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Mattel Inc. (NASDAQ:MAT)

Q3 2010 Earnings Call

October 15, 2010 8:30 am ET

Executives

Dianne Douglas - SVP or IR

Bob Eckert - Chairman and CEO

Kevin Farr - CFO

Analysts

Drew Crum - Stifel Nicolaus

Robert Carroll - UBS

Tim Conder - Wells Fargo

Margaret Whitfield - Sterne, Agee

Felicia Hendrix - Barclays Capital

John Taylor - Arcadia Investment

Alvin Concepcion - Citigroup

Sean McGowan - Needham

Tony Gikas - Piper Jaffray

Gerrick Johnson - BMO Capital Markets

Linda Bolton-Weiser - Caris

Ed Woo - Wedbush Securities

Operator

Good day, ladies and gentlemen, and welcome to Mattel's third quarter 2010 earnings conference call. (Operator Instructions) I'd now like to turn the conference over to your host, Ms. Dianne Douglas, Senior Vice President of Investor Relations.

Dianne Douglas

As you know, this morning we reported Mattel's third quarter 2010 financial results. In a few minutes, Bob Eckert, Mattel's Chairman and CEO; and Kevin Farr, Mattel's CFO, will provide comments on the results. And then the call will be opened for your questions.

Certain statements Bob and Kevin make during the call may include forward-looking statements relating to the future performance of our overall business, brands and product lines. These statements are based on currently available operating, financial, economic and competitive information, and they are subject to a number of significant risks and uncertainties which could cause our actual results to differ materially from those projected in the forward-looking statements.

We described some of these uncertainties in the Risk Factors section of our 2009 Annual Report on Form 10-K as well as in our quarterly reports on Form 10-Q and in other filings we make with the SEC from time to time. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

Information required by Regulation G regarding non-GAAP financial measures is available on the Investors & Media section of our corporate website, mattel.com, under the subheading Financial Information and Earnings Releases.

Now, I'd like to turn the call over to Bob Eckert.

Bob Eckert

Thank you, Dianne, and good morning everyone. We continue to be pleased with the performance of the business, while the all important holiday season still lies ahead. We remain on track to deliver solid revenue and profit growth, driven by our portfolio of brands across various countries and regions.

As such, there are still some challenges ahead in relation to the biggest selling season for toys. After scrutinizing what was written about the back-to-school season, the consensus seems to be that sales came, but they came late, with analysts surmising that consumers are still cautious about the economy and therefore purchasing closer to the actual event or need than in previous seasons. As such, retailers remain guarded with inventories and several are betting on a late holiday season this year.

So anticipating the question I'm asked most often during this time of the year, yes, there will be a Christmas and Mattel toys will be under the tree and we'll likely sell more toys than anyone else. That said, I suspect it will play out later than we're accustomed to.

As we move into the all important holiday season, toy industry gurus as well as our retailer customers had named Mattel and Fisher-Price toys to their must-have holiday toy list, including Barbie Video Girl, Monster High Dolls, Sing-A-Ma-Jig, Loopz, Stealth Rides, Dance Star Mickey, iXL, Imaginext BIGFOOT and a variety of toys from the Toy Story 3 line as well as My American Girl and the 2010 Girl of the Year Doll, Lanie.

Speaking of American Girl, beginning the week of October 18, the brand's first ever product-focused national television commercial is scheduled to air and features the new My American Girl line of contemporary dolls, books and accessories as well as American Girl's new interactive online world, innerstaru.com.

In Barbie's world, our I Can Be campaign continues to excel worldwide and our new Barbie entertainment strategy, which is focused on more relevant and contemporary stories and themes, has proven quite successful this year. Our spring release Barbie in A Mermaid Tale resonated with girls, and our fall offering Barbie A Fashion Fairytale is just starting to hit shelves.

Monster High sales are up to a strong start across multiple categories, including toys, apparel, accessories and costumes. Both the Justice and Party City retail chains report strong sell-through of Monster High merchandize, and Party City reports that Monster High costumes are in its top 10 for kids' costumes.

The Monster High hardcover twin chapter book written by New York Times bestseller, Lisi Harrison, is now number five on the New York Times Children's Bestseller list, and that's only after one month of being on the shelves. And on Halloween, Nickelodeon will be airing a special 22-minute episode of Monster High, featuring the music of American Idol contestant, Allison Iraheta. This new princess is having an excellent year, driven by expansion in games and play patterns as well as a full line supporting Disney's next major Princess theatrical release, Tangled which hits theaters this November.

Disney Pixar's Toy Story 3, now the biggest animated film of all time in global box office continues to drive strong sales across figures, vehicles, playsets, role-play dolls and games. Toy Story 3 will release on DVD November 2, and we expect retailers to continue to strongly support the property through that period and well into 2011 as Disney continues to drive the franchise as an evergreen property.

Sales in Hot Wheels have been strong in the basic car, Monster Jam and Color Shifters lines. And this year we are seeing growth for our colors across a broader array of accounts than ever before, including grocery and drug stores. The business overseas is also doing well.

Our overall games business is up, and we are experiencing good momentum on all our core brands like Uno, Apples to Apples, Blokus, Mad Gab and Pictionary. And I'd like to highlight the strong performance of our Kid and Preschool games, led by Whac-a-Mole, Rock 'em Sock 'em Robots and our Thomas the Tank Engine games.

Included in games is Radica, which is experiencing nice growth, driven by strong second-year sales of Mindflex as well as new entries like Puppy Tweets and Loopz, which is off to an incredible start and is shown up on almost every hot toy list in the U.S. so far.

In the world of Fisher-Price, there are some bright spots as Thomas & Friends is performing above expectations globally. Dora the Explorer has rebounded in the U.S. during Nickelodeon's 10th anniversary celebration which kicked off on television and at retail in August.

Additionally, Fisher-Price is running a more focused television ad campaign this fall in the U.S., which we've shifted later back. It's just starting to debut now as we believe consumers will be shopping later than usual for this holiday season.

And as I said last year and still rings true today, I appreciate that many families will have to make choices this year when it comes to buying toys for their children. I'm convinced that Barbie, Hot Wheels, Fisher-Price and American Girl and some of our new introductions like Monster High, Sing-a-ma-jigs and Loopz will provide superior value for parents and great play experiences for the kids.

At this time, I'd like to introduce Mattel's Chief Financial Officer, Kevin Farr, who will take you through a financial review of the quarter.

Kevin Farr

I'll begin my review of the third quarter with the discussion of worldwide gross sales shown on Exhibit 2 of today's press release.

Total worldwide gross sales for the quarter increased 2%, including a 3 percentage point negative impact from changes in foreign exchange rates. Total worldwide gross sales on a year-to-date basis increased 7%, including a 2 percentage point negative impact from changes in foreign exchange rates.

U.S. sales were up 3%, and international sales were up 2%, including a 7 percentage point negative impact from foreign exchange, driven primarily by exchange rate changes in Venezuela.

On a regional basis, sales in Europe were up 3%, including an 8 percentage point negative impact from exchange rates. Sales in Latin America were down 6%, including an 11 percentage point negative impact from foreign exchange driven primarily by exchange rate changes in Venezuela.

Sales in Asia-Pacific were up 13%, including a 3 percentage point positive impact from changes in exchange rates.

I will now review our core categories and brands for the third quarter.

Mattel Girls and Boys Brands: Worldwide sales for Mattel Girls and Boys brands were up 8%, including a 4 percentage point negative impact from changes in exchange rates. Worldwide Barbie sales were up 6%, including a 5 percentage point negative impact from foreign exchange.

Barbie sales in the U.S. were up 16%, and Barbie sales in the international markets were flat, including a 7 percentage point negative impact from foreign exchange. Worldwide sales of other Girls brands were up 7%, including a 4 percentage point negative impact from exchange rates.

Sales in the U.S. were up 12%, while international sales of other Girls brands were up 3%, including a 6 percentage point negative impact from foreign exchange. The worldwide sales increase was driven primarily by higher sales of Disney Princess and the launch of Monster High, partially offset by sales declines in Little Mommy, Polly Pocket and High School Musical.

Worldwide sales in the Wheels category were down 5%, including a 2 percentage point negative impact from changes in currency exchange rates. Worldwide sales reflected sales declines in Tyco R/C.

For core Hot Wheels, worldwide sales were down 3 percentage points, including a 3 percentage point negative impact from foreign exchange. Domestic sales decreased 7%, driven primarily by declines in sales of Track Sets and Playsets.

Sales in international markets increased 1%, including a 5 percentage point negative impact from foreign exchange.

Worldwide sales in our entertainment business, which includes games and puzzles and Radica increased 23%, including a 6 percentage point negative impact from changes in foreign exchange. The overall increase in entertainment business was primarily attributable to sales of toys due to Toy Story 3 and WWE Wrestling.

Fisher-Price Brands, worldwide sales for Fisher-Price brands decreased 5%, including a two percentage point negative impact from changes in currency exchange rates. International sales of Fisher-Price brands decreased 1% including a six percentage point negative impact from foreign exchange. And sales in the U.S. declined 7%. Worldwide core Fisher-Price decreased 10% including a two percentage point negative impact from changes in exchange rates.

U.S. sales of Fisher-Price core declined 13% while international sales were down 5% including a six percentage point negative impact from foreign exchange rates. Worldwide sales for Fisher-Price Friends increased 16% which included a four percentage point negative impact from changes in foreign exchange rates. Sales of Fisher-Price Friends in the U.S. were up 19% while international sales were up 12% including a ten percentage point negative impact from foreign exchange.

The overall increase in Fisher-Price Friends was primarily driven by sales of products supporting Thomas & Friends and the launch of Sing-a-ma-jigs partially offset by sales decline in Sesame Street in certain smaller licensed properties.

American Girl brands, sales of American Girl brands were up 2% primarily, reflecting strong sales of Felicity dolls, Lanie the Girl of the Year doll, and the benefit of two new store openings in Denver and Kansas City.

Now, let's review the P&L which is shown on exhibit one. Our gross margin in this year's third quarter was 51.1% as compared to last year's margin of 51.3%. The decline was primarily due to higher royalties and input costs partially offset by price increases and mix.

Advertising expense was $201.6 million, 11% of net sales flat with third quarter last year. Selling, general and administrative expense decreased by $7.7 million to $377.3 million. As a percentage of net sales, SG&A expenses were 20.6% compared to 21.5% last year. The year and year decrease is primarily driven by lower severance charges and savings related to our global cost leadership initiative, partially offset by a higher employee related cost in asset impairments of $8 million for the house of Barbie.

In SG&A, global cost leadership savings of $8 million were partially offset by a severance charge of $2 million. In the quarter, our global cost leadership program delivered overall net savings of approximately $12 million bringing the cumulative net savings to $194 million.

In addition to the $6 million net savings reflected in SG&A, there were savings of roughly $1 million in cost of goods sold and $5 million in advertising. We are on track to deliver cumulative net savings slightly above the high end of our target range of $180 million to $200 million from this program by the end of 2010.

Operating income during the quarter was $358.6 million compared to operating income of $336.5 million last year. The improvement was driven by higher sales and lower SG&A expenses partially offset product recall impact of $7.6 million and higher advertising. Interest expense was $13.8 million versus $19.3 million in 2009. The decrease in interest expense versus last year is primarily due to lower average rates and lower average borrowers.

As you know on September 28, we issued 250 million senior unsecured notes due 2020 and 250 million senior unsecured notes due in 2040. We'll use these funds for general corporate purposes including paying off $260 million of long term debt maturities over the next year. Interest income was $1.8 million versus $1.5 million last year. The higher interest income was due to higher average invested cash balances during the quarter partially offset by lower average investment rates.

Other non-operating income expense was zero versus an expense of $14.1 million in 2009. This quarter's income tax provision was $63.3 million compared to prior year's expense of $74.8 million. This quarter's income tax provision included net discrete tax benefits of $16.8 million or $0.05 per share. We currently estimate the 2010 full year effective tax rate to be 23% to 24% excluding discrete items.

Overall, we reported net income of $283.3 million or $0.77 per share versus last year's net income of $229.8 million or $0.63 per share.

Now, turning to the cash flow and balance sheet, year-to-date cash flow used for operations was $428 million as compared to $319 million for the first three quarter of 2009. The higher use was primarily driven by the decision not to factor domestic receivables and higher working capital requirements partially offset by higher net income.

Our cash on hand at the end of the quarter was $961 million, up from $324 million in the prior year. The higher cash balance at the end of third quarter of 2010 was primarily due to a higher beginning cash balance of $1.117 billion this year versus $618 million last year and higher long-term borrowings partially offset by lower short-term borrowings and the decision not to factor receivables.

During the quarter, the company repurchased approximately 2 million shares of its common stock at an average price of $21.49 per share, a total cost of approximately $42 million.

Receivables were $1.55 billion or 76 days of sales outstanding, three days higher than last year. Factoring of domestic receivables decreased from $126 million in 2009 to $0 in 2010. Prior to factoring, days sales outstanding decreased four days.

During the first nine months of 2010, we made the decision not to factor domestic receivables due to our current cash position and the availability of lower cost funding alternatives. At this point, we do not expect to factor domestic receivables in the fourth quarter.

Inventories at $741 million were up $135 million or 22% versus 2009. Our third quarter inventories were more in line with levels experienced in 2007 and 2008 prior to the global economic decline. Our total balance sheet debt increased by $296 million from the prior year, reflecting a recent debt issuance of $500 million, partially offset by payment of $50 million of the maturing medium-term debt, and $154 million reduction of short-term borrowings. Our debt-to-total-capital ratio ended the quarter at 29.8% as compared to 27.6% at the end of last year's third quarter.

Capital expenditures during the quarter were $37.6 million, up from last year's third quarter of $28.6 million.

So to summarize, as Bob mentioned, we remain on track to have a good year, but there is a lot of work to be done between now and year-end to deliver on our priorities; continued core brand momentum, maximize the opportunities surrounding our new entertainment properties, maintain cost and expense controls, and deliver another strong year of profits and cash flow.

That concludes my review of the financial results. Now we'd like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Drew Crum of Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Bob, I want to start with some of the moves that retailers have made, at least announced during the third quarter to add square footage. Did that have any impact on your third quarter performance, or is that something you're anticipating more for the fourth quarter?

Bob Eckert

I think it's probably a little bit more in the fourth quarter. A lot of these pop-up stores haven't yet opened, and the shipments are just starting to flow into the retailers as we speak.

Drew Crum - Stifel Nicolaus

And could you comment on your inventory position entering the fourth quarter, both domestic and international?

Bob Eckert

Yes, I think Drew let me take this chance to kind of put both the sales and the inventories in perspective. Our shipments in the retailers here in the States were a bit soft late in the quarter. That wasn't the case in international markets. And from a supply-side standpoint, we're still struggling a bit with a few lines, mostly in Fisher-Price. But overall, our inventories have returned to normal levels if you go back over the past couple of years.

We do continue to see good performance in POS data. The NPD reports indicate that the toy industry is holding up well and we're continuing to gain share. I also think, as I mentioned in my remarks, that we'll have our share of the bestselling toys this year, based on the various holiday toy lists. But if you look at our inventory levels at retail in the U.S., they've now fallen below year-ago levels, despite last year been a tight year for us all and the fact that we have some new growing brands in our portfolio like WWE, Toy Story and Thomas.

So how the holiday season is going to play out is still up in the air. We do know that some key retailers are betting on late Christmas, based in part on their experience during back-to-school. We also know that we are in good shape with advertising and shelf space and merchandising commitments. So my own belief is, the inventories will move, Christmas will come, consumers will show up and buy toys, and we'll gain share both here and abroad.

Drew Crum - Stifel Nicolaus

And just a follow on to the inventory position, and specific to Barbie, could you assess your inventory position with Bratz now returning to the category and starting to pick up some shelf space?

Bob Eckert

I don't want to comment on competitors' positions, but we continue to see continued good momentum on Barbie; the brand's rejuvenation is spreading around the globe. We've had good success in the core areas of aspiration with I Can Be, or Fashion, with the new Fashionistas dolls or the collector dolls like Twilight and the black dresses.

The doll category is growing. We're gaining share in both Barbie and Disney Princesses, which continues to perform superbly. And you'll recall, the Tangled movie launch is later this fall. So overall, the doll category is growing and we're continuing to gain share.

Drew Crum - Stifel Nicolaus

Two last quick ones from me. Kevin, what was the impact on earnings from FX in the quarter. And can you give us any sense as to the timing on the debt reify?

Kevin Farr

FX for the quarter was at 3% negative impact on worldwide gross sales and $0.01 unfavorable impact on EPS for the quarter. And we did basically issue $500 million of debt in September. We'll be repaying down debt in 2011, in June of $240 million and in October $10 million in 2011.

Drew Crum - Stifel Nicolaus

So those are 2011 events?

Kevin Farr

That's correct.

Operator

Our next question comes from Robert Carroll of UBS.

Robert Carroll - UBS

On the inventory, is there any way you could break out how much of the increase is due to higher material costs versus higher actual levels?

Kevin Farr

We really don't provide that level of detail. There is a bit related to higher costs, but most of this is building in anticipation of the fourth quarter.

Robert Carroll - UBS

And then two, I guess some are related questions; one, would you be able to just break out the gross margin impact from shipping costs, royalties? I know you guys normally do it in the Q, but if you add any color on that now would be great.

And then on the theme, being, along with shipping expenses were there any delays in moving product that might have moved some shipments into Q4 that would have normally come in Q3 if the shipping environment was not so tight?

Bob Eckert

Let me start with the second one, Rob, and then I'll have Kevin do the first one. That was not a big deal in the quarter. We certainly experienced, as we commented on the second quarter call some supply chain disruptions and shipping delays earlier in the year, but we've overcome most of that, not quite all of it. We're still a little slow as I mentioned on some Fisher-Price items. But broadly speaking, the supply chain is flowing pretty well right now.

Kevin Farr

And as I indicated in the script, third quarter gross margin was relatively flat at 51.1% compared to last year's third quarter gross margin of 51.3%. The 20 basis point decline in gross margin was primarily due to higher input costs and royalties, partially offset by price increases and favorable mix.

With regard to higher input costs, part of that related to higher shipping costs. And we expected higher royalties due to the increased sales entertainment properties, but we don't go to the next level of detail.

Operator

Our next question comes from Tim Conder of Wells Fargo.

Tim Conder - Wells Fargo

Just wanted to follow on one of those questions there. Bob, on the supply chain and then the potential impact in the quarter on Fisher-Price, how much of the decline in Fisher-Price, or just any color you can give us on that was related to the supply chain issue that you're alluding to versus just some issues in the core Fisher-Price category?

Bob Eckert

I don't have a quantification Tim, of the answer. Supply chain is a little tight on Fisher-Price, but qualitatively I'd tell you the majority of the sales decline in Fisher-Price was not related to supply chain issues. As you know, our core Fisher-Price POS has been a bit soft, really dating back to last year's holiday season.

And so we have retooled the price value architecture. This fall's key driver products, they're now hitting shelves. And recognizing what both we and retailers think will be a late Christmas, we delayed the timing of our marketing programs on Fisher-Price. For example, last year in September we ran 17 product ads on Fisher-Price and this September we ran five. So the marketing support has now kicked in. I have seen ads on TV for Fisher-Price in the last couple of days.

The retail sales are a bit more encouraging in recent weeks, but it's still very early, and I would describe it as the jury's still out till we read the holidays on Fisher-Price.

Tim Conder - Wells Fargo

Would the decline in Fisher-Price that you noted in your revenue breakdown, do you anticipate that being more of a timing issue given just what you laid out here, and given that you've retooled for this Christmas holiday season for the lower price points? So was that the combination of those two or is there something beyond that that you're worried about, that you should say, 'Hey, we may have to look at some additional issues once we get through fourth quarter.'

Bob Eckert

No Tim, I don't think there are additional issues that we are worried about today. That said, Fisher-Price products tend to be pretty seasonal. There are some of the higher-priced items in the fourth quarter. Those key drivers, as we've talked about for the past year make up a big chunk of the incremental holiday volume. And that movement is still in front of us.

So while we are not orderly anxious right now, we have to see how this plays out. We have retooled the line; we have changed the marketing spend and we'll see what happens when it happens. I can't really predict what we might learn from the holidays yet.

Tim Conder - Wells Fargo

Should we anticipate for the full year much of a change in your total ad spend as a percent of sales? I think you guys have previously commented on prior calls that this is to remain in that 11% to 12%, 13% area but probably towards the lower end on an annual basis. Is that still fair?

Bob Eckert

Yes.

Kevin Farr

Yes.

Tim Conder - Wells Fargo

Another question here is looking forward good gross margin performance here in the quarter despite the disappointment on the sales side I think from versus street expectations. But how do you see that? Do you think the combinations that you've seen in this quarter impacting gross margin, will some of the negative start to become more apparent going forward? Or should we expect a little bit of a good balancing act here on an annual basis?

Kevin Farr

I think we've made good progress in rebuilding our gross margin in 2009 and year-to-date through the first nine months of 2010, delivered gross margins consistent with our long-term gross margin goal of 50%. As we said, our overall basket of product cost for 2010 are consistent with the cost assumption used to determine our pricing for our 2010 product lines, and we're delivering on our manufacturing efficiency programs and global cost leadership initiatives.

They always say predicting gross margin is very difficult due to the complexity of all the moving pieces, including mix, product cost. foreign exchange and royalties. Well, we don't give guidance. It's our goal to maintain and sustain the progress we've made in rebuilding gross margins, continue to deliver topline growth and progress the cost cutting initiatives or to achieve operating margins consistent with our long-term annual goal of 15% to 20%.

Tim Conder - Wells Fargo

You've had some visibility into meetings with large retailers looking into next year. How are you thinking about pricing now that you've had those meetings and that impact looking into the next year? Should we anticipate some pricing that you're all okay with?

Bob Eckert

Well, I think the answer to that, Tim, is yes. We believe costs are going up whether you look at component cost, raw material cost, labor cost, shipping cost. And as we're beginning to have those discussions about next year's line with retailers, we haven't finalized the pricing plans, but I am anticipating that the price of toys will be higher next year than it is this year.

Operator

Our next question comes from Margaret Whitfield of Sterne, Agee.

Margaret Whitfield - Sterne, Agee

Bob, I noticed some out-of-stock, Monster High. Toy Story 3 seems limited. Tangled is just coming in. What are you expecting for Q4? Do you think you can match the demand that's out there? The retail inventory situation below last year despite new lines, is this widespread or consigned to one or two retailers?

Bob Eckert

Let me start with the back-end of the question, Margaret. It's reasonably widespread across the major retailers. If we look at our overall retail inventory position, as we measure it based on what we ship into retailers and into the POS data that we get from them, our inventories are now down low-to-mid single digit versus a year ago. And last year's inventories at retail were quite low compared to normal years.

If you exclude some of the new properties that we have like Toy Story and WWE, the retail inventories right now are down double digits below what they were last year. And again, last year was pretty tight.

I wouldn't isolate it to one or two retailers. I think several of the major retailers are betting out on late Christmas this year. We've aligned with them in terms of our support and our programs. And I think that's how it's going to play out.

The first part of your question, we're in the position that we're in a lot at this time of year where we do have some SKUs and some products where we're just not going to be able to fulfill demand. Monster High is a good example. It's gotten off to a terrific start. Justice has done well with it. Party City has done well with it. The toy retailers have done well with it. And it's unlikely that we're going to be able to keep up with demand for Monster High this year.

There is always that handful of brands on the one side of the normal distribution curve where we don't have enough of them, and we don't talk much about the other end of the normal distribution curve where we've made too many of something. But overall, we tend to do well in the middle of the product line.

Margaret Whitfield - Sterne, Agee

And for Kevin, could you comment on legal cost?

Kevin Farr

I think for the quarter, we incurred incremental legal fees of approximately $11 million primarily related to the MGA trial set for January of 2011. These incremental legal fees were partially upset by year-over-year favorable changes in recall-related settlement charges of about $10 million. Now, that relates to about $5 million charge in Q3 of 2009 for higher recall-related legal settlement charges and a $5 million legal insurance cost recovery in the third quarter of 2010.

Operator

Our next question comes from Felicia Hendrix of Barclays Capital.

Felicia Hendrix - Barclays Capital

Kevin, you mentioned at the end of your prepared remarks that you repurchased 2 million shares. It wasn't in the release. So I am just wondering is that just done to offset stock option expense dilution or was that an incremental buyback?

Kevin Farr

That was an incremental buyback related to our capital investment framework. Maybe, I could talk a little bit about our capital deployment here. First, I'd like to help you with yearend cash. We started the year with about $1.1 billion of cash on our balance sheet. As you know, in late September, we issued about $500 million of senior unsecured notes, giving the attractiveness to the debt markets and knowing that we intend to pay down $260 million of long-term debt that matures over the next year, which as previously stated, is in June of '011 and October of '011.

Additionally, at this point, we do not expect to factor domestic receivables in the fourth quarter. In past years, we have typically factored about $300 million of domestic receivables each fourth quarter. The net impact of the recent debt issuance and our decision not to factor receivables in 2010 should result in a favorable impact to our yearend 2010 cash balances of approximately $200 million. And again, we intend to pay down $260 million of long-term debt that matures over the next year.

Moving on to capital deployment for 2010, we have continued to execute based upon our capital investment framework. We can use our excess cash to reinvest in the business, make strategic acquisitions or return funds to our shareholders in the form of dividends and share repurchases.

Consistent with this framework, in the first nine months of 2010, we repurchased 7 million shares of our total stock at a total cost of $153 million, and that included 2 million shares in Q3 for $43 million. As most of you probably know, our Board of Directors will consider the payment of the dividend in November, remain committed to deploying capital, build shareholder value just as we have done for the last 10 years.

Felicia Hendrix - Barclays Capital

On the tax benefits, I was just wondering if you could elaborate on what that was from?

Kevin Farr

Sure. In relation to the foreign tax credit carryovers that we have, we have approximately $209 million of foreign tax credit carryforwards as of December 31, 2009. Previously, we have not recognized the full benefit of these foreign tax credits carryforwards for financial purposes, since it was not likely that we would utilize them in the carryforward period on our U.S. tax returns.

In August of 2010, the U.S. enacted legislation that had the impact of providing Mattel with greater capacity in future years to utilize excess foreign tax credit carryovers from prior years. In the third quarter of 2010, Mattel formalized a plan to repatriate earnings from certain foreign subsidiaries in order to be able to fully utilize excess foreign tax credits. As a result, Mattel recognized net discreet tax benefits of $16.8 million in the third quarter of 2010.

Felicia Hendrix - Barclays Capital

Is there any way for us to forecast how you will use that in the future?

Kevin Farr

The credit started in 2000 and we will start utilizing them in 2010 until we have fully utilized them. So when you think about our U.S. tax position, we will be utilizing these credits as allowed by the tax laws, which there are specific requirements with regard to you can use them to the extent that you generate foreign source for the company. So fairly complicated, but you should see over the next five to 10 years our utilization of those credits.

Felicia Hendrix - Barclays Capital

Bob, on Fisher-Price, I thought you gave us a good explanation of what was going on there, because it was lower than what we were looking for, but I kind of get it. I'm just wondering if winding down of Sesame Street has any material impact. And Kevin in his prepared remarks said it did have some of an impact. So just trying to wonder how we should think about that, because it has been posed to us that Sesame Street wasn't really that much of an impact for you guys on a positive recently.

Bob Eckert

Sesame Street has been a declining business for us for some time, and it is being more than offset by things like Sing-a-Ma-Jigs. We are having great success right now with Dance Start Mickey. That's a product we're not going to have enough of. Doors holding up, so some of the smaller properties in the Fisher-Price Friends portfolio are declining. Sesame is still declining. But it's not a material impact on the business.

Felicia Hendrix - Barclays Capital

And then as you think about pricing in the fourth quarter, you've mentioned and we all know that the consumer is price-sensitive, I was just wondering a range where you think the sweet spot of pricing for the consumer is. And really the crux of my question is what percentage of your product is above that.

Bob Eckert

In general, toys broadly speaking are really good value. Most toys cost under $20 at retail. And certainly the bestselling toy on an individual unit basis is a Hot Wheels car that for many retailers still sells for less than $1.

The sweet spot for toys tends to be in that $10 to $20 range. The majority of toys are in that range. But on an incremental basis, particularly late in the year as we get close to Christmas, the big track sets go, the big Fisher-Price items go, the big Dollhouses go, and those tend to be the things in the $50 to $100 range.

And as we look back, you'd remember last year, we had in our judgment and based on our analysis, too many of those Fisher-Price items priced in the $60 to $100 range. This year, we're down to a couple in that range, things like the BIGFOOT which is a big seller. We'll probably run out of that. iXL, which is a big seller. And really those are the only couple of items that are really highest price point.

The majority of the key drivers in Fisher-Price have been retooled, they have been reengineered to sell for lower prices at still attractive margins.

Felicia Hendrix - Barclays Capital

And actually you mentioned track sets. And Kevin or Bob, I was just wondering, in Wheels we did see a slowdown in track sets in the quarter. I was wondering if that was price or if you're just transitioning for something else there.

Kevin Farr

We are transitioning. The basic cars business is fine. And as I mentioned, the alternate channels segment is growing nicely for Hot Wheels. But the higher price track sets were a little slow. Remember last year, we were featuring core track sets. I think in the U.S., our shipments in the third quarter a year ago were up 25% on Hot Wheels. This year, we've been featuring Trick Tracks. So far it hasn't been as effective as last year's program.

So for Christmas, we're going to return to our core track focus with the Criss Cross Crash, and I think that'll help us a bit, and also on Hot Wheels. Remember international continues to do quite well.

Felicia Hendrix - Barclays Capital

And just wondering if you could give us some color on cars since Pixar Cars since we're all excited about that for next year including a four year-old who's living under my roof? I'm just wondering can you remind us what Cars did in 2006 for you, and maybe what it was on an evergreen basis?

Kevin Farr

I can't believe you got a four year-old child. I remember walking through New York city on Michigan Avenue would have been four and a half years ago, talking about this. So congratulations. Anyway, you know I won' specifically answer lines or size of business in individual lines. But Cars is a big deal. Let me put it in some perspective for you.

Toy Story is a big deal, we and Disney and retailers have had high expectations for Toy Story. And as you're seeing, those are being realized. That said, on a nine month year-to-date basis this year, our Cars shipments are this year four years after the movie only about 10% lower than what we've shipped on Toy Story. That gap will widen in the forth quarter because of the DVD release for Toy Story 3.

But in fact, four years after we've had the big entertainment, Cars is still a big deal. And despite all the attention Toy Story and a lot of other entertainment properties, that business is still growing at Pos this year is up on Cars. So the bottomline is Disney and Pixar create terrific brands and we're thrilled to partner with them. And I think Cars is going to be a big deal next year just like it already is today.

Operator

Our next question comes from John Taylor of Arcadia Investment.

John Taylor - Arcadia Investment

I've got a couple of questions. One, let me take a stab at inventory again. I wonder if you could characterize whether the build-up this year is just sort of restocking, whether you guys are making sure you've got it on hand, when the orders, if and when the orders come in for late delivery, and that sort of thing. I mean how much of this is just sort of heart stopping with you a little bit longer than being shipped on to retailers?

Bob Eckert

It's all of the above, JT. Number one, as you know, we started this year and finished last year and the fourth quarter with insufficient inventories. We just want sufficiently filling orders certainly at the beginning of this year for our customers. And that's our responsibility is to have enough goods to fill the orders. And so we've been in catch-up mode with our inventory.

Number two, you know as we talked about last quarter, the supply chain was slower and has taken us longer to get the goods in, but we've now got the goods. Number three, there are at least some retailers who are really betting on a late Christmas and they want the goods later this year than normal, and we're holding the goods for longer than normal.

And number four, if you really go back to 2008-2007, our inventories are right about in line with where they were then. We've got more business today, particularly as we picked up things like WWE and Toy Story and Thomas. But our inventories are back to what I would think of as a reasonably normal level. So some of it is clearly related to in the tight times with all the anxiety about last year's holiday season, we didn't make enough goods, but this year we have.

John Taylor - Arcadia Investment

And then, Kevin, the tax benefit, the specific benefit you're calling out is I think you're guiding to us 23%, 24%. And so the total we're going to get is what happens in Q3 and Q4. Is that right? There's nothing in the first half from related to stuff like that.

Kevin Farr

I think there is a little bit in the second quarter related to discrete period items. In total, I think it's about 3%. And the previous one was related to year-to-date that is related to the reassessment of prior-year tax liabilities based upon the status of current audits and tax filings in various jurisdictions. I don't have the amount, JT. It was about $4 million. So it's probably about a total of $20 million for the year.

John Taylor - Arcadia Investment

Is that a year-to-date number?

Kevin Farr

Yes, that's a year-to-date number. And we can't predict what's going to happen in the fourth quarter with regard to discretes, but at this point it's around $20 million year-to-date.

John Taylor - Arcadia Investment

And then on the product side, Bob, in terms of core Fisher-Price number being down to 13 in the U.S., so obviously there is a lot of things going on here. But is there anything sort of competitively or is there anything category-specific like maybe a shift towards electronics away from sort of basic plastic things, or how much of this is timing? I mean can you give us any color on that?

Bob Eckert

JT, at this point, I can't give you a lot of color other than the infant/pre-school category continues to hold up well. Fisher-Price's share is holding up well based on an August year-to-date basis, which is what we have for NPD. For10 years I've been reading the NPD data, the infant/pre-school category has done relatively well and Fisher-Price has done quite well within that category. There is no change in that so far this year.

So my read, based on where we sit today, is there is not a pronounced competitive issue in the infant/pre-school category. That said, a lot of people know that category is doing well. A lot of people know that Fisher-Price is a strong brand. And so we have a lot of competition in that category.

Operator

Our next question comes from Greg Badishkanian of Citigroup.

Alvin Concepcion - Citigroup

This is Alvin Concepcion in for Greg. Regarding the retail inventories, I know you mentioned some products were out of stock. How much do you think that impacted sales?

Bob Eckert

Not an abnormal amount. At this time of the year, the hot toys are starting to sell. And I do think based on everybody else's list that we've got our fair share or more of the hot toys. And so those toys are not going to be around and they're already starting to disappear, things like Dance Star Mickey, Sing-a-Ma-Jigs, Monster High. Those products are already hard to find. But at this time of the year, that's not that unusual.

Alvin Concepcion - Citigroup

And then could you quantify what the retail sales were in the U.S. and internationally in the quarter?

Bob Eckert

We don't really provide data on retail sales. We have point of sales data from some of our customers, not all of our customers, and we don't disclose their data.

Alvin Concepcion - Citigroup

And it sounds like you're gaining market share. So I mean it's like arranged with mid-single digits U.S.?

Bob Eckert

Well, I'd say the POS has been improving quarter-on-quarter as the year has progressed. We are up in POS. I don't want to quantify, but the trend has been our friend on POS this year.

Operator

Our next question comes from Sean McGowan of Needham.

Sean McGowan - Needham

One question I had is regarding Monster High. You mentioned the 22-minute episode coming up on Nickelodeon. Are there any plans for other TV support for their properties?

Bob Eckert

Sean, we are looking at it. The brand's off to a terrific start. Let me give you some of the outlined traffic numbers. The monsterhigh.com website's at over 7.5 million visitors; the music video was the most watched video on YouTube for the weekend of Friday, August 13; when we ran up the Facebook page, has over 100,000 fans.

You know, this thing has not been broadly advertised. We are just starting to television-advertise it now. The Chapter Book as I mentioned has done well; we are getting good reports from both Justice and Party City. So the brand certainly has some traction. We think investing behind the brand makes sense. We are going to do something with Nickelodeon, one of our strong network partners here for Halloween, and we are certainly looking at entertainment, both television and theatrical for Monster High as we build out the franchise.

Sean McGowan - Needham

I knew you mentioned the prospect of something theatrical well into the future, but no definite plans or anything in the works for TV?

Bob Eckert

No definite plans, but again I just tell you, it is something we are actively exploring.

Sean McGowan - Needham

Could you remind us Kevin what was the other expense item, the $14 million last year?

Kevin Farr

Yes, related to a foreign exchange loss on the Venezuelan subsidiary, primarily.

Sean McGowan - Needham

Okay. I just want to circle back to the Fisher-Price Core; it is one of the most surprising things I thought in the quarter. Do you think there is a demographic angle to this as well? I mean, our birthrates have been down, but do you think is it that nature of the product, the (inaudible) product?

Bob Eckert

No, I really don't Shawn. Certainly the birthrate which was favorable to us the last couple of years has subsided with the recession. But again, looking at the NPD data, we only have it for the first eight months, not for the most important four months of the year. But the Infant and Preschool categories held up well and Fisher-Price as well.

Operator

Our next question comes from Tony Gikas of Piper Jaffray.

Tony Gikas - Piper Jaffray

Just as it relates to two properties, is Toy Story 3 product performing better than you've expected? There wasn't a lot of mention in the press release. Similarly, with the WWE was kind of absent in your press release. Is that performing better than you're expectations? And lastly, any comment on MGA, seems like there's lot of noise around the litigation there and costs? Any kind of update you have there would be helpful.

Kevin Farr

Well, I would say that all three of the major new properties for this years that is Thomas, Toy Story, WWE; all three of those we've had high expectations for and we're at least achieving those expectations.

As it relates to MGA, as you remember the Ninth Circuit decided that some of the aspects of the first phase of our case against MGA in which we had a favorable outcome will need to be retried. So, the new judge, the judge from the first part of the case retired from the bench and the new judge has combined what was sort of Phase 1 and Phase 2. Phase 1 being the intellectual property and Phase 2 primarily being trade secret theft into one trial that starts I believe January 11.

We think that with the trial, it's comprehensive and puts everything together in one place in front of one Jury. We think that gives us an even more compelling case than was possible with a divided trial. And I have great confidence in the judicial system and the ability of the Jury to right the wrongs that Mattel is suffering.

So, we're going to continue pursuing this for as long as we need to. It is expensive, but we have an obligation to the owners of the company, to the employees of the company to protect their intellectual property and our rights and we're going to do so.

Tony Gikas - Piper Jaffray

This is the time of the year when all the retailers are talking about discounting of toys. Just for the record, does it appear to be any more aggressive this year than it has in the past few years?

Kevin Farr

No, it's still a little bit early. So it remains to be seen, there's clearly some market share shifts among retailers. But I wouldn't describe it at this point in time as being abnormal competition based on retail price.

Tony Gikas - Piper Jaffray

One more if I can squeeze it in. With Toys R Us having a lot of these new pop stores, a lot more than last year. Does that really grow overall toy sales in the industry or do you do that really as just redistribution of sales?

Kevin Farr

I suspect it's going to be a little bit of both. I mean, providing more convenient access to products is good for the entire category, the toy category. Also, to me Toys R Us must have concluded that they have an opportunity gain some share by doing so. So, I suspect it's a combination of both things.

Operator

Our next question comes from Gerrick Johnson of BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

I was hoping you could talk a little bit about some things going on at Wal-Mart, perhaps the flexing of their space year-over-year looks down pretty significantly thanks to project impact. I was wondering how that impacts your sales as well as your inventory position out there at retail? So what would say inventory at retail be excluding Wal-Mart at the other nasty discounters or retailers?

Kevin Farr

You know, Gerrick, I am sensitive in not wanting to go down the slippery slope here of isolating customer information. I'll just respond by saying, broadly speaking, our retail inventories are down and it's not confined to one customer.

That said, certainly if you look at starting last year, particularly infant/pre-school section Wal-Mart has added some house brands in that department and that cut into our Fisher-Price business. At the same time, my expectation is Wal-Mart is going to be quite aggressive for this holiday season. We've seen what they did in Mexico where we have a significant toy business and a significant toy business with them. And I think they're going to flex their space this fourth quarter and be strong in the toy business. But, we'll have to see is how it plays out.

Gerrick Johnson - BMO Capital Markets

The house brand Garanimals was part B of that question, so thank you for answering that. Where do you think you have too much inventory? You mentioned before, where you have too little, where do you think you have too much inventory right now?

Kevin Farr

I don't think we have too much right now, but I am sure that if you ask me that question in 90 days I'll be able to answer it. But we're not at this point of time, we're not sort of particularly long in one segment or in one brand.

Gerrick Johnson - BMO Capital Markets

And switching back over to the legal department, can you give us some ballpark figures to how much you've spent cumulatively over last five year or so on this legal expedition?

Kevin Farr

No, we haven't and we won't. And we just don't go into that kind of fine line detail. We have talked about the expense goes up in anticipation of trails or in years when there is a trial the expense comes down following those. We're clearly in ramp-up mode right now. It is Phase I and Phase II of the trial together, and it starts January 11.

We've been working very hard this entire year, we'll continue working very hard up until the trial. So we are clearly in ramp-up mode on the expense. The trial starts January 11 and we'll have to see what happens following that.

Gerrick Johnson - BMO Capital Markets

So if you're spending a lot in ramp-up mode, should we assume that in 2011 the incremental legal expense, that question we'll ask every single quarter, will the incremental expense be up or down in 2011?

Kevin Farr

We're not going to give guidance on anything but specifically as it relates to legal expense. We're going to have to see how the case plays out and going to see how long the case lasts, and what we need to do during the case and what happens after the case. I don't even know if I can predict it right now. All I can tell you is, we'll continue making the investment to protect our intellectual property, to right the wrongs that happened.

Gerrick Johnson - BMO Capital Markets

And finally on that topic, there have been new charges that MGA has brought out in corporate espionage, stuff like that. Will that be part of the overall January 11 trial, or is that something separate?

Kevin Farr

As we've said about this, we believe that MGAs $11 counter claims, if you will, are cynical attempts to deflect the tension from their own wrongdoing. So the answer we filed in response to those counter claims, which I think was filed very recently, speaks for itself. I am not going to get into the specifics of the case other than to say that we're ready to go in front of a Jury.

Gerrick Johnson - BMO Capital Markets

Right, but is that a separate issue? Is it a separate trial, or are those all going to be combined into the one January 11 trial?

Kevin Farr

Well, I don't know exactly what's going to be in and out of the trial. But I do believe that there will not be a separate trial on those claims.

Gerrick Johnson - BMO Capital Markets

And are there any pre-trial motions or anything that we should be concerned about between now and January 11?

Kevin Farr

There are. In this case, an incredible number of motions being filed. I think the key thing between here and there are motions for summary judgment on some of the claims to really define what will go in front of the Jury.

Operator

Our next question comes from Linda Bolton-Weiser of Caris.

Linda Bolton-Weiser - Caris

I actually was down in Arkansas at the Wal-Mart analyst meeting a few days ago. And they definitely talked about taking a cue from what they did in Mexico and flexing the space and creating additional space. I thought they said in December and it would be like a doubling of space. And I know you don't want to get too detailed but did I misunderstand them?

And also on the inventory issue, they are actually reversing a lot of the inventory reductions they had made over the last few years as part of almost a reversal of strategy. So are you saying that you don't expect or the toys is not getting their bump-up in inventory build at retail and that it's going more to other categories or can you just kind of elaborate on that a little bit?

Kevin Farr

No Linda, you're talking directly to them. So I don't want to get in between you and one of our customers. I would just say that I think they are gearing up and they have plans, they have a good holiday season as do several other major retailers. And my sense is by the time Christmas comes, their stores are going to have a good selection of toys and I am hopeful we have our fair share of that selection.

Linda Bolton-Weiser - Caris

And then just on the Fisher-Price again. Given that like the price points and the mix of price points is certainly different as you've talked about several times, is there anyway you can describe what the price mix versus the unit-volume growth for Fisher-Price was in the quarter to help us better understand that?

Kevin Farr

No, other than to just qualitatively say, I don't think there is a big impact on price mix. Certainly a component when you look at some of these key drivers. But right now I would tell you that it tends to be more in the area of what's selling in the retailers. And as I have mentioned now since last holiday season, the Pos on the core business is no more soft. So we have adjusted the price mix, but I think that will play out more as the holiday season approaches.

Linda Bolton-Weiser - Caris

And then, I think you mentioned in the SG&A that there was $8 million pre-tax impairment charge for the house of Barbie, is that the store in Shanghai? And can you just describe why did you need to take that impairment charge? Is that store not doing what you wanted it to do and is it going to be more charges related to it?

Kevin Farr

No, there won't be more charges. But this Barbie Shanghai store was opened as part of a marketing strategy that was specific to China, to introduce the total brand if you will, the Chinese girls and moms, most of whom are not familiar with the brand. And the toy sales have actually been pretty good in that store. But the overall retail sales have not performed to our expectations. So based on the financial performance of the store, we will require to write-off substantially all of our lease hold improvements.

Linda Bolton-Weiser - Caris

So then for the time being, you think that's enough of a right offer now?

Bob Eckert

I think it's enough of a right offer now. And I can't imagine there is anything or much left to write off in the future.

Kevin Farr

That's right, Bob.

Operator

Our last question comes from Ed Woo of Wedbush Securities.

Ed Woo - Wedbush Securities

How easy is it for you to be able to chase product this late and through the holiday season?

Bob Eckert

It's going to be hard Ed. And that's one of the issues here, as retailers think the holidays are going to be late, as they take product later when something is running, there's going to be less opportunity to chase it. So we're chasing some goods as we speak. Even though our inventories are in pretty good shape, we don't have enough to some of the toys. So later the season is, the harder it is to chase.

Ed Woo - Wedbush Securities

And also on recall expenses, was there any recall expense for the recent announcement? And do you expect any in the fourth quarter?

Kevin Farr

As you know, we recalled in September 2010 in cooperation with the Consumer Product Safety Commission, certain Fisher-Price products, as a result we recorded $7.6 million accrual which relates to our estimates in customer sales returns. Our obligation to the consumers and other related cost. We think the accrual is appropriate and at this point we don't expect any additional charge in the fourth quarter. But this is one of those accruals that each quarter you chew it up to your expense rate on recalls.

Dianne Douglas

Thanks everyone, for participating today. There will be a replay of this call available beginning at 11:30 Eastern Time today. The number for the replay is 706-645-9291 and the passcode is 96255098. Thank you operator, and thanks to everyone for participation.

Operator

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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