Mattel Inc. reported its second quarter 2018 financial results. The company also announced a reduction of more than 2,200 positions, representing 22 percent of global non-manufacturing workforce, as well as planned sale of manufacturing sites in Mexico.

For the second quarter of this year, net sales were down 14 percent as reported and in constant currency, versus the prior year’s second quarter. Gross sales were down 11 percent as reported and in constant currency, reflecting a 10 percent impact from the Toys “R” Us liquidation. Reported operating loss was $189.2 million, and adjusted operating loss was $141.3 million. Reported loss per share was $0.70, and adjusted loss per share was $0.56.

Financial Overview
For the second quarter, net sales in the North America segment decreased by 14 percent as reported, and decreased by 15 percent in constant currency, versus the prior year’s second quarter. Gross sales in the North America segment decreased by 13 percent as reported and in constant currency, primarily driven by the impact of the Toys “R” Us liquidation, lower sales of CARS, Fisher-Price, and Thomas & Friends, and Toy Box owned brands, partially offset by initial sales of Jurassic World and higher sales of Hot Wheels.

In the international segment, net sales decreased by 10 percent as reported and in constant currency versus the prior year’s second quarter. Gross sales in the international segment decreased by 5 percent as reported and in constant currency, primarily driven by lower sales of CARS, Fisher-Price, and Thomas & Friends, and the impact of the Toys “R” Us liquidation, partially offset by initial sales of Jurassic World and higher sales of Barbie and Hot Wheels. By region, the decrease in gross sales as reported was driven by lower sales in global emerging markets, primarily in China.

Net sales for the American Girl segment decreased by 32 percent as reported and in constant currency, versus the prior year’s second quarter. Gross sales for the American Girl segment decreased by 34 percent as reported and in constant currency due to lower sales across channels.

Reported gross margin in the second quarter decreased from 41.0 percent last year to 30.1 percent in 2018, primarily driven by higher materials costs, higher obsolescence, and unfavorable product mix. Reported other selling and administrative expenses increased by $6.8 million, primarily driven by severance and restructuring charges, partially offset by structural simplification program savings. Adjusted other selling and administrative expenses for the quarter decreased by $29.7 million, primarily driven by structural simplification program savings.

For the six months ended June 30, 2018, net cash flows used for operating activities were approximately $557 million, an increase of $8 million as compared to the prior period, primarily driven by a higher net loss, excluding the impact of non-cash charges, partially offset by lower working capital usage. Cash flows used for investing activities were approximately $85 million, a decrease of approximately $21 million as compared to the prior period, primarily driven by lower capital spending, partially offset by changes in foreign currency forward exchange contracts. Cash flows used for financing activities and other were approximately $209 million, as compared to cash flows provided by financing activities of approximately $61 million in the prior period, primarily driven by lower net short-term borrowings and net repayments of long-term borrowings of $274.5 million, partially offset by $260.4 million of dividend payments during the six months ended June 30, 2017.

Sales by Brand

Power Brands
For the second quarter, worldwide gross sales for Mattel Power Brands were $619.4 million, down 2% as reported and in constant currency, versus the prior year’s second quarter. Worldwide gross sales for the Barbie brand were up 12% as reported and in constant currency, primarily driven by positive POS momentum. Worldwide gross sales for the Hot Wheels brand were up 21% as reported, and up 22% in constant currency, primarily driven by higher sales of die cast cars. Worldwide gross sales for the Fisher-Price and Thomas & Friends brands were down 14% as reported, and down 15% in constant currency, primarily driven by lower sales of Fisher-Price infant and Thomas & Friends products. Worldwide gross sales for the American Girl brand were down 33% as reported and in constant currency, due to lower sales across channels.

Toy Box
For the second quarter, worldwide gross sales for Mattel Toy Box brands, which includes Owned Brands and Partner Brands, were $334.7 million, down 23% as reported and in constant currency, versus the prior year’s second quarter. Worldwide gross sales for Owned Brands were down 10% as reported and in constant currency, primarily driven by lower sales of Monster High® and MEGA™, partially offset by sales of Enchantimals™. Worldwide gross sales for Partner Brands were down 32% as reported and in constant currency, primarily driven by lower sales of CARS, partially offset by initial sales of Jurassic World™.

Non-GAAP Financial Measures
To supplement the financial results presented in accordance with generally accepted accounting principles in the U.S., Mattel presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measures that Mattel uses in this earnings release include gross sales, adjusted net sales, adjusted gross profit, adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income (loss), adjusted earnings (loss) per share, earnings before interest expense, taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, and constant currency. Mattel uses these metrics to analyze its continuing operations and to monitor, assess and identify meaningful trends in its operating and financial performance, and each is discussed in detail below.

Prior to its bankruptcy and liquidation in the first quarter of 2018, Toys “R” Us was Mattel’s second largest customer. As a result of the Toys “R” Us bankruptcy and liquidation, Mattel reversed net sales for the estimated uncollectible portion of its outstanding receivables originating from first quarter of 2018 sales and separately recorded bad debt expense for the estimated uncollectible portion of its outstanding receivables prior to the first quarter of 2018, net of subsequent recoveries. As such, for the first quarter of 2018, gross profit, as reported, operating income (loss), as reported, earnings (loss) per share, as reported, and EBITDA include the cost of sales for the inventory sold to Toys “R” Us but excludes the corresponding net sales.

Other selling and administrative expenses, as reported, operating income (loss), as reported, earnings (loss) per share, as reported, and EBITDA also include bad debt expense, net of recoveries from the Toys “R” Us bankruptcy and liquidation. Mattel believes the presentation of gross profit, as reported, other selling and administrative expense, as reported, operating income (loss), as reported, earnings (loss) per share, as reported, and EBITDA excluding the Toys “R” Us sales reversal and bad debt expense, net is helpful to investors because it improves the comparability of our profit and margin measures, allowing investors to evaluate our performance and compare it to prior and future periods. Adjustments related to the Toys “R” Us bankruptcy and liquidation are reflected in the first quarter of 2018, but are only reflected in subsequent quarters to the extent necessary to revise prior adjustments. These adjustments are intended to improve comparability for investors and do not attempt to show what Mattel’s future net sales or other operating results would be without the loss of Toys “R” Us.