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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended
December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to  
                     
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)
Registrant’s telephone number, including area code (310) 252-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $1.00 per share
 
MAT
 
The Nasdaq Global Select Market
______________________________________________________
 Securities registered pursuant to Section 12(g) of the Act:
NONE
______________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  ý
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 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 Act).  Yes      No  
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $5,044,446 based upon the closing market price as of the close of business June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter.
Number of shares outstanding of registrant’s common stock, $1.00 par value, as of February 7, 2020: 346,870,826 shares

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mattel, Inc. 2020 Proxy Statement, filed with the Securities and Exchange Commission (“SEC”) within 120 days after the closing of the registrant's fiscal year (incorporated into Part III to the extent stated herein).



MATTEL, INC. AND SUBSIDIARIES
 
 
Page
 
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
Item 15.
Item 16.
 

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(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 Annual Report on Form 10-K 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, such as 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 Mattel’s significant retailers, such as Toys "R" Us, Inc. 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, arbitration, or regulatory decisions or settlement actions; (xx) uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; (xxi) an inability to remediate the material weakness in our internal control over financial reporting or additional material weaknesses or other deficiencies in the future or the failure to maintain an effective system of internal controls; and (xxii) other risks and uncertainties detailed in Part 1, Item 1A "Risk Factors." Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.

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PART I
Item 1.
Business.
Throughout this report "Mattel" refers to Mattel, Inc. and/or one or more of its family of companies. Mattel is a leading global children's entertainment company that specializes in the design and production of quality toys and consumer products. Mattel's products are among the most widely recognized toy products in the world. Mattel's mission is to "create innovative products and experiences that inspire, entertain, and develop children through play." In order to deliver on this mission, Mattel is focused on the following two-part strategy to transform Mattel from a toy manufacturing company into an intellectual property ("IP") driven, high-performing toy company:
In the short- to mid-term, restore profitability by reshaping operations and regain topline growth by growing Mattel's Power Brands (Barbie, Hot Wheels, Fisher-Price and Thomas & Friends, and American Girl) and expanding Mattel's brand portfolio.
In the mid- to long-term, capture the full value of Mattel's IP through franchise management and the development of Mattel's online retail and e-commerce capabilities.
Mattel is the owner of a portfolio of global brands with vast intellectual property potential. Mattel's portfolio of owned and licensed brands and products are organized into the following categories:
Dolls—including brands such as Barbie, American Girl, Enchantimals, and Polly Pocket. Empowering girls since 1959, Barbie has inspired the limitless potential of every girl by showing them that they can be anything. With an extensive portfolio of dolls and accessories, content, gaming, and lifestyle products, Barbie is the premier fashion doll for children around the world. American Girl is best known for imparting valuable life lessons through its inspiring dolls and books, featuring diverse characters from past and present. Its products are sold directly to consumers via its catalog, website, and proprietary retail stores.
Infant, Toddler, and Preschool—including brands such as Fisher-Price and Thomas & Friends, Power Wheels, Fireman Sam, and Shimmer and Shine (Nickelodeon). As a leader in play and child development, Fisher-Price’s mission is to provide meaningful solutions for parents and enrich children’s lives from birth to school readiness, helping families get the best possible start. Thomas & Friends is an award-winning preschool train brand franchise that brings meaningful life lessons of friendship and teamwork to kids through content, toys, live events, and other lifestyle categories.
Vehicles—including brands such as Hot Wheels, Matchbox, CARS (Disney Pixar), and Jurassic World (NBCUniversal). In production for over 50 years, Hot Wheels continues to push the limits of performance and design and ignites the challenger spirit of kids, adults, and collectors. From diecast cars, to tracks, playsets, and advanced play products, the Hot Wheels portfolio has broad appeal that engages and excites kids.
Action Figures, Building Sets, and Games—including brands such as MEGA, UNO, Toy Story (Disney Pixar), Jurassic World (NBCUniversal), and WWE. From big blocks to small bricks, first builders to advanced collectors, MEGA creates products that spark purposeful play and encourage kids and adults to "build beyond." America's number one game, UNO is the classic matching card game that is easy to pick up and fast fun for everyone.
Mattel, Inc. was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (310) 252-2000.
Business Segments
Mattel's operating segments are: (i) North America, which consists of the U.S. and Canada; (ii) International; and (iii) American Girl.  The North America and International segments sell products across categories, although some products are developed and adapted for particular international markets.
For additional information on Mattel’s worldwide revenues by brand category, see Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Segment Information."

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North America Segment
The North America segment markets and sells toys in the U.S. and Canada across categories.
In the Dolls category, Mattel will seek to continue the strong momentum started by the 60th anniversary of Barbie in 2020.  In spring 2020, Barbie will celebrate wellness with a new product launch and a 360-degree program centered around meditation and mindfulness including consumer products, digital activations, and collaborations.  Barbie will also kick off its inaugural You Can Be Anything Festival, benefiting the Dream Gap Project Fund with key talent timed to International Women’s Day. Barbie will continue a full year of the new Color Reveal segment, a new and innovative play pattern.  In summer and fall 2020, Barbie will launch its sports campaign tied to the Olympics and a new We Are Barbie campaign focusing on the message of diversity and inclusivity.  Barbie products will also continue to be supported by new animated content, including new episodes of Barbie: Dreamhouse Adventures, a new Barbie Princess Adventures Special.
Building off of its content distribution, Mattel will continue to support Polly Pocket and Enchantimals by streaming animated content on key broadcast platforms globally.  Both brands will have a strong new product line and will continue to be amplified by new content in 2020.
In 2020, Fisher-Price will celebrate its 90th birthday.  Further development on the new brand platform launched in the fall of 2019 will look to turn brand awareness into brand love by surprising and delighting consumers as a trusted brand for infants and children up to five years old.
Thomas & Friends will celebrate a milestone 75th anniversary in 2020.  Thomas has delighted fans for generations through books and television, and in 2020, Mattel is introducing more storytelling touchpoints than ever before for the next generation of fans.  New series on YouTube, new audio stories, new music, and exciting partnerships in key markets around the world will celebrate Thomas & Friends throughout the year.
In the Vehicles category, industry leader Hot Wheels will continue its strong momentum as a multigenerational franchise with globally expanded Hot Wheels Legends and Hot Wheels Monster Trucks Live tours, and always-on premium content on YouTube.  The core product offering will be refreshed with the new Track Builder Unlimited line and exciting partnerships with some of the best automotive and entertainment properties, including Fast & Furious 9 from NBCUniversal.  Mattel will also continue to partner with Disney Pixar for CARS, with increased franchise support.  Additionally, Matchbox is poised to have a great year, enhanced by its partnership with Viacom as global toy partner for Top Gun: Maverick.
Mattel’s Action Figures category will continue to collaborate with key licensor partners, such as Disney, NBCUniversal, WWE, and Microsoft, to bring innovative products to the global marketplace.  Key 2020 product lines based on entertainment franchises include Minions, with a theatrical release in July 2020, support for the launch of the Minecraft Earth video game, as well as continued franchise support of NBCUniversal’s Jurassic World and Disney Pixar's Toy Story 4 and other Disney Pixar properties.
MEGA is the global challenger brand in the building sets category, providing innovative building play experiences, authentic details and accessible value for fans and families. In 2020, MEGA will invite consumers of all ages to build more together, promoting inclusivity within the industry and the world. Parents of preschoolers can discover the new MEGA Bloks Peek-a-Bloks segment, featuring easy building playsets and collectible peek-a-boo surprise characters. The MEGA Construx portfolio will introduce open-ended StoryBuilders sets to transition builders ages four to six to big kid building. Fans of partner franchises can continue to build and collect with Pokemon, Game of Thrones, and Halo.
In the Games category in 2020, Mattel’s flagship card game UNO will be introducing new innovative ways to play as well as continuing to introduce a variety of pop culture and entertainment themed decks. With one of the largest branded portfolios in the world, we will continue to maximize evergreen brands like Pictionary, Rock 'Em Sock 'Em Robots, and Magic 8 Ball and bring new innovative concepts to market.
International Segment
Products marketed by the International segment are generally the same as those developed and marketed by the North America segment, although some are developed or adapted for particular international markets. Mattel’s products are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence. No individual country within the International segment exceeded 7% of worldwide consolidated gross sales during 2019.

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American Girl Segment
The American Girl segment is a direct marketer, children’s publisher, and retailer dedicated to its mission to help build girls of strong character.  American Girl is best known for its line of historical and contemporary characters that feature 18" dolls, books, and accessories that inspire girls with important lessons from America’s past to today.  For girls who are ready to tell their own stories, Truly Me allows girls to express what’s on their minds and in their hearts by choosing a doll—or creating their own—from more than 1.3 million possibilities. Bitty Baby introduces girls to nurturing play until they are ready for WellieWishers, a sweet group of girls who teach about empathy and being a good friend. American Girl also publishes best-selling fiction and non-fiction titles that help girls navigate the changes and challenges of growing up.  The American Girl segment sells products directly to consumers via its catalog, website, in its proprietary retail stores in the U.S., at select retailers nationwide, and at specialty boutiques and franchise stores in Canada, Dubai, and Bahrain. The American Girl stores in Dubai and Bahrain are scheduled to close in early 2020.
In January 2020, American Girl introduced its newest Girl of the Year character, Joss Kendrick, a fierce athlete born with hearing loss and a passion for surfing and competitive cheer. Throughout 2020, American Girl will focus on its mission to build girls of strong character through immersive storytelling; differentiated, premium experiences; and our commitment to service and quality.
Manufacturing and Materials
Mattel manufactures toy products for all segments in both company-owned facilities and through third-party manufacturers. Products are also purchased from unrelated entities that design, develop, and manufacture those products. To provide greater flexibility in the manufacture and delivery of its products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in company-owned facilities and generally uses third-party manufacturers for the production of non-core products.
Mattel’s principal manufacturing facilities are located in Canada, China, Indonesia, Malaysia, Mexico, and Thailand. In conjunction with the Capital Light program, Mattel discontinued production in 2019 at certain plants located in China, Indonesia, and Mexico. In addition to the discontinued production at the three plants, Mattel announced that it will discontinue production in 2020 at its plant located in Canada. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies or regulations, natural and manmade disasters, and other risks, Mattel produces its products in multiple facilities across multiple countries. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ facilities is sufficient to handle expected volume in the foreseeable future. Mattel continues to evaluate its manufacturing footprint in connection with its Capital Light program.
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.
The majority of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price. See Part I, Item 1A "Risk Factors."
Competition and Industry Background
Mattel is a worldwide leader in the manufacture, marketing, and sale of toys, games, and other products related to play, learning, and development. Competition in the toy industry is based primarily on quality, play value, brands, and price. Mattel offers a diverse range of products for children of all ages and families that include, among others, toys for infants and preschoolers, dolls, vehicles, action figures, construction toys, youth electronics, hand-held and other games, puzzles, educational toys, technology-related products, media-driven products, and fashion-related toys. The North America segment competes with several large toy companies, including Funko, Hasbro, JAKKS Pacific, Jazwares, Just Play Products, LEGO, MGA Entertainment, Spin Master, VTech, many smaller toy companies, and manufacturers of video games and consumer electronics. The International segment competes with global toy companies including Funko, Hasbro, JAKKS Pacific, Just Play Products, LEGO, MGA Entertainment, Playmobil, Ravensburger, Simba, Spin Master, VTech, other national and regional toy companies, and manufacturers of video games and consumer electronics. Foreign regions may include competitors that are strong in a particular toy line or geographical area but do not compete with Mattel or other international toy companies worldwide. The American Girl segment competes with companies that manufacture dolls and accessories and with children’s book publishers and retailers.

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Competition among the above companies is intensifying due to trends towards shorter life cycles for individual toy products and an increasing use of more sophisticated technology among consumers.  As a result of children outgrowing toys at younger ages, Mattel competes with companies that sell non-toy products, such as electronic consumer products, video games, as well as content and other entertainment companies.  Competition continues to be heavily influenced by the fact that a small number of retailers account for a large portion of all toy sales, allocate the shelf space from which toys are viewed, and have direct contact with parents and children through in-store and online purchases. Such retailers can and do promote their own private-label toys, facilitate the sale of competitors’ toys, showcase toys online based on proprietary algorithms, and allocate shelf space to one type of toy over another. Online distributors are able to promote a wide variety of toys and represent a wide variety of toy manufacturers.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year in anticipation of holiday buying. These seasonal purchasing patterns and requisite production lead times create risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of less popular toys that do not match consumer demand. Retailers have also been attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.
In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See Part II, Item 8 "Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt."
Advertising and Marketing
Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes television and radio commercials, social media, and magazine, newspaper, and internet advertisements. Promotions include in-store displays, sweepstakes, merchandising materials, major events focusing on products, and tie-ins with various consumer products companies.
During 2019, 2018, and 2017, Mattel incurred advertising and promotion expenses of $551.5 million (12.2% of net sales), $524.3 million (11.6% of net sales), and $642.3 million (13.2% of net sales), respectively.
Sales
Mattel’s products are sold throughout the world. Products within the North America segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets, and, to a limited extent, wholesalers. Mattel also operates small retail outlets at certain corporate offices as a service to its employees and as an outlet for its products. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence. Mattel also has retail outlets in Latin America and Europe that serve as outlets for its products. American Girl products and its children's publications are sold directly to consumers and select retailers nationwide. Mattel has retail space in Chicago, Illinois; Los Angeles, California; and New York, New York for its American Girl Place stores, and in over 10 other cities across the United States for its American Girl stores, each of which features children’s products from the American Girl segment. Additionally, Mattel sells certain of its products online through websites of one or more of its subsidiaries.

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During 2019 and 2018, Mattel’s two largest customers (Walmart at $1.01 billion and Target at $0.44 billion during 2019, Walmart at $1.07 billion and Target at $0.45 billion during 2018) accounted for approximately 32% and 34%, respectively, of worldwide consolidated net sales. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the U.S., none of which exceeded 10% of worldwide consolidated net sales. The customers and the degree of concentration vary depending upon the region or nation. See Part I, Item 1A "Risk Factors" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Segment Information."
Licenses and Distribution Agreements
Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters, or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations.
Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Star Wars, Mickey Mouse, Pixar (including CARS and Toy Story) and certain other Disney films and television properties), NBCUniversal (including Fast and Furious and Jurassic World), Viacom International, Inc. relating to its Nickelodeon properties (including Blaze and the Monster Machines, Sunny Day, Shimmer and Shine, and Butterbean's Cafe), Warner Bros. Consumer Products (including Batman, Superman, Wonder Woman, Justice League, and DC Comics Superhero Girls), Microsoft (including Halo and Minecraft), and WWE.
Mattel's license with Warner Bros. Consumer Products for the global rights to produce and sell action figures based on DC Comics characters expires in March 2020 and will not be renewed.
Royalty expense for 2019, 2018, and 2017 was $220.2 million, $224.0 million, and $244.5 million, respectively. See "Commitments" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Commitments and Contingencies."
Mattel also licenses a number of its trademarks and other property rights to others for use in connection with the sale of their products. Mattel distributes some third-party finished products that are independently designed and manufactured.
Trademarks, Copyrights, and Patents
Most of Mattel’s products are sold under trademarks, trade names, and copyrights, and some of these products incorporate devices or designs for which patent protection has been, or is being pursued. Trademarks, copyrights, and patents are significant assets of Mattel in that they provide product recognition and acceptance worldwide.
Mattel customarily seeks trademark, copyright, and/or patent protection covering its products, and it owns or has applications pending or registrations for U.S. and foreign trademarks, copyrights, and patents covering many of its products. Although a number of these trademarks, copyrights, and patents relate to product lines that are significant to Mattel’s business and operations, Mattel does not believe it is dependent on a single trademark, copyright, or patent. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented, or challenged.
Commitments
In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery and to obtain and protect Mattel’s right to create and market certain products. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used in the normal course of business.
Agreements to purchase inventory, services, and other items with terms extending through 2022 contain future minimum payments totaling approximately $342 million. Licensing and similar agreements with terms extending through 2024 contain provisions for future guaranteed minimum payments totaling approximately $184 million. Lease commitments with terms extending through 2024 and beyond contain future minimum obligations totaling approximately $450 million. See Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments", Part II, Item 8 "Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Commitments and Contingencies" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements—Leases."

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Backlog
Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. Many of Mattel's customers use quick response or just-in-time inventory management practices resulting in fewer advance orders and therefore less backlog of orders. Mattel believes that the amount of backlog orders at any given time may not accurately indicate future sales.
Financial Instruments
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel seeks to mitigate its exposure to foreign exchange risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 10 to the Consolidated Financial Statements—Derivative Instruments."
Seasonal Financing
See Part II, Item 8 "Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt."
Government Regulations and Environmental Quality
Mattel’s products sold in the U.S. are subject to the provisions of the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008, the Federal Hazardous Substances Act, and the Consumer Product Safety Improvement Act of 2008, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug, and Cosmetics Act and the regulations promulgated pursuant to such statutes. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The Consumer Product Safety Commission may require the recall, repurchase, replacement, or repair of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. Similar laws exist in some U.S. states. Mattel believes that it is in substantial compliance with these federal and state laws and regulations.
Mattel’s products sold worldwide are subject to the provisions of similar laws and regulations in many jurisdictions, including the European Union ("EU") and Canada. Mattel believes that it is in substantial compliance with these laws and regulations.
Mattel maintains a quality control program to help ensure compliance with applicable product safety requirements. Nonetheless, Mattel has experienced, and may in the future experience, issues in products that result in recalls, withdrawals, or replacements of products. A product recall could have a material adverse effect on Mattel’s results of operations and financial condition, depending on the product affected by the recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel’s reputation and the sales of other Mattel products. See Part I, Item 1A "Risk Factors."
Mattel’s advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission, and the Federal Communications Commission, as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel’s web-based products and services and other online and digital communications activity are or may be subject to U.S. and foreign privacy-related regulations, including the U.S. Children’s Online Privacy Protection Act of 1998 and the EU General Data Protection Regulation and related national regulations. Privacy-related laws also exist in some U.S. states, including the recently enacted California Consumer Protection Act. Mattel believes that it is in substantial compliance with these laws and regulations.
Mattel’s worldwide operations are subject to the requirements of various environmental laws and regulations in the jurisdictions where those operations are located. Mattel believes that it is in substantial compliance with those laws and regulations. Mattel’s operations are from time to time the subject of investigations, conferences, discussions, and negotiations with various federal, state, and local environmental agencies within and outside the U.S. with respect to the discharge or cleanup of hazardous waste. Mattel is not aware of any material cleanup liabilities.

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Mattel is subject to various other federal, state, local, and international laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations.
Employees
The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. As of December 31, 2019, Mattel’s total number of employees (excluding temporary and seasonal employees) was approximately 24,000.
Available Information
Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") with the SEC. The SEC maintains an Internet website that contains reports, proxy, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Mattel’s internet website address is http://corporate.mattel.com. Mattel makes available on its internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.
Item 1A.
Risk Factors.
If any of the risks and uncertainties described in the cautionary risk factors listed below actually occurs, Mattel’s business, financial condition and results of operations could be adversely affected, and such effects could at times be significant. The risk factors listed below are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact Mattel’s business, financial condition and results of operations. Moreover, Mattel operates in a very competitive and rapidly changing environment. New factors emerge from time to time, and it is not possible for management to predict the impact of all of these factors on Mattel’s business, financial condition, or results of operations, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by Mattel or its representatives may turn out to be wrong. Mattel expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
Mattel is not always able to successfully identify and/or satisfy consumer preferences, which could cause its business, financial condition, and results of operations to be adversely affected.
Mattel’s business and operating results depend largely upon the appeal of its products, driven by both innovation and marketing. Consumer preferences, particularly with children as the end users of Mattel’s products, are continuously changing. Mattel is not always able to identify trends in consumer preferences or identify and satisfy consumer preferences in a timely manner. Significant, sudden shifts in demand are caused by "hit" toys and trends, which are often unpredictable. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls’ and boys’ toys, youth electronics, digital media, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. Mattel competes domestically and internationally with a wide range of large and small manufacturers, marketers and sellers of toys, video games, consumer electronics such as tablets and mobile devices, and other play products, as well as retailers, which means that Mattel’s market position is always at risk. Mattel’s ability to maintain its current product sales, and increase its product sales or establish product sales with new, innovative toys, depends on Mattel’s ability to satisfy play preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of these products. These challenges are intensifying due to trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing traditional toys at younger ages, an increasing use of more sophisticated technology in toys, and an evolving path to purchase. Mattel's failure to successfully meet the challenges outlined above in a timely and cost-effective manner could decrease demand for its products and may adversely affect Mattel’s business, financial condition, and results of operations.

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High levels of competition and low barriers to entry make it difficult to achieve, maintain, or build upon the success of Mattel’s brands, products, and product lines.
Mattel faces competitors who are also constantly monitoring and attempting to anticipate consumer tastes, seeking ideas which will appeal to consumers, and introducing new products that compete with Mattel’s products. In addition, competition for access to entertainment properties has and may continue to lessen Mattel’s ability to secure, maintain, and renew popular licenses to entertainment products developed by other parties and licensed to Mattel, or require Mattel to pay licensors higher royalties and higher minimum guaranteed payments in order to obtain or retain these licenses. As a licensee of entertainment properties, Mattel has no guarantee that a particular property or brand will translate into a successful toy, game, or other product. In addition, the barriers to entry for new participants in the toy products industry are low. In a very short period of time, new market participants with a popular product idea or entertainment property can become a significant source of competition for Mattel and its products. Reduced demand for Mattel’s brands, products and product lines as a result of these factors may adversely affect Mattel’s business, financial condition, and results of operations.
Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can adversely affect Mattel’s sales, financial condition, and results of operations.
Successful movies and characters in children’s literature affect play preferences, and many products depend on media-based intellectual property licenses. Media-based licenses can cause a line of toys or other products to gain immediate success among children, parents, or families. Trends in media, movies, and children’s characters change swiftly and contribute to the transience and uncertainty of play preferences. In addition, certain developments in the entertainment industry, including labor strikes, could cause delays or interruptions in the release of new movies and television programs and could adversely affect the sales of Mattel’s products based on such movies and television programs. Mattel attempts to respond to such trends and developments by modifying, refreshing, extending, and expanding its product offerings on an annual basis. Any inability by Mattel to accurately anticipate trends in popular culture, movies, media, fashion, or technology, may cause its products not to be accepted by children, parents, or families and may adversely affect its sales, financial condition, and results of operations.
Mattel’s failure to successfully market or advertise its products could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel’s products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Mattel’s ability to sell products is dependent in part upon the success of these programs. Mattel’s business, financial condition, and results of operations could be adversely effected by its failure to successfully market its products or by an increase in its media or other advertising or promotional costs.
Mattel’s business is highly seasonal and its operating results depend, in large part, on sales during the relatively brief traditional holiday season. Events that disrupt Mattel’s business during its peak demand times can adversely and disproportionately affect Mattel’s business, financial condition, and results of operations.
Mattel’s business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that are less popular with consumers. Sales of toy products at retail are highly seasonal, with a majority of retail sales occurring during the period from September through December. In recent years, many consumers have delayed their purchases until just before the holidays. As a result, Mattel’s operating results depend, in large part, on sales during the relatively brief traditional holiday season. Retailers attempt to manage their inventories tightly, which requires Mattel to ship products closer to the time the retailers expect to sell the products to consumers. This in turn results in shorter lead times for production. Management believes that the increase in "last minute" shopping during the holiday season and the popularity of gift cards (which often shift purchases to after the holiday season) may negatively impact customer re-orders during the holiday season. These factors may decrease sales or increase the risks that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
In addition, as a result of the seasonal nature of Mattel’s business, Mattel may be adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as terrorist attacks, economic shocks, severe weather, earthquakes or other catastrophic events, that harm the retail environment or consumer buying patterns during its key selling season, or by events, such as strikes, disruptions in transportation, or port delays, that interfere with the manufacture or shipment of goods during the critical months leading up to the holiday purchasing season.

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Mattel has significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of its key customers could have an adverse effect on Mattel’s business, financial condition, and results of operations.
A small number of customers account for a large share of Mattel’s worldwide consolidated net sales. In 2019, Mattel’s two largest customers, Walmart and Target, in the aggregate, accounted for approximately 32% of net sales (Walmart at $1.01 billion and Target at $0.44 billion) and its ten largest customers, in the aggregate, accounted for approximately 49% of net sales. While the concentration of Mattel’s business with a relatively small number of customers may provide certain benefits to Mattel, such as potentially more efficient product distribution and decreased costs of sales and distribution, this concentration exposes Mattel to risk of a material adverse effect if one or more of Mattel’s large customers were to significantly reduce purchases for any reason, favor competitors or new entrants, or increase their direct competition with Mattel by expanding their private-label business. Customers make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer reducing its overall purchases of Mattel’s products, reducing the number and variety of Mattel’s products that it carries and the shelf space allotted for Mattel’s products, or otherwise seeking to materially change the terms of the business relationship at any time could adversely affect Mattel’s business, financial condition, and results of operations.
Liquidity problems or bankruptcy of Mattel’s key customers, such as the bankruptcy filing by Toys "R" Us, could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel’s sales to customers are typically made on credit without collateral. There is a risk that key customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers, weak retail sales, or other factors beyond the control of Mattel, which could increase Mattel’s exposure to losses from bad debts. In addition, when key customers cease doing business with Mattel as a result of bankruptcy, or significantly reduce the number of stores operated, it can have an adverse effect on Mattel’s business, financial condition, and results of operations.
On September 18, 2017, Toys "R" Us and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division. This Chapter 11 proceeding and subsequent liquidation has negatively impacted Mattel’s recurring revenue from Toys "R" Us.
To the extent Mattel is unable to realize the anticipated cost savings from its previously announced cost savings programs or incurs additional and/or unexpected costs in order to realize such cost savings, Mattel's business, financial condition, and results of operations could be adversely affected.
Mattel has and continues to implement a series of cost savings programs as described in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Cost Savings Programs." Mattel incurred costs of $59.1 million and $109.8 million in 2019 and 2018, respectively, to achieve such cost savings, and expects to incur additional costs during 2020. There can be no assurance that Mattel will be able to realize the anticipated cost savings from its previously announced cost savings programs in the amounts or within the anticipated timeframes or at all. In addition, any cost savings that Mattel realizes may be offset, in whole or in part, by reductions in net sales or through increases in other expenses. Failure to realize the expected cost savings from these cost savings programs could have an adverse effect on Mattel’s business, financial condition, and results of operations.
The amounts of anticipated cost savings and anticipated expenses related thereto are based on Mattel’s current estimates, but they involve risks, uncertainties, assumptions, and other factors that may cause actual results, performance, or achievements to be materially different from those described herein. Assumptions relating to the plans and amounts related thereto involve subjective decisions and judgments with respect to, among other things, the estimated impact of certain operational adjustments, including marketing efficiency, labor management, material input cost fluctuations, plant transition costs, and other cost and savings adjustments, as well as future economic, competitive, industry and market conditions and future business decisions, all of which are inherently uncertain and may be beyond the control of Mattel’s management. Although Mattel’s management believes these estimates and assumptions to be reasonable, there can be no assurance that the assumptions or estimates described herein will prove to be accurate or that the objectives and plans expressed will be achieved. Neither Mattel’s independent registered public accounting firm nor any other independent registered public accounting firm, has examined, compiled, or performed any procedures with respect to these amounts, nor have they expressed any opinion, or any other form of assurance, on such information or their achievability.

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Accordingly, there can be no assurance that the anticipated cost savings will be realized or that the impact of the efforts to achieve such cost savings will not be significantly different than currently anticipated. Mattel undertakes no obligation to update or otherwise revise or reconcile its expectations regarding its cost savings efforts whether as a result of new information, future events or otherwise.
Failure to successfully implement new initiatives or meet product introduction schedules can have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel has at times in the past announced, and in the future may announce, initiatives to reduce its costs, optimize its manufacturing footprint, increase its efficiency, improve the execution of its core business, globalize and extend Mattel’s brands, catch new trends, create new brands, offer new innovative products and improve existing products, enhance product safety, develop people, improve productivity, simplify processes, maintain customer service levels, as well as initiatives designed to drive sales growth, capitalize on Mattel’s scale advantage, and improve its supply chain. These initiatives involve investment of capital and complex decision-making as well as extensive and intensive execution, and the success of these initiatives is not assured. In addition, Mattel may anticipate introducing a particular product, product line or brand at a certain time in the future. There is no guarantee that Mattel will be able to manufacture, source and ship new or continuing products in a timely manner and on a cost-effective basis. Unforeseen delays or difficulties in the development process or significant increases in the planned cost of development for new Mattel products may cause the introduction date for products to be later than anticipated or, in some situations, may cause a product or new product introduction to be discontinued. Failure to successfully implement any of these initiatives or launches, or the failure of any of these initiatives or launches to produce the results anticipated by management, could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Significant increases in the price of commodities, transportation, or labor, if not offset by declines in other input costs, or a reduction or interruption in the delivery of raw materials, components, and finished products from Mattel’s vendors could adversely affect Mattel’s business, financial condition, and results of operations.
Cost increases, whether resulting from rising costs of materials, transportation, services, labor, or compliance with existing or future regulatory requirements, impact the profit margins realized by Mattel on the sale of its products. Because of market conditions, timing of pricing decisions, and other factors, there can be no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Mattel’s products may not be sustainable and could result in lower sales. Mattel’s ability to meet customer demand depends, in part, on its ability to obtain timely and adequate delivery of materials, parts, and components from its suppliers and internal manufacturing capacity. Mattel has experienced shortages in the past, including shortages of raw materials and components. Additionally, as Mattel cannot guarantee the stability of its major suppliers, major suppliers may stop manufacturing components at any time with little or no notice. If Mattel is required to use alternative sources, it may be required to redesign some aspects of the affected products, which may involve delays and additional expense. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these problems in the future. Reductions or interruptions in supplies or in the delivery of finished products, whether resulting from more stringent regulatory requirements, disruptions in transportation, port delays, labor strikes, lockouts, an outbreak of a severe public health pandemic, severe weather, the occurrence or threat of wars or other conflicts, or a significant increase in the price of one or more supplies, such as fuel or resin (which is an oil-based product used in plastics), or otherwise, have at times in the past and could in the future adversely affect Mattel’s business, financial condition, and results of operations.
Mattel’s substantial indebtedness could adversely affect its ability to raise additional capital to fund its operations, limit its ability to react to changes in the economy or its industry, and expose it to interest rate risk to the extent of its variable rate debt.
At December 31, 2019, Mattel had $2.85 billion of indebtedness on a consolidated basis, consisting primarily of 6.75% Senior Notes due 2025 and 5.875% Senior Notes due 2027, as well as Senior Notes issued in prior years. In addition, Mattel has $1.60 billion of commitments under its senior secured revolving credit facilities, subject to borrowing base capacity. For more information, see Part II, Item 8 "Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt."

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Subject to the limits contained in the credit agreement that governs Mattel’s senior secured revolving credit facilities, the indenture that governs the notes and Mattel’s other debt instruments, Mattel may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. To the extent Mattel does so, the risks related to Mattel’s high level of debt would increase. Specifically, Mattel’s substantial indebtedness could have important consequences. For example, it could:
Require Mattel to dedicate a substantial portion of its cash flow from operations to payments on Mattel’s indebtedness, thereby reducing the availability of Mattel’s cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts, and other general corporate purposes;
Increase Mattel’s vulnerability to and limit Mattel’s flexibility in planning for, or reacting to, changes in its business and the industries in which it operates;
Restrict Mattel from making strategic acquisitions or cause Mattel to make non-strategic divestitures;
Expose Mattel to the risk of increased interest rates as borrowings under its senior secured revolving credit facilities will be subject to variable rates of interest;
Expose Mattel to additional risks related to currency exchange rates and repatriation of funds;
Place Mattel at a competitive disadvantage compared to its competitors that have less debt; and
Limit Mattel’s ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions, and general corporate or other purposes.
Mattel’s credit ratings have declined in recent years and as a result, Mattel’s cost of issuing new debt has increased. Any further reduction in Mattel’s credit ratings could further increase the cost of issuing any such debt. Mattel may be hindered from obtaining, or required to incur incremental costs to obtain, additional credit in tight credit markets. Further, Mattel’s ability to issue additional debt could be adversely affected by other factors, including market conditions.
In addition, the indenture governing the notes and the agreements governing Mattel’s senior secured revolving credit facilities contain affirmative and negative covenants that limit Mattel’s ability to engage in activities that may be in its long-term best interests. Mattel’s failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of Mattel’s debts.
To service Mattel’s indebtedness, Mattel requires a significant amount of cash and Mattel’s ability to generate cash depends on many factors beyond Mattel’s control.
Mattel’s ability to make cash payments on and to refinance its indebtedness, and to fund planned capital expenditures, depends on Mattel’s ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond Mattel’s control.
Mattel’s business may not generate sufficient cash flow from operations and future borrowings may not be available under Mattel’s senior secured revolving credit facilities in an amount sufficient to enable Mattel to pay its indebtedness or to fund its other liquidity needs. In such circumstances, Mattel may need to refinance all or a portion of its indebtedness upon or before maturity. Mattel may not be able to refinance any of Mattel’s indebtedness, including its senior secured revolving credit facilities and the notes, on commercially reasonable terms or at all. If Mattel cannot service its indebtedness, Mattel may need to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. There can be no assurance that such actions, if necessary, will be effected on commercially reasonable terms or at all. The credit agreement governing Mattel’s senior secured revolving credit facilities and the indenture governing the notes will restrict Mattel’s ability to sell assets and use the proceeds from such sales.

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If Mattel is unable to generate sufficient cash flow or is otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on its indebtedness, or if Mattel otherwise fails to comply with the various covenants in the instruments governing its indebtedness, Mattel could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness will have the right to elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under Mattel’s senior secured revolving credit facilities will have the right to elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against Mattel’s assets, and Mattel could be forced into bankruptcy or liquidation. Declines in Mattel’s operating performance may require Mattel to obtain waivers in the future from the required lenders under its senior secured revolving credit facilities to avoid being in default. If Mattel breaches its covenants under its senior secured revolving credit facilities and seeks a waiver, Mattel may not be able to obtain a waiver from the required lenders. If this occurs, Mattel would be in default under its senior secured revolving credit facilities, the lenders could exercise their rights, as described above, and Mattel could be forced into bankruptcy or liquidation.
Mattel’s variable rate indebtedness subjects Mattel to interest rate risk, which could cause Mattel’s debt service obligations to increase significantly.
Borrowings under Mattel’s senior secured revolving credit facilities will be at variable rates of interest and will expose Mattel to interest rate risk. Interest rates are currently at historically low levels. If interest rates increase, Mattel’s debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same, and Mattel’s net income and cash flows, including cash available for servicing its indebtedness, will correspondingly decrease. Assuming Mattel's senior secured revolving credit facilities are fully drawn up to the maximum commitment level and the interest rates are above the interest rate floor set forth in the credit agreement governing Mattel’s senior secured revolving credit facilities, each one-eighth point change in interest rates would result in a $2.0 million change in annual interest expense on Mattel’s indebtedness under its senior secured revolving credit facilities. Any interest rate swaps that Mattel enters into with respect to its variable rate indebtedness, may not fully mitigate Mattel’s interest rate risk.
Mattel is dependent upon its lenders for financing to execute its business strategy and meet its liquidity needs. If Mattel’s lenders are unable to fund borrowings under their credit commitments or Mattel is unable to borrow, it could adversely affect Mattel’s business, financial condition, and results of operations.
There is risk that one or more of Mattel's lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to extending credit up to the maximum amount permitted by a credit facility and otherwise accessing capital and/or honoring loan commitments. If Mattel’s lenders are unable to fund borrowings under their credit commitments or Mattel is unable to borrow, it could be difficult to replace Mattel’s senior secured revolving credit facilities on similar terms, which could adversely affect Mattel's business, financial condition, and results of operations.
Significant changes in currency exchange rates or the ability to transfer capital across borders could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel operates facilities and sells products in numerous countries outside the U.S. During 2019, Mattel’s International segment net sales were 44% of Mattel’s total consolidated net sales. Furthermore, Mattel’s net investment in its foreign subsidiaries and its results of operations and cash flows are subject to changes in currency exchange rates and regulations. Highly inflationary economies of certain foreign countries can result in foreign currency devaluation, which negatively impacts Mattel’s profitability. Mattel seeks to mitigate the exposure of its results of operations to fluctuations in currency exchange rates by aligning its prices with the local currency cost of acquiring inventory, distributing earnings in U.S. dollars, and partially hedging this exposure using foreign currency forward exchange contracts. These contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. Government action may restrict Mattel’s ability to transfer capital across borders and may also impact the fluctuation of currencies in the countries where Mattel conducts business or has invested capital. Significant changes in currency exchange rates, reductions in Mattel’s ability to transfer its capital across borders, and changes in government-fixed currency exchange rates, including the Chinese yuan, could have an adverse effect on Mattel’s business, financial condition, and results of operations.

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The deterioration of global economic conditions could adversely affect Mattel’s business, financial condition, and results of operations.
Mattel designs, manufactures, and markets a wide variety of toy products worldwide through sales to retailer customers and directly to consumers. Mattel’s performance is impacted by the level of discretionary consumer spending, which remains relatively weak in many countries around the world in which Mattel does business. Consumers’ discretionary purchases of toy products are often impacted by job losses, foreclosures, bankruptcies, reduced access to credit, falling home prices, lower consumer confidence, and other macroeconomic factors that affect consumer spending behavior. Any of these factors can reduce the amount that consumers spend on the purchase of Mattel’s products. Deterioration of global economic conditions have at times in the past adversely affected Mattel's business and financial results. Future deterioration of global economic conditions or disruptions in credit markets in the markets in which Mattel operates could potentially have a material adverse effect on Mattel’s liquidity and capital resources, including increasing Mattel’s cost of capital or its ability to raise additional capital if needed, or otherwise adversely affect Mattel’s business, financial condition, and results of operations. For instance, Mattel's business, financial condition and results of operations could be adversely affected by the economic impact of changes in trade relations among the United States and other countries, including a new United States-Mexico-Canada Agreement, China, or changes in the European Union, such as Brexit. For further discussion of these risks, see below risk factor "Political developments, including trade relations, and the threat or occurrence of war or terrorist activities could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions."
In addition to experiencing potentially lower revenues during times of economic difficulty, in an effort to maintain sales during such times, Mattel may need to increase promotional spending or take other steps to encourage retailer and consumer purchase of its products. Those steps may increase costs and/or decrease operating margins and are not always successful.
An increasing portion of Mattel's business is expected to come from new and emerging markets, and growing business in new and emerging markets presents additional challenges.
Mattel expects an increasing portion of its net revenues to come from new and emerging markets, including China, India, and Russia. Operating in new and emerging markets, each with its own unique consumer preferences and business climates, presents additional challenges that Mattel must meet. In addition, sales and operations in new and emerging markets are subject to other risks associated with international operations. Such risks include complications in complying with different laws in varying jurisdictions; dealing with changes in governmental policies and the evolution of laws and regulations that impact Mattel's product offerings and related enforcement; difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets, which are often quite different from the U.S.; difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions; potential challenges to Mattel's transfer pricing determinations and other aspects of its cross border transactions; and the impact of tariffs, quotas, or other protectionist measures.
Because of the importance of Mattel's new and emerging market revenues, failure to properly manage the risks described above or to otherwise successfully manage its new and emerging market business could adversely affect Mattel's business, financial condition, and results of operations.
An increasing portion of Mattel's business may come from technologically advanced or sophisticated digital and smart technology products, which present additional challenges compared to more traditional toys and games.
Mattel expects that children will continue to be interested in product offerings incorporating sophisticated technology, such as video games, consumer electronics, and social and digital media, at younger and younger ages. Mattel also expects that parents will seek to enhance child development and learning through digital technologies and analog and technology-based play.

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In addition to the risks associated with Mattel’s more traditional products, sophisticated digital and smart technology products face certain additional risks. Costs associated with designing, developing, and producing technologically advanced or sophisticated products tend to be higher than for many of Mattel’s more traditional products. Heavy competition in consumer electronics and entertainment products and difficult economic conditions may increase the risk of Mattel not achieving sales sufficient to recover the increased costs associated with these products. Designing, developing, and producing sophisticated digital and smart technology products requires different competencies and may follow longer timelines than traditional toys and games, and any delays in the design, development, or production of these products could adversely impact Mattel's ability to successfully offer such products. In addition, the pace of change in product offerings and consumer tastes in the video games, consumer electronics, and social and digital media areas is potentially even greater than for Mattel’s more traditional products. This pace of change means that the window in which a technologically advanced or sophisticated product can achieve and maintain consumer interest may be shorter than traditional toys and games. These products may also present data security and data privacy risks and be subject to certain laws, government policies or regulations not applicable to more traditional products, such as the U.S. Children’s Online Privacy Protection Act of 1998, the EU General Data Protection Regulation, which took effect in May 2018, and related national regulations. For further discussion of these risks, see below risk factor "Mattel relies extensively on information technology in its operations, and any material failure, inadequacy, interruption, or security breach of that technology could have an adverse effect on its business, financial condition, and results of operations."
Mattel relies extensively on information technology in its operations, and any material failure, inadequacy, interruption, or security breach of that technology could have an adverse effect on its business, financial condition, and results of operations.
Mattel relies extensively on information technology systems across its operations, including for management of its supply chain, sale and delivery of its products and services, reporting its results of operations, collection and storage of consumer data, personal data of customers, employees and other stakeholders, and various other processes and transactions. Many of these systems are managed by third-party service providers. Mattel uses third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. A small and growing volume of Mattel’s consumer products and services are web-based, and some are offered in conjunction with business partners or such third-party service providers. Mattel and its business partners and third-party service providers collect, process, store, and transmit consumer data, including personal information, in connection with those products and services. Failure to follow applicable regulations related to those activities, or to prevent or mitigate data loss or other security breaches, including breaches of Mattel’s business partners’ technology and systems, could expose Mattel or its customers to a risk of loss or misuse of such information, which could adversely affect Mattel’s operating results, result in regulatory enforcement, other litigation and potential liability for Mattel, and otherwise harm its business. Mattel’s ability to effectively manage its business and coordinate the production, distribution, and sale of its products and services depends significantly on the reliability and capacity of these systems and third-party service providers. The systems and processes Mattel has developed to protect personal information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party provider do not provide absolute security, and any failure or inadequacy of such systems or processes could have an adverse effect on Mattel's business, financial condition, and results of operations.
Mattel has exposure to similar security risks faced by other large companies that have data stored on their information technology systems. To its knowledge, Mattel has not experienced any material breach of its network systems. If Mattel’s or its third-party service providers' systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of which could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, including denial-of-service attacks, Mattel could experience delays or decreases in product sales and reduced efficiency of its operations. Additionally, any of these types of events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets, or data, which could expose Mattel to potential litigation, regulatory actions, sanctions, or other statutory penalties, any or all of which could adversely affect its business, and cause it to incur significant losses and remediation costs.

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As a global company, Mattel is subject to a variety of continuously evolving and developing laws and regulations in the U.S. and abroad regarding privacy, data protection, and data security, including those related to the collection, storage, handling, use, disclosure, transfer, and security of personal data. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. For example, the EU General Data Protection Regulation, which greatly increases the jurisdictional reach of European Union law and became effective in May 2018, added a broad array of requirements for handling personal data, including the public disclosure of significant data breaches, and imposes substantial penalties for non-compliance. Mattel’s ongoing compliance with the EU General Data Protection Regulation and other privacy and data protection laws, such as the California Consumer Privacy Act, imposes significant costs and challenges that are likely to increase over time.
Mattel’s business depends in large part on the success of its vendors and outsourcers and Mattel’s brands and reputation are subject to harm from actions taken by third parties that are outside Mattel’s control. In addition, any significant failure, inadequacy, or interruption from such vendors or outsourcers could harm Mattel’s ability to effectively operate its business.
As a part of its efforts to cut costs, achieve better efficiencies and increase productivity and service quality, Mattel relies significantly on vendor and outsourcing relationships with third parties for services and systems including manufacturing, transportation, logistics, and information technology. Any shortcoming of a Mattel vendor or outsourcer, particularly an issue affecting the quality of these services or systems, results in risk of damage to Mattel’s reputation and brand value, and potentially adverse effects to Mattel's business, financial condition, and results of operations. In addition, problems with transitioning these services and systems to, or operating failures with, these vendors and outsourcers cause delays in product sales and reduce efficiency of Mattel’s operations, and significant capital investments could be required to remediate the problem.
Mattel faces risks related to protecting its proprietary intellectual property and information, and is subject to third-party claims that Mattel is infringing on their intellectual property rights, either of which could adversely affect Mattel's business, financial condition, and results of operations.
The value of Mattel’s business depends on its ability to protect its intellectual property and information, including its trademarks, trade names, copyrights, patents, trade secrets, and rights under intellectual property license agreements and other agreements with third parties, in the U.S. and around the world, as well as its customer, employee, and consumer data. From time to time, third parties have challenged, and may in the future try to challenge, Mattel's ownership of its intellectual property in the U.S. and around the world. In addition, Mattel's business is subject to the risk of third parties counterfeiting its products or infringing on its intellectual property rights. The steps Mattel has taken may not prevent unauthorized use of its intellectual property, particularly in foreign countries where the laws may not protect its intellectual property as fully as in the U.S. Mattel at times resorts to litigation to protect its intellectual property rights, which could result in substantial costs and diversion of resources. Mattel's failure to protect its proprietary intellectual property and information, including with respect to any successful challenge to Mattel’s ownership of its intellectual property or significant infringements of its intellectual property, could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel has acquired certain intellectual properties from third parties. Declines in the profitability of these acquired brands may impact Mattel’s ability to recover the carrying value of the related assets and could result in an impairment charge. Reduction in net earnings caused by impairment charges could harm Mattel’s results of operations.
Unfavorable resolution of or adverse developments in legal proceedings, other investigations, or regulatory matters could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel periodically receives claims of infringement of intellectual property rights held by other parties. Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may divert management and key personnel from business operations. Findings of infringement on the intellectual property rights of any third party by Mattel, its distributors, its licensors or its manufacturers may require obtaining a license to use those rights, which may not be obtainable on reasonable terms, if at all.
Mattel is, from time to time, involved in litigation or other disputes, investigations, and regulatory matters. An unfavorable resolution of these matters could have an adverse effect on Mattel’s business, financial condition, and results of operations. Regardless of their outcome, these matters may result in substantial costs and expenses, significantly divert the attention of management, or interrupt Mattel’s normal business operations. There can be no assurance that Mattel will be able to prevail in, or achieve a favorable settlement of, any of these matters.

18


Mattel is subject to various laws and government policies or regulations in numerous jurisdictions, violation of which could subject it to sanctions.  In addition, changes in such laws or policies or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that could adversely affect Mattel’s business, financial condition, and results of operations.
Mattel operates in a highly regulated environment in the U.S. and international markets.  U.S. federal, state, and local governmental entities, and foreign governments regulate many aspects of Mattel’s business, including its products and the importation and exportation of its products, and these laws and regulations can change frequently.  These policies or regulations include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws, and revised tax law interpretations), product safety and other safety standards, trade restrictions, duties and tariffs (including international trade laws and regulations, export controls, and economic sanctions), and regulations regarding currency and financial matters, anticorruption standards (such as the U.S. Foreign Corrupt Practices Act), environmental matters, advertising directed toward children, product content, and privacy and data protection, as well as other administrative and regulatory restrictions.  The steps Mattel takes to comply with these laws and policies or regulations do not ensure that Mattel will be in compliance in the future.  Compliance with these various laws, regulations, and policies imposes significant costs on Mattel’s business, and failure to comply could result in monetary liabilities and other penalties and could lead to negative media attention and consumer dissatisfaction, which could have an adverse effect on Mattel’s business, financial condition, and results of operations.
In addition, changes in laws, policies or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations, any of which could negatively impact its financial condition and results of operations. Specifically, in December 2017, the Tax Cuts and Jobs Act (the "U.S. Tax Act") was signed into law and significantly revised the Internal Revenue Code of 1986, as amended. This legislation, among other things, contains significant changes to corporate taxation, including the reduction of the corporate income tax rate from 35% to 21% beginning in 2018.  Notwithstanding the reduction in the corporate income tax rate, Mattel is continuing to examine the long-term impact of the U.S. Tax Act. During 2019, the Department of the Treasury issued certain guidance in the form of notices and proposed regulations with respect to several provisions of the U.S. Tax Act. It is anticipated that additional regulations or other guidance may be issued with respect to the U.S. Tax Act in 2020 and subsequent years. As regulations and guidance evolve with respect to the U.S. Tax Act, this could have a material adverse effect on Mattel’s financial performance.  In addition, it is uncertain if, and to what extent, various states will conform to the new tax law and how foreign jurisdictions will react to the new tax law by adopting tax legislation or taking other actions that could adversely affect Mattel's business.
In addition, increases in import and excise duties and/or sales or value added taxes in the jurisdictions in which Mattel operates could affect the affordability of Mattel’s products and, therefore, reduce demand.
From time to time, issues with products lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory or other actions by governmental authorities, which could divert resources, affect business operations, decrease sales, increase costs, and put Mattel at a competitive disadvantage, any of which could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel has at times in the past experienced, and may in the future experience, issues with products that lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. These issues and activities have resulted in increased governmental scrutiny and inquiries, harm to Mattel’s reputation, reduced demand by consumers for its products, decreased willingness by retailer customers to purchase or provide marketing support for those products, adverse impacts on Mattel’s ability to enter into licensing agreements for products on competitive terms, absence or increased cost of insurance, or additional safety and testing requirements. For example, the insurance terms we negotiated for the period from February 1, 2020 to December 31, 2021 were less favorable than in the past as a result of past claims, product liability incidents, changes in market conditions, and other factors. These issues and activities can divert development and management resources, adversely affect Mattel’s business operations, decrease sales, increase legal fees and other costs, and put Mattel at a competitive disadvantage compared to other manufacturers not affected by similar issues with products, any of which could have an adverse effect on Mattel’s business, financial condition, and results of operations.

19


Mattel’s current and future operating procedures and product requirements may increase costs, adversely affect its relationship with vendors, and make it more difficult for Mattel to produce, purchase, and deliver products on a timely basis to meet market demands. Future conditions may require Mattel to adopt further changes that may increase its costs and further affect its relationship with vendors.
Mattel’s current operating procedures and product requirements, including testing requirements and standards, have imposed costs on both Mattel and the vendors from which it purchases products. Changes in business conditions, including those resulting from new legislative and regulatory requirements, have at times in the past caused, and in the future could cause, further revisions in Mattel’s operating procedures and product requirements. Changes in Mattel’s operating procedures and product requirements can delay delivery of products and increase costs. Mattel’s relationships with its existing vendors may be adversely affected as a result of these changes, making Mattel more dependent on a smaller number of vendors. Mattel is not currently dependent on a single supplier or group of suppliers. Some vendors may choose not to continue to do business with Mattel or not to accommodate Mattel’s needs to the extent that they have done in the past. In addition, rising production costs, contraction of credit availability, and labor shortages have caused a substantial contraction in the number of toy manufacturers in China, decreasing the number of potential vendors to manufacture Mattel’s products. Because of the seasonal nature of Mattel’s business and the demands of its customers for deliveries with short lead times, Mattel depends upon the cooperation of its vendors to meet market demand for its products in a timely manner. There can be no assurance that existing and future events will not require Mattel to adopt additional requirements and incur additional costs, and impose those requirements and costs on its vendors, which may adversely affect its relationship with those vendors and Mattel’s ability to meet market demand in a timely manner.
The production and sale of private-label toys by Mattel’s retail customers may result in lower purchases of Mattel-branded products by those retail customers.
In recent years, consumer goods companies, including those in the toy business, generally have experienced the phenomenon of retail customers developing their own private-label products that directly compete with the products of traditional manufacturers. Some retail chains and online retailers that are customers of Mattel, including its largest retail customers, Walmart and Target, sell private-label toys designed, manufactured, and branded by the retailers themselves. These toys may be sold at prices lower than comparable toys sold by Mattel and may result in lower purchases of Mattel-branded products by these retailers. In some cases, retailers who sell these private-label toys are larger than Mattel and have substantially more resources than Mattel.
Mattel depends on key personnel and may not be able to hire, retain, and integrate sufficient qualified personnel to maintain and expand its business.
Mattel’s future success depends partly on the continued contribution of key executives, designers, technical, sales, marketing, manufacturing, and other personnel. The loss of services of any of Mattel’s key personnel could harm Mattel’s business. Recruiting and retaining skilled personnel is costly and highly competitive. If Mattel fails to retain, hire, train, and integrate qualified employees and contractors, Mattel may not be able to maintain or expand its business.
Political developments, including trade relations, and the threat or occurrence of war or terrorist activities could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Mattel’s business is worldwide in scope, including operations in over 50 countries and territories. Political instability, civil unrest, the deterioration of the political situation in a country in which Mattel has significant sales or operations, or the breakdown of trade relations between the U.S. and a foreign country in which Mattel has significant manufacturing facilities or other operations, could adversely affect Mattel’s business, financial condition, and results of operations. For example, a change in trade status between the U.S. and China or Mexico could result in a substantial increase in the import duty of toys manufactured in these countries and imported into the U.S. There is currently significant uncertainty about the future relationship between the U.S. and China, including with respect to trade policies, tariffs, treaties, and government regulations. The current U.S. presidential administration has called for substantial changes to U.S. foreign trade policy with respect to China, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the U.S. Recently, the U.S. has increased tariffs on certain goods imported into the U.S. from China, following which the Chinese government increased tariffs on certain goods imported into China from the U.S., in response to which the U.S. announced plans to impose additional tariffs. There is a risk of further escalation and retaliatory actions between the two countries. In addition, the current administration, certain members of Congress, and federal officials have stated that the U.S. may seek to implement more protective trade measures, not just with respect to China, but with respect to other countries in the Asia Pacific region as well. Any increased trade barriers or restrictions on global trade, especially trade with China, could adversely affect Mattel's business, financial condition, and results of operations.

20


In addition, the occurrence of war or hostilities between countries or threat of terrorist activities, and the responses to and results of these activities, could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Disruptions in Mattel’s manufacturing operations or supply chain due to political instability, civil unrest, or disease could adversely affect Mattel’s business, financial position, sales, and results of operations.
Mattel owns, operates and manages manufacturing facilities and utilizes third-party manufacturers and suppliers throughout Asia, primarily in China, Indonesia, Malaysia, Thailand, Canada, and Mexico. The risk of political instability and civil unrest exists in certain of these countries, which could temporarily or permanently damage the manufacturing operations of Mattel or its third-party manufacturers located there. Outbreaks of communicable diseases have also been known to occur in certain of these countries. In the past, outbreaks of avian flu have been significantly concentrated in Asia, particularly in Hong Kong, and in the Guangdong province of China, where many of Mattel’s manufacturing facilities and third-party manufacturers are located. More recently, a strain of coronavirus surfaced in Wuhan, Hubei Province, China, resulting in a public health crisis. Disruptions from public health crises such as these result from, among other things, workers contracting diseases, restrictions on factory openings, restrictions on travel, restrictions on shipping, and the closure of critical infrastructure. The design, development, and manufacture of Mattel’s products could suffer if a significant number of Mattel’s employees or the employees of its third-party manufacturers or their suppliers contract communicable diseases such as these, or if Mattel, Mattel’s third-party manufacturers, or their suppliers are adversely affected by other impacts of such diseases. In addition, the contingency plans Mattel has developed to help mitigate the impact of disruptions in its manufacturing operations, may not prevent its business, financial position, sales, and results of operations from being adversely affected by a significant disruption to its manufacturing operations or suppliers.
Earthquakes or other catastrophic events out of Mattel’s control may damage its facilities or those of its contractors and adversely affect Mattel’s business, financial condition, and results of operations.
Mattel has significant operations near major earthquake faults, including its corporate headquarters in El Segundo, California. A catastrophic event where Mattel has important operations, such as an earthquake, tsunami, flood, typhoon, fire, or other natural or manmade disaster, could disrupt Mattel’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions, or otherwise affect its business negatively, adversely affecting Mattel’s business, financial condition, and results of operations.
Mattel has at times in the past engaged, and may in the future engage in acquisitions, mergers, dispositions, or other strategic transactions, which can affect Mattel's revenues, profit, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. In addition, Mattel has certain anti-takeover provisions in its bylaws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.
Mattel regularly considers, and from time to time engages in, discussions and negotiations regarding acquisitions, mergers, or dispositions, or other strategic transactions that could affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. There can be no assurance that Mattel will be able to identify suitable acquisition targets or merger partners or that, if identified, it will be able to complete these transactions on terms acceptable to Mattel and to potential merger partners. There can also be no assurance that Mattel will be successful in integrating any acquired company into its overall operations, or that any such acquired company will operate profitably or will not otherwise adversely impact Mattel’s results of operations. Further, Mattel cannot be certain that key talented individuals at those acquired companies will continue to work for Mattel after the acquisition or that they will continue to develop popular and profitable products or services. In addition, Mattel has certain anti-takeover provisions in its bylaws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.

21


The level of returns on pension plan assets and the actuarial assumptions used for valuation purposes could affect Mattel’s earnings in future periods. Changes in standards and government regulations could also affect its pension plan expense and funding requirements.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for Mattel’s pension plan are evaluated by Mattel in consultation with outside actuaries. In the event that Mattel determines that changes are warranted in the assumptions used, such as the discount rate, expected long term rate of return, or health care costs, its future pension benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the actuarial assumptions that Mattel uses may differ from actual results, which could have an impact on its pension and postretirement liability and related costs. Funding obligations are determined based on the value of assets and liabilities on a specific date as required under relevant government regulations for each plan. Future pension funding requirements, and the timing of funding payments, could be affected by legislation enacted by the relevant governmental authorities.
If Mattel’s goodwill becomes impaired, Mattel’s results of operations could be adversely affected.
Mattel tests its goodwill for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are at the operating segment level. Declines in profitability of Mattel’s reporting units may impact the fair value of its reporting units, which could result in an impairment of its goodwill, adversely affecting its results of operations. For more information, see Part I, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Estimates—Goodwill" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 3 to the Consolidated Financial Statements—Goodwill and Other Intangibles."
Mattel’s stock price has been volatile over the past several years and could decline in the future, resulting in losses for Mattel's investors.
All the factors discussed in this section or any other material announcements or events can affect Mattel's stock price. In addition, quarterly fluctuations in Mattel's operating results, changes in investor and analyst perception of Mattel's business risks and conditions of our business, Mattel's ability to meet earnings estimates and other performance expectations of financial analysts or investors, unfavorable commentary or downgrades of Mattel's stock by research analysts, fluctuations in the stock prices of Mattel's peer companies or in stock markets in general, and general economic or political conditions can also cause the price of Mattel's stock to change. A significant drop in the price of Mattel's stock would expose Mattel to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting Mattel's business. There is a purported class action alleging federal securities laws violations currently pending in the Ninth Circuit Court of Appeals following dismissal of the lawsuit by the United States District Court for the Central District of California against Mattel and individual defendants. In addition, a stockholder has filed a derivative action in the United States District Court for the District of Delaware making allegations that are substantially identical to, or are based upon, the allegations of the class action lawsuit. For more information, see Part II, Item 8 "Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation."
Mattel’s restatement of certain of its previously issued financial statements and other related events have and may continue to impose unanticipated costs, affect investor confidence, and cause reputational harm.
Mattel filed an amended Annual Report on Form 10-K for the year ended December 31, 2018 to (1) restate the unaudited quarterly financial data for the three month periods ended September 30, 2017 and ended December 31, 2017 set forth in Note 17 to the Consolidated Financial Statements—Restatement of Quarterly Financial Information (Unaudited) (including restatement related information for the nine months ended September 30, 2017); and (2) restate Management’s Report on Internal Control over Financial Reporting included under Item 8 and the Evaluation of Disclosure Controls and Procedures included under Item 9A. The restated consolidated financial statements and financial information also reflected revisions for other immaterial misstatements. The restatement followed an independent investigation conducted by the Audit Committee of Mattel’s Board of Directors into allegations contained in an anonymous whistleblower letter Mattel was made aware of on August 6, 2019. Mattel has incurred, and may continue to incur, unanticipated costs in connection with or related to the investigation and restatement, as well as litigation and regulatory inquiries resulting therefrom. For example, in December 2019, Mattel received a subpoena from the SEC, seeking documents related to the whistleblower letter and subsequent investigation, and is responding to the SEC’s subpoena. In addition, the investigation, restatement, and related media coverage may negatively affect investor confidence in the accuracy of Mattel’s financial disclosures and cause it reputational harm.


22


Any material weaknesses in Mattel's internal control over financial reporting which, if not remediated appropriately or timely, could affect Mattel's ability to record, process, and report financial information accurately, impair its ability to prepare financial statements, negatively affect investor confidence, and cause reputational harm.
Effective internal controls are necessary for us to provide reliable and accurate financial reporting and financial statements for external purposes in accordance with generally accepted accounting principles. A failure to maintain effective internal control processes could lead to violations, unintentional or otherwise, of laws and regulations. As disclosed in Part II, Item 9A “Controls and Procedures,” in Mattel's Annual Report on Form 10-K/A for the year ended December 31, 2018, Mattel determined that there were material weaknesses in its internal control over financial reporting at the time of the preparation of its financial statements for the quarters ending on September 30, 2017, and December 31, 2017. As a result, Mattel concluded that its internal control over financial reporting continued to be ineffective as of December 31, 2018. Mattel has determined that the material weaknesses have been remediated and that its internal control over financial reporting is effective as of December 31, 2019. However, if Mattel is unable to maintain effective internal control over financial reporting or disclosure controls and procedures, its ability to record, process, and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected. Litigation, government investigations, or regulatory enforcement actions arising out of any such failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect Mattel's reputation, financial condition, and operating results. If Mattel is unable to maintain effective internal control over financial reporting, the material weakness, remediation efforts, and any related litigation or government investigations, or regulatory enforcement actions will require management attention and resources, and the incurrence of unanticipated costs, and could negatively affect investor confidence in Mattel’s financial statements, cause it reputational harm, and raise other risks to its operations. In addition, the costs and other effects of defending litigation or addressing government investigations or regulatory enforcement actions against us are difficult to determine and could adversely affect Mattel's financial condition and operating results.

If Mattel’s independent registered public accounting firm is determined not to satisfy the SEC’s and Public Company Accounting Oversight Board’s ("PCAOB") auditor independence requirements, Mattel may not be compliant with applicable securities laws, which could result in a material adverse effect on Mattel’s business, operating results, and financial condition, negatively affect investor confidence and cause reputational harm, and may impact the Company’s ability to comply with certain covenants.
In connection with the anonymous whistleblower letter that was announced in a Form 8-K filed on August 8, 2019, the independent investigation conducted by the Audit Committee of Mattel’s Board of Directors and a separate investigation by Mattel’s outside auditor concluded that certain actions by the lead audit partner of Mattel’s outside auditor were in violation of the SEC’s auditor independence rules. Both the Audit Committee and Mattel’s outside auditor separately concluded, after evaluating the nature and severity of these matters, that Mattel’s outside auditor remains capable of exercising objective and impartial judgment on all issues with respect to pending and relevant past audits. The Audit Committee also determined that Mattel’s outside auditor should remain as Mattel’s independent registered public accounting firm.
However, if Mattel’s outside auditor is determined by regulatory authorities not to be capable of exercising objective and impartial judgment in connection with the audits of Mattel's financial statements, or if, for whatever reason, Mattel’s outside auditor finds that it cannot confirm that it is capable of exercising objective and impartial judgment in connection with the audits of Mattel’s financial statements, in each case in accordance with applicable securities laws and applicable rules, regulations, and standards of the SEC and PCAOB, Mattel’s outside auditor would be terminated and Mattel could experience failures to meet its reporting obligations under applicable securities laws. Mattel will also need to take action and incur unanticipated costs in order for Mattel’s SEC filings containing financial statements to be determined compliant with applicable securities laws. Such action may include obtaining the review and audit of Mattel’s financial statements by another independent registered public accounting firm. In addition, under such circumstances, Mattel’s eligibility to issue securities under its existing registration statements on Form S-3 and Form S-8 may be impacted and its ability to comply with certain covenants under certain of its debt financing arrangements may be impacted. Such consequences could have a material adverse effect on Mattel’s business, operating results, and financial condition, and negatively affect investor confidence and cause reputational harm. Mattel also could experience unanticipated costs or delays or other failures to meet its reporting obligations under applicable securities laws and its ability to comply with certain covenants under certain of its debt financing arrangements may be impacted.
Item 1B.
Unresolved Staff Comments.
None.

23


Item 2.
Properties.
Mattel owns its corporate headquarters in El Segundo, California, consisting of approximately 335,000 square feet, and an adjacent office building consisting of approximately 55,000 square feet. Mattel also leases buildings in El Segundo consisting of approximately 327,000 square feet. All segments use these facilities. Mattel also owns facilities in East Aurora, New York, consisting of approximately 607,000 square feet, which is used by the North America segment and for brand and corporate support functions. American Girl owns its headquarters facilities in Middleton, Wisconsin, consisting of approximately 180,000 square feet, a warehouse in Middleton, consisting of approximately 215,000 square feet, and distribution facilities in Middleton, DeForest, and Wilmot, Wisconsin, consisting of a total of approximately 948,000 square feet, all of which are used by the American Girl segment. Mattel also owns its principal manufacturing facilities located in Indonesia, Malaysia, Mexico, and Thailand.
Mattel maintains leased offices in Arkansas, California, Minnesota, and New York, and leased warehouse and distribution facilities in California, Pennsylvania, and Texas, all of which are used by the North America segment. Mattel has leased retail and related office space in Chicago, Illinois; Los Angeles, California; and New York, New York for its American Girl Place stores, and in over 10 other cities across the United States for its American Girl stores. Internationally, Mattel has offices and/or warehouse space in over 30 countries. The primary locations for facilities leased and used by the International segment are in Canada, China, Hong Kong, India, Mexico, the Netherlands, Germany, Italy, France, and the United Kingdom. Mattel also leases office space and principal manufacturing facilities in China, which support the North America, International, and American Girl segments. Additionally, Mattel leases a facility in Montreal, Canada, consisting of approximately 817,000 square feet, which is used for brand support and manufacturing functions. These facilities in Canada are used by both the North America and International segments.
For leases that are scheduled to expire within the next twelve months, Mattel may negotiate new lease agreements, renew existing lease agreements, or utilize alternate facilities. See Part II, Item 8 "Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements—Leases." Mattel believes that its owned and leased facilities, in general, are suitable and adequate for its present and currently foreseeable needs.
Item 3.
Legal Proceedings.
See Part II, Item 8 "Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation."
Item 4.
Mine Safety Disclosures.
Not applicable.

24


PART II
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market Information
Mattel’s common stock, par value $1.00 per share, is traded under the symbol "MAT" on The Nasdaq Global Select Market.
Holders of Record
As of February 7, 2020, Mattel had approximately 25,000 holders of record of its common stock.
Recent Sales of Unregistered Securities
During the fourth quarter of 2019, Mattel did not sell any unregistered securities.
Issuer Purchases of Equity Securities
During 2019, 2018, and 2017, Mattel did not repurchase any shares of its common stock.
The following table provides certain information with respect to Mattel’s purchases of its common stock during the fourth quarter of 2019:
 
Total Number of Shares (or Units) Purchased (a)
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or  Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (b)
Period:
 
 
 
 
 
 
 
October 1 - 31
2,958

 
$
11.94

 

 
$
203,016,273

November 1 - 30
3,375

 
11.70

 

 
203,016,273

December 1 - 31
21,870

 
13.79

 

 
203,016,273

Total
28,203

 
$
13.35

 

 
$
203,016,273

(a)
The total number of shares purchased includes 28,203 shares withheld from employees to satisfy minimum tax withholding obligations that occur upon vesting of restricted stock units. These shares were not purchased as part of a publicly announced repurchase plan or program.
(b)
Mattel's share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At December 31, 2019, share repurchase authorizations of $203.0 million had not been executed. Repurchases under the program will take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.

25


Performance Graph
The following graph compares the performance of Mattel's common stock with that of the S&P 500 Index and the S&P 500 Consumer Discretionary Index. The Cumulative Total Return listed below assumes an initial investment of $100 on December 31, 2014 and reinvestment of dividends.
https://cdn.kscope.io/f9c0dcbd3a99f4b39b93dc931fd67e81-chart-de368f75da1a52b3b1d.jpg
 
December 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Cumulative Total Return:
 
 
 
 
 
 
 
 
 
 
 
Mattel, Inc.
$
100.00

 
$
93.43

 
$
99.45

 
$
57.83

 
$
37.56

 
$
50.95

S&P 500
$
100.00

 
$
101.37

 
$
113.49

 
$
138.26

 
$
132.19

 
$
173.80

S&P 500 Consumer Discretionary
$
100.00

 
$
110.11

 
$
116.75

 
$
143.57

 
$
144.74

 
$
185.18


26


Item 6.
Selected Financial Data.
 
Year Ended December 31,
 
2019
 
2018
 
2017 (b)
 
2016 (b)
 
2015 (b)
 
(In thousands, except per share and percentage information)
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
4,504,571

 
$
4,514,810

 
$
4,881,493

 
$
5,453,150

 
$
5,702,613

Gross profit
1,980,779

 
1,798,683

 
1,824,571

 
2,546,691

 
2,806,358

% of net sales
44.0
%
 
39.8
 %
 
37.4
 %
 
46.7
%
 
49.2
%
Operating income (loss)
39,240

 
(234,349
)
 
(335,698
)
 
519,975

 
542,208

% of net sales
0.9
%
 
(5.2
)%
 
(6.9
)%
 
9.5
%
 
9.5
%
(Loss) income before income taxes
(158,288
)
 
(417,103
)
 
(501,245
)
 
402,042

 
456,527

Provision for income taxes (a)
55,224

 
116,196

 
553,334

 
89,134

 
91,610

Net (loss) income
$
(213,512
)
 
$
(533,299
)
 
$
(1,054,579
)
 
$
312,908

 
$
364,917

Net (Loss) Income Per Common Share—Basic
$
(0.62
)
 
$
(1.55
)
 
$
(3.07
)
 
$
0.91

 
$
1.07

Net (Loss) Income Per Common Share—Diluted
$
(0.62
)
 
$
(1.55
)
 
$
(3.07
)
 
$
0.91

 
$
1.06

Dividends Declared Per Common Share
$

 
$

 
$
0.91

 
$
1.52

 
$
1.52

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2019
 
2018 (c)
 
2017 (c)
 
2016 (c)
 
2015 (c)
 
(In thousands)
Financial Position:
 
 
 
 
 
 
 
 
 
Total assets
$
5,325,226

 
$
5,238,225

 
$
6,228,147

 
$
6,488,381

 
$
6,530,644

Noncurrent liabilities
$
3,556,605

 
$
3,321,392

 
$
3,357,245

 
$
2,580,439

 
$
2,256,360

Stockholders’ equity
$
491,714

 
$
666,901

 
$
1,257,197

 
$
2,408,267

 
$
2,638,853

(a)
The provision for income taxes in 2017 was negatively impacted by net tax expense of $457.1 million, primarily related to the establishment of a valuation allowance in the third quarter of 2017 on U.S. deferred tax assets that will likely not be realized and a provisional estimate of the impact of the U.S. Tax Act in the fourth quarter of 2017.
(b)
In accordance with Accounting Standards Update ("ASU") 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, prior period amounts have been retrospectively adjusted, which resulted in a reclassification of $3.4 million, $8.4 million, and $8.7 million of expense, net from other selling and administrative expenses to other non-operating expense, net for the year ended December 31, 2017, 2016, and 2015, respectively.
(c)
Revised to correct for an adjustment related to the overstatement of accrued royalties payable and understatement of retained earnings of $10.1 million as of January 1, 2015 and all subsequent periods presented.

27


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes. See Item 8 "Financial Statements and Supplementary Data." Note that amounts within this Item shown in millions may not foot due to rounding.
Mattel has omitted discussion of 2017 results where it would be redundant to the discussion previously included in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of Mattel’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2018.
The following discussion also includes gross sales and currency exchange rate impact, non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission ("Regulation G"), to supplement the financial results as reported in accordance with GAAP. Gross sales represent sales to customers, excluding the impact of sales adjustments, such as trade discounts and other allowances. The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. These measures are not, and should not be viewed as, a substitute for GAAP financial measures. Refer to "Non-GAAP Financial Measures" in this Annual Report on Form 10-K for a more detailed discussion, including a reconciliation of gross sales, a non-GAAP financial measure, to net sales, its most directly comparable GAAP financial measure.
Overview
Mattel is a leading global children's entertainment company that specializes in the design and production of quality toys and consumer products. Mattel's products are among the most widely recognized toy products in the world. Mattel's mission is to "create innovative products and experiences that inspire, entertain, and develop children through play." In order to deliver on this mission, Mattel is focused on the following two-part strategy to transform Mattel from a toy manufacturing company into an intellectual property ("IP") driven, high-performing toy company:
In the short- to mid-term, restore profitability by reshaping operations and regain topline growth by growing Mattel's Power Brands (Barbie, Hot Wheels, Fisher-Price and Thomas & Friends, and American Girl) and expanding Mattel's brand portfolio.
In the mid- to long-term, capture the full value of Mattel's IP through franchise management and the development of Mattel's online retail and e-commerce capabilities.
Reorganization of Gross Sales by Categories and Brand in 2019
Although there were no changes to Mattel's commercial operations that impacted its operating segments, in the first quarter of 2019, Mattel modified its reporting structure for revenues, as outlined below, and reorganized its regional sales reporting structure within the International segment. Prior period amounts have been reclassified to conform to the current period presentation. Gross sales by categories are presented as follows:
Dolls—including brands such as Barbie, American Girl, Enchantimals, and Polly Pocket.
Infant, Toddler, and Preschool—including brands such as Fisher-Price and Thomas & Friends, Power Wheels, Fireman Sam, and Shimmer and Shine (Nickelodeon).
Vehicles—including brands such as Hot Wheels, Matchbox, and CARS (Disney Pixar).
Action Figures, Building Sets, and Games—including brands such as MEGA, UNO, Toy Story (Disney Pixar), Jurassic World (NBCUniversal), and WWE.

28


The following table provides a summary of Mattel’s consolidated gross sales by categories, along with supplemental information by brand for the years ended December 31, 2018 and 2017, based on Mattel's current reporting structure for revenues:
 
For the Year Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
December 31, 2018
 
December 31, 2017
 
 
(In millions, except percentage information)
Revenues by Categories
 
 
 
 
 
 
 
Dolls
$
1,730.9

 
$
1,725.9

 
 %
 
-1
 %
Infant, Toddler, and Preschool
1,417.8

 
1,677.2

 
-15
 %
 
 %
Vehicles
1,065.5

 
1,242.8

 
-14
 %
 
-1
 %
Action Figures, Building Sets, and Games
861.3

 
868.2

 
-1
 %
 
-1
 %
Gross Sales
$
5,075.5

 
$
5,514.1

 
-8
 %
 
-1
 %
Sales Adjustments
(560.7
)
 
(632.6
)
 
 
 
 
Net Sales
$
4,514.8

 
$
4,881.5

 
-8
 %
 
-1
 %
 
 
 
 
 
 
 
 
Supplemental Revenue Disclosure
 
 
 
 
 
 
 
Revenues by Top 3 Power Brands
 
 
 
 
 
 
 
Barbie
$
1,089.0

 
$
954.9

 
14
 %
 
-1
 %
Hot Wheels
834.1

 
777.3

 
7
 %
 
-2
 %
Fisher-Price and Thomas & Friends
1,185.7

 
1,370.5

 
-13
 %
 
 %
Other
1,966.8

 
2,411.3

 
-18
 %
 
 %
Gross Sales
$
5,075.5

 
$
5,514.1

 
-8
 %
 
-1
 %
The following table provides a summary of Mattel's consolidated gross sales by brand results for the years ended December 31, 2018 and 2017, as presented in Mattel's Annual Report on Form 10-K/A for the year ended December 31, 2018:
 
For the Year Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
December 31, 2018
 
December 31, 2017
 
 
(In millions, except percentage information)
Power Brands
 
 
 
 
 
 
 
Barbie
$
1,089.0

 
$
954.9

 
14
 %
 
-1
 %
Hot Wheels
834.1

 
777.3

 
7
 %
 
-2
 %
Fisher-Price and Thomas & Friends
1,185.7

 
1,370.5

 
-13
 %
 
 %
American Girl
342.4

 
473.3

 
-28
 %
 
 %
Total Power Brands
3,451.1

 
3,576.1

 
-3
 %
 
-1
 %
 
 
 
 
 
 
 
 
Toy Box
 
 
 
 
 
 
 
Owned Brands
887.4

 
980.6

 
-10
 %
 
-2
 %
Partner Brands
737.0

 
957.5

 
-23
 %
 
-1
 %
Total Toy Box
1,624.4

 
1,938.0

 
-16
 %
 
-1
 %
 
 
 
 
 
 
 
 
Total Gross Sales
5,075.5

 
5,514.1

 
-8
 %
 
-1
 %
Sales Adjustments
(560.7
)
 
(632.6
)
 
 
 
 
Total Net Sales
$
4,514.8

 
$
4,881.5

 
-8
 %
 
-1
 %


29


Results of Operations
2019 Compared to 2018
Consolidated Results
Net sales for 2019 were $4.50 billion, as compared to $4.51 billion in 2018. Net loss for 2019 was $213.5 million, or $0.62 loss per share, as compared to a net loss of $533.3 million, or $1.55 loss per share, in 2018, primarily due to higher gross profit and lower selling and administrative expenses.  Net loss for 2019 included the impact of approximately $38 million related to the inclined sleeper product recalls, of which approximately $6 million was a reduction to net sales, approximately $22 million was included in cost of sales, and approximately $10 million was included in other selling and administrative expenses. Net loss for 2018 includes a sales reversal of approximately $30 million and bad debt expense, net of approximately $32 million as a result of the Toys "R" Us liquidation.
The following table provides a summary of Mattel’s consolidated results for 2019 and 2018:
 
For the Year Ended
 
Year/Year Change
 
December 31, 2019
 
December 31, 2018
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
%
 
Basis Points
of Net Sales
 
(In millions, except percentage and basis point information)
Net sales
$
4,504.6

 
100.0
 %
 
$
4,514.8

 
100.0
 %
 
 %
 

Gross profit
$
1,980.8

 
44.0
 %
 
$
1,798.7

 
39.8
 %
 
10
 %
 
420

Advertising and promotion expenses
551.5

 
12.2
 %
 
524.3

 
11.6
 %
 
5
 %
 
60

Other selling and administrative expenses
1,390.0

 
30.9
 %
 
1,508.7

 
33.4
 %
 
-8
 %
 
(250
)
Operating income (loss)
39.2

 
0.9
 %
 
(234.3
)
 
-5.2
 %
 
n/m

 
n/m

Interest expense
201.0

 
4.5
 %
 
181.9

 
4.0
 %
 
11
 %
 
50

Interest (income)
(6.2
)
 
-0.1
 %
 
(6.5
)
 
-0.1
 %
 
-5
 %
 

Other non-operating expense, net
2.6

 
 
 
7.3

 
 
 


 
 
Loss before income taxes
$
(158.3
)
 
-3.5
 %
 
$
(417.1
)
 
-9.2
 %
 
-62
 %
 
570

Provision for income taxes
$
55.2

 
1.2
 %
 
$
116.2

 
2.6
 %
 
-52
 %
 
(140
)
Net loss
$
(213.5
)
 
-4.7
 %
 
$
(533.3
)
 
-11.8
 %
 
-60
 %
 
710

n/m - Not Meaningful

30


Sales
Net sales for 2019 were $4.50 billion as compared to $4.51 billion in 2018.
The following table provides a summary of Mattel’s consolidated gross sales by categories, along with supplemental information by brand for 2019 and 2018:
 
For the Year Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
December 31, 2019
 
December 31, 2018
 
 
(In millions, except percentage information)
Revenues by Categories (a)
 
 
 
 
 
 
 
Dolls
$
1,724.0

 
$
1,730.9

 
 %
 
-2
 %
Infant, Toddler, and Preschool
1,257.6

 
1,417.8

 
-11
 %
 
-1
 %
Vehicles
1,101.3

 
1,065.5

 
3
 %
 
-3
 %
Action Figures, Building Sets, and Games
981.6

 
861.3

 
14
 %
 
-1
 %
Gross Sales
$
5,064.6

 
$
5,075.5

 
 %
 
-2
 %
Sales Adjustments
(560.0
)
 
(560.7
)
 
 
 
 
Net Sales
$
4,504.6

 
$
4,514.8

 
 %
 
-1
 %
 
 
 
 
 
 
 
 
Supplemental Revenue Disclosure
 
 
 
 
 
 
 
Revenues by Top 3 Power Brands
 
 
 
 
 
 
 
Barbie
$
1,159.8

 
$
1,089.0

 
7
 %
 
-2
 %
Hot Wheels
925.9

 
834.1

 
11
 %
 
-3
 %
Fisher-Price and Thomas & Friends
1,131.8

 
1,185.7

 
-5
 %
 
-2
 %
Other
1,847.2

 
1,966.8

 
-6
 %
 
-1
 %
Gross Sales
$
5,064.6

 
$
5,075.5

 
 %
 
-2
 %
__________________________________________ 
(a) Mattel modified its reporting structure for revenues in the first quarter of 2019 to disclose revenues by categories.
Gross sales were $5.06 billion in 2019, as compared to $5.08 billion in 2018, with an unfavorable impact from changes in currency exchange rates of 2 percentage points. Gross sales in 2018 included the Toys "R" Us sales reversal of approximately $30 million. The decrease in gross sales was primarily due to lower sales of Infant, Toddler, and Preschool, substantially offset by higher sales of Action Figures, Building Sets, and Games.
Gross sales of Dolls remained flat year-over-year, with declines of American Girl products, primarily driven by lower sales in proprietary retail and direct channels, substantially offset by higher sales of Barbie products, primarily driven by strong brand POS momentum in concert with Barbie’s 60th anniversary.
Of the 11% decrease in Infant, Toddler, and Preschool gross sales, 5% was due to lower sales of Fisher-Price Friends products, primarily driven by the rationalization of licensing partnerships, and 4% was due to lower sales of Fisher-Price and Thomas & Friends products.
Of the 3% increase in Vehicles gross sales, 8% was due to higher sales of Hot Wheels products, primarily due to higher sales of diecast cars, and tracks and playsets products, partially offset by lower sales of CARS products of 3% and lower sales of Jurassic World products of 1% following their movie launches in prior years.
Of the 14% increase in Action Figures, Building Sets, and Games gross sales, 22% was due to initial sales of Toy Story 4 products coinciding with its 2019 theatrical release, partially offset by lower sales of Jurassic World products of 8% following the movie launch in the prior year.

31


Cost of Sales
Cost of sales as a percentage of net sales was 56.0% in 2019, as compared to 60.2% in 2018. Cost of sales in 2019 included the impact of approximately $22 million related to the inclined sleeper product recalls. Cost of sales decreased by $192.3 million, or 7%, to $2.52 billion in 2019 from $2.72 billion in 2018, as compared to flat net sales. Within cost of sales, product and other costs decreased by $149.8 million, or 7%, to $2.00 billion in 2019 from $2.15 billion in 2018; freight and logistics expenses decreased by $38.8 million, or 11%, to $305.4 million in 2019 from $344.2 million in 2018; and royalty expense decreased by $3.7 million, or 2%, to $220.2 million in 2019 from $224.0 million in 2018.
Gross Margin
Gross margin increased to 44.0% in 2019 from 39.8% in 2018. Gross margin in 2019 included the impact of approximately $28 million related to the inclined sleeper product recalls. The increase in gross margin was primarily driven by incremental Structural Simplification savings, partially offset by input cost inflation due to higher plant labor costs.
Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers, and (iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as a percentage of net sales increased to 12.2% in 2019 from 11.6% in 2018, primarily driven by strategic advertising investments in the fourth quarter.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.39 billion, or 30.9% of net sales, in 2019, as compared to $1.51 billion, or 33.4% of net sales, in 2018. The decrease in other selling and administrative expenses was primarily driven by incremental Structural Simplification savings, lower severance and other restructuring charges, and a benefit from the absence of the 2018 Toys "R" Us bad debt expense of approximately $32 million. This was partially offset by higher incentive compensation expense due to improved business performance, a $25.9 million impairment charge related to certain American Girl retail store assets, as a result of lower fourth quarter sales in certain retail stores, and the impact of the inclined sleeper product recalls of approximately $10 million.
Interest Expense
Interest expense was $201.0 million in 2019, as compared to $181.9 million in 2018. The increase in interest expense was primarily due to debt extinguishment costs of $9.2 million associated with the early redemption of the 2010 Senior Notes due October 1, 2020 and the 2016 Senior Notes due August 12, 2021, and higher interest rates associated with the 2019 Senior Notes.
Provision for Income Taxes
Mattel’s provision for income taxes was $55.2 million in 2019, as compared to $116.2 million in 2018. The 2019 income tax provision included a $13.4 million tax benefit related to the release of valuation allowances in certain foreign tax jurisdictions, and a $16.9 million tax benefit related to reassessments of prior year’s tax liabilities based on the status of audits and settlements in various jurisdictions. The 2018 income tax provision included a $14.6 million expense related to changes to its indefinite reinvestment assertion and a $3.7 million expense related to the deemed repatriation of accumulated foreign earnings (net of related valuation allowance change).

32


Segment Results
North America Segment
Net sales for the North America segment were $2.28 billion in 2019, an increase of $3.0 million as compared to $2.27 billion in 2018.
The following table provides a summary of Mattel’s gross sales for the North America segment by categories, along with supplemental information by brand, for 2019 and 2018:
 
For the Year Ended
 
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
December 31, 2019
 
December 31, 2018
 
 
(In millions, except percentage information)
Revenues by Categories (a)
 
 
 
 
 
 
 
Dolls
$
636.2

 
$
624.7

 
2
 %
 
 %
Infant, Toddler, and Preschool
730.3

 
808.2

 
-10
 %
 
 %
Vehicles
510.8

 
488.6

 
5
 %
 
 %
Action Figures, Building Sets, and Games
555.0

 
500.6

 
11
 %
 
 %
Gross Sales
$
2,432.3

 
$
2,422.1

 
 %
 
-1
 %
Sales Adjustments
(156.5
)
 
(149.3
)
 
 
 
 
Net Sales
$
2,275.8

 
$
2,272.8

 
 %
 
 %
 
 
 
 
 
 
 
 
Supplemental Revenue Disclosure
 
 
 
 
 
 
 
Revenues by Top 3 Power Brands
 
 
 
 
 
 
 
Barbie
$
558.3

 
$
535.7

 
4
 %
 
 %
Hot Wheels
419.0

 
380.2

 
10
 %
 
 %
Fisher-Price and Thomas & Friends
650.7

 
665.9

 
-2
 %
 
 %
Other
804.2

 
840.3

 
-4
 %
 
 %
Gross Sales
$
2,432.3

 
$
2,422.1

 
 %
 
-1
 %
__________________________________________ 
(a) Mattel modified its reporting structure for revenues in the first quarter of 2019 to disclose revenues by categories.
Gross sales for the North America segment were $2.43 billion in 2019, an increase of $10.2 million, as compared to $2.42 billion in 2018, with an unfavorable impact from changes in currency exchange rates of 1 percentage point. Gross sales in 2018 included the Toys "R" Us sales reversal of approximately $27 million. The increase in the North America segment gross sales was primarily due to higher sales of Action Figures, Building Sets, and Games, as well as Vehicles, and Dolls, substantially offset by lower sales of Infant, Toddler, and Preschool.
Of the 2% increase in Dolls gross sales, 4% was due to higher sales of Barbie products, partially offset by lower sales of Enchantimals products of 2%.
Of the 10% decrease in Infant, Toddler, and Preschool gross sales, 5% was due to lower sales of Fisher-Price Friends products, primarily driven by the rationalization of licensing partnerships, 2% was due to lower sales of Power Wheels products, and 2% was due to lower sales of Fisher-Price and Thomas & Friends products.
Of the 5% increase in Vehicles gross sales, 9% was due to higher sales of Hot Wheels products, primarily due to higher sales of diecast cars, and tracks and playsets products, partially offset by lower sales of Jurassic World products of 2% and lower sales of CARS products of 2% following their movie launches in prior years.
Of the 11% increase in Action Figures, Building Sets, and Games gross sales, 20% was due to initial sales of Toy Story 4 products coinciding with its 2019 theatrical release and 4% was due to higher sales of MEGA products, partially offset by lower sales of Jurassic World products of 10% following the movie launch in the prior year.

33


Cost of sales decreased 7% in 2019, as compared to flat net sales, primarily due to lower product and other costs and lower freight and logistics expense. Cost of sales in 2019 included the impact of approximately $21 million related to the inclined sleeper product recalls. Gross margin in 2019 increased primarily due to incremental Structural Simplification savings and a benefit from the absence of the first quarter of 2018 Toys "R" Us sales reversal of approximately $27 million, partially offset by input cost inflation due to higher plant labor costs and the impact of the inclined sleeper product recalls of approximately $26 million.
North America segment income was $357.0 million in 2019, as compared to segment income of $220.8 million in 2018, primarily due to higher gross profit and lower other selling and administrative expenses, partially offset by higher advertising and promotion expenses. North America segment income for 2019 included the impact of the inclined sleeper product recalls of approximately $32 million. North America segment income for 2018 included the net sales reversal and bad debt expense, net attributable to the Toy "R" Us liquidation of approximately $48 million.
International Segment
Net sales for the International segment were $1.97 billion in 2019, an increase of $57.0 million as compared to $1.92 billion in 2018.
The following table provides a summary of Mattel’s gross sales for the International segment by categories, along with supplemental brand information, for 2019 and 2018:
 
For the Year Ended
  
% Change as
Reported
 
Currency
Exchange Rate
Impact
 
December 31, 2019
 
December 31, 2018
  
 
(In millions, except percentage information)
Revenues by Categories (a)
 
 
 
 
 
 
 
Dolls
$
819.4

 
$
765.6

 
7
 %
 
-5
 %
Infant, Toddler, and Preschool
527.3

 
609.6

 
-13
 %
 
-3
 %
Vehicles
590.5

 
576.9

 
2
 %
 
-5
 %
Action Figures, Building Sets, and Games
426.5

 
360.2

 
18
 %
 
-4
 %
Gross Sales
$
2,363.8

 
$
2,312.2

 
2
 %
 
-4
 %
Sales Adjustments
(391.6
)
 
(397.1
)
 
 
 
 
Net Sales
$
1,972.2

 
$
1,915.2

 
3
 %
 
-4
 %
 
 
 
 
 
 
 
 
Supplemental Revenue Disclosure
 
 
 
 
 
 
 
Revenues by Top 3 Power Brands
 
 
 
 
 
 
 
Barbie
$
601.4

 
$
553.2

 
9
 %
 
-5
 %
Hot Wheels
506.9

 
453.9

 
12
 %
 
-5
 %
Fisher-Price and Thomas & Friends
481.0

 
519.8

 
-7
 %
 
-3
 %
Other
774.5

 
785.4

 
-1
 %
 
-3
 %
Gross Sales
$
2,363.8

 
$
2,312.2

 
2
 %
 
-4
 %
__________________________________________ 
(a) Mattel modified its reporting structure for revenues in the first quarter of 2019 to disclose revenues by categories.
Gross sales for the International segment were $2.36 billion in 2019, an increase of $51.6 million, or 2%, as compared to $2.31 billion in 2018, with an unfavorable impact from changes in currency exchange rates of 4 percentage points. The increase in the International segment gross sales was primarily due to higher sales of Action Figures, Building Sets, and Games, as well as Dolls, and Vehicles, partially offset by lower sales of Infant, Toddler, and Preschool.
Of the 7% increase in Dolls gross sales, 6% was due to higher sales of Barbie products, primarily driven by strong brand