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 March 31, 2017
¨
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
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 April 14, 2017:
342,556,368 shares

1



MATTEL, INC. AND SUBSIDIARIES

 
 
Page
 
 
 
 
PART I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)
Mattel is including this Cautionary Statement to caution investors and qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”) for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “seeks,” “aims,” “estimates,” “projects,” “on track” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” or “may.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. These forward-looking statements are all based on currently available operating, financial, economic and competitive information and are subject to various risks and uncertainties. Mattel’s actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties detailed in Part 1, Item 1A “Risk Factors” in Mattel’s 2016 Annual Report on Form 10-K. Mattel expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new developments or otherwise.


2



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(Unaudited; in thousands, except share data)
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and equivalents
$
381,887

 
$
599,708

 
$
869,531

Accounts receivable, net
806,800

 
748,074

 
1,115,217

Inventories
769,799

 
698,316

 
613,798

Prepaid expenses and other current assets
362,879

 
349,859

 
341,518

Total current assets
2,321,365

 
2,395,957

 
2,940,064

Noncurrent Assets
 
 
 
 
 
Property, plant, and equipment, net
783,469

 
732,667

 
773,965

Goodwill
1,389,920

 
1,401,567

 
1,387,628

Other noncurrent assets
1,426,175

 
1,438,754

 
1,392,137

Total Assets
$
5,920,929

 
$
5,968,945

 
$
6,493,794

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Short-term borrowings
$
180,000

 
$

 
$
192,168

Current portion of long-term debt
250,000

 
300,000

 

Accounts payable
481,412

 
424,349

 
664,857

Accrued liabilities
450,316

 
495,383

 
628,826

Income taxes payable
9,316

 
14,393

 
19,722

Total current liabilities
1,371,044

 
1,234,125

 
1,505,573

Noncurrent Liabilities
 
 
 
 
 
Long-term debt
1,884,982

 
1,785,427

 
2,134,271

Other noncurrent liabilities
448,962

 
474,273

 
446,168

Total noncurrent liabilities
2,333,944

 
2,259,700

 
2,580,439

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
1,798,726

 
1,797,967

 
1,790,832

Treasury stock at cost: 98.8 million shares, 101.0 million shares, and 99.0 million shares, respectively
(2,422,197
)
 
(2,476,006
)
 
(2,426,749
)
Retained earnings
3,301,875

 
3,542,486

 
3,545,359

Accumulated other comprehensive loss
(903,832
)
 
(830,696
)
 
(943,029
)
Total stockholders’ equity
2,215,941

 
2,475,120

 
2,407,782

Total Liabilities and Stockholders’ Equity
$
5,920,929

 
$
5,968,945

 
$
6,493,794

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
March 31,
2017
 
March 31,
2016
 
(Unaudited; in thousands, except per share amounts)
Net Sales
$
735,618

 
$
869,399

Cost of sales
456,840

 
480,728

Gross Profit
278,778

 
388,671

Advertising and promotion expenses
73,562

 
86,943

Other selling and administrative expenses
332,244

 
350,874

Operating Loss
(127,028
)
 
(49,146
)
Interest expense
22,030

 
22,520

Interest (income)
(2,466
)
 
(2,360
)
Other non-operating (income) expense, net
(921
)
 
24,173

Loss Before Income Taxes
(145,671
)
 
(93,479
)
Benefit from income taxes
(32,440
)
 
(20,520
)
Net Loss
$
(113,231
)
 
$
(72,959
)
Net Loss Per Common Share—Basic
$
(0.33
)
 
$
(0.21
)
Weighted average number of common shares
342,914

 
340,369

Net Loss Per Common Share—Diluted
$
(0.33
)
 
$
(0.21
)
Weighted average number of common and potential common shares
342,914

 
340,369

Dividends Declared Per Common Share
$
0.38

 
$
0.38

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

4



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(Unaudited; in thousands)
Net Loss
$
(113,231
)
 
$
(72,959
)
Other Comprehensive Income, Net of Tax:
 
 
 
Currency translation adjustments
54,269

 
40,021

Defined benefit pension plan adjustments
1,055

 
1,085

Net unrealized loss on available-for-sale security
(1,314
)
 

Net unrealized losses on derivative instruments:
 
 
 
Unrealized holding losses
(12,584
)
 
(15,893
)
Reclassification adjustment for realized gains included in net income
(2,229
)
 
(7,010
)
 
(14,813
)
 
(22,903
)
Other Comprehensive Income, Net of Tax
39,197

 
18,203

Comprehensive Loss
$
(74,034
)
 
$
(54,756
)

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

5



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended
March 31,
2017
 
March 31,
2016
 
(Unaudited; in thousands)
Cash Flows From Operating Activities:
 
Net loss
$
(113,231
)
 
$
(72,959
)
Adjustments to reconcile net income to net cash flows used for operating activities:
 
 
 
Depreciation
59,312

 
60,002

Amortization
5,239

 
6,338

Deferred income taxes
(45,434
)
 
(35,197
)
Share-based compensation
12,671

 
12,364

Increase (decrease) from changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
323,810

 
402,501

Inventories
(146,003
)
 
(96,132
)
Prepaid expenses and other current assets
(24,980
)
 
20,833

Accounts payable, accrued liabilities, and income taxes payable
(363,469
)
 
(358,700
)
Other, net
(17,956
)
 
(28,303
)
Net cash flows used for operating activities
(310,041
)
 
(89,253
)
Cash Flows From Investing Activities:
 
Purchases of tools, dies, and molds
(29,286
)
 
(31,077
)
Purchases of other property, plant, and equipment
(41,046
)
 
(14,232
)
Payments for acquisition, net of cash acquired

 
(32,606
)
Proceeds from foreign currency forward exchange contracts
25,928

 
19,379

Other, net
(291
)
 
3,792

Net cash flows used for investing activities
(44,695
)
 
(54,744
)
Cash Flows From Financing Activities:
 
Payments of short-term borrowings, net
(192,168
)
 
(16,914
)
Proceeds from short-term borrowings, net
180,000

 

Payments of dividends on common stock
(130,129
)
 
(129,202
)
Proceeds from exercise of stock options
1,415

 
12,421

Other, net
(1,764
)
 
(670
)
Net cash flows used for financing activities
(142,646
)
 
(134,365
)
Effect of Currency Exchange Rate Changes on Cash
9,738

 
(14,744
)
Decrease in Cash and Equivalents
(487,644
)
 
(293,106
)
Cash and Equivalents at Beginning of Period
869,531

 
892,814

Cash and Equivalents at End of Period
$
381,887

 
$
599,708

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 2016 Annual Report on Form 10-K.
2.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $23.3 million, $31.9 million, and $21.4 million as of March 31, 2017March 31, 2016, and December 31, 2016, respectively.
3.
Inventories
Inventories include the following:
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Raw materials and work in process
$
121,746

 
$
126,511

 
$
112,327

Finished goods
648,053

 
571,805

 
501,471

 
$
769,799

 
$
698,316

 
$
613,798

4.
Property, Plant, and Equipment
Property, plant, and equipment, net includes the following: 
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Land
$
25,186

 
$
27,125

 
$
25,113

Buildings
285,051

 
276,413

 
280,226

Machinery and equipment
850,723

 
777,831

 
828,969

Software
364,495

 
337,147

 
356,622

Tools, dies, and molds
880,171

 
842,136

 
869,385

Capital leases
23,970

 
23,970

 
23,970

Leasehold improvements
270,659

 
250,556

 
261,254

 
2,700,255

 
2,535,178

 
2,645,539

Less: accumulated depreciation
(1,916,786
)
 
(1,802,511
)
 
(1,871,574
)
 
$
783,469

 
$
732,667

 
$
773,965


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.
The change in the carrying amount of goodwill by operating segment for the three months ended March 31, 2017 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,
2016
 
Currency
Exchange Rate
Impact
 
March 31,
2017
 
(In thousands)
North America
$
730,139

 
$
483

 
$
730,622

International
445,008

 
1,746

 
446,754

American Girl
212,481

 
63

 
212,544

Total goodwill
$
1,387,628

 
$
2,292

 
$
1,389,920

Acquisitions of Sproutling, Inc. and Fuhu, assets
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 finalized the valuation of the assets acquired and liabilities assumed in the fourth quarter of 2016, which resulted in adjustments to the purchase price allocation during the measurement period. During 2016, Mattel recognized approximately $2 million 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: 
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Deferred income taxes
$
554,056

 
$
548,184

 
$
508,363

Nonamortizable identifiable intangibles
461,179

 
483,506

 
458,589

Identifiable intangibles (net of amortization of $157.9 million, $136.8 million, and $153.7 million, respectively)
198,156

 
218,032

 
201,859

Other
212,784

 
189,032

 
223,326

 
$
1,426,175

 
$
1,438,754

 
$
1,392,137

In connection with the acquisitions of Sproutling and substantially all of the assets of Fuhu in the first quarter of 2016, 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.
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. 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.

8



7.
Accrued Liabilities
Accrued liabilities include the following: 
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Royalties
$
46,973

 
$
48,170

 
$
107,077

Advertising and promotion
31,325

 
21,533

 
85,116

Taxes other than income taxes
30,209

 
24,108

 
67,555

Other
341,809

 
401,572

 
369,078

 
$
450,316

 
$
495,383

 
$
628,826

8.
Seasonal Financing
Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility ("Credit Facility") with a commercial bank group. The 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 0.00% 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 facility renewal related to creditors involved in both the prior facility and amended 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 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 March 31, 2017.
The credit agreement 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.
Long-Term Debt
Long-term debt includes the following:
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(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
300,000

 
600,000

 
300,000

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

 

 
350,000

Debt issuance costs
(15,018
)
 
(14,573
)
 
(15,729
)
 
2,134,982

 
2,085,427

 
2,134,271

Less: current portion
(250,000
)
 
(300,000
)
 

Total long-term debt
$
1,884,982

 
$
1,785,427

 
$
2,134,271



9



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:
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Benefit plan liabilities
$
179,720

 
$
204,025

 
$
192,466

Noncurrent tax liabilities
98,208

 
107,148

 
96,871

Other
171,034

 
163,100

 
156,831

 
$
448,962

 
$
474,273

 
$
446,168

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 March 31, 2017
 
Derivative
Instruments
 
Available-for-Sale Security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2016
$
17,469

 
$
3,149

 
$
(157,704
)
 
$
(805,943
)
 
$
(943,029
)
Other comprehensive (loss) income before reclassifications
(12,584
)
 
(1,314
)
 
(100
)
 
54,269

 
40,271

Amounts reclassified from accumulated other comprehensive income (loss)
(2,229
)
 

 
1,155

 

 
(1,074
)
Net (decrease) increase in other comprehensive income
(14,813
)
 
(1,314
)
 
1,055

 
54,269

 
39,197

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of March 31, 2017
$
2,656

 
$
1,835

 
$
(156,649
)
 
$
(751,674
)
 
$
(903,832
)

10



 
For the Three Months Ended March 31, 2016
 
Derivative
Instruments
 
Available-for-Sale Security
 
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 (loss) income before reclassifications
(15,893
)
 

 
(1,024
)
 
40,021

 
23,104

Amounts reclassified from accumulated other comprehensive income (loss)
(7,010
)
 

 
2,109

 

 
(4,901
)
Net (decrease) increase in other comprehensive income
(22,903
)
 

 
1,085

 
40,021

 
18,203

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of March 31, 2016
$
(7,540
)
 
$

 
$
(158,773
)
 
$
(664,383
)
 
$
(830,696
)
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
 
 
 
March 31,
2017
 
March 31,
2016
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
Gain on foreign currency forward exchange contracts
$
2,207

 
$
7,212

 
Cost of sales
 
22

 
(202
)
 
Provision for income taxes
 
$
2,229

 
$
7,010

 
Net income
Defined Benefit Pension Plans

 

 
 
Amortization of prior service cost
$
(8
)
 
$
(8
)
 
(a)
Recognized actuarial loss
(1,857
)
 
(1,873
)
 
(a)
 
(1,865
)
 
(1,881
)
 
 
 
710

 
(228
)
 
Provision for income taxes
 
$
(1,155
)
 
$
(2,109
)
 
Net income
 ____________________________________________
(a)
The amortization of prior service cost 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 gain of $54.3 million for the three months ended March 31, 2017, primarily due to the strengthening of the Mexican Peso and Euro against the US dollar. Currency translation adjustments resulted in a net gain of $40.0 million for the three months ended March 31, 2016, primarily due to the strengthening of the Euro against the US dollar at the end of the quarter.

11



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 March 31, 2017March 31, 2016, and December 31, 2016, Mattel held foreign currency forward exchange contracts with notional amounts of approximately $1.48 billion, $1.22 billion, and $1.20 billion, respectively.
The following tables present Mattel’s derivative assets and liabilities:
 
Derivative Assets
 
Balance Sheet Classification
 
Fair Value
 
 
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
 
 
(In thousands) 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
12,198

 
$
3,748

 
$
18,747

Foreign currency forward exchange contracts
Other noncurrent assets
 
2,683

 
82

 
5,782

Total derivatives designated as hedging instruments
 
 
$
14,881

 
$
3,830

 
$
24,529

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
2,303

 
$
4,739

 
$
2,678

Total
 
 
$
17,184

 
$
8,569

 
$
27,207

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
Balance Sheet Classification
 
Fair Value
 
 
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
 
 
(In thousands) 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
7,808

 
$
11,352

 
$
1,917

Foreign currency forward exchange contracts
Other noncurrent liabilities
 
706

 
3,852

 
223

Total derivatives designated as hedging instruments
 
 
$
8,514

 
$
15,204

 
$
2,140

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
6,671

 
$
472

 
$
7,072

Total
 
 
$
15,185

 
$
15,676

 
$
9,212


12



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
 
 
 
March 31, 2017
 
March 31, 2016
 
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
$
(12,584
)
 
$
2,229

 
$
(15,893
)
 
$
7,010

 
Cost of sales
The net gains of $2.2 million and $7.0 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three months ended March 31, 2017 and 2016, 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
 
 
March 31,
2017
 
March 31,
2016
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
25,569

 
$
23,592

 
Other non-operating income/expense
Foreign currency forward exchange contracts
386

 
1,125

 
Cost of sales
Total
$
25,955

 
$
24,717

 
 
The net gains of $26.0 million and $24.7 million recognized in the consolidated statements of operations for the three months ended March 31, 2017 and 2016, 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.

13



Mattel’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following:
 
March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
17,184

 
$

 
$
17,184

Available-for-sale security (b)
13,624

 

 

 
13,624

Total assets
$
13,624

 
$
17,184

 
$

 
$
30,808

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
15,185

 
$

 
$
15,185

 
 
 
 
 
 
 
 
 
March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
8,569

 
$

 
$
8,569

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
15,676

 
$

 
$
15,676

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
27,207

 
$

 
$
27,207

Available-for-sale security (b)
14,939

 

 

 
14,939

Total assets
$
14,939

 
$
27,207

 
$

 
$
42,146

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
9,212

 
$

 
$
9,212

 ____________________________________________
(a)
The fair value of the foreign currency forward exchange contracts is 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.
(b)
The fair value of the available-for-sale security is based on the quoted price on an active public exchange.
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 $2.19 billion (compared to a carrying value of $2.15 billion) as of March 31, 2017, $2.15 billion (compared to a carrying value of $2.10 billion) as of March 31, 2016, and $2.18 billion (compared to a carrying value of $2.15 billion) as of December 31, 2016. 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.

14



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.
The following table reconciles earnings per common share for the three months ended March 31, 2017 and 2016: 
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands, except per share amounts)
Basic:
 
 
 
Net loss
$
(113,231
)
 
$
(72,959
)
Less: net loss allocable to participating RSUs (a)

 

Net loss available for basic common shares
$
(113,231
)
 
$
(72,959
)
Weighted average common shares outstanding
342,914

 
340,369

Basic net loss per common share
$
(0.33
)
 
$
(0.21
)
Diluted:
 
 
 
Net loss
$
(113,231
)
 
$
(72,959
)
Less: net loss allocable to participating RSUs (a)

 

Net loss available for diluted common shares
$
(113,231
)
 
$
(72,959
)
Weighted average common shares outstanding
342,914

 
340,369

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

 

Weighted average number of common and potential common shares
342,914

 
340,369

Diluted net loss per common share
$
(0.33
)
 
$
(0.21
)
 _______________________________________
(a)
During the three months ended March 31, 2017 and 2016, Mattel did not allocate its net loss to its participating RSUs as its participating RSUs are not obligated to share in Mattel's losses.
Mattel was in a net loss position during the three months ended March 31, 2017 and 2016, and, accordingly, all outstanding nonqualified stock options and non-participating RSUs were excluded from the calculation of diluted earnings per common share because their effect would be 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 2016 Annual Report on Form 10-K.

15



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
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Service cost
$
1,166

 
$
1,422

Interest cost
5,320

 
6,141

Expected return on plan assets
(5,733
)
 
(6,473
)
Amortization of prior service cost
8

 
8

Recognized actuarial loss
1,820

 
1,836

 
$
2,581

 
$
2,934


A summary of the components of net periodic benefit cost for Mattel’s postretirement benefit plans is as follows:
 
 
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Service cost
$
1

 
$
13

Interest cost
255

 
286

Recognized actuarial loss
37

 
37

 
$
293

 
$
336

During the three months ended March 31, 2017, Mattel made cash contributions totaling approximately $2 million related to its defined benefit pension and postretirement benefit plans. During the remainder of 2017, Mattel expects to make additional cash contributions of approximately $8 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 2016 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 2017, the Compensation Committee approved a new long-term incentive program ("LTIP") for the performance cycle of January 1, 2017–December 31, 2019. As of March 31, 2017, Mattel has two long-term incentive programs in place: (i) a January 1, 2016–December 31, 2018 performance cycle, and (ii) a January 1, 2017–December 31, 2019 performance cycle.
For the January 1, 2017–December 31, 2019 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 a three-year average of annual achievements of Mattel's performance with respect to annual EPS targets for the performance cycle ("the 2017-2019 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 "2017-2019 market-related component"). The Performance RSUs under the 2017-2019 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.

16



During the three months ended March 31, 2017, Mattel recognized no expense related to the 2017-2019 performance-related component or 2016-2018 performance-related component. Additionally, during the three months ended March 31, 2017, Mattel recognized no expense related to the 2017-2019 market-related component and $0.1 million of expense related to the 2016-2018 market-related component. These amounts are included within RSU compensation expense in the table below.
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
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Stock option compensation expense
$
3,073

 
$
2,379

RSU compensation expense
9,598

 
9,985

 
$
12,671

 
$
12,364

As of March 31, 2017, total unrecognized compensation cost related to unvested share-based payments totaled $104.9 million and is expected to be recognized over a weighted-average period of 2.0 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 three months ended March 31, 2017 and 2016 was $1.4 million and $12.4 million, respectively.
17.
Other Selling and Administrative Expenses
Other selling and administrative expenses include the following:
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Design and development
$
51,812

 
$
51,836

Identifiable intangible asset amortization
4,189

 
5,293

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, Mexican peso, Australian dollar, British pound sterling, Canadian dollar, Brazilian real, and Russian ruble are the primary transactions that cause foreign currency transaction exposure for Mattel.
Currency transaction (losses) gains included in the consolidated statements of operations are as follows:
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Operating loss
$
(28,149
)
 
$
(11,842
)
Other non-operating income (expense), net
16

 
(26,989
)
Net transaction losses
$
(28,133
)
 
$
(38,831
)

17



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 (income) expense, net as a result of the change in the remeasurement rate.
19.
Income Taxes
Mattel’s benefit from income taxes was $32.4 million and $20.5 million for the three months ended March 31, 2017 and 2016, respectively. During the three months ended March 31, 2017 and 2016, Mattel recognized net discrete tax expense of $0.5 million and $0.2 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. 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 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.
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.
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.

18



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.
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.

19



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.
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.

20



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 $12.0 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.
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.

21



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 $18.0 million. The high end of this range, approximately $18.0 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 $7.5 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”).
Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, 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.

22



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
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Revenues by Segment
 
 
 
North America
$
362,318

 
$
490,522

International
366,336

 
374,804

American Girl
85,984

 
96,779

Gross sales
814,638

 
962,105

Sales adjustments
(79,020
)
 
(92,706
)
Net sales
$
735,618

 
$
869,399

 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Segment (Loss) Income
 
 
 
North America
$
(19,340
)
 
$
41,149

International
(24,842
)
 
(17,362
)
American Girl
(5,785
)
 
3,387

 
(49,967
)
 
27,174

Corporate and other expense (a)
(77,061
)
 
(76,320
)
Operating loss
(127,028
)
 
(49,146
)
Interest expense
22,030

 
22,520

Interest (income)
(2,466
)
 
(2,360
)
Other non-operating (income) expense, net
(921
)
 
24,173

Loss before income taxes
$
(145,671
)
 
$
(93,479
)
__________________________________________ 
(a)
Corporate and other expense includes severance and restructuring expenses of $3.0 million and $9.8 million for the three months ended March 31, 2017 and 2016 , respectively, and share-based compensation expense of $12.7 million and $12.4 million for the three months ended March 31, 2017 and 2016, respectively.

23



Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.
 
March 31,
2017
 
March 31,
2016
 
December 31,
2016
 
(In thousands)
Assets by Segment
 
 
 
 
 
North America
$
624,539

 
$
590,939

 
$
677,203

International
675,996

 
594,507

 
766,584

American Girl
150,373

 
114,026

 
154,924

 
1,450,908

 
1,299,472

 
1,598,711

Corporate and other
125,691

 
146,918

 
130,304

Accounts receivable and inventories, net
$
1,576,599

 
$
1,446,390

 
$
1,729,015

The table below presents worldwide revenues by brand category:
 
For the Three Months Ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Worldwide Revenues by Brand Category
 
 
 
Mattel Girls & Boys Brands
$
441,064

 
$
527,854

Fisher-Price Brands
246,889

 
272,612

American Girl Brands
82,214

 
93,286

Construction and Arts & Crafts Brands
38,501

 
61,915

Other
5,970

 
6,438

Gross sales
814,638

 
962,105

Sales adjustments
(79,020
)
 
(92,706
)
Net sales
$
735,618

 
$
869,399

22.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and most industry-specific guidance.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The new guidance establishes a five-step model to achieve that core principle and also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts.  ASU 2014-09 was originally effective for interim and annual reporting periods beginning after December 15, 2016.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the effective date to annual reporting periods beginning after December 15, 2017.  Early application is permitted after December 15, 2016.  In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations, and ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance.  In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies guidance on assessing collectibility, presenting sales taxes and other similar taxes collected from customers, measuring noncash consideration, and certain transition matters. Mattel intends to adopt ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12 (collectively, the “new revenue standards”) using the modified retrospective transition method. Upon adoption, Mattel will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. Mattel is currently evaluating the impact of the adoption of the new revenue standards on its operating results and financial position. 

24



In February 2016, the FASB issued ASU 2016-02, Leases, which requires a lessee to recognize a lease asset and lease liability on its balance sheet for all leases with a term greater than 12 months. ASU 2016-02 will be effective for interim and annual reporting periods beginning after December 15, 2018. Early application is permitted. Mattel is currently evaluating the impact of the adoption of ASU 2016-02 on its operating results and financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 will be effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted. Mattel is currently evaluating the impact of the adoption of ASU 2016-15 on its operating results and financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will be effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted. Mattel is currently evaluating the impact of the adoption of ASU 2016-16 on its operating results and financial position.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses and refines the definition of the term output. ASU 2017-01 will be effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted. Mattel is currently evaluating the impact of the adoption of ASU 2017-01 on its operating results and financial position.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. ASU 2017-04 will be effective for interim and annual reporting periods beginning after December 15, 2019. Early application is permitted after January 1, 2017. Mattel is currently evaluating the impact of the adoption of ASU 2017-04 on its operating results and financial position.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope on recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. ASU 2017-05 will be effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Mattel is currently evaluating the impact of the adoption of ASU 2017-05 on its operating results and financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities that sponsor defined benefit plans to (i) present service cost within operations, if such a subtotal is presented, (ii) other components of net benefit costs should be presented separately outside of income from operations, if such a subtotal is presented, and (iii) only the service cost component should be capitalized, when applicable. If a separate line item is not used, the line item in the income statement where the other components of net benefit costs are included must be disclosed. Further, gains and losses from curtailments and settlements, and the cost of certain termination benefits should be reported in the same manner as other components of net benefit cost. ASU 2017-07 will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early application is permitted as of the beginning of an annual period for which interim financial statements have not been issued. Mattel is currently evaluating the impact of the adoption of ASU 2017-07 on its operating results and financial statements.
23.
Subsequent Event
On April 20, 2017, Mattel announced that its Board of Directors declared a second quarter dividend of $0.38 per common share. The dividend is payable on June 9, 2017 to stockholders of record on May 19, 2017.


25



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
In the discussion that follows, “Mattel” refers to Mattel, Inc. and/or one or more of its family of companies.
The following discussion should be read in conjunction with the consolidated financial information and related notes that appear in Part I, Item 1 of this Quarterly Report on Form 10-Q. Mattel’s business is seasonal with consumers making a large percentage of all toy purchases during the traditional holiday season; therefore, results of operations are comparable only with corresponding periods.
The following discussion also includes gross sales and currency exchange rate impact, non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission (“Regulation G”), to supplement the financial results as reported in accordance with GAAP. Gross sales represent sales to customers, excluding the impact of sales adjustments, such as trade discounts and other allowances. The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of non-GAAP financial measures provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. These measures are not, and should not be viewed as, a substitute for GAAP financial measures. Refer to “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a more detailed discussion, including a reconciliation of gross sales, a non-GAAP financial measure, to net sales, its most directly comparable GAAP financial measure.
Overview
Mattel designs, manufactures, and markets a broad variety of toy products worldwide which are sold to its customers and directly to consumers. Mattel is the owner of a portfolio of global brands with untapped intellectual property potential. Mattel's products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products 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”).
Fisher-Price Brands—including Fisher-Price, Little People, BabyGear, 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.
In order to leverage Mattel’s intellectual properties, as well as a number of premier licensed entertainment properties, and its capabilities as a world-class toy maker, management has established the following strategies:
First, Mattel is focused on embracing brand building, creativity, and innovation, and management will put a premium on speed and personal accountability. Management is focused on putting Mattel back on track for growth and improved profitability.
Additionally, Mattel is organizing around the following five strategic priorities:
Build powerful brand franchises;
Establish Toy Box as the partner of choice;
Develop unmatched commercial excellence;
Drive continuous cost improvement; and
Build emerging market leadership.

26



First Quarter 2017 Overview
Mattel's performance during the first quarter of 2017 was below expectations. A greater than expected impact of the retail inventory overhang coming out of the holiday period and the resulting slower pace of retail reorders, mixed with a lighter entertainment slate, and unfavorable timing of the Easter holiday negatively impacted the results. Although first quarter earnings were below expectations, internal consumer takeaway analysis, tracked at wholesale, showed key core brands including Barbie, Fisher-Price, and Hot Wheels continuing to demonstrate strength in the marketplace. We are equally encouraged by our performance in emerging markets, particularly Asia Pacific and Latin America, which continue to show significant long-term potential.
Mattel’s first quarter 2017 financial highlights include the following:
Net sales in the first quarter of 2017 were $735.6 million, down 15% as compared to first quarter of 2016 net sales of $869.4 million.
Gross sales in the first quarter of 2017 were $814.6 million, down 15% as compared to first quarter of 2016 gross sales of $962.1 million.
Gross margin in the first quarter of 2017 was 37.9%, a decrease of 680 basis points from the first quarter of 2016.
Operating loss in the first quarter of 2017 was $127.0 million, as compared to operating loss of $49.1 million in the first quarter of 2016.
Loss per share in the first quarter of 2017 was $0.33, as compared to loss per share of $0.21 in the first quarter of 2016.
Results of Operations—First Quarter
Consolidated Results
Net sales for the first quarter of 2017 were $735.6 million, a 15% decrease, as compared to $869.4 million in the first quarter of 2016. Net loss for the first quarter of 2017 was $113.2 million, or $0.33 per diluted share, as compared to net loss of $73.0 million, or $0.21 per diluted share, in the first quarter of 2016. Net loss for the first quarter of 2017 was negatively impacted by lower gross profit, partially offset by lower other non-operating expenses, lower other selling and administrative expenses, and lower advertising and promotion expenses.
The following table provides a summary of Mattel’s consolidated results for the first quarter of 2017 and 2016 (in millions, except percentage and basis point information):
 
For the Three Months Ended
 
Year/Year Change
March 31, 2017
 
March 31, 2016
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
%
 
Basis Points
of Net Sales
Net sales
$
735.6

 
100.0
 %
 
$
869.4

 
100.0
 %
 
-15
 %
 

Gross profit
$
278.8

 
37.9
 %
 
$
388.7

 
44.7
 %
 
-28
 %
 
-680

Advertising and promotion expenses
73.6

 
10.0
 %
 
86.9

 
10.0
 %
 
-15
 %
 

Other selling and administrative expenses
332.2

 
45.2
 %
 
350.9

 
40.4
 %
 
-5
 %
 
480

Operating loss
(127.0
)
 
-17.3
 %
 
(49.1
)
 
-5.7
 %
 
158
 %
 
-1,160

Interest expense
22.0

 
3.0
 %
 
22.5

 
2.6
 %
 
-2
 %
 
40

Interest (income)
(2.5
)
 
-0.3
 %
 
(2.4
)
 
-0.3
 %
 
4
 %
 

Other non-operating (income) expense, net
(0.8
)
 
 
 
24.3

 
 
 
 
 
 
Loss before income taxes
$
(145.7
)
 
-19.8
 %
 
$
(93.5
)
 
-10.8
 %
 
56
 %
 
-900

Sales
Net sales for the first quarter of 2017 were $735.6 million, a 15% decrease, as compared to $869.4 million in the first quarter of 2016.

27



The following table provides a summary of Mattel’s consolidated gross sales by brand for the first quarter of 2017 and 2016:
 
For the Three Months Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
March 31,
2017
 
March 31,
2016
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
Barbie
$
123.4

 
$
141.1

 
-13
 %
 
-1
 %
Other Girls
47.8

 
72.4

 
-34
 %
 
 %
Wheels
139.8

 
134.9

 
4
 %
 
 %
Entertainment
130.1

 
179.5

 
-27
 %
 
 %
 
441.1

 
527.9

 
-16
 %
 
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
Core Fisher-Price
166.8

 
178.3

 
-6
 %
 
 %
Fisher-Price Friends
68.9

 
79.6

 
-13
 %
 
-3
 %
Other Fisher-Price
11.2

 
14.7

 
-24
 %
 
 %
 
246.9

 
272.6

 
-9
 %
 
-1
 %
American Girl Brands
82.2

 
93.3

 
-12
 %
 
 %
Construction and Arts & Crafts Brands
38.5

 
61.9

 
-38
 %
 
 %
Other
5.9

 
6.4

 
 
 
 
Total Gross Sales
$
814.6

 
$
962.1

 
-15
 %
 
 %
Sales Adjustments
(79.0
)
 
(92.7
)
 
 
 
 
Total Net Sales
$
735.6

 
$
869.4

 
-15
 %
 
 %
Gross sales were $814.6 million in the first quarter of 2017, a decrease of $147.5 million or 15%, as compared to $962.1 million in the first quarter of 2016. The decrease in gross sales was primarily due to lower sales of Construction and Arts & Crafts, Other Girls, Entertainment, Barbie, Fisher-Price Friends, and American Girl products. Of the 38% decrease in Construction and Arts & Crafts gross sales, 36% was due to lower sales of MEGA BLOKS products. Of the 34% decrease in Other Girls gross sales, 32% was due to lower sales of Monster High products and 17% was due to lower sales of Ever After High products, partially offset by higher sales of DC Super Hero Girls products of 15%. Of the 27% decrease in Entertainment gross sales, 18% was due to lower sales of DC Comics products, 6% was due to lower sales of Minecraft products, and 3% was due to lower sales of WWE products, partially offset by higher sales of Cars products of 6%. The 13% decrease in Barbie gross sales was primarily due to fourth quarter inventory overhang. Of the 13% decrease in Fisher-Price Friends gross sales, 14% was due to lower sales of Thomas and Friends products and 6% was due to lower licensing income, partially offset by higher sales of Shimmer and Shine™ products of 8%. Of the 12% decrease in American Girl gross sales, 9% was due to lower sales of Truly Me products and 7% was due to lower sales of Girl of the Year products, partially offset by higher sales of Wellie Wishers and contemporary doll product lines of 8%.
Cost of Sales
Cost of sales as a percentage of net sales was 62.1% in the first quarter of 2017, as compared to 55.3% in the first quarter of 2016. Cost of sales decreased by $23.9 million, or 5%, to $456.8 million in the first quarter of 2017 from $480.7 million in the first quarter of 2016, as compared to a 15% decrease in net sales. Within cost of sales, product and other costs decreased by $16.4 million, or 4%, to $366.4 million in the first quarter of 2017 from $382.8 million in the first quarter of 2016; royalty expenses decreased by $9.5 million, or 25%, to $28.4 million in the first quarter of 2017 from $37.9 million in the first quarter of 2016; freight and logistics expenses increased by $2.0 million, or 3%, to $62.0 million in the first quarter of 2017 from $60.0 million in the first quarter of 2016.
Gross Margin
Gross margin decreased to 37.9% in the first quarter of 2017 from 44.7% in the first quarter of 2016. The decrease in gross margin was driven by higher obsolescence expense, the unfavorable impact of fixed cost absorption due to lower sales, lower licensing income, higher freight and logistics expenses, unfavorable product mix, unfavorable foreign currency, and higher product-related costs, partially offset by strategic pricing and cost savings initiatives.

28



Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers and (iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as a percentage of net sales were flat at 10.0% in the first quarter of 2017 and 2016.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $332.2 million, or 45.2% of net sales, in the first quarter of 2017, as compared to $350.9 million, or 40.4% of net sales, in the first quarter of 2016. The decrease in other selling and administrative expenses was primarily due to lower severance and restructuring charges of approximately $7 million, savings from cost savings initiatives of approximately $6 million, and a favorable impact from changes in currency exchange rates of approximately $4 million.
Other Non-Operating (Income) Expense, Net
Other non-operating income was $0.8 million in the first quarter of 2017, as compared to other non-operating expense of $24.3 million in the first quarter of 2016. The change in other non-operating (income) expense, net was primarily due to the change in the remeasurement rate used by Mattel's Venezuelan subsidiary, which resulted in an unrealized foreign currency exchange loss of approximately $26 million in the first quarter of 2016.
Provision for Income Taxes
Mattel’s benefit from income taxes was $32.4 million and $20.5 million for the three months ended March 31, 2017 and 2016, respectively. During the three months ended March 31, 2017 and 2016, Mattel recognized net discrete tax expense of $0.5 million and $0.2 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.
North America Segment
The following table provides a summary of Mattel’s gross sales by brand for the North America segment for the first quarter of 2017 and 2016:
 
For the Three Months Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
March 31,
2017
 
March 31,
2016
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
Barbie
$
46.9

 
$
69.0

 
-32
 %
 
 %
Other Girls
18.7

 
36.6

 
-49
 %
 
 %
Wheels
62.5

 
69.0

 
-9
 %
 
1
 %
Entertainment
74.6

 
110.2

 
-32
 %
 
 %
 
202.7

 
284.8

 
-29
 %
 
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
Core Fisher-Price
93.8

 
105.0

 
-11
 %
 
 %
Fisher-Price Friends
28.2

 
40.6

 
-31
 %
 
-1
 %
Other Fisher-Price
11.1

 
14.5

 
-23
 %
 
 %
 
133.1

 
160.1

 
-17
 %
 
 %
Construction and Arts & Crafts Brands
24.3

 
42.8

 
-43
 %
 
1
 %
Other
2.2

 
2.8

 
 
 
 
Total Gross Sales
$
362.3

 
$
490.5

 
-26
 %
 
 %
Sales Adjustments
(20.1
)
 
(33.6
)
 
 
 
 
Total Net Sales
$
342.2

 
$
456.9

 
-25
 %
 
 %

29



Gross sales for the North America segment were $362.3 million in the first quarter of 2017, a decrease of $128.2 million, or 26%, as compared to $490.5 million in the first quarter of 2016. The decrease in the North America segment gross sales was primarily due to lower sales of Other Girls, Construction and Arts & Crafts, Entertainment, Barbie, Fisher-Price Friends, and Core Fisher-Price products. Of the 49% decrease in Other Girls gross sales, 38% was due to lower sales of Monster High products, 24% was due to lower sales of Ever After High products, and 7% was due to lower sales of Disney Princess® products, partially offset by higher sales of DC Super Hero Girls products of 10% and initial sales of Wonder Woman products of 8%. Of the 43% decrease in Construction and Arts & Crafts gross sales, 41% was due to lower sales of MEGA BLOKS products. Of the 32% decrease in Entertainment gross sales, 18% was due to lower sales of DC Comics products, 8% was due to lower sales of Minecraft products, 4% was due to lower sales of WWE products, and 4% was due to lower sales of Dinotrux® products, partially offset by higher sales of Cars products of 8%. The 32% decrease in Barbie gross sales was primarily due to fourth quarter inventory overhang. Of the 31% decrease in Fisher-Price Friends gross sales, 23% was due to lower sales of Thomas and Friends products, 12% was due to lower licensing income, and 6% was due to lower sales of other Nickelodeon® products, partially offset by higher sales of Shimmer and Shine products of 10%. Of the 11% decrease in Core Fisher-Price gross sales, 11% was due to lower sales of infant products. Cost of sales decreased 15% in the first quarter of 2017, as compared to a 25% decrease in net sales, primarily due to lower product and other costs. Gross margins in the first quarter of 2017 decreased as a result of the unfavorable impact of fixed cost absorption due to lower sales, higher obsolescence expense, lower licensing income, higher freight and logistics expenses, and unfavorable product mix.
North America segment loss increased by 147% to $19.3 million in the first quarter of 2017, as compared to segment income of $41.1 million in the first quarter of 2016, primarily due to lower gross profit, partially offset by lower advertising and promotion expenses.
International Segment
The following table provides a summary of percentage changes in net sales within the International segment in the first quarter of 2017 versus 2016:
 
% Change in
Net Sales as Reported
 
Currency Exchange
Rate Impact
Total International Segment
-2
 %
 
-1
 %
Europe
-10
 %
 
-4
 %
Latin America
-1
 %
 
2
 %
Asia Pacific
17
 %
 
-2
 %
The following table provides a summary of percentage changes in gross sales within the International segment in the first quarter of 2017 versus 2016:
 
% Change in
Gross Sales as Reported
 
Currency Exchange
Rate Impact
Total International Segment
-2
 %
 
-2
 %
Europe
-10
 %
 
-3
 %
Latin America
4
 %
 
2
 %
Asia Pacific
17
 %
 
-1
 %

30



The following table provides a summary of Mattel’s gross sales by brand for the International segment for the first quarter of 2017 and 2016:
 
For the Three Months Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
March 31,
2017
 
March 31,
2016
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
Barbie
$
76.5

 
$
72.1

 
6
 %
 
-2
 %
Other Girls
29.1

 
35.7

 
-19
 %
 
 %
Wheels
77.3

 
65.9

 
17
 %
 
-1
 %
Entertainment
55.5

 
69.4

 
-20
 %
 
-3
 %
 
238.4

 
243.1

 
-2
 %
 
-1
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
Core Fisher-Price
73.0

 
73.3

 
 %
 
-1
 %
Fisher-Price Friends
40.7