Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
___________________________________________________________ 
FORM 10-Q
 ___________________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-05647
___________________________________________________________ 
MATTEL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________ 

Delaware
 
95-1567322
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
333 Continental Blvd.
El Segundo, CA
 
90245-5012
 
(Address of principal executive offices)
 
(Zip Code)
(310) 252-2000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report):
NONE
___________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares outstanding of registrant’s common stock, $1.00 par value, as of October 14, 2016:
342,045,279 shares

1



MATTEL, INC. AND SUBSIDIARIES

 
 
Page
 
 
 
 
PART I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  

2



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(Unaudited; in thousands, except share data)
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and equivalents
$
297,089

 
$
289,697

 
$
892,814

Accounts receivable, net
1,528,808

 
1,451,250

 
1,145,099

Inventories
910,546

 
870,785

 
587,521

Prepaid expenses and other current assets
342,362

 
367,953

 
375,625

Total current assets
3,078,805

 
2,979,685

 
3,001,059

Noncurrent Assets
 
 
 
 
 
Property, plant, and equipment, net
747,451

 
721,299

 
741,147

Goodwill
1,392,155

 
1,387,959

 
1,384,520

Other noncurrent assets
1,430,456

 
1,540,678

 
1,408,417

Total Assets
$
6,648,867

 
$
6,629,621

 
$
6,535,143

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Short-term borrowings
$

 
$
161,008

 
$
16,914

Current portion of long-term debt
300,000

 

 
300,000

Accounts payable
694,757

 
560,668

 
651,681

Accrued liabilities
629,114

 
687,869

 
658,182

Income taxes payable
21,695

 
31,918

 
18,752

Total current liabilities
1,645,566

 
1,441,463

 
1,645,529

Noncurrent Liabilities
 
 
 
 
 
Long-term debt
2,133,489

 
2,084,015

 
1,784,721

Other noncurrent liabilities
454,434

 
531,480

 
471,639

Total noncurrent liabilities
2,587,923

 
2,615,495

 
2,256,360

Stockholders’ Equity
 
 
 
 
 
Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued
441,369

 
441,369

 
441,369

Additional paid-in capital
1,781,540

 
1,779,176

 
1,789,870

Treasury stock at cost: 99.3 million shares, 102.1 million shares, and 101.7 million shares, respectively
(2,434,520
)
 
(2,503,757
)
 
(2,494,901
)
Retained earnings
3,502,076

 
3,660,796

 
3,745,815

Accumulated other comprehensive loss
(875,087
)
 
(804,921
)
 
(848,899
)
Total stockholders’ equity
2,415,378

 
2,572,663

 
2,633,254

Total Liabilities and Stockholders’ Equity
$
6,648,867

 
$
6,629,621

 
$
6,535,143

The accompanying notes are an integral part of these financial statements

3



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Three Months Ended
 
For the Nine Months Ended
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(Unaudited; in thousands, except per share amounts)
Net Sales
$
1,795,575

 
$
1,791,968

 
$
3,622,250

 
$
3,702,869

Cost of sales
924,810

 
912,371

 
1,929,247

 
1,899,966

Gross Profit
870,765

 
879,597

 
1,693,003

 
1,802,903

Advertising and promotion expenses
202,900

 
213,245

 
384,614

 
420,417

Other selling and administrative expenses
350,469

 
365,579

 
1,051,799

 
1,135,617

Operating Income
317,396

 
300,773

 
256,590

 
246,869

Interest expense
24,989

 
21,409

 
70,133

 
62,516

Interest (income)
(2,477
)
 
(1,990
)
 
(7,550
)
 
(5,757
)
Other non-operating expense (income), net
856

 
(4,785
)
 
23,210

 
(2,984
)
Income Before Income Taxes
294,028

 
286,139

 
170,797

 
193,094

Provision from income taxes
57,778

 
62,355

 
26,620

 
38,838

Net Income
$
236,250

 
$
223,784

 
$
144,177

 
$
154,256

Net Income Per Common Share—Basic
$
0.69

 
$
0.66

 
$
0.42

 
$
0.45

Weighted average number of common shares
341,961

 
339,420

 
341,089

 
338,954

Net Income Per Common Share—Diluted
$
0.68

 
$
0.66

 
$
0.42

 
$
0.45

Weighted average number of common and potential common shares
344,226

 
339,790

 
343,298

 
339,544

Dividends Declared Per Common Share
$
0.38

 
$
0.38

 
$
1.14

 
$
1.14

The accompanying notes are an integral part of these financial statements.

4



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(Unaudited; in thousands)
Net Income
$
236,250

 
$
223,784

 
$
144,177

 
$
154,256

Other Comprehensive Loss, Net of Tax:
 
 
 
 
 
 
 
Currency translation adjustments
(14,570
)
 
(90,486
)
 
(18,926
)
 
(179,802
)
Defined benefit pension plan adjustments
2,024

 
6,724

 
4,568

 
6,311

Net unrealized losses on derivative instruments:
 
 
 
 
 
 
 
Unrealized holding gains
974

 
8,866

 
642

 
32,367

Reclassification adjustment for realized gains included in net income
(2,157
)
 
(19,152
)
 
(12,472
)
 
(41,708
)
 
(1,183
)
 
(10,286
)
 
(11,830
)
 
(9,341
)
Other Comprehensive Loss, Net of Tax
(13,729
)
 
(94,048
)
 
(26,188
)
 
(182,832
)
Comprehensive Income (Loss)
$
222,521

 
$
129,736

 
$
117,989

 
$
(28,576
)

The accompanying notes are an integral part of these financial statements.

5



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended
September 30,
2016
 
September 30,
2015
 
(Unaudited; in thousands)
Cash Flows From Operating Activities:
 
Net Income
$
144,177

 
$
154,256

Adjustments to reconcile net income to net cash flows used for operating activities:
 
 
 
Depreciation
177,939

 
173,026

Amortization
19,577

 
24,396

Deferred income taxes
(38,424
)
 
(14,551
)
Share-based compensation
38,744

 
41,130

(Decrease) increase from changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(389,550
)
 
(411,829
)
Inventories
(311,141
)
 
(349,476
)
Prepaid expenses and other current assets
25,292

 
(24,369
)
Accounts payable, accrued liabilities, and income taxes payable
42,006

 
180,969

Other, net
(39,966
)
 
4,110

Net cash flows used for operating activities
(331,346
)
 
(222,338
)
Cash Flows From Investing Activities:
 
Purchases of tools, dies, and molds
(101,562
)
 
(95,751
)
Purchases of other property, plant, and equipment
(77,586
)
 
(74,856
)
Payments for acquisitions
(33,154
)
 

Proceeds from (payments for) foreign currency forward exchange contracts
6,228

 
(68,443
)
Other, net
1,349

 
33,091

Net cash flows used for investing activities
(204,725
)
 
(205,959
)
Cash Flows From Financing Activities:
 
Payments of short-term borrowings, net
(83,914
)
 

Proceeds from short-term borrowings, net
67,000

 
161,008

Proceeds from long-term borrowings, net
350,000

 

Payments of dividends on common stock
(388,518
)
 
(386,102
)
Proceeds from exercise of stock options
28,531

 
10,458

Other, net
(16,341
)
 
(15,330
)
Net cash flows used for financing activities
(43,242
)
 
(229,966
)
Effect of Currency Exchange Rate Changes on Cash
(16,412
)
 
(23,690
)
Decrease in Cash and Equivalents
(595,725
)
 
(681,953
)
Cash and Equivalents at Beginning of Period
892,814

 
971,650

Cash and Equivalents at End of Period
$
297,089

 
$
289,697

The accompanying notes are an integral part of these financial statements.


6



MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of Mattel, Inc. and its subsidiaries (“Mattel”) as of and for the periods presented have been included. As Mattel’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.
The year-end balance sheet data was derived from audited financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all disclosures required by GAAP.
The financial information included herein should be read in conjunction with Mattel’s consolidated financial statements and related notes in its 2015 Annual Report on Form 10-K.
2.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $30.9 million, $26.0 million, and $24.4 million as of September 30, 2016September 30, 2015, and December 31, 2015, respectively.
3.
Inventories
Inventories include the following:
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Raw materials and work in process
$
137,385

 
$
126,261

 
$
105,917

Finished goods
773,161

 
744,524

 
481,604

 
$
910,546

 
$
870,785

 
$
587,521

4.
Property, Plant, and Equipment
Property, plant, and equipment, net includes the following: 
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Land
$
25,193

 
$
27,055

 
$
27,049

Buildings
277,974

 
273,139

 
275,266

Machinery and equipment
819,501

 
748,247

 
764,657

Software
342,974

 
327,190

 
331,251

Tools, dies, and molds
876,642

 
820,772

 
840,586

Capital leases
23,970

 
23,970

 
23,970

Leasehold improvements
255,769

 
242,060

 
245,082

 
2,622,023

 
2,462,433

 
2,507,861

Less: accumulated depreciation
(1,874,572
)
 
(1,741,134
)
 
(1,766,714
)
 
$
747,451

 
$
721,299

 
$
741,147


7



5.
Goodwill
Goodwill is allocated to various reporting units, which are at the operating segment level, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. In the third quarter of 2016, Mattel performed its annual impairment tests and determined that goodwill was not impaired since each reporting unit's fair value exceeded its carrying value.
The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2016 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America and American Girl operating segments selling those brands, thereby causing a foreign currency translation impact for these operating segments.
 
December 31,
2015
 
Acquisitions
 
Currency
Exchange Rate
Impact
 
September 30,
2016
 
 (In thousands)                                  
North America
$
718,999

 
$
12,061

 
$
(866
)
 
$
730,194

International
452,879

 
10,312

 
(14,047
)
 
449,144

American Girl
212,642

 

 
175

 
212,817

Total goodwill
$
1,384,520

 
$
22,373

 
$
(14,738
)
 
$
1,392,155

Acquisitions of Sproutling, Inc. and Fuhu, Inc.
In January 2016, Mattel completed its acquisition of Sproutling, Inc. ("Sproutling"), a maker of smart technology products for parents and families, for total consideration of $9.9 million and additional contingent consideration that may become payable under the terms of the agreement based on Sproutling's operating results over the next three years. Also in January 2016, Mattel acquired substantially all of the assets of Fuhu, Inc. ("Fuhu"), a developer of high technology products for children and families and best known for its nabi® brand of products, for total consideration of $23.3 million. These acquisitions are expected to strengthen Mattel's digital and smart technology capabilities and create opportunities to bring new technology-enabled products to market.
Mattel is in the process of finalizing the valuation of the assets acquired and liabilities assumed. The determination of the final values of assets acquired and liabilities assumed may result in adjustments to these values and a corresponding adjustment to goodwill. During the three and nine months ended September 30, 2016, Mattel recognized $0.3 million and $1.4 million, respectively, of integration and acquisition costs. Integration and acquisition costs are recorded within other selling and administrative expenses in the consolidated statements of operations. The pro forma and actual results of operations for these acquisitions have not been presented because they are not material, individually or in the aggregate, to Mattel.
6.
Other Noncurrent Assets
Other noncurrent assets include the following: 
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Deferred income taxes
$
548,437

 
$
589,719

 
$
510,928

Nonamortizable identifiable intangibles
466,384

 
492,979

 
488,144

Identifiable intangibles (net of amortization of $147.9 million, $124.6 million, and $131.5 million, respectively)
206,874

 
219,311

 
212,161

Other
208,761

 
238,669

 
197,184

 
$
1,430,456

 
$
1,540,678

 
$
1,408,417

In connection with the acquisitions of Fuhu and Sproutling, as more fully described in “Note 5 to the Consolidated Financial Statements—Goodwill” of this Quarterly Report on Form 10-Q, Mattel recognized $11.2 million of amortizable identifiable intangible assets, primarily related to patents.

8



Mattel tests nonamortizable intangible assets, including trademarks and trade names, for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying values may exceed the fair values. During the third quarter of 2016, Mattel performed its annual impairment assessments and determined that its nonamortizable intangible assets were not impaired.
Mattel also tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Amortizable intangible assets were determined to not be impaired during the three and nine months ended September 30, 2016.
7.
Accrued Liabilities
Accrued liabilities include the following: 
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Advertising and promotion
$
101,649

 
$
116,529

 
$
75,991

Royalties
92,739

 
111,082

 
122,153

Taxes other than income taxes
60,031

 
70,815

 
66,848

Other
374,695

 
389,443

 
393,190

 
$
629,114

 
$
687,869

 
$
658,182

8.
Seasonal Financing
Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility with a commercial bank group. The credit facility is used as a back-up to Mattel’s commercial paper program, which is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement governing the credit facility was amended and restated on June 8, 2015 to, among other things, (i) extend the maturity date of the credit facility to June 9, 2020, (ii) amend the definition of consolidated earnings before interest, taxes, depreciation, and amortization (“Consolidated EBITDA”) used in calculating Mattel’s financial ratio covenants, and (iii) increase the maximum allowed consolidated debt-to-Consolidated EBITDA ratio to 3.50 to 1. The aggregate commitments under the credit facility remain at $1.60 billion, with an “accordion feature,” which allows Mattel to increase the aggregate availability under the credit facility to $1.85 billion under certain circumstances. In addition, applicable interest rate margins remain within a range of 0% to 0.75% above the applicable base rate for base rate loans and 0.88% to 1.75% above the applicable LIBOR for Eurodollar rate loans, and the commitment fees range from 0.08% to 0.25% of the unused commitments under the credit facility, in each case depending on Mattel’s senior unsecured long-term debt rating.
The proportion of unamortized debt issuance costs from the prior credit facility renewal related to creditors involved in both the prior credit facility and amended credit facility and borrowing costs incurred as a result of the amendment were deferred, and such costs will be amortized over the term of the amended credit facility.
Mattel is required to meet financial ratio covenants at the end of each quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at September 30, 2016.
The agreement governing the credit facility is a material agreement, and failure to comply with the financial ratio covenants may result in an event of default under the terms of the credit facility. If Mattel were to default under the terms of the credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

9



9.
Long-Term Debt
During the first quarter of 2016, Mattel retrospectively adopted Accounting Standards Update ("ASU") 2015-03, Simplifying the Presentation of Debt Issuance Costs. As such, prior periods were restated to present debt issuance costs as a deduction from long-term debt. Long-term debt includes the following:
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
2010 Senior Notes due October 2020 and October 2040
$
500,000

 
$
500,000

 
$
500,000

2011 Senior Notes due November 2016 and November 2041
600,000

 
600,000

 
600,000

2013 Senior Notes due March 2018 and March 2023
500,000

 
500,000

 
500,000

2014 Senior Notes due May 2019
500,000

 
500,000

 
500,000

2016 Senior Notes due August 2021
350,000

 

 

Debt issuance costs
(16,511
)
 
(15,985
)
 
(15,279
)
 
2,433,489

 
2,084,015

 
2,084,721

Less: current portion
(300,000
)
 

 
(300,000
)
Total long-term debt
$
2,133,489

 
$
2,084,015

 
$
1,784,721


In August 2016, Mattel issued $350.0 million aggregate principal amount of 2.35% senior unsecured notes due August 15, 2021 (“2016 Senior Notes”). Interest on the 2016 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning February 15, 2017. Mattel may redeem all or part of the 2016 Senior Notes at any time or from time to time prior to July 15, 2021 (one month prior to the maturity date of the 2016 Senior Notes) (the “Par Call Date”), at its option, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2016 Senior Notes being redeemed or (2) a “make-whole” amount based on the yield of a comparable U.S. Treasury security plus 20 basis points, plus, in each case, accrued and unpaid interest on the 2016 Senior Notes being redeemed to, but excluding, the redemption date. Mattel may redeem all or part of the 2016 Senior Notes at any time or from time to time on or after the Par Call Date, at its option, at a redemption price equal to 100% of the principal amount of the 2016 Senior Notes to be redeemed, plus accrued and unpaid interest on the 2016 Senior Notes being redeemed to, but excluding, the redemption date.
10.
Other Noncurrent Liabilities
Other noncurrent liabilities include the following:
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Benefit plan liabilities
$
179,979

 
$
203,251

 
$
195,916

Noncurrent tax liabilities
96,447

 
164,915

 
106,584

Other
178,008

 
163,314

 
169,139

 
$
454,434

 
$
531,480

 
$
471,639


10



11.
Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss):
 
For the Three Months Ended September 30, 2016
 
Derivative
Instruments
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2016
$
4,716

 
$
(157,314
)
 
$
(708,760
)
 
$
(861,358
)
Other comprehensive income (loss) before reclassifications
974

 
(74
)
 
(14,570
)
 
(13,670
)
Amounts reclassified from accumulated other comprehensive income (loss)
(2,157
)
 
2,098

 

 
(59
)
Net (decrease) increase in other comprehensive income (loss)
(1,183
)
 
2,024

 
(14,570
)
 
(13,729
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2016
$
3,533

 
$
(155,290
)
 
$
(723,330
)
 
$
(875,087
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2016
 
Derivative
Instruments
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2015
$
15,363

 
$
(159,858
)
 
$
(704,404
)
 
$
(848,899
)
Other comprehensive income (loss) before reclassifications
642

 
(208
)
 
(18,926
)
 
(18,492
)
Amounts reclassified from accumulated other comprehensive income (loss)
(12,472
)
 
4,776

 

 
(7,696
)
Net (decrease) increase in other comprehensive income (loss)
(11,830
)
 
4,568

 
(18,926
)
 
(26,188
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2016
$
3,533

 
$
(155,290
)
 
$
(723,330
)
 
$
(875,087
)
 
For the Three Months Ended September 30, 2015
 
Derivative
Instruments
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2015
$
30,970

 
$
(161,920
)
 
$
(579,923
)
 
$
(710,873
)
Other comprehensive income (loss) before reclassifications
8,866

 
(103
)
 
(90,486
)
 
(81,723
)
Amounts reclassified from accumulated other comprehensive income (loss)
(19,152
)
 
6,827

 

 
(12,325
)
Net (decrease) increase in other comprehensive income (loss)
(10,286
)
 
6,724

 
(90,486
)
 
(94,048
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2015
$
20,684

 
$
(155,196
)
 
$
(670,409
)
 
$
(804,921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11



 
For the Nine Months Ended September 30, 2015
 
Derivative
Instruments
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2014
$
30,025

 
$
(161,507
)
 
$
(490,607
)
 
$
(622,089
)
Other comprehensive income (loss) before reclassifications
32,367

 
(1,053
)
 
(179,802
)
 
(148,488
)
Amounts reclassified from accumulated other comprehensive income (loss)
(41,708
)
 
7,364

 

 
(34,344
)
Net (decrease) increase in other comprehensive income (loss)
(9,341
)
 
6,311

 
(179,802
)
 
(182,832
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2015
$
20,684

 
$
(155,196
)
 
$
(670,409
)
 
$
(804,921
)
The following tables present the classification and amount of the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30,
2016
 
September 30,
2015
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
Gain on foreign currency forward exchange contracts
$
2,383

 
$
18,909

 
Cost of sales
 
(226
)
 
243

 
Provision for income taxes
 
$
2,157

 
$
19,152

 
Net income
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service cost
$
(8
)
 
$
(6
)
 
(a)
Recognized actuarial loss
(1,769
)
 
(3,172
)
 
(a)
Settlement loss
(1,495
)
 
(5,233
)
 
Other selling and
administrative expenses
 
(3,272
)
 
(8,411
)
 
 
 
1,174

 
1,584

 
Provision for income taxes
 
$
(2,098
)
 
$
(6,827
)
 
Net income


12



 
For the Nine Months Ended
 
 
 
September 30,
2016
 
September 30,
2015
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
Gain on foreign currency forward exchange contracts
$
13,260

 
$
41,290

 
Cost of sales
 
(788
)
 
418

 
Provision for income taxes
 
$
12,472

 
$
41,708

 
Net income
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service (cost) credit
$
(23
)
 
$
522

 
(a)
Recognized actuarial loss
(5,305
)
 
(13,030
)
 
(a)
Curtailment gain

 
8,639

 
Other selling and
administrative expenses
Settlement loss
(1,495
)
 
(5,233
)
 
Other selling and
administrative expenses
 
(6,823
)
 
(9,102
)
 
 
 
2,047

 
1,738

 
Provision for income taxes
 
$
(4,776
)
 
$
(7,364
)
 
Net income
 ____________________________________________
(a)
The amortization of prior service (cost) credit and recognized actuarial loss are included in the computation of net periodic benefit cost. Refer to “Note 15 to the Consolidated Financial Statements—Employee Benefit Plans” of this Quarterly Report on Form 10-Q for additional information regarding Mattel’s net periodic benefit cost.
Currency Translation Adjustments
Mattel’s reporting currency is the US dollar. The translation of its net investments in subsidiaries with non-US dollar functional currencies subjects Mattel to the impact of currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Currency translation adjustments resulted in a net loss of $18.9 million for the nine months ended September 30, 2016, primarily due to the weakening of the British pound sterling and the Mexican Peso against the US dollar, partially offset by the strengthening of the Euro and the Brazilian real. Currency translation adjustments resulted in a net loss of $179.8 million for the nine months ended September 30, 2015, primarily due to the weakening of the Euro, Mexican peso, and Brazilian real against the US dollar.
12.
Derivative Instruments
Mattel seeks to mitigate its exposure to foreign currency transaction risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts. Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. These derivative instruments have been designated as effective cash flow hedges, whereby the unsettled hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in other comprehensive income (“OCI”). Realized gains and losses for these contracts are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel has not designated these contracts as hedging instruments, and as such, changes in fair value are recorded in the period of change in the consolidated statements of operations. As of September 30, 2016September 30, 2015, and December 31, 2015, Mattel held foreign currency forward exchange contracts with notional amounts of approximately $1.15 billion, $972 million, and $931 million, respectively. As of September 30, 2016 and September 30, 2015, Mattel also held cross currency swap contracts with notional amounts of $16.9 million and $30.0 million, respectively.

13



The following tables present Mattel’s derivative assets and liabilities:
 
Derivative Assets
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
 
 
(In thousands) 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
7,127

 
$
21,138

 
$
15,279

Foreign currency forward exchange contracts
Other noncurrent assets
 
1,122

 
1,027

 
1,611

Total derivatives designated as hedging instruments
 
 
$
8,249

 
$
22,165

 
$
16,890

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
826

 
$
827

 
$
1,216

Cross currency swap contract
Prepaid expenses and other
current assets
 

 
5,288

 

Total derivatives not designated as hedging instruments
 
 
$
826

 
$
6,115

 
$
1,216

Total
 
 
$
9,075

 
$
28,280

 
$
18,106

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
 
 
(In thousands) 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
5,131

 
$
6,773

 
$
1,214

Foreign currency forward exchange contracts
Other noncurrent liabilities
 
1,382

 
672

 
219

Total derivatives designated as hedging instruments
 
 
$
6,513

 
$
7,445

 
$
1,433

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$

 
$
816

 
$
2,287

Cross currency swap contract
Accrued liabilities
 
1,532

 

 

Total derivatives not designated as hedging instruments
 
 
$
1,532

 
$
816

 
$
2,287

Total
 
 
$
8,045

 
$
8,261

 
$
3,720


14



The following tables present the classification and amount of gains and losses, net of tax, from derivatives reported in the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30, 2016
 
September 30, 2015
 
Statements of
Operations
Classification
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
974

 
$
2,157

 
$
8,866

 
$
19,152

 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
 
 
September 30, 2016
 
September 30, 2015
 
Statements of
Operations
Classification
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements  of
Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
642

 
$
12,472

 
$
32,367

 
$
41,708

 
Cost of sales
The net gains of $2.2 million and $12.5 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2016, respectively, and the net gains of $19.2 million and $41.7 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2015, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.
 
 
Amount of Gain
(Loss) Recognized in the
Statements of Operations
 
Statements of Operations
Classification
 
For the Three Months Ended
 
 
September 30,
2016
 
September 30,
2015
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
306

 
$
(14,711
)
 
Non-operating income/expense
Cross currency swap contract
(274
)
 
6,085

 
Non-operating income/expense
Foreign currency forward exchange contracts
619

 
896

 
Cost of sales
Total
$
651

 
$
(7,730
)
 
 

15



 
Amount of Gain
(Loss) Recognized in the
Statements of Operations
 
Statements of Operations
Classification
 
For the Nine Months Ended
 
 
September 30,
2016
 
September 30,
2015
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
5,909

 
$
(55,033
)
 
Non-operating income/expense
Cross currency swap contract
(1,532
)
 
5,288

 
Non-operating income/expense
Foreign currency forward exchange contracts
2,217

 
(3
)
 
Cost of sales
Total
$
6,594

 
$
(49,748
)
 
 
The net gains of $0.7 million and $6.6 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2016, respectively, and the net losses of $7.7 million and $49.7 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2015, respectively, are offset by foreign currency transaction gains and losses on the related hedged balances.
13.
Fair Value Measurements
The following tables present information about Mattel’s assets and liabilities measured and reported in the financial statements at fair value and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:
Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and that are significant to the fair value of the assets or liabilities.
Mattel’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following:
 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
9,075

 
$

 
$
9,075

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
6,513

 
$

 
$
6,513

Cross currency swap contract (a)

 
1,532

 

 
1,532

Total liabilities
$

 
$
8,045

 
$

 
$
8,045

 
 
 
 
 
 
 
 

16



 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
22,992

 
$

 
$
22,992

Cross currency swap contract (a)

 
5,288

 

 
5,288

Total assets
$

 
$
28,280

 
$

 
$
28,280

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
8,261

 
$

 
$
8,261

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
18,106

 
$

 
$
18,106

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
3,720

 
$

 
$
3,720

 ____________________________________________
(a)
The fair values of the foreign currency forward exchange contracts and cross currency swap contracts are based on dealer quotes of market forward rates and reflect the amount that Mattel would receive or pay at their maturity dates for contracts involving the same notional amounts, currencies, and maturity dates.
During the third quarter of 2015, Mattel sold its auction rate security and received proceeds of $32.3 million.
Other Financial Instruments
Mattel’s financial instruments include cash and equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities. The fair values of these instruments approximate their carrying values because of their short-term nature and are classified as Level 2 within the fair value hierarchy.
The estimated fair value of Mattel’s long-term debt, including the current portion, was $2.57 billion (compared to a carrying value of $2.45 billion) as of September 30, 2016, $2.15 billion (compared to a carrying value of $2.10 billion) as of September 30, 2015, and $2.15 billion (compared to a carrying value of $2.10 billion) as of December 31, 2015. The estimated fair values have been calculated based on broker quotes or rates for the same or similar instruments and are classified as Level 2 within the fair value hierarchy.
14.
Earnings Per Share
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Certain of Mattel’s restricted stock units (“RSUs”) are considered participating securities because they contain nonforfeitable rights to dividend equivalents.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

17



The following table reconciles earnings per common share for the three and nine months ended September 30, 2016 and 2015: 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
Net income
$
236,250

 
$
223,784

 
$
144,177

 
$
154,256

Less: net income allocable to participating RSUs (a)
(610
)
 
(1,036
)
 
(1,628
)
 
(2,393
)
Net income available for basic common shares
$
235,640

 
$
222,748

 
$
142,549

 
$
151,863

Weighted average common shares outstanding
341,961

 
339,420

 
341,089

 
338,954

Basic net income per common share
$
0.69

 
$
0.66

 
$
0.42

 
$
0.45

Diluted:
 
 
 
 
 
 
 
Net income
$
236,250

 
$
223,784

 
$
144,177

 
$
154,256

Less: net income allocable to participating RSUs (a)
(609
)
 
(1,035
)
 
(1,628
)
 
(2,393
)
Net income available for diluted common shares
$
235,641

 
$
222,749

 
$
142,549

 
$
151,863

Weighted average common shares outstanding
341,961

 
339,420

 
341,089

 
338,954

Weighted average common equivalent shares arising from:
 
 
 
 
 
 
 
Dilutive stock options and non-participating RSUs
2,265

 
370

 
2,209

 
590

Weighted average number of common and potential common shares
344,226

 
339,790

 
343,298

 
339,544

Diluted net income per common share
$
0.68

 
$
0.66

 
$
0.42

 
$
0.45

 _______________________________________
(a)
During the three and nine months ended September 30, 2016 and 2015, Mattel allocated a proportionate share of both dividends and undistributed earnings to participating RSUs.
The calculation of potential common shares assumes the exercise of dilutive stock options and vesting of non-participating RSUs, net of assumed treasury share repurchases at average market prices. Nonqualified stock options and non-participating RSUs totaling 9.8 million and 7.7 million shares were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2016, respectively, because they were antidilutive. Nonqualified stock options and non-participating RSUs totaling 14.9 million and 8.6 million shares were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2015, respectively, because they were antidilutive.
15.
Employee Benefit Plans
Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements–Employee Benefit Plans” in its 2015 Annual Report on Form 10-K.

18



A summary of the components of net periodic benefit cost for Mattel’s defined benefit pension plans is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Service cost
$
1,609

 
$
624

 
$
4,293

 
$
4,988

Interest cost
6,107

 
7,036

 
18,407

 
19,568

Expected return on plan assets
(6,393
)
 
(7,356
)
 
(19,309
)
 
(22,629
)
Amortization of prior service cost (credit)
8

 
6

 
23

 
(522
)
Recognized actuarial loss
1,732

 
3,138

 
5,194

 
12,919

Curtailment gain

 

 

 
(8,639
)
Settlement loss
1,495

 
5,233

 
1,495

 
5,233

 
$
4,558

 
$
8,681

 
$
10,103

 
$
10,918


A summary of the components of net periodic benefit cost for Mattel’s postretirement benefit plans is as follows:
 
 
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Service cost (credit)
$
13

 
$
(1
)
 
$
39

 
$
41

Interest cost
286

 
270

 
857

 
896

Recognized actuarial loss
37

 
34

 
111

 
111

 
$
336

 
$
303

 
$
1,007

 
$
1,048

During the nine months ended September 30, 2016, Mattel made cash contributions totaling approximately $17 million and $2 million related to its defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2016, Mattel expects to make additional cash contributions of approximately $2 million.
16.
Share-Based Payments
Mattel has various stock compensation plans, which are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements–Share-Based Payments” in its 2015 Annual Report on Form 10-K. Under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel’s common stock on the applicable grant date and expire no later than ten years from the date of grant. Both stock options and time-vesting RSUs generally provide for vesting over a period of three years from the date of grant.
In March 2016, the Compensation Committee approved a new long-term incentive program ("LTIP") for the performance cycle of January 1, 2016–December 31, 2018, while also maintaining the current January 1, 2014–December 31, 2016 LTIP performance cycle.

19



For the January 1, 2016–December 31, 2018 LTIP performance cycle, Mattel granted performance-based restricted stock units ("Performance RSUs") under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan to senior executives. Performance RSUs granted under this program will be earned based on the product of the initial target number of Performance RSUs multiplied by a performance factor based on achievement of Mattel's performance with respect to a cumulative three-year EPS target for the performance cycle ("the 2016-2018 performance-related component") and then adjusted upward or downward based on Mattel's total shareholder return ("TSR") for the three-year performance cycle relative to the TSR realized by companies comprising the S&P 500 (the "2016-2018 market-related component"). The Performance RSUs under the 2016-2018 LTIP performance cycle have dividend equivalent rights that are converted to shares of Mattel common stock only when and to the extent the underlying Performance RSUs are earned and paid. During the three and nine months ended September 30, 2016, Mattel recognized $1.7 million of expense related to the 2016-2018 performance-related component. Additionally, during the three and nine months ended September 30, 2016, Mattel recognized $0.2 million of expense related to the 2016-2018 market-related component.
Compensation expense, included within other selling and administrative expenses in the consolidated statements of operations, related to stock options and RSUs is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Stock option compensation expense
$
2,528

 
$
4,644

 
$
6,826

 
$
11,833

RSU compensation expense
9,840

 
9,196

 
31,918

 
29,297

 
$
12,368

 
$
13,840

 
$
38,744

 
$
41,130

As of September 30, 2016, total unrecognized compensation cost related to unvested share-based payments totaled $100.3 million and is expected to be recognized over a weighted-average period of 2.2 years.
Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. Cash received for stock option exercises for the nine months ended September 30, 2016 and 2015 was $28.5 million and $10.5 million, respectively.
17.
Other Selling and Administrative Expenses
Other selling and administrative expenses include the following:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Design and development
$
54,680

 
$
54,278

 
$
160,264

 
$
164,824

Identifiable intangible asset amortization
5,524

 
7,035

 
16,354

 
20,963

18.
Foreign Currency Transaction Gains and Losses
Currency exchange rate fluctuations impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income to which they relate in the consolidated statements of operations. For hedges of intercompany loans and advances, which do not qualify for hedge accounting treatment, the gains or losses on the hedges resulting from changes in fair value as well as the offsetting transaction gains or losses on the related hedged items, along with unhedged items, are recognized in other non-operating income (expense), net in the consolidated statements of operations.  Inventory purchase and sale transactions denominated in the Euro, British pound sterling, Mexican peso, Canadian dollar, Brazilian real, Russian ruble, and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure for Mattel.

20



Currency transaction (losses) gains included in the consolidated statements of operations are as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Operating income
$
(48,076
)
 
$
(16,463
)
 
$
(85,081
)
 
$
7,976

Other non-operating (expense) income, net
(1,269
)
 
(2,926
)
 
(29,388
)
 
(6,324
)
Net transaction (losses) gains
$
(49,345
)
 
$
(19,389
)
 
$
(114,469
)
 
$
1,652

In March 2016, the Venezuelan government revised its currency exchange platform to a dual system. The Sistema Complementario de Administración de Divisas ("SICAD") rate merged with the official exchange rate, becoming the new Tipo de Cambio Protegido ("DIPRO") exchange rate. The existing Marginal Currency System ("SIMADI") rate was renamed the Tipo de Cambio Complementario ("DICOM") exchange rate. During the three months ended March 31, 2016, Mattel changed its remeasurement rate from the official exchange rate to the new DICOM exchange rate and recognized an unrealized foreign currency exchange loss of approximately $26 million in other non-operating (expense) income, net as a result of the change in the remeasurement rate.
19.
Income Taxes
Mattel’s provision for income taxes was $26.6 million and $38.8 million for the nine months ended September 30, 2016 and 2015, respectively. During the three and nine months ended September 30, 2016, Mattel recognized net discrete tax benefits of $9.0 million and $12.8 million, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. During the three and nine months ended September 30, 2015, Mattel recognized net discrete tax expense of $0.8 million and net discrete tax benefits of $2.8 million, respectively, primarily related to reassessments of prior years' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
In the normal course of business, Mattel is regularly audited by federal, state, and foreign tax authorities. During the third quarter of 2016, the statute of limitations for Mattel’s 2012 federal income tax return expired. Based on the current status of federal, state, and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $11.5 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
During the first quarter of 2016, Mattel retrospectively adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes. As of September 30, 2015, prepaid expenses and other current assets decreased by $203.5 million, other noncurrent assets increased by $199.6 million, accounts payable and accrued liabilities decreased by $0.1 million, and other noncurrent liabilities decreased by $3.8 million from the previously reported amounts. As of December 31, 2015, prepaid expenses and other current assets decreased by $195.8 million, other noncurrent assets increased by $193.6 million, and other noncurrent liabilities decreased by $2.2 million from the previously reported amounts.
20.
Contingencies
Litigation Related to Carter Bryant and MGA Entertainment, Inc.
In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. Bryant also removed Mattel’s suit to the United States District Court for the Central District of California. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to Bratz properties are at stake in the litigation.
Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in Bratz was proper and that he did not misappropriate Mattel property in creating Bratz.

21



In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition, and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging, and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging, and/or television commercials for various MGA product lines, including Bratz. The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors, and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.
In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief.
On January 12, 2007, Mattel filed an Amended Complaint setting forth counterclaims that included additional claims against Bryant as well as claims for copyright infringement, Racketeer Influenced and Corrupt Organizations (“RICO”) violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA, its Chief Executive Officer Isaac Larian, certain MGA affiliates and an MGA employee. The RICO claim alleged that MGA stole Bratz and then, by recruiting and hiring key Mattel employees and directing them to bring with them Mattel confidential and proprietary information, unfairly competed against Mattel using Mattel’s trade secrets, confidential information, and key employees to build their business.
Mattel sought to try all of its claims in a single trial, but in February 2007, the Court decided that the consolidated cases would be tried in two phases, with the first trial to determine claims and defenses related to Mattel’s ownership of Bratz works and whether MGA infringed those works. On May 19, 2008, Bryant reached a settlement agreement with Mattel and is no longer a defendant in the litigation. In the public stipulation entered by Mattel and Bryant in connection with the resolution, Bryant agreed that he was and would continue to be bound by all prior and future Court Orders relating to Bratz ownership and infringement, including the Court’s summary judgment rulings.
The first phase of the first trial resulted in a unanimous jury verdict on July 17, 2008 in favor of Mattel. The jury found that almost all of the Bratz design drawings and other works in question were created by Bryant while he was employed at Mattel; that MGA and Isaac Larian intentionally interfered with the contractual duties owed by Bryant to Mattel, aided and abetted Bryant’s breaches of his duty of loyalty to Mattel, aided and abetted Bryant’s breaches of the fiduciary duties he owed to Mattel, and converted Mattel property for their own use. The same jury determined that defendants MGA, Larian, and MGA Entertainment (HK) Limited infringed Mattel’s copyrights in the Bratz design drawings and other Bratz works, and awarded Mattel total damages of approximately $100 million against the defendants. On December 3, 2008, the Court issued a series of orders rejecting MGA’s equitable defenses and granting Mattel’s motions for equitable relief, including an order enjoining the MGA party defendants from manufacturing, marketing, or selling certain Bratz fashion dolls or from using the “Bratz” name. The Court stayed its December 3, 2008 injunctive orders until further order of the Court.
The parties filed and argued additional motions for post-trial relief, including a request by MGA to enter judgment as a matter of law on Mattel’s claims in MGA’s favor and to reduce the jury’s damages award to Mattel. Mattel additionally moved for the appointment of a receiver. On April 27, 2009, the Court entered an order confirming that Bratz works found by the jury to have been created by Bryant during his Mattel employment were Mattel’s property and that hundreds of Bratz female fashion dolls infringe Mattel’s copyrights. The Court also upheld the jury’s award of damages in the amount of $100 million and ordered an accounting of post-trial Bratz sales. The Court further vacated the stay of the December 3, 2008 orders.
MGA appealed the Court’s equitable orders to the Court of Appeals for the Ninth Circuit. On December 9, 2009, the Ninth Circuit heard oral argument on MGA’s appeal and issued an order staying the District Court’s equitable orders pending a further order to be issued by the Ninth Circuit. On July 22, 2010, the Ninth Circuit vacated the District Court’s equitable orders. The Ninth Circuit stated that, because of several jury instruction errors it identified, a significant portion-if not all-of the jury verdict and damage award should be vacated.

22



In its opinion, the Ninth Circuit found that the District Court erred in concluding that Mattel’s Invention Agreement unambiguously applied to “ideas;” that it should have considered extrinsic evidence in determining the application of the agreement; and if the conclusion turns on conflicting evidence, it should have been up to the jury to decide. The Ninth Circuit also concluded that the District Judge erred in transferring the entire brand to Mattel based on misappropriated names and that the Court should have submitted to the jury, rather than deciding itself, whether Bryant’s agreement assigned works created outside the scope of his employment and whether Bryant’s creation of the Bratz designs and sculpt was outside of his employment. The Court then went on to address copyright issues which would be raised after a retrial, since Mattel “might well convince a properly instructed jury” that it owns Bryant’s designs and sculpt. The Ninth Circuit stated that the sculpt itself was entitled only to “thin” copyright protection against virtually identical works, while the Bratz sketches were entitled to “broad” protection against substantially similar works; in applying the broad protection, however, the Ninth Circuit found that the lower court had erred in failing to filter out all of the unprotectable elements of Bryant’s sketches. This mistake, the Court said, caused the lower court to conclude that all Bratz dolls were substantially similar to Bryant’s original sketches.
Judge Stephen Larson, who presided over the first trial, retired from the bench during the course of the appeal, and the case was transferred to Judge David O. Carter. After the transfer, Judge Carter granted Mattel leave to file a Fourth Amended Answer and Counterclaims which focused on RICO, trade secret and other claims, and added additional parties, and subsequently granted in part and denied in part a defense motion to dismiss those counterclaims.
Later, on August 16, 2010, MGA asserted several new claims against Mattel in response to Mattel’s Fourth Amended Answer and Counterclaims, including claims for alleged trade secret misappropriation, an alleged violation of RICO, and wrongful injunction. MGA alleged, in summary, that, for more than a decade dating back to 1992, Mattel employees engaged in a pattern of stealing alleged trade secret information from competitors “toy fair” showrooms, and then sought to conceal that alleged misconduct. Mattel moved to strike and/or dismiss these claims, as well as certain MGA allegations regarding Mattel’s motives for filing suit. The Court granted that motion as to the wrongful injunction claim, which it dismissed with prejudice, and as to the allegations about Mattel’s motives, which it struck. The Court denied the motion as to MGA’s trade secret misappropriation claim and its claim for violations of RICO.
The Court resolved summary judgment motions in late 2010. Among other rulings, the Court dismissed both parties’ RICO claims; dismissed Mattel’s claim for breach of fiduciary duty and portions of other claims as “preempted” by the trade secrets act; dismissed MGA’s trade dress infringement claims; dismissed MGA’s unjust enrichment claim; dismissed MGA’s common law unfair competition claim; and dismissed portions of Mattel’s copyright infringement claim as to “later generation” Bratz dolls.
Trial of all remaining claims began in early January 2011. During the trial, and before the case was submitted to the jury, the Court granted MGA’s motions for judgment as to Mattel’s claims for aiding and abetting breach of duty of loyalty and conversion. The Court also granted a defense motion for judgment on portions of Mattel’s claim for misappropriation of trade secrets relating to thefts by former Mattel employees located in Mexico.
The jury reached verdicts on the remaining claims in April 2011. In those verdicts, the jury ruled against Mattel on its claims for ownership of Bratz-related works, for copyright infringement, and for misappropriation of trade secrets. The jury ruled for MGA on its claim of trade secret misappropriation as to 26 of its claimed trade secrets and awarded $88.5 million in damages. The jury ruled against MGA as to 88 of its claimed trade secrets. The jury found that Mattel’s misappropriation was willful and malicious.
In early August 2011, the Court ruled on post-trial motions. The Court rejected MGA’s unfair competition claims and also rejected Mattel’s equitable defenses to MGA’s misappropriation of trade secrets claim. The Court reduced the jury’s damages award of $88.5 million to $85.0 million. The Court awarded MGA an additional $85.0 million in punitive damages and approximately $140 million in attorney’s fees and costs. The Court entered a judgment which totaled approximately $310 million in favor of MGA.
On August 11, 2011, Mattel appealed the judgment, challenging on appeal the entirety of the District Court’s monetary award in favor of MGA, including both the award of $170 million in damages for alleged trade secret misappropriation and approximately $140 million in attorney’s fees and costs. On January 24, 2013, the Ninth Circuit Court of Appeals issued a ruling on Mattel’s appeal. In that ruling, the Court found that MGA’s claim for trade secrets misappropriation was not compulsory to any Mattel claim and could not be filed as a counterclaim-in-reply. Accordingly, the Court of Appeals vacated the portion of the judgment awarding damages and attorney’s fees and costs to MGA for prevailing on its trade secrets misappropriation claim, totaling approximately $172.5 million. It ruled that, on remand, the District Court must dismiss MGA’s trade secret claim without prejudice. In its ruling, the Court of Appeals also affirmed the District Court’s award of attorney’s fees and costs under the Copyright Act. Accordingly, Mattel recorded a litigation accrual of approximately $138 million during the fourth quarter of 2012 to cover these fees and costs.

23



Because multiple claimants asserted rights to the attorney’s fees portion of the judgment, on February 13, 2013, Mattel filed a motion in the District Court for orders permitting Mattel to interplead the proceeds of the judgment and releasing Mattel from liability to any claimant based on Mattel’s payment of the judgment.
On February 27, 2013, MGA filed a motion for leave to amend its prior complaint in the existing federal court lawsuit so that it could reassert its trade secrets claim. Mattel opposed that motion. On December 17, 2013, the District Court denied MGA’s motion for leave to amend and entered an order dismissing MGA’s trade secrets claim without prejudice. Also on December 17, 2013, following a settlement between MGA and certain insurance carriers, the District Court denied Mattel’s motion for leave to interplead the proceeds of the judgment.
On December 21, 2013, a stipulation regarding settlement with insurers and payment of judgment was filed in the District Court, which provided that (i) Mattel would pay approximately $138 million, including accrued interest, in full satisfaction of the copyright fees judgment, (ii) all parties would consent to entry of an order exonerating and discharging the appeal bond posted by Mattel, and (iii) MGA’s insurers would dismiss all pending actions related to the proceeds of the copyright fees judgment, including an appeal by Evanston Insurance Company in an action against Mattel that was pending in the Ninth Circuit. On December 23, 2013, Mattel paid the copyright fees judgment in the total sum, including interest, of approximately $138 million. On December 26, 2013, the District Court entered an order exonerating and discharging the appeal bond posted by Mattel, and on December 27, 2013, MGA filed an acknowledgment of satisfaction of judgment. On December 30, 2013, Evanston Insurance Company’s appeal in its action against Mattel was dismissed.
On January 13, 2014, MGA filed a new, but virtually identical, trade secrets claim against Mattel in Los Angeles County Superior Court. In its complaint, MGA purports to seek damages in excess of $1 billion. Mattel believes that MGA’s claim should be barred as a matter of law, and intends to vigorously defend against it. On December 3, 2014, the Court overruled Mattel’s request to dismiss MGA’s case as barred as a result of prior litigation between the parties. In light of that ruling, Mattel believes that it is reasonably possible that damages in this matter could range from $0 to approximately $12.5 million. In addition, Mattel believes that if such damages are awarded, it is reasonably possible that pre-judgment interest, ranging from $0 to approximately $10 million, could be awarded. Mattel may be entitled to an offset against any damages awarded to MGA. Mattel has not quantified the amount of any such offset as it is not currently estimable. As Mattel believes a loss in this matter is reasonably possible but not probable, no liability has been accrued to date.
Litigation Related to Yellowstone do Brasil Ltda.
Yellowstone do Brasil Ltda. (formerly known as Trebbor Informática Ltda.) was a customer of Mattel’s subsidiary Mattel do Brasil Ltda. when a commercial dispute arose between Yellowstone and Mattel do Brasil regarding the supply of product and related payment terms. As a consequence of the dispute, in April 1999, Yellowstone filed a declarative action against Mattel do Brasil before the 15th Civil Court of Curitiba - State of Parana (the “Trial Court”), requesting the annulment of its security bonds and promissory notes given to Mattel do Brasil as well as requesting the Trial Court to find Mattel do Brasil liable for damages incurred as a result of Mattel do Brasil’s alleged abrupt and unreasonable breach of an oral exclusive distribution agreement between the parties relating to the supply and sale of toys in Brazil. Yellowstone’s complaint sought alleged loss of profits of approximately $1 million, plus an unspecified amount of damages consisting of: (i) compensation for all investments made by Yellowstone to develop Mattel do Brasil’s business; (ii) reimbursement of the amounts paid by Yellowstone to terminate labor and civil contracts in connection with the business; (iii) compensation for alleged unfair competition and for the goodwill of trade; and (iv) compensation for non-pecuniary damages.
Mattel do Brasil filed its defenses to these claims and simultaneously presented a counterclaim for unpaid accounts receivable for goods supplied to Yellowstone in the approximate amount of $4 million.
During the evidentiary phase a first accounting report was submitted by a court-appointed expert. Such report stated that Yellowstone had invested approximately $3 million in its business. Additionally, the court-appointed expert calculated a loss of profits compensation of approximately $1 million. Mattel do Brasil challenged the report since it was not made based on the official accounting documents of Yellowstone and since the report calculated damages based only on documents unilaterally submitted by Yellowstone.
The Trial Court accepted the challenge and ruled that a second accounting examination should take place in the lawsuit. Yellowstone appealed the decision to the Court of Appeals of the State of Parana (the “Appeals Court”), but it was upheld by the Appeals Court.
The second court-appointed expert’s report submitted at trial did not assign a value to any of Yellowstone’s claims and found no evidence of causation between Mattel do Brasil’s actions and such claims.

24



In January 2010, the Trial Court ruled in favor of Mattel do Brasil and denied all of Yellowstone’s claims based primarily on the lack of any causal connection between the acts of Mattel do Brasil and Yellowstone’s alleged damages. Additionally, the Trial Court upheld Mattel do Brasil’s counterclaim and ordered Yellowstone to pay Mattel do Brasil approximately $4 million. The likelihood of Mattel do Brasil recovering this amount was uncertain due to the fact that Yellowstone was declared insolvent and filed for bankruptcy protection. In February 2010, Yellowstone filed a motion seeking clarification of the decision which was denied.
In September 2010, Yellowstone filed a further appeal with the Appeals Court. Under Brazilian law, the appeal was de novo and Yellowstone restated all of the arguments it made at the Trial Court level. Yellowstone did not provide any additional information supporting its unspecified alleged damages. The Appeals Court held hearings on the appeal in March and April 2013. On July 26, 2013, the Appeals Court awarded Yellowstone approximately $17 million in damages, plus attorney's fees, as adjusted for inflation and interest. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. On August 2, 2013, Mattel do Brasil filed a motion with the Appeals Court for clarification since the written decision contained clear errors in terms of amounts awarded and interest and inflation adjustments. Mattel do Brasil’s motion also asked the Appeals Court to decide whether Yellowstone’s award could be offset by the counterclaim award, despite Yellowstone’s status as a bankrupt entity. Yellowstone also filed a motion for clarification on August 5, 2013. A decision on the clarification motions was rendered on November 11, 2014, and the Appeals Court accepted partially the arguments raised by Mattel do Brasil. As a result, the Appeals Court awarded Yellowstone approximately $14.5 million in damages, as adjusted for inflation and interest, plus attorney's fees. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. The decision also recognized the existence of legal rules that support Mattel do Brasil’s right to offset its counterclaim award of approximately $7.5 million. Mattel do Brasil filed a new motion for clarification with the Appeals Court on January 21, 2015, due to the incorrect statement made by the reporting judge of the Appeals Court, that the court-appointed expert analyzed the “accounting documents” of Yellowstone. On April 26, 2015, a decision on the motion for clarification was rendered. The Appeals Court ruled that the motion for clarification was denied and imposed a fine on Mattel do Brasil equal to 1% of the value of the claims made for the delay caused by the motion. On July 3, 2015, Mattel do Brasil filed a special appeal to the Superior Court of Justice based upon both procedural and substantive grounds. This special appeal seeks to reverse the Appeals Court's decision of July 26, 2013, and to reverse the fine as inappropriate under the law. This special appeal was submitted to the Appeals Court which must rule on its admissibility before it is transferred to the Superior Court.
Yellowstone also filed a special appeal with the Appeals Court in February 2015, which was made available to Mattel do Brasil on October 7, 2015. Yellowstone's special appeal seeks to reverse the Appeals Court decision with respect to: (a) the limitation on Yellowstone's loss of profits claim to the amount requested in the complaint, instead of the amount contained in the first court-appointed experts report, and (b) the award of damages to Mattel do Brasil on the counterclaim, since the specific amount was not requested in Mattel do Brasil's counterclaim brief.
On October 19, 2015, Mattel do Brasil filed its answer to the special appeal filed by Yellowstone and Yellowstone filed its answer to the special appeal filed by Mattel do Brasil. On April 4, 2016, the Appeals Court rendered a decision denying the admissibility of Mattel’s and Yellowstone’s special appeals. On May 11, 2016, both Mattel and Yellowstone filed interlocutory appeals and are awaiting the decision.
Mattel believes that it is reasonably possible that a loss in this matter could range from $0 to approximately $14.0 million. The high end of this range, approximately $14.0 million, is based on the calculation of the current amount of the damages (reported in the first court-appointed examination report submitted in the lawsuit), and loss of profits (indicated in the complaint by Yellowstone), including interest, inflation, currency adjustments, plus attorney's fees. Mattel do Brasil will be entitled to offset its counterclaim award of approximately $6.1 million, the current amount including inflation, and currency adjustment, against such loss. The existence of procedural matters that will be addressed to the Superior Court of Justice adds some uncertainty to the final outcome of the matter. Mattel do Brasil believes, however, that it has valid legal grounds for an appeal of the Appeals Court decision and currently does not believe that a loss is probable for this matter. Accordingly, a liability has not been accrued to date. Mattel do Brasil may be required by the Trial Court to place a bond for the full amount of the damage award in escrow pending an appeal decision by the Superior Court.
21.
Segment Information
Mattel, through its subsidiaries, sells a broad variety of toy products which are grouped into four major brand categories:
Mattel Girls & Boys Brands—including Barbie® fashion dolls and accessories (“Barbie”), Monster High®, Ever After High®, Polly Pocket®, and DC Super Hero Girls™ (collectively “Other Girls”), Hot Wheels® and Matchbox® vehicles and play sets (collectively “Wheels”), and CARS™, DC Comics™, WWE® Wrestling, Minecraft®, Max Steel®, BOOMco.®, Toy Story®, and games and puzzles (collectively “Entertainment”).

25



Fisher-Price Brands—including Fisher-Price®, Little People®, Baby Gear™, Laugh & Learn®, and Imaginext® (collectively “Core Fisher-Price”), Thomas & Friends™, Dora the Explorer®, Mickey Mouse® Clubhouse, and Disney Jake and the Never Land Pirates® (collectively “Fisher-Price Friends”), and Power Wheels®.
American Girl Brands—including Truly Me®, Girl of the Year®, BeForever®, Bitty Baby®, and WellieWishers™. American Girl Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores, as well as sold directly to certain retailers.
Construction and Arts & Crafts Brands—including MEGA BLOKS® and RoseArt®.
Mattel’s operating segments are: (i) North America, which consists of the US and Canada, (ii) International, and (iii) American Girl.  The North America and International segments sell products in the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brands categories, although some are developed and adapted for particular international markets.
Segment Data
The following tables present information about revenues, income, and assets by segment. In the following tables, Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as “gross sales” and reconciled to net sales in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures” of this Quarterly Report on Form 10-Q). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to brands or individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income represents each segment’s operating income, while consolidated operating income represents income from operations before net interest, other non-operating income (expense), and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes costs not allocated to individual segments, including charges related to incentive compensation, share-based payments, and corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency exchange rates on intercompany transactions.
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Revenues by Segment
 
 
 
 
 
 
 
North America
$
1,071,030

 
$
1,069,116

 
$
2,077,147

 
$
2,053,053

International
774,211

 
798,584

 
1,614,169

 
1,732,125

American Girl
130,109

 
115,651

 
298,933

 
313,504

Gross sales
1,975,350

 
1,983,351

 
3,990,249

 
4,098,682

Sales adjustments
(179,775
)
 
(191,383
)
 
(367,999
)
 
(395,813
)
Net sales
$
1,795,575

 
$
1,791,968

 
$
3,622,250

 
$
3,702,869


26



 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
Segment Income
 
 
 
 
 
 
 
North America
$
265,597

 
$
230,216

 
$
371,096

 
$
283,356

International
150,232

 
142,576

 
155,949

 
160,250

American Girl
28,056

 
7,142

 
21,850

 
5,617

 
443,885

 
379,934

 
548,895

 
449,223

Corporate and other expense (a)
(126,489
)
 
(79,161
)
 
(292,305
)
 
(202,354
)
Operating income
317,396

 
300,773

 
256,590

 
246,869

Interest expense
24,989

 
21,409

 
70,133

 
62,516

Interest (income)
(2,477
)
 
(1,990
)
 
(7,550
)
 
(5,757
)
Other non-operating expense (income), net
856

 
(4,785
)
 
23,210

 
(2,984
)
Income before income taxes
$
294,028

 
$
286,139

 
$
170,797

 
$
193,094

__________________________________________ 
(a)
Corporate and other expense includes severance and restructuring expenses of $6.4 million and $33.6 million for the three and nine months ended September 30, 2016, respectively, and $13.3 million and $61.1 million for the three and nine months ended September 30, 2015, respectively, and share-based compensation expense of $12.4 million and $38.7 million for the three and nine months ended September 30, 2016, respectively, and $13.8 million and $41.1 million for the three and nine months ended September 30, 2015, respectively.
Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.
 
September 30,
2016
 
September 30,
2015
 
December 31,
2015
 
(In thousands)
Assets by Segment
 
 
 
 
 
North America
$
1,050,120

 
$
1,011,546

 
$
764,945

International
1,049,008

 
1,063,727

 
759,709

American Girl
184,101

 
147,517

 
108,414

 
2,283,229

 
2,222,790

 
1,633,068

Corporate and other
156,125

 
99,245

 
99,552

Accounts receivable and inventories, net
$
2,439,354