By Paul Ziobro
Mattel Inc.'s chief financial officer is leaving, and the
company is restating some past earnings after completing an
investigation into accounting issues raised in a whistleblower
letter.
The investigation found shortcomings in the toy maker's
accounting and reporting procedures but concluded that the actions
didn't amount to fraud.
Shares of the maker of Barbie dolls and Hot Wheels cars rose
more than 20% in post-market trading as the resolution, coupled
with strong third-quarter earnings, removes a roadblock to the
company's plans to refinance debt due next year. The whistleblower
letter, disclosed in August, abruptly nixed plans to raise debt at
the last minute.
The investigation found that Mattel understated its net loss by
$109 million in the third quarter of 2017 due to an error
calculating its tax valuation allowance, and then understated
fourth-quarter results that year by a similar amount. The error
wasn't reported to the CEO at the time or the audit committee.
The letter also questioned the independence of the lead auditor,
PricewaterhouseCoopers LLP. The investigation found that the lead
partner at the accounting firm violated some independence rules by
recommending candidates for Mattel's senior finance positions.
Mattel said that PwC replaced its lead partner and other members of
its audit team that deals with the toy maker but will continue as
auditor.
Mattel has launched a search for a new CFO to succeed Joe
Euteneuer, who joined the company in late 2017. He will leave the
company after a six-month transition period.
A Mattel spokesperson said Mr. Euteneuer was unavailable for
comment.
PwC said in a statement that both the accounting firm and Mattel
had concluded PwC is "objective and impartial." The firm "takes
independence very seriously and has robust policies and procedures
in place to identify and address potential threats to
independence," the statement said.
Mattel otherwise reported a sharp jump in profit, as ongoing
cost cuts benefited the bottom line while overall sales rose for
the second straight quarter.
In an interview, Mattel Chief Executive Ynon Kreiz said tariffs
had minimal impact on the El Segundo, Calif.-based company in the
latest quarter.
Mr. Kreiz said more retailers agreed to buy Mattel's products in
China rather than ask the toy maker to import products to the U.S.
and store them in warehouses. "It says a lot about the retailers'
confidence and the inventory they're committing to," Mr. Kreiz
said.
Rival Hasbro Inc. dealt with the opposite trend. The maker of
Play-Doh and Nerf blasters said that the threat of tariffs widely
disrupted ordering patterns in the third quarter.
Retailers canceled direct import orders, where the sale is made
in China, and instead required Hasbro to import the products
themselves, adding to shipping and warehousing costs. The switch
caused Hasbro to miss out on some orders that they couldn't fulfill
in time, which hurt the company's profit and sales in the
period.
Hasbro executives said the delay was caused by uncertainty about
when a tariff on toys from China would go into effect. Currently, a
10% tariff is set to take effect on Dec. 15.
Mr. Kreiz said that tariffs wouldn't be an issue for Mattel this
year. "We saw a de minimis impact on our results, and we don't
expect to see any impact from tariffs this year," he said.
Mattel, which is undergoing a revamp under Mr. Kreiz that
includes cutting costs and putting out more movies and television
shows based on Mattel brands, posted sharply higher profit in the
third quarter. The company benefited from ongoing cost cuts, while
sales rose for the second straight quarter.
Mr. Kreiz said the toy maker is confident as the company enters
the all-important holiday season, even as it faces a truncated
shopping season due to Thanksgiving falling later.
"We need to work harder in fewer days," Mr. Kreiz said. "We know
the challenges, we know the opportunities, and our team is focused
on executing and delivering."
Mattel posted earnings of $70.6 million, or 20 cents a share, in
the third quarter, compared with $6.3 million, or 2 cents a share,
in the same period a year ago. Analysts polled by FactSet were
expecting per-share earnings of 16 cents.
Sales rose 3% to $1.48 billion, primarily from a 10% increase in
the international segment as sales in the U.S. stalled. Analysts
expected revenue of $1.43 billion.
The fastest-growing brands include some of Mattel's largest.
Barbie sales rose 10%, while Hot Wheels sales rose 25%.
Fisher-Price sales fell 3%, while American Girl, a high-end doll
line and retail chain, posted a 15% sales decline.
Gross margin widened to 46.3% from 42.6% last year.
Jean Eaglesham contributed to this article.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
October 29, 2019 23:10 ET (03:10 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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