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Principles of finance ah la shmoop cash flow from operations

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All right let's do this thing Mattel Here are the

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filings were looking at the june thirty two thousand sixteen

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cash flows from operations line and we note that company

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at a loss of net income of about ninety two

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million dollars Ouch Things not going so well there with

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barbie Well but that's it counting on an accrual basis

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And of course we have an opus eleven hour video

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explaining the deets of accrual accounting Check out all of

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it if you will have no life Okay so we're

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looking at mattel from a cash flow perspective and maybe

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from that perspective or bases or foundation will find that

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mattel is more like cap cities a hidden gem producing

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actual tons of free cash All right so the next

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line is depreciation They'd appreciate a hundred nineteen million dollars

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in the six month period there And don't get confused

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when some companies produce these lines quarterly It seems like

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a lot Annualized That'd be almost a quarter billion dollars

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a year of depreciation Was the plastic stamping factory getting

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old Well maybe it was That license is paid to

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Miley or kanye or boomer for their doll lookalikes may

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be the key difference remember between amortization and depreciation is

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that amortization is used for intangible assets like licenses and

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patents while depreciation is used for tangible ones Was it

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the book value of the brands they acquired years ago

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And that now aren't worth much Well No If that

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were the case it would go in the financing section

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lower sea they're tricky but note that the depreciation line

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is positive The net income loss of ninety two million

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dollars was negative See the parentheses there around it Well

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why is depreciation positive here Well because we're trying to

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calculate cash earnings from operations in a cruel accounting you

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take into account depreciation but in cash accounting wealth appreciation

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is kind of phantom so since we subtracted it from

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the cruel world to get r ninety two million dollars

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in net income losses you have to add it back

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now in the cash accounting part that we're doing confusing

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Yes well hang in there we're confused to next line

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is amortization and just like depreciation we're gonna add back

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almost thirteen million bucks over that six month period just

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a za total sidebar here and not for anything other

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than your prurient pleasure Note that our accounting loss of

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ninety two million bucks is fully negated by are just

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adding back dna here that is we have negative ninety

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two plus hundred nineteen plus their teen equals forty and

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that's forty million dollars of cash flow production Well why

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does that matter Well lot of wall street people quote

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earnings results as one form or another of ebitda earnings

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before interest taxes depreciation and amortization Just worth noting so

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noted Move on deferred income taxes air Next we owe

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taxes We differed paying them They consumed sixty million dollars

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of cash in the six month period Likely meaning that

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we had a debt obligation of taxes which we had

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to pay off in this period And that consumed cash

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Alright next is share based compensation Okay We paid our

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top execs with stock and options Why Well we want

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them to behave as owner managers rather than just employees

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If they own a chunk of the company hopefully they'll

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act in the long term Best interest of the company

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as owners not just people taking a paycheck and running

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So we pay them with cash and stock but stock

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isn't free It has to be accounted for on an

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accrual basis Stock is usually evaluated at some average price

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for where the shares were trading around when they were

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granted There's long formula for all this that's totally not

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worth covering in this course so we'll just move on

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from it is paying in stock the same his cash

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No So you have to add back the value of

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that stock compensation by adding back the cash amount that

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was notionally deducted on an accrual basis for paying for

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it all right Next up onto net change in assets

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and liabilities Ooh this is a complex one Well let's

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start with the super basic concept Recall the deal with

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the super bowl and our friendly little lemonade stand a

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while ago Our balance sheet change dramatically after we got

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paid by the nfl for providing lemonade for the super

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bowl Right We had a mountain of cash come in

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courtesy of the kindly loving people of the nfl and

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we paid off our debts Grandma in the cup vendor

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in the five k visa card and costco over sugar

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And lemons and all that Well this event generated a

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ton of cash and a bunch of other things changed

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A cz Well the biggest changes was that archy inventory

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went down to the well basically nothing And in the

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case of the lemonade company inventory zehr generally really cheap

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They represent only a small fraction of the cost of

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goods sold like fifteen percent or fifteen cents A cop

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for you no sugar and lemons on a one dollars

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a cup sail but repurposed last it's hello barbie are

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very different The plastic expires or melts or gets damaged

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in transit And some kids just cry and cry and

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cry And mommy takes ken back to the store for

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a refund so mattel could be gearing up for a

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huge new foray into swimming plastic doll with a big

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michael phelps campaign He floats along with hope and they

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spend a hundred million dollars in cash producing ten million

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michael phelps stalls ready to sell them at twenty bucks

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a pop this summer Well that event of stocking up

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in inventory consumed a ton of cash It was a

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negative to cash production even though you now have this

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Little army of bendable michael's which by the way you

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plan to sell it double the price for which you

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produce them You hope they sell anyway but during that

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period of stocking up it was really bad for your

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cash flow But what if you didn't have to Hey

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your plastic vendors right away And what if the little

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impede on the doll could wait to be paid for

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five months Well you promised to pay whether the dolls

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sell or not You owe the money eventually but in

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greenlighting all of that work you've accumulated a huge change

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in your accounts payable in this period and you haven't

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gotten a diamond cash from selling michael's yet so you

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need capital that just works for you for some period

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of time until you can monetize michael this summer when

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the whether it's hot kids want him to swim alongside

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them in the pool before he melts into the deck

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and you sell the parents of the crying kid another

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doll very high margin hot decks in the summer you're

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praying for another scorcher So for starters note the ad

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back of three hundred fifty one million dollars in accounts

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Receivable here Att mattel That means that mattel collected in

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cash two hundred fifty one million dollars in a r

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or accounts receivable This would be from places like walmart

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amazon target while they're still alive and the other places

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mattel sells its wares but it also grew inventory See

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the two hundred eighty nine million dollars in cash cost

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to build inventories and that's a lot Maybe they really

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are doing a michael swimmer doll Finally note the mishmash

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of accounts payable accrued liabilities and income tax is payable

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all in one line Why would they jam them all

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into one line They're well Paper is cheap And computer

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server disk space is pretty much free in the cloud

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these days So why jam him in Why not break

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them out Well the answer is that the numbers were

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probably really ugly Look how much was burned in there

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in cash Three hundred eleven million dollars We're going to

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skip other for now And just look at the bottom

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line for cash from operations for mattel Yet they burned

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over two hundred forty million dollars for operating company for

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six months This is a company in trouble People go

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Type in ticker m eighty on a stock quote thing

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and you'll get that whole ugly story were it not

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for this company paying a huge fat dividend It'd be

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a really low price stock And you can only imagine

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what had happened if they ever cut their dividend groups

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They did later and here's what happened So what we

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thought was bad enough with the ninety million dollars accrual

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accounting loss when we uncover the cash from operations line

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and find a loss of two hundred forty million dollars

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it's even worse Ug in the back Your mind however

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you should be thinking this is a toy company When

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do most toys get sold Oh yeah Christmas that it

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be December is december reflected in the january one to

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june thirty time frame No So maybe things will be

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better in the back half of the year That's not

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our mission here We just went through cash flows from

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operations which is the first of three parts of cash

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flows So before we go let's do a quick review

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of the math of accounts receivable in accounts payable Let's

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just tweak the superbowl lemonade delivery slightly What if the

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nfl had said we'll pay you after you deliver the

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hundred thousand cups of lemonade according to the following formula

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you get fifty thousand dollars the day after the super

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bowl and then you get fifty thousand dollars three months

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later because we want to be sure nobody sues us

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for lousy lemonade that ruined they're doing all right Well

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we of course say yes because well they are the

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nfl which stands for no freaking lawyers How would the

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numbers then look on our income statement next quarter in

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the following quarter Well we'd recognize the cash paid this

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quarter but would recognize all a hundred grand of the

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revenues like aren't the odds really high The nfl will

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hey yes yes but we don't get the revenues for

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three months so best practices gap accounting would make a

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note of that either we would not recognize the revenues

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until next quarter or without a line for deferred revenue

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so we're recognizing them light that way once they become

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full fledged revenues next quarter fifty grand will evaporate from

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our deferred revenues line and our accounts receivable line and

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fifty grand will then go into our revenues line while

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the same works in the other direction We're going to

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throw a bunch of these computations your way as we

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work through the course So if you don't get all 00:09:26.523 --> [endTime] this right away don't sweat it Just keep plugging

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