Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________ 
FORM 10-Q
 ___________________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
¨
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 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 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
 
¨  
  
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 October 12, 2018:
345,150,787 shares

1



MATTEL, INC. AND SUBSIDIARIES

 
 
Page
 
 
 
 
PART I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  

2



(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. The use of words such as "anticipates," "expects," "intends," "plans," "confident that" and "believes," among others, generally identify forward-looking statements. These forward-looking statements are based on currently available operating, financial, economic and other information, and are subject to a number of significant risks and uncertainties. A variety of factors, many of which are beyond our control, could cause actual future results to differ materially from those projected in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to: (i) Mattel’s ability to design, develop, produce, manufacture, source and ship products on a timely and cost-effective basis, as well as interest in and purchase of those products by retail customers and consumers in quantities and at prices that will be sufficient to profitably recover Mattel’s costs; (ii) downturns in economic conditions affecting Mattel’s markets which can negatively impact retail customers and consumers, and which can result in lower employment levels, lower consumer disposable income and spending, including lower spending on purchases of Mattel’s products; (iii) other factors which can lower discretionary consumer spending, such as higher costs for fuel and food, drops in the value of homes or other consumer assets, and high levels of consumer debt; (iv) potential difficulties or delays Mattel may experience in implementing cost savings and efficiency enhancing initiatives; (v) other economic and public health conditions or regulatory changes in the markets in which Mattel and its customers and suppliers operate, which could create delays or increase Mattel’s costs, such as higher commodity prices, labor costs or transportation costs, or outbreaks of disease; (vi) currency fluctuations, including movements in foreign exchange rates, which can lower Mattel’s net revenues and earnings, and significantly impact Mattel’s costs; (vii) the concentration of Mattel’s customers, potentially increasing the negative impact to Mattel of difficulties experienced by any of Mattel’s customers, including the bankruptcy and liquidation of Toys "R" Us, Inc., or changes in their purchasing or selling patterns; (viii) the future willingness of licensors of entertainment properties for which Mattel currently has licenses or would seek to have licenses in the future to license those products to Mattel; (ix) the inventory policies of Mattel’s retail customers, including retailers’ potential decisions to lower their inventories, even if it results in lost sales, as well as the concentration of Mattel’s revenues in the second half of the year, which coupled with reliance by retailers on quick response inventory management techniques increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve compressed shipping schedules; (x) the increased costs of developing more sophisticated digital and smart technology products, and the corresponding supply chain and design challenges associated with such products; (xi) work disruptions, which may impact Mattel’s ability to manufacture or deliver product in a timely and cost-effective manner; (xii) the bankruptcy and liquidation of Toys "R" Us, Inc. or other of Mattel’s significant retailers, or the general lack of success of one of Mattel’s significant retailers which could negatively impact Mattel’s revenues or bad debt exposure; (xiii) the impact of competition on revenues, margins and other aspects of Mattel’s business, including the ability to offer products which consumers choose to buy instead of competitive products, the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees; (xiv) the risk of product recalls or product liability suits and costs associated with product safety regulations; (xv) changes in laws or regulations in the United States and/or in other major markets, such as China, in which Mattel operates, including, without limitation, with respect to taxes, tariffs, trade policies, or product safety, which may increase Mattel’s product costs and other costs of doing business, and reduce Mattel’s earnings, (xvi) failure to realize the planned benefits from any investments or acquisitions made by Mattel, (xvii) the impact of other market conditions, third party actions or approvals and competition which could reduce demand for Mattel’s products or delay or increase the cost of implementation of Mattel’s programs or alter Mattel’s actions and reduce actual results; (xviii) changes in financing markets or the inability of Mattel to obtain financing on attractive terms (xix) the impact of litigation or arbitration decisions or settlement actions; and (xx) other risks and uncertainties detailed in Part 1, Item 1A "Risk Factors" in Mattel’s 2017 Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.

3



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(Unaudited; in thousands, except share data)
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and equivalents
$
209,150

 
$
181,308

 
$
1,079,221

Accounts receivable, net
1,312,932

 
1,506,145

 
1,128,610

Inventories
726,012

 
989,995

 
600,704

Prepaid expenses and other current assets
287,042

 
352,711

 
303,053

Total current assets
2,535,136

 
3,030,159

 
3,111,588

Noncurrent Assets


 


 


Property, plant, and equipment, net
677,030

 
821,228

 
785,285

Goodwill
1,388,883

 
1,397,642

 
1,396,669

Other noncurrent assets
880,796

 
950,655

 
944,961

Total Assets
$
5,481,845

 
$
6,199,684

 
$
6,238,503

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Short-term borrowings
$
275,000

 
$
732,649

 
$

Current portion of long-term debt

 
250,000

 
250,000

Accounts payable
529,720

 
713,488

 
572,166

Accrued liabilities
683,470

 
568,845

 
792,139

Income taxes payable
5,813

 
32,296

 
9,498

Total current liabilities
1,494,003

 
2,297,278

 
1,623,803

Noncurrent Liabilities
 
 
 
 
 
Long-term debt
2,849,922

 
1,886,404

 
2,873,119

Other noncurrent liabilities
471,510

 
576,327

 
484,126

Total noncurrent liabilities
3,321,432

 
2,462,731

 
3,357,245

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
1,802,556

 
1,793,036

 
1,808,391

Treasury stock at cost: 96.2 million shares, 97.7 million shares, and 97.6 million shares, respectively
(2,356,836
)
 
(2,392,422
)
 
(2,389,877
)
Retained earnings
1,614,343

 
2,460,224

 
2,179,358

Accumulated other comprehensive loss
(835,022
)
 
(862,532
)
 
(781,786
)
Total stockholders’ equity
666,410

 
1,439,675

 
1,257,455

Total Liabilities and Stockholders’ Equity
$
5,481,845

 
$
6,199,684

 
$
6,238,503

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

4



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Three Months Ended
 
For the Nine Months Ended
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(Unaudited; in thousands, except per share amounts)
Net Sales
$
1,437,451

 
$
1,560,983

 
$
2,986,571

 
$
3,271,078

Cost of sales
824,395

 
913,834

 
1,901,440

 
1,945,386

Gross Profit
613,056

 
647,149

 
1,085,131

 
1,325,692

Advertising and promotion expenses
165,308

 
179,691

 
318,538

 
348,752

Other selling and administrative expenses
325,874

 
381,214

 
1,110,491

 
1,065,339

Operating Income (Loss)
121,874

 
86,244

 
(343,898
)
 
(88,399
)
Interest expense
48,156

 
24,646

 
132,702

 
68,557

Interest (income)
(785
)
 
(1,575
)
 
(5,631
)
 
(6,337
)
Other non-operating expense, net
1,911

 
1,910

 
4,366

 
7,532

Income (Loss) Before Income Taxes
72,592

 
61,263

 
(475,335
)
 
(158,151
)
Provision for income taxes
66,314

 
664,510

 
70,571

 
614,402

Net Income (Loss)
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Net Income (Loss) Per Common Share - Basic
$
0.02

 
$
(1.75
)
 
$
(1.58
)
 
$
(2.25
)
Weighted average number of common shares
345,285

 
343,870

 
344,774

 
343,304

Net Income (Loss) Per Common Share - Diluted
$
0.02

 
$
(1.75
)
 
$
(1.58
)
 
$
(2.25
)
Weighted average number of common and potential common shares
345,672

 
343,870

 
344,774

 
343,304

Dividends Declared Per Common Share
$

 
$
0.15

 
$

 
$
0.91

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

5



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(Unaudited; in thousands)
Net Income (Loss)
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Other Comprehensive (Loss) Income, Net of Tax

 

 

 

Currency translation adjustments
(17,132
)
 
36,912

 
(80,870
)
 
142,248

Defined benefit pension plan adjustments
1,762

 
1,106

 
4,447

 
3,185

Net unrealized gains (losses) on available-for-sale security
424

 
(3,848
)
 
(2,365
)
 
(7,585
)
Net unrealized gains (losses) on derivative instruments:

 

 

 

Unrealized holding gains (losses)
3,215

 
(24,009
)
 
15,548

 
(63,999
)
Reclassification adjustment for realized gains included in net income (loss)
787

 
9,241

 
10,004

 
6,648

 
4,002

 
(14,768
)
 
25,552

 
(57,351
)
Other Comprehensive (Loss) Income, Net of Tax
(10,944
)
 
19,402

 
(53,236
)
 
80,497

Comprehensive Loss
$
(4,666
)
 
$
(583,845
)
 
$
(599,142
)
 
$
(692,056
)

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

6



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended
September 30,
2018
 
September 30,
2017
 
(Unaudited; in thousands)
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(545,906
)
 
$
(772,553
)
Adjustments to reconcile net loss to net cash flows used for operating activities:
 
 
 
Depreciation
179,617

 
179,831

Amortization
29,925

 
16,264

Asset impairments
13,653

 
14,942

Deferred income taxes
1,435

 
2,057

Indefinite reinvestment assertion and U.S. Tax Reform
23,833

 

Valuation allowance on deferred tax assets

 
561,915

Share-based compensation
36,187

 
47,582

Bad debt expense
43,617

 
11,758

Inventory obsolescence
56,586

 
37,402

Decrease from changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(255,781
)
 
(367,579
)
Inventories
(210,437
)
 
(396,415
)
Prepaid expenses and other current assets
9,250

 
(19,027
)
Accounts payable, accrued liabilities, and income taxes payable
(107,601
)
 
9,893

Other, net
(5,830
)
 
(66,140
)
Net cash flows used for operating activities
(731,452
)
 
(740,070
)
Cash Flows From Investing Activities:
 
 
 
Purchases of tools, dies, and molds
(58,187
)
 
(101,428
)
Purchases of other property, plant, and equipment
(52,945
)
 
(133,895
)
(Payments for) proceeds from foreign currency forward exchange contracts
(10,220
)
 
60,376

Other, net
6,712

 
38

Net cash flows used for investing activities
(114,640
)
 
(174,909
)
Cash Flows From Financing Activities:
 
 
 
Payments of short-term borrowings, net

 
(878,937
)
Proceeds from short-term borrowings, net
275,000

 
1,419,418

Payments of long-term borrowings
(750,000
)
 

Proceeds from long-term borrowings, net
475,550

 

Payments of dividends on common stock

 
(311,973
)
Proceeds from exercise of stock options

 
1,768

Other, net
(11,236
)
 
(16,543
)
Net cash flows (used for) provided by financing activities
(10,686
)
 
213,733

Effect of Currency Exchange Rate Changes on Cash
(13,293
)
 
13,023

Decrease in Cash and Equivalents
(870,071
)
 
(688,223
)
Cash and Equivalents at Beginning of Period
1,079,221

 
869,531

Cash and Equivalents at End of Period
$
209,150

 
$
181,308

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


7



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 statement 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. Prior period amounts have been reclassified to conform to the current period presentation, as further discussed in "Note 16 to the Consolidated Financial Statements—Employee Benefit Plans" and "Note 23 to the Consolidated Financial Statements—Segment Information."
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 the annual 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 2017 Annual Report on Form 10-K.
2.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $23.4 million, $22.4 million, and $25.4 million as of September 30, 2018September 30, 2017, and December 31, 2017, respectively. As a result of the Toys "R" Us liquidation in the first quarter of 2018, Mattel reversed net sales which occurred during the first quarter of 2018 and related accounts receivable of approximately $30 million. In addition, for the three and nine months ended September 30, 2018, Mattel recorded bad debt expense, net of approximately $(13) million and $37 million, respectively, related to outstanding Toys "R" Us receivables as of December 31, 2017. As a result of Toys "R" Us filing for bankruptcy in September 2017, Mattel reversed gross sales and accounts receivable of approximately $47 million and reversed net sales of approximately $43 million for the three and nine months ended September 30, 2017.
3.
Inventories
Inventories include the following:
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
Raw materials and work in process
$
129,088

 
$
130,895

 
$
101,690

Finished goods
596,924

 
859,100

 
499,014

 
$
726,012

 
$
989,995

 
$
600,704


8



4.
Property, Plant, and Equipment
Property, plant, and equipment, net includes the following: 
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
Land
$
25,064

 
$
25,045

 
$
25,114

Buildings
298,659

 
293,024

 
303,495

Machinery and equipment
873,574

 
933,967

 
902,861

Software
387,503

 
374,934

 
384,568

Tools, dies, and molds
864,089

 
923,752

 
887,442

Capital leases
23,927

 
23,970

 
24,279

Leasehold improvements
239,587

 
263,276

 
213,238


2,712,403

 
2,837,968

 
2,740,997

Less: accumulated depreciation
(2,035,373
)
 
(2,016,740
)
 
(1,955,712
)
 
$
677,030

 
$
821,228

 
$
785,285

5.
Goodwill
Goodwill is allocated to various reporting units, which are at the operating segment level, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value.
In the third quarter of 2018, Mattel performed its annual impairment test and determined that goodwill was not impaired. The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2018 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. In the first quarter of 2018, Mattel sold certain assets related to its Corolle business and wrote off approximately $4 million of goodwill.
 
December 31,
2017
 
Dispositions
 
Currency
Exchange Rate
Impact
 
September 30,
2018
 
 (In thousands)                                  
North America
$
733,034

 
$

 
$
(1,159
)
 
$
731,875

International
452,152

 

 
(2,715
)
 
449,437

American Girl
211,483

 
(4,018
)
 
106

 
207,571

 
$
1,396,669

 
$
(4,018
)
 
$
(3,768
)
 
$
1,388,883

6.
Other Noncurrent Assets
Other noncurrent assets include the following: 
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
Identifiable intangibles (net of amortization of $198.7 million, $166.7 million, and $168.8 million, respectively)
$
599,938

 
$
189,382

 
$
639,203

Deferred income taxes
75,590

 
75,660

 
76,750

Nonamortizable identifiable intangibles

 
462,398

 

Other
205,268

 
223,215

 
229,008

 
$
880,796

 
$
950,655

 
$
944,961


9



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. In the fourth quarter of 2017, Mattel concluded that a triggering event had occurred related to its remaining nonamortizable intangible asset and determined that it was not impaired, but that the intangible asset was no longer nonamortizable.
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. During the three months ended June 30, 2018, Mattel discontinued the use of certain brands and products, which resulted in $4.3 million of asset impairments. Mattel's remaining amortizable intangible assets were not impaired during the three and nine months ended September 30, 2018.
During the third quarter of 2017, Mattel established a valuation allowance on certain deferred tax assets, the benefits of which Mattel believes will likely not be realized. Refer to Part II, Item 8 "Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Income Taxes" in its 2017 Annual Report on Form 10-K for additional information.
7.
Accrued Liabilities
Accrued liabilities include the following: 
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
Advertising and promotion
$
124,120

 
$
81,185

 
$
165,572

Royalties
92,998

 
90,968

 
111,669

Taxes other than income taxes
52,273

 
61,318

 
74,626

Other
414,079

 
335,374

 
440,272

 
$
683,470

 
$
568,845

 
$
792,139

8.
Seasonal Financing
On December 20, 2017, Mattel, Inc. and certain of its domestic subsidiaries ("U.S. Borrowers") and a Canadian subsidiary ("Canadian Borrower") entered into a syndicated facility agreement (as amended, the "Credit Agreement"), as borrowers thereunder, with Bank of America, N.A., as global administrative agent, collateral agent, Australian security trustee, and lender, and the other lenders and financial institutions party thereto, providing for $1.60 billion in aggregate principal amount of senior secured revolving credit facilities (the "senior secured revolving credit facilities"), consisting of an asset based lending facility, subject to borrowing base capacity, and a revolving credit facility secured by certain fixed assets and intellectual property of the U.S. Borrowers and certain equity interests in various subsidiaries of Mattel, subject to borrowing base capacity (the "Fixed Asset & IP Facility"). As of September 30, 2018, Mattel had outstanding borrowings under the senior secured revolving credit facilities of $275.0 million. There were no amounts outstanding as of December 31, 2017.
On March 28, 2018 and March 29, 2018, Mattel, Inc. and certain of its subsidiaries entered into various foreign joinder agreements to the Credit Agreement. The foreign joinder agreements join the relevant foreign borrowers and foreign lenders to the Credit Agreement, as contemplated therein, making portions of the senior secured revolving credit facilities available to other subsidiaries of Mattel, Inc. such that, together with the initial entry into the Credit Agreement, the senior secured revolving credit facilities are available to certain subsidiaries of Mattel, Inc., in their capacity as borrowers, located in the following jurisdictions: (i) the United States (the "U.S. Borrowers"), (ii) Canada (the "Canadian Borrower"), (iii) Germany, the Netherlands and the United Kingdom (the "European (GNU) Borrowers"), (iv) Spain (the "Spanish Borrower"), (v) France (the "French Borrower"), and (vi) Australia (the "Australian Borrower"), in each case through subfacilities in each such jurisdiction (each, a "Subfacility"). Through the initial Credit Agreement and the foreign joinder agreements, certain additional domestic and foreign subsidiaries of Mattel, Inc. are also parties to the Credit Agreement as guarantors of various obligations of the borrowers under the Credit Agreement as further described below.
On June 1, 2018, Mattel, Inc. entered into an amendment (the "Amendment") to the Credit Agreement. The Amendment amends certain terms of the Credit Agreement, including, but not limited to, the extension of the maturity date of the Credit Agreement (and the facilities and lending commitments thereunder) from December 20, 2020 to June 1, 2021.

10



Borrowings under the senior secured revolving credit facilities (i) are limited by jurisdiction-specific borrowing base calculations based on the sum of specified percentages of eligible accounts receivable, eligible inventory and certain fixed assets and intellectual property, as applicable, minus the amount of any applicable reserves, and (ii) bear interest at a floating rate, which can be either, at the Borrower’s option, (a) an adjusted LIBOR rate plus an applicable margin ranging from 1.25% to 3.00% per annum or (b) an alternate base rate plus an applicable margin ranging from 0.25% to 2.00% per annum, in each case, such applicable margins to be determined based on the Borrower’s average borrowing availability remaining under the senior secured revolving credit facilities.
In addition to paying interest on the outstanding principal under the senior secured revolving credit facilities, Mattel, Inc. is required to pay (i) an unused line fee per annum of the average daily unused portion of the senior secured revolving credit facilities; (ii) a letter of credit fronting fee based on a percentage of the aggregate face amount of outstanding letters of credit; and (iii) certain other customary fees and expenses of the lenders and agents.
The U.S. Borrowers, as well as certain Mattel U.S. subsidiaries that are guarantors (the "U.S. Guarantors"), are guaranteeing the obligations of all Borrowers under the senior secured revolving credit facilities. Additionally, the obligations of the Canadian Borrower, the French Borrower, the Spanish Borrower, the European (GNU) Borrowers and the Australian Borrower (collectively, the "Foreign Borrowers"), are each guaranteed by the obligations of the other Foreign Borrowers, as well as additional foreign subsidiaries of Mattel, Inc. that are guarantors (the "Foreign Guarantors").
The U.S. Subfacility is secured by liens on substantially all of the U.S. Borrowers’ and the U.S. Guarantors’ accounts receivable and inventory (the "U.S. Current Assets Collateral"). The Canadian Subfacility, the French Subfacility, the Spanish Subfacility, the European (GNU) Subfacility and the Australian Subfacility are each secured by a first priority lien on (i) the accounts receivable and inventory of the applicable Foreign Borrower(s) and Foreign Guarantors under such facility, and (ii) the U.S. Current Assets Collateral. The Fixed Asset & IP Facility is secured by a first priority lien on certain owned real property in the U.S., certain U.S. trademarks and patents, and 100% of the equity interests in the U.S. Borrowers (aside from Mattel) and U.S. Guarantors, as well as 65% of the voting equity interests and 100% of the non-voting equity interests in Mattel Holdings Limited. The Fixed Asset & IP Facility is also secured by 65% of the voting equity interests of such additional Foreign Borrowers and Foreign Guarantors that are directly owned by a U.S. Borrower or U.S. Guarantor.
The Credit Agreement contains customary covenants, including, but not limited to, restrictions on the Borrower’s and its subsidiaries’ ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets outside of the ordinary course, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates, or change their line of business.
The Credit Agreement requires the maintenance of a fixed charge coverage ratio of 1.00 to 1.00 at the end of each fiscal quarter when excess availability under the senior secured revolving credit facilities is less than the greater of (x) $100 million and (y) 10% of the aggregate amount available thereunder (the "Availability Threshold") and on the last day of each subsequent fiscal quarter ending thereafter until no event of default exists and excess availability is greater than the Availability Threshold for at least 30 consecutive days.
The fixed charge coverage ratio covenant was not in effect based on Mattel's excess availability under the senior secured revolving credit facilities as of September 30, 2018. Mattel was in compliance with all covenants contained in the Credit Agreement as of September 30, 2018. The Credit Agreement is a material agreement, and failure to comply with the covenants may result in an event of default under the terms of the senior secured revolving credit facilities. If Mattel were to default under the terms of the senior secured revolving credit facilities, its ability to meet its seasonal financing requirements could be adversely affected.

11



9.
Long-Term Debt
Long-term debt includes the following:
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
2010 Senior Notes due October 2020 and October 2040
$
500,000

 
$
500,000

 
$
500,000

2011 Senior Notes due November 2041
300,000

 
300,000

 
300,000

2013 Senior Notes due March 2018 and March 2023
250,000

 
500,000

 
500,000

2014 Senior Notes due May 2019

 
500,000

 
500,000

2016 Senior Notes due August 2021
350,000

 
350,000

 
350,000

2017/2018 Senior Notes due December 2025
1,500,000

 

 
1,000,000

Debt issuance costs and debt discount
(50,078
)
 
(13,596
)
 
(26,881
)

2,849,922

 
2,136,404

 
3,123,119

Less: current portion

 
(250,000
)
 
(250,000
)
Total long-term debt
$
2,849,922

 
$
1,886,404

 
$
2,873,119

In December 2017, Mattel issued $1.00 billion aggregate principal amount of 6.75% senior unsecured notes due December 31, 2025 ("2017 Senior Notes"). The 2017 Senior Notes were issued pursuant to an indenture, dated December 20, 2017, among Mattel, the guarantors named therein, and MUFG Union Bank, N.A., as Trustee (the "Indenture"). Interest on the 2017 Senior Notes is payable semi-annually in arrears on June 30 and December 31 of each year, beginning on June 30, 2018. Mattel may redeem all or part of the 2017 Senior Notes at any time, or from time to time prior to December 31, 2020, at its option, at a redemption price equal to 100% of the principal amount, plus a "make whole" premium, plus accrued and unpaid interest on the 2017 Senior Notes being redeemed to, but excluding, the redemption date. Mattel may also redeem up to 40% of the principal amount of the 2017 Senior Notes at any time, or from time to time prior to December 31, 2020, at its option, at a redemption price equal to 106.75% of the principal amount, plus accrued and unpaid interest on the 2017 Senior Notes being redeemed to, but excluding, the redemption date, with the net cash proceeds of sales of one or more equity offerings by Mattel, or any direct or indirect parent of Mattel. Mattel may redeem all or part of the 2017 Senior Notes at any time, or from time to time on or after December 31, 2020, at its option, at a redemption price including a call premium that varies from 0% to 5.063%, depending on the year of redemption, plus accrued and unpaid interest on the 2017 Senior Notes being redeemed to, but excluding, the redemption date.
In March 2018, Mattel repaid $250.0 million of its 2013 Senior Notes in connection with its scheduled maturity.
In May 2018, Mattel issued $500.0 million aggregate principal amount of its 6.75% senior unsecured notes due December 31, 2025 ("2018 Senior Notes"). The 2018 Senior Notes were issued pursuant to a supplemental indenture, dated May 31, 2018 (the "Supplemental Indenture"), to the Indenture, dated December 20, 2017, among Mattel, the guarantors named therein and MUFG Union Bank, N.A., as Trustee.
In June 2018, Mattel used the net proceeds from the issuance of the 2018 Senior Notes, plus cash on hand, to redeem and retire all of its 2014 Senior Notes due May 6, 2019 at a redemption price equal to the principal amount, plus accrued and unpaid interest.
10.
Other Noncurrent Liabilities
Other noncurrent liabilities include the following:
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
 
(In thousands)
Benefit plan liabilities
$
177,289

 
$
196,967

 
$
168,539

Noncurrent tax liabilities
156,135

 
218,308

 
124,330

Other
138,086

 
161,052

 
191,257

 
$
471,510

 
$
576,327

 
$
484,126


12



11.
Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss):
 
For the Three Months Ended September 30, 2018
 
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 June 30, 2018
$
452

 
$
(5,588
)
 
$
(140,528
)
 
$
(678,414
)
 
$
(824,078
)
Other comprehensive income (loss) before reclassifications
3,215

 
424

 
219

 
(17,132
)
 
(13,274
)
Amounts reclassified from accumulated other comprehensive income (loss)
787

 

 
1,543

 

 
2,330

Net increase (decrease) in other comprehensive income (loss)
4,002


424


1,762


(17,132
)

(10,944
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2018
$
4,454

 
$
(5,164
)
 
$
(138,766
)
 
$
(695,546
)
 
$
(835,022
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2018
 
Derivative
Instruments
 
Available-for-sale security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Loss, Net of Tax, as of December 31, 2017
$
(21,098
)
 
$
(2,799
)
 
$
(143,213
)
 
$
(614,676
)
 
$
(781,786
)
Other comprehensive income (loss) before reclassifications
15,548

 
(2,365
)
 
(2,888
)
 
(80,870
)
 
(70,575
)
Amounts reclassified from accumulated other comprehensive loss
10,004

 

 
7,335

 

 
17,339

Net increase (decrease) in other comprehensive income (loss)
25,552

 
(2,365
)
 
4,447

 
(80,870
)
 
(53,236
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2018
$
4,454

 
$
(5,164
)
 
$
(138,766
)
 
$
(695,546
)
 
$
(835,022
)
 
For the Three Months Ended September 30, 2017
 
Derivative
Instruments
 
Available-for-sale security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Loss, Net of Tax, as of June 30, 2017
$
(25,114
)
 
$
(588
)
 
$
(155,625
)
 
$
(700,607
)
 
$
(881,934
)
Other comprehensive (loss) income before reclassifications
(24,009
)
 
(3,848
)
 
(103
)
 
36,912

 
8,952

Amounts reclassified from accumulated other comprehensive loss
9,241

 

 
1,209

 

 
10,450

Net (decrease) increase in other comprehensive (loss) income
(14,768
)

(3,848
)

1,106


36,912


19,402

Accumulated Other Comprehensive Loss, Net of Tax, as of September 30, 2017
$
(39,882
)
 
$
(4,436
)
 
$
(154,519
)
 
$
(663,695
)
 
$
(862,532
)
 
 
 
 
 
 
 
 
 
 

13



 
For the Nine Months Ended September 30, 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
(63,999
)
 
(7,585
)
 
(303
)
 
142,248

 
70,361

Amounts reclassified from accumulated other comprehensive income (loss)
6,648

 

 
3,488

 

 
10,136

Net (decrease) increase in other comprehensive (loss) income
(57,351
)
 
(7,585
)
 
3,185

 
142,248

 
80,497

Accumulated Other Comprehensive Loss, Net of Tax, as of September 30, 2017
$
(39,882
)
 
$
(4,436
)
 
$
(154,519
)
 
$
(663,695
)
 
$
(862,532
)
The following tables present the classification and amount of the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30,
2018
 
September 30,
2017
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
Loss on foreign currency forward exchange contracts
$
(910
)
 
$
(9,124
)
 
Cost of sales
Tax effect of net loss
123

 
(117
)
 
Provision for income taxes

$
(787
)
 
$
(9,241
)
 
Net income (loss)
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service credit (cost) (a)
$
502

 
$
(8
)
 
Other non-operating expense, net
Recognized actuarial loss (a)
(2,045
)
 
(1,860
)
 
Other non-operating expense, net

(1,543
)
 
(1,868
)
 
 
Tax effect of net loss

 
659

 
Provision for income taxes

$
(1,543
)
 
$
(1,209
)
 
Net income (loss)
 
 
 
 
 
 

14



 
For the Nine Months Ended
 
 
 
September 30,
2018
 
September 30,
2017
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
Loss on foreign currency forward exchange contracts
$
(10,060
)
 
$
(6,658
)
 
Cost of sales
Tax effect of net loss
56

 
10

 
Provision for income taxes

$
(10,004
)
 
$
(6,648
)
 
Net income (loss)
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service credit (cost) (a)
$
1,505

 
$
(23
)
 
Other non-operating expense, net
Recognized actuarial loss (a)
(6,408
)
 
(5,576
)
 
Other non-operating expense, net
Settlement loss
(2,443
)
 

 
Other non-operating expense, net

(7,346
)
 
(5,599
)
 
 
Tax effect of net loss
11

 
2,111

 
Provision for income taxes

$
(7,335
)
 
$
(3,488
)
 
Net income (loss)
 _______________________________________
(a)
The amortization of prior service credit (cost) and recognized actuarial loss are included in the computation of net periodic benefit cost. Refer to "Note 16 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 U.S. dollar. The translation of its net investments in subsidiaries with non-U.S. 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-U.S. dollar functional currencies are translated into U.S. dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Currency translation adjustments resulted in a net loss of $80.9 million for the nine months ended September 30, 2018, primarily due to the weakening of the Euro, Brazilian real, Russian ruble, British pound sterling, and Turkish lira against the U.S. dollar. Currency translation adjustments resulted in a net gain of $142.2 million for the nine months ended September 30, 2017, primarily due to the strengthening of the Euro, British pound sterling, and Mexican peso against the U.S. dollar.
12.
Derivative Instruments
Mattel seeks to mitigate its exposure to foreign currency transaction risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts. Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. These derivative instruments have been designated as effective cash flow hedges, whereby the unsettled hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in other comprehensive income (loss) ("OCI"). Realized gains and losses for these contracts are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel has not designated these contracts as hedging instruments, and, as such, changes in fair value are recorded in the period of change in the consolidated statements of operations. As of September 30, 2018September 30, 2017, and December 31, 2017, Mattel held foreign currency forward exchange contracts with notional amounts of $936.8 million, $2.46 billion, and $987.7 million, respectively.

15



The following tables present Mattel’s derivative assets and liabilities:
 
Derivative Assets
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
7,399

 
$
1,951

 
$
2,175

Foreign currency forward exchange contracts
Other noncurrent assets
 
1,758

 
764

 
115

Total derivatives designated as hedging instruments
 
 
$
9,157

 
$
2,715

 
$
2,290

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
619

 
$
1,369

 
$
5,514

Total

 
$
9,776

 
$
4,084

 
$
7,804

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2018
 
September 30,
2017
 
December 31,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
5,219

 
$
21,624

 
$
15,970

Foreign currency forward exchange contracts
Other noncurrent liabilities
 
68

 
7,206

 
3,159

Total derivatives designated as hedging instruments
 
 
$
5,287

 
$
28,830

 
$
19,129

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 

 

Foreign currency forward exchange contracts
Accrued liabilities
 
$
4,505

 
$
1,047

 
$
191

Total
 
 
$
9,792

 
$
29,877

 
$
19,320

The following tables present the classification and amount of gains and losses, net of tax, from derivatives reported in the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30, 2018
 
September 30, 2017
 
Statements of
Operations
Classification
 
Amount of Gain Recognized in OCI
 
Amount of (Loss) Reclassified from Accumulated OCI to Statement of Operations
 
Amount of (Loss) Recognized in OCI
 
Amount of (Loss) Reclassified from Accumulated OCI to Statement of Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
3,215

 
$
(787
)
 
$
(24,009
)
 
$
(9,241
)
 
Cost of sales
 
 
 
 
 
 
 
 
 
 

16



 
For the Nine Months Ended
 
 
 
September 30, 2018
 
September 30, 2017
 
Statements of
Operations
Classification
 
Amount of Gain Recognized in OCI
 
Amount of (Loss) Reclassified from Accumulated OCI to Statement of Operations
 
Amount of (Loss) Recognized in OCI
 
Amount of (Loss) Reclassified from Accumulated OCI to Statement of Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
15,548

 
$
(10,004
)
 
$
(63,999
)
 
$
(6,648
)
 
Cost of sales
The net losses of $0.8 million and $10.0 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2018, respectively, and the net losses of $9.2 million and $6.6 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2017, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.
 
Amount of (Loss) Gain Recognized in the Statements of Operations
 
Statements of Operations
Classification
 
For the Three Months Ended
 
 
September 30,
2018
 
September 30,
2017
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
(2,332
)
 
$
13,624

 
Other non-operating expense, net
Foreign currency forward exchange contracts
15

 
9

 
Cost of sales
Total
$
(2,317
)
 
$
13,633

 
 
 
 
 
 
 
 
 
Amount of (Loss) Gain Recognized in the Statements of Operations
 
Statements of Operations
Classification
 
For the Nine Months Ended
 
 
September 30,
2018
 
September 30,
2017
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
(19,196
)
 
$
64,582

 
Other non-operating expense, net
Foreign currency forward exchange contracts
(233
)
 
511

 
Cost of sales
Total
$
(19,429
)
 
$
65,093

 
 
The net losses of $2.3 million and $19.4 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2018, respectively, and the net gains of $13.6 million and $65.1 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2017, 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.

17



Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and that are significant to the fair value of the assets or liabilities.
Mattel’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following:
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
9,776

 
$

 
$
9,776

Available-for-sale (b)
6,657

 

 

 
6,657

Total assets
$
6,657

 
$
9,776

 
$

 
$
16,433

Liabilities:

 

 

 

Foreign currency forward exchange contracts (a)
$

 
$
9,792

 
$

 
$
9,792

 
 
 
 
 
 
 
 
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
4,084

 
$

 
$
4,084

Available-for-sale (b)
7,354

 

 

 
7,354

Total assets
$
7,354

 
$
4,084

 
$

 
$
11,438

Liabilities:

 

 

 

Foreign currency forward exchange contracts (a)
$

 
$
29,877

 
$

 
$
29,877

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
7,804

 
$

 
$
7,804

Available-for-sale (b)
8,991

 

 

 
8,991

Total assets
$
8,991

 
$
7,804

 
$

 
$
16,795

Liabilities:

 

 

 

Foreign currency forward exchange contracts (a)
$

 
$
19,320

 
$

 
$
19,320

 ____________________________________________
(a)
The fair value of the foreign currency forward exchange contracts are based on dealer quotes of market forward rates and reflect the amount that Mattel would receive or pay at their maturity dates for contracts involving the same notional amounts, currencies, and maturity dates.
(b)
The fair value of the available-for-sale security is based on the quoted price on an active public exchange.
Non-Recurring Fair Value Measurements
Mattel tests its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the carrying value may exceed its fair value. During the three and nine months ended September 30, 2018, Mattel fully impaired certain intangible assets and property, plant, and equipment of $1.8 million and $13.7 million, respectively, due to discontinued use.

18



Other Financial Instruments
Mattel’s financial instruments include cash and equivalents, accounts receivable and payable, accrued liabilities, and short-term and long-term borrowings. The fair values of these instruments approximate their carrying values because of their short-term nature. Cash is classified as Level 1 and all other financial instruments 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 $2.70 billion (compared to a carrying value of $2.90 billion) as of September 30, 2018, $2.17 billion (compared to a carrying value of $2.15 billion) as of September 30, 2017, and $3.01 billion (compared to a carrying value of $3.15 billion) as of December 31, 2017. 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. Prior to June 30, 2018, certain of Mattel’s restricted stock units ("RSUs") were considered participating securities because they contained nonforfeitable rights to dividend equivalents.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
The following table reconciles earnings per common share for the three and nine months ended September 30, 2018 and 2017: 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018

September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
Net income (loss)
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Less: Net income (loss) allocable to participating RSUs (a)

 

 

 

Net income (loss) available for basic common shares
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Weighted average common shares outstanding
345,285

 
343,870

 
344,774

 
343,304

Basic net income (loss) per common share
$
0.02

 
$
(1.75
)
 
$
(1.58
)
 
$
(2.25
)
Diluted:
 
 
 
 
 
 
 
Net income (loss)
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Less: Net income (loss) allocable to participating RSUs (a)

 

 

 

Net income (loss) available for diluted common shares
$
6,278

 
$
(603,247
)
 
$
(545,906
)
 
$
(772,553
)
Weighted average common shares outstanding
345,285

 
343,870

 
344,774

 
343,304

Weighted average common equivalent shares arising from:

 

 

 

Dilutive stock options and non-participating RSUs (b)
387

 

 

 

Weighted average number of common and potential common shares
345,672

 
343,870

 
344,774

 
343,304

Diluted net income (loss) per common share
$
0.02

 
$
(1.75
)
 
$
(1.58
)
 
$
(2.25
)
 _______________________________________
(a)
For the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, Mattel did not allocate its net loss to its participating RSUs as its participating RSUs are not obligated to share in Mattel's losses. As of July 1, 2018, Mattel no longer has participating RSUs.

19



(b)
Mattel was in a net loss position for the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, 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. Nonqualified stock options and nonparticipating RSUs totaling 22.6 million shares were excluded from the calculation of diluted net income per common share for the three months ended September 30, 2018 because their effect would be antidilutive.
15.
Revenues
Effective January 1, 2018, Mattel adopted ASU 2014-09 and its related amendments (collectively, the "new revenue standards") using the modified retrospective transition method, which was applied to all contracts not completed as of that date. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standards, while prior periods were not adjusted.
The cumulative effect of the adoption of the new revenue standards on January 1, 2018 was reflected as a net reduction of approximately $29 million to the opening balance of retained earnings associated with certain licensing contracts. The adoption of the new revenue standards did not have a material impact on Mattel's consolidated balance sheets or consolidated statements of earnings as of or for the three and nine months ended September 30, 2018.
Revenue Recognition and Sales Adjustments
Substantially all of Mattel's revenues continue to be recognized upon shipment or upon receipt of finished goods by the customer, depending on the contract terms. Additionally, Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs, which can be either contractual or discretionary in nature, are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Mattel bases its estimates for these programs on agreed upon customer contract terms as well as historical experience. The costs of these programs are considered variable consideration and are recorded as sales adjustments that reduce gross sales in the period the related sale is recognized. Based on Mattel's analysis of the new revenue standards, revenue recognition from the sale of finished goods to customers, which represents substantially all of Mattel's revenues, was not impacted by the adoption of the new revenue standards.
Mattel also enters into symbolic and functional licensing arrangements, whereby the licensee pays Mattel royalties based on sales of licensed product, and in certain cases are subject to minimum guaranteed amounts. The timing of revenue recognition for certain of these licensing arrangements with minimum guarantees changed under the new revenue standards, which under the new revenue standards is based on the determination of whether the license of intellectual property ("IP") is symbolic, which includes the license of Mattel's brands, or functional, which includes the license of Mattel's completed television or streaming content.
Revenues from symbolic licenses of IP are recognized based on actual sales when Mattel expects royalties to exceed the minimum guarantee. For symbolic licensing arrangements in which Mattel does not expect royalties to exceed the minimum guarantee, an estimate of the royalties expected to be recouped is recognized on a straight-line basis over the license term.
Revenues from functional licenses of IP are recognized once the license period has commenced and the licensee has the ability to use the delivered content.
Disaggregated Revenues
For a presentation of Mattel's revenues disaggregated by segment, brand, and geography, see "Note 23 to the Consolidated Financial Statements—Segment Information."
Practical Expedient
Mattel applied the practical expedient prescribed in the new revenue standards and did not evaluate contracts of one year or less for the existence of a significant financing component. Multi-year contracts were not material.
16.
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 2017 Annual Report on Form 10-K.

20



A summary of the components of net periodic benefit cost for Mattel’s defined benefit pension plans is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Service cost
$
1,014

 
$
1,198

 
$
3,206

 
$
3,441

Interest cost
4,494

 
4,479

 
13,691

 
13,370

Expected return on plan assets
(5,621
)
 
(5,768
)
 
(16,952
)
 
(17,253
)
Amortization of prior service cost
7

 
8

 
23

 
23

Recognized actuarial loss
2,125

 
1,823

 
6,648

 
5,464

Settlement loss

 

 
2,443

 


$
2,019

 
$
1,740

 
$
9,059

 
$
5,045

A summary of the components of net periodic benefit cost for Mattel's postretirement benefit plans is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Service credit
$

 
$

 
$
1

 
$
1

Interest cost
52

 
203

 
156

 
609

Amortization of prior service credit
(509
)
 

 
(1,528
)
 

Recognized actuarial (gain) loss
(80
)
 
37

 
(240
)
 
112


$
(537
)
 
$
240

 
$
(1,611
)
 
$
722

In accordance with ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which went into effect for interim and annual reporting periods beginning on January 1, 2018, Mattel's service cost component is recorded within operating income (loss), presented in the same line items as other employee compensation costs arising from employee services rendered in the period, while other components of net periodic pension cost and postretirement benefit cost are recorded outside of income from operations, presented in other non-operating expense, net. Prior period amounts have been retrospectively adjusted, which resulted in a reclassification of $0.5 million and $1.6 million of expense, net from other selling and administrative expenses to other non-operating expense, net for the three and nine months ended September 30, 2017, respectively.
During the nine months ended September 30, 2018, Mattel made cash contributions totaling approximately $17 million related to its defined benefit pension and postretirement benefit plans. During the remainder of 2018, Mattel expects to make additional cash contributions of approximately $3 million.
17.
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 2017 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 April 2018, the Compensation Committee approved a new long-term incentive program for the January 1, 2018–December 31, 2020 performance cycle. As of September 30, 2018, three long-term incentive programs were in place with the following performance cycles: (i) a January 1, 2016–December 31, 2018 performance cycle, (ii) a January 1, 2017–December 31, 2019 performance cycle, and (iii) a January 1, 2018–December 31, 2020 performance cycle.

21



For the January 1, 2018–December 31, 2020 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 providing services to Mattel. Performance RSUs granted under this program are earned based on an initial target number with the final number of Performance RSUs payable being determined based on the product of the initial target number of Performance RSUs multiplied by a performance factor based on measurements of Mattel's performance with respect to (i) a cumulative three-year free cash flow target for the performance cycle and (ii) Mattel's total shareholder return ("TSR") multiplier, which is based on Mattel’s three-year TSR relative to the TSR realized by companies comprised of the S&P 500 as of the first day of the performance cycle. The Performance RSUs also 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 in shares of Mattel common stock.
During the three and nine months ended September 30, 2018, Mattel recognized $0.6 million of compensation expense in connection with its 2018–2020 performance cycle. During the three and nine months ended September 30, 2018, Mattel recognized $0.5 million of compensation expense related to the 2017–2019 performance-related component and no compensation expense related to the 2016–2018 performance-related component. Mattel recognized minimal expense related to the 2017–2019 and the 2016–2018 market-related components during the three and nine months ended September 30, 2018.
Compensation expense, included within other selling and administrative expenses in the consolidated statements of operations, related to stock options and RSUs is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Stock option compensation expense
$
2,751

 
$
3,446

 
$
6,125

 
$
9,262

RSU compensation expense
11,019

 
13,583

 
30,062

 
38,320

 
$
13,770

 
$
17,029

 
$
36,187

 
$
47,582

As of September 30, 2018, total unrecognized compensation cost related to unvested share-based payments totaled $115.4 million and is expected to be recognized over a weighted-average period of 2.4 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 was $0 and $1.8 million during the nine months ended September 30, 2018 and 2017, respectively.
18.
Other Selling and Administrative Expenses
Other selling and administrative expenses include the following:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Design and development
$
48,766

 
$
58,288

 
$
154,987

 
$
166,784

Identifiable intangible asset amortization
10,195

 
4,444

 
29,925

 
13,045

19.
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 (loss) 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 expense, net in the consolidated statements of operations.  Inventory purchase and sale transactions denominated in the Euro, Mexican peso, British pound sterling, Canadian dollar, Australian dollar, Chinese renminbi, Russian ruble, and Brazilian real are the primary transactions that cause foreign currency transaction exposure for Mattel.

22



Currency transaction (losses) gains included in the consolidated statements of operations are as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Operating (loss) income
$
(4,482
)
 
$
2,857

 
$
(9,023
)
 
$
(32,137
)
Other non-operating expense, net
(1,568
)
 
(1,244
)
 
(535
)
 
(7,368
)
Net transaction (losses) gains
$
(6,050
)
 
$
1,613

 
$
(9,558
)
 
$
(39,505
)
20.
Restructuring Charges
During the third quarter of 2017, Mattel initiated its Structural Simplification Cost Savings program, with plans to target at least $650 million in cost savings by 2020.
The major initiatives of the Structural Simplification Cost Savings program include:
Reducing manufacturing complexity, including SKU reduction, implementing process improvement initiatives at owned and co-manufacturing facilities, exploring strategic alternatives for Mattel’s manufacturing footprint, and optimizing the supply chain;
Streamlining the organizational structure and reducing headcount expense to better align with the revenue base; and
Optimizing advertising spend.
The following table summarizes Mattel's severance and other restructuring costs activity for the nine months ended September 30, 2018:
 
Liability at December 31, 2017
 
 Charges
 
Payments/Utilization
 
Liability at September 30, 2018
 
(In thousands)
Severance
$
29,794

 
$
61,735

 
$
(48,611
)
 
$
42,918

Other restructuring costs (a)
5,394

 
42,189

 
(37,164
)
 
10,419

 
$
35,188

 
$
103,924

 
$
(85,775
)
 
$
53,337

______________________________________________________________________
(a)
Consists primarily of consulting fees.
To date, Mattel has recorded cumulative severance and other restructuring charges of $149.1 million and expects to incur total charges of approximately $200 million related to the Structural Simplification Cost Savings program.
In connection with the Structural Simplification Cost Savings program, Mattel recorded severance and other restructuring costs in the following cost and expense categories within the consolidated statements of operations:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
 
(In thousands)
Cost of sales (a)
$
5,741

 
$

 
$
5,741

 
$

Other selling and administrative (b)
25,472

 

 
98,183

 

 
$
31,213

 
$

 
$
103,924

 
$

________________________________________________________________________
(a)
Severance and other restructuring costs recorded within cost of sales include plant restructuring charges.
(b)
Severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in "Note 23 to the Consolidated Financial Statements—Segment Information."

23



21.
Income Taxes
Mattel’s provision for income taxes was $66.3 million and $70.6 million for the three and nine months ended September 30, 2018, respectively, as compared to a provision for income taxes of $664.5 million and $614.4 million for the three and nine months ended September 30, 2017, respectively. Excluding discrete tax items, Mattel's 2018 tax expense or benefit is driven by income or loss in foreign taxable jurisdictions due to the U.S. valuation allowance. Mattel recognized a net discrete tax expense of $42.1 million and $44.3 million for the three and nine months ended September 30, 2018, respectively. For the three months ended September 30, 2018, Mattel recognized discrete tax expense primarily related to the provisional tax of $9.3 million for deemed repatriation of accumulated foreign earnings (net of related valuation allowance change), $14.6 million related to changes to the indefinite reinvestment assertion, and $17.8 million net tax expense related to reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. Mattel recognized a net discrete tax expense of $561.5 million and $558.8 million for the three and nine months ended September 30, 2017, respectively, primarily related to the establishment of a valuation allowance against U.S. deferred tax assets in the third quarter of 2017 and reassessments of prior years' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world.
On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act ("Tax Act" or "U.S. Tax Reform"), was enacted. The Securities Exchange Commission has issued guidance under Staff Accounting Bulletin 118 that allows for companies to provide provisional amounts for certain income tax effects of the Tax Act for which the company can provide a reasonable estimate. The guidance also provides that a company may not have the necessary information available, prepared, or analyzed for certain income tax effects of the Tax Act, in which case the company would not be expected to provide a provisional amount for those specific items. Additionally, the guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.
As of December 31, 2017, Mattel reasonably estimated and recorded provisional amounts associated with the impact of the corporate tax rate change. Mattel continues to gather additional information to complete the accounting for these items and will complete our accounting within the prescribed measurement period.
In January 2018, the Financial Accounting Standards Board ("FASB") issued guidance stating that a company must make an accounting policy election of either (i) treating taxes due on future U.S. inclusions in taxable income related to Global Intangible Low-Taxed Income ("GILTI") as a current-period expense when incurred (the "period cost method") or (ii) factoring such amounts into a company’s measurement of its deferred taxes (the "deferred method"). Mattel has elected the period cost method and has considered the estimated 2018 GILTI impact in its 2018 tax expense.
On January 1, 2018, Mattel adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which required Mattel to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. Previously, the income tax effect of intercompany transfers of assets was deferred until the asset was sold to an outside party or otherwise recognized (e.g., depreciated, amortized, impaired). The new guidance requires Mattel to defer only the income tax effects of intercompany transfers of inventory. A cumulative effect adjustment of approximately $9 million was recorded as an increase to beginning retained earnings in the first quarter of 2018.
As of September 30, 2018, Mattel reasonably estimated and recorded a provisional tax of $9.3 million, associated with the impact of the deemed repatriation of accumulated foreign earnings. Mattel recorded a gross tax of $268.5 million, prior to the utilization of tax attributes, and released a valuation allowance of $259.2 million related to tax attributes utilized against the provisional tax. Mattel is continuing to evaluate the impact of this provision of the Tax Act and will complete the accounting for this item within the prescribed measurement period. The net tax due related to the deemed repatriation of accumulated foreign earnings is payable over eight years.
In addition, U.S. Tax Reform will provide Mattel with a reduced cost to access the earnings of its foreign subsidiaries. As such, Mattel has re-evaluated its intentions related to its indefinite reinvestment assertion, and has recorded a $14.6 million tax charge related to state income taxes and withholding taxes on $300 million of prior year foreign earnings that will not be indefinitely reinvested.
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 $3.5 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

24



22.
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.
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.

25



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.
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.

26



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.
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. 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. On July 31, 2017, Mattel filed a motion for summary judgment on the grounds that MGA’s complaint is barred by the statute of limitations.  On February 13, 2018, the Court granted Mattel's summary judgment motion. Consistent with this ruling, the Court entered judgment for Mattel on March 8, 2018. On April 24, 2018, MGA filed a Notice of Appeal of the judgment. Mattel does not presently believe that damages in any amount are reasonably possible.  Accordingly, 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.

27



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.
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 sought 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 .
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 sought 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.
On August 31, 2017, the reporting justice for the Appeals Court denied Yellowstone’s interlocutory appeal. As to Mattel, the reporting justice reversed the fine referenced above that had been previously imposed on Mattel for filing a motion for clarification. However, the reporting justice rejected Mattel’s arguments on the merits of Yellowstone’s damages claims. On September 22, 2017, Mattel filed a further appeal to the full panel of five appellate justices to challenge the merits of Yellowstone’s damages claims. Yellowstone did not file a further appeal.

28



In April 2018, Mattel do Brasil entered into a settlement agreement to resolve this matter for 5.0 million Brazilian real (approximately $1.3 million). In August 2018, the settlement was rejected by the bankruptcy court, in part based upon the fact that Mattel do Brasil’s appeal remained pending and the decision in favor of Yellowstone was not yet final. In September 2018, Mattel appealed that decision.
On October 2, 2018, the Appeals Court rejected Mattel’s merits appeal to the five justice panel, and affirmed the prior rulings in favor of Yellowstone. As the Mattel do Brasil appeal of the bankruptcy court’s rejection of the settlement remains pending, and the October 2, 2018 Appeals Court decision now resolves the bankruptcy court’s concern that the underlying case was not final, it is possible the bankruptcy appeals court may approve the parties’ settlement.

Securities Litigation
A purported class action lawsuit is pending in the United States District Court for the Central District of California (consolidating Waterford Township Police & Fire Retirement System v. Mattel, Inc., et al., filed June 27, 2017; and Lathe v. Mattel, Inc., et al., filed July 6, 2017) against Mattel, Christopher A. Sinclair, Richard Dickson, Kevin M. Farr, and Joseph B. Johnson alleging federal securities laws violations in connection with statements allegedly made by the defendants during the period October 20, 2016 through April 20, 2017. In general, the lawsuit asserts allegations that the defendants artificially inflated Mattel’s common stock price by knowingly making materially false and misleading statements and omissions to the investing public about retail customer inventory, the alignment between point-of-sale and shipping data, and Mattel’s overall financial condition. The lawsuit alleges that the defendants’ conduct caused the plaintiff and other stockholders to purchase