s Annual Report on Form 10-K for the year ended December 31,
2018, and Mattel’s Quarterly Reports on Form 10-Q for quarters
ended March 31, 2019, June 30, 2019 and September 30, 2019, as well
as in Mattel’s other public statements. Mattel does not update
forward-looking statements and expressly disclaims any obligation
to do so, except as required by law.
About Mattel
Mattel is a leading global children’s entertainment company that
specializes in design and production of quality toys and consumer
products. We create innovative products and experiences that
inspire, entertain and develop children through play. We engage
consumers through our portfolio of iconic franchises, including
Barbie®, Hot Wheels®, American Girl®, Fisher-Price®, Thomas &
Friends® and MEGA®, as well as other popular brands that we own or
license in partnership with global entertainment companies. Our
offerings include film and television content, gaming, music and
live events. We operate in 40 locations and sell products in more
than 150 countries in collaboration with the world’s leading retail
and technology companies. Since its founding in 1945, Mattel is
proud to be a trusted partner in exploring the wonder of childhood
and empowering kids to reach their full potential. Visit us online
at www.mattel.com.
MAT-FIN MAT-CORP
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version on businesswire.com: https://www.businesswire.com/news/home/20191029006029/en/
News Media Dena Cook dena.cook@mattel.com 310-252-4247
Securities Analysts David Zbojniewicz
david.zbojniewicz@mattel.com 310-252-2703
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